As filed with the Securities and Exchange Commission on March 28, 1996
Registration Nos. 33-8214
811-4813
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /X/
Pre-Effective Amendment No. / /
Post-Effective Amendment No. 73 /X/
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 /X/
Amendment No. 76 /X/
(Check appropriate box or boxes.)
---------------
Standish, Ayer & Wood Investment Trust
(Exact Name of Registrant as Specified in Charter)
One Financial Center, Boston, Massachusetts 02111
(Address of Principal Executive Offices)
Registrant's Telephone Number, including Area Code: (617) 375-1760
ERNEST V. KLEIN, Esq.
Hale and Dorr
60 State Street
Boston, Massachusetts 02109
(Name and Address of Agent for Service)
It is proposed that this filing will become effective:
/ / Immediately upon filing pursuant to Rule 485(b)
/X/ On April 29, 1996 pursuant to Rule 485(b)
/ / 60 days after filing pursuant to Rule 485(a)(1)
/ / 0n (date) pursuant to Rule 485(a)(1)
/ / 75 days after filing pursuant to Rule 485(a)(2)
/ / 0n (date) pursuant to Rule 485(a)(2)
The Registrant has registered an indefinite number of shares under the
Securities Act of 1933, as amended, pursuant to Rule 24f-2 under the Investment
Company Act of 1940, as amended. The Rule 24f-2 Notice for the fiscal year ended
December 31, 1995 was filed on or about February 27, 1996.
----------
This Post-Effective Amendment has been executed outside of the United States by
the Trustees and Officers of Standish, Ayer & Wood Master Portfolio.
<PAGE>
STANDISH, AYER & WOOD INVESTMENT TRUST*
Standish Equity Fund
Standish Fixed Income Fund
Standish Global Fixed Income Fund
Standish Small Capitalization Equity Fund
Cross-Reference Sheet Pursuant to Rule 495(a)
Part A Prospectus
Form Item Cross-Reference
- --------- ---------------
Item 1. Cover Page Cover Page
Item 2. Synopsis "Expense Information"
Item 3. Condensed Financial "Financial Highlights"
Information
Item 4. General Description Cover Page, "The Fund
of Registrant and the Portfolio", "Investment
Objective and Policies" and
"Special Information Concerning
the Hub and Spoke Master-Feeder
Fund Structure"
Item 5. Management of the Fund "Management" and "Custodian,
Transfer Agent and Dividend
Disbursing Agent"
Item 6. Capital Stock and "The Fund and Its Shares",
Other Securities "Purchase of Shares", "Exchange
of Shares", "Redemption of
Shares", "Dividends and
Distributions" and "Federal
Income Taxes"
Item 7. Purchase of Securities Cover Page, "Purchase of
Being Offered Shares" and "Exchange of
Shares"
Item 8. Redemption or "Redemption of Shares"
Repurchase
Item 9. Pending Legal Not Applicable
Proceedings
* This Post-Effective Amendment to the Registrant's Registration Statement
is being filed with respect to the series of the Registrant set forth above and
does not affect the Prospectuses and Statements of Additional Information of any
additional series of the Registrant.
<PAGE>
Statement of Additional
Part B Information Cross-
Form Item Reference
--------- ---------
Item 10. Cover Page Cover Page
Item 11. Table of Contents "Contents"
Item 12. General Information
and History Not Applicable
Item 13. Investment Objectives "Investment Objective
and Policies and Policies" and "Investment
Restrictions"
Item 14. Management of the Fund "Management"
Item 15. Control Persons and "Management"
Principal Holders
of Securities
Item 16. Investment Advisory and "Management"
Other Services
Item 17. Brokerage Allocation "Portfolio Transactions"
Item 18. Capital Stock and "The Fund and Its Shares" and
Other Securities "The Portfolio and Its
Investors"
Item 19. Purchase, Redemption "Redemption of Shares" and
and Pricing of "Determination of Net Asset
Securities Being Value"
Offered
Item 20. Tax Status "Taxation"
Item 21. Underwriters Not Applicable
Item 22. Calculation of "Calculation of Performance
Performance Data Data"
Item 23. Financial Statements "Experts and Financial
Statements"
<PAGE>
Prospectus dated April 29, 1996
PROSPECTUS
STANDISH EQUITY FUND
One Financial Center
Boston, Massachusetts 02111
(800) 221-4795
Standish Equity Fund (the "Fund") is one fund in the Standish, Ayer & Wood
family of funds. The Fund is organized as a separate diversified investment
series of Standish, Ayer & Wood Investment Trust (the "Trust"), an open-end
management investment company.
The Fund's investment objective is to achieve long-term growth of capital
through investment primarily in equity securities of companies which appear to
be undervalued. Under normal circumstances, at least 80% of the Fund's assets
will be invested in such securities. The Fund seeks to achieve its investment
objective by investing all its investable assets (the "Investable Assets") in
the Standish Equity Portfolio (the "Portfolio") which has the same investment
objective as the Fund. The Portfolio is a series of Standish, Ayer & Wood Master
Portfolio (the "Portfolio Trust"), which is also an open-end management
investment company. The Portfolio invests primarily in publicly traded equity
securities of United States companies and, to a lesser extent, of foreign
issuers. The Portfolio normally does not invest in securities which are
restricted as to disposition by federal securities laws or are otherwise
illiquid but may do so to a limited extent under certain circumstances. See
"Investment Policies." Standish, Ayer & Wood, Inc. , Boston, Massachusetts, is
the Portfolio's investment adviser ("Standish" or the "Adviser").
UNLIKE OTHER MUTUAL FUNDS WHICH DIRECTLY ACQUIRE AND MANAGE THEIR OWN
PORTFOLIOS OF SECURITIES, THE FUND SEEKS TO ACHIEVE ITS INVESTMENT OBJECTIVE BY
INVESTING ALL OF ITS INVESTABLE ASSETS IN THE PORTFOLIO WHICH IS A SEPARATE FUND
WITH AN IDENTICAL INVESTMENT OBJECTIVE. SEE "SPECIAL INFORMATION CONCERNING THE
HUB AND SPOKE MASTER-FEEDER FUND STRUCTURE" ON PAGE 7.
Investors may purchase shares of the Fund from the Trust's principal
underwriter, Standish Fund Distributors, L.P. (the "Principal Underwriter"), at
the address and phone number set forth above without a sales commission or other
transaction charges. Unless waived by the Fund, the minimum initial investment
is $100,000. Additional investments may be made in amounts of at least $10,000.
This Prospectus is intended to set forth concisely the information
about the Fund and the Trust that a prospective investor should know before
investing. Investors are encouraged to read this Prospectus and retain it for
future reference. Additional information about the Fund and the Trust is
contained in a Statement of Additional Information which has been filed with the
Securities and Exchange Commission (the "SEC") and is available upon request and
without charge by calling or writing to the Principal Underwriter at the
telephone number or address set forth above. The Statement of Additional
Information bears the same date as this Prospectus and is incorporated by
reference into this Prospectus.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK OR OTHER INSURED DEPOSITORY INSTITUTION, AND ARE NOT
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD
OR ANY OTHER GOVERNMENT AGENCY. AN INVESTMENT IN SHARES OF THE FUND INVOLVES
INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
CONTENTS
Expense Information...........................................2
Financial Highlights..........................................3
Investment Objective and Policies.............................4
Risk Factors and Suitability..................................7
Special Information Concerning the Hub and Spoke Master-
Feeder Fund Structure...................................7
Calculation of Performance Data..............................8
Dividends and Distributions...................................8
Purchase of Shares............................................8
Exchange of Shares............................................9
Redemption of Shares..........................................9
Management...................................................10
Federal Income Taxes.........................................12
The Fund and The Portfolio...................................13
Principal Underwriter........................................13
Custodian, Transfer Agent and Dividend Disbursing Agent .....13
Independent Accountants......................................14
Legal Counsel................................................14
Tax Certification Instructions...............................14
1
<PAGE>
EXPENSE INFORMATION
Shareholder Transaction Expenses
Maximum Sales Load Imposed on Purchases None
Maximum Sales Load Imposed on Reinvested Dividends None
Deferred Sales Load None
Redemption Fees None
Exchange Fees None
Annual Fund Operating Expenses (as a percentage of average net assets)
Management Fees 1 0.50%
12b-1 Fees None
Other Expenses (After Expense Limitation) 0.21%*
Total Operating Expenses (After Expense Limitation) 0.71%*
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Example 1 yr. 3 yrs. 5 yrs. 10 yrs.
- ------- ----- ------ ------ -------
You would pay the following expenses on a $1,000 investment,
assuming (1) 5% annual return and (2) redemption at the end
of each time period: $8 $25 $44 $98
</TABLE>
The purpose of the above table is to assist the investor in understanding
the various costs and expenses of the Fund and the Portfolio that an investor in
the Fund will bear directly or indirectly. The figure shown in the caption
"Other Expenses," which includes, among other things, custodian and transfer
agent fees, registration costs and payments for insurance and audit and legal
services, is estimated based upon expenses for the Fund's fiscal year ended
December 31, 1995. The Trustees of the Trust believe that over time the
aggregate per share expenses of the Fund and the Portfolio will not be more than
the expenses which the Fund would incur if it were to retain the services of an
investment adviser and the Investable Assets of the Fund were invested directly
in the types of securities being held by the Portfolio.
- --------------------------------------------------------------------------------
1As of the close of business on April 26, 1996, the Fund transferred its
Investable Assets to the Portfolio in exchange for an interest in the Portfolio.
Prior to such date, the Trust, on behalf of the Fund, retained Standish as its
investment adviser.
*Standish has voluntarily agreed to limit the master-feeder aggregate annual
operating expenses (excluding brokerage commissions, taxes and extraordinary
expenses) of the Fund and the Portfolio to the Fund's ratio of expenses to
average net assets in effect immediately prior to the Fund's conversion to the
Hub and Spoke master-feeder fund structure. The expense ratio considered to be
in effect immediately prior to the conversion for this purpose will be
calculated using the actual expenses incurred by the Fund during the three
months immediately prior to conversion and annualizing this amount. Standish may
discontinue or modify such limitation in the future at its discretion, although
it has no current intention to do so. In the absence of such agreement, Other
Expenses and Total Operating Expenses of the Fund and the Portfolio are
estimated to be 0.29% and 0.79%, respectively, of average daily net assets.
For more information with respect to the expenses of the Fund and the
Portfolio see "Management-Investment Adviser" and "Management-Expenses" herein.
THE INFORMATION IN THE TABLE AND HYPOTHETICAL EXAMPLE ABOVE SHOULD NOT BE
CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY
BE GREATER OR LESS THAN THOSE SHOWN. MOREOVER, WHILE THE EXAMPLE ASSUMES A 5%
ANNUAL RETURN, THE FUND'S ACTUAL PERFORMANCE WILL VARY AND MAY RESULT IN AN
ACTUAL RETURN GREATER OR LESS THAN 5%.
2
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
The financial highlights for the years ended December 31, 1993, 1994, and
1995 have been audited by Coopers & Lybrand L.L.P., independent accountants,
whose report, together with the financial statements of the Fund, is
incorporated into the Statement of Additional Information.
Per share data (for a share outstanding Year Ended December 31,
------------------------------------------------------------------
throughout each period) 1995 1994 1993 1992 * 1991 *,+
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net asset value - beginning of period $28.66 $30.89 $26.28 $25.66 $20.00
----------- ----------- ----------- ----------- -----------
Income from investment operations
Net investment income ** $0.76 $0.45 $0.50 $0.56 $0.46
Net realized and unrealized gain (loss) 9.94 (1.62) 5.57 1.81 6.17
----------- ----------- ----------- ----------- -----------
Total from investment operations $10.70 ($1.17) $6.07 $2.37 $6.63
----------- ----------- ----------- ----------- -----------
Less distributions declared to shareholders
From net investment income (0.78) (0.44) (0.47) (0.54) (0.35)
From realized gain (3.77) (0.62) (0.99) (1.19) (0.62)
From paid-in capital - - - (0.02) -
----------- ----------- ----------- ----------- -----------
Total distributions declared to shareholders ($4.55) ($1.06) ($1.46) ($1.75) ($0.97)
----------- ----------- ----------- ----------- -----------
Net asset value - end of period $34.81 $28.66 $30.89 $26.28 $25.66
=========== =========== =========== =========== ===========
Total return 37.55% -3.78% 20.79% 9.52% 33.45% t
Ratios (to average net assets)/Supplemental Data
Net assets at end of period (000's omitted) $88,532 $86,591 $72,916 $14,679 $7,498
Expenses ** 0.69% 0.70% 0.80% 0.00% 1.00% t
Net investment income ** 2.05% 1.55% 1.29% 2.52% 1.92% t
Portfolio turnover 159% 182% 192% 92% 86%
** For the three year period ended December 31, 1993, the investment adviser did not impose a
portion of its advisory fee. If this voluntary reduction had not been undertaken, the net
investment income per share and the ratios would have been:
Net investment income per share $0.47 $0.34 $0.23
Ratios (to average net assets):
Expenses 0.97% 1.00% 1.99%
Net investment income 1.12% 1.52% 0.93%
t Computed on an annualized basis.
* Audited by other auditors
+ For the period from January 2, 1991 (start of business) to December 31, 1991.
</TABLE>
Further information about the performance of the Fund is contained in the
Fund's Annual Report, which may be obtained from the Principal Underwriter
without charge.
3
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
Investment Objective
The Fund seeks to achieve its investment objective by investing all its
Investable Assets in the Portfolio which has the same investment objective as
the Fund. There can be no assurance that the investment objective of either the
Fund or the Portfolio will be achieved.
Since the investment characteristics of the Fund will correspond directly
to those of the Portfolio, the following is a discussion of the various
investments and investment policies of the Portfolio.
The Portfolio's investment objective is to achieve long-term growth of
capital through investment primarily in equity and equity-related securities of
companies which appear to be undervalued. Under normal circumstances, at least
80% of the Portfolio's total assets will be invested in such securities. (Equity
and equity-related securities include common stocks, preferred stocks,
securities convertible into common stocks and options, futures and other
strategic transactions based on common stocks.) The Portfolio may invest in
equity securities of foreign issuers that are listed on a United States
securities exchange or traded in the U.S. over-the-counter market, and may
invest up to 10% of its assets in such securities which are not so listed or
traded.
The Portfolio may also invest in debt securities and preferred stocks which
are convertible into, or exchangeable for, common stocks. Such securities will
be rated Aaa, Aa or A by Moody's Investors Service, Inc. ("Moody's"), or AAA, AA
or A by Standard & Poor's Ratings Group ("Standard & Poor's") or if not rated,
are determined to be of comparable credit quality by the Adviser. Up to 5% of
the Portfolio's total assets invested in convertible debt securities and
preferred stocks may be rated Baa by Moody's or BBB by Standard & Poor's or, if
not rated, determined to be of comparable credit quality by the Adviser. In the
case of a security that is rated differently by the two rating services, the
higher rating is used in connection with the foregoing policy. In the event the
rating on a security held by the Portfolio is downgraded by a rating service,
such action will be considered by the Adviser in its evaluation of the overall
investment merits of that security, but will not necessarily result in the sale
of the security. Securities rated Baa by Moody's or BBB by Standard & Poor's and
unrated securities of equivalent credit quality are considered medium grade
obligations with speculative characteristics. Adverse changes in economic
conditions or other circumstances are more likely to weaken the issuer's
capacity to pay interest and repay principal on these securities than is the
case for issuers of higher rated securities.
The Portfolio may write and purchase put and call options on its portfolio
securities and invest in financial futures contracts on U.S. equity indices and
purchase and sell options on such futures contracts. Although the Portfolio does
not normally invest in equity securities which are restricted as to disposition
by federal securities laws or are otherwise illiquid, the Portfolio may do so to
a limited extent under certain circumstances. Because of the uncertainty
inherent in all investments, no assurance can be given that either the Fund or
the Portfolio will achieve its investment objective.
4
<PAGE>
The investment objective of the Fund is a fundamental policy which may not
be changed without a vote of the Fund's shareholders. The investment objective
of the Portfolio is not a fundamental policy and may be changed upon notice to,
but without the approval of, the Portfolio's investors. Investment policies
which are not fundamental policies may be changed by the Trustees of the Trust
and the Trustees of the Portfolio Trust, without the approval of the Fund's
shareholders or the Portfolio's investors. The Fund's and the Portfolio's
investment policies are described further in the Statement of Additional
Information.
Investment Policies
The Portfolio will follow a disciplined investment strategy, emphasizing
stocks which the Adviser believes to offer above average potential for capital
growth. 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 Portfolio's holdings. Securities selected for inclusion in the
Portfolio's holdings will represent various industries and sectors.
Short-Term Debt Securities
The Portfolio may establish and maintain cash balances for temporary
purposes in order to maintain liquidity to meet shareholder redemptions. The
Portfolio may also establish and maintain cash balances for temporary defensive
purposes without limitation to hedge against potential stock market declines.
The Portfolio's cash balances, including uncommitted cash balances, may be
invested in investment grade money market instruments and short-term
interest-bearing securities. The securities consist of U.S. Government
obligations and obligations issued or guaranteed by any U.S. Government agencies
or instrumentalities, instruments of U.S. and foreign banks (including
negotiable certificates of deposit, non-negotiable fixed time deposits and
bankers' acceptances), repurchase agreements, prime commercial paper of U.S. and
foreign companies, debt securities that make periodic interest payments at
variable or floating rates and other money market securities and investments.
The Portfolio's investments in money market securities (i.e., securities
with maturities of less than one year) will be rated, at the time of investment,
P-1 by Moody's or A-1 by Standard & Poor's. At least 95% of the Portfolio's
assets invested in short-term interest-bearing securities (i.e., securities with
maturities of one to three years) 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 assets
invested in such short-term 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. 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.
5
<PAGE>
Foreign Securities
Although the Portfolio intends to invest primarily in equity securities of
U.S. issuers, the Portfolio may invest (without limitation) in equity securities
of foreign issuers that are listed on a United States exchange or traded in the
U.S. over-the-counter market, and may invest up to 10% of its assets in foreign
equity securities which are not so listed or traded. Foreign securities will be
selected for investment by the Portfolio 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. See "Risk
Factors and Suitability."
Strategic Transactions
The Portfolio may, but is not required to, utilize various other investment
strategies as described below to hedge various market risks (such as interest
rates, currency exchange rates, and broad or specific equity market movements),
or to enhance potential gain. Such strategies are generally accepted as part of
modern portfolio management and are regularly utilized by many mutual funds and
other institutional investors. Techniques and instruments used by the Portfolio
may change over time as new instruments and strategies are developed or
regulatory changes occur.
In the course of pursuing its investment objective, the Portfolio may
purchase and sell (write) exchange-listed and over-the-counter put and call
options on securities, equity indices and other financial instruments; purchase
and sell financial futures contracts and options thereon; enter into various
interest rate transactions such as swaps, caps, floors or collars; and enter
into various currency transactions such as currency forward contracts, currency
futures contracts, currency swaps or options on currencies or currency futures
(collectively, all the above are called "Strategic Transactions"). Strategic
Transactions may be used in an attempt to protect against possible changes in
the market value of securities held in or to be purchased for the Portfolio's
portfolio resulting from securities market or currency exchange rate
fluctuations, to protect the Portfolio's unrealized gains in the value of its
portfolio securities, to facilitate the sale of such securities for investment
purposes, 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 Portfolio will attempt to limit its net
loss exposure resulting from Strategic Transactions entered into for such
purposes to not more than 3% of the Portfolio's net assets at any one time and,
to the extent necessary, the Portfolio 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
6
<PAGE>
calculating the Portfolio'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 Portfolio is underweighted in
cyclical stocks and overweighted in consumer stocks, the Portfolio 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 Portfolio's net loss exposure. The ability of the
Portfolio to utilize these Strategic Transactions successfully will depend on
the Adviser's ability to predict pertinent market movements, which cannot be
assured. The Portfolio will comply with applicable regulatory requirements when
implementing these strategies, techniques and instruments. The Portfolio's
activities involving Strategic Transactions may be limited to enable the Fund to
comply with the requirements of Subchapter M of the Internal Revenue Code of
1986, as amended (the "Code"), for qualification as a regulated investment
company.
Strategic Transaction 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 Portfolio, 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 Portfolio can realize on its investments or cause the
Portfolio to hold a security it might otherwise sell. The use of currency
transactions can result in the Portfolio incurring losses as a result of a
number of factors including the imposition of exchange controls, suspension of
settlements, or the inability to deliver or receive a specified currency. The
use of options and futures transactions entails certain other risks. In
particular, the variable degree of correlation between price movements of
futures contracts and price movements in the related portfolio position of the
Portfolio creates the possibility that losses on the hedging instrument may be
greater than gains in the value of the Portfolio's position. The writing of
options could significantly increase the Portfolio'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 Portfolio 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
Portfolio in writing options on futures and entering into futures transactions
is potentially unlimited; however, as described above, the Portfolio will
7
<PAGE>
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 Portfolio'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
Portfolio's Strategic Transactions is set forth in the Statement of Additional
Information.
Short-Selling
The Portfolio may make short sales, which are transactions in which the
Portfolio sells a security it does not own in anticipation of a decline in the
market value of that security. To complete such a transaction, the Portfolio
must borrow the security to make delivery to the buyer. The Portfolio 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 Portfolio. Until the security is
replaced, the Portfolio 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 Portfolio also may be required to pay a premium, which would
increase the cost of the security sold. The proceeds of the short sale will be
retained by the broker, to the extent necessary to meet margin requirements,
until the short position is closed out.
Until the Portfolio replaces a borrowed security in connection with a short
sale, the Portfolio will: (a) maintain daily a segregated account not with the
broker, containing cash or U.S. Government securities, at such a level that the
amount deposited in the account plus the amount deposited with the broker as
collateral will equal the current value of the security sold short; or (b)
otherwise cover its short position.
The Portfolio 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 Portfolio replaces the borrowed security. The Portfolio will realize a
gain if the security declines in price between those dates by an amount greater
than the premium and transaction costs. This result is the opposite of what one
would expect from a cash purchase of a long position in a security. The amount
of any gain will be decreased, and the amount of any loss increased, by the
amount of any premium or amounts in lieu of dividends or interest the Portfolio
may be required to pay in connection with a short sale.
The Portfolio's loss on a short sale as a result of an increase in the
price of a security sold short is potentially unlimited. The Portfolio may
purchase call options to provide a hedge against an increase in the price of a
security sold short by the Portfolio. When the Portfolio 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 Portfolio, the
premium and the commission paid may be more than the amount of the brokerage
commission charged if the security were to be purchased directly. See "Strategic
Transactions" above.
8
<PAGE>
The Portfolio anticipates that the frequency of short sales will vary
substantially in different periods, and it does not intend that any specified
portion of its assets, as a matter of practice, will be in short sales. However,
no securities will be sold short if, after giving effect to any such short sale,
the total market value of all securities sold short would exceed 5% of the value
of the Portfolio's net assets.
In addition to the short sales discussed above, the Portfolio may make
short sales "against the box," a transaction in which the Portfolio enters into
a short sale of a security which the Portfolio owns. The proceeds of the short
sale are held by a broker until the settlement date at which time the Portfolio
delivers the security to close the short position. The Portfolio receives the
net proceeds from the short sale.
Repurchase Agreements
The Portfolio may invest up to 10% of its net assets in repurchase
agreements under normal circumstances. Repurchase agreements acquired by the
Portfolio 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, the Portfolio might suffer a loss
to the extent that the proceeds from the sale of the underlying securities and
other collateral held by the Portfolio in connection with the related repurchase
agreement are less than the repurchase price. In addition, in the event of
bankruptcy of the seller or failure of the seller to repurchase the securities
as agreed, the Portfolio could suffer losses, including loss of interest on or
principal of the security and costs associated with delay and enforcement of the
repurchase agreement.
Portfolio Turnover
It is not the policy of the Portfolio to purchase or sell securities for
trading purposes. However, the Portfolio places no restrictions on portfolio
turnover and it may sell any portfolio security without regard to the period of
time it has been held. The Portfolio may therefore generally change its
portfolio investments at any time in accordance with the Adviser's appraisal of
factors affecting any particular issuer or market, or the economy in general. A
rate of turnover of 100% would occur, 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 involves a correspondingly greater amount of
transaction costs which must be borne directly by the Portfolio and thus
indirectly by the Fund and its shareholders. It may also result in the
realization of larger amounts of net short-term capital gains, the Fund's
distributions from which are taxable to Fund shareholders as ordinary income and
may, under certain circumstances, make it more difficult for the Fund to qualify
as a regulated investment company under the Code. The portfolio turnover rates
are listed in the section captioned "Financial Highlights."
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Investment Restrictions
Each of the Fund and the Portfolio has adopted certain fundamental policies
which may not be changed without the approval of the Fund's shareholders or the
Portfolio's investors, as the case may be.
The Fund has the same investment restrictions as the Portfolio, except that
the Fund may invest substantially all of its Investable Assets in an open-end
management investment company with substantially the same investment objective
as the Fund. References below to the Portfolio's investment restrictions also
include the Fund's investment restrictions. These policies provide, among other
things, that the Portfolio may not: (i) with respect to at least 75% of its
total assets, invest more than 5% in the securities of any one issuer (other
than the U.S. Government, its agencies or instrumentalities) or acquire more
than 10% of the outstanding voting securities of any issuer; (ii) issue senior
securities, borrow money, enter into reverse repurchase agreements or pledge or
mortgage its assets, except that the Portfolio may borrow from banks in an
amount up to 15% of the current value of its total assets as a temporary measure
for extraordinary or emergency purposes (but not investment purposes), and
pledge its assets to an extent not greater than 15% of the current value of its
total assets to secure such borrowings; however, the Portfolio may not make any
additional investments while its outstanding borrowings exceed 5% of the current
value of its total assets; (iii) make loans of portfolio securities, except that
the Portfolio may enter into repurchase agreements with respect to 10% of the
value of its net assets; or (iv) invest more than 25% of its total assets in a
single industry except that this restriction shall not apply to U.S.
Government securities.
If any percentage restriction described above is adhered to at the time of
investment, a subsequent increase or decrease in the percentage resulting from a
change in the value of the Portfolio's assets will not constitute a violation of
the restriction. Certain non-fundamental policies and additional fundamental
policies adopted by the Fund and the Portfolio are described in the Statement of
Additional Information.
RISK FACTORS AND SUITABILITY
The Fund is not intended to provide an investment program meeting all of
the requirements of an investor. The Portfolio will not emphasize current income
unless this income will have a favorable influence on the market value of a
portfolio security. Additionally, notwithstanding the Portfolio's ability to
spread risk by holding securities of a number of portfolio companies,
shareholders of the Fund should be able and prepared to bear the risk of
investment losses which may accompany the investments contemplated by the
Portfolio.
Foreign Securities
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,
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<PAGE>
exchange control regulations (including currency blockage), expropriation of
assets of companies in which the Portfolio invests, nationalization of such
companies, imposition of withholding taxes on dividend or interest payments, and
possible difficulty in obtaining and enforcing judgments against a foreign
issuer. Also, foreign securities may not be as liquid and may be more volatile
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 Portfolio, in connection with
its purchases and sales of foreign securities, other than securities denominated
in United States dollars, will incur transaction costs in converting currencies.
Brokerage commissions in foreign countries are generally fixed, and other
transaction costs related to securities exchanges are generally higher than in
the United States. Most foreign securities of the Portfolio are held by foreign
subcustodians that satisfy certain eligibility requirements. However, foreign
subcustodian arrangements are significantly more expensive than domestic
custody. In addition, foreign settlement of securities transactions is subject
to local law and custom that is not, generally, as well established or as
reliable as U.S. regulation and custom applicable to settlements of securities
transactions and, accordingly, there is generally perceived to be a greater risk
of loss in connection with securities transactions in many foreign countries.
The Portfolio'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 is intended to limit the Portfolio's exposure to
the risks associated with investments in foreign securities.
SPECIAL INFORMATION CONCERNING THE HUB
AND SPOKE(R) MASTER-FEEDER FUND
Unlike other mutual funds which directly acquire and manage their own
portfolio securities, the Fund seeks to achieve its investment objective by
investing all of its Investable Assets in the Portfolio which has the same
investment objective as the Fund. The Portfolio in turn invests primarily in
securities consistent with that objective. Therefore, an investor's interest in
the Portfolio's securities is indirect, like investments in other investment
companies and pooled investment vehicles only more so. In addition to selling a
beneficial interest to the Fund, the Portfolio may sell beneficial interests to
other mutual funds or institutional investors. Such investors will invest in the
Portfolio on the same terms and conditions and will pay a proportionate share of
the Portfolio's expenses. However, the other investors investing in the
Portfolio are not required to sell their shares at the same public offering
price as the Fund due to the imposition of sales commissions and variations in
other operating expenses. Therefore, investors in the Fund should be aware that
these differences may result in differences in returns experienced by investors
in the different funds that invest in the Portfolio. Such differences in returns
are also present in other mutual fund structures. Information concerning other
holders of interests in the Portfolio is available from the Adviser (800)
221-4795.
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<PAGE>
The Hub and Spoke master-feeder fund structure has been developed
relatively recently, so shareholders should carefully consider this investment
approach.
Smaller funds investing in the Portfolio may be materially affected by the
actions of larger funds investing in the Portfolio. For example, if a large fund
withdraws from the Portfolio, the remaining funds may experience higher pro rata
operating expenses, thereby producing lower returns (however, this possibility
exists as well for traditionally structured funds that have large institutional
investors). Additionally, because the Portfolio would have fewer assets in such
a case, it may become less diversified, resulting in increased portfolio risk.
Also, funds with a greater pro rata ownership in the Portfolio could have
effective voting control of the operations of the Portfolio. Except as permitted
by the SEC, whenever the Trust is requested to vote on matters pertaining to the
Portfolio (other than a vote by the Fund to continue the operations of the
Portfolio upon the withdrawal of another investor in the Portfolio), the Trust
will hold a meeting of shareholders of the Fund and will cast all of its votes
in the same proportion as the votes of the Fund's shareholders. The percentage
of the Trust's votes representing Fund shareholders not voting will be voted by
the Trustees or officers of the Trust in the same proportion as the Fund
shareholders who do, in fact, vote. Fund shareholders who do not vote will not
affect the Trust's votes at the Portfolio meeting.
Certain changes in the Portfolio's investment objectives, policies or
restrictions may require the Fund to withdraw its interest in the Portfolio. Any
such withdrawal could result in a distribution "in kind" of portfolio securities
(as opposed to a cash distribution from the Portfolio) to the extent permitted
by the Investment Company Act of 1940, as amended (the "1940 Act"), or rules
adopted thereunder. If securities are distributed, the Fund could incur
brokerage, tax or other charges in converting the securities to cash. In
addition, the distribution in kind may result in a less diversified portfolio of
investments or adversely affect the liquidity of the Fund. Notwithstanding the
above, there are other means for meeting redemption requests, such as borrowing.
The Fund's investment objective is a fundamental policy and may not be
changed without the approval of the Fund's shareholders. The investment
objective of the Portfolio is not a fundamental policy and may be changed
without the approval of investors in the Portfolio. If the Portfolio proposed to
change its investment objective, the Fund would either obtain shareholder
approval to make a corresponding change to its investment objective or withdraw
its investment from the Portfolio. The Fund may withdraw its investment from the
Portfolio at any time if the Board of Trustees of the Trust determines that it
is in the best interests of the shareholders of the Fund to do so (including if
the Fund's and the Portfolio's investment objectives were not substantially the
same). Upon any such withdrawal, the Board of Trustees of the Trust would
consider what action might be taken, including investing all the Investable
Assets of the Fund in another pooled investment entity having substantially the
same investment objective as the Fund or retaining an investment adviser to
manage directly the Fund's assets in accordance with its investment policies
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described above with respect to the Portfolio. In any event, shareholders of the
Fund will receive 30 days prior written notice with respect to any change in the
investment objective of the Portfolio. See "investment Objective and Policies"
for a description of the fundamental policies of the Portfolio that cannot be
changed without approval by the "vote of a majority of the outstanding voting
securities" (as defined in the 1940 Act) of the Portfolio.
For descriptions of the investment objective, policies and restrictions of
the Portfolio, see "Investment Objective and Policies." For descriptions of the
management of the Portfolio, see "Management" herein and in the Statement of
Additional Information. For descriptions of the expenses of the Portfolio, see
"Management" herein.
CALCULATION OF PERFORMANCE DATA
From time to time the Fund may advertise its total return. Total return
figures are based on historical earnings and are not intended to indicate future
performance. The "total return" of the Fund refers to the average annual
compounded rates of return over 1, 5 and 10 year periods (or any shorter period
since inception) that would equate an initial amount invested at the beginning
of a stated period to the ending redeemable value of the investment. The
calculation assumes the reinvestment of all dividends and distributions,
includes all recurring fees that are charged to all shareholder accounts and
deducts all nonrecurring charges at the end of each period.
From time to time, the Fund may compare its performance with that of other
mutual funds with similar investment objectives, to stock and other relevant
indices, and to performance rankings prepared by recognized mutual fund
statistical services. In addition, the Fund's performance may be compared to
alternative investment or savings vehicles and/or to indices or indicators of
economic activity.
DIVIDENDS AND DISTRIBUTIONS
The Fund's dividends from short-term and long-term capital gains, if any,
after reduction by capital losses, will be declared and distributed at least
annually, as will any dividends from net investment income. In determining the
amounts of its dividends, the Fund will take into account its share of the
income, gains or losses, expenses, and any other tax items of the Portfolio.
Dividends from net investment income and from short-term and long-term capital
gains, if any, are automatically reinvested in additional shares of the Fund
unless the shareholder elects to receive them in cash.
PURCHASE OF SHARES
Shares of the Fund may be purchased from the Principal Underwriter, which
offers the Fund's shares to the public on a continuous basis. Shares are sold at
the net asset value per share next computed after the purchase order is received
in good order by the Principal Underwriter and payment for the shares is
received by the Fund's custodian. Please see the Fund's account application or
call the Principal Underwriter for instructions on how to make payment of shares
to the Fund's custodian. Unless waived by the Fund, the minimum initial
investment is $100,000. Additional investments may be made in amounts of at
least $10,000.
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<PAGE>
Shares of the Fund may also be purchased through securities dealers. Orders
for the purchase of Fund shares received by dealers by the close of regular
trading on the New York Stock Exchange on any business day and transmitted to
the Principal Underwriter or its agent by the close of its business day
(normally 4:00 p.m., New York City time) will be effected as of the close of
regular trading on the New York Stock Exchange on that day, provided that
payment for the shares is also received by the Fund's custodian on that day.
Otherwise, orders will be effected at the net asset value per share determined
on the next business day. It is the responsibility of dealers to transmit orders
so that they will be received by the Principal Underwriter before the close of
its business day. Shares of the Fund purchased through dealers may be subject to
transaction fees, no part of which will be received by the Fund, the Principal
Underwriter or the Adviser.
The Fund's net asset value per share is computed 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 City time). The net asset value per share is calculated by
determining the value of all the Fund's assets (i.e., the value of its
investment in the Portfolio and other assets), subtracting all liabilities and
dividing the result by the total number of shares outstanding. The Portfolio's
portfolio 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. 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. 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 of the Portfolio
Trust. Additional information concerning the Portfolio's valuation policies is
contained in the Statement of Additional Information.
In the sole discretion of the Trust, the Fund may accept securities instead
of cash for the purchase of shares of the Fund. The Trust will ask the Adviser
to determine that any securities acquired by the Fund in this manner are
consistent with the investment objective, policies and restrictions of the
Portfolio. The securities will be valued in the manner stated above. The
purchase of shares of the Fund for securities instead of cash may cause an
investor who contributed them to realize a taxable gain or loss with respect to
the securities transferred to the Fund.
The Trust reserves the right in its sole discretion (i) to suspend the
offering of the Fund's shares, (ii) to reject purchase orders when in the best
interest of the Fund and (iii) to modify or eliminate the minimum initial
investment in Fund shares. The Fund's investment minimums do not apply to
accounts for which the Adviser or any of its affiliates serves as investment
adviser or to employees of the Adviser or any of its affiliates or to members of
such persons' immediate families. The Fund's investment minimums apply to the
aggregate value invested in omnibus accounts rather than to the investment of
the underlying participants in the omnibus accounts.
EXCHANGE OF SHARES
Shares of the Fund may be exchanged for shares of one or more other funds
in the Standish, Ayer & Wood family of funds. Shares of the Fund redeemed in an
exchange transaction are valued at their net asset value next determined after
the exchange request is received by the Principal Underwriter or its agent.
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
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<PAGE>
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 Fund may be exchanged by written order to the Principal
Underwriter, One Financial Center, Boston, Massachusetts 02111. A written
exchange request must (a) state the name of the current Fund, (b) state the name
of the fund into which the current Fund shares will be exchanged, (c) state the
number of shares or the dollar amount to be exchanged, (d) identify the
shareholder's account numbers in both funds and (e) be signed by each registered
owner exactly as the shares are registered. Signature(s) must be guaranteed as
listed under "Written Redemption" below.
Telephonic Exchanges
Shareholders who elect telephonic privileges may exchange shares by calling
the Principal Underwriter at (800) 221-4795. Telephonic privileges are not
available to shareholders automatically. Proper identification will be required
for each telephonic exchange. Please see "Telephone Transactions" below for more
information regarding telephonic transactions.
General Exchange Information
All exchanges are subject to the following exchange restrictions: (i) the
fund into which shares are being exchanged must be registered for sale in your
state; (ii) exchanges may be made only between funds that are registered in the
same name, address and, if applicable, taxpayer identification number; and (iii)
unless waived by the Trust, the amount to be exchanged must satisfy the minimum
account size of the fund to be exchanged into. Exchange requests will not be
processed until payment for the shares of the current Fund have been received by
the Fund's custodian. The exchange privilege may be changed or discontinued and
may be subject to additional limitations upon sixty (60) days' notice to
shareholders, including certain restrictions on purchases by market-timer
accounts.
REDEMPTION OF SHARES
Shares of the Fund may be redeemed by any of the methods described below at
the net asset value per share next determined after receipt by the Principal
Underwriter 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 Fund may be redeemed by written order to the Principal
Underwriter, One Financial Center, 26th Floor, Boston, MA 02111. A written
redemption request must (a) state the name of the Fund and the number of shares
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<PAGE>
or the dollar amount to be redeemed, (b) identify the shareholder's account
number and (c) be signed by each registered owner exactly as the shares are
registered. Signature(s) must be guaranteed by a member of either the Securities
Transfer Association's STAMP program or the New York Stock Exchange's Medallion
Signature Program or by any one of the following institutions, provided that
such institution meets credit standards established by Investors Bank & Trust
Company, the Fund's transfer agent: (i) a bank; (ii) a securities broker or
dealer, including a government or municipal securities broker or dealer, that is
a member of a clearing corporation or has net capital of at least $100,000;
(iii) a credit union having authority to issue signature guarantees; (iv) a
savings and loan association, a building and loan association, a cooperative
bank, or a federal savings bank or association; or (v) a national securities
exchange, a registered securities exchange or a clearing agency. Additional
supporting documents may be required in the case of estates, trusts,
corporations, partnerships and other shareholders that are not individuals.
Redemption proceeds will normally be paid by check mailed within three business
days of receipt by the Principal Underwriter of a written redemption request in
proper form. If shares to be redeemed were recently purchased by check, the Fund
may delay transmittal of redemption proceeds until such time as it has assured
itself that good funds have been collected for the purchase of such shares. This
may take up to fifteen (15) days in the case of payments made by check.
Telephonic Redemption
Shareholders who elect telephonic privileges may redeem shares by calling
the Principal Underwriter at (800) 221-4795. Telephonic privileges are not
available to shareholders automatically. Redemption proceeds will be mailed or
wired in accordance with the shareholder's instruction on the account
application to a pre-designated account. Redemption proceeds will normally be
paid promptly after receipt of telephonic instructions, but no later than three
business days thereafter, except as described above for shares purchased by
check. Redemption proceeds will be sent only by check payable to the shareholder
of record at the address of record, unless the shareholder has indicated, in the
initial application for the purchase of shares, a commercial bank to which
redemption proceeds may be sent by wire. These instructions may be changed
subsequently only in writing, accompanied by a signature guarantee, and
additional documentation in the case of shares held by a corporation or other
entity or by a fiduciary such as a trustee or executor. Wire charges, if any,
will be deducted from redemption proceeds. Proper identification will be
required for each telephonic redemption.
Repurchase Order
In addition to 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 payment
for the shares by the Fund's custodian. Brokers and dealers are obligated to
transmit repurchase orders to the Principal Underwriter prior to the close of
the Principal Underwriter's business day (normally 4:00 p.m.). Brokers or
dealers may charge for their services in connection with a repurchase of Fund
shares, but neither the Trust nor the Principal Underwriter imposes a charge for
share repurchases.
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<PAGE>
Telephone Transactions
By maintaining an account that is eligible for telephonic exchange and
redemption privileges, the shareholder authorizes the Adviser, the Principal
Underwriter, the Trust and the Fund's custodian to act upon instructions of any
person to redeem and/or exchange shares from the shareholder's account. Further,
the shareholder acknowledges that, as long as the Fund employs reasonable
procedures to confirm that telephonic instructions are genuine, and follows
telephonic instructions that it reasonably believes to be genuine, neither the
Adviser, nor the Principal Underwriter, nor the Trust, nor the Fund, nor the
Fund's custodian, nor their respective officers or employees, will be liable for
any loss, expense or cost arising out of any request for a telephonic redemption
or exchange, even if such transaction results from any fraudulent or
unauthorized instructions. Depending upon the circumstances, the Fund intends to
employ personal identification or written confirmation of transactions
procedures, and if it does not, the Fund may be liable for any losses due to
unauthorized or fraudulent instructions. All telephone transaction requests will
be recorded. Shareholders may experience delays in exercising telephone
transaction privileges during periods of abnormal market activity. Accordingly,
during periods of volatile economic and market conditions, shareholders may wish
to consider transmitting redemption and exchange requests in writing.
* * * *
The proceeds paid upon redemption or repurchase may be more or less than
the cost of the shares, depending upon the market value of the Portfolio's
portfolio investments at the time of redemption or repurchase. The Fund intends
to pay cash for all shares redeemed, but under certain conditions, the Fund may
make payments wholly or partially in securities withdrawn from the Portfolio for
this purpose. Please see the Statement of Additional Information for further
information regarding the Fund's ability to satisfy redemption requests in-kind.
Because of the cost of maintaining shareholder accounts, the Fund may
redeem, at net asset value, the shares in any account if the value of such
shares has decreased to less than $25,000 as a result of redemptions or
transfers. Before doing so, the Fund will notify the shareholder that the value
of the shares in the account is less than the specified minimum and will allow
the shareholder 30 days to make an additional investment in an amount which will
increase the value of the account to at least $25,000. The Fund may eliminate
duplicate mailings of Fund materials to shareholders that have the same address
of record.
MANAGEMENT
Trustees
The Fund is a separate investment series of Standish, Ayer & Wood
Investment Trust, a Massachusetts business trust. Under the terms of the
Agreement and Declaration of Trust establishing the Trust, which is governed by
the laws of The Commonwealth of Massachusetts, the Trustees of the Trust are
ultimately responsible for the management of its business and affairs.
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The Portfolio is a separate investment series of Standish, Ayer & Wood
Master Portfolio, a master trust fund organized under the laws of the State of
New York. Under the terms of the Declaration of Trust, the affairs of the
Portfolio are managed under the supervision of the Trustees of the Portfolio
Trust.
A majority of the Trustees who are not "interested persons" (as defined in
the 1940 Act) of the Trust or the Portfolio Trust, as the case may be, have
adopted written procedures reasonably appropriate to deal with potential
conflicts of interest arising from the fact that the same individuals are
trustees of the Trust and of the Portfolio Trust, up to and including creating
separate boards of trustees. See "Management" in the Statement of Additional
Information for more information about the Trustees and officers of the Trust
and the Portfolio Trust.
Investment Adviser
Standish, Ayer & Wood, Inc. ("Standish" or the "Adviser"), One Financial
Center, Boston, Massachusetts 02111, serves as investment adviser to the
Portfolio pursuant to an investment advisory agreement with the Portfolio Trust
and manages the Portfolio's investments and affairs subject to the supervision
of the Trustees of the Portfolio Trust. The Adviser is a Massachusetts
corporation incorporated in 1933 and is a registered investment adviser under
the Investment Advisers Act of 1940.
The Adviser provides fully discretionary management services and counseling
and advisory services to a broad range of clients throughout the United States
and abroad. As of February 29, 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
(February 29, 1996)
- --------------------------------------------------------------------------------
Standish Controlled Maturity Fund $9,206,532
Standish Equity Fund 95,832,592
Standish Fixed Income Fund 2,274,975,978
Standish Fixed Income Fund II 10,046,446
Standish Global Fixed Income Fund 147,989,501
Standish Intermediate Tax Exempt Bond Fund 31,338,929
Standish International Equity Fund 55,691,972
Standish International Fixed Income Fund 792,817,998
Standish Massachusetts Intermediate
Tax Exempt Bond Fund 322,170,126
Standish Securitized Fund 55,002,171
Standish Short-Term Asset Reserve Fund 298,685,235
Standish Small Capitalization Equity Fund 188,411,176
Standish Small Cap Tax-Sensitive Equity Fund 1,278,405
Standish Tax-Sensitive Equity Fund 1,232,170
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Corporate pension funds are the largest asset under active management by
the Adviser. The Adviser's clients also include charitable and educational
endowment funds, financial institutions, trusts and individual investors. As of
February 29, 1996, the Adviser managed approximately $29 billion of assets.
The Portfolio's portfolio managers are Ralph S. Tate and David C. Cameron.
Mr. Tate and Mr. Cameron have been primarily responsible for the day-to-day
management of the Fund's portfolio since its inception in January, 1991 and of
the Portfolio's portfolio since the Fund's conversion to the Hub and Spoke
master-feeder fund structure on April 26, 1996. During the past five years,
Messrs. Tate and Cameron have each served as a Director and Vice President of
the Adviser.
Subject to the supervision and direction of the Trustees of the Portfolio
Trust, the Adviser manages the Portfolio in accordance with its stated
investment objective and policies, recommends investment decisions for the
Portfolio, places orders to purchase and sell securities on behalf of the
Portfolio, and permits the Portfolio to use the name "Standish." For its
services to the Portfolio, the Adviser receives a monthly fee equal on an annual
basis to 0.50% of the Portfolio's average daily net assets. For the Fund's
fiscal year ended December 31, 1995, advisory fees represented 0.50% of the
Fund's average daily net assets.
Administrator of the Fund
Standish also serves as administrator to the Fund (the "Administrator")
pursuant to an administration agreement. As Administrator, Standish manages the
affairs of the Fund, provides all necessary office space and services of
executive personnel for administering the affairs of the Fund, and allows the
Fund to use the name "Standish." For these services, Standish currently does not
receive any additional compensation. The Trustees of the Trust may, however,
determine in the future to compensate Standish for its administrative services.
Expenses
The Portfolio and the Fund, as the case may be, are each responsible for
all of their respective costs and expenses not expressly stated to be payable by
Standish under the investment advisory agreement with the Portfolio or the
administration agreement with the Fund. Among other expenses, the Portfolio will
pay investment advisory fees; bookkeeping, share pricing and custodian fees and
expenses; expenses of reports and notices to interest-holders; and expenses of
the Portfolio's administrator. The Fund will pay shareholder servicing fees and
expenses; expenses of prospectuses, statements of additional information and
shareholder reports which are furnished to existing shareholders. Each of the
Fund and the Portfolio will pay legal and auditing fees; registration and
reporting fees and expenses; and Trustees' fees and expenses. The Trust's
Principal Underwriter, Standish Fund Distributors, L.P., bears without
subsequent reimbursement the distribution expenses attributable to the offering
and sale of Fund shares. Expenses of the Trust or the Portfolio Trust which
relate to more than one of their respective series are allocated among such
series by the Adviser and SIMCO in an equitable manner, primarily on the basis
of relative net asset values. For the fiscal year ended December 31, 1995,
expenses borne by the Fund represented 0.67% of the Fund's average daily net
assets.
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Standish has voluntarily agreed to limit the master-feeder aggregate annual
operating expenses (excluding brokerage commissions, taxes and extraordinary
expenses) of the Fund and the Portfolio to the Fund's ratio of expenses to
average net assets in effect immediately prior to the Fund's conversion to the
Hub and Spoke master-feeder fund structure. The expense ratio considered to be
in effect immediately prior to the conversion for this purpose will be
calculated using the actual expenses incurred by the Fund during the three
months immediately prior to conversion and annualizing this amount. Standish may
discontinue or modify such limitation in the future at its discretion, although
it has no current intention to do so. In addition, Standish has agreed in the
administration agreement to limit the Fund's aggregate annual operating expenses
(excluding brokerage commissions, taxes and extraordinary expenses) to the
permissible limit applicable in any state in which shares of the Fund are then
qualified for sale. If any expense limit is exceeded, the compensation due
Standish 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
such fiscal year.
Portfolio Transactions
Subject to the supervision of the Trustees of the Portfolio Trust, the
Adviser selects the brokers and dealers that execute orders to purchase and sell
portfolio securities for the Portfolio. The Adviser will generally seek to
obtain the best available price and most favorable execution with respect to all
transactions for the Portfolio.
Subject to the consideration of best price and execution and to applicable
regulations, the receipt of research and sales of Fund shares may also be
considered factors in the selection of brokers and dealers that execute orders
to purchase and sell portfolio securities for the Portfolio.
FEDERAL INCOME TAXES
The Fund presently qualifies and intends to continue to qualify for
taxation as a "regulated investment company" under the Code. If it qualifies for
treatment as a regulated investment company, the Fund will not be subject to
federal income tax on income (including capital gains) distributed to
shareholders in the form of dividends or capital gain distributions in
accordance with certain timing requirements of the Code.
The Fund will not be subject to a nondeductible 4%
excise tax under the Code to the extent that it meets certain distribution
requirements with respect to each calendar year. Certain distributions made in
order to satisfy the Code's distribution requirements may be declared by the
Fund during October, November or December of the year but paid during the
following January. Such distributions will be taxable to taxable shareholders as
if received on December 31 of the year the distributions are declared, rather
than the year in which the distributions are received.
20
<PAGE>
Shareholders which are taxable entities or persons will be subject to
federal income tax on dividends and capital gain distributions made by the Fund.
These dividends and distributions will be attributable to the Fund's allocable
share of the net income and net long-term and short-term capital gains of the
Portfolio and will also take into account any expenses incurred or income earned
directly by the Fund. Dividends paid by the Fund from net investment income,
certain net foreign currency gains, and any excess of net short-term capital
gain over net long-term capital loss will be taxable to shareholders as ordinary
income, whether received in cash or Fund shares. The portion of such dividends
attributable to the Fund's allocable share of qualifying dividends the Portfolio
receives, if any, may qualify for the corporate dividends received deduction,
subject to certain holding period requirements and debt financing limitations
under the Code. Dividends paid by the Fund from net capital gain (the excess of
net long-term capital gain over net short-term capital loss), called "capital
gain distributions," will be taxable to shareholders as long-term capital gains,
whether received in cash or Fund shares and without regard to how long the
shareholder has held shares of the Fund. Capital gain distributions do not
qualify for the corporate dividends received deduction. Dividends and capital
gain distributions may also be subject to state and local or foreign taxes.
The Portfolio anticipates that it may be subject to foreign withholding
taxes or other foreign taxes on income (possibly including capital gains) on
certain foreign investments (if any), which will reduce the yield or return on
those investments. Such taxes may be reduced or eliminated pursuant to an income
tax treaty in some cases. The Fund anticipates that it generally will not
qualify to pass its allocable share of such foreign taxes and any associated tax
deductions or credits through to its shareholders.
Redemptions and repurchases of shares are taxable events on which a
shareholder may recognize a gain or loss. Special rules recharacterize as
long-term any losses on the sale or exchange of Fund shares with a tax holding
period of six months or less, to the extent the shareholder received a capital
gain distribution with respect to such shares.
Individuals and certain other classes of shareholders may be subject to 31%
backup withholding of federal income tax on dividends, capital gain
distributions, and the proceeds of redemptions or repurchases of shares, if they
fail to furnish the Fund with their correct taxpayer identification number and
certain certifications or if they are otherwise subject to backup withholding.
Individuals, corporations and other shareholders that are not U.S. persons under
the Code are subject to different tax rules and may be subject to nonresident
alien withholding tax at the rate of 30% (or a lower rate provided by an
applicable tax treaty) on amounts treated as ordinary dividends from the Fund
and, unless a current IRS Form W-8 or an acceptable substitute is furnished to
the Fund, to backup withholding on certain payments from the Fund.
A state income (and possibly local income and/or intangible property) tax
exemption is generally available to the extent, if any, the Fund's distributions
are derived from interest on (or, in the case of intangibles taxes, the value of
its assets is attributable to) investments in certain U.S. Government
obligations, provided in some states that certain thresholds for holdings of
such obligations and/or reporting requirements are satisfied. Shareholders
should consult their tax advisers regarding the applicable requirements in their
particular states, including the effect, if any, of the Fund's indirect
ownership (through the Portfolio) of any such obligations.
21
<PAGE>
After the close of each calendar year, the Fund will send a notice to
shareholders that provides information about the federal tax status of
distributions to shareholders for such calendar year.
THE FUND AND THE PORTFOLIO
The Fund is a separate investment series of Standish, Ayer & Wood
Investment Trust, an unincorporated business trust organized under the laws of
The Commonwealth of Massachusetts pursuant to an Agreement and Declaration of
Trust dated August 13, 1986. Under the Agreement and Declaration of Trust, the
Trustees have authority to issue an unlimited number of shares of beneficial
interest, par value $.01 per share, of the Fund. Each share of the Fund is
entitled to one vote. All Fund shares have equal rights with regard to voting,
redemption, dividends, distributions and liquidation, and shareholders of the
Fund have the right to vote as a separate class with respect to certain matters
under the 1940 Act and the Agreement and Declaration of Trust. Shares of the
Fund do not have cumulative voting rights. Fractional shares have proportional
voting rights and participate in any distributions and dividends. When issued,
each Fund share will be fully paid and nonassessable. Shareholders of the Fund
do not have preemptive or conversion rights. Certificates representing shares of
the Fund will not be issued.
The Trust has established fourteen series that currently offer their shares
to the public and may establish additional series at any time. Each series is a
separate taxpayer, eligible to qualify as a separate regulated investment
company for federal income tax purposes. The calculation of the net asset value
of a series and the tax consequences of investing in a series will be determined
separately for each series.
The Trust is not required to hold annual meetings of shareholders. Special
meetings of shareholders may be called from time to time for purposes such as
electing or removing Trustees, changing a fundamental policy, or approving an
investment advisory agreement.
If less than two-thirds of the Trustees holding office have been elected by
shareholders, a special meeting of shareholders of the Trust will be called to
elect Trustees. Under the Agreement and Declaration of Trust and the 1940 Act,
the record holders of not less than two-thirds of the outstanding shares of the
Trust may remove a Trustee by votes cast in person or by proxy at a meeting
called for the purpose or by a written declaration filed with each of the
Trust's custodian banks. Except as described above, the Trustees will continue
to hold office and may appoint successor Trustees. Whenever ten or more
shareholders of the Trust who have been such for at least six months, and who
hold in the aggregate shares having a net asset value of at least $25,000 or
which represent at least 1% of the outstanding shares, whichever is less, apply
to the Trustees in writing stating that they wish to communicate with other
shareholders with a view to obtaining signatures to request a meeting, and such
application is accompanied by a form of communication and request which they
wish to transmit, the Trustees shall within five (5) business days after receipt
of such application either (1) afford to such applicants access to a list of the
names and addresses of all shareholders as recorded on the books of the Trust;
or (2) inform such applicants as to the approximate number of shareholders of
record and the approximate cost of mailing to them the proposed communication or
form of request.
22
<PAGE>
The Portfolio, in which all the Investable Assets of the Fund are invested,
is a series of Standish, Ayer & Wood Master Portfolio, an open-end management
investment company. The Portfolio Trust's Declaration of Trust provides that the
Portfolio Trust may establish and designate separate series of the Portfolio
Trust. The Portfolio Trust has established four series and may establish
additional series at any time. The Portfolio Trust's Declaration of Trust also
provides that the Fund and other entities investing in the Portfolio (e.g.,
other investment companies, insurance company separate accounts and common and
commingled trust funds) will not be liable for the obligations of the Portfolio,
although they will bear the risk of loss of their entire respective interests in
the Portfolio. However, there is a risk that interest-holders in the Portfolio
may be held personally liable as partners for the Portfolio's obligations.
Because the Portfolio Trust's declaration of trust disclaims interest-holder
liability and provides for indemnification against such liability, the risk of
the Fund incurring financial loss on account of such liability is limited to
circumstances in which both inadequate insurance existed and the Portfolio
itself was unable to meet its obligations. As such, it is unlikely that the Fund
would experience liability from the investment structure itself. In any event,
shareholders of the Fund will continue to remain shareholders of a Massachusetts
business trust, and the risk of such a person incurring liability by reason of
being a shareholder of the Fund is remote. The interests in the Portfolio Trust
are divided into separate series, such as the Portfolio. No series of the
Portfolio Trust has any preference over any other series.
Investors in other series of the Portfolio Trust will not be involved in
any vote involving only the Portfolio. Investors of all of the series of the
Portfolio Trust will, however, vote together to elect Trustees of the Portfolio
Trust and for certain other matters affecting the Portfolio Trust. As provided
by the 1940 Act, under certain circumstances, the shareholders of one or more
series could control the outcome of these votes.
Inquiries concerning the Fund should be made by contacting the Fund or the
Principal Underwriter at the address and telephone number listed on the cover of
this Prospectus.
PRINCIPAL UNDERWRITER
Standish Fund Distributors, L.P., One Financial Center, 26th Floor, Boston,
Massachusetts 02111, serves as the Trust's principal underwriter.
CUSTODIAN, TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
Investors Bank & Trust Company, 24 Federal Street, Boston, Massachusetts
02110, serves as the Fund's transfer and dividend disbursing agent and as
custodian of all cash and securities of the Portfolio.
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P., One Post Office Square, Boston, Massachusetts
02109 and Coopers & Lybrand, P.O. Box 219, Grand Cayman, Cayman Islands, BWI,
serve as independent accountants for the Trust and the Portfolio Trust,
respectively, and will audit the Fund's and the Portfolio's respective financial
statements annually.
LEGAL COUNSEL
Hale and Dorr, 60 State Street, Boston, Massachusetts 02109, is legal
counsel to the Trust, the Portfolio Trust and to the Adviser.
- --------------------------------------------------------------------------------
No dealer, salesman or other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus or in the Statement of Additional Information, and, if given or made,
such other information or representations must not be relied upon as having been
authorized by the Trust. This Prospectus does not constitute an offering in any
jurisdiction in which such offering may not be lawfully made.
23
<PAGE>
TAX CERTIFICATION INSTRUCTIONS
Federal law requires that taxable distributions and proceeds of redemptions
and exchanges be reported to the IRS and that 31% be withheld if you fail to
provide your correct Taxpayer Identification Number (TIN) and the certifications
contained in the Account Purchase Application (Application) or you are otherwise
subject to backup withholding. Amounts withheld and forwarded to the IRS can be
credited as a payment of tax when completing your Federal income tax return.
For most individual taxpayers, the TIN is the social security number.
Special rules apply for certain accounts. For example, for an account
established under the Uniform Gift to Minors Act, the TIN of the minor should be
furnished. If you do not have a TIN, you may apply for one using forms available
at local offices of the Social Security Administration or the IRS, and you
should write "Applied For" in the space for a TIN on the Application.
Recipients exempt from backup withholding, including corporations and
certain other entities, should provide their TIN and underline "exempt" in
section 2(a) of the TIN section of the Application to avoid possible erroneous
withholding. Non-resident aliens and foreign entities may be subject to
withholding of up to 30% on certain distributions received from the Fund and
must provide certain certifications on IRS Form W-8 to avoid backup withholding
with respect to other payments. For further information, see Code Sections 1441,
1442 and 3406 and/or consult your tax adviser.
24
<PAGE>
STANDISH EQUITY FUND
Investment Adviser
Standish, Ayer & Wood, Inc.
One Financial Center
Boston, Massachusetts 02111
Custodian
Investors Bank & Trust Company
24 Federal Street
Boston, Massachusetts 02110
Principal Underwriter
Standish Fund Distributors, L.P.
One Financial Center
Boston, Massachusetts 02111
Independent Accountants
Coopers & Lybrand L.L.P.
One Post Office Square
Boston, Massachusetts 02109
Legal Counsel
Hale and Dorr
60 State Street
Boston, Massachusetts 02109
- --------------------------------------------------------------------------------
1Hub and Spoke(R) is a registered service mark of Signature Financial Group,Inc.
25
<PAGE>
Prospectus dated April 29, 1996
PROSPECTUS
STANDISH FIXED INCOME FUND
One Financial Center
Boston, Massachusetts 02111
(800) 221-4795
Standish Fixed Income Fund (the "Fund") is one fund in the Standish, Ayer &
Wood family of funds. The Fund is organized as a separate diversified investment
series of Standish, Ayer & Wood Investment Trust (the "Trust"), an open-end
management investment company.
The Fund is designed primarily, but not exclusively, for tax-exempt
institutional investors, such as pension and profit-sharing plans, foundations
and endowments. The Fund's investment objective is primarily to achieve a high
level of current income, consistent with preserving principal and liquidity, and
secondarily to seek capital appreciation when market factors such as declining
interest rates indicate that capital appreciation may be available without
significant risk to principal. The Fund seeks to achieve its investment
objective by investing all its investable assets (the "Investable Assets") in
the Standish Fixed Income Portfolio (the "Portfolio") which has the same
investment objective as the Fund. The Portfolio is a series of Standish, Ayer &
Wood Master Portfolio (the "Portfolio Trust"), which is also an open-end
management investment company. The Portfolio will seek to achieve its investment
objective primarily through investing in a diversified portfolio of
investment-grade fixed-income securities with an average dollar-weighted
maturity of five to thirteen years. However, the Portfolio may invest up to 15%
of its net assets in securities which are classified by the rating agencies in
the highest category of non-investment grade securities, carry a high degree of
risk and are considered speculative by the rating agencies. See "Investment
Policies." Standish, Ayer & Wood, Inc., Boston, Massachusetts, is the
Portfolio's investment adviser ("Standish" or the "Adviser").
UNLIKE OTHER MUTUAL FUNDS WHICH DIRECTLY ACQUIRE AND MANAGE THEIR OWN
PORTFOLIOS OF SECURITIES, THE FUND SEEKS TO ACHIEVE ITS INVESTMENT OBJECTIVE BY
INVESTING ALL OF ITS INVESTABLE ASSETS IN THE PORTFOLIO WHICH IS A SEPARATE FUND
WITH AN IDENTICAL INVESTMENT OBJECTIVE. SEE "SPECIAL INFORMATION CONCERNING THE
HUB AND SPOKE MASTER-FEEDER FUND STRUCTURE" ON PAGE 9.
Investors may purchase shares of the Fund from the Trust's principal
underwriter, Standish Fund Distributors, L.P. (the "Principal Underwriter"), at
the address and phone number set forth above without a sales commission or other
transaction charges. Unless waived by the Fund, the minimum initial investment
is $100,000. Additional investments may be made in amounts of at least $5,000.
This Prospectus is intended to set forth concisely the information about
the Fund and the Trust that a prospective investor should know before investing.
Investors are encouraged to read this Prospectus and retain it for future
reference. Additional information about the Fund and the Trust is contained in a
Statement of Additional Information which has been filed with the Securities and
Exchange Commission (the "SEC") and is available upon request and without charge
by calling or writing to the Principal Underwriter at the telephone number or
address set forth above. The Statement of Additional Information bears the same
date as this Prospectus and is incorporated by reference into this Prospectus.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK OR OTHER INSURED DEPOSITORY INSTITUTION, AND ARE NOT
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD
OR ANY OTHER GOVERNMENT AGENCY. AN INVESTMENT IN SHARES OF THE FUND INVOLVES
INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
CONTENTS
Expense Information...........................................2
Financial Highlights .........................................3
Investment Objective and Policies ............................4
Risk Factors and Suitability .................................8
Special Information Concerning the Hub and Spoke Master-
Feeder Fund Structure ....................................9
Calculation of Performance Data .............................10
Dividends and Distributions .................................10
Purchase of Shares ..........................................10
Exchange of Shares ..........................................11
Redemption of Shares ........................................11
Management ..................................................12
Federal Income Taxes ........................................14
The Fund and the Portfolio ..................................14
Principal Underwriter .......................................15
Custodian, Transfer Agent and Dividend-Disbursing Agent......15
Independent Accountants......................................15
Legal Counsel ...............................................15
Appendix A...................................................16
Tax Certification Instructions ..............................17
1
<PAGE>
EXPENSE INFORMATION
Shareholder Transaction Expenses
Maximum Sales Load Imposed on Purchases None
Maximum Sales Load Imposed on Reinvested Dividends None
Deferred Sales Load None
Redemption Fees None
Annual Fund Operating Expenses (as a percentage of average net assets)
Management Fees 1 0.32%
12b-1 Fees None
Other Expenses (After Expense Limitation) 0.05%*
Total Fund Operating Expenses (After Expense Limitation) 0.37%*
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Example 1 yr. 3 yrs. 5 yrs. 10 yrs.
- --------------------------------------------------------------------------------------------------------------------------------
You would pay the following expenses on a $1,000 investment,
assuming (1) 5% annual return and (2) redemption at the end
of each time period: $4 $12 $21 $47
</TABLE>
The purpose of the above table is to assist the investor in understanding
the various costs and expenses of the Fund and the Portfolio that an investor in
the Fund will bear directly or indirectly. The figure shown in the caption
"Other Expenses," which includes, among other things, custodian and transfer
agent fees, registration costs and payments for insurance and audit and legal
services, is based on the Fund's expenses for the fiscal year ended December 31,
1995. The Trustees of the Trust believe that over time the aggregate per share
expenses of the Fund and the Portfolio will not be more than the expenses which
the Fund would incur if it were to retain the services of an investment adviser
and the Investable Assets of the Fund were invested directly in the types of
securities being held by the Portfolio.
- -------------
1 As of the close of business on April 26, 1996, the Fund transferred its
Investable Assets to the Portfolio in exchange for an interest in the Portfolio.
Prior to such date, the Trust, on behalf of the Fund, retained Standish as its
investment adviser.
* Standish has voluntarily agreed to limit the master-feeder aggregate
annual operating expenses of the Fund and the Portfolio (excluding brokerage
commissions, taxes and extraordinary expenses) to the Fund's ratio of expenses
to average net assets in effect immediately prior to the Fund's conversion to
the Hub and Spoke master-feeder fund structure. The expense ratio considered to
be in effect immediately prior to the conversion for this purpose will be
calculated using the actual expenses incurred by the Fund during the three
months immediately prior to conversion and annualizing this amount. Standish may
discontinue or modify such limitation in the future at its discretion, although
it has no current intention to do so. In the absence of such agreement, Other
Expenses and Total Operating Expenses of the Fund and the Portfolio are
estimated to be 0.06% and 0.38%, respectively, of average daily net assets. For
more information with respect to the expenses of the Fund and the Portfolio see
"Management -- Investment Adviser" and "Management -- Expenses" herein.
THE INFORMATION IN THE TABLE AND HYPOTHETICAL EXAMPLE ABOVE SHOULD NOT BE
CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY
BE GREATER OR LESS THAN THOSE SHOWN. MOREOVER, WHILE THE EXAMPLE ASSUMES A 5%
ANNUAL RETURN, THE FUND'S ACTUAL PERFORMANCE WILL VARY AND MAY RESULT IN AN
ACTUAL RETURN GREATER OR LESS THAN 5%.
2
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights for the years ended December 31, 1993, 1994 and
1995 have been audited by Coopers & Lybrand L.L.P., independent accountants,
whose report, together with the financial statements of the Fund, is
incorporated into the Statement of Additional Information.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------------
1995 1994 1993 1992* 1991*
------------ ------------ ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net asset value - beginning of period $18.91 $21.25 $20.55 $20.96 $19.56
------------ ------------ ----------- ---------- ----------
Income from investment operations
Net investment income $1.35 $1.25 $1.50 $1.59 $1.68
Net realized and unrealized gain (loss) 2.08 (2.29) 1.45 (0.18) 1.66
------------ ------------ ----------- ---------- ----------
Total from investment operations $3.43 ($1.04) $2.95 $1.41 $3.34
------------ ------------ ----------- ---------- ----------
Less distributions declared to shareholders
From net investment income ($1.42) ($1.10) ($1.51) ($1.52) ($1.49)
In excess of net investment income - - (0.04) - -
From realized gain - (0.04) (0.70) (0.30) (0.45)
Tax return of capital - (0.16) - - -
------------ ------------ ----------- ---------- ----------
Total distributions declared to shareholders ($1.42) ($1.30) ($2.25) ($1.82) ($1.94)
------------ ------------ ----------- ---------- ----------
Net asset value - end of period $20.92 $18.91 $21.25 $20.55 $20.96
============ ============ =========== ========== ==========
Total return 18.54% (4.86)% 14.64% 6.88% 17.65%
Ratios (to average net assets)/Supplemental Data
Net assets at end of period (000 omitted) $2,267,107 $1,642,933 $1,307,099 $919,909 $631,457
Expenses 0.38% 0.38% 0.40% 0.41% 0.46%
Net investment income 7.80% 7.25% 7.07% 7.61% 8.28%
Portfolio turnover 132% 122% 150% 217% 176%
(Continued Below)
Year Ended December 31, (continued)
-------------------------------------------------
1990* 1989* 1988* 1987*+
---------- ---------- ---------- ----------
Net asset value - beginning of period $19.54 $18.84 $18.99 $20.00
---------- ---------- ---------- ----------
Income from investment operations
Net investment income $1.76 $1.81 $1.72 $1.17
Net realized and unrealized gain (loss) (0.05) 0.69 (0.13) (1.07)
---------- ---------- ---------- ----------
Total from investment operations $1.71 $2.50 $1.59 $0.10
---------- ---------- ---------- ----------
Less distributions declared to shareholders
From net investment income ($1.69) ($1.80) ($1.74) ($1.11)
In excess of net investment income - - - -
From realized gain - - - -
Tax return of capital - - - -
---------- ---------- ---------- ----------
Total distributions declared to shareholders ($1.69) ($1.80) ($1.74) ($1.11)
---------- ---------- ---------- ----------
Net asset value - end of period $19.56 $19.54 $18.84 $18.99
========== ========== ========== ==========
Total return 9.23% 13.75% 8.53% 0.83% t
Ratios (to average net assets)/Supplemental Data
Net assets at end of period (000 omitted) $397,267 $264,874 $198,836 $156,834
Expenses 0.49% 0.53% 0.54% 0.59% t
Net investment income 9.07% 9.26% 8.94% 8.16% t
Portfolio turnover 107% 106% 119% 73%
t Computed on an annualized basis
* Audited by other auditors.
+ For the period from March 27, 1987 (start of business) to December 31, 1987
</TABLE>
Further information about the performance of the Fund is contained in the
Fund's Annual Report, which may be obtained from the Principal Underwriter
without charge.
3
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
Investment Objective
The Fund seeks to achieve its investment objective by investing all its
Investable Assets in the Portfolio which has the same investment objective as
the Fund. There can be no assurance that the investment objective of either the
Fund or the Portfolio will be achieved.
Since the investment characteristics of the Fund will correspond directly
to those of the Portfolio, the following is a discussion of the various
investments and investment policies of the Portfolio.
The Portfolio's investment objective is primarily to achieve a high level
of current income, consistent with conserving principal and liquidity, and
secondarily to seek capital appreciation when changes in interest rates or other
economic conditions indicate that capital appreciation may be available without
significant risk to principal. Such capital appreciation may result from an
improvement in the credit standing of an issuer whose securities are held by the
Portfolio or from a decline in interest rates or from a combination of both
factors. The Portfolio will seek to achieve its investment objective primarily
through investing in a diversified portfolio of fixed-income securities,
generally of investment grade, with an average dollar-weighted maturity of five
to thirteen years. Because of the uncertainty inherent in all investments, no
assurance can be given that either the Fund or the Portfolio will achieve its
investment objective.
The investment objective of the Fund is a fundamental policy which may not
be changed without a vote of the Fund's shareholders. The investment objective
of the Portfolio is not a fundamental policy and may be changed upon notice to
but without the approval of the Portfolio's investors. Investment policies which
are not fundamental policies may be changed by the Trustees of the Trust and the
Trustees of the Portfolio Trust without the approval of the Fund's shareholders
or the Portfolio's investors. The Fund's and the Portfolio's investment policies
are described further in the Statement of Additional Information.
Investment Policies
The Portfolio may invest in a broad range of fixed-income securities,
including bonds, notes, mortgage-backed and asset-backed securities, preferred
stock and convertible debt securities. The Portfolio may purchase securities
that pay interest on a fixed, variable, floating (including inverse floating),
contingent, in-kind or deferred basis. Under normal market conditions, at least
65% of the Portfolio's total assets will be invested in such securities. Because
the Portfolio is seeking a high level of current income, the possibility that it
will exercise the conversion options of any high yield convertible debt
securities it acquires is remote. Investors should be aware that investing in
mortgage-backed securities involves risks of fluctuation in yields and market
prices and of early prepayments on the underlying mortgages.
The Portfolio will normally invest in U.S. dollar denominated securities,
but may invest up to 20% of its total assets in securities denominated in
foreign currencies; provided, however, that at any particular time, no more than
10% of the Portfolio's total assets will be invested in foreign securities which
are not subject to currency hedging transactions back into U.S. dollars. See
"Risk Factors and Suitability" for a description of the risks associated with
investments in foreign securities.
4
<PAGE>
Although the Fund is intended primarily for tax-exempt institutional
investors and will be managed without regard to potential tax considerations,
the Portfolio may invest up to 10% of its total assets in tax-exempt securities,
such as state and municipal bonds, if the Adviser believes they will provide
competitive returns. The Fund's distributions of its allocable portion of the
interest the Portfolio earns from such securities will not be tax-exempt. The
Portfolio may adopt a temporary defensive position during adverse market
conditions by investing without limit in high quality money market instruments,
including short-term U.S. Government securities, negotiable certificates of
deposit, non-negotiable fixed time deposits, bankers' acceptances, floating-rate
notes and repurchase agreements.
The Portfolio will not have more than 25% of the current value of its total
assets invested in any single industry, provided that this restriction shall not
apply to U.S. Government securities, including mortgage pass-through securities
(GNMAs). Rather, the Portfolio will invest in a broad range of bond market
sectors, especially those deemed by the Adviser to be undervalued and
consequently underpriced and offering higher yields relative to the market as a
whole. Such sectors include mortgage pass-throughs, electric, telephone and gas
utilities, industrials, bank holding companies, Eurodollar bonds and original
issue discount bonds (i.e., bonds which are offered by an issuer at a discount
from their stated par value and which, because of uncertainty about their
quality, are potentially more volatile). In order to achieve its investment
objective, the Portfolio will seek to add value by selecting undervalued
investments, thus taking advantage of lower prices and higher yields, rather
than by varying the maturities of its portfolio investments to reflect interest
rate forecasts. Investments in bonds with maturities of five to fifteen years
will be emphasized, and it is expected that the average dollar-weighted maturity
of the Portfolio's portfolio will vary from five to thirteen years.
Ratings
The Portfolio will generally invest in investment grade fixed-income
securities, i.e., securities which, at the date of investment, are rated within
the four highest grades as determined by Moody's Investors Service, Inc.
("Moody's") (Aaa, Aa, A or Baa) or by Standard & Poor's Ratings Group ("Standard
& Poor's") (AAA, AA, A or BBB) or their respective equivalent ratings or, if not
rated, judged by the Adviser to be of equivalent credit quality to securities so
rated. Securities rated Baa by Moody's or BBB by Standard & Poor's 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.
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<PAGE>
The Portfolio may invest up to 15% of its net assets in securities rated
either Ba by Moody's or BB by Standard & Poor's or, if not rated, are judged by
the Adviser to be of equivalent credit quality to securities so rated ("BB Rated
Securities"). Securities rated Ba by Moody's or BB by Standard & Poor's are
classified in the highest category of non-investment grade securities. Such
securities may be considered to be high-yield securities ("junk bonds"), carry a
high degree of risk and are considered speculative by the major credit rating
agencies. The Portfolio intends to avoid what it perceives to be the most
speculative areas of the BB Rated Securities universe. See "Risk Factors and
Suitability" for a description of the risks associated with investments in BB
Rated Securities.
It is anticipated that the average dollar-weighted rated credit quality of
the securities in the Portfolio's portfolio will be Aa or AA according to
Moody's and Standard & Poor's ratings, respectively, or of comparable credit
quality as determined by the Adviser. In the case of a security that is rated
differently by the two rating services, the higher rating is used in computing
the Portfolio's average dollar-weighted credit quality and in connection with
the Portfolio's policy regarding BB Rated Securities. In the event that the
rating on a security held in the Portfolio's portfolio is downgraded by a rating
service, such action will be considered by the Adviser in its evaluation of the
overall investment merits of that security, but will not necessarily result in
the sale of the security. In determining whether securities are of equivalent
credit quality, the Adviser may take into account, but will not rely entirely
on, ratings assigned by foreign rating agencies. In the case of unrated
sovereign, subnational and sovereign related debt of foreign countries, the
Adviser may take into account, but will not rely entirely on, the ratings
assigned to the issuers of such securities. Appendix A sets forth excerpts from
the descriptions of ratings of corporate debt securities and sovereign,
subnational and sovereign related debt of foreign countries.
Mortgage-Backed Pass-Through Securities
Mortgage-backed "pass-through securities" are subject to regular payments
of principal and early prepayments of principal, which will affect the Fund's
current and total returns. It is not possible to predict accurately the life of
a particular issue of mortgage-backed "pass-through securities" held by the
Portfolio. The actual life of any mortgage-backed "pass-through security" is
likely to be substantially shorter than the original average maturity of the
mortgage pool underlying the security because unscheduled early prepayments of
principal on the security owned by the Portfolio will result from the
prepayment, refinancing or foreclosure of the underlying mortgage loans in the
mortgage pool.
For example, mortgagors may increase the rate at which they prepay their
mortgages when interest rates decline sufficiently to encourage refinancing. The
Portfolio, when the monthly payments (which may include unscheduled prepayments)
on a security are passed-through to it, may be able to reinvest them only at a
lower rate of interest. Because of the regular scheduled payments of principal
and the early unscheduled prepayments of principal, the mortgage-backed
"pass-through security" is less effective than other types of obligations as a
means of locking in attractive long-term interest rates. As a result, this type
of security may have less potential for capital appreciation during periods of
declining interest rates than other U.S. Government securities of comparable
maturities, although many issues of mortgage-backed "pass-through securities"
may have a comparable risk of decline in market value during periods of rising
interest rates. Although a security purchased at a premium above its par value
may carry a higher stated rate of return, both a scheduled payment of principal,
which will be made at par, and an unscheduled prepayment of principal generally
will decrease current and total returns and will accelerate the recognition of
income which, when distributed to Fund shareholders, will be taxable as ordinary
income.
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Collateralized Mortgage Obligations (CMOs)
The issuer of a CMO effectively transforms a mortgage pool into obligations
comprised of several different maturities, thus creating mortgage securities
that appeal to short-term and intermediate-term investors as well as the more
traditional long-term mortgage investor. CMOs are debt securities issued by
Federal Home Loan Mortgage Corporation, Federal National Mortgage Corporation
and by non-governmental financial institutions and other mortgage lenders and
are generally fully collateralized by a pool of mortgages held under an
indenture. CMOs are issued in a number of classes or series which have different
maturities and are generally retired in sequence. CMOs are designed to be
retired as the underlying mortgage loans in the mortgage pool are repaid. In the
event of sufficient early prepayments on such mortgages, the class or series of
CMO first to mature generally will be retired prior to its maturity. Thus the
early retirement of a particular class or series of a CMO held by the Portfolio
would affect the Fund's current and total returns in the manner indicated above.
In making investments in CMOs, the Adviser will take into account the
following considerations: the total return on CMOs will vary with interest
rates, which cannot be predicted; the maturity of the CMOs is variable and is
not known at the time of purchase; prepayments on the CMOs will depend upon
prevailing interest rates and the CMOs may have a shorter life than expected;
and, because CMOs are relatively new securities and have not been in existence
through all market cycles, the risks of investing in CMOs are not fully known.
Strategic Transactions
The Portfolio may, but is not required to, utilize various other investment
strategies as described below to hedge various market risks (such as interest
rates, currency exchange rates, and broad or specific equity or fixed-income
market movements), to manage the effective maturity or duration of fixed-income
securities, or to enhance potential gain. Such strategies are generally accepted
as part of modern portfolio management and are regularly utilized by many mutual
funds and other institutional investors. Techniques and instruments used by the
Portfolio may change over time as new instruments and strategies are developed
or regulatory changes occur.
In the course of pursuing its investment objective, the Portfolio may
purchase and sell (write) exchange-listed and over-the-counter put and call
options on securities, equity and fixed-income indices and other financial
instruments; purchase and sell financial futures contracts and options thereon;
enter into various interest rate transactions such as swaps, caps, floors or
7
<PAGE>
collars; and enter into various currency transactions such as currency forward
contracts, currency futures contracts, currency swaps or options on currencies
or currency futures (collectively, all the above are called "Strategic
Transactions"). Strategic Transactions may be used in an attempt to protect
against possible changes in the market value of securities held in or to be
purchased for the Portfolio's portfolio resulting from securities markets or
currency exchange rate fluctuations, to protect the Portfolio's unrealized gains
in the value of its portfolio securities, to facilitate the sale of such
securities for investment purposes, to manage the effective maturity or duration
of the Portfolio'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 Portfolio will attempt
to limit its net loss exposure resulting from Strategic Transactions entered
into for such purposes to not more than 3% of the Portfolio's net assets at any
one time and, to the extent necessary, the Portfolio will close out transactions
in order to comply with this limitation. (Transactions such as writing covered
call options are considered to involve hedging for the purposes of this
limitation.) In calculating the Portfolio's net loss exposure from such
Strategic Transactions, an unrealized gain from a particular Strategic
Transaction position would be netted against an unrealized loss from a related
Strategic Transaction position. For example, if the Adviser anticipates that the
Belgian franc will appreciate relative to the French franc, the Portfolio may
take a long forward currency position in the Belgian franc and a short foreign
currency position in the French franc. Under such circumstances, any unrealized
loss in the Belgian franc position would be netted against any unrealized gain
in the French franc position (and vice versa) for purposes of calculating the
Portfolio's net loss exposure. The ability of the Portfolio to utilize these
Strategic Transactions successfully will depend on the Adviser's ability to
predict pertinent market movements, which cannot be assured. The Portfolio will
comply with applicable regulatory requirements when implementing these
strategies, techniques and instruments. The Portfolio's activities involving
Strategic Transactions may be limited to enable the Fund to comply with the
requirements of Subchapter M of the Internal Revenue Code of 1986, as amended
(the "Code"), for qualification as a regulated investment company.
Strategic Transactions have risks associated with them including possible
default by the other party to the transaction, illiquidity and, to the extent
the Adviser's view as to certain market movements is incorrect, the risk that
the use of such Strategic Transactions could result in losses greater than if
they had not been used. The writing of put and call options may result in losses
to the Portfolio, 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 Portfolio can realize on its investments or cause the
Portfolio to hold a security it might otherwise sell. The use of currency
transactions can result in the Portfolio incurring losses as a result of a
number of factors including the imposition of exchange controls, suspension of
8
<PAGE>
settlements, or the inability to deliver or receive a specified currency. The
use of options and futures transactions entails certain other risks. In
particular, the variable degree of correlation between price movements of
futures contracts and price movements in the related portfolio position of the
Portfolio creates the possibility that losses on the hedging instrument may be
greater than gains in the value of the Portfolio's position. The writing of
options could significantly increase the Portfolio'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 Portfolio 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
Portfolio in writing options on futures and entering into futures transactions
is potentially unlimited; however, as described above, the Portfolio 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 Portfolio'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
Portfolio's Strategic Transactions is set forth in the Statement of Additional
Information.
When-Issued Securities and "Delayed Delivery" Securities
The Portfolio may commit up to 15% of its net assets to purchase securities
on a "when-issued" or "delayed delivery" basis. Although the Portfolio would
generally purchase securities on a when-issued or delayed delivery basis with
the intention of actually acquiring the securities, the Portfolio may dispose of
a when-issued or delayed delivery security prior to settlement if the Adviser
deems it appropriate to do so. The payment obligation and the interest rate on
these securities will be fixed at the time the Portfolio enters into the
commitment, but no income will accrue to the Portfolio until they are delivered
and paid for. Unless the Portfolio has entered into an offsetting agreement to
sell the securities, cash or liquid, high grade debt securities equal to the
amount of the Portfolio's commitment will be segregated and maintained with the
custodian for the Portfolio to secure the Portfolio'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 Portfolio.
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<PAGE>
Repurchase Agreements
The Portfolio may invest up to 5% of its net assets in repurchase
agreements under normal circumstances. Repurchase agreements acquired by the
Portfolio will always be fully collateralized as to principal and interest by
money market instruments or a letter of credit and will be entered into only
with commercial banks, brokers and dealers considered creditworthy by the
Adviser. If the other party or "seller" of a repurchase agreement defaults, the
Portfolio might suffer a loss to the extent that the proceeds from the sale of
the underlying securities and other collateral held by the Portfolio in
connection with the related repurchase agreement are less than the repurchase
price. In addition, in the event of bankruptcy of the seller or failure of the
seller to repurchase the securities as agreed, the Portfolio could suffer
losses, including loss of interest on or principal of the security and costs
associated with delay and enforcement of the repurchase agreement.
Short-Selling
The Portfolio may make short sales, which are transactions in which the
Portfolio sells a security it does not own in anticipation of a decline in the
market value of that security. To complete such a transaction, the Portfolio
must borrow the security to make delivery to the buyer. The Portfolio 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 Portfolio. Until the security is
replaced, the Portfolio 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 Portfolio also may be required to pay a premium, which would
increase the cost of the security sold. The proceeds of the short sale will be
retained by the broker, to the extent necessary to meet margin requirements,
until the short position is closed out.
Until the Portfolio replaces a borrowed security in connection with a short
sale, the Portfolio will: (a) maintain daily a segregated account not with the
broker, containing cash or U.S. Government securities, at such a level that the
amount deposited in the account plus the amount deposited with the broker as
collateral will equal the current value of the security sold short; or (b)
otherwise cover its short position.
The Portfolio 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 Portfolio replaces the borrowed security. The Portfolio will realize a
gain if the security declines in price between those dates by an amount greater
than premium and transaction costs. This result is the opposite of what one
would expect from a cash purchase of a long position in a security. The amount
of any gain will be decreased, and the amount of any loss increased, by the
amount of any premium or amounts in lieu of dividends or interest the Portfolio
may be required to pay in connection with a short sale.
The Portfolio's loss on a short sale as a result of an increase in the
price of a security sold short is potentially unlimited. The Portfolio may
purchase call options to provide a hedge against an increase in the price of a
security sold short by the Portfolio. When the Portfolio 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 Portfolio, the
premium and the commission paid may be more than the amount of the brokerage
commission charged if the security were to be purchased directly. See "Strategic
Transactions" above.
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<PAGE>
The Portfolio anticipates that the frequency of short sales will vary
substantially in different periods, and it does not intend that any specified
portion of its assets, as a matter of practice, will be in short sales. However,
no securities will be sold short if, after 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 Portfolio's net assets.
In addition to the short sales discussed above, the Portfolio may make
short sales "against the box," a transaction in which the Portfolio enters into
a short sale of a security which the Portfolio owns. The proceeds of the short
sale are held by a broker until the settlement date at which time the Portfolio
delivers the security to close the short position. The Portfolio receives the
net proceeds from the short sale.
Forward Roll Transactions
In order to enhance current income, the Portfolio may enter into forward
roll transactions with respect to mortgage-backed securities to the extent of
10% of its net assets. In a forward roll transaction, the Portfolio sells a
mortgage-backed security to a financial institution, such as a bank or
broker-dealer, and simultaneously agrees to repurchase a similar security from
the institution at a later date at an agreed-upon price. The mortgage-backed
securities that are repurchased will bear the same interest rate as those sold,
but generally will be collateralized by different pools of mortgages with
different prepayment histories than those sold. During the period between the
sale and repurchase, the Portfolio will not be entitled to receive interest and
principal payments on the securities sold. Proceeds of the sale will be invested
in short-term instruments, such as repurchase agreements or other short-term
securities, and the income from these investments, together with any additional
fee income received on the sale and the amount gained by repurchasing the
securities in the future at a lower purchase price, will generate income and
gain for the Portfolio which is intended to exceed the yield on the securities
sold. Forward roll transactions involve the risk that the market value of the
securities sold by the Portfolio may decline below the repurchase price of those
securities. At the time the Portfolio enters into a forward roll transaction, it
will place in a segregated custodial account cash or liquid, high quality debt
obligations having a value equal to the repurchase price (including accrued
interest) and will subsequently monitor the account to insure that the
equivalent value is maintained. The use of forward roll transactions involves
leverage, which allows any investment gains made with additional monies received
(in excess of the cost of the roll transaction) to increase the net asset value
of the Portfolio's interests faster than would otherwise be the case. On the
other hand, if the additional monies received are invested in ways that do not
fully recover the costs of such transactions to the Portfolio, the net asset
value of the Portfolio would fall faster than would otherwise be the case.
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<PAGE>
Illiquid and Restricted Securities
The Portfolio may not invest more than 15% of its net assets in illiquid
investments and securities that are subject to restrictions on resale (i.e.,
private placements) under the Securities Act of 1933 (the "1993 Act"), including
securities eligible for resale in reliance on Rule 144A under the 1933 Act
("restricted securities"). Illiquid investments include securities that are not
readily marketable, repurchase agreements maturing in more than seven days, time
deposits with a notice or demand period of more than seven days, certain
over-the-counter options, and restricted securities, unless it is determined,
based upon continuing review of the trading markets for the specific restricted
security, that such restricted security is eligible for resale under Rule 144A
and is liquid. The Board of Trustees of the Portfolio Trust has adopted
guidelines and delegated to the Adviser the daily function of determining and
monitoring the liquidity of restricted securities. The Board of Trustees,
however, retains oversight focusing on factors such as valuation, liquidity and
availability of information and is ultimately responsible for such
determinations. Investing in restricted securities eligible for resale pursuant
to Rule 144A could have the effect of increasing the level of illiquidity in the
Portfolio to the extent that qualified institutional buyers become for a time
uninterested in purchasing these restricted securities. The purchase price and
subsequent valuation of restricted and illiquid securities normally reflect a
discount, which may be significant, from the market price of comparable
securities for which a liquid market exists.
Portfolio Turnover
Portfolio turnover is not expected to exceed 200% on an annual basis. A
rate of turnover of 100% would occur if the value of the lesser of purchases and
sales of portfolio securities for a particular year equaled the average monthly
value of portfolio securities owned during the year (excluding short-term
securities). A high rate of portfolio turnover (100% or more) involves a
correspondingly greater amount of brokerage commissions and other costs which
must be borne directly by the Portfolio and thus indirectly by the Fund and its
shareholders. It may also result in the realization of larger amounts of net
short-term capital gains, distributions from which are taxable to Fund
shareholders as ordinary income and may, under certain circumstances, make it
more difficult for the Fund to qualify as a regulated investment company under
the Code. The portfolio turnover rates are listed in the section captioned
"Financial Highlights."
Investment Restrictions
Each of the Fund and the Portfolio has adopted certain fundamental policies
which may not be changed without the approval of the Fund's shareholders or the
Portfolio's investors, as the case may be.
The Fund has the same investment restrictions as the Portfolio, except that
the Fund may invest substantially all of its Investable Assets in an open-end
management investment company with substantially the same investment objective
as the Fund. References below to the Portfolio's investment restrictions also
include the Fund's investment restrictions. These policies provide, among other
things, that the Portfolio may not: (i) invest, with respect to at least 75% of
its total assets, more than 5% in the securities of any one issuer (other than
the U.S. Government, its agencies or instrumentalities) or acquire more than 10%
of the outstanding voting securities of any issuer; (ii) issue senior
securities, borrow money or securities or pledge or mortgage its assets, except
that the Portfolio may (a) borrow money from banks as a temporary measure for
extraordinary or emergency purposes (but not for investment purposes) in an
amount up to 15% of the current value of its total assets, (b) enter into
forward roll transactions, and (c) pledge its assets to an extent not greater
than 15% of the current value of its total assets to secure such borrowings;
however, the Portfolio may not make any additional investments while its
outstanding bank borrowings exceed 5% of the current value of its total assets;
or (iii) lend portfolio securities.
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<PAGE>
If any percentage restriction described above is adhered to at the time of
investment, a subsequent increase or decrease in the percentage resulting from a
change in the value of the Portfolio's assets will not constitute a violation of
the restriction. Certain non-fundamental policies and additional fundamental
policies adopted by the Fund and the Portfolio are described in the Statement of
Additional Information.
RISK FACTORS AND SUITABILITY
The Fund is designed primarily for tax-exempt institutional investors such
as pension or profit-sharing plans, foundations and endowments which seek to
maximize total return and whose beneficiaries are in a position to benefit from
the tax-deferred reinvestment of the quarterly income dividends and any capital
gains distributions paid by the Fund. The Fund may also be suitable for other
investors, depending upon their investment goals and financial and tax
positions. Although the price of the Fund's shares may fluctuate more than
short-term money market instruments, the Fund will seek to keep such volatility
below that of longer-term debt securities by limiting the average term of
securities in its portfolio. The Fund is not intended to provide an investment
program meeting all the requirements of an investor. Additionally,
notwithstanding the Portfolio's ability to diversify and spread risk by holding
securities of a number of portfolio companies, investors should invest in the
Fund only if they are able and prepared to bear the risk of investment losses
which may accompany the investments contemplated by the Portfolio.
Yields on debt securities depend on a variety of factors, such as general
conditions in the money and bond markets, and the size, maturity and rating of a
particular issue. Debt securities with longer maturities tend to produce higher
yields and are generally subject to greater potential capital appreciation and
depreciation. The market prices of debt securities usually vary depending upon
available yields, rising when interest rates decline and declining when interest
rates rise.
Foreign Securities
Investing in securities of foreign issuers and securities denominated in
foreign currencies or utilizing foreign currency transactions involves certain
risks of political, economic and legal conditions and developments not typically
associated with investing in United States companies. Such conditions or
developments might include unfavorable changes in currency exchange rates,
exchange control regulations (including currency blockage), expropriation of
assets of companies in which the Portfolio invests, nationalization of such
companies, imposition of withholding taxes on dividend or interest payments, and
possible difficulty in obtaining and enforcing judgments against a foreign
issuer. Also, foreign securities may not be as liquid and may be more volatile
than comparable domestic securities. Furthermore, issuers of foreign securities
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<PAGE>
are subject to different, often less comprehensive, accounting, reporting and
disclosure requirements than domestic issuers. The Portfolio, in connection with
its purchases and sales of foreign securities, other than those denominated in
U.S. dollars, will incur transaction costs in converting currencies. Also,
brokerage costs in purchasing and selling corporate securities in foreign
securities markets are sometimes higher than such costs in comparable
transactions in domestic securities markets, and foreign custodial costs
relating to the Portfolio's portfolio securities are higher than domestic
custodial costs.
BB Rated Securities
Investing in BB Rated Securities involves a higher degree of credit risk
(the risk that the issuer will not make interest or principal payments when due)
than investing in higher rated securities. In the event of an unanticipated
default, the Portfolio will experience a reduction in its income, and could
expect a decline in the market value of the securities so affected. More careful
analysis of the financial condition of each issuer of BB Rated Securities is
therefore necessary. During an economic downturn or substantial period of rising
interest rates, highly leveraged issuers may experience financial stress which
would adversely affect their ability to service their principal and interest
payment obligations, to meet projected business goals and to obtain additional
financing. Periods of economic or political uncertainty and change can be
expected to result in volatility in prices of these securities.
BB Rated Securities generally offer a higher yield, but may be subject to a
higher risk of default in interest or principal payments than higher rated
securities. The market prices of BB Rated Securities are generally less
sensitive to interest rate changes than higher rated securities, but are
generally more sensitive to adverse economic or political changes or, in the
case of corporate issuers, to individual company developments. BB Rated
Securities also may have less liquid markets than higher rated securities, and
their liquidity, as well as their value, may be more severely affected by
adverse economic conditions. Adverse publicity and investor perceptions of the
market, as well as newly enacted or proposed legislation, may also have a
negative impact on the market for BB Rated Securities.
For the fiscal year ended December 31, 1995, the Fund's investments, on a
dollar weighted basis, calculated
at the end of each month, had the following credit quality characteristics:
Investments Percentage
- ----------- ----------
U.S. Government Securities 33.2%
U.S. Government Agency Securities 20.6%
Bonds:
Aaa or AAA 6.9%
Aa or AA 3.2%
A 9.1%
Baa or BBB 12.2%
Ba or BB 14.8%
----
100%
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SPECIAL INFORMATION CONCERNING THE HUB
AND SPOKE(R) MASTER-FEEDER FUND
Unlike other mutual funds which directly acquire and manage their own
portfolio securities, the Fund seeks to achieve its investment objective by
investing all of its Investable Assets in the Portfolio, which has the same
investment objective and restrictions as the Fund. The Portfolio in turn invests
primarily in securities consistent with that objective. Therefore, an investor's
interest in the Portfolio's securities is indirect, like investments in other
investment companies and pooled investment vehicles only more so. In addition to
selling a beneficial interest to the Fund, the Portfolio may sell beneficial
interests to other mutual funds or institutional investors. Such investors will
invest in the Portfolio on the same terms and conditions and will pay a
proportionate share of the Portfolio's expenses. However, the other investors
investing in the Portfolio are not required to sell their shares at the same
public offering price as the Fund due to the imposition of sales commissions and
variations in other operating expenses. Therefore, investors in the Fund should
be aware that these differences may result in differences in returns experienced
by investors in the different funds that invest in the Portfolio. Such
differences in returns are also present in other mutual fund structures.
Information concerning other holders of interests in the Portfolio is available
from the Adviser (800) 221-4795.
The Hub and Spoke master-feeder fund structure has been developed
relatively recently, so shareholders should carefully consider this investment
approach.
Smaller funds investing in the Portfolio may be materially affected by the
actions of larger funds investing in the Portfolio. For example, if a large fund
withdraws from the Portfolio, the remaining funds may experience higher pro rata
operating expenses, thereby producing lower returns (however, this possibility
exists as well for traditionally structured funds that have large institutional
investors). Additionally, because the Portfolio would have fewer assets in such
a case, it may become less diversified, resulting in increased portfolio risk.
Also, funds with a greater pro rata ownership in the Portfolio could have
effective voting control of the operations of the Portfolio. Except as permitted
by the SEC, whenever the Trust is requested to vote on matters pertaining to the
Portfolio (other than a vote by the Fund to continue the operations of the
Portfolio upon the withdrawal of another investor in the Portfolio), the Trust
will hold a meeting of shareholders of the Fund and will cast all of its votes
in the same proportion as the votes of the Fund's shareholders. The percentage
of the Trust's votes representing Fund shareholders not voting will be voted by
the Trustees or officers of the Trust in the same proportion as the Fund
shareholders who do, in fact, vote. Fund shareholders who do not vote will not
affect the Trust's votes at the Portfolio meeting.
Certain changes in the Portfolio's investment objectives, policies or
restrictions may require the Fund to withdraw its interest in the Portfolio. Any
such withdrawal could result in a distribution "in kind" of portfolio securities
(as opposed to a cash distribution from the Portfolio) to the extent permitted
by the Investment Company Act of 1940, as amended (the "1940 Act"), and the
rules thereunder. If securities are distributed, the Fund could incur brokerage,
tax or other charges in converting the securities to cash. In addition, the
distribution in kind may result in a less diversified portfolio of investments
or adversely affect the liquidity of the Fund. Notwithstanding the above, there
are other means for meeting redemption requests, such as borrowing.
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<PAGE>
The Fund's investment objective is a fundamental policy and may not be
changed without the approval of the Fund's shareholders. The investment
objective of the Portfolio is not a fundamental policy and may be changed
without the approval of investors in the Portfolio. If the Portfolio proposed to
change its investment objective, the Fund would either obtain shareholder
approval to make a corresponding change to its investment objective or withdraw
its investment from the Portfolio. The Fund may withdraw its investment from the
Portfolio at any time if the Board of Trustees of the Trust determines that it
is in the best interests of the shareholders of the Fund to do so (including if
the Fund's and the Portfolio's investment objectives were not substantially the
same). Upon any such withdrawal, the Board of Trustees of the Trust would
consider what action might be taken, including investing all the Investable
Assets of the Fund in another pooled investment entity having substantially the
same investment objective as the Fund or retaining an investment adviser to
manage directly the Fund's assets in accordance with its investment policies
described above with respect to the Portfolio. In any event, shareholders of the
Fund will receive 30 days prior written notice with respect to any change in the
investment objective of the Portfolio. See "investment Objective and Policies"
for a description of the fundamental policies of the Portfolio that cannot be
changed without approval by the "vote of a majority of the outstanding voting
securities" (as defined in the 1940 Act) of the Portfolio.
For descriptions of the investment objective, policies and restrictions of
the Portfolio, see "Investment Objective and Policies." For descriptions of the
management of the Portfolio, see "Management" herein and in the Statement of
Additional Information. For descriptions of the expenses of the Portfolio, see
"Management" herein.
CALCULATION OF PERFORMANCE DATA
From time to time the Fund may advertise its yield and total return. Both
yield and total return figures are based on historical earnings and are not
intended to indicate future performance. The "total return" of the Fund refers
to the average annual compounded rates of return over 1, 5 and 10 year periods
(or any shorter period since inception) that would equate an initial amount
invested at the beginning of a stated period to the ending redeemable value of
the investment. The calculation assumes the reinvestment of all dividends and
distributions, includes all recurring fees that are charged to all shareholder
accounts and deducts all nonrecurring charges at the end of each period.
The "yield" of the Fund is computed by dividing the net investment income
per share earned during the period stated in the advertisement by the maximum
offering price per share on the last day of the period (using the average number
of shares entitled to receive dividends). For the purpose of determining net
investment income, the calculation includes among expenses of the Fund all
recurring fees that are charged to all shareholder accounts and any nonrecurring
charges for the period stated.
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From time to time, the Fund may compare its performance with that of other
mutual funds with similar investment objectives, to stock, bond and other
relevant indices, and to performance rankings prepared by recognized mutual fund
statistical services. In addition, the Fund's performance may be compared to
alternative investment or savings vehicles and/or to indices or indicators of
economic activity.
DIVIDENDS AND DISTRIBUTIONS
The Fund's dividends from net investment income will be declared and
distributed quarterly. The Fund's dividends from short-term and long-term
capital gains, if any, after reduction by capital losses, will be declared and
distributed at least annually. In determining the amounts of its dividends, the
Fund will take into account its share of the income, gains or losses, expenses,
and any other tax items of the Portfolio. Dividends from net investment income
and capital gains distributions, if any, are automatically reinvested in
additional shares of the Fund unless the shareholder elects to receive them in
cash.
PURCHASE OF SHARES
Shares of the Fund may be purchased from the Principal Underwriter, which
offers the Fund's shares to the public on a continuous basis. Shares are sold at
the net asset value per share next computed after the purchase order is received
in good order by the Principal Underwriter and payment for the shares is
received by the Fund's custodian. Please see the Fund's account application or
call the Principal Underwriter for instructions on how to make payment of shares
to the Fund's custodian. Unless waived by the Fund, the minimum initial
investment is $100,000. Additional investments may be made in amounts of at
least $5,000.
Shares of the Fund may also be purchased through securities dealers. Orders
for the purchase of Fund shares received by dealers by the close of regular
trading on the New York Stock Exchange on any business day and transmitted to
the Principal Underwriter or its agent by the close of its business day
(normally 4:00 p.m., New York City time) will be effected as of the close of
regular trading on the New York Stock Exchange on that day, provided that
payment for the shares is also received by the Fund's custodian on that day.
Otherwise, orders will be effected at the net asset value per share determined
on the next business day. It is the responsibility of dealers to transmit orders
so they will be received by the Principal Underwriter before the close of its
business day. Shares of the Fund purchased through dealers may be subject to
transaction fees, no part of which will be received by the Fund, the Principal
Underwriter or the Adviser.
The Fund's net asset value per share is computed each day on which the New
York Stock Exchange is open as of the close of regular trading on the exchange
(currently 4:00 p.m., New York City time). The net asset value per share is
calculated by determining the value of all the Fund's assets (i.e., the value of
its investment in the Portfolio and other assets), subtracting all liabilities
and dividing the result by the total number of shares outstanding. The
Portfolio's portfolio securities are valued at the last sale prices, on the
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valuation day, on the exchange or national securities market on which they are
primarily traded. Securities not listed on an exchange or national securities
market, or securities for which there were no reported transactions, are valued
at the last quoted bid prices. Securities for which quotations are not readily
available and all other assets are valued at fair value as determined in good
faith by the Adviser in accordance with procedures approved by the Trustees of
the Portfolio Trust. Money market instruments with less than sixty days
remaining to maturity when acquired by the Portfolio are valued on an amortized
cost basis unless the Portfolio Trust's Board of Trustees determines that
amortized cost does not represent fair value. If the Portfolio acquires a money
market instrument with more than sixty days remaining to its maturity, it is
valued at current market value until the sixtieth day prior to maturity and will
then be valued at amortized cost based upon the value on such date unless the
Trustees of the Portfolio Trust determine during such sixty-day period that
amortized cost does not represent fair value. Additional information concerning
the Portfolio's valuation policies is contained in the statement of Additional
Information.
In the sole discretion of the Trust, the Fund may accept securities instead
of cash for the purchase of shares of the Fund. The Trust will ask the Adviser
to determine that any securities acquired by the Fund in this manner are
consistent with the investment objective, policies and restrictions of the
Portfolio. The securities will be valued in the manner stated above. The
purchase of shares of the Fund for securities instead of cash may cause an
investor who contributed them to realize a taxable gain or loss with respect to
the securities transferred to the Fund.
The Trust reserves the right in its sole discretion (i) to suspend the
offering of the Fund's shares, (ii) to reject purchase orders when in the best
interest of the Fund and (iii) to modify or eliminate the minimum initial
investment in Fund shares. The Fund's investment minimums do not apply to
accounts for which the Adviser or any of its affiliates serves as investment
adviser or to employees of the Adviser or any of its affiliates or to members of
such persons' immediate families. The Fund's investment minimums apply to the
aggregate value invested in omnibus accounts rather than to the investment of
the underlying participants in the omnibus accounts.
