STANDISH, AYER & WOOD INVESTMENT TRUST
One Financial Center
Boston, Massachusetts 02111
(617) 350-6100
STANDISH TAX-SENSITIVE EQUITY FUND ("Equity Fund")
Seeks to maximize after-tax total return, with an emphasis on long-term
growth of capital, through investment primarily in equity securities of
companies that appear to be undervalued
STANDISH SMALL CAP TAX-SENSITIVE EQUITY FUND ("Small Cap Fund")
Seeks to maximize after-tax total return, with an emphasis on long-term
growth of capital, through investment primarily in equity securities of
small capitalization companies that appear to be undervalued.
STANDISH INTERMEDIATE TAX EXEMPT BOND FUND ("Tax Exempt Fund")
Seeks to provide a high level of interest income exempt from federal
income taxes, while seeking preservation of shareholders' capital
through investing the Fund's assets in investment grade intermediate-
term municipal securities.
Prospectus
January 1, 1996
Equity Fund, Small Cap Fund and Tax Exempt Fund (collectively, the
"Funds") are members of the Standish, Ayer & Wood family of funds. Each Fund is
organized as a separate diversified investment series of Standish, Ayer & Wood
Investment Trust (the "Trust"), an open-end management investment company. Each
Fund's investment adviser is Standish, Ayer & Wood, Inc., Boston, Massachusetts
(the "Adviser").
Investors may purchase shares of the Funds directly from the Funds
without a sales commission or other transaction charges. Unless waived by the
Funds, the minimum initial investment is $100,000. Additional investments may be
made in amounts of at least $10,000 ($5,000 for the Tax Exempt Fund).
This combined Prospectus is intended to set forth concisely the
information about the Funds and the Trust that a prospective investor should
know before investing. Investors are encouraged to read this Prospectus and
retain it for future reference. Additional information about the Funds and the
Trust is contained in a combined Statement of Additional Information which has
been filed with the Securities and Exchange Commission and is available upon
request and without charge by calling or writing the Trust at the telephone
number or address listed above. The Statement of Additional Information bears
the same date as this Prospectus and is incorporated by reference into this
Prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
1
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The Equity Fund and the Small Cap Fund (together, the "Tax-Sensitive
Funds") are designed for investors in the upper federal income tax brackets who
are seeking the highest long-term after-tax total return. In seeking to achieve
its investment objective, the Equity Fund invests primarily in publicly traded
equity securities of United States companies and, to a lesser extent, of foreign
issuers. The Small Cap Fund invests primarily in publicly traded securities,
including securities being issued in initial public offerings, of small
capitalization companies located in the United States and, to a lesser extent,
in foreign countries. The Tax-Sensitive Funds do not normally invest in equity
securities that are restricted as to disposition by federal securities laws or
are otherwise illiquid but may do so to a limited extent under certain
circumstances.
The Tax Exempt Fund is designed for investors in the upper federal
income tax brackets who are seeking a higher level of federally tax-free income
than is normally provided by short-term tax exempt investments, and more price
stability than investments in long-term municipal bonds. Municipal bonds in
which the Tax Exempt Fund invests will be rated, at the time of purchase, within
the four highest ratings by Moody's Investor Services, Inc. ("Moody's"),
Standard & Poor's Ratings Group ("Standard & Poor's") or Fitch Investors
Service, Inc. ("Fitch") or, if unrated, determined to be of comparable credit
quality.
There can, of course, be no guarantee that a Fund's objective will be
achieved. The Tax-Sensitive Funds are not tax-exempt funds. While the
Tax-Sensitive Funds are managed to consider the impact of federal and state
taxes on shareholders' investment returns, it is expected that the Tax-Sensitive
Funds will earn and distribute taxable income and realize and distribute capital
gains from time to time and neither Tax-Sensitive Fund will be managed
considering any particular state's tax laws.
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Contents Page
Expense Information................................................
Financial Highlights...............................................
Investment Objectives and Policies.................................
Risk Factors, Suitability and Other Investment Practices...........
Calculations of Performance Data...................................
Dividends and Distributions........................................
Purchase of Shares.................................................
Exchange of Shares.................................................
Redemption of Shares...............................................
Management.........................................................
Federal Income Taxes...............................................
The Trust and Its Shares...........................................
Custodian, Transfer Agent and Dividend-Disbursing Agent............
Independent Accountants............................................
Legal Counsel......................................................
<TABLE>
<CAPTION>
EXPENSE INFORMATION
<S> <C> <C> <C>
Equity Small Cap Tax Exempt
Shareholder Transaction Expenses Fund Fund Fund
- -------------------------------- ---- ---- ----
Maximum Sales Load Imposed on Purchases None None None
Maximum Sales Load Imposed on Reinvested Dividends None None None
Deferred Sales Load None None None
Redemption Fees None None None
Exchange Fees None None None
Equity Small Cap Tax Exempt
Annual Fund Operating Expenses Fund Fund Fund
- ------------------------------ ---- ---- ----
(as a percentage of average net assets) (After Expense
Limitation)
Management Fees 0.50% 0.60% .16%+
12b-1 Fees None None None
Other Expenses 0.30% 0.25% 0.49%
Total Fund Operating Expenses* 0.80% 0.85% 0.65%+
===== ===== =====
(See the next page for footnotes.)
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
Example: Hypothetically assume that each Fund's annual return is 5% and that its
operating expenses are exactly as just described. For every $1,000 you invested,
you would have paid the following expenses if you closed your account after the
number or years indicated:
Equity Small Cap Tax Exempt
Fund Fund Fund
<S> <C> <C> <C>
After 1 Year $ 8 $ 9 $ 6
After 3 Years $26 $27 $12
After 5 Years N/A N/A $36
After 10 Years N/A N/A $81
</TABLE>
The purpose of the above table is to assist an investor in
understanding the various costs and expenses of the Funds that an investor in
the Funds will bear directly or indirectly. See "Management - Investment
Adviser" and "Management - Expenses." The Tax-Sensitive Funds are newly
organized and have no operating history. The figures shown in the caption "Other
Expenses," which includes, among other things, custodian and transfer agent
fees, registration costs and payments for insurance and audit and legal
services, and in the hypothetical example are (1) with respect to the
Tax-Sensitive Funds, based on estimates of the Funds' expenses for their initial
fiscal years ending September 30, 1996 and (2) with respect to the Tax Exempt
Fund, based upon expenses for the fiscal year ended December 31, 1994 during
which time the Adviser agreed not to impose a portion of its fee.
* The Adviser has voluntarily agreed to limit each Fund's Total Fund
Operating Expenses (excluding litigation, indemnification and other
extraordinary expenses) to the following percentages of each Fund's average
daily net assets for the Fund's fiscal year ending September 30, 1996: Equity
Fund--1.00%; Small Cap Fund--0.90% and Tax Exempt Fund--0.65%. These agreements
are voluntary and temporary and may be discontinued or revised by the Adviser at
any time after September 30, 1996. It is expected that, after December 31, 1995,
the Tax Exempt Fund will change its fiscal year end from December 31 to
September 30.
+ After expense limitation. If the Adviser had not agreed to the limits
described above, Management Fees and Total Fund Operating Expenses of the Tax
Exempt Fund would have been 0.40% and 0.89% for the fiscal year ended December
31, 1994.
THE INFORMATION IN THE TABLE AND HYPOTHETICAL EXAMPLE SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR
LESS THAN THOSE SHOWN. MOREOVER, WHILE THE EXAMPLE ASSUMES A 5% ANNUAL RETURN,
EACH FUND'S ACTUAL PERFORMANCE WILL VARY AND MAY RESULT IN AN ACTUAL RETURN
GREATER OR LESS THAN 5%.
4
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
Equity Fund and Small Cap Fund are newly organized and have no
operating history. The following financial highlights are presented for the Tax
Exempt Fund. The financial highlights for the years ended December 31, 1993 and
1994 have been audited by Coopers & Lybrand L.L.P., independent accountants,
whose report, together with the financial statements of the Tax Exempt Fund, is
incorporated into the Statement of Additional Information.
Standish Intermediate Tax Exempt Bond Fund
From
Six Months Year Ended November 2, 1992
Ended December 31, (start of business) to
June 30, 1995# 1994 1993 December 31, 1992*
------------- ----- ----- -----------------
Per share data (for a share outstanding throughout each period):
<S> <C> <C> <C> <C>
Net asset value -- beginning of period $19.91 $21.44 $20.42 $20.00
------ ------ ------ ------
Income from investment operations:
Net investment income $0.54 $0.95 $0.93 $0.14
Net realized and unrealized gain (loss)
on investments $0.83 ($1.51) $1.24 $0.42
----- ------- ----- ------
Total from investment operations $1.37 ($0.56) 2.17 $0.56
----- ------- ---- ------
Less distributions declared to shareholders:
From net investment income ($0.54) ($0.95) ($0.93) ($0.14)
From realized gains .-- ($0.02) ($0.22) .--
------- ------- ------- ------
Total distributions declared to
shareholders ($0.54) ($0.97) ($1.15) ($0.14)
------- ------- ------- -------
Net asset value -- end of period $20.74 $19.91 $21.44 $20.42
====== ====== ====== ======
Total Return 6.66%y (2.68%) 10.78% 17.02%+
Ratios (to average net assets)/
Supplemental Data:
Expenses** 0.65% + 0.65% 0.65% 0.65% +
Net investment income** 4.84% + 4.62% 4.36% 4.16% +
- --------
* Audited by other auditors.
y The total return for the period is not annualized.
+ Computed on an annualized basis.
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<PAGE>
Portfolio turnover 28% 157% 126% 62%
Net assets at end of
period (000 omitted) $28,759 $20,514 $17,132 $5,577
** The Adviser did not impose a portion of its advisory fee. If this reduction
had not been undertaken, the net investment income per share and the ratios
would have been:
Net investment income per share $0.53 $0.90 $0.85 $0.12#
Ratios (to average net assets):
Expenses 0.77% + 0.89% 1.15% 1.47%+,#
Net investment income 4.72% + 4.38% 3.86% 3.34%+,#
- --------------------------
+ Computed on an annualized basis.
# Unaudited.
Further information about the performance of the Tax Exempt Fund is
contained in the Tax Exempt Fund's Annual Report, which may be obtained from the
Trust without charge.
</TABLE>
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INVESTMENT OBJECTIVES AND POLICIES
THE TAX-SENSITIVE FUNDS
The Tax-Sensitive Funds are designed for investors in the upper federal
income tax brackets who seek the highest long-term after-tax total return.
Taxable dividends from any source, other than long-term capital gains,
distributed to individuals by mutual funds are currently taxed at federal income
tax rates of up to 39.6%, and the effective tax rate may be higher due to
limitations at higher income levels on allowable deductions and exemptions.
Long-term capital gains distributed to individuals by mutual funds are currently
taxed at federal tax rates of up to 28%. Taxable dividends from any source,
including long-term capital gains, distributed to corporations by mutual funds
are currently taxed at federal income tax rates of up to 35%. Additionally,
state taxes on mutual fund distributions reduce after-tax returns.
The Tax-Sensitive Funds employ various techniques to seek the highest
long-term total return after considering the impact of federal and state income
taxes paid by shareholders on the Funds' distributions.
o The Tax-Sensitive Funds seek to minimize, to the extent
practicable, taxable dividend income by emphasizing securities
with low dividend yields and minimizing investments in debt
obligations. The Tax-Sensitive Funds also intend to be
substantially fully invested in equity investments.
o When selling portfolio securities, each Tax-Sensitive Fund
will generally select the highest cost shares of the specific
security (and/or, if gains will be realized, shares that will
produce long-term capital gains) in order to reduce, to the
extent practicable, the realization of capital gains,
particularly short-term capital gains. Additionally, each
Tax-Sensitive Fund may, in furtherance of its investment
objective, sell portfolio securities in order to realize
capital losses. Realized capital losses can be used to offset
realized capital gains, thus reducing the amount of capital
gains a Fund will distribute.
o The Tax-Sensitive Funds intend to have relatively low annual
portfolio turnover rates under normal circumstances. For
taxpayers in the highest tax brackets, ordinary income is
taxed at a higher tax rate than capital gains on securities
held for more than one year ("long-term capital gains").
Ordinary income includes dividends from a Fund's net
investment income and net short-term capital gains. Net
long-term capital gains realized and distributed by the
Tax-Sensitive Funds are treated by shareholders as long-term
capital gains for federal income tax purposes. Therefore, each
Tax- Sensitive Fund intends, when practicable and prudent, to
hold appreciated portfolio securities for more than one year
in order to reduce the realization and, therefore, the
distribution to shareholders of short-term capital gains
taxable to them as ordinary income.
Although the Tax-Sensitive Funds expect that they will generally use
some or all of the foregoing management techniques in considering the impact of
federal and state income taxes on a shareholder's investment returns, portfolio
management decisions may be made based on other criteria in particular cases,
where warranted by actual or anticipated economic, market or issuer-specific
developments and the Tax-Sensitive Funds may from time to time employ investment
management techniques that produce taxable ordinary income. For example, a
particular security may be sold, even though a Fund may realize a short-term
capital gain, if the value of that security is believed to have peaked or is
anticipated to decline before the Fund would have held it for the long-term
holding period. Similarly, a Fund may from time to time be required to sell
securities it would otherwise have continued to hold in order to generate cash
to pay expenses or satisfy shareholder redemption requests. Further, certain
equity securities and debt obligations in which the Tax-Sensitive Funds will
invest will produce ordinary taxable income on a regular basis.