EXCHANGE OF SHARES
Shares of the Fund may be exchanged for shares of one or more other funds
in the Standish, Ayer & Wood family of funds. Shares of the Fund redeemed in an
exchange transaction are valued at their net asset value next determined after
the exchange request is received by the Principal Underwriter or its agent.
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.
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Written Exchanges
Shares of the Fund may be exchanged by written order to the Principal
Underwriter, One Financial Center, Boston, Massachusetts 02111. A written
exchange request must (a) state the name of the current Fund, (b) state the name
of the fund into which the current Fund shares will be exchanged, (c) state the
number of shares or the dollar amount to be exchanged, (d) identify the
shareholder's account numbers in both funds and (e) be signed by each registered
owner exactly as the shares are registered. Signature(s) must be guaranteed as
listed under "Written Redemption" below.
Telephonic Exchanges
Shareholders who elect telephonic privileges may exchange shares by calling
the Principal Underwriter at (800) 221-4795. Telephonic privileges are not
available to shareholders automatically. Proper identification will be required
for each telephonic exchange. Please see "Telephone Transactions" below for more
information regarding telephonic transactions.
General Exchange Information
All exchanges are subject to the following exchange restrictions: (i) the
fund into which shares are being exchanged must be registered for sale in your
state; (ii) exchanges may be made only between funds that are registered in the
same name, address and, if applicable, taxpayer identification number; and (iii)
unless waived by the Trust, the amount to be exchanged must satisfy the minimum
account size of the fund to be exchanged into. Exchange requests will not be
processed until payment for the shares of the current Fund have been received by
the Principal Underwriter. The exchange privilege may be changed or discontinued
and may be subject to additional limitations upon sixty (60) days' notice to
shareholders, including certain restrictions on purchases by market-timer
accounts.
REDEMPTION OF SHARES
Shares of the Fund may be redeemed by any of the methods described below at
the net asset value per share next determined after receipt by the Principal
Underwriter 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 Fund may be redeemed by written order to the Principal
Underwriter, One Financial Center, 26th Floor, Boston, Massachusetts 02111. A
written redemption request must (a) state the name of the Fund and the number of
shares or the dollar amount to be redeemed, (b) identify the shareholder's
account number and (c) be signed by each registered owner exactly as the shares
are registered. Signature(s) must be guaranteed by a member of either the
Securities Transfer Association's STAMP program or the New York Stock Exchange's
Medallion Signature Program or by any one of the following institutions,
provided that such institution meets credit standards established by Investors
Bank & Trust Company, the Fund's transfer agent: (i) a bank; (ii) a securities
broker or dealer, including a government or municipal securities broker or
dealer, that is a member of a clearing corporation or has net capital of at
least $100,000; (iii) a credit union having authority to issue signature
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guarantees; (iv) a savings and loan association, a building and loan
association, a cooperative bank, or a federal savings bank or association; or
(v) a national securities exchange, a registered securities exchange or a
clearing agency. Additional supporting documents may be required in the case of
estates, trusts, corporations, partnerships and other shareholders that are not
individuals. Redemption proceeds will normally be paid by check mailed within
three business days of receipt by the Principal Underwriter of a written
redemption request in proper form. If shares to be redeemed were recently
purchased by check, the Fund may delay transmittal of redemption proceeds until
such time as it has assured itself that good funds have been collected for the
purchase of such shares. This may take up to fifteen (15) days in the case of
payments made by check.
Telephonic Redemption
Shareholders who elect telephonic privileges may redeem shares by calling
the Principal Underwriter at (800) 221-4795. Telephonic privileges are not
available to shareholders automatically. Redemption proceeds will be mailed or
wired in accordance with the shareholder's instruction on the account
application to a pre-designated account. Redemption proceeds will normally be
paid promptly after receipt of telephonic instructions, but no later than three
business days thereafter, except as described above for shares purchased by
check. Redemption proceeds will be sent only by check payable to the shareholder
of record at the address of record, unless the shareholder has indicated, in the
initial application for the purchase of shares, a commercial bank to which
redemption proceeds may be sent by wire. These instructions may be changed
subsequently only in writing, accompanied by a signature guarantee, and
additional documentation in the case of shares held by a corporation or other
entity or by a fiduciary such as a trustee or executor. Wire charges, if any,
will be deducted from redemption proceeds. Proper identification will be
required for each telephonic redemption.
Repurchase Order
In addition to 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 payment
of the shares by the Fund's custodian. Brokers and dealers are obligated to
transmit repurchase orders to the Principal Underwriter promptly prior to the
close of the Principal Underwriter's business day (normally 4:00 p.m.). Brokers
or dealers may charge for their services in connection with a repurchase of Fund
shares, but neither the Trust 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 Trust and the Fund's custodian to act upon instructions of any
person to redeem and/or exchange shares from the shareholder's account. Further,
the shareholder acknowledges that, as long as the Fund employs reasonable
procedures to confirm that telephonic instructions are genuine, and follows
telephonic instructions that it reasonably believes to be genuine, neither the
Adviser, nor the Principal Underwriter, nor the Trust, nor the Fund, nor the
Fund's custodian, nor their respective officers or employees, will be liable for
any loss, expense or cost arising out of any request for a telephonic redemption
or exchange, even if such transaction results from any fraudulent or
unauthorized instructions.
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Depending upon the circumstances, the Fund intends to employ personal
identification or written confirmation of transactions procedures, and if it
does not, the Fund may be liable for any losses due to unauthorized or
fraudulent instructions. All telephone transaction requests will be recorded.
Shareholders may experience delays in exercising telephone transaction
privileges during periods of abnormal market activity. Accordingly, during
periods of volatile economic and market conditions, shareholders may wish to
consider transmitting redemption and exchange requests in writing.
* * * *
The proceeds paid upon redemption or repurchase may be more or less than
the cost of the shares, depending upon the market value of the Portfolio's
portfolio investments at the time of redemption or repurchase. The Fund intends
to pay cash for all shares redeemed, but under certain conditions, the Fund may
make payments wholly or partially in securities withdrawn from the Portfolio for
this purpose. Please see the Statement of Additional Information for further
information regarding the Fund's ability to satisfy redemption requests in-kind.
Because of the cost of maintaining shareholder accounts, the Fund may
redeem, at net asset value, the shares in any account which has a value of less
than $50,000 as a result of redemptions or transfers. Before doing so, the Fund
will notify the shareholder that the value of the shares in the account is less
than the specified minimum and will allow the shareholder 30 days to make an
additional investment in an amount which will increase the value of the account
to at least $50,000. The Fund may eliminate duplicate mailings of Fund materials
to shareholders that have the same address of record.
MANAGEMENT
Trustees
The Fund is a separate investment series of Standish, Ayer & Wood
Investment Trust, a Massachusetts business trust. Under the terms of the
Agreement and Declaration of Trust establishing the Trust, which is governed by
the laws of The Commonwealth of Massachusetts, the Trustees of the Trust are
ultimately responsible for the management of its business and affairs.
The Portfolio is a separate investment series of Standish, Ayer & Wood
Master Portfolio, a master trust fund organized under the laws of the State of
New York. Under the terms of the Declaration of Trust, the affairs of the
Portfolio are managed under the supervision of the Trustees of the Portfolio
Trust.
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A majority of the Trustees who are not "interested persons" (as defined in
the 1940 Act) of the Trust or the Portfolio Trust, as the case may be, have
adopted written procedures reasonably appropriate to deal with potential
conflicts of interest arising from the fact that the same individuals are
trustees of the Trust and of the Portfolio Trust, up to and including creating
separate boards of trustees. See "Management" in the Statement of Additional
Information for more information about the Trustees and officers of the Trust
and the Portfolio Trust.
Investment Adviser
Standish, Ayer & Wood, Inc.("Standish" or the "Adviser"), One Financial
Center, Boston, Massachusetts 02111, serves as investment adviser to the
Portfolio pursuant to an investment advisory agreement and manages the
Portfolio's investments and affairs subject to the supervision of the Trustees
of the Portfolio Trust. The Adviser is a Massachusetts corporation incorporated
in 1933 and is a registered investment adviser under the Investment Advisers Act
of 1940.
The Adviser provides fully discretionary management services and counseling
and advisory services to a broad range of clients throughout the United States
and abroad. As of February 29, 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
(February 29, 1996)
- ------------------------------------------------------------------
Standish Controlled Maturity Fund $ 9,206,532
Standish Equity Fund 95,832,592
Standish Fixed Income Fund 2,274,975,978
Standish Fixed Income Fund II 10,046,446
Standish Global Fixed Income Fund 147,989,501
Standish Intermediate Tax Exempt Bond Fund 31,338,929
Standish International Equity Fund 55,691,972
Standish International Fixed Income Fund 792,817,998
Standish Massachusetts Intermediate
Tax Exempt Bond Fund 32,170,126
Standish Securitized Fund 55,002,171
Standish Short-Term Asset Reserve Fund 298,685,235
Standish Small Capitalization Equity Fund 188,411,176
Standish Small Cap Tax-Sensitive Equity Fund 1,278,405
Standish Tax-Sensitive Equity Fund 1,232,170
Corporate pension funds are the largest asset under active management by
the Adviser. The Adviser's clients also include charitable and educational
endowment funds, financial institutions, trusts and individual investors. As of
February 29, 1996, the Adviser managed approximately
$29 billion of assets.
The Portfolio's portfolio manager is Caleb F. Aldrich. Mr. Aldrich has been
primarily responsible for the day-to-day management of the Fund's portfolio
since January 1, 1993 and of the Portfolio's portfolio since the Fund's
conversion to the Hub and Spoke master-feeder fund structure on April 26, 1996.
During the past five years, Mr. Aldrich has served as a Director (1992) and Vice
President of the Adviser.
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Subject to the supervision and direction of the Trustees of the Portfolio
Trust, the Adviser manages the Portfolio in accordance with its stated
investment objective and policies, recommends investment decisions for the
Portfolio, places orders to purchase and sell securities on behalf of the
Portfolio and permits the Portfolio to use the name "Standish." For its services
to the Portfolio, the Adviser receives a monthly fee equal on an annual basis to
0.40% of the first $250 million of average daily net assets, 0.35% of the next
$250 million of average daily net assets and 0.30% of average daily net assets
in excess of $250 million. For the Fund's fiscal year ended December 31, 1995,
advisory fees paid by the Fund represented 0.32% of the Fund's average daily net
assets.
Administrator of the Fund
Standish also serves as administrator to the Fund (the "Administrator")
pursuant to an administration agreement. As administrator, Standish manages the
affairs of the Fund, provides all necessary office space and services of
executive personnel for administering the affairs of the Fund, and allows the
Fund to use the name "Standish." For these services, Standish currently does not
receive any additional compensation. The Trustees of the Trust may, however,
determine in the future to compensate Standish for its administrative services.
Expenses
The Portfolio and the Fund, as the case may be, are each responsible for
all of their respective costs and expenses not expressly stated to be payable by
Standish under the investment advisory agreement with the Portfolio or the
administration agreement with the Fund. Among other expenses, the Portfolio will
pay investment advisory fees; bookkeeping, share pricing and custodian fees and
expenses; expenses of notices and reports to interest-holders; and expenses of
the Portfolio's administrator. The Fund will pay shareholder servicing fees and
expenses; expenses of prospectuses, statements of additional information and
shareholder reports which are furnished to shareholders. Each of the Fund and
Portfolio will pay legal and auditing fees; registration and reporting fees and
expenses; and Trustees' fees and expenses. The Trust's Principal Underwriter,
Standish Fund Distributors, L.P., bears without subsequent reimbursement the
distribution expenses attributable to the offering and sale of Fund shares.
Expenses of the Trust or the Portfolio Trust which relate to more than one of
their respective series are allocated among such series by the Adviser and SIMCO
in an equitable manner, primarily on the basis of relative net asset values. For
the fiscal year ended December 31, 1995, expenses borne by the Fund represented
0.38% of the Fund's average daily net assets.
Standish has voluntarily agreed to limit the master-feeder aggregate annual
operating expenses (excluding brokerage commissions, taxes and extraordinary
expenses) of the Fund and the Portfolio to the Fund's ratio of expenses to
average net assets in effect immediately prior to the Fund's conversion to the
Hub and Spoke master-feeder fund structure. The expense ratio considered to be
in effect immediately prior to the conversion for this purpose will be
calculated using the actual expenses incurred by the Fund during the three
months immediately prior to conversion and annualizing this amount. Standish may
discontinue or modify such limitation in the future at its discretion, although
it has no current intention to do so. In addition, Standish has agreed in the
administration agreement to limit the Fund's aggregate annual operating expenses
(excluding brokerage commissions, taxes and extraordinary expenses) to the
permissible limit applicable in any state in which shares of the Fund are then
qualified for sale. If either expense limit is exceeded, the compensation due
Standish 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
such fiscal year.
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Portfolio Transactions
Subject to the supervision of the Trustees of the Portfolio Trust, the
Adviser selects the brokers and dealers that execute orders to purchase and sell
portfolio securities for the Portfolio. The Adviser will generally seek to
obtain the best available price and most favorable execution with respect to all
transactions for the Portfolio.
Subject to the consideration of best price and execution and to applicable
regulations, the receipt of research and sales of Fund shares may also be
considered factors in the selection of brokers and dealers that execute orders
to purchase and sell portfolio securities for the Portfolio.
FEDERAL INCOME TAXES
The Fund presently qualifies and intends to continue to qualify for
taxation as a "regulated investment company" under the Code. If it qualifies for
treatment as a regulated investment company, the Fund will not be subject to
federal income tax on income (including capital gains) distributed to
shareholders in the form of dividends or capital gain distributions in
accordance with certain timing requirements of the Code.
The Fund will be subject to a nondeductible 4% excise tax under the Code to
the extent that it fails to meet certain distribution requirements with respect
to each calendar year. Certain distributions made in order to satisfy the Code's
distribution requirements may be declared by the Fund during October, November
or December of the year but paid during the following January. Such
distributions will be taxable to taxable shareholders as if received on December
31 of the year the distributions are declared, rather than the year in which the
distributions are received.
Shareholders which are taxable entities or persons will be subject to
federal income tax on dividends and capital gain distributions made by the Fund.
These dividends and distributions will be attributable to the Fund's allocable
share of the net income and net long-term and short-term capital gains of the
Portfolio and will also take into account any expenses incurred or income earned
directly by the Fund. Dividends paid by the Fund from net investment income,
certain net foreign currency gains, and any excess of net short-term capital
gain over net long-term capital loss will be taxable to shareholders as ordinary
income, whether received in cash or Fund shares. Only a small portion, if any,
of such dividends may qualify for the corporate dividends received deduction
under the Code. Dividends paid by the Fund from net capital gain (the excess of
net long-term capital gain over net short-term capital loss), called "capital
gain distributions," will be taxable to shareholders as long-term capital gains,
whether received in cash or Fund shares and without regard to how long the
shareholder has held shares of the Fund. Capital gain distributions do not
qualify for the corporate dividends received deduction. Dividends and capital
gain distributions may also be subject to state and local or foreign taxes.
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The Portfolio anticipates that it may be subject to foreign withholding
taxes or other foreign taxes on income (possibly including capital gains) on
certain foreign investments (if any), which will reduce the yield on those
investments. Such taxes may be reduced or eliminated pursuant to an income tax
treaty in some cases. The Fund does not expect to qualify to pass its allocable
share of such foreign taxes and any associated tax deductions or credits through
to its shareholders.
Redemptions and repurchases of shares are taxable events on which a
shareholder may recognize a gain or loss. Special rules recharacterize as
long-term any losses on the sale or exchange of Fund shares with a tax holding
period of six months or less, to the extent the shareholder received a capital
gain distribution with respect to such shares.
Individuals and certain other classes of shareholders may be subject to 31%
backup withholding of federal income tax on dividends, capital gain
distributions, and the proceeds of redemptions or repurchases of shares, if they
fail to furnish the Fund with their correct taxpayer identification number and
certain certifications or if they are otherwise subject to backup withholding.
Individuals, corporations and other shareholders that are not U.S. persons under
the Code are subject to different tax rules and may be subject to nonresident
alien withholding at the rate of 30% (or a lower rate provided by an applicable
tax treaty) on amounts treated as ordinary dividends from the Fund and, unless a
current IRS Form W-8 or an acceptable substitute is furnished to the Fund, to
backup withholding on certain payments from the Fund.
A state income (and possibly local income and/or intangible property) tax
exemption is generally available to the extent the Fund's distributions are
derived from interest on (or, in the case of intangibles taxes, the value of its
assets is attributable to) investments in certain U.S. Government obligations,
provided in some states that certain thresholds for holdings of such obligations
and/or reporting requirements are satisfied. Shareholders should consult their
tax advisers regarding the applicable requirements in their particular states,
including the effect, if any, of the Fund's indirect ownership (through the
Portfolio) of any such obligations.
After the close of each calendar year, the Fund will send a notice to
shareholders that provides information about the federal tax status of
distributions to shareholders for such calendar year.
THE FUND AND THE PORTFOLIO
The Fund is a separate investment series of Standish, Ayer & Wood
Investment Trust, an unincorporated business trust organized under the laws of
The Commonwealth of Massachusetts pursuant to an Agreement and Declaration of
Trust dated August 13, 1986. Under the Agreement and Declaration of Trust, the
Trustees have authority to issue an unlimited number of shares of beneficial
interest, par value $.01 per share, of the Fund. Each share of the Fund is
entitled to one vote. All Fund shares have equal rights with regard to voting,
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redemption, dividends, distributions and liquidation, and shareholders of the
Fund have the right to vote as a separate class with respect to certain matters
under the 1940 Act and the Agreement and Declaration of Trust. Shares of the
Fund do not have cumulative voting rights. Fractional shares have proportional
voting rights and participate in any distributions and dividends. When issued,
each Fund share will be fully paid and nonassessable. Shareholders of the Fund
do not have preemptive or conversion rights. Certificates representing shares of
the Fund will not be issued.
The Trust has established fourteen series that currently offer their shares
to the public and may establish additional series at any time. Each series is a
separate taxpayer, eligible to qualify as a separate regulated investment
company for federal income tax purposes. The calculation of the net asset value
of a series and the tax consequences of investing in a series will be determined
separately for each series.
The Trust is not required to hold annual meetings of shareholders. Special
meetings of shareholders may be called from time to time for purposes such as
electing or removing Trustees, changing a fundamental policy, or approving an
investment advisory agreement.
If less than two-thirds of the Trustees holding office have been elected by
shareholders, a special meeting of shareholders of the Trust will be called to
elect Trustees. Under the Agreement and Declaration of Trust and the 1940 Act,
the record holders of not less than two-thirds of the outstanding shares of the
Trust may remove a Trustee by votes cast in person or by proxy at a meeting
called for the purpose or by a written declaration filed with each of the
Trust's custodian banks. Except as described above, the Trustees will continue
to hold office and may appoint successor Trustees. Whenever ten or more
shareholders of the Trust who have been such for at least six months, and who
hold in the aggregate shares having a net asset value of at least $25,000 or 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.
The Portfolio, in which all the Investable Assets of the Fund are invested,
is a series of Standish, Ayer & Wood Master Portfolio, an open-end management
investment company. The Portfolio Trust's Declaration of Trust provides that the
Portfolio Trust may establish and designate separate series of the Portfolio
Trust. The Portfolio Trust has established four series and may establish
additional series at any time. The Portfolio Trust's Declaration of Trust also
provides that the Fund and other entities investing in the Portfolio (e.g.,
other investment companies, insurance company separate accounts and common and
commingled trust funds) will not be liable for the obligations of the Portfolio,
although they will bear the risk of loss of their entire respective interests in
the Portfolio. However, there is a risk that interest-holders in the Portfolio
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may be held personally liable as partners for the Portfolio's obligations.
Because the Portfolio Trust's Declaration of Trust disclaims interest-holder
liability and provides for indemnification against such liability, the risk of
the Fund incurring financial loss on account of such liability is limited to
circumstances in which both inadequate insurance existed and the Portfolio
itself was unable to meet its obligations. As such, it is unlikely that the Fund
would experience liability from the investment structure itself. In any event,
shareholders of the Fund will continue to remain shareholders of a Massachusetts
business trust, and the risk of such a person incurring liability by reason of
being a shareholder of the Fund is remote. The interests in the Portfolio Trust
are divided into separate series, such as the Portfolio. No series of the
Portfolio Trust has any preference over any other series.
Investors in other series of the Portfolio Trust will not be involved in
any vote involving only the Portfolio. Investors of all of the series of the
Portfolio Trust will, however, vote together to elect Trustees of the Portfolio
Trust and for certain other matters affecting the Portfolio Trust. As provided
by the 1940 Act, under certain circumstances, the shareholders of one or more
series could control the outcome of these votes.
Inquiries concerning the Fund should be made by contacting the Fund or the
Principal Underwriter at the address and telephone number listed on the cover of
this Prospectus.
PRINCIPAL UNDERWRITER
Standish Fund Distributors, L.P., One Financial Center, 26th Floor, Boston,
Massachusetts 02111, serves as the Trust's principal underwriter.
CUSTODIAN, TRANSFER AGENT AND
DIVIDEND-DISBURSING AGENT
Investors Bank & Trust Company, 24 Federal Street, Boston, Massachusetts
02110, serves as the Fund's transfer agent and dividend-disbursing agent and as
custodian of all cash and securities of the Portfolio.
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P., One Post Office Square, Boston, Massachusetts
02109 and Coopers & Lybrand, P.O. Box 219, Grand Cayman, Cayman Islands, BWI,
serve as independent accountants for the Trust and the Portfolio Trust,
respectively, and will audit the Fund's and the Portfolio's respective financial
statements annually.
LEGAL COUNSEL
Hale and Dorr, 60 State Street, Boston, Massachusetts 02109, is legal
counsel to the Trust, the Portfolio Trust and to the Adviser.
- --------------------------------------------------------------------------------
No dealer, salesman or other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus or in the Statement of Additional Information, and, if given or made,
such other information or representations must not be relied upon as having been
authorized by the Trust. This Prospectus does not constitute an offering in any
jurisdiction in which such offering may not be lawfully made.
27
<PAGE>
APPENDIX A
KEY TO MOODY'S CORPORATE BOND RATINGS AND FOR SOVEREIGN, SUBNATIONAL AND
SOVEREIGN RELATED ISSUES
Aaa - Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa - Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long term risks appear somewhat larger than in Aaa securities.
A - Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa - Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba - Bonds which are rated Ba are judged to have speculative elements. Their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
STANDARD & POOR'S RATINGS DEFINITIONS
AAA - Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA- Debt rated AA has a very strong capacity to pay interest and repay principal
and differs from the higher rated issues only in small degree.
A - Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB - Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
28
<PAGE>
BB - Debt rated BB is regarded, on balance, as predominantly speculative with
respect to capacity to pay interest and repay principal in accordance with the
terms of the obligation. While such debt will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or major
risk exposures to adverse conditions.
STANDARD & POOR'S CHARACTERISTICS OF
SOVEREIGN DEBT OF FOREIGN COUNTRIES
AAA- Stable, predictable governments with demonstrated track record of
responding flexibly to changing economic and political circumstances
Key players in the global trade and financial system:
- - Prosperous and resilient economies, high per capita incomes
- - Low fiscal deficits and government debt, low inflation
- - Low external debt
AA- Stable, predictable governments with demonstrated track record of responding
to changing economic and political circumstances
- - Tightly integrated into global trade and financial system
- - Differ from AAAs only to a small degree because:
- - Economies are smaller, less prosperous and generally more vulnerable to
adverse external influences (e.g., protection and terms of trade shocks)
- - More variable fiscal deficits, government debt and inflation
- - Moderate to high external debt
A- Politics evolving toward more open, predictable forms of governance in
environment of rapid economic and social change
- - Established trend of integration into global trade and financial system
- - Economies are smaller, less prosperous and generally more vulnerable to
adverse external influences (e.g., protection and terms of trade shocks), but
- - Usually rapid growth in output and per capita incomes
- - Manageable through variable fiscal deficits, government debt and inflation
- - Usually low but variable debt
- - Integration into global trade and financial system growing but untested
- - Low to moderate income developing economies but variable performance and quite
vulnerable to adverse external influences
- - Variable to high fiscal deficits, government debt and inflation
- - Very high and variable debt, often graduates of Brady plan but track record
not well established
BBB-- Political factors a source of significant uncertainty, either because
system is in transition or due to external threats, or both, often in
environment of rapid economic and social change
- - Integration into global trade and financial system growing but untested
29
<PAGE>
- - Economies less prosperous and often more vulnerable to adverse external
influences
- - Variable to high fiscal deficits, government debt and inflation
- - High and variable external debt
BB-- Political factors a source of major uncertainty, either because system is
in transition or due to external threats, or both, often in environment of rapid
economic and social change
- - Integration into global trade and financial system growing but untested
- - Low to moderate income developing economies, but variable performance and
quite vulnerable to adverse external influences
- - Variable to high fiscal deficits, government debt and inflation
- - Very high and variable debt, often graduates of Brady Plan but track record
not well established
BB- Political factors a source of major uncertainty, either because system is in
transition or due to external threats, or both, often in environment of rapid
economic and social change In the case of sovereign, subnational and sovereign
related issuers, the Portfolio uses the foreign currency or domestic (local)
currency rating depending upon how a security in the portfolio is denominated.
In the case where the Portfolio holds a security denominated in a domestic
(local) currency and one of the rating services does not provide a domestic
(local) currency rating for the issuer, the Portfolio will use the foreign
currency rating for the issuer; in the case where the Portfolio holds a security
denominated in a foreign currency and one of the rating services does not
provide a foreign currency rating for the issuer, the Portfolio will treat the
security as being unrated.
30
<PAGE>
TAX CERTIFICATION INSTRUCTIONS
Federal law requires that taxable distributions and proceeds of redemptions
and exchanges be reported to the IRS and that 31% be withheld if you fail to
provide your correct Taxpayer Identification Number (TIN) and the certifications
contained in the Account Purchase Application (Application) or you are otherwise
subject to backup withholding. Amounts withheld and forwarded to the IRS can be
credited as a payment of tax when completing your Federal income tax return.
For most individual taxpayers, the TIN is the social security number.
Special rules apply for certain accounts. For example, for an account
established under the Uniform Gift to Minors Act, the TIN of the minor should be
furnished. If you do not have a TIN, you may apply for one using forms available
at local offices of the Social Security Administration or the IRS, and you
should write "Applied For" in the space for a TIN on the Application.
Recipients exempt from backup withholding, including corporations and
certain other entities, should provide their TIN and underline "exempt" in
section 2(a) of the TIN section of the Application to avoid possible erroneous
withholding. Non-resident aliens and foreign entities may be subject to
withholding of up to 30% on certain distributions received from the Fund and
must provide certain certifications on IRS Form W-8 to avoid backup withholding
with respect to other payments. For further information, see Code Sections 1441,
1442 and 3406 and/or consult your tax adviser.
STANDISH FIXED INCOME FUND
Investment Adviser
Standish, Ayer & Wood, Inc.
One Financial Center
Boston, Massachusetts 02111
Custodian
Investors Bank & Trust Company
24 Federal Street
Boston, Massachusetts 02110
Principal Underwriter
Standish Fund Distributors, L.P.
One Financial Center
Boston, Massachusetts 02111
Independent Accountants
Coopers & Lybrand L.L.P.
One Post Office Square
Boston, Massachusetts 02109
Legal Counsel
Hale and Dorr
60 State Street
Boston, Massachusetts 02109
- --------------------------------------------------------------------------------
1Hub and Spoke(R) is a registered service mark of Signature Financial Group,Inc.
31
<PAGE>
Prospectus dated April 29, 1996
PROSPECTUS
STANDISH GLOBAL FIXED INCOME FUND
One Financial Center
Boston, Massachusetts 02111
(800) 221-4795
Standish Global Fixed Income Fund (the "Fund") is one fund in the Standish,
Ayer & Wood family of Funds. The Fund is organized as a separate non-diversified
investment series of Standish, Ayer & Wood Investment Trust (the "Trust"), an
open-end management investment company.
The Fund is designed primarily, but not exclusively, for tax-exempt
institutional investors, such as pension and profit-sharing plans, foundations
and endowments. The Fund's investment objective is to maximize total return
while realizing a market level of income, consistent with preserving principal
and liquidity. The Fund seeks to achieve its investment objective by investing
all its investable assets (the "Investable Assets") in the Standish Global Fixed
Income Portfolio (the "Portfolio") which has the same investment objective as
the Fund. The Portfolio is a series of Standish, Ayer & Wood Master Portfolio
(the "Portfolio Trust"), which is also an open-end management investment
company. The Portfolio will seek to achieve its investment objective primarily
through investing in a portfolio of investment grade fixed-income securities
denominated in foreign currencies and the U.S. dollar. The Portfolio expects its
yield to be comparable to the yield of the general market for such securities.
The Fund provides a vehicle through which investors may participate in the
global bond markets. See "Investment Policies." Standish International
Management Company, L.P., Boston, Massachusetts, is the Fund's investment
adviser (the "Adviser").
UNLIKE OTHER MUTUAL FUNDS WHICH DIRECTLY ACQUIRE AND MANAGE THEIR OWN
PORTFOLIOS OF SECURITIES, THE FUND SEEKS TO ACHIEVE ITS INVESTMENT OBJECTIVE BY
INVESTING ALL OF ITS INVESTABLE ASSETS IN THE PORTFOLIO WHICH IS A SEPARATE FUND
WITH AN IDENTICAL INVESTMENT OBJECTIVE. SEE "SPECIAL INFORMATION CONCERNING THE
HUB AND SPOKE MASTER-FEEDER FUND STRUCTURE" ON PAGE 9.
Investors may purchase shares of the Fund from the Trust's principal
underwriter, Standish Fund Distributors, L.P. (the "Principal Underwriters"), at
the address and phone number set forth above without a sales commission or other
transaction charges. Unless waived by the Fund, the minimum initial investment
is $100,000. Additional investments may be made in amounts of at least $5,000.
This Prospectus is intended to set forth concisely the information about
the Fund and the Trust that a prospective investor should know before investing.
Investors are encouraged to read this Prospectus and retain it for future
reference. Additional information about the Fund and the Trust is contained in a
Statement of Additional Information which has been filed with the Securities and
Exchange Commission (the "SEC") and is available upon request and without charge
by calling or writing the Principal Underwriter at the telephone number or
address set forth above. The Statement of Additional Information bears the same
date as this Prospectus and is incorporated by reference into this Prospectus.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK OR OTHER INSURED DEPOSITORY INSTITUTION, AND ARE NOT
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD
OR ANY OTHER GOVERNMENT AGENCY. AN INVESTMENT IN SHARES OF THE FUND INVOLVES
INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
CONTENTS
Expense Information...........................................2
Financial Highlights..........................................3
Investment Objective and Policies.............................4
Risk Factors and Suitability..................................8
Special Information Concerning the Hub and Spoke Master-
Feeder Fund Structure....................................9
Calculation of Performance Data..............................10
Dividends and Distributions..................................10
Purchase of Shares...........................................10
Exchange of Shares...........................................11
Redemption of Shares.........................................12
Management...................................................13
Federal Income Taxes.........................................14
The Fund and The Portfolio...................................15
Principal Underwriter........................................16
Custodian, Transfer Agent and Dividend Disbursing Agent......16
Independent Accountants......................................16
Legal Counsel................................................16
Appendix A...................................................17
Tax Certification Instructions...............................18
1
<PAGE>
EXPENSE INFORMATION
Shareholder Transaction Expenses
Maximum Sales Load Imposed on Purchases None
Maximum Sales Load Imposed on Reinvested Dividends None
Deferred Sales Load None
Redemption Fees None
Exchange Fees None
Annual Fund Operating Expenses (as a percentage of average net assets)
Management Fees 1 0.40%
12b-1 Fees None
Other Expenses (After Expense Limitation) 0.23%*
Total Operating Expenses (After Expense Limitation) 0.63%*
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Example 1 yr. 3 yrs. 5 yrs. 10 yrs.
- ------- ----- ------ ------ -------
You would pay the following expenses on a $1,000 investment,
assuming (1) 5% annual return and (2) redemption at the end
of each time period: $6 $20 $35 $78
</TABLE>
The purpose of the above table is to assist the investor in understanding
the various costs and expenses of the Fund and the Portfolio that an investor in
the Fund will bear directly or indirectly. The figure shown in the caption
"Other Expenses," which includes, among other things, custodian and transfer
agent fees, registration costs and payments for insurance and audit and legal
services, is based upon the expenses for the Fund's fiscal year ended December
31, 1995. The Trustees of the Trust believe that over time the aggregate per
share expenses of the Fund and the Portfolio will not be more than the expenses
which the Fund would incur if it were to retain the services of an investment
adviser and the Investable Assets of the Fund were invested directly in the
types of securities being held by the Portfolio.
- --------------------------------------------------------------------------------
1 As of the close of business on April 26, 1996, the Fund transferred its
Investable Assets to the Portfolio in exchange for an interest in the Portfolio.
Prior to such date, the Trust, on behalf of the Fund, retained the Adviser as
its investment adviser.
* Standish has voluntarily agreed to limit the master-feeder aggregate annual
operating expenses of the Fund and the Portfolio (excluding brokerage
commissions, taxes and extraordinary expenses) to the Fund's ratio of expenses
to average net assets in effect immediately prior to the Fund's conversion to
the Hub and Spoke master-feeder fund structure. The expense ratio considered to
be in effect immediately prior to the conversion for this purpose will be
calculated using the actual expenses incurred by the Fund during the three
months immediately prior to conversion and annualizing this amount. Standish may
discontinue or modify such limitation in the future at its discretion, although
it has no current intention to do so. In the absence of such agreement, Other
Expenses and Total Operating Expenses of the Fund and the Portfolio are
estimated to be 0.28% and 0.68%, respectively, of average daily net assets.
For more information with respect to the expenses of the Fund and the
Portfolio see "Management-Investment Adviser" and "Management-Expenses" herein.
THE INFORMATION IN THE TABLE AND HYPOTHETICAL EXAMPLE ABOVE SHOULD NOT BE
CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY
BE GREATER OR LESS THAN THOSE SHOWN. MOREOVER, WHILE THE EXAMPLE ASSUMES A 5%
ANNUAL RETURN, THE FUND'S ACTUAL PERFORMANCE WILL VARY AND MAY RESULT IN AN
ACTUAL RETURN GREATER OR LESS THAN 5%.
2
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights of the Fund for the period from January 3, 1994
(commencement of operations) through December 31, 1994 and the year ended
December 31, 1995 have been audited by Coopers & Lybrand L.L.P., independent
accountants, whose report, together with the financial statements, is
incorporated into the Statement of Additional Information.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------
1995 1994 +
------------------ ------------------
<S> <C> <C>
Net asset value - beginning of period $17.99 $20.00
------------------ ------------------
Income from investment operations
Net investment income $1.59 $1.29
Net realized and unrealized gain (loss) 1.60 (2.70)
------------------ ------------------
Total from investment operations $3.19 ($1.41)
------------------ ------------------
Less distributions declared to shareholders
Tax return of capital - ($0.60)
From net investment income ($1.65) -
------------------ ------------------
Total distributions declared to shareholders ($1.65) ($0.60)
------------------ ------------------
Net asset value - end of period $19.53 $17.99
================== ==================
Total return 18.13% (7.06%) *
Ratios (to average net assets)/Supplemental Data
Net assets at end of period (000's omitted) $137,899 $135,232
Expenses 0.62% 0.65% t,**
Net investment income 7.69% 7.73% t,**
Portfolio turnover 163% 140% x
** The Advisor voluntarily agreed not to impose a portion of its investment advisory fee
for the year ended December 31, 1994. Had these actions not been taken, the net
investment income per share and the ratios would have been:
Net investment income per share $1.27
Ratios (to average daily net assets):
Expenses 0.73% t
Net Investment Income 7.65% t
+ For the period from January 3, 1994 (start of business) to December 31, 1994.
t Computed on an annualized basis.
* The total return for the period is not annualized.
x Portfolio turnover not computed on an annualized basis.
</TABLE>
Further Information about the performance of the Fund is contained in the
Fund's Annual Report, which may be obtained from the Principal Underwriter
without charge.
3
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
Investment Objective
The Fund seeks to achieve its investment objective by investing all its
Investable Assets in the Portfolio which has the same investment objective as
the Fund. There can be no assurance that the investment objective of either the
Fund or the Portfolio will be achieved.
Since the investment characteristics of the Fund will correspond directly
to those of the Portfolio, the following is a discussion of the various
investments and investment policies of the Portfolio.
The Portfolio's investment objective is to maximize total return while
realizing a market level of income, consistent with preserving principal and
liquidity. The Portfolio will seek to achieve its investment objective primarily
through investing in a portfolio of investment grade fixed-income securities
denominated in foreign currencies and the U.S. dollar. Because some of the
Portfolio's investments will be denominated in foreign currencies, including
bonds denominated in the European Currency Unit ("ECU"), exchange rates may have
a significant impact on the performance of the Portfolio. Because of the
uncertainty inherent in all investments, no assurance can be given that either
the Fund or the Portfolio will achieve its investment objective.
The investment objective of the Fund is a fundamental policy which may not
be changed without a vote of the Fund's shareholders. The investment objective
of the Portfolio is not a fundamental policy and may be changed upon notice to
but without the approval of the Portfolio's investors. Investment policies which
are not fundamental policies may be changed by the Trustees of the Trust and the
Trustees of Portfolio Trust, without the approval of the Fund's shareholders or
the Portfolio's investors. The Fund's and the Portfolio's investment policies
are described further in the Statement of Additional Information.
Investment Policies
The Portfolio may invest in a broad range of fixed-income securities
denominated in foreign currencies and U.S. dollars, including bonds, notes,
mortgage-backed and asset-backed, convertible debt securities, preferred stock
(including convertible preferred stock), structured notes and debt securities
issued or guaranteed by national, provincial, state or other governments with
taxing authority or by their agencies or by supranational entities. Other types
of fixed income securities can be expected to be developed in the future, and
the Portfolio will invest in them if the Adviser determines that such investment
is consistent with the Portfolio's investment objective and policies. (The Fund
will supplement this Prospectus and, if appropriate, the Statement of Additional
Information before the Portfolio makes any such investments to a significant
extent.) Supranational entities include international organizations designated
or supported by governmental entities to promote economic reconstruction or
development, and international banking institutions and related government
agencies. Examples of supranational entities are the International Bank for
Reconstruction and Development (the World Bank), the European Steel and Coal
Community, the Asian Development Bank and the Inter-American Development Bank.
4
<PAGE>
The Portfolio expects to emphasize foreign government and agency securities,
securities of U.S. companies denominated in foreign currencies, U.S. Government
and agency securities, mortgage-backed and asset-backed securities and
securities of foreign companies denominated in U.S. dollars or foreign
currencies. Investors should be aware that investing in mortgage-backed
securities involves risks of fluctuation in yields and market prices and of
early prepayments on the underlying mortgages. The Portfolio may invest in
securities that pay interest on a fixed, variable, floating (including inverse
floating), contingent, in-kind or deferred basis. The Portfolio may also invest
in unlisted warrants to purchase fixed income securities. (Warrants are
substantially the same as call options in their nature, use and effect, except
that warrants are generally of a longer term and are issued by the issuer of the
underlying security, rather than by an option writer. See "General
Characteristics of Options" in the Statement of Additional Information.)
Ratings
The Portfolio will generally invest in investment grade fixed-income
securities, i.e., securities which, at the date of investment, are rated within
the four highest grades as determined by Moody's Investors Service, Inc.
("Moody's") (Aaa, Aa, A or Baa) or by Standard & Poor's Ratings Group ("Standard
& Poor's"), Duff & Phelps, Inc. ("Duff & Phelps") or IBAC, Inc. ("IBAC") (AAA,
AA, A or BBB) or their respective equivalent ratings or, if not rated, judged by
the Adviser to be of equivalent credit quality to securities so rated.
Securities rated Baa by Moody's or BBB by Standard & Poor's, Duff & Phelps or
IBAC and unrated securities of equivalent credit quality are considered medium
grade obligations with speculative characteristics. Adverse changes in economic
conditions or other circumstances are more likely to weaken the issuer's
capacity to pay interest and repay principal on these securities than is the
case for issuers of higher rated securities.
The Portfolio may invest up to 15% of its net assets in securities rated,
at the date of investment, either Ba by Moody's or BB by Standard & Poor's, Duff
& Phelps or IBAC or, if not rated, judged by the Adviser to be of equivalent
credit quality to securities so rated ("BB Rated Securities"). Securities rated
Ba by Moody's or BB by Standard & Poor's, Duff & Phelps or IBAC are classified
in the highest category of non-investment grade securities. Such securities may
be considered to be high-yield securities, carry a high degree of risk and are
considered speculative by the major credit rating agencies. The Portfolio
intends to avoid what it perceives to be the most speculative areas of the BB
Rated Securities universe. See "Risk Factors and Suitability" for a description
of risks associated with investments in BB Rated Securities.
It is anticipated that the average dollar-weighted rated credit quality of
the securities in the Portfolio's portfolio will be in a range of Aa to A
according to the ratings of Moody's or AA to A according to the ratings of
Standard & Poor's, Duff & Phelps or IBAC, or comparable credit quality as
determined by the Adviser. In the case of a security that is rated differently
by the rating services, the highest rating is used in computing the Portfolio's
average dollar-weighted credit quality and in connection with the Portfolio's
policy regarding BB Rated Securities. In the event that the rating on a security
held in the Portfolio'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
5
<PAGE>
security. In determining whether securities are of equivalent credit quality,
the Adviser may take into account, but will not rely entirely on, ratings
assigned by foreign rating agencies. In the case of unrated sovereign,
subnational and sovereign related debt of foreign countries, the Adviser may
take into account, but will not rely entirely on, the ratings assigned to the
issuers of such securities. Appendix A sets forth excerpts from the descriptions
of ratings of corporate debt securities and sovereign, subnational and sovereign
related debt of foreign countries.
While under normal circumstances, at least 65% of the Portfolio's total
assets will be invested in the fixed-income securities of issuers located or
primarily doing business in at least three different countries, the Portfolio
intends to make investments among countries and to include securities of no
fewer than eight different countries. The Portfolio may invest a substantial
portion of its assets in one or more of those eight countries. See "Risk Factors
and Suitability" for a description of the risks associated with investments in
foreign securities.
The Portfolio may establish and maintain cash balances for liquidity
purposes. The Adviser may also establish and maintain cash balances in the
Portfolio for temporary defensive purposes without limitation in the event of,
or in anticipation of, a general decline in the market prices of the securities
in which it invests. The Portfolio's cash balances may be invested in high
quality short-term money-market instruments denominated in the U.S. dollar or
foreign currencies, including, but not limited to, government obligations,
certificates of deposit, bankers' acceptances, commercial paper, short-term
corporate debt securities and repurchase agreements.
In pursuing the Portfolio's investment objective, the Adviser intends to
emphasize intermediate-term economic fundamentals relating to various countries
in the international economy, rather than evaluate day-to-day fluctuations in
particular currency and bond markets. The Adviser will review the economic
conditions and prospects relating to various countries in the international
economy and evaluate the available yield differentials with a view toward
maximizing total return.
Non-Diversified Portfolio and Fund
Each of the Portfolio and the Fund is a "non-diversified" investment
company so that with respect to 50% of the Portfolio's assets, it will be able
to invest more than 5% of its assets in obligations of one or more issuers,
while being limited with respect to the other half of its assets to investments
not exceeding 5% of the Portfolio's total assets. (A "diversified" investment
company would be required under the Investment Company Act of 1940, as amended
(the "1940 Act"), to maintain at least 75% of its assets in cash (including
foreign currency), cash items, U.S. Government securities, and other securities
limited per issuer to not more than 5% of the investment company's total
assets.) In order to enable the Fund to qualify as a regulated investment
company under the Internal Revenue Code of 1986, as amended (the "Code"), the
Portfolio, among other things, may not invest more than 25% of its total assets,
at the close of each quarter of the Fund's taxable year, in obligations of any
one issuer (other than U.S. Government securities). In any event, the Portfolio
does not intend to invest more than 5% of its assets in the securities of any
6
<PAGE>
one issuer unless such securities are issued or guaranteed by a national
government or are deemed by the Adviser to be of comparable credit quality. The
Portfolio does not believe that the credit risk inherent in the obligations of
stable foreign governments is significantly greater than that of U.S. Government
obligations. As a "non-diversified" investment company, the Portfolio may invest
a greater proportion of its assets in the securities of a smaller number of
issuers and therefore may be subject to greater market and credit risk than a
more broadly diversified fund.
The Portfolio will not have more than 25% of the current value of its total
assets invested in any single industry, provided that this restriction shall not
apply to debt securities issued or guaranteed by the U.S.
Government or its agencies or instrumentalities.
Illiquid and Restricted Securities
The Portfolio may not invest more than 15% of its net assets in illiquid
investments and securities that are subject to restrictions on resale (i.e.,
private placements) under the Securities Act of 1933, as amended ("1933 Act"),
including securities eligible for resale in reliance on Rule 144A under the 1933
Act ("restricted securities"). Illiquid investments include securities that are
not readily marketable, repurchase agreements maturing in more than seven days,
time deposits with a notice or demand period of more than seven days, certain
over-the-counter options, and restricted securities, unless it is determined,
based upon continuing review of the trading markets for the specific restricted
security, that such restricted security is eligible for resale under Rule 144A
and is liquid. The Board of Trustees of the Portfolio Trust has adopted
guidelines and delegated to the Adviser the daily function of determining and
monitoring the liquidity of restricted securities. The Board of Trustees,
however, retains oversight focusing on factors such as valuation, liquidity and
availability of information and is ultimately responsible for such
determinations. Investing in restricted securities eligible for resale pursuant
to Rule 144A could have the effect of increasing the level of illiquidity in the
Portfolio to the extent that qualified institutional buyers become for a time
uninterested in purchasing these restricted securities. The purchase price and
subsequent valuation of restricted and illiquid securities normally reflect a
discount, which may be significant, from the market price of comparable
securities for which a liquid market exists.
Portfolio Turnover
Portfolio turnover is not expected to be in excess of 250% on an annual
basis. A rate of turnover of 100% would occur, for example, if the value of the
lesser of purchases and sales of portfolio securities for a particular year
equaled the average monthly value of portfolio securities owned during the year
(excluding short-term securities). A high rate of portfolio turnover involves a
correspondingly greater amount of transaction costs which must be borne directly
by the Portfolio and thus indirectly by its shareholders. It may also result in
the realization of larger amounts of net short-term capital gains, the Fund's
distributions from which are taxable to Fund shareholders as ordinary income and
may, under certain circumstances, make it more difficult for the Fund to qualify
as a regulated investment company under the Code. The portfolio turnover rates
are listed in the section captioned "Financial Highlights."
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<PAGE>
Strategic Transactions
The Portfolio may, but is not required to, utilize various other investment
strategies as described below to hedge various market risks (such as interest
rates, currency exchange rates, and broad or specific equity or fixed-income
market movements), to manage the effective maturity or duration of fixed-income
securities, or to enhance potential gain. Such strategies are generally accepted
as part of modern portfolio management and are regularly utilized by many mutual
funds and other institutional investors. Techniques and instruments used by the
Portfolio may change over time as new instruments and strategies are developed
or regulatory changes occur.
In the course of pursuing its investment objective, the Portfolio may
purchase and sell (write) exchange-listed and over-the-counter put and call
options on securities, equity and fixed-income indices and other financial
instruments; purchase and sell financial futures contracts and options thereon;
enter into various interest rate transactions such as swaps, caps, floors or
collars; and enter into various currency transactions such as currency forward
contracts, currency futures contracts, currency swaps or options on currencies
or currency futures (collectively, all the above are called "Strategic
Transactions"). Strategic Transactions may be used in an attempt to protect
against possible changes in the market value of securities held in or to be
purchased for the Portfolio's portfolio resulting from securities market or
currency exchange rate fluctuations, to protect the Portfolio's unrealized gains
in the value of its portfolio securities, to facilitate the sale of such
securities for investment purposes, to manage the effective maturity or duration
of the Portfolio'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 Portfolio will attempt
to limit its net loss exposure resulting from Strategic Transactions entered
into for such purposes to not more than 3% of the Portfolio's net assets at any
one time and, to the extent necessary, the Portfolio will close out transactions
in order to comply with this limitation. (Transactions such as writing covered
call options are considered to involve hedging for the purposes of this
limitation.) In calculating the Portfolio's net loss exposure from such
Strategic Transactions, an unrealized gain from a particular Strategic
Transaction position would be netted against an unrealized loss from a related
Strategic Transaction position. For example, if the Adviser anticipates that the
Belgian franc will appreciate relative to the French franc, the Portfolio may
take a long forward currency position in the Belgian franc and a short foreign
currency position in the French franc. Under such circumstances, any unrealized
loss in the Belgian franc position would be netted against any unrealized gain
in the French franc position (and vice versa) for purposes of calculating the
Portfolio's net loss exposure. The ability of the Portfolio to utilize these
Strategic Transactions successfully will depend on the Adviser's ability to
predict pertinent market movements, which cannot be assured. The Portfolio will
comply with applicable regulatory requirements when implementing these
strategies, techniques and instruments. The Portfolio's activities involving
Strategic Transactions may be limited to enable the Fund to comply with the
requirements of Subchapter M of the Code for qualification as a regulated
investment company.
8
<PAGE>
Strategic Transactions have risks associated with them including possible
default by the other party to the transaction, illiquidity and, to the extent
the Adviser's view as to certain market 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 Portfolio, 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 Portfolio can realize on its investments or cause the
Portfolio to hold a security it might otherwise sell. The use of currency
transactions can result in the Portfolio incurring losses as a result of a
number of factors including the imposition of exchange controls, suspension of
settlements, or the inability to deliver or receive a specified currency. The
use of options and futures transactions entails certain other risks. In
particular, the variable degree of correlation between price movements of
futures contracts and price movements in the related portfolio position of the
Portfolio creates the possibility that losses on the hedging instrument may be
greater than gains in the value of the Portfolio's position. The writing of
options could significantly increase the Portfolio'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 Portfolio 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
Portfolio in writing options on futures and entering into futures transactions
is potentially unlimited; however, as described above, the Portfolio 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 Portfolio'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
Portfolio's Strategic Transactions is set forth in the Statement of Additional
Information.
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<PAGE>
Short-Selling
The Portfolio may make short sales, which are transactions in which the
Portfolio sells a security it does not own in anticipation of a decline in the
market value of that security. To complete such a transaction, the Portfolio
must borrow the security to make delivery to the buyer. The Portfolio 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 Portfolio. Until the security is
replaced, the Portfolio 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 Portfolio also may be required to pay a premium, which would
increase the cost of the security sold. The proceeds of the short sale will be
retained by the broker, to the extent necessary to meet margin requirements,
until the short position is closed out.
Until the Portfolio replaces a borrowed security in connection with a short
sale, the Portfolio will: (a) maintain daily a segregated account not with the
broker, containing cash or U.S. Government securities, at such a level that the
amount deposited in the account plus the amount deposited with the broker as
collateral will equal the current value of the security sold short; or (b)
otherwise cover its short position.
The Portfolio 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 Portfolio replaces the borrowed security. The Portfolio will realize a
gain if the security declines in price between those dates by an amount greater
than premium and transaction costs. This result is the opposite of what one
would expect from a cash purchase of a long position in a security. The amount
of any gain will be decreased, and the amount of any loss increased, by the
amount of any premium or amounts in lieu of dividends or interest the Portfolio
may be required to pay in connection with a short sale.
The Portfolio's loss on a short sale as a result of an increase in the
price of a security sold short is potentially unlimited. The Portfolio may
purchase call options to provide a hedge against an increase in the price of a
security sold short by the Portfolio. When the Portfolio 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 Portfolio, the
premium and the commission paid may be more than the amount of the brokerage
commission charged if the security were to be purchased directly. See "Strategic
Transactions" above.
The Portfolio anticipates that the frequency of short sales will vary
substantially in different periods, and it does not intend that any specified
portion of its assets, as a matter of practice, will be in short sales. However,
no securities will be sold short if, after giving effect to any such short sale,
the total market value of all securities sold short would exceed 5% of the value
of the Portfolio's net assets.
In addition to the short sales discussed above, the Portfolio may make
short sales "against the box," a transaction in which the Portfolio enters into
a short sale of a security which the Portfolio owns. The proceeds of the short
sale are held by a broker until the settlement date at which time the Portfolio
delivers the security to close the short position. The Portfolio receives the
net proceeds from the short sale.
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<PAGE>
Forward Roll Transactions
In order to enhance current income, the Portfolio may enter into forward
roll transactions with respect to mortgage-backed securities to the extent of 5%
of its total assets. In a forward roll transaction, the Portfolio sells a
mortgage-backed security to a financial institution, such as a bank or
broker-dealer, and simultaneously agrees to repurchase a similar security from
the institution at a later date at an agreed-upon price. The mortgage-backed
securities that are repurchased will bear the same interest rate as those sold,
but generally will be collateralized by different pools of mortgages with
different prepayment histories than those sold. During the period between the
sale and repurchase, the Portfolio will not be entitled to receive interest and
principal payments on the securities sold. Proceeds of the sale will be invested
in short-term instruments, such as repurchase agreements or other short term
securities, and the income from these investments, together with any additional
fee income received on the sale and the amount gained by repurchasing the
securities in the future at a lower purchase price, will generate income and
gain for the Portfolio exceeding the yield on the securities sold. Forward roll
transactions involve the risk that the market value of the securities sold by
the Portfolio may decline below the repurchase price of those securities. At the
time the Portfolio enters into a forward roll transaction, it will place in a
segregated custodial account cash or liquid, high grade debt obligations having
a value equal to the repurchase price (including accrued interest) and will
subsequently monitor the account to insure that the equivalent value is
maintained.
When-Issued and "Delayed Delivery" Securities
The Portfolio may commit up to 25% of its net assets to purchase securities
on a "when-issued" or "delayed delivery" basis, but will only do so with the
intention of actually acquiring the securities. The payment obligation and the
interest rate on these securities will be fixed at the time the Portfolio enters
into the commitment, but no income will accrue to the Portfolio until they are
delivered and paid for. Unless the Portfolio has entered into an offsetting
agreement to sell the securities, cash or liquid, high-grade debt securities
equal to the amount of the Portfolio's commitment will be segregated with the
custodian for the Portfolio, to secure the Portfolio's obligation and to ensure
that it is not leveraged. Securities purchased on a "when-issued" basis may have
a market value on delivery which is less than the amount paid by the Portfolio.
Changes in market value may be based upon the public's perception of the
creditworthiness of the issuer or changes in the level of interest rates.
Generally, the value of "when-issued" securities will fluctuate inversely to
changes in interest rates, i.e., they will appreciate in value when interest
rates fall and will depreciate in value when interest rates rise.
Repurchase Agreements
The Portfolio may invest up to 25% of its net assets in repurchase
agreements under normal circumstances. In no event will the Portfolio invest
more than an aggregate of 15% of its assets in repurchase agreements that are
not terminable within seven days. Repurchase agreements acquired by the
Portfolio will always be fully collateralized as to principal and interest by
money market instruments and will be entered into only with commercial banks,
brokers and dealers considered creditworthy by the Adviser. If the other party
or "seller" of a repurchase agreement defaults, the Portfolio might suffer a
11
<PAGE>
loss to the extent that the proceeds from the sale of the underlying securities
and other collateral held by the Portfolio in connection with the related
repurchase agreement are less than the repurchase price. In addition, in the
event of bankruptcy of the seller or failure of the seller to repurchase the
securities as agreed, the Portfolio could suffer losses, including loss of
interest on or principal of the security and costs associated with delay and
enforcement of the repurchase agreement.
Securities Loans
In order to realize additional income, the Portfolio may lend a portion of
the securities in its portfolio to broker-dealers and financial institutions,
who from time to time may wish to borrow securities, generally to carry out
transactions for which they have contracted. The market value of securities
loaned by the Portfolio may not exceed 20% of the value of the Portfolio's total
assets, with a 10% limit for any single borrower.
In order to secure their obligations to return securities borrowed from the
Portfolio, borrowers will deposit collateral with the Portfolio's custodian
equal to at least 100% of the market value of the borrowed securities, and the
collateral will be "marked to market" daily. As is the case with any extension
of credit, portfolio securities loans involve certain risks in the event a
borrower should fail financially, including delays or inability to recover the
loaned securities or foreclose against the collateral. The Adviser, under the
supervision of the Portfolio's Board of Trustees, monitors the creditworthiness
of the parties to whom the Fund makes securities loans.
Investment Restrictions
Each of the Fund and the Portfolio has adopted certain fundamental policies
which may not be changed without the approval of the Fund's shareholders or the
Portfolio's investors, as the case may be.
The Fund has the same investment restrictions as the Portfolio, except that
the Fund may invest substantially all of its Investable Assets in an open-end
management investment company with substantially the same investment objective
as the Fund. References below to the Portfolio's investment restrictions also
include the Fund's investment restrictions. These policies provide, among other
things, that the Portfolio may not: (i) invest, with respect to at least 50% of
its total assets, more than 5% in the securities of any one issuer (other than
the U.S. Government, its agencies or instrumentalities) or acquire more than 10%
of the outstanding voting securities of any issuer; (ii) issue senior
securities, borrow money or securities or pledge or mortgage its assets, except
that the Portfolio may (a) borrow money from banks as a temporary measure for
extraordinary or emergency purposes (but not for investment purposes) in an
amount up to 15% of the current value of its total assets, (b) enter into
forward roll transactions, and (c) pledge its assets to an extent not greater
than 15% of the current value of its total assets to secure such borrowings;
however, the Portfolio may not make any additional investments while its
outstanding borrowings exceed 5% of the current value of its total assets; or
(iii) lend portfolio securities, except that the Portfolio may lend its
portfolio securities with a value up to 20% of its total assets (with a 10%
limit for any borrower).
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<PAGE>
If any percentage restriction described above is adhered to at the time of
investment, a subsequent increase or decrease in the percentage resulting from a
change in the value of the Portfolio's assets will not constitute a violation of
the restriction. Certain non-fundamental policies and additional fundamental
policies adopted by the Fund and the Portfolio are described in the Statement of
Additional Information.
RISK FACTORS AND SUITABILITY
The Fund is not an appropriate investment for investors seeking complete
stability of principal. The Fund is designed primarily for tax-exempt
institutional investors such as pension or profit-sharing plans, foundations and
endowments which seek to maximize total return and whose beneficiaries are in a
position to benefit from the reinvestment of the quarterly income dividends and
any capital gains distributions paid by the Fund on a tax-deferred basis. The
Fund may also be suitable for other investors, depending upon their investment
goals and financial and tax positions. Investing in foreign securities may
involve a higher degree of risk than investing in domestic securities. Shares of
the Fund should not be regarded as a complete investment program.
Yields on debt securities depend on a variety of factors, such as general
conditions in the money and bond markets, and the size, maturity and rating of a
particular issue. Debt securities with longer maturities tend to produce higher
yields and are generally subject to greater potential capital appreciation and
depreciation. The market prices of debt securities usually vary depending upon
available yields, rising when interest rates decline and declining when interest
rates rise.
Foreign Securities
Investing in securities of foreign companies and securities denominated in
foreign currencies or utilizing foreign currency transactions involves certain
risks of political, economic and legal conditions and developments not typically
associated with investing in securities of U.S. companies. Such conditions or
developments might include unfavorable changes in currency exchange rates,
exchange control regulations (including currency blockage), expropriation of
assets of companies in which the Portfolio invests, nationalization of such
companies, imposition of withholding taxes on dividend or interest payments, and
possible difficulty in obtaining and enforcing judgments against a foreign
issuer. Also, foreign securities may not be as liquid and may be more volatile
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 Portfolio, in connection with
its purchases and sales of foreign securities, other than securities denominated
in United States dollars, will incur transaction costs in converting currencies.
Brokerage commissions in foreign countries are generally fixed, and other
transaction costs related to securities exchanges are generally higher than in
the United States. Most foreign securities of the Portfolio are held by foreign
13
<PAGE>
subcustodians that satisfy certain eligibility requirements. However, foreign
subcustodian arrangements are significantly more expensive than domestic
custody. In addition, foreign settlement of securities transactions is subject
to local law and custom that is not, generally, as well established or as
reliable as U.S. regulation and custom applicable to settlements of securities
transactions and, accordingly, there is generally perceived to be a greater risk
of loss in connection with securities transactions in many foreign countries.
Emerging Markets
The Portfolio may invest in countries with emerging economies or securities
markets ("Emerging Markets"). Investments in Emerging Markets involves risks in
addition to those generally associated with investments in foreign securities.
Political and economic structures in many Emerging Markets may be undergoing
significant evolution and rapid development, and such countries may lack the
social, political and economic stability characteristics of more developed
countries. As a result, the risks described above relating to investments in
foreign securities, including the risks of nationalization or expropriation of
assets, may be heightened. In addition, unanticipated political or social
developments may affect the values of the Portfolio's investments and the
availability to the Portfolio of additional investments in such Emerging
Markets. The small size and inexperience of the securities markets in certain
Emerging Markets and the limited volume of trading in securities in those
markets may make the Portfolio's investments in such countries less liquid and
more volatile than investments in countries with more developed securities
markets (such as the U.S., Japan or most Western European countries).
BB Rated Securities
Investing in BB Rated Securities involves a higher degree of credit risk
(the risk that the issuer will not make interest or principal payments when due)
than investing in higher rated securities. In the event of an unanticipated
default, the Portfolio will experience a reduction in its income, and could
expect a decline in the market value of the securities so affected. More careful
analysis of the financial condition of each issuer of BB Rated Securities is
therefore necessary. During an economic downturn or substantial period of rising
interest rates, highly leveraged issuers may experience financial stress which
would adversely affect their ability to service their principal and interest
payment obligations, to meet projected business goals and to obtain additional
financing. Periods of economic or political uncertainty and change can be
expected to result in volatility in prices of these securities.
BB Rated Securities generally offer a higher yield, but may be subject to a
higher risk of default in interest or principal payments than higher rated
securities. The market prices of BB Rated Securities are generally less
sensitive to interest rate changes than higher rated securities, but are
generally more sensitive to adverse economic or political changes or, in the
case of corporate issuers, to individual company developments. BB Rated
Securities also may have less liquid markets than higher rated securities, and
their liquidity, as well as their value, may be more severely affected by
adverse economic conditions. Adverse publicity and investor perceptions of the
market, as well as newly enacted or proposed legislation, may also have a
negative impact on the market for BB Rated Securities.
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For the fiscal year ended December 31, 1995, the Fund's investments, on a
dollar weighted basis, calculated
at the end of each month, had the following credit quality characteristics:
Investments Percentage
- ----------- ----------
U.S. Government Treasury Securities 5.0%
U.S. Government Agency Securities 4.1%
Bonds:
Aaa or AAA 30.6%
Aa or AA 19.4%
A 14.0%
Baa or BBB 13.6%
Ba or BB 13.3%
B 0%
-----
100%
SPECIAL INFORMATION CONCERNING THE HUB
AND SPOKE(R) MASTER-FEEDER FUND
Unlike other mutual funds which directly acquire and manage their own
portfolio securities, the Fund seeks to achieve its investment objective by
investing all of its Investable Assets in the Portfolio which has the same
investment objective as the Fund. The Portfolio in turn invests primarily in
securities consistent with that objective. Therefore, an investor's interest in
the Portfolio's securities is indirect, like investments in other investment
companies and pooled investment vehicles only more so. In addition to selling a
beneficial interest to the Fund, the Portfolio may sell beneficial interests to
other mutual funds or institutional investors. Such investors will invest in the
Portfolio on the same terms and conditions and will pay a proportionate share of
the Portfolio's expenses. However, the other investors investing in the
Portfolio are not required to sell their shares at the same public offering
price as the Fund due to the imposition of sales commissions and variations in
other operating expenses. Therefore, investors in the Fund should be aware that
these differences may result in differences in returns experienced by investors
in the different funds that invest in the Portfolio. Such differences in returns
are also present in other mutual fund structures. Information concerning other
holders of interests in the Portfolio is available from the Adviser (800)
221-4795.
The Hub and Spoke master-feeder fund structure has been developed
relatively recently, so shareholders should carefully consider this investment
approach.
Smaller funds investing in the Portfolio may be materially affected by the
actions of larger funds investing in the Portfolio. For example, if a large fund
withdraws from the Portfolio, the remaining funds may experience higher pro rata
operating expenses, thereby producing lower returns (however, this possibility
exists as well for traditionally structured funds that have large institutional
investors). Additionally, because the Portfolio would have fewer assets in such
a case, it may become less diversified, resulting in increased portfolio risk.
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<PAGE>
Also, funds with a greater pro rata ownership in the Portfolio could have
effective voting control of the operations of the Portfolio. Except as permitted
by the SEC, whenever the Trust is requested to vote on matters pertaining to the
Portfolio (other than a vote by the Fund to continue the operations of the
Portfolio upon the withdrawal of another investor in the Portfolio), the Trust
will hold a meeting of shareholders of the Fund and will cast all of its votes
in the same proportion as the votes of the Fund's shareholders. The percentage
of the Trust's votes representing Fund shareholders not voting will be voted by
the Trustees or officers of the Trust in the same proportion as the Fund
shareholders who do, in fact, vote. Fund shareholders who do not vote will not
affect the Trust's votes at the Portfolio meeting.
Certain changes in the Portfolio's investment objectives, policies or
restrictions may require the Fund to withdraw its interest in the Portfolio. Any
such withdrawal could result in a distribution "in kind" of portfolio securities
(as opposed to a cash distribution from the Portfolio) to the extent permitted
by the 1940 Act or the rules adopted thereunder. If securities are distributed,
the Fund could incur brokerage, tax or other charges in converting the
securities to cash. In addition, the distribution in kind may result in a less
diversified portfolio of investments or adversely affect the liquidity of the
Fund. Notwithstanding the above, there are other means for meeting redemption
requests, such as borrowing.
The Fund's investment objective is a fundamental policy and may not be
changed without the approval of the Fund's shareholders. The investment
objective of the Portfolio is not a fundamental policy and may be changed
without the approval of investors in the Portfolio. If the Portfolio proposed to
change its investment objective, the Fund would either obtain shareholder
approval to make a corresponding change to its investment objective or withdraw
its investment from the Portfolio. The Fund may withdraw its investment from the
Portfolio at any time if the Board of Trustees of the Trust determines that it
is in the best interests of the shareholders of the Fund to do so (including if
the Fund's and the Portfolio's investment objectives were not substantially the
same). Upon any such withdrawal, the Board of Trustees of the Trust would
consider what action might be taken, including investing all the Investable
Assets of the Fund in another pooled investment entity having substantially the
same investment objective as the Fund or retaining an investment adviser to
manage directly the Fund's assets in accordance with its investment policies
described above with respect to the Portfolio. In any event, shareholders of the
Fund will receive 30 days prior written notice with respect to any change in the
investment objective of the Portfolio. See "investment Objective and Policies"
for a description of the fundamental policies of the Portfolio that cannot be
changed without approval by the "vote of a majority of the outstanding voting
securities" (as defined in the 1940 Act) of the Portfolio.
For descriptions of the investment objective, policies and restrictions of
the Portfolio, see "Investment Objective and Policies." For descriptions of the
management of the Portfolio, see "Management" herein and in the Statement of
Additional Information. For descriptions of the expenses of the Portfolio, see
"Management" herein.
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<PAGE>
CALCULATION OF PERFORMANCE DATA
From time to time the Fund may advertise its yield and total return. Both
yield and total return figures are based on historical earnings and are not
intended to indicate future performance. The "total return" of the Fund refers
to the average annual compounded rates of return over 1, 5 and 10 year periods
(or any shorter period since inception) that would equate an initial amount
invested at the beginning of a stated period to the ending redeemable value of
the investment. The calculation assumes the reinvestment of all dividends and
distributions, includes all recurring fees that are charged to all shareholder
accounts and deducts all nonrecurring charges at the end of each period.
The "yield" of the Fund is computed by dividing the net investment income
per share earned during the period stated in the advertisement by the maximum
offering price per share on the last day of the period (using the average number
of shares entitled to receive dividends). For the purpose of determining net
investment income, the calculation includes among expenses of the Fund all
recurring fees that are charged to all shareholder accounts and any nonrecurring
charges for the period stated.
From time to time, the Fund may compare its performance with that of other
mutual funds with similar investment objectives, to stock, bond and other
relevant indices, and to performance rankings prepared by recognized mutual fund
statistical services. In addition, the Fund's performance may be compared to
alternative investment or savings vehicles and/or to indices or indicators of
economic activity.
DIVIDENDS AND DISTRIBUTIONS
The Fund's dividends from net investment income will be declared and
distributed quarterly. The Fund's dividends from short-term and long-term
capital gains, if any, after reduction by capital losses, will be declared and
distributed at least annually. In determining the amounts of its dividends, the
Fund will take into account its share of the income, gains or losses, expenses,
and any other tax items of the Portfolio. Dividends from net investment income
and from short-term and long-term capital gains, if any, are automatically
reinvested in additional shares of the Fund unless the shareholder elects to
receive them in cash.
PURCHASE OF SHARES
Shares of the Fund may be purchased from the Principal Underwriter, which
offers the Fund's shares to the public on a continuous basis. Shares are sold at
the net asset value per share next computed after the purchase order is received
in good order by the Principal Underwriter and payment for the shares is
received by the Fund's Custodian. Please see the Fund's account application or
call the Principal Underwriter for instructions on how to make payment of shares
to the Fund's custodian. Unless waived by the Fund, the minimum initial
investment is $100,000. Additional investments may be made in amounts of at
least $5,000.
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<PAGE>
Shares of the Fund may also be purchased through securities dealers. Orders
for the purchase of Fund shares received by dealers by the close of regular
trading on the New York Stock Exchange on any business day and transmitted to
the Principal Underwriter or its agent by the close of its business day
(normally 4:00 p.m., New York City time) will be effected as of the close of
regular trading on the New York Stock Exchange on that day, provided that
payment for the shares is also received by the Fund's custodian on that day.
Otherwise, orders will be effected at the net asset value per share determined
on the next business day. It is the responsibility of dealers to transmit orders
so that they will be received by the Principal Underwriter before the close of
its business day. Shares of the Fund purchased through dealers may be subject to
transaction fees, no part of which will be received by the Fund, the Principal
Underwriter or the Adviser.
The Fund's net asset value per share is computed each day on which the New
York Stock Exchange is open as of the close of regular trading on the Exchange
(currently 4:00 p.m., New York City time). The net asset value per share is
calculated by determining the value of all the Fund's assets (i.e., the value of
its investment in the Portfolio and other assets), subtracting all liabilities
and dividing the result by the total number of shares outstanding. The Portfolio
values short-term obligations with maturities of 60 days or less at original
cost plus either accrued interest or amortized discount unless the Trustees
determine that such methods do not approximate fair value. All other investments
are valued at market value or, where market quotations are not readily
available, at fair value as determined in good faith by the Adviser in
accordance with procedures approved by the Trustees of the Portfolio Trust.
Generally, trading in foreign securities is substantially completed each day at
various times prior to the close of regular trading on the New York Stock
Exchange. The values of such securities in the Portfolio's portfolio and used in
computing the net asset value of the Fund's shares are determined as of such
times. Foreign currency exchange rates are also generally determined prior to
the close of regular trading on the New York Stock Exchange. Occasionally,
events which affect the values of such securities and such exchange rates may
occur between the times at which they are determined and the close of regular
trading on the New York Stock Exchange and will therefore not be reflected in
the computation of the Fund's net asset value. If events materially affecting
the value of such securities occur during such period, then these securities are
valued at their fair value as determined in good faith in accordance with
procedures approved by the Trustees of the Portfolio Trust. Additional
information concerning the Portfolio's valuation policies is contained in the
Statement of Additional Information.
In the sole discretion of the Trust, the Fund may accept securities instead
of cash for the purchase of shares of the Fund. The Trust will ask the Adviser
to determine that any securities acquired by the Fund in this manner are
consistent with the investment objective, policies and restrictions of the
Portfolio. The securities will be valued in the manner stated above. The
purchase of shares of the Fund for securities instead of cash may cause an
investor who contributed them to realize a taxable gain or loss with respect to
the securities transferred to the Fund.
The Trust reserves the right in its sole discretion (i) to suspend the
offering of the Fund's shares, (ii) to reject purchase orders when in the best
interest of the Fund and (iii) to modify or eliminate the minimum initial
investment in Fund shares. The Fund's investment minimums do not apply to
accounts for which the Adviser or any of its affiliates serves as investment
adviser or to employees of the Adviser or any of its affiliates or to members of
such persons' immediate families. The Fund's investment minimums apply to the
aggregate value invested in omnibus accounts rather than to the investment of
the underlying participants in the omnibus accounts.
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EXCHANGE OF SHARES
Shares of the Fund may be exchanged for shares of one or more other funds
in the Standish, Ayer & Wood family of funds. Shares of the Fund redeemed in an
exchange transaction are valued at their net asset value next determined after
the exchange request is received by the Principal Underwriter or its agent.
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 Fund may be exchanged by written order to the Principal
Underwriter, One Financial Center, Boston, Massachusetts 02111. A written
exchange request must (a) state the name of the current Fund, (b) state the name
of the fund into which the current Fund shares will be exchanged, (c) state the
number of shares or the dollar amount to be exchanged, (d) identify the
shareholder's account numbers in both funds and (e) be signed by each registered
owner exactly as the shares are registered. Signature(s) must be guaranteed as
listed under "Written Redemption" below.
Telephonic Exchanges
Shareholders who elect telephonic privileges may exchange shares by calling
the Principal Underwriter at (800) 221-4795. Telephonic privileges are not
available to shareholders automatically. Proper identification will be required
for each telephonic exchange. Please see "Telephone Transactions" below for more
information regarding telephonic transactions.
General Exchange Information
All exchanges are subject to the following exchange restrictions: (i) the
fund into which shares are being exchanged must be registered for sale in your
state; (ii) exchanges may be made only between funds that are registered in the
same name, address and, if applicable, taxpayer identification number; and (iii)
unless waived by the Trust, the amount to be exchanged must satisfy the minimum
account size of the fund to be exchanged into. Exchange requests will not be
processed until payment for the shares of the current Fund has been received by
the Fund's custodian. The exchange privilege may be changed or discontinued and
may be subject to additional limitations upon sixty (60) days' notice to
shareholders, including certain restrictions on purchases by market-timer
accounts.
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REDEMPTION OF SHARES
Shares of the Fund may be redeemed by any of the methods described below at
the net asset value per share next determined after receipt by the Principal
Underwriter 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 Fund may be redeemed by written order to the Principal
Underwriter, One Financial Center, 26th Floor, Boston, Massachusetts 02111. A
written redemption request must (a) state the name of the Fund and the number of
shares or the dollar amount to be redeemed, (b) identify the shareholder's
account number and (c) be signed by each registered owner exactly as the shares
are registered. Signature(s) must be guaranteed by a member of either the
Securities Transfer Association's STAMP program or the New York Stock Exchange's
Medallion Signature Program or by any one of the following institutions,
provided that such institution meets credit standards established by Investors
Bank and Trust Company, the Fund's transfer agent: (i) a bank; (ii) a securities
broker or dealer, including a government or municipal securities broker or
dealer, that is a member of a clearing corporation or has net capital of at
least $100,000; (iii) a credit union having authority to issue signature
guarantees; (iv) a savings and loan association, a building and loan
association, a cooperative bank, or a federal savings bank or association; or
(v) a national securities exchange, a registered securities exchange or a
clearing agency. Additional supporting documents may be required in the case of
estates, trusts, corporations, partnerships and other shareholders that are not
individuals. Redemption proceeds will normally be paid by check mailed within
three business days of receipt by the Principal Underwriter of a written
redemption request in proper form. If shares to be redeemed were recently
purchased by check, the Fund may delay transmittal of redemption proceeds until
such time as it has assured itself that good funds have been collected for the
purchase of such shares. This may take up to fifteen (15) days in the case of
payments made by check.
Telephonic Redemption
Shareholders who elect telephonic privileges may redeem shares by calling
the Principal Underwriter at (800) 221-4795. Telephonic privileges are not
available to shareholders automatically. Redemption proceeds will be mailed or
wired in accordance with the shareholder's instruction on the account
application to a pre-designated account. Redemption proceeds will normally be
paid promptly after receipt of telephonic instructions, but no later than three
business days thereafter, except as described above for shares purchased by
check. Redemption proceeds will be sent only by check payable to the shareholder
of record at the address of record, unless the shareholder has indicated, in the
initial application for the purchase of shares, a commercial bank to which
redemption proceeds may be sent by wire. These instructions may be changed
subsequently only in writing, accompanied by a signature guarantee, and
additional documentation in the case of shares held by a corporation or other
entity or by a fiduciary such as a trustee or executor. Wire charges, if any,
will be deducted from redemption proceeds. Proper identification will be
required for each telephonic redemption.
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<PAGE>
Repurchase Order
In addition to 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 payment
of the shares by the Fund's custodian. Brokers and dealers are obligated to
transmit repurchase orders to the Principal Underwriter prior to the close of
the Principal Underwriter's business day (normally 4:00 p.m.). Brokers or
dealers may charge for their services in connection with a repurchase of Fund
shares, but neither the Trust 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 Trust and the Fund's custodian to act upon instructions of any
person to redeem and/or exchange shares from the shareholder's account. Further,
the shareholder acknowledges that, as long as the Fund employs reasonable
procedures to confirm that telephonic instructions are genuine, and follows
telephonic instructions that it reasonably believes to be genuine, neither the
Adviser, nor the Principal Underwriter, nor the Trust, nor the Fund, nor the
Fund's custodian, nor their respective officers or employees, will be liable for
any loss, expense or cost arising out of any request for a telephonic redemption
or exchange, even if such transaction results from any fraudulent or
unauthorized instructions. Depending upon the circumstances, the Fund intends to
employ personal identification or written confirmation of transactions
procedures, and if it does not, the Fund may be liable for any losses due to
unauthorized or fraudulent instructions. All telephone transaction requests will
be recorded. Shareholders may experience delays in exercising telephone
transaction privileges during periods of abnormal market activity. Accordingly,
during periods of volatile economic and market conditions, shareholders may wish
to consider transmitting redemption and exchange requests in writing.
* * * *
The proceeds paid upon redemption or repurchase may be more or less than
the cost of the shares, depending upon the market value of the Portfolio's
portfolio investments at the time of redemption or repurchase. The Fund intends
to pay cash for all shares redeemed, but under certain conditions, the Fund may
make payments wholly or partially in portfolio securities withdrawn from the
Portfolio for this purpose. Please see the Statement of Additional Information
for further information regarding the Fund's ability to satisfy redemption
requests in-kind.
Because of the cost of maintaining shareholder accounts, the Fund may
redeem, at net asset value, the shares in any account if the value of such
shares has decreased to less than $50,000 as a result of redemptions or
transfers. Before doing so, the Fund will notify the shareholder that the value
of the shares in the account is less than the specified minimum and will allow
the shareholder 30 days to make an additional investment in an amount which will
increase the value of the account to at least $50,000. The Fund may eliminate
duplicate mailings of Fund materials to shareholders that have the same address
of record.
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MANAGEMENT
Trustees
The Fund is a separate investment series of Standish, Ayer & Wood
Investment Trust, a Massachusetts business trust. Under the terms of the
Agreement and Declaration of Trust establishing the Trust, which is governed by
the laws of The Commonwealth of Massachusetts, the Trustees of the Trust are
ultimately responsible for the management of its business and affairs.
The Portfolio is a separate investment series of Standish, Ayer & Wood
Master Portfolio, a master trust fund organized under the laws of the State of
New York. Under the terms of the Declaration of Trust, the affairs of the
Portfolio are managed under the supervision of the Trustees of the Portfolio
Trust.
A majority of the Trustees who are not "interested persons" (as defined in
the 1940 Act) of the Trust or the Portfolio Trust, as the case may be, have
adopted written procedures reasonably appropriate to deal with potential
conflicts of interest arising from the fact that the same individuals are
trustees of the Trust and of the Portfolio Trust, up to and including creating
separate boards of trustees. See "Management" in the Statement of Additional
Information for more information about the Trustees and officers of the Trust
and the Portfolio Trust.
Investment Adviser
Standish International Management Company, L.P. (the "Adviser"), One
Financial Center, Boston, MA 02111, serves as investment adviser to the
Portfolio pursuant to an investment advisory agreement and manages the
Portfolio's investments and affairs subject to the supervision of the Trustees
of the Portfolio Trust. The Adviser is a Delaware limited partnership which was
organized in 1991 and is a registered investment adviser under the Investment
Advisers Act of 1940. The general partner of the Adviser is Standish, Ayer &
Wood, Inc. ("Standish"), One Financial Center, Boston, MA 02111, which holds a
99.98% partnership interest. The limited partners, who each hold a 0.01%
interest in the Adviser, are Walter M. Cabot, Sr., Chairman of the Board of the
Adviser and a Director and Senior Adviser to Standish, and D. Barr Clayson, the
President of the Adviser and a Managing Director of Standish.
Standish and the Adviser provide fully discretionary management services
and counseling and advisory services to a broad range of clients throughout the
United States and abroad. As of February 29, 1996 Standish or the Adviser served
as the investment adviser to each of the following fourteen funds in the
Standish, Ayer & Wood family of funds:
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Net Assets
(February 29, 1996)
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Standish Controlled Maturity Fund $9,206,532
Standish Equity Fund 95,832,592
Standish Fixed Income Fund 2,274,975,978
Standish Fixed Income Fund II 10,046,446
Standish Global Fixed Income Fund 147,989,501
Standish Intermediate Tax Exempt Bond Fund 31,338,929
Standish International Equity Fund 55,691,972
Standish International Fixed Income Fund 792,817,998
Standish Massachusetts Intermediate
Tax Exempt Bond Fund 32,170,126
Standish Securitized Fund 55,002,171
Standish Short-Term Asset Reserve Fund 298,685,235
Standish Small Capitalization Equity Fund 188,411,176
Standish Small Cap Tax-Sensitive Equity Fund 1,278,405
Standish Tax-Sensitive Equity Fund 1,232,170
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 February
29, 1996, Standish managed approximately
$29 billion in assets.
The Portfolio's portfolio manager is Richard S. Wood. Mr. Wood has been
primarily responsible for the day-to-day management of the Fund's portfolio
since the Fund's inception and of the Portfolio's portfolio since the Fund's
conversion to the Hub and Spoke master-feeder fund structure on April 26, 1996.
During the past five years, Mr. Wood has served as a Vice President and Director
of Standish, President of the Trust and Executive Vice President of the Adviser.
Subject to the supervision and direction of the Trustees of the Portfolio
Trust, the Adviser manages the Portfolio in accordance with its stated
investment objective and policies, recommends investment decisions for the
Portfolio, places orders to purchase and sell securities on behalf of the
Portfolio and permits the Portfolio to use the name "Standish". For its services
to the Portfolio, the Adviser receives a monthly fee equal on an annual basis to
40% of the Portfolio's average net assets. For the fiscal year ended December
31, 1995, advisory fees paid by the Fund represented 0.40% of the Fund's average
daily net assets.
Administrator of the Fund
Standish serves as administrator to the Fund (the "Administrator") pursuant
to an administration agreement. As Administrator, Standish manages the affairs
of the Fund, provides all necessary office space and services of executive
personnel for administering the affairs of the Fund, and allows the Fund to use
the name "Standish." For these services Standish does not receive any
compensation. The Trustees of the Trust may, however, determine in the future to
compensate Standish for its administrative services.
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<PAGE>
Expenses
The Portfolio and the Fund, as the case may be, are responsible for all of
their respective costs and expenses not expressly stated to be payable by the
Adviser under the investment advisory agreement with the Portfolio or by
Standish under the administration agreement with the Fund. Among other expenses,
the Portfolio will pay investment advisory fees; bookkeeping, share pricing and
custodian fees and expenses; expenses of notices and reports to
interest-holders; and the expenses of the Portfolio's administrator. The Fund
will pay shareholder servicing fees and expenses; expenses of prospectuses,
statements of additional information and shareholder reports which are furnished
to shareholders. Each of the Fund and Portfolio will pay legal and auditing
fees; registration and reporting fees and expenses; and Trustees' fees and
expenses. The Trust's Principal Underwriter, Standish Fund Distributors, L.P.,
bears without subsequent reimbursement the distribution expenses attributable to
the offering and sale of Fund shares. Expenses of the Trust or the Portfolio
Trust which relate to more than one of their respective series are allocated
among such series by the Adviser and Standish in an equitable manner. For the
fiscal year ended December 31, 1995, total expenses of the Fund represented
0.62% of the Fund's average daily net assets.
Standish has voluntarily agreed to limit the master-feeder aggregate annual
operating expenses (excluding brokerage commissions, taxes and extraordinary
expenses) of the Fund and the Portfolio to the Fund's ratio of expenses to
average net assets in effect immediately prior to the Fund's conversion to the
Hub and Spoke master-feeder fund structure. The expense ratio considered to be
in effect immediately prior to the conversion for this purpose will be
calculated using the actual expenses incurred by the Fund during the three
months immediately prior to conversion and annualizing this amount. Standish may
discontinue or modify such limitation in the future at its discretion, although
it has no current intention to do so. In addition, Standish has agreed in the
administration agreement to limit the Fund's aggregate annual operating expenses
(excluding brokerage commissions, taxes and extraordinary expenses) to the
permissible limit applicable in any state in which shares of the Fund are then
qualified for sale. The Adviser has also agreed in the advisory agreement to
limit the Portfolio's total annual operating expenses (excluding brokerage
commissions, taxes and extraordinary expenses) to 0.65% of the Portfolio's
average daily net assets. If any expense limit is exceeded, the compensation due
the Adviser for such fiscal year shall be proportionately reduced by the amount
of such excess by a reduction or refund thereof at the time such compensation is
payable after the end of each calendar month, subject to readjustment during
such fiscal year.
Portfolio Transactions
Subject to the supervision of the Trustees of the Portfolio Trust, the
Adviser selects the brokers and dealers that execute orders to purchase and sell
portfolio securities for the Portfolio. The Adviser will generally seek to
obtain the best available price and most favorable execution with respect to all
transactions for the Portfolio.
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<PAGE>
Subject to the consideration of best price and execution and to applicable
regulations, the receipt of research and sales of Fund shares may also be
considered factors in the selection of brokers and dealers that execute orders
to purchase and sell portfolio securities for the Portfolio.
FEDERAL INCOME TAXES
The Fund presently qualifies and intends to continue to qualify for
taxation as a "regulated investment company" under the Code. If it qualifies for
treatment as a regulated investment company, the Fund will not be subject to
federal income tax on income (including capital gains) distributed to
shareholders in the form of dividends or capital gain distributions in
accordance with certain timing requirements of the Code.
The Fund will be subject to nondeductible 4% excise tax under the Code to
the extent that it fails to meet certain distribution requirements with respect
to each calendar year. Certain distributions made in order to satisfy the Code's
distribution requirements may be declared by the Fund during October, November
or December of the year but paid during the following January. Such
distributions will be taxable to taxable shareholders as if received on December
31 of the year the distributions are declared, rather than the year in which the
distributions are received.
Shareholders which are taxable entities or persons will be subject to
federal income tax on dividends and capital gain distributions made by the Fund.
These dividends and distributions will be attributable to the Fund's allocable
share of the net income and net long-term and short-term capital gains of the
Portfolio and will also take into account any expenses incurred or income earned
directly by the Fund. Dividends paid by the Fund from net investment income,
certain net foreign currency gains, and any excess of net short-term capital
gain over net long-term capital loss will be taxable to shareholders as ordinary
income, whether received in cash or Fund shares. No portion of such dividends is
expected to qualify for the corporate dividends received deduction under the
Code. Dividends paid by the Fund from net capital gain (the excess of net
long-term capital gain over net short-term capital loss), called "capital gain
distributions," will be taxable to shareholders as long-term capital gains,
whether received in cash or Fund shares and without regard to how long the
shareholder has held shares of the Fund. Capital gain distributions do not
qualify for the corporate dividends received deduction. Dividends and capital
gain distributions may also be subject to state and local or foreign taxes.
The Portfolio anticipates that it will be subject to foreign withholding
taxes or other foreign taxes on income (possibly including capital gains) on
certain of its foreign investments, which will reduce the yield or return from
those investments. Such taxes may be reduced or eliminated pursuant to an income
tax treaty in some cases.
The Fund may qualify to make an election to pass its allocable share of
qualifying foreign taxes paid by the Portfolio through to Fund shareholders, who
would then include their share of such taxes in their gross incomes (in addition
to the actual dividends and capital gain distributions received from the Fund)
and might be entitled, subject to certain conditions and limitations under the
Code, to a federal income tax credit or deduction for their share of such taxes.
Tax-exempt shareholders generally will not benefit from this election. If the
Fund makes this election, it will provide necessary information to its
shareholders regarding any foreign taxes passed through to them. If the Fund
does not make this election, it may deduct its allocable share of the foreign
taxes paid by the Portfolio in computing the net income the Fund must distribute
to shareholders to satisfy the Code's distribution requirements.
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<PAGE>
Redemptions and repurchases of shares are taxable events on which a
shareholder may recognize a gain or loss. Special rules recharacterize as
long-term any losses on the sale or exchange of Fund shares with a tax holding
period of six months or less, to the extent the shareholder received a capital
gain distribution with respect to such shares.
Individuals and certain other classes of shareholders may be subject to 31%
backup withholding of federal income tax on dividends, capital gain
distributions, and the proceeds of redemptions or repurchases of shares, if they
fail to furnish the Fund with their correct taxpayer identification number and
certain certifications or if they are otherwise subject to backup withholding.
Individuals, corporations and other shareholders that are not U.S. persons under
the Code are subject to different tax rules and may be subject to nonresident
alien withholding tax at the rate of 30% (or a lower rate provided by an
applicable tax treaty) on amounts treated as ordinary dividends from the Fund
and, unless a current IRS Form W-8 or an acceptable substitute is furnished to
the Fund, to backup withholding on certain payments from the Fund.
A state income (and possibly local income and/or intangible property) tax
exemption is generally available to the extent, if any, the Fund's distributions
are derived from interest on (or, in the case of intangibles taxes, the value of
its assets is attributable to) investments in certain U.S. Government
obligations, provided in some states that certain thresholds for holdings of
such obligations and/or reporting requirements are satisfied. Shareholders
should consult their tax advisers regarding the applicable requirements in their
particular states, including the effect, if any, of the Fund's indirect
ownership (through the Portfolio) of any such obligations.
After the close of each calendar year, the Fund will send a notice to
shareholders that provides information about the federal tax status of
distributions to shareholders for such calendar year.
THE FUND AND THE PORTFOLIO
The Fund is a separate investment series of Standish, Ayer & Wood
Investment Trust, an unincorporated business trust organized under the laws of
The Commonwealth of Massachusetts pursuant to an Agreement and Declaration of
Trust dated August 13, 1986. Under the Agreement and Declaration of Trust, the
Trustees have authority to issue an unlimited number of shares of beneficial
interest, par value $.01 per share, of the Fund. Each share of the Fund is
entitled to one vote. All Fund shares have equal rights with regard to voting,
redemption, dividends, distributions and liquidation, and shareholders of the
Fund have the right to vote as a separate class with respect to certain matters
under the 1940 Act and the Agreement and Declaration of Trust. Shares of the
Fund do not have cumulative voting rights. Fractional shares have proportional
voting rights and participate in any distributions and dividends. When issued,
each Fund share will be fully paid and nonassessable. Shareholders of the Fund
do not have preemptive or conversion rights. Certificates representing shares of
the Fund will not be issued.
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<PAGE>
The Trust has established fourteen series that currently offer their shares
to the public and may establish additional series at any time. Each series is a
separate taxpayer, eligible to qualify as a separate regulated investment
company for federal income tax purposes. The calculation of the net asset value
of a series and the tax consequences of investing in a series will be determined
separately for each series.
The Trust is not required to hold annual meetings of shareholders. Special
meetings of shareholders may be called from time to time for purposes such as
electing or removing Trustees, changing a fundamental policy, or approving an
investment advisory agreement.
If less than two-thirds of the Trustees holding office have been elected by
shareholders, a special meeting of shareholders of the Trust will be called to
elect Trustees. Under the Agreement and Declaration of Trust and the 1940 Act,
the record holders of not less than two-thirds of the outstanding shares of the
Trust may remove a Trustee by votes cast in person or by proxy at a meeting
called for the purpose or by a written declaration filed with each of the
Trust's custodian banks. Except as described above, the Trustees will continue
to hold office and may appoint successor Trustees. Whenever ten or more
shareholders of the Trust who have been such for at least six months, and who
hold in the aggregate shares having a net asset value of at least $25,000 or
which represent at least 1% of the outstanding shares, whichever is less, apply
to the Trustees in writing stating that they wish to communicate with other
shareholders with a view to obtaining signatures to request a meeting, and such
application is accompanied by a form of communication and request which they
wish to transmit, the Trustees shall within five (5) business days after receipt
of such application either (1) afford to such applicants access to a list of the
names and addresses of all shareholders as recorded on the books of the Trust;
or (2) inform such applicants as to the approximate number of shareholders of
record and the approximate cost of mailing to them the proposed communication or
form of request.
The Portfolio, in which all the Investable Assets of the Fund are invested,
is a series of Standish, Ayer & Wood Master Portfolio, an open-end management
investment company. The Portfolio Trust's Declaration of Trust provides that the
Portfolio Trust may establish and designate separate series of the Portfolio
Trust. The Portfolio Trust has established four series and may establish
additional series at any time. The Portfolio Trust's Declaration of Trust also
provides that the Fund and other entities investing in the Portfolio (e.g.,
other investment companies, insurance company separate accounts and common and
commingled trust funds) will not be liable for the obligations of the Portfolio,
although they will bear the risk of loss of their entire respective interests in
the Portfolio. However, there is a risk that interest-holders in the Portfolio
may be held personally liable as partners for the Portfolio's obligations.
Because the Portfolio Trust's Declaration of Trust disclaims interest-holder
liability and provides for indemnification against such liability, the risk of
the Fund incurring financial loss on account of such liability is limited to
27
<PAGE>
circumstances in which both inadequate insurance existed and the Portfolio
itself was unable to meet its obligations. As such, it is unlikely that the Fund
would experience liability from the investment structure itself. In any event,
shareholders of the Fund will continue to remain shareholders of a Massachusetts
business trust, and the risk of such a person incurring liability by reason of
being a shareholder of the Fund is remote. The interests in the Portfolio Trust
are divided into separate series, such as the Portfolio. No series of the
Portfolio Trust has any preference over any other series.
Investors in other series of the Portfolio Trust will not be involved in
any vote specifically involving only the Portfolio. Investors of all of the
series of the Portfolio Trust will, however, vote together to elect Trustees of
the Portfolio Trust and for certain other matters affecting the Portfolio Trust.
As provided by the 1940 Act, under certain circumstances, the shareholders of
one or more series could control the outcome of these votes.
Inquiries concerning the Fund should be made by contacting the Fund or the
Principal Underwriter at the Fund's address and telephone number listed on the
cover of this Prospectus.
PRINCIPAL UNDERWRITER
Standish Fund Distributors, L.P., One Financial Center, 26th Floor, Boston,
Massachusetts 02111, serves as the Trust's principal underwriter.
CUSTODIAN, TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
Investors Bank & Trust Company, 24 Federal Street, Boston, Massachusetts,
serves as the Fund's transfer agent and dividend disbursing agent and as
custodian of all cash and securities of the Portfolio.
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P., One Post Office Square, Boston, Massachusetts
02109 and Coopers & Lybrand, P.O. Box 219, Grand Cayman, Cayman Islands, BWI,
serve as independent accountants for the Trust and the Portfolio Trust,
respectively, and will audit the Fund's and the Portfolio's respective financial
statements annually.
LEGAL COUNSEL
Hale and Dorr, 60 State Street, Boston, Massachusetts 02109, is legal
counsel to the Trust, the Portfolio Trust and to the Adviser.
- --------------------------------------------------------------------------------
No dealer, salesman or other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus or in the Statement of Additional Information, and, if given or made,
such other information or representations must not be relied upon as having been
authorized by the Trust. This Prospectus does not constitute an offering in any
jurisdiction in which such offering may not be lawfully made.
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APPENDIX A
KEY TO MOODY'S RATINGS FOR CORPORATE BONDS AND FOR SOVEREIGN, SUBNATIONAL AND
SOVEREIGN RELATED ISSUERS
Aaa-Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edge." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa-Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long term risks appear somewhat larger than in Aaa securities.
A-Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa-Bonds which are rated Baa are considered as medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba-Bonds which are rated Ba are judged to have speculative elements. Their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
STANDARD & POOR'S RATINGS DEFINITIONS FOR CORPORATE BONDS AAA-Debt rated AAA has
the highest rating assigned by Standard & Poor's. Capacity to pay interest and
repay principal is extremely strong.
AA-Debt rated AA has a very strong capacity to pay interest and repay principal
and differs from the higher rated issues only in small degree.
A-Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB-Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
29
<PAGE>
BB-Debt rated BB is regarded, on balance, as predominantly speculative with
respect to capacity to pay interest and repay principal in accordance with the
terms of the obligation. While such debt will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or major
risk exposures to adverse conditions.
STANDARD & POOR'S CHARACTERISTICS OF
SOVEREIGN DEBT OF FOREIGN COUNTRIES
AAA-Stable, predictable governments with demonstrated track record of responding
flexibly to changing economic and political circumstances -Key players in the
global trade and financial system -Prosperous and resilient economies, high per
capita incomes -Low fiscal deficits and government debt, low inflation -Low
external debt
AA-Stable, predictable governments with demonstrated track record of responding
to changing economic and political circumstances -Tightly integrated into global
trade and financial system -Differ from AAAs only to a small degree because:
- -Economies are smaller, less prosperous and generally more vulnerable to adverse
external influences (e.g., protection and terms of trade shocks) -More variable
fiscal deficits, government debt and inflation -Moderate to high external debt.
A-Politics evolving toward more open, predictable forms of governance in
environment of rapid economic and social change -Established trend of
integration into global trade and financial system -Economies are smaller, less
prosperous and generally more vulnerable to adverse external influences (e.g.,
protection and terms of trade shocks), but -Usually rapid growth in output and
per capita incomes -Manageable through variable fiscal deficits, government debt
and inflation -Usually low but variable debt.
BB-Political factors a source of major uncertainty, either because system is in
transition or due to external threats, or both, often in environment of rapid
economic and social change -Integration into global trade and financial system
growing but untested -Low to moderate income developing economies but variable
performance and quite vulnerable to adverse external influences -Variable to
high fiscal deficits, government debt and inflation -Very high and variable
debt, often graduates of Brady plan but track record not well established.
DESCRIPTION OF DUFF & PHELPS RATINGS FOR CORPORATE BONDS AND FOR SOVEREIGN,
SUBNATIONAL AND SOVEREIGN RELATED ISSUERS
AAA-Highest credit quality. The risk factors are negligible, being only slightly
more than for risk-free U.S. Treasury debt.
AA-High credit quality. Protection factors are strong. Risk is modest but may
vary slightly from time to time because of economic conditions.
A-Protection factors are average but adequate. However, risk factors are more
variable and greater in periods of economic stress.
BBB-Below average protection factors but still considered sufficient for prudent
investment. Considerable variability in risk during economic cycles.
30
<PAGE>
BB-Below investment grade but deemed likely to meet obligations when due.
Present or prospective financial protection factors fluctuate according to
industry conditions or company fortunes. Overall quality may move up or down
frequently within this category.
IBAC LONG TERM RATINGS FOR CORPORATE BONDS AND FOR SOVEREIGN, SUBNATIONAL AND
SOVEREIGN RELATED ISSUES
AAA-Obligations for which there is the lowest expectation of investment risk.
Capacity for timely repayment of principal and interest is substantial, such
that adverse changes in business, economic or financial conditions are unlikely
to increase investment risk substantially.
AA-Obligations for which there is a very low expectation of investment risk.
Capacity for timely repayment of principal and interest is substantial. Adverse
changes in business, economic or financial conditions may increase investment
risk, albeit not very significantly.
A-Obligations for which there is a low expectation of investment risk. Capacity
for timely repayment of principal and interest is strong, although adverse
changes in business, economic or financial conditions may lead to increased
investment risk.
BBB-Obligations for which there is currently a low expectation of investment
risk. Capacity for timely repayment of principal and interest is adequate,
although adverse changes in business, economic or financial conditions are more
likely to lead to increased investment risk than for obligations in other
categories.
BB-Obligations for which there is a possibility of investment risk developing.
Capacity for timely repayment of principal and interest exists, but is
susceptible over time to adverse changes in business, economic or financial
conditions.
* * *
In the case of sovereign, subnational and sovereign related issuers, the
Portfolio uses the foreign currency or domestic (local) currency rating
depending upon how a security in the portfolio is denominated. In the case where
the Portfolio holds a security denominated in a domestic (local) currency and
one of the rating services does not provide a domestic (local) currency rating
for the issuer, the Portfolio will use the foreign currency rating for the
issuer; in the case where the Portfolio holds a security denominated in a
foreign currency and one of the rating services does not provide a foreign
currency rating for the issuer, the Portfolio will treat the security as being
unrated.
31
<PAGE>
TAX CERTIFICATION INSTRUCTIONS
Federal law requires that taxable distributions and proceeds of redemptions
and exchanges be reported to the IRS and that 31% be withheld if you fail to
provide your correct Taxpayer Identification Number (TIN) and the certifications
contained in the Account Purchase Application (Application) or you are otherwise
subject to backup withholding. Amounts withheld and forwarded to the IRS can be
credited as a payment of tax when completing your Federal income tax return.
For most individual taxpayers, the TIN is the social security number.
Special rules apply for certain accounts. For example, for an account
established under the Uniform Gift to Minors Act, the TIN of the minor should be
furnished. If you do not have a TIN, you may apply for one using forms available
at local offices of the Social Security Administration or the IRS, and you
should write "Applied For" in the space for a TIN on the Application.
Recipients exempt from backup withholding, including corporations and
certain other entities, should provide their TIN and underline "exempt" in
section 2(a) of the TIN section of the Application to avoid possible erroneous
withholding. Non-resident aliens and foreign entities may be subject to
withholding of up to 30% on certain distributions received from the Fund and
must provide certain certifications on IRS Form W-8 to avoid backup withholding
with respect to other payments. For further information, see Code Sections 1441,
1442 and 3406 and/or consult your tax adviser.
- --------------------------------------------------------------------------------
1Hub and Spoke(R) is a registered service mark of Signature Financial Group,Inc.
32
<PAGE>
STANDISH GLOBAL FIXED INCOME FUND
Investment Adviser
Standish International Management Company, L.P.
One Financial Center
Boston, Massachusetts 02111
Custodian
Investors Bank & Trust Company
24 Federal Street
Boston, Massachusetts 02110
Principal Underwriter
Standish Fund Distributors, L.P.
One Financial Center
Boston, Massachusetts 02111
Independent Accountants
Coopers & Lybrand, L.L.P.
One Post Office Square
Boston, Massachusetts 02109
Legal Counsel
Hale and Dorr
60 State Street
Boston, Massachusetts 02109
Further information about the performance of the Fund is contained in the
Fund's Annual Report, which may be obtained from the Principal Underwriter
without charge.
33
<PAGE>
Prospectus dated April 29, 1996
PROSPECTUS
STANDISH SMALL CAPITALIZATION EQUITY FUND
One Financial Center
Boston, Massachusetts 02111
(800) 221-4795
Standish Small Capitalization Equity Fund (the "Fund") is one fund in the
Standish, Ayer & Wood family of funds. The Fund is organized as a separate
diversified investment series of Standish, Ayer & Wood Investment Trust (the
"Trust"), an open-end management investment company.
The Fund's investment objective is to achieve long-term growth of capital
through investment primarily in equity securities of small companies which
appear to be undervalued. The Fund seeks to achieve its investment objective by
investing all its investable assets (the "Investable Assets") in the Standish
Small Capitalization Equity Portfolio (the "Portfolio") which has the same
investment objective as the Fund. The Portfolio is a series of Standish, Ayer &
Wood Master Portfolio (the "Portfolio Trust"), which is also an open-end
management investment company. The Portfolio invests primarily in publicly
traded securities, including securities being issued in initial public
offerings. The Portfolio does not normally invest in equity securities which are
restricted as to disposition by federal securities laws or are otherwise
illiquid but may do so to a limited extent under certain circumstances. See
"Investment Policies." Standish, Ayer & Wood, Inc. is the Fund's investment
adviser ("Standish" or the "Adviser").
UNLIKE OTHER MUTUAL FUNDS WHICH DIRECTLY ACQUIRE AND MANAGE THEIR OWN
PORTFOLIOS OF SECURITIES THE FUND SEEKS TO ACHIEVE ITS INVESTMENT OBJECTIVE BY
INVESTING ALL OF ITS INVESTABLE ASSETS IN THE PORTFOLIO WHICH IS A SEPARATE FUND
WITH AN IDENTICAL INVESTMENT OBJECTIVE. SEE "SPECIAL INFORMATION CONCERNING THE
HUB AND SPOKE MASTER-FEEDER FUND STRUCTURE" ON PAGE 8.
Investors may purchase shares of the Fund from the Trust's principal
underwriter, Standish Fund Distributors, L.P. (the "Principal Underwriter"), at
the address and phone number set forth above without a sales commission or other
transaction charges. Unless waived by the Fund, the minimum initial investment
is $100,000. Additional investments may be made in amounts of at least $10,000.
This Prospectus is intended to set forth concisely the information about
the Fund and the Trust that a prospective investor should know before investing.
Investors are encouraged to read this Prospectus and retain it for future
reference. Additional information about the Fund and the Trust is contained in a
Statement of Additional Information which has been filed with the Securities and
Exchange Commission and is available upon request and without charge by calling
or writing to the Principal Underwriter at the telephone number or address set
forth above. The Statement of Additional Information bears the same date as this
Prospectus and is incorporated by reference into this Prospectus.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK OR OTHER INSURED DEPOSITORY INSTITUTION, AND ARE NOT
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD
OR ANY OTHER GOVERNMENT AGENCY. AN INVESTMENT IN SHARES OF THE FUND INVOLVES
INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
CONTENTS
Expense Information..........................................2
Financial Highlights.........................................3
Investment Objective and Policies............................4
Risk Factors and Suitability.................................7
Special Information Concerning the Hub and Spoke Master
Feeder Fund Structure..................................8
Calculations of Performance Data.............................8
Dividends and Distributions..................................9
Purchase of Shares...........................................9
Exchange of Shares...........................................9
Redemption of Shares........................................10
Management..................................................11
Federal Income Taxes........................................12
The Fund and The Portfolio..................................13
Principal Underwriter.......................................14
Custodian, Transfer Agent and Dividend-
Disbursing Agent.......................................14
Independent Accountants.....................................14
Legal Counsel...............................................14
Tax Certification Instructions..............................14
EXPENSE INFORMATION
Shareholder Transaction Expenses
Maximum Sales Load Imposed on Purchases None
Maximum Sales Load Imposed on Reinvested Dividends None
Deferred Sales Load None
Redemption Fees None
Exchange Fees None
Annual Fund Operating Expenses (as a percentage of average net assets)
Management Fees 1 0.60%
12b-1 Fees None
Other Expenses (After Expense Limitation) 0.15%*
Total Operating Expenses (After Expense Limitation) 0.75%*
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Example 1 year 3 years 5 years 10 years
------- ------ ------- ------- --------
You would pay the following expenses on a $1,000 investment, assuming (1)
5% annual return and (2) redemption at the end
of each time period: $8 $24 $42 $93
</TABLE>
The purpose of the above table is to assist the investor in understanding
the various costs and expenses of the Fund and the Portfolio that an investor in
the Fund will bear directly or indirectly. The figure shown in the caption
"Other Expenses," which includes, among other things, custodian and transfer
agent fees, registration costs and payments for insurance and audit and legal
services, is based upon the Fund's expenses for the fiscal year ended December
31, 1995. The Trustees of the Trust believe that over time the aggregate per
share expenses of the Fund and the Portfolio will not be more than the expenses
which the Fund would incur if it were to retain the services of an investment
adviser and the Investable Assets of the Fund were invested directly in the
types of securities being held by the Portfolio.
- --------------------------------------------------------------------------------
1 As of the close of business on April 26, 1996, the Fund transferred its
Investable Assets to the Portfolio in exchange for an interest in the Portfolio.
Prior to such date, the Trust, on behalf of the Fund, retained Standish as its
investment adviser.
* Standish has voluntarily agreed to limit the master-feeder aggregate annual
operating expenses of the Fund and the Portfolio (excluding brokerage
commissions, taxes and extraordinary expenses) to the Fund's ratio of expenses
to average net assets in effect immediately prior to the Fund's conversion to
the Hub and Spoke master-feeder fund structure. The expense ratio considered to
be in effect immediately prior to the conversion for this purpose will be
calculated using the actual expenses incurred by the Fund during the three
months immediately prior to conversion and annualizing this amount. Standish may
discontinue or modify such limitation in the future at its discretion, although
it has no current intention to do so. In the absence of such agreement, Other
Expenses and the Total Operating Expenses of the Fund and the Portfolio are
estimated to be 0.19% and 0.79%, respectively, of average daily net assets.
For more information with respect to the expenses of the Fund and the
Portfolio see "Management-Investment Adviser" and "Management-Expenses" herein.
THE INFORMATION IN THE TABLE AND HYPOTHETICAL EXAMPLE SHOULD NOT BE
CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY
BE GREATER OR LESS THAN THOSE SHOWN. MOREOVER, WHILE THE EXAMPLE ASSUMES A 5%
ANNUAL RETURN, THE FUND'S ACTUAL PERFORMANCE WILL VARY AND MAY RESULT IN AN
ACTUAL RETURN GREATER OR LESS THAN 5%.
1
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights for the years ended December 31, 1993, 1994 and
1995 have been audited by Coopers & Lybrand L.L.P., independent accountants,
whose report, together with the financial statements of the Fund, is
incorporated into the Statement of Additional Information.
<TABLE>
<CAPTION>
Per share data (for a share outstanding Year Ended December 31,
----------------------------------------------------------------------
throughout each period): 1995 1994 1993 1992* 1991* 1990*+
---------- ---------- --------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net asset value - beginning of period $42.15 $48.97 $39.83 $39.99 $27.57 $26.24
---------- ---------- --------- --------- ---------- ---------
Income from investment operations
Net investment income (loss) - - ($0.07) ($0.11) ($0.04) $0.01
Net realized and unrealized gain (loss) 12.57 (1.84) 11.31 4.00 17.87 1.33
---------- ---------- --------- --------- ---------- ---------
Total from investment operations $12.57 ($1.84) $11.24 $3.89 $17.83 $1.34
---------- ---------- --------- --------- ---------- ---------
Less distributions declared to shareholders
From net investment income - - - - - (0.01)
From realized gain (1.26) (4.98) (2.10) (4.05) (5.35) -
From paid-in capital - - - - (0.06) -
---------- ---------- --------- --------- ---------- ---------
Total distributions declared to shareholders ($1.26) ($4.98) ($2.10) ($4.05) ($5.41) ($0.01)
---------- ---------- --------- --------- ---------- ---------
Net asset value - end of period $53.46 $42.15 $48.97 $39.83 $39.99 $27.57
========== ========== ========= ========= ========== =========
Total return 29.83% (3.66%) 28.21% 9.74% 64.71% 15.35% t
Ratios (to average net assets)/Supplemental Data
Net assets at end of period (000 omitted) $180,470 $107,591 $85,141 $50,950 $35,418 $13,273
Expenses 0.75% 0.79% 0.88% 1.04% 0.87% 1.48% t
Net Investment Income (0.30)% (0.27)% (0.18)% (0.38)% (0.15)% 0.17 t
Portfolio turnover 112% 130% 144% 101% 96% 13%
t Computed on an annualized basis.
* Audited by other auditors.
+ For the period from August 31, 1990 (start of business) to December 31, 1990.
</TABLE>
Further information about the performance of the Fund is contained in the
Fund's Annual Report, which may be obtained from the Principal Underwriter
without charge.
2
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
Investment Objective
The Fund seeks to achieve its investment objective by investing all its
Investable Assets in the Portfolio which has the same investment objective as
the Fund. Because of the uncertainty inherent in all investments, no assurance
can be given that either the Fund or the Portfolio will achieve its investment
objective.
Since the investment characteristics of the Fund will correspond directly
to those of the Portfolio, the following is a discussion of the various
investments and investment policies of the Portfolio.
The Portfolio's investment objective is to achieve long-term growth of
capital through investment primarily in equity and equity-related securities of
small capitalization companies. Under normal circumstances, at least 80% of the
Portfolio's total assets will be invested in such securities. Equity and
equity-related securities include common stocks, preferred stocks, securities
convertible into common stocks and options, futures and other strategic
transactions based on common stocks. The Portfolio invests in publicly traded
securities, including securities issued in initial public offerings. The
Portfolio does not normally invest in equity securities which are restricted as
to disposition by federal securities laws or are otherwise illiquid but may do
so to a limited extent under certain circumstances. As a temporary matter and
for defensive purposes, the Portfolio may purchase investment grade short-term
interest-bearing securities, the amount of which will depend on market
conditions and the needs of the Portfolio.
The investment objective of the Fund is a fundamental policy which may not
be changed without a vote of the Fund's shareholders. The investment objective
of the Portfolio is not a fundamental policy and may be changed upon notice to
but without the approval of the Portfolio's investors. Investment policies which
are not fundamental policies may be changed by the Trustees of the Trust and the
Trustees of the Portfolio Trust without the approval of the Fund's shareholders
or the Portfolio's investors. The Fund's and the Portfolio's investment policies
are described further in the Statement of Additional Information.
Investment Policies
The common stocks of small capitalization companies in which the Portfolio
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 Portfolio expects to emphasize investments in companies involved
with value added products or services in expanding industries. At times,
particularly when the Adviser believes that securities of small capitalization
companies are overvalued, the Portfolio'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 Portfolio's total
assets. As a temporary matter and for defensive purposes, the Portfolio may
invest all or a portion of its assets in short-term debt securities or cash
3
<PAGE>
equivalents. The Portfolio will attempt to reduce risk by diversifying its
investments within the investment policy set forth above. The Portfolio will
invest in publicly traded equity securities and, excluding equity securities
received as distributions on portfolio securities, will not normally hold equity
securities which are restricted as to disposition under federal securities laws
or are otherwise illiquid or not readily marketable but may do so to a limited
extent under certain circumstances. The Portfolio may participate in initial
public offerings for previously privately held companies which are expected to
have market capitalizations of up to $700 million after the consummation of the
offering and 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 Portfolio invests, which may pose
additional risks. See "Risk Factors and Suitability."
Foreign Securities
The Portfolio may invest up to 15% of its net assets in foreign equity
securities, including securities of foreign issuers that are listed on a United
States 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
Portfolio if the Adviser believes these securities will offer above average
capital growth potential. Investing in securities of foreign companies which are
generally denominated in foreign currencies and utilizing foreign currency
transactions involves certain risks of political, economic and legal conditions
and developments not typically associated with investing in United States
companies. Such conditions or developments might include favorable or
unfavorable changes in currency exchange rates, exchange control regulations
(including currency blockage), civil disorder, expropriation of assets of
companies in which the Portfolio invests, nationalization of such companies,
imposition of withholding taxes on dividend or interest payments, and possible
difficulty in obtaining and enforcing judgments against a foreign issuer. Also,
foreign securities may not be as liquid as, 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 Portfolio, in connection with
its purchases and sales of foreign securities, other than securities denominated
in United States dollars, will incur transaction costs in converting currencies.
Also, foreign custodial costs relating to the Portfolio's portfolio securities
are higher than domestic custodial costs. Fixed commissions on foreign stock
exchanges are generally higher than negotiated commissions on United States
exchanges. Finally, transactions in equity securities effected on some foreign
stock exchanges, and consequently the Portfolio's 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.
4
<PAGE>
Investments by the Portfolio in securities of issuers in emerging markets
involves risks in addition to those discussed above. Many emerging market
countries have experienced substantial, and in some periods extremely high,
rates of inflation for many years. Inflation and rapid fluctuations in inflation
rates have had and may continue to have negative effects on the economies and
securities markets of certain emerging market countries. Moreover, the economies
of individual emerging market countries may differ favorably or unfavorably from
the U.S. economy in such respects as the rate of growth of gross domestic
product, the rate of inflation, capital reinvestment, resource self-sufficiency
and balance of payments position.
Short Term Debt Securities; Money Market Instruments
The Portfolio may invest uncommitted cash and cash needed to maintain
liquidity for redemptions in short-term debt securities and cash equivalents,
including short-term U.S. Government securities (direct obligations of the U.S.
Government backed by the full faith and credit of the United States and
securities issued by agencies and instrumentalities of the U.S. Government),
U.S. and foreign commercial paper, negotiable certificates of deposit,
non-negotiable fixed time deposits, bankers' acceptances, repurchase agreements
and other money market securities and instruments.
When the Adviser deems it advisable because of market conditions, the
Portfolio may temporarily invest in short-term debt securities or retain cash or
cash equivalents without limit. Such investments will be limited to 20% of total
assets unless the Portfolio is in a temporary defensive position.
The Portfolio's investments in money market securities (i.e., securities
with maturities of less than one year) will be limited to securities which are
rated P-1 by Moody's Investors Service, Inc. (Moody's) or A-1 by Standard &
Poor's Ratings Group ("Standard & Poor's"). The Portfolio will invest at least
95% of its assets which are invested in short-term interest-bearing securities
(i.e., securities with maturities of one to three years) in securities which are
rated at the time of investment Aaa, Aa or A by Moody's or AAA, AA, or A by
Standard & Poor's, or which, if not rated, are of comparable investment quality
in the opinion of the Adviser. Up to 5% of assets invested in such short-term
securities may be invested in securities which are rated Baa by Moody's or BBB
by Standard & Poor's, or which, if not rated, are of comparable investment
quality in the opinion of the Adviser. In the case of a security rated
differently by the two rating services the higher rating is used in applying the
5% limit.
In the event that the rating on a security held in the Portfolio's
portfolio is lowered by a rating service, such action will be considered by the
Adviser in its evaluation of the overall investment merits of that security, but
will not necessarily result in the sale of the security. Securities rated Baa by
Moody's and BBB by Standard & Poor's may have some speculative characteristics
and changes in economic conditions and other circumstances are more likely to
lead to weakened capacity to make principal and interest payments than is the
case with higher rated securities.
5
<PAGE>
Repurchase Agreements
The Portfolio may invest up to 10% of its net assets in repurchase
agreements under normal circumstances. Repurchase agreements acquired by the
Portfolio 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, the Portfolio might suffer a loss
to the extent that the proceeds from the sale of the underlying securities and
other collateral held by the Portfolio in connection with the related repurchase
agreement are less than the repurchase price. In addition, in the event of
bankruptcy of the seller or failure of the seller to repurchase the securities
as agreed, the Portfolio 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 Transactions
The Portfolio may, but is not required to, utilize various other investment
strategies as described below to hedge various market risks (such as interest
rates, currency exchange rates, and broad or specific equity market movements)
or to enhance potential gain. Such strategies are generally accepted as part of
modern portfolio management and are regularly utilized by many mutual funds and
other institutional investors. Techniques and instruments used by the Portfolio
may change over time as new instruments and strategies are developed or
regulatory changes occur.
In the course of pursuing its investment objective, the Portfolio may
purchase and sell (write) exchange-listed and over-the-counter put and call
options on securities, equity indices and other financial instruments; purchase
and sell financial futures contracts and options thereon; enter into various
interest rate transactions such as swaps, caps, floors or collars; and enter
into various currency transactions such as currency forward contracts, currency
futures contracts, currency swaps or options on currencies or currency futures
(collectively, all the above are called "Strategic Transactions"). Strategic
Transactions may be used in an attempt to protect against possible changes in
the market value of securities held in or to be purchased for the Portfolio's
portfolio resulting from securities markets or currency exchange rate
fluctuations, to protect the Portfolio's unrealized gains in the value of its
portfolio securities, to facilitate the sale of such securities for investment
purposes, 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 Portfolio will attempt to limit its net
loss exposure resulting from Strategic Transactions entered into for such
purposes to not more than 3% of the Portfolio's net assets at any one time and,
to the extent necessary, the Portfolio will close out transactions in order to
comply with this limitation. (Transactions such as writing covered call options
are considered to involve hedging for the purposes of this limitation.) In
calculating the Portfolio'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 Portfolio is underweighted in
cyclical stocks and overweighted in consumer stocks, the Portfolio 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
6
<PAGE>
against any unrealized gain in the consumer position (and vice versa) for
purposes of calculating the Portfolio's net loss exposure. The ability of the
Portfolio to utilize these Strategic Transactions successfully will depend on
the Adviser's ability to predict pertinent market movements, which cannot be
assured. The Portfolio will comply with applicable regulatory requirements when
implementing these strategies, techniques and instruments. The Portfolio's
activities involving Strategic Transactions may be limited to enable the Fund to
comply with the requirements of Subchapter M of the Internal Revenue Code of
1986, as amended (the "Code"), for qualification as a regulated investment
company.
Strategic Transactions have risks associated with them including possible
default by the other party to the transaction, illiquidity and, to the extent
the Adviser's view as to certain market movements is incorrect, the risk that
the use of such Strategic Transactions could result in losses greater than if
they had not been used. The writing of put and call options may result in losses
to the Portfolio, 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 Portfolio can realize on its investments or cause the
Portfolio to hold a security it might otherwise sell. The use of currency
transactions can result in the Portfolio incurring losses as a result of a
number of factors including the imposition of exchange controls, suspension of
settlements, or the inability to deliver or receive a specified currency. The
use of options and futures transactions entails certain other risks. In
particular, the variable degree of correlation between price movements of
futures contracts and price movements in the related portfolio position of the
Portfolio creates the possibility that losses on the hedging instrument may be
greater than gains in the value of the Portfolio's position. The writing of
options could significantly increase the Portfolio'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 Portfolio 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 Portfolio in writing options on futures and entering into futures
transactions is potentially unlimited; however, as described above, the
Portfolio 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 Portfolio'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 Portfolio's Strategic Transactions is set forth in
the Statement of Additional Information.
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Short-Selling
The Portfolio may make short sales, which are transactions in which the
Portfolio sells a security it does not own in anticipation of a decline in the
market value of that security. To complete such a transaction, the Portfolio
must borrow the security to make delivery to the buyer. The Portfolio 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 Portfolio. Until the security is
replaced, the Portfolio 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 Portfolio also may be required to pay a premium, which would
increase the cost of the security sold. The proceeds of the short sale will be
retained by the broker, to the extent necessary to meet margin requirements,
until the short position is closed out.
Until the Portfolio replaces a borrowed security in connection with a short
sale, the Portfolio will: (a) maintain daily a segregated account not with the
broker, containing cash or U.S. Government securities, at such a level that the
amount deposited in the account plus the amount deposited with the broker as
collateral will equal the current value of the security sold short; or (b)
otherwise cover its short position.
The Portfolio 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 Portfolio replaces the borrowed security. The Portfolio will realize a
gain if the security declines in price between those dates by an amount greater
than premium and transaction costs. This result is the opposite of what one
would expect from a cash purchase of a long position in a security. The amount
of any gain will be decreased, and the amount of any loss increased, by the
amount of any premium or amounts in lieu of dividends or interest the Portfolio
may be required to pay in connection with a short sale.
The Portfolio's loss on a short sale as a result of an increase in the
price of the security sold short is potentially unlimited. The Portfolio may
purchase call options to provide a hedge against an increase in the price of a
security sold short by the Portfolio. When the Portfolio 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 Portfolio, the
premium and the commission paid may be more than the amount of the brokerage
commission charged if the security were to be purchased directly. See "Strategic
Transactions" above.
The Portfolio anticipates that the frequency of short sales will vary
substantially in different periods, and it does not intend that any specified
portion of its assets, as a matter of practice, will be in short sales. However,
no securities will be sold short if, after 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 Portfolio's net assets.
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In addition to the short sales discussed above, the Portfolio may make
short sales "against the box," a transaction in which the Portfolio enters into
a short sale of a security which the Portfolio owns. The proceeds of the short
sale are held by a broker until the settlement date at which time the Portfolio
delivers the security to close the short position. The Portfolio receives the
net proceeds from the short sale.
Other Investment Companies
The Portfolio 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 Portfolio
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 Portfolio will indirectly
bear its proportionate share of any management fees and other expenses paid by
investment companies in which it invests in addition to the advisory and
administration fees paid by the Portfolio. However, to the extent that the
Portfolio invests in a registered open-end investment company, the Adviser will
waive its advisory fees on the portion of the Portfolio's assets so invested.
Portfolio Turnover
It is not the policy of the Portfolio to purchase or sell securities for
trading purposes. However, the Portfolio places no restrictions on portfolio
turnover and it may sell any portfolio security without regard to the period of
time it has been held. The Portfolio may therefore generally change its
portfolio investments at any time in accordance with the Adviser's appraisal of
factors affecting any particular issuer or market, or the economy in general.
Portfolio turnover is not expected to exceed 150% on an annual basis. A rate of
turnover of 100% would occur, for example, if the value of the lesser of
purchases or sales of portfolio securities for a particular year equaled the
average monthly value of portfolio securities owned during the year (excluding
securities with a maturity date of one year or less at the date of acquisition).
A high rate of portfolio turnover involves a correspondingly greater amount of
transaction costs which must be borne directly by the Portfolio and thus
indirectly by the Fund and its shareholders. It may also result in the
realization of larger amounts of short-term capital gains, the Fund's
distribution from which are taxable to Fund shareholders as ordinary income and
may, under certain circumstances, make it more difficult for the Fund to qualify
as a regulated investment company under the Code. The portfolio turnover rates
are listed in the section captioned "Financial Highlights."
Investment Restrictions
Each of the Fund and the Portfolio has adopted certain fundamental policies
which may not be changed without the approval of the Fund's shareholders or the
Portfolio's investors, as the case may be.
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The Fund has the same investment restrictions as the Portfolio, except that
the Fund may invest substantially all of its Investable Assets in an open-end
management investment company with substantially the same investment objective
as the Fund. Reference below to the Portfolio's investment restrictions also
include the Fund's investment restrictions. These policies provide, among other
things, that the Portfolio may not: (i) invest, with respect to at least 75% of
its total assets, more than 5% in the securities of any one issuer (other than
the U.S. Government, its agencies or instrumentalities) or acquire more than 10%
of the outstanding voting securities of any issuer; (ii) issue senior
securities, borrow money, enter into reverse repurchase agreements or pledge or
mortgage its assets, except that the Portfolio may borrow from banks in an
amount up to 15% of the current value of its total assets as a temporary measure
for extraordinary or emergency purposes (but not investment purposes), and
pledge its assets to an extent not greater than 15% of the current value of its
total assets to secure such borrowings; however, the Portfolio may not make any
additional investments while its outstanding borrowings exceed 5% of the current
value of its total assets; (iii) make loans of portfolio securities; or (iv)
invest 25% or more of its total assets in a single industry except that this
restriction shall not apply to U.S. Government securities.
If any percentage restriction described above is adhered to at the time of
investment, a subsequent increase or decrease in the percentage resulting from a
change in the value of the Portfolio's assets will not constitute a violation of
the restriction. Certain non-fundamental policies and additional fundamental
policies adopted by the Fund and the Portfolio are described in the Statement of
Additional Information.
RISK FACTORS AND SUITABILITY
The Fund is not intended to provide an investment program meeting all of
the requirements of an investor. The companies in which the Fund invests
generally reinvest their earnings, and dividend income should not be expected.
Additionally, notwithstanding the Portfolio's ability to diversify and spread
risk by holding securities of a number of portfolio companies, investors should
invest in the Fund only if they are able and prepared to bear the risk of
investment losses which may accompany the investments contemplated by the
Portfolio.
Although investments in small capitalization companies may present greater
opportunities for growth, they also involve greater risks than are customarily
associated with investments in larger, more established companies. The
securities of small companies may be subject to more volatile market movements
than securities of larger, more established companies. Smaller companies may
have limited product lines, markets or financial resources, and they may depend
upon a limited or less experienced management group. The securities of small
companies may be traded only on 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 the
Portfolio of portfolio securities in order to meet redemptions or otherwise may
require the Portfolio to sell securities at a discount from market prices, over
a longer period of time or during periods when disposition is not desirable.
The Portfolio's investments in foreign securities and its utilization of
Strategic Transactions and short sales also involve special risks, as discussed
above in the correspondingly captioned sections.
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SPECIAL INFORMATION CONCERNING THE HUB
AND SPOKE(R) MASTER-FEEDER FUND
Unlike other mutual funds which directly acquire and manage their own
portfolio securities, the Fund seeks to achieve its investment objective by
investing all of its Investable Assets in the Portfolio which has the same
investment objective as the Fund. The Portfolio in turn invests primarily in
securities consistent with that objective. Therefore, an investor's interest in
the Portfolio's securities is indirect, like investments in other investment
companies and pooled investment vehicles only more so. In addition to selling a
beneficial interest to the Fund, the Portfolio may sell beneficial interests to
other mutual funds or institutional investors. Such investors will invest in the
Portfolio on the same terms and conditions and will pay a proportionate share of
the Portfolio's expenses. However, the other investors investing in the
Portfolio are not required to sell their shares at the same public offering
price as the Fund due to the imposition of sales commissions and variations in
other operating expenses. Therefore, investors in the Fund should be aware that
these differences may result in differences in returns experienced by investors
in the different funds that invest in the Portfolio. Such differences in returns
are also present in other mutual fund structures. Information concerning other
holders of interests in the Portfolio is available from the Adviser (800)
221-4795.
The Hub and Spoke master-feeder fund structure has been developed
relatively recently, so shareholders should carefully consider this investment
approach.
Smaller funds investing in the Portfolio may be materially affected by the
actions of larger funds investing in the Portfolio. For example, if a large fund
withdraws from the Portfolio, the remaining funds may experience higher pro rata
operating expenses, thereby producing lower returns (however, this possibility
exists as well for traditionally structured funds that have large institutional
investors). Additionally, because the Portfolio would have fewer assets in such
a case, it may become less diversified, resulting in increased portfolio risk.
Also, funds with a greater pro rata ownership in the Portfolio could have
effective voting control of the operations of the Portfolio. Except as permitted
by the SEC, whenever the Trust is requested to vote on matters pertaining to the
Portfolio (other than a vote by the Fund to continue the operations of the
Portfolio upon the withdrawal of another investor in the Portfolio), the Trust
will hold a meeting of shareholders of the Fund and will cast all of its votes
in the same proportion as the votes of the Fund's shareholders. The percentage
of the Trust's votes representing Fund shareholders not voting will be voted by
the Trustees or officers of the Trust in the same proportion as the Fund
shareholders who do, in fact, vote. Fund shareholders who do not vote will not
affect the Trust's votes at the Portfolio meeting.
Certain changes in the Portfolio's investment objectives, policies or
restrictions may require the Fund to withdraw its interest in the Portfolio. Any
such withdrawal could result in a distribution "in kind" of portfolio securities
(as opposed to a cash distribution from the Portfolio) to the extent permitted
by the Investment Company Act of 1940, as amended (the "1940 Act"), or rules
adopted thereunder. If securities are distributed, the Fund could incur
brokerage, tax or other charges in converting the securities to cash. In
addition, the distribution in kind may result in a less diversified portfolio of
investments or adversely affect the liquidity of the Fund. Notwithstanding the
above, there are other means for meeting redemption requests, such as borrowing.
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The Fund's investment objective is a fundamental policy and may not be
changed without the approval of the Fund's shareholders. The investment
objective of the Portfolio is not a fundamental policy and may be changed
without the approval of investors in the Portfolio. If the Portfolio proposed to
change its investment objective, the Fund would either obtain shareholder
approval to make a corresponding change to its investment objective or withdraw
its investment from the Portfolio. The Fund may withdraw its investment from the
Portfolio at any time if the Board of Trustees of the Trust determines that it
is in the best interests of the shareholders of the Fund to do so (including if
the Fund's and the Portfolio's investment objectives were not substantially the
same). Upon any such withdrawal, the Board of Trustees of the Trust would
consider what action might be taken, including investing all the Investable
Assets of the Fund in another pooled investment entity having substantially the
same investment objective as the Fund or retaining an investment adviser to
manage directly the Fund's assets in accordance with its investment policies
described above with respect to the Portfolio. In any event, shareholders of the
Fund will receive 30 days prior written notice with respect to any change in the
investment objective of the Portfolio. See "investment Objective and Policies"
for a description of the fundamental policies of the Portfolio that cannot be
changed without approval by the "vote of a majority of the outstanding voting
securities" (as defined in the 1940 Act) of the Portfolio.
For descriptions of the investment objective, policies and restrictions of
the Portfolio, see "Investment Objective and Policies." For descriptions of the
management of the Portfolio, see "Management" herein and in the Statement of
Additional Information. For descriptions of the expenses of the Portfolio, see
"Management" herein.
CALCULATION OF PERFORMANCE DATA
From time to time the Fund may advertise its total return. Total return
figures are based on historical earnings and are not intended to indicate future
performance.
The "total return" of the Fund refers to the average annual compounded
rates of return over 1, 5 and 10 year periods (or shorter period since
inception) that would equate an initial amount invested at the beginning of a
stated period to the ending redeemable value of the investment. The calculation
assumes the reinvestment of all dividends and distributions, includes all
recurring fees that are charged to all shareholder accounts and deducts all
nonrecurring charges at the end of each period.
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From time to time, the Fund may compare its performance with that of other
mutual funds with similar investment objectives, to stock and other relevant
indices, and to performance rankings prepared by recognized mutual fund
statistical services. In addition, the Fund's performance may be compared to
alternative investment or savings vehicles and/or to indices or indicators of
economic activity.
DIVIDENDS AND DISTRIBUTIONS
The Fund's dividends from short-term and long-term capital gains, if any,
after reduction by capital losses, will be declared and distributed at least
annually, as will dividends from net investment income. In determining the
amounts of its dividends, the Fund will take into account its share of the
income, gains or losses, expenses, and any other tax items of the Portfolio.
Dividends from net investment income and capital gains distributions, if any,
are automatically reinvested in additional shares of the Fund unless the
shareholder elects to receive them in cash.
PURCHASE OF SHARES
Shares of the Fund may be purchased from the Principal Underwriter, which
offers the Fund's shares to the public on a continuous basis. Shares are sold at
the net asset value per share next computed after the purchase order is received
in good order by the Principal Underwriter and payment for the shares is
received by the Fund's custodian. Please see the Fund's account application or
call the Principal Underwriter for instructions on how to make payment of shares
to the Fund's custodian. Unless waived by the Fund, the minimum initial
investment is $100,000. Additional investments may be made in amounts of at
least $10,000.
Shares of the Fund may also be purchased through securities dealers. Orders
for the purchase of Fund shares received by dealers by the close of regular
trading on the New York Stock Exchange on any business day and transmitted to
the Principal Underwriter or its agent by the close of its business day
(normally 4:00 p.m., New York City time) will be effected as of the close of
regular trading on the New York Stock Exchange on that day, provided that
payment for the shares is also received by the Fund's custodian on that day.
Otherwise, orders will be effected at the net asset value per share determined
on the next business day. It is the responsibility of dealers to transmit orders
so that they will be received by the Principal Underwriter by the close of its
business day. Shares of the Fund purchased through dealers may be subject to
transaction fees, no part of which will be received by the Fund, the Principal
Underwriter or the Adviser.
The Fund's net asset value per share is computed 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 City time). The net asset value per share is calculated by
determining the value of all the Fund's assets (i.e., the value of its
investment in the Portfolio and other assets), subtracting all liabilities and
dividing the result by the total number of shares outstanding. The Portfolio's
portfolio 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. 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. 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 of the Portfolio
Trust. Additional information concerning the Portfolio's valuation policies is
contained in the Statement of Additional Information.
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In the sole discretion of the Trust, the Fund may accept securities instead
of cash for the purchase of shares of the Fund. The Trust will ask the Adviser
to determine that any securities acquired by the Fund in this manner are
consistent with the investment objective, policies and restrictions of the
Portfolio. 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.
The Trust reserves the right in its sole discretion (i) to suspend the
offering of the Fund's shares, (ii) to reject purchase orders when in the best
interest of the Fund and (iii) to modify or eliminate the minimum initial
investment in Fund shares. The Fund's investment minimums do not apply to
accounts for which the Adviser or any of its affiliates serves as investment
adviser or to employees of the Adviser or any of its affiliates or to members of
such persons' immediate families. The Fund's investment minimums apply to the
aggregate value invested in omnibus accounts rather than to the investment of
the underlying participants in the omnibus accounts.
EXCHANGE OF SHARES
Shares of the Fund may be exchanged for shares of one or more other funds
in the Standish, Ayer & Wood family of funds. Shares of the Fund redeemed in an
exchange transaction are valued at their net asset value next determined after
the exchange request is received by the Principal Underwriter or its agent.
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 Fund may be exchanged by written order to the Principal
Underwriter, One Financial Center, Boston, Massachusetts 02111. A written
exchange request must (a) state the name of the current Fund, (b) state the name
of the fund into which the current Fund shares will be exchanged, (c) state the
number of shares or the dollar amount to be exchanged, (d) identify the
shareholder's account numbers in both funds and (e) be signed by each registered
owner exactly as the shares are registered. Signature(s) must be guaranteed as
listed under "Written Redemption" below.
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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 shareholders automatically. Proper identification will be required
for each telephonic exchange. Please see "Telephone Transactions" below for more
information regarding telephonic transactions.
General Exchange Information
All exchanges are subject to the following exchange restrictions: (i) the
fund into which shares are being exchanged must be registered for sale in your
state; (ii) exchanges may be made only between funds that are registered in the
same name, address and, if applicable, taxpayer identification number; and (iii)
unless waived by the Trust, the amount to be exchanged must satisfy the minimum
account size of the fund to be exchanged into. Exchange requests will not be
processed until payment for the shares of the current Fund have been received by
the Principal Underwriter. The exchange privilege may be changed or discontinued
and may be subject to additional limitations upon sixty (60) days' notice to
shareholders, including certain restrictions on purchases by market-timer
accounts.
REDEMPTION OF SHARES
Shares of the Fund may be redeemed by any of the methods described below at
the net asset value per share next determined after receipt by the Principal
Underwriter 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 Fund may be redeemed by written order to the Principal
Underwriter, One Financial Center, 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 and Trust
Company, the Fund's transfer agent: (i) a bank; (ii) a securities broker or
dealer, including a government or municipal securities broker or dealer, that is
a member of a clearing corporation or has net capital of at least $100,000;
(iii) a credit union having authority to issue signature guarantees; (iv) a
savings and loan association, a building and loan association, a cooperative
bank, or a federal savings bank or association; or (v) a national securities
exchange, a registered securities exchange or a clearing agency. Additional
supporting documents may be required in the case of estates, trusts,
corporations, partnerships and other shareholders that are not individuals.
Redemption proceeds will normally be paid by check mailed within three business
days of receipt by the Principal Underwriter of a written redemption request in
proper form. If shares to be redeemed were recently purchased by check, the Fund
may delay transmittal of redemption proceeds until such time as it has assured
itself that good funds have been collected for the purchase of such shares. This
may take up to fifteen (15) days in the case of payments made by check.
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Telephonic Redemption
Shareholders who elect telephonic privileges may redeem shares by calling
the Principal Underwriter at (800) 221-4795. Telephonic privileges are not
available to shareholders automatically. Redemption proceeds will be mailed or
wired in accordance with the shareholder's instruction on the account
application to a pre-designated account. Redemption proceeds will normally be
paid promptly after receipt of telephonic instructions, but no later than three
business days thereafter, except as described above for shares purchased by
check. Redemption proceeds will be sent only by check payable to the shareholder
of record at the address of record, unless the shareholder has indicated, in the
initial application for the purchase of shares, a commercial bank to which
redemption proceeds may be sent by wire. These instructions may be changed
subsequently only in writing, accompanied by a signature guarantee, and
additional documentation in the case of shares held by a corporation or other
entity or by a fiduciary such as a trustee or executor. Wire charges, if any,
will be deducted from redemption proceeds. Proper identification will be
required for each telephonic redemption.
Repurchase Order
In addition to written redemption of Principal Underwriter shares, the Fund
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 payment
for the shares by the Fund's custodian. Brokers and dealers are obligated to
transmit repurchase orders to the Principal Underwriter prior to the close of
the Principal Underwriter's business day (normally 4:00 p.m.). Brokers or
dealers may charge for their services in connection with a repurchase of Fund
shares, but neither the Trust 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 Trust and the Fund's custodian to act upon instructions of any
person to redeem and/or exchange shares from the shareholder's account. Further,
the shareholder acknowledges that, as long as the Fund employs reasonable
procedures to confirm that telephonic instructions are genuine, and follows
telephonic instructions that it reasonably believes to be genuine, neither the
Adviser, nor the Principal Underwriter, nor the Trust, nor the Fund, nor the
Fund's custodian, nor their respective officers or employees, will be liable for
any loss, expense or cost arising out of any request for a telephonic redemption
or exchange, even if such transaction results from any fraudulent or
unauthorized instructions. Depending upon the circumstances, the Fund intends to
employ personal identification or written confirmation of transactions
procedures, and if it does not, the Fund may be liable for any losses due to
unauthorized or fraudulent instructions. All telephone transaction requests will
be recorded. Shareholders may experience delays in exercising telephone
transaction privileges during periods of abnormal market activity. Accordingly,
during periods of volatile economic and market conditions, shareholders may wish
to consider transmitting redemption and exchange requests in writing.
* * * *
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The proceeds paid upon redemption or repurchase may be more or less than
the cost of the shares, depending upon the market value of the Portfolio's
portfolio investments at the time of redemption or repurchase. The Fund intends
to pay cash for all shares redeemed, but under certain conditions, the Fund may
make payments wholly or partially in securities withdrawn from the Portfolio for
this purpose. Please see the Statement of Additional Information for further
information regarding the Fund's ability to satisfy redemption requests in-kind.
Because of the cost of maintaining shareholder accounts, the Fund may
redeem, at net asset value, the shares in any account which has a value of less
than $25,000 as a result of redemptions or transfers. Before doing so, the Fund
will notify the shareholder that the value of the shares in the account is less
than the specified minimum and will allow the shareholder 30 days to make an
additional investment in an amount which will increase the value of the account
to at least $25,000. The Fund may eliminate duplicate mailings of Fund materials
to shareholders that have the same address of record.
MANAGEMENT
Trustees
The Fund is a separate investment series of Standish, Ayer & Wood
Investment Trust, a Massachusetts business trust. Under the terms of the
Agreement and Declaration of Trust establishing the Trust, which is governed by
the laws of The Commonwealth of Massachusetts, the Trustees of the Trust are
ultimately responsible for the management of its business and affairs.
The Portfolio is a separate investment series of Standish, Ayer & Wood
Master Portfolio, a master trust fund organized under the laws of the State of
New York. Under the terms of the Declaration of Trust, the affairs of the
Portfolio are managed under the supervision of the Trustees of the Portfolio
Trust.
A majority of the Trustees who are not "interested persons" (as defined in
the 1940 Act) of the Trust or the Portfolio Trust, as the case may be, have
adopted written procedures reasonably appropriate to deal with potential
conflicts of interest arising from the fact that the same individuals are
trustees of the Trust and of the Portfolio Trust, up to and including creating
separate boards of trustees. See "Management" in the Statement of Additional
Information for more information about the Trustees and officers of the Trust
and the Portfolio Trust.
Investment Adviser
Standish, Ayer & Wood, Inc., One Financial Center, Boston, Massachusetts
02111, serves as investment adviser to the Portfolio pursuant to an investment
advisory agreement with the Trust and manages the Portfolio's investments and
affairs subject to the supervision of the Trustees of the Trust. The Adviser is
a Massachusetts corporation incorporated in 1933 and is a registered investment
adviser under the Investment Advisers Act of 1940.
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The Adviser provides fully discretionary management services and counseling
and advisory services to a broad range of clients throughout the United States
and abroad. As of February 29, 1996, the Adviser or its affiliate, Standish
International Management Company, L.P. ("SIMCO"), serves as the investment
adviser to each of the following fourteen funds in the Standish, Ayer & Wood
family of funds:
Net Assets
(February 29, 1996)
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Standish Controlled Maturity Fund $9,206,532
Standish Equity Fund 95,832,592
Standish Fixed Income Fund 2,274,975,978
Standish Fixed Income Fund II 10,046,446
Standish Global Fixed Income Fund 147,989,501
Standish Intermediate Tax Exempt Bond Fund 31,338,929
Standish International Equity Fund 55,691,972
Standish International Fixed Income Fund 792,817,998
Standish Massachusetts Intermediate
Tax Exempt Bond Fund 322,170,126
Standish Securitized Fund 55,002,171
Standish Short-Term Asset Reserve Fund 298,685,235
Standish Small Capitalization Equity Fund 188,411,176
Standish Small Cap Tax-Sensitive Equity Fund 1,278,405
Standish Tax-Sensitive Equity Fund 1,232,170
The Adviser's clients also include charitable and educational endowment
funds, financial institutions, trusts and individual investors. As of February
29, 1996, the Adviser managed approximately $29 billion of assets.
The Portfolio's portfolio manager is Nicholas S. Battelle. Mr. Battelle has
been primarily responsible for the day-to-day management of the Fund's portfolio
since its inception as a registered investment company in August, 1990 and of
the Portfolio's portfolio since the Fund's conversion to the Hub and Spoke
master-feeder fund structure on April 26, 1996. During the past five years, Mr.
Battelle has served as a Vice President as well as a Director of the Adviser.
Subject to the supervision and direction of the Trustees of the Portfolio
Trust, the Adviser manages the Portfolio in accordance with its stated
investment objective and policies, recommends investment decisions for the
Portfolio, places orders to purchase and sell securities on behalf of the
Portfolio and permits the Portfolio to use the name "Standish." For its services
to the Portfolio, the Adviser receives a monthly fee equal on an annual basis to
0.60% of the Portfolio's average daily net assets. For the fiscal year ended
December 31, 1995, advisory fees paid by the Fund represented 0.60% of the
Fund's average daily net assets.
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Administrator of the Fund
Standish also serves as administrator to the Fund (the "Administrator")
pursuant to an administration agreement. As Administrator, Standish manages the
affairs of the Fund, provides all necessary office space and services of
executive personnel for administering the affairs of the Fund, and allows the
Fund to use the name "Standish." For these services, Standish currently does not
receive any additional compensation. The Trustees of the Trust may, however,
determine in the future to compensate Standish for its administrative services.
Expenses
The Portfolio and the Fund, as the case may be, will be responsible for all
of their respective costs and expenses not expressly stated to be payable by
Standish under the investment advisory agreement with the Portfolio or the
administration agreement with the Fund. Among other expenses, the Portfolio will
pay investment advisory fees; bookkeeping, share pricing and custodian fees and
expenses; expenses of notices and reports to interest-holders; and expenses of
the Portfolio's administrator. The Fund will pay shareholder servicing fees and
expenses, expenses of prospectuses, statements of additional information and
shareholder reports which are furnished to existing shareholders. Each of the
Fund and Portfolio will pay legal and auditing fees; registration and reporting
fees and expenses; and Trustees' fees and expenses. The Trust's Principal
Underwriter, Standish Fund Distributors, L.P., bears, without subsequent
reimbursement, the distribution expenses attributable to the offering and sale
of Fund shares. Expenses of the Trust or the Portfolio Trust which relate to
more than one of their respective series are allocated among such series by the
Adviser and SIMCO in an equitable manner, primarily on the basis of relative net
asset values. For the fiscal year ended December 31, 1995, expenses borne by the
Fund represented 0.75% of the Fund's average daily net assets.
Standish has voluntarily agreed to limit the master-feeder aggregate annual
operating expenses (excluding brokerage commissions, taxes and extraordinary
expenses) of the Fund and Portfolio to the Fund's ratio of expenses to average
net assets in effect immediately prior to the Fund's conversion to the Hub and
Spoke master-feeder fund structure. The expense ratio considered to be in effect
immediately prior to the conversion for this purpose will be calculated using
the actual expenses incurred by the Fund during the three months immediately
prior to conversion and annualizing this amount. Standish may discontinue or
modify such limitation in the future at its discretion, although it has no
current intention to do so. In addition, Standish has agreed in the
administration agreement to limit the Fund's aggregate annual operating expenses
(excluding brokerage commissions, taxes and extraordinary expenses) to the
permissible limit applicable in any state in which shares of the Fund are then
qualified for sale. Standish has also agreed in the advisory agreement to limit
the Portfolio's total annual operating expenses (excluding brokerage
commissions, taxes and extraordinary expenses) to 1.50% of the Portfolio's
average daily net assets. If any expense limit is exceeded, the compensation due
Standish 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
such fiscal year.
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Portfolio Transactions
Subject to the supervision of the Trustees of the Portfolio Trust, the
Adviser selects the brokers and dealers that execute orders to purchase and sell
portfolio securities for the Portfolio. The Adviser will generally seek to
obtain the best available price and most favorable execution with respect to all
transactions for the Portfolio.
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 Portfolio.
FEDERAL INCOME TAXES
The Fund presently qualifies and intends to continue to qualify for
taxation as a "regulated investment company" under the Code. If it qualifies for
treatment as a regulated investment company, the Fund will not be subject to
federal income tax on income (including capital gains) distributed to
shareholders in the form of dividends or capital gain distributions in
accordance with certain timing requirements of the Code.
The Fund will be subject to nondeductible 4% excise tax under the Code to
the extent that it fails to meet certain distribution requirements with respect
to each calendar year. Certain distributions made in order to satisfy the Code's
distribution requirements may be declared by the Fund during October, November
or December of the year but paid during the following January. Such
distributions will be taxable to taxable shareholders as if received on December
31 of the year the distributions are declared, rather than the year in which the
distributions are received.
Shareholders which are taxable entities or persons will be subject to
federal income tax on dividends and capital gain distributions made by the Fund.
These dividends and distributions will be attributable to the Fund's allocable
share of the net income and net long-term and short-term capital gains of the
Portfolio and will also take into account any expenses incurred or income earned
directly by the Fund. Dividends paid by the Fund from net investment income,
certain net foreign currency gains, and any excess of net short-term capital
gain over net long-term capital loss will be taxable to shareholders as ordinary
income, whether received in cash or Fund shares. The portion of such dividends
attributable to the Fund's allocable share of qualifying dividends the Portfolio
receives, if any, may qualify for the corporate dividends received deduction,
subject to certain holding period requirements and debt financing limitations
under the Code. Dividends paid by the Fund from net capital gain (the excess of
net long-term capital gain over net short-term capital loss), called "capital
gain distributions," will be taxable to shareholders as long-term capital gains,
whether received in cash or Fund shares and without regard to how long the
shareholder has held shares of the Fund. Capital gain distributions do not
qualify for the corporate dividends received deduction. Dividends and capital
gain distributions may also be subject to state and local or foreign taxes.
20
<PAGE>
The Portfolio anticipates that it may be subject to foreign withholding
taxes or other foreign taxes on income (possibly including capital gains) on
certain foreign investments (if any), which will reduce the yield on those
investments. Such taxes may be reduced or eliminated pursuant to an income tax
treaty in some cases. The Fund does not expect to qualify to pass its allocable
share of such foreign taxes and any associated tax deductions or credits through
to its shareholders.
Redemptions and repurchases of shares are taxable events on which a
shareholder may recognize a gain or loss. Special rules recharacterize as
long-term any losses on the sale or exchange of Fund shares with a tax holding
period of six months or less, to the extent the shareholder received a capital
gain distribution with respect to such shares.
Individuals and certain other classes of shareholders may be subject to 31%
backup withholding of federal income tax on dividends, capital gain
distributions, and the proceeds of redemptions or repurchases of shares, if they
fail to furnish the Fund with their correct taxpayer identification number and
certain certifications or if they are otherwise subject to backup withholding.
Individuals, corporations and other shareholders that are not U.S. persons under
the Code are subject to different tax rules and may be subject to nonresident
alien withholding tax at the rate of 30% (or a lower rate provided by an
applicable tax treaty) on amounts treated as ordinary dividends from the Fund
and, unless a current IRS Form W-8 or an acceptable substitute is furnished to
the Fund, to backup withholding on certain payments from the Fund.
A state income (and possibly local income and/or intangible property) tax
exemption is generally available to the extent, if any, the Fund's distributions
are derived from interest on (or, in the case of intangibles taxes, the value of
its assets is attributable to) investments in certain U.S. Government
obligations, provided in some states that certain thresholds for holdings of
such obligations and/or reporting requirements are satisfied. Shareholders
should consult their tax advisers regarding the applicable requirements in their
particular states, including the effect, if any, of the Fund's indirect
ownership (through the Portfolio) of any such obligations.
After the close of each calendar year, the Fund will send a notice to
shareholders that provides information about the federal tax status of
distributions to shareholders for such calendar year.
THE FUND AND THE PORTFOLIO
The Fund is a separate investment series of Standish, Ayer & Wood
Investment Trust, an unincorporated business trust organized under the laws of
The Commonwealth of Massachusetts pursuant to an Agreement and Declaration of
Trust dated August 13, 1986. Under the Agreement and Declaration of Trust, the
Trustees have authority to issue an unlimited number of shares of beneficial
interest, par value $.01 per share, of the Fund. Each share of the Fund is
entitled to one vote. All Fund shares have equal rights with regard to voting,
redemption, dividends, distributions and liquidation, and shareholders of the
Fund have the right to vote as a separate class with respect to certain matters
under the 1940 Act and the Agreement and Declaration of Trust. Shares of the
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<PAGE>
Fund do not have cumulative voting rights. Fractional shares have proportional
voting rights and participate in any distributions and dividends. When issued,
each Fund share will be fully paid and nonassessable. Shareholders of the Fund
do not have preemptive or conversion rights. On August 31, 1990 the Fund became
the successor to Standish Small Equity Fund Limited Partnership a limited
partnership organized and existing under the Uniform Limited Partnership Act of
The Commonwealth of Massachusetts, pursuant to an Agreement and Plan of
Reorganization. Certificates representing shares of the Fund will not be issued.
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 determination of the tax consequences of investing in a
series will be determined separately for each series.
The Trust is not required to hold annual meetings of shareholders. Special
meetings of shareholders may be called from time to time for purposes such as
electing or removing Trustees, changing a fundamental policy, or approving an
investment advisory agreement.
If less than two-thirds of the Trustees holding office have been elected by
shareholders, a meeting of shareholders of the Trust will be called to elect
Trustees. Under the Agreement and Declaration of Trust and the 1940 Act, the
record holders of not less than two-thirds of the outstanding shares of the
Trust may remove a Trustee by votes cast in person or by proxy at a meeting
called for the purpose or by a written declaration filed with each of the
Trust's custodian banks. Except as described above, the Trustees will continue
to hold office and may appoint successor Trustees. Whenever ten or more
shareholders of the Trust who have been such for at least six months, and who
hold in the aggregate shares having a net asset value of at least $25,000 or 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.
The Portfolio, in which all the Investable Assets of the Fund are invested,
is a series of Standish, Ayer & Wood Master Portfolio, an open-end management
investment company. The Portfolio Trust's Declaration of Trust provides that the
Portfolio Trust may establish and designate separate series of the Portfolio
Trust. The Portfolio Trust has established four series and may establish
additional series at any time. The Portfolio Trust's Declaration of Trust also
provides that the Fund and other entities investing in the Portfolio (e.g.,
other investment companies, insurance company separate accounts and common and
commingled trust funds) will not be liable for the obligations of the Portfolio,
although they will bear the risk of loss of their entire respective interests in
the Portfolio. However, there is a risk that interest-holders in the Portfolio
may be held personally liable as partners for the Portfolio's obligations.
Because the Portfolio Trust's declaration of trust disclaims interest-holder
liability and provides for indemnification against such liability, the risk of
22
<PAGE>
the Fund incurring financial loss on account of such liability is limited to
circumstances in which both inadequate insurance existed and the Portfolio
itself was unable to meet its obligations. As such, it is unlikely that the Fund
would experience liability from the investment structure itself. In any event,
shareholders of the Fund will continue to remain shareholders of a Massachusetts
business trust, and the risk of such a person incurring liability by reason of
being a shareholder of the Fund is remote. The interests in the Portfolio Trust
are divided into separate series, such as the Portfolio. No series of the
Portfolio Trust has any preference over any other series.
Investors in other series of the Portfolio Trust will not be involved in
any vote involving only the Portfolio. Investors of all of the series of the
Portfolio Trust will, however, vote together to elect Trustees of the Portfolio
Trust and for certain other matters affecting the Portfolio Trust. As provided
by the 1940 Act, under certain circumstances, the shareholders of one or more
series could control the outcome of these votes.
Inquiries concerning the Fund should be made by contacting the Fund or the
Principal Underwriter at the address and telephone number listed on the cover of
this Prospectus.
PRINCIPAL UNDERWRITER
Standish Fund Distributors, L.P., One Financial Center, 26th Floor, Boston,
Massachusetts 02111, serves as the Trust's principal underwriter.
CUSTODIAN, TRANSFER AGENT AND
DIVIDEND-DISBURSING AGENT
Investors Bank & Trust Company, 24 Federal Street, Boston, Massachusetts
02110, serves as the Fund's transfer and dividend-disbursing agent and as
custodian of all cash and securities of the Portfolio.
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P., One Post Office Square, Boston, Massachusetts
02109 and Coopers & Lybrand, P.O. Box 219, Grand Cayman, Grand Cayman Islands,
BWI, serve as independent accountants for the Trust and the Portfolio Trust,
respectively, and will audit the Fund's and the Portfolio's respective financial
statements annually.
LEGAL COUNSEL
Hale and Dorr, 60 State Street, Boston, Massachusetts 02109, is legal
counsel to the Trust, the Portfolio Trust and to the Adviser.
- --------------------------------------------------------------------------------
No dealer, salesman or other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus or in the Statement of Additional Information, and, if given or made,
such other information or representations must not be relied upon as having been
authorized by the Trust. This Prospectus does not constitute an offering in any
jurisdiction in which such offering may not be lawfully made.
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<PAGE>
TAX CERTIFICATION INSTRUCTIONS
Federal law requires that taxable distributions and proceeds of redemptions
and exchanges be reported to the IRS and that 31% be withheld if you fail to
provide your correct Taxpayer Identification Number (TIN) and the certifications
contained in the Account Purchase Application (Application) or you are otherwise
subject to backup withholding. Amounts withheld and forwarded to the IRS can be
credited as a payment of tax when completing your Federal income tax return.
For most individual taxpayers, the TIN is the social security number.
Special rules apply for certain accounts. For example, for an account
established under the Uniform Gift to Minors Act, the TIN of the minor should be
furnished. If you do not have a TIN, you may apply for one using forms available
at local offices of the Social Security Administration or the IRS, and you
should write "Applied For" in the space for a TIN on the Application.
Recipients exempt from backup withholding, including corporations and
certain other entities, should provide their TIN and underline "exempt" in
section 2(a) of the TIN section of the Application to avoid possible erroneous
withholding. Non-resident aliens and foreign entities may be subject to
withholding of up to 30% on certain distributions received from the Fund and
must provide certain certifications on IRS Form W-8 to avoid backup withholding
with respect to other payments. For further information, see Code Sections 1441,
1442 and 3406 and/or consult your tax adviser.
24
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STANDISH SMALL CAPITALIZATION EQUITY FUND
Investment Adviser
Standish, Ayer & Wood, Inc.
One Financial Center
Boston, Massachusetts 02111
Custodian
Investors Bank & Trust Company
24 Federal Street
Boston, Massachusetts 02110
Principal Underwriter
Standish Fund Distributors, L.P.
One Financial Center
Boston, Massachusetts 02111
Independent Accountants
Coopers & Lybrand L.L.P.
One Post Office Square
Boston, Massachusetts 02109
Legal Counsel
Hale and Dorr
60 State Street
Boston, Massachusetts 02109
Standish, Ayer & Wood Investment Trust
One Financial Center
Boston, MA 02111
(800) 221-4795
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1Hub and Spoke(R) is a registered service mark of Signature Financial Group,Inc.
25
<PAGE>
April 29, 1996
STANDISH EQUITY FUND
One Financial Center
Boston, Massachusetts 02111
(800) 221-4795
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information is not a prospectus, but expands
upon and supplements the information contained in the Prospectus dated April 29,
1996, as amended and/or supplemented from time to time (the "Prospectus") of
Standish Equity Fund (the "Fund"), a separate investment series of Standish,
Ayer & Wood Investment Trust (the "Trust"). This Statement of Additional
Information should be read in conjunction with the Fund's Prospectus a copy of
which may be obtained without charge by writing or calling the Trust's principal
underwriter, Standish Fund Distributors, L.P. (the "Principal Underwriter"), at
the address and phone number set forth above.
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND IS
AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY IF PRECEDED OR
ACCOMPANIED BY AN EFFECTIVE PROSPECTUS.
Investment Objective and Policies............................2
Investment Restrictions......................................8
Calculation of Performance Data .............................9
Management..................................................10
Redemption of Shares........................................16
Portfolio Transactions......................................16
Determination of Net Asset Value............................16
The Fund and Its Shares.....................................16
The Portfolio and Its Investors.............................17
Taxation....................................................18
Additional Information......................................20
Experts and Financial Statements............................20
Financial Statements........................................21
1
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INVESTMENT OBJECTIVE AND POLICIES
As described in the Prospectus, the Fund seeks to achieve its investment
objective by investing all its investable assets in the Standish Equity
Portfolio (the "Portfolio"), a series of Standish, Ayer & Wood Master Portfolio
(the "Portfolio Trust"), an open-end management investment company. The
Portfolio has the same investment objective and restrictions as the Fund.
The Fund's Prospectus describes the investment objective of the Fund and
the Portfolio and summarizes the investment policies they will follow. Since the
investment characteristics of the Fund will correspond directly to those of the
Portfolio, the following, which supplements the Prospectus, is a discussion of
the various investment techniques employed by the Portfolio. See the Prospectus
for a more complete description of the Fund's and the Portfolio's investment
objective, policies and restrictions.
Investment Objective
The Portfolio's investment objective is to achieve long-term growth of
capital through investment primarily in equity securities of companies which
appear to be undervalued. Under normal circumstances, at least 80% of the
Portfolio's assets will be invested in such securities. The Portfolio may invest
in equity securities of foreign issuers that are listed on a United States
exchange or traded in the U.S. over-the-counter market, but will not invest more
than 10% of its assets in such securities which are not so listed or traded. In
addition, the Portfolio may engage in certain strategic transactions as
discussed below. Although the Portfolio normally does not invest in securities
which are restricted as to disposition by federal securities laws or are
otherwise illiquid, the Portfolio may so invest up to 15% of its net assets. The
Portfolio purchases short-term interest-bearing securities with uninvested
funds, the amount of which will depend upon market conditions and the needs of
the Portfolio.
Suitability and Risk Factors
The Fund is not intended to provide an investment program meeting all of
the requirements of an investor. The companies in which the Portfolio invests
generally reinvest their earnings, and dividend income should not be expected.
Additionally, notwithstanding the Portfolio'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 Portfolio.
Foreign Securities
Foreign securities may be purchased and sold in over-the-counter markets
(but persons affiliated with the Portfolio will not act as principal in such
purchases and sales) or on stock exchanges located in the countries in which the
respective principal offices of the issuers of the various securities are
located, if that is the best available market. Foreign stock markets are
generally not as developed or efficient as those in the United States. While
growing in volume, they usually have substantially less volume than the New York
Stock Exchange, and securities of some foreign companies are less liquid and
more volatile than securities of comparable United States companies. Fixed
2
<PAGE>
commissions on foreign stock exchanges are generally higher than negotiated
commissions on United States exchanges, although the Portfolio will endeavor to
achieve the most favorable net results on its portfolio transactions. There is
generally less government supervision and regulation of stock exchanges, brokers
and listed companies abroad than in the United States.
The dividends and interest payable on certain of the Portfolio's foreign
portfolio securities may be subject to foreign withholding taxes and in some
cases capital gains from such securities may also be subject to foreign tax,
thus reducing the net amount of income or gain available for distribution to the
Fund's shareholders.
Investors should understand that the expense ratio of the Portfolio may be
higher than that of investment companies investing exclusively in domestic
securities because of the cost of maintaining the custody of foreign securities.
Strategic Transactions
The Portfolio may, but is not required to, utilize various other investment
strategies as described below to hedge various market risks (such as interest
rates, currency exchange rates, and broad or specific equity market movements),
or to enhance potential gain. Such strategies are generally accepted as part of
modern portfolio management and are regularly utilized by many mutual funds and
other institutional investors. Techniques and instruments used by the Portfolio
may change over time as new instruments and strategies are developed or
regulatory changes occur.
In the course of pursuing its investment objective, the Portfolio may
purchase and sell (write) exchange-listed and over-the-counter put and call
options on securities, equity indices and other financial instruments; purchase
and sell financial futures contracts and options thereon; enter into various
interest rate transactions such as swaps, caps, floors or collars; and enter
into various currency transactions such as currency forward contracts, currency
futures contracts, currency swaps or options on currencies or currency futures
(collectively, all the above are called "Strategic Transactions"). Strategic
Transactions may be used in an attempt to protect against possible changes in
the market value of securities held in or to be purchased for the Portfolio's
portfolio resulting from securities market or currency exchange rate
fluctuations, to protect the Portfolio's unrealized gains in the value of its
portfolio securities, to facilitate the sale of such securities for investment
purposes, 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 Portfolio will attempt to limit its net
loss exposure resulting from Strategic Transactions entered into for such
purposes to not more than 3% of the Portfolio's net assets at any one time and,
to the extent necessary, the Portfolio will close out transactions in order to
comply with this limitation. (Transactions such as writing covered call options
are considered to involve hedging for the purposes of this limitation.) In
calculating the Portfolio'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.
3
<PAGE>
For example, if Standish, Ayer & Wood, Inc. ("Standish" or the "Adviser")
believes that the Portfolio is underweighted in cyclical stocks and overweighted
in consumer stocks, the Portfolio 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 Portfolio's net loss
exposure. The ability of the Portfolio to utilize these Strategic Transactions
successfully will depend on the Adviser's ability to predict pertinent market
movements, which cannot be assured. The Portfolio will comply with applicable
regulatory requirements when implementing these strategies, techniques and
instruments. The Portfolio's activities involving Strategic Transactions may be
limited in order to enable the Fund to comply with the requirements of
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code") for
qualification as a regulated investment company.
Risks of Strategic Transactions
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 Portfolio, 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 Portfolio can realize on its investments or cause the
Portfolio to hold a security it might otherwise sell. The use of currency
transactions can result in the Portfolio incurring losses as a result of a
number of factors including the imposition of exchange controls, suspension of
settlements, or the inability to deliver or receive a specified currency. The
use of options and futures transactions entails certain other risks. In
particular, the variable degree of correlation between price movements of
futures contracts and price movements in the related portfolio position of the
Portfolio creates the possibility that losses on the hedging instrument may be
greater than gains in the value of the Portfolio's position. The writing of
options could significantly increase the Portfolio'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 Portfolio might not be able to close out a transaction without incurring
substantial losses, if at all. Although the use of futures and options
transactions for hedging should tend to minimize the risk of loss due to a
decline in the value of the hedged position, at the same time, in certain
circumstances, they tend to limit any potential gain which might result from an
increase in value of such position. The loss incurred by the Portfolio in
writing options on futures and entering into futures transactions is potentially
unlimited; however, as described above, the Portfolio will attempt to limit its
4
<PAGE>
net loss exposure resulting from Strategic Transactions entered into for
non-hedging purposes to not more than 3% of its net assets at any one time.
Futures markets are highly volatile and the use of futures may increase the
volatility of the Fund's net asset value. Finally, entering into futures
contracts would create a greater ongoing potential financial risk than would
purchases of options where the exposure is limited to the cost of the initial
premium. Losses resulting from the use of Strategic Transactions would reduce
net asset value and the net result may be less favorable than if the Strategic
Transactions had not been utilized.
General Characteristics of Options
Put options and call options typically have similar structural
characteristics and operational mechanics regardless of the underlying
instrument on which they are purchased or sold. Thus, the following general
discussion relates to each of the particular types of options discussed in
greater detail below. In addition, many Strategic Transactions involving options
require segregation of the Portfolio's assets in special accounts, as described
below under "Use of Segregated Accounts."
A put option gives the purchaser of the option, in consideration for the
payment of a premium, the right to sell, and the writer the obligation to buy
(if the option is exercised), the underlying security, commodity, index,
currency or other instrument at the exercise price. For instance, the
Portfolio's purchase of a put option on a security might be designed to protect
its holdings in the underlying instrument (or, in some cases, a similar
instrument) against a substantial decline in the market value by giving the
Portfolio the right to sell such instrument at the option exercise price. A call
option, in consideration for the payment of a premium, gives the purchaser of
the option the right to buy, and the seller the obligation to sell (if the
option is exercised), the underlying instrument at the exercise price. The
Portfolio may purchase a call option on a security, futures contract, index,
currency or other instrument to seek to protect the Portfolio against an
increase in the price of the underlying instrument that it intends to purchase
in the future by fixing the price at which it may purchase such instrument. An
American style put or call option may be exercised at any time during the option
period while a European style put or call option may be exercised only upon
expiration or during a fixed period prior thereto. The Portfolio is authorized
to purchase and sell exchange listed options and over-the-counter options ("OTC
options"). Exchange listed options are issued by a regulated intermediary such
as the Options Clearing Corporation ("OCC"), which guarantees the performance of
the obligations of the parties to such options. The discussion below uses the
OCC as an example, but is also applicable to other financial intermediaries.
With certain exceptions, exchange listed options generally settle by
physical delivery of the underlying security or currency, although in the future
cash settlement may become available. Index options and Eurodollar instruments
are cash settled for the net amount, if any, by which the option is
"in-the-money" (i.e., where the value of the underlying instrument exceeds, in
the case of a call option, or is less than, in the case of a put option, the
exercise price of the option) at the time the option is exercised. Frequently,
rather than taking or making delivery of the underlying instrument through the
process of exercising the option, listed options are closed by entering into
offsetting purchase or sale transactions that do not result in ownership of the
new option.
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The Portfolio's ability to close out its position as a purchaser or seller
of an exchange listed put or call option is dependent, in part, upon the
liquidity of the option market. There is no assurance that a liquid option
market on an exchange will exist. In the event that the relevant market for an
option on an exchange ceases to exist, outstanding options on that exchange
would generally continue to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours
during which the underlying financial instruments are traded. To the extent that
the option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct bilateral
agreement with the Counterparty. In contrast to exchange listed options, which
generally have standardized terms and performance mechanics, all the terms of an
OTC option, including such terms as method of settlement, term, exercise price,
premium, guarantees and security, are set by negotiation of the parties. The
Portfolio will generally sell (write) OTC options (other than OTC currency
options) that are subject to a buy-back provision permitting the Portfolio to
require the Counterparty to sell the option back to the Portfolio at a formula
price within seven days. (To the extent that the Portfolio does not do so, the
OTC options are subject to the Portfolio's restriction on illiquid securities.)
The Portfolio expects generally to enter into OTC options that have cash
settlement provisions, although it is not required to do so.
Unless the parties provide for it, there is no central clearing or guaranty
function in an OTC option. As a result, if the Counterparty fails to make
delivery of the security, currency or other instrument underlying an OTC option
it has entered into with the Portfolio or fails to make a cash settlement
payment due in accordance with the terms of that option, the Portfolio will lose
any premium it paid for the option as well as any anticipated benefit of the
transaction. Accordingly, the Adviser must assess the creditworthiness of each
such Counterparty or any guarantor or credit enhancement of the Counterparty's
credit to determine the likelihood that the terms of the OTC option will be
satisfied. The Portfolio will engage in OTC option transactions only with U.S.
Government securities dealers recognized by the Federal Reserve Bank of New York
as "primary dealers", or broker dealers, domestic or foreign banks or other
financial institutions which have received, combined with any credit
enhancements, a long-term debt rating of A from Standard & Poor's Ratings Group
("S&P") or Moody's Investors Service, Inc. ("Moody's") or an equivalent rating
from any other nationally recognized statistical rating organization ("NRSRO")
or which issue debt that is determined to be of equivalent credit quality by the
Adviser. The staff of the Securities and Exchange Commission ("SEC") currently
takes the position that, absent the buy-back provisions discussed above, OTC
options purchased by the Portfolio, and portfolio securities "covering" the
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amount of the Portfolio's obligation pursuant to an OTC option sold by it (the
cost of the sell-back plus the in-the-money amount, if any) are illiquid, and
are subject to the Portfolio's limitation on investing in illiquid securities.
However, for options written with "primary dealers" in U.S. Government
securities pursuant to an agreement requiring a closing purchase transaction at
a formula price, the amount which is considered to be illiquid may be calculated
by reference to a formula price.
If the Portfolio sells (writes) a call option, the premium that it receives
may serve as a partial hedge, to the extent of the option premium, against a
decrease in the value of the underlying securities or instruments in its
portfolio or will increase the Portfolio's income. The sale (writing) of put
options can also provide income.
The Portfolio may purchase and sell (write) call options on securities,
equity securities (including convertible securities) and Eurodollar instruments
that are traded on U.S. and foreign securities exchanges and in the
over-the-counter markets, and on securities indices, currencies and futures
contracts. All calls sold by the Portfolio must be "covered" (i.e., the
Portfolio must own the securities or futures contract subject to the call) or
must meet the asset segregation requirements described below as long as the call
is outstanding. Even though the Portfolio will receive the option premium to
help offset any loss, the Portfolio may incur a loss if the exercise price is
below the market price for the security subject to the call at the time of
exercise. A call sold by the Portfolio also exposes the Portfolio during the
term of the option to possible loss of opportunity to realize appreciation in
the market price of the underlying security or instrument and may require the
Portfolio to hold a security or instrument which it might otherwise have sold.
The Portfolio may purchase and sell (write) put options on securities
including equity securities (including convertible securities) and Eurodollar
instruments (whether or not it holds the above securities in its portfolio), and
on securities indices, currencies and futures contracts. The Portfolio will not
sell put options if, as a result, more than 50% of the Portfolio's assets would
be required to be segregated to cover its potential obligations under such put
options other than those with respect to futures and options thereon. In selling
put options, there is a risk that the Portfolio may be required to buy the
underlying security at a price above the market price.
Options on Securities Indices and Other Financial Indices
The Portfolio may also purchase and sell (write) call and put options on
securities indices and other financial indices. Options on securities indices
and other financial indices are similar to options on a security or other
instrument except that, rather than settling by physical delivery of the
underlying instrument, they settle by cash settlement. For example, an option on
an index gives the holder the right to receive, upon exercise of the option, an
amount of cash if the closing level of the index upon which the option is based
exceeds, in the case of a call, or is less than, in the case of a put, the
exercise price of the option (except if, in the case of an OTC option, physical
delivery is specified). This amount of cash is equal to the differential between
the closing price of the index and the exercise price of the option, which also
may be multiplied by a formula value. The seller of the option is obligated, in
return for the premium received, to make delivery of this amount upon exercise
of the option. In addition to the methods described above, the Portfolio may
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cover call options on a securities index by owning securities whose price
changes are expected to be similar to those of the underlying index, or by
having an absolute and immediate right to acquire such securities without
additional cash consideration (or for additional cash consideration held in a
segregated account by its custodian) upon conversion or exchange of other
securities in its portfolio.
General Characteristics of Futures
The Portfolio may enter into financial futures contracts or purchase or
sell put and call options on such futures. Futures are generally bought and sold
on the commodities exchanges where they are listed and involve payment of
initial and variation margin as described below. The sale of futures contracts
creates a firm obligation by the Portfolio, as seller, to deliver to the buyer
the specific type of financial instrument called for in the contract at a
specific future time for a specified price (or, with respect to index futures
and Eurodollar instruments, the net cash amount). The purchase of futures
contracts creates a corresponding obligation by the Portfolio, as purchaser to
purchase a financial instrument at a specific time and price. Options on futures
contracts are similar to options on securities except that an option on a
futures contract gives the purchaser the right in return for the premium paid to
assume a position in a futures contract and obligates the seller to deliver such
position upon exercise of the option.
The Portfolio's use of financial futures and options thereon will in all
cases be consistent with applicable regulatory requirements and in particular
the regulations of the Commodity Futures Trading Commission relating to
exclusions from regulation as a commodity pool operator. Those regulations
currently provide that the Portfolio may use commodity futures and option
positions (i) for bona fide hedging purposes without regard to the percentage of
assets committed to margin and option premiums, or (ii) for other purposes
permitted by the SEC to the extent that the aggregate initial margin and option
premiums required to establish such non-hedging positions (net of the amount the
positions were "in the money" at the time of purchase) do not exceed 5% of the
net asset value of the Portfolio's portfolio, after taking into account
unrealized profits and losses on such positions. Typically, maintaining a
futures contract or selling an option thereon requires the Portfolio to deposit
with its custodian for the benefit of a futures commission merchant as security
for its obligations an amount of cash or other specified assets (initial margin)
which initially is typically 1% to 10% of the face amount of the contract (but
may be higher in some circumstances). Additional cash or assets (variation
margin) may be required to be deposited directly with the futures commission
merchant thereafter on a daily basis as the value of the contract fluctuates.
The purchase of an option on financial futures involves payment of a premium for
the option without any further obligation on the part of the Portfolio. If the
Portfolio exercises an option on a futures contract it will be obligated to post
initial margin (and potential subsequent variation margin) for the resulting
futures position just as it would for any position. Futures contracts and
options thereon are generally settled by entering into an offsetting transaction
but there can be no assurance that the position can be offset prior to
settlement at an advantageous price, nor that delivery will occur. The
segregation requirements with respect to futures contracts and options thereon
are described below.
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Currency Transactions
The Portfolio may engage in currency transactions with Counterparties in
order to hedge the value of portfolio holdings denominated in particular
currencies against fluctuations in relative value or to enhance potential gain.
Currency transactions include currency contracts, exchange listed currency
futures, exchange listed and OTC options on currencies, and currency swaps. A
forward currency contract involves a privately negotiated obligation to purchase
or sell (with delivery generally required) a specific currency at a future date,
which may be any fixed number of days from the date of the contract agreed upon
by the parties, at a price set at the time of the contract. A currency swap is
an agreement to exchange cash flows based on the notional (agreed-upon)
difference among two or more currencies and operates similarly to an interest
rate swap, which is described below. A Portfolio may enter into over-the-counter
currency transactions with Counterparties which have received, combined with any
credit enhancements, a long term debt rating of A by S&P or Moody's,
respectively, or that have an equivalent rating from a NRSRO or (except for OTC
currency options) whose obligations are determined to be of equivalent credit
quality by the Adviser.
The Portfolio's dealings in forward currency contracts and other currency
transactions such as futures, options, options on futures and swaps will
generally be limited to hedging involving either specific transactions or
portfolio positions. See, "Strategic Transactions." Transaction hedging is
entering into a currency transaction with respect to specific assets or
liabilities of a Portfolio, which will generally arise in connection with the
purchase or sale of its portfolio securities or the receipt of income therefrom.
Position hedging is entering into a currency transaction with respect to
portfolio security positions denominated or generally quoted in that currency.
The Portfolio will not enter into a transaction to hedge currency exposure
to an extent greater, after netting all transactions intended wholly or
partially to offset other transactions, than the aggregate market value (at the
time of entering into the transaction) of the securities held in its portfolio
that are denominated or generally quoted in or currently convertible into such
currency, other than with respect to proxy hedging as described below.
The Portfolio may also cross-hedge currencies by entering into transactions
to purchase or sell one or more currencies that are expected to decline in value
in relation to other currencies to which the Portfolio has or in which the
Portfolio expects to have portfolio exposure. For example, the Portfolio may
hold a French security and the Adviser may believe that French francs will
deteriorate against German marks. The Portfolio would sell French francs to
reduce its exposure to that currency and buy German marks. This strategy would
be a hedge against a decline in the value of French francs, although it would
expose the Portfolio to declines in the value of the German mark relative to the
U.S. dollar.
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To reduce the effect of currency fluctuations on the value of existing or
anticipated holdings of portfolio securities, the Portfolio may also engage in
proxy hedging. Proxy hedging is often used when the currency to which the
Portfolio's portfolio is exposed is difficult to hedge or to hedge against the
dollar. Proxy hedging entails entering into a forward contract to sell a
currency whose changes in value are generally considered to be linked to a
currency or currencies in which certain of the Portfolio's portfolio securities
are or are expected to be denominated, and to buy U.S. dollars. The amount of
the contract would not exceed the value of the Portfolio's securities
denominated in linked currencies. For example, if the Adviser considers that the
Austrian schilling is linked to the German deutschemark (the "D-mark"), the
Portfolio holds securities denominated in schillings and the Adviser believes
that the value of schillings will decline against the U.S. dollar, the Adviser
may enter into a contract to sell D-marks and buy dollars. Proxy hedging
involves some of the same risks and considerations as other transactions with
similar instruments. Currency transactions can result in losses to the Portfolio
if the currency being hedged fluctuates in value to a degree or in a direction
that is not anticipated. Further, there is the risk that the perceived linkage
between various currencies may not be present or may not be present during the
particular time that the Portfolio is engaging in proxy hedging. If the
Portfolio enters into a currency hedging transaction, the Portfolio will comply
with the asset segregation requirements described below.
Risks of Currency Transactions
Currency transactions are subject to risks different from those of other
portfolio transactions. Because currency control is of great importance to the
issuing governments and influences economic planning and policy, purchases and
sales of currency and related instruments can be negatively affected by
government exchange controls, blockages, and manipulations or exchange
restrictions imposed by governments. These can result in losses to the Portfolio
if it is unable to deliver or receive currency or funds in settlement of
obligations and could also cause hedges it has entered into to be rendered
useless, resulting in full currency exposure as well as incurring transaction
costs. Buyers and sellers of currency futures are subject to the same risks that
apply to the use of futures generally. Further, settlement of a currency futures
contract for the purchase of most currencies must occur at a bank based in the
issuing nation. Trading options on currency futures is relatively new, and the
ability to establish and close out positions on such options is subject to the
maintenance of a liquid market which may not always be available. Currency
exchange rates may fluctuate based on factors extrinsic to that country's
economy.
Combined Transactions
The Portfolio may enter into multiple transactions, including multiple
options transactions, multiple futures transactions, multiple currency
transactions (including forward currency contracts) and multiple interest rate
transactions, structured notes and any combination of futures, options, currency
and interest rate transactions ("component transactions"), instead of a single
Strategic Transaction, as part of a single or combined strategy when, in the
opinion of the Adviser it is in the best interests of the Portfolio to do so. A
combined transaction will usually contain elements of risk that are present in
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each of its component transactions. Although combined transactions are normally
entered into based on the Adviser's judgment that the combined strategies will
reduce risk or otherwise more effectively achieve the desired portfolio
management goal, it is possible that the combination will instead increase such
risks or hinder achievement of the portfolio management objective.
Swaps, Caps, Floors and Collars
Among the Strategic Transactions into which the Portfolio may enter are
interest rate, currency and index swaps and the purchase or sale of related
caps, floors and collars. The Portfolio expects to enter into these transactions
primarily for hedging purposes, including, but not limited to, preserving a
return or spread on a particular investment or portion of its portfolio,
protecting against currency fluctuations, as a duration management technique or
protecting against an increase in the price of securities the Portfolio
anticipates purchasing at a later date. Swaps, caps, floors and collars may also
be used to enhance potential gain in circumstances where hedging is not involved
although, as described above, the Portfolio will attempt to limit its net loss
exposure resulting from swaps, caps, floors and collars and other Strategic
Transactions entered into for such purposes to not more than 3% of the
Portfolio's net assets at any one time. The Portfolio will not sell interest
rate caps or floors where it does not own securities or other instruments
providing the income stream the Portfolio may be obligated to pay. Interest rate
swaps involve the exchange by the Portfolio with another party of their
respective commitments to pay or receive interest, e.g., an exchange of floating
rate payments for fixed rate payments with respect to a notional amount of
principal. A currency swap is an agreement to exchange cash flows on a notional
amount of two or more currencies based on the relative value differential among
them and an index swap is an agreement to swap cash flows on a notional amount
based on changes in the values of the reference indices. The purchase of a cap
entitles the purchaser to receive payments on a notional principal amount from
the party selling such cap to the extent that a specified index exceeds a
predetermined interest rate or amount. The purchase of a floor entitles the
purchaser to receive payments on a notional principal amount from the party
selling such floor to the extent that a specified index falls below a
predetermined interest rate or amount. A collar is a combination of a cap and a
floor that preserves a certain rate of return within a predetermined range of
interest rates or values.
The Portfolio will usually enter into swaps on a net basis, i.e., the two
payment streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with the Portfolio receiving or paying, as the case
may be, only the net amount of the two payments. The Portfolio will not enter
into any swap, cap, floor or collar transaction unless, at the time of entering
into such transaction, the unsecured long-term debt of the Counterparty,
combined with any credit enhancements, is rated at least A by S&P or Moody's or
has an equivalent rating from an NRSRO or which issue debt that is determined to
be of equivalent credit quality by the Adviser. If there is a default by the
Counterparty, the Portfolio may have contractual remedies pursuant to the
agreements related to the transaction. The swap market has grown substantially
in recent years with a large number of banks and investment banking firms acting
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both as principals and as agents utilizing standardized swap documentation. As a
result, the swap market has become relatively liquid. Caps, floors and collars
are more recent innovations for which standardized documentation has not yet
been fully developed. Swaps, caps, floors and collars are considered illiquid
for purposes of the Portfolio's policy regarding illiquid securities, unless it
is determined, based upon continuing review of the trading markets for the
specific security, that such security is liquid. The Board of Trustees has
adopted guidelines and delegated to the Adviser the daily function of
determining and monitoring the liquidity of swaps, caps, floors and collars. The
Portfolio Trust's Board of Trustees, however, retains oversight focusing on
factors such as valuation, liquidity and availability of information and is
ultimately responsible for such determinations. The staff of the SEC currently
takes the position that swaps, caps, floors and collars are illiquid, and are
subject to the Portfolio's limitation on investing in illiquid securities.
Eurodollar Contracts
The Portfolio may make investments in Eurodollar contracts. Eurodollar
contracts are U.S. dollar-denominated futures contracts or options thereon which
are linked to the London Interbank Offered Rate ("LIBOR"), although foreign
currency-denominated instruments are available from time to time. Eurodollar
futures contracts enable purchasers to obtain a fixed rate for the lending of
funds and sellers to obtain a fixed rate for borrowings. The Portfolio might use
Eurodollar futures contracts and options thereon to hedge against changes in
LIBOR, to which many interest rate swaps and fixed income instruments are
linked.
Risks of Strategic Transactions Outside the United States
When conducted outside the United States, Strategic Transactions may not be
regulated as rigorously as in the United States, may not involve a clearing
mechanism and related guarantees, and are subject to the risk of governmental
actions affecting trading in, or the prices of, foreign securities, currencies
and other instruments. The value of such positions also could be adversely
affected by: (i) lesser availability than in the United States of data on which
to make trading decisions, (ii) delays in the Portfolio's ability to act upon
economic events occurring in foreign markets during non-business hours in the
United States, (iii) the imposition of different exercise and settlement terms
and procedures and margin requirements than in the United States, (iv) lower
trading volume and liquidity, and (v) other complex foreign political, legal and
economic factors. At the same time, Strategic Transactions may offer advantages
such as trading in instruments that are not currently traded in the United
States or arbitrage possibilities not available in the United States.
Use of Segregated Accounts
The Portfolio will hold securities or other instruments whose values are
expected to offset its obligations under the Strategic Transactions. The
Portfolio will cover Strategic Transactions as required by interpretive
positions of the SEC. The Portfolio will not enter into Strategic Transactions
that expose the Portfolio to an obligation to another party unless it owns
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either (i) an offsetting position in securities or other options, futures
contracts or other instruments or (ii) cash, receivables or liquid, high grade
debt securities with a value sufficient to cover its potential obligations. The
Portfolio may have to comply with any applicable regulatory requirements for
Strategic Transactions, and if required, will set aside cash and other assets in
a segregated account with its custodian bank in the amount prescribed. In that
case, the Portfolio's custodian would maintain the value of such segregated
account equal to the prescribed amount by adding or removing additional cash or
other assets to account for fluctuations in the value of the account and the
Fund's obligations on the underlying Strategic Transactions. Assets held in a
segregated account would not be sold while the Strategic Transaction is
outstanding, unless they are replaced with similar assets. As a result, there is
a possibility that segregation of a large percentage of the Portfolio's assets
could impede portfolio management or the Portfolio's ability to meet redemption
requests or other current obligations.
Money Market Instruments and Repurchase Agreements
When the Adviser considers investments in equity securities to present
excessive risks and to maintain liquidity for redemptions, the Portfolio may
invest all or a portion of its assets in money market instruments or short-term
interest-bearing securities. The Portfolio may also invest uncommitted cash in
such instruments and securities.
Money market instruments include short-term U.S. government securities,
U.S. and foreign commercial paper (promissory notes issued by corporations to
finance their short-term credit needs), negotiable certificates of deposit,
non-negotiable fixed time deposits, bankers' acceptances and repurchase
agreements.
U.S. government securities include securities which are direct obligations
of the U.S. government backed by the full faith and credit of the United States,
and securities issued by agencies and instrumentalities of the U.S. government,
which may be guaranteed by the U.S. Treasury or supported by the issuer's right
to borrow from the Treasury or may be backed by the credit of the federal agency
or instrumentality itself. Agencies and instrumentalities of the U.S. government
include, but are not limited to, Federal Land Banks, the Federal Farm Credit
Bank, the Central Bank for Cooperatives, Federal Intermediate Credit Banks,
Federal Home Loan Banks and the Federal National Mortgage Association.
A repurchase agreement is an agreement under which the Portfolio acquires
money market instruments (generally U.S. government securities, bankers'
acceptances or certificates of deposit) from a commercial bank, broker or
dealer, subject to resale to the seller at an agreed-upon price and date
(normally the next business day). The resale price reflects an agreed-upon
interest rate effective for the period the instruments are held by the Portfolio
and is unrelated to the interest rate on the instruments. The instruments
acquired by the Portfolio (including accrued interest) must have an aggregate
market value in excess of the resale price and will be held by the custodian
bank for the Portfolio until they are repurchased. The Trustees will monitor the
standards which the Adviser will use in reviewing the creditworthiness of any
party to a repurchase agreement with the Portfolio.
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The use of repurchase agreements involves certain risks. For example, if
the seller defaults on its obligation to repurchase the instruments acquired by
the Portfolio at a time when their market value has declined, the Portfolio may
incur a loss. If the seller becomes insolvent or subject to liquidation or
reorganization under bankruptcy or other laws, a court may determine that the
instruments acquired by the Portfolio are collateral for a loan by the Portfolio
and therefore are subject to sale by the trustee in bankruptcy. Finally, it is
possible that the Portfolio may not be able to substantiate its interest in the
instruments it acquires. While the Trustees acknowledge these risks, it is
expected that they can be controlled through careful documentation and
monitoring.
Portfolio Turnover
The Portfolio places no restrictions on portfolio turnover and it may sell
any portfolio security without regard to the period of time it has been held,
except as may be necessary to enable the Fund to maintain its status as a
regulated investment company under the Internal Revenue Code. The Portfolio may
therefore generally change its portfolio investments at any time in accordance
with the Adviser's appraisal of factors affecting any particular issuer or
market, or the economy in general.
INVESTMENT RESTRICTIONS
The Fund and the Portfolio have each adopted the following fundamental
policies. Each of the Fund's and the Portfolio's fundamental policies cannot be
changed unless the change is approved by the "vote of the outstanding voting
securities" of the Fund or the Portfolio, as the case may be, which phrase as
used herein means the lesser of (i) 67% or more of the voting securities of the
Fund or the Portfolio present at a meeting, if the holders of more than 50% of
the outstanding voting securities of the Fund or the Portfolio are present or
represented by proxy, or (ii) more than 50% of the outstanding voting securities
of the Fund or the Portfolio.
As a matter of fundamental policy, the Portfolio (Fund) may not:
1. Invest more than 25% of the current value of its total assets in any
single industry, provided that this restriction shall not apply to
U.S. government securities.
2. Underwrite the securities of other issuers, except to the extent that,
in connection with the disposition of portfolio securities, the
Portfolio (Fund) may be deemed to be an underwriter under the
Securities Act of 1933.
3. Purchase real estate or real estate mortgage loans.
4. Purchase securities on margin (except that the Portfolio (Fund) may
obtain such short-term credits as may be necessary for the clearance of
purchases and sales of securities).
5. Purchase or sell commodities or commodity contracts (except futures
contracts and options on such futures contracts and foreign currency
exchange transactions).
6. With respect to at least 75% of its total assets, invest more than 5%
in the securities of any one issuer (other than the U.S. Government,
its agencies or instrumentalities) or acquire more than 10% of the
outstanding voting securities of any issuer.
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7. Issue senior securities, borrow money, enter into reverse repurchase
agreements or pledge or mortgage its assets, except that the Fund may
borrow from banks in an amount up to 15% of the current value of its
total assets as a temporary measure for extraordinary or emergency
purposes (but not investment purposes), and pledge its assets to an
extent not greater than 15% of the current value of its total assets to
secure such borrowings; however, the Fund may not make any additional
investments while its outstanding borrowings exceed 5% of the current
value of its total assets.
8. Make loans of portfolio securities.
Notwithstanding the foregoing, the Fund may invest all of its assets (other
than assets which are not "investment securities" (as defined in the 1940 Act)
or are excepted by the SEC) in an open-end management investment company with
substantially the same investment objective as the Fund.
The following restrictions are not fundamental policies and may be changed
by the Trustees of the Portfolio Trust (Trust) without investor approval, in
accordance with applicable laws, regulations or regulatory policy. The Portfolio
(Fund) may not:
a. Make short sales of securities unless (a) after effect is given to any
such short sale, the total market value of all securities sold short
would not exceed 5% of the value of the Portfolio's (Fund's) net assets
or (b) at all times during which a short position is open it owns an
equal amount of such securities, or by virtue of ownership of
convertible or exchangeable securities it has the right to obtain
through the conversion or exchange of such other securities an amount
equal to the securities sold short.
b. Invest in companies for the purpose of exercising control or
management.
c. Invest in interests in oil, gas or other exploration or development
programs.
d. Invest more than 5% of the assets of the Portfolio (Fund) in the
securities of any issuers which together with their corporate parents
have records of less than three years' continuous operation, including
the operation of any predecessor, other than (a) obligations issued or
guaranteed by the U.S. Government or its agencies and (b) repurchase
agreements fully collateralized by such securities.
e. Invest in securities of any company if any officer or director
(trustee) of the Portfolio Trust (Trust) or of the Portfolio's
investment adviser owns more than 1/2 of 1% of the outstanding
securities of such company and such officers and directors (trustees)
own in the aggregate more than 5% of the securities of such company.
f. Purchase or write options, except pursuant to the limitations under
"Strategic Transactions."
g. Invest more than an aggregate of 15% of the net assets of the
Portfolio (Fund) in (a) repurchase agreements which are not terminable
within seven days and (b) securities subject to legal or contractual
restrictions on resale or for which there are no readily available
market quotations and (c) in other illiquid securities, unless such
securities were received as distributions on portfolio securities.
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h. Purchase the securities of other investment companies, provided that
the Fund may make such a purchase as part of a merger, consolidation,
or acquisition of assets, and provided further that the Fund may make
such a purchase in the open market where no commission or profit to a
sponsor or dealer results from the purchase other than customary
brokers' commissions and then only to the extent permitted by the 1940
Act.
i. Invest more than 10% of its net assets in repurchase agreements (this
restriction is Fundamental with respect to the Fund, but not the
Portfolio).
Notwithstanding any non-fundamental policy, the Fund may invest all of its
assets (other than assets which are not "investment securities" (as defined in
the 1940 Act) or are excepted by the SEC) in an open-end management investment
company with substantially the same investment objective as the Fund.
If any percentage restriction described above is adhered to at the time of
investment, a subsequent increase or decrease in the percentage resulting from a
change in the value of the Portfolio's (Fund's) assets will not constitute a
violation of the restriction, except with respect to restriction (e) above.
In order to permit the sale of shares of the Fund in certain states, the
Board may, in its sole discretion, adopt restrictions on investment policy more
restrictive than those described above. Should the Board determine that any such
more restrictive policy is no longer in the best interest of the Fund and its
shareholders, the Fund may cease offering shares in the state involved and the
Board may revoke such restrictive policy. Moreover, if the states involved shall
no longer require any such restrictive policy, the Board may, in its sole
discretion, revoke such policy.
CALCULATION OF PERFORMANCE DATA
As indicated in the Prospectus, the Fund may, from time to time, advertise
certain total return information. The average annual total return of the Fund
for a period is computed by subtracting the net asset value per share at the
beginning of the period from the net asset value per share at the end of the
period (after adjusting for the reinvestment of any income dividends and capital
gain distributions), and dividing the result by the net asset value per share at
the beginning of the period. In particular, the average annual total return of
the Fund ("T") is computed by using the redeemable value at the end of a
specified period of time ("ERV") of a hypothetical initial investment of $1,000
("P") over a period of time ("n") according to the formula P(1+T)n=ERV.
The average annual total return quotations for the Fund for the one year
period ended December 31, 1995, and since inception (January 2, 1991 to December
31, 1995) are 37.55% and 18.49%, respectively. These performance quotations
should not be considered as representative of the Fund's performance for any
specified period in the future.
16
<PAGE>
In addition to average annual return quotations, the Fund may quote
quarterly and annual performance on a net (with management and administration
fees deducted) and gross basis as follows:
Quarter/Year Net Gross
- --------------------------------------------------------------------------------
1Q91 16.30 16.50
2Q91 (2.76) (2.53)
3Q91 6.15 6.42
4Q91 11.09 11.34
1991 36.36 34.62
1Q92 (2.77) (2.52)
2Q92 (2.63) (2.38)
3Q92 4.03 4.28
4Q92 11.20 10.74
1992 9.52 9.52
1Q93 7.71 7.91
2Q93 2.76 2.96
3Q93 6.64 6.84
4Q93 2.34 2.54
1993 20.79 21.72
1Q94 (2.30) (2.13)
2Q94 (3.14) (2.96)
3Q94 3.22 3.40
4Q94 (1.50) (1.33)
1994 (3.78)% (3.10)%
1Q95 8.76 8.93
2Q95 11.10 11.28
3Q95 9.56 9.74
4Q95 3.90 4.09
1995 37.55 38.46
These performance quotations should not be considered as representative of
the Fund's performance for any specified period in the future.
The Fund's performance may be compared in sales literature to the
performance of other mutual funds having similar objectives or to standardized
indices or other measures of investment performance. In particular, the Fund may
compare its performance to the S&P 500 Index, which is generally considered to
be representative of the performance of unmanaged common stocks that are
publicly traded in the United States securities markets. Comparative performance
may also be expressed by reference to a ranking prepared by a mutual fund
monitoring service or by one or more newspapers, newsletters or financial
periodicals. Performance comparisons may be useful to investors who wish to
compare the Fund's past performance to that of other mutual funds and investment
products. Of course, past performance is not a guarantee of future results.
17
<PAGE>
MANAGEMENT
Trustees and Officers of the Trust and Portfolio Trust
The Trustees and executive officers of the Trust are listed below. The
Trustees of the Portfolio Trust are identical to the Trustees of the Trust. The
officers of the Portfolio Trust are Messrs. Clayson, Ladd, Wood, Hollis and
Murray, and Mss. Banfield, Chase, Hermann and Kneeland who hold the same office
with the Portfolio Trust as with the Trust. All executive officers of the Trust
and the Portfolio Trust are affiliates of Standish, Ayer & Wood, Inc., the
Portfolio's investment adviser.
<TABLE>
<CAPTION>
Position Held Principal Occupation
Name, Address and Date of Birth With Trust During Past 5 Years
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
D. Barr Clayson*, 7/29/35 Vice President Vice President and Managing
c/o Standish, Ayer & Wood, Inc. and Trustee Director, Standish, Ayer
One Financial Center & Wood, Inc.; President,
Boston, MA 02111 Standish International
Management Company, L.P.
Samuel C. Fleming, 9/30/40 Trustee Chairman of the Board and
c/o Decision Resources, Inc. Chief Executive Officer,
1100 Winter Street Decision Resources, Inc.;
Waltham, MA 02154 through 1989, Senior V.P. Arthur D. Little
Benjamin M. Friedman, 8/5/44 Trustee William Joseph Maier
c/o Harvard University Professor of Political
Cambridge, MA 02138 Economy, Harvard University
John H. Hewitt, 4/11/35 Trustee Trustee, The Peabody
P.O. Box 307 Foundation; Trustee,
So. Woodstock, VT 05071 Visiting Nurse Alliance of
Vermont and New Hampshire
Edward H. Ladd*, 1/3/38 Trustee and Vice President Chairman of the Board
c/o Standish, Ayer & Wood, Inc. and Managing Director,
One Financial Center Standish, Ayer & Wood, Inc.
Boston, MA 02111 since 1990; formerly,
President of Standish, Ayer & Wood, Inc.
Caleb Loring III, 11/14/43 Trustee Trustee, Essex Street
c/o Essex Street Associates Associates (family
P.O. Box 5600 investment trust office);
Beverly Farms, MA 01915 Director, Holyoke Mutual
Insurance Company
Richard S. Wood*, 5/2/54 President and Trustee Vice President, Secretary
c/o Standish, Ayer & Wood, Inc. and Director, Standish,
One Financial Center Ayer & Wood, Inc.;
Boston, MA 02111 Executive Vice President,
Standish International
Management Company, L.P.
Richard C. Doll, 7/8/48 Vice President Vice President and
c/o Standish, Ayer & Wood, Inc. Director, Standish, Ayer
One Financial Center & Wood, Inc.
Boston, MA 02111
James E. Hollis III, 11/21/48 Executive Vice Vice President and
c/o Standish, Ayer & Wood, Inc. President Director, Standish, Ayer
One Financial Center & Wood, Inc.
Boston, MA 02111
18
<PAGE>
Position Held Principal Occupation
Name, Address and Date of Birth With Trust During Past 5 Years
- --------------------------------------------------------------------------------------------------------------------
David W. Murray, 5/5/40 Treasurer and Vice President, Treasurer
c/o Standish, Ayer & Wood, Inc. Secretary and Director, Standish,
One Financial Center Ayer & Wood, Inc.
Boston, MA 02111
Caleb F. Aldrich, 9/20/57 Vice President Vice President and
c/o Standish, Ayer & Wood, Inc. Director, Standish, Ayer
One Financial Center & Wood, Inc.
Boston, MA 02111
Beverly E. Banfield, 7/6/56 Vice President Vice President and
c/o Standish, Ayer & Wood, Inc. Compliance Officer,
One Financial Center Standish, Ayer & Wood,
Boston, MA 02111 Inc.; Assistant Vice
President and Compliance
Officer, Freedom Capital
Management Corp. (1989-1992)
Nicholas S. Battelle, 6/24/42 Vice President Vice President and
c/o Standish, Ayer & Wood, Inc. Director, Standish, Ayer
One Financial Center & Wood, Inc.
Boston, MA 02111
Walter M. Cabot, 1/6/33 Vice President Senior Advisor and
c/o Standish, Ayer & Wood, Inc. Director, Standish, Ayer
One Financial Center & Wood, Inc.; prior to
Boston, MA 02111 1991, President, Harvard
Management Company
David H. Cameron, 11/2/55 Vice President Vice President and
c/o Standish, Ayer & Wood, Inc. Director, Standish, Ayer
One Financial Center & Wood, Inc.
Boston, MA 02111
Karen K. Chandor, 2/13/50 Vice President Vice President and
c/o Standish, Ayer & Wood, Inc. Director, Standish, Ayer
One Financial Center & Wood, Inc.
Boston, MA 02111
Lavinia B. Chase, 6/4/46 Vice President Vice President, Standish,
c/o Standish, Ayer & Wood, Inc. Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Susan B. Coan, 5/1/52 Vice President Vice President, Standish,
c/o Standish, Ayer & Wood, Inc. Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
W. Charles Cook II, 7/16/63 Vice President Vice President, Standish,
c/o Standish, Ayer & Wood, Inc. Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
19
<PAGE>
Position Held Principal Occupation
Name, Address and Date of Birth With Trust During Past 5 Years
- --------------------------------------------------------------------------------------------------------------------
Joseph M. Corrado, 5/13/55 Vice President Vice President and Associate Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Dolores S. Driscoll, 2/17/48 Vice President Vice President and Managing
c/o Standish, Ayer & Wood, Inc. Director, Standish, Ayer
One Financial Center & Wood, Inc.
Boston, MA 02111
Mark A. Flaherty, 4/24/59 Vice President Vice President,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Anne P. Herrmann, 1/26/56 Vice President Mutual Fund Administrator,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Ann S. Higgins, 4/8/35 Vice President Vice President, Standish,
c/o Standish, Ayer & Wood, Inc. Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Denise B. Kneeland, 8/19/51 Vice President Senior Operations Manager,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center since January, 1996; Boston, MA 02111
formerly Vice President, Scudder, Clark, and Stevens
Raymond J. Kubiak, 9/3/57 Vice President Vice President and
c/o Standish, Ayer & Wood, Inc. Director, Standish, Ayer
One Financial Center & Wood, Inc.
Boston, MA 02111
Maria D. Furman, 2/3/54 Vice President Vice President and
c/o Standish, Ayer & Wood, Inc. Director, Standish, Ayer
One Financial Center & Wood, Inc.
Boston, MA 02111
Phillip D. Leonardi, 4/24/62 Vice President Vice President, Standish,
c/o Standish, Ayer & Wood, Inc. Ayer & Wood, Inc. since
One Financial Center November 1993; formerly, Investment Sales,
Boston, MA 02111 Cigna Corporation (1993) and
Travelers Corporation (1984-1993)
Laurence A. Manchester, 5/24/43 Vice President Vice President and
c/o Standish, Ayer & Wood, Inc. Director, Standish, Ayer
One Financial Center & Wood, Inc.
Boston, MA 02111
George W. Noyes, 11/12/44 Vice President President and Managing
c/o Standish, Ayer & Wood, Inc. Director, Standish, Ayer
One Financial Center & Wood, Inc.
Boston, MA 02111
20
<PAGE>
Position Held Principal Occupation
Name, Address and Date of Birth With Trust During Past 5 Years
- --------------------------------------------------------------------------------------------------------------------
Arthur H. Parker, 8/12/35 Vice President Vice President and
c/o Standish, Ayer & Wood, Inc. Director, Standish, Ayer
One Financial Center & Wood, Inc.
Boston, MA 02111
Jennifer A. Pline, 3/8/60 Vice President Vice President, Standish,
c/o Standish, Ayer & Wood, Inc. Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Howard B. Rubin, 10/29/59 Vice President Vice President and
c/o Standish, Ayer & Wood, Inc. Director, Standish, Ayer
One Financial Center & Wood, Inc.
Boston, MA 02111
Michael C. Schoeck, 10/24/55 Vice President Vice President, Standish,
c/o Standish, Ayer & Wood, Inc. Ayer & Wood, Inc. since
One Financial Center August, 1993; formerly,
Boston, MA 02111 Vice President,
Commerzbank, Frankfurt, Germany
Austin C. Smith, 7/25/42 Vice President Vice President and
c/o Standish, Ayer & Wood, Inc. Director, Standish, Ayer
One Financial Center & Wood, Inc.
Boston, MA 02111
Stephen A. Smith, 3/13/49 Vice President Vice President, since
c/o Standish, Ayer & Wood, Inc. November 2, 1993; formerly,
One Financial Center Standish, Ayer & Wood, Inc.
Boston, MA 02111 Consultant Cambridge
David C. Stuehr, 3/1/58 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
James W. Sweeney, 5/15/59 Vice President Vice President and
c/o Standish, Ayer & Wood, Inc. Director, Standish, Ayer
One Financial Center & Wood, Inc.
Boston, MA 02111
Ralph S. Tate, 4/2/47 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center since April, 1990; formerly Vice President,
Boston, MA 02111 Aetna Life & Casualty
Michael W. Thompson, 3/31/56 Vice President Vice President, Standish,
c/o Standish, Ayer & Wood, Inc. Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Christopher Van Alstyne, 3/24/60 Vice President Vice President,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
*Indicates that Trustee is an interested person of the Trust or the Portfolio
Trust for purposes of the 1940 Act.
</TABLE>
21
<PAGE>
Compensation of Trustees and Officers
Each of the Trust and the Portfolio Trust pays no compensation to the
Trustees of the Trust or the Portfolio Trust affiliated with Standish as the
Administrator of the Fund (the "Fund Administrator") or the Adviser,
respectively, or to the Trust's and Portfolio Trust's officers. None of the
Trustees or officers have engaged in any financial transactions (other than the
purchase or redemption of the Fund's shares) with the Trust, the Portfolio Trust
or the Adviser.
The following table sets forth all compensation paid to the Trust's
Trustees as of the Fund's fiscal year ended December 31, 1995:
<TABLE>
<CAPTION>
Pension or Retirement Total Compensation
Aggregate Compensation Benefits Accrued as from Fund and
Name of Trustee from the Fund Part of Fund's Expenses Other Funds in Complex*
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
D. Barr Clayson $0 $0 $0
Richard C. Doll** 0 0 0
Samuel C. Fleming 0 0 41,750
Benjamin M. Friedman 217 0 36,750
John H. Hewitt 191 0 36,750
Edward H. Ladd 191 0 0
Caleb Loring, III 191 0 36,750
Richard S. Wood 0 0 0
* As of the date of this Statement of Additional Information there were
18 funds in the fund complex.
** Mr. Doll resigned as a Trustee effective December 6, 1995.
</TABLE>
- --------------------------------------------------------------------------------
Certain Shareholders
At March 1, 1996, Trustees and officers of the Trust and the Portfolio
Trust as a group beneficially owned (i.e., had voting and/or investment power)
less than 1% of the then outstanding shares of the Fund. At that date, each of
the following persons beneficially owned 5% or more of the then outstanding
shares of the Fund:
Percentage of
Name and Address Outstanding Shares
- --------------------------------------------------------------------------------
The Boston Home 15%
2049 Dorchester Avenue
Dorchester, MA 02124
Bingham Dana & Gould 11%
150 Federal Street
Boston, MA 02110
Shipley Company, Inc. 8%
500 Nickerson Road
Marlborough, MA 01752-4634
Davis Educational Foundation 5%
P.O. Box 600
East Bridgewater, MA 02333
Fletcher Allen Health 5%
111 Colchester Avenue
Burlington, VT 05401
22
<PAGE>
Investment Adviser of the Portfolio Trust
Standish serves as the Adviser to the Portfolio pursuant to a written
investment advisory agreement with the Portfolio Trust. Prior to the close of
business on April 26, 1996, the Adviser managed directly the assets of the Fund
pursuant to an investment advisory agreement. This agreement was terminated by
the Fund on such date subsequent to the approval by the Fund's shareholders on
March 29, 1996 to implement certain changes in the Fund's investment
restrictions which enable the Fund to invest all of its investable assets in the
Portfolio. The Adviser is a Massachusetts corporation organized in 1933 and is
registered under the Investment Advisers Act of 1940.
The following, constituting all of the Directors and all of the
shareholders of the Adviser, are the Adviser's controlling persons: Caleb F.
Aldrich, Nicholas S. Battelle, Walter M. Cabot, Sr., David H. Cameron, Karen K.
Chandor, D. Barr Clayson, Richard C. Doll, Dolores S. Driscoll, Mark A.
Flaherty, Maria D. Furman, James E. Hollis III, Raymond J. Kobiak, Edward H.
Ladd, Laurence A. Manchester, David W. Murray, George W. Noyes, Arthur H.
Parker, Howard B. Rubin, Austin C. Smith, David C. Stuehr, James J. Sweeney,
Ralph S. Tate and Richard S. Wood.
Certain services provided by the Adviser under the advisory agreement are
described in the Prospectus. These services are provided without reimbursement
by the Portfolio for any costs incurred. Under the investment advisory
agreement, the Adviser is paid a fee based upon a percentage of the Portfolio's
average daily net asset value computed as described in the Prospectus. The rate
and time at which the fee is paid and expense limits voluntarily agreed to by
the Adviser are described in the Prospectus. For services to the Fund during the
fiscal year ended December 31, 1993, the Adviser did not impose a portion of its
fee, amounting to $60,610, and received advisory fees of $114,932. For the
fiscal year ended December 31, 1994 and 1995, the Adviser received advisory fees
of $422,731 and $555,164.
23
<PAGE>
Pursuant to the investment advisory agreement, the Portfolio bears expenses
of its operations other than those incurred by the Adviser pursuant to the
investment advisory agreement. Among other expenses, the Portfolio will pay
share pricing expenses; custodian fees and expenses; administration fees; legal
and auditing fees and expenses; expenses of notices and reports to
interest-holders; registration and reporting fees and expenses; and Trustees'
fees and expenses.