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<PAGE>
While attempting to reduce the impact of federal and state income taxes
paid by shareholders on Fund distributions, each of the Tax-Sensitive Funds will
follow a disciplined investment strategy, emphasizing stocks that the Adviser
believes to offer above average potential for capital growth that offer low
dividend yields. Although the precise application of the discipline will vary
according to market conditions, the Adviser intends to use statistical modeling
techniques that utilize stock specific factors, such as current price earnings
ratios, stability of earnings growth, forecasted changes in earnings growth,
trends in consensus analysts' estimates, and measures of earnings results
relative to expectations, to identify equity securities that are attractive as
purchase candidates. Once identified, these securities will be subject to
further fundamental analysis by the Adviser's professional staff before they are
included in the Fund's holdings. Securities selected for inclusion in a Fund's
portfolio will represent various industries and sectors.
Standish Tax-Sensitive Equity Fund
Investment Objective. The Equity Fund seeks to maximize after-tax total
return, consisting of long-term growth of capital with nominal current income,
through investment primarily in equity securities of companies that appear to be
undervalued.
Investment Policies. Under normal circumstances, at least 80% of the
Equity Fund's total assets will be invested in equity and equity-related
securities, such as common stocks and preferred stocks. The Equity Fund may
invest in equity securities of foreign issuers that are listed on a U.S.
securities exchange or traded in the U.S. over-the-counter market, but will not
invest more than 10% of its total assets in such securities that are not so
listed or traded.
Although the Equity Fund will prefer long-term capital gains to taxable
dividend income and interest income, the Fund may to a limited extent invest in
debt securities and preferred stocks that are convertible into, or exchangeable
for, common stocks. Such securities will be rated Aaa, Aa or A by Moody's or
AAA, AA or A by Standard & Poor's or, if not rated, are determined by the
Adviser to be of comparable credit quality. Up to 5% of the Fund's total assets
invested in convertible debt securities and preferred stocks may be rated Baa by
Moody's or BBB by Standard & Poor's or, if not rated, determined by the Adviser
to be of comparable credit quality. As a temporary matter and for defensive
purposes, the Fund may purchase investment grade short-term debt securities, the
amount of which will depend on market conditions and the needs of the Fund. The
Fund will attempt to reduce risk by diversifying its investments within the
investment policy set forth above.
The Equity Fund may, but is not required to, utilize various investment
strategies and techniques to hedge various market risks (such as broad or
specific equity market movements and currency exchange rate risks) or to enhance
potential gain. Such strategies and techniques are generally accepted as part of
modern portfolio management and are regularly utilized by many mutual funds. In
the course of pursuing its investment objective, the Equity Fund may: (i)
purchase and write (sell) put and call options on securities, equity indices and
other financial instruments; (ii) purchase and sell financial futures contracts
on U.S. equity indices and options thereon; (iii) enter into repurchase
agreements; (iv) enter into various currency transactions, such as currency
forward contracts, currency futures contracts, currency swaps or options on
currencies or currency futures; and (v) make short sales. These techniques may
produce taxable ordinary income and/or short-term or long-term capital gains.
Although the Fund does not normally invest in equity securities that are
restricted as to disposition by federal securities laws or are otherwise
illiquid, the Fund may so invest up to 15% of its net assets when, in the
opinion of the Adviser, investment opportunities presented by such securities
are particularly attractive. For further information concerning the securities
in which the Equity Fund may invest and the investment strategies and techniques
it may employ, see "Risk Factors, Suitability and Other Investment Practices and
Policies" below in this Prospectus.
8
<PAGE>
Standish Small Cap Tax-Sensitive Equity Fund
Investment Objective. The Small Cap Fund seeks to maximize after-tax
total return, consisting of long-term growth of capital with nominal current
income, through investment primarily in equity securities of small
capitalization companies that appear to be undervalued.
Investment Policies. Under normal circumstances, at least 80% of the
Small Cap Fund's total assets will be invested in equity and equity-related
securities (such as common stocks, preferred stocks and options, futures and
other strategic transactions based on common stocks) of small capitalization
companies. The Fund invests in publicly traded securities, including securities
issued in initial public offerings. The Fund may invest up to 15% of its total
assets in foreign equity securities, including securities of foreign issuers
that are listed on a U.S. exchange or traded in the U.S. over-the-counter market
and sponsored and unsponsored American Depositary Receipts (ADRs). As a
temporary matter and for defensive purposes, the Fund may purchase investment
grade short-term debt securities, the amount of which will depend on market
conditions and the needs of the Fund.
The common stocks of small growth companies in which the Small Cap Fund
invests have market capitalizations up to and including $700 million. Market
capitalization is determined by multiplying the number of fully diluted equity
shares by the current market price per share. Morningstar Mutual Funds, a
leading mutual fund monitoring service, includes in the small-cap category all
funds that invest in companies with median market capitalizations of less than
$1 billion. The Fund expects to emphasize investments in companies involved with
value added products or services in expanding industries. At times, particularly
when the Adviser believes that securities of small capitalization companies are
overvalued, the Fund's portfolio may include securities of larger, more mature
companies, provided that the value of the securities of such larger, more mature
companies shall not exceed 20% of the Fund's total assets. The Fund will attempt
to reduce risk by diversifying its investments within the investment policy set
forth above.
The Small Cap Fund may, but is not required to, utilize various
investment strategies and techniques to hedge various market risks (such as
broad or specific equity market movements and currency exchange rate risks) or
to enhance potential gain. Such strategies and techniques are generally accepted
as part of modern portfolio management and are regularly utilized by many mutual
funds. In the course of pursuing its investment objective, the Small Cap Fund
may: (i) purchase and write (sell) put and call options on securities, equity
indices and other financial instruments; (ii) purchase and sell financial
futures contracts on U.S. equity indices and options thereon; (iii) enter into
repurchase agreements; (iv) enter into various currency transactions, such as
currency forward contracts, currency futures contracts, currency swaps or
options on currencies or currency futures; and (v) make short sales. These
techniques may produce taxable ordinary income and/or short-term or long-term
capital gains. Although the Fund does not normally invest in equity securities
that are restricted as to disposition by federal securities laws or are
otherwise illiquid, the Fund may so invest up to 15% of its net assets when, in
the opinion of the Adviser, investment opportunities presented by such
securities are particularly attractive. For further information concerning the
securities in which the Small Cap Fund may invest and the investment strategies
and techniques it may employ, see "Risk Factors, Suitability and Other
Investment Practices and Policies" below in this Prospectus.
Standish Intermediate Tax Exempt Bond Fund
Investment Objective. The Tax Exempt Fund seeks to provide a high level
of interest income exempt from federal income taxes, while seeking preservation
of shareholders' capital, through investing the Fund's assets primarily in
investment grade intermediate-term municipal securities. The investment
objective of the Fund is a fundamental policy that may not be changed without
shareholder approval.
9
<PAGE>
Investment Policies. The Tax Exempt Fund will seek to achieve its
objective by investing in a diversified portfolio of municipal securities which
are obligations issued by or on behalf of states, territories and possessions
(including Puerto Rico, the U.S. Virgin Islands and Guam) of the United States,
and the District of Columbia and their political subdivisions, agencies,
authorities and instrumentalities, the interest on which is, in the opinion of
bond counsel to the issuer, excluded from gross income for federal income tax
purposes.
Although the Tax Exempt Fund will invest primarily in investment grade
municipal bonds of any maturity, it intends to emphasize high quality
intermediate-term municipal bonds. The Fund's dollar-weighted average portfolio
maturity will normally be in a range of three to ten years. However, the Fund
may purchase individual securities with effective maturities which are outside
of this range. A mutual fund with an average maturity longer than that of the
Fund will tend to have a higher yield, but will generally exhibit greater share
price volatility. Conversely, a mutual fund with a shorter maturity will
generally have a lower yield, but will generally offer more price stability. The
Fund's emphasis on high quality securities is expected to reduce its share price
volatility. Because the Fund holds investment grade municipal securities, the
income earned on shares of the Fund will tend to be less than it might be on a
portfolio emphasizing lower quality securities.
The Tax Exempt Fund may invest, without percentage limitations, in
municipal bonds rated at the time of purchase within one of the four highest
municipal ratings by Moody's (Aaa, Aa, A, Baa), Standard & Poor's (AAA, AA, A,
BBB) or Fitch (AAA, AA, A, BBB) or, if unrated, determined by the Adviser to be
of comparable credit quality. The Fund may invest in municipal notes rated MIG-1
or MIG-2 by Moody's or at least SP-1 or SP-2 by Standard & Poor's or in
municipal notes that are not rated, provided that, in the opinion of the
Adviser, such notes are of a comparable credit quality. See "Securities Ratings"
below for a discussion of securities ratings generally and how these policies
apply to certain types of rated securities.
Although as a matter of fundamental policy it is authorized to do so,
the Tax Exempt Fund does not expect to invest more than 25% of its total assets
in any one of the following sectors of the municipal securities market:
hospitals, ports, airports, colleges and universities, turnpikes and toll roads,
housing bonds, lease rental bonds, industrial revenue bonds or pollution control
bonds. For the purposes of this limitation, securities whose credit is enhanced
by bond insurance, letters of credit or other means are not considered to belong
to a particular sector.
As a fundamental policy, at least 80% of the Tax Exempt Fund's net
assets will normally be invested in tax-exempt municipal securities. Municipal
securities pay interest income that is excluded from gross income for federal
income tax purposes. Also as a fundamental policy, during normal market
conditions, at least 65% of the Fund's net assets will be invested in municipal
bonds. There may be certain occasions, however, during which more than 20% of
the Tax Exempt Fund's assets may be invested in taxable instruments. In unusual
circumstances, as a temporary defensive measure, the Fund may invest in taxable,
fixed income obligations when the Adviser believes that market conditions, such
as rising interest rates or other adverse factors, would cause serious erosion
of portfolio value. In addition, the Fund may also invest up to 20% of its net
assets in taxable, fixed income obligations when there is a yield disparity
between taxable and municipal securities on an after-tax basis which is
favorable for taxable investments. The Fund's taxable investments will generally
be of comparable credit quality and maturity to the municipal securities in
which the Fund invests and will be limited primarily to obligations issued or
guaranteed by the U.S. Government, its agencies, instrumentalities or
authorities; investment grade corporate debt securities; prime commercial paper;
certain certificates of deposit of domestic banks; and repurchase agreements,
secured by U.S. Government securities, with maturities not in excess of seven
days. To the extent that income dividends include income from taxable sources, a
portion of a shareholder's dividend income will be taxable. See "Federal Income
Taxes" in this Prospectus.
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<PAGE>
The Tax Exempt Fund may, but is not required to, utilize various
investment strategies and techniques to hedge various market risks (such as
broad or specific fixed income market movements and interest rate risks), to
manage the effective maturity or duration of fixed-income portfolio securities,
or to enhance potential gain. Such strategies and techniques are generally
accepted as part of modern portfolio management and are regularly utilized by
many mutual funds. In the course of pursuing its investment objective, the Tax
Exempt Fund may: (i) purchase and write (sell) put and call options on
securities, fixed-income indices and other financial instruments; (ii) purchase
and sell financial futures contracts and options thereon; (iii) enter into
repurchase agreements; (iv) purchase securities on a forward commitment, when
issued or delayed delivery basis; and (v) enter into various interest rate
transactions, such as swaps, caps, floors and collars. The Fund may also invest
up to 15% of its net assets in the aggregate of restricted securities,
securities for which there are no readily available marked quotations and other
illiquid securities. For further information concerning the securities in which
the Tax Exempt Fund may invest and the investment strategies and techniques it
may employ, see "Risk Factors, Suitability and Other Investment Practices and
Policies" below in this Prospectus.
RISK FACTORS, SUITABILITY AND OTHER INVESTMENT PRACTICES
Because each Fund owns different types of investments, its performance
is affected by a variety of factors. The value of a Fund's investments and the
income they generate will vary from day to day, and generally reflect interest
rates, market conditions, and other company, political and economic news. When
you sell your shares, they may be worth more or less than what you paid for
them. Because of the uncertainty inherent in all investments, no assurance can
be given that any Fund will achieve its investment objective.
Investing in Small Capitalization Companies
The Small Cap Fund will emphasize, and the Equity Fund may invest in,
smaller, lesser-known companies. Although investments in securities of small
capitalization companies may present greater opportunities for growth, they also
involve greater risks than are customarily associated with investments in
larger, more mature, better known companies. Small capitalization securities may
be subject to more volatile market movements than securities of larger
capitalization securities, such as those included in the S&P 500 Index. Smaller
companies may have limited product lines, markets or financial resources, and
they may depend upon a limited or less experienced management group. Small
capitalization securities may be traded only 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 a Fund of portfolio securities to meet redemptions or otherwise
may require the Fund to sell securities at a discount from market prices, over a
longer period of time or during periods when disposition is not desirable.
The Small Cap and Equity Funds may participate in initial public
offerings for previously privately held companies whose securities are expected
to be liquid after the offering. Such companies may have a more limited
operating history and/or less experienced management than other companies in
which the Funds invest, which may pose additional risks. The Small Cap Fund will
participate in initial public offerings of companies that are expected to have
market capitalizations of up to $700 million after consummation of the offering.
Foreign Securities
Although Equity Fund intends to invest primarily in equity securities
of U.S. issuers, the Equity Fund may invest (without limitation) in equity
securities of issuers located in any foreign country which securities are listed
on a U.S. exchange or traded in the U.S. over-the-counter market. The Equity
Fund will not invest more than 10% of its total assets in foreign equity
securities that are not so listed or traded. Small Cap Fund may invest up to 15%
of its total assets in equity securities of issuers located in any foreign
country, including but, not limited to, securities of foreign issuers that are
listed on a U.S. exchange or traded in the U.S. over-the-counter market and
sponsored and unsponsored American Depositary Receipts (ADRs). Securities of
foreign issuers, including emerging markets companies, will be selected for
investment by the Equity and Small Cap Funds if the Adviser believes these
securities will offer above average capital growth potential.