Unless terminated as provided below, the investment advisory agreement
continues in full force and effect until April 26, 1998 and for successive
periods of one year thereafter, but only so long as each such continuance is
approved annually (i) by either the Trustees of the Portfolio Trust or by the
"vote of a majority of the outstanding voting securities" of the Portfolio, and,
in either event (ii) by vote of a majority of the Trustees of the Portfolio
Trust who are not parties to the investment advisory agreement or "interested
persons" (as defined in the 1940 Act) of any such party, cast in person at a
meeting called for the purpose of voting on such approval. The investment
advisory agreement may be terminated at any time without the payment of any
penalty by vote of the Trustees of the Portfolio Trust or by the "vote of a
majority of the outstanding voting securities" of the Portfolio or by the
Adviser, on sixty days' written notice to the other parties. The investment
advisory agreement terminates in the event of its assignment as defined in the
1940 Act.
In an attempt to avoid any potential conflict with portfolio transactions
for the Portfolio, the Adviser, the Principal Underwriter, the Trust and the
Portfolio Trust have each adopted extensive restrictions on personal securities
trading by personnel of the Adviser and its affiliates. These restrictions
include: pre-clearance of all personal securities transactions and a prohibition
of purchasing initial public offerings of securities. These restrictions are a
continuation of the basic principle that the interests of the Fund and its
shareholders, and the Portfolio and its investors, come before those of the
Adviser, its affiliates and their employees.
Administrator of the Fund
Standish also serves as the administrator to the Fund (the "Fund
Administrator") pursuant to a written administration agreement with the Trust on
behalf of the Fund. Certain services provided by the Fund Administrator under
the administration agreement are described in the Prospectus. For these
services, the Fund Administrator currently does not receive any additional
compensation. The Trustees of the Trust may, however, determine in the future to
compensate the Fund Administrator for its administrative services. The
administration agreement provides that if the total expenses of the Fund and the
Portfolio in any fiscal year exceed the most restrictive expense limitation
applicable to the Fund in any state in which shares of the Fund are then
qualified for sale, the compensation due the Fund Administrator shall be reduced
by the amount of the excess, by a reduction or refund thereof at the time such
compensation is payable after the end of each calendar month during the fiscal
year, subject to readjustment during the year. Currently, the most restrictive
state expense limitation provision limits the Fund's expenses to 2 1/2% of the
first $30 million of average net assets, 2% of the next $70 million of such net
assets and 1 1/2% of such net assets in excess of $100 million.
24
<PAGE>
The Fund's administration agreement can be terminated by either party on
not more than sixty days' written notice.
Administrator of the Portfolio
IBT Trust Company (Cayman) Ltd., P.O. Box 501, Grand Cayman, Cayman
Islands, BWI, serves as the administrator to the Portfolio (the "Portfolio
Administrator") pursuant to a written administration agreement with the
Portfolio Trust on behalf of the Portfolio. The Portfolio Administrator provides
the Portfolio Trust with office space for managing its affairs, and with certain
clerical services and facilities. For these services, the Portfolio
Administrator currently receives a fee from the Portfolio in the amount of
$7,500 annually.
The Portfolio's administration agreement can be terminated by either party
on not more than sixty days' written notice.
Distributor of the Fund
Standish Fund Distributors, L.P. (the "Principal Underwriter"), an
affiliate of the Adviser, serves as the Trust's exclusive principal underwriter
and holds itself available to receive purchase orders for the Fund's shares. In
that capacity, the Principal Underwriter has been granted the right, as agent of
the Trust, to solicit and accept orders for the purchase of the Fund's shares in
accordance with the terms of the Underwriting Agreement between the Trust and
the Principal Underwriter. Pursuant to the Underwriting Agreement, the Principal
Underwriter has agreed to use its best efforts to obtain orders for the
continuous offering of the Fund's shares. The Principal Underwriter receives no
commissions or other compensation for its services, and has not received any
such amounts in any prior year. The Underwriting Agreement shall continue in
effect with respect to the Fund until two years after its execution and for
successive periods of one year thereafter only if it is approved at least
annually thereafter (i) by a vote of the holders of a majority of the Fund's
outstanding shares or by the Trustees of the Trust or (ii) by a vote of a
majority of the Trustees of the Trust who are not "interested persons" (as
defined by the 1940 Act) of the parties to the Underwriting Agreement, cast in
person at a meeting called for the purpose of voting on such approval. The
Underwriting Agreement will terminate automatically if assigned by either party
thereto and is terminable at any time without penalty by a vote of a majority of
the Trustees of the Trust, a vote of a majority of the Trustees who are not
"interested persons" of the Trust, or by a vote of the holders of a majority of
the Fund's outstanding shares, in any case without payment of any penalty on not
more than 60 days' written notice to the other party. The offices of the
Principal Underwriter are located at One Financial Center, 26th Floor, Boston,
Massachusetts 02111.
25
<PAGE>
REDEMPTION OF SHARES
Detailed information on redemption of shares is included in the Prospectus.
The Trust may suspend the right to redeem Fund shares or postpone the date of
payment upon redemption for more than seven days (i) for any period during which
the New York Stock Exchange is closed (other than customary weekend or holiday
closings) or trading on the exchange is restricted; (ii) for any period during
which an emergency exists as a result of which disposal by the Portfolio of
securities owned by it or determination by the Portfolio of the value of its net
assets is not reasonably practicable; or (iii) for such other periods as the SEC
may permit for the protection of shareholders of the Fund.
The Trust intends to pay in cash for all Fund shares redeemed, but under
certain conditions, the Trust may make payment wholly or partly in portfolio
securities from the Portfolio, in conformity to the applicable rule of the SEC.
Portfolio securities paid upon redemption of Fund shares will be valued at their
then current market value. The Trust, on behalf of each of its series, has
elected to be governed by the provisions of Rule 18f-1 under the 1940 Act which
limits the Fund's obligation to make cash redemption payments to any shareholder
during any 90-day period to the lesser of $250,000 or 1% of the Fund's net asset
value at the beginning of such period. An investor may incur brokerage costs in
converting portfolio securities received upon redemption to cash. The Portfolio
has advised the Trust that the Portfolio will not redeem in-kind except in
circumstances in which the Fund is permitted to redeem in-kind or except in the
event the Fund completely withdraws its interest from the Portfolio.
PORTFOLIO TRANSACTIONS
The Adviser is responsible for placing the Portfolio's portfolio
transactions and will do so in a manner deemed fair and reasonable to the
Portfolio and not according to any formula. The primary consideration in all
portfolio transactions will be prompt execution of orders in an efficient manner
at the most favorable price. In selecting broker-dealers and in negotiating
commissions, the Adviser will consider the firm's reliability, the quality of
its execution services on a continuing basis and its financial condition. When
more than one firm is believed to meet these criteria, preference may be given
to firms which also sell shares of the Fund. In addition, if the Adviser
determines in good faith that the amount of commissions charged by a broker is
reasonable in relation to the value of the brokerage and research services
provided by such broker, the Fund may pay commissions to such broker in an
amount greater than the amount another firm may charge. Research services may
include (i) furnishing advice as to the value of securities, the advisability of
investing in, purchasing or selling securities, and the availability of
securities or purchasers or sellers of securities, (ii) furnishing analyses and
reports concerning issuers, industries, securities, economic factors and trends,
portfolio strategy, and the performance of accounts, and (iii) effecting
securities transactions and performing functions incidental thereto (such as
clearance and settlement). Research services furnished by firms through which
the Portfolio effects its securities transactions may be used by the Adviser in
servicing other accounts; not all of these services may be used by the Adviser
in connection with the Portfolio. The investment advisory fee paid by the
Portfolio under the advisory agreement will not be reduced as a of the Adviser's
receipt of research services.
26
<PAGE>
For the fiscal years ended December 31, 1993, 1994 and 1995, brokerage
commissions paid by the Fund on portfolio transactions totaled $75,896, $287,545
and $416,679.70, respectively. Brokerage commissions of $416,679.70 paid during
the fiscal year ended December 31, 1995 were paid on portfolio transactions
aggregating $298,238,021.71 executed by brokers who provided research and other
statistical and factual information. At December 31, 1995, the Fund did not hold
any securities of its regular brokers or dealers.
The Adviser also places portfolio transactions for other advisory accounts.
The Adviser will seek to allocate portfolio transactions equitably whenever
concurrent decisions are made to purchase or sell securities for the Portfolio
and another advisory account. In some cases, this procedure could have an
adverse effect on the price or the amount of securities available to the
Portfolio. In making such allocations, the main factors considered by the
Adviser will be the respective investment objectives, the relative size of
portfolio holdings of the same or comparable securities, the availability of
cash for investment, the size of investment commitments generally held, and
opinions of the persons responsible for recommending the investment.
DETERMINATION OF NET ASSET VALUE
The Fund's net asset value per share is computed on each day on which the
New York Stock Exchange is open (a "Business Day") as of the close of regular
trading (currently 4:00 p.m. New York City time). Currently the New York Stock
Exchange is not open on weekends, New Year's Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
The net asset value per share is computed by dividing the value of all
securities and other assets of the Fund (substantially all of which will be
represented by the Fund's investment in the Portfolio) less all liabilities by
the number of Fund shares outstanding, and rounding to the nearest cent per
share. Expenses and fees of the Fund are accrued daily and taken into account
for the purpose of determining net asset value.
The value of the Portfolio's net assets (i.e., the value of its securities
and other assets less its liabilities, including expenses payable or accrued) is
determined at the same time and on the same days as the net asset value per
share of the Fund is determined. Each investor in the Portfolio, including the
Fund, may add to or reduce its investment in the Portfolio on each Business Day.
As of 4:00 p.m. (Eastern time) on each Business Day, the value of each
investor's interest in the Portfolio will be determined by multiplying the net
asset value of the Portfolio by the percentage representing that investor's
share of the aggregate beneficial interests in the Portfolio. Any additions or
reductions which are to be effected on that day will then be effected. The
investor's percentage of the aggregate beneficial interests in the Portfolio
will then be recomputed as the percentage equal to the fraction (i) the
numerator of which is the value of such investor's investment in the Portfolio
as of 4:00 p.m. on such day plus or minus, as the case may be, the amount of net
additions to or reductions in the investor's investment in the Portfolio
effected on such day, and (ii) the denominator of which is the aggregate net
asset value of the Portfolio as of 4:00 p.m. on such day plus or minus, as the
case may be, the amount of the net additions to or reductions in the aggregate
investments in the Portfolio by all investors in the Portfolio. The percentage
so determined will then be applied to determine the value of the investor's
interest in the Portfolio as of 4:00 p.m. on the following Business Day.
27
<PAGE>
Portfolio securities are valued at the last sale prices on the exchange or
national securities market on which they are primarily traded. Securities not
listed on an exchange or national securities market, or securities for which
there were no reported transactions, are valued at the last quoted bid prices.
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.
THE FUND AND ITS SHARES
The Fund is an investment series of the 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 of the Trust, the Trustees of the Trust have authority
to issue an unlimited number of shares of beneficial interest, par value $.01
per share, of the Fund. Each share represents an equal proportionate interest in
the Fund with each other share and is entitled to such dividends and
distributions as are declared by the Trustees. Shareholders are not entitled to
any preemptive, conversion or subscription rights. All shares, when issued, will
be fully paid and non-assessable by the Trust. Upon any liquidation of the Fund,
shareholders are entitled to share pro rata in the net assets available for
distribution.
Pursuant to the Declaration, the Trustees may create additional funds by
establishing additional series of shares in the Trust. The establishment of
additional series would not affect the interests of current shareholders in the
Fund. As of the date of this Statement of Additional Information, the Trustees
have established fourteen other series of the Trust that publicly offer their
shares. Pursuant to the Declaration, the Board may establish and issue multiple
classes of shares for each series of the Trust. As of the date of this Statement
of Additional Information, the Trustees do not have any plan to establish
multiple classes of shares for the Fund.
All Fund shares have equal rights with regard to voting, and shareholders
of the Fund have the right to vote as a separate class with respect to matters
as to which their interests are not identical to those of shareholders of other
classes of the Trust, including any change of investment policy requiring the
approval of shareholders.
Under Massachusetts law, shareholders of the Trust could, under certain
circumstances, be held liable for the obligations of the Trust. However, the
Agreement and Declaration of Trust disclaims shareholder liability for acts or
obligations of the Trust and requires that notice of this disclaimer be given in
each agreement, obligation or instrument entered into or executed by the Trust
or a Trustee. The Declaration also provides for indemnification from the assets
of the Trust for all losses and expenses of any Trust shareholder held liable
for the obligations of the Trust. Thus, the risk of a shareholder incurring a
financial loss on account of his or its liability as a shareholder of the Trust
is limited to circumstances in which the Trust would be unable to meet its
obligations. The possibility that these circumstances would occur is remote.
28
<PAGE>
Upon payment of any liability incurred by the Trust, the shareholder paying the
liability will be entitled to reimbursement from the general assets of the
Trust. The Declaration also provides that no series of the Trust is liable for
the obligations of any other series. The Trustees intend to conduct the
operations of the Trust to avoid, to the extent possible, ultimate liability of
shareholders for liabilities of the Trust.
Except as described below, whenever the Trust is requested to vote on a
fundamental policy of or matters pertaining to the Portfolio, the Trust will
hold a meeting of the Fund's shareholders and will cast its vote proportionately
as instructed by the Fund's shareholders. Fund shareholders who do not vote will
not affect the Trust's votes at the Portfolio meeting. The percentage of the
Trust's votes representing Fund shareholders not voting will be voted by the
Trustees of the Trust in the same proportion as the Fund shareholders who do, in
fact, vote. Subject to applicable statutory and regulatory requirements, the
Fund would not request a vote of its shareholders with respect to (a) any
proposal relating to the Portfolio, which proposal, if made with respect to the
Fund, would not require the vote of the shareholders of the Fund, or (b) any
proposal with respect to the Portfolio that is identical in all material
respects to a proposal that has previously been approved by shareholders of the
Fund. Any proposal submitted to holders in the Portfolio, and that is not
required to be voted on by shareholders of the Fund, would nonetheless be voted
on by the Trustees of the Trust.
THE PORTFOLIO AND ITS INVESTORS
The Portfolio is a series of Standish, Ayer & Wood Master Portfolio, a
newly formed trust and, like the Fund, is an open-end management investment
company under the Investment Company Act of 1940, as amended. The Portfolio
Trust was organized as a master trust fund under the laws of the State of New
York on January 18, 1996.
Interests in the Portfolio have no preemptive or conversion rights, and are
fully paid and non-assessable, except as set forth in the Prospectus. The
Portfolio normally will not hold meetings of holders of such interests except as
required under the 1940 Act. The Portfolio would be required to hold a meeting
of holders in the event that at any time less than a majority of its Trustees
holding office had been elected by holders. The Trustees of the Portfolio
continue to hold office until their successors are elected and have qualified.
Holders holding a specified percentage of interests in the Portfolio may call a
meeting of holders in the Portfolio for the purpose of removing any Trustee. A
Trustee of the Portfolio may be removed upon a majority vote of the interests
held by holders in the Portfolio qualified to vote in the election. The 1940 Act
requires the Portfolio to assist its holders in calling such a meeting. Upon
liquidation of the Portfolio, holders in the Portfolio would be entitled to
share pro rata in the net assets of the Portfolio available for distribution to
holders.
Each holder in the Portfolio is entitled to a vote in proportion to its
percentage interest in the Portfolio.
TAXATION
Each series of the Trust, including the Fund, is treated as a separate
entity for accounting and tax purposes. The Fund has qualified and elected to be
treated as a "regulated investment company" ("RIC") under Subchapter M of the
Code and intends to continue to so qualify in the future. As such and by
complying with the applicable provisions of the Code regarding the sources of
its income, the timing of its distributions, and the diversification of its
assets, the Fund will not be subject to Federal income tax on its investment
company taxable income (i.e., all income, after reduction by deductible
expenses, other than its "net capital gain," which is the excess, if any, of its
net long-term capital gain over its net short-term capital loss) and net capital
gain which are distributed to shareholders in accordance with the timing
requirements of the Code.
The Trust anticipates that the Portfolio will be treated as a partnership
for federal income tax purposes. As such, the Portfolio is not subject to
federal income taxation. Instead, the Fund must take into account, in computing
its federal income tax liability, its share of the Portfolio's income, gains,
losses, deductions, credits and tax preference items, without regard to whether
it has received any cash distributions from the Portfolio. Because the Fund
invests its assets in the Portfolio, the Portfolio normally must satisfy the
applicable source of income and diversification requirements in order for the
Fund to satisfy them. The Portfolio will allocate at least annually among its
investors, including the Fund, each investor's distributive share of the
Portfolio's net investment income, net realized capital gains, and any other
items of income, gain, loss, deduction or credit. The Portfolio will make
allocations to the Fund in accordance with the Code and applicable regulations
and will make moneys available for withdrawal at appropriate times and in
sufficient amounts to enable the Fund to satisfy the tax distribution
requirements that apply to the Fund and that must be satisfied in order to avoid
Federal income and/or excise tax on the Fund. For purposes of applying the
requirements of the Code regarding qualification as a RIC, the Fund will be
deemed (i) to own its proportionate share of each of the assets of the Portfolio
and (ii) to be entitled to the gross income of the Portfolio attributable to
such share.
The Fund will be subject to a 4% non-deductible federal excise tax on
certain amounts not distributed (and not treated as having been distributed) on
a timely basis in accordance with annual minimum distribution requirements. The
Fund intends under normal circumstances to avoid liability for such tax by
satisfying such distribution requirements.
The Fund is not subject to Massachusetts corporate excise or franchise
taxes. Provided that the Fund qualifies as a regulated investment company under
the Code, it will also not be required to pay any Massachusetts income tax.
The Fund will not distribute long-term or short-term capital gain realized
in any year to the extent that a capital loss is carried forward from prior
years against such gain. For federal income tax purposes, the Fund is permitted
to carry forward a net capital loss in any year to offset its own net capital
gains, if any, during the eight years following the year of the loss. To the
extent subsequent capital gains are offset by such losses, they would not result
in federal income tax liability to the Fund and, as noted above, would not be
distributed as such to shareholders.
29
<PAGE>
Limitations imposed by the Code on regulated investment companies like the
Fund may restrict the Portfolio's ability to enter into futures, options and
currency forward transactions.
Certain options, futures and forward foreign currency transactions
undertaken by the Portfolio may cause the Portfolio to recognize gains or losses
from marking to market even though the Portfolio's positions have not been sold
or terminated and affect the character as long-term or short-term (or, in the
case of certain currency forwards, options and futures, as ordinary income or
loss) and timing of some capital gains and losses realized by the Portfolio and
allocable to the Fund. Any net mark to market gains may also have to be
distributed by the Fund to satisfy the distribution requirements referred to
above even though no corresponding cash amounts may concurrently be received,
possibly requiring the disposition by the Portfolio of portfolio securities or
borrowing to obtain the necessary cash. Also, certain of the Portfolio's losses
on the Portfolio's transactions involving options, futures or forward contracts
and/or offsetting Portfolio positions may be deferred rather than being taken
into account currently in calculating the Portfolio's taxable income or gain.
Certain of the applicable tax rules may be modified if the Portfolio is eligible
and chooses to make one or more of certain tax elections that may be available.
Because the Fund's income, gains and losses consist primarily of its share of
the income, gains and losses of the Portfolio, which are directly affected by
the provisions described in this paragraph, these transactions may affect the
amount, timing and character of the Fund's distributions to shareholders. The
Portfolio will take into account the special tax rules (including consideration
of available elections) applicable to options, futures or forward contracts in
order to minimize any potential adverse tax consequences.
The Federal income tax rules applicable to interest rate or currency swaps,
caps, floors and collars are unclear in certain respects, and the Portfolio may
be required to account for these instruments under tax rules in a manner that,
under certain circumstances, may limit its transactions in these instruments.
Foreign exchange gains and losses realized by the Portfolio in connection
with certain transactions involving foreign currency-denominated debt
securities, if any, certain foreign currency futures and options, foreign
currency forward contracts, foreign currencies, or payables or receivables
denominated in a foreign currency are subject to Section 988 of the Code, which
generally causes such gains and losses to be treated as ordinary income and
losses and, because the Fund invests in the Portfolio, may affect the amount,
timing and character of Fund distributions to shareholders. Any such
transactions that are not directly related to the Portfolio's investment in
stock or securities, possibly including speculative currency positions or
currency derivatives not used for hedging purposes, may increase the amount of
gain it is deemed to recognize from the sale of certain investments held for
less than three months. The Fund's share of such gain (plus any such gain the
Fund may realize from other sources) is limited under the Code to less than 30%
of the Fund's annual gross income. Such transactions could under future Treasury
regulations produce income not among the types of "qualifying income" from which
the Fund must derive at least 90% of its annual gross income.
30
<PAGE>
The Portfolio may be subject to withholding and other taxes imposed by
foreign countries with respect to its investments in foreign securities. Tax
conventions between certain countries and the U.S. may reduce or eliminate such
taxes. Investors in the Fund would be entitled to claim U.S. foreign tax credits
or deductions with respect to such taxes, subject to certain provisions and
limitations contained in the Code, only if more than 50% of the value of the
Fund's total assets at the close of any taxable year were to consist of stock or
securities of foreign corporations and the Fund were to file an election with
the Internal Revenue Service. Because the investments of the Portfolio are such
that the Fund generally does not expect to meet this 50% requirement,
shareholders of the Fund generally will not directly take into account the
foreign taxes, if any, paid by the Portfolio and allocable to the Fund, and will
generally not be entitled to any related tax deductions or credits. Such taxes
will reduce the amounts the Fund would otherwise have available to distribute.
If the Portfolio acquires stock in certain non-U.S. corporations that
receive at least 75% of their annual gross income from passive sources (such as
interest, dividends, rents, royalties or capital gain) or hold at least 50% of
their assets in investments producing such passive income ("passive foreign
investment companies"), the Fund could be subject to Federal income tax and
additional interest charges on its allocable portion of "excess distributions"
received from such companies or gain from the sale of stock in such companies,
even if all income or gain actually allocated to the Fund is timely distributed
to its shareholders. The Fund would not be able to pass through to its
shareholders any credit or deduction for such a tax. Certain elections may, if
available, ameliorate these adverse tax consequences, but any such election
would require the Fund to recognize taxable income or gain without the
concurrent receipt of cash. The Portfolio may limit and/or manage its stock
holdings in passive foreign investment companies to minimize the Fund's tax
liability or maximize its return from these investments.
Distributions from the Fund's current or accumulated earnings and profits
("E&P"), as computed for Federal income tax purposes, will be taxable as
described in the Fund's Prospectus whether taken in shares or in cash.
Distributions, if any, in excess of E&P will constitute a return of capital,
which will first reduce an investor's tax basis in Fund shares and thereafter
(after such basis is reduced to zero) will generally give rise to capital gains.
Shareholders electing to receive distributions in the form of additional shares
will have a cost basis for federal income tax purposes in each share so received
equal to the amount of cash they would have received had they elected to receive
the distributions in cash, divided by the number of shares received.
For purposes of the dividends received deduction available to corporations,
dividends received by the Portfolio and allocable to the Fund, if any, from U.S.
domestic corporations in respect of the stock of such corporations held by the
Portfolio, for U.S. Federal income tax purposes, for at least a minimum holding
period, generally 46 days, and distributed and designated by the Fund may be
treated as qualifying dividends. Corporate shareholders must meet the minimum
holding period requirement referred to above with respect to their shares of the
31
<PAGE>
Fund in order to qualify for the deduction and, if they borrow to acquire such
shares, may be denied a portion of the dividends received deduction. The entire
qualifying dividend, including the otherwise deductible amount, will be included
in determining the excess (if any) of a corporate shareholder's adjusted current
earnings over its alternative minimum taxable income, which may increase its
alternative minimum tax liability. Additionally, any corporate shareholder
should consult its tax adviser regarding the possibility that its basis in its
shares may be reduced, for Federal income tax purposes, by reason of
"extraordinary dividends" received with respect to the shares, for the purpose
of computing its gain or loss on redemption or other disposition of the shares.
At the time of an investor's purchase of Fund shares, a portion of the
purchase price is often attributable to undistributed net investment income
and/or realized or unrealized appreciation in the Fund's share of the
Portfolio's portfolio. Consequently, subsequent distributions by the Fund from
such income and/or appreciation may be taxable to such investor even if the net
asset value of the investor's shares is, as a result of the distributions,
reduced below the investor's cost for such shares, and the distributions in
reality represent a return of a portion of the purchase price.
Upon a redemption (including a repurchase) of shares of the Fund, a
shareholder may realize a taxable gain or loss, depending upon the difference
between the redemption proceeds and the shareholder's tax basis in his shares.
Such gain or loss will be treated as capital gain or loss if the shares are
capital assets in the shareholder's hands and will be long-term or short-term,
depending upon the shareholder's tax holding period for the shares. Any loss
realized on a redemption may be disallowed to the extent the shares disposed of
are replaced with other shares of the Fund within a period of 61 days beginning
30 days before and ending 30 days after the shares are disposed of, such as
pursuant to automatic dividend reinvestments. In such a case, the basis of the
shares acquired will be adjusted to reflect the disallowed loss. Any loss
realized upon the redemption of shares with a tax holding period of six months
or less will be treated as a long-term capital loss to the extent of any amounts
treated as distributions of long-term capital gain with respect to such shares.
Different tax treatment, including penalties on certain excess
contributions and deferrals, certain pre-retirement and post-retirement
distributions and certain prohibited transactions, is accorded to accounts
maintained as qualified retirement plans. Shareholders should consult their tax
advisers for more information.
The foregoing discussion relates solely to U.S. Federal income tax law as
applicable to U.S. persons (i.e., U.S. citizens or residents and U.S. domestic
corporations, partnerships, trusts or estates) subject to tax under such law.
The discussion does not address special tax rules applicable to certain classes
of investors, such as tax-exempt entities, insurance companies, and financial
institutions. Dividends, capital gain distributions, and ownership of or gains
realized on the redemption (including an exchange) of Fund shares may also be
subject to state and local taxes. Shareholders should consult their own tax
advisers as to the Federal, state or local tax consequences of ownership of
shares of, and receipt of distributions from, the Fund in their particular
circumstances.
32
<PAGE>
Non-U.S. investors not engaged in a U.S. trade or business with which their
investment in the Fund is effectively connected will be subject to U.S. Federal
income tax treatment that is different from that described above. These
investors may be subject to nonresident alien withholding tax at the rate of 30%
(or a lower rate under an applicable tax treaty) on amounts treated as ordinary
dividends from the Fund and, unless an effective IRS Form W-8 or authorized
substitute is on file, to 31% backup withholding on certain other payments from
the Fund. Non-U.S. investors should consult their tax advisers regarding such
treatment and the application of foreign taxes to an investment in the Fund.
ADDITIONAL INFORMATION
The Fund's Prospectus and this Statement of Additional Information omit
certain information contained in the registration statement filed with the SEC,
which may be obtained from the SEC's principal office at 450 Fifth Street, N.W.,
Washington, D.C. 20549, upon payment of the fee prescribed by the rules and
regulations promulgated by the Commission.
EXPERTS AND FINANCIAL STATEMENTS
The Fund's financial statements for the fiscal years ended December 31,
1993, 1994 and 1995 included in this Statement of Additional Information have
been audited by Coopers & Lybrand L.L.P., independent accountants, as set forth
in its report appearing elsewhere herein, and have been so included in reliance
upon the authority of the report of such auditors as experts in accounting and
auditing. The financial highlights of the Fund for the fiscal year ended
December 31, 1992 and for the period from January 2, 1991 (commencement of
operations) through December 31, 1991 were audited by Deloitte & Touche LLP,
independent auditors, and have been similarly included in reliance upon the
expertise of that firm. Coopers & Lybrand L.L.P., independent accountants, will
audit the Fund's financial statements for the fiscal year ending December 31,
1996. Coopers & Lybrand, an affiliate of Coopers & Lybrand L.L.P., will audit
the Portfolio's financial statements for the fiscal year ending December 31,
1996.
33
<PAGE>
Standish, Ayer & Wood Investment Trust
Standish Equity Fund Series
Financial Statements for the Year Ended
December 31, 1995
1
<PAGE>
Standish, Ayer & Wood Investment Trust
Chairman's Message
January 29, 1996
Dear Standish, Ayer & Wood Investment Trust Shareholder:
I am pleased to have an opportunity to review the major developments at
Standish, Ayer & Wood during this past year as they relate to the activities of
the Investment Trust. The major news for our clients in 1995 was the spectacular
performance of the U.S. investment markets. While we would, of course, like to
claim credit for producing the full extent of these splendid returns, the
reality is obvious: The markets themselves are beyond our control. For the year
as a whole, U.S. stocks, as represented by the Standard and Poor's 500 Index,
produced a total return of 37.6%, and higher grade intermediate-term bonds, as
represented by the Lehman Brothers Aggregate Index, provided a total return of
18.5%. Nearly as surprising, stock and bond prices marched steadily upward
throughout the year, a persistent and almost uninterrupted advance.
Even after the subdued markets of 1994, neither we nor most other investment
managers expected 1995 to be anywhere near as good as it turned out to be. In
this context, we are generally pleased by our investment performance. In most
asset classes, we kept pace with or modestly exceeded market returns. We adhered
to our established investment philosophies, which are designed to add reasonably
consistent increments of value. Our clients seem to be pleased by our efforts as
we continue to have very little client turnover.
As a firm, we have registered moderate growth during the year. Reflecting some
flow of new clients as well as market appreciation, our clients' assets under
management at the end of 1995 totalled $29.4 billion, an increase from $24.4
billion at the end of 1994. We are particularly pleased by the growth in new
assets managed for insurance companies and by the increases in assets of both
large capitalization and small capitalization U.S. common stocks.
The asset class of greatest disappointment in 1995 was international equities.
Not only did the asset class continue to provide subpar returns, but our
portfolios underperformed the international equity markets. These results
reflect judgments early in 1995 to hedge a portion of the currency exposure back
to dollars and to have a moderate stake in emerging markets. While we believe we
have rectified those problems, we are not satisfied with the results and are
working vigorously to improve future performance. We are also counseling our
clients not to lose faith in the international equity asset class despite its
recent disappointing returns.
The figure for total Standish assets under management includes about $1.6
billion managed in conjunction with Standish International Management Company,
L.P. (SIMCO), our affiliate that manages overseas assets for domestic clients
and U.S. assets for overseas clients. It also includes $3.9 billion in the
Standish Investment Trust, our mutual fund organization. In addition, the asset
total reflects an increase over the last few years in the assets we manage in
private, non-mutual fund vehicles.
We introduced two new mutual funds at mid-year 1995, namely the Standish Fixed
Income Fund II (which is designed to parallel the Standish Fixed Income Fund but
exclude the purchase of both nondollar bonds and below-investment-grade
securities), and the Standish Controlled Maturity Fund (which is designed for
investors who wish less volatility and interest rate risk than traditional
intermediate-maturity bonds).
At the beginning of 1996, we introduced two additional mutual funds, the
Standish Tax-Sensitive Equity Fund and the Standish Small Cap Tax-Sensitive
Equity Fund. At Standish we have noted for some time the adverse impact for
taxable investors of high portfolio turnover, which triggers capital gains,
possibly including short-term gains that may result in an even greater tax
liability for investors. We believe there is a major opportunity through both
separate account management and these funds to improve aftertax returns by
limiting the portfolio turnover and managing capital gains.
2
<PAGE>
During 1995, Standish acquired all remaining interests in the business of the
joint venture between Consolidated Investment Corp. (CIC) and Standish, entered
into over seven years ago. Consolidated had been formed by Trigon (previously
Blue Cross/Blue Shield of Virginia) to manage shorter-term taxable and tax
exempt fixed income portfolios. We and Trigon agreed that it was best to have
this unit operating under one owner.
Standish continues to be proud of its structure as an independent management
firm with ownership in the hands of investment professionals active in the
business. There were no changes during 1995 either in corporate structure or in
the people who own the enterprise.
We appreciate the opportunity to serve you, and we remain confident that we have
the resources and the organization to do a superior job. We will be working hard
to fulfill your expectations in 1996.
Sincerely yours,
Edward H. Ladd
Chairman
3
<PAGE>
Standish, Ayer & Wood Investment Trust
Standish Equity Fund Series
Management Discussion
Calendar 1995 was an excellent period for U.S. common stocks and The Standish
Equity Fund fully participated in the year's gains. For the 12 month period
ending December 31, 1995, the Fund enjoyed a total return of 37.6%, matching the
return for the S&P 500 for the period.
This strong absolute result was derived from several sources. First, it is our
policy to manage the account with minimal cash reserves. This meant that we
experienced only a limited amount of performance "drag" from cash balances held
during the year. Second, our focus is on stock selection across a broadly
diversified portfolio. During the year, our focus on finding companies with
superior underlying growth characteristics at attractive valuations worked well.
In a year like 1995 when market leadership changed dramatically during the year
(importantly from Technology related issues in the first half to Consumer Stable
and Defensive issues in the second half), we were not dependent on getting the
market's "fashion" right. Within groups, we saw particularly good stock
selection results in Finance (a sector that performed well all year on an
absolute basis), Technology, and Transportation.
For the market as a whole, capitalization was an important element of
performance attribution during the year. Larger capitalization stocks dominated
returns for the year, with the S&P 500 enjoying a total return that was over 9%
higher than that realized by the Frank Russell 2000 index. For our portfolio,
which tends to have a median capitalization that is half of that of the S&P 500,
this capitalization bias was a negative that had to be overcome with above
average stocks selection.
For the Fund itself, one important business event is highlighted in the footnote
on page 14 of the Financial Statements. During the year a financial institution
that was the largest single shareholder in the Fund determined that it wanted to
move to a position of direct ownership of securities in a portfolio managed by
Standish. Given out desire to minimize the transactions costs involved with this
change, we received permission from the Securities and Exchange Commission to
execute a transfer in kind of securities out of the Fund to this new separately
managed account at year end. We are pleased that we were able to accomplish this
important transition with minimal impact on our remaining shareholders.
Looking forward to 1996, we continue to pursue our company focused analysis and
see nothing in the current environment that lessens our confidence in the
investment disciplines that have driven the strong results over the first five
years of the Standish Equity Fund. The environment for U.S. equities continues
to be positive, with continued (albeit slowing) economic growth and a positive
interest rate and inflation environment. We expect 1996 to be a good year and
look forward to reporting to you on the results of the Fund as the year
progresses.
Ralph S. Tate David H. Cameron
4
<PAGE>
Standish, Ayer & Wood Investment Trust
Standish Equity Fund Series
Comparison of Change in Value of $100,000 Investment in
Standish Equity Fund and the S&P 500 Index
The following is a description of the graphical chart omitted from electronic
format:
This line chart shows the cumulative performance of the Standish Equity Fund
compared with the S&P 500 Index for the period January 2, 1991 to December 31,
1995, based upon a $100,000 investment. Also included are the average annual
total returns for one year, five year, and since inception.
5
<PAGE>
<TABLE>
<CAPTION>
Standish, Ayer & Wood Investment Trust
Standish Equity Fund Series
Portfolio of Investments
December 31, 1995
Value
Security Shares (Note 1A)
- -------------------------------------------------------------------------------- -------------- --------------------
Stocks-97.1%
- --------------------------------------------------------------------------------
Basic Industries-10.3%
- --------------------------------------------------------------------------------
<S> <C> <C>
Alcoa Corp. 22,100 $1,168,538
Burlington Northern Santa Fe Corp. 10,000 780,000
Carpenter Technology Corp. 9,600 394,800
Eastman Chemical Co. 17,500 1,095,938
Illinois Central Corp. 23,200 890,300
Phelps Dodge Corp. 16,700 1,039,575
Union Carbide Corp. 34,000 1,275,000
Westvaco Corp. 26,450 733,987
Weyerhaeuser Co. 23,800 1,029,350
Willamette Industries Corp. 13,100 736,875
--------------------
$9,144,363
--------------------
Capital Goods/Technology-24.6%
- --------------------------------------------------------------------------------
Allied Signal Inc. 17,900 $850,250
Applied Materials Inc. 29,300 1,153,688
Avery-Dennison Corp. 25,200 1,263,150
Compaq Computer Corp. * 11,400 547,200
Computer Associates International Corp. 18,350 1,043,656
Dover Corp. 33,600 1,239,000
General Electric Co. 23,900 1,720,800
Harnischfeger Industries Inc. 46,100 1,532,824
Hewlett-Packard Co. 9,900 829,125
International Business Machine Inc. 12,000 1,101,000
Johnson Controls Corp. 16,200 1,113,750
KLA Instruments Corp. 16,100 419,605
Komag Inc. * 8,000 369,000
McDonnell Douglas Corp. 9,900 910,800
Parker Hannifin Corp. 29,100 996,675
Rockwell International Corp. 26,400 1,395,900
Seagate Technology Inc. * 14,600 693,500
Sun Microsystems Corp. 12,900 588,563
Texas Instruments Inc. 11,500 595,125
Textron Inc. 11,200 756,000
United Technologies Corp. 22,200 2,106,225
Varian Associates Inc. 12,600 601,650
--------------------
$21,827,486
--------------------
Consumer Cyclical-8.3%
- --------------------------------------------------------------------------------
AMR Corp. * 5,900 $438,074
Delta Airlines Inc. 12,700 938,214
Oakwood Homes Corp. 13,100 502,713
Value
6
<PAGE>
Portfolio of Investments
(continued)
Value
Security Shares (Note 1A)
- -------------------------------------------------------------------------------- -------------- --------------------
Consumer Cyclical-(Continued)
- --------------------------------------------------------------------------------
Pier 1 Imports Inc. 73,100 831,513
Ross Stores Inc. 43,800 837,675
Sears Roebuck & Co. 40,100 1,563,900
UAL Inc. * 7,300 1,303,050
Waban Inc. * 47,700 894,374
--------------------
$7,309,513
--------------------
Consumer Stable-19.8%
- --------------------------------------------------------------------------------
Bristol-Myers Squibb Inc. 33,200 $2,851,050
Carnival Corp. 58,500 1,425,937
IBP Inc. 6,500 328,250
Jones Apparel Group Inc. * 23,800 937,124
Omnicom Group 29,900 1,113,775
Philip Morris Co. 26,700 2,416,350
Premark International Inc. 27,900 1,412,439
Robert Half International Inc. * 9,800 410,374
Safeway Stores * 25,000 1,287,500
Schering Plough Corp. 48,000 2,628,000
Smithkline Beecham Corp. 25,100 1,393,050
Wendy's International Inc. 62,600 1,330,250
--------------------
$17,534,099
--------------------
Energy-9.0%
- --------------------------------------------------------------------------------
Amoco Corp. 35,564 $2,556,163
British Petroleum Corp. 26,755 2,732,386
Mobil Corp. 24,200 2,710,400
--------------------
$7,998,949
--------------------
Interest Sensitive-25.1%
- --------------------------------------------------------------------------------
Allstate Corp. 26,682 $1,097,297
American Bankers Insurance Group 23,200 904,800
American Financial Group Inc. 14,300 437,937
Ameritech Corp. 33,800 1,994,200
Bank Of Boston Corp. 24,900 1,151,624
BankAmerica Corp. 25,100 1,625,226
Bay Apartment Communities Inc. 19,300 468,025
Cigna Corp. 8,800 908,600
CMS Energy Corp. 28,500 851,438
Crestar Financial Corp. 7,900 467,087
DQE Inc. 21,750 668,813
FPL Group Inc. 18,000 834,750
First Union Corp. 21,800 1,212,626
Macerich Company 36,100 722,000
Value
7
<PAGE>
Portfolio of Investments
(continued)
Value
Security Shares (Note 1A)
- -------------------------------------------------------------------------------- -------------- --------------------
Interest Sensitive-(Continued)
- --------------------------------------------------------------------------------
Merry Land & Investment Co. 37,100 876,487
Nationsbank Corp. 19,000 1,322,876
Northern Trust Co. 17,800 996,800
Old Republic International Corp. 11,900 422,450
Peco Energy Co. 30,700 924,837
Reliastar Financial Corp. 35,600 1,579,750
Travelers Group Inc. 17,600 1,106,600
Unicom Corp. 49,200 1,611,300
--------------------
$22,185,523
--------------------
Total Stocks $85,999,933
--------------------
(identified cost $75,625,915)
Principal Value
Short Term Obligations-4.7% Amount (Note 1A)
- -------------------------------------------------------------------------------- ----------------- --------------------
Repurchase Agreement-4.3%
- --------------------------------------------------------------------------------
Prudential-Bache repurchase agreement
dated 12/29/95, 5.39% due 1/2/96 to pay
$3,830,569 (Collateralized by Federal National Mortgage Association, 0%, due
2/1/23, market value $964,320 and Federal Home Loan Mortgage Corp., 6.96%, due
1/1/20,
market value $2,941,112) $3,828,849 $3,828,849
--------------------
U.S. Government Securities-0.4% Rate ** Maturity
- --------------------------------------------------------------------------------
U.S. Treasury Bills *** 5.15 5/16/96 $350,000 $343,476
--------------------
Total Short Term Obligations $4,172,325
--------------------
(identified cost $4,171,188)
Total Investments-101.8% $90,172,258
--------------------
(identified cost $79,797,103)
Other assets, less liabilities-(1.8%) ($1,639,875)
--------------------
Net Assets- 100% $88,532,383
====================
* Non-income producing security
** Rate noted is yield to maturity (unaudited)
*** Denotes all or part of a security pledged as a margin deposit. (Note 6)
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
Standish, Ayer & Wood Investment Trust
Standish Equity Fund Series
Statement of Assets and Liabilities
December 31, 1995
Assets
<S> <C> <C>
Investments, at value (Note 1A) (identified cost, $79,797,103) $90,172,258
Cash 7,060
Receivable for investments sold 3,933,886
Receivable for Fund shares sold 20,000
Interest and dividends receivable 333,904
Receivable for daily variation margin on financial futures contracts 2,525
Other assets 879
----------------
Total assets $94,470,512
Liabilities
Distribution payable $328,911
Payable for investments purchased 4,112,823
Payable for fund shares redeemed 1,271,110
Payable for premium on purchased options 16,548
Accrued investment advisory fee (Note 2) 164,849
Accrued trustee fees (Note 2) 1,379
Accrued expenses and other liabilities 42,509
-------------
Total liabilities $5,938,129
----------------
Net Assets $88,532,383
================
Net Assets consist of
Paid-in capital $75,690,282
Distributions in excess of net investment income ($20,724)
Accumulated undistributed net realized gain (loss) 2,485,145
Net unrealized appreciation (depreciation) 10,377,680
----------------
Total $88,532,383
================
Shares of beneficial interest outstanding 2,543,181
================
Net asset value, offering price, and redemption price per share $34.81
================
(Net assets/Shares outstanding)
9
<PAGE>
Standish, Ayer & Wood Investment Trust
Standish Equity Fund Series
Statement of Operations
Year Ended December 31, 1995
Investment income
Dividend income $2,587,046
Interest income 354,705
----------------
Total income $2,941,751
Expenses
Investment advisory fee (Note 2) $555,164
Trustee fees (Note 2) 4,697
Accounting, custody and transfer agent fees 117,223
Registration costs 29,675
Audit services 26,227
Legal services 3,328
Insurance Expense 2,468
Amortization of organization expense (Note 1E) 2,059
Miscellaneous 4,800
----------------
Total expenses 745,641
----------------
Net investment income $2,196,110
Realized and unrealized gain (loss)
Net realized gain (loss)
Investment securities $19,911,072
Written options 229,040
Financial futures 1,424,593
----------------
Net realized gain (loss) $21,564,705
Change in net unrealized appreciation (depreciation)
Investment securities $10,308,586
Written options (10,860)
Financial futures (68,700)
----------------
Change in net unrealized appreciation (depreciation) 10,229,026
----------------
Net gain (loss) $31,793,731
----------------
Net increase (decrease) in net assets from operations $33,989,841
================
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
Standish, Ayer & Wood Investment Trust
Standish Equity Fund Series
Statement of Changes in Net Assets
Year Ended December 31,
-------------------------------------
Increase (decrease) in Net Assets 1995 1994
----------------- -----------------
<S> <C> <C>
From operations
Net investment income $2,196,110 $1,305,815
Net realized gain (loss) 21,564,705 732,664
Change in net unrealized appreciation (depreciation) 10,229,026 (5,631,004)
----------------- -----------------
Net increase (decrease) in net assets from operations $33,989,841 ($3,592,525)
----------------- -----------------
Distributions to shareholders
From net investment income ($2,203,103) ($1,278,182)
From realized capital gains (8,605,084) (1,795,950)
----------------- -----------------
Total distributions to shareholders ($10,808,187) ($3,074,132)
----------------- -----------------
Fund share (principal) transactions (Note 4)
Net proceeds from sale of shares $32,648,683 $33,714,612
Net asset value of shares issued to shareholders in
payment of distributions declared 10,246,215 2,827,543
Cost of shares redeemed (64,134,926) (16,200,955)
----------------- -----------------
Increase (decrease) in net assets from Fund share transactions ($21,240,028) $20,341,200
----------------- -----------------
Net increase (decrease) in net assets $1,941,626 $13,674,543
Net assets
At beginning of period 86,590,757 72,916,214
----------------- -----------------
At end of period (including distributions in excess of net income
of $20,724 and undistributed net investment income of $27,644
at December 31, 1995 and 1994, respectively) $88,532,383 $86,590,757
================= =================
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
Standish, Ayer & Wood Investment Trust
Standish Equity Fund Series
Financial Highlights
Per share data (for a share outstanding Year Ended December 31,
------------------------------------------------------------------
throughout each period) 1995 1994 1993 1992 * 1991 *,+
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net asset value - beginning of period $28.66 $30.89 $26.28 $25.66 $20.00
----------- ----------- ----------- ----------- -----------
Income from investment operations
Net investment income ** $0.76 $0.45 $0.50 $0.56 $0.46
Net realized and unrealized gain (loss) 9.94 (1.62) 5.57 1.81 6.17
----------- ----------- ----------- ----------- -----------
Total from investment operations $10.70 ($1.17) $6.07 $2.37 $6.63
----------- ----------- ----------- ----------- -----------
Less distributions declared to shareholders
From net investment income (0.78) (0.44) (0.47) (0.54) (0.35)
From realized gain (3.77) (0.62) (0.99) (1.19) (0.62)
From paid-in capital - - - (0.02) -
----------- ----------- ----------- ----------- -----------
Total distributions declared to shareholders ($4.55) ($1.06) ($1.46) ($1.75) ($0.97)
----------- ----------- ----------- ----------- -----------
Net asset value - end of period $34.81 $28.66 $30.89 $26.28 $25.66
=========== =========== =========== =========== ===========
Total return 37.55% -3.78% 20.79% 9.52% 33.45% t
Ratios (to average net assets)/Supplemental Data
Expenses ** 0.69% 0.70% 0.80% 0.00% 1.00% t
Net investment income ** 2.05% 1.55% 1.29% 2.52% 1.92% t
Portfolio turnover 159% 182% 192% 92% 86%
Net assets at end of period (000's omitted) $88,532 $86,591 $72,916 $14,679 $7,498
** For the three year period ended December 31, 1993, the investment adviser
did not impose a portion of its advisory fee. If this voluntary reduction
had not been undertaken, the net investment income per share and the
ratios would have been:
Net investment income per share $0.47 $0.34 $0.23
Ratios (to average net assets):
Expenses 0.97% 1.00% 1.99%
Net investment income 1.12% 1.52% 0.93%
t Computed on an annualized basis.
* Audited by other auditors
+ For the period from January 2, 1991 (start of business) to December 31, 1991.
</TABLE>
12
<PAGE>
Standish, Ayer & Wood Investment Trust
Standish Equity Fund Series
Notes to Financial Statements
(1).....Significant Accounting Policies:
Standish, Ayer & Wood Investment Trust (Trust) is organized as a
Massachusetts business trust and is registered under the Investment
Company Act of 1940, as amended, as an open-end, management investment
company. Standish Equity Fund Series (Fund) is a separate diversified
investment series of the Trust.
The following is a summary of significant accounting policies followed
by the Fund in the preparation of the financial statements. The
preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts and disclosures in the
financial statements. Actual results could differ from those estimates.
A...Investment security valuations--
Securities for which quotations are readily available are valued at the
last sale price, or if no sale, at the closing bid price in the
principal market in which such securities are normally traded.
Securities (including restricted securities) for which quotations are
not readily available are valued primarily using dealer-supplied
valuations or at their fair value as determined in good faith under
consistently applied procedures under the general supervision of the
Board of Trustees.
Short term instruments with less than sixty-one days remaining to
maturity when acquired by the Fund are valued on an amortized cost
basis. If the Fund acquires a short term instrument with more than
sixty days remaining to its maturity, it is valued at current market
value until the sixtieth day prior to maturity and will then be valued
at amortized cost based upon the value on such date unless the trustees
determine during such sixty-day period that amortized cost does not
represent fair value.
B...Repurchase agreements--
It is the policy of the Fund to require the custodian bank to take
possession, to have legally segregated in the Federal Reserve Book
Entry System, or to have segregated within the custodian bank's vault,
all securities held as collateral in support of repurchase agreement
investments. Additionally, procedures have been established by the Fund
to monitor on a daily basis, the market value of the repurchase
agreement's underlying investments to ensure the existence of a proper
level of collateral.
C...Securities transaction and income--
Securities transactions are recorded as of the trade date. Interest
income is determined on the basis of interest accrued. Dividend income
is recorded on the ex-dividend date. Realized gains and losses from
securities sold are recorded on the identified cost basis.
D...Federal taxes--
As a qualified regulated investment company under Subchapter M of the
Internal Revenue Code the Fund is not subject to income taxes to the
extent that it distributes all of its taxable income for its fiscal
year.
E...Deferred organization expense--
Costs incurred by the Fund in connection with its organization and
initial registration were amortized, on a straight-line basis, through
December 1995.
F...Distributions to shareholders--
Distributions to shareholders are recorded on the ex-dividend date.
Income and capital gain distributions are determined in accordance with
income tax regulations which may differ from generally accepted
accounting principles. These differences are primarily due to differing
treatments for futures and options transactions. Permanent book and tax
basis differences relating to shareholder distributions will result in
reclassifications to paid-in capital.
13
<PAGE>
(2) ....Investment Advisory Fee:
The investment advisory fee paid to Standish, Ayer & Wood, Inc. (SA&W)
for overall investment advisory and administrative services, and
general office facilities, is paid quarterly at the annual rate of
0.50% of the Fund's average daily net assets. The Fund pays no
compensation directly to its trustees who are affiliated with the
investment adviser or to its officers, all of whom receive remuneration
for their services to the Fund from the investment adviser. Certain of
the trustees and officers of the Trust are directors or officers of
SA&W.
(3).....Purchases and Sales of Investments:
Purchases and sales of investments, other than purchased option
transactions and short-term obligations, were as follows:
<TABLE>
<CAPTION>
Purchases Sales
----------------- ------------------
<S> <C> <C>
U.S. government securities $1,694,802 $1,618,039
================= ==================
Investments (non-U.S. government securities) $159,001,718 $186,796,331
================= ==================
</TABLE>
(4).....Shares of Beneficial Interest:
<TABLE>
<CAPTION>
The Declaration of Trust permits the trustees to issue an unlimited
number of full and fractional shares of beneficial interest having a
par value of one cent per share. Transactions in Fund shares were as
follows:
Year Ended December 31,
----------------------------------
1995 1994
---------------- ----------------
<S> <C> <C>
Shares sold 932,595 1,096,060
Shares issued to shareholders in payment of distributions declared 294,939 97,860
Shares redeemed (1,705,536) (533,095)
---------------- ----------------
Net increase (decrease) (478,002) 660,825
================ ================
</TABLE>
During the year, a major investor in the Fund redeemed its shares in-kind,
receiving from the Fund $52,313,910 in securities that had been held by the
Fund. The financial statements reflect a realized gain of $9,970,933. For tax
purposes, this gain is not recognized by the Fund. Through this redemption such
investor transferred its investments in the Fund to a separate account, for
which Standish, Ayer & Wood, Inc. serves as the investment adviser. The
redemption transaction was effected pursuant to an exemption order issued by the
Securities and Exchange Commission.
(5).....Federal Income Tax Basis of Investment Securities:
The cost and unrealized appreciation in value of the investment
securities owned at December 31, 1995, as computed on a federal income
tax basis, are as follows:
Aggregate Cost $79,905,620
=====================
Gross unrealized appreciation $11,424,742
Gross unrealized depreciation (1,158,104)
--------------------
Net unrealized appreciation $10,266,638
====================
(6) Financial Instruments:
In general, the following instruments are used for hedging purposes as
described below. However, these instruments may also be used to enhance
potential gain in circumstances where hedging is not involved. The
nature, risks and objectives of these investments are set forth more
fully in the Fund's Prospectus and Statement of Additional Information.
The Fund trades the following financial instruments with off-balance
sheet risk:
14
<PAGE>
Options--
Call and put options give the holder the right to purchase or sell,
respectively, a security or currency at a specified price on or before
a certain date. The Fund uses options to hedge against risks of market
exposure and changes in securities prices and foreign currencies, as
well as to enhance returns. Options, both held and written by the Fund,
are reflected in the accompanying Statement of Assets and Liabilities
at market value. Premiums received from writing options which expire
are treated as realized gains. Premiums received from writing options
which are exercised or are closed are added to or offset against the
proceeds or amount paid on the transaction to determine the realized
gain or loss. If a put option written by the Fund is exercised, the
premium reduces the cost basis of the securities purchased by the Fund.
The Fund, as writer of an option, has no control over whether the
underlying securities may be sold (call) or purchased (put) and as a
result bears the market risk of an unfavorable change in the price of
the security underlying the written option. A summary of such
transactions for the year ended December 31, 1995 is as follows:
Written Call Option Transactions
- --------------------------------------------------------------------------------
Number of
Contracts
(000 Omitted) Premiums
---------------- ---------------
Outstanding, beginning of year 126 $15,823
Options written 2,730 549,935
Options exercised (343) (445,053)
Options expired (454) (75,433)
Options closed (2,059) (45,272)
---------------- ---------------
Outstanding, end of year 0 0
================ ===============
Futures Contracts--
The Fund may enter into financial futures contracts for the delayed
sale or delivery of securities or contracts based on financial indices
at a fixed price on a future date. The Fund is required to deposit
either in cash or securities an amount equal to a certain percentage of
the contract amount. Subsequent payments are made or received by the
Fund each day, dependent on the daily fluctuations in the value of the
underlying security, and are recorded for financial statement purposes
as unrealized gains or losses by the Fund. There are several risks in
connection with the use of futures contracts as a hedging device. The
change in value of futures contracts primarily corresponds with the
value of their underlying instruments or index, which may not correlate
with changes in value of the hedged investments. In addition, there is
the risk that the Fund may not be able to enter into a closing
transaction because of an illiquid secondary market. The Fund enters
into financial futures transactions primarily to manage its exposure to
certain markets and to changes in securities prices and foreign
currencies. At December 31, 1995, the Fund had entered into the
following financial futures contracts:
At December 31, 1995, the Fund had segregated sufficient cash and/or
securities to cover margin requirements on open futures contracts.
<TABLE>
<CAPTION>
Underlying Face Unrealized
Contract Position Expiration Amount at Value Gain (Loss)
- ---------------------------------- ----------- ----------- ---------------------- ----------------
<C> <C> <C> <C>
(6 contracts) S&P 500 Long 3/15/96 1,855,350 2,525
====================== ================
- --------------------------------------------------------------------------------
</TABLE>
Federal Income Tax Information (Unaudited)
The amount of long-term capital gain for the Fund for the year ended
December 31, 1995 was $5,067,676. This amount may differ from those
cited elsewhere in this report due to differences in the calculation of
income and capital gains for Securities and Exchange Commission (book)
purposes and Internal Revenue Service (tax) purposes.
15
<PAGE>
Report of Independent Accountants
To the Trustees of Standish, Ayer & Wood Investment Trust and the
Shareholders of Standish Equity Fund Series:
We have audited the accompanying statement of assets and liabilities of
Standish, Ayer & Wood Investment Trust: Standish Equity Fund Series
(the "Fund"), including the schedule of portfolio investments, as of
December 31, 1995, and the related statement of operations for the year
then ended, changes in the net assets for each of the two years in the
period then ended and financial highlights for each of the three years
in the period then ended. These financial statements and financial
highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements
and financial highlights based on our audits. The financial highlights
for the year ended December 31, 1992, and for the period from January
2, 1991 (start of business) to December 31, 1991, presented herein,
were audited by other auditors, whose report, dated February 12, 1993,
expressed an unqualified opinion on such financial highlights.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
and financial highlights are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts
and disclosures in e financial statements. Our procedures included
confirmation of securities owned as of December 31, 1995 by
correspondence with the custodian and brokers. An audit also includes
assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the financial statements and financial highlights
referred to above present fairly, in all material respects, the
financial position of Standish, Ayer & Wood Investment Trust: Standish
Equity Fund Series as of December 31, 1995, the results of its
operations for the year then ended, the changes in net assets for each
of the two years in the period then ended and financial highlights for
each of the three years in the period then ended, in conformity with
generally accepted accounting principles.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
February 13, 1996
16
<PAGE>
Standish, Ayer & Wood Investment Trust
One Financial Center
Boston, MA 02111
(800) 221-4795
17
<PAGE>
STANDISH FIXED INCOME FUND
One Financial Center
Boston, Massachusetts 02111
(800) 221-4795
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information is not a prospectus, but expands
upon and supplements the information contained in the Prospectus dated April 29,
1996, as amended and/or supplemented from time to time (the "Prospectus"), of
Standish Fixed Income Fund (the "Fund"), a separate investment series of
Standish, Ayer & Wood Investment Trust (the "Trust"). This Statement of
Additional Information should be read in conjunction with the Fund's Prospectus,
a copy of which may be obtained without charge by writing or calling the Trust's
principal underwriter, Standish Fund Distributors, L.P. (the "Principal
Underwriter"), at the address and phone number set forth above.
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND IS
AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY IF PRECEDED OR
ACCOMPANIED BY AN EFFECTIVE PROSPECTUS.
CONTENTS
Investment Objective and Policies............................2
Investment Restrictions......................................8
Calculation of Performance Data..............................9
Management..................................................11
Redemption of Shares........................................16
Portfolio Transactions......................................17
Determination of Net Asset Value............................17
The Fund and Its Shares.....................................17
The Portfolio and Its Investors.............................18
Taxation....................................................18
Additional Information......................................21
Experts and Financial Statements............................21
Financial Statements........................................22
1
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
As described in the Prospectus, the Fund seeks to achieve its investment
objective by investing all its investable assets in the Standish Fixed Income
Portfolio (the "Portfolio"), a series of Standish, Ayer & Wood Master Portfolio
(the "Portfolio Trust"), an open-end management investment company. The
Portfolio has the same investment objective and restrictions as the Fund.
The Fund's Prospectus describes the investment objective of the Fund and
the Portfolio and summarizes the investment policies they will follow. Since the
investment characteristics of the Fund will correspond directly to those of the
Portfolio, the following, which supplements the Prospectus, is a discussion of
the various investment techniques employed by the Portfolio. See the Prospectus
for a more complete description of the Fund's and the Portfolio's investment
objective, policies and restrictions.
Money Market Instruments and Repurchase Agreements
Money market instruments include short-term U.S. Government securities,
commercial paper (promissory notes issued by corporations to finance their
short-term credit needs), negotiable certificates of deposit, nonnegotiable
fixed time deposits, bankers' acceptances and repurchase agreements.
U.S. Government securities include securities which are direct obligations
of the U.S. Government backed by the full faith and credit of the United States,
and securities issued by agencies and instrumentalities of the U.S. Government,
which may be guaranteed by the U.S. Treasury or supported by the issuer's right
to borrow from the U.S. Treasury or may be backed by the credit of the federal
agency or instrumentality itself. Agencies and instrumentalities of the U.S.
Government include, but are not limited to, Federal Land Banks, the Federal Farm
Credit Bank, the Central Bank for Cooperatives, Federal Intermediate Credit
Banks, Federal Home Loan Banks and the Federal National Mortgage Association.
Investments in commercial paper will be rated Prime-1 by Moody's Investors
Service, Inc. ("Moody's") or A-1 by Standard & Poor's Ratings Group ("S&P") or
Duff 1+ by Duff & Phelps, which are the highest ratings assigned by these rating
services (even if rated lower by one or more of the other agencies), or which,
if not rated or rated lower by one or more of the agencies and not rated by the
other agency or agencies, are judged by Standish, Ayer & Wood, Inc. ("Standish"
or the "Adviser"), the Portfolio's investment adviser, to be of equivalent
quality to the securities so rated.
A repurchase agreement is an agreement under which the Portfolio acquires
money market instruments (generally U.S. Government securities) from a
commercial bank, broker or dealer, subject to resale to the seller at an
agreed-upon price and date (normally the next business day). The resale price
reflects an agreed-upon interest rate effective for the period the instruments
are held by the Portfolio and is unrelated to the interest rate on the
instruments. The instruments acquired by the Portfolio (including accrued
interest) must have an aggregate market value in excess of the resale price and
will be held by the custodian bank for the Portfolio until they are repurchased.
The Trustees of the Portfolio Trust will monitor the standards which the Adviser
will use in reviewing the credit worthiness of any party to a repurchase
agreement with the Portfolio.
2
<PAGE>
The use of repurchase agreements involves certain risks. For example, if
the seller defaults on its obligation to repurchase the instruments acquired by
the Portfolio at a time when their market value has declined, the Portfolio may
incur a loss. If the seller becomes insolvent or subject to liquidation or
reorganization under bankruptcy or other laws, a court may determine that the
instruments acquired by the Portfolio are collateral for a loan by the Portfolio
and therefore are subject to sale by the trustee in bankruptcy. Finally, it is
possible that the Portfolio may not be able to substantiate its interest in the
instruments it acquires. While the Trustees acknowledge these risks, it is
expected that they can be controlled through careful documentation and
monitoring.
Strategic Transactions
The Portfolio may, but is not required to, utilize various other investment
strategies as described below to hedge various market risks (such as interest
rates, currency exchange rates, and broad or specific equity or fixed-income
market movements), to manage the effective maturity or duration of fixed-income
securities, or to enhance potential gain. Such strategies are generally accepted
as part of modern portfolio management and are regularly utilized by many mutual
funds and other institutional investors. Techniques and instruments used by the
Portfolio may change over time as new instruments and strategies are developed
or regulatory changes occur.
In the course of pursuing its investment objective, the Portfolio may
purchase and sell (write) exchange-listed and over-the-counter put and call
options on securities, equity and fixed-income indices and other financial
instruments; purchase and sell financial futures contracts and options thereon;
enter into various interest rate transactions such as swaps, caps, floors or
collars; and enter into various currency transactions such as currency forward
contracts, currency futures contracts, currency swaps or options on currencies
or currency futures (collectively, all the above are called "Strategic
Transactions"). Strategic Transactions may be used in an attempt to protect
against possible changes in the market value of securities held in or to be
purchased for the Portfolio's portfolio resulting from securities markets or
currency exchange rate fluctuations, to protect the Portfolio's unrealized gains
in the value of its portfolio securities, to facilitate the sale of such
securities for investment purposes, to manage the effective maturity or duration
of the Portfolio'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 Portfolio will attempt
to limit its net loss exposure resulting from Strategic Transactions entered
into for such purposes to not more than 3% of the Portfolio's net assets at any
one time and, to the extent necessary, the Portfolio will close out transactions
in order to comply with this limitation. (Transactions such as writing covered
call options are considered to involve hedging for the purposes of this
limitation.) In calculating the Portfolio's net loss exposure from such
Strategic Transactions, an unrealized gain from a particular Strategic
Transaction position would be netted against an unrealized loss from a related
Strategic Transaction position. For example, if the Adviser anticipates that the
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Belgian franc will appreciate relative to the French franc, the Portfolio may
take a long forward currency position in the Belgian franc and a short foreign
currency position in the French franc. Under such circumstances, any unrealized
loss in the Belgian franc position would be netted against any unrealized gain
in the French franc position (and vice versa) for purposes of calculating the
Portfolio's net loss exposure. The ability of the Portfolio to utilize these
Strategic Transactions successfully will depend on the Adviser's ability to
predict pertinent market movements, which cannot be assured. The Portfolio will
comply with applicable regulatory requirements when implementing these
strategies, techniques and instruments. The Portfolio's activities involving
Strategic Transactions may be limited in order to enable the Fund to comply with
the requirements of Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code"), for qualification as a regulated investment company.
Risks of Strategic Transactions
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 Portfolio, 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 Portfolio can realize on its investments or cause the
Portfolio to hold a security it might otherwise sell. The use of currency
transactions can result in the Portfolio incurring losses as a result of a
number of factors including the imposition of exchange controls, suspension of
settlements, or the inability to deliver or receive a specified currency. The
use of options and futures transactions entails certain other risks. In
particular, the variable degree of correlation between price movements of
futures contracts and price movements in the related portfolio position of the
Portfolio creates the possibility that losses on the hedging instrument may be
greater than gains in the value of the Portfolio's position. The writing of
options could significantly increase the Portfolio'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 Portfolio might not be able to close out a transaction without incurring
substantial losses, if at all. Although the use of futures and options
transactions for hedging should tend to minimize the risk of loss due to a
decline in the value of the hedged position, at the same time, in certain
circumstances, they tend to limit any potential gain which might result from an
increase in value of such position. The loss incurred by the Portfolio in
writing options on futures and entering into futures transactions is potentially
unlimited; however, as described above, the Portfolio 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.
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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.
Collateralized Mortgage Obligations ("CMOs")
The Investment Company Act of 1940, as amended (the "1940 Act"), limits the
ability of one investment company to invest in the securities of another
investment company. The staff of the Securities and Exchange Commission (the
"SEC") takes the position that CMOs and certain other securitized assets are
investment companies for this purpose unless such issuers have complied with an
exemptive rule or have obtained orders from the SEC exempting them from all
provisions of the Act. The Portfolio intends to operate within the applicable
limitations. See the Prospectus for a further description of CMOs.
General Characteristics of Options
Put options and call options typically have similar structural
characteristics and operational mechanics regardless of the underlying
instrument on which they are purchased or sold. Thus, the following general
discussion relates to each of the particular types of options discussed in
greater detail below. In addition, many Strategic Transactions involving options
require segregation of the Portfolio's assets in special accounts, as described
below under "Use of Segregated Accounts."
A put option gives the purchaser of the option, in consideration for the
payment of a premium, the right to sell, and the writer the obligation to buy
(if the option is exercised), the underlying security, commodity, index,
currency or other instrument at the exercise price. For instance, the
Portfolio's purchase of a put option on a security might be designed to protect
its holdings in the underlying instrument (or, in some cases, a similar
instrument) against a substantial decline in the market value by giving the
Portfolio the right to sell such instrument at the option exercise price. A call
option, in consideration for the payment of a premium, gives the purchaser of
the option the right to buy, and the seller the obligation to sell (if the
option is exercised), the underlying instrument at the exercise price. The
Portfolio may purchase a call option on a security, futures contract index,
currency or other instrument to seek to protect the Portfolio against an
increase in the price of the underlying instrument that it intends to purchase
in the future by fixing the price at which it may purchase such instrument. An
American style put or call option may be exercised at any time during the option
period while a European style put or call option may be exercised only upon
expiration or during a fixed period prior thereto. The Portfolio is authorized
to purchase and sell exchange listed options and over-the-counter options ("OTC"
options). Exchange listed options are issued by a regulated intermediary such as
the Options Clearing Corporation ("OCC"), which guarantees the performance of
the obligations of the parties to such options. The discussion below uses the
OCC as an example, but is also applicable to other financial intermediaries.
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With certain exceptions, exchange listed options generally settle by
physical delivery of the underlying security or currency, although in the future
cash settlement may become available. Index options and Eurodollar instruments
are cash settled for the net amount, if any, by which the option is in-the-money
(i.e., where the value of the underlying instrument exceeds, in the case of a
call option, or is less than, in the case of a put option, the exercise price of
the option) at the time the option is exercised. Frequently, rather than taking
or making delivery of the underlying instrument through the process of
exercising the option, listed options are closed by entering into offsetting
purchase or sale transactions that do not result in ownership of the new option.
The Portfolio's ability to close out its position as a purchaser or seller
of an exchange listed put or call option is dependent, in part, upon the
liquidity of the option market. There is no assurance that a liquid option
market on an exchange will exist. In the event that the relevant market for an
option on an exchange ceases to exist, outstanding options on that exchange
would generally continue to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours
during which the underlying financial instruments are traded. To the extent that
the option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct agreement with
the Counterparty. In contrast to exchange listed options, which generally have
standardized terms and performance mechanics, all the terms of an OTC option,
including such terms as method of settlement, term, exercise price, premium,
guarantees and security, are set by negotiation of the parties. The Portfolio
will generally sell (write) OTC options (other than OTC currency options) that
are subject to a buy-back provision permitting the Portfolio to require the
Counterparty to sell the option back to the Portfolio at a formula price within
seven days. (To the extent that the Portfolio does not do so, the OTC options
are subject to the Portfolio's restriction on illiquid securities.) The
Portfolio expects generally to enter into OTC options that have cash settlement
provisions, although it is not required to do so.
Unless the parties provide for it, there is no central clearing or guaranty
function in an OTC option. As a result, if the Counterparty fails to make
delivery of the security, currency or other instrument underlying an OTC option
it has entered into with the Portfolio or fails to make a cash settlement
payment due in accordance with the terms of that option, the Portfolio will lose
any premium it paid for the option as well as any anticipated benefit of the
transaction. Accordingly, the Adviser must assess the creditworthiness of each
such Counterparty or any guarantor or credit enhancement of the Counterparty's
credit to determine the likelihood that the terms of the OTC option will be
satisfied. The Portfolio will engage in OTC option transactions only with U.S.
Government securities dealers recognized by the Federal Reserve Bank of New York
as "Primary dealers," or broker dealers, domestic or foreign banks or other
financial institutions which have received, combined with any credit
enhancements, a long-term debt rating of A from S&P or Moody's or an equivalent
rating from any other nationally recognized statistical rating organization
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("NRSRO") or the debt of which is determined to be of equivalent credit quality
by the Adviser. The staff of the SEC currently takes the position that, absent
the buy-back provisions discussed above, OTC options purchased by the Portfolio,
and portfolio securities "covering" the amount of the Portfolio's obligation
pursuant to an OTC option sold by it (the cost of the sell-back plus the
in-the-money amount, if any) are illiquid, and are subject to the Portfolio's
limitation on investing in illiquid securities. However, for options written
with "primary dealers" pursuant to an agreement requiring a closing purchase
transaction at a formula price, the amount which is considered to be illiquid
may be calculated by reference to a formula price.
If the Portfolio sells (writes) a call option, the premium that it receives
may serve as a partial hedge, to the extent of the option premium, against a
decrease in the value of the underlying securities or instruments in its
portfolio or will increase the Portfolio's income. The sale (writing) of put
options can also provide income.
The Portfolio may purchase and sell (write) call options on securities
including U.S. Treasury and agency securities, mortgage-backed securities,
corporate debt securities, equity securities (including convertible securities)
and Eurodollar instruments that are traded on U.S. and foreign securities
exchanges and in the over-the-counter markets, and on securities indices,
currencies and futures contracts. All calls sold by the Portfolio must be
covered (i.e., the Portfolio must own the securities or the futures contract
subject to the call) or must meet the asset segregation requirements described
below as long as the call is outstanding. Even though the Portfolio will receive
the option premium to help offset any loss, the Portfolio may incur a loss if
the exercise price is below the market price for the security subject to the
call at the time of exercise. A call sold by the Portfolio also exposes the
Portfolio during the term of the option to possible loss of opportunity to
realize appreciation in the market price of the underlying security or
instrument and may require the Portfolio to hold a security or instrument which
it might otherwise have sold.
The Portfolio may purchase and sell (write) put options on securities
including U.S. Treasury and agency securities, mortgage backed securities,
foreign sovereign debt, corporate debt securities, equity securities (including
convertible securities) and Eurodollar instruments (whether or not it holds the
above securities in its portfolio), and on securities indices, currencies and
futures contracts. The Portfolio will not sell put options if, as a result, more
than 50% of the Portfolio's assets would be required to be segregated to cover
its potential obligations under such put options other than those with respect
to futures and options thereon. In selling put options, there is a risk that the
Portfolio may be required to buy the underlying security at a price above the
market price.
Options on Securities Indices and Other Financial Indices
The Portfolio may also purchase and sell (write) call and put options on
securities indices and other financial indices. Options on securities indices
and other financial indices are similar to options on a security or other
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instrument except that, rather than settling by physical delivery of the
underlying instrument, they settle by cash settlement. For example, an option on
an index gives the holder the right to receive, upon exercise of the option, an
amount of cash if the closing level of the index upon which the option is based
exceeds, in the case of a call, or is less than, in the case of a put, the
exercise price of the option (except if, in the case of an OTC option, physical
delivery is specified). This amount of cash is equal to the differential between
the closing price of the index and the exercise price of the option, which also
may be multiplied by a formula value. The seller of the option is obligated, in
return for the premium received, to make delivery of this amount. In addition to
the methods described above, the Portfolio may cover call options on a
securities index by owning securities whose price changes are expected to be
similar to those of the underlying index, or by having an absolute and immediate
right to acquire such securities without additional cash consideration (or for
additional cash consideration held in a segregated account by its custodian)
upon conversion or exchange of other securities in its portfolio.
General Characteristics of Futures
The Portfolio may enter into financial futures contracts or purchase or
sell put and call options on such futures. Futures are generally bought and sold
on the commodities exchanges where they are listed and involve payment of
initial and variation margin as described below. The sale of futures contracts
creates a firm obligation by the Portfolio, as seller, to deliver to the buyer
the specific type of financial instrument called for in the contract at a
specific future time for a specified price (or, with respect to index futures
and Eurodollar instruments, the net cash amount). The purchase of futures
contracts creates a corresponding obligation by the Portfolio, as purchaser to
purchase a financial instrument at a specific time and price. Options on futures
contracts are similar to options on securities except that an option on a
futures contract gives the purchaser the right in return for the premium paid to
assume a position in a futures contract and obligates the seller to deliver such
position.
The Portfolio's use of financial futures and options thereon will in all
cases be consistent with applicable regulatory requirements and in particular
the regulations of the Commodity Futures Trading Commission relating to
exclusions from regulation as a commodity pool operator. Those regulations
currently provide that the Portfolio may use commodity futures and option
positions (i) for bona fide hedging purposes without regard to the percentage of
assets committed to margin and option premiums, or (ii) for other purposes
permitted by the SEC to the extent that the aggregate initial margin and option
premiums required to establish such non-hedging positions (net of the amount
that the positions were "in the money" at the time of purchase) do not exceed 5%
of the net asset value of the Portfolio's portfolio, after taking into account
unrealized profits and losses on such positions. Typically, maintaining a
futures contract or selling an option thereon requires the Portfolio to deposit,
with its custodian for the benefit of a futures commission merchant as security
for its obligations an amount of cash or other specified assets (initial margin)
which initially is typically 1% to 10% of the face amount of the contract (but
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may be higher in some circumstances). Additional cash or assets (variation
margin) may be required to be deposited directly with the futures commission
merchant thereafter on a daily basis as the value of the contract fluctuates.
The purchase of an option on financial futures involves payment of a premium for
the option without any further obligation on the part of the Portfolio. If the
Portfolio exercises an option on a futures contract it will be obligated to post
initial margin (and potential subsequent variation margin) for the resulting
futures position just it would for any position. Futures contracts and options
thereon are generally settled by entering into an offsetting transaction but
there can be no assurance that the position can be offset prior to settlement at
an advantageous price, nor that delivery will occur. The segregation
requirements with respect to futures contracts and options thereon are described
below.
Currency Transactions
The Portfolio may engage in currency transactions with Counterparties in
order to hedge the value of portfolio holdings denominated in particular
currencies against fluctuations in relative value or to enhance potential gain.
Currency transactions include currency contracts, exchange listed currency
futures, exchange listed and OTC options on currencies, and currency swaps. A
forward currency contract involves a privately negotiated obligation to purchase
or sell (with delivery generally required) a specific currency at a future date,
which may be any fixed number of days from the date of the contract agreed upon
by the parties, at a price set at the time of the contract. A currency swap is
an agreement to exchange cash flows based on the notional (agreed upon)
difference among two or more currencies and operates similarly to an interest
rate swap, which is described below. A Portfolio may enter into over-the-counter
currency transactions with Counterparties which have received, combined with any
credit enhancements, a long term debt rating of A by S&P or Moody's,
respectively, or that have an equivalent rating from NRSRO or (except for OTC
currency options) are determined to be equivalent credit quality by the Adviser.
The Portfolio's dealings in forward currency contracts and other currency
transactions such as futures, options, options on futures and swaps will
generally be limited to hedging involving either specific transactions or
portfolio positions. See "Strategic Transactions." Transaction hedging is
entering into a currency transaction with respect to specific assets or
liabilities of a Portfolio, which will generally arise in connection with the
purchase or sale of its portfolio securities or the receipt of income therefrom.
Position hedging is entering into a currency transaction with respect to
portfolio security positions denominated or generally quoted in that currency.
The Portfolio will not enter into a transaction to hedge currency exposure
to an extent greater, after netting all transactions intended wholly or
partially to offset other transactions, than the aggregate market value (at the
time of entering into the transaction) of the securities held in its portfolio
that are denominated or generally quoted in or currently convertible into such
currency, other than with respect to proxy hedging as described below.
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The Portfolio may also cross-hedge currencies by entering into transactions
to purchase or sell one or more currencies that are expected to decline in value
in relation to other currencies to which the Portfolio has or in which the
Portfolio expects to have portfolio exposure. For example, the Portfolio may
hold a French government bond and the Adviser may believe that French francs
will deteriorate against German marks. The Portfolio would sell French francs to
reduce its exposure to that currency and buy German marks. This strategy would
be a hedge against a decline in the value of French francs, although it would
expose the Portfolio to declines in the value of the German mark relative to the
U.S. dollar.
To reduce the effect of currency fluctuations on the value of existing or
anticipated holdings of portfolio securities, the Portfolio may also engage in
proxy hedging. Proxy hedging is often used when the currency to which the
Portfolio's portfolio is exposed is difficult to hedge or to hedge against the
dollar. Proxy hedging entails entering into a forward contract to sell a
currency whose changes in value are generally considered to be linked to a
currency or currencies in which certain of the Portfolio's portfolio securities
are or are expected to be denominated, and to buy U.S. dollars. The amount of
the contract would not exceed the value of the Portfolio's securities
denominated in linked currencies. For example, if the Adviser considers that the
Austrian schilling is linked to the German deutschemark (the "D-mark"), the
Portfolio holds securities denominated in schillings and the Adviser believes
that the value of schillings will decline against the U.S. dollar, the Adviser
may enter into a contract to sell D-marks and buy dollars. Proxy hedging
involves some of the same risks and considerations as other transactions with
similar instruments. Currency transactions can result in losses to the Portfolio
if the Currency being hedged fluctuates in value to a degree or in a direction
that is not anticipated. Further, there is the risk that the perceived linkage
between various currencies may not be present or may not be present during the
particular time that the Portfolio is engaging in proxy hedging. If the
Portfolio enters into a currency hedging transaction, the Portfolio will comply
with the asset segregation requirements described below.
Risks of Currency Transactions
Currency transactions are subject to risks different from those of other
portfolio transactions. Because currency control is of great importance to the
issuing governments and influences economic planning and policy, purchases and
sales of currency and related instruments can be negatively affected by
government exchange controls, blockages, and manipulations or exchange
restrictions imposed by governments. These can result in losses to the Portfolio
if it is unable to deliver or receive currency or funds in settlement of
obligations and could also cause hedges it has entered into to be rendered
useless, resulting in full currency exposure as well as incurring transaction
costs. Buyers and sellers of currency futures are subject to the same risks that
apply to the use of futures generally. Further, settlement of a currency futures
contract for the purchase of most currencies must occur at a bank based in the
issuing nation. Trading options on currency futures is relatively new, and the
ability to establish and close out positions on such options is subject to the
maintenance of a liquid market which may not always be available. Currency
exchange rates may fluctuate based on factors extrinsic to that country's
economy.
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Combined Transactions
The Portfolio may enter into multiple transactions, including multiple
options transactions, multiple futures transactions, multiple currency
transactions (including forward currency contracts) and multiple interest rate
transactions, structured notes and any combination of futures, options, currency
and interest rate transactions (component transactions), instead of a single
Strategic Transaction, as part of a single or combined strategy when, in the
opinion of the Adviser it is in the best interests of the Portfolio to do so. A
combined transaction will usually contain elements of risk that are present in
each of its component transactions. Although combined transactions are normally
entered into based on the Adviser's judgment that the combined strategies will
reduce risk or otherwise more effectively achieve the desired portfolio
management goal, it is possible that the combination will instead increase such
risks or hinder achievement of the portfolio management objective.
Swaps, Caps, Floors and Collars
Among the Strategic Transactions into which the Portfolio may enter are
interest rate, currency and index swaps and the purchase or sale of related
caps, floors and collars. The Portfolio expects to enter into these transactions
primarily for hedging purposes, including, but not limited to, preserving a
return or spread on a particular investment or portion of its portfolio,
protecting against currency fluctuations, as a duration management technique or
protecting against an increase in the price of securities the Portfolio
anticipates purchasing at a later date. Swaps, caps, floors and collars may also
be used to enhance potential gain in circumstances where hedging in not involved
although, as described above, the Portfolio will attempt to limit its net loss
exposure resulting from swaps, caps, floors and collars and other Strategic
Transactions entered into for such purposes to not more than 3% of the
Portfolio's net assets at any one time. The Portfolio will not sell interest
rate caps or floors where it does not own securities or other instruments
providing the income stream the Portfolio may be obligated to pay. Interest rate
swaps involve the exchange by the Portfolio with another party of their
respective commitments to pay or receive interest, e.g., an exchange of floating
rate payments for fixed rate payments with respect to a notional amount of
principal. A currency swap is an agreement to exchange cash flows on a notional
amount of two or more currencies based on the relative value differential among
them and an index swap is an agreement to swap cash flows on a notional amount
based on changes in the values of the reference indices. The purchase of a cap
entitles the purchaser to receive payments on a notional principal amount from
the party selling such cap to the extent that a specified index exceeds a
predetermined interest rate or amount. The purchase of a floor entitles the
purchaser to receive payments on a notional principal amount from the party
selling such floor to the extent that a specified index falls below a
predetermined interest rate or amount. A collar is a combination of a cap and a
floor that preserves a certain rate of return within a predetermined range of
interest rates or values.
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The Portfolio will usually enter into swaps on a net basis, i.e., the two
payment streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with the Portfolio receiving or paying as the case
may be, only the net amount of the two payments. The Portfolio will not enter
into any swap, cap, floor or collar transaction unless, at the time of entering
into such transaction, the unsecured long-term debt of the Counterparty,
combined with any credit enhancements, is rated a least A by S&P or Moody's or
has an equivalent rating from an NRSRO or the Counterparty issues debt that is
determined to be of equivalent credit quality by the Adviser. If there is a
default by the Counterparty, the Portfolio may have contractual remedies
pursuant to the agreements related to the transaction. The swap market has grown
substantially in recent years with a large number of banks and investment
banking firms acting both as principals and as agents utilizing standardized
swap documentation. As a result, the swap market has become relatively liquid.
Caps, floors and collars are more recent innovations for which standardized
documentation has not yet been fully developed. Swaps, caps, floors and collars
are considered illiquid for purposes of the Portfolio's policy regarding
illiquid securities, unless it is determined, based upon continuing review of
the trading markets for the specific security, that such security is liquid. The
Board of Trustees of the Portfolio Trust has adopted guidelines and delegated to
the Adviser the daily function of determining and monitoring the liquidity of
swaps, caps, floors and collars. The Portfolio Trust's Board of Trustees,
however, retains oversight focusing on factors such as valuation, liquidity and
availability of information and is ultimately responsible for such
determinations. The staff of the SEC currently takes the position that swaps,
caps, floors and collars are illiquid, and are subject to the Portfolio's
limitation on investing in illiquid securities.
Eurodollar Contracts
The Portfolio may make investments in Eurodollar contracts. Eurodollar
contracts are U.S. dollar-denominated futures contracts or options thereon which
are linked to the London Interbank Offered Rate ("LlBOR"), although foreign
currency-denominated instruments are available from time to time. Eurodollar
futures contracts enable purchasers to obtain a fixed rate for the lending of
funds and sellers to obtain a fixed rate for borrowings. The Portfolio might use
Eurodollar futures contracts and options thereon to hedge against changes in
LIBOR, to which many interest rate swaps and fixed income instruments are
linked.
Risks of Strategic Transactions Outside the United States
When conducted outside the United States, Strategic Transactions may not be
regulated as rigorously as in the United States, may not involve a clearing
mechanism and related guarantees, and are subject to the risk of governmental
actions affecting trading in, or the prices of, foreign securities, currencies
and other instruments. The value of such positions also could be adversely
affected by: (i) lesser availability than in the United States of data on which
to make trading decisions, (ii) delays in the Portfolio's ability to act upon
economic events occurring in foreign markets during non-business hours in the
United States, (iii) the imposition of different exercise and settlement terms
and procedures and margin requirements than in the United States, (iv) lower
trading volume and liquidity, and (v) other complex foreign political, legal and
economic factors. At the same time, Strategic Transactions may offer advantages
such as trading in instruments that are not currently traded in the United
States or arbitrage possibilities not available in the United States.
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Use of Segregated Accounts
The Portfolio will hold securities or other instruments whose values are
expected to offset its obligations under the Strategic Transactions. The
Portfolio will cover Strategic Transactions as required by interpretive
positions of the SEC. The Portfolio will not enter into Strategic Transactions
that expose the Portfolio to an obligation to another party unless it owns
either (i) an offsetting position in securities or other options, futures
contracts or other instruments or (ii) cash, receivables or liquid, high grade
debt securities with a value sufficient to cover its potential obligations. The
Portfolio may have to comply with any applicable regulatory requirements for
Strategic Transactions, and if required, will set aside cash and other assets in
a segregated account with its custodian bank in the amount prescribed. In that
case, the Portfolio's custodian would maintain the value of such segregated
account equal to the prescribed amount by adding or removing additional cash or
other assets to account for fluctuations in the value of the account and the
Fund's obligations on the underlying Strategic Transactions. Assets held in a
segregated account would not be sold while the Strategic Transaction is
outstanding, unless they are replaced with similar assets. As a result, there is
a possibility that segregation of a large percentage of the Portfolio's assets
could impede portfolio management or the Portfolio's ability to meet redemption
requests or other current obligations.
"When-Issued" and "Delayed Delivery Securities"
The Portfolio may commit up to 15% of its net assets to purchase securities
on a "when-issued" and "delayed delivery" basis, which means that delivery and
payment for the securities will normally take place 15 to 45 days after the date
of the transaction. The payment obligation and interest rate on the securities
are fixed at the time the Portfolio enters into the commitment, but interest
will not accrue to the Portfolio until delivery of and payment for the
securities. Although the Portfolio will only make commitments to purchase
"when-issued" and "delayed delivery" securities with the intention of actually
acquiring the securities, the Portfolio may sell the securities before the
settlement date if deemed advisable by the Adviser.
Unless the Portfolio has entered into an offsetting agreement to sell the
securities purchased on a when-issued or forward commitment basis, cash or
liquid, high-grade debt obligations with a market value at least equal to the
amount of the Portfolio's commitment will be segregated with the Portfolio's
custodian bank. If the market value of these securities declines, additional
cash or securities will be segregated daily so that the aggregate market value
of the segregated securities equals the amount of the Portfolio's commitment.
Securities purchased on a "when-issued" and "delayed delivery" basis may
have a market value on delivery which is less than the amount paid by the
Portfolio. Changes in market value may be based upon the public's perception of
the creditworthiness of the issuer or changes in the level of interest rates.
Generally, the value of "when-issued" securities will fluctuate inversely to
changes in interest rates, i.e., they will appreciate in value when interest
rates fall and will depreciate in value when interest rates rise.
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Portfolio Turnover
It is not the policy of the Portfolio to purchase or sell securities for
trading purposes. However, the Portfolio places no restrictions on portfolio
turnover and it may sell any portfolio security without regard to the period of
time it has been held, except as may be necessary to enable the Fund to maintain
its status as a regulated investment company under the Code. The Portfolio may
therefore generally change its portfolio investments at any time in accordance
with the Adviser's appraisal of factors affecting any particular issuer or
market, or the economy in general. A rate of turnover of 100% would occur if the
value of the lesser of purchases and sales of portfolio securities for a
particular year equaled the average monthly value of portfolio securities owned
during the year (excluding short-term securities). A high rate of portfolio
turnover (100% or more) involves a correspondingly greater amount of brokerage
commissions and other costs which must be borne directly by the Portfolio and
thus indirectly by its shareholders. It may also result in the realization of
larger amounts of net short-term capital gains, which (when allocated to and
distributed by the Fund) are taxable to its shareholders as ordinary income and
may, under certain circumstances, make it more difficult for the Fund to qualify
as a regulated investment company under the Code.
INVESTMENT RESTRICTIONS
The Fund and the Portfolio have each adopted the following fundamental
policies. Each of the Fund's and the Portfolio's fundamental policies cannot be
changed unless the change is approved by the "vote of the outstanding voting
securities" of the Fund or the Portfolio, as the case may be, which phrase as
used herein means the lesser of (i) 67% or more of the voting securities of the
Fund or the Portfolio present at a meeting, if the holders of more than 50% of
the outstanding voting securities of the Fund or the Portfolio are present or
represented by proxy, or (ii) more than 50% of the outstanding voting securities
of the Fund or the Portfolio.
As a matter of fundamental policy, the Portfolio (Fund) may not:
1. Invest, with respect to at least 75% of its total assets, more than 5%
in the securities of any one issuer (other than the U.S. Government,
its agencies or instrumentalities) or acquire more than 10% of the
outstanding voting securities of any issuer.
2. Issue senior securities, borrow money or securities or pledge or
mortgage its assets, except that the Fund may (a) borrow money from
banks as a temporary measure for extraordinary or emergency purposes
(but not for investment purposes) in an amount up to 15% of the
current value of its total assets, (b) enter into forward roll
transactions, and (c) pledge its assets to an extent not greater than
15% of the current value of its total assets to secure such
borrowings; however, the Fund may not make any additional investments
while its outstanding bank borrowings exceed 5% of the current value
of its total assets.
14
<PAGE>
3. Lend portfolio securities except that the Portfolio (i) may lend
portfolio securities in accordance with the Fund's investment policies
up to 33 1/3% of the Portfolio's total assets taken at market value,
(ii) enter into repurchase agreements, and (iii) purchase all or a
portion of an issue of debt securities, bank loan participation
interests, bank certificates of deposit, bankers' acceptances,
debentures or other securities, whether or not the purchase is made
upon the original issuance of the securities, and except that the Fund
may enter into repurchase agreements with respect to 5% of the value
of its net assets.
4. Invest more than 25% of the current value of its total assets in any
single industry, provided that this restriction shall not apply to
U.S. Government securities, including mortgage pass-through securities
(GNMAs).
5. Underwrite the securities of other issuers, except to the extent that,
in connection with the disposition of portfolio securities, the
Portfolio (Fund) may be deemed to be an underwriter under the
Securities Act of 1933.
6. Purchase real estate or real estate mortgage loans, although the
Portfolio (Fund) may purchase marketable securities of companies which
deal in real estate, real estate mortgage loans or interests therein.
7. Purchase securities on margin (except that the Portfolio (Fund) may
obtain such short-term credits as may be necessary for the clearance
of purchases and sales of securities).
8. Purchase or sell commodities or commodity contracts except that the
Portfolio (Fund) may purchase and sell financial futures contracts and
options on financial futures contracts and engage in foreign currency
exchange transactions.
Notwithstanding the foregoing, the Fund may invest all of its assets (other
than assets which are not "investment securities" (as defined in the 1940 Act)
or are excepted by the SEC) in an open-end management investment company with
substantially the same investment objective as the Fund.
The following restrictions are not fundamental policies and may be changed
by the Trustees of the Portfolio Trust (Trust) without investor approval in
accordance with applicable laws, regulations or regulatory policy. The Portfolio
(Fund) may not:
a. Make short sales of securities unless (a) after effect is given to any
such short sale, the total market value of all securities sold short
would not exceed 5% of the value of the Portfolio's (Fund's) net
assets or (b) at all times during which a short position is open it
owns an equal amount of such securities, or by virtue of ownership of
convertible or exchangeable securities it has the right to obtain
through the conversion or exchange of such other securities an amount
equal to the securities sold short.
15
<PAGE>
b. Invest in companies for the purpose of exercising control or
management.
c. Purchase securities of any other investment company, provided that the
Fund may make such a purchase as part of a merger, consolidation, or
acquisition of assets, and provided further that the Fund may make
such a purchase in the open market where no commission or profit to a
sponsor or dealer results from the purchase other than customary
brokers' commissions and then only to the extent permitted by the 1940
Act.
d. Purchase or write options, except as described under "Strategic
Transactions."
e. Invest in interests in oil, gas or other exploration or development
programs.
f. Invest more than 5% of the assets of the Portfolio (Fund) in the
securities of any issuers which together with their corporate parents
have records of less than three years' continuous operation, including
the operation of any predecessor, other than obligations issued or
guaranteed by the U.S. Government or its agencies, and securities
fully collateralized by such securities.
g. Invest in securities of any company if any officer or director
(Trustee) of the Portfolio Trust (Trust) or of the Portfolio's
investment adviser owns more than 1/2 of 1% of the outstanding
securities of such company and such officers and directors (Trustees)
own in the aggregate more than 5% of the securities of such company.
h. Invest more than an aggregate of 15% of the net assets of the
Portfolio (Fund) in the aggregate of (a) repurchase agreements which
are not terminable within seven days, (b) securities subject to legal
or contractual restrictions on resale or for which there are no
readily available market quotations and (c) other illiquid securities,
including nonnegotiable fixed time deposits.
i. Invest more than 5% of its net assets in repurchase agreements (this
restriction is fundamental with respect to the Fund, but not the
Portfolio).
Notwithstanding any non-fundamental policy, the Fund may invest all of its
assets (other than assets which are not "investment securities" (as defined in
the 1940 Act) or are excepted by the SEC) in an open-end management investment
company with substantially the same investment objective as the Fund.
If any percentage restriction described above is adhered to at the time of
investment, a subsequent increase or decrease in the percentage resulting from a
change in the value of the Portfolio's (Fund's) assets will not constitute a
violation of the restriction, except with respect to restriction (g) above.
16
<PAGE>
In order to permit the sale of shares of the Fund in certain states, the
Board may, in its sole discretion, adopt restrictions on investment policy more
restrictive than those described above. Should the Board determine that any such
more restrictive policy is no longer in the best interest of the Fund and its
shareholders, the Fund may cease offering shares in the state involved and the
Board may revoke such restrictive policy. Moreover, if the states involved shall
no longer require any such restrictive policy, the Board may, in its sole
discretion, revoke such policy.
CALCULATION OF PERFORMANCE DATA
As indicated in the Prospectus, the Fund may, from time to time, advertise
certain total return and yield information. The average annual total return of
the Fund for a period is computed by subtracting the net asset value per share
at the beginning of the period from the net asset value per share at the end of
the period (after adjusting for the reinvestment of any income dividends and
capital gain distributions), and dividing the result by the net asset value per
share at the beginning of the period. In particular, the average annual total
return of the Fund ("T") is computed by using the redeemable value at the end of
a specified period of time ("ERV") of a hypothetical initial investment of
$1,000 ("P") over a period of time ("n") according to the formula P(1+T)n=ERV.
The average annual total return quotations for the Fund for the one and five
year periods ended December 31, 1995 are 18.54% and 10.21%, respectively, and
since inception (March 27, 1987 to December 31, 1995) is 9.46%. The Fund's
average annualized yield for the thirty day period ended December 31, 1995 was
7.12%.
The yield of the Fund is computed by dividing the net investment income per
share earned during the period stated in the advertisement by the maximum
offering price per share on the last day of the period. For the purpose of
determining net investment income, the calculation includes, among expenses of
the Fund, all recurring fees that are charged to all shareholder accounts and
any non-recurring charges for the period stated. In particular, yield is
determined according to the following formula:
Yield = [2[((A - B + 1)^6) - 1]]/CD
Where: A equals dividends and interest earned during the period; B equals
net expenses accrued for the period; C equals average daily number of shares
outstanding during the period that were entitled to receive dividends; D equals
the maximum offering price per share on the last day of the period.
The Fund may also quote non-standardized yield, such as yield-to-maturity
("YTM"). YTM represents the rate of return an investor will receive if a
long-term, interest bearing investment, such as a bond, is held to its maturity
date. YTM does not take into account purchase price, redemption value, time to
maturity, coupon yield, and the time between interest payments.
17
<PAGE>
In addition to average annual return quotations, the Fund may quote
quarterly and annual performance on a net (with management and administration
fees deducted) and gross basis as follows:
Quarter/Year Net Gross
- --------------------------------------------------------------------------------
2Q87 (1.14)% (0.95)%
3Q87 (2.16) (2.04)
4Q87 4.15 4.30
1987 0.74 1.20
1Q88 4.36 4.52
2Q88 1.18 1.29
3Q88 1.98 2.11
4Q88 0.78 0.91
1988 8.53 9.09
1Q89 1.23 1.37
2Q89 7.57 7.70
3Q89 1.13 1.26
4Q89 3.30 3.42
1989 13.76 14.33
1Q90 (0.50) (0.38)
2Q90 3.69 3.84
3Q90 0.89 1.00
4Q90 4.95 5.06
1990 9.23 9.77
1Q91 3.16 3.28
2Q91 1.71 1.84
3Q91 6.19 6.29
4Q91 5.58 5.68
1991 17.65 18.15
1Q92 (0.95) (0.84)
2Q92 4.95 5.04
3Q92 3.43 3.53
4Q92 (0.58) (0.47)
1992 6.88 7.33
1Q93 5.88 5.98
2Q93 3.42 3.52
3Q93 3.42 3.52
4Q93 1.23 1.33
1993 14.64 15.08
1Q94 (3.99) (3.90)
2Q94 (1.88) (1.78)
3Q94 0.67 0.77
4Q94 0.32 0.42
1994 (4.86) (4.48)
1Q95 4.39 4.48
2Q95 5.91 6.01
3Q95 2.46 2.56
4Q95 4.64 4.73
1995 18.54 18.97
18
<PAGE>
These performance quotations should not be considered as representative of
the Fund's performance for any specified period in the future.
The Fund's performance may be compared in sales literature to the
performance of other mutual funds having similar objectives or to standardized
indices or other measures of investment performance. In particular, the Fund may
compare its performance to the Lehman Government/Corporate Index, which is
generally considered to be representative of the performance of all domestic,
dollar denominated, fixed rate, investment grade bonds, and the Lehman Brothers
Aggregate Index which is composed of securities from the Lehman Brothers
Government/Corporate Bond Index, Mortgage Backed Securities Index and Yankee
Bond Index, and is generally considered to be representative of all unmanaged,
domestic, dollar denominated, fixed rate investment grade bonds. Comparative
performance may also be expressed by reference to a ranking prepared by a mutual
fund monitoring service or by one or more newspapers, newsletters or financial
periodicals. Performance comparisons may be useful to investors who wish to
compare the Fund's past performance to that of other mutual funds and investment
products. Of course, past performance is not a guarantee of future results.
19
<PAGE>
MANAGEMENT
Trustees and Officers of the Trust and Portfolio Trust
The Trustees and executive officers of the Trust are listed below. The
Trustees of the Portfolio Trust are identical to the Trustees of the Trust. The
officers of the Portfolio Trust are Messrs. Clayson, Ladd, Wood, Hollis and
Murray, and Mss. Banfield, Chase, Herrmann and Kneeland, who hold the same
office with the Portfolio Trust as with the Trust. All executive officers of the
Trust and the Portfolio Trust are affiliates of Standish, Ayer & Wood, Inc., the
Portfolio's investment adviser.
<TABLE>
<CAPTION>
Position Held Principal Occupation
Name, Address and Date of Birth With Trust During Past 5 Years
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
*D. Barr Clayson, 7/29/35 Vice President Vice President and Managing
c/o Standish, Ayer & Wood, Inc. and Trustee Director, Standish, Ayer
One Financial Center & Wood, Inc.; President,
Boston, MA 02111 Standish International
Management Company, L.P.
Samuel C. Fleming, 9/30/40 Trustee Chairman of the Board and
c/o Decision Resources, Inc. Chief Executive Officer,
1100 Winter Street Decision Resources, Inc.;
Waltham, MA 02154 through 1989, Senior V.P.
Arthur D. Little
Benjamin M. Friedman, 8/5/44 Trustee William Joseph Maier
c/o Harvard University Professor of Political
Cambridge, MA 02138 Economy, Harvard University
John H. Hewitt, 4/11/35 Trustee Trustee, The Peabody
P.O. Box 307 Foundation; Trustee,
So. Woodstock, VT 05071 Visiting Nurse Alliance of
Vermont and New Hampshire
Edward H. Ladd*, 1/3/38 Trustee and Chairman of the Board and
c/o Standish, Ayer & Wood, Inc. Vice President Managing Director,
One Financial Center Standish, Ayer & Wood, Inc.
Boston, MA 02111 since 1990; formerly,
President of Standish, Ayer
& Wood, Inc.
Caleb Loring III, 11/14/43 Trustee Trustee, Essex Street
c/o Essex Street Associates Associates (family
P.O. Box 5600 investment trust office);
Beverly Farms, MA 01915 Director, Holyoke Mutual Insurance Company
Richard S. Wood*, 5/2/54 President and Vice President, Secretary
c/o Standish, Ayer & Wood, Inc. Trustee and Director, Standish,
One Financial Center Ayer & Wood, Inc.;
Boston, MA 02111 Executive Vice President,
Standish International
Management Company, L.P.
Richard C. Doll, 7/8/48 Vice President Vice President and
c/o Standish, Ayer & Wood, Inc. Director, Standish, Ayer
One Financial Center & Wood, Inc.
Boston, MA 02111
James E. Hollis III, 11/21/48 Executive Vice Vice President and
c/o Standish, Ayer & Wood, Inc. President Director, Standish, Ayer
One Financial Center & Wood, Inc.
Boston, MA 02111
20
<PAGE>
Position Held Principal Occupation
Name, Address and Date of Birth With Trust During Past 5 Years
- --------------------------------------------------------------------------------------------------------------------
David W. Murray, 5/5/40 Treasurer and Vice President, Treasurer
c/o Standish, Ayer & Wood, Inc. Secretary and Director, Standish,
One Financial Center Ayer & Wood, Inc.
Boston, MA 02111
Caleb F. Aldrich, 9/20/57 Vice President Vice President and
c/o Standish, Ayer & Wood, Inc. Director, Standish, Ayer
One Financial Center & Wood, Inc.
Boston, MA 02111
Beverly E. Banfield, 7/6/56 Vice President Vice President and
c/o Standish, Ayer & Wood, Inc. Compliance Officer,
One Financial Center Standish, Ayer & Wood, Inc.
Boston, MA 02111 Assistant Vice President and Compliance Officer,
Freedom Capital Management Corp. (1989-1992)
Nicholas S. Battelle, 6/24/42 Vice President Vice President and
c/o Standish, Ayer & Wood, Inc. Director, Standish, Ayer
One Financial Center & Wood, Inc.
Boston, MA 02111
Walter M. Cabot, 1/6/33 Vice President Senior Advisor and
c/o Standish, Ayer & Wood, Inc. Director, Standish, Ayer
One Financial Center & Wood, Inc.; prior to 1991,
Boston, MA 02111 President, Harvard Management Company
David H. Cameron, 11/2/55 Vice President Vice President and
c/o Standish, Ayer & Wood, Inc. Director, Standish, Ayer
One Financial Center & Wood, Inc.
Boston, MA 02111
Karen K. Chandor, 2/13/50 Vice President Vice President and
c/o Standish, Ayer & Wood, Inc. Director, Standish, Ayer
One Financial Center & Wood, Inc.
Boston, MA 02111
Lavinia B. Chase, 6/4/46 Vice President Vice President, Standish,
c/o Standish, Ayer & Wood, Inc. Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Susan B. Coan, 5/1/52 Vice President Vice President, Standish,
c/o Standish, Ayer & Wood, Inc. Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
W. Charles Cook II, 7/16/63 Vice President Vice President, Standish,
c/o Standish, Ayer & Wood, Inc. Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Joseph M. Corrado, 5/13/55 Vice President Vice President and Associate Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
21
<PAGE>
Position Held Principal Occupation
Name, Address and Date of Birth With Trust During Past 5 Years
- --------------------------------------------------------------------------------------------------------------------
Dolores S. Driscoll, 2/17/48 Vice President Vice President and Managing
c/o Standish, Ayer & Wood, Inc. Director, Standish, Ayer
One Financial Center & Wood, Inc.
Boston, MA 02111
Mark A. Flaherty, 4/24/59 Vice President Vice President,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Anne P. Herrmann, 1/26/56 Vice President Mutual Fund Administrator,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Ann S. Higgins, 4/8/35 Vice President Vice President, Standish,
c/o Standish, Ayer & Wood, Inc. Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Denise B. Kneeland, 8/19/51 Vice President Senior Operations Manager,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center since January, 1996; formerly,
Boston, MA 02111 Vice President, Scudder, Clark, and Stevens
Raymond J. Kubiak, 9/3/57 Vice President Vice President and
c/o Standish, Ayer & Wood, Inc. Director, Standish, Ayer
One Financial Center & Wood, Inc.
Boston, MA 02111
Maria D. Furman, 2/3/54 Vice President Vice President and
c/o Standish, Ayer & Wood, Inc. Director, Standish, Ayer
One Financial Center & Wood, Inc.
Boston, MA 02111
Phillip D. Leonardi, 4/24/62 Vice President Vice President, Standish,
c/o Standish, Ayer & Wood, Inc. Ayer & Wood, Inc. since
One Financial Center November 1993; formerly,
Boston, MA 02111 Investment Sales, Cigna Corporation (1993) and
Travelers Corporation (1984-1993)
Laurence A. Manchester, 5/24/43 Vice President Vice President and
c/o Standish, Ayer & Wood, Inc. Director, Standish, Ayer
One Financial Center & Wood, Inc.
Boston, MA 02111
George W. Noyes, 11/12/44 Vice President President and Managing
c/o Standish, Ayer & Wood, Inc. Director, Standish, Ayer
One Financial Center & Wood, Inc.