11
<PAGE>
Investing in securities of foreign companies and securities denominated
in foreign currencies or utilizing foreign currency transactions involve certain
risks of political, economic and legal conditions and developments not typically
associated with investing in securities of U.S. companies. Such conditions or
developments might include unfavorable changes in currency exchange rates,
exchange control regulations (including currency blockage), civil disorder,
expropriation of assets of companies in which a Fund invests, nationalization of
such companies, imposition of withholding or other foreign taxes on dividend or
interest payments (or, in some cases, capital gains), and possible difficulty in
obtaining and enforcing judgments against a foreign issuer. Also, foreign
securities may not be as liquid and may be more volatile than comparable
domestic securities. Furthermore, issuers of foreign securities are subject to
different, often less comprehensive, accounting, reporting and disclosure
requirements than domestic issuers. The Funds, in connection with purchases and
sales of foreign securities, other than securities denominated in U.S. dollars,
will incur transaction costs in converting currencies. Brokerage commissions in
foreign countries are generally fixed, and other transaction costs related to
securities exchanges are generally higher than in the U.S. Most foreign
securities of the Funds are held by foreign subcustodians that satisfy certain
eligibility requirements. Foreign custodial costs relating to the Funds'
portfolio securities are higher than domestic custodial costs. In addition,
foreign settlement of securities transactions is subject to local law and custom
that is not, generally, as well established or as reliable as U.S. regulation
and custom applicable to settlements of securities transactions and,
accordingly, there is generally perceived to be a greater risk of loss in
connection with securities transactions in many foreign countries. Fixed
commissions on foreign stock exchanges are generally higher than negotiated
commissions on U.S. exchanges. Finally, transactions in equity securities
effected on some foreign stock exchanges, and consequently the Funds'
investments on such exchanges, may not be settled promptly and therefore such
investments may be less liquid and subject to the risk of fluctuating currency
exchange rates pending settlement. The Equity Fund's policy of investing no more
than 10% of its total assets in foreign securities that are not listed on a U.S.
stock exchange or traded in the U.S. over-the-counter market and the Small Cap
Fund's policy of investing no more than 15% of its total assets in foreign
equity securities are intended to limit each Fund's exposure to the risks
associated with investments in foreign securities.
Investments by the Tax-Sensitive Funds in securities of issuers in
emerging markets involves risks in addition to those discussed above. Many
emerging market countries have experienced substantial, and in some periods
extremely high, rates of inflation for many years. Inflation and rapid
fluctuations in inflation rates have had and may continue to have negative
effects on the economies and securities markets of certain emerging market
countries. Moreover, the economies of individual emerging market countries may
differ favorably or unfavorably from the U.S. economy in such respects as the
rate of growth of gross domestic product, the rate of inflation, capital
reinvestment, resource self-sufficiency and balance of payments position.
Municipal Securities
Municipal securities in which the Tax Exempt Fund may invest include
debt obligations issued to obtain funds for various public purposes, including
the construction of a variety of public facilities such as bridges, highways,
housing, hospitals, mass transportation, schools, streets and water and sewer
works. Other public purposes for which municipal securities or bonds may be
issued include the refunding of outstanding obligations, obtaining funds for
general operating expenses and the obtaining of funds to loan to other public
institutions and facilities. In addition, certain types of industrial revenue
bonds are, or have been under prior tax law, issued by or on behalf of public
authorities to obtain funds to provide privately operated housing facilities,
sports facilities, convention or trade show facilities, airport, mass transit,
port or parking facilities, air or water pollution control facilities and
certain local facilities for water supply, gas, electricity, or sewage or solid
waste disposal. The interest on certain such bonds (and the Fund's distributions
to its shareholders from such interest) may be a tax preference item for
purposes of the federal alternative minimum tax: these bonds are sometimes
referred to as "AMT Bonds" and are treated as taxable obligations for the
purposes of the Fund's policies. See "Federal Income Taxes" in this Prospectus.
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Municipal bonds are issued in order to meet long-term capital needs and
generally have maturities of more than one year when issued. The two principal
classifications of municipal bonds are "general obligation" and "revenue" bonds.
General obligation bonds are secured by the pledge of the municipality's faith,
credit and taxing power for the payment of principal and interest, and are
considered the safest type of municipal bond. Revenue bonds are payable only
from the revenues derived from a particular project or facility and are
generally dependent solely on a specific revenue source. Industrial revenue
bonds are a specific type of revenue bond backed by the credit and security of a
private user. Assessment bonds, which are issued by a specially created district
or project area which levies a tax (generally on its taxable property) to pay
for an improvement or project, may be considered to belong to either category.
There are, of course, other variations in the safety of municipal bonds, both
within a particular classification and between classifications, depending on
numerous factors. The Tax Exempt Fund is not limited with respect to the
categories of municipal securities it may acquire.
Municipal securities also include municipal notes, which are generally
issued to satisfy short-term capital needs and have maturities of one year or
less. Municipal notes include tax anticipation notes, revenue anticipation
notes, bond anticipation notes and construction loan notes. The Fund may also
invest in variable rate demand instruments, which are securities with long
stated maturities, but demand features that allow the holder to demand 100% of
the principal plus interest within one to seven days. The coupon varies daily,
weekly or monthly with the market. The price remains at par, which provides
stability to the portfolio while earning market yields. For federal income tax
purposes, the income earned from municipal securities may be entirely tax free,
taxable or subject only to the federal alternative minimum tax.
Securities Ratings
In the case of a security proposed to be purchased by a Fund that is
rated differently by the two rating services, the higher rating is used for
purposes of the Funds' rating policies; provided, however, all securities
purchased must also meet the credit standards of the Adviser. Securities rated
Baa by Moody's or BBB by Standard & Poor's and Fitch and unrated securities of
equivalent credit quality are considered medium grade obligations with
speculative characteristics. Adverse changes in economic conditions or other
circumstances are more likely to weaken the issuer's capacity to pay interest
and repay principal on these securities than is the case for issuers of higher
rated securities. Prior to acquiring unrated securities for a Fund's portfolio,
the Adviser considers the terms of the offering and various other factors in
order to initially determine whether the securities are consistent with the
Fund's investment objective and policies and thereafter to determine the
issuer's comparative credit rating. In the event the rating on a security held
in a Fund's portfolio is downgraded by a rating service, such action will be
considered by the Adviser in its evaluation of the overall investment merits of
that security, but will not necessarily result in the sale of the security.
Temporary and Short-Term Investments
Notwithstanding a Fund's investment objective, each Fund may on
occasion, for temporary defensive purposes to preserve capital, hold part or all
of its assets in cash and investment grade money market instruments (i.e.,
securities with maturities of less than one year) and short-term debt securities
(i.e., securities with maturities of one to three years). Each Fund may also
invest uncommitted cash and cash needed to maintain liquidity for redemptions in
investment grade money market instruments and short-term debt securities.
Investments in such securities will be limited to 20% of a Fund's total assets
unless the Fund is in a temporary defensive position.
The money market instruments and short-term debt securities in which
the Funds may invest consist of obligations issued or guaranteed by the U.S.
Government, its agencies, instrumentalities or authorities; instruments
(including negotiable certificates of deposit, non-negotiable fixed time
deposits and bankers' acceptances) of U.S. banks and foreign banks (the
Tax-Sensitive Funds only), repurchase agreements, and prime commercial paper of
U.S. companies and foreign companies (the Tax-Sensitive Funds only).
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The Funds' investments in money market securities will be rated, at the
time of investment, P-1 by Moody's or A-1 by Standard & Poor's. At least 95% of
each Tax-Sensitive Fund's assets invested in short-term debt securities will be
rated, at the time of investment, Aaa, Aa, or A by Moody's or AAA, AA, or A by
Standard & Poor's or, if not rated, determined to be of comparable credit
quality by the Adviser. Up to 5% of each Tax-Sensitive Fund's total assets
invested in short-term debt securities may be invested in securities which are
rated Baa by Moody's or BBB by Standard & Poor's or, if not rated, determined to
be of comparable credit quality by the Adviser.
The Tax Exempt Fund's investments in taxable securities, such as money
market and short-term debt securities, will generally be of comparable credit
quality and maturity to the municipal securities in the Tax Exempt Fund invests.
To the extent that income dividends distributed by the Tax Exempt Fund include
income from taxable sources, a portion of a shareholder's dividend income will
be taxable. See "Federal Income Taxes."
Each Fund may invest up to 15% of its net assets in repurchase
agreements under normal circumstances. Repurchase agreements acquired by the
Funds will always be fully collateralized as to principal and interest by money
market instruments and will be entered into with commercial banks, brokers and
dealers considered creditworthy by the Adviser. If the other party or "seller"
of a repurchase agreement defaults, a Fund might suffer a loss to the extent
that the proceeds from the sale of the underlying securities and other
collateral held by the Fund in connection with the related repurchase agreement
are less than the repurchase price. In addition, in the event of bankruptcy of
the seller or failure of the seller to repurchase the securities as agreed, a
Fund could suffer losses, including loss of interest on or principal of the
security and costs associated with delay and enforcement of the repurchase
agreement.
Strategic and Derivative Transactions
Each Fund may, but is not required to, utilize various other investment
strategies as described below to hedge various market risks (such as interest
rates, currency exchange rates (Equity Fund and Small Cap Fund only), and broad
or specific market movements), to enhance potential gain or, with respect to the
Tax Exempt Fund, to manage the effective maturity or duration of fixed-income
portfolio securities. Such strategies are generally accepted as part of modern
portfolio management and are regularly utilized by many mutual funds and other
institutional investors. Techniques and instruments used by the Funds may change
over time as new instruments and strategies are developed or regulatory changes
occur.
In the course of pursuing their respective investment objectives, the
Funds may purchase and sell (write) exchange-listed and over-the-counter put and
call options on securities, equity indices (Equity Fund and Small Cap Fund
only), fixed-income indices (Tax Exempt Fund only) and other financial
instruments; purchase and sell financial futures contracts and options thereon;
enter into various interest rate transactions such as swaps, caps, floors or
collars. In addition, Equity Fund and Small Cap Fund may enter into various
currency transactions such as currency forward contracts, currency futures
contracts, currency swaps or options on currencies or currency futures. The
risks associated with the Funds' transactions in options, futures and other
types of derivative securities including swaps may include some or all of the
following: market risk, leverage and volatility risk, correlation risk, credit
risk and liquidity and valuation risk. These investment techniques are referred
to herein as "Strategic Transactions." Strategic Transactions may be used in an
attempt to protect against possible changes in the market value of securities
held in or to be purchased for a Fund's portfolio resulting from securities
markets fluctuations, currency exchange rate fluctuations (Equity Fund and Small
Cap Fund only), to protect a Fund's unrealized gains in the value of its
portfolio securities, to facilitate the sale of such securities for investment
purposes, to manage the effective duration or maturity of the Tax Exempt Fund's
portfolio, or to establish a position in the derivatives markets as a temporary
substitute for purchasing or selling particular securities. In addition to the
hedging transactions referred to in the preceding sentence, Strategic
Transactions may also be used to enhance potential gain in circumstances where
hedging is not involved although a Fund's net loss exposure resulting from
Strategic Transactions entered into for such purposes will not exceed more than
3% of that Fund's net assets at any one time and, to the extent necessary, the
Funds will close out transactions in order to comply with this limitation.
(Transactions such as writing covered call options are considered to involve
hedging for the purposes of this limitation.) In calculating a Fund's net loss
exposure from such Strategic Transactions, an unrealized gain from a particular
Strategic Transaction position would be netted against an unrealized loss from a
related Strategic Transaction position. For example, if the Adviser believes
that the Equity Fund is underweighted in cyclical stocks and overweighted in
consumer stocks, the Equity Fund may buy a cyclical index call option and sell a
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<PAGE>
cyclical index put option and sell a consumer index call option and buy a
consumer index put option. Under such circumstances, any unrealized loss in the
cyclical position would be netted against any unrealized gain in the consumer
position (and vice versa) for purposes of calculating the Fund's net loss
exposure. The ability of the Funds to utilize these Strategic Transactions
successfully will depend on the Adviser's ability to predict pertinent market
movements, which cannot be assured. The Funds will comply with applicable
regulatory requirements when implementing these strategies, techniques and
instruments. The Funds' activities involving Strategic Transactions may be
limited by the requirements of Subchapter M of the Internal Revenue Code of
1986, as amended (the "Code"), for qualification as a regulated investment
company and by the Funds' tax-related objectives due to the fact that Strategic
Transactions may produce taxable income or short-term capital gain in many cases
and the applicable tax rules may make it more difficult to control the timing of
gains or losses.
Strategic Transactions have risks associated with them including
possible default by the other party to the transaction, illiquidity and, to the
extent the Adviser's view as to certain market movements is incorrect, the risk
that the use of such Strategic Transactions could result in losses greater than
if they had not been used. The writing of put and call options may result in
losses to the Funds, force the purchase or sale, respectively of portfolio
securities at inopportune times or for prices higher than (in the case of
purchases due to the exercise of put options) or lower than (in the case of
sales due to the exercise of call options) current market values, limit the
amount of appreciation the Funds can realize on their respective investments or
cause the Funds to hold a security they might otherwise sell. The use of
currency transactions by the Equity Fund and Small Cap Fund can result in these
Funds incurring losses as a result of a number of factors including the
imposition of exchange controls, suspension of settlements, or the inability to
deliver or receive a specified currency. The use of options and futures
transactions entails certain other risks. In particular, the variable degree of
correlation between price movements of futures contracts and price movements in
the related portfolio position of a Fund creates the possibility that losses on
the hedging instrument may be greater than gains in the value of the Fund's
position. The writing of options could significantly increase a Fund's portfolio
turnover rate and, therefore, associated brokerage commissions or spreads. In
addition, futures and options markets may not be liquid in all circumstances and
certain over-the-counter options may have no markets. As a result, in certain
markets, the Funds might not be able to close out a transaction without
incurring substantial losses, if at all. Although the use of futures and options
transactions for hedging should tend to minimize the risk of loss due to a
decline in the value of the hedged position, at the same time, in certain
circumstances, these transactions tend to limit any potential gain which might
result from an increase in value of such position. The loss incurred by the
Funds in writing options on futures and entering into futures transactions is
potentially unlimited, however as described above, each Fund will limit its net
loss exposure resulting from Strategic Transactions entered into for non-hedging
purposes to 3% of its net assets at any one time. Futures markets are highly
volatile and the use of futures may increase the volatility of the Fund's net
asset value. Finally, entering into futures contracts would create a greater
ongoing potential financial risk than would purchases of options, where the
exposure is limited to the cost of the initial premium. Losses resulting from
the use of Strategic Transactions would reduce net asset value and the net
result may be less favorable than if the Strategic Transactions had not been
utilized. Further information concerning the Funds' Strategic Transactions is
set forth in the Statement of Additional Information.
Short-Selling
The Tax-Sensitive Funds may make short sales, which are transactions in
which a Fund sells a security it does not own in anticipation of a decline in
the market value of that security or in order to defer the realization of gain
or loss for federal income tax purposes on a similar security previously sold by
the Fund. To complete a short sale transaction, a Fund must borrow the security
sold short in order to make delivery to the buyer. The Fund then is obligated to
replace the security borrowed by purchasing it at the market price at the time
of replacement. The price at such time may be more or less than the price at
which the security was sold by the Fund. Until the security is replaced, the
Fund is required to pay to the lender amounts equal to any dividends or interest
which accrue during the period of the loan. To borrow the security, the Fund may
also be required to pay a premium, which would increase the cost of the security
sold. The proceeds of the short sale will be retained by the broker, to the
extent necessary to meet margin requirements, until the short position is closed
out.
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Until a Fund replaces a borrowed security in connection with a short
sale, the Fund will: (a) maintain daily a segregated account not with the
broker, containing cash or U.S. Government securities, at such a level that (i)
the amount deposited in the account plus the amount deposited with the broker as
collateral will equal the current value of the security sold short and (ii) the
amount deposited in the segregated account plus the amount deposited with the
broker as collateral will not be less than the market value of the security at
the time it was sold short; or (b) otherwise cover its short position.
A Fund will incur a loss as a result of the short sale if the price of
the security increases between the date of the short sale and the date on which
the Fund replaces the borrowed security. A Fund will realize a gain if the
security declines in price between those dates by an amount greater than premium
and transaction costs. This result is the opposite of what one would expect from
a cash purchase of a long position in a security. The amount of any gain will be
decreased, and the amount of any loss increased, by the amount of any premium or
amounts in lieu of dividends or interest that the Fund may be required to pay in
connection with a short sale.
A Fund's loss on a short sale as a result of an increase in the price
of a security sold short is potentially unlimited. The Equity and Small Cap
Funds may purchase call options to provide a hedge against an increase in the
price of a security sold short. When a Fund purchases a call option it has to
pay a premium to the person writing the option and a commission to the broker
selling the option. If the option is exercised by the Fund, the premium and the
commission paid may be more than the amount of the brokerage commission charged
if the security were to be purchased directly. See "Strategic and Derivative
Transactions" above.
The Tax-Sensitive Funds anticipate that the frequency of short sales
will vary substantially in different periods, and they do not intend that any
specified portion of their assets, as a matter of practice, will be in short
sales. However, no securities will be sold short if, after effect is given to
any such short sale, the total market value of all securities sold short would
exceed 5% of the value of the respective Fund's net assets.
In addition to the short sales discussed above, the Tax-Sensitive Funds
may make short sales "against-the- box." A short sale is against-the-box if the
Fund, at all times when a short position is open, owns an equal amount of
securities sold short or securities convertible into or exchangeable, without
payment of any further consideration, for an equal amount of the securities of
the same issuer as the securities sold short. The proceeds of the short sale are
held by a broker until the settlement date at which time the Fund delivers the
security to close the short position. The Fund receives the net proceeds from
the short sale.
When-Issued Securities and "Delayed Delivery" Securities
The Tax Exempt Fund may commit up to 40% of its total assets to
purchase securities on a "when-issued" or "delayed delivery" basis, but will
only do so with the intention of actually acquiring the securities. The payment
obligation and the interest rate on these securities will be fixed at the time
the Fund enters into the commitment, but no income will accrue to the Fund until
the securities are delivered and paid for. Unless the Fund has entered into an
offsetting agreement to sell the securities, cash or liquid, high-grade debt
securities equal to the amount of the Fund's commitment will be segregated with
the Fund's custodian to secure the Fund's obligation and to ensure that it is
not leveraged. The market value of the securities when they are delivered may be
less than the amount paid by the Fund. The Fund may sell portfolio securities on
a delayed delivery basis. The market value of the securities when they are
delivered may be more than the amount to be received by the Fund.
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Stand-By Commitments
To facilitate liquidity, the Tax Exempt Fund may enter into "stand-by
commitments" permitting it to resell municipal securities to the original seller
at a specified price. Stand-by commitments generally involve no cost. Any such
costs may, however, reduce yields.
Third Party Puts
The Tax Exempt Fund may purchase long-term fixed rate bonds which have
been coupled with an option granted by a third party financial institution
allowing the Fund at specified intervals to tender or put its bonds to the
institution and receive the face value thereof. These third party puts are
available in several different forms, may be represented by custodial receipts
or trust certificates and may be combined with other features. The financial
institution granting the put option does not provide credit enhancement, and
typically, if there is a default on or significant downgrading of the bond, or a
loss of its tax-exempt status, the put option will terminate automatically and
the risk to the Fund will be that of holding a long-term bond. These third party
puts will not be considered to shorten the Fund's maturity.
Illiquid and Restricted Securities
The Equity and Small Cap Funds will normally invest in publicly traded
equity securities and, excluding equity securities received as distributions on
portfolio securities, will not normally hold equity securities which are
illiquid and securities that are subject to legal or contractual restrictions on
resale (i.e., private placements), including securities eligible for resale in
reliance on Rule 144A under the Securities Act of 1933. Each Fund, including the
Tax Exempt Fund, may however invest up to 15% of its net assets in illiquid and
restricted securities when, in the opinion of the Adviser, investment
opportunities presented by such securities are particularly attractive. Illiquid
investments include securities that are not readily marketable, repurchase
agreements maturing in more than seven days, time deposits with a notice or
demand period of more than seven days, certain over-the-counter options, and
restricted securities. The purchase price and subsequent valuation of restricted
and illiquid securities normally reflect a discount, which may be significant,
from the market price of comparable securities for which a liquid market exists.
Market Changes
Each Fund's net asset value fluctuates as a result of changes in the
market value of portfolio securities. The value of equity securities will
fluctuate as a result of a variety of factors including, but not limited to,
general conditions in the equity markets and the issuer's earning prospects,
perceived value, dividend paying ability, growth rate, market position in the
market in which it operates, and level of financial leverage. Yields on debt
securities depend on a variety of factors, such as general conditions in the
money and bond markets, and the size, maturity and rating of a particular issue.
Debt securities with longer maturities tend to produce higher yields and are
generally subject to greater potential capital appreciation and depreciation.
The market prices of debt securities usually vary depending upon available
yields, rising when interest rates decline and declining when interest rates
rise. Changes by recognized rating services in their ratings of debt securities,
including municipal securities, and in the ability of an issuer to make payments
of interest and repayments of principal will also affect the value of these
investments. Changes in the value of debt securities held in a Fund's portfolio
will not affect cash income derived from those securities but will affect a
Fund's net asset value.
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Portfolio Turnover
It is not the policy of any Fund to purchase or sell securities for
trading purposes, and the Tax-Sensitive Funds intend to have low annual
portfolio turnover rates in order to reduce the realization and, therefore, the
distribution to shareholders of capital gains. The Tax Exempt Fund places no
restrictions on portfolio turnover. Notwithstanding the foregoing with respect
to the Tax-Sensitive Funds, a Fund may generally change its portfolio
investments at any time in accordance with the Adviser's appraisal of factors
affecting any particular issuer or market, or the economy in general. It is
expected that the portfolio turnover rates of the Equity Fund and the Small Cap
Fund will not exceed 20% and 50%, respectively, in the coming year. The Tax
Exempt Fund's portfolio turnover rates are listed in the section captioned
"Financial Highlights." A rate of turnover of 100% would occur, for example, if
the value of the lesser of purchases and sales of portfolio securities for a
particular year equaled the average monthly value of portfolio securities owned
during the year (excluding securities with a maturity date of one year or less
at the date of acquisition). A high rate of portfolio turnover involves a
correspondingly greater amount of transaction costs which must be borne directly
by a Fund and thus indirectly by its shareholders. It may also result in the
realization of larger amounts of short-term capital gains, a Fund's
distributions of which are taxable to shareholders as ordinary income, and may
under certain circumstances make it more difficult for the Fund to qualify as a
regulated investment company under the Internal Revenue Code.
Investment Restrictions and Diversification
Except as otherwise noted, the foregoing investment policies are
non-fundamental policies which may be changed by the Trust's Board of Trustees
without the approval of shareholders of the affected Fund. The investment
objectives of each of the Equity Fund and the Small Cap Fund are
non-fundamental. If there is a change in either of these Fund's investment
objective, shareholders should consider whether the Fund remains an appropriate
investment in light of their then current financial positions and needs. Each of
the Funds has adopted certain fundamental policies that may not be changed
without the approval of their respective shareholders. See "Investment
Restrictions" in the combined Statement of Additional Information.
Each Fund is diversified, as defined in the Investment Company Act of
1940. As such, each Fund has a fundamental policy that limits its investments so
that, with respect to 75% of its assets (i) no more than 5% of the Fund's total
assets will be invested in the securities of a single issuer and (ii) each Fund
will purchase no more than 10% of the outstanding voting securities of a single
issuer. These limitations do not apply to obligations issued or guaranteed by
the U.S. Government, its agencies or instrumentalities, repurchase agreements
collateralized by U.S.
Government securities or investments in other registered investment companies.
If any percentage restriction described above is adhered to at the time
of investment, a subsequent increase or decrease in the percentage resulting
from a change in the value of a Fund's assets will not constitute a violation of
the restriction.
Other Investment Companies
Each of the Equity Fund and the Small Cap Fund may invest up to 10% of
its total assets in the securities of other investment companies but may not
invest more than 5% of its total assets in the securities of any one investment
company or acquire more than 3% of the voting securities of any other investment
company. For example, the Equity Fund may invest in Standard & Poor's Depositary
Receipts (commonly referred to as "Spiders"), which are exchange-traded shares
of a closed-end investment company that are designed to replicate the price
performance and dividend yield of the Standard & Poor's 500 Composite Stock
Price Index. The Funds will indirectly bear their proportionate share of any
management fees and other expenses paid by investment companies in which they
invest in addition to the advisory and administration fees paid by the Funds.
However, to the extent that a Fund invests in a registered open-end investment
company, the Adviser will waive its advisory fees on the portion of the Fund's
assets so invested.
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Each of the Equity Fund and the Small Cap Fund is authorized to invest
all of its assets in the securities of a single open-end registered investment
company (a "pooled fund") having substantially identical investment objectives,
policies and restrictions as such Fund, notwithstanding any other investment
restriction or policy. Such a structure is commonly referred to as
"master/feeder" or Hub & Spoke(TM). If authorized by the Trustees and subject to
shareholder approval (if then required by applicable law), a Fund would seek to
achieve its investment objective by investing in a pooled fund which would
invest in a portfolio of securities that complies with the Fund's investment
objective, policies and restrictions. The Trustees currently do not intend to
authorize investing in a pooled fund in connection with a master/feeder
structure. Hub & Spoke is a registered trademark of Signature Financial Group,
Inc.
Suitability
None of the Funds is intended to provide an investment program meeting
all of the requirements of an investor. Notwithstanding each Fund's ability to
spread risk by holding securities of a number of portfolio companies,
shareholders should be able and prepared to bear the risk of investment losses
which may accompany the investments contemplated by the Funds.
Because the Tax-Sensitive Funds will be managed to seek the highest
long-term total return after considering the impact of federal and state income
taxes paid by shareholders on the Funds' distributions and the Tax Exempt Fund
seeks to provide a high level of interest income exempt from federal income
taxes, the Funds may not be suitable investments for non-taxable investors or
persons investing through tax deferred vehicles (e.g., individual retirement
accounts (IRAs) or other qualified pension and retirement plans).
CALCULATION OF PERFORMANCE DATA
From time to time the Funds may advertise their total returns and the
Tax Exempt Fund may also advertise its yield and tax equivalent yield. Total
return, yield and tax equivalent yield figures are based on historical earnings
and are not intended to indicate future performance. The "total return" of a
Fund refers to the average annual compounded rates of return over 1, 5 and 10
year periods 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. As long as a Fund has been
operating less than 1, 5 or 10 years, the time period during which the Fund has
been operating will be substituted accordingly.