Boston, MA 02111
Arthur H. Parker, 8/12/35 Vice President Vice President and
c/o Standish, Ayer & Wood, Inc. Director, Standish, Ayer
One Financial Center & Wood, Inc.
Boston, MA 02111
22
<PAGE>
Position Held Principal Occupation
Name, Address and Date of Birth With Trust During Past 5 Years
- --------------------------------------------------------------------------------------------------------------------
Jennifer A. Pline, 3/8/60 Vice President Vice President, Standish,
c/o Standish, Ayer & Wood, Inc. Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Howard B. Rubin, 10/29/59 Vice President Vice President and
c/o Standish, Ayer & Wood, Inc. Director, Standish, Ayer
One Financial Center & Wood, Inc.
Boston, MA 02111
Michael C. Schoeck, 10/24/55 Vice President Vice President, Standish,
c/o Standish, Ayer & Wood, Inc. Ayer & Wood, Inc. since
One Financial Center August, 1993; formerly,
Boston, MA 02111 Vice President,
Commerzbank, Frankfurt, Germany
Austin C. Smith, 7/25/42 Vice President Vice President and
c/o Standish, Ayer & Wood, Inc. Director, Standish, Ayer
One Financial Center & Wood, Inc.
Boston, MA 02111
Stephen A. Smith, 3/13/49 Vice President Vice President, since
c/o Standish, Ayer & Wood, Inc. November 2, 1993; formerly,
One Financial Center Standish, Ayer & Wood, Inc.
Boston, MA 02111 Consultant Cambridge
David C. Stuehr, 3/1/58 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
James W. Sweeney, 5/15/59 Vice President Vice President and
c/o Standish, Ayer & Wood, Inc. Director, Standish, Ayer
One Financial Center & Wood, Inc.
Boston, MA 02111
Ralph S. Tate, 4/2/47 Vice President Vice President and
c/o Standish, Ayer & Wood, Inc. Director, Standish, Ayer
One Financial Center & Wood, Inc. since April,
Boston, MA 02111 1990; formerly Vice President,
Aetna Life & Casualty
Michael W. Thompson, 3/31/56 Vice President Vice President, Standish,
c/o Standish, Ayer & Wood, Inc. Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Christopher Van Alstyne, 3/24/60 Vice President Vice President,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
*Indicates that Trustee is an interested person of the Trust or the Portfolio
Trust for purposes of the 1940 Act.
</TABLE>
23
<PAGE>
Compensation of Trustees and Officers
Each of the Trust and the Portfolio Trust pays no compensation to the
Trustees of the Trust or the Portfolio Trust affiliated with Standish as the
Administrator of the Fund (the "Fund Administrator") or the Adviser,
respectively, or to the Trusts's and Portfolio Trust's officers. None of the
Trustees or officers have engaged in any financial transactions (other than the
purchase or redemption of the Fund's shares) with the Trust, the Portfolio Trust
or the Adviser.
The following table sets forth all compensation paid to the Trust's
Trustees as of the Fund's fiscal year ended December 31, 1995:
<TABLE>
<CAPTION>
Pension or Retirement Total Compensation
Aggregate Compensation Benefits Accrued as from Fund and
Name of Trustee from the Fund Part of Fund's Expenses Other Funds in Complex*
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
D. Barr Clayson $0 $0 $0
Richard C. Doll** 0 0 0
Samuel C. Fleming 6,000 0 41,750
Benjamin M. Friedman 5,285 0 36,750
John H. Hewitt 5,285 0 36,750
Edward H. Ladd 0 0 0
Caleb Loring, III 5,285 0 36,750
Richard S. Wood 0 0 0
* As of the date of this Statement of Additional Information there were 18
funds in the fund complex.
** Mr. Doll resigned as a Trustee effective December 6, 1995.
</TABLE>
- --------------------------------------------------------------------------------
Certain Shareholders
At March 1, 1996, Trustees and officers of the Trust and the Portfolio
Trust as a group beneficially owned (i.e., had voting and/or investment power)
less than 1% of the then outstanding shares of the Fund. At that date, no person
beneficially owned 5% or more of the then outstanding shares of the Fund.
Investment Adviser of the Portfolio Trust
Standish serves as the Adviser to the Portfolio pursuant to a written
investment advisory agreement with the Portfolio Trust. Prior to the close of
business on April 26, 1996, Standish managed directly the assets of the Fund
pursuant to an investment advisory agreement. This agreement was terminated by
the Fund on such date subsequent to the approval by the Fund's shareholders on
March 29, 1996 to implement certain changes in the Fund's investment
restrictions which enable the Fund to invest all of its investable assets in the
Portfolio. The Adviser is a Massachusetts corporation organized in 1933 and is
registered under the 1940 Act.
24
<PAGE>
The following, constituting all of the Directors and all of the
shareholders of the Adviser, are the Adviser's controlling persons: Caleb F.
Aldrich, Nicholas S. Battelle, Walter M. Cabot, Sr., David H. Cameron, Karen K.
Chandor, D. Barr Clayson, Richard C. Doll, Dolores S. Driscoll, Mark A.
Flaherty, Maria D. Furman, James E. Hollis III, Raymond J. Kubiak, Edward H.
Ladd, Laurence A. Manchester, David W. Murray, George W. Noyes, Arthur H.
Parker, Howard B. Rubin, Austin C. Smith, David C. Stuehr, James J. Sweeney,
Ralph S. Tate, and Richard S. Wood.
Certain services provided by the Adviser under the advisory agreement are
described in the Prospectus. These services are provided without reimbursement
by the Portfolio for any costs incurred. Under the investment advisory
agreement, the Adviser is paid a fee based upon a percentage of the Portfolio's
average daily net asset value computed as described in the Prospectus. The
expense limit voluntarily agreed to by the Adviser is described in the
Prospectus. The current fee is paid monthly. For services to the Fund during the
fiscal years ended December 31, 1993, 1994 and 1995, the Adviser received fees
from the Fund of $3,596,577, $4,750,132 and $6,321,967, respectively.
Pursuant to the investment advisory agreement, the Portfolio bears expenses
of its operations other than those incurred by the Adviser pursuant to the
investment advisory agreement. Among other expenses, the Portfolio will pay
share pricing expenses; custodian fees and expenses; administration fees; legal
and auditing fees and expenses; expenses of notices and reports to
interest-holders; registration and reporting fees and expenses; and Trustees'
fees and expenses.
Unless terminated as provided below, the investment advisory agreement
continues in full force and effect until April 26, 1998 and for successive
periods of one year thereafter, but only so long as each such continuance is
approved annually (i) by either the Trustees of the Portfolio Trust or by the
"vote of a majority of the outstanding voting securities" of the Portfolio, and,
in either event (ii) by vote of a majority of the Trustees of the Portfolio
Trust who are not parties to the investment advisory agreement or "interested
persons" (as defined in the 1940 Act) of any such party, cast in person at a
meeting called for the purpose of voting on such approval. The investment
advisory agreement may be terminated at any time without the payment of any
penalty by vote of the Trustees of the Portfolio Trust or by the "vote of a
majority of the outstanding voting securities" of the Portfolio or by the
Adviser, on sixty days' written notice to the other parties. The investment
advisory agreement terminates in the event of its assignment as defined in the
1940 Act.
25
<PAGE>
In an attempt to avoid any potential conflict with portfolio transactions
for the Portfolio, the Adviser, the Principal Underwriter, the Trust and the
Portfolio Trust have each adopted extensive restrictions on personal securities
trading by personnel of the Adviser and its affiliates. These restrictions
include: pre-clearance of all personal securities transactions and a prohibition
of purchasing initial public offerings of securities. These restrictions are a
continuation of the basic principle that the interests of the Fund and its
shareholders, and the Portfolio and its investors, come before those of the
Adviser and its employees.
Administrator of the Fund
Standish also serves as the administrator to the Fund (the "Fund
Administrator") pursuant to a written administration agreement with the Trust on
behalf of the Fund. Certain services provided by the Fund Administrator under
the administration agreement are described in the Prospectus. For these
services, the Fund Administrator currently does not receive any additional
compensation. The Trustees of the Trust may, however, determine in the future to
compensate the Fund Administrator for its administrative services. The
administration agreement provides that if the total expenses of the Fund and the
Portfolio in any fiscal year exceed the most restrictive expense limitation
applicable to the Fund in any state in which shares of the Fund are then
qualified for sale, the compensation due the Fund Administrator shall be reduced
by the amount of the excess, by a reduction or refund thereof at the time such
compensation is payable after the end of each calendar month during the fiscal
year, subject to readjustment during the year. Currently, the most restrictive
state expense limitation provision limits the Fund's expenses to 2 1/2% of the
first $30 million of average net assets, 2% of the next $70 million of such net
assets and 1 1/2% of such net assets in excess of $100 million.
The Fund's administration agreement can be terminated by either party on
not more than sixty days' written notice.
Administrator of the Portfolio
IBT Trust Company (Cayman) Ltd., P.O. Box 501, Grand Cayman, Cayman
Islands, BWI, serves as the administrator to the Portfolio (the "Portfolio
Administrator") pursuant to a written administration agreement with the
Portfolio Trust on behalf of the Portfolio. The Portfolio Administrator provides
the Portfolio Trust with office space for managing its affairs, and with certain
clerical services and facilities. For its services to the Portfolio Trust, the
Portfolio Administrator currently receives a fee from the Portfolio in the
amount of $7,500 annually.
The Portfolio's administration agreement can be terminated by either party
on not more than sixty days' written notice.
Distributor of the Fund
Standish Fund Distributors, L.P. (the "Principal Underwriter"), an
affiliate of the Adviser, serves as the Trust's exclusive principal underwriter
and holds itself available to receive purchase orders for the Fund's shares. In
that capacity, the Principal Underwriter has been granted the right, as agent of
the Trust, to solicit and accept orders for the purchase of the Fund's shares in
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accordance with the terms of the Underwriting Agreement between the Trust and
the Principal Underwriter. Pursuant to the Underwriting Agreement, the Principal
Underwriter has agreed to use its best efforts to obtain orders for the
continuous offering of the Fund's shares. The Principal Underwriter receives no
commissions or other compensation for its services, and has not received any
such amounts in any prior year. The Underwriting Agreement shall continue in
effect with respect to the Fund until two years after its execution and for
successive periods of one year thereafter only if it is approved at least
annually thereafter (i) by a vote of the holders of a majority of the Fund's
outstanding shares or by the Trustees of the Trust or (ii) by a vote of a
majority of the Trustees of the Trust who are not "interested persons" (as
defined by the 1940 Act) of the parties to the Underwriting Agreement, cast in
person at a meeting called for the purpose of voting on such approval. The
Underwriting Agreement will terminate automatically if assigned by either party
thereto and is terminable at any time without penalty by a vote of a majority of
the Trustees of the Trust, a vote of a majority of the Trustees who are not
"interested persons" of the Trust, or by a vote of the holders of a majority of
the Fund's outstanding shares, in any case without payment of any penalty on not
more than 60 days' written notice to the other party. The offices of the
Principal Underwriter are located at One Financial Center, 26th Floor, Boston,
Massachusetts 02111.
REDEMPTION OF SHARES
Detailed information on redemption of shares is included in the Prospectus.
The Trust may suspend the right to redeem Fund shares or postpone the date of
payment upon redemption for more than seven days (i) for any period during which
the New York Stock Exchange is closed (other than customary weekend or holiday
closings) or trading on the exchange is restricted; (ii) for any period during
which an emergency exists as a result of which disposal by the Portfolio of
securities owned by it or determination by the Portfolio of the value of its net
assets is not reasonably practicable; or (iii) for such other periods as the SEC
may permit for the protection of shareholders of the Fund.
The Trust intends to pay redemption proceeds in cash for all Fund shares
redeemed but, under certain conditions, the Trust may make payment wholly or
partly in portfolio securities from the Portfolio, in conformity to the
applicable rule of the SEC. Portfolio securities paid upon redemption of Fund
shares will be valued at their then current market value. The Trust, on behalf
of each of its series, has elected to be governed by the provisions of Rule
18f-1 under the 1940 Act which limits the Fund's obligation to make cash
redemption payments to any shareholder during any 90-day period to the lesser of
$250,000 or 1% of the Fund's net asset value at the beginning of such period. An
investor may incur brokerage costs in converting portfolio securities received
upon redemption to cash. The Portfolio has advised the Trust that the Portfolio
will not redeem in-kind except in circumstances in which the Fund is permitted
to redeem in-kind or except in the event the Fund completely withdraws its
interest from the Portfolio.
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PORTFOLIO TRANSACTIONS
The Adviser is responsible for placing the Portfolio's portfolio
transactions and will do so in a manner deemed fair and reasonable to the
Portfolio and not according to any formula. The primary consideration in all
portfolio transactions will be prompt execution of orders in an efficient manner
at the most favorable price. In selecting broker-dealers and in negotiating
commissions, the Adviser will consider the firm's reliability, the quality of
its execution services on a continuing basis and its financial condition. When
more than one firm is believed to meet these criteria, preference may be given
to firms which also sell shares of the Fund. In addition, if the Adviser
determines in good faith that the amount of commissions charged by a broker is
reasonable in relation to the value of the brokerage and research services
provided by such broker, the Fund may pay commissions to such broker in an
amount greater than the amount another firm may charge. Research services may
include (i) furnishing advice as to the value of securities, the advisability of
investing in, purchasing or selling securities, and the availability of
securities or purchasers or sellers of securities, (ii) furnishing analyses and
reports concerning issuers, industries, securities, economic factors and trends,
portfolio strategy, and the performance of accounts, and (iii) effecting
securities transactions and performing functions incidental thereto (such as
clearance and settlement). Research services furnished by firms through which
the Portfolio effects its securities transactions may be used by the Adviser in
servicing other accounts; not all of these services may be used by the Adviser
in connection with the Portfolio. The investment advisory fee paid by the
Portfolio under the advisory agreement will not be reduced as a result of the
Adviser's receipt of research services.
The Adviser also places portfolio transactions for other advisory accounts.
The Adviser will seek to allocate portfolio transactions equitably whenever
concurrent decisions are made to purchase or sell securities for the Portfolio
and another advisory account. In some cases, this procedure could have an
adverse effect on the price or the amount of securities available to the
Portfolio. In making such allocations, the main factors considered by the
Adviser will be the respective investment objectives, the relative size of
portfolio holdings of the same or comparable securities, the availability of
cash for investment, the size of investment commitments generally held, and
opinions of the persons responsible for recommending the investment.
Because most of the Fund's securities transactions are effected on a
principal basis involving a "spread" or "dealer mark-up," the Fund has not paid
any brokerage commissions during the past three years.
DETERMINATION OF NET ASSET VALUE
The Fund's net asset value is calculated each day on which the New York
Stock Exchange is open (a "Business Day"). Currently the New York Stock Exchange
is not open on weekends, New Year's Day, Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. The net
asset value of the Fund's shares is determined as of the close of regular
trading on the New York Stock Exchange (currently 4:00 p.m., New York City time)
and is computed by dividing the value of all securities and other assets of the
Fund (substantially all of which will be represented by the Fund's investment in
the Portfolio) less all liabilities by the number of Fund shares outstanding,
and adjusting to the nearest cent per share. Expenses and fees of the Fund are
accrued daily and taken into account for the purpose of determining net asset
value.
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The value of the Portfolio's net assets (i.e., the value of its securities
and other assets less its liabilities, including expenses payable or accrued) is
determined at the same time and on the same days as the net asset value per
share of the Fund is determined. Each investor in the Portfolio, including the
Fund, may add to or reduce its investment in the Portfolio on each Business Day.
As of 4:00 p.m. (Eastern time) on each Business Day, the value of each
investor's interest in the Portfolio will be determined by multiplying the net
asset value of the Portfolio by the percentage representing that investor's
share of the aggregate beneficial interests in the Portfolio. Any additions or
reductions which are to be effected on that day will then be effected. The
investor's percentage of the aggregate beneficial interests in the Portfolio
will then be recomputed as the percentage equal to the fraction (i) the
numerator of which is the value of such investor's investment in the Portfolio
as of 4:00 p.m. on such day plus or minus, as the case may be, the amount of net
additions to or reductions in the investor's investment in the Portfolio
effected on such day, and (ii) the denominator of which is the aggregate net
asset value of the Portfolio as of 4:00 p.m. on such day plus or minus, as the
case may be, the amount of the net additions to or reductions in the aggregate
investments in the Portfolio by all investors in the Portfolio. The percentage
so determined will then be applied to determine the value of the investor's
interest in the Portfolio as of 4:00 p.m. on the following Business Day.
Portfolio securities are valued at the last sale prices, on the valuation
day, on the exchange or national securities market on which they are primarily
traded. Securities not listed on an exchange or national securities market, or
securities for which there were no reported transactions, are valued at the last
quoted bid prices. Securities for which quotations are not readily available and
all other assets are valued at fair value as determined by the Adviser in
accordance with procedures approved by the Trustees.
Money market instruments with less than sixty days remaining to maturity
when acquired by the Portfolio are valued on an amortized cost basis. If the
Portfolio acquires a money market instrument with more than sixty days remaining
to its maturity, it is valued at current market value until the sixtieth day
prior to maturity and will then be valued at amortized cost based upon the value
on such date unless the Trustees determine during such sixty-day period that
amortized cost does not represent fair value.
THE FUND AND ITS SHARES
The Fund is an investment series of the 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 of the Trust have authority to issue an
unlimited number of shares of beneficial interest, par value $.01 per share, of
the Fund. Each share represents an equal proportionate interest in the Fund with
each other share and is entitled to such dividends and distributions as are
declared by the Trustees. Shareholders are not entitled to any preemptive,
conversion or subscription rights. All shares, when issued, will be fully paid
and non-assessable by the Trust. Upon any liquidation of the Fund, shareholders
are entitled to share pro rata in the net assets available for distribution.
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Pursuant to the Declaration, the Trustees may create additional funds by
establishing additional series of shares in the Trust. The establishment of
additional series would not affect the interests of current shareholders in the
Fund. As of the date of this Statement of Additional Information, the Trustees
have established fourteen other series of the Trust that publicly offer their
shares. Pursuant to the Declaration, the Board may establish and issue multiple
classes of shares for each series of the Trust. As of the date of this Statement
of Additional Information, the Trustees do not have any plan to establish
multiple classes of shares for the Fund.
All Fund shares have equal rights with regard to voting, and shareholders
of the Fund have the right to vote as a separate class with respect to matters
as to which their interests are not identical to those of shareholders of other
classes of the Trust, including any change of investment policy requiring the
approval of shareholders.
Under Massachusetts law, shareholders of the Trust could, under certain
circumstances, be held liable for the obligations of the Trust. However, the
Agreement and Declaration of Trust disclaims shareholder liability for acts or
obligations of the Trust and requires that notice of this disclaimer be given in
each agreement, obligation or instrument entered into or executed by the Trust
or a Trustee. The Declaration also provides for indemnification from the assets
of the Trust for all losses and expenses of any Trust shareholder held liable
for the obligations of the Trust. Thus, the risk of a shareholder incurring a
financial loss on account of his or its liability as a shareholder of the Trust
is limited to circumstances in which the Trust would be unable to meet its
obligations. The possibility that these circumstances would occur is remote.
Upon payment of any liability incurred by the Trust, the shareholder paying the
liability will be entitled to reimbursement from the general assets of the
Trust. The Declaration also provides that no series of the Trust is liable for
the obligations of any other series. The Trustees intend to conduct the
operations of the Trust to avoid, to the extent possible, ultimate liability of
shareholders for liabilities of the Trust.
Except as described below, whenever the Trust is requested to vote on a
fundamental policy of or matters pertaining to the Portfolio, the Trust will
hold a meeting of the Fund's shareholders and will cast its vote proportionately
as instructed by the Fund's shareholders. Fund shareholders who do not vote will
not affect the Trust's votes at the Portfolio meeting. The percentage of the
Trust's votes representing Fund shareholders not voting will be voted by the
Trustees of the Trust in the same proportion as the Fund shareholders who do, in
fact, vote. Subject to applicable statutory and regulatory requirements, the
Fund would not request a vote of its shareholders with respect to (a) any
proposal relating to the Portfolio, which proposal, if made with respect to the
Fund, would not require the vote of the shareholders of the Fund, or (b) any
proposal with respect to the Portfolio that is identical in all material
respects to a proposal that has previously been approved by shareholders of the
Fund. Any proposal submitted to holders in the Portfolio, and that is not
required to be voted on by shareholders of the Fund, would nonetheless be voted
on by the Trustees of the Trust.
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THE PORTFOLIO AND ITS INVESTORS
The Portfolio is a series of Standish, Ayer & Wood Master Portfolio, a
newly formed trust and, like the Fund, is an open-end management investment
company under the Investment Company Act of 1940, as amended. The Portfolio
Trust was organized as a master trust fund under the laws of the State of New
York on January 18, 1996.
Interests in the Portfolio have no preemptive or conversion rights, and are
fully paid and non-assessable, except as set forth in the Prospectus. The
Portfolio normally will not hold meetings of holders of such interests except as
required under the 1940 Act. The Portfolio would be required to hold a meeting
of holders in the event that at any time less than a majority of its Trustees
holding office had been elected by holders. The Trustees of the Portfolio
continue to hold office until their successors are elected and have qualified.
Holders holding a specified percentage of interests in the Portfolio may call a
meeting of holders in the Portfolio for the purpose of removing any Trustee. A
Trustee of the Portfolio may be removed upon a majority vote of the interests
held by holders in the Portfolio qualified to vote in the election. The 1940 Act
requires the Portfolio to assist its holders in calling such a meeting. Upon
liquidation of the Portfolio, holders in the Portfolio would be entitled to
share pro rata in the net assets of the Portfolio available for distribution to
holders.
Each holder in the Portfolio is entitled to a vote in proportion to its
percentage interest in the Portfolio.
TAXATION
Each series of the Trust, including the Fund, is treated as a separate
entity for accounting and tax purposes. The Fund has qualified and elected to be
treated as a "regulated investment company" ("RIC") under Subchapter M of the
Code, and intends to continue to so qualify in the future. As such and by
complying with the applicable provisions of the Code regarding the sources of
its income, the timing of its distributions, and the diversification of its
assets, the Fund will not be subject to Federal income tax on its investment
company taxable income (i.e., all income, after reduction by deductible
expenses, other than its "net capital gain," which is the excess, if any, of its
net long-term capital gain over its net short-term capital loss) and net capital
gain which are distributed to shareholders at least annually in accordance with
the timing requirements of the Code.
The Trust anticipates that the Portfolio will be treated as a partnership
for federal income tax purposes. As such, the Portfolio is not subject to
federal income taxation. Instead, the Fund must take into account, in computing
its federal income tax liability, its share of the Portfolio's income, gains,
losses, deductions, credits and tax preference items, without regard to whether
it has received any cash distributions from the Portfolio. Because the Fund
invests its assets in the Portfolio, the Portfolio normally must satisfy the
applicable source of income and diversification requirements in order for the
Fund to satisfy them. The Portfolio will allocate at least annually among its
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investors, including the Fund, each investor's distributive share of the
Portfolio's net investment income, net realized capital gains, and any other
items of income, gain, loss, deduction or credit. The Portfolio will make
allocations to the Fund in accordance with the Code and applicable regulations
and will make moneys available for withdrawal at appropriate times and in
sufficient amounts to enable the Fund to satisfy the tax distribution
requirements that apply to the Fund and that must be satisfied in order to avoid
Federal income and/or excise tax on the Fund. For purposes of applying the
requirements of the Code regarding qualification as a RIC, the Fund will be
deemed (i) to own its proportionate share of each of the assets of the Portfolio
and (ii) to be entitled to the gross income of the Portfolio attributable to
such share.
The Fund will be subject to a 4% nondeductible federal excise tax on
certain amounts not distributed (and not treated as having been distributed) on
a timely basis in accordance with annual minimum distribution requirements. The
Fund intends under normal circumstances to avoid liability for such tax by
satisfying such distribution requirements.
The Fund is not subject to Massachusetts corporate excise or franchise
taxes. Provided that the Fund qualifies as a regulated investment company under
the Code, it will also not be required to pay any Massachusetts income tax.
The Fund will not distribute net capital gains realized in any year to the
extent that a capital loss is carried forward from prior years against such
gain. For federal income tax purposes, the Fund is permitted to carry forward a
net capital loss in any year to offset its own net capital gains, if any, during
the eight years following the year of the loss. To the extent subsequent net
capital gains are offset by such losses, they would not result in federal income
tax liability to the Fund and, as noted above, would not be distributed as such
to shareholders. The Fund has $14,954,615 of capital loss carryforwards, which
expire on December 31, 2002, available to offset future net capital gains.
If the Portfolio invests in zero coupon securities, certain increasing rate
or deferred interest securities or, in general, other securities with original
issue discount (or with market discount if the Portfolio elects to include
market discount in income currently), the Portfolio must accrue income on such
investments prior to the receipt of the corresponding cash payments. However,
the Fund must distribute, at least annually, all or substantially all of its net
income, including its distributive share of such income accrued by the
Portfolio, to shareholders to qualify as a regulated investment company under
the Internal Revenue Code and avoid federal income and excise taxes. Therefore,
the Portfolio may have to dispose of its portfolio securities under
disadvantageous circumstances to generate cash, or may have to leverage itself
by borrowing the cash, to provide cash that the Fund may withdraw from the
Portfolio and distribute in order to satisfy the distribution requirements
applicable to the Fund.
Limitations imposed by the Code on regulated investment companies like the
Fund may restrict the Portfolio's ability to enter into futures, options or
currency forward transactions.
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Certain options, futures or currency forward transactions undertaken by the
Portfolio may cause the Portfolio to recognize gains or losses from marking to
market even though the Portfolio's positions have not been sold or terminated
and affect the character as long-term or short-term (or, in the case of certain
options, futures or forward contracts, as ordinary income or loss) and timing of
some capital gains and losses realized by the Portfolio and allocable to the
Fund. Any net mark to market gains may also have to be distributed to satisfy
the distribution requirements referred to above even though no corresponding
cash amounts may concurrently be received, possibly requiring the disposition of
portfolio securities or borrowing to obtain the necessary cash. Also, certain of
the Portfolio's losses on the Portfolio's transactions involving options,
futures or forward contracts and/or offsetting Portfolio positions may be
deferred rather than being taken into account currently in calculating the
Portfolio's taxable income or gain. Certain of the applicable tax rules may be
modified if the Portfolio is eligible and chooses to make one or more of certain
tax elections that may be available. Because the Fund's income, gains and losses
consist primarily of its share of the income, gains and losses of the Portfolio,
which are directly affected by the provisions described in this paragraph, these
transactions may affect the amount, timing and character of the Fund's
distributions to shareholders. The Portfolio will take into account the special
tax rules (including consideration of available elections) applicable to
options, futures or forward contracts in order to minimize any potential adverse
tax consequences.
The Federal income tax rules applicable to mortgage dollar rolls and
interest rate swaps, caps, floors and collars are unclear in certain respects,
and the Portfolio may be required to account for these instruments under tax
rules in a manner that, under certain circumstances, may limit its transactions
in these instruments.
Foreign exchange gains and losses realized by the Portfolio in connection
with certain transactions involving foreign currency-denominated debt
securities, if any, certain foreign currency futures and options, foreign
currency forward contracts, foreign currencies, or payables or receivables
denominated in a foreign currency are subject to Section 988 of the Code, which
generally causes such gains and losses to be treated as ordinary income and
losses and, because the Fund invests in the Portfolio, may affect the amount,
timing and character of Fund distributions to shareholders. In some cases,
elections may be available that would alter this treatment. Any such
transactions that are not directly related to the Portfolio's investment in
stock or securities, possibly including speculative currency positions or
currency derivatives not used for hedging purposes, may increase the amount of
gain it is deemed to recognize from the sale of certain investments held for
less than three months. The Fund's share of such gain (plus any such gain the
Fund may realize from other sources) is limited under the Code to less than 30%
of the Fund's annual gross income, and could under future Treasury regulations
produce income not among the types of "qualifying income" from which the Fund
must derive at least 90% of its annual gross income.
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The Portfolio may be subject to withholding and other taxes imposed by
foreign countries with respect to its investments in foreign securities. Tax
conventions between certain countries and the U.S. may reduce or eliminate such
taxes. Investors in the Fund would be entitled to claim U.S. foreign tax credits
with respect to such taxes, subject to certain provisions and limitations
contained in the Code, only if more than 50% of the value of the Fund's total
assets at the close of any taxable year were to consist of stock or securities
of foreign corporations and the Fund were to file an election with the Internal
Revenue Service. Because the investments of the Portfolio are such that the Fund
expects that it generally will not meet this 50% requirement, shareholders of
the Fund generally will not directly take into account the foreign taxes, if
any, paid by the Portfolio and allocable to the Fund, and will not be entitled
to any related tax deductions or credits. Such taxes will reduce the amounts the
Fund would otherwise have available to distribute.
If the Portfolio acquires stock in certain non-U.S. corporations that
receive at least 75% of their annual gross income from passive sources (such as
interest, dividends, rents, royalties or capital gain) or hold at least 50% of
their assets in investments producing such passive income ("passive foreign
investment companies"), the Fund could be subject to Federal income tax and
additional interest charges on its allocable portion of "excess distributions"
received from such companies or gain from the sale of stock in such companies,
even if all income or gain actually allocated to the Fund is timely distributed
to its shareholders. The Fund would not be able to pass through to its
shareholders any credit or deduction for such a tax. Certain elections may, if
available, ameliorate these adverse tax consequences, but any such election
would require the Fund to recognize taxable income or gain without the
concurrent receipt of cash. The Portfolio may limit and/or manage its stock
holdings, if any, in passive foreign investment companies to minimize the Fund's
tax liability or maximize its return from these investments.
Investment in debt obligations by the Portfolio that are at risk of or in
default presents special tax issues for the Fund. Tax rules are not entirely
clear about issues such as when the Portfolio may cease to accrue interest,
original issue discount, or market discount, when and to what extent deductions
may be taken for bad debts or worthless securities, how payments received on
obligations in default should be allocated between principal and income, and
whether exchanges of debt obligations in a workout context are taxable. These
and other issues will be addressed by the Portfolio, in the event that it holds
such obligations, in order to reduce the risk of the Fund, or any other RIC
investing in the Portfolio, distributing insufficient income to preserve its
status as a RIC and seek to avoid becoming subject to Federal income or excise
tax.
Due to possible unfavorable consequences under present tax law, the
Portfolio does not currently intend to acquire "residual" interests in real
estate mortgage investment conduits ("REMICs"), although the Portfolio may
acquire "regular" interests in REMICs.
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Distributions from the Fund's current or accumulated earnings and profits
("E&P"), as computed for Federal income tax purposes, will be taxable as
described in the Fund's Prospectus whether taken in shares or in cash.
Distributions, if any, in excess of E&P will constitute a return of capital,
which will first reduce an investor's tax basis in Fund shares and thereafter
(after such basis is reduced to zero) will generally give rise to capital gains.
Shareholders electing to receive distributions in the form of additional shares
will have a cost basis for federal income tax purposes in each share so received
equal to the amount of cash they would have received had they elected to receive
the distributions in cash, divided by the number of shares received.
The Fund's distributions to its corporate shareholders would potentially
qualify in their hands for the corporate dividends received deduction, subject
to certain holding period requirements and limitations on debt financing under
the Code, only to the extent the Fund was properly allocated dividend income
from the Portfolio's stock investments in U.S. domestic corporations. Although
the Portfolio is not expected to concentrate its investments in such stock, the
Portfolio is permitted to acquire preferred stocks, and it is therefore possible
that a portion of the Fund's distributions, attributable to its distributive
share of the dividends the Portfolio receives with respect to such preferred
stocks, may qualify for the dividends received deduction. Such qualifying
portion, if any, may affect a corporate shareholder's liability for alternative
minimum tax and/or result in basis reductions in certain circumstances.
At the time of an investor's purchase of Fund shares, a portion of the
purchase price is often attributable to undistributed net investment income
and/or realized or unrealized appreciation in the Fund's share of the
Portfolio's portfolio. Consequently, subsequent distributions by the Fund from
such income and/or appreciation may be taxable to such investor even if the net
asset value of the investor's shares is, as a result of the distributions,
reduced below the investor's cost for such shares, and the distributions in
reality represent a return of a portion of the purchase price.
Upon a redemption (including a repurchase) of shares of the Fund, a
shareholder may realize a taxable gain or loss, depending upon the difference
between the redemption proceeds and the shareholder's tax basis in his shares.
Such gain or loss will be treated as capital gain or loss if the shares are
capital assets in the shareholder's hands and will be long-term or short-term,
depending upon the shareholder's tax holding period for the shares. Any loss
realized on a redemption may be disallowed to the extent the shares disposed of
are replaced with other shares of the Fund within a period of 61 days beginning
30 days before and ending 30 days after the shares are disposed of, such as
pursuant to automatic dividend reinvestments. In such a case, the basis of the
shares acquired will be adjusted to reflect the disallowed loss. Any loss
realized upon the redemption of shares with a tax holding period of six months
or less will be treated as a long-term capital loss to the extent of any amounts
treated as distributions of long-term capital gain with respect to such shares.
Different tax treatment, including penalties on certain excess
contributions and deferrals, certain pre-retirement and post-retirement
distributions and certain prohibited transactions, is accorded to accounts
maintained as qualified retirement plans. Shareholders should consult their tax
advisers for more information.
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The foregoing discussion relates solely to U.S. Federal income tax law as
applicable to U.S. persons (i.e., U.S. citizens or residents and U.S. domestic
corporations, partnerships, trusts or estates) subject to tax under such law.
The discussion does not address special tax rules applicable to certain classes
of investors, such as tax-exempt entities, insurance companies, and financial
institutions. Dividends, capital gain distributions, and ownership of or gains
realized on the redemption (including an exchange) of Fund shares may also be
subject to state and local taxes. Shareholders should consult their own tax
advisers as to the Federal, state or local tax consequences of ownership of
shares of, and receipt of distributions from, the Fund in their particular
circumstances.
Non-U.S. investors not engaged in a U.S. trade or business with which their
investment in the Fund is effectively connected will be subject to U.S. Federal
income tax treatment that is different from that described above. These
investors may be subject to nonresident alien withholding tax at the rate of 30%
(or a lower rate under an applicable tax treaty) on amounts treated as ordinary
dividends from the Fund and, unless an effective IRS Form W-8 or authorized
substitute is on file, to 31% backup withholding on certain other payments from
the Fund. Non-U.S. investors should consult their tax advisers regarding such
treatment and the application of foreign taxes to an investment in the Fund.
ADDITIONAL INFORMATION
The Fund's Prospectus and this Statement of Additional Information omit
certain information contained in the registration statement filed with the SEC,
which may be obtained from the SEC's principal office at 450 Fifth Street, N.W.;
Washington, D.C. 20549, upon payment of the fee prescribed by the rules and
regulations promulgated by the Commission.
EXPERTS AND FINANCIAL STATEMENTS
The Fund's financial statements for the fiscal years ended December 31,
1993, 1994 and 1995 included in this Statement of Additional Information have
been audited by Coopers & Lybrand L.L.P., independent accountants, as set forth
in its report appearing elsewhere herein, and have been so included in reliance
upon the authority of the report of such auditors as experts in accounting and
auditing. Financial highlights of the Fund for the fiscal years ended December
31, 1990, 1991, 1992 were audited by Deloitte & Touche LLP, independent
auditors, and have been similarly included in reliance upon the expertise of
that firm. Coopers & Lybrand L.L.P., independent accountants, will audit the
Fund's financial statements for the fiscal year ending December 31, 1996.
Coopers & Lybrand, an affiliate of Coopers & Lybrand L.L.P., will audit the
Portfolio's financial statements for the fiscal year ending December 31, 1996.
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Standish, Ayer & Wood Investment Trust
Standish Fixed Income Fund Series
Financial Statements for the Year Ended
December 31, 1995
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Standish, Ayer & Wood Investment Trust
Chairman's Message
January 29, 1996
Dear Standish, Ayer & Wood Investment Trust Shareholder:
I am pleased to have an opportunity to review the major developments at
Standish, Ayer & Wood during this past year as they relate to the activities of
the Investment Trust. The major news for our clients in 1995 was the spectacular
performance of the U.S. investment markets. While we would, of course, like to
claim credit for producing the full extent of these splendid returns, the
reality is obvious: The markets themselves are beyond our control. For the year
as a whole, U.S. stocks, as represented by the Standard and Poor's 500 Index,
produced a total return of 37.6%, and higher grade intermediate-term bonds, as
represented by the Lehman Brothers Aggregate Index, provided a total return of
18.5%. Nearly as surprising, stock and bond prices marched steadily upward
throughout the year, a persistent and almost uninterrupted advance.
Even after the subdued markets of 1994, neither we nor most other investment
managers expected 1995 to be anywhere near as good as it turned out to be. In
this context, we are generally pleased by our investment performance. In most
asset classes, we kept pace with or modestly exceeded market returns. We adhered
to our established investment philosophies, which are designed to add reasonably
consistent increments of value. Our clients seem to be pleased by our efforts as
we continue to have very little client turnover.
As a firm, we have registered moderate growth during the year. Reflecting some
flow of new clients as well as market appreciation, our clients' assets under
management at the end of 1995 totalled $29.4 billion, an increase from $24.4
billion at the end of 1994. We are particularly pleased by the growth in new
assets managed for insurance companies and by the increases in assets of both
large capitalization and small capitalization U.S. common stocks.
The asset class of greatest disappointment in 1995 was international equities.
Not only did the asset class continue to provide subpar returns, but our
portfolios underperformed the international equity markets. These results
reflect judgments early in 1995 to hedge a portion of the currency exposure back
to dollars and to have a moderate stake in emerging markets. While we believe we
have rectified those problems, we are not satisfied with the results and are
working vigorously to improve future performance. We are also counseling our
clients not to lose faith in the international equity asset class despite its
recent disappointing returns.
The figure for total Standish assets under management includes about $1.6
billion managed in conjunction with Standish International Management Company,
L.P. (SIMCO), our affiliate that manages overseas assets for domestic clients
and U.S. assets for overseas clients. It also includes $3.9 billion in the
Standish Investment Trust, our mutual fund organization. In addition, the asset
total reflects an increase over the last few years in the assets we manage in
private, non-mutual fund vehicles.
We introduced two new mutual funds at mid-year 1995, namely the Standish Fixed
Income Fund II (which is designed to parallel the Standish Fixed Income Fund but
exclude the purchase of both nondollar bonds and below-investment-grade
securities), and the Standish Controlled Maturity Fund (which is designed for
investors who wish less volatility and interest rate risk than traditional
intermediate-maturity bonds).
At the beginning of 1996, we introduced two additional mutual funds, the
Standish Tax-Sensitive Equity Fund and the Standish Small Cap Tax-Sensitive
Equity Fund. At Standish we have noted for some time the adverse impact for
taxable investors of high portfolio turnover, which triggers capital gains,
possibly including short-term gains that may result in an even greater tax
liability for investors. We believe there is a major opportunity through both
separate account management and these funds to improve aftertax returns by
limiting the portfolio turnover and managing capital gains.
2
<PAGE>
During 1995, Standish acquired all remaining interests in the business of the
joint venture between Consolidated Investment Corp. (CIC) and Standish, entered
into over seven years ago. Consolidated had been formed by Trigon (previously
Blue Cross/Blue Shield of Virginia) to manage shorter-term taxable and tax
exempt fixed income portfolios. We and Trigon agreed that it was best to have
this unit operating under one owner.
Standish continues to be proud of its structure as an independent management
firm with ownership in the hands of investment professionals active in the
business. There were no changes during 1995 either in corporate structure or in
the people who own the enterprise.
We appreciate the opportunity to serve you, and we remain confident that we have
the resources and the organization to do a superior job. We will be working hard
to fulfill your expectations in 1996.
Sincerely yours,
Edward H. Ladd
Chairman
3
<PAGE>
Standish, Ayer & Wood Investment Trust
Standish Fixed Income Fund Series
Management Discussion
In sharp contrast to 1994, 1995 will be remembered as one of the finest years
ever for fixed income investors as nearly every sector of the bond market
produced impressive double digit returns. Against this backdrop, the Standish
Fixed Income Fund provided its best absolute one-year return year ever of 18.54%
versus 18.47% and 19.24% for the Lehman Brothers Aggregate and Government
Corporate Indices, respectively.
Reviewing the year, 1995 started off on a strong note. The first and second
quarters for the U.S. Treasury market were both exceptional from a total return
standpoint as investors reacted to favorable inflation statistics and growing
evidence of an economic slowdown. From a relative return standpoint, this was a
difficult period for the Fund as nondollar markets and, to a lesser extent,
mortgages failed to keep pace with the treasury market. Our response to the
underperformance in mortgages was to increase the weighting in the Fund to take
advantage of historically cheap valuations across the sector. In the nondollar
sector, we maintained our exposure until these markets recovered substantially.
We then trimmed the allocation late in the third quarter as we became
increasingly concerned that the U.S. market may fare better than many overseas
markets. In the fourth quarter, we adjusted our view again by increasing the
interest rate exposure of the remaining nondollar sector allocation to enhance
return should these markets outperform. Both of these sector responses helped
the Fund outperform the benchmark indices during the second half of the year.
On a more positive note the Fund was overweighted in corporate bonds which were
steady contributors all year despite fears of an economic slowdown and
relatively heavy new issue supply. Our strategy of focusing on rapidly
improving, medium-quality companies continued to result in credit rating
upgrades across a wide variety of industries. These upgrades as well as
improving market sentiment for many of our holdings added measurably to absolute
and relative returns.
As we enter 1996, we believe that the bond market is fully or near fully valued.
We acknowledge that the economy is slowing and that inflation pressures are
modest but believe that the market is already discounting much of this favorable
news. Consequently, we are projecting that upfront yield will be a more
important determinant of absolute return going forward and believe that we have
positioned the Fund well in an environment of more stable or modestly higher
interest rates.
As always, we thank you for your continued confidence as shareholders and hope
that this information is helpful to you in reviewing your overall investment
strategies. A graph on the accompanying page shows the cumulative performance of
the Fund versus its relative benchmarks.
Caleb F. Aldrich
4
<PAGE>
Standish, Ayer & Wood Investment Trust
Standish Fixed Income Fund Series
Comparison of Change in Value of $100,000 Investment in Standish Fixed
Income Fund,
Lehman Gov't/Corp Index and Lehman Aggregate Index
The following is a description of the graphical chart omitted from electronic
format:
This line chart shows the cumulative performance of the Standish Fixed Income
Fund compared with the Lehman Gov't/Corp Index and Lehman Aggregate Index for
the period March 30, 1987 to December 31, 1995, based upon a $100,000
investment. Also included are the average annual total returns for one year,
five year, and since inception.
5
<PAGE>
<TABLE>
<CAPTION>
Standish, Ayer & Wood Investment Trust
Standish Fixed Income Fund Series
Portfolio of Investments
Par Value
Security Rate Maturity Value (Note 1A)
- ------------------------------------------------------------- -------- ---------------- ------------------- --------------------
Bonds - 96.9%
- -------------------------------------------------------------
Asset Backed Securities - 3.6%
- -------------------------------------------------------------
<S> <C> <C> <C> <C>
Advanta Home Equity Loan Trust 91-1A 9.00 02/25/06 2,538,016 $ 2,660,158
AFC Home Equity Loan Trust 93-2 6.00 01/20/13 165,925 163,280
Contimortgage Home Equity Loan Trust 94-5A2 9.07 10/15/09 19,600,000 20,086,938
Contimortgage Home Equity Loan Trust 95-1A2A 8.60 02/15/10 10,100,000 10,355,656
CSFB 95-A 144A** 7.00 11/15/05 11,150,000 11,136,063
Greentree Securities Trust 94-A 6.90 02/15/04 5,379,954 5,416,941
Greentree Securities Trust 95-A 7.25 07/15/05 7,666,419 7,774,228
OSCC Home Equity 92-3 A2 6.30 09/25/07 60,120 60,233
OSCC Home Equity 92-4 6.55 11/25/07 166,397 167,593
TMS Home Equity 92-B 6.90 07/15/07 139,052 140,725
TMS Home Equity 94-DA4 8.75 09/15/20 3,250,000 3,451,602
UCFC Home Equity Loan Trust 94 DA-4 8.78 02/10/16 16,562,000 17,612,652
UCFC Home Equity Loan Trust 94-BA6 7.10 06/10/23 2,517,270 2,558,175
--------------------
$ 81,584,244
--------------------
Bank Bonds - 2.6%
- -------------------------------------------------------------
Anchor Bancorp Notes 8.94 07/09/03 7,325,000 $ 7,599,688
Bank of Boston Notes 8.38 12/15/02 225,000 251,777
Bank of Boston Notes 9.50 08/15/97 35,000 37,121
Capital One Bank Notes 6.39 06/29/98 250,000 253,013
Capital One Bank Notes 8.63 01/15/97 12,975,000 13,337,003
Coast Federal Bank Notes 13.00 12/31/02 5,000,000 5,709,500
First Nationwide Bank Notes 12.25 05/15/01 13,200,000 14,982,000
First USA Bank Notes 5.75 01/15/99 200,000 199,414
First USA Bank Notes 8.20 02/15/98 250,000 260,393
Hartford National Bank Notes 9.85 06/01/99 300,000 335,670
Midlantic Bank Notes 9.88 12/01/99 75,000 85,147
Signet Bank Notes 9.63 06/01/99 3,250,000 3,588,910
USAT Holdings Inc. 144A Notes** 9.05 05/15/98 10,000,000 9,850,000
Valley National Corp. Notes 9.88 03/01/16 2,009,000 2,116,100
--------------------
$ 58,605,736
--------------------
Collateralized Mortgage Obligations - 0.2%
- -------------------------------------------------------------
FHLMC 1752 Z 8.00 09/15/24 4,065,679 $ 4,045,351
FNMA P/O Trust 108 0.00 03/25/20 1,151,295 906,285
Mid-State Trust II A3 9.35 04/01/98 500,000 519,531
Veterans Affairs 1992-1 Cl D 7.75 12/15/14 50,000 51,250
--------------------
$ 5,522,417
--------------------
Federal Agency Bonds - 0.0%
- -------------------------------------------------------------
Federal Farm Credit Bank 6.60 08/28/98 100,000 $ 102,982
--------------------
6
<PAGE>
Portfolio of Investments
(continued)
Par Value
Security Rate Maturity Value (Note 1A)
- ------------------------------------------------------------- -------- ---------------- ------------------- --------------------
Finance Bonds - 9.6%
- -------------------------------------------------------------
Avalon Prop Reit Notes 7.38 09/15/02 175,000 $ 180,509
Bear Stearns Notes 6.75 08/15/00 400,000 411,356
Chartwell Re Sr Nts Nc'99/103.84 10.25 03/01/04 4,705,000 4,952,013
Duke Realty Reit Notes 7.38 09/22/05 150,000 154,700
Equitable Co. Notes 6.95 12/01/05 10,475,000 10,553,563
Fairfax Financial Holdings Ltd Notes 7.75 12/15/03 6,000,000 6,306,000
Fairfax Financial Holdings Ltd Notes 8.25 10/01/15 5,200,000 5,569,668
Goldman Sachs Inc. 144A Notes** 6.38 06/15/00 11,850,000 11,989,712
Goldman Sachs Inc. 144A Notes** 6.20 12/15/00 16,725,000 16,823,009
Goldman Sachs Inc. 144A Notes** 6.20 02/15/01 15,000,000 15,075,000
Liberty Mutual Insurance Co. Inc. 144A Notes** 8.50 05/15/25 1,900,000 2,114,624
Liberty Mutual Insurance Co. Inc. 144A Notes** 8.20 05/04/07 25,325,000 28,082,133
Merrill Lynch Notes 6.70 08/01/00 500,000 515,535
Merry Land Co. Reit Notes 7.25 10/01/02 150,000 156,375
Minnesota Mutual Insurance Co. 144A Notes** 8.25 09/15/25 13,325,000 14,524,250
New England Mutual Life Insurance Co. 144A Notes** 7.88 02/15/24 14,650,000 15,199,375
Penncorp Financial Group Notes 9.25 12/15/03 10,150,000 10,302,250
Reliance Group Holdings Corp. Notes 9.00 11/15/00 17,275,000 17,771,656
Salomon Inc. Notes 6.70 12/01/98 5,850,000 5,877,203
Salomon Inc. Notes 6.82 07/26/99 8,625,000 8,755,583
Salomon Inc. Notes 7.00 01/20/98 2,290,000 2,317,366
Salomon Inc. Notes 7.13 08/01/99 1,600,000 1,614,576
Shopping Center Reit 144A Notes** 6.75 01/15/04 10,000,000 9,975,000
Smith Barney Notes 6.50 10/15/02 50,000 50,870
Smith Barney Notes 6.63 06/01/00 300,000 308,169
Spieker Property Notes 6.65 12/15/00 150,000 150,278
Taubman Reit Group Notes 8.00 06/15/99 9,900,000 10,259,073
TIG Holdings Inc. Notes 8.13 04/15/05 50,000 54,805
United Co. Financial Notes 7.00 07/15/98 5,050,000 5,138,375
United Co. Financial Notes 9.35 11/01/99 11,175,000 12,278,196
USF & G Corp. Notes 7.00 05/15/98 50,000 51,115
Wellsford Reit Notes 7.75 08/15/05 300,000 315,735
--------------------
$ 217,828,072
--------------------
Industrial Bonds - 14.4%
- -------------------------------------------------------------
ADT Operations Notes 8.25 08/01/00 8,285,000 $ 8,813,252
Clark Oil Co. Notes 10.50 12/01/01 9,250,000 9,824,055
Continental Cable Co. Notes 8.30 05/15/06 7,000,000 7,026,250
Continental Cable Co. Notes 8.88 09/15/05 5,610,000 5,876,475
Continental Cable Co. Notes 8.63 08/15/03 7,000,000 7,280,000
Doman Industries Notes 8.75 03/15/04 12,300,000 11,777,250
Domtar Inc. Notes 12.00 04/15/01 9,500,000 11,233,750
Enterprise Corp. 144A Notes** 7.88 03/15/98 16,775,000 17,449,691
7
<PAGE>
Portfolio of Investments
(continued)
Par Value
Security Rate Maturity Value (Note 1A)
------------------------------------------------------------- -------- ---------------- ------------- --------------------
Industrial Bonds (continued)
-------------------------------------------------------------
Exide Corp. Notes 10.75 12/15/02 11,750,000 12,748,750
Georgia Pacific Corp. Notes 9.95 06/15/02 4,275,000 5,092,209
Healthsouth Corp. Notes 9.50 04/01/01 11,875,000 12,825,000
Hertz Corp. Notes 6.70 06/15/02 100,000 102,857
Hertz Corp. Notes 7.00 04/15/01 35,000 36,579
Inland Steel Co. Notes 12.00 12/01/98 3,000,000 3,310,350
Inland Steel Co. Notes 12.75 12/15/02 5,150,000 5,793,750
ITT Destinations Notes 6.75 11/15/05 250,000 255,020
Koppers Industries Inc. Notes 8.50 02/01/04 7,475,000 7,306,813
Malette Inc. Notes 12.25 07/15/04 7,050,000 7,896,000
Methanex Notes 7.75 08/15/05 18,435,000 19,554,926
News America Holdings Corp. Notes 7.70 10/30/25 10,500,000 10,737,195
News America Holdings Corp. Notes 8.88 04/26/23 2,400,000 2,775,072
News America Holdings Corp. Notes 9.50 07/15/24 4,250,000 5,216,238
News America Holdings Corp. Notes 12.00 12/15/01 70,000 77,905
Owens Illinois Corp. Notes 11.00 12/01/03 16,385,000 18,515,050
Purity Supreme Notes 11.75 08/01/99 75,000 82,125
R. P. Scherer Corp. Notes 6.75 02/01/04 50,000 50,075
Ralcorp Holdings Notes 8.75 09/15/04 275,000 308,300
Schuller International Group Inc. Notes 10.88 12/15/04 9,700,000 10,888,250
Southland Corp. Notes 5.00 12/15/03 15,000,000 12,487,500
Tenet Healthcare Corp. Notes 8.63 12/01/03 17,225,000 18,086,250
Time Warner Inc. Notes 9.13 01/15/13 32,880,000 37,054,116
Time Warner Inc. Notes 9.15 02/01/23 7,345,000 8,329,524
Viacom Inc. Notes 6.75 01/15/03 7,200,000 7,261,848
Viacom Inc. Notes 7.63 01/15/16 5,525,000 5,550,249
Viacom Inc. Notes 7.75 06/01/05 22,855,000 24,271,324
Westpoint Stevens Notes 8.75 12/15/01 9,800,000 9,861,250
--------------------
$ 325,755,248
--------------------
Non-Dollar Bonds - 8.4%***
-------------------------------------------------------------
AUD Govt. of Australia Notes 7.50 07/15/05 2,200,000 $ 1,559,829
AUD New South Wales Treasury Notes 0.00 09/03/10 6,130,000 1,330,411
AUD Govt. of South Australia Notes 0.00 12/21/15 11,500,000 1,528,436
AUD State Elecectric Commission of Victoria Notes 0.00 01/11/06 3,250,000 1,007,480
AUD Victoria Public Health Authority Notes 0.00 08/31/11 5,500,000 1,057,691
BEF Govt. of Belgian Notes 6.50 03/31/05 68,000,000 2,272,807
CAD Govt. of Canada General Residual Strips 0.00 12/01/98 7,000,000 4,291,795
CAD Govt. of Canada Notes 7.75 09/01/99 1,200,000 918,857
CAD Govt. of Canada Notes 8.50 03/01/00 2,800,000 2,202,051
CAD Govt. of Canada Notes 8.50 04/01/02 1,200,000 957,099
DEM Baden Wurttemberg Notes 6.20 11/22/13 3,000,000 2,093,048
8
<PAGE>
Portfolio of Investments
(continued)
Par Value
Security Rate Maturity Value (Note 1A)
------------------------------------------------------------- -------- ---------------- ------------------- --------------
Non-Dollar Bonds (continued)
-------------------------------------------------------------
DEM Deutschland Republic Notes 6.00 06/20/16 1,500,000 962,213
DEM Deutschland Republic Notes 6.25 01/04/24 7,025,000 4,557,206
DEM Deutschland Republic Notes 6.75 07/15/04 1,000,000 731,315
DEM Deutschland Republic Notes 6.88 05/12/05 1,500,000 1,105,741
DEM General Electric Notes 6.75 04/25/00 2,255,000 1,675,934
DEM IBRD Global Notes 7.13 04/12/05 1,150,000 850,696
DEM KFW International Notes 6.75 06/20/05 1,000,000 717,808
DKK LKB Bad-Wur Notes 6.50 09/15/08 5,050,000 3,557,210
DKK Denmark BRF Byggeriets 8.00 10/01/26 3,945,000 686,916
DKK Denmark Kreditforeningen 10.00 10/01/07 2,987,000 570,469
DKK Denmark Nykredit 7.00 10/01/26 71,068,000 11,486,770
DKK Denmark Nykredit 8.00 10/01/26 29,857,000 5,198,799
DKK Denmark Nykredit 9.00 10/01/26 3,288,000 600,591
DKK Denmark Nykredit 10.00 10/01/10 944,000 180,289
DKK Denmark Realkredit 10.00 10/01/26 27,859,000 5,123,817
DKK Denmark Realkredit 7.00 10/01/26 3,156,000 510,106
ESP Denmark Realkredit 8.00 10/01/26 6,397,000 1,113,867
ESP Andalucia Notes 11.10 12/02/05 690,000,000 5,963,380
ESP Castilla Junta Notes 8.30 11/29/01 85,000,000 678,646
ESP Kingdom of Spain Notes 7.40 07/30/99 265,000,000 2,057,509
ESP Kingdom of Spain Notes 10.00 02/28/05 1,091,650,000 9,089,763
ESP Kingdom of Spain Notes 11.30 01/15/02 218,000,000 1,927,257
FIM Kingdom of Spain Notes 12.25 03/25/00 299,300,000 2,698,098
FRF Govt. of Finland Notes 9.50 03/15/04 6,000,000 1,569,049
FRF French Oat Notes 7.75 10/25/05 4,800,000 1,053,017
FRF French Oat Strips 0.00 10/25/98 11,700,000 2,053,168
FRF French Oat Strips 0.00 04/25/99 12,200,000 2,073,590
FRF Republic of France Btans 7.00 11/12/99 20,500,000 4,370,061
GBP Mexican Par Notes 6.63 12/31/19 101,000,000 11,345,135
GBP Elf Enterprise Notes 8.75 06/27/06 1,200,000 1,847,837
GBP Hanson Trust Notes 10.00 04/18/06 1,500,000 2,589,857
GBP Royal Bank Of Scotland Notes 9.63 06/22/15 620,000 1,011,306
GBP Salomon Inc. Notes 7.75 01/10/04 1,400,000 1,939,316
GBP Smithkline Beecham Notes 8.13 11/25/98 1,500,000 2,397,114
GBP U.K. Gilt Notes 6.00 08/10/99 612,000 929,044
GBP U.K. Gilt Notes 8.75 08/25/17 1,800,000 3,088,552
GBP U.K. Gilt Notes 9.00 03/03/00 1,310,000 2,193,792
GBP U.K. Gilt Notes 9.50 01/15/99 3,200,000 5,360,432
ITL U.K. Gilt Treasury Notes 6.75 11/26/04 1,000,000 1,484,628
ITL Bank Nederlandse Notes 10.50 06/18/03 1,300,000,000 795,463
ITL Govt. of Italy Btps 8.50 01/01/99 7,400,000,000 4,475,816
ITL Govt. of Italy Btps 8.50 04/01/99 3,175,000,000 1,909,191
NOK Govt. of Italy Btps 9.50 01/01/05 2,000,000,000 1,178,980
NOK Govt. of Norway Notes 9.00 01/31/99 20,500,000 3,551,596
9
<PAGE>
Portfolio of Investments
(continued)
Par Value
Security Rate Maturity Value (Note 1A)
------------------------------------------------ ---------- ---------------- ------------------- --------------------
Non-Dollar Bonds (continued)
---------------------------------------------------
NOK Sparebanken Notes 12.75 10/26/02 12,500,000 2,168,959
NOK Uni Storebrand Notes 11.15 01/15/02 13,500,000 2,505,993
NOK Vesta Forsikring Notes 9.50 08/25/00 2,000,000 342,239
NOK Vital Forsikring Notes 7.85 09/22/03 11,500,000 1,820,963
NZD Fletcher Challenge Notes 10.00 04/30/05 1,500,000 1,045,361
NZD Fletcher Challenge Notes 11.25 12/15/02 3,100,000 2,265,483
NZD Govt. of New Zealand Property Service Notes 7.25 03/15/99 4,850,000 3,062,350
NZD Govt. of New Zealand Notes 8.00 07/15/98 3,700,000 2,427,456
SEK Fulmar Mtge #1 7.65 11/01/00 8,514,080 1,264,464
SEK Govt. of Sweden Notes 10.25 05/05/03 15,500,000 2,567,020
SEK Govt. of Sweden Notes 10.25 05/05/00 61,500,000 9,925,505
THB Thai Investment Co. Bills of Exchange 0.00 10/28/1996- 10/31/96 85,000,000 3,082,982
ECU Republic of France Oat 6.75 04/25/02 3,075,000 3,963,625
ECU Republic of France Oat 7.50 04/25/05 9,050,000 11,939,522
ECU Republic of France Oat 8.25 04/25/22 2,600,000 3,539,502
--------------------
$ 190,402,272
--------------------
Original Issue Discount - 1.2%
---------------------------------------------------
U. S. Treasury Principal Strips 0.00 11/15/99 3,475,000 $ 2,832,542
U. S. Treasury Principal Strips 0.00 11/15/18 1,100,000 267,179
U. S. Treasury Principal Strips 0.00 11/15/21 109,775,000 22,368,852
U. S. Treasury Strips 0.00 08/15/15 4,965,000 1,487,166
--------------------
$ 26,955,739
--------------------
Pass Thru Securities - 34.9%
---------------------------------------------------
FDIC Trust 94- C1II-C 8.45 09/25/25 250,000 $ 268,516
FNMA 7.011/01/23-12/01/25 290,302,452 292,659,706
FNMA 7.509/01/22-11/01/25 118,465,022 121,403,719
FNMA 8.008/01/24-10/01/25 893,374 925,197
GNMA*, + 7.004/15/22-01/15/26 170,670,161 172,716,754
GNMA 7.512/15/21-10/15/25 86,934,869 89,492,395
GNMA 9.003/15/18-11/15/25 50,789,798 53,995,622
Lehman Brothers Commercial Conduit Mortgage Trust 7.05 09/25/25 1,930,000 1,904,669
Resolution Trust Corp. 92-M2 A4 8.47 03/25/20 63,893 63,813
Resolution Trust Corp. 92-M4 A1 8.00 09/25/21 2,992,482 3,043,915
Resolution Trust Corp. 94-1 M2 7.75 09/25/29 3,911,161 3,946,606
Resolution Trust Corp. 94-C2 D A1 8.00 06/25/26 7,975,192 8,137,188
Resolution Trust Corp. 94-C2 D 8.00 04/25/25 4,877,014 4,979,127
Resolution Trust Corp. 94-C2 E A1 8.00 04/25/25 5,697,527 5,434,016
Resolution Trust Corp. 95 Cl E 6.90 02/25/27 14,146,071 11,628,513
Resolution Trust Corp. 95-2B1 7.45 09/15/25 2,747,495 2,780,121
SKW Ltd Partnership 144A Cl D** 9.30 04/15/05 7,942,000 7,976,746
Structured Asset Security Corp. 94-Cl D 6.87 08/25/26 10,000,000 9,512,500
--------------------
$ 790,869,123
--------------------
10
<PAGE>
Portfolio of Investments
(continued)
Par Value
Security Rate Maturity Value (Note 1A)
------------------------------------------------------------- -------- ---------------- ------------------- --------------------
Public Utility Bonds - 0.4%
-------------------------------------------------------------
Systems Energy Resources Corp. Notes 7.38 10/01/00 350,000 $ 351,323
Systems Energy Resources Corp. Notes 10.50 09/01/96 9,050,000 9,312,269
--------------------
$ 9,663,592
--------------------
U.S. Treasury Bonds - 18.1%
-------------------------------------------------------------
U.S. Treasury Bonds 7.25 05/15/16 58,945,000 $ 67,307,527
U.S. Treasury Bonds 7.50 11/15/16 3,825,000 4,484,813
U.S. Treasury Bonds 7.88 02/15/21 11,165,000 13,748,693
U.S. Treasury Bonds 8.13 08/15/19 14,200,000 17,854,228
U.S. Treasury Notes 5.13 11/30/98 22,275,000 22,201,938
U.S. Treasury Notes 5.25 07/31/98 45,715,000 45,729,172
U.S. Treasury Notes 6.25 01/31/97 700,000 707,217
U.S. Treasury Notes 6.38 01/15/00 62,410,000 64,799,055
U.S. Treasury Notes 6.50 05/15/97 4,455,000 4,529,488
U.S. Treasury Notes 6.75 06/30/99 19,775,000 20,677,136
U.S. Treasury Notes 6.88 07/31/99 41,320,000 43,386,000
U.S. Treasury Notes 6.88 08/31/99 42,125,000 44,270,848
U.S. Treasury Notes 7.13 02/29/00 20,000,000 21,290,600
U.S. Treasury Notes + 7.50 12/31/96 34,325,000 35,075,688
U.S. Treasury Notes 7.50 11/15/01 3,325,000 3,662,188
--------------------
$ 409,724,591
--------------------
Variable Interest Bonds - 0.5%****
-------------------------------------------------------------
Ford Motor Credit Corp. Notes 4.82 07/12/96 6,550,000 $ 6,500,875
Salomon Inc. Notes 5.77 04/05/99 4,300,000 4,085,000
--------------------
$ 10,585,875
--------------------
Yankee Bonds - 3.0%
-------------------------------------------------------------
Banponce Notes 6.75 12/15/05 175,000 $ 177,205
Brascan Ltd Notes 7.38 10/01/02 9,350,000 9,671,266
Cott Corporation Notes 9.38 07/01/05 7,975,000 7,992,146
London Insurance Group Notes 6.88 09/15/05 150,000 154,500
Novacor Chemical Ltd 144A ** 6.50 09/22/00 525,000 532,959
Province Of Quebec Notes 7.50 07/15/23 15,580,000 16,332,826
Republic Of Colombia Notes 7.25 02/23/04 5,275,000 5,059,991
St Georges Bank 144A** 7.15 10/15/05 19,200,000 19,873,152
Tembec Inc. Notes 9.88 09/30/05 9,325,000 9,255,063
--------------------
$ 69,049,108
--------------------
Total Bonds $ 2,196,648,999
--------------------
(identified cost, $2,109,052,593)
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
Portfolio of Investments
(continued)
Value
Security Shares (Note 1A)
- ------------------------------------------------------------- ------------------- --------------------
Preferred Stock -1.2%
- -------------------------------------------------------------
Perpetual/Sinking Fund Preferred Stock - 1.0%
- -------------------------------------------------------------
<S> <C> <C>
Australia & New Zealand Bank 360,300 $ 9,818,175
Bank United Texas A 148,380 3,932,070
Credit Lyonnais 144A** 242,000 6,050,000
First Nationwide 8,400 943,950
Public Service Co. of New Hampshire 73,220 1,885,415
--------------------
$ 22,629,610
--------------------
Variable Rate Preferred Stock - 0.2%
- -------------------------------------------------------------
Newscorp Overseas Ltd. Ser B 232,000 $ 5,133,000
--------------------
Total Preferred Stock $ 27,762,610
-------------------
(identified cost $27,297,689)
Purchased Options - 0.1% Principal Amount
- -------------------------------------------------------------
Deliver/Receive, Exercise Price, Expiration of Contracts
- ------------------------------------------------------------- -------------------
Put Belgian Govt. 7.00% Str 104.68, 4/2/96 245,000,000 $ 15,680
Put CHF/SEK Call Str 5.84 10/30/96 3,450,000 63,352
Call Japanese Govt. 3.60% Str 106.057, 2/1/96 360,000,000 1,080
JPY Put/ESB Call Str 1.20 10/30/96 375,000,000 79,125
JPY Put/ITL Call Str 15.67 10/30/96 375,000,000 105,375
JPY Put/ITL Call Str 15.70 12/12/96 479,550,000 108,378
Call German Govt. 6.8750% Str 105.19, 3/19/96 2,936,000 19,818
DEM Put/USD Call Str 1.4450, 2/28/96 5,700,000 86,184
Put Danish Govt. 7.00% Str 96.50, 1/11/96 45,800,000 4,122
Put France Govt. 7.75% Str 105.0500, 2/27/96 27,340,000 21,735
Call United States Govt. 7.625% Str 122.0937 2/23/96 185,250 1,319,906
Call United States Govt. 6.50% Str 108.3437 368,000 442,750
Call German Govt. 7.375% Str 105.91 3/15/96 8,600,000 201,687
--------------------
Total Options (premiums paid $1,978,917) $ 2,469,192
--------------------
Short Term Obligations - 2.8%
- -------------------------------------------------------------
Federal Agency Discount Bonds - 2.4%
- -------------------------------------------------------------
Federal Home Loan Mortgage Corp., due 1/11/96 1,000,000 $ 996,826
Federal Home Loan Mortgage Corp., due 1/16/96 53,700,000 53,414,702
--------------------
$ 54,411,528
12
<PAGE>
Portfolio of Investments
(continued)
Par Value
Security Value (Note 1A)
- ------------------------------------------------------------- ------------------- --------------------
Repurchase Agreements - 0.1%
- -------------------------------------------------------------
Prudential Bache repurchase agreement dated 12/29/95,
5.39% due 1/2/96 to pay $2,173,535 (Collateralized by Federal Home
Loan Mtg. Corp. 6.958%, due 1/1/20, market value $1,107,809 and Federal
National Mtg. Assn. 9%, due 9/1/22, market value $1,108,204), at cost. 2,172,559 $ 2,172,559
--------------------
U.S, Treasury Bills - 0.3%
- -------------------------------------------------------------
U.S. Treasury Bills, due 2/15/96 7,360,000 $ 7,317,533
--------------------
Total Short Term Obligations $ 63,901,620
--------------------
(identified cost $63,851,029)
Total Investments - 101% $ 2,290,782,421
--------------------
(identified cost $2,202,180,228)
Written Options - (0.0%) Principal Amount
- -------------------------------------------------------------
Deliver/Receive, Exercise Price, Expiration of Contracts
- ------------------------------------------------------------- -------------------
Put German Govt. 6.1250% Str 103.12, 4/2/96 (11,600,000) $ (11,298)
Put German Govt. 6.50% Str 101.23, 2/27/96 (7,990,000) (21,126)
Put German Govt. 6.50% Str 101.43, 1/11/96 (11,800,000) (1,640)
Call German Govt. 7.375% Str 105.91, 3/15/96 (8,800,000) (204,078)
DEM Put/USD Call Str 1.50, 2/28/96 (5,700,000) (26,904)
ESB Put/JPY Call Str 1.40, 10/30/96 (375,000,000) (28,875)
ITL Put/JPY Call Str 19.50, 10/30/96 (375,000,000) (28,125)
SEK Put/CHF Call Str 6.50, 10/30/96 (3,450,000) (31,078)
USD Put/DEM Call Str 1.38, 2/28/96 (5,700,000) (38,304)
Call United States Govt. 6.50% Str 108.3437, 3/1/96 (36,800,000) (175,375)
Call United States Govt. 7.625% 2 Str 122.09375, 2/23/96 (37,050,000) (665,742)
Put United States Govt. 6.50% Str 102.34375, 3/1/96 (36,800,000) (48,875)
--------------------
Total Written Options (premiums received $1,193,967) $ (1,281,420)
--------------------
Other assets, less liabilities - (1.0%) $ (22,394,114)
--------------------
Net Assets - 100% $ 2,267,106,887
====================
</TABLE>
13
<PAGE>
Portfolio of Investments
(continued)
The following abbreviations are used in this portfolio:
AFC - Alliance Funding Corp.
BEF - Belgian Franc
CHF- Swiss Franc
CSFB- C.S. First Boston
ESP- Spanish Peseta
FHLMC- Federal Home Loan Mortgage Corporation
FNMA- Federal National Mortgage Association
GNMA - Government National Mortgage Association
ITL- Italian Lira
JPY- Japanese Yen
OAT- France Government Bonds
OSCC- Old Stone Credit Corp.
SEK- Swedish Krona
STR- Strike price of an option
TMS- The Money Store
UCFC- United Companies Funding Corp.
USAT- United Savers of Texas
USD- U.S. Dollar
USF&G- United States Fidelity & Guarantee
UST- United States Treasury
* This security is identified as a when issued security in note (7)
** This security is restricted but eligible for resale under 144A
**** Interest rate is rate in effect at December 31, 1995
+ Denotes all or part security pledged as a margin deposit (see note (6))
14
<PAGE>
<TABLE>
<CAPTION>
Standish, Ayer & Wood Investment Trust
Standish Fixed Income Fund Series
Statement of Assets and Liabilities
December 31, 1995
Assets
<S> <C> <C>
Investments, at value (Note 1A) (identified cost, $2,202,180,228) $2,290,782,421
Foreign currency, at value (cost, $65,747) 65,821
Receivable for investments sold 4,814,405
Receivable for Fund shares sold 36,548,656
Interest and dividends receivable 34,008,835
Unrealized appreciation on forward foreign currency exchange contracts (Note 6) 2,564,601
Other assets 13,430
----------------
Total assets $2,368,798,169
Liabilities
Distribution payable $16,018,186
Payable for investments purchased 22,342,378
Payable for delayed delivery transactions (Note 7) 53,490,234
Payable for Fund shares redeemed 5,862,641
Written options outstanding, at value (Note 6) (premiums received, $1,193,967) 1,281,420
Payable for premiums on purchased options 11,578
Unrealized depreciation on forward foreign currency exchange contracts (Note 6) 1,936,709
Payable for daily variation margin on financial futures contracts (Note 6) 4,710
Accrued investment advisory fee (Note 2) 561,697
Accrued trustee fees (Note 2) 22,194
Accrued expenses and other liabilities 159,535
----------------
Total liabilities $101,691,282
----------------
Net Assets $2,267,106,887
================
Net assets consist of
Paid-in capital $2,189,898,702
Undistributed net investment income (loss) 3,798,973
Accumulated undistributed net realized gain (loss) (15,716,937)
Net unrealized appreciation (depreciation) 89,126,149
----------------
Total $2,267,106,887
================
Shares of beneficial interest outstanding 108,347,706
----------------
Net asset value, offering price, and redemption price per share
(Net assets/Shares outstanding) $20.92
================
15
<PAGE>
Standish, Ayer & Wood Investment Trust
Standish Fixed Income Fund Series
Statement of Operations
December 31, 1995
Investment income
Interest income (Net of foreign withholding taxes of $68,811) $150,691,965
Dividend income 2,549,708
----------------
Total income $153,241,673
Expenses
Investment advisory fee (Note 2) $6,321,967
Trustees fees 79,216
Accounting, custody, and transfer agent fees 670,545
Registration costs 123,385
Audit services 54,363
Legal services 19,870
Insurance expense 46,477
Miscellaneous 88,939
-------------
Total expenses 7,404,762
----------------
Net investment income $145,836,911
----------------
Realized and unrealized gain (loss)
Net realized gain (loss)
Investment securities $25,147,636
Written options 801,588
Financial futures (1,558,779)
Interest rate swap contracts (881,527)
Foreign currency and forward currency exchange contracts 16,405
-------------
Net realized gain (loss) $23,525,323
Change in net unrealized appreciation (depreciation)
Investment securities $165,791,006
Written options (272,232)
Financial futures (71,677)
Interest rate swap contracts 1,075,377
Translation of assets and liabilities in foreign currencies
and foreign exchange contracts 102,404
---------------
Change in net unrealized appreciation (depreciation) 166,624,878
----------------
Net gain (loss) $190,150,201
----------------
Net increase (decrease) in net assets from operations $335,987,112
================
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
Standish, Ayer & Wood Investment Trust
Standish Fixed Income Fund Series
Statement of Changes in Net Assets
Year Ended December 31,
-----------------------------------
1995 1994
---------------- ----------------
Increase (decrease) in Net Assets
From operations
<S> <C> <C>
Net investment income $145,836,911 $105,488,496
Net realized gain (loss) 23,525,323 (59,903,085)
Change in net unrealized appreciation (depreciation) 166,624,878 (111,698,211)
---------------- ----------------
Net increase (decrease) in net assets from operations $335,987,112 ($66,112,800)
---------------- ----------------
Distributions to shareholders
From net investment income ($142,241,343) ($82,397,485)
From realized capital gains - (2,788,221)
Tax return of capital - (12,694,123)
---------------- ----------------
Total distributions to shareholders ($142,241,343) ($97,879,829)
---------------- ----------------
Fund share (principal) transactions (Note 4)
Net proceeds from sale of shares $569,023,301 $597,161,561
Net asset value of shares issued to shareholders in
payment of distributions declared 100,609,209 64,335,980
Cost of shares redeemed (239,204,674) (161,670,957)
---------------- ----------------
Increase (decrease) in net assets from Fund share transactions $430,427,836 $499,826,584
---------------- ----------------
Net increase (decrease) in net assets $624,173,605 $335,833,955
Net assets:
At beginning of period 1,642,933,282 1,307,099,327
---------------- ----------------
At end of period (including undistributed net investment income of
$3,798,973 and $0 at December 31, 1995 and 1994, respectively.) $2,267,106,887 $1,642,933,282
================ ================
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
Standish, Ayer & Wood Investment Trust
Standish Fixed Income Fund Series
Financial Highlights
Year Ended December 31,
-------------------------------------------------------------------
1995 1994 1993 1992* 1991*
-------------------------------------------------------------------
Net asset value - beginning of period $18.91 $21.25 $20.55 $20.96 $19.56
------------ ------------ ------------ ---------- ----------
Income from investment operations:
<S> <C> <C> <C> <C> <C>
Net investment income $1.35 $1.25 $1.50 $1.59 $1.68
Net realized and unrealized gain (loss) 2.08 (2.29) 1.45 (0.18) 1.66
------------ ------------ ------------ ---------- ----------
Total from investment operations $3.43 ($1.04) $2.95 $1.41 $3.34
------------ ------------ ------------ ---------- ----------
Less distributions declared to shareholders
From net investment income ($1.42) ($1.10) ($1.51) ($1.52) ($1.49)
In excess of net investment income - - (0.04) - -
From realized gain - (0.04) (0.70) (0.30) (0.45)
Tax return of capital - (0.16) - - -
------------ ------------ ------------ ---------- ----------
Total distributions declared to shareholders ($1.42) ($1.30) ($2.25) ($1.82) ($1.94)
------------ ------------ ------------ ---------- ----------
Net asset value - end of period $20.92 $18.91 $21.25 $20.55 $20.96
============ ============ ============ ========== ==========
Total return 18.54% (4.86)% 14.64% 6.88% 17.65%
Ratios (to average net assets)/Supplemental Data
Expenses 0.38% 0.38% 0.40% 0.41% 0.46%
Net investment income 7.80% 7.25% 7.07% 7.61% 8.28%
Portfolio turnover 132% 122% 150% 217% 176%
Net assets at end of period (000 omitted) $2,267,107 $1,642,933 $1,307,099 $919,909 $631,457
* Audited by other auditors.
</TABLE>
18
<PAGE>
Standish, Ayer & Wood Investment Trust
Standish Fixed Income Fund Series
Notes to Financial Statements
(1) Significant Accounting Policies:
Standish, Ayer & Wood Investment Trust (Trust) is organized as a
Massachusetts business trust and is registered under the Investment
Company Act of 1940, as amended, as an open-end, management investment
company. Standish Fixed Income Fund (Fund) is a separate diversified
investment series of the Trust.
The following is a summary of significant accounting policies
consistently followed by the Fund in the preparation of its financial
statements. The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and
disclosures in the financial statements. Actual results could differ
from those estimates.
A. Investment security valuations--
Securities for which quotations are readily available are valued at the
last sale price, or if no sale price, at the closing bid price in the
principal market in which such securities are normally traded.
Securities (including restricted securities) for which quotations are
not readily available are valued primarily using dealer-supplied
valuations or at their fair value as determined in good faith under
consistently applied procedures under the general supervision of the
Board of Trustees.
Short term instruments with less than sixty-one days remaining to
maturity when acquired by the Fund are valued at amortized cost. If the
Fund acquires a short term instrument with more than sixty days
remaining to its maturity, it is valued at current market value until
the sixtieth day prior to maturity and will then be valued at amortized
cost based upon the value on such date unless the trustees determine
during such sixty-day period that amortized cost does not represent
fair value.
B. Repurchase agreements--
It is the policy of the Fund to require the custodian bank to take
possession, to have legally segregated in the Federal Reserve Book
Entry System or to have segregated within the custodian bank's vault,
all securities held as collateral in support of repurchase agreement
investments. Additionally, procedures have been established by the Fund
to monitor on a daily basis, the market value of the repurchase
agreement's underlying investments to ensure the existence of a proper
level of collateral.
C. Securities transactions and income--
Securities transactions are recorded as of trade date. Interest income
is determined on the basis of interest accrued, adjusted for
amortization of premium or discount on long-term debt securities when
required for federal income tax purposes. Dividend income is recorded
on the ex-dividend date. Realized gains and losses from securities sold
are recorded on the identified cost basis. The Fund does not isolate
that portion of the results of operations resulting from changes in
foreign exchange rates on investments from the fluctuations arising
from changes in market prices of securities held. Such fluctuations are
included with the net realized and unrealized gain or loss from
investments.
D. Federal taxes--
As a qualified regulated investment company under Subchapter M of the
Internal Revenue Code, the Fund is not subject to income taxes to the
extent that it distributes all of its taxable income for its fiscal
year.
At December 31, 1995, the Fund, for federal income tax purposes, had
capital loss carryovers which will reduce the Fund's taxable income
arising from future net realized gain on investments, if any, to the
extent permitted by the Internal Revenue Code and thus will reduce the
amount of distributions to shareholders which would otherwise be
necessary to relieve the Fund of any liability for federal income tax.
Such capital loss carryovers are $14,954,615 which expire on December
31, 2002.
E. Foreign currency transactions--
Investment security valuations, other assets, and liabilities initially
expressed in foreign currencies are converted into U.S. dollars based
upon current exchange rates. Purchases and sales of foreign investment
securities and income and expenses are converted into U.S. dollars
based upon currency exchange rates prevailing on the respective dates
of such transactions.
Section 988 of the Internal Revenue Code provides that gains or losses
on certain transactions attributable to fluctuations in foreign
currency exchange rates must be treated as ordinary income or loss. For
financial statement purposes, such amounts are included in net realized
gains or losses.
19
<PAGE>
F. Distribution to shareholders--
Distributions to shareholders are recorded on the ex-dividend date.
Income and capital gain distributions are determined in accordance with
income tax regulations which may differ from generally accepted
accounting principles. These differences are primarily due to differing
treatments for mortgage backed securities and foreign currency
transactions. Permanent book and tax basis differences relating to
shareholder distributions will result in reclassifications to
paid-in-capital.
(2) Investment Advisory Fee:
The investment advisory fee paid to Standish, Ayer & Wood, Inc. (SA&W)
for overall investment advisory and administrative services, and
general office facilities, is paid monthly at the annual rate of 0.4%
of the Fund's first $250,000,000 of average daily net assets, 0.35% of
the next $250,000,000 of average daily net assets, and 0.30% of the
average daily net assets in excess of $500,000,000. The Fund pays no
compensation directly to its trustees who are affiliated with the
investment adviser or to its officers, all of whom receive remuneration
for their services to the Fund from the investment adviser. Certain of
the trustees and officers of the Trust are partners or officers of
SA&W.
(3) Purchases and Sales of Investments:
Purchases and proceeds from sales of investments, short-term
obligations, were as follows:
<TABLE>
<CAPTION>
Purchases Sales
---------------- ----------------
<S> <C> <C>
U.S. Government securities $2,013,746,084 $1,689,388,547
================ ===============
Investments (non-U.S. government securities) $917,960,250 $873,409,479
================ ===============
</TABLE>
(4) Shares of Beneficial Interest:
The Declaration of Trust permits the trustees to issue an unlimited
number of full and fractional shares of beneficial interest having a
par value of one cent per share. Transactions in Fund shares were as
follows:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1995 1994
---------------- ----------------
<S> <C> <C>
Shares sold 28,240,659 30,193,812
Shares issued in payment of distributions declared 4,933,561 3,330,643
Shares reacquired (11,707,017) (8,161,348)
---------------- ----------------
Net increase 21,467,203 25,363,107
================ ================
</TABLE>
(5) Federal Income Tax Basis of Investment Securities:
The cost and unrealized appreciation (depreciation) in value of the
investment securities owned at December 31, 1995, as computed on a
federal income tax basis, are as follows:
Aggregate cost $2,202,560,784
================
Gross unrealized appreciation $93,652,301
Gross unrealized depreciation (5,430,664)
---------------
Net unrealized appreciation $88,221,637
===============
20
<PAGE>
(6).....Financial Instruments
In general, the following instruments are used for hedging purposes as
described below. However, these instruments may also be used to enhance
potential gain in circumstances where hedging is not involved. The
nature, risks, and objectives of these instruments are set forth more
fully in the Fund's Prospectus and Statement of Additional Information.
The Fund trades the following financial insturments with off-balance
sheet risk:
.........Options--
Call and put options give the holder the right to purchase or sell,
respectively, a security or currency at a specified price on or before
a certain date. The Fund uses options to hedge against risks of market
exposure and changes in security prices and foreign currencies, as well
as to enhance returns. Options, both held and written by the Fund, are
reflected in the accompanying Statement of Assets and Liabilities at
market value. Premiums received from writing options which expire are
treated as realized gains.
Premiums received from writing options which are exercised or are
closed are added to or offset against the proceeds or amount paid on
the transaction to determine the realized gain or loss. If a put option
purchased by the Fund is exercised, the premium reduces the cost basis
of the securities purchased by the Fund. The Fund, as writer of an
option, has no control over whether the underlying securities may be
sold (call) or purchased (put) and as a result bears the market risk of
an unfavorable change in the price of the security underlying the
written option. A summary of such transactions for the year ended
December 31, 1995 is as follows:
<TABLE>
<CAPTION>
Written Put Option Transactions
Number of
Contracts Premiums
---------------- ----------------
<S> <C> <C>
Outstanding, beginning of period 8 $242,421
Options written 31 2,169,829
Options exercised 0 0
Options expired (18) (1,174,059)
Options closed (16) (1,196,436)
---------------- ----------------
Outstanding, end of period 5 $41,755
================ ================
Written Call Option Transactions
Number of
Contracts Premiums
---------------- ----------------
Outstanding, beginning of period 2 $221,016
Options written 31 2,693,220
Options exercised (2) (31,782)
Options expired (10) (763,915)
Options closed (17) (1,293,852)
---------------- ----------------
Outstanding, end of period 4 $824,687
================ ================
Written Cross Currency Option Transactions
Number of
Contracts Premiums
---------------- ----------------
Outstanding, beginning of period 3 $547,359
Options written 6 244,852
Options exercised 0 0
Options expired (2) (226,889)
Options closed (4) (237,797)
---------------- ----------------
Outstanding, end of period 3 $327,525
================ ================
</TABLE>
21
<PAGE>
Forward currency exchange contracts--
The Fund may enter into forward foreign currency and cross currency
exchange contracts for the purchase or sale of a specific foreign
currency at a fixed price on a future date. Risks may arise upon
entering these contracts from the potential inability of counterparties
to meet the terms of their contracts and from unanticipated movements
in the value of a foreign currency relative to the U.S. dollar and
other foreign currencies. The forward foreign currency and cross
currency exchange contracts are marked to market using the forward
foreign currency rate of the underlying currency and any gains or
losses are recorded for financial statement purposes as unrealized
until the contract settlement date. Forward currency exchange contracts
are used by the Fund primarily to protect the value of the Fund's
foreign securities from adverse currency movements.
At December 31, 1995, the Fund held the following forward foreign
currency and cross currency exchange contracts:
<TABLE>
<CAPTION>
Forward Foreign Currency Contracts
- ----------------------------------
Local U.S. $ U.S. $ U.S $
Principal Contract Market Aggregate Unrealized
Contracts to Receive Amount Value Date Value Face Amount Gain / (Loss)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Swiss Franc 7,090,500 1/12/96 $6,151,143 $6,102,505 $48,638
German Deutsche Mark 15,971,037 1/17/96 - 3/11/96 $11,138,639 $11,155,434 ($16,795)
Danish Krone 5,314,000 1/2/96-3/14/96 $956,064 $957,517 ($1,453)
Spanish Peseta 293,220,445 2/7/96 $2,397,224 $2,378,492 $18,732
Finnish Markka 1,763,929 1/5/96 $404,905 $416,080 ($11,175)
French Franc 5,894,383 1/24/96 $1,201,733 $1,203,279 ($1,546)
Great British Pound 7,644,993 1/4/96 - 2/5/96 $11,852,957 $11,901,872 ($48,915)
Italian Lira 10,164,940,800 1/12/96 $6,384,131 $6,248,238 $135,893
European Currency Unit 1,770,743 1/03/96 $2,263,615 $2,266,551 ($2,936)
-------------- ---------------- ----------
$42,750,411 $42,629,968 $120,443
============== ================ ==========
Local U.S. $ U.S. $ U.S $
Principal Contract Market Aggregate Unrealized
Contracts to Deliver Amount Value Date Value Face Amount Gain / (Loss)
- --------------------------------------------------------------------------------------------------------------------
Australian Dollar 5,951,309 1/3/96 - 2/29/96 $4,408,840 $4,477,648 $68,808
Belgian Franc 70,271,200 3/12/96 $2,388,518 $2,364,679 ($23,839)
Canadian Dollar 10,748,673 2/9/96 - 3/25/96 $7,872,480 $7,904,635 $32,155
Swiss Franc 7,090,500 1/12/96 $6,151,143 $6,248,238 $97,095
German Deutsche Mark 38,030,646 1/5/96 - 3/11/96 $26,523,531 $26,976,384 $452,853
Danish Krone 148,556,569 1/2/96 - 3/27/96 $26,739,941 $26,778,702 $38,761
Spanish Peseta 2,801,991,329 1/19/96 - 3/21/96 $22,895,437 $22,716,970 ($178,467)
Finnish Markka 8,912,029 1/5/96 - 2/27/96 $2,049,281 $2,109,633 $60,352
French Franc 106,039,589 1/24/96 - 3/27/96 $21,629,420 $21,367,785 ($261,635)
Great British Pound 23,221,240 1/3/96 - 3/28/96 $35,993,771 $36,294,928 $301,157
Italian Lira 23,054,507,650 1/12/96 - 3/7/96 $14,452,199 $14,296,007 ($156,192)
Norwegian Krone 57,962,678 1/12/96 - 3/29/96 $9,147,962 $9,167,157 $19,195
New Zealand Guilder 8,701,111 3/7/96 - 3/26/96 $5,645,868 $5,599,333 ($46,535)
Swedish Krona 95,628,845 1/23/96 - 3/4/96 $14,305,484 $14,343,825 $38,341
European Currency Unit 14,456,420 2/7/96 - 4/3/96 $18,481,489 $18,581,551 $100,062
-------------- ---------------- ----------
$218,685,364 $219,227,475 $542,111
============== ================ ==========
Forward Foreign Cross Currency Contracts
- ----------------------------------------
U.S $ U.S. $ U.S $
Market Market Contract Unrealized
Contracts to Deliver Value In Exchange For Value Value Date Gain / (Loss)
- --------------------------------------------------------------------------------------------------------------------
Belgian Franc $10,965,738 German Deutsche Mark $10,916,243 1/9/96 - 3/29/96 ($49,495)
German Deutsche Mark $6,739,656 Belgian Franc $6,833,560 1/9/96 $93,904
French Franc $7,544,548 German Deutsche Mark $7,465,477 2/1/96 - 2/6/96 ($79,071)
---------------- -------------- ----------
$25,249,942 $25,215,280 ($34,662)
================ ============== ==========
</TABLE>
22
<PAGE>
Futures contracts--
The Fund may enter into financial futures contracts for the delayed
sale or delivery of securities or contracts based on financial indices
at a fixed price on a future date. The Fund is required to deposit
either in cash or securities an amount equal to a certain percentage of
the contract amount. Subsequent payments are made or received by the
Fund each day, dependent on the daily fluctuations in the value of the
underlying security, and are recorded for financial statement purposes
as unrealized gains or losses by the Fund. There are several risks in
connection with the use of futures contracts as a hedging device. The
change in value of futures contracts primarily corresponds with the
value of their underlying instruments or indices, which may not
correlate with changes in the value of hedged investments. In addition,
there is the risk that the Fund may not be able to enter into a closing
transaction because of an illiquid secondary market. The Fund enters
into financial futures transactions primarily to manage its exposure to
certain markets and to changes in security prices and foreign
currencies.
At December 31, 1995, the Fund held the following futures contracts.
<TABLE>
<CAPTION>
Underlying Face Unrealized
Contract Position Expiration Amount at Value Gain/(Loss)
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Australian 10 year bond (18 contracts) Short 03/18/96 $2,257,166 ($4,710)
Interest rate swap contracts:
Interest rate swaps involve the exchange by the Fund with another party
of their respective commitments to pay or receive interest, e.g., an
exchange of floating rate payments for fixed rate payments with respect
to a notional amount of principal. Credit and market risk exist with
respect to these instruments. The Fund expects to enter into these
transactions primarily for hedging purposes including, but not limited
to, preserving a return or spread on a particular investment or portion
of its portfolio, protecting against currency fluctuations, as a
duration management technique or protecting against an increase in the
price of securities the Fund anticipates purchasing at a later date.
At December 31, 1995, there were no open interest rate swap contracts.
</TABLE>
(7).....Delayed Delivery Transactions:
The Fund may purchase securities on a when-iussued or forward
commitment basis. Payment and delivery may take place a month or more
after the date of the transactions. The price of the underlying
securities and the date when the securities will be delivered and paid
for are fixed at the time the transaction is negotiated. The Fund
instructs its custodian to segregate securities having a value at least
equal to the amount of the purchase commitment.
At December 31, 1995, the Fund had entered into the following delayed
delivery transactions.
Type Security Settlement Date Amount
- --------------------------------------------------------------------------------
BUY GNMA, 7.0% 1/22/96 $53,490,234
23
<PAGE>
Report of Independent Accountants
To the Trustees of Standish, Ayer & Wood Investment Trust and the Shareholders
of Standish Fixed Income Fund Series: We have audited the accompanying statement
of assets and liabilities of Standish, Ayer & Wood Investment Trust: Standish
Fixed Income Fund Series (the "Fund"), including the schedule of portfolio
investments, as of December 31, 1995, and the related statement of operations
for the year then ended, changes in net assets for each of the two years then
ended and the financial highlights for each of the three years in the period
then ended. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits. The financial highlights for each of the two years in the period to
December 31, 1992, presented herein, were audited by other auditors, whose
report, dated February 12, 1993, expressed an unqualified opinion on such
financial highlights.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1995 by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Standish, Ayer & Wood Investment Trust: Standish Fixed Income Fund Series as of
December 31, 1995, the results of its operations for the year then ended the
changes in net asset for each of the two years then ended and the financial
highlights for each of the three years in the period then ended, in conformity
with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
February 13, 1996
24
<PAGE>
April 29, 1996
STANDISH GLOBAL FIXED INCOME FUND
One Financial Center
Boston, Massachusetts 02111
(800) 421-4795
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information is not a prospectus, but expands
upon and supplements the information contained in the Prospectus dated April 29,
1996, as amended and/or supplemented from time to time (the "Prospectus"), of
Standish Global Fixed Income Fund (the "Fund"), a separate investment series of
Standish, Ayer & Wood Investment Trust (the "Trust"). This Statement of
Additional Information should be read in conjunction with the Fund's Prospectus
a copy of which may be obtained without charge by writing or calling the Trust's
principal underwriter, Standish Fund Distributors, L.P. (the "Principal
Underwriter"), at the address and phone number set forth above.
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND IS
AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY IF PRECEDED OR
ACCOMPANIED BY AN EFFECTIVE PROSPECTUS.
Investment Objective and Policies............................2
Investment Restrictions......................................2
Calculation of Performance Data..............................9
Management..................................................10
Redemption of Shares........................................15
Portfolio Transactions......................................16
Determination of Net Asset Value............................16
The Fund and Its Shares.....................................16
The Portfolio and Its Investors.............................17
Additional Information......................................17
Taxation....................................................17
Experts and Financial Statements............................20
Financial Statements........................................21
1
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
As described in the Prospectus, the Fund seeks to achieve its investment
objective by investing all its investable assets in the Standish Global Fixed
Income Portfolio (the "Portfolio"), a series of Standish, Ayer & Wood Master
Portfolio (the "Portfolio Trust"), an open-end management investment company.
The Portfolio has the same investment objective and restrictions as the Fund.
The Fund's Prospectus describes the investment objective of the Fund and
the Portfolio and summarizes the investment policies they will follow. Since the
investment characteristics of the Fund will correspond directly to those of the
Portfolio, the following, which supplements the Prospectus, is a discussion of
the various investment techniques employed by the Portfolio. See the Prospectus
for a more complete description of the Fund's and the Portfolio's investment
objective, policies and restrictions.
Money Market Instruments and Repurchase Agreements
Money market instruments include short-term U.S. and foreign Government
securities, commercial paper (promissory notes issued by corporations to finance
their short-term credit needs), negotiable certificates of deposit,
non-negotiable fixed time deposits, bankers' acceptances and repurchase
agreements.
U.S. Government securities include securities which are direct obligations
of the U.S. Government backed by the full faith and credit of the United States,
and securities issued by agencies and instrumentalities of the U.S. Government,
which may be guaranteed by the U.S. Treasury or supported by the issuer's right
to borrow from the Treasury or may be backed by the credit of the federal agency
or instrumentality itself. Agencies and instrumentalities of the U.S. Government
include, but are not limited to, Federal Land Banks, the Federal Farm Credit
Bank, the Central Bank for Cooperatives, Federal Intermediate Credit Banks,
Federal Home Loan Banks and the Federal National Mortgage Association.
Investments in commercial paper will be rated "Prime-1" by Moody's
Investors Service, Inc. ("Moody's") or "A-1" by Standard & Poor's Ratings Group
("S&P") or Duff 1+ by Duff & Phelps, Inc. which are the highest ratings assigned
by these rating services (even if rated lower by one or more of the other
agencies), or which, if not rated or rated lower by one or more of the agencies
and not rated by the other agency or agencies, are judged by Standish
International Management Company, L.P. (the "Adviser"), the Portfolio's
investment adviser, to be of equivalent quality to the securities so rated. In
determining whether securities are of equivalent quality, the Adviser may take
into account, but will not rely entirely on, ratings assigned by foreign rating
agencies.
A repurchase agreement is an agreement under which the Portfolio acquires
money market instruments (generally U.S. Government securities) from a
commercial bank, broker or dealer, subject to resale to the seller at an
agreed-upon price and date (normally the next business day). The resale price
reflects an agreed-upon interest rate effective for the period the instruments
are held by the Portfolio and is unrelated to the interest rate on the
instruments. The instruments acquired by the Portfolio (including accrued
interest) must have an aggregate market value in excess of the resale price and
will be held by the custodian bank for the Portfolio until they are repurchased.
The Trustees of the Portfolio Trust will monitor the standards which the Adviser
will use in reviewing the creditworthiness of any party to a repurchase
agreement with the Portfolio.
2
<PAGE>
The use of repurchase agreements involves certain risks. For example, if
the seller defaults on its obligation to repurchase the instruments acquired by
the Portfolio at a time when their market value has declined, the Portfolio may
incur a loss. If the seller becomes insolvent or subject to liquidation or
reorganization under bankruptcy or other laws, a court may determine that the
instruments acquired by the Portfolio are collateral for a loan by the Portfolio
and therefore are subject to sale by the trustee in bankruptcy. Finally, it is
possible that the Portfolio may not be able to substantiate its interest in the
instruments it acquires. While the Trustees acknowledge these risks, it is
expected that they can be controlled through careful documentation and
monitoring.
Strategic Transactions
The Portfolio may, but is not required to, utilize various other investment
strategies as described below to hedge various market risks (such as interest
rates, currency exchange rates, and broad or specific equity or fixed-income
market movements), to manage the effective maturity or duration of fixed-income
securities, or to enhance potential gain. Such strategies are generally accepted
as part of modern portfolio management and are regularly utilized by many mutual
funds and other institutional investors. Techniques and instruments used by the
Portfolio may change over time as new instruments and strategies are developed
or regulatory changes occur.
In the course of pursuing its investment objective, the Portfolio may
purchase and sell (write) exchange-listed and over-the-counter put and call
options on securities, equity and fixed-income indices and other financial
instruments; purchase and sell financial futures contracts and options thereon;
enter into various interest rate transactions such as swaps, caps, floors or
collars; and enter into various currency transactions such as currency forward
contracts, currency futures contracts, currency swaps or options on currencies
or currency futures (collectively, all the above are called "Strategic
Transactions"). Strategic Transactions may be used in an attempt to protect
against possible changes in the market value of securities held in or to be
purchased for the Portfolio's portfolio resulting from securities market or
currency exchange rate fluctuations, to protect the Portfolio's unrealized gains
in the value of its portfolio securities, to facilitate the sale of such
securities for investment purposes, to manage the effective maturity or duration
of the Portfolio'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 Portfolio will attempt
to limit its net loss exposure resulting from Strategic Transactions entered
into for such purposes to not more than 3% of the Portfolio's net assets at any
one time and, to the extent necessary, the Portfolio will close out transactions
3
<PAGE>
in order to comply with this limitation. (Transactions such as writing covered
call options are considered to involve hedging for the purposes of this
limitation.) In calculating the Portfolio's net loss exposure from such
Strategic Transactions, an unrealized gain from a particular Strategic
Transaction position would be netted against an unrealized loss from a related
Strategic Transaction position. For example, if the Adviser anticipates that the
Belgian franc will appreciate relative to the French franc, the Portfolio may
take a long forward currency position in the Belgian franc and a short foreign
currency position in the French franc. Under such circumstances, any unrealized
loss in the Belgian franc position would be netted against any unrealized gain
in the French franc position (and vice versa) for purposes of calculating the
Portfolio's net loss exposure. The ability of the Portfolio to utilize these
Strategic Transactions successfully will depend on the Adviser's ability to
predict pertinent market movements, which cannot be assured. The Portfolio will
comply with applicable regulatory requirements when implementing these
strategies, techniques and instruments. The Portfolio's activities involving
Strategic Transactions may be limited in order to enable the Fund to comply with
the requirements of Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code"), for qualification as a regulated investment company.
Risks of Strategic Transactions
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 Portfolio, 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 Portfolio can realize on its investments or cause the
Portfolio to hold a security it might otherwise sell. The use of currency
transactions can result in the Portfolio incurring losses as a result of a
number of factors including the imposition of exchange controls, suspension of
settlements, or the inability to deliver or receive a specified currency. The
use of options and futures transactions entails certain other risks. In
particular, the variable degree of correlation between price movements of
futures contracts and price movements in the related portfolio position of the
Portfolio creates the possibility that losses on the hedging instrument may be
greater than gains in the value of the Portfolio's position. The writing of
options could significantly increase the Portfolio'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 Portfolio might not be able to close out a transaction without incurring
substantial losses, if at all. Although the use of futures and options
transactions for hedging should tend to minimize the risk of loss due to a
decline in the value of the hedged position, at the same time, in certain
circumstances, they tend to limit any potential gain which might result from an
increase in value of such position. The loss incurred by the Portfolio in
writing options on futures and entering into futures transactions is potentially
4
<PAGE>
unlimited; however, as described above, the Portfolio will attempt to limit its
net loss exposure resulting from Strategic Transactions entered into for non-
hedging purposes to not more than 3% of its net assets at any one time. Futures
markets are highly volatile and the use of futures may increase the volatility
of the Fund's net asset value. Finally, entering into futures contracts would
create a greater ongoing potential financial risk than would purchases of
options where the exposure is limited to the cost of the initial premium. Losses
resulting from the use of Strategic Transactions would reduce net asset value
and the net result may be less favorable than if the Strategic Transactions had
not been utilized.
General Characteristics of Options
Put options and call options typically have similar structural
characteristics and operational mechanics regardless of the underlying
instrument on which they are purchased or sold. Thus, the following general
discussion relates to each of the particular types of options discussed in
greater detail below. In addition, many Strategic Transactions involving options
require segregation of the Portfolio's assets in special accounts, as described
below under "Use of Segregated Accounts."
A put option gives the purchaser of the option, in consideration for the
payment of a premium, the right to sell, and the writer the obligation to buy if
the option is exercised, the underlying security, commodity, index, currency or
other instrument at the exercise price. For instance, the Portfolio's purchase
of a put option on a security might be designed to protect its holdings in the
underlying instrument (or, in some cases, a similar instrument) against a
substantial decline in the market value by giving the Portfolio the right to
sell such instrument at the option exercise price. A call option, in
consideration for the payment of a premium, gives the purchaser of the option
the right to buy, and the seller the obligation to sell if the option is
exercised, the underlying instrument at the exercise price. The Portfolio may
purchase a call option on a security, futures contract, index, currency or other
instrument to seek to protect the Portfolio against an increase in the price of
the underlying instrument that it intends to purchase in the future by fixing
the price at which it may purchase such instrument. An American style put or
call option may be exercised at any time during the option period while a
European style put or call option may be exercised only upon expiration or
during a fixed period prior thereto. The Portfolio is authorized to purchase and
sell exchange listed options and over-the-counter options ("OTC options").
Exchange listed options are issued by a regulated intermediary such as the
Options Clearing Corporation ("OCC"), which guarantees the performance of the
obligations of the parties to such options. The discussion below uses the OCC as
an example, but is also applicable to other financial intermediaries.
With certain exceptions, exchange listed options generally settle by
physical delivery of the underlying security or currency, although in the future
cash settlement may become available. Index options and Eurodollar instruments
are cash settled for the net amount, if any, by which the option is
"in-the-money" (i.e., where the value of the underlying instrument exceeds, in
the case of a call option, or is less than, in the case of a put option, the
exercise price of the option) at the time the option is exercised. Frequently,
rather than taking or making delivery of the underlying instrument through the
process of exercising the option, listed options are closed by entering into
offsetting purchase or sale transactions that do not result in ownership of the
new option.
5
<PAGE>
The Portfolio's ability to close out its position as a purchaser or seller
of an exchange listed put or call option is dependent, in part, upon the
liquidity of the option market. There is no assurance that a liquid option
market on an exchange will exist. In the event that the relevant market for an
option on an exchange ceases to exist, outstanding options on that exchange
would generally continue to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours
during which the underlying financial instruments are traded. To the extent that
the option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct agreement with
the Counterparty. In contrast to exchange listed options, which generally have
standardized terms and performance mechanics, all the terms of an OTC option,
including such terms as method of settlement, term, exercise price, premium,
guarantees and security, are set by negotiation of the parties. The Portfolio
will generally sell (write) OTC options (other than OTC currency options) that
are subject to a buy-back provision permitting the Portfolio to require the
Counterparty to sell the option back to the Portfolio at a formula price within
seven days. (To the extent that the Portfolio does not do so, the OTC options
are subject to the Portfolio's restriction on illiquid securities.) The
Portfolio expects generally to enter into OTC options that have cash settlement
provisions, although it is not required to do so.
Unless the parties provide for it, there is no central clearing or guaranty
function in an OTC option. As a result, if the Counterparty fails to make
delivery of the security, currency or other instrument underlying an OTC option
it has entered into with the Portfolio or fails to make a cash settlement
payment due in accordance with the terms of that option, the Portfolio will lose
any premium it paid for the option as well as any anticipated benefit of the
transaction. Accordingly, the Adviser must assess the creditworthiness of each
such Counterparty or any guarantor or credit enhancement of the Counterparty's
credit to determine the likelihood that the terms of the OTC option will be
satisfied. The Portfolio will engage in OTC option transactions only with U.S.