The "yield" of the Tax Exempt Fund is computed by dividing the net
investment income per share earned during the period stated in the advertisement
by the maximum offering price (net asset value) per share on the last day of the
period (using the average number of shares entitled to receive dividends). For
the purpose of determining net investment income, the calculation includes among
expenses of the Tax Exempt Fund all recurring fees that are charged to all
shareholder accounts and any nonrecurring charges for the period stated.
Tax equivalent yield demonstrates the yield from a taxable investment
necessary to produce an after-tax yield equivalent to that of a fund, such as
the Tax Exempt Fund, which invests primarily in tax-exempt obligations. It is
computed by dividing the tax-exempt portion of the Tax Exempt Fund's yield
(calculated as indicated above) by one, minus a stated income tax rate and
adding the product to the taxable portion (if any) of the Tax Exempt Fund's
yield.
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<TABLE>
<CAPTION>
Taxable Equivalent Yield Table
Federal
Marginal Taxable Equivalent Rates Based on Tax-Exempt Yield of:
Tax Rate 4% 5% 6% 7% 8% 9% 10%
----- ----- ----- ------ ------ ------ -----
<S> <C> <C> <C> <C> <C> <C> <C>
31.00% 5.80% 7.25% 8.70% 10.14% 11.59% 13.04% 14.49%
36.00% 6.25% 7.81% 9.38% 10.94% 12.50% 14.06% 15.63%
39.60% 6.62% 8.28% 9.93% 11.59% 13.25% 14.90% 16.56%
</TABLE>
Each Fund may from time to time advertise one or more additional
measurements of performance, including but not limited to historical cumulative
total returns, distribution returns, non-standardized yield (Tax Exempt Fund
only), results of actual or hypothetical investments, changes in dividends,
distributions or share values, or any graphic illustration of such data. This
data may cover any period of a Fund's operations and may or may not include the
impact of taxes or other factors.
DIVIDENDS AND DISTRIBUTIONS
Each Fund will declare and distribute, at least annually, dividends
from short-term and long-term capital gains, if any, after reduction by capital
losses. The Tax-Sensitive Funds will declare and distribute, at least annually,
any dividends from net investment income. The Tax Exempt Fund will declare daily
and distribute monthly dividends from net investment income. Dividends from net
investment income and capital gains distributions, if any, are automatically
reinvested in additional shares of the appropriate Fund unless the shareholder
elects to receive them in cash. It is possible that a Fund may use equalization
tax accounting in furtherance of its tax objective, which may affect the amount,
timing and character of its distributions. See the Statement of Additional
Information for further information.
PURCHASE OF SHARES
Shares of the Funds may be purchased directly from the Trust, which
offers shares of the Funds to the public on a continuous basis. Shares are sold
at the net asset value per share next computed after the purchase order and
payment for the shares is received by the Trust. Unless waived by the Trust, the
minimum initial investment is $100,000. Additional investments may be made in
amounts of at least $10,000 ($5,000 for the Tax Exempt Fund).
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 Trust by the close of its business day (normally 4:00 p.m.,
New York time) will be effected as of the close of regular trading on the New
York Stock Exchange on that day. 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 Trust by the close of its business day. Shares of the Funds purchased
through dealers may be subject to transaction fees, no part of which will be
received by the Funds or the Adviser.
Each Fund's net asset value per share is computed on each day on which
the New York Stock Exchange is open as of the close of regular trading
(currently 4:00 p.m. New York time). The net asset value per share is calculated
by determining the value of all a Fund's assets, subtracting all liabilities and
dividing the result by the total number of shares outstanding. Equity and other
taxable securities are valued at the last sales prices, on the valuation date,
on the exchange or national securities market on which they are primarily
traded. Equity and other taxable securities not listed on an exchange or
20
<PAGE>
national securities market, or securities for which there are no reported
transactions, are valued at the last quoted bid prices. Municipal securities are
valued by the Adviser or by an independent pricing service approved by the
Trustees, which uses information with respect to transactions in bonds,
quotations from bond dealers, market transactions in comparable securities and
various relationships between securities in determining value. The Tax Exempt
Fund believes that reliable market quotations for municipal securities are
generally not readily available for purposes of valuing its portfolio
securities. As a result, it is likely that most of the valuations of municipal
securities made by the Adviser or provided by such pricing service will be based
upon fair value determined on the basis of the factors listed above (which may
also include use of yield equivalents or matrix pricing). Securities for which
quotations are not readily available and all other assets will be valued at fair
value as determined in good faith by the Adviser in accordance with procedures
approved by the Trustees. Money market instruments with less than sixty days
remaining to maturity when acquired by a Fund are valued on an amortized cost
basis. If a Fund acquires a money market instrument with more than sixty days
remaining to its maturity, it is valued at current market value until the
sixtieth day prior to maturity and will then be valued at amortized cost based
upon its value on such date unless the Trustees determine during such sixty-day
period that amortized cost does not represent fair value. Additional information
concerning the Funds' valuation policies is contained in the Statement of
Additional Information.
Prospective investors should consider the tax implications of buying
shares of a Fund prior to an anticipated taxable dividend or capital gain
distribution from that Fund. A portion of the purchase price of such shares may
be attributable to the taxable income already earned by the Fund and/or net
capital gains already realized by the Fund that will be included in the
anticipated distribution. The distribution will, nevertheless, generally be
taxable to the investor even if it reduces the net asset value of the Fund's
shares below the investor's cost and economically represents a return of a
portion of the investor's purchase price.
In the sole discretion of the Adviser, each Fund may accept securities
instead of cash for the purchase of Fund shares. The Adviser will determine that
any securities acquired in this manner are consistent with the investment
objective, policies and restrictions of the particular Fund. The securities will
be valued in the manner stated above. The purchase of Fund shares for securities
instead of cash may cause an investor who contributes them to realize a taxable
gain or loss with respect to the securities transferred to the Fund.
Consequently, prospective investors should consult with their own tax advisers
before acquiring Fund shares in exchange for appreciated or depreciated
securities in order to evaluate fully the effect on their particular tax
situations.
The Trust reserves the right in its sole discretion (i) to suspend the
offering of each Fund's shares, (ii) to reject purchase orders when in the best
interest of the particular Fund and (iii) to modify or eliminate the minimum
initial investment requirement in Fund shares.
EXCHANGE OF SHARES
Shares of the Funds may be exchanged for shares of one or more other
funds in the Standish, Ayer & Wood family of funds. Shares of a Fund redeemed in
an exchange transaction are valued at their net asset value next determined
after the exchange request is received by the Trust. Shares of a fund purchased
in an exchange transaction are sold at their net asset value next determined
after the exchange request is received by the Trust and payment for the shares
is received by the fund into which your shares are to be exchanged. Until
receipt of the purchase price by the fund into which your shares are to be
exchanged (which may take up to three business days), your money will not be
invested. To obtain a current prospectus for any of the other funds in the
Standish, Ayer & Wood family of funds, please call the Trust at (800) 221-4795.
Please consider the differences in investment objectives and expenses of a fund
as described in its prospectus before making an exchange.
Written Exchanges
Shares of a Fund may be exchanged by written order to: "Standish, Ayer
& Wood Investment Trust, One Financial Center, Boston, Massachusetts 02111". A
written exchange request must (a) state the name of the current Fund, (b) state
the name of the fund into which the current Fund shares will be exchanged, (c)
state the number of shares or the dollar amount to be exchanged, (d) identify
the shareholder's account numbers in both funds and (e) be signed by each
registered owner exactly as the shares are registered. Signature(s) must be
guaranteed as listed under "Written Redemption" below.
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<PAGE>
Telephonic Exchanges
Shareholders who complete the telephonic privileges portion of the
Funds' account application may exchange shares by calling (800) 221-4795. The
telephonic privileges are not available to shareholders automatically; they must
first elect the privilege. Proper identification will be required for each
telephonic exchange. Please see "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. 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 each Fund may be redeemed by any of the methods described
below at the net asset value per share next determined after receipt of a
redemption request in proper form. Redemptions will not be processed until a
completed Share Purchase Application and payment for the shares to be redeemed
have been received.
Written Redemption
Shares of a Fund may be redeemed by written order to: "Standish, Ayer &
Wood Investment Trust, One Financial Center, Boston, Massachusetts 02111". A
written redemption request must (a) state the name of the applicable Fund, (b)
state the number of shares or the dollar amount to be redeemed, (c) identify the
shareholder's account number and (d) be signed by each registered owner exactly
as the shares are registered. Signature(s) must be guaranteed by a member of
either the Securities Transfer Association's STAMP program or the New York Stock
Exchange's Medallion Signature Program, or by any one of the following
institutions, provided that such institution meets credit standards established
by Investors Bank & Trust Company, the Funds' transfer agent: (i) a bank; (ii) a
securities broker or dealer, including a government or municipal securities
broker or dealer, that is a member of a clearing corporation or has net capital
of at least $100,000; (iii) a credit union having authority to issue signature
guarantees; (iv) a savings and loan association, a building and loan
association, a cooperative bank, or a federal savings bank or association; or
(v) a national securities exchange, a registered securities exchange or a
clearing agency. Additional supporting documents may be required in the case of
estates, trusts, corporations, partnerships and other shareholders which are not
individuals. Redemption proceeds will normally be paid by check mailed within
seven days of receipt of a written redemption request in proper form. If shares
of a Fund to be redeemed were recently purchased by check, the Fund may delay
transmittal of redemption proceeds until such time as it has assured itself that
good funds have been collected for the purchase of such shares. This may take up
to fifteen (15) days.
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<PAGE>
Telephonic Redemption
Shareholders who complete the telephonic privileges portion of the
Funds' account application may redeem shares by calling (800) 221-4795. The
telephonic redemption privilege is not available to shareholders automatically;
they must first elect the privilege. Redemption proceeds will be mailed or wired
in accordance with the shareholder's instruction on the account application to a
pre-designated account. Redemption proceeds will normally be paid promptly after
receipt of telephonic instructions, but no later than seven days thereafter,
except as described above for shares purchased by check. Wire charges, if any,
will be deducted from redemption proceeds. 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.
Proper identification will be required for each telephonic redemption. Please
see "Telephone Transactions" below for more information regarding telephonic
transactions.
Repurchase Order
In addition to written redemption of Fund shares, the Trust may accept
wire or telephone orders from brokers or dealers for the repurchase of Fund
shares, or from the Adviser with respect to accounts over which it has
investment discretion. The repurchase price is the net asset value per share
next determined after receipt of an order by a broker or dealer, which is
obligated to transmit the order to the Trust prior to the close of the Trust's
business day (normally 4:00 p.m.). Brokers or dealers may charge for their
services in connection with a repurchase of Fund shares, but the Trust imposes
no 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 Trust and the
Funds' custodian to act upon instructions of any person to redeem and/or
exchange shares from the shareholder's account. Further, the shareholder
acknowledges that, as long as the Funds employ reasonable procedures to confirm
that telephonic instructions are genuine, and follow telephonic instructions
that they reasonably believe to be genuine, neither the Adviser, nor the Trust,
nor the applicable 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 Funds intend to employ personal identification or written
confirmation of transactions procedures, and if they do not, the Funds may be
liable for any losses due to unauthorized or fraudulent instructions. All
telephone transaction requests will be recorded. Shareholders may experience
delays in exercising telephone transaction privileges during periods of abnormal
market activity. Accordingly, during periods of volatile economic and market
conditions, shareholders may wish to consider transmitting redemption and
exchange requests in writing.
* * * *
The proceeds paid upon redemption or repurchase may be more or less
than the cost of the shares, depending upon the market value of the applicable
Fund's portfolio investments at the time of redemption or repurchase. Each Fund
intends to pay cash for all shares redeemed, but under certain conditions, the
Funds may make payments wholly or partially in portfolio securities. Please see
the Statement of Additional Information for further information regarding the
Funds' ability to satisfy redemption requests in-kind.
Because of the cost of maintaining shareholder accounts, the Funds may
redeem, at net asset value, the shares in any account that has a value of less
than $25,000 ($10,000 for the Tax Exempt Fund) as a result of redemptions or
transfers. Before doing so, the applicable Fund will notify the shareholder that
the value of the shares in the account is less than the specified minimum and
will allow the shareholder 30 days to make an additional investment in an amount
that will increase the value of the account to at least $25,000 ($10,000 for the
Tax Exempt Fund).
23
<PAGE>
MANAGEMENT
Trustees
Each Fund is a separate investment series of Standish, Ayer & Wood
Investment Trust, a Massachusetts business trust. Under the terms of the
Agreement and Declaration of Trust establishing the Trust, which is governed by
the laws of The Commonwealth of Massachusetts, the Trustees of the Trust are
ultimately responsible for the management of its business and affairs.
Investment Adviser
Standish, Ayer & Wood, Inc. (the "Adviser"), One Financial Center,
Boston, Massachusetts 02111, serves as investment adviser to each Fund pursuant
to separate investment advisory agreements with the Trust and manages each
Fund's investments and affairs subject to the supervision of the Trustees of the
Trust.
The Adviser is a Massachusetts corporation incorporated in 1933 and is
a registered investment adviser under the Investment Advisers Act of 1940. The
Adviser provides fully discretionary management services and counseling and
advisory services to a broad range of clients throughout the United States. The
Adviser also provides investment advisory services to certain other funds of the
Trust, acting as investment adviser to Standish Controlled Maturity Fund,
Standish Equity Fund, Standish Fixed Income Fund, Standish Fixed Income Fund II,
Standish Intermediate Tax Exempt Bond Fund, Standish Massachusetts Intermediate
Tax Exempt Bond Fund, Standish Securitized Fund, Standish Short-Term Asset
Reserve Fund and Standish Small Capitalization Equity Fund, which had net assets
of $6 million, $128 million, $2 billion, $27 million, $31 million, $32 million,
$55 million, $292 million and $177 million respectively, at September 30, 1995.