Government securities dealers recognized by the Federal Reserve Bank of New York
as "primary dealers", or broker dealers, domestic or foreign banks or other
financial institutions which have received, combined with any credit
enhancements, a long-term debt rating of A from S&P or Moody's or an equivalent
rating from any other nationally recognized statistical rating organization
("NRSRO") or which issue debt that is determined to be of equivalent credit
quality by the Adviser. The staff of the Securities and Exchange Commission (the
"SEC") currently takes the position that, absent the buy-back provisions
6
<PAGE>
discussed above, OTC options purchased by the Portfolio, and portfolio
securities "covering" the amount of the Portfolio's obligation pursuant to an
OTC option sold by it (the cost of the sell-back plus the in-the-money amount,
if any) are illiquid, and are subject to the Portfolio's limitation on investing
in illiquid securities. However, for options written with "primary dealers" in
U.S. Government securities pursuant to an agreement requiring a closing purchase
transaction at a formula price, the amount which is considered to be illiquid
may be calculated by reference to a formula price.
If the Portfolio sells (writes) a call option, the premium that it receives
may serve as a partial hedge, to the extent of the option premium, against a
decrease in the value of the underlying securities or instruments in its
portfolio or will increase the Portfolio's income. The sale (writing) of put
options can also provide income.
The Portfolio may purchase and sell (write) call options on securities
including U.S. Treasury and agency securities, mortgage-backed securities,
corporate debt securities, equity securities (including convertible securities)
and Eurodollar instruments that are traded on U.S. and foreign securities
exchanges and in the over-the-counter markets, and on securities indices,
currencies and futures contracts. All calls sold by the Portfolio must be
"covered" (i.e., the Portfolio must own the securities or the futures contract
subject to the call) or must meet the asset segregation requirements described
below as long as the call is outstanding. Even though the Portfolio will receive
the option premium to help offset any loss, the Portfolio may incur a loss if
the exercise price is below the market price for the security subject to the
call at the time of exercise. A call sold by the Portfolio also exposes the
Portfolio during the term of the option to possible loss of opportunity to
realize appreciation in the market price of the underlying security or
instrument and may require the Portfolio to hold a security or instrument which
it might otherwise have sold.
The Portfolio may purchase and sell (write) put options on securities
including U.S. Treasury and agency securities, mortgage backed securities,
foreign sovereign debt, corporate debt securities, equity securities (including
convertible securities) and Eurodollar instruments (whether or not it holds the
above securities in its portfolio), and on securities indices, currencies and
futures contracts. The Portfolio will not sell put options if, as a result, more
than 50% of the Portfolio's assets would be required to be segregated to cover
its potential obligations under such put options other than those with respect
to futures and options thereon. In selling put options, there is a risk that the
Portfolio may be required to buy the underlying security at a price above the
market price.
Options on Securities Indices and Other Financial Indices
The Portfolio may also purchase and sell (write) call and put options on
securities indices and other financial indices. Options on securities indices
and other financial indices are similar to options on a security or other
instrument except that, rather than settling by physical delivery of the
underlying instrument, they settle by cash settlement. For example, an option on
an index gives the holder the right to receive, upon exercise of the option, an
amount of cash if the closing level of the index upon which the option is based
exceeds, in the case of a call, or is less than, in the case of a put, the
exercise price of the option (except if, in the case of an OTC option, physical
7
<PAGE>
delivery is specified). This amount of cash is equal to the differential between
the closing price of the index and the exercise price of the option, which also
may be multiplied by a formula value. The seller of the option is obligated, in
return for the premium received, to make delivery of this amount upon exercise
of the option. In addition to the methods described above, the Portfolio may
cover call options on a securities index by owning securities whose price
changes are expected to be similar to those of the underlying index, or by
having an absolute and immediate right to acquire such securities without
additional cash consideration (or for additional cash consideration held in a
segregated account by its custodian) upon conversion or exchange of other
securities in its portfolio.
General Characteristics of Futures
The Portfolio may enter into financial futures contracts or purchase or
sell put and call options on such futures. Futures are generally bought and sold
on the commodities exchanges where they are listed and involve payment of
initial and variation margin as described below. The sale of futures contracts
creates a firm obligation by the Portfolio, as seller, to deliver to the buyer
the specific type of financial instrument called for in the contract at a
specific future time for a specified price (or, with respect to index futures
and Eurodollar instruments, the net cash amount). The purchase of futures
contracts creates a corresponding obligation by the Portfolio, as purchaser to
purchase a financial instrument at a specific time and price. Options on futures
contracts are similar to options on securities except that an option on a
futures contract gives the purchaser the right in return for the premium paid to
assume a position in a futures contract and obligates the seller to deliver such
position upon exercise of the option.
The Portfolio's use of financial futures and options thereon will in all
cases be consistent with applicable regulatory requirements and in particular
the regulations of the Commodity Futures Trading Commission relating to
exclusions from regulation as a commodity pool operator. Those regulations
currently provide that the Portfolio may use commodity futures and option
positions (i) for bona fide hedging purposes without regard to the percentage of
assets committed to margin and option premiums, or (ii) for other purposes
permitted by the SEC to the extent that the aggregate initial margin and option
premiums required to establish such non-hedging positions (net of the amount
that the positions were "in the money" at the time of purchase) do not exceed 5%
of the net asset value of the Portfolio's portfolio, after taking into account
unrealized profits and losses in such positions. Typically, maintaining a
futures contract or selling an option thereon requires the Portfolio to deposit,
with its custodian for the benefit of a futures commission merchant, as security
for its obligations an amount of cash or other specified assets (initial margin)
which initially is typically 1% to 10% of the face amount of the contract (but
may be higher in some circumstances). Additional cash or assets (variation
margin) may be required to be deposited directly with the futures commission
merchant thereafter on a daily basis as the value of the contract fluctuates.
8
<PAGE>
The purchase of an option on financial futures involves payment of a premium for
the option without any further obligation on the part of the Portfolio. If the
Portfolio exercises an option on a futures contract it will be obligated to post
initial margin (and potential subsequent variation margin) for the resulting
futures position just as it would for any position. Futures contracts and
options thereon are generally settled by entering into an offsetting transaction
but there can be no assurance that the position can be offset prior to
settlement at an advantageous price, nor that delivery will occur. The
segregation requirements with respect to futures contracts and options thereon
are described below.
Currency Transactions
The Portfolio may engage in currency transactions with Counterparties in
order to hedge the value of portfolio holdings denominated in particular
currencies against fluctuations in relative value or to enhance potential gain.
Currency transactions include currency contracts, exchange listed currency
futures, exchange listed and OTC options on currencies, and currency swaps. A
forward currency contract involves a privately negotiated obligation to purchase
or sell (with delivery generally required) a specific currency at a future date,
which may be any fixed number of days from the date of the contract agreed upon
by the parties, at a price set at the time of the contract. A currency swap is
an agreement to exchange cash flows based on the notional (agreed-upon)
difference among two or more currencies and operates similarly to an interest
rate swap, which is described below. A Portfolio may enter into over-the-counter
currency transactions with Counterparties which have received, combined with any
credit enhancements, a long term debt rating of A by S&P or Moody's,
respectively, or that have an equivalent rating from a NRSRO or (except for OTC
currency options) whose obligations are determined to be of equivalent credit
quality by the Adviser.
The Portfolio's dealings in forward currency contracts and other currency
transactions such as futures, options, options on futures and swaps will
generally be limited to hedging involving either specific transactions or
portfolio positions. See, "Strategic Transactions." Transaction hedging is
entering into a currency transaction with respect to specific assets or
liabilities of a Portfolio, which will generally arise in connection with the
purchase or sale of its portfolio securities or the receipt of income therefrom.
Position hedging is entering into a currency transaction with respect to
portfolio security positions denominated or generally quoted in that currency.
The Portfolio will not enter into a transaction to hedge currency exposure
to an extent greater, after netting all transactions intended wholly or
partially to offset other transactions, than the aggregate market value (at the
time of entering into the transaction) of the securities held in its portfolio
that are denominated or generally quoted in or currently convertible into such
currency, other than with respect to proxy hedging as described below.
The Portfolio may also cross-hedge currencies by entering into transactions
to purchase or sell one or more currencies that are expected to decline in value
in relation to other currencies to which the Portfolio has or in which the
Portfolio expects to have portfolio exposure. For example, the Portfolio may
hold a French government bond and the Adviser may believe that French francs
will deteriorate against German marks. The Portfolio would sell French francs to
reduce its exposure to that currency and buy German marks. This strategy would
be a hedge against a decline in the value of French francs, although it would
expose the Portfolio to declines in the value of the German mark relative to the
U.S. dollar.
9
<PAGE>
To reduce the effect of currency fluctuations on the value of existing or
anticipated holdings of portfolio securities, the Portfolio may also engage in
proxy hedging. Proxy hedging is often used when the currency to which the
Portfolio's portfolio is exposed is difficult to hedge or to hedge against the
dollar. Proxy hedging entails entering into a forward contract to sell a
currency whose changes in value are generally considered to be linked to a
currency or currencies in which certain of the Portfolio's portfolio securities
are or are expected to be denominated, and to buy U.S. dollars. The amount of
the contract would not exceed the value of the Portfolio's securities
denominated in linked currencies. For example, if the Adviser considers that the
Austrian schilling is linked to the German deutschemark (the "D-mark"), the
Portfolio holds securities denominated in schillings and the Adviser believes
that the value of schillings will decline against the U.S. dollar, the Adviser
may enter into a contract to sell D-marks and buy dollars. Proxy hedging
involves some of the same risks and considerations as other transactions with
similar instruments. Currency transactions can result in losses to the Portfolio
if the currency being hedged fluctuates in value to a degree or in a direction
that is not anticipated. Further, there is the risk that the perceived linkage
between various currencies may not be present or may not be present during the
particular time that the Portfolio is engaging in proxy hedging. If the
Portfolio enters into a currency hedging transaction, the Portfolio will comply
with the asset segregation requirements described below.
Risks of Currency Transactions
Currency transactions are subject to risks different from those of other
portfolio transactions. Because currency control is of great importance to the
issuing governments and influences economic planning and policy, purchases and
sales of currency and related instruments can be negatively affected by
government exchange controls, blockages, and manipulations or exchange
restrictions imposed by governments. These can result in losses to the Portfolio
if it is unable to deliver or receive currency or funds in settlement of
obligations and could also cause hedges it has entered into to be rendered
useless, resulting in full currency exposure as well as incurring transaction
costs. Buyers and sellers of currency futures are subject to the same risks that
apply to the use of futures generally. Further, settlement of a currency futures
contract for the purchase of most currencies must occur at a bank based in the
issuing nation. Trading options on currency futures is relatively new, and the
ability to establish and close out positions on such options is subject to the
maintenance of a liquid market which may not always be available. Currency
exchange rates may fluctuate based on factors extrinsic to that country's
economy.
10
<PAGE>
Combined Transactions
The Portfolio may enter into multiple transactions, including multiple
options transactions, multiple futures transactions, multiple currency
transactions (including forward currency contracts) and multiple interest rate
transactions, structured notes and any combination of futures, options, currency
and interest rate transactions ("component" transactions), instead of a single
Strategic Transaction, as part of a single or combined strategy when, in the
opinion of the Adviser it is in the best interests of the Portfolio to do so. A
combined transaction will usually contain elements of risk that are present in
each of its component transactions. Although combined transactions are normally
entered into based on the Adviser's judgment that the combined strategies will
reduce risk or otherwise more effectively achieve the desired portfolio
management goal, it is possible that the combination will instead increase such
risks or hinder achievement of the portfolio management objective.
Swaps, Caps, Floors and Collars
Among the Strategic Transactions into which the Portfolio may enter are
interest rate, currency and index swaps and the purchase or sale of related
caps, floors and collars. The Portfolio expects to enter into these transactions
primarily for hedging purposes, including, but not limited to, preserving a
return or spread on a particular investment or portion of its portfolio,
protecting against currency fluctuations, as a duration management technique or
protecting against an increase in the price of securities the Portfolio
anticipates purchasing at a later date. Swaps, caps, floors and collars may also
be used to enhance potential gain in circumstances where hedging is not involved
although, as described above, the Portfolio will attempt to limit its net loss
exposure resulting from swaps, caps, floors and collars and other Strategic
Transactions entered into for such purposes to not more than 3% of the
Portfolio's net assets at any one time. The Portfolio will not sell interest
rate caps or floors where it does not own securities or other instruments
providing the income stream the Portfolio may be obligated to pay. Interest rate
swaps involve the exchange by the Portfolio with another party of their
respective commitments to pay or receive interest, e.g., an exchange of floating
rate payments for fixed rate payments with respect to a notional amount of
principal. A currency swap is an agreement to exchange cash flows on a notional
amount of two or more currencies based on the relative value differential among
them and an index swap is an agreement to swap cash flows on a notional amount
based on changes in the values of the reference indices. The purchase of a cap
entitles the purchaser to receive payments on a notional principal amount from
the party selling such cap to the extent that a specified index exceeds a
predetermined interest rate or amount. The purchase of a floor entitles the
purchaser to receive payments on a notional principal amount from the party
selling such floor to the extent that a specified index falls below a
predetermined interest rate or amount. A collar is a combination of a cap and a
floor that preserves a certain rate of return within a predetermined range of
interest rates or values.
The Portfolio will usually enter into swaps on a net basis, i.e., the two
payment streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with the Portfolio receiving or paying, as the case
may be, only the net amount of the two payments. The Portfolio will not enter
into any swap, cap, floor or collar transaction unless, at the time of entering
into such transaction, the unsecured long-term debt of the Counterparty,
combined with any credit enhancements, is rated at least A by S&P or Moody's or
11
<PAGE>
has an equivalent rating from an NRSRO or which issue debt that is determined to
be of equivalent credit quality by the Adviser. If there is a default by the
Counterparty, the Portfolio may have contractual remedies pursuant to the
agreements related to the transaction. The swap market has grown substantially
in recent years with a large number of banks and investment banking firms acting
both as principals and as agents utilizing standardized swap documentation. As a
result, the swap market has become relatively liquid. Caps, floors and collars
are more recent innovations for which standardized documentation has not yet
been fully developed. Swaps, caps, floors and collars are considered illiquid
for purposes of the Portfolio's policy regarding illiquid securities, unless it
is determined, based upon continuing review of the trading markets for the
specific security, that such security is liquid. The Board of Trustees of the
Portfolio Trust has adopted guidelines and delegated to the Adviser the daily
function of determining and monitoring the liquidity of swaps, caps, floors and
collars. The Board of Trustees, however, retains oversight focusing on factors
such as valuation, liquidity and availability of information and is ultimately
responsible for such determinations. The Staff of the SEC currently takes the
position that swaps, caps, floors and collars are illiquid, and are subject to
the Portfolio's limitation on investing in illiquid securities.
Eurodollar Contracts
The Portfolio may make investments in Eurodollar contracts. Eurodollar
contracts are U.S. dollar-denominated futures contracts or options thereon which
are linked to the London Interbank Offered Rate ("LIBOR"), although foreign
currency-denominated instruments are available from time to time. Eurodollar
futures contracts enable purchasers to obtain a fixed rate for the lending of
funds and sellers to obtain a fixed rate for borrowings. The Portfolio might use
Eurodollar futures contracts and options thereon to hedge against changes in
LIBOR, to which many interest rate swaps and fixed income instruments are
linked.
Risks of Strategic Transactions Outside the United States
When conducted outside the United States, Strategic Transactions may not be
regulated as rigorously as in the United States, may not involve a clearing
mechanism and related guarantees, and are subject to the risk of governmental
actions affecting trading in, or the prices of, foreign securities, currencies
and other instruments. The value of such positions also could be adversely
affected by: (i) lesser availability than in the United States of data on which
to make trading decisions, (ii) delays in the Portfolio's ability to act upon
economic events occurring in foreign markets during non-business hours in the
United States, (iii) the imposition of different exercise and settlement terms
and procedures and margin requirements than in the United States, (iv) lower
trading volume and liquidity, and (v) other complex foreign political, legal and
economic factors. At the same time, Strategic Transactions may offer advantages
such as trading in instruments that are not currently traded in the United
States or arbitrage possibilities not available in the United States.
12
<PAGE>
Use of Segregated Accounts
The Portfolio will hold securities or other instruments whose values are
expected to offset its obligations under the Strategic Transactions. The
Portfolio will cover Strategic Transactions as required by interpretive
positions of the SEC. The Portfolio will not enter into Strategic Transactions
that expose the Portfolio to an obligation to another party unless it owns
either (i) an offsetting position in securities or other options, futures
contracts or other instruments or (ii) cash, receivables or liquid, high grade
debt securities with a value sufficient to cover its potential obligations. The
Portfolio may have to comply with any applicable regulatory requirements for
Strategic Transactions, and if required, will set aside cash and other assets in
a segregated account with its custodian bank in the amount prescribed. In that
case, the Portfolio's custodian would maintain the value of such segregated
account equal to the prescribed amount by adding or removing additional cash or
other assets to account for fluctuations in the value of the account and the
Fund's obligation on the underlying Strategic Transactions. Assets held in a
segregated account would not be sold while the Strategic Transaction is
outstanding, unless they are replaced with similar assets. As a result, there is
a possibility that segregation of a large percentage of the Portfolio's assets
could impede portfolio management or the Portfolio's ability to meet redemption
requests or other current obligations.
"When-Issued" and "Delayed Delivery" Securities
The Portfolio may commit up to 25% of its net assets to purchase securities
on a "when-issued" or "delayed delivery" basis, which means that delivery and
payment for the securities will normally take place 15 to 45 days after the date
of the transaction. The payment obligation and interest rate on the securities
are fixed at the time the Portfolio enters into the commitment, but interest
will not accrue to the Portfolio until delivery of and payment for the
securities. Although the Portfolio will only make commitments to purchase
"when-issued" and "delayed delivery" securities with the intention of actually
acquiring the securities, the Portfolio may sell the securities before the
settlement date if deemed advisable by the Adviser.
Unless the Portfolio has entered into an offsetting agreement to sell the
securities, cash, or liquid high-grade debt obligations with a market value
equal to the amount of the Portfolio's commitment will be segregated with the
custodian bank for the Portfolio. If the market value of these securities
declines, additional cash or securities will be segregated daily so that the
aggregate market value of the segregated securities equals the amount of the
Portfolio's commitment.
Securities purchased on a "when-issued" and "delayed delivery" basis may
have a market value on delivery which is less than the amount paid by the
Portfolio. Changes in market value may be based upon the public's perception of
the creditworthiness of the issuer or changes in the level of interest rates.
Generally, the value of "when-issued" securities will fluctuate inversely to
changes in interest rates, i.e., they will appreciate in value when interest
rates fall and will decline in value when interest rates rise.
13
<PAGE>
Portfolio Turnover
It is not the policy of the Portfolio to purchase or sell securities for
trading purposes. However, the Portfolio places no restrictions on portfolio
turnover and it may sell any portfolio security without regard to the period of
time it has been held, except as may be necessary to enable the Fund to maintain
its status as a regulated investment company under the Code. The Portfolio may
therefore generally change its portfolio investments at any time in accordance
with the Adviser's appraisal of factors affecting any particular issuer or
market, or relevant economic conditions. Portfolio turnover is not expected to
exceed 250% on an annual basis.
INVESTMENT RESTRICTIONS
The Fund and the Portfolio have each adopted the following fundamental
policies. Each of the Fund's and the Portfolio's fundamental policies cannot be
changed unless the change is approved by the "vote of the outstanding voting
securities" of the Fund or the Portfolio, as the case may be, which phrase as
used herein means the lesser of (i) 67% or more of the voting securities of the
Fund or the Portfolio present at a meeting, if the holders of more than 50% of
the outstanding voting securities of the Fund or the Portfolio are present or
represented by proxy, or (ii) more than 50% of the outstanding voting securities
of the Fund or the Portfolio.
As a matter of fundamental policy, the Portfolio (Fund) may not:
1. Invest more than 25% of the current value of its total assets in any
single industry, provided that this restriction shall not apply to debt
securities issued or guaranteed by the United States government or its
agencies or instrumentalities.
2. Underwrite the securities of other issuers, except to the extent that,
in connection with the disposition of portfolio securities, the
Portfolio (Fund) may be deemed to be an underwriter under the
Securities Act of 1933.
3. Purchase real estate or real estate mortgage loans, although the
Portfolio (Fund) may purchase marketable securities of companies which
deal in real estate, real estate mortgage loans or interests therein.
4. Purchase securities on margin (except that the Portfolio (Fund) may
obtain such short-term credits as may be necessary for the clearance of
purchases and sales of securities).
5. Purchase or sell commodities or commodity contracts except that the
Portfolio (Fund) may purchase and sell financial futures contracts and
options on financial futures contracts and engage in foreign currency
exchange transactions.
6. With respect to at least 50% of its total assets, invest more than 5%
in the securities of any one issuer (other than the U.S. Government,
its agencies or instrumentalities) or acquire more than 10% of the
outstanding voting securities of any issuer.
7. Issue senior securities, borrow money, enter into reverse repurchase
agreements or pledge or mortgage its assets, except that the Fund may
(a) borrow from banks as a temporary measure for extraordinary or
emergency purposes (but not investment purposes) in an amount up to 15%
of the current value of its total assets to secure such borrowings, (b)
14
<PAGE>
enter into forward roll transactions, and (c) pledge its assets to an
extent not greater than 15% of the current value of its total assets to
secure such borrowings; however, the Fund may not make any additional
investments while its outstanding borrowings exceed 5% of the current
value of its total assets.
8. Lend portfolio securities, except that the Fund may lend its portfolio
securities with a value up to 20% of its total assets (with a 10% limit
for any borrower).
Notwithstanding the foregoing, the Fund may invest all of its assets (other
than assets which are not "investment securities" (as defined in the 1940 Act)
or are excepted by the SEC) in an open-end management investment company with
substantially the same investment objective as the Fund.
The following restrictions are not fundamental policies and may be changed
by the Trustees of the Portfolio Trust (Trust) without investor approval, in
accordance with applicable laws, regulations or regulatory policy. The Portfolio
(Fund) may not:
a. Make short sales of securities unless (a) after effect is given to any
such short sale, the total market value of all securities sold short
would not exceed 5% of the value of the Fund's net assets or (b) at all
times during which a short position is open it owns an equal amount of
such securities, or by virtue of ownership of convertible or
exchangeable securities it has the right to obtain through the
conversion or exchange of such other securities an amount equal to the
securities sold short.
b. Invest in companies for the purpose of exercising control or
management.
c. Purchase the securities of other investment companies, provided that
the Portfolio (Fund) may make a purchase (a) in the open market
involving no commission or profit to a sponsor or dealer (other than
the customary broker's commission), provided that immediately
thereafter (i) not more than 10% of the Portfolio's (Fund's) total
assets would be invested in such securities, (ii) not more than 5% of
the Portfolio's (Fund's) total assets would be invested in the
securities of any one investment company and (iii) not more than 3% of
the voting stock of any one investment company would be owned by the
Portfolio (Fund), or (b) as part of a merger, consolidation, or
acquisition of assets.
d. Purchase or write options, except as described under "Strategic
Transactions."
e. Invest in interests in oil, gas or other exploration or development
programs.
f. Invest more than 5% of the assets of the Portfolio (Fund) in the
securities of any issuers which together with their corporate parents
have records of less than three years' continuous operation, including
the operation of any predecessor, other than debt securities issued or
guaranteed by U.S. or foreign national, provincial, state or other
governments with taxing authority or by their agencies or by
supranational entities and securities fully collateralized by such
securities.
15
<PAGE>
g. Invest in securities of any company if any officer or director
(trustee) of the Portfolio Trust (Trust) or of the Portfolio's
investment adviser owns more than 1/2 of 1% of the outstanding
securities of such company and such officers and directors (trustees)
own in the aggregate more than 5% of the securities of such company.
h. Invest more than an aggregate of 15% of the net assets of the Portfolio
(Fund) in (a) repurchase agreements which are not terminable within
seven days, (b) securities subject to legal or contractual restrictions
on resale or for which there are no readily available market quotations
and (c) in other illiquid securities, including nonnegotiable fixed
time deposits.
i. Invest more than 25% of its net assets in repurchase agreements (this
restriction is fundamental with respect to the Fund but not the
Portfolio).
Notwithstanding any non-fundamental policy, the Fund may invest all of its
assets (other than assets which are not "investment securities" (as defined in
the 1940 Act) or are excepted by the SEC) in an open-end management investment
company with substantially the same investment objective as the Fund.
Purchases of securities of other investment companies permitted under
restriction (c) above could cause the Portfolio (Fund) to pay additional
management and advisory fees and distribution fees.
If any percentage restriction described above is adhered to at the time of
investment, a subsequent increase or decrease in the percentage resulting from a
change in the value of the Portfolio's assets will not constitute a violation of
the restriction, except with respect to restriction (g) above.
In order to permit the sale of shares of the Fund in certain states, the
Board may, in its sole discretion, adopt restrictions on investment policy more
restrictive than those described above. Should the Board determine that any such
more restrictive policy is no longer in the best interest of the Fund and its
shareholders, the Fund may cease offering shares in the state involved and the
Board may revoke such restrictive policy. Moreover, if the states involved shall
no longer require any such restrictive policy, the Board may, in its sole
discretion, revoke such policy.
CALCULATION OF PERFORMANCE DATA
As indicated in the Prospectus, the Fund may, from time to time, advertise
certain total return information. The average annual total return of the Fund
for a period is computed by subtracting the net asset value per share at the
beginning of the period from the net asset value per share at the end of the
period (after adjusting for the reinvestment of any income dividends and capital
gain distributions), and dividing the result by the net asset value per share at
the beginning of the period. In particular, the average annual total return of
the Fund ("T") is computed by using the redeemable value at the end of a
16
<PAGE>
specified period of time ("ERV") of a hypothetical initial investment of $1,000
("P") over a period of time ("n") according to the formula P(1+T)n=ERV. The
average annual total return quotation for the Fund for the one year period ended
December 31, 1995 was 18.13%. The average total return quotation for the Fund
for the period January 3, 1994 (commencement of operation) through December 31,
1995 was 4.77%. The Fund's average annualized yield for the 30 day period ended
December 31, 1995 was 7.51%.
The yield of the Fund is computed by dividing the net investment income per
share earned during the period stated in the advertisement by the maximum
offering price per share on the last day of the period. For the purpose of
determining net investment income, the calculation includes, among expenses of
the Fund, all recurring fees that are charged to all shareholder accounts and
any non recurring charges for the period stated. In particular, yield is
determined according to the following formula:
Yield = [2[((A - B + 1)^6) - 1]]/CD
Where: A equals dividends and interest earned during the period; B equals
net expenses accrued for the period; C equals average daily number of shares
outstanding during the period that were entitled to received dividends; D equals
the maximum offering price per share on the last day of the period.
The Fund may also quote non-standardized yield, such as yield-to- maturity
("YTM"). YTM represents the rate of return an investor will receive if a
long-term, interest bearing investment, such as a bond, is held to its maturity
date. YTM does not take into account purchase price, redemption value, time to
maturity, coupon yield, and the time between interest payments.
In addition to average annual total return quotations, the Fund may quote
quarterly and annual performance on a net (with management and administration
fees deducted) and gross basis as follows:
Quarter/Year Net Gross
- --------------------------------------------------------------------------------
1Q94 (4.80)% (4.64)%
2Q94 (3.56) (3.40)
3Q94 (0.77) (0.05)
4Q94 1.44 1.60
1994 (7.06) (6.46)
1Q95 2.94 3.10
2Q95 5.21 5.36
3Q95 3.80 3.95
4Q95 5.09 5.26
1995 18.13 18.84
Performance quotations should not be considered as representative of the
Fund's performance for any specified period in the future.
17
<PAGE>
The Fund's performance may be compared in sales literature to the
performance of other mutual funds having similar objectives or to standardized
indices or other measures of domestic, international or global investment
performance. In particular, the Fund may compare its performance to the J.P.
Morgan Global Index, which is generally considered to be representative of the
performance of fixed rate, domestic government bonds from eleven countries.
Comparative performance may also be expressed by reference to a ranking prepared
by a mutual fund monitoring service or by one or more newspapers, newsletters or
financial periodicals. Performance comparisons may be useful to investors who
wish to compare the Fund's past performance to that of other mutual funds and
investment products. Of course, past performance is not a guarantee of future
results.
MANAGEMENT
Trustees and Officers of the Trust and Portfolio Trust
The Trustees and executive officers of the Trust are listed below. The
Trustees of the Portfolio Trust are identical to the Trustees of the Trust. The
officers of the Portfolio Trust are Messrs. Clayson, Ladd, Wood, Hollis and
Murray, and Mss. Banfield, Chase, Herrmann and Kneeland, who hold the same
office with the Portfolio Trust as with the Trust. All executive officers of the
Trust and the Portfolio Trust are affiliates of Standish International
Management Company, L.P., the Portfolio's investment adviser.
<TABLE>
<CAPTION>
Position Held Principal Occupation
Name, Address and Date of Birth With Trust During Past 5 Years
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
D. Barr Clayson*, 7/29/35 Vice President Vice President and Managing
c/o Standish, Ayer & Wood, Inc. and Trustee Director, Standish, Ayer
One Financial Center & Wood, Inc.; President,
Boston, MA 02111 Standish International Management Company, L.P.
Samuel C. Fleming, 9/30/40 Trustee Chairman of the Board and
c/o Decision Resources, Inc. Chief Executive Officer,
1100 Winter Street Decision Resources, Inc.;
Waltham, MA 02154 through 1989, Senior V.P. Arthur D. Little
Benjamin M. Friedman, 8/5/44 Trustee William Joseph Maier
c/o Harvard University Professor of Political
Cambridge, MA 02138 Economy, Harvard University
John H. Hewitt, 4/11/35 Trustee Trustee, The Peabody
P.O. Box 307 Foundation; Trustee,
So. Woodstock, VT 05071 Visiting Nurse Alliance of
Vermont and New Hampshire
Edward H. Ladd*, 1/3/38 Trustee and Chairman of the Board and
c/o Standish, Ayer & Wood, Inc. Vice President Managing Director,
One Financial Center Standish, Ayer & Wood, Inc.
Boston, MA 02111 since 1990; formerly, President of
Standish, Ayer & Wood, Inc.
Caleb Loring III, 11/14/43 Trustee Trustee, Essex Street
c/o Essex Street Associates Associates (family
P.O. Box 5600 investment trust office);
Beverly Farms, MA 01915 Director, Holyoke Mutual
Insurance Company
Richard S. Wood*, 5/2/54 President and Vice President, Secretary
c/o Standish, Ayer & Wood, Inc. Trustee and Director, Standish,
One Financial Center Ayer & Wood, Inc.;
Boston, MA 02111 Executive Vice President,
Standish International
Management Company, L.P.
18
<PAGE>
Position Held Principal Occupation
Name, Address and Date of Birth With Trust During Past 5 Years
- --------------------------------------------------------------------------------------------------------------------
Richard C. Doll, 7/8/48 Vice President Vice President and
c/o Standish, Ayer & Wood, Inc. Director, Standish, Ayer
One Financial Center & Wood, Inc.
Boston, MA 02111
James E. Hollis III, 11/21/48 Executive Vice Vice President and
c/o Standish, Ayer & Wood, Inc. President Director, Standish, Ayer
One Financial Center & Wood, Inc.
Boston, MA 02111
David W. Murray, 5/5/40 Treasurer and Vice President, Treasurer
c/o Standish, Ayer & Wood, Inc. Secretary and Director, Standish,
One Financial Center Ayer & Wood, Inc.
Boston, MA 02111
Caleb F. Aldrich, 9/20/57 Vice President Vice President and
c/o Standish, Ayer & Wood, Inc. Director, Standish, Ayer
One Financial Center & Wood, Inc.
Boston, MA 02111
Beverly E. Banfield, 7/6/56 Vice President Vice President and
c/o Standish, Ayer & Wood, Inc. Compliance Officer,
One Financial Center Standish, Ayer & Wood,
Boston, MA 02111 Inc.; Assistant Vice
President and Compliance Officer,
Freedom Capital Management Corp. (1989-1992)
Nicholas S. Battelle, 6/24/42 Vice President Vice President and
c/o Standish, Ayer & Wood, Inc. Director, Standish, Ayer
One Financial Center & Wood, Inc.
Boston, MA 02111
Walter M. Cabot, 1/6/33 Vice President Senior Advisor and
c/o Standish, Ayer & Wood, Inc. Director, Standish, Ayer
One Financial Center & Wood, Inc.; prior to
Boston, MA 02111 1991, President, Harvard
Management Company
David H. Cameron, 11/2/55 Vice President Vice President and
c/o Standish, Ayer & Wood, Inc. Director, Standish, Ayer
One Financial Center & Wood, Inc.
Boston, MA 02111
Karen K. Chandor, 2/13/50 Vice President Vice President and
c/o Standish, Ayer & Wood, Inc. Director, Standish, Ayer
One Financial Center & Wood, Inc.
Boston, MA 02111
Lavinia B. Chase, 6/4/46 Vice President Vice President, Standish,
c/o Standish, Ayer & Wood, Inc. Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Susan B. Coan, 5/1/52 Vice President Vice President, Standish,
c/o Standish, Ayer & Wood, Inc. Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
19
<PAGE>
Position Held Principal Occupation
Name, Address and Date of Birth With Trust During Past 5 Years
- --------------------------------------------------------------------------------------------------------------------
W. Charles Cook II, 7/16/63 Vice President Vice President, Standish,
c/o Standish, Ayer & Wood, Inc. Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Joseph M. Corrado, 5/13/55 Vice President Vice President and Associate Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Dolores S. Driscoll, 2/17/48 Vice President Vice President and Managing
c/o Standish, Ayer & Wood, Inc. Director, Standish, Ayer
One Financial Center & Wood, Inc.
Boston, MA 02111
Mark A. Flaherty, 4/24/59 Vice President Vice President,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Anne P. Herrmann, 1/26/56 Vice President Mutual Fund Administrator,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Ann S. Higgins, 4/8/35 Vice President Vice President, Standish,
c/o Standish, Ayer & Wood, Inc. Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Denise B. Kneeland, 8/19/51 Vice President Senior Operations Manager,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center since January, 1996;
Boston, MA 02111 formerly, Vice President,
Scudder, Clark and Stevens
Raymond J. Kubiak, 9/3/57 Vice President Vice President and
c/o Standish, Ayer & Wood, Inc. Director, Standish, Ayer
One Financial Center & Wood, Inc.
Boston, MA 02111
Maria D. Furman, 2/3/54 Vice President Vice President and
c/o Standish, Ayer & Wood, Inc. Director, Standish, Ayer
One Financial Center & Wood, Inc.
Boston, MA 02111
Phillip D. Leonardi, 4/24/62 Vice President Vice President, Standish,
c/o Standish, Ayer & Wood, Inc. Ayer & Wood, Inc. since
One Financial Center November 1993; formerly,
Boston, MA 02111 Investment Sales, Cigna Corporation (1993)
and Travelers Corporation (1984-1993)
Laurence A. Manchester, 5/24/43 Vice President Vice President and
c/o Standish, Ayer & Wood, Inc. Director, Standish, Ayer
One Financial Center & Wood, Inc.
Boston, MA 02111
20
<PAGE>
Position Held Principal Occupation
Name, Address and Date of Birth With Trust During Past 5 Years
- --------------------------------------------------------------------------------------------------------------------
George W. Noyes, 11/12/44 Vice President President and Managing
c/o Standish, Ayer & Wood, Inc. Director, Standish, Ayer
One Financial Center & Wood, Inc.
Boston, MA 02111
Arthur H. Parker, 8/12/35 Vice President Vice President and
c/o Standish, Ayer & Wood, Inc. Director, Standish, Ayer
One Financial Center & Wood, Inc.
Boston, MA 02111
Jennifer A. Pline, 3/8/60 Vice President Vice President, Standish,
c/o Standish, Ayer & Wood, Inc. Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Howard B. Rubin, 10/29/59 Vice President Vice President and
c/o Standish, Ayer & Wood, Inc. Director, Standish, Ayer
One Financial Center & Wood, Inc.
Boston, MA 02111
Michael C. Schoeck, 10/24/55 Vice President Vice President, Standish,
c/o Standish, Ayer & Wood, Inc. Ayer & Wood, Inc. since
One Financial Center August, 1993; formerly,
Boston, MA 02111 Vice President,
Commerzbank, Frankfurt, Germany
Austin C. Smith, 7/25/42 Vice President Vice President and
c/o Standish, Ayer & Wood, Inc. Director, Standish, Ayer
One Financial Center & Wood, Inc.
Boston, MA 02111
Stephen A. Smith, 3/13/49 Vice President Vice President, since
c/o Standish, Ayer & Wood, Inc. November 2, 1993; formerly,
One Financial Center Standish, Ayer & Wood, Inc.
Boston, MA 02111 Consultant Cambridge
David C. Stuehr, 3/1/58 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
James W. Sweeney, 5/15/59 Vice President Vice President and
c/o Standish, Ayer & Wood, Inc. Director, Standish, Ayer
One Financial Center & Wood, Inc.
Boston, MA 02111
Ralph S. Tate, 4/2/47 Vice President Vice President and
c/o Standish, Ayer & Wood, Inc. Director, Standish, Ayer
One Financial Center & Wood, Inc. since April,
Boston, MA 02111 1990; formerly Vice President,
Aetna Life & Casualty
21
<PAGE>
Position Held Principal Occupation
Name, Address and Date of Birth With Trust During Past 5 Years
- --------------------------------------------------------------------------------------------------------------------
Michael W. Thompson, 3/31/56 Vice President Vice President, Standish,
c/o Standish, Ayer & Wood, Inc. Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Christopher Van Alstyne, 3/24/60 Vice President Vice President,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
*Indicates that Trustee is an interested person of the Trust for purposes of the
1940 Act.
</TABLE>
Compensation of Trustees and Officers
Each of the Trust and the Portfolio Trust pays no compensation to the
Trustees of the Trust or the Portfolio Trust affiliated with Standish, Ayer &
Wood, Inc. as the Administrator of the Fund ("Standish" or the "Fund
Administrator") or the Adviser, respectively, or to the Trusts's and Portfolio
Trust's officers. None of the Trustees or officers have engaged in any financial
transactions (other than the purchase or redemption of the Fund's shares) with
the Trust, the Portfolio Trust or the Adviser.
The following table sets forth all compensation paid to the Trust's
Trustees as of the Fund's fiscal year ended December 31, 1995:
<TABLE>
<CAPTION>
Pension or Retirement Total Compensation
Aggregate Compensation Benefits Accrued as from Fund and
Name of Trustee from the Fund Part of Fund's Expenses Other Funds in Complex*
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
D. Barr Clayson $0 $0 $0
Richard C. Doll** 0 0 0
Samuel C. Fleming 368 0 41,750
Benjamin M. Friedman 323 0 36,750
John H. Hewitt 323 0 36,750
Edward H. Ladd 0 0 0
Caleb Loring, III 323 0 36,750
Richard S. Wood 0 0 0
* As of the date of this Statement of Additional Information there were
18 funds in the fund complex.
** Mr. Doll resigned as a Trustee effective December 6, 1995.
</TABLE>
- --------------------------------------------------------------------------------
22
<PAGE>
Certain Shareholders
At March 1, 1996, the Trustees and officers of the Trust and the Portfolio
as a group beneficially owned (i.e., had voting and/or investment power) less
than 1% of the then outstanding shares of the Fund. At that date, each of the
following persons beneficially owned 5% or more of the then outstanding shares
of the Fund:
Percentage of
Name and Address Outstanding Shares
- --------------------------------------------------------------------------------
Brown University 26%
164 Angell Street
Investment Office - Box C
Providence, RI 02912
Childrens Medical Center Corp. 15%
1295 Boylston Street
Suite 300
Boston, MA 02215
Lafayette College 13%
234 Markle Hall
Easton, PA 18042-1779
Wenner-Gren Foundation 9%
220 Fifth Avenue
New York, NY 10001
Trustees of Boston College 8%
St. Thomas More Hall
Room 310
Chestnut Hill, MA 02167
Sisters of Mercy Health System 5%
2039 N. Geyer Road
St. Louis, MO 63131
Investment Adviser of the Portfolio Trust
Standish International Management Company, L.P. serves as the Adviser to
the Portfolio pursuant to a written investment advisory agreement with the
Portfolio Trust. Prior to the close of business on April 26, 1996, the Adviser
managed directly the assets of the Fund pursuant to an investment advisory
agreement. This agreement was terminated by the Fund on such date subsequent to
the approval by the Fund's shareholders on March 29, 1996 to implement certain
changes in the Fund's investment restrictions which enable the Fund to invest
all of its investable assets in the Portfolio. The Adviser is a Delaware limited
partnership organized in 1991 and is registered under the 1940 Act. The General
Partner of the Adviser is Standish, One Financial Center, Boston, MA 02111,
which holds a 99.98% partnership interest. The Limited Partners, who each hold a
0.01% interest in the Adviser, are Walter M. Cabot, Sr., Chairman of the Board
of the Adviser and a Director of and a Senior Adviser to Standish, and D. Barr
Clayson, the President of the Adviser and a Managing Director of Standish.
Richard S. Wood, a Vice President and Director of Standish and the President of
the Trust, is the Executive Vice President of the Adviser.
23
<PAGE>
The following, constituting all of the Directors and all of the
shareholders of Standish, are Standish's controlling persons: Caleb F. Aldrich,
Nicholas S. Battelle, Walter M. Cabot, David H. Cameron, Karen K. Chandor, D.
Barr Clayson, Richard C. Doll, Dolores S. Driscoll, Mark A. Flaherty, Maria
O'Malley Furman, James E. Hollis III, Raymond J. Kuback, Edward H. Ladd,
Laurence A. Manchester, David W. Murray, George W. Noyes, Arthur H. Parker,
Howard B. Rubin, Austin C. Smith, David C. Stuehr, James J. Sweeney, Ralph S.
Tate and Richard S. Wood.
Certain services provided by the Adviser under the advisory agreement are
described in the Prospectus. These services are provided without reimbursement
by the Portfolio for any costs incurred. Under the Investment Advisory
Agreement, the Adviser is paid a fee based upon a percentage of the Portfolio's
average daily net asset value computed as described in the Prospectus. The
current fee is paid monthly. The rate at which the fee is paid and expense
limits voluntarily agreed to by the Adviser and Standish are described in the
Prospectus. For the period from January 3, 1994 (commencement of operations)
through December 31, 1994, the Fund paid advisory fees in the amount of $407,392
after a reduction of $89,878. For the fiscal year ended December 31, 1995, the
Adviser received fees from the Fund of $535,630.
Pursuant to the investment advisory agreement, the Portfolio bears expenses
of its operations other than those incurred by the Adviser pursuant to the
investment advisory agreement. Among other expenses, the Portfolio will pay
share pricing expenses; custodian fees and expenses; administration fees; legal
and auditing fees and expenses; expenses of notices and reports to interest
holders; registration and reporting fees and expenses; and Trustees' fees and
expenses.
Unless terminated as provided below, the investment advisory agreement
continues in full force and effect until April 26, 1998 and for successive
periods of one year thereafter, but only so long as each such continuance is
approved annually (i) by either the Trustees of the Portfolio Trust or by the
"vote of a majority of the outstanding voting securities" of the Portfolio, and,
in either event (ii) by vote of a majority of the Trustees of the Portfolio
Trust who are not parties to the investment advisory agreement or "interested
persons" (as defined in the 1940 Act) of any such party, cast in person at a
meeting called for the purpose of voting on such approval. The investment
advisory agreement may be terminated at any time without the payment of any
penalty by vote of the Trustees of the Portfolio Trust or by the "vote of a
majority of the outstanding voting securities" of the Portfolio or by the
Adviser, on sixty days' written notice to the other parties. The investment
advisory agreement terminates in the event of its assignment as defined in the
1940 Act.
In an attempt to avoid any potential conflict with portfolio transactions
for the Portfolio, the Adviser, the Principal Underwriter, the Trust and the
Portfolio Trust have each adopted extensive restrictions on personal securities
trading by personnel of the Adviser and its affiliates. These restrictions
include: pre-clearance of all personal securities transactions and a prohibition
of purchasing initial public offerings of securities. These restrictions are a
continuation of the basic principle that the interests of the Fund and its
shareholders, and the Portfolio and its investors, come before those of the
Adviser, its affliliates and their employees.
24
<PAGE>
Administrator of the Fund
Standish serves as the administrator to the Fund (the "Fund Administrator")
pursuant to a written administration agreement with the Trust on behalf of the
Fund. Certain services provided by the Fund Administrator under the
administration agreement are described in the Prospectus. For these services,
the Fund Administrator currently does not receive any additional compensation.
The Trustees of the Trust may, however, determine in the future to compensate
the Fund Administrator for its administrative services. The administration
agreement provides that if the total expenses of the Fund and the Portfolio in
any fiscal year exceed the most restrictive expense limitation applicable to the
Fund in any state in which shares of the Fund are then qualified for sale, the
compensation due the Fund Administrator shall be reduced by the amount of the
excess, by a reduction or refund thereof at the time such compensation is
payable after the end of each calendar month during the fiscal year, subject to
readjustment during the year. Currently, the most restrictive state expense
limitation provision limits the Fund's expenses to 2 1/2% of the first $30
million of average net assets, 2% of the next $70 million of such net assets and
1 1/2% of such net assets in excess of $100 million.
The Fund's administration agreement can be terminated by either party on
not more than sixty days' written notice.
Administrator of the Portfolio
IBT Trust Company (Cayman) Ltd., P.O. Box 501 Grand Cayman, Cayman Islands,
BWI, serves as the administrator to the Portfolio (the "Portfolio
Administrator") pursuant to a written administration agreement with the
Portfolio Trust on behalf of the Portfolio. The Portfolio Administrator provides
the Portfolio Trust with office space for managing its affairs, and with certain
clerical services and facilities. For these services, the Portfolio
Administrator currently receives a fee from the Portfolio in the amount of
$7,500 annually.
The Portfolio's administration agreement can be terminated by either party
on not more than sixty days' written notice.
Distributor of the Fund
Standish Fund Distributors, L.P. (the "Principal Underwriter"), an
affiliate of the Adviser, serves as the Trust's exclusive principal underwriter
and holds itself available to receive purchase orders for the Fund's shares. In
that capacity, the Principal Underwriter has been granted the right, as agent of
the Trust, to solicit and accept orders for the purchase of the Fund's shares in
accordance with the terms of the Underwriting Agreement between the Trust and
the Principal Underwriter. Pursuant to the Underwriting Agreement, the Principal
Underwriter has agreed to use its best efforts to obtain orders for the
continuous offering of the Fund's shares. The Principal Underwriter receives no
commissions or other compensation for its services, and has not received any
such amounts in any prior year. The Underwriting Agreement shall continue in
effect with respect to the Fund until two years after its execution and for
successive periods of one year thereafter only if it is approved at least
annually thereafter (i) by a vote of the holders of a majority of the Fund's
25
<PAGE>
outstanding shares or by the Trustees of the Trust or (ii) by a vote of a
majority of the Trustees of the Trust who are not "interested persons" (as
defined by the 1940 Act) of the parties to the Underwriting Agreement, cast in
person at a meeting called for the purpose of voting on such approval. The
Underwriting Agreement will terminate automatically if assigned by either party
thereto and is terminable at any time without penalty by a vote of a majority of
the Trustees of the Trust, a vote of a majority of the Trustees who are not
"interested persons" of the Trust, or by a vote of the holders of a majority of
the Fund's outstanding shares, in any case without payment of any penalty on not
more than 60 days' written notice to the other party. The offices of the
Principal Underwriter are located at One Financial Center, 26th Floor, Boston,
Massachusetts 02111.
REDEMPTION OF SHARES
Detailed information on redemption of shares is included in the Prospectus.
The Trust may suspend the right to redeem Fund shares or postpone the date of
payment upon redemption for more than seven days (i) for any period during which
the New York Stock Exchange is closed (other than customary weekend or holiday
closings) or trading on the exchange is restricted; (ii) for any period during
which an emergency exists as a result of which disposal by the Portfolio of
securities owned by it or determination by the Portfolio of the value of its net
assets is not reasonably practicable; or (iii) for such other periods as the SEC
may permit for the protection of shareholders of the Fund.
The Trust intends to pay in cash for all Fund shares redeemed but, under
certain conditions, the Trust may make payment wholly or partly in portfolio
securities from the Portfolio, in conformity to the applicable rule of the SEC.
Portfolio securities paid upon redemption of Fund shares will be valued at their
then current market value. The Trust, on behalf of each of its series, has
elected to be governed by the provisions of Rule 18f-1 under the 1940 Act which
limits the Fund's obligation to make cash redemption payments to each
shareholder during any 90-day period to the lesser of $250,000 or 1% of the
Fund's net asset value at the beginning of such period. An investor may incur
brokerage costs in converting portfolio securities received upon redemption to
cash. The Portfolio has advised the Trust that the Portfolio will not redeem
in-kind except in circumstances in which the Fund is permitted to redeem in-kind
or except in the event the Fund completely withdraws its interest from the
Portfolio.
PORTFOLIO TRANSACTIONS
The Adviser is responsible for placing the Portfolio's portfolio
transactions and will do so in a manner deemed fair and reasonable to the
Portfolio and not according to any formula. The primary consideration in all
portfolio transactions will be prompt execution of orders in an efficient manner
at the most favorable price. In selecting brokers and in negotiating
commissions, the Adviser will consider the firm's reliability, the quality of
its execution services on a continuing basis and its financial condition. When
more than one firm is believed to meet these criteria, preference may be given
to firms which also sell shares of the Fund. In addition, if the Adviser
determines in good faith that the amount of commissions charged by a broker is
reasonable in relation to the value of the brokerage and research services
provided by such broker, the Fund may pay commissions to such broker in an
26
<PAGE>
amount greater than the amount another firm may charge. Research services may
include (i) furnishing advice as to the value of securities, the advisability of
investing in, purchasing or selling securities, and the availability of
securities or purchasers or sellers of securities, (ii) furnishing analyses and
reports concerning issuers, industries, securities, economic factors and trends,
portfolio strategy, and the performance of accounts, and (iii) effecting
securities transactions and performing functions incidental thereto (such as
clearance, settlement and custody). Research services furnished by firms through
which the Portfolio effects its securities transactions may be used by the
Adviser in servicing other accounts; not all of these services may be used by
the Adviser in connection with the Portfolio. The investment advisory fee paid
by the Portfolio under the Investment Advisory Agreement will not be reduced as
a result of the Adviser's receipt of research services.
The Adviser also places portfolio transactions for other advisory accounts.
The Adviser will seek to allocate portfolio transactions equitably whenever
concurrent decisions are made to purchase or sell securities by the Portfolio
and another advisory account. In some cases, this procedure could have an
adverse effect on the price or the amount of securities available to the
Portfolio. In making such allocations, the main factors considered by the
Adviser will be the respective investment objectives, the relative size of
portfolio holdings of the same or comparable securities, the availability of
cash for investment, the size of investment commitments generally held, and
opinions of the persons responsible for recommending the investment.
DETERMINATION OF NET ASSET VALUE
The Fund's net asset value per share is computed each day on which the New
York Stock Exchange is open (a "Business Day") as of the close of regular
trading (currently 4:00 p.m., New York City time). Currently, the New York Stock
Exchange is not open weekends, New Year's Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
The net asset value of the Fund's shares is computed by dividing the value of
all securities and other assets of the Fund (substantially all of which will be
represented by the Fund's investment in the Portfolio) less all liabilities by
the number of Fund shares outstanding, and rounding to the nearest cent per
share. Expenses and fees of the Fund are accrued daily and taken into account
for the purpose of determining net asset value.
The value of the Portfolio's net assets (i.e., the value of its securities
and other assets less its liabilities, including expenses payable or accrued) is
determined at the same time and on the same days as the net asset value per
share of the Fund is determined. Each investor in the Portfolio, including the
Fund, may add to or reduce its investment in the Portfolio on each Business Day.
As of 4:00 p.m. (Eastern time) on each Business Day, the value of each
investor's interest in the Portfolio will be determined by multiplying the net
asset value of the Portfolio by the percentage representing that investor's
share of the aggregate beneficial interests in the Portfolio. Any additions or
reductions which are to be effected on that day will then be effected. The
investor's percentage of the aggregate beneficial interests in the Portfolio
will then be recomputed as the percentage equal to the fraction (i) the
27
<PAGE>
numerator of which is the value of such investor's investment in the Portfolio
as of 4:00 p.m. on such day plus or minus, as the case may be, the amount of net
additions to or reductions in the investor's investment in the Portfolio
effected on such day, and (ii) the denominator of which is the aggregate net
asset value of the Portfolio as of 4:00 p.m. on such day plus or minus, as the
case may be, the amount of the net additions to or reductions in the aggregate
investments in the Portfolio by all investors in the Portfolio. The percentage
so determined will then be applied to determine the value of the investor's
interest in the Portfolio as of 4:00 p.m. on the following Business Day.
Portfolio securities are valued at the last sale prices on the exchange or
national securities market on which they are primarily traded. Securities not
listed on an exchange or national securities market, or securities for which
there were no reported transactions, are valued at the last quoted bid price.
Securities for which quotations are not readily available and all other assets
are valued at fair value as determined in good faith by the Adviser in
accordance with procedures approved by the Trustees.
Money market instruments with less than 60 days remaining to maturity when
acquired by the Portfolio are valued on an amortized cost basis. This is
accomplished by valuing the instrument at cost and then assuming a constant
amortization to maturity of any premium or discount. If the Portfolio acquires a
money market instrument with more than 60 days remaining to its maturity, it is
valued at current market value until the 60th day prior to maturity, and will
then be valued at amortized cost based upon the value on such date unless the
Trustees determine during such 60-day period that amortized cost does not
represent fair value.
THE FUND AND ITS SHARES
The Fund is an investment series of the 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 of the Trust have authority to issue an
unlimited number of shares of beneficial interest, par value $.01 per share, of
the Fund. Each share represents an equal proportionate interest in the Fund with
each other share and is entitled to such dividends and distributions as are
declared by the Trustees. Shareholders are not entitled to any preemptive,
conversion or subscription rights. All shares, when issued, will be fully paid
and non-assessable by the Trust. Upon any liquidation of the Fund, shareholders
are entitled to share pro rata in the net assets available for distribution.
Pursuant to the Declaration, the Trustees may create additional funds by
establishing additional series of shares in the Trust. The establishment of
additional series would not affect the interests of current shareholders in the
Fund. As of the date of this Statement of Additional Information, the Trustees
have established fourteen other series of the Trust that publicly offer their
shares. Pursuant to the Declaration, the Board may establish and issue multiple
classes of shares for each series of the Trust. As of the date of this Statement
of Additional Information, the Trustees do not have any plan to establish
multiple classes of shares for the Fund.
28
<PAGE>
All Fund shares have equal rights with regard to voting, and shareholders
of the Fund have the right to vote as a separate class with respect to matters
as to which their interests are not identical to those of shareholders of other
investment series of the Trust, including any change of investment policy
requiring the approval of shareholders.
Under Massachusetts law, shareholders of the Trust could, under certain
circumstances, be held liable for the obligations of the Trust. However, the
Agreement and Declaration of Trust disclaims shareholder liability for acts or
obligations of the Trust and requires that notice of this disclaimer be given in
each agreement, obligation or instrument entered into or executed by the Trust
or a Trustee. The Declaration also provides for indemnification from the assets
of the Trust for all losses and expenses of any Trust shareholder held liable
for the obligations of the Trust. Thus, the risk of a shareholder incurring a
financial loss on account of his or its liability as a shareholder of the Trust
is limited to circumstances in which the Trust would be unable to meet its
obligations. The possibility that these circumstances would occur is remote.
Upon payment of any liability incurred by the Trust, the shareholder paying the
liability will be entitled to reimbursement from the general assets of the
Trust. The Declaration also provides that no series of the Trust is liable for
the obligations of any other series. The Trustees intend to conduct the
operations of the Trust to avoid, to the extent possible, ultimate liability of
shareholders for liabilities of the Trust.
Except as described below, whenever the Trust is requested to vote on a
fundamental policy of or matters pertaining to the Portfolio, the Trust will
hold a meeting of the Fund's shareholders and will cast its vote proportionately
as instructed by the Fund's shareholders. Fund shareholders who do not vote will
not affect the Trust's votes at the Portfolio meeting. The percentage of the
Trust's votes representing Fund shareholders not voting will be voted by the
Trustees of the Trust in the same proportion as the Fund shareholders who do, in
fact, vote. Subject to applicable statutory and regulatory requirements, the
Fund would not request a vote of its shareholders with respect to (a) any
proposal relating to the Portfolio, which proposal, if made with respect to the
Fund, would not require the vote of the shareholders of the Fund, or (b) any
proposal with respect to the Portfolio that is identical in all material
respects to a proposal that has previously been approved by shareholders of the
Fund. Any proposal submitted to holders in the Portfolio, and that is not
required to be voted on by shareholders of the Fund, would nonetheless be voted
on by the Trustees of the Trust.
THE PORTFOLIO AND ITS INVESTORS
The Portfolio is a series of Standish, Ayer & Wood Master Portfolio, a
newly formed trust and, like the Fund, is an open-end management investment
company under the Investment Company Act of 1940, as amended. The Portfolio
Trust was organized as a master trust fund under the laws of the State of New
York on January 18, 1996.
29
<PAGE>
Interests in the Portfolio have no preemptive or conversion rights, and are
fully paid and non-assessable, except as set forth in the Prospectus. The
Portfolio normally will not hold meetings of holders of such interests except as
required under the 1940 Act. The Portfolio would be required to hold a meeting
of holders in the event that at any time less than a majority of its Trustees
holding office had been elected by holders. The Trustees of the Portfolio
continue to hold office until their successors are elected and have qualified.
Holders holding a specified percentage of interests in the Portfolio may call a
meeting of holders in the Portfolio for the purpose of removing any Trustee. A
Trustee of the Portfolio may be removed upon a majority vote of the interests
held by holders in the Portfolio qualified to vote in the election. The 1940 Act
requires the Portfolio to assist its holders in calling such a meeting. Upon
liquidation of the Portfolio, holders in the Portfolio would be entitled to
share pro rata in the net assets of the Portfolio available for distribution to
holders.
Each holder in the Portfolio is entitled to a vote in proportion to its
percentage interest in the Portfolio.
ADDITIONAL INFORMATION
The Fund's Prospectus and this Statement of Additional Information omit
certain information contained in the registration statement filed with the
Securities and Exchange Commission, which may be obtained from the Commission's
principal office at 450 Fifth Street, N.W., Washington, D.C. 20549, upon payment
of the fee prescribed by the rules and regulations promulgated by the
Commission.
TAXATION
Each series of the Trust, including the Fund, is treated as a separate
entity for accounting and tax purposes. The Fund has qualified and elected to be
treated as a "regulated investment company" ("RIC") under Subchapter M of the
Code and intends to continue to so qualify in the future. As such and by
complying with the applicable provisions of the Code regarding the sources of
its income, the timing of its distributions, and the diversification of its
assets, the Fund will not be subject to Federal income tax on its investment
company taxable income (i.e., all income, after reduction by deductible
expenses, other than its "net capital gain," which is the excess, if any, of its
net long-term capital gain over its net short-term capital loss) and net capital
gain which are distributed to shareholders in accordance with the timing
requirements of the Code.
The Trust anticipates that the Portfolio will be treated as a partnership
for federal income tax purposes. As such, the Portfolio is not subject to
federal income taxation. Instead, the Fund must take into account, in computing
its federal income tax liability, its share of the Portfolio's income, gains,
losses, deductions, credits and tax preference items, without regard to whether
it has received any cash distributions from the Portfolio. Because the Fund
invests its assets in the Portfolio, the Portfolio normally must satisfy the
applicable source of income and diversification requirements in order for the
Fund to satisfy them. The Portfolio will allocate at least annually among its
investors, including the Fund, each investor's distributive share of the
Portfolio's net investment income, net realized capital gains, and any other
items of income, gain, loss, deduction or credit. The Portfolio will make
allocations to the Fund in accordance with the Code and applicable regulations
30
<PAGE>
and will make moneys available for withdrawal at appropriate times and in
sufficient amounts to enable the Fund to satisfy the tax distribution
requirements that apply to the Fund and that must be satisfied in order to avoid
Federal income and/or excise tax on the Fund. For purposes of applying the
requirements of the Code regarding qualification as a RIC, the Fund will be
deemed (i) to own its proportionate share of each of the assets of the Portfolio
and (ii) to be entitled to the gross income of the Portfolio attributable to
such share.
The Fund will be subject to a 4% non-deductible federal excise tax on
certain amounts not distributed (and not treated as having been distributed) on
a timely basis in accordance with annual minimum distribution requirements. The
Fund intends under normal circumstances to avoid liability for such tax by
satisfying such distribution requirements.
The Fund is not subject to Massachusetts corporate excise or franchise
taxes. Provided that the Fund qualifies as a regulated investment company under
the Code, it will also not be required to pay any Massachusetts income tax.
The Fund will not distribute long-term or short-term capital gain realized
in any year to the extent that a capital loss is carried forward from prior
years against such gain. For federal income tax purposes, the Fund is permitted
to carry forward a net capital loss in any year to offset its own net capital
gains, if any, during the eight years following the year of the loss. To the
extent subsequent capital gains are offset by such losses, they would not result
in federal income tax liability to the Fund and, as noted above, would not be
distributed as such to shareholders. At December 31, 1995, the Fund had capital
loss carryovers of $3,284,436 which expire on December 31, 2002.
If the Portfolio invests in certain zero coupon securities, increasing rate
securities or, in general, other securities with original issue discount (or
with market discount if the Portfolio elects to include market discount in
income currently), the Portfolio must accrue income on such investments prior to
the receipt of the corresponding cash payments. However, the Fund must
distribute, at least annually, all or substantially all of its net income,
including its distributive share of such income accrued by the Portfolio, to
shareholders to qualify as a regulated investment company under the Code and
avoid federal income and excise taxes. Therefore, the Portfolio may have to
dispose of its portfolio securities under disadvantageous circumstances to
generate cash, or may have to leverage itself by borrowing the cash, to provide
cash that the Fund may withdraw from the Portfolio and distribute in order to
satisfy the distribution requirements applicable to the Fund.
Limitations imposed by the Code on regulated investment companies like the
Fund may restrict the Portfolio's ability to enter into futures, options and
currency forward transactions.
Certain options, futures and forward foreign currency transactions
undertaken by the Portfolio may cause the Portfolio to recognize gains or losses
from marking to market even though the Portfolio's positions have not been sold
or terminated and affect the character as long-term or short-term (or, in the
case of certain currency forwards, options and futures, as ordinary income or
loss) and timing of some capital gains and losses realized by the Portfolio and
allocable to the Fund. Any net mark to market gains may also have to be
31
<PAGE>
distributed by the Fund to satisfy the distribution requirements referred to
above even though no corresponding cash amounts may concurrently be received,
possibly requiring the disposition by the Portfolio of portfolio securities or
borrowing to obtain the necessary cash. Also, certain of the Portfolio's losses
on the Portfolio's transactions involving options, futures or forward contracts
and/or offsetting Portfolio positions may be deferred rather than being taken
into account currently in calculating the Portfolio's taxable income or gain.
Certain of the applicable tax rules may be modified if the Portfolio is eligible
and chooses to make one or more of certain tax elections that may be available.
Because the Fund's income, gains and losses consist primarily of its share of
the income, gains and losses of the Portfolio, which are directly affected by
the provisions described in this paragraph, these transactions may affect the
amount, timing and character of the Fund's distributions to shareholders. The
Portfolio will take into account the special tax rules (including consideration
of available elections) applicable to options, futures or forward contracts in
order to minimize any potential adverse tax consequences.
The Federal income tax rules applicable to forward roll transactions,
interest rate or currency swaps, caps, floors and collars are unclear in certain
respects, and the Portfolio may be required to account for these instruments
under tax rules in a manner that, under certain circumstances, may limit its
transactions in these instruments.
If the Portfolio acquires stock in certain non-U.S. corporations that
receive at least 75% of their annual gross income from passive sources (such as
interest, dividends, rents, royalties or capital gain) or hold at least 50% of
their assets in investments producing such passive income ("passive foreign
investment companies"), the Fund could be subject to Federal income tax and
additional interest charges on its allocable portion of "excess distributions"
received from such companies or gain from the sale of stock in such companies,
even if all income or gain actually allocated to the Fund is timely distributed
to its shareholders. The Fund would not be able to pass through to its
shareholders any credit or deduction for such a tax. Certain elections may, if
available, ameliorate these adverse tax consequences, but any such election
would require the Fund to recognize taxable income or gain without the
concurrent receipt of cash. The Portfolio may limit and/or manage its stock
holdings in passive foreign investment companies to minimize the Fund's tax
liability or maximize its return from these investments.
Foreign exchange gains and losses realized by the Portfolio in connection
with certain transactions involving foreign currency-denominated debt
securities, certain foreign currency futures and options, foreign currency
forward contracts, foreign currencies, or payables or receivables denominated in
a foreign currency are subject to Section 988 of the Code, which generally
causes such gains and losses to be treated as ordinary income and losses and,
because the Fund invests in the Portfolio, may affect the amount, timing and
character of Fund distributions to shareholders. Any such transactions that are
not directly related to the Portfolio's investment in stock or securities,
possibly including speculative currency positions or currency derivatives not
used for hedging purposes, may increase the amount of gain it is deemed to
32
<PAGE>
recognize from the sale of certain investments held for less than three months.
The Fund's share of such gain (plus any such gain the Fund may realize from
other sources) is limited under the Code to less than 30% of the Fund's annual
gross income. Such transactions could under future Treasury regulations produce
income not among the types of "qualifying income" from which the Fund must
derive at least 90% of its annual gross income.
The Portfolio may be subject to withholding and other taxes imposed by
foreign countries with respect to its investments in foreign securities. Tax
conventions between certain countries and the U.S. may reduce or eliminate such
taxes. Investors in the Fund would be entitled to claim U.S. foreign tax credits
or deductions with respect to such taxes, subject to certain provisions and
limitations contained in the Code. Specifically, if more than 50% of the value
of the Fund's total assets (including its share of the Portfolio's assets) at
the close of any taxable year consists of stock or securities of foreign
corporations, the Fund may file an election with the Internal Revenue Service
pursuant to which shareholders of the Fund will be required to (i) include in
ordinary gross income (in addition to taxable dividends actually received) their
pro rata shares of foreign income taxes paid by the Portfolio and allocable to
the Fund even though not actually received by them, and (ii) treat such
respective pro rata portions as foreign income taxes paid by them.
If the Fund makes this election, shareholders may then deduct such pro rata
portions of foreign income taxes in computing their taxable incomes, or,
alternatively, use them as foreign tax credits, subject to applicable
limitations, against their U.S. Federal income taxes. Shareholders who do not
itemize deductions for Federal income tax purposes will not, however, be able to
deduct their pro rata portion of foreign income taxes paid by the Portfolio and
allocable to the Fund, although such shareholders will be required to include
their share of such taxes in gross income. Shareholders who claim a foreign tax
credit for such foreign taxes may be required to treat a portion of dividends
received from the Fund as a separate category of income for purposes of
computing the limitations on the foreign tax credit. Tax-exempt shareholders
will ordinarily not benefit from this election. Each year that the Fund files
the election described above, its shareholders will be notified of the amount of
(i) each shareholder's pro rata share of foreign income taxes paid by the
Portfolio and allocable to the Fund and (ii) the portion of the Fund's dividends
which represents income from each foreign country.
Due to possible unfavorable consequences under present tax law, the
Portfolio does not currently intend to acquire "residual" interests in real
estate mortgage investment conduits ("REMICs"), although the Portfolio may
acquire "regular" interests in REMICs.
Distributions from the Fund's current or accumulated earnings and profits
("E&P"), as computed for Federal income tax purposes, will be taxable as
described in the Fund's Prospectus whether taken in shares or in cash.
Distributions, if any, in excess of E&P will constitute a return of capital,
which will first reduce an investor's tax basis in Fund shares and thereafter
(after such basis is reduced to zero) will generally give rise to capital gains.
Shareholders electing to receive distributions in the form of additional shares
will have a cost basis for federal income tax purposes in each share so received
equal to the amount of cash they would have received had they elected to receive
the distributions in cash, divided by the number of shares received.
33
<PAGE>
At the time of an investor's purchase of Fund shares, a portion of the
purchase price is often attributable to undistributed net investment income
and/or realized or unrealized appreciation in the Fund's share of the
Portfolio's portfolio. Consequently, subsequent distributions by the Fund from
such income and/or appreciation may be taxable to such investor even if the net
asset value of the investor's shares is, as a result of the distributions,
reduced below the investor's cost for such shares, and the distributions in
reality represent a return of a portion of the purchase price.
Upon a redemption (including a repurchase) of shares of the Fund, a
shareholder may realize a taxable gain or loss, depending upon the difference
between the redemption proceeds and the shareholder's tax basis in his shares.
Such gain or loss will be treated as capital gain or loss if the shares are
capital assets in the shareholder's hands and will be long-term or short-term,
depending upon the shareholder's tax holding period for the shares. Any loss
realized on a redemption may be disallowed to the extent the shares disposed of
are replaced with other shares of the Fund within a period of 61 days beginning
30 days before and ending 30 days after the shares are disposed of, such as
pursuant to automatic dividend reinvestments. In such a case, the basis of the
shares acquired will be adjusted to reflect the disallowed loss. Any loss
realized upon the redemption of shares with a tax holding period of six months
or less will be treated as a long-term capital loss to the extent of any amounts
treated as distributions of long-term capital gain with respect to such shares.
Different tax treatment, including penalties on certain excess
contributions and deferrals, certain pre-retirement and post-retirement
distributions and certain prohibited transactions, is accorded to accounts
maintained as qualified retirement plans. Shareholders should consult their tax
advisers for more information.
The foregoing discussion relates solely to U.S. Federal income tax law as
applicable to U.S. persons (i.e., U.S. citizens or residents and U.S. domestic
corporations, partnerships, trusts or estates) subject to tax under such law.
The discussion does not address special tax rules applicable to certain classes
of investors, such as tax-exempt entities, insurance companies, and financial
institutions. Dividends, capital gain distributions, and ownership of or gains
realized on the redemption (including an exchange) of Fund shares may also be
subject to state and local taxes. Shareholders should consult their own tax
advisers as to the Federal, state or local tax consequences of ownership of
shares of, and receipt of distributions from, the Fund in their particular
circumstances.
Non-U.S. investors not engaged in a U.S. trade or business with which their
investment in the Fund is effectively connected will be subject to U.S. Federal
income tax treatment that is different from that described above. These
investors may be subject to nonresident alien withholding tax at the rate of 30%
(or a lower rate under an applicable tax treaty) on amounts treated as ordinary
dividends from the Fund and, unless an effective IRS Form W-8 or authorized
substitute is on file, to 31% backup withholding on certain other payments from
the Fund. Non-U.S. investors should consult their tax advisers regarding such
treatment and the application of foreign taxes to an investment in the Fund.
34
<PAGE>
EXPERTS AND FINANCIAL STATEMENTS
The Fund's financial statements for the period from January 3, 1994 through
December 31, 1994 and for the fiscal year ended December 31, 1995 included in
this Statement of Additional Information have been audited by Coopers & Lybrand
L.L.P., independent auditors, as set forth in its report appearing elsewhere
herein, and have been so included in reliance upon the authority of the report
of such auditors as experts in accounting and auditing. Coopers & Lybrand
L.L.P., independent auditors, will audit the Fund's financial statements for the
fiscal year ending December 31, 1996. Coopers & Lybrand, an affiliate of Coopers
& Lybrand L.L.P., will audit the Portfolio's financial statements for the fiscal
year ending December 31, 1996.
35
<PAGE>
Standish, Ayer & Wood Investment Trust
Standish Global Fixed Income Fund Series
Financial Statements for the Year Ended
December 31, 1995
1
<PAGE>
Standish, Ayer & Wood Investment Trust
Chairman's Message
January 29, 1996
Dear Standish, Ayer & Wood Investment Trust Shareholder:
I am pleased to have an opportunity to review the major developments at
Standish, Ayer & Wood during this past year as they relate to the activities of
the Investment Trust. The major news for our clients in 1995 was the spectacular
performance of the U.S. investment markets. While we would, of course, like to
claim credit for producing the full extent of these splendid returns, the
reality is obvious: The markets themselves are beyond our control. For the year
as a whole, U.S. stocks, as represented by the Standard and Poor's 500 Index,
produced a total return of 37.6%, and higher grade intermediate-term bonds, as
represented by the Lehman Brothers Aggregate Index, provided a total return of
18.5%. Nearly as surprising, stock and bond prices marched steadily upward
throughout the year, a persistent and almost uninterrupted advance.
Even after the subdued markets of 1994, neither we nor most other investment
managers expected 1995 to be anywhere near as good as it turned out to be. In
this context, we are generally pleased by our investment performance. In most
asset classes, we kept pace with or modestly exceeded market returns. We adhered
to our established investment philosophies, which are designed to add reasonably
consistent increments of value. Our clients seem to be pleased by our efforts as
we continue to have very little client turnover.
As a firm, we have registered moderate growth during the year. Reflecting some
flow of new clients as well as market appreciation, our clients' assets under
management at the end of 1995 totalled $29.4 billion, an increase from $24.4
billion at the end of 1994. We are particularly pleased by the growth in new
assets managed for insurance companies and by the increases in assets of both
large capitalization and small capitalization U.S. common stocks.
The asset class of greatest disappointment in 1995 was international equities.
Not only did the asset class continue to provide subpar returns, but our
portfolios underperformed the international equity markets. These results
reflect judgments early in 1995 to hedge a portion of the currency exposure back
to dollars and to have a moderate stake in emerging markets. While we believe we
have rectified those problems, we are not satisfied with the results and are
working vigorously to improve future performance. We are also counseling our
clients not to lose faith in the international equity asset class despite its
recent disappointing returns.
The figure for total Standish assets under management includes about $1.6
billion managed in conjunction with Standish International Management Company,
L.P. (SIMCO), our affiliate that manages overseas assets for domestic clients
and U.S. assets for overseas clients. It also includes $3.9 billion in the
Standish Investment Trust, our mutual fund organization. In addition, the asset
total reflects an increase over the last few years in the assets we manage in
private, non-mutual fund vehicles.
We introduced two new mutual funds at mid-year 1995, namely the Standish Fixed
Income Fund II (which is designed to parallel the Standish Fixed Income Fund but
exclude the purchase of both nondollar bonds and below-investment-grade
securities), and the Standish Controlled Maturity Fund (which is designed for
investors who wish less volatility and interest rate risk than traditional
intermediate-maturity bonds).
At the beginning of 1996, we introduced two additional mutual funds, the
Standish Tax-Sensitive Equity Fund and the Standish Small Cap Tax-Sensitive
Equity Fund. At Standish we have noted for some time the adverse impact for
taxable investors of high portfolio turnover, which triggers capital gains,
possibly including short-term gains that may result in an even greater tax
liability for investors. We believe there is a major opportunity through both
separate account management and these funds to improve aftertax returns by
limiting the portfolio turnover and managing capital gains.
2
<PAGE>
During 1995, Standish acquired all remaining interests in the business of the
joint venture between Consolidated Investment Corp. (CIC) and Standish, entered
into over seven years ago. Consolidated had been formed by Trigon (previously
Blue Cross/Blue Shield of Virginia) to manage shorter-term taxable and tax
exempt fixed income portfolios. We and Trigon agreed that it was best to have
this unit operating under one owner.
Standish continues to be proud of its structure as an independent management
firm with ownership in the hands of investment professionals active in the
business. There were no changes during 1995 either in corporate structure or in
the people who own the enterprise.
We appreciate the opportunity to serve you, and we remain confident that we have
the resources and the organization to do a superior job. We will be working hard
to fulfill your expectations in 1996.
Sincerely yours,
Edward H. Ladd
Chairman
3
<PAGE>
Standish, Ayer & Wood Investment Trust
Standish Global Fixed Income Fund Series
Management Discussion
Global bond markets recovered strongly in 1995 from historically weak returns
the previous year. Slower economic growth and subdued inflation throughout the
developed world provided the impetus for one of the most impressive rallies
fixed income securities have seen in recent years. The Standish Global Fixed
Income Fund participated fully in the rally, returning 18.13% for 1995.
Over the year as a whole, the major bond markets turned in remarkably similar
performance, but the pattern of returns varied significantly. As 1995 opened,
the U.S. and the leading European economies were still enjoying fairly robust
growth, and the risk of higher inflation was a widespread concern. In this
period of relatively tight money, the U.S. performed well while most countries
with large budget deficits or capital shortages, such as Italy and Australia,
struggled. Japan, the leading exporter of capital, also rallied sharply, pushing
already extremely low yields more than 1% lower. The yen appreciated
dramatically as well, putting intense pressure on export industries and the
entire Japanese economy, still struggling from a protracted recession.
By mid-year, the pattern of market behavior had reversed, with European markets
now reacting to a marked slowdown in economic activity and surprisingly subdued
inflation. Central banks around the world, led by the German Bundesbank and the
Bank of Japan, eased short-term interest rates aggressively. As liquidity
conditions improved, higher yielding countries began to outperform, with
Scandinavian and Southern European markets leading the way. Meanwhile, the surge
in Japanese bonds could not be sustained despite aggressive buying of securities
by the Japanese central bank. The dollar also recovered fully from a 20% plunge
against the yen, finally ending slightly stronger on the year. In 1995, the
dollar did fall about 8% against the Deutschemark and other European currencies
closely linked to the German currency.
Underweighted positions in Japan and the U.S. caused the Standish Global Fixed
Income Fund to underperform its benchmark early in the year, but these same
positions contributed to substantial outperformance versus the index from
mid-year. Meanwhile, our holdings in corporate and mortgage securities in many
of the world's markets increased yield throughout the year and further enhanced
performance, as the yield differentials on many of our non-sovereign holdings
tightened to their comparable government alternatives. For the year as a whole,
the Fund modestly outperformed its benchmark.
With global interest rates having fallen so far in recent months, the outlook
for 1996 is mixed. Continued economic weakness and subdued inflation in the
major world economies provide a positive fundamental backdrop for fixed income
securities, but a great deal of the supportive news for bonds is already
discounted. Short of the onset of a deep global recession, which we do not
anticipate, it will be virtually impossible for the markets to match their 1995
performance. However, inflation-adjusted yields remain reasonably attractive,
and there is good opportunity to enhance return by hedging lower yielding
currencies, such as the Deutschemark and the Yen back into dollars. We intend to
emphasize currency hedging as a way to seek increased return, reduction in
volatility, and protection against the risk of capital loss should the
still-undervalued U.S. dollar continue its recent recovery.
Richard S. Wood
4
<PAGE>
Standish, Ayer & Wood Investment Trust
Standish Global Fixed Income Fund Series
Comparison of Change in Value of $100,000 Investment in
Standish Global Fixed Income Fund, the J.P. Morgan
Global Index, and
the J.P. Morgan Global Hedged Index
The following is a description of the graphical chart omitted from electronic
format:
This line chart shows the cumulative performance of the Standish Global Fixed
Income Fund compared with the J.P. Morgan Global Index and J.P. Morgan Global
Hedged Index for the period January 3, 1994 to December 31, 1995, based upon a
$100,000 investment. Also included are the average annual total returns for one
year and since inception.
5
<PAGE>
<TABLE>
<CAPTION>
Standish, Ayer & Wood Investment Trust
Standish Global Fixed Income Fund Series
Portfolio of Investments
December 31, 1995
Par Value
Security Rate Maturity Value+ (Note 1A)
- --------------------------------------------------- ------- ---------------- ------------- ------------------
Bonds-93.1%
- ---------------------------------------------------
Foreign Denominated Bonds-62.4%
- ---------------------------------------------------
Australia-3.3%
- ---------------------------------------------------
<S> <C> <C> <C> <C>
Govt. of Australia Notes 7.50 07/15/05 750,000 $531,760
New South Wales Treasury Notes 0.00 11/23/20 2,800,000 260,915
News America Holdings Corp. Notes 8.63 02/07/14 2,000,000 1,306,800
South Australian Government Financial Notes 0.00 12/21/15 3,500,000 465,176
State Electric Commission of Victoria Notes 0.00 0/11/06-1/11/11 3,950,000 1,064,207
Union Bank Of Norway Notes 0.00 05/22/96 800,000 572,367
Victoria Public Authority Notes 0.00 08/31/11 2,000,000 384,615
------------------
$4,585,840
------------------
Belgium-0.9%
- ---------------------------------------------------
Belgian Government Notes 6.50 03/31/05 39,000,000 $1,303,522
------------------
Canada-3.3%
- ---------------------------------------------------
Canada General Residual Strips 0.00 12/01/98 3,300,000 $2,023,275
Govt. of Canada Notes 7.75 09/01/99 800,000 612,571
Govt. of Canada Notes 8.50 03/01/00 1,700,000 1,336,960
Govt. of Canada Notes 8.50 04/01/02 800,000 638,066
------------------
$4,610,872
------------------
Denmark-9.3%
- ---------------------------------------------------
Denmark Brf Byggeriets 8.00 10/01/26 585,000 $101,862
Denmark Nykredit 7.00 10/01/26 40,091,000 6,479,936
Denmark Nykredit 8.00 10/01/26 17,020,000 2,963,578
Denmark Nykredit 11.00 10/01/17 24,000 4,638
Denmark Realkredit 10.00 10/01/26 10,796,000 1,985,596
Denmark Realkredit 7.00 10/01/26 2,524,000 407,956
Denmark Realkredit 8.00 10/01/26 4,931,000 858,602
------------------
$12,802,168
------------------
Finland-0.9%
- ---------------------------------------------------
Govt. of Finland 9.50 03/15/04 5,000,000 $1,307,541
------------------
France-4.3%
- ---------------------------------------------------
Mexican Par Bonds 6.63 12/31/19 15,400,000 $1,729,852
Republic of France Btans, d 7.00 11/12/99 7,400,000 1,577,485
Republic of France Oat Strips 0.00 10/25/98 15,400,000 2,658,867
------------------
$5,966,204
------------------
6
<PAGE>
Portfolio of Investments
(continued)
Par Value
Security Rate Maturity Value+ (Note 1A)
- --------------------------------------------------- ------- ---------------- ------------- ------------------
Germany-6.4%
- ---------------------------------------------------
Baden Wurttemberg Notes 6.20 11/22/13 2,000,000 $1,395,365
Deutschland Republic Notes, d 6.25 01/04/24 3,250,000 2,108,316
Deutschland Republic Notes 8.00 07/22/02 400,000 314,210
General Electric Capital Notes 6.75 04/25/00 500,000 371,604
Ibrd Global Notes 7.13 04/12/05 1,000,000 739,736
Lkb Badwurttenberg Notes 6.50 09/15/08 1,900,000 1,338,356
Treuhandanstalt Notes 6.63 07/09/03 3,500,000 2,549,861
------------------
$8,817,448
------------------
Italy-2.7%
- ---------------------------------------------------
Abbey National Notes 10.00 08/24/00 1,450,000,000 $875,476
Bank Nederlandse Notes 10.50 06/18/03 800,000,000 489,515
Govt. of Italy Btps 8.50 08/01/04 600,000,000 333,228
Govt. of Italy Btps, d 8.50 04/01/99 2,180,000,000 1,310,881
Govt. of Italy Btps, d 9.50 01/01/05 1,300,000,000 766,337
------------------
$3,775,437
------------------
Japan-0.4%
- ---------------------------------------------------
Glaxo Holdings Notes 4.30 09/28/98 50,000,000 $495,413
------------------
New Zealand-3.8%
- ---------------------------------------------------
Fletcher Challenge Notes 10.00 04/30/05 1,000,000 $696,907
Fletcher Challenge Notes 11.25 12/15/02 1,900,000 1,388,522
Fletcher Challenge Notes 14.50 09/30/00 500,000 396,293
Govt. of New Zealand 8.00 07/15/98 2,200,000 1,443,352
Govt. of New Zealand Property Service 7.25 03/15/99 2,000,000 1,262,825
------------------
$5,187,899
------------------
Norway-2.9%
- ---------------------------------------------------
Uni Storebrand Notes 11.15 01/15/02 12,500,000 $2,320,364
Vesta Forsikring Notes 9.50 08/25/00 3,000,000 513,358
Vital Forsikring Notes 7.85 09/22/03 7,000,000 1,108,412
------------------
$3,942,134
------------------
Spain-6.0%
- ---------------------------------------------------
Castilla Junta Notes 8.30 11/29/01 28,000,000 $223,554
Junta de Andalucia Notes 11.10 12/02/05 248,000,000 2,143,360
Kingdom of Spain Notes 7.40 07/30/99 90,000,000 698,776
Kingdom of Spain Notes 10.00 02/28/05 328,200,000 2,732,799
7
<PAGE>
Portfolio of Investments
(continued)
Par Value
Security Rate Maturity Value+ (Note 1A)
- --------------------------------------------------- ------- ---------------- ------------- ------------------
Spain-(Continued)
- ---------------------------------------------------
Kingdom of Spain Notes 11.30 01/15/02 156,000,000 1,379,137
Kingdom of Spain Notes 12.25 03/25/00 128,000,000 1,153,881
------------------
$8,331,507
------------------
Sweden-4.3%
- ---------------------------------------------------
Fulmar Mtge #1 7.65 11/01/00 5,321,300 $790,290
Govt. of Sweden Notes 10.25 05/05/00 23,600,000 3,808,812
Govt. of Sweden Notes 10.25 05/05/03 8,000,000 1,324,914
------------------
$5,924,016
------------------
Thailand-1.1%
- ---------------------------------------------------
Thai Investment Co. Bills of Exchange 0.00 10/28/96-10/29/96 40,000,000 $1,451,270
------------------
United Kingdom-7.3%
- ---------------------------------------------------
Elf Enterprise Notes 8.75 06/27/06 750,000 $1,154,898
Hanson Trust Notes 10.00 04/18/06 1,050,000 1,812,900
Inco Notes 15.75 07/15/06 200,000 463,964
Royal Bank Of Scotland Notes, d 9.63 06/22/15 350,000 570,899
Salomon Inc. Notes, d 7.75 01/10/04 1,000,000 1,385,226
U K Gilt Treasury Notes, d 8.00 12/07/00 800,000 1,301,321
U K Gilt Treasury Notes, d 8.75 08/25/17 1,350,000 2,316,414
U K Gilt Treasury Notes, d 9.00 03/03/00 646,000 1,081,825
------------------
$10,087,447
------------------
ECU-5.5%
- ---------------------------------------------------
Govt. of Italy Btps Strips 0.00 3/07/99-03/07/05 1,591,000 $1,353,755
Republic of France Oat 6.75 04/25/02 1,445,000 1,862,581
Republic of France Oat 7.50 04/25/05 2,700,000 3,562,067
Republic of France Oat, d 8.25 04/25/22 600,000 816,808
------------------
$7,595,211
------------------
Total Foreign Denominated Bonds $86,183,929
------------------
(identified cost $83,013,164)
8
<PAGE>
Portfolio of Investments
(continued)
Par Value
Security Rate Maturity Value+ (Note 1A)
- --------------------------------------------------- ------- ---------------- ------------- ------------------
U.S. Dollar Denominated Bonds-30.7%
- ---------------------------------------------------
Asset Backed Securities-1.0%
- ---------------------------------------------------
Greentree Securities Trust 94-A 6.90 02/15/04 803,978 $809,506
The Money Store Home Equity 95-CA3 6.55 06/15/17 500,000 502,734
------------------
$1,312,240
------------------
Bank Bonds-1.2%
- ---------------------------------------------------
Anchor Bancorp Notes 8.94 07/09/03 1,000,000 $1,037,500
First Nationwide Bank Notes 12.25 05/15/01 500,000 567,500
------------------
$1,605,000
------------------
Finance Bonds-7.7%
- ---------------------------------------------------
Credit Foncier Notes 8.00 01/14/02 1,000,000 $1,081,700
Equity Residential Property REIT Notes, a 8.50 05/15/99 500,000 529,965
Fairfax Financial Holdings Ltd. Notes 8.25 10/01/15 500,000 535,545
Goldman Sachs Inc. Notes, a 6.20 02/15/01 1,000,000 1,005,000
Liberty Mutual Inc. Notes, a 8.50 05/15/25 1,000,000 1,112,960
Minnesota Mutual Notes, a 8.25 09/15/25 500,000 545,000
Penncorp Financial Group Notes 9.25 12/15/03 1,000,000 1,015,000
Reliance Group Holdings Corp. Notes 9.00 11/15/00 1,500,000 1,543,125
Taubman Realty Group Notes 8.00 06/15/99 1,000,000 1,036,270
United Co. Financial Notes 9.35 11/01/99 1,000,000 1,098,720
Wellsford Reit Notes 9.38 02/01/02 1,000,000 1,121,230
------------------
$10,624,515
------------------
Industrial Bonds-8.6%
- ---------------------------------------------------
Clark Oil Notes 10.50 12/01/01 1,000,000 $1,062,060
Continental Cable Co. Notes 8.50 09/15/01 500,000 518,750
Domtar Inc. Notes 11.75 03/15/99 1,000,000 1,120,000
Exide Corp. Notes 10.00 04/15/05 500,000 542,500
Koppers Industries Inc. Notes 8.50 02/01/04 1,000,000 977,500
Methanex Notes 7.75 08/15/05 450,000 477,338
News America Holdings Corp. Notes 7.70 10/30/25 500,000 511,295
Owens Illinois Corp. Notes 11.00 12/01/03 1,000,000 1,130,000
Schuller International Group Inc. Notes 10.88 12/15/04 500,000 561,250
Southland Corp. Notes 4.50 06/15/04 474,000 369,720
Southland Corp. Notes 5.00 12/15/03 250,000 208,125
Stop & Shop Co. Notes 9.75 02/01/02 500,000 551,250
Tenet Healthcare Corp. Notes 8.63 12/01/03 500,000 525,000
Tenet Healthcare Corp. Notes 9.63 09/01/02 500,000 548,500
Time Warner Inc. Notes 9.13 01/15/13 250,000 281,738
Time Warner Inc. Notes 9.15 02/01/23 500,000 567,020
9
<PAGE>
Portfolio of Investments
(continued)
Par Value
Security Rate Maturity Value+ (Note 1A)
- --------------------------------------------------- ------- ---------------- ------------- ------------------
Industrial Bonds-(Continued)
- ---------------------------------------------------
Time Warner Inc. Notes 9.63 05/01/02 500,000 579,185
Viacom Inc. Notes 7.63 01/15/16 225,000 226,028
Viacom Inc. Notes 7.75 06/01/05 500,000 530,985
Westpoint Stevens Sr. Notes 8.75 12/15/01 500,000 503,125
------------------
$11,791,369
------------------
Pass Thru Securities-6.1%
- ---------------------------------------------------
FNMA (c),d 7.00 05/01/24-01/01/26 3,286,699 $3,313,385
FNMA Dwarf, d 7.50 03/01/24-05/01/24 1,228,228 1,258,541
FNMA, d 6.50 12/01/10 297,000 298,392
GNMA 7.00 06/15/23-05/15/24 965,673 977,493
GNMA 7.50 07/15/23-08/15/25 1,193,114 1,227,561
GNMA 9.00 01/15/25 833,738 883,237
Resolution Trust Corp. 95-1 6.90 02/25/27 500,000 496,094
------------------
$8,454,703
------------------
Public Utility Bonds-0.4%
- ---------------------------------------------------
Systems Energy Resources Corp. Notes 7.38 10/01/00 500,000 $501,890
------------------
Variable Interest Bonds-0.7%
- ---------------------------------------------------
Ford Motor Credit Corp. Notes (c) 4.82 07/12/96 1,000,000 $992,500
------------------
U.S. Treasury Bonds-2.4%
- ---------------------------------------------------
U.S. Treasury Bonds 7.25 05/15/16 1,775,000 $2,026,819
U.S. Treasury Bonds 8.13 08/15/19 700,000 880,138
U.S. Treasury Bonds 6.50 08/15/05 250,000 266,328
U.S. Treasury Notes 6.38 07/15/99 125,000 129,511
U.S. Treasury Notes 6.63 03/31/97 65,000 66,076
------------------
$3,368,872
------------------
Yankee Bonds-2.6%
- ---------------------------------------------------
Brascan Ltd. Notes 7.38 10/01/02 500,000 $517,180
Cott Corporation Notes 9.38 07/01/05 1,000,000 1,002,150
Province Of Quebec Notes 7.50 07/15/23 1,000,000 1,048,320
Tembec Inc. Notes 9.88 09/30/05 1,000,000 992,500
------------------
$3,560,150
------------------
Total U.S. Dollar Denominated Bonds $42,211,239
------------------
(identified cost $40,561,704)
10
<PAGE>
Portfolio of Investments
(continued)
Value
Security (Note 1A)
- --------------------------------------------------- ------------------
Total Bonds $128,395,168
------------------
(identified cost $123,574,868)
Preferred Stock-0.7% Shares
- --------------------------------------------------- ----------------
Equity Residential Properties 3,000 76,500
Newscorp Overseas Ltd. Series B 20,000 442,500
Texaco Capital LLC Floater Series B 14,000 294,000
Wellsford Residential Prop. Series B 3,000 78,000
------------------
Total Preferred Stock (identified cost $985,000) $891,000
------------------
Purchased Options-0.3% Principal
- --------------------------------------------------- Amount
Deliver/Receive, Exercise Price, Expiration of Contracts
- --------------------------------------------------- ------------------
Call German Govt. 7.375%, Str. 105.91, 09/16/96 5,400,000 $126,641
Call German Govt. 6.875%, Str. 105.19, 03/19/96 1,816,000 12,258
Put French Govt., 7.75%, Str. 105.05, 02/27/96 18,760,000 14,914
Put Danish Govt., 7.0%, Str. 96.58, 01/11/96 31,400,000 2,826
Put Belgian Govt. 7.0%, Str. 104.68, 04/02/96 150,000,000 9,600
Call Japanese Govt., 3.6%, Str. 106.057, 02/01/96 260,000,000 780
CHF Put/ SEK Call Str. 5.8400, 10/30/96 2,480,000 45,540
DEM Put/ USD Call Str 1.4450, 02/28/96 3,900,000 58,968
JPY Put/ ESB Call Str. 1.2000, 10/30/96 270,000,000 56,970
JPY Put/ ITL Call Str. 15.6700, 10/30/96 270,000,000 75,870
JPY Put/ ITL Call Str. 15.7000, 12/12/96 280,780,000 63,456
------------------
Total Options (Premium paid $458,542) $467,823
------------------
Short Term Obligations-5.3%
- ---------------------------------------------------
Federal Agency Discount Notes-0.3%
- ---------------------------------------------------
Federal Home Loan Mortgage Corp., due 1/16/96 500,000 $498,548
------------------
Repurchase Agreement-5.0%
- ---------------------------------------------------
Prudential-Bache repurchase agreement
dated 12/29/95, 5.39% due 1/2/96 to pay
$6,847,167 (Collateralized by $2,755,307 Federal
Home Loan Mortgage Corp., 7.00%, $142,750 Federal
11
<PAGE>
Portfolio of Investments
(continued)
Par Value
Security Rate Maturity Value+ (Note 1A)
- --------------------------------------------------- ------- ---------------- ------------- ------------------
Repurchase Agreement-(Continued)
- ---------------------------------------------------
Home Loan Mortgage Corp., 6.50%, $3,004,424.75 Fede
Home Loan Mortgage Corp., 8.00%, $1,080,591.38 Fede
Home Loan Mortgage Corp., 6.19%) at cost. $6,846,142 $6,846,142
------------------
Total Short Term Obligations $7,344,690
------------------
(identified cost $7,344,690)
Total Investments-99.4% $137,098,681
------------------
(identified cost $132,363,100)
Written Options-(0.2%)
- --------------------------------------------------- Principal Amount
Deliver/Receive, Exercise Price, Expiration of Contracts
- --------------------------------------------------- ------------------
Call German Govt., 7.375%, Str. 105.91, 03/15/96 (5,400,000) $ (128,142)
Put German Govt., 6.5%, Str. 101.43, 01/11/96 (8,100,000) (1,126)
Put German Govt., 6.125%, Str. 103.12, 04/02/96 (7,300,000) (7,110)
Put German Govt., 6.5%, Str. 101.23, 02/27/96 (5,480,000) (14,489)
ESP Put/ JPY Call Str. 1.4000, 10/30/96 (270,000,000) (20,790)
ITL Put/ JPY Call Str. 19.5000, 10/30/96 (270,000,000) (20,250)
DEM Put/ USD Call Str. 1.50, 02/28/96 (3,900,000) (18,408)
USD Put/ DEM Call Str. 1.3800, 02/28/96 (3,900,000) (26,208)
SEK Put/ CHF Call Str. 6.5000, 10/30/96 (2,480,000) (22,340)
------------------
Total Written Options (Premiums Received $344,473) ($258,863)
------------------
Other assets, less liabilities-0.8% $1,059,204
------------------
Net Assets- 100% $137,899,022
==================
+ The principal amounts of these bonds are stated in the currency of the country
classification.
a This security is restricted but eligible for resale under 144a
b Included in this pool of securities are when issued securities identified
in Note 7.
c Rates in effect at 12/31/95
d Denotes all or part of a security pledged as a margin deposit (Note 6)
The following abbreviations are used in this portfolio
BEL- Belgian Francs JPY- Japanese Yen
CHF- Swiss Franc SEK- Swedish Krona
DEM- German Deutschemark USD- United States Dollar
DKK- Danish Krona FNMA- Federal National Mortgage Association
ESP- Spanish Peseta GNMA- Government National Mortgage Association
ITL- Italian Lira
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
Standish, Ayer & Wood Investment Trust
Standish Global Fixed Income Fund Series
Statements of Assets and Liabilities
December 31, 1995
Assets
<S> <C> <C>
Investments, at value (Note 1A) (identified cost, $132,363,100) $137,098,681
Cash and foreign currency, at value (cost, $208,699) 209,096
Receivable for investments sold 1,261,718
Interest and dividends receivable 3,671,584
Unrealized appreciation on forward foreign currency exchange contracts (Note 6) 771,401
Receivable for daily variation margin on financial futures contracts (Note 6) 1,103
Deferred organization expenses (Note 1F) 6,789
Other Assets 1,033
-----------------
Total assets $143,021,405
Liabilities
Distribution payable $2,716,876
Payable for investments purchased 1,115,052
Payable for delayed delivery transactions (Note 7) 501,563
Payable for Fund shares redeemed 60,000
Written options outstanding, at value (premiums received, $344,473) (Note 6) 258,863
Unrealized depreciation on forward currency exchange contracts (Note 6) 281,493
Accrued investment advisory fee (Note 2) 130,489
Accrued trustee fees 1,337
Accrued expenses and other liabilities 56,710
------------
Total liabilities $5,122,383
-----------------
Net Assets $137,899,022
=================
Net assets consist of
Paid-in capital $136,347,384
Distributions in excess of net investment income (424,310)
Accumulated undistributed net realized gain (loss) (3,304,586)
Net unrealized appreciation (depreciation) 5,280,534
-----------------
Total $137,899,022
=================
Shares of beneficial interest outstanding 7,060,025
=================
Net asset value, offering price, and redemption price per share $19.53
=================
(Net assets/Shares outstanding)
13
<PAGE>
Standish, Ayer & Wood Investment Trust
Standish Global Fixed Income Fund Series
Statement of Operations for the Year Ended
December 31, 1995
Investment income
Interest income (net of withholding taxes of $27,603) $11,448,898
Dividend income 78,598
----------------
Total income $11,527,496
Expenses
Investment advisory fee (Note 2) $535,630
Trustees fees 5,092
Accounting, custody, and transfer agent fees 233,589
Audit services 43,749
Legal services 8,986
Insurance expense 3,702
Amortization of organization expense (Note 1F) 2,250
Miscellaneous 1,549
--------------
Total expenses $834,547
----------------
Net investment income $10,692,949
----------------
Realized and unrealized gain (loss)
Net realized gain (loss)
Investment securities $5,625,447
Written options 750,346
Financial futures (257,657)
Interest rate swaps (330,077)
Foreign currency and foreign exchange contracts (4,192,918)
--------------
Net realized gain (loss) $1,595,141
Change in net unrealized appreciation (depreciation)
Investment securities $9,897,632
Written options (71,935)
Financial futures 41,887
Interest rate swaps 409,000
Translation of assets and liabilities in foreign currencies and
foreign exchange contracts (106,982)
--------------
Change in net unrealized appreciation (depreciation) $10,169,602
----------------
Net gain (loss) $11,764,743
================
Net increase (decrease) in net assets from operations $22,457,692
================
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
Standish, Ayer & Wood Investment Trust
Standish Global Fixed Income Fund Series
Statement of Changes in Net Assets
For the period from
Year January 3, 1994
Ended (start of business)
December 31, 1995 to December 31, 1994
------------------------ ------------------------
Increase (Decrease) in Net Assets
From operations
<S> <C> <C>
Net investment income $10,692,949 $9,396,385
Net realized gain (loss) 1,595,141 (14,057,068)
Change in net unrealized appreciation (depreciation) 10,169,602 (4,889,068)
------------------------ ------------------------
Net increase (decrease) in net assets from operations $22,457,692 ($9,549,751)
------------------------ ------------------------
Distributions to shareholders
From net investment income ($10,692,948) --
Distribution in excess of net investment income (736,162)
Tax return of capital -- ($4,240,486)
------------------------ ------------------------
Total distributions to shareholders ($11,429,110) ($4,240,486)
------------------------ ------------------------
Fund share (principal) transactions (Note 4)
Net proceeds from sale of shares $10,989,037 $160,162,365
Net asset value of shares issued to shareholders in
payment of distributions declared 6,104,310 2,480,921
Cost of shares redeemed (25,454,420) (14,068,689)
------------------------ ------------------------
Increase (decrease) in net assets from Fund ($8,361,073) $148,574,597
------------------------ ------------------------
share transactions
Net increase (decrease) in net assets $2,667,509 $134,784,360
Net assets
At beginning of period $135,231,513 $447,153
------------------------ ------------------------
At end of period (including distributions in excess of $137,899,022 $135,231,513
investment income of $424,310 at December 31, 1995 and $0 ======================== ========================
at December 31, 1994.)
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
Standish, Ayer & Wood Investment Trust
Standish Global Fixed Income Fund Series
Financial Highlights
Year Ended December 31,
-----------------------------------------------
1995 1994 +
------------------------ --------------------
<S> <C> <C>
Net asset value - beginning of period $17.99 $20.00
------------------------ --------------------
Income from investment operations
Net investment income $1.59 $1.29
Net realized and unrealized gain (loss) 1.60 (2.70)
------------------------ --------------------
Total from investment operations $3.19 ($1.41)
------------------------ --------------------
Less distributions declared to shareholders
Tax return of capital -- ($0.60)
From net investment income ($1.65) --
------------------------ --------------------
Total distributions declared to shareholders ($1.65) ($0.60)
------------------------ --------------------
Net asset value - end of period $19.53 $17.99
======================== ====================
Total return 18.13% (7.06%)*
Ratios (to average net assets)/Supplemental Data
Expenses 0.62% 0.65% t,**
Net investment income 7.69% 7.73% t,**
Portfolio turnover 163% 140% x
Net assets at end of period (000's omitted) $137,899 $135,232
** The investment advisor voluntarily waived a portion of its investment
advisory fee for the year ended December 31, 1994. Had these actions not
been taken, the net investment income per share and the ratios would have
been.
Net investment income per share $1.27
Ratios (to average daily net assets):
Expenses 0.73% t
Net Investment Income 7.65% t
+ For the period from January 3, 1994 (start of business) to December 31, 1994.
t Computed on an annualized basis.
* The total return for the period is not annualized.
x Portfolio turnover not computed on an annualized basis.
</TABLE>
16
<PAGE>
Standish, Ayer & Wood Investment Trust
Standish Global Fixed Income Fund Series
Notes to Financial Statements
(1) Significant Accounting Policies:
Standish, Ayer & Wood Investment Trust (Trust) is organized as a
Massachusetts business trust and is registered under the Investment
Company Act of 1940, as amended, as an open-end, management investment
company. Standish Global Fixed Income Fund (Fund) is a separate
non-diversified investment series of the Trust. The following is a
summary of significant accounting policies consistently followed by the
Fund in the preparation of its financial statements. The preparation of
financial statements in accordance with generally accepted accounting
principles requires management to make estimates and assumptions that
affect the reported amounts and disclosures in the financial
statements. Actual results could differ from those estimates.
A. Investment security valuations--
Securities for which quotations are readily available are valued at the
last sale price, or if no sale price, at the closing bid price in the
principal market in which such securities are normally traded.
Securities (including restricted securities) for which quotations are
not readily available are valued primarily using dealer-supplied
valuations or at their fair value as determined in good faith under
consistently applied procedures under the general supervision of the
Board of Trustees.
Short term instruments with less than sixty-one days remaining to
maturity when acquired by the Fund are valued at amortized cost. If the
Fund acquires a short term instrument with more than sixty days
remaining to its maturity, it is valued at current market value until
the sixtieth day prior to maturity and will then be valued at amortized
cost based upon the value on such date unless the trustees determine
during such sixty-day period that amortized cost does not represent
fair value.
B. Repurchase agreements--
It is the policy of the Fund to require the custodian bank to take
possession, to have legally segregated in the Federal Reserve Book
Entry System or to have segregated within the custodian bank's vault,
all securities held as collateral in support of repurchase agreement
investments. Additionally, procedures have been established by the Fund
to monitor on a daily basis, the market value of the repurchase
agreements' underlying investments to ensure the existence of a proper
level of collateral.
C. Securities transactions and income--
Securities transactions are recorded as of trade date. Interest income
is determined on the basis of interest accrued, adjusted for
amortization of premium or discount on long-term debt securities when
required for federal income tax purposes. Realized gains and losses
from securities sold are recorded on the identified cost basis. The
Fund does not isolate that portion of the results of operations
resulting from changes in foreign exchange rates on investments from
the fluctuations arising from changes in market prices of securities
held. Such fluctuations are included with the net realized and
unrealized gain or loss from investments.
D. Federal taxes--
As a qualified regulated investment company under Subchapter M of the
Internal Revenue Code the Fund is not subject to income taxes to the
extent that it distributes all of its taxable income for its fiscal
year.
At December 31, 1995, the Fund, for federal income tax purposes, had
capital loss carryovers which will reduce the Fund's taxable income
arising from future net realized gain on investments, if any, to the
extent permitted by the Internal Revenue Code and thus will reduce the
amount of distributions to shareholders which would otherwise be
necessary to relieve the Fund of any liability for federal income tax.
Such capital loss carryovers are $3,284,436 which expire on December
31, 2002.
E. Foreign currency transactions--
Investment security valuations, other assets and liabilities initially
expressed in foreign currencies are converted into U.S. dollars based
upon current exchange rates. Purchases and sales of foreign investment
securities and income and expenses are converted into U.S. dollars
based upon currency exchange rates prevailing on the respective dates
of such transactions.
Section 988 of the Internal Revenue Code provides that gains or losses
on certain transactions attributable to fluctuations in foreign
currency exchange rates must be treated as ordinary income or loss. For
financial statement purposes, such amounts are included in net realized
gains or losses.