An affiliate of the Adviser, Standish International Management Company, L.P.
("SIMCO"), acts as investment adviser to Standish International Equity Fund,
Standish International Fixed Income Fund and Standish Global Fixed Income Fund,
which had net assets of $92 million, $847 million and $128 million at September
30, 1995. Corporate pension funds are the largest asset under active management
by the Adviser. The Adviser's clients also include charitable and educational
endowment funds, financial institutions, trusts and individual investors. As of
September 30, 1995, the Adviser managed approximately $29 billion of assets.
The Equity Fund's portfolio manager is Laurence A. Manchester. During
the past five years, Mr. Manchester has served as a Vice President and Director
of the Adviser.
The Small Cap Fund's portfolio manager is Nicholas S. Battelle. During
the past five years, Mr. Battelle has served as a Vice President and Director of
the Adviser.
The Tax Exempt Fund's portfolio managers are Maria D. Furman and
Raymond J. Kubiak. During the past five years, Ms. Furman has served as a Vice
President and Director of the Adviser and Mr. Kubiak has been a Vice President
and, since 1995, a Director of the Adviser.
Subject to the supervision and direction of the Trustees of the Trust,
the Adviser manages each Fund's portfolio in accordance with its stated
investment objective and policies, recommends investment decisions for the
Funds, places orders to purchase and sell securities on behalf of the Funds, and
permits the Funds to use the name "Standish." The Adviser provides all necessary
office space and services of executive personnel for administering the affairs
of the Funds. For these services, each Fund pays the Adviser a fee monthly equal
on an annual basis to the following percentages of each Fund's average daily net
asset value: Equity Fund--0.50%, Small Cap Fund--0.60% and Tax Exempt
Fund--0.40%. For Tax Exempt Fund's fiscal year ended December 31, 1994, the
Adviser did not impose $50,193 of its $82,694 fee.
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<PAGE>
Expenses
Expenses of the Trust that relate to more than one series are allocated
among such series by the Adviser and SIMCO in a manner considered to be
equitable, primarily on the basis of relative net asset values. Each Fund bears
all expenses of its operations other than those incurred by the Adviser under
the investment advisory agreement. Among other expenses, each Fund will pay
investment advisory fees; bookkeeping, share pricing and shareholder servicing
fees and expenses; custodian fees and expenses; legal and auditing fees;
expenses of prospectuses, statements of additional information and shareholder
reports which are furnished to existing shareholders; registration and reporting
fees and expenses; and Trustees' fees and expenses. The Adviser bears, without
subsequent reimbursement, the distribution expenses attributable to the offering
and sale of Fund shares.
The Adviser has voluntarily agreed for each Fund's fiscal year ending
September 30, 1996 to limit Total Fund Operating Expenses (excluding litigation,
indemnification and other extraordinary expenses) of each Fund to the lower of
(a) the permissible limit applicable in any state in which shares of the Fund
are then qualified for sale and (b) the following percentages of each Fund's
average daily net assets: Equity Fund--1.00%; Small Cap Fund--0.90%; and Tax
Exempt Fund--0.65%. These agreements are voluntary and temporary and may be
discontinued or revised by the Adviser at any time after September 30, 1996. If
Total Fund Operating Expenses (as defined above) would exceed the expense limit,
the compensation due the Adviser for such fiscal year shall be proportionately
reduced by the amount of such excess by a reduction or refund thereof at the
time such compensation is payable after the end of each calendar month, subject
to readjustment during the fiscal year. For the fiscal year ended December 31,
1994, expenses borne by Tax Exempt Fund amounted to $134,379, which represented
0.65% of average daily net assets after an expense reduction of $50,193.
Portfolio Transactions
Subject to the supervision of the Trustees of the Trust, the Adviser
selects the brokers and dealers that execute orders to purchase and sell
portfolio securities for the Funds. The Adviser will seek to obtain the best
available price and most favorable execution with respect to all transactions
for the Funds. It is not anticipated that the Tax Exempt Fund will incur a
significant amount of brokerage expenses because municipal securities are
generally traded on a "net" basis in principal transactions without the addition
or deduction of brokerage commissions or transfer taxes.
Subject to the consideration of best price and execution and to
applicable regulations, the receipt of research and sales of Fund shares may
also be considered factors in the selection of brokers that execute orders to
purchase and sell portfolio securities for the Funds.
FEDERAL INCOME TAXES
Each Fund is treated as a separate entity for federal income tax
purposes. The Tax Exempt Fund presently qualifies and intends to continue to
qualify, and each of the Equity and Small Cap Funds intends to elect to be
treated and to qualify, for taxation as a separate "regulated investment
company" under the Internal Revenue Code of 1986, as amended (the "Code"). As a
regulated investment company, each Fund will not be subject to federal income
tax on any net investment income and net realized capital gains that are
distributed to shareholders in accordance with certain timing requirements of
the Code.
A Fund will be subject to a nondeductible 4% excise tax under the Code
to the extent that it fails to meet certain distribution requirements with
respect to each calendar year. Certain distributions made in order to satisfy
the Code's distribution requirements may be declared by the Funds during
October, November or December of the year but paid during the following January.
Such distributions will be taxable to taxable shareholders as if received on
December 31 of the year the distributions are declared, rather than the year in
which the distributions are received.
25
<PAGE>
Shareholders of the Equity Fund and Small Cap Fund which are taxable
entities or persons will be subject to federal income tax on dividends and
capital gain distributions (as defined below) made by these Funds. Dividends
paid by the Equity Fund and Small Cap Fund from net investment income, certain
net foreign currency gains, and any excess of net short-term capital gain over
net long-term capital loss will be taxable to shareholders as ordinary income,
whether received in cash or Fund shares. The portion of such dividends
attributable to qualifying dividends that Equity Fund or Small Cap Fund
receives, if any, may qualify for the 70% corporate dividends received
deduction, subject to certain holding period requirements and debt financing
limitations under the Code.
The Tax Exempt Fund intends to satisfy applicable requirements of the
Code so that its distributions to shareholders of the tax-exempt interest it
earns will qualify as "exempt-interest dividends," which shareholders are
entitled to treat as tax-exempt interest. Any portion of an exempt-interest
dividend that is attributable to the interest that the Tax Exempt Fund receives
on certain tax-exempt obligations that are "private activity bonds" and, for
corporate shareholders, the entire exempt-interest dividend, may increase a
shareholder's liability, if any, for alternative minimum tax.
Shareholders receiving social security benefits and certain railroad
retirement benefits may be subject to Federal income tax on a portion of such
benefits as a result of receiving investment income, including tax-exempt income
(such as exempt-interest dividends) and other dividends paid by the Funds.
Shares of the Tax Exempt Fund may not be an appropriate investment for persons
who are "substantial users" of facilities financed by industrial development or
private activity bonds, or persons related to "substantial users." Consult your
tax advisor if you think this may apply to you.
Shareholders in the Tax Exempt Fund which are taxable entities or
persons will be subject to federal income tax on capital gain distributions (as
defined below) from the Tax Exempt Fund and on any other dividends they receive
from the Tax Exempt Fund that are not exempt-interest dividends. Dividends paid
by the Tax Exempt Fund from any taxable net investment income, such as interest
income from taxable debt obligations, accrued market discount recognized by the
Fund, or repurchase agreements, and any excess of net short-term capital gain
over net long-term capital loss will be taxable to shareholders as ordinary
income, whether received in cash or Fund shares. None of the Tax Exempt Fund's
exempt-interest dividends, taxable income dividends or capital gain
distributions will qualify for the corporate dividends received deduction.
Dividends paid by any Fund from net capital gain (the excess of net
long-term capital gain over net short-term capital loss), called "capital gain
distributions," will be taxable to shareholders as long-term capital gains,
whether received in cash or Fund shares and without regard to how long the
shareholder has held shares of the applicable Fund. Capital gain distributions
do not qualify for the corporate dividends received deduction. Dividends and
capital gain distributions by a Fund may also be subject to state and local or
foreign taxes.
The Equity Fund and the Small Cap Fund anticipate that they may be
subject to foreign withholding taxes or other foreign taxes on income (possibly
including capital gains) on certain foreign investments (if any), which will
reduce the yield on those investments. Such taxes may be reduced or eliminated
pursuant to an income tax treaty in some cases. These Funds do not expect to
qualify to pass such foreign taxes and any associated tax deductions or credits
through to their shareholders.
Redemptions and repurchases of shares are taxable events on which a
shareholder may recognize a gain or loss. Special rules disallow any losses on
the sale or exchange of shares of the Tax Exempt Fund with a tax holding period
of six months or less, to the extent the shareholder received exempt-interest
dividends with respect to such shares, and recharacterize as long-term any
otherwise allowable losses on the sale or exchange of the shares of any Fund
with a tax holding period of six months or less, to the extent the shareholder
received a capital gain distribution with respect to such shares.
26
<PAGE>
Individuals and certain other classes of shareholders may be subject to
31% backup withholding of federal income tax on taxable dividends, capital gain
distributions, and the proceeds of redemptions or repurchases of shares, if they
fail to furnish the Funds with their correct taxpayer identification number and
certain certifications or if they are otherwise subject to backup withholding.
Individuals, corporations and other shareholders that are not U.S. persons under
the Code are subject to different tax rules and may be subject to nonresident
alien withholding at the rate of 30% (or a lower rate provided by an applicable
tax treaty) on amounts treated as ordinary taxable dividends from the Funds and,
unless a current IRS Form W-8 or an acceptable substitute is furnished to the
Funds, to backup withholding on certain payments from the Funds.
A state income (and possibly local income and/or intangible property)
tax exemption is generally available to the extent, if any, that a Fund's
distributions are derived from interest on (or, in the case of intangibles
taxes, the value of its assets is attributable to) certain U.S. Government
obligations and/or tax-exempt municipal obligations issued by or on behalf of
the particular state in which the shareholder is subject to tax or a political
subdivision thereof, provided in some states that certain thresholds for
holdings of such obligations and/or reporting requirements are satisfied.
After the close of each calendar year, each Fund will send a notice to
its shareholders that provides information about the federal tax status of
distributions to shareholders for such calendar year.
THE TRUST AND ITS SHARES
Each Fund is a separate investment series of Standish, Ayer & Wood
Investment Trust, an unincorporated business trust organized under the laws of
The Commonwealth of Massachusetts pursuant to an Agreement and Declaration of
Trust dated August 13, 1986. Under the Agreement and Declaration of Trust, the
Trustees have authority to issue an unlimited number of shares of beneficial
interest, par value $.01 per share, of each Fund. Each share of each Fund is
entitled to one vote. All Fund shares have equal rights with regard to voting,
redemption, dividends, distributions and liquidation, and shareholders of the
Funds have the right to vote as a separate class with respect to certain matters
under the Investment Company Act of 1940 and the Agreement and Declaration of
Trust. Shares of the Funds do not have cumulative voting rights. Fractional
shares have proportional voting rights and participate in any distributions and
dividends. When issued, each Fund share will be fully paid and nonassessable.
Shareholders of the Funds do not have preemptive or conversion rights.
Certificates representing shares of the Funds will not be issued.
At October 1, 1995, more than 25% of the then outstanding shares of the
Tax Exempt Fund were held by BDG & Co., c/o Bingham, Dana & Gould, 150 Federal
Street, Boston, MA, which was deemed to control the Tax Exempt Fund.
The Trust has established fourteen series 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
Investment Company Act of 1940, the record holders of not less than two-thirds
of the outstanding shares of the Trust may remove a Trustee by votes cast in
person or by proxy at a meeting called for the purpose or by a written
27
<PAGE>
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.
Subject to Trustee approval and shareholder approval (if then
required), each of the Equity Fund and the Small Cap Fund may pursue its
investment objective by investing all of its investable assets in a pooled fund.
Inquiries concerning the Funds should be made by contacting the Trust
at the address and telephone number listed on the cover of this Prospectus.
Although each Fund is offering only its own shares, since the Funds use this
combined Prospectus, it is possible that one Fund might become liable for a
misstatement or omission in this Prospectus regarding another Fund. The Trustees
have considered this factor in approving the use of this combined Prospectus.
CUSTODIAN, TRANSFER AGENT AND
DIVIDEND-DISBURSING AGENT
Investors Bank & Trust Company, 24 Federal Street, Boston,
Massachusetts 02110, serves as the Funds' transfer and dividend-disbursing agent
and as custodian of all cash and securities of the Funds.
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P., One Post Office Square, Boston, Massachusetts
02109, serves as independent accountants for the Trust and will audit each
Fund's financial statements annually.
LEGAL COUNSEL
Hale and Dorr, 60 State Street, Boston, Massachusetts 02109, is legal
counsel to the Trust 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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Investment Adviser
Standish, Ayer & Wood, Inc.
One Financial Center STANDISH TAX-SENSITIVE EQUITY FUND
Boston, Massachusetts 02111 STANDISH TAX-SENSITIVE SMALL CAP FUND
STANDISH INTERMEDIATE TAX EXEMPT
BOND FUND
Custodian
Investors Bank & Trust Company
24 Federal Street
Boston, Massachusetts 02110
Independent Accountants
Coopers & Lybrand L.L.P.