17
<PAGE>
F. Deferred organization expense--
Costs incurred by the Fund in connection with its organization and
initial registration are being amortized, on a straight-line basis, for
5 years beginning January 3, 1994 through December 1998.
G. Distributions to shareholders-
Distributions to shareholders are recorded on the ex-dividend date.
Distributions in excess of net realized gain on investments, written
options, and foreign currency arise because of certain timing
differences.
Income and capital gain distributions are determined in accordance with
income tax regulations which may differ from generally accepted
accounting principles. These differences are primarily due to differing
treatments for foreign currency transactions. Permanent book and tax
basis differences relating to shareholder distributions will result in
reclassifications to paid-in-capital.
(2).....Investment Advisory Fee:
The investment advisory fee paid to Standish International Management
Company, L.P. (SIMCO) for overall investment advisory and
administrative services, and general office facilities, is paid
quarterly at the annual rate of 0.4% of the Fund's average daily net
assets. The advisory agreement provides that if the total annual
operating expenses of the Fund (excluding brokerage commissions, taxes
and extraordinary expenses) in any fiscal year exceed the lower of (a)
0.65% of the Fund's average daily net assets or (b) the permissible
expense limitation applicable to the Fund in any state in which shares
of the Fund are then qualified for sale, the compensation due the
adviser shall be reduced by the amount of the excess. The Fund pays no
compensation directly to its trustees who are affiliated with the
investment adviser or to its officers, all of whom receive renumeration
for their services to the Fund from the investment adviser. Certain of
the trustees and officers of the Trust are partners or officers of
SIMCO.
(3).....Purchases and Sales of Investments:
<TABLE>
<CAPTION>
Purchases and proceeds from sales of investments, other than short-term
investments, were as follows:
Purchases Sales
------------------------ -------------------------
<S> <C> <C>
Investments (non-U.S. government securities) $182,599,769 $194,794,200
U.S. government securities 26,288,162 31,885,557
------------------------ ------------------------
$208,887,931 $226,679,757
======================== ========================
</TABLE>
(4) Shares of Beneficial Interest:
<TABLE>
<CAPTION>
The Declaration of Trust permits the trustees to issue an unlimited
number of full and fractional shares of beneficial interest having a
par value of one cent per share. Transactions in Fund shares were as
follows:
For the period
Year January 3, 1994
Ended (start of business)
December 31, 1995 to December 31, 1994
------------------------ ------------------------
<S> <C> <C>
Shares sold 558,609 8,116,215
Shares issued in payment of dividends declared 317,125 135,607
Shares redeemed (1,332,915) (756,974)
------------------------ ------------------------
Net increase (decrease) (457,181) 7,494,848
======================== ========================
During the period January 4, 1994 through February 28, 1994, securities with a
fair market value of approximately $76,265,000 were contributed to the Fund by
shareholders. In return for such securities, shareholders received shares of the
fund.
</TABLE>
(5) Federal Income Tax Basis of Investment Securities:
The cost and unrealized appreciation (depreciation) in value of the
investment securities owned at December 31, 1995, as computed on a
federal income tax basis, are as follows:
Aggregate cost $132,383,251
========================
Gross unrealized appreciation $5,645,005
Gross unrealized depreciation (929,575)
------------------------
Net unrealized appreciation (depreciation) $4,715,430
========================
(6).....Financial Instruments:
In general, the following instruments are used for hedging purposes as
described below. However, these instruments may also be used to enhance
potential gain in circumstances where hedging is not involved. The
nature, risks and objectives of these investments are set forth more
fully in the Fund's Prospectus and Statement of Additional Information.
The Fund trades the following financial instruments with off-balance
sheet risk:
Options--
Call and put options give the holder the right to purchase or sell,
respectively, a security or currency at a specified price on or before
a certain date. The Fund uses options to hedge against risks of market
exposure and changes in security prices and foreign currencies, as well
as to enhance returns. Options, both held and written by the Fund, are
reflected in the accompanying Statement of Assets and Liabilities at
market value.
Premiums received from writing options which expire are treated as
realized gains. Premiums received from writing options which are
exercised or are closed are added to or offset against the proceeds or
amount paid on the transaction to determine the realized gain or loss.
If a put option written by the Fund is exercised, the premium reduces
the cost basis of the securities purchased by the Fund. The Fund, as
writer of an option, has no control over whether the underlying
securities may be sold (call) or purchased (put) and as a result bears
the market risk of an unfavorable change in the price of the security
underlying the written option. A summary of such transactions for the
year ended December 31, 1995 is as follows:
18
<PAGE>
<TABLE>
<CAPTION>
Written Put Option Transactions
- ------------------------------------------------------------------------------------------------------------------------
Number of
Contracts Premiums
------------------------ ------------------------
<S> <C> <C>
Outstanding, beginning of period 8 $367,895
Options written 23 1,014,869
Options exercised (1) (16,678)
Options expired (16) (688,653)
Options closed (10) (523,737)
------------------------ ------------------------
Outstanding, end of period 4 $153,696
======================== ========================
Written Call Option Transactions
- ------------------------------------------------------------------------------------------------------------------------
Number of
Contracts Premiums
------------------------ ------------------------
Outstanding, beginning of period 2 $79,635
Options written 25 863,688
Options exercised (2) (23,441)
Options expired (11) (650,045)
Options closed (12) (198,922)
------------------------ ------------------------
Outstanding, end of period 2 $70,915
======================== ========================
Written Cross Currency Option Transactions
- ------------------------------------------------------------------------------------------------------------------------
Number of
Contracts Premiums
------------------------ ------------------------
Outstanding, beginning of period 3 $274,206
Options written 7 173,462
Options exercised 0 0
Options expired (1) (158,228)
Options closed (6) (169,578)
------------------------ ------------------------
Outstanding, end of period 3 $119,862
======================== ========================
</TABLE>
19
<PAGE>
Forward currency exchange contracts--
The Fund may enter into forward foreign currency and cross currency
exchange contracts for the purchase or sale of a specific foreign
currency at a fixed price on a future date. Risks may arise upon
entering these contracts from the potential inability of counterparties
to meet the terms of their contracts and from unanticipated movements
in the value of a foreign currency relative to the U.S. dollar and
other foreign currencies. The forward foreign currency and cross
currency exchange contracts are marked to market using the forward
foreign currency rate of the underlying currency and any gains or
losses are recorded for financial statement purposes as unrealized
until the contract settlement date. Forward currency exchange contracts
are used by the fund primarily to protect the value of the Fund's
foreign securities from adverse currency movements.
At December 31, 1995, the Fund held the following forward foreign currency
and cross currency exchange contracts:
<TABLE>
<CAPTION>
Local U.S. $ U.S. $ U.S. $
Principal Contract Market Aggregate Unrealized
Contracts to Receive Amount Value Date Value Face Amount Gain / (Loss)
- -------------------- ------ ---------- ----- ----------- -------------
<S> <C> <C> <C> <C> <C>
German Deutsche Mark 8,063,738 1/2/96-3/29/96 $5,625,200 $5,629,129 ($3,929)
Danish Krone 1,113,778 3/14/96-12/29/96 200,317 200,489 (172)
Spanish Peseta 170,600,986 02/07/96 1,394,748 1,383,850 10,898
British Pound Sterling 1,667,564 1/2/96-2/21/96 2,585,504 2,575,680 9,824
European Currency Units 872,157 01/03/96 1,114,915 1,116,361 (1,446)
============= =============== =============
$10,920,684 $10,905,509 $15,175
============= =============== =============
Local U.S. $ U.S. $ U.S. $
Principal Contract Market Aggregate Unrealized
Contracts to Deliver Amount Value Date Value Face Amount Gain / (Loss)
- -------------------- ------ ---------- ----- ----------- -------------
Australian Dollars 4,867,929 1/2/96-2/8/96 $3,577,483 $3,644,333 $66,850
Belgian Francs 40,302,600 03/12/96 1,369,886 1,356,214 (13,672)
Canadian Dollar 5,952,591 2/9/96-3/25/96 4,359,747 4,375,266 15,519
German Deutsche Mark 19,325,267 1/2/96-3/29/96 13,482,008 13,670,972 188,964
Danish Krone 61,628,629 1/2/96-3/5/96 11,089,828 11,174,481 84,653
Spanish Peseta 1,238,219,076 2/7/96-3/21/96 10,107,318 10,046,596 (60,722)
Finnish Markka 5,956,750 02/27/96 1,370,313 1,416,419 46,106
French Franc 31,066,774 1/24/96-3/27/96 6,335,979 6,299,581 (36,398)
British Pound Sterling 8,657,700 1/2/96-3/26/96 13,414,978 13,433,660 18,682
Italian Lira 6,247,009,750 1/12/96-3/7/96 3,912,573 3,868,449 (44,124)
Norwegian Krone 28,555,796 2/29/96-3/29/96 4,506,449 4,524,682 18,233
New Zealand Dollars 5,290,128 3/7/96-3/26/96 3,432,616 3,404,320 (28,296)
Swedish Krona 47,437,845 1/23/96-3/4/96 7,097,760 7,112,640 14,880
European Currency Units 5,815,397 1/2/96-4/3/96 7,432,518 7,522,132 89,614
============= =============== =============
$91,489,456 $91,849,745 $360,289
============= =============== =============
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
Forward Foreign Cross Currency Contracts
- ----------------------------------------
US $ U.S. $ U.S. $
Market Market Contract Unrealized
Contracts to Deliver Value In Exchange For Value Value Date Gain / (Loss)
- -------------------- ----- --------------- ----- ---------- -------------
<S> <C> <C> <C> <C>
French Franc $5,158,840 Deutsche Mark $5,104,567 2/1/96-02/06/96 ($54,273)
Belgian Franc 6,842,529 Deutsche Mark 6,811,578 1/9/96-3/29/96 (30,951)
German Deutsche Mark 4,228,601 Belgian Franc 4,287,518 01/09/96 58,917
Swiss Franc 3,914,245 Italian Lira 4,062,506 01/12/96 148,261
Italian Lira 3,921,755 Swiss Franc 3,914,245 01/12/96 (7,510)
============= ============= =============
$24,065,970 $24,180,414 $114,444
============= ============= =============
</TABLE>
Futures contracts--
The Fund may enter into financial futures contracts for the delayed
sale or delivery of securities or contracts based on financial indices
at a fixed price on a future date. The Fund is required to deposit
either in cash or securities an amount equal to a certain percentage
of the contract amount. Subsequent payments are made or received by
the Fund each day, dependent on the daily fluctuations in the value of
the underlying security, and are recorded for financial statement
purposes as unrealized gains or losses by the Fund. There are several
risks in connection with the use of futures contracts as a hedging
device. The change in value of futures contracts primarily corresponds
with the value of their underlying instruments or indices, which may
not correlate with changes in the value of hedged investments. In
addition, there is the risk that the Fund may not be able to enter
into a closing transaction because of an illiquid secondary market.
The Fund enters into financial futures transactions primarily to
manage its exposure to certain markets and to changes in security
prices and foreign currencies.
At December 31, 1995, the Fund held the following futures contracts:
<TABLE>
<CAPTION>
Expiration Underlying Face Unrealized
Contract Position Date Amount at Value Gain / (Loss)
- --------------------------------------- ----------- ------------ --------------------- -----------------
<S> <C> <C> <C>
Australian 10 year (10 contracts) Short 03/15/95 ($931,082) ($48)
British Pound (16 contracts) Long 03/29/96 1,375,787 (805)
Deutsche Mark 10 year (8 contracts) Long 03/11/96 1,383,855 2,250
Deutsche Mark 5 year (8 contracts) Long 03/11/96 1,452,053 853
ECU 10 year (12 contracts) Long 03/18/96 1,382,922 (1,635)
--------------------- ---------------
$4,663,535 $615
===================== =================
</TABLE>
At December 31, 1995, the Fund had segregated sufficient cash and/or securities
to cover margin requirements on open future contracts.
Interest rate swap contracts--
Interest rate swaps involve the exchange by the Fund with another
party of their respective commitments to pay or receive interest,
e.g., an exchange of floating rate payments for fixed rate payments
with respect to a notional amount of principal. Credit and market risk
exist with respect to these instruments. The Fund expects to enter
into these transactions primarily for hedging purposes including, but
not limited to, preserving a return or spread on a particular
investment or portion of its portfolio, protecting against currency
fluctuations, as a duration management technique or protecting against
an increase in the price of securities the Fund anticipates purchasing
at a later date. At December 31, 1995, there were no open interest
rate swap contracts.
21
<PAGE>
(7) Delayed Delivery Transactions:
The Fund may purchase securities on a when-issued or forward commitment
basis. Payment and delivery may take place a month or more after the
date of the transactions. The price of the underlying securities and
the date when the securities will be delivered and paid for are fixed
at the time the transaction is negotiated. The Fund instructs its
custodian to segregate securities having a value at least equal to the
amount of the purchase commitment. At December 31, 1995, the Fund had
entered into the following delayed delivery transaction:
<TABLE>
<CAPTION>
Type Security Settlement Date Amount
- ---------------------------- ------------------------ ------------------------ ------------------------
<S> <C> <C>
Buy FNMA 01/16/96 $501,563
------------------------
Total delayed delivery securities $501,563
========================
</TABLE>
22
<PAGE>
Report of Independent Accountants
To the Trustees of Standish, Ayer & Wood Investment Trust and the Shareholders
of Standish Global Fixed Income Fund Series:
We have audited the accompanying statement of assets and liabilities of
Standish, Ayer & Wood Investment Trust: Standish Global Fixed Income Fund Series
(the "Fund"), including the schedule of portfolio investments, as of December
31, 1995, the related statement of operations for the year then ended and
statement of changes in net assets and financial highlights for the year ended
December 31, 1995 and the period January 3, 1994 (start of business) to December
31, 1994. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1995 by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Standish, Ayer & Wood Investment Trust: Standish Global Fixed Income Fund Series
as of December 31, 1995, the results of operations for the year then ended, the
changes in its net assets, and the financial highlights for the year then ended
and the period January 3, 1994 (start of business) to December 31, 1994, in
conformity with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
February 13, 1996
23
<PAGE>
Standish, Ayer & Wood Investment Trust
One Financial Center
Boston, MA 02111
(800) 221-4795
24
<PAGE>
April 29, 1996
STANDISH SMALL CAPITALIZATION EQUITY FUND
ONE FINANCIAL CENTER
BOSTON, MASSACHUSETTS 02111
(800) 221-4795
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information is not a prospectus, but expands
upon and supplements the information contained in the Prospectus dated April 29,
1996, as amended and/or supplemented from time to time (the "Prospectus"), of
Standish Small Capitalization Equity Fund (the "Fund"), a separate investment
series of Standish Ayer & Wood Investment Trust (the "Trust"). The Statement of
Additional Information should be read in conjunction with the Fund's Prospectus,
a copy of which may be obtained without charge by writing or calling the Trust's
principal underwriter, Standish Fund Distributors, L.P. (the "Principal
Underwriter"), at the address or phone number set forth above.
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND IS
AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY IF PRECEDED OR
ACCOMPANIED BY AN EFFECTIVE PROSPECTUS.
Investment Objective and Policies............................2
Investment Restrictions......................................8
Calculation of Performance Data..............................9
Management..................................................11
Redemption of Shares........................................16
Portfolio Transactions......................................17
Determination of Net Asset Value............................17
Taxation....................................................17
The Fund and Its Shares.....................................20
The Portfolio and Its Investors.............................20
Additional Information......................................20
Experts and Financial Statements............................21
Financial Statements .......................................22
1
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
As described in the Prospectus, the Fund seeks to achieve its investment
objective by investing all its investable assets in the Standish Small
Capitalization Equity Portfolio (the "Portfolio"), a series of Standish, Ayer &
Wood Master Portfolio (the "Portfolio Trust"), an open-end management investment
company. The Portfolio has the same investment objective and restrictions as the
Fund.
The Fund's Prospectus describes the investment objective of the Fund and
the Portfolio and summarizes the investment policies they will follow. Since the
investment characteristics of the Fund will correspond directly to those of the
Portfolio, the following, which supplements the Prospectus, is a discussion of
the various investment techniques employed by the Portfolio. See the Prospectus
for a more complete description of the Fund's and the Portfolio's investment
objective, policies and restrictions.
Investment Objective
The Portfolio's investment objective is to achieve long-term growth of
capital through investment primarily in equity securities of small
capitilization companies. Under normal circumstances, at least 80% of the
Portfolio's assets will be invested in such securities. The Portfolio invests
primarily in publicly traded securities including securities issued in initial
public offerings. The Portfolio does not normally invest in equity securities
which are restricted as to disposition by federal securities laws or are
otherwise illiquid. The Portfolio may invest up to 15% of its net assets in
foreign equity securities, including securities of foreign issuers that are
listed on a U.S. exchange or traded in the over-the-counter market and American
Depositary Receipts (ADRs). In addition, the Portfolio may engage in certain
strategic transactions as discussed below. The Portfolio purchases short-term
interest-bearing securities with uninvested funds, the proportion of which will
depend upon market conditions and the needs of the Portfolio.
Common Stocks
The common stocks of small growth companies in which the Portfolio invests
typically have market capitalizations up to $700 million. (Morningstar Mutual
Funds, a leading mutual fund monitoring service, includes in the small-cap
category all funds with median portfolio market capitalizations of less than $1
billion.) Investments are expected to emphasize companies involved with value
added products or services in expanding industries. At times, particularly when
Standish, Ayer & Wood, Inc. ("Standish" or the "Adviser") believes that the
securities of small companies are overvalued, the Portfolio'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
Portfolio's net assets. The Portfolio will attempt to reduce risk by
diversifying its investments within the investment policies set forth above. The
Portfolio will invest in publicly traded equity securities and, excluding equity
securities received as distributions on portfolio securities, will not normally
hold equity securities which are restricted as to disposition under federal
securities laws or are otherwise illiquid or not readily marketable.
2
<PAGE>
Foreign Securities
Foreign securities may be purchased and sold in over-the-counter markets or
on stock exchanges located in the countries in which the respective principal
offices of their issuers are located, if that is the best available market.
Foreign stock markets are generally not as developed or efficient as those in
the United States. While growing in volume, they usually have substantially less
volume than the New York Stock Exchange, and securities of some foreign
companies are less liquid and more volatile than securities of comparable United
States companies. Fixed commissions on foreign stock exchanges are generally
higher than negotiated commissions on United States exchanges, although the
Portfolio will endeavor to achieve the most favorable net results on its
portfolio transactions. There is generally less government supervision and
regulation of stock exchanges, brokers and listed companies abroad than in the
United States.
The dividends and interest payable on certain of the Portfolio's foreign
portfolio securities may be subject to foreign withholding taxes, (and in some
cases capital gains from such securities may also be subject to foreign taxes)
thus reducing the net amount of income available for distribution to the Fund's
shareholders.
Investors should understand that the expense ratio of the Portfolio may be
higher than that of investment companies investing exclusively in domestic
securities because of the cost of maintaining the custody of foreign securities.
The Portfolio may acquire sponsored and unsponsored ADRs. Unsponsored ADRs
are acquired from banks that do not have a contractual relationship with the
issuer of the security underlying the depositary receipt to issue and secure
such depositary receipt. To the extent that the Portfolio invests in such
unsponsored ADRs there may be an increased possibility that the Portfolio may
not become aware of events affecting the underlying security and thus the value
of the related depositary receipt. In addition, certain benefits (i.e., rights
offerings) which may be associated with the security underlying the depositary
receipt may not inure to the benefit of the holder of such depositary receipt.
Money Market Instruments and Repurchase Agreements
When the Adviser considers investments in equity securities to present
excessive risks, the Portfolio may invest all or a portion of its assets in debt
securities or cash equivalents. The Portfolio will also invest uncommitted cash
in short-term debt securities.
To maintain liquidity for redemptions or at times when the Adviser deems it
advisable because of market conditions, the Portfolio may invest in short-term
debt securities and short-term securities of the United States government and
its instrumentalities or retain cash or cash equivalents.
Money market instruments include short-term U.S. Government securities,
U.S. and foreign commercial paper (promissory notes issued by corporations to
finance their short-term credit needs), negotiable certificates of deposit,
non-negotiable fixed time deposits, bankers' acceptances and repurchase
agreements.
3
<PAGE>
U.S. Government securities include securities which are direct obligations
of the U.S. Government backed by the full faith and credit of the United States,
and securities issued by agencies and instrumentalities of the U.S. Government,
which may be guaranteed by the U.S. Treasury or supported by the issuer's right
to borrow from the Treasury or may be backed by the credit of the federal agency
or instrumentality itself. Agencies and instrumentalities of the U.S. Government
include, but are not limited to, Federal Land Banks, the Federal Farm Credit
Bank, the Central Bank for Cooperatives, Federal Intermediate Credit Banks,
Federal Home Loan Banks and the Federal National Mortgage Association.
The Portfolio may invest up to 10% of its net assets in repurchase
agreements. A repurchase agreement is an agreement under which the Portfolio
acquires money market instruments (generally U.S. Government securities) from a
commercial bank, broker or dealer, subject to resale to the seller at an
agreed-upon price and date (normally the next business day). The resale price
reflects an agreed-upon interest rate effective for the period the instruments
are held by the Portfolio and is unrelated to the interest rate on the
instruments. The instruments acquired by the Portfolio (including accrued
interest) must have an aggregate market value in excess of the resale price and
will be held by the Portfolio's custodian bank until they are repurchased. The
Trustees will consider the standards which the Adviser will use in reviewing the
creditworthiness of any party to a repurchase agreement with the Portfolio.
The use of repurchase agreements involves certain risks. For example, if
the seller defaults on its obligation to repurchase the instruments acquired by
the Portfolio at a time when their market value has declined, the Portfolio may
incur a loss. If the seller becomes insolvent or subject to liquidation or
reorganization under bankruptcy or other laws, a court may determine that the
instruments acquired by the Portfolio are collateral for a loan by the Portfolio
and therefore are subject to sale by the trustee in bankruptcy. Finally, it is
possible that the Portfolio may not be able to substantiate its interest in the
instruments it acquires. While the Trustees acknowledge these risks, it is
expected that they can be controlled through careful documentation and
monitoring.
Strategic Transactions
The Portfolio may, but is not required to, utilize various other investment
strategies as described below to hedge various market risks (such as interest
rates, currency exchange rates, and broad or specific equity market movements),
to manage the effective maturity or duration of fixed-income securities, or to
enhance potential gain. Such strategies are generally accepted as part of modern
portfolio management and are regularly utilized by many mutual funds and other
institutional investors. Techniques and instruments used by the Portfolio may
change over time as new instruments and strategies are developed or regulatory
changes occur.
In the course of pursuing its investment objective, the Portfolio may
purchase and sell (write) exchange-listed and over-the-counter put and call
options on securities, equity indices and other financial instruments; purchase
and sell financial futures contracts and options thereon; enter into various
interest rate transactions such as swaps, caps, floors or collars; and enter
into various currency transactions such as currency forward contracts, currency
4
<PAGE>
futures contracts, currency swaps or options on currencies or currency futures
(collectively, all the above are called "Strategic Transactions"). Strategic
Transactions may be used as an attempt to protect against possible changes in
the market value of securities held in or to be purchased for the Portfolio's
portfolio resulting from securities markets or currency exchange rate
fluctuations, to protect the Portfolio's unrealized gains in the value of its
portfolio securities, to facilitate the sale of such securities for investment
purposes, 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 Portfolio will attempt to limit its net
loss exposure resulting from Strategic Transactions entered into for such
purposes to not more than 3% of the Portfolio's net assets at any one time and,
to the extent necessary, the Portfolio will close out transactions in order to
comply with this limitation. (Transactions such as writing covered call options
are considered to involve hedging for the purposes of this limitation.) In
calculating the Portfolio'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 Portfolio is underweighted in
cyclical stocks and overweighted in consumer stocks, the Portfolio 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 Portfolio's net loss exposure. The ability of the
Portfolio to utilize these Strategic Transactions successfully will depend on
the Adviser's ability to predict pertinent market movements, which cannot be
assured. The Portfolio will comply with applicable regulatory requirements when
implementing these strategies, techniques and instruments. The Portfolio's
activities involving Strategic Transactions may be limited in order to enable
the Fund to comply with the requirements of Subchapter M of the Internal Revenue
Code of 1986, as amended (the "Internal Revenue Code"), for qualification as a
regulated investment company.
Risks of Strategic Transactions
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 Portfolio, force the purchase or sale, respectively, of portfolio
securities at inopportune times or for prices higher than (in the case of put
options) or lower than (in the case of call options) current market values,
limit the amount of appreciation the Portfolio can realize on its investments or
cause the Portfolio to hold a security it might otherwise sell. The use of
5
<PAGE>
currency transactions can result in the Portfolio incurring losses as a result
of a number of factors including the imposition of exchange controls, suspension
of settlements, or the inability to deliver or receive a specified currency. The
use of options and futures transactions entails certain other risks. In
particular, the variable degree of correlation between price movements of
futures contracts and price movements in the related portfolio position of the
Portfolio creates the possibility that losses on the hedging instrument may be
greater than gains in the value of the Portfolio's position. The writing of
options could significantly increase the Portfolio'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 Portfolio might not be able to close out a transaction without incurring
substantial losses, if at all. Although the use of futures and options
transactions for hedging should tend to minimize the risk of loss due to a
decline in the value of the hedged position, at the same time, in certain
circumstances, they tend to limit any potential gain which might result from an
increase in value of such position. The loss incurred by the Portfolio in
writing options on futures and entering into futures transactions is potentially
unlimited; however, as described above, the Portfolio will attempt to limit its
net loss exposure resulting from Strategic Transactions entered into for
non-hedging purposes to not more than 3% of its net assets at any one time.
Futures markets are highly volatile and the use of futures may increase the
volatility of the Fund's net asset value. Finally, entering into futures
contracts would create a greater ongoing potential financial risk than would
purchases of options where the exposure is limited to the cost of the initial
premium. Losses resulting from the use of Strategic Transactions would reduce
net asset value and the net result may be less favorable than if the Strategic
Transactions had not been utilized.
General Characteristics of Options
Put options and call options typically have similar structural
characteristics and operational mechanics regardless of the underlying
instrument on which they are purchased or sold.
Thus, the following general discussion relates to each of the particular
types of options discussed in greater detail below. In addition, many Strategic
Transactions involving options require segregation of the Portfolio's assets in
special accounts, as described below under "Use of Segregated Accounts."
A put option gives the purchaser of the option, in consideration for the
payment of a premium, the right to sell, and the writer the obligation to buy
(if the option is exercised), the underlying security, commodity, index,
currency or other instrument at the exercise price. For instance, the
Portfolio's purchase of a put option on a security might be designed to protect
its holdings in the underlying instrument (or, in some cases, a similar
instrument) against a substantial decline in the market value by giving the
Portfolio the right to sell such instrument at the option exercise price. A call
option, in consideration for the payment of a premium, gives the purchaser of
the option the right to buy, and the seller the obligation to sell (if the
option is exercised), the underlying instrument at the exercise price. The
Portfolio may purchase a call option on a security, futures contract, index,
currency or other instrument to seek to protect the Portfolio against an
6
<PAGE>
increase in the price of the underlying instrument that it intends to purchase
in the future by fixing the price at which it may purchase such instrument. An
American style put or call option may be exercised at any time during the option
period while a European style put or call option may be exercised only upon
expiration or during a fixed period prior thereto. The Portfolio is authorized
to purchase and sell exchange listed options and over-the-counter options ("OTC
options"). Exchange listed options are issued by a regulated intermediary such
as the Options Clearing Corporation ("OCC"), which guarantees the performance of
the obligations of the parties to such options. The discussion below uses the
OCC as an example, but is also applicable to other financial intermediaries.
With certain exceptions, exchange listed options generally settle by
physical delivery of the underlying security or currency, although in the future
cash settlement may become available. Index options and Eurodollar instruments
are cash settled for the net amount, if any, by which the option is in-the-money
(i.e., where the value of the underlying instrument exceeds, in the case of a
call option, or is less than, in the case of a put option, the exercise price of
the option) at the time the option is exercised. Frequently, rather than taking
or making delivery of the underlying instrument through the process of
exercising the option, listed options are closed by entering into offsetting
purchase or sale transactions that do not result in ownership of the new option.
The Portfolio's ability to close out its position as a purchaser or seller
of an exchange listed put or call option is dependent, in part, upon the
liquidity of the option market. There is no assurance that a liquid option
market on an exchange will exist. In the event that the relevant market for an
option on an exchange ceases to exist, outstanding options on that exchange
would generally continue to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours
during which the underlying financial instruments are traded. To the extent that
the option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct agreement with
the Counterparty. In contrast to exchange listed options, which generally have
standardized terms and performance mechanics, all the terms of an OTC option,
including such terms as method of settlement, term, exercise price, premium,
guarantees and security, are set by negotiation of the parties. The Portfolio
will generally sell (write) OTC options (other than OTC currency options) that
are subject to a buy-back provision permitting the Portfolio to require the
Counterparty to sell the option back to the Portfolio at a formula price within
seven days. (To the extent that the Portfolio does not do so, the OTC options
are subject to the Portfolio's restriction on illiquid securities.) The
Portfolio expects generally to enter into OTC options that have cash settlement
provisions, although it is not required to do so.
7
<PAGE>
Unless the parties provide for it, there is no central clearing or guaranty
function in an OTC option. As a result, if the Counterparty fails to make
delivery of the security, currency or other instrument underlying an OTC option
it has entered into with the Portfolio or fails to make a cash settlement
payment due in accordance with the terms of that option, the Portfolio will lose
any premium it paid for the option as well as any anticipated benefit of the
transaction. Accordingly, the Adviser must assess the creditworthiness of each
such Counterparty or any guarantor or credit enhancement of the Counterparty's
credit to determine the likelihood that the terms of the OTC option will be
satisfied. The Portfolio will engage in OTC option transactions only with U.S.
Government securities dealers recognized by the Federal Reserve Bank of New York
as `primary dealers', or broker dealers, domestic or foreign banks or other
financial institutions which have received, combined with any credit
enhancements, a long-term debt rating of A from Standard & Poor's Ratings Group
("S&P") or Moody's Investor Services ("Moody's") or an equivalent rating from
any other nationally recognized statistical rating organization ("NRSRO") or the
debt of which is determined to be of equivalent credit quality by the Adviser.
The staff of the Securities and Exchange Commission (the "SEC") currently takes
the position that, absent the buy-back provisions discussed above, OTC options
purchased by the Portfolio, and portfolio securities "covering" the amount of
the Portfolio's obligation pursuant to an OTC option sold by it (the cost of the
sell-back plus the in-the-money amount, if any) are illiquid, and are subject to
the Portfolio's limitation on investing no more than 15% of its assets in
illiquid securities. However, for options written with `primary dealers' in U.S.
Government securities pursuant to an agreement requiring a closing purchase
transaction at a formula price, the amount which is considered to be illiquid
may be calculated by reference to a formula price.
If the Portfolio sells (writes) a call option, the premium that it receives
may serve as a partial hedge, to the extent of the option premium, against a
decrease in the value of the underlying securities or instruments in its
portfolio or will increase the Portfolio's income. The sale (writing) of put
options can also provide income.
The Portfolio may purchase and sell (write) call options on securities,
equity securities (including convertible securities) and Eurodollar instruments
that are traded on U.S. and foreign securities exchanges and in the
over-the-counter markets, and on securities indices, currencies and futures
contracts. All calls sold by the Portfolio must be "covered" (i.e., the
Portfolio must own the securities or futures contract subject to the call) or
must meet the asset segregation requirements described below as long as the call
is outstanding. Even though the Portfolio will receive the option premium to
help protect it against loss, a call sold by the Portfolio exposes the Portfolio
during the term of the option to possible loss of opportunity to realize
appreciation in the market price of the underlying security or instrument and
may require the Portfolio to hold a security or instrument which it might
otherwise have sold.
The Portfolio may purchase and sell (write) put options on securities
including equity securities (including convertible securities) and Eurodollar
instruments (whether or not it holds the above securities in its portfolio), and
8
<PAGE>
on securities indices, currencies and futures contracts. The Portfolio will not
sell put options if, as a result, more than 50% of the Portfolio's assets would
be required to be segregated to cover its potential obligations under such put
options other than those with respect to futures and options thereon. In selling
put options, there is a risk that the Portfolio may be required to buy the
underlying security at a disadvantageous price above the market price.
Options on Securities Indices and Other Financial Indices
The Portfolio may also purchase and sell (write) call and put options on
securities indices and other financial indices. Options on securities indices
and other financial indices are similar to options on a security or other
instrument except that, rather than settling by physical delivery of the
underlying instrument, they settle by cash settlement. For example, an option on
an index gives the holder the right to receive, upon exercise of the option, an
amount of cash if the closing level of the index upon which the option is based
exceeds, in the case of a call, or is less than, in the case of a put, the
exercise price of the option (except if, in the case of an OTC option, physical
delivery is specified). This amount of cash is equal to the differential between
the closing price of the index and the exercise price of the option, which also
may be multiplied by a formula value. The seller of the option is obligated, in
return for the premium received, to make delivery of this amount. In addition to
the methods described above, the Portfolio may cover call options on a
securities index by owning securities whose price changes are expected to be
similar to those of the underlying index, or by having an absolute and immediate
right to acquire such securities without additional cash consideration (or for
additional cash consideration held in a segregated account by its custodian)
upon conversion or exchange of other securities in its portfolio.
General Characteristics of Futures
The Portfolio may enter into financial futures contracts or purchase or
sell put and call options on such futures. Futures are generally bought and sold
on the commodities exchanges where they are listed with payment of initial and
variation margin as described below. The sale of futures contracts creates a
firm obligation by the Portfolio, as seller, to deliver to the buyer the
specific type of financial instrument called for in the contract at a specific
future time for a specified price (or, with respect to index futures and
Eurodollar instruments, the net cash amount). The purchase of futures contracts
creates a corresponding obligation by the Portfolio, as purchaser. Options on
futures contracts are similar to options on securities except that an option on
a futures contract gives the purchaser the right in return for the premium paid
to assume a position in a futures contract and obligates the seller to deliver
such position if the option is exercised.
The Portfolio's use of financial futures and options thereon will in all
cases be consistent with applicable regulatory requirements and in particular
the regulations of the Commodity Futures Trading Commission relating to
exclusions from regulation as a commodity pool operator. Those regulations
currently provide that the Portfolio may use commodity futures and option
positions (i) for bona fide hedging purposes without regard to the percentage of
assets committed to margin and option premiums, or (ii) for other purposes
9
<PAGE>
permitted by the SEC to the extent that the aggregate initial margin and option
premiums required to establish such non-hedging positions (net of the amount the
positions were "in the money" at the time of purchase) do not exceed 5% of the
net asset value of the Portfolio's portfolio, after taking into account
unrealized profits and losses on such positions. Typically, maintaining a
futures contract or selling an option thereon requires the Portfolio to deposit
with a financial intermediary as security for its obligations an amount of cash
or other specified assets (initial margin) which initially is typically 1% to
10% of the face amount of the contract (but may be higher in some
circumstances). Additional cash or assets (variation margin) may be required to
be deposited thereafter on a daily basis as the value of the contract
fluctuates. The purchase of an option on financial futures involves payment of a
premium for the option without any further obligation on the part of the
Portfolio. If the Portfolio exercises an option on a futures contract, it will
be obligated to post initial margin (and potential subsequent variation margin)
for the resulting futures position just as it would for any position. Futures
contracts and options thereon are generally settled by entering into an
offsetting transaction, but there can be no assurance that the position can be
offset prior to settlement at an advantageous price, nor that delivery will
occur. The segregation requirements with respect to futures contracts and
options thereon are described below.
Currency Transactions
The Portfolio may engage in currency transactions with Counterparties in
order to hedge the value of portfolio holdings denominated in particular
currencies against fluctuations in relative value or to enhance potential gain.
Currency transactions include forward currency contracts, exchange listed
currency futures, exchange listed and OTC options on currencies, and currency
swaps. A forward currency contract involves a privately negotiated obligation to
purchase or sell (with delivery generally required) a specific currency at a
future date, which may be any fixed number of days from the date of the contract
agreed upon by the parties, at a price set at the time of the contract. A
currency swap is an agreement to exchange cash flows based on the notional
(agreed-upon) difference among two or more currencies and operates similarly to
an interest rate swap, which is described below. The Portfolio may enter into
over-the-counter currency transactions with Counterparties which have received,
combined with any credit enhancements, a long term debt rating of A by S&P or
Moody's, respectively, or that have an equivalent rating from a NRSRO or (except
for OTC currency options) are determined to be of equivalent credit quality by
the Adviser.
The Portfolio's dealings in forward currency contracts and other currency
transactions such as futures, options, options on futures and swaps will
generally be limited to hedging involving either specific transactions or
portfolio positions. See, "Strategic Transactions." Transaction hedging is
entering into a currency transaction with respect to specific assets or
liabilities of a Portfolio, which will generally arise in connection with the
purchase or sale of its portfolio securities or the receipt of income therefrom.
Position hedging is entering into a currency transaction with respect to
portfolio security positions denominated or generally quoted in that currency.
10
<PAGE>
The Portfolio will not enter into a transaction to hedge currency exposure
to an extent greater, after netting all transactions intended wholly or
partially to offset other transactions, than the aggregate market value (at the
time of entering into the transaction) of the securities held in its portfolio
that are denominated or generally quoted in or currently convertible into such
currency, other than with respect to proxy hedging as described below.
The Portfolio may also cross-hedge currencies by entering into transactions
to purchase or sell one or more currencies that are expected to decline in value
in relation to other currencies to which the Portfolio has or in which the
Portfolio expects to have portfolio exposure. For example, the Portfolio may
hold a French security and the Adviser may believe that French francs will
deteriorate against German marks. The Portfolio would sell French francs to
reduce its exposure to that currency and buy German marks. This strategy would
be a hedge against a decline in the value of French francs, although it would
expose the Portfolio to declines in the value of the German mark relative to the
U.S. dollar.
To reduce the effect of currency fluctuations on the value of existing or
anticipated holdings of portfolio securities, the Portfolio may also engage in
proxy hedging. Proxy hedging is often used when the currency to which the
Portfolio's portfolio is exposed is difficult to hedge or to hedge against the
dollar. Proxy hedging entails entering into a forward contract to sell a
currency whose changes in value are generally considered to be linked to a
currency or currencies in which certain of the Portfolio's portfolio securities
are or are expected to be denominated, and to buy U.S. dollars. The amount of
the contract would not exceed the value of the Portfolio's securities
denominated in linked currencies. For example, if the Adviser considers that the
Austrian schilling is linked to the German deutschemark (the "D-mark"), the
Portfolio holds securities denominated in schillings and the Adviser believes
that the value of schillings will decline against the U.S. dollar, the Adviser
may enter into a contract to sell D-marks and buy dollars. Proxy hedging
involves some of the same risks and considerations as other transactions with
similar instruments. Currency transactions can result in losses to the Portfolio
if the currency being hedged fluctuates in value to a degree or in a direction
that is not anticipated. Further, there is the risk that the perceived linkage
between various currencies may not be present or may not be present during the
particular time that the Portfolio is engaging in proxy hedging. If the
Portfolio enters into a currency hedging transaction, the Portfolio will comply
with the asset segregation requirements described below.
Risks of Currency Transactions
Currency transactions are subject to risks different from those of other
portfolio transactions. Because currency control is of great importance to the
issuing governments and influences economic planning and policy, purchases and
sales of currency and related instruments can be negatively affected by
government exchange controls, blockages, and manipulations or exchange
11
<PAGE>
restrictions imposed by governments. These can result in losses to the Portfolio
if it is unable to deliver or receive currency or funds in settlement of
obligations and could also cause hedges it has entered into to be rendered
useless, resulting in full currency exposure as well as incurring transaction
costs. Buyers and sellers of currency futures are subject to the same risks that
apply to the use of futures generally. Further, settlement of a currency futures
contract for the purchase of most currencies must occur at a bank based in the
issuing nation. Trading options on currency futures is relatively new, and the
ability to establish and close out positions on such options is subject to the
maintenance of a liquid market which may not always be available. Currency
exchange rates may fluctuate based on factors extrinsic to that country's
economy.
Combined Transactions
The Portfolio may enter into multiple transactions, including multiple
options transactions, multiple futures transactions, multiple currency
transactions (including forward currency contracts) and multiple interest rate
transactions, structured notes and any combination of futures, options, currency
and interest rate transactions (component transactions), instead of a single
Strategic Transaction, as part of a single or combined strategy when, in the
opinion of the Adviser, it is in the best interests of the Portfolio to do so. A
combined transaction will usually contain elements of risk that are present in
each of its component transactions. Although combined transactions are normally
entered into based on the Adviser's judgment that the combined strategies will
reduce risk or otherwise more effectively achieve the desired portfolio
management goal, it is possible that the combination will instead increase such
risks or hinder achievement of the portfolio management objective.
Swaps, Caps, Floors and Collars
Among the Strategic Transactions into which the Portfolio may enter are
interest rate, currency and index swaps and the purchase or sale of related
caps, floors and collars. The Portfolio expects to enter into these transactions
primarily for hedging purposes, including, but not limited to, preserving a
return or spread on a particular investment or portion of its portfolio,
protecting against currency fluctuations, as a duration management technique or
protecting against an increase in the price of securities the Portfolio
anticipates purchasing at a later date. Swaps, caps, floors and collars may also
be used to enhance potential gain in circumstances where hedging is not involved
although, as described above, the Portfolio will attempt to limit its net loss
exposure resulting from swaps, caps, floors and collars and other Strategic
Transactions entered into for such purposes to not more than 3% of the
Portfolio's net assets at any one time. The Portfolio will not sell interest
rate caps or floors where it does not own securities or other instruments
providing the income stream the Portfolio may be obligated to pay. Interest rate
swaps involve the exchange by the Portfolio with another party of their
respective commitments to pay or receive interest, e.g., an exchange of floating
rate payments for fixed rate payments with respect to a notional amount of
12
<PAGE>
principal. A currency swap is an agreement to exchange cash flows on a notional
amount of two or more currencies based on the relative value differential among
them, and an index swap is an agreement to swap cash flows on a notional amount
based on changes in the values of the reference indices. The purchase of a cap
entitles the purchaser to receive payments on a notional principal amount from
the party selling such cap to the extent that a specified index exceeds a
predetermined interest rate or amount. The purchase of a floor entitles the
purchaser to receive payments on a notional principal amount from the party
selling such floor to the extent that a specified index falls below a
predetermined interest rate or amount. A collar is a combination of a cap and a
floor that preserves a certain rate of return within a predetermined range of
interest rates or values.
The Portfolio will usually enter into swaps on a net basis, i.e., the two
payment streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with the Portfolio receiving or paying, as the case
may be, only the net amount of the two payments. The Portfolio will not enter
into any swap, cap, floor or collar transaction unless, at the time of entering
into such transaction, the unsecured long-term debt of the Counterparty,
combined with any credit enhancements, is rated at least A by S&P or Moody's or
has an equivalent rating from an NRSRO or is determined to be of equivalent
credit quality by the Adviser. If there is a default by the Counterparty, the
Portfolio may have contractual remedies pursuant to the agreements related to
the transaction. The swap market has grown substantially in recent years with a
large number of banks and investment banking firms acting both as principals and
as agents utilizing standardized swap documentation. As a result, the swap
market has become relatively liquid. Caps, floors and collars are more recent
innovations for which standardized documentation has not yet been fully
developed. Swaps, caps, floors and collars are considered illiquid for purposes
of the Portfolio's policy regarding illiquid securities, unless it is
determined, based upon continuing review of the trading markets for the specific
security, that such security is liquid. The Board of Trustees of the Portfolio
Trust has adopted guidelines and delegated to the Adviser the daily function of
determining and monitoring the liquidity of swaps, caps, floors and collars. The
Portfolio Trust's Board of Trustees, however, retains oversight focusing on
factors such as valuation, liquidity and availability of information and is
ultimately responsible for such determinations. The Staff of the SEC currently
takes the position that swaps, caps, floors and collars are illiquid, and are
subject to the Portfolio's limitation on investing in illiquid securities.
Eurodollar Instruments
The Portfolio may make investments in Eurodollar instruments. Eurodollar
instruments are U.S. dollar-denominated futures contracts or options thereon
which are linked to the London Interbank Offered Rate ("LIBOR"), although
foreign currency-denominated instruments are available from time to time.
Eurodollar futures contracts enable purchasers to obtain a fixed rate for the
lending of funds and sellers to obtain a fixed rate for borrowings. The
Portfolio might use Eurodollar futures contracts and options thereon to hedge
against changes in LIBOR, to which many interest rate swaps and fixed income
instruments are linked.
13
<PAGE>
Risks of Strategic Transactions Outside the United States
When conducted outside the United States, Strategic Transactions may not be
regulated as rigorously as in the United States, may not involve a clearing
mechanism and related guarantees, and are subject to the risk of governmental
actions affecting trading in, or the prices of, foreign securities, currencies
and other instruments. The value of such positions also could be adversely
affected by: (i) lesser availability than in the United States of data on which
to make trading decisions, (ii) delays in the Portfolio's ability to act upon
economic events occurring in foreign markets during non-business hours in the
United States, (iii) the imposition of different exercise and settlement terms
and procedures and margin requirements than in the United States, (iv) lower
trading volume and liquidity, and (v) other complex foreign political, legal and
economic factors. At the same time, Strategic Transactions may offer advantages
such as trading in instruments that are not currently traded in the United
States or arbitrage possibilities not available in the United States.
Use of Segregated Accounts
The Portfolio will hold securities or other instruments whose values are
expected to offset its obligations under the Strategic Transactions. The
Portfolio will cover Strategic Transactions as required by interpretive
positions of the SEC. The Portfolio will not enter into Strategic Transactions
that expose the Portfolio to an obligation to another party unless it owns
either (i) an offsetting position in securities or other options, futures
contracts or other instruments or (ii) cash, receivables or liquid, high grade
debt securities with a value sufficient to cover its potential obligations. The
Portfolio may have to comply with any applicable regulatory requirements for
Strategic Transactions, and if required, will set aside cash and other assets in
a segregated account with its custodian bank in the amount prescribed. In that
case, the Portfolio's custodian would maintain the value of such segregated
account equal to the prescribed amount by adding or removing additional cash or
other assets to account for fluctuations in the value of the account and the
Fund's obligations on the underlying Strategic Transactions. Assets held in a
segregated account would not be sold while the Strategic Transaction is
outstanding, unless they are replaced with similar assets and the Fund's
obligations on the underlying Strategic Transactions. As a result, there is a
possibility that segregation of a large percentage of the Portfolio's assets
could impede portfolio management or the Portfolio's ability to meet redemption
requests or other current obligations.
Short-Term Debt Securities
For defensive or temporary purposes, the Portfolio may invest in investment
grade money market instruments and short-term interest-bearing securities. Such
securities may be used to invest uncommitted cash balances, to maintain
liquidity to meet shareholder redemptions, or to take a defensive position
against potential stock market declines. The Portfolio's investments will
include U.S. Government obligations and obligations issued or guaranteed by any
U.S. Government agencies or instrumentalities, instruments of U.S. and foreign
banks (including negotiable certificates of deposit, non-negotiable fixed time
deposits and bankers' acceptances), repurchase agreements, prime commercial
paper of U.S. and foreign companies, and debt securities that make periodic
interest payments at variable or floating rates.
14
<PAGE>
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.
Portfolio Turnover
The Portfolio places no restrictions on portfolio turnover and it may sell
any portfolio security without regard to the period of time it has been held,
except as may be necessary to enable the Fund to maintain its status as a
regulated investment company under the Internal Revenue Code. The Portfolio may
therefore generally change its portfolio investments at any time in accordance
with the Adviser's appraisal of factors affecting any particular issuer or
market, or the economy in general.
INVESTMENT RESTRICTIONS
The Fund and the Portfolio have each adopted the following fundamental
policies. Each of the Fund's and the Portfolio's fundamental policies cannot be
changed unless the change is approved by the "vote of the outstanding voting
securities" of the Fund or the Portfolio, as the case may be, which phrase as
used herein means the lesser of (i) 67% or more of the voting securities of the
Fund or the Portfolio present at a meeting, if the holders of more than 50% of
the outstanding voting securities of the Fund or the Portfolio are present or
represented by proxy, or (ii) more than 50% of the outstanding voting securities
of the Fund or the Portfolio.
As a matter of fundamental policy, the Portfolio (Fund) may not:
1. Invest more than 25% of the current value of its total assets in any
single industry, provided that this restriction shall not apply to
U.S. Government securities.
2. Underwrite the securities of other issuers, except to the extent that,
in connection with the disposition of portfolio securities, the
Portfolio (Fund) may be deemed to be an underwriter under the
Securities Act of 1933.
3. Purchase real estate or real estate mortgage loans.
4. Purchase securities on margin (except that the Portfolio (Fund) may
obtain such short-term credits as may be necessary for the clearance
of purchases and sales of securities).
5. Purchase or sell commodities or commodity contracts except that the
Portfolio (Fund) may purchase and sell financial futures contracts and
options on financial futures contracts and engage in foreign currency
exchange transactions.
15
<PAGE>
6. With respect to at least 75% of its total assets, invest more than 5%
in the securities of any one issuer (other than the U.S. Government,
its agencies or instrumentalities) or acquire more than 10% of the
outstanding voting securities of any issuer.
7. Issue senior securities, borrow money, enter into reverse repurchase
agreements or pledge or mortgage its assets, except that the Fund may
borrow from banks in an amount up to 15% of the current value of its
total assets as a temporary measure for extraordinary or emergency
purposes (but not investment purposes), and pledge its assets to an
extent not greater than 15% of the current value of its total assets
to secure such borrowings; however, the Fund may not make any
additional investments while its outstanding borrowings exceed 5% of
the current value of its total assets.
8. Make loans of portfolio securities.
Notwithstanding the foregoing, the Fund may invest all of its assets (other
than assets which are not "investment securities" (as defined in the 1940 Act)
or are excepted by the SEC) in an open-end management investment company with
substantially the same investment objective as the Fund.
The following restrictions are not fundamental policies and may be changed
by the Trustees of the Portfolio Trust (Trust) without investor approval, in
accordance with applicable laws, regulations or regulatory policy. The Portfolio
(Fund) may not:
a. Make short sales of securities unless (a) after effect is given to any
such short sale, the total market value of all securities sold short
would not exceed 5% of the value of the Portfolio's (Fund's) net
assets or (b) at all times during which a short position is open it
owns an equal amount of such securities, or by virtue of ownership of
convertible or exchangeable securities it has the right to obtain
through the conversion or exchange of such other securities an amount
equal to the securities sold short.
b. Purchase or write options except to the extent described above under
"Strategic Transactions."
c. Invest in companies for the purpose of exercising control or
management.
d. Invest in interests in oil, gas or other exploration or development
programs.
e. Invest more than 5% of the assets of the Portfolio (Fund) in the
securities of any issuers which together with their corporate parents
have records of less than three years' continuous operation, including
the operation of any predecessor, other than (a) obligations issued or
guaranteed by the U.S. Government or its agencies and (b) repurchase
agreements fully collateralized by such securities.
f. Invest in securities of any company if any officer or director
(trustee) of the Portfolio Trust (Trust) or of the Portfolio's
investment adviser owns more than 1/2 of 1% of the outstanding
securities of such company and such officers and directors (trustees)
own in the aggregate more than 5% of the securities of such company.
16
<PAGE>
g. Invest more than an aggregate of 15% of the net assets of the
Portfolio (Fund) in (a) repurchase agreements which are not terminable
within seven days, (b) securities subject to legal or contractual
restrictions on resale or for which there are no readily available
market quotations and (c) other illiquid securities.
h. Purchase the securities of other investment companies, provided that
the Fund may make such a purchase as part of a merger, consolidation,
or acquisition of assets, and provided further that the Fund may make
such a purchase in the open market where no commission or profit to a
sponsor or dealer results from the purchase other than customary
brokers' commissions and then only to the extent permitted by the 1940
Act.
i. Invest more than 10% of its net assets in repurchase agreements (this
restriction is fundamental with respect to the Fund but not the
Portfolio).
Notwithstanding any non-fundamental policy, the Fund may invest all of its
assets (other than assets which are not "investment securities" (as defined in
the 1940 Act) or are excepted by the SEC) in an open-end management investment
company with substantially the same investment objective as the Fund.
If any percentage restriction described above is adhered to at the time of
investment, a subsequent increase or decrease in the percentage resulting from a
change in the value of the Portfolio's (Fund's) assets will not constitute a
violation of the restriction, except with respect to restriction (f) above.
In order to permit the sale of shares of the Fund in certain states, the
Board may, in its sole discretion, adopt restrictions on investment policy more
restrictive than those described above. Should the Board determine that any such
more restrictive policy is no longer in the best interest of the Fund and its
shareholders, the Fund may cease offering shares in the state involved and the
Board may revoke such restrictive policy. Moreover, if the states involved shall
no longer require any such restrictive policy, the Board may, in its sole
discretion, revoke such policy.
CALCULATION OF PERFORMANCE DATA
As indicated in the Prospectus, the Fund may, from time to time, advertise
certain total return information. The average annual total return of the Fund
for a period is computed by subtracting the net asset value per share at the
beginning of the period from the net asset value per share at the end of the
period (after adjusting for the reinvestment of any income dividends and capital
gain distributions), and dividing the result by the net asset value per share at
the beginning of the period. In particular, the average annual total return of
the Fund (T) is computed by using the redeemable value at the end of a specified
period of time (ERV) of a hypothetical initial investment of $1,000 (P) over a
period of time (N) according to the formula P(1+T)n=ERV. The average annual
total return quotations for the Fund for the one and five year periods ended
December 31, 1995 and since inception (September 1, 1990 to December 31, 1995)
are 29.83%, 23.71% and 23.23%, respectively.
17
<PAGE>
In addition to average annual return quotations, the Fund may quote
quarterly and annual performance on a net (with management and administration
fees deducted) and gross basis as follows:
Quarter/Year Net Gross
- --------------------------------------------------------------------------------
1/91 28.41 28.68
2/91 2.87 3.12
3/91 12.58 12.73
4/91 10.74 10.94
1991 64.71 65.95
1/92 3.16 3.38
2/92 (12.15) (11.92)
3/92 7.23 7.52
4/92 12.91 13.20
1992 9.74 10.83
1/93 0.62 0.84
2/93 3.45 3.70
3/93 14.45 14.67
4/93 7.63 7.83
1993 28.21 29.30
1/94 (3.48) (3.29)
2/94 (4.39) (4.19)
3/94 5.90 6.11
4/94 (1.42) (1.22)
1994 (3.66) (2.88)
1Q95 6.03 6.22
2Q95 2.55 2.73
3Q95 16.17 16.36
4Q95 2.80 2.98
1995 29.83 30.77
18
<PAGE>
These performance quotations should not be considered as representative of
the Fund's performance for any specified period in the future.
The Fund's performance may be compared in sales literature to the
performance of other mutual funds having similar objectives or to standardized
indices or other measures of investment performance. In particular, the Fund may
compare its performance to the Russell 2000 Index, which is generally considered
to be representative of unmanaged small capitalization stocks in the United
States markets, and the S&P 500 Index, which is generally considered to be
representative of the performance of unmanaged common stocks that are publicly
traded in the United States securities markets. Comparative performance may also
be expressed by reference to a ranking prepared by a mutual fund monitoring
service or by one or more newspapers, newsletters or financial periodicals.
Performance comparisons may be useful to investors who wish to compare the
Fund's past performance to that of other mutual funds and investment products.
Of course, past performance is not a guarantee of future results.
19
<PAGE>
MANAGEMENT
Trustees and Officers of the Trust and the Portfolio Trust
The Trustees and executive officers of the Trust are listed below. The
Trustees of the Portfolio Trust are identical to the Trustees of the Trust. The
officers of the Portfolio Trust are Messrs. Clayson, Ladd, Wood, Hollis and
Murray, and Mss. Banfield, Chase, Herrmann and Kneeland, who hold the same
office with the Portfolio Trust as with the Trust. All executive officers of the
Trust and the Portfolio Trust are affiliates of Standish, Ayer & Wood, Inc., the
Portfolio's investment adviser.
<TABLE>
<CAPTION>
Position Held Principal Occupation
Name, Address and Date of Birth With Trust During Past 5 Years
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
*D. Barr Clayson, 7/29/35 Vice President Vice President and Managing
c/o Standish, Ayer & Wood, Inc. and Trustee Director, Standish, Ayer
One Financial Center & Wood, Inc.; President,
Boston, MA 02111 Standish International
Management Company, L.P.
Samuel C. Fleming, 9/30/40 Trustee Chairman of the Board and
c/o Decision Resources, Inc. Chief Executive Officer,
1100 Winter Street Decision Resources, Inc.;
Waltham, MA 02154 through 1989, Senior V.P. Arthur D. Little
Benjamin M. Friedman, 8/5/44 Trustee William Joseph Maier
c/o Harvard University Professor of Political
Cambridge, MA 02138 Economy, Harvard University
John H. Hewitt, 4/11/35 Trustee Trustee, The Peabody
P.O. Box 307 Foundation; Trustee,
So. Woodstock, VT 05071 Visiting Nurse Alliance of
Vermont and New Hampshire
Edward H. Ladd*, 1/3/38 Trustee and Chairman of the Board and
c/o Standish, Ayer & Wood, Inc. Vice President Managing Director,
One Financial Center Standish, Ayer & Wood, Inc.
Boston, MA 02111 since 1990; formerly,
President of Standish, Ayer
& Wood, Inc.
Caleb Loring III, 11/14/43 Trustee Trustee, Essex Street
c/o Essex Street Associates Associates (family
P.O. Box 5600 investment trust office);
Beverly Farms, MA 01915 Director, Holyoke Mutual
Insurance Company
Richard S. Wood*, 5/2/54 President and Vice President, Secretary
c/o Standish, Ayer & Wood, Inc. Trustee and Director, Standish,
One Financial Center Ayer & Wood, Inc.;
Boston, MA 02111 Executive Vice President,
Standish International
Management Company, L.P.
Richard C. Doll, 7/8/48 Vice President Vice President and
c/o Standish, Ayer & Wood, Inc. Director, Standish, Ayer
One Financial Center & Wood, Inc.
Boston, MA 02111
James E. Hollis III, 11/21/48 Executive Vice Vice President and
c/o Standish, Ayer & Wood, Inc. President Director, Standish, Ayer
One Financial Center & Wood, Inc.
Boston, MA 02111
20
<PAGE>
Position Held Principal Occupation
Name, Address and Date of Birth With Trust During Past 5 Years
- --------------------------------------------------------------------------------------------------------------------
David W. Murray, 5/5/40 Treasurer and Vice President, Treasurer
c/o Standish, Ayer & Wood, Inc. Secretary and Director, Standish,
One Financial Center Ayer & Wood, Inc.
Boston, MA 02111
Caleb F. Aldrich, 9/20/57 Vice President Vice President and
c/o Standish, Ayer & Wood, Inc. Director, Standish, Ayer
One Financial Center & Wood, Inc.
Boston, MA 02111
Beverly E. Banfield, 7/6/56 Vice President Vice President and
c/o Standish, Ayer & Wood, Inc. Compliance Officer,
One Financial Center Standish, Ayer & Wood, Inc.
Boston, MA 02111 Assistant Vice President and Compliance Officer,
Freedom Capital Management Corp. (1989-1992)
Nicholas S. Battelle, 6/24/42 Vice President Vice President and
c/o Standish, Ayer & Wood, Inc. Director, Standish, Ayer
One Financial Center & Wood, Inc.
Boston, MA 02111
Walter M. Cabot, 1/6/33 Vice President Senior Advisor and
c/o Standish, Ayer & Wood, Inc. Director, Standish, Ayer
One Financial Center & Wood, Inc.; prior to
Boston, MA 02111 1991, President, Harvard Management Company
David H. Cameron, 11/2/55 Vice President Vice President and
c/o Standish, Ayer & Wood, Inc. Director, Standish, Ayer
One Financial Center & Wood, Inc.
Boston, MA 02111
Karen K. Chandor, 2/13/50 Vice President Vice President and
c/o Standish, Ayer & Wood, Inc. Director, Standish, Ayer
One Financial Center & Wood, Inc.
Boston, MA 02111
Lavinia B. Chase, 6/4/46 Vice President Vice President, Standish,
c/o Standish, Ayer & Wood, Inc. Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Susan B. Coan, 5/1/52 Vice President Vice President, Standish,
c/o Standish, Ayer & Wood, Inc. Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
W. Charles Cook II, 7/16/63 Vice President Vice President, Standish,
c/o Standish, Ayer & Wood, Inc. Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Joseph M. Corrado, 8/13/55 Vice President Vice President and Associate Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
21
<PAGE>
Position Held Principal Occupation
Name, Address and Date of Birth With Trust During Past 5 Years
- --------------------------------------------------------------------------------------------------------------------
Dolores S. Driscoll, 2/17/48 Vice President Vice President and Managing
c/o Standish, Ayer & Wood, Inc. Director, Standish, Ayer
One Financial Center & Wood, Inc.
Boston, MA 02111
Mark A. Flaherty, 4/24/59 Vice President Vice President,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Anne P. Herrmann, 1/26/56 Vice President Mutual Fund Administrator,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Ann S. Higgins, 4/8/35 Vice President Vice President, Standish,
c/o Standish, Ayer & Wood, Inc. Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Denise B. Kneeland, 8/19/51 Vice President Senior Operations Manager,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center since January, 1996; formerly,
Boston, MA 02111 Vice President, Scudder, Clark, and Stevens
Raymond J. Kubiak, 9/3/57 Vice President Vice President and
c/o Standish, Ayer & Wood, Inc. Director, Standish, Ayer
One Financial Center & Wood, Inc.
Boston, MA 02111
Maria D. Furman, 2/3/54 Vice President Vice President and
c/o Standish, Ayer & Wood, Inc. Director, Standish, Ayer
One Financial Center & Wood, Inc.
Boston, MA 02111
Phillip D. Leonardi, 4/24/62 Vice President Vice President, Standish,
c/o Standish, Ayer & Wood, Inc. Ayer & Wood, Inc. since
One Financial Center November 1993; formerly,
Boston, MA 02111 Investment Sales, Cigna Corporation (1993)
and Travelers Corporation (1984-1993)
Laurence A. Manchester, 5/24/43 Vice President Vice President and
c/o Standish, Ayer & Wood, Inc. Director, Standish, Ayer
One Financial Center & Wood, Inc.
Boston, MA 02111
George W. Noyes, 11/12/44 Vice President President and Managing
c/o Standish, Ayer & Wood, Inc. Director, Standish, Ayer
One Financial Center & Wood, Inc.
Boston, MA 02111
Arthur H. Parker, 8/12/35 Vice President Vice President and
c/o Standish, Ayer & Wood, Inc. Director, Standish, Ayer
One Financial Center & Wood, Inc.
Boston, MA 02111
22
<PAGE>
Position Held Principal Occupation
Name, Address and Date of Birth With Trust During Past 5 Years
- --------------------------------------------------------------------------------------------------------------------
Jennifer A. Pline, 3/8/60 Vice President Vice President, Standish,
c/o Standish, Ayer & Wood, Inc. Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Howard B. Rubin, 10/29/59 Vice President Vice President and
c/o Standish, Ayer & Wood, Inc. Director, Standish, Ayer
One Financial Center & Wood, Inc.
Boston, MA 02111
Michael C. Schoeck, 10/24/55 Vice President Vice President, Standish,
c/o Standish, Ayer & Wood, Inc. Ayer & Wood, Inc. since
One Financial Center August, 1993; formerly,
Boston, MA 02111 Vice President,
Commerzbank, Frankfurt, Germany
Austin C. Smith, 7/25/42 Vice President Vice President and
c/o Standish, Ayer & Wood, Inc. Director, Standish, Ayer
One Financial Center & Wood, Inc.
Boston, MA 02111
Stephen A. Smith, 3/13/49 Vice President Vice President, since
c/o Standish, Ayer & Wood, Inc. November 2, 1993; formerly,
One Financial Center Standish, Ayer & Wood, Inc.
Boston, MA 02111 Consultant Cambridge
David C. Stuehr, 3/1/58 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
James W. Sweeney, 5/15/59 Vice President Vice President and
c/o Standish, Ayer & Wood, Inc. Director, Standish, Ayer
One Financial Center & Wood, Inc.
Boston, MA 02111
Ralph S. Tate, 4/2/47 Vice President Vice President and
c/o Standish, Ayer & Wood, Inc. Director, Standish, Ayer
One Financial Center & Wood, Inc. since April,
Boston, MA 02111 1990; formerly Vice
President, Aetna Life & Casualty
Michael W. Thompson, 3/31/56 Vice President Vice President, Standish,
c/o Standish, Ayer & Wood, Inc. Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Christopher Van Alstyne, 3/24/60 Vice President Vice President,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
*Indicates that Trustee is an interested person of the Trust or the Portfolio
Trust for purposes of the 1940 Act.
</TABLE>
23
<PAGE>
Compensation of Trustees and Officers
Each of the Trust and the Portfolio Trust pays no compensation to the
Trustees of the Trust or the Portfolio Trust affiliated with Standish as the
Administrator of the Fund (the "Fund Administrator") or the Adviser,
respectively, or to the Trusts's and Portfolio Trust's officers. None of the
Trustees or officers have engaged in any financial transactions (other than the
purchase or redemption of the Fund's shares) with the Trust, the Portfolio Trust
or the Adviser.
The following table sets forth all compensation paid to the Trust's
Trustees as of the Trust's fiscal year ended December 31, 1995:
<TABLE>
<CAPTION>
Pension or Retirement Total Compensation
Aggregate Compensation Benefits Accrued as from Fund and
Name of Trustee from the Fund Part of Fund's Expenses Other Funds in Complex*
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
D. Barr Clayson $0 $0 $0
Richard C. Doll** 0 0 0
Samuel C. Fleming 482 0 41,750
Benjamin M. Friedman 424 0 36,750
John H. Hewitt 424 0 36,750
Edward H. Ladd 0 0 0
Caleb Loring, III 424 0 36,750
Richard S. Wood 0 0 0
* As of the date of this Statement of Additional Information there were
18 funds in the fund complex.
** Mr. Doll resigned as a Trustee effective December 6, 1995.
</TABLE>
- --------------------------------------------------------------------------------
Certain Shareholders
At March 1, 1996, Trustees and officers of the Trust and the Portfolio as a
group beneficially owned (i.e., had voting and/or investment power) less than 1%
of the then outstanding shares of the Fund. On the same date each of the
following institutions beneficially owned 5% or more of the then outstanding
shares of the Fund:
Percentage of
Name and Address Outstanding Shares
- --------------------------------------------------------------------------------
Rosemount Aerospace 8%
14300 Judicial Road
Burnsville, MN 55306
Bingham, Dana & Gould 8%
150 Federal Street
Boston, MA 02110
Lutheran Health Systems Employee Pension 6%
Harris Trust & Savings Bank
4310 17th Avenue, S.W.
Fargo, ND 58106
24
<PAGE>
Investment Adviser of the Portfolio Trust
Standish serves as investment adviser to the Portfolio pursuant to a
written investment advisory agreement with the Portfolio Trust. Prior to the
close of business on April 26, 1996, Standish managed directly the assets of the
Fund pursuant to an investment advisory agreement. This agreement was terminated
on such date subsequent to the approval by the Fund's shareholders on March 29,
1996 to implement certain changes in the Fund's investment restrictions which
enable the Fund to invest all of its investable assets in the Portfolio. The
Adviser is a Massachusetts corporation organized in 1933 and is registered under
the 1940 Act.
The following, constituting all of the Directors and all of the
shareholders of the Adviser, are the Adviser's controlling persons: Caleb F.
Aldrich, Nicholas S. Battelle, Walter M. Cabot, Sr., David H. Cameron, Karen K.
Chandor, D. Barr Clayson, Richard C. Doll, Dolores S. Driscoll, Mark A.
Flaherty, Maria D. Furman, James E. Hollis III, Raymond J. Kubiak, Edward H.
Ladd, Laurence A. Manchester, David W. Murray, George W. Noyes, Arthur H.
Parker, Howard B. Rubin, Austin C. Smith, David C. Stuehr, James J. Sweeney,
Ralph S. Tate and Richard S. Wood.
Certain services provided by the Adviser under the advisory agreement are
described in the Prospectus. These services are provided without reimbursement
by the Portfolio for any costs incurred. Under the investment advisory
agreement, the Adviser is paid a fee based upon a percentage of the Portfolio's
average daily net asset value computed as described in the Prospectus. The rate
and time at which the fee is paid and expense limits voluntarily agreed to by
the Adviser are described in the Prospectus. For services to the Fund during the
fiscal years ended December 31, 1993, 1994 and 1995, the Adviser received fees
from the Fund of $368,093, $557,359 and $871,879, respectively.
Pursuant to the investment advisory agreement, the Portfolio bears expenses
of its operations other than those incurred by the Adviser pursuant to the
investment advisory agreement. Among other expenses, the Portfolio will pay
share pricing expenses; custodian fees and expenses; administration fees; legal
and auditing fees and expenses; expenses of notices and report to
interest-holders; registration and reporting fees and expenses; and Trustees'
fees and expenses.
25
<PAGE>
Unless terminated as provided below, the investment advisory agreement
continues in full force and effect until April 26, 1998 and for successive
periods of one year thereafter, but only so long as each such continuance is
approved annually (i) by either the Trustees of the Portfolio Trust or by the
"vote of a majority of the outstanding voting securities" of the Portfolio, and,
in either event, (ii) by vote of a majority of the Trustees of the Portfolio
Trust who are not parties to the investment advisory agreement or "interested
persons" (as defined in the 1940 Act) of any such party, cast in person at a
meeting called for the purpose of voting on such approval. The investment
advisory agreement may be terminated at any time without the payment of any
penalty by vote of the Trustees of the Portfolio Trust or by the "vote of a
majority of the outstanding voting securities" of the Portfolio or by the
Adviser, on sixty days' written notice to the other parties. The investment
advisory agreement terminates in the event of its assignment as defined in the
1940 Act.
In an attempt to avoid any potential conflict with portfolio transactions
for the Portfolio, the Adviser, the Principal Underwriter, the Trust and the
Portfolio Trust have each adopted extensive restrictions on personal securities
trading by personnel of the Adviser and its affiliates. These restrictions
include: pre-clearance of all personal securities transactions and a prohibition
of purchasing initial public offerings of securities. These restrictions are a
continuation of the basic principle that the interests of the Fund and its
shareholders, and the Portfolio and its investors come before those of the
Adviser, its affiliates and their employees.
Administrator of the Fund
Standish also serves as the administrator to the Fund (the "Fund
Administrator") pursuant to a written administration agreement with the Trust on
behalf of the Fund. Certain services provided by the Fund Administrator under
the administration agreement are described in the Prospectus. For these
services, the Fund Administrator currently does not receive any additional
compensation. The Trustees of the Trust may, however, determine in the future to
compensate the Fund Administrator for its administrative services. The
administration agreement provides that if the total expenses of the Fund and the
Portfolio in any fiscal year exceed the most restrictive expense limitation
applicable to the Fund in any state in which shares of the Fund are then
qualified for sale, the compensation due the Fund Administrator shall be reduced
by the amount of the excess, by a reduction or refund thereof at the time such
compensation is payable after the end of each calendar month during the fiscal
year, subject to readjustment during the year. Currently, the most restrictive
state expense limitation provision limits the Fund's expenses to 2 1/2% of the
first $30 million of average net assets, 2% of the next $70 million of such net
assets and 1 1/2% of such net assets in excess of $100 million.
The Fund's administration agreement can be terminated by either party on
not more than sixty days' written notice.
26
<PAGE>
Administrator of the Portfolio
IBT Trust Company (Cayman) Ltd., P.O. Box 501, Grand Cayman, Cayman
Islands, BWI, serves as the administrator to the Portfolio (the "Portfolio
Administrator") pursuant to a written administration agreement with the
Portfolio Trust on behalf of the Portfolio. The Portfolio Administrator provides
the Portfolio Trust with office space for managing its affairs, and with certain
clerical services and facilities. For these services, the Portfolio
Administrator currently receives a fee from the Portfolio in the amount of
$7,500 annually.
The Portfolio's administration agreement can be terminated by either party
on not more than sixty days' written notice.
Distributor of the Fund
Standish Fund Distributors, L.P. (the "Principal Underwriter"), an
affiliate of the Adviser, serves as the Trust's exclusive principal underwriter
and holds itself available to receive purchase orders for the Fund's shares. In
that capacity, the Principal Underwriter has been granted the right, as agent of
the Trust, to solicit and accept orders for the purchase of the Fund's shares in
accordance with the terms of the Underwriting Agreement between the Trust and
the Principal Underwriter. Pursuant to the Underwriting Agreement, the Principal
Underwriter has agreed to use its best efforts to obtain orders for the
continuous offering of the Fund's shares. The Principal Underwriter receives no
commissions or other compensation for its services, and has not received any
such amounts in any prior year. The Underwriting Agreement shall continue in
effect with respect to the Fund until two years after its execution and for
successive periods of one year thereafter only if it is approved at least
annually thereafter (i) by a vote of the holders of a majority of the Fund's
outstanding shares or by the Trustees of the Trust or (ii) by a vote of a
majority of the Trustees of the Trust who are not "interested persons" (as
defined by the 1940 Act) of the parties to the Underwriting Agreement, cast in
person at a meeting called for the purpose of voting on such approval. The
Underwriting Agreement will terminate automatically if assigned by either party
thereto and is terminable at any time without penalty by a vote of a majority of
the Trustees of the Trust, a vote of a majority of the Trustees who are not
"interested persons" of the Trust, or by a vote of the holders of a majority of
the Fund's outstanding shares, in any case without payment of any penalty on not
more than 60 days' written notice to the other party. The offices of the
Principal Underwriter are located at One Financial Center, 26th Floor, Boston,
Massachusetts 02111.
REDEMPTION OF SHARES
Detailed information on redemption of shares is included in the Prospectus.
The Trust may suspend the right to redeem Fund shares or postpone the date of
payment upon redemption for more than seven days (i) for any period during which
the New York Stock Exchange is closed (other than customary weekend or holiday
closings) or trading on the exchange is restricted; (ii) for any period during
which an emergency exists as a result of which disposal by the Portfolio of
securities owned by it or determination by the Portfolio of the value of its net
assets is not reasonably practicable; or (iii) for such other periods as the SEC
may permit for the protection of shareholders of the Fund.
27
<PAGE>
The Trust intends to pay redemption proceeds in cash for all Fund shares
redeemed, but under certain conditions, the Trust may make payment wholly or
partly in portfolio securities from the Portfolio, in conformity to the
applicable rule of the SEC. Portfolio securities paid upon redemption of Fund
shares will be valued at their then current market value. The Trust, on behalf
of each of its series, has elected to be governed by the provisions of Rule
18f-1 under the 1940 Act which limits the Fund's obligation to make cash
redemption payments to any shareholder during any 90-day period to the lesser of
$250,000 or 1% of the Fund's net asset value at the beginning of such period. An
investor may incur brokerage costs in converting portfolio securities received
upon redemption to cash. The Portfolio has advised the Trust that the Portfolio
will not redeem in-kind except in circumstances in which the Fund is permitted
to redeem in-kind or except in the event the Fund completely withdraws its
interest from the Portfolio.
PORTFOLIO TRANSACTIONS
The Adviser is responsible for placing the Portfolio's portfolio
transactions and will do so in a manner deemed fair and reasonable to the
Portfolio and not according to any formula. The primary consideration in all
portfolio transactions will be prompt execution of orders in an efficient manner
at the most favorable price. In selecting brokers and in negotiating
commissions, the Adviser will consider the firm's reliability, the quality of
its execution services on a continuing basis and its financial condition. When
more than one firm is believed to meet these criteria, preference may be given
to firms which also sell shares of the Fund. In addition, if the Adviser
determines in good faith that the amount of commissions charged by a broker is
reasonable in relation to the value of the brokerage and research services
provided by such broker, the Fund may pay commissions to such broker in an
amount greater than the amount another firm may charge. Research services may
include (i) furnishing advice as to the value of securities, the advisability of
investing in, purchasing or selling securities, and the availability of
securities or purchasers or sellers of securities, (ii) furnishing analyses and
reports concerning issuers, industries, securities, economic factors and trends,
portfolio strategy, and the performance of accounts, and (iii) effecting
securities transactions and performing functions incidental thereto (such as
clearance and settlement). Research services furnished by firms through which
the Portfolio effects its securities transactions may be used by the Adviser in
servicing other accounts; not all of these services may be used by the Adviser
in connection with the Portfolio. The investment advisory fee paid by the
Portfolio under the advisory agreement will not be reduced as a result of the
Adviser's receipt of research services.
For the years ended December 31, 1993, 1994 and 1995 the Fund paid
brokerage commissions of $172,793, $512,334 and $859,777.01, respectively. For
the fiscal year ended December 31, 1995, the Fund paid brokerage commissions of
$859,777.01 on portfolio transactions aggregating $334,244,688.86. All such
commissions were paid on portfolio transactions executed by brokers who provided
research and other statistical and factual information. During the fiscal year
ended December 31, 1995, the Fund did not acquire securities of its regular
brokers or dealers or their parents.
28
<PAGE>
The Adviser also places portfolio transactions for other advisory accounts.
The Adviser will seek to allocate portfolio transactions equitably whenever
concurrent decisions are made to purchase or sell securities by the Portfolio
and another advisory account. In some cases, this procedure could have an
adverse effect on the price or the amount of securities available to the
Portfolio. In making such allocations, the main factors considered by the
Adviser will be the respective investment objectives, the relative size of
portfolio holdings of the same or comparable securities, the availability of
cash for investment, the size of investment commitments generally held, and
opinions of the persons responsible for recommending the investment.
DETERMINATION OF NET ASSET VALUE
The Fund's net asset value per share is computed on each business day on
which the New York Stock Exchange is open (a "Business Day"). Currently the New
York Stock Exchange is not open on weekends, New Year's Day, Presidents' Day,
Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day. The net asset value of the Fund's shares is determined as of the
close of regular trading on the New York Stock Exchange (currently 4:00 p.m. New
York City time) and is computed by dividing the value of all securities and
other assets of the Fund (substantially all of which will be represented by the
Fund's investment in the Portfolio) less all liabilities by the number of Fund
shares outstanding, and rounding to the nearest cent per share. Expenses and
fees of the fund are accrued daily and taken into account for the purpose of
determining net asset value.
Portfolio securities are valued at the last sale prices on the exchange or
national securities market on which they are primarily traded. Securities not
listed on an exchange or national securities market, or securities for which
there were no reported transactions, are valued at the last quoted bid prices.
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.
The value of the Portfolio's net assets (i.e., the value of its securities
and other assets less its liabilities, including expenses payable or accrued) is
determined at the same time and on the same days as the net asset value per
share of the Fund is determined. Each investor in the Portfolio, including the
Fund, may add to or reduce its investment in the Portfolio on each Business Day.
As of 4:00 p.m. (Eastern time) on each Business Day, the value of each
investor's interest in the Portfolio will be determined by multiplying the net
asset value of the Portfolio by the percentage representing that investor's
share of the aggregate beneficial interests in the Portfolio. Any additions or
reductions which are to be effected on that day will then be effected. The
investor's percentage of the aggregate beneficial interests in the Portfolio
will then be recomputed as the percentage equal to the fraction (i) the
numerator of which is the value of such investor's investment in the Portfolio
as of 4:00 p.m. on such day plus or minus, as the case may be, the amount of net
additions to or reductions in the investor's investment in the Portfolio
effected on such day, and (ii) the denominator of which is the aggregate net
asset value of the Portfolio as of 4:00 p.m. on such day plus or minus, as the
case may be, the amount of the net additions to or reductions in the aggregate
investments in the Portfolio by all investors in the Portfolio. The percentage
so determined will then be applied to determine the value of the investor's
interest in the Portfolio as of 4:00 p.m. on the following Business Day.
29
<PAGE>
TAXATION
Each series of the Trust, including the Fund, is treated as a separate
entity for accounting and tax purposes. The Fund has qualified and elected to be
treated as a "regulated investment company" ("RIC") under Subchapter M of the
Internal Revenue Code of 1986, as amended (the "Code"), and intends to continue
to so qualify in the future. As such and by complying with the applicable
provisions of the Code regarding the sources of its income, the timing of its
distributions, and the diversification of its assets, the Fund will not be
subject to Federal income tax on its investment company taxable income (i.e.,
all income, after reduction by deductible expenses, other than its "net capital
gain," which is the excess, if any, of its net long-term capital gain over its
net short-term capital loss) and net capital gain which are distributed to
shareholders in accordance with the timing requirements of the Code.
The Trust anticipates that the Portfolio will be treated as a partnership
for federal income tax purposes. As such, the Portfolio is not subject to
federal income taxation. Instead, the Fund must take into account, in computing
its federal income tax liability, its share of the Portfolio's income, gains,
losses, deductions, credits and tax preference items, without regard to whether
it has received any cash distributions from the Portfolio. Because the Fund
invests its assets in the Portfolio, the Portfolio normally must satisfy the
applicable source of income and diversification requirements in order for the
Fund to satisfy them. The Portfolio will allocate at least annually among its
investors, including the Fund, each investor's distributive share of the
Portfolio's net investment income, net realized capital gains, and any other
items of income, gain, loss, deduction or credit. The Portfolio will make
allocations to the Fund in accordance with the Code and applicable regulations
and will make moneys available for withdrawal at appropriate times and in
sufficient amounts to enable the Fund to satisfy the tax distribution
requirements that apply to the Fund and that must be satisfied in order to avoid
Federal income and/or excise tax on the Fund. For purposes of applying the
requirements of the Code regarding qualification as a RIC, the Fund will be
deemed (i) to own its proportionate share of each of the assets of the Portfolio
and (ii) to be entitled to the gross income of the Portfolio attributable to
such share.
The Fund will be subject to a 4% non-deductible federal excise tax on
certain amounts not distributed (and not treated as having been distributed) on
a timely basis in accordance with annual minimum distribution requirements. The
Fund intends under normal circumstances to avoid liability for such tax by
satisfying such distribution requirements.
The Fund is not subject to Massachusetts corporate excise or franchise
taxes. Provided that the Fund qualifies as a regulated investment company under
the Code, it will also not be required to pay any Massachusetts income tax.
30
<PAGE>
The Fund will not distribute long-term or short-term capital gain realized
in any year to the extent that a capital loss is carried forward from prior
years against such gain. For federal income tax purposes, the Fund is permitted
to carry forward a net capital loss in any year to offset its own net capital
gains, if any, during the eight years following the year of the loss. To the
extent subsequent capital gains are offset by such losses, they would not result
in federal income tax liability to the Fund and, as noted above, would not be
distributed as such to shareholders.
Limitations imposed by the Code on regulated investment companies like the
Fund may restrict the Portfolio's ability to enter into futures, options and
currency forward transactions.
Certain options, futures and forward foreign currency transactions
undertaken by the Portfolio may cause the Portfolio to recognize gains or losses
from marking to market even though the Portfolio's positions have not been sold
or terminated and affect the character as long-term or short-term (or, in the
case of certain currency forwards, options and futures, as ordinary income or
loss) and timing of some capital gains and losses realized by the Portfolio and
allocable to the Fund. Any net mark to market gains may also have to be
distributed by the Fund to satisfy the distribution requirements referred to
above even though no corresponding cash amounts may concurrently be received,
possibly requiring the disposition by the Portfolio of portfolio securities or
borrowing to obtain the necessary cash. Also, certain of the Portfolio's losses
on the Portfolio's transactions involving options, futures or forward contracts
and/or offsetting Portfolio positions may be deferred rather than being taken
into account currently in calculating the Portfolio's taxable income or gain.
Certain of the applicable tax rules may be modified if the Portfolio is eligible
and chooses to make one or more of certain tax elections that may be available.
Because the Fund's income, gains and losses consist primarily of its share of
the income, gains and losses of the Portfolio, which are directly affected by
the provisions described in this paragraph, these transactions may affect the
amount, timing and character of the Fund's distributions to shareholders. The
Portfolio will take into account the special tax rules (including consideration
of available elections) applicable to options, futures or forward contracts in
order to minimize any potential adverse tax consequences.
The Federal income tax rules applicable to interest rate or currency swaps,
caps, floors and collars are unclear in certain respects, and the Portfolio may
be required to account for these instruments under tax rules in a manner that,
under certain circumstances, may limit its transactions in these instruments.
If the Portfolio acquires stock in certain non-U.S. corporations that
receive at least 75% of their annual gross income from passive sources (such as
interest, dividends, rents, royalties or capital gain) or hold at least 50% of
their assets in investments producing such passive income ("passive foreign
investment companies"), the Fund could be subject to Federal income tax and
additional interest charges on its allocable portion of "excess distributions"
received from such companies or gain from the sale of stock in such companies,
even if all income or gain actually allocated to the Fund is timely distributed
to its shareholders. The Fund would not be able to pass through to its
shareholders any credit or deduction for such a tax. Certain elections may, if
available, ameliorate these adverse tax consequences, but any such election
would require the Fund to recognize taxable income or gain without the
concurrent receipt of cash. The Portfolio may limit and/or manage its stock
holdings in passive foreign investment companies to minimize the Fund's tax
liability or maximize its return from these investments.
31
<PAGE>
Foreign exchange gains and losses realized by the Portfolio in connection
with certain transactions involving foreign currency-denominated debt
securities, if any, certain foreign currency futures and options, foreign
currency forward contracts, foreign currencies, or payables or receivables
denominated in a foreign currency are subject to Section 988 of the Code, which
generally causes such gains and losses to be treated as ordinary income and
losses and, because the Fund invests in the Portfolio, may affect the amount,
timing and character of Fund distributions to shareholders. Any such
transactions that are not directly related to the Portfolio's investment in
stock or securities, possibly including speculative currency positions or
currency derivatives not used for hedging purposes, may increase the amount of
gain it is deemed to recognize from the sale of certain investments held for
less than three months. The Fund's share of such gain (plus any such gain the
Fund may realize from other sources) is limited under the Code to less than 30%
of the Fund's annual gross income. Such transactions could under future Treasury
regulations produce income not among the types of "qualifying income" from which
the Fund must derive at least 90% of its annual gross income.
The Portfolio may be subject to withholding and other taxes imposed by
foreign countries with respect to its investments in foreign securities. Tax
conventions between certain countries and the U.S. may reduce or eliminate such
taxes. Investors in the Fund would be entitled to claim U.S. foreign tax credits
or deductions with respect to such taxes, subject to certain provisions and
limitations contained in the Code, only if more than 50% of the value of the
Fund's total assets at the close of any taxable year were to consist of stock or
securities of foreign corporations and the Fund were to file an election with
the Internal Revenue Service. Because the investments of the Portfolio are such
that the Fund will not meet this 50% requirement, shareholders of the Fund will
not directly take into account the foreign taxes, if any, paid by the Portfolio
and allocable to the Fund, and will not be entitled to any related tax
deductions or credits. Such taxes will reduce the amounts the Fund would
otherwise have available to distribute.
Distributions from the Fund's current or accumulated earnings and profits
("E&P"), as computed for Federal income tax purposes, will be taxable as
described in the Fund's Prospectus whether taken in shares or in cash.
Distributions, if any, in excess of E&P will constitute a return of capital,
which will first reduce an investor's tax basis in Fund shares and thereafter
(after such basis is reduced to zero) will generally give rise to capital gains.
Shareholders electing to receive distributions in the form of additional shares
will have a cost basis for federal income tax purposes in each share so received
equal to the amount of cash they would have received had they elected to receive
the distributions in cash, divided by the number of shares received.
32
<PAGE>
For purposes of the dividends received deduction available to corporations,
dividends received by the Portfolio and allocable to the Fund, if any, from U.S.
domestic corporations in respect of the stock of such corporations held by the
Portfolio, for U.S. Federal income tax purposes, for at least a minimum holding
period, generally 46 days, and distributed and designated by the Fund may be
treated as qualifying dividends. Corporate shareholders must meet the minimum
holding period requirement referred to above with respect to their shares of the
Fund in order to qualify for the deduction and, if they borrow to acquire such
shares, may be denied a portion of the dividends received deduction. The entire
qualifying dividend, including the otherwise deductible amount, will be included
in determining the excess (if any) of a corporate shareholder's adjusted current
earnings over its alternative minimum taxable income, which may increase its
alternative minimum tax liability.
Additionally, any corporate shareholder should consult its tax adviser
regarding the possibility that its basis in its shares may be reduced, for
Federal income tax purposes, by reason of "extraordinary dividends" received
with respect to the shares, for the purpose of computing its gain or loss on
redemption or other disposition of the shares.
At the time of an investor's purchase of Fund shares, a portion of the
purchase price is often attributable to undistributed net investment income
and/or realized or unrealized appreciation in the Fund's share of the
Portfolio's portfolio. Consequently, subsequent distributions by the Fund from
such income and/or appreciation may be taxable to such investor, even if the net
asset value of the investor's shares is, as a result of the distributions,
reduced below the investor's cost for such shares, and the distributions in
reality represent a return of a portion of the purchase price.
Upon a redemption (including a repurchase) of shares of the Fund, a
shareholder may realize a taxable gain or loss, depending upon the difference
between the redemption proceeds and the shareholder's tax basis in his shares.
Such gain or loss will be treated as capital gain or loss if the shares are
capital assets in the shareholder's hands and will be long-term or short-term,
depending upon the shareholder's tax holding period for the shares. Any loss
realized on a redemption may be disallowed to the extent the shares disposed of
are replaced with other shares of the Fund within a period of 61 days beginning
30 days before and ending 30 days after the shares are disposed of, such as
pursuant to automatic dividend reinvestments. In such a case, the basis of the
shares acquired will be adjusted to reflect the disallowed loss. Any loss
realized upon the redemption of shares with a tax holding period of six months
or less will be treated as a long-term capital loss to the extent of any amounts
treated as distributions of long-term capital gain with respect to such shares.
Different tax treatment, including penalties on certain excess
contributions and deferrals, certain pre-retirement and post-retirement
distributions and certain prohibited transactions, is accorded to accounts
maintained as qualified retirement plans. Shareholders should consult their tax
advisers for more information.
33
<PAGE>
The foregoing discussion relates solely to U.S. Federal income tax law as
applicable to U.S. persons (i.e., U.S. citizens or residents and U.S. domestic
corporations, partnerships, trusts or estates) subject to tax under such law.
The discussion does not address special tax rules applicable to certain classes
of investors, such as tax-exempt entities, insurance companies, and financial
institutions. Dividends, capital gain distributions, and ownership of or gains
realized on the redemption (including an exchange) of Fund shares may also be
subject to state and local taxes. Shareholders should consult their own tax
advisers as to the Federal, state or local tax consequences of ownership of
shares of, and receipt of distributions from, the Fund in their particular
circumstances.
Non-U.S. investors not engaged in a U.S. trade or business with which their
investment in the Fund is effectively connected will be subject to U.S. Federal
income tax treatment that is different from that described above. These
investors may be subject to nonresident alien withholding tax at the rate of 30%
(or a lower rate under an applicable tax treaty) on amounts treated as ordinary
dividends from the Fund and, unless an effective IRS Form W-8 or authorized
substitute is on file, to 31% backup withholding on certain other payments from
the Fund. Non-U.S. investors should consult their tax advisers regarding such
treatment and the application of foreign taxes to an investment in the Fund.
THE FUND AND ITS SHARES
The Fund is an investment series of the 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 of the Trust have authority to issue an
unlimited number of shares of beneficial interest, par value $.01 per share, of
the Fund. Each share represents an equal proportionate interest in the Fund with
each other share and is entitled to such dividends and distributions as are
declared by the Trustees. Shareholders are not entitled to any preemptive,
conversion or subscription rights. All shares, when issued, will be fully paid
and non-assessable by the Trust. Upon any liquidation of the Fund, shareholders
are entitled to share pro rata in the net assets available for distribution.
Pursuant to the Declaration, the Trustees may create additional funds by
establishing additional series of shares in the Trust. The establishment of
additional series would not affect the interests of current shareholders in the
Fund. As of the date of this Statement of Additional Information, the Trustees
have established fourteen other series of the Trust that publicly offer their
shares. Pursuant to the Declaration, the Board may establish and issue multiple
classes of shares for each series of the Trust. As of the date of this Statement
of Additional Information, the Trustees do not have any plan to establish
multiple classes of shares for the Fund.
All Fund shares have equal rights with regard to voting and shareholders of
the Fund have the right to vote as a separate class with respect to matters as
to which their interests are not identical to those of shareholders of other
classes of the Trust, including any change of investment policy requiring the
approval of shareholders.
34
<PAGE>
Under Massachusetts law, shareholders of the Trust could, under certain
circumstances, be held liable for the obligations of the Trust. However, the
Agreement and Declaration of Trust disclaims shareholder liability for acts or
obligations of the Trust and requires that notice of this disclaimer be given in
each agreement, obligation or instrument entered into or executed by the Trust
or a Trustee. The Declaration also provides for indemnification from the assets
of the Trust for all losses and expenses of any Trust shareholder held liable
for the obligations of the Trust. Thus, the risk of a shareholder incurring a
financial loss on account of his or its liability as a shareholder of the Trust
is limited to circumstances in which the Trust would be unable to meet its
obligations. The possibility that these circumstances would occur is remote.
Upon payment of any liability incurred by the Trust, the shareholder paying the
liability will be entitled to reimbursement from the general assets of the
Trust. The Declaration also provides that no series of the Trust is liable for
the obligations of any other series. The Trustees intend to conduct the
operations of the Trust to avoid, to the extent possible, ultimate liability of
shareholders for liabilities of the Trust.
The Fund acquired all of the assets of Standish Small Equity Fund Limited
Partnership (the "Partnership") in a transaction which closed on August 31, 1990
in exchange for an assumption of liabilities and the issuance of shares of
beneficial ownership to the Limited Partners of the Partnership, who received
the shares as a distribution in liquidation of the Partnership. Each Limited
Partner received 50 shares per each unit of limited partnership interest owned.
Prior to that date, the Fund had no assets. The net value of the assets acquired
by the Fund on August 31, 1990 was $12,499,477. The Partnership started business
on January 8, 1988 as a limited partnership organized under the Uniform Limited
Partnership Law of The Commonwealth of Massachusetts. The Partnership was not a
registered investment company in reliance on Section 3(c)(1) of the 1940 Act and
the units of limited partnership interests were not registered under the
Securities Act of 1933, as amended, in reliance on Section 4(2) thereof.
Except as described below, whenever the Trust is requested to vote on a
fundamental policy of or matters pertaining to the Portfolio, the Trust will
hold a meeting of the Fund's shareholders and will cast its vote proportionately
as instructed by the Fund's shareholders. Fund shareholders who do not vote will
not affect the Trust's votes at the Portfolio meeting. The percentage of the
Trust's votes representing Fund shareholders not voting will be voted by the
Trustees of the Trust in the same proportion as the Fund shareholders who do, in
fact, vote. Subject to applicable statutory and regulatory requirements, the
Fund would not request a vote of its shareholders with respect to (a) any
proposal relating to the Portfolio, which proposal, if made with respect to the
Fund, would not require the vote of the shareholders of the Fund, or (b) any
proposal with respect to the Portfolio that is identical in all material
respects to a proposal that has previously been approved by shareholders of the
Fund. Any proposal submitted to holders in the Portfolio, and that is not
required to be voted on by shareholders of the Fund, would nonetheless be voted
on by the Trustees of the Trust.
35
<PAGE>
THE PORTFOLIO AND ITS INVESTORS
The Portfolio is a series of Standish, Ayer & Wood Master Portfolio, a
newly formed trust and, like the Fund, is an open-end management investment
company under the Investment Company Act of 1940, as amended. The Portfolio
Trust was organized as a master trust fund under the laws of the State of New
York on January 18, 1996.
Interests in the Portfolio have no preemptive or conversion rights, and are
fully paid and non-assessable except as described in the Prospectus. The
Portfolio normally will not hold meetings of holders of such interests except as
required under the 1940 Act. The Portfolio would be required to hold a meeting
of holders in the event that at any time less than a majority of its Trustees
holding office had been elected by holders. The Trustees of the Portfolio
continue to hold office until their successors are elected and have qualified.
Holders holding a specified percentage of interests in the Portfolio may call a
meeting of holders in the Portfolio for the purpose of removing any Trustee. A
Trustee of the Portfolio may be removed upon a majority vote of the interests
held by holders in the Portfolio qualified to vote in the election. The 1940 Act
requires the Portfolio to assist its holders in calling such a meeting. Upon
liquidation of the Portfolio, holders in the Portfolio would be entitled to
share pro rata in the net assets of the Portfolio available for distribution to
holders.
Each holder in the Portfolio is entitled to a vote in proportion to its
percentage interest in the Portfolio.
ADDITIONAL INFORMATION
The Fund's Prospectus and this Statement of Additional Information omit
certain information contained in the registration statement filed with the SEC,
which may be obtained from the SEC's principal office at 450 Fifth Street, N.W.,
Washington, D.C. 20549, upon payment of the fee prescribed by the rules and
regulations promulgated by the Commission.
EXPERTS AND FINANCIAL STATEMENTS
The Fund's financial statements for the fiscal years ended December 31,
1993, 1994 and 1995 included in this Statement of Additional Information have
been audited by Coopers & Lybrand L.L.P., independent accountants, as set forth
in its report appearing elsewhere herein, and have been so included in reliance
upon the authority of the report of such auditors as experts in accounting and
auditing. Financial highlights of the Fund for the fiscal years ended December
31, 1992, 1991 and 1990 were audited by Deloitte & Touche LLP, independent
auditors, and have been similarly included in reliance upon the expertise of
that firm. Coopers & Lybrand L.L.P., independent accountants, will audit the
Fund's financial statements for the fiscal year ending December 31, 1996. An
affiliate of Coopers & Lybrand, L.L.P., Coopers & Lybrand, will audit the
Portfolio's financial statements for the fiscal year ending December 31, 1996.
36
<PAGE>
Standish, Ayer & Wood Investment Trust
Standish Small Capitalization Equity Fund Series
Financial Statements for the Year Ended
December 31, 1995
1
<PAGE>
Standish, Ayer & Wood Investment Trust
Chairman's Message
January 29, 1996
Dear Standish, Ayer & Wood Investment Trust Shareholder:
I am pleased to have an opportunity to review the major developments at
Standish, Ayer & Wood during this past year as they relate to the activities of
the Investment Trust. The major news for our clients in 1995 was the spectacular
performance of the U.S. investment markets. While we would, of course, like to
claim credit for producing the full extent of these splendid returns, the
reality is obvious: The markets themselves are beyond our control. For the year
as a whole, U.S. stocks, as represented by the Standard and Poor's 500 Index,
produced a total return of 37.6%, and higher grade intermediate-term bonds, as
represented by the Lehman Brothers Aggregate Index, provided a total return of
18.5%. Nearly as surprising, stock and bond prices marched steadily upward
throughout the year, a persistent and almost uninterrupted advance.
Even after the subdued markets of 1994, neither we nor most other investment
managers expected 1995 to be anywhere near as good as it turned out to be. In
this context, we are generally pleased by our investment performance. In most
asset classes, we kept pace with or modestly exceeded market returns. We adhered
to our established investment philosophies, which are designed to add reasonably
consistent increments of value. Our clients seem to be pleased by our efforts as
we continue to have very little client turnover.
As a firm, we have registered moderate growth during the year. Reflecting some
flow of new clients as well as market appreciation, our clients' assets under
management at the end of 1995 totalled $29.4 billion, an increase from $24.4
billion at the end of 1994. We are particularly pleased by the growth in new
assets managed for insurance companies and by the increases in assets of both
large capitalization and small capitalization U.S. common stocks.
The asset class of greatest disappointment in 1995 was international equities.
Not only did the asset class continue to provide subpar returns, but our
portfolios underperformed the international equity markets. These results
reflect judgments early in 1995 to hedge a portion of the currency exposure back
to dollars and to have a moderate stake in emerging markets. While we believe we
have rectified those problems, we are not satisfied with the results and are
working vigorously to improve future performance. We are also counseling our
clients not to lose faith in the international equity asset class despite its
recent disappointing returns.
The figure for total Standish assets under management includes about $1.6
billion managed in conjunction with Standish International Management Company,
L.P. (SIMCO), our affiliate that manages overseas assets for domestic clients
and U.S. assets for overseas clients. It also includes $3.9 billion in the
Standish Investment Trust, our mutual fund organization. In addition, the asset
total reflects an increase over the last few years in the assets we manage in
private, non-mutual fund vehicles.
We introduced two new mutual funds at mid-year 1995, namely the Standish Fixed
Income Fund II (which is designed to parallel the Standish Fixed Income Fund but
exclude the purchase of both nondollar bonds and below-investment-grade
securities), and the Standish Controlled Maturity Fund (which is designed for
investors who wish less volatility and interest rate risk than traditional
intermediate-maturity bonds).
At the beginning of 1996, we introduced two additional mutual funds, the
Standish Tax-Sensitive Equity Fund and the Standish Small Cap Tax-Sensitive
Equity Fund. At Standish we have noted for some time the adverse impact for
taxable investors of high portfolio turnover, which triggers capital gains,
possibly including short-term gains that may result in an even greater tax
liability for investors. We believe there is a major opportunity through both
separate account management and these funds to improve aftertax returns by
limiting the portfolio turnover and managing capital gains.
2
<PAGE>
During 1995, Standish acquired all remaining interests in the business of the
joint venture between Consolidated Investment Corp. (CIC) and Standish, entered
into over seven years ago. Consolidated had been formed by Trigon (previously
Blue Cross/Blue Shield of Virginia) to manage shorter-term taxable and tax
exempt fixed income portfolios. We and Trigon agreed that it was best to have
this unit operating under one owner.
Standish continues to be proud of its structure as an independent management
firm with ownership in the hands of investment professionals active in the
business. There were no changes during 1995 either in corporate structure or in
the people who own the enterprise.
We appreciate the opportunity to serve you, and we remain confident that we have
the resources and the organization to do a superior job. We will be working hard
to fulfill your expectations in 1996.
Sincerely yours,
Edward H. Ladd
Chairman
3
<PAGE>
Standish, Ayer & Wood Investment Trust
Standish Small Capitalization Equity Fund Series
Management Discussion
The Standish Small Capitalization Equity Fund's net asset value (NAV) at
December 31, 1995 was $53.46. Total return for the Fund for 1995 was 29.83%,
while the Russell 2000 Index of Small Companies increased 28.44%. The most
notable characteristics of the small stock market in 1995 were: 1.) small cap
stocks underperformed larger cap stocks considerably; 2.) within the small cap
stock area there was important volatility developed by the extreme
outperformance, then subsequent sharp decline of technology stocks; 3.) the
dramatic recovery of the biotechnology group, 4.) and the very active small
stock new issue market. Additionally, the flow of funds into aggressive equity
mutual funds was very high, undoubtedly benefiting small company stocks overall
and perhaps contributing to the dynamics of the biotech and technology sectors.
The net assets of the Fund increased substantially from $107.6 million at the
beginning of 1995 to $180.5 million on December 31, 1995. The average size of
the portfolio companies as determined by the weighted average market
capitalization of the issues was $247 million at the start of 1995 and $287
million at the end of the year. The Fund's management is committed to remaining
in the $250 million to $350 million range in average issue market
capitalization. During the year, the Fund was always substantially full
invested, which occasionally involved the use of Russell 2000 or S&P Midcap
Futures. There was no utilization of any options during the year. It is not
expected that the Fund's use of futures and options will expand beyond use as a
cash management tool. Investment in foreign securities (including American
Depository Receipts) did not exceed 5% of the Fund assets at any point during
1995, and it is not expected that such investments, which are limited to 15% of
assets, will be used more broadly in the future.
The Fund's investment approach has always emphasized high quality companies with
rapid, sustainable growth, strong balance sheets, superb business positions,
proven management, and moderate price earnings ratios. We will continue to use
this approach to guide the investments made by the Fund in the future. We
sincerely appreciate your continued support and interest in the Standish Small
Capitalization Equity Fund.
Nicholas S. Battelle
4
<PAGE>
Standish, Ayer & Wood Investment Trust
Standish Small Capitalization Equity Fund Series
Comparison of Change in Value of $100,000 Investment in
Standish Small Capitalization Equity Fund, the S&P 500 Index, and the Russell
2000 Index
The following is a description of the graphical chart omitted from electronic
format:
This line chart shows the cumulative performance of the Standish Small
Capitalization Equity Fund compared with the S&P 500 Index and the Russell 2000
Index for the period September 1, 1990 to December 31, 1995, based upon a
$100,000 investment. Also included are the average annual total returns for one
year, five year, and since inception.