One Post Office Square
Boston, Massachusetts 02109
Legal Counsel
Hale and Dorr
60 State Street
Boston, Massachusetts 02109
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STANDISH, AYER & WOOD INVESTMENT TRUST
One Financial Center
Boston, Massachusetts 02111
(617) 350-6100
STANDISH TAX-SENSITIVE EQUITY FUND
STANDISH SMALL CAP TAX-SENSITIVE EQUITY FUND
STANDISH INTERMEDIATE TAX EXEMPT BOND FUND
STATEMENT OF ADDITIONAL INFORMATION
January 1, 1996
This combined Statement of Additional Information is not a prospectus,
but expands upon and supplements the information contained in the combined
Prospectus dated January 1, 1996, as amended and/or supplemented from time to
time (the "Prospectus"), of Standish Tax-Sensitive Equity Fund ("Equity Fund"),
Standish Small Cap Tax-Sensitive Equity Fund ("Small Cap Fund") and Standish
Intermediate Tax Exempt Bond Fund ("Tax Exempt Fund"), each a separate
investment series of Standish, Ayer & Wood Investment Trust (the "Trust"). The
Equity Fund, Small Cap Fund and Tax Exempt Fund are sometimes referred to herein
individually as the "Fund" and collectively as the "Funds." This Statement of
Additional Information should be read in conjunction with the Funds' Prospectus,
a copy of which may be obtained without charge by writing or calling the Trust
at the address and phone number set forth above.
Contents Page
Investment Objectives and Policies.................................
Investment Restrictions............................................
Calculation of Performance Data....................................
Management.........................................................
Redemption of Shares...............................................
Portfolio Transactions.............................................
Determination of Net Asset Value...................................
Federal Income Taxes...............................................
The Trust and Its Shares...........................................
Additional Information.............................................
Experts and Financial Statements...................................
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.
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INVESTMENT OBJECTIVES AND POLICIES
The Funds' Prospectus describes the investment objective and policies
of each Fund. The following discussion supplements the description of the Funds'
investment policies in the Prospectus. Each Fund's investment adviser is
Standish, Ayer & Wood, Inc. (the "Adviser").
Portfolio Maturity (Tax Exempt Fund)
Under normal market conditions, the Tax Exempt Fund will maintain a
dollar-weighted average portfolio maturity of between three and ten years. This
means that the dollar-weighted average duration of the Fund's portfolio
investments will be less than the duration of a U.S. Treasury obligation with a
remaining stated maturity of three to ten years. Duration represents the
weighted average maturity of expected cash flows (i.e., interest and principal
payments) on one or more debt obligations, discounted to their present values.
The duration of an obligation is always less than or equal to its stated
maturity and is related to the degree of the volatility in the market value of
the obligation. In computing the duration of its portfolio, the Tax Exempt Fund
will have to estimate the duration of debt obligations that are subject to
prepayment or redemption by the issuer, based on projected cash flows from such
obligations. Subject to the requirement that the Fund's dollar-weighted average
portfolio maturity will not exceed ten years, the Fund may invest in individual
debt obligations of any maturity, including obligations with a remaining stated
maturity of less than three or more than ten years. For purposes of the Fund's
investment policy, an instrument will be treated as having a maturity earlier
than its stated maturity date if the instrument has technical features (such as
puts or demand features) or a variable rate of interest which, in the judgment
of the Adviser, will result in the instrument being valued in the market as
though it has the earlier maturity.
Municipal Securities
The Tax Exempt Fund may invest in all kinds of municipal securities,
including municipal notes, municipal bonds, private activity bonds and variable
rate demand instruments.
Because the Tax Exempt Fund holds investment grade municipal
securities, the income earned on shares of the Fund will tend to be less than it
might be on a portfolio emphasizing lower quality securities. Municipal
obligations are subject to the provisions of bankruptcy, insolvency and other
laws affecting the rights and remedies of creditors, such as the Federal
Bankruptcy Code, and laws which may be enacted by Congress or state legislatures
extending the time for payment of principal or interest, or both, or imposing
other constraints upon enforcement of such obligations or upon municipalities to
levy taxes. There is also the possibility that as a result of litigation or
other conditions the power or ability of any one or more issuers to pay when due
principal of and interest on its or their municipal obligations may be
materially affected. Although the Tax Exempt Fund's quality standards are
designed to minimize the credit risk of investing in the Fund, that risk cannot
be entirely eliminated.
Municipal Notes
The Tax Exempt Fund may invest in municipal notes. Municipal notes are
generally issued to satisfy short-term capital needs and generally have
maturities of one year or less. Municipal notes include: tax anticipation notes;
revenue anticipation notes; bond anticipation notes; and construction loan
notes.
Tax anticipation notes are sold to finance working capital needs of
municipalities. They are generally payable from specific tax revenues expected
to be received at a future date. Revenue anticipation notes are issued in
expectation of receipt of other types of revenue such as Federal revenues
available under the Federal Revenue Sharing Program. Tax anticipation notes and
revenue anticipation notes are generally issued in anticipation of various
seasonal revenues such as income, sales, use, and business taxes. Bond
anticipation notes are sold to provide interim financing. These notes are
generally issued in anticipation of long-term financing in the market. In most
cases, these monies provide for the repayment of the notes. Construction loan
notes are sold to provide construction financing. After the projects are
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successfully completed and accepted, many projects receive permanent financing
through the Federal Housing Administration under "Fannie Mae" (the Federal
National Mortgage Association) or "Ginnie Mae" (the Government National Mortgage
Association). There are, of course, a number of other types of notes in which
the Tax Exempt Fund may invest which are issued for different purposes and
secured differently from those described above.
Municipal Bonds
The Tax Exempt Fund may invest in municipal bonds. Municipal bonds,
which meet longer term capital needs and generally have maturities of more than
one year when issued, have two principal classifications: "General Obligation"
Bonds and "Revenue" Bonds.
Issuers of General Obligation Bonds include states, counties, cities,
towns and regional districts. The proceeds of these obligations are used to fund
a wide range of public projects including the construction or improvement of
schools, highways and roads, water and sewer systems and a variety of other
public purposes. The basic security of General Obligation Bonds is the issuer's
pledge of its full faith, credit and taxing power for the payment of principal
and interest. The taxes that can be levied for the payment of debt service may
be limited or unlimited as to rate or amount or special assessments.
The principal security for a Revenue Bond is generally the net revenues
derived from a particular facility or group of facilities or, in some cases,
from the proceeds of a special excise or other specific revenue source. Revenue
Bonds have been issued to fund a wide variety of capital projects including:
electric, gas, water and sewer systems; highways, bridges and tunnels; port and
airport facilities; colleges and universities; and hospitals. Although the
principal security behind these bonds varies widely, many provide additional
security in the form of a debt service reserve fund whose monies may also be
used to make principal and interest payments on the issuer's obligations.
Housing finance authorities have a wide range of security including partially or
fully insured, rent subsidized and/or collateralized mortgages, and/or the net
revenues from housing or other public projects. In addition to a debt service
reserve fund, some authorities provide further security in the form of a state's
ability (without obligation) to make up deficiencies in the debt service reserve
fund. Lease rental revenue bonds issued by a state or local authority for
capital projects are secured by annual lease rental payments from the state or
locality to the authority sufficient to cover debt service on the authority's
obligations.
Industrial Development and Pollution Control Bonds (which are types of
private activity bonds), although nominally issued by municipal authorities, are
generally not secured by the taxing power of the municipality but are secured by
the revenues of the authority derived from payments by the industrial user.
Under federal tax legislation, certain types of Industrial Development Bonds and
Pollution Control Bonds may no longer be issued on a tax-exempt basis, although
previously-issued bonds of these types and certain refundings of such bonds are
not affected.
Other Municipal Securities
There is a variety of hybrid and special types of municipal securities
as well as numerous differences in the security of municipal securities both
within and between the two principal classifications above.
Variable Rate Demand Instruments
The Tax Exempt Fund may purchase variable rate demand instruments that
are tax-exempt municipal obligations providing for a periodic adjustment in the
interest rate paid on the instrument according to changes in interest rates
generally. These instruments also permit the Fund to demand payment of the
unpaid principal balance plus accrued interest upon a specified number of days'
notice to the issuer or its agent. The demand feature may be backed by a bank
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letter of credit or guarantee issued with respect to such instrument. A bank
that issues a repurchase commitment may receive a fee from the Fund for this
arrangement. The issuer of a variable rate demand instrument may have a
corresponding right to prepay in its discretion the outstanding principal of the
instrument plus accrued interest upon notice comparable to that required for the
holder to demand payment.
The variable rate demand instruments that the Tax Exempt Fund may
purchase are payable on demand on not more than seven calendar days' notice. The
terms of the instruments provide that interest rates are adjustable at intervals
ranging from daily up to six months, and the adjustments are based upon the
current interest rate environment as provided in the respective instruments. The
Adviser will select the variable rate demand instruments that the Fund will
purchase in accordance with procedures approved by the Trustees to minimize
credit risks. The Adviser may determine that an unrated variable rate demand
instrument meets the Fund's quality criteria by reason of being backed by a
letter of credit or guarantee issued by a bank that meets the quality criteria
of the Fund. Thus, either the credit of the issuer of the municipal obligation
or the guarantor bank or both will meet the quality standards of the Fund.
The interest rate of the underlying variable rate demand instruments
may change with changes in interest rates generally, but the variable rate
nature of these instruments should decrease changes in value due to interest
rate fluctuations. Accordingly, as interest rates decrease or increase, the
potential for capital gain and the risk of capital loss on the disposition of
portfolio securities are less than would be the case with a comparable portfolio
of fixed income securities. Because the adjustment of interest rates on the
variable rate demand instruments is made in relation to movements of the
applicable rate adjustment index, the variable rate demand instruments are not
comparable to long-term fixed interest rate securities. Accordingly, interest
rates on the variable rate demand instruments may be higher or lower than
current market rates for fixed rate obligations of comparable quality with
similar final maturities.
The maturity of the variable rate demand instruments held by the Tax
Exempt Fund will ordinarily be deemed to be the longer of (1) the notice period
required before the Fund is entitled to receive payment of the principal amount
of the instrument or (2) the period remaining until the instrument's next
interest rate adjustment.
Restricted and Illiquid Municipal Securities
An entire issue of Municipal Securities may be purchased by one or a
small number of institutional investors such as the Tax Exempt Fund. Thus, the
issue may not be said to be publicly offered. Unlike securities which must be
registered under the Securities Act of 1933 prior to offer and sale unless an
exemption from such registration is available, municipal securities which are
not publicly offered may nevertheless be readily marketable. A secondary market
exists for many municipal securities which were not publicly offered initially.
Securities purchased for the Fund are subject to the limitations on
holdings of securities which are not readily marketable contained in the Fund's
investment restrictions. The Adviser determines whether a municipal security is
readily marketable based on whether it may be sold in a reasonable time
consistent with the customs of the municipal markets (usually seven days) at a
price (or interest rate) which accurately reflects its value. The Adviser
believes that the quality standards applicable to the Tax Exempt Fund's
investments enhance marketability. In addition, stand-by commitments and demand
obligations also enhance marketability.
Foreign Securities
Foreign securities may be purchased and sold by the Equity and Small
Cap Funds in over-the-counter markets (but persons affiliated with the Fund will
not act as principal in such purchases and sales) or on stock exchanges located
in the countries in which the respective principal offices of the issuers of the
various securities are located, if that is the best available market. Foreign
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<PAGE>
stock markets are generally not as developed or efficient as those in the United
States. While growing in volume, they usually have substantially less volume
than the New York Stock Exchange, and securities of some foreign companies are
less liquid and more volatile than securities of comparable United States
companies. Fixed commissions on foreign stock exchanges are generally higher
than negotiated commissions on United States exchanges, although the Equity and
Small Cap Funds will endeavor to achieve the most favorable net results on their
foreign portfolio transactions. There is generally less government supervision
and regulation of stock exchanges, brokers and listed companies abroad than in
the United States.
The dividends and interest payable on certain of the Equity and Small
Cap Funds' foreign portfolio securities may be subject to foreign withholding
taxes and in some cases capital gains from such securities may also be subject
to foreign tax, thus reducing the net amount of income or gain available for
distribution to the Equity and Small Cap Funds' respective shareholders.
Investors should understand that the expense ratios of the Equity and
Small Cap Funds may be higher than that of investment companies investing
exclusively in domestic securities because of the cost of maintaining the
custody of foreign securities.
The Small Cap Fund and the Equity Fund may acquire sponsored and
unsponsored ADRs. Unsponsored ADRs are acquired from banks that do not have a
contractual relationship with the issuer of the security underlying the
depositary receipt to issue and secure such depositary receipt. To the extent
that a Fund invests in such unsponsored ADRs there may be an increased
possibility that the Fund may not become aware of events affecting the
underlying security and thus the value of the related depositary receipt. In
addition, certain benefits (e.g., rights offerings) which may be associated with
the security underlying the depositary receipt may not inure to the benefit of
the holder of such depositary receipt.
Money Market Instruments and Repurchase Agreements
The money market instruments in which each Fund may invest include
short-term U.S. Government securities, commercial paper (promissory notes issued
by corporations to finance their short- term credit needs) of foreign (Equity
and Small Cap Funds only) and domestic issuers, negotiable certificates of
deposit, non-negotiable fixed time deposits, bankers' acceptances and repurchase
agreements.