5
<PAGE>
<TABLE>
<CAPTION>
Standish, Ayer & Wood Investment Trust
Standish Small Capitalization Equity Fund Series
Portfolio of Investments
December 31, 1995
Value
Security Shares Note 1A
- ------------------------------------------------------------------- -------------- --------------
<S> <C> <C>
Stocks- 95.6%
- -------------------------------------------------------------------
Basic Industries- 1.9%
- -------------------------------------------------------------------
OM Group Inc. 41,800 $1,384,625
U. S. Delivery Systems Inc.* 71,100 2,061,900
----------
$3,446,525
----------
Capital Goods/Technology- 33.0%
- -------------------------------------------------------------------
Adflex Solutions Inc.* 78,600 $2,102,550
Analyst International Corp. 68,300 2,049,000
Applix Inc.* 8,800 239,800
Black Box Corporation* 116,000 1,899,500
Cable Design Technologies, Inc.* 69,500 3,058,000
Cidco Inc.* 15,000 382,500
Computer Horizons Corp.* 90,250 3,429,500
Continental Waste Industries Inc.* 154,500 1,796,062
Datastream Systems Inc.* 4,300 81,700
Dialogic Corp.* 50,600 1,948,100
Emmis Broadcasting Corporation* 46,700 1,447,700
Equalnet Holding Corp.* 105,700 766,325
Gasonics International Corp.* 91,150 1,230,525
Greenfield Industries Inc. 67,800 2,118,750
Hughes Supply Inc. 19,300 545,225
In Focus Systems Inc.* 41,200 1,488,350
Integrated Systems Inc.* 1,200 46,800
Inter-tel Inc.* 50,000 768,750
Intertape Polymer Group Inc. 54,000 1,694,250
Intervoice Inc.* 40,000 760,000
ITI Technologies Inc.* 75,000 2,231,250
Lydall Inc.* 84,200 1,915,550
MDL Informations Systems* 119,400 2,746,200
Midcom Communications Inc.* 69,300 1,264,725
Mysoftware Company* 37,100 473,025
National Computer Systems Inc. 73,000 1,377,875
Nera As American Depository Requirements* 68,100 2,213,250
NN Ball & Roller Inc. 152,550 2,669,625
Norrell Corp. 91,200 2,679,000
P-Com Inc.* 11,200 224,000
Perceptron Inc.* 118,800 2,643,300
Photronics Inc.* 72,500 1,939,375
Plantronics, Inc.* 35,300 1,275,212
Sanmina Corp.* 28,100 1,457,688
Scandinavian Broadcast Systems Corp.* 84,500 1,848,438
Systems & Computer Technology Corp.* 51,200 1,017,600
6
<PAGE>
Portfolio of Investments
(continued)
Value
Security Shares Note 1A
- ------------------------------------------------------------------- -------------- --------------
Capital Goods/Technology- (Continued)
- -------------------------------------------------------------------
TSX Corporation* 75,000 1,612,500
United Waste Systems Inc.* 36,100 1,344,725
VTel Corporation* 44,700 826,950
----------
$59,613,675
----------
Consumer Cyclical- 8.4%
- -------------------------------------------------------------------
Affiliated Computer Services Inc.* 69,600 $2,610,000
Air Express International, Inc. 102,500 2,357,500
Arbor Drugs Inc. 80,800 1,696,800
Big B Inc. 140,000 1,400,000
Carson Pirie Scott & Co.* 110,000 2,186,250
Custom Chrome Inc.* 111,800 2,585,375
Gadzooks Inc.* 75,000 1,893,750
Grist Mill Inc.* 58,900 434,387
----------
$15,164,062
----------
Consumer Stable- 46.4%
- -------------------------------------------------------------------
Access Health Inc.* 50,000 $2,212,500
Advantage Health Corp.* 68,400 2,983,950
Advocat Inc.* 85,000 945,625
Agouron Pharmaceuticals Inc.* 60,200 1,971,550
Anchor Gaming Co.* 110,000 2,502,500
Ballard Medical Products Corp. 60,000 1,072,500
BMC Industries Inc. 143,400 3,334,050
Cardiometrics Inc.* 104,300 795,287
Central Parking Corp. 43,700 1,256,375
Conmed Corp.* 82,500 2,062,500
Corvel Corp.* 73,100 2,786,937
Devon Group Inc.* 14,500 421,406
Dura Pharmaceuticals, Inc.* 51,400 1,786,150
Emcare Holdings Inc.* 63,800 1,531,200
FPA Medical Management Inc.* 170,100 1,594,688
Genesis Health Ventures Inc.* 65,200 2,379,800
Gynecare Inc.* 108,900 1,068,581
Healthdyne Technologies Inc.* 107,100 1,231,650
Inhale Therapeutic Systems Inc.* 104,700 1,020,825
Inphynet Medical Management Inc.* 96,400 2,313,600
Matrix Pharmaceuticals Inc.* 109,300 2,049,375
Medcath Inc.* 83,200 1,747,200
Minntech Corporation 120,200 2,366,438
Moovies Inc.* 159,800 2,157,300
Myriad Genetics Inc.* 31,100 1,014,638
National Surgey Center* 70,400 1,619,200
7
<PAGE>
Portfolio of Investments
(continued)
Value
Security Shares Note 1A
- ------------------------------------------------------------------- -------------- --------------
Consumer Stable- (Continued)
- -------------------------------------------------------------------
Occusystems Inc.* 91,100 1,822,000
On Assignment Inc.* 103,100 3,376,525
Orthofix International Corp.* 36,800 271,400
Ostex International Inc.* 72,200 1,389,850
Patterson Dental Company* 76,850 2,074,950
Performance Food Group Co.* 142,700 3,389,125
Possis Medical Inc.* 110,200 1,776,975
Protocol Systems Inc.* 114,700 1,204,350
Quiksilver Inc.* 65,000 2,222,187
Richfood Holdings Inc. 53,400 1,428,450
Right Management Consultants* 95,250 2,214,563
Robert Mondavi Corp.* 80,000 2,210,000
Rochester Medical Corp.* 76,900 1,076,600
Rural/Metro Corp.* 90,000 2,036,250
Scientific Games Holdings Corp.* 67,700 2,555,675
Sholodge Inc.* 65,214 619,534
Summit Care Corp.* 70,000 1,601,250
Tecnol Medical Products Corp.* 72,500 1,305,000
Thomas Nelson Inc. 168,450 2,189,850
Vertex Pharmaceuticals Inc.* 100,000 2,650,000
----------
$83,640,359
----------
Energy- 3.3%
- -------------------------------------------------------------------
Dawson Geophysical Co.* 117,000 $1,096,875
Landmark Graphics Corp.* 50,000 1,162,500
Numar Corp.* 115,000 1,279,375
Seitel Inc.* 70,200 2,483,325
----------
$6,022,075
----------
Interest Sensitive- 2.6%
- -------------------------------------------------------------------
American Travellers Corp.* 106,500 $2,995,313
Cellstar Corp.* 61,600 1,601,600
----------
$4,596,913
----------
Total Stocks $172,483,609
------------
(identified cost- $137,779,115)
Principal Value
Short Term Obligations- 1.7% Rate** Maturity Amount Note 1A
- ----------------------------------------------- ------------- ------------- -------------- -------------------
U.S. Government Securities- 0.1%
- -----------------------------------------------
Treasury Bills *** 5.06% 3/14/96 130,000 $ 128,718
Treasury Bills *** 5.15 5/16/96 170,000 166,831
---------------------
$ 295,549
---------------------
8
<PAGE>
Portfolio of Investments
(continued)
Principal Value
Security Amount Note 1A
- ------------------------------------------------------------------- -------------- -------------------
Repurchase Agreement- 1.6%
- -------------------------------------------------------------------
Prudential Bache repurchase agreement
dated 12/29/95, 5.39% due 1/2/96 to pay
$2,802,589 (Collateralized by Federal Home Loan Mortgage
Corp., 6.96%, due 1/1/20, market value $2,857,361) at cost $ 2,801,330 $2,801,330
-------------- -------------------
Total Short Term Obligations $3,096,879
-------------------
(identified cost- $3,096,351)
Total Investments- 97.3% $175,580,488
-------------------
(identified cost- $140,875,466)
Other assets, less liabilities- 2.7% $4,889,478
-------------------
Net Assets- 100% $180,469,966
===================
* Non-income producing security
** Rate noted is yield to maturity (unaudited)
*** Denotes all or part of a security pledged as a margin deposit (see Note 6)
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
Standish, Ayer & Wood Investment Trust
Standish Small Capitalization Equity Fund Series
Statement of Assets and Liabilities
December 31, 1995
<S> <C> <C>
Assets
Investments, at value (Note 1A) (identified cost, $140,875,466) $175,580,488
Receivable for investments sold 7,166,687
Receivable for Fund shares sold 120,000
Interest and dividends receivable 35,127
Receivable for daily variation margin on financial futures contracts (Note 6) 34,687
Other assets 1,003
----------------
Total assets $182,937,992
Liabilities
Distribution payable $245,912
Payable for investments purchased 1,917,395
Accrued investment advisory fee (Note 2) 259,340
Accrued trustee fees (Note 2) 1,783
Accrued expenses and other liabilities 43,596
----------------
Total liabilities $2,468,026
----------------
Net Assets $180,469,966
================
Net Assets consist of
Paid - in capital $139,154,962
Accumulated undistributed net realized gain (loss) 6,582,032
Net unrealized appreciation (depreciation) 34,732,972
----------------
Total $180,469,966
================
Shares of beneficial interest outstanding 3,375,809
================
Net asset value, offering price, and redemption price per share $53.46
================
(Net assets/Shares outstanding)
10
<PAGE>
Standish, Ayer & Wood Investment Trust
Standish Small Capitalization Equity Fund Series
Statement of Operations
Year Ended December 31, 1995
Investment income
Dividend income $353,726
Interest income 302,991
----------------
Total income $656,717
Expenses
Investment advisory fee (Note 2) $871,879
Trustee fees (Note 2) 6,214
Accounting, custody and transfer agent fees 149,069
Registration costs 28,602
Audit services 22,572
Legal services 5,397
Insurance expense 2,963
Miscellaneous 6,310
----------------
Total expenses $1,093,006
----------------
Net investment loss ($436,289)
----------------
Realized and unrealized gain (loss)
Net realized gain (loss)
Investment securities $12,312,982
Financial futures 520,625
----------------
Net realized gain (loss) $12,833,607
Change in net unrealized appreciation (depreciation)
Investment securities $27,544,486
Financial futures 27,950
----------------
Change in net unrealized appreciation (depreciation) 27,572,436
----------------
Net gain (loss) $40,406,043
----------------
Net increase (decrease) in net assets from operations $39,969,754
================
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
Standish, Ayer & Wood Investment Trust
Standish Small Capitalization Equity Fund Series
Statement of Changes in Net Assets
Year Ended Year Ended
December 31, 1995 December 31, 1994
------------------ -----------------
Increase (decrease) in Net Assets
<S> <C> <C>
From operations:
Net investment loss ($436,289) ($253,939)
Net realized gain (loss) 12,833,607 7,390,183
Change in net unrealized appreciation (depreciation) 27,572,436 (9,878,398)
---------------- ----------------
Net increase (decrease) in net assets from operations $39,969,754 ($2,742,154)
---------------- ----------------
Distributions to shareholders from net realized gains ($4,170,634) ($11,063,125)
---------------- ----------------
Fund share (principal) transactions (Note 4)
Net proceeds from sale of shares $56,591,350 $33,374,612
Net asset value of shares issued to shareholders in
payment of distributions declared 3,924,054 10,415,680
Cost of shares redeemed. (23,435,868) (7,534,645)
---------------- ----------------
Increase (decrease) in net assets from Fund share transactions $37,079,536 $36,255,647
---------------- ----------------
Net increase (decrease) in net assets $72,878,656 $22,450,368
Net Assets
At beginning of period $107,591,310 $85,140,942
---------------- ----------------
At end of period $180,469,966 $107,591,310
================ ================
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
Standish, Ayer & Wood Investment Trust
Standish Small Capitalization Equity Fund Series
Financial Highlights
Year Ended December 31,
---------------------------------------------------------------------
1995 1994 1993 1992* 1991*
------------ ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net asset value - beginning of period $42.15 $48.97 $39.83 $39.99 $27.57
------------ ------------- ----------- ----------- -----------
Income from investment operations
Net investment income (loss) - - ($0.07) ($0.11) ($0.04)
Net realized and unrealized gain (loss) 12.57 (1.84) 11.31 4.00 17.87
------------ ------------- ----------- ----------- -----------
Total from investment operations $12.57 ($1.84) $11.24 $3.89 $17.83
------------ ------------- ----------- ----------- -----------
Less distributions declared to shareholders
From net investment income - - - - -
From realized gain (1.26) (4.98) (2.10) (4.05) (5.35)
From paid-in capital - - - - (0.06)
------------ ------------- ----------- ----------- -----------
Total distributions declared to shareholders ($1.26) ($4.98) ($2.10) ($4.05) ($5.41)
------------ ------------- ----------- ----------- -----------
Net asset value - end of period $53.46 $42.15 $48.97 $39.83 $39.99
=========== =========== =========== ========== ===========
Total return 29.83% (3.66%) 28.21% 9.74% 64.71%
Ratios (to average net assets)/Supplemental Data
Expenses 0.75% 0.79% 0.88% 1.04% 0.87%
Net Investment Income (0.30)% (0.27)% (0.18) (0.38) (0.15)%
Portfolio turnover 112% 130% 144% 101% 96%
Net assets at end of period (000 omitted) $180,470 $107,591 $85,141 $50,950 $35,418
* Audited by other auditors.
</TABLE>
13
<PAGE>
Standish, Ayer & Wood Investment Trust
Standish Small Capitalization Equity Fund Series
Notes to Financial Statements
(1) Significant Accounting Policies:
Standish, Ayer & Wood Investment Trust (the "Trust") is organized as a
Massachusetts business trust and is registered under the Investment
Company Act of 1940, as amended, as an open-end, management investment
company. Standish Small Capitalization Equity Fund (the "Fund") is a
separate diversified investment series of the Trust. The following is a
summary of significant accounting policies followed by the Fund in the
preparation of the financial statements. The preparation of financial
statements in accordance with generally accepted accounting principles
requires management to make estimates and assumptions that affect the
reported amounts and disclosures in the financial statements. Actual
results could differ from those estimates.
A. Investment security valuations--
Securities for which quotations are readily available are valued at the
last sale price, or if no sale, at the closing bid price in the
principal market in which such securities are normally traded.
Securities (including restricted securities) for which quotations are
not readily available are valued primarily using dealer-supplied
valuations or at their fair value as determined in good faith under
consistently applied procedures under the general supervision of the
Board of Trustees. Short term instruments with less than sixty-one days
remaining to maturity when acquired by the Fund are valued on an
amortized cost basis. If the Fund acquires a short term instrument with
more than sixty days remaining to its maturity, it is valued at current
market value until the sixtieth day prior to maturity and will then be
valued at amortized cost based upon the value on such date unless the
trustees determine during such sixty-day period that amortized cost
does not represent fair value.
B. Repurchase agreements--
It is the policy of the Fund to require the custodian bank to take
possession, to have legally segregated in the Federal Reserve Book
Entry System, or to have segregated within the custodian bank's vault,
all securities held as collateral in support of repurchase agreement
investments. Additionally, procedures have been established by the Fund
to monitor on a daily basis, the market value of the repurchase
agreement's underlying investments to ensure the existence of a proper
level of collateral.
C. Securities transactions and income--
Securities transactions are recorded as of the trade date. Interest
income is determined on the basis of interest accrued. Dividend income
is recorded on the ex-dividend date. Realized gains and losses from
securities sold are recorded on the identified cost basis.
D. Federal taxes--
As a qualified regulated investment company under Subchapter M of the
Internal Revenue Code the Fund is not subject to income taxes to the
extent that it distributes all of its taxable income for its fiscal
year.
E. Distributions to Shareholders--
Distributions to shareholders are recorded on the ex-dividend date.
Income and capital gain distributions are determined in accordance with
income tax regulations which may differ from generally accepted
accounting principles. These differences are primarily due to differing
treatments for net operating losses. Permanent book and tax basis
differences relating to shareholder distributions will result in
reclassifications to paid-in capital.
(2) Investment Advisory Fee:
The investment advisory fee paid to Standish, Ayer & Wood, Inc. (SA&W)
for overall investment advisory and administrative services, and
general office facilities, is paid quarterly at the annual rate of
0.60% of the Fund's average daily net assets. The Fund will pay no
compensation directly to its trustees who are affiliated with the
investment adviser or to its officers, all of whom receive remuneration
for their services to the Fund from the investment adviser. Certain of
the trustees and officers of the Trust are directors or officers of
SA&W.
14
<PAGE>
(3) Purchases and Sales of Investments:
Purchases and sales of investments, other than short-term obligations,
were as follows:
Purchases Sales
---------------- --------------
U.S. government securities $833,602 $544,810
================ ==============
Investments (non-U.S. government securities) $182,170,101 $156,681,177
================ ==============
<TABLE>
<CAPTION>
(4) Shares of Beneficial Interest:
The Declaration of Trust permits the trustees to issue an unlimited
number of full and fractional shares of beneficial interest having a
par value of one cent per share. Transactions in Fund shares were as
follows:
Year Ended December 31,
------------------------------------
1995 1994
--------------- ----------------
<S> <C> <C>
Shares sold 1,215,183 724,870
Shares issued to shareholders in payment of distributions declared 73,432 245,057
Shares redeemed (465,355) (156,117)
================ ================
823,260 813,810
================ ================
</TABLE>
(5) Federal Income Tax Basis of Investment Securities:
The cost and unrealized appreciation in value of the investment
securities owned at December 31, 1995, as computed on a federal income
tax basis, are as follows:
Aggregate Cost $140,934,793
===============
Gross unrealized appreciation $40,569,354
Gross unrealized depreciation (5,923,659)
===============
Net unrealized appreciation $34,645,695
===============
(6) Financial Instruments:
In general, the following instruments are used for hedging purposes as
described below. However, these instruments may also be used to enhance
potential gain in circumstances where hedging is not involved. The
nature, risks and objectives of these investments are set forth more
fully in the Fund's Prospectus and Statement of Additional Information.
The Fund trades the following financial instruments with off-balance
sheet risk:
Options--
Call and put options give the holder the right to purchase or sell,
respectively, a security or currency at a specified price on or before
a certain date. The Fund uses options to hedge against risks of market
exposure and changes in securities prices and foreign currencies, as
well as to enhance returns. Options, both held and written by the Fund,
are reflected in the accompanying Statement of Assets and Liabilities
at market value. Premiums received from writing options which expire
are treated as realized gains. Premiums received from writing options
which are exercised or are closed are added to or offset against the
proceeds or amount paid on the transaction to determine the realized
gain or loss. If a put option written by the Fund is exercised, the
premium reduces the cost basis of the securities purchased by the Fund.
The Fund, as writer of an option, has no control over whether the
underlying securities may be sold (call) or purchased (put) and as a
result bears the market risk of an unfavorable change in the price of
the security underlying the written option. The fund entered into no
such transactions during the year ended December 31, 1995.
15
<PAGE>
Futures contracts--
The Fund may enter into financial futures contracts for the delayed
sale or delivery of securities or contracts based on financial indices
at a fixed price on a future date. The Fund is required to deposit
either in cash or securities an amount equal to a certain percentage of
the contract amount. Subsequent payments are made or received by the
Fund each day, dependent on the daily fluctuations in the value of the
underlying security, and are recorded for financial statement purposes
as unrealized gains or losses by the Fund. There are several risks in
connection with the use of futures contracts as a hedging device. The
change in value of futures contracts primarily corresponds with the
value of their underlying instruments or indices, which may not
correlate with changes in value of the hedged investments. In addition,
there is the risk that the Fund may not be able to enter into a closing
transaction because of an illiquid secondary market. The Fund enters
into financial futures transactions primarily to manage its exposure to
certain markets and to changes in securities prices and foreign
currencies.
At December 31, 1995, the Fund held the following futures contract:
<TABLE>
<CAPTION>
Expiration Underlying Face Unrealized
Contract Position Date Amount at Value Gain/(Loss)
- ----------------------------------- -------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
Midcap March Futures (70 contracts) Long 3/16/96 $7,631,750 $18,563
Russell March Futures (7 contracts) Long 3/16/96 1,117,025 9,387
--------------- ----------------
8,748,775 27,950
=============== ================
</TABLE>
At December 31, 1995, the Fund had segregated sufficient securities to
cover margin requirements on open future contracts.
- --------------------------------------------------------------------------------
Federal Income Tax Information (Unaudited)
The amount of long-term capital gain for the Fund for the year ended
December 31, 1995 was $2,409,232. This amount may differ from those
cited elsewhere in this report due to differences in the calculation of
income and capital gains for Securities and Exchange Commission (book)
purposes and Internal Revenue Service (tax) purposes.
16
<PAGE>
Report of Independent Accountants
To the Trustees of Standish, Ayer & Wood Investment Trust and the
shareholders of Standish Small Capitalization Equity Fund Series:
We have audited the accompanying statement of assets and liabilities of
Standish, Ayer & Wood Investment Trust: Standish Small Capitalization
Equity Fund Series (the "Fund"), including the schedule of portfolio
investments, as of December 31, 1995, and the related statement of
operations for the year then ended, changes in net assets for each of
the two years in the period ended, and financial highlights for each of
the three years in the period then ended. These financial statements
and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits. The
financial highlights for each of the two years in the period to
December 31, 1992, were audited by other auditors, whose report, dated
February 12, 1993, expressed an unqualified opinion on such financial
highlights.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
and financial highlights are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. Our procedures included
confirmation of securities owned as of December 31, 1995 by
correspondence with the custodian and brokers. An audit also includes
assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the financial statements and financial highlights
referred to above present fairly, in all material respects, the
financial position of Standish, Ayer & Wood Investment Trust: Standish
Small Capitalization Equity Fund Series as of December 31, 1995, the
results of its operations for the year then ended, the changes in net
assets for each of the two years in the period then ended, and
financial highlights for each of the three years in the period then
ended, in conformity with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
February 13, 1996
17
<PAGE>
Standish, Ayer & Wood Investment Trust
One Financial Center
Boston, MA 02111
(800) 221-4795
18
<PAGE>
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements:
Financial Highlights of the following series of the Registrant
are included in the related Prospectuses: Standish Equity Fund,
Standish Fixed Income Fund, Standish Global Fixed Income Fund and
Standish Small Capitalization Equity Fund.
The following financial statements are included in the Statements of
Additional Information of the above-referenced series of the Registrant:
Schedule of Portfolio Investments
Statement of Assets and Liabilities
Statement of Operations
Statement of Changes In Net Assets
Financial Highlights
Notes to Financial Statements
(b) Exhibits:
(1) Agreement and Declaration of Trust dated
August 13, 1986*
(1A) Certificate of Designation of Standish Fixed Income
Fund**
(1B) Certificate of Designation of Standish
International Fund**
(1C) Certificate of Designation of Standish
Securitized Fund**
(1D) Certificate of Designation of Standish
Short-Term Asset Reserve Fund**
(1E) Certificate of Designation of Standish
Marathon Fund*
(1F) Certificate of Amendment dated November 21,
1989*
(1G) Certificate of Amendment dated November 29,
1989*
1
<PAGE>
(1H) Certificate of Amendment dated April 24, 1990*
(1I) Certificate of Designation of Standish Equity Fund**
(1J) Certificate of Designation of Standish International
Fixed Income Fund**
(1K) Certificate of Designation of Standish Intermediate Tax
Exempt Bond Fund*
(1L) Certificate of Designation of Standish Massachusetts
Intermediate Tax Exempt Bond Fund*
(1M) Certificate of Designation of Standish Global Fixed
Income Fund*
(1N) Certificate of Designation of Standish Controlled
Maturity Fund and Standish Fixed Income Fund II**
(1O) Certificate of Designation of Standish Tax-
Sensitive Small Cap Equity Fund and Standish
Tax-Sensitive Equity Fund**
(2) Bylaws of the Registrant*
(3) Not applicable
(4) Not applicable
(5A) Investment Advisory Agreement between the Registrant and
Standish, Ayer & Wood, Inc. relating to Standish
Securitized Fund**
(5B) Form of Investment Advisory Agreement between the
Registrant and Standish, Ayer & Wood, Inc. relating
to Standish Short-Term Asset Reserve Fund**
(5C) Investment Advisory Agreement between the Registrant and
Standish, Ayer & Wood, Inc. relating to Standish
International Fixed Income Fund**
(5D) Assignment of Investment Advisory Agreement between the
Registrant and Standish, Ayer & Wood, Inc. relating to
Standish International Fixed Income Fund**
(5E) Form of Investment Advisory Agreement between the
Registrant and Standish, Ayer & Wood, Inc. relating to
Standish Intermediate Tax Exempt Bond Fund**
2
<PAGE>
(5F) Investment Advisory Agreement between the Registrant and
Standish, Ayer & Wood, Inc. relating to Standish
Massachusetts Intermediate Tax Exempt Bond Fund**
(5G) Investment Advisory Agreement between the Registrant and
Standish, Ayer & Wood, Inc. relating to Standish
Controlled Maturity Fund**
(5H) Investment Advisory Agreement between the Registrant and
Standish, Ayer & Wood, Inc. relating to Standish Fixed
Income Fund II**
(5I) Investment Advisory Agreement between the Registrant
and Standish, Ayer & Wood, Inc. relating to Standish
Small Cap Tax-Sensitive Equity Fund**
(5J) Investment Advisory Agreement between the Registrant
and Standish, Ayer & Wood, Inc. relating to Standish
Tax-Sensitive Equity Fund**
(6) Underwriting Agreement between the Registrant and
Standish Fund Distributors, L.P.***
(7) Not applicable
(8) Master Custody Agreement between the Registrant and
Investors Bank & Trust Company**
(9A) Transfer Agency and Service Agreement between the
Registrant and Investors Bank & Trust Company***
(9B) Master Administration Agreement between Registrant and
Investors Bank & Trust Company***
(9C) Form of Administrative Services Agreement between
Standish, Ayer & Wood, Inc. and the Registrant on behalf
of Standish Fixed Income Fund, Standish Equity Fund,
Standish Small Cap Equity Fund and Standish Global Fixed
Income Fund***
(10A) Opinion and Consent of Counsel for Standish Fixed Income
Fund**
(10B) Opinion and Consent of Counsel for Standish Securitized
Fund**
(10C) Opinion and Consent of Counsel for Standish Short-Term
Asset Reserve Fund**
3
<PAGE>
(10D) Opinion and Consent of Counsel for Standish Small
Capitalization Equity Fund (formerly Standish Marathon
Fund)**
(10E) Opinion and Consent of Counsel for Standish Equity
Fund**
(10F) Opinion and Consent of Counsel for Standish
International Fixed Income Fund**
(10G) Opinion and Consent of Counsel for Standish Intermediate
Tax Exempt Bond Fund**
(10H) Opinion and Consent of Counsel for Standish
Massachusetts Intermediate Tax Exempt Bond Fund**
(10I) Opinion and Consent of Counsel for Standish Global Fixed
Income Fund**
(10J) Opinion and Consent of Counsel for the Registrant**
(11A) Opinion and Consent of Independent Public Accountants***
(11B) Consent of Independent Public Accountants***
(12) Not applicable
(13) Form of Initial Capital Agreement between the Registrant
and Standish, Ayer & Wood, Inc.**
(14) Not applicable
(15) Not applicable
(16) Performance Calculations**
(17A) Financial Data Schedule of Standish Equity Fund***
(17B) Financial Data Schedule of Standish Fixed Income Fund***
(17C) Financial Data Schedule of Standish Global Fixed Income
Fund***
(17D) Financial Data Schedule of Standish Small Capitalization
Equity Fund***
(18) Not applicable
4
<PAGE>
(19A) Power of Attorney for Registrant (Richard S. Wood)**
(19B) Power of Attorney for Registrant (David W. Murray)**
(19C) Power of Attorney for Registrant (Samuel C. Fleming)**
(19D) Power of Attorney for Registrant (Benjamin M.
Friedman)**
(19E) Power of Attorney for Registrant (John H. Hewitt)**
(19F) Power of Attorney for Registrant (Edward H. Ladd)**
(19G) Power of Attorney for Registrant (Caleb Loring III)**
(19H) Power of Attorney for Registrant (D. Barr Clayson)**
(19I) Power of Attorney for Standish, Ayer & Wood Master
Portfolio (Richard S. Wood)***
(19J) Power of Attorney for Standish, Ayer & Wood Master
Portfolio (Samuel C. Fleming, Benjamin M. Friedman, John
H. Hewitt, Edward H. Ladd, Caleb Loring III, Richard S.
Wood and D. Barr Clayson)***
--------------------
* Filed as an exhibit to Registration
Statement No. 33-10615 and incorporated
herein by reference thereto.
** Filed as an exhibit to Registration
Statement No. 33-8214 and incorporated
herein by reference thereto.
*** Filed herewith.
Item 25. Persons Controlled by or under Common Control
with Registrant
No person is directly or indirectly controlled by or under common
control with the Registrant.
Item 26. Number of Holders of Securities
Set forth below is the number of record holders, as of February 1,
1996, of the shares of each series of the Registrant.
5
<PAGE>
Number of Record
Title of Class Holders
-------------- -------
Shares of beneficial interest, par value $.01, of:
Standish Fixed Income Fund 424
Standish Securitized Fund 15
Standish Short-Term Asset
Reserve Fund 110
Standish International Fixed
Income Fund 194
Standish Global Fixed Income Fund 49
Standish Equity Fund 146
Standish Small Capitalization
Equity Fund 416
Standish Massachusetts Intermediate
Tax Exempt Bond Fund 85
Standish Intermediate Tax Exempt
Bond Fund 100
Standish International Equity Fund 212
Standish Controlled Maturity Fund 10
Standish Fixed Income Fund II 4
Standish Small Cap Tax-Sensitive
Equity Fund 45
Standish Tax-Sensitive Equity Fund 23
Item 27. Indemnification
Under the Registrant's Agreement and Declaration of Trust, any past or
present Trustee or officer of the Registrant is indemnified to the fullest
extent permitted by law against liability and all expenses reasonably incurred
by him in connection with any action, suit or proceeding to which he may be a
party or is otherwise involved by reason of his being or having been a Trustee
or officer of the Registrant. The Agreement and Declaration of Trust of the
Registrant does not authorize indemnification where it is determined, in the
manner specified in the Declaration, that such Trustee or officer has not acted
in good faith in the reasonable belief that his actions were in the best
interest of the Registrant. Moreover, the Declaration does not authorize
indemnification where such Trustee or officer is liable to the Registrant or its
shareholders by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of his or her duties.
6
<PAGE>
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to Trustees, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that, in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a Trustee, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by any such Trustee, officer or controlling person
against the Registrant in connection with the securities being registered, and
the Commission is still of the same opinion, the Registrant will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification is against public policy as expressed in the Act and will be
governed by the final adjudication of such issue.
Item 28. Business and Other Connections of Investment Advisers
The business and other connections of the officers and Directors of
Standish, Ayer & Wood, Inc. ("Standish, Ayer & Wood"), the investment adviser to
all series of the Registrant other than Standish International Equity Fund,
Standish Global Fixed Income Fund Standish International Fixed Income Fund are
listed on the Form ADV of Standish, Ayer & Wood as currently on file with the
Commission (File No. 801-584), the text of which is hereby incorporated by
reference.
The business and other connections of the officers and partners of
Standish International Management Company, L.P. ("Standish International"), the
investment adviser to Standish International Equity Fund, Standish Global Fixed
Income Fund and Standish International Fixed Income Fund, are listed on the Form
ADV of Standish International as currently on file with the Commission (File No.
801-639338), the text of which is hereby incorporated by reference.
The following sections of each such Form ADV are incorporated herein by
reference:
(a) Items 1 and 2 of Part 2;
(b) Section IV, Business Background, of
each Schedule D.
Item 29. Principal Underwriter
(a) Standish Fund Distributors, L.P. serves or will
serve as the principal underwriter of each of the series of the
Registrant as listed in Item 26 above.
(b) Directors and Officers of Standish Fund
Distributors, L.P.:
7
<PAGE>
<TABLE>
<CAPTION>
Positions and Offices Positions and Offices
Name with Underwriter with Registrant
- ---- ---------------- ---------------
<S> <C> <C>
James E. Hollis, III Chief Executive Officer Vice President
Beverly E. Banfield Chief Operating Officer Vice President
</TABLE>
The General Partner of Standish Fund Distributors, L.P. is
Standish, Ayer & Wood, Inc.
(c) Not applicable.
Item 30. Location of Accounts and Records
The Registrant maintains the records required by Section 31(a) of the
Investment Company Act of 1940 and Rules 31a-1 to 31a-3 inclusive thereunder at
its principal office, located at One Financial Center, Boston, Massachusetts
02111. Certain records, including records relating to the Registrant's
shareholders and the physical possession of its securities, may be maintained
pursuant to Rule 31a-3 at the main offices of the Registrant's transfer and
dividend disbursing agent and custodian.
Item 31. Management Services
Not applicable
Item 32. Undertakings
(a) Not applicable.
(b) With respect to each of Standish Small Cap Tax-
Sensitive Equity Fund and Standish Tax-Sensitive
Equity Fund, the Registrant undertakes to file a
post-effective amendment, using financial
statements which need not be certified, within four
to six months from the effective date of the Post-
Effective Amendment to its Registration Statement
registering shares of such Funds.
(c) The Registrant undertakes to furnish each person to
whom a Prospectus is delivered a copy of Registrant's
latest annual report to shareholders, upon request
and without charge.
8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this
Post-Effective Amendment to its Registration Statement (which meets all the
requirements for effectiveness pursuant to Rule 485(b) under the Securities Act
of 1933) to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Boston and The Commonwealth of Massachusetts on the
25th day of March, 1996.
STANDISH, AYER & WOOD
INVESTMENT TRUST
/s/ David W. Murray
David W. Murray, Treasurer
The term "Standish, Ayer & Wood Investment Trust" means and refers to
the Trustees from time to time serving under the Agreement and Declaration of
Trust of the Registrant dated August 13, 1986, a copy of which is on file with
the Secretary of State of The Commonwealth of Massachusetts. The obligations of
the Registrant hereunder are not binding personally upon any of the Trustees,
shareholders, nominees, officers, agents or employees of the Registrant, but
bind only the trust property of the Registrant, as provided in the Agreement and
Declaration of Trust of the Registrant. The execution of this Registration
Statement has been authorized by the Trustees of the Registrant and this
Registration Statement has been signed by an authorized officer of the
Registrant, acting as such, and neither such authorization by such Trustees nor
such execution by such officer shall be deemed to have been made by any of them,
but shall bind only the trust property of the Registrant as provided in its
Declaration of Trust.
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to the Registration Statement has been signed below by
the following persons in the capacities and on the date indicated.
9
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
Richard S. Wood* Trustee and President March 25, 1996
- ----------------------
Richard S. Wood (principal executive
officer)
David W. Murray* Treasurer (principal March 25, 1996
- ----------------------
David W. Murray financial and accounting
officer) and Secretary
D. Barr Clayson* Trustee March 25, 1996
D. Barr Clayson
Samuel C. Fleming* Trustee March 25, 1996
Samuel C. Fleming
Benjamin M. Friedman* Trustee March 25, 1996
Benjamin M. Friedman
John H. Hewitt* Trustee March 25, 1996
John H. Hewitt
Edward H. Ladd* Trustee March 25, 1996
Edward H. Ladd
Caleb Loring III* Trustee March 25, 1996
Caleb Loring III
*By: /s/ David W. Murray
David W. Murray
Attorney-In-Fact
</TABLE>
10
<PAGE>
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, Standish, Ayer & Wood Master Portfolio has duly
caused this Post-Effective Amendment to the Registration Statement of Standish,
Ayer & Wood Investment Trust to be signed on its behalf by the undersigned,
thereunto duly authorized, outside the United States on the 25th day of March,
1996.
STANDISH, AYER & WOOD
MASTER PORTFOLIO
/s/ Richard S. Wood*
Richard S. Wood, President
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to the Registration Statement of Standish, Ayer & Wood
Investment Trust has been signed outside the United States by the following
persons in their capacities with Standish, Ayer & Wood Master Portfolio and on
the date indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
Richard S. Wood* Trustee and President March 25, 1996
- ----------------------
Richard S. Wood (principal executive
officer)
D. Barr Clayson* Trustee March 25, 1996
D. Barr Clayson
Samuel C. Fleming* Trustee March 25, 1996
Samuel C. Fleming
Benjamin M. Friedman* Trustee March 25, 1996
Benjamin M. Friedman
John H. Hewitt* Trustee March 25, 1996
John H. Hewitt
Edward H. Ladd* Trustee March 25, 1996
Edward H. Ladd
Caleb Loring III* Trustee March 25, 1996
Caleb Loring III
*By: /s/ Susan Jakuboski
Susan Jakuboski
Attorney-In-Fact
</TABLE>
11
<PAGE>
EXHIBIT INDEX
Exhibit
(6) Underwriting Agreement between the Registrant and Standish
Fund Distributors, L.P.
(9A) Transfer Agency and Service Agreement between the Registrant
and Investors Bank & Trust Company
(9B) Master Administration Agreement between Registrant and
Investors Bank & Trust Company
(9C) Form of Administrative Services Agreement between Standish,
Ayer & Wood, Inc. and the Registrant on behalf of Standish
Fixed Income Fund, Standish Equity Fund, Standish Small Cap
Equity Fund and Standish Global Fixed Income Fund
(11A) Opinion and Consent of Independent Public Accountants
(11B) Consent of Independent Public Accountants
(17A) Financial Data Schedule of Standish Equity Fund
(17B) Financial Data Schedule of Standish Fixed Income Fund
(17C) Financial Data Schedule of Standish Global Fixed Income Fund
(17D) Financial Data Schedule of Standish Small Capitalization
Equity Fund
(19I) Power of Attorney for Standish, Ayer & Wood Master Portfolio
(Richard S. Wood)
(19J) Power of Attorney for Standish, Ayer & Wood Master Portfolio
(Samuel C. Fleming, Benjamin M. Friedman, John H. Hewitt,
Edward H. Ladd, Caleb Loring III, Richard S. Wood and D.
Barr Clayson)
12
UNDERWRITING AGREEMENT
THIS UNDERWRITING AGREEMENT, dated this 21st day of February, 1996, by
and between Standish, Ayer and Wood Investment Trust, a Massachusetts business
trust (the "Trust"), and Standish Fund Distributors, L.P., a Delaware limited
partnership (the "Underwriter").
W I T N E S S E T H
WHEREAS, the Trust is registered as an open-end, management investment
company under the Investment Company Act of 1940, as amended (the "1940 Act"),
and has an effective registration statement (the "Registration Statement") with
the Securities and Exchange Commission (the "Commission") for the purpose of
registering shares of beneficial interest for offering under the Securities Act
of 1933, as amended (the "1933 Act");
WHEREAS, the Underwriter is registered as a broker-dealer with the
Commission and is a member in good standing of the National Association of
Securities Dealers, Inc. (the "NASD");
WHEREAS, the parties hereto deem it mutually advantageous that the
Underwriter should act as Principal Underwriter, as defined in the 1940 Act, for
the sale of the shares of beneficial interest of each series of the Trust which
the Trustees may or have established from time to time and make subject to this
Agreement by listing on Exhibit A hereto (individually, a "Portfolio" and
collectively, the "Portfolios"); and
NOW, THEREFORE, in consideration of the mutual covenants and benefits
set forth herein, the Trust and the Underwriter do hereby agree as follows:
1. The Trust does hereby grant to the Underwriter the right and option
to purchase shares of beneficial interest of each Portfolio (the "Shares") for
sale to investors, either directly or indirectly through other broker-dealers.
The Underwriter is not required to purchase any specified number of Shares, but
will purchase from the Trust only a sufficient number of Shares as may be
necessary to fill unconditional orders received from time to time by the
Underwriter for the benefit of investors.
2. The Underwriter shall use its best efforts (but only in states in
which it may lawfully do so) to obtain from investors unconditional orders for
Shares authorized for issue by the Trust and registered under the 1933 Act,
provided that the Underwriter may in its sole discretion refuse to accept orders
for Shares from any particular applicant. The Underwriter shall offer Shares at
the net asset value of the Shares, to be calculated for each Portfolio of Shares
as described in the Registration Statement, including the prospectuses, filed
with the Commission and in effect at the time of the offering.
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3. Any right granted to the Principal Underwriter to accept orders for
shares or make sales on behalf of the Trust will not apply to shares issued in
connection with the merger or consolidation of any other investment company with
the Trust, or any Portfolio, or its acquisition, by purchase or otherwise, of
all or substantially all the assets of any investment company or substantially
all the outstanding shares of any such company, and such right shall not apply
to shares that may be offered or otherwise issued by the Trust to shareholders
by virtue of their being shareholders of the Trust.
4. The Trust, on behalf of the respective Portfolio, shall receive the
applicable net asset value on all sales of shares by the Principal Underwriter
as agent of the Trust.
5. The Principal Underwriter shall not have "custody" (as such term is
interpreted by the staff of the Commission) of Trust assets, including payments
made pursuant to orders accepted by the Principal Underwriter. In this regard,
the Principal Underwriter shall not accept payment for Shares made by wire
transfer and shall not accept payment for Shares made by draft, other than
drafts made payable to the Trust. To the extent the Principal Underwriter
accepts drafts made payable to the Trust, the Principal Underwriter shall
deliver such drafts accompanied by proper applications for the purchase of
Shares to the Trust's custodian no later than 12:00 p.m. (Boston time) on the
first business day following the receipt by the Principal Underwriter of such
payments and applications.
6. The Trust will use its best efforts to register from time to time
under the 1933 Act such number of Shares not already so registered as the
Underwriter may be expected to sell on behalf of the Trust. The Underwriter and
the Trust agree to cooperate in taking such action as may be necessary from time
to time to qualify Shares so registered for sale by the Underwriter or the Trust
in any states mutually agreeable and to maintain such qualification. This
Agreement relates to the issue and sale of Shares that are duly authorized and
registered and available for sale by the Trust, including redeemed or
repurchased Shares if and to the extent that they may legally be sold and if,
but only if, the Trust sees fit to sell them.
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7. If and whenever the determination of net asset value is suspended
and until such suspension is terminated, the Underwriter shall not accept
further orders for Shares except unconditional orders placed with the
Underwriter before the Underwriter had knowledge of the suspension. In addition,
the Trust reserves the right to suspend sales and the Underwriter's authority to
accept orders for Shares on behalf of the Trust if, in the judgment of a
majority of the Board of Trustees or a majority of the Executive Committee of
such Board, if such body exists, it is in the best interests of the Trust to do
so, such suspension to continue for such period as may be determined by such
majority; and in that event, the Underwriter shall not sell any Shares on behalf
of the Trust while such suspension remains in effect except for Shares necessary
to cover unconditional orders accepted by the Underwriter before the Underwriter
had knowledge of the suspension.
8. This Agreement shall become effective on the date first written
above and shall terminate on any anniversary thereof if its terms and renewal
have not been approved by a majority vote of the Trustees of the Trust voting in
person, including a majority of its Trustees who are not "interested persons" of
the Trust and who have no direct or indirect financial interest in the operation
of the Underwriting Agreement (the "Qualified Trustees"), at a meeting of
Trustees called for the purpose of voting on such approval. This Agreement may
also be terminated at any time, without payment of any penalty, by the Trust on
60 days' written notice to the Underwriter, or by the Underwriter upon similar
notice to the Trust. This Agreement may also be terminated by a party upon five
(5) days' written notice to the other party in the event that the Commission has
issued an order or obtained an injunction or other court order suspending
effectiveness of the Registration Statement covering the Shares of the Trust.
Finally, this Agreement may also be terminated by the Trust upon five (5) days'
written notice to the Underwriter if the NASD has expelled the Underwriter or
suspended its membership in that organization.
9. No provisions of this Agreement may be changed, waived, discharged
or terminated orally, but only by an instrument in writing signed by the party
against which enforcement of the change, waiver, discharge or termination is
sought.
10. The parties to this Agreement acknowledge and agree that all
liabilities of the Trust arising hereunder, whether direct or indirect, of any
nature whatsoever shall be satisfied out of the assets of the Trust and that no
Trustee, officer or holder of shares of beneficial interest of the Trust shall
be personally liable for any of the foregoing liabilities. No Portfolio of the
Trust shall be responsible for the liabilities or obligations of any other
Portfolio. The Trust's Declaration of Trust, as amended from time to time, is on
file in the Office of Secretary of State of The Commonwealth of Massachusetts,
and a copy of the Trust's Declaration of Trust, as amended from time to time,
has been provided to the Underwriter. The Declaration of Trust describes in
detail the respective responsibilities and limitations on liability of the
Trustees, officers, and holders of Shares of the Trust.
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11. Nothing contained herein shall relieve the Trust of any obligation
under its investment advisory agreement or any other contract with any affiliate
of the Underwriter.
12. This Agreement shall automatically terminate in the event of its
assignment (as that term is defined in the 1940 Act).
13. In the event of any dispute between the parties, this Agreement
shall be construed according to the laws of The Commonwealth of Massachusetts
provided that nothing herein shall be construed in a manner inconsistent with
the 1940 Act, 1933 Act or any rule or order of the Securities and Exchange
Commission thereunder.
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IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be executed by their duly authorized officers as of day and year first above
written.
ATTEST: STANDISH, AYER AND WOOD
INVESTMENT TRUST on behalf of
each of its series
By:/s/ Lora L. Beaulieu By:/s/ Richard S. Wood
Its: Regulatory Specialist Its: President
ATTEST: STANDISH FUND DISTRIBUTORS, L.P.
By:/s/ Beverly E. Banfield By:/s/ James E. Hollis III
Its: Chief Operations Officer Its: Chief Executive Officer
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EXHIBIT A
Portfolios:
1. Standish Intermediate Tax Exempt Bond Fund
2. Standish Small Cap Tax-Sensitive Equity Fund
3. Standish Tax-Sensitive Equity Fund
Effective: February 22, 1996
Portfolios:
4. Standish Equity Fund
5. Standish Fixed Income Fund
6. Standish Global Fixed Income Fund
7. Standish Small Capitalization Equity Fund
Effective: April 29, 1996
Portfolios:
8. Standish Controlled Maturity Fund
9. Standish Fixed Income Fund II
10. Standish International Fixed Income Fund
11. Standish International Equity Fund
12. Standish Massachusetts Intermediate Tax Exempt Bond Fund
13. Standish Securitized Fund
14. Standish Short-Term Asset Reserve Fund
Effective: May 1, 1996
6
TRANSFER AGENCY AND SERVICE AGREEMENT
between
STANDISH AYER & WOOD INVESTMENT TRUST
and
INVESTORS BANK & TRUST COMPANY
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TABLE OF CONTENTS
Page
ARTICLE 1. Terms of Appointment; Duties of the Bank..........................1
ARTICLE 2. Sale of Company Shares............................................4
ARTICLE 3. Returned Checks..................................................5
ARTICLE 4 . Redemptions.......................................................5
ARTICLE 5. Transfers and Exchanges............................................5
ARTICLE 6. Right to Seek Assurances...........................................5
ARTICLE 7. Distributions......................................................6
ARTICLE 8. Other Duties.......................................................7
ARTICLE 9. Taxes.............................................................7
ARTICLE 10. Books and Records.................................................7
ARTICLE 11. Fees and Expenses................................................8
ARTICLE 12. Representations and Warranties of the Bank........................8
ARTICLE 13. Representations and Warranties of the Company.....................8
ARTICLE 14. Indemnification..................................................9
ARTICLE 15. Covenants of the Company and the Bank............................11
ARTICLE 16. Term of Agreement.................................................12
ARTICLE 17. Additional Funds..................................................13
ARTICLE 18. Assignment........................................................13
ARTICLE 19. Amendment........................................................13
ARTICLE 20. Massachusetts Law to Apply.......................................13
ARTICLE 21. Merger of Agreement and Severability.............................13
ARTICLE 22. Notices..........................................................14
ARTICLE 23. Limitation of Liability .........................................14
2
<PAGE>
TRANSFER AGENCY AND SERVICE AGREEMENT
AGREEMENT effective as of the 22nd day of March, 1996 by and between
STANDISH, AYER & WOOD, a Massachusetts business trust organized under the laws
of the Commonwealth of Massachusetts (the "Company"), and INVESTORS BANK & TRUST
COMPANY, a Massachusetts trust company (the "Bank").
WITNESSETH:
WHEREAS, the Company desires to appoint the Bank as its transfer agent,
dividend disbursing agent and agent in connection with certain other activities,
for each of the portfolios of the Company listed in Appendix A hereto, and the
Bank desires to accept such appointment;
WHEREAS, the Bank is duly registered as a transfer agent as provided in
Section 17A(c) of the Securities Exchange Act of 1934, as amended, (the "1934
Act");
WHEREAS, the Company is authorized to issue shares in separate series,
with each such series representing interests in a separate portfolio of
securities and other assets;
WHEREAS, the Company currently offers shares in fourteen series, named in
Appendix A hereto (such series, together with all other series subsequently
established by the Company and made subject to this Agreement in accordance with
Article 17, being herein referred to as the "Fund(s)");
NOW, THEREFORE, in consideration of the mutual covenants herein set forth,
the Company and the Bank agree as follows:
ARTICLE 1. Terms of Appointment; Duties of the Bank
1.01 Subject to the terms and conditions set forth in this Agreement, the
Company on behalf of the Funds, hereby employs and appoints the Bank to act as,
and the Bank agrees to act as, transfer agent for each of the Fund(s)'
authorized and issued shares of beneficial interest ("Shares"), dividend
disbursing agent and agent in connection with any accumulation, open-account or
similar plans provided to the shareholders of the Company ("Shareholders") and
set out in the currently effective prospectus and statement of additional
information, as each may be amended from time to time, (the "Prospectus") of the
Company, including without limitation any periodic investment plan or periodic
withdrawal program.
1.02 The Bank agrees that it will perform the following services:
(a) In connection with procedures established from time to time by
agreement between the Company and the Bank, the Bank shall:
(i) Receive for acceptance, orders for the purchase of Shares,
and promptly deliver payment and appropriate documentation therefor to the
custodian of the Company appointed by the Board of Trustees of the Company (the
"Custodian");
(ii) Pursuant to purchase orders, issue the appropriate number of
Shares and hold such Shares in the appropriate Shareholder account;
(iii) Receive for acceptance, redemption requests and redemption
directions and deliver the appropriate documentation therefor to the Custodian;
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<PAGE>
(iv) At the appropriate time as and when it receives monies paid to
it by the Custodian with respect to any redemption, pay over or cause to be paid
over in the appropriate manner such monies as instructed by the redeeming
Shareholders;
(v) Effect transfers of Shares by the registered owners thereof
upon receipt of appropriate instructions;
(vi) Prepare and transmit payments for dividends and distributions
declared by the Company on behalf of a Fund; and
(vii) Create and maintain all necessary records including those
specified in Article 10 hereof, in accordance with all applicable laws, rules
and regulations, including but not limited to records required by Section 31(a)
of the Investment Company Act of 1940, as amended (the "1940 Act"), and those
records pertaining to the various functions performed by it hereunder. All
records shall be available for inspection and use by the Company. Where
applicable, such records shall be maintained by the Bank for the periods and in
the places required by Rule 31a-2 under the 1940 Act.
(viii) Make available during regular business hours all records and
other data created and maintained pursuant to this Agreement for reasonable
audit and inspection by the Company, or any person retained by the Company. Upon
reasonable notice by the Company, the Bank shall make available during regular
business hours its facilities and premises employed in connection with its
performance of this Agreement for reasonable visitation by the Company, or any
person retained by the Company.
(ix) At the expense of and at the request of the Company, the Bank
shall maintain an adequate supply of blank share certificates for each Fund
providing for the issuance of certificates to meet the Bank's requirements
therefor. Such share certificates shall be properly signed by facsimile. The
Company agrees that, notwithstanding the death, resignation, or removal of any
officer of the Company whose signature appears on such certificates, the Bank
may continue to countersign certificates which bear such signatures until
otherwise directed by the Company. Share certificates may be issued and
accounted for entirely by the Bank and do not require any third party registrar
or other endorsing party.
(x) Issue replacement share certificates in lieu of certificates
which have been lost, stolen, mutilated or destroyed, without any further action
by the Board of Trustees or any officer of the Company, upon receipt by the Bank
of properly executed affidavits and lost certificate bonds, in form satisfactory
to the Bank with the Company and the Bank as obligees under the bond. At the
discretion of the Bank, and at its sole risk, the Bank may issue replacement
certificates without requiring the affidavits and lost certificate bonds
described above and the Bank agrees to indemnify the Company against any and all
losses or claims which may arise by reason of the issuance of such new
certificates in the place of the ones allegedly lost, stolen or destroyed.
(xi) Record the issuance of Shares of the Company and maintain,
pursuant to Rule 17Ad-10(e) under the 1934 Act, a record of the total number of
Shares of the Company which are authorized, based upon data provided to it by
the Company, and issued and outstanding. The Bank shall also provide the Company
on a regular basis with the total number of Shares which are authorized and
issued and outstanding and shall have no obligation, when recording the issuance
of Shares, to monitor the issuance of such Shares or to take cognizance of any
laws relating to the issue or sale of such Shares, which functions shall be the
sole responsibility of the Company.
(b) In addition to and not in lieu of the services set forth in the
above paragraph (a) or in any Schedule hereto, the Bank shall: (i) perform all
of the customary services of a transfer agent, dividend disbursing agent and, as
relevant, agent in connection with accumulation, open-account or similar plans
(including without limitation any periodic investment plan or periodic
withdrawal program); including but not limited to maintaining all Shareholder
accounts, preparing Shareholder meeting lists, mailing proxies, receiving and
tabulating proxies, mailing Shareholder reports and prospectuses to current
Shareholders, at such Shareholder's addresses specified on the Bank's books and
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<PAGE>
records or as specified by the Company, withholding taxes on all accounts,
including nonresident alien accounts, preparing and filing U.S. Treasury
Department Forms 1099 and other appropriate forms required with respect to
dividends and distributions by federal authorities for all Shareholders,
preparing and mailing confirmation forms and statements of account to
Shareholders for all purchases and redemptions of Shares and other confirmable
transactions in Shareholder accounts, responding to Shareholder telephone calls
and Shareholder correspondence, preparing and mailing activity statements for
Shareholders, and providing Shareholder account information; and (ii) provide a
system which will enable the Company to monitor the total number of shares sold
in each State. The Company shall (i) identify to the Bank in writing those
transactions and assets to be treated as exempt from blue sky reporting for each
State and (ii) verify the establishment of transactions for each State on the
system prior to activation and thereafter monitor the daily activity for each
State. The responsibility of the Bank for a Fund's blue sky state registration
status is solely limited to the initial establishment of transactions subject to
blue sky compliance by such Fund(s) and the reporting of such transactions to
the Fund(s) as provided above.
(c) Additionally, the Bank shall utilize a system to identify all Share
transactions which involve purchase and redemption orders that are processed at
a time other than the time of the computation of net asset value per share next
computed after receipt of such orders, and shall compute the net effect upon the
Fund(s) of such transactions so identified on a daily and cumulative basis.
ARTICLE 2. Sale of Company Shares
2.01 Whenever the Company, or its agent, shall sell or cause to be sold
any Shares of a Fund, the Company, or its agent, shall deliver or cause to be
delivered to the Bank a document duly specifying: (i) the name of the Fund whose
Shares were sold; (ii) the number of Shares sold, trade date, and price; (iii)
the amount of money to be delivered to the Custodian for the sale of such Shares
and specifically allocated to such Fund; and (iv) in the case of a new account,
a new account application or sufficient information to establish an account.
2.02 The Bank will, upon receipt by it of a check or other payment
identified by it as an investment in Shares of one of the Funds and drawn or
endorsed to the Bank as agent for, or identified as being for the account of,
one of the Funds, promptly deposit such check or other payment to the
appropriate account postings necessary to reflect the investment. The Bank will
notify the Company, or its designee, and the Custodian of all purchases and
related account adjustments.
2.03 Under procedures as established by mutual agreement between the
Company and the Bank, the Bank shall issue to the purchaser or his authorized
agent such Shares, computed to the nearest three decimal points, as he is
entitled to receive, based on the appropriate net asset value of the Funds'
Shares, determined in accordance with the applicable Fund's prospectus and
applicable Federal law or regulation. In issuing Shares to a purchaser or his
authorized agent, the Bank shall be entitled to rely upon the latest directions
given in accordance with procedures set forth in the applicable Fund's
prospectus, if any, previously received by the Bank from the purchaser or his
authorized agent concerning the delivery of such Shares.
2.04 The Bank shall not be required to issue any Shares of the Company
where it has received a written instruction from the Company or written
notification from any appropriate Federal or State authority that the sale of
the Shares of the Fund(s) in question has been suspended or discontinued, and
the Bank shall be entitled to rely upon such written instructions or written
notification. The Bank shall immediately notify the Company in the event it
receives instructions from any entity other than the Company to suspend or
discontinue the sale of Shares.
2.05 Upon the issuance of any Shares of any Fund(s) in accordance with
foregoing provisions of this Section, the Bank shall not be responsible for the
payment of any original issue or other taxes, if any, required to be paid by the
Company in connection with such issuance.
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<PAGE>
2.06 With the prior written consent of the Company, the Bank may establish
such additional rules and regulations governing the transfer or registration of
Shares as it may deem advisable and consistent with such rules and regulations
generally adopted by transfer agents, or any other rules and regulations.
ARTICLE 3. Returned Checks
3.01 In the event that any check or other order for the transfer of money
is returned unpaid for any reason, the Bank will take such steps as the Bank
may, in its discretion, deem appropriate to protect the Company from financial
loss or as the Company or its designee may instruct. Provided that the standard
procedures, as agreed upon from time to time, between the Company and the Bank,
regarding purchases and redemptions of Shares, are adhered to by the Bank, the
Bank shall not be liable for any loss suffered by a Fund as a result of returned
or unpaid purchase or redemption transactions. Legal or other expenses incurred
to collect amounts owed to a Fund as a consequence of returned or unpaid
purchase or redemption transactions shall be an expense of that Fund.
ARTICLE 4 . Redemptions
4.01 Shares of any Fund may be redeemed and the Bank will duly and timely
process all redemption requests in accordance with the procedures set forth in
the Prospectus of the Company.
ARTICLE 5. Transfers and Exchanges
5.01 The Bank is authorized to review and process transfers of Shares of
each Fund, exchanges between Funds on the records of the Funds maintained by the
Bank, and exchanges between the Company and any other entity as may be permitted
by the Prospectus of the Company. If Shares to be transferred are represented by
outstanding certificates, the Bank will, upon surrender to it of the
certificates in proper form for transfer, and upon cancellation thereof,
countersign and issue new certificates for a like number of Shares and deliver
the same. If the Shares to be transferred are not represented by outstanding
certificates, the Bank will, upon an order therefor by or on behalf of the
registered holder thereof in proper form, credit the same to the transferee on
its books. If Shares are to be exchanged for Shares of another Fund, the Bank
will process such exchange in the same manner as a redemption and sale of
Shares, except that it may in its discretion waive requirements for information
and documentation (other than information and documentation required by the
applicable Fund's prospectus in conjunction with an exchange transaction).
ARTICLE 6. Right to Seek Assurances
6.01 The Bank reserves the right to refuse to transfer or redeem Shares
until it is satisfied that the requested transfer or redemption is legally
authorized, and it shall incur no liability for the refusal, in good faith, to
make transfers or redemptions which the Bank, in its judgment, deems improper or
unauthorized, or until it is satisfied that there is no basis for any claims
adverse to such transfer or redemption. The Bank may, in effecting transfers,
rely upon the provisions of the Uniform Act for the Simplification of Fiduciary
Security Transfers or the Uniform Commercial Code, as the same may be amended
from time to time, which in the opinion of legal counsel for the Company or of
its own legal counsel protect it in not requiring certain documents in
connection with the transfer or redemption of Shares of any Fund, and the
Company shall indemnify the Bank for any act done or omitted by it in reasonable
reliance upon such laws or opinions of counsel of the Company or of its own
counsel.
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<PAGE>
ARTICLE 7. Distributions
7.01 The Company will promptly notify the Bank of the declaration of any
dividend or distribution. The Company shall furnish to the Bank a resolution of
the Board of Trustees of the Company certified by an officer of the Company (a
"Certificate"): (i) authorizing the declaration of dividends on a specified
periodic basis and authorizing the Bank to rely on oral instructions or a
Certificate specifying the date of the declaration of such dividend or
distribution, the date of payment thereof, the record date as of which
Shareholders entitled to payment shall be determined and the amount payable per
share to Shareholders of record as of the date and the total amount payable to
the Bank on the payment date; or (ii) setting forth the date of the declaration
of any dividend or distribution by a Fund, the date of payment thereof, the
record date as of which Shareholders entitled to payment shall be determined,
and the amount payable per share to the Shareholders of record as of that date
and the total amount payable to the Bank on the payment date.
7.02 The Bank, on behalf of the Company, shall instruct the Custodian
to place in a dividend disbursing account funds equal to the cash amount
of any dividend or distribution to be paid out. The Bank will calculate,
prepare and mail checks to (at the address as it appears on the records of
the Bank), or (where appropriate) credit such dividend or distribution to
the account of, Fund Shareholders, and maintain and safeguard all
underlying records.
7.03 The Bank will replace lost checks at its discretion and in conformity
with regular business practices.
7.04 The Bank will maintain all records necessary to reflect the crediting
of dividends which are reinvested in Shares of the Company, including without
limitation daily dividends.
7.05 The Bank shall not be liable for any improper payments made in
accordance with a resolution of the Board of Trustees of the Company, provided
that the Bank has not violated it's standard of care set forth in Section 14.02.
7.06 If the Bank shall not receive from the Custodian sufficient cash to
make payment to all Shareholders of the Company as of the record date, the Bank
shall, upon notifying the Company, withhold payment to all Shareholders of
record as of the record date until such sufficient cash is provided to the Bank.
ARTICLE 8. Other Duties
8.01 In addition to the duties expressly provided for herein, the Bank
shall perform such other duties and functions and shall be paid such amounts
therefor as may from time to time be agreed to in writing.
ARTICLE 9. Taxes
9.01 It is understood that the Bank shall file such appropriate
information returns concerning the payment of dividends and capital gain
distributions and tax withholding with the proper Federal, State and local
authorities as are required by law to be filed by the Company and shall withhold
such sums as are required to be withheld by applicable law.
ARTICLE 10. Books and Records
10.01 The Bank shall maintain confidential records showing for each
Shareholder's account the following: (i) names, addresses and tax identification
numbers; (ii) numbers of Shares held; (iii) historical information (as available
from prior transfer agents) regarding the account of each Shareholder, including
dividends paid and date and price of all transactions on a Shareholder's
account; (iv) any stop or restraining order placed against a Shareholder's
account; (v) information with respect to withholdings; (vi) any capital gain or
dividend reinvestment order, plan application, dividend address and
correspondence relating to the current maintenance of a Shareholder's account;
(vii) certificate numbers and denominations for any Shareholders holding
certificates; (viii) any information required in order for the Bank to perform
the calculations contemplated or required by this Agreement; and (ix) such other
information and data as may be required by applicable law.
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10.02 The Bank shall maintain such records in connection with the
performance of its duties hereunder as are required to be maintained by Rule
31a-1 under the 1940 Act and will preserve such records for the periods
prescribed in Rule 31a-2 under the 1940 Act. Such records may be inspected by
the Company at reasonable times. The Bank may, at its option at any time, and
shall forthwith upon the Company's demand, turn over to the Company and cease to
retain in the Bank's files, records and documents created and maintained by the
Bank in performance of its service or for its protection. At the end of the
six-year retention period, such periods and documents will either be turned over
to the Company, or destroyed in accordance with the Company's authorization.
10.03 Procedures applicable to the services to be performed hereunder may
be established from time to time by agreement between the Fund(s) and the Bank.
The Bank shall have the right to utilize any shareholder accounting and
recordkeeping systems which, in its good faith opinion, qualifies to perform any
services to be performed hereunder. The Bank shall keep records relating to the
services performed hereunder, in the form and manner as it may deem advisable
consistent with Rule 31a-2.
ARTICLE 11. Fees and Expenses.
11.01 For performance by the Bank pursuant to this Agreement, the Fund(s)
agree to pay the Bank an annual maintenance fee for each Shareholder account as
set out in the initial fee schedule attached hereto. Such fees and out-of-pocket
expenses and advances identified under Section 11.02 below may be changed from
time to time subject to mutual written agreement between the Fund(s) and the
Bank.
11.02 In addition to the fee paid under Section 11.01 above, the Fund(s)
agree to reimburse the Bank for reasonable out-of-pocket expenses or advances
incurred by the Bank for the items set out in the fee schedule attached hereto.
In addition, any other expenses incurred by the Bank at the request or with the
consent of the Fund(s) including, without limitation, any equipment or supplies
specifically ordered by the Company or required to be purchased by the Company,
will be reimbursed by the Fund(s).
11.03 The Fund(s) agree to pay all fees and reimbursable expenses within
thirty days following the mailing of the respective billing notice. Postage for
mailing of dividends, proxies, Fund reports and other mailings to all
shareholder accounts shall be advanced to the Bank by the Fund(s) at least seven
(7) days prior to the mailing date of such material.
ARTICLE 12. Representations and Warranties of the Bank
The Bank represents and warrants to the Company that:
12.01 It is a trust company duly organized and existing and in good
standing under the laws of the Commonwealth of Massachusetts.
12.02 It is empowered under applicable laws and by its charter and by-laws
to enter into and perform this Agreement.
12.03 All requisite corporate proceedings have been taken to authorize it
to enter into and perform this Agreement.
12.04 It has and will continue to have access to the necessary facilities,
equipment and personnel to perform its duties and obligations under this
Agreement.
12.05 It is and will remain registered as a transfer agent as provided in
Section 17A(c) of the 1934 Act.
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ARTICLE 13. Representations and Warranties of the Company
The Company represents and warrants to the Bank that:
13.01 It is a business trust duly established and existing and in good
standing under the laws of the State of its incorporation as set forth in the
preamble hereto.
13.02 It is empowered under applicable laws and by its charter documents
and by-laws to enter into and perform this Agreement.
13.03 All proceedings required by said charter documents and by-laws have
been taken to authorize it to enter into and perform this Agreement.
13.04 It is an open-end investment company registered under the 1940 Act.
13.05 A registration statement on Form N-1A (including a prospectus and
statement of additional information) under the Securities Act of 1933 and the
1940 Act is currently effective and will remain effective, and appropriate state
securities law filings have been made and will continue to be made, with respect
to all Shares of the Company being offered for sale.
13.06 When Shares are hereafter issued in accordance with the terms of the
Prospectus, such Shares shall be validly issued, fully paid and nonassessable by
the Fund(s).
ARTICLE 14. Indemnification
14.01 Except as set forth in subparagraph (f) hereof, the Bank shall not
be responsible for, and the Company shall indemnify and hold the Bank harmless
from and against, any and all losses, damages, costs, charges, reasonable
counsel fees, payments, expenses and liability arising out of or attributable
to:
(a) All actions taken or omitted to be taken by the Bank or its agent
or subcontractors in good faith in reliance on or use by the Bank or its agents
or subcontractors of information, records and documents which (i) are received
by the Bank or its agents or subcontractors and furnished to it by or on behalf
of the Fund(s), (ii) have been prepared and/or maintained by the Fund(s) or any
other person or firm on behalf of the Fund(s), and (iii) were received by the
Bank or its agents or subcontractors from a prior transfer agent.
(b) Any action taken or omitted to be taken by the Bank in connection
with its appointment in good faith in reliance upon any law, act, regulation in
effect at the time such action was taken or omitted, or interpretation of the
same.
(c) The Fund(s)' refusal or failure to comply with the terms of this
Agreement, or which arise out of the Funds' lack of good faith, negligence or
willful misconduct or which arise out of the breach of any representation or
warranty of the Fund(s) hereunder.
(d) The reliance on, or the carrying out by the Bank or its agents or
subcontractors of any instructions or requests, whether written or oral, of the
Fund(s).
(e) The offer or sale of Shares by the Company in violation of any
requirement under the federal securities laws or regulations or the securities
laws or regulations of any State that such Shares be registered in such State or
in violation of any stop order or other determination or ruling by any federal
agency or any State with respect to the offer or sale of such Shares in such
state.
(f) In addition to any other limitation provided herein, or by law,
indemnification under this Agreement shall not apply to actions or omissions of
the Bank or its directors, officers, employees, agents or subcontractors in
cases its own gross negligence, willful misconduct, bad faith, reckless
disregard of its duties or their own duties hereunder, knowing violation of law
or fraud.
9
<PAGE>
14.02 The Bank shall indemnify and hold the Fund(s) harmless from and
against any and all losses, damages, costs, charges, counsel fees, payments,
expenses and liability arising out of or attributed to any action or failure or
omission to act by the Bank as a result of the Bank's lack of good faith, gross
negligence, willful misconduct, knowing violation of law or fraud.
14.03 At any time the Bank may apply to any officer of the Company for
instructions, and may consult with legal counsel with respect to any matter
arising in connection with the services to be performed by the Bank under this
Agreement, and the Bank and its agents or subcontractors shall not be liable and
shall be indemnified by the Company for any action taken or omitted by it in
reasonable reliance upon such instructions or upon the opinion of such counsel
except for a knowing violation of law. The Bank, its agents and subcontractors
shall be protected and indemnified in acting upon any paper or document
furnished by or on behalf of the Fund(s), reasonably believed to be genuine and
to have been signed by the proper person or persons, or upon any instruction,
information, data, records or documents provided the Bank or its agents or
subcontractors by machine readable input, telex, CRT data entry or other similar
means authorized by the Fund(s), and shall not be held to have notice of any
change of authority of any person, until receipt of written notice thereof from
the Fund(s). The Bank, its agents and subcontractors shall also be protected and
indemnified in recognizing stock certificates which are reasonably believed to
bear the proper manual or facsimile signatures of an officer of the Company, and
one proper countersignature of any former transfer agent or registrar, or of a
co-transfer agent or co-registrar.
14.04 In the event either party is unable to perform its obligations under
the terms of this Agreement because of acts of God, strikes, interruption of
electrical power or other utilities, equipment or transmission failure or damage
reasonably beyond its control, or other causes reasonably beyond its control,
such party shall not be liable to the other for any damages resulting from such
failure to perform or otherwise from such causes.
14.05 Neither party to this Agreement shall be liable to the other party
for consequential damages under any provision of this Agreement even if the Bank
has been advised of the possibility of such damages, or for any act or failure
to act hereunder as contemplated by this Agreement.
14.06 In order that the indemnification provisions contained in this
Article 14 shall apply, upon the assertion of a claim for which either party may
be required to indemnify the other, the party seeking the indemnification shall
promptly notify the other party of such assertion, and shall keep the other
party advised with respect to all developments concerning such claim. The party
who may be required to indemnify shall have the option to participate with the
party seeking indemnification in the defense of such claim. The party seeking
indemnification shall in no case confess any claim or make any compromise in any
case in which the other party may be required to indemnify it except with the
other party's prior written consent, which consent shall not be unreasonably
withheld.
ARTICLE 15. Covenants of the Company and the Bank
15.01 The Company shall promptly furnish to the Bank the following:
(a) A certified copy of the resolution of the Trustees of the Company
authorizing the appointment of the Bank and the execution and delivery of this
Agreement.
(b) A copy of the charter documents and by-laws of the Company and all
amendments thereto.
(c) Copies of each vote of the Trustees designating authorized persons
to give instructions to the Bank, and a Certificate providing specimen
signatures for such authorized persons.
10
<PAGE>
(d) Certificates as to any change in any officer or Trustee of the
Company.
(e) If applicable a specimen of the certificate of Shares in each Fund
of the Company in the form approved by the Trustees, with a Certificate as to
such approval.
(f) Specimens of all new certificates for Shares, accompanied by the
Trustees' resolutions approving such forms.
(g) All account application forms and other documents relating to
shareholder accounts or relating to any plan, program or service offered by the
Company.
(h) A list of all Shareholders of the Fund(s) with the name, address
and tax identification number of each Shareholder, and the number of Shares of
the Fund(s) held by each, certificate numbers and denominations ( if any
certificates have been issued), lists of any account against which stops have
been placed, together with the reasons for said stops, and the number of Shares
redeemed by the Fund(s).
(i) An opinion of counsel for the Company with respect to the validity
of the Shares and the status of such Shares under the Securities Act of 1933.
(j) Copies of the Fund(s) registration statement on Form N-1A as
amended and declared effective by the Securities and Exchange Commission and all
post-effective amendments thereto.
(k) Such other certificates, documents or opinions as may mutually be
deemed necessary or appropriate for the Bank in the proper performance of its
duties.
15.02 The Bank hereby agrees to establish and maintain facilities and
procedures reasonably acceptable to the Company for safekeeping of stock
certificates, check forms and facsimile signature imprinting devices, if any;
and for the preparation or use, and for keeping account of, such certificates,
forms and devices.
15.03 The Bank shall keep records relating to the services to be performed
hereunder, in the form and manner as it may deem advisable consistent with Rule
31a-2 under the 1940 Act. To the extent required by Section 31 of the 1940 Act
and the Rules thereunder, the Bank agrees that all such records prepared or
maintained by the Bank relating to the services to be performed by the Bank
hereunder are the confidential property of the Company and will be preserved,
maintained and made available in accordance with such Section and Rules, and
will be surrendered to the Company on and in accordance with its request.
15.04 The Bank and the Company agree that all books, records, information
and data pertaining to the business of the other party which are exchanged or
received pursuant to the negotiation or the carrying out of this Agreement shall
remain confidential, and shall not be voluntarily disclosed to any other person,
except as may be required by law. Notwithstanding the foregoing, the Bank agrees
to permit examination of such books and records at any time or from time to time
during the Bank's business hours by representatives or designees of the
Securities and Exchange Commission (the "SEC") and to promptly furnish, upon
demand and to the location specified by the SEC, true, correct, complete and
current hard copies of any or all or any part of such books and records.
15.05 In case of any requests or demands for the inspection of the
Shareholder records of the Company, the Bank shall notify the Company and will
use its best efforts to secure instructions from an authorized officer of the
Company as to such instruction. The Bank reserves the right, however, to exhibit
the Shareholder records to any person whenever it is advised by its counsel that
it may be held liable for the failure to exhibit the Shareholder records to such
person.
11
<PAGE>
ARTICLE 16. Term of Agreement
16.01 This Agreement shall become effective on the date hereof (the "
Effective Date") and shall continue in effect for twelve months from the
Effective Date ( the "Initial Term") and from year to year thereafter with
respect to each Fund, provided that subsequent to the Initial Term, this
Agreement may be terminated by either party at any time without payment of any
penalty upon ninety (90) days written notice to the other. In the event such
notice is given by the Company, it shall be accompanied by a resolution of the
Board of Trustees, certified by the Secretary, electing to terminate this
Agreement and designating a successor transfer agent.
16.02 Should the Company exercise its right to terminate, all
out-of-pocket expenses associated with the movement of records and material will
be borne by the Company. Additionally, the Bank reserves the right to charge for
any other reasonable expenses associated with such termination.
ARTICLE 17. Additional Funds
17.01 In the event that the Company establishes one or more series of
Shares in addition to the initial series with respect to which it desires to
have the Bank render services as transfer agent under the terms hereof, it shall
so notify the Bank in writing, and if the Bank agrees in writing to provide such
services, such series of Shares or Trusts shall become a Fund hereunder.
ARTICLE 18. Assignment
18.01 Except as provided in Section 18.03 below, neither this Agreement
nor any rights or obligations hereunder may be assigned by either party without
the written consent of the other party.
18.02 This Agreement shall inure to the benefit of and be binding upon the
parties and their respective permitted successors and assigns.
18.03 The Bank, may without further consent on the part of the Company,
subcontract for the performance of any of the services to be provided hereunder
to third parties, including any affiliate of the Bank, provided that the Bank
shall remain liable hereunder for any acts or omissions of any subcontractor as
if performed by the Bank.
ARTICLE 19. Amendment
19.01 This Agreement may be amended or modified only by a written
agreement executed by both parties.
ARTICLE 20. Massachusetts Law to Apply
20.01 This Agreement shall be construed and the provisions thereof
interpreted under and in accordance with the laws of the Commonwealth of
Massachusetts.
ARTICLE 21. Merger of Agreement and Severability
21.01 This Agreement constitutes the entire agreement between the parties
hereto and supersedes any prior agreement with respect to the subject hereof
whether oral or written, it being duly recognized that the Bank and the Company
are parties to a Master Custodian Agreement and a Master Administration
Agreement.
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<PAGE>
21.02 In the event any provision of this Agreement shall be held
unenforceable or invalid for any reason, the remainder of the Agreement shall
remain in full force and effect.
21.03 This Agreement may be executed in any number of counterparts, each
of which shall be deemed to be an original; but such counterparts shall
together, constitute only one instrument.
ARTICLE 22. Notices
22. 01 Any notice or other instrument in writing authorized or required by
this Agreement to be given to either party hereto will be sufficiently given if
addressed to such party and mailed or delivered to it at its office at the
address set forth below:
For the Fund(s): Standish, Ayer & Wood Investment Trust
One Financial Center
Boston, Massachusetts 02111
Attention: Anne Herrmann
For the Bank: Investors Bank & Trust Company
P.O. Box 1537
Boston, Massachusetts 02205-1537
Attention: James Keenan
ARTICLE 23. Limitation of Liability
23.01 A copy of the Declaration of Trust of the Company is on
file with the Secretary of State of the Commonwealth of Massachusetts and notice
is hereby given that this Agreement has been executed on behalf of the Company
by an officer of the Company as an officer and not individually and the
obligations of the Company arising out of this Agreement are not binding upon
any of the trustees, officers, agents or shareholders of the Company
individually but are binding only upon the assets and property of the Company.
No series of the Company shall be liable for the obligations of any other series
of the Company.
13
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed in their names and on their behalf under their seals by and through
their duly authorized officers, as of the day and the year first above written.
Standish, Ayer & Wood Investment Trust
By: /S/ James E. Hollis
Name: James E. Hollis
Title: Executive Vice President
ATTEST: /s/Denise Kneeland
Investors Bank & Trust Company
By: /s/ Henry N. Joyce
Name: Henry N. Joyce
Title: Director
ATTEST: /s/Karen Pratt
DATE: March 19, 1996
14
<PAGE>
APPENDIX A
Standish Massachusetts Intermediate Tax Exempt Bond Fund
Standish Intermediate Tax Exempt Bond Fund
Standish International Fixed Income Fund
Standish Fixed Income Fund
Standish Short-Term Asset Reserve Fund
Standish Equity Fund
Standish Small Capitalization Equity Fund
Standish Securitized Fund
Standish Global Fixed Income Fund
Standish Controlled Maturity Fund
Standish Fixed Income Fund II
Standish Tax-Sensitive Equity Fund
Standish Small Cap Tax-Sensitive Equity Fund
Standish International Equity Fund
15
MASTER ADMINISTRATION AGREEMENT
between
STANDISH AYER & WOOD INVESTMENT TRUST
and
INVESTORS BANK & TRUST COMPANY
1
<PAGE>
MASTER ADMINISTRATION AGREEMENT
THIS ADMINISTRATION AGREEMENT is made as of March 4, 1996 by and
between STANDISH, AYER & WOOD INVESTMENT TRUST, a Massachusetts business trust
(the "Fund"), and INVESTORS BANK & TRUST COMPANY, a Massachusetts trust company
("Investors Bank").
WHEREAS, the Fund is registered as an open-end management investment
company under the Investment Company Act of 1940, as amended (the "1940 Act")
consisting of the separate portfolios set forth in Appendix A; and
WHEREAS, the Fund desires to retain Investors Bank to render certain
administrative services to the Fund and Investors Bank is willing to render such
services;
WITNESSETH:
NOW, THEREFORE, in consideration of the mutual covenants herein set
forth, it is agreed between the parties hereto as follows:
1. Appointment. The Fund hereby appoints Investors Bank to act as
Administrator of the Fund on the terms set forth in this Agreement. Investors
Bank accepts such appointment and agrees to render the services herein set forth
for the compensation herein provided.
2. Delivery of Documents. The Fund has furnished Investors Bank with
copies properly certified or authenticated of each of the following:
(a) Resolutions of the Fund's Board of Directors authorizing the
appointment of Investors Bank to provide certain administrative services to the
Fund and approving this Agreement;
(b) The Fund's incorporating documents filed with the state of [ the
state ] on [date] and all amendments thereto (the "Articles");
(c) The Fund's by-laws and all amendments thereto (the "By-Laws");
(d) The Fund's agreements with all service providers which include any
investment advisory agreements, sub-investment advisory agreements, custody
agreements, distribution agreements and transfer agency agreements
(collectively, the "Agreements");
(e) The Fund's most recent Registration Statement on Form N-1A (the
"Registration Statement") under the Securities Act of 1933 and under the 1940
Act and all amendments thereto; and
(f) The Fund's most recent prospectus and statement of additional
information (the "Prospectus"); and
2
<PAGE>
(g) Such other certificates, documents or opinions as may mutually be
deemed necessary or appropriate for Investors Bank in the proper performance of
its duties hereunder.
The Fund will immediately furnish Investors Bank with copies, properly
certified or authenticated, of all amendments of or supplements to the
foregoing. Furthermore, the Fund will notify Investors Bank as soon as possible
of any matter materially affecting the performance of Investors Bank of its
services under this Agreement.
3. Duties of Administrator. Subject to the supervision and direction of
the Board of Trustees of the Fund, Investors Bank, as an Administrator,
undertakes to perform the specific services set forth in Appendix B.
In performing all services under this Agreement, Investors Bank shall
act in conformity with the Fund's Articles and By-Laws and the 1940 Act, as the
same may be amended from time to time; and the investment objectives, investment
policies and other practices and policies set forth in the Fund's Registration
Statement, as the same may be amended from time to time. Notwithstanding any
item discussed herein, Investors Bank has no discretion over the Fund's assets
or choice of investments and cannot be held liable for any problem relating to
such investments.
4. Fees and Expenses.
(a) For the services to be rendered by Investors Bank, as provided for
in this Agreement, the Fund will compensate Investors Bank in accordance with
the fee schedule set forth in Appendix B. Such fees do not include out-of-pocket
disbursements (as delineated on the fee schedule or other expenses with the
prior approval of the Fund's management) of Investors Bank for which Investors
Bank shall be entitled to bill separately.
(b) Investors Bank shall not be required to pay any expenses incurred by
the Fund.
5. Limitation of Liability.
(a) Investors Bank, its directors, officers, employees and agents shall
not be liable for any error of judgment or mistake of law or for any loss
suffered by the Fund in connection with the performance of its obligations and
duties under this Agreement, except a loss resulting from willful misfeasance,
bad faith or gross negligence in the performance of such obligations and duties,
or by reason of its reckless disregard thereof. The Fund will indemnify
Investors Bank, its directors, officers, employees and agents against and hold
it and them harmless from any and all losses, claims, damages, liabilities or
expenses (including reasonable counsel fees and expenses) resulting from any
claim, demand, action or suit not resulting from the willful misfeasance, bad
faith or gross negligence of Investors Bank in the performance of such
obligations and duties or by reason of its reckless disregard thereof.
3
<PAGE>
(b) Investors Bank may apply to the Fund at any time for instructions
and may consult counsel for the Fund, or its own counsel, and with accountants
and other experts with respect to any matter arising in connection with its
duties hereunder, and Investors Bank shall not be liable or accountable for any
action taken or omitted by it in good faith in accordance with such instruction,
or with the opinion of such counsel, accountants, or other experts. Investors
Bank shall be protected in acting upon any document, certificate or instrument
which it reasonably believes to be genuine and to be signed or presented by the
proper person or persons. Investors Bank shall not be held to have notice of any
change of authority of any officers, employees, or agents of the Fund until
receipt of written notice thereof has been received from the Fund.
6. Termination of Agreement.
(a) This Agreement shall become effective on the date hereof and shall
remain in force unless terminated pursuant to the provisions of subsection (b)
of this Section 6, provided however that Section 5 shall survive the termination
of the Agreement.
(b) This Agreement may be terminated at any time without payment of any
penalty, upon 60 days written notice delivered by either party to the other.
7. Miscellaneous.
(a) Any notice or other instrument authorized or required by this
Agreement to be given in writing to the Fund or Investors Bank shall be
sufficiently given if addressed to that party and received by it at its office
set forth below or at such other place as it may from time to time designate in
writing.
To the Fund: Standish Ayer & Wood Investment Trust
One Financial Center
Boston, MA 02111
Attention: James E. Hollis III
To Investors Bank: Investors Bank & Trust Company
89 South Street
Boston, MA 02111
Attention: James Keenan
(b) This Agreement shall extend to and shall be binding upon the parties
hereto and their respective successors and assigns; provided, however, that this
Agreement shall not be assignable without the written consent of the other
party.
(c) This Agreement shall be construed in accordance with the laws of the
Commonwealth of Massachusetts.
4
<PAGE>
(d) This Agreement may be executed in any number of counterparts each of
which shall be deemed to be an original and which collectively shall be deemed
to constitute only one instrument.
(e) The captions of this Agreement are included for convenience of
reference only and in no way define or delimit any of the provisions hereof or
otherwise affect their construction or effect.
8. Confidentiality. All books, records, information and data pertaining
to the business of the other party which are exchanged or received pursuant to
the negotiation or the carrying out of this Agreement shall remain confidential,
and shall not be voluntarily disclosed to any other person, except as may be
required in the performance of duties hereunder or as otherwise required by law.
9. Use of Name. The Fund shall not use the name of Investors Bank or any
of its affiliates in any prospectus, sales literature or other material relating
to the Fund in a manner not approved by the Bank prior thereto in writing;
provided however, that the approval of Investors Bank shall not be required for
any use of its name which merely refers in accurate and factual terms to its
appointment hereunder or which is required by the Securities and Exchange
Commission or any state securities authority or any other appropriate
regulatory, governmental or judicial authority; provided further, that in no
event shall such approval be unreasonably withheld or delayed.
10. Limitation of Liability. A copy of the Articles is on file with the
Secretary of State of the Commonwealth of Massachusetts and notice is hereby
given that this Agreement has been executed on behalf of the Fund by an officer
of the Fund as an officer and not individually and the obligations of the Fund
arising out of this Agreement are not binding upon any of the trustees,
officers, or shareholders of the Fund individually but are binding only upon the
assets and property of the Fund. No series of the Fund shall be liable for the
obligations of any other series of the Fund.
5
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
duly executed and delivered by their duly authorized officers as of the date
first written above.
Standish, Ayer & Wood Investment Trust
By: /S/ James E. Hollis
Name: James E. Hollis
Title: Executive Vice President
ATTEST: /s/Denise Kneeland
Investors Bank & Trust Company
By: /s/ Henry N. Joyce
Name: Henry N. Joyce
Title: Director
ATTEST: /s/Karen Pratt
DATE: March 4, 1996
6
<PAGE>
APPENDIX A
Dated March 4, 1996
to
MASTER ADMINISTRATION AGREEMENT
between
STANDISH, AYER & WOOD INVESTMENT TRUST
and
INVESTORS BANK & TRUST COMPANY
dated March 4, 1996
Standish Massachusetts Intermediate Tax Exempt Bond Fund
Standish Intermediate Tax Exempt Bond Fund
Standish International Fixed Income Fund
Standish Fixed Income Fund
Standish Short-Term Asset Reserve Fund
Standish Equity Fund
Standish Small Capitalization Equity Fund
Standish Securitized Fund
Standish Global Fixed Income Fund
Standish Controlled Maturity Fund
Standish Fixed Income Fund II
Standish International Equity Fund
Standish Tax-Sensitive Equity Fund
Standish Small Cap Tax-Sensitive Equity Fund
7
STANDISH, AYER & WOOD INVESTMENT TRUST
FORM OF ADMINISTRATIVE SERVICES AGREEMENT
AGREEMENT made this 21st day of March, 1996, between Standish, Ayer &
Wood Investment Trust, a Massachusetts business trust (the "Trust"), on behalf
of each of the Funds listed on Exhibit A hereto (collectively, the "Funds"), and
Standish, Ayer & Wood, Inc. (the "Administrator").
1. Duties of the Administrator. The Trust hereby employs the
Administrator to act as administrator of the Funds and to administer their
affairs, subject to the supervision of the Board of Trustees of the Trust, for
the period and on the terms set forth in this Agreement.
The Administrator hereby accepts such employment, and undertakes to
afford to the Trust and its Board of Trustees the advice and assistance of the
Administrator's organization in the administration of the Funds and to furnish
for the use of the Funds office space and all necessary office facilities,
equipment and personnel for administering the affairs of the Funds and to pay
the portion allocable to the Funds of the salaries and fees of all officers and
Trustees of the Trust who are members of the Administrator's organization and
the salaries and fees of all personnel of the Administrator performing services
relating to administrative activities. The Administrator shall for all purposes
herein be deemed to be an independent contractor and shall, except as otherwise
expressly provided or authorized, have no authority to act for or represent the
Trust in any way or otherwise be deemed an agent of the Trust.
Notwithstanding the foregoing, the Administrator shall not be deemed to
have assumed any duties hereunder with respect to, and shall not, by the
execution of this Agreement, be responsible for, the management of the Funds'
assets or the rendering of investment advice and supervision with respect
thereto or the distribution of shares of the Funds, nor shall the Administrator
be deemed to have assumed hereunder or have any responsibility hereunder with
respect to functions specifically assumed by any transfer agent, custodian, or
shareholder servicing agent of the Trust or the Funds. It is intended that the
assets of the Funds will be invested in corresponding portfolios (the
"Portfolios") of Standish, Ayer & Wood Master Portfolio (the "Portfolio Trust"),
each Portfolio having substantially the same investment objective, policies and
restrictions as the applicable Fund. It is duly recognized that Standish, Ayer &
Wood, Inc. or its affiliate, Standish International Management Company, L.P.,
acts as the investment adviser to each Portfolio under Investment Advisory
Agreements, dated March 29, 1996. As part of its duties hereunder, however, the
Administrator shall obtain from the Portfolios and compile such information
about the Portfolios as requested from time to time by the Trust's Board of
Trustees.
1
<PAGE>
2. Allocation of Charges and Expenses. The Administrator will pay all
costs it incurs in connection with the performance of its duties under Section 1
of this Agreement. The Administrator will pay the compensation and expenses of
all of its personnel and will make available, without expense to the Trust, the
services of such of its directors, officers and employees as may duly be elected
officers or Trustees of the Trust, subject to their individual consent to serve
and to any limitations imposed by law. The Administrator will not be required to
pay any expenses of the Trust other than those specifically allocated to the
Administrator in this Section 2. In particular, but without limiting the
generality of the foregoing, the Administrator will not be required to pay: (i)
fees and expenses of any investment adviser of the Trust; (ii) organization
expenses of the Trust; (iii) fees and expenses incurred by the Trust in
connection with membership in investment company organizations; (iv)
commissions, fees and other expenses connected with the acquisition, disposition
and valuation of securities and other investments; (v) payment for portfolio
pricing services to a pricing agent, if any; (vi) legal, accounting or auditing
expenses; (vii) interest, insurance premiums, taxes or governmental fees; (viii)
the fees and expenses of the transfer agent of the Trust; (ix) the cost of
preparing stock certificates or any other expenses, including, without
limitation, clerical expenses of issue, redemption or repurchase of shares of
the Trust; (x) the expenses of and fees for registering or qualifying shares of
the Trust for sale and of maintaining the registration of the Trust and
registering the Trust as a broker or a dealer; (xi) the fees and expenses of
Trustees of the Trust who are not affiliated with the Administrator; (xii) the
cost of preparing and distributing reports and notices to shareholders, the
Securities and Exchange Commission and other regulatory authorities; (xiii) the
fees or disbursements of custodians of the Trust's assets, including expenses
incurred in the performance of any obligations enumerated by the Declaration of
Trust or By-Laws of the Trust insofar as they govern agreements with any such
custodian; (xiv) costs in connection with annual or special meetings of
shareholders, including proxy material preparation, printing and mailing; (xv)
any direct charges to shareholders approved by the Board of Trustees of the
Trust; (xvi) litigation and indemnification expenses and other extraordinary
expenses not incurred in the ordinary course of the Trust's business; or (xvii)
costs, including brokerage commissions and transfer taxes, in connection with
the purchase and sale of portfolio securities. The Administrator shall not be
required to pay expenses of activities which are primarily intended to result in
sales of shares of the Trust.
2
<PAGE>
3. Compensation of Administrator. The Board of Trustees of the Trust
has currently determined that the Administrator shall receive no compensation
from the Trust or the Funds in respect of the services to be rendered and the
facilities to be provided by the Administrator under this Agreement. If the
Board of Trustees determines that the Trust or a Fund should in the future
compensate the Administrator for such services and facilities, such compen
sation shall be set forth in a new agreement or in an amendment to this
Agreement to be entered into by the parties hereto.
4. Other Interests. It is understood that the Trustees and officers of
the Trust and shareholders of the Funds are or may be or become interested in
the Administrator as directors, officers, employees, shareholders or otherwise
and that directors, officers, employees and shareholders of the Administrator
are or may be or become similarly interested in the Funds, and that the
Administrator may be or become interested in the Funds as shareholder or
otherwise. It is also understood that directors, officers, employees and
shareholders of the Administrator may be or become interested (as directors,
trustees, officers, employees, stockholders or otherwise) in other companies or
entities (includ ing, without limitation, other investment companies) which the
Administrator may organize, sponsor or acquire, or with which it may merge or
consolidate, and which may include the words "Standish, Ayer & Wood" or any
combination or derivation thereof as part of their name, and that the
Administrator or its affiliates may enter into advisory or management or
administration agreements or other contracts or relationships with such other
companies or entities.
5. Administrator's Services Not Exclusive. The services of the
Administrator to the Trust and the Funds are not to be deemed to be exclusive,
the Administrator being free to render services to others and engage in other
business activities.
6. Sub-Administrators. The Administrator may employ one or more
sub-administrators from time to time to perform such of the acts and services of
the Administrator and upon such terms and conditions as may be agreed upon
between the Administrator and such sub-administrators and approved by the Board
of Trustees of the Trust.
7. Duration and Termination of this Agreement. This Agreement shall
become effective on the date hereof. Unless terminated as herein provided, this
Agreement shall remain in full force and effect for two years from the date
hereof and shall continue in full force and effect for successive periods of one
year thereafter, but only so long as each such continuance is approved annually
(i) by the Board of Trustees of the Trust and (ii) by the vote of a majority of
those Trustees of the Trust who are not interested persons of the Administrator
or the Trust.
3
<PAGE>
Either party hereto may, at any time on at least sixty (60) days' prior
written notice to the other, terminate this Agreement without the payment of any
penalty, by action of Board of Trustees of the Trust or the Board of Trustees of
the Administrator, as the case may be. This Agreement shall terminate
automatically in the event of its assignment.
8. Amendments of the Agreement. This Agreement may be amended by a
writing signed by both parties hereto, provided that no amendment to this
Agreement shall be effective until approved by the (i) vote of a majority of
those Trustees of the Trust who are not interested persons of the Administrator
or the Trust, and (ii) vote of the entire Board of Trustees of the Trust.
9. Limitation of Liability of Fund and Administrator. The Administrator
shall not be liable for any error of judgment or mistake of law or for any loss
suffered by the Trust in connection with the matters to which this Agreement
relates, except a loss resulting from willful misfeasance, bad faith or gross
negligence on its part in the performance of its duties or from reckless
disregard by the Administrator of its obligations and duties under this
Agreement. Any person, even though also employed by the Administrator, who may
be or become an employee of and paid by the Trust shall be deemed, when acting
within the scope of his or her employment by the Trust, to be acting in such
employment solely for the Trust and not as its employee or agent. It is
understood and expressly stipulated that none of the Trustees, officers, agents
or shareholders of the Trust shall be personally liable hereunder. None of the
trustees, officers, agents or shareholders of the Trust assume any personal
liability for obligations entered into on behalf of the Trust. All persons
dealing with the Trust must look solely to the property of the Trust for the
enforcement of any claims against the Trust. No Fund shall be liable for any
claims against any other Fund or any other series of the Trust.
10. Name of the Trust. The Trust hereby agrees that in the event that
neither the Administrator nor any of its affiliates acts as the administrator or
investment adviser to the Trust, the name of the Trust and the Fund will be
changed to one that does not contain the name "Standish, Ayer & Wood" or
otherwise suggest an affiliation with the Administrator.
11. Certain Definitions. The terms "assignment" and "interested
persons" when used herein shall have the respective meanings specified in the
Investment Company Act of 1940, as amended, as now in effect or as hereafter
amended subject, however, to such exemptions as may be granted by the Securities
and Exchange Commission by any rule, regulation or order.
4
<PAGE>
12. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of The Commonwealth of Massachusetts.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed on the day and year first above written.
STANDISH, AYER & WOOD
INVESTMENT TRUST on behalf
of each of its series
listed on Exhibit A hereto
By:________________________________
Its:_______________________________
STANDISH, AYER & WOOD, INC.
By:________________________________
Its:_______________________________
5
<PAGE>
EXHIBIT A
FUNDS
-----
Standish Equity Fund
Standish Global Fixed Income Fund
Standish Fixed Income Fund
Standish Small Capitalization Equity Fund
6
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in Post-Effective Amendment No. 73 to the
Registration Statement on Form N-1A (1933 Act File Number 33-8214) of Standish,
Ayer & Wood Investment Trust: Standish Global Fixed Income Fund, Standish Small
Capitalization Equity Fund, Standish Fixed Income Fund and Standish Equity Fund
(the Funds) of our reports dated February 13, 1996, on our audits of the
financial statements and financial highlights of the Funds, which reports are
included in the Annual Reports to Shareholders for the year ended December 31,
1995 which are also included in this Registration Statement.
We also consent to the references to our Firm under the caption "The Funds
Financial Highlights" in the Prospectus and under the caption "Independent
Accountants" in the Statement of Additional Information of the Registration
Statement.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
March 22, 1996
Exhibit 11
INDEPENDENT AUDITORS' CONSENT
We consent in this Post-Effective Amendment No. 73 to Registration Statement
(No. 33-8214) of Standish, Ayer & Wood Investment Trust (including Standish
Fixed Income Fund, Standish Small Capitilization Equity Fund, and Standish
Equity Fund) to the references to us under the heading "Experts and Financial
Statements" appearing in the Statements of Additional Information, which are a
part of such Registration Statement.
Deloitte & Touche LLP
Boston, Massachusetts
March 21, 1996
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 7
<NAME> Standish Equity Fund
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-1-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 79,797,103
<INVESTMENTS-AT-VALUE> 90,172,258
<RECEIVABLES> 4,290,315
<ASSETS-OTHER> 7,939
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 94,470,512
<PAYABLE-FOR-SECURITIES> 4,112,823
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,825,306
<TOTAL-LIABILITIES> 5,938,129
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 75,690,282
<SHARES-COMMON-STOCK> 0
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 20,724
<ACCUMULATED-NET-GAINS> 2,485,145
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 10,377,680
<NET-ASSETS> 88,532,383
<DIVIDEND-INCOME> 2,587,046
<INTEREST-INCOME> 354,705
<OTHER-INCOME> 0
<EXPENSES-NET> 745,641
<NET-INVESTMENT-INCOME> 2,196,110
<REALIZED-GAINS-CURRENT> 21,564,705
<APPREC-INCREASE-CURRENT> 10,229,026
<NET-CHANGE-FROM-OPS> 33,989,841
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 2,203,103
<DISTRIBUTIONS-OF-GAINS> 8,605,084
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 932,595
<NUMBER-OF-SHARES-REDEEMED> 1,705,536
<SHARES-REINVESTED> 294,939
<NET-CHANGE-IN-ASSETS> 1,941,626
<ACCUMULATED-NII-PRIOR> 27,644
<ACCUMULATED-GAINS-PRIOR> (503,470)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 555,164
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 745,641
<AVERAGE-NET-ASSETS> 107,354,842
<PER-SHARE-NAV-BEGIN> 28.66
<PER-SHARE-NII> 0.76
<PER-SHARE-GAIN-APPREC> 9.94
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 4.55
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 34.81
<EXPENSE-RATIO> 0.69
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 1
<NAME> Standish Fixed Income Fund
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-1-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 2,202,180,228
<INVESTMENTS-AT-VALUE> 2,290,782,421
<RECEIVABLES> 75,371,896
<ASSETS-OTHER> 2,643,852
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 2,368,798,169
<PAYABLE-FOR-SECURITIES> 75,832,612
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 25,858,670
<TOTAL-LIABILITIES> 101,691,282
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 2,189,898,702
<SHARES-COMMON-STOCK> 0
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 3,798,973
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (15,716,937)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 89,126,149
<NET-ASSETS> 2,267,106,887
<DIVIDEND-INCOME> 2,549,708
<INTEREST-INCOME> 150,691,965
<OTHER-INCOME> 0
<EXPENSES-NET> 7,404,762
<NET-INVESTMENT-INCOME> 145,836,911
<REALIZED-GAINS-CURRENT> 23,525,323
<APPREC-INCREASE-CURRENT> 166,624,878
<NET-CHANGE-FROM-OPS> 335,987,112
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 142,241,343
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 28,240,659
<NUMBER-OF-SHARES-REDEEMED> 11,707,017
<SHARES-REINVESTED> 4,933,561
<NET-CHANGE-IN-ASSETS> 624,173,605
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (39,038,855)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 6,321,967
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 7,404,762
<AVERAGE-NET-ASSETS> 1,976,135,297
<PER-SHARE-NAV-BEGIN> 18.91
<PER-SHARE-NII> 1.35
<PER-SHARE-GAIN-APPREC> 2.08
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 1.42
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 20.92
<EXPENSE-RATIO> 0.38
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 10
<NAME> Standish Global Fixed Income Fund
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-1-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 132,363,100
<INVESTMENTS-AT-VALUE> 137,098,681
<RECEIVABLES> 4,934,405
<ASSETS-OTHER> 988,319
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 143,021,405
<PAYABLE-FOR-SECURITIES> 1,616,615
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 3,505,768
<TOTAL-LIABILITIES> 5,122,383
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 136,347,384
<SHARES-COMMON-STOCK> 0
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 424,310
<ACCUMULATED-NET-GAINS> (3,304,586)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 5,280,534
<NET-ASSETS> 137,899,022
<DIVIDEND-INCOME> 78,598
<INTEREST-INCOME> 11,448,898
<OTHER-INCOME> 0
<EXPENSES-NET> 834,547
<NET-INVESTMENT-INCOME> 10,692,949
<REALIZED-GAINS-CURRENT> 1,595,141
<APPREC-INCREASE-CURRENT> 10,169,602
<NET-CHANGE-FROM-OPS> 22,457,692
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 10,692,949
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 736,162
<NUMBER-OF-SHARES-SOLD> 558,609
<NUMBER-OF-SHARES-REDEEMED> 1,332,915
<SHARES-REINVESTED> 317,125
<NET-CHANGE-IN-ASSETS> 2,667,509
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (4,587,876)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 535,630
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 834,547
<AVERAGE-NET-ASSETS> 134,323,863
<PER-SHARE-NAV-BEGIN> 17.99
<PER-SHARE-NII> 1.59
<PER-SHARE-GAIN-APPREC> 1.60
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 1.65
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 19.53
<EXPENSE-RATIO> 0.62
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 5
<NAME> Standish Small Capitilization Equity Fund
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-1-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 140,875,466
<INVESTMENTS-AT-VALUE> 175,580,488
<RECEIVABLES> 7,356,501
<ASSETS-OTHER> 1,003
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 182,937,992
<PAYABLE-FOR-SECURITIES> 1,917,395
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 550,631
<TOTAL-LIABILITIES> 2,468,026
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 139,154,962
<SHARES-COMMON-STOCK> 0
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 6,582,032
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 34,732,972
<NET-ASSETS> 180,469,966
<DIVIDEND-INCOME> 353,726
<INTEREST-INCOME> 302,991
<OTHER-INCOME> 0
<EXPENSES-NET> 1,093,006
<NET-INVESTMENT-INCOME> (436,289)
<REALIZED-GAINS-CURRENT> 12,833,607
<APPREC-INCREASE-CURRENT> 27,572,436
<NET-CHANGE-FROM-OPS> 39,969,754
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 4,170,634
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,215,183
<NUMBER-OF-SHARES-REDEEMED> 465,355
<SHARES-REINVESTED> 73,432
<NET-CHANGE-IN-ASSETS> 72,878,656
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (1,644,652)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 871,879
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,093,006
<AVERAGE-NET-ASSETS> 145,484,130
<PER-SHARE-NAV-BEGIN> 42.15
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 12.57
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 1.26
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 53.46
<EXPENSE-RATIO> 0.75
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
POWER OF ATTORNEY
The undersigned officer of Standish, Ayer & Wood Master Portfolio, a
New York trust (the "Portfolio Trust"), does hereby constitute and appoint
Edward H. Ladd, David W. Murray and Susan Jakuboski, and each of them acting
singly, to be my true, sufficient and lawful attorneys, with full power to each
of them, and each of them acting singly, to sign for me, in my name and in the
capacities indicated below, the Registration Statements on Form N-8A and Form
N-1A to be filed by the Portfolio Trust under the Investment Company Act of
1940, as amended (the "1940 Act"), and any and all amendments thereto, (2) any
and all amendments to the registration statement on Form N-1A of Standish, Ayer
& Wood Investment Trust (the "Investment Trust") under the 1940 Act and the
Securities Act of 1933, as amended (the "1933 Act"), (3) the registration
statement on Form N-1A of any other registered investment company that is or
will become a holder of an interest in the Portfolio Trust (a "Holder"), (4) any
registration statement on Form N-14, and any and all amendments thereto, filed
by the Portfolio Trust, the Investment Trust or any Holder and (5) any and all
other documents and papers relating thereto, and generally to do all such things
in my name and on my behalf in the capacities indicated below to enable the
Portfolio Trust to comply with the 1940 Act and the 1933 Act (where applicable)
and all requirements of the Securities and Exchange Commission thereunder,
hereby ratifying and confirming my signature as it may be signed by said
attorneys or each of them to any and all such documents.
IN WITNESS WHEREOF, I have hereunder set my hand on this Instrument
outside the United States on this 10th day of February, 1996.
/s/ Richard S. Wood
- --------------------------------
Richard S. Wood, President
(principal executive officer)
POWER OF ATTORNEY
We, the undersigned Trustees of Standish, Ayer & Wood Master Portfolio,
a New York trust (the "Portfolio Trust"), do hereby severally constitute and
appoint Richard S. Wood, Edward H. Ladd, David W. Murray and Susan Jakuboski,
and each of them acting singly, to be our true, sufficient and lawful attorneys,
with full power to each of them, and each of them acting singly, to sign for
each of us, in the name of each of us and in the capacity as trustee, the
Registration Statement on Form N-1A to be filed by the Portfolio Trust under the
Investment Company Act of 1940, as amended (the "1940 Act"), and any and all
amendments thereto, (2) any and all amendments to the registration statement on
Form N-1A of Standish, Ayer & Wood Investment Trust (the "Investment Trust")
under the 1940 Act and the Securities Act of 1933, as amended (the "1933 Act"),
(3) the registration statement on Form N-1A of any other registered investment
company that is or will become a holder of an interest in the Portfolio Trust (a
"Holder"), (4) any registration statement on Form N-14, and any and all
amendments thereto, filed by the Portfolio Trust, the Investment Trust or any
Holder and (5) any and all other documents and papers relating thereto, and
generally to do all such things in the name of each of us and on behalf of each
of us in the capacity as trustee to enable the Portfolio Trust to comply with
the 1940 Act and the 1933 Act (where applicable) and all requirements of the
Securities and Exchange Commission thereunder, hereby ratifying and confirming
the signature of each of us as it may be signed by said attorneys or each of
them to any and all such documents.
IN WITNESS WHEREOF, we have hereunder set our hands on this Instrument
outside the United States on this 10th day of February, 1996.
/s/ D. Barr Clayson /s/ Samuel C. Fleming
D. Barr Clayson, Trustee Samuel C. Fleming, Trustee
/s/ Benjamin M. Friedman /s/ John H. Hewitt
Benjamin M. Friedman, Trustee John H. Hewitt, Trustee
/s/ Edward H. Ladd /s/ Caleb Loring
Edward H. Ladd, Trustee Caleb Loring III, Trustee
/s/ Richard S. Wood
Richard S. Wood, Trustee