U.S. Government securities include securities which are direct
obligations of the U.S. Government backed by the full faith and credit of the
United States, and securities issued by agencies and instrumentalities of the
U.S. Government, which may be guaranteed by the U.S. Treasury or supported by
the issuer's right to borrow from the U.S. Treasury or may be backed by the
credit of the federal agency or instrumentality itself. Agencies and
instrumentalities of the U.S. Government include, but are not limited to,
Federal Land Banks, the Federal Farm Credit Bank, the Central Bank for
Cooperatives, Federal Intermediate Credit Banks, Federal Home Loan Banks and the
Federal National Mortgage Association.
Investments in commercial paper will be rated Prime-1 by Moody's
Investors Service, Inc. ("Moody's") or A-1 by Standard & Poor's Ratings Group
("S&P") or Duff 1+ by Duff & Phelps, which are the highest ratings assigned by
these rating services (even if rated lower by one or more of the other
agencies), or which, if not rated or rated lower by one or more of the agencies
and not rated by the other agency or agencies, are judged by the Adviser to be
of equivalent quality to the securities so rated. In determining whether
securities are of equivalent quality, the Adviser may take into account, but
will not rely entirely on, ratings assigned by foreign rating agencies.
A repurchase agreement is an agreement under which a Fund acquires
money market instruments (generally U.S. Government securities, bankers'
acceptances or certificates of deposit) from a commercial bank, broker or
dealer, subject to resale to the seller at an agreed-upon price and date
(normally the next business day). The resale price reflects an agreed-upon
interest rate effective for the period the instruments are held by the Fund and
is unrelated to the interest rate on the instruments. The instruments acquired
by the Funds (including accrued interest) must have an aggregate market value in
excess of the resale price and will be held by the custodian bank for the Funds
until they are repurchased. The Trustees will monitor the standards which the
Adviser will use in reviewing the creditworthiness of any party to a repurchase
agreement with the Funds.
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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 a Fund at a time when their market value has declined, the Fund may incur a
loss. If the seller becomes insolvent or subject to liquidation or
reorganization under bankruptcy or other laws, a court may determine that the
instruments acquired by a Fund are collateral for a loan by the Fund and
therefore are subject to sale by the trustee in bankruptcy. Finally, it is
possible that a Fund may not be able to substantiate its interest in the
instruments it acquires. While the Trustees acknowledge these risks, it is
expected that they can be controlled through careful documentation and
monitoring.
Strategic and Derivative Transactions
Each Fund may, but is not required to, utilize various other investment
strategies as described below to hedge various market risks (such as interest
rates, currency exchange rates (Equity and Small Cap Funds) and broad or
specific fixed-income (Tax Exempt Fund) or equity (Equity and Small Cap Funds)
market movements), to manage the effective maturity or duration of fixed-income
securities (Tax Exempt Fund), or to enhance potential gain. Such strategies are
generally accepted as part of modern portfolio management and are regularly
utilized by many mutual funds and other institutional investors. Techniques and
instruments used by the Funds may change over time as new instruments and
strategies are developed or regulatory changes occur.
In the course of pursuing their respective investment objectives, the
Funds may purchase and sell (write) exchange-listed and over-the-counter put and
call options on securities, equity indices (Equity Fund and Small Cap Fund
only), fixed-income indices (Tax Exempt Fund only) and other financial
instruments; purchase and sell financial futures contracts and options thereon;
enter into various interest rate transactions such as swaps, caps, floors or
collars. In addition, Equity Fund and Small Cap Fund may enter into various
currency transactions such as currency forward contracts, currency futures
contracts, currency swaps or options on currencies or currency futures. The
risks associated with the Funds' transactions in options, futures and other
types of derivative securities including swaps may include some or all of the
following: market risk, leverage and volatility risk, correlation risk, credit
risk and liquidity and valuation risk. These investment techniques are referred
to herein as "Strategic Transactions." Strategic Transactions may be used in an
attempt to protect against possible changes in the market value of securities
held in or to be purchased for a Fund's portfolio resulting from securities
markets fluctuations, currency exchange rate fluctuations (Equity Fund and Small
Cap Fund only), to protect a Fund's unrealized gains in the value of its
portfolio securities, to facilitate the sale of such securities for investment
purposes, to manage the effective duration or maturity of the Tax Exempt Fund's
portfolio, or to establish a position in the derivatives markets as a temporary
substitute for purchasing or selling particular securities. In addition to the
hedging transactions referred to in the preceding sentence, Strategic
Transactions may also be used to enhance potential gain in circumstances where
hedging is not involved. (Transactions such as writing covered call options are
considered to involve hedging for the purposes of this limitation.) In
calculating a Fund's net loss exposure from such Strategic Transactions, an
unrealized gain from a particular Strategic Transaction position would be netted
against an unrealized loss from a related Strategic Transaction position. For
example, if the Adviser believes that the Equity Fund is underweighted in
cyclical stocks and overweighted in consumer stocks, the Equity Fund may buy a
cyclical index call option and sell a cyclical index put option and sell a
consumer index call option and buy a consumer index put option. Under such
circumstances, any unrealized loss in the cyclical position would be netted
against any unrealized gain in the consumer position (and vice versa) for
purposes of calculating the Fund's net loss exposure. The ability of the Funds
to utilize these Strategic Transactions successfully will depend on the
Adviser's ability to predict pertinent market movements, which cannot be
assured. The Funds will comply with applicable regulatory requirements when
implementing these strategies, techniques and instruments. The Funds' activities
involving Strategic Transactions may be limited by the requirements of
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"), for
qualification as a regulated investment company or by the Funds' objective to
minimize taxable distributions.
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Risks of Strategic and Derivative 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 Funds, force the purchase or sale, respectively of portfolio
securities at inopportune times or for prices higher than (in the case of
purchases due to the exercise of put options) or lower than (in the case of
sales due to the exercise of call options) current market values, limit the
amount of appreciation the Funds can realize on their respective investments or
cause the Funds to hold a security they might otherwise sell. The use of
currency transactions by the Equity Fund and Small Cap Fund can result in these
Funds incurring losses as a result of a number of factors including the
imposition of exchange controls, suspension of settlements, or the inability to
deliver or receive a specified currency. The use of options and futures
transactions entails certain other risks. In particular, the variable degree of
correlation between price movements of futures contracts and price movements in
the related portfolio position of a Fund creates the possibility that losses on
the hedging instrument may be greater than gains in the value of the Fund's
position. The writing of options could significantly increase a Fund's portfolio
turnover rate and, therefore, associated brokerage commissions or spreads. In
addition, futures and options markets may not be liquid in all circumstances and
certain over-the-counter options may have no markets. As a result, in certain
markets, the Funds might not be able to close out a transaction without
incurring substantial losses, if at all. Although the use of futures and options
transactions for hedging should tend to minimize the risk of loss due to a
decline in the value of the hedged position, at the same time, in certain
circumstances, these transactions tend to limit any potential gain which might
result from an increase in value of such position. The loss incurred by the
Funds in writing options on futures and entering into futures transactions is
potentially unlimited. Futures markets are highly volatile and the use of
futures may increase the volatility of the Fund's net asset value. Finally,
entering into futures contracts would create a greater ongoing potential
financial risk than would purchases of options where the exposure is limited to
the cost of the initial premium. Losses resulting from the use of Strategic
Transactions would reduce net asset value and the net result may be less
favorable than if the Strategic Transactions had not been utilized.
Risks of Strategic and Derivative Transactions Outside the United States
When conducted outside the United States, Strategic Transactions may
not be regulated as rigorously as in the United States, may not involve a
clearing mechanism and related guarantees, and are subject to the risk of
governmental actions affecting trading in, or the prices of, foreign securities,
currencies and other instruments. The value of such positions also could be
adversely affected by: (i) lesser availability than in the United States of data
on which to make trading decisions, (ii) delays in a Fund's ability to act upon
economic events occurring in foreign markets during non-business hours in the
United States, (iii) the imposition of different exercise and settlement terms
and procedures and margin requirements than in the United States, (iv) lower
trading volume and liquidity, and (v) other complex foreign political, legal and
economic factors. At the same time, Strategic Transactions may offer advantages
such as trading in instruments that are not currently traded in the United
States or arbitrage possibilities not available in the United States.
General Characteristics of Options
Put options and call options typically have similar structural
characteristics and operational mechanics regardless of the underlying
instrument on which they are purchased or sold. Thus, the following general
discussion relates to each of the particular types of options discussed in
greater detail below. In addition, many Strategic Transactions involving options
require segregation of a Fund's assets in special accounts, as described below
under "Use of Segregated Accounts."
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A put option gives the purchaser of the option, in consideration for
the payment of a premium, the right to sell, and the writer the obligation to
buy (if the option is exercised) the underlying security, commodity, index, or
other instrument at the exercise price. For instance, a Fund's purchase of a put
option on a security might be designed to protect its holdings in the underlying
instrument (or, in some cases, a similar instrument) against a substantial
decline in the market value by giving the Fund the right to sell such instrument
at the option exercise price. A call option, in consideration for the payment of
a premium, gives the purchaser of the option the right to buy, and the seller
the obligation to sell (if the option is exercised) the underlying instrument at
the exercise price. A Fund may purchase a call option on a security, currency
(Equity and Small Cap Funds), futures contract, index or other instrument to
seek to protect the Fund against an increase in the price of the underlying
instrument that it intends to purchase in the future by fixing the price at
which it may purchase such instrument. An American style put or call option may
be exercised at any time during the option period while a European style put or
call option may be exercised only upon expiration or during a fixed period prior
thereto. The Funds are authorized to purchase and sell exchange listed options
and over-the-counter options ("OTC options"). Exchange listed options are issued
by a regulated intermediary such as the Options Clearing Corporation ("OCC"),
which guarantees the performance of the obligations of the parties to such
options. The discussion below uses the OCC as an example, but is also applicable
to other financial intermediaries.
With certain exceptions, exchange listed options generally settle by
physical delivery of the underlying security or currency, although in the future
cash settlement may become available. Index options and Eurodollar instruments
are cash settled for the net amount, if any, by which the option is
"in-the-money" (i.e., where the value of the underlying instrument exceeds, in
the case of a call option, or is less than, in the case of a put option, the
exercise price of the option) at the time the option is exercised. Frequently,
rather than taking or making delivery of the underlying instrument through the
process of exercising the option, listed options are closed by entering into
offsetting purchase or sale transactions that do not result in ownership of the
new option.
A Fund's ability to close out its position as a purchaser or seller of
an exchange listed put or call option is dependent, in part, upon the liquidity
of the option market. There is no assurance that a liquid option market on an
exchange will exist. In the event that the relevant market for an option on an
exchange ceases to exist, outstanding options on that exchange would generally
continue to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours
during which the underlying financial instruments are traded. To the extent that
the option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct bilateral
agreement with the Counterparty. In contrast to exchange listed options, which
generally have standardized terms and performance mechanics, all the terms of an
OTC option, including such terms as method of settlement, term, exercise price,
premium, guarantees and security, are set by negotiation of the parties. The
Funds will generally sell (write) OTC options (other than OTC currency options)
that are subject to a buy-back provision permitting a Fund to require the
Counterparty to sell the option back to the Fund at a formula price within seven
days. (To the extent that the Funds do not do so, the OTC options are subject to
the Funds' restriction on illiquid securities.) The Funds expect generally to
enter into OTC options that have cash settlement provisions, although they are
not required to do so.
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 (Equity and Small Cap Funds) or other
instrument underlying an OTC option it has entered into with a Fund or fails to
make a cash settlement payment due in accordance with the terms of that option,
the Fund will lose any premium it paid for the option as well as any anticipated
benefit of the transaction. Accordingly, the Adviser must assess the
creditworthiness of each such Counterparty or any guarantor or credit
enhancement of the Counterparty's credit to determine the likelihood that the
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terms of the OTC option will be satisfied. The Funds will engage in OTC option
transactions only with U.S. Government securities dealers recognized by the
Federal Reserve Bank of New York as "primary dealers", or broker dealers,
domestic or foreign banks or other financial institutions which have received,
combined with any credit enhancements, a long-term debt rating of A from S&P or
Moody's or an equivalent rating from any other nationally recognized statistical
rating organization ("NRSRO") or which issue debt that is determined to be of
equivalent credit quality by the Adviser. The staff of the Securities and
Exchange Commission (the "SEC") currently takes the position that, absent the
buy-back provisions discussed above, OTC options purchased by the Funds, and
portfolio securities "covering" the amount of the Funds' obligation pursuant to
an OTC option sold by them (the cost of the sell-back plus the in-the-money
amount, if any) are illiquid, and are subject to the Funds' limitation on
investing in illiquid securities. However, for options written with "primary
dealers" pursuant to an agreement requiring a closing purchase transaction at a
formula price, the amount which is considered to be illiquid may be calculated
by reference to a formula price.
If a Fund sells (writes) a call option, the premium that it receives
may serve as a partial hedge, to the extent of the option premium, against a
decrease in the value of the underlying securities or instruments in its
portfolio or will increase the Fund's income. The sale (writing) of put options
can also provide income.
Each Fund may purchase and sell (write) call options on equity (Equity
and Small Cap Funds) and debt (Tax Exempt Fund) securities including U.S.
Treasury and agency securities, municipal notes and bonds (Tax Exempt Fund) and
Eurodollar instruments that are traded on U.S. and foreign securities exchanges
and in the over-the-counter markets, and on securities indices, currencies
(Equity and Small Cap Funds) and futures contracts. All call options sold by the
Funds must be "covered" (i.e., the Fund must own the securities or the futures
contract subject to the call) or must meet the asset segregation requirements
described below as long as the call is outstanding. Even though a Fund will
receive the option premium to help offset any loss, the Fund may incur a loss if
the exercise price is below the market price for the security subject to the
call at the time of exercise. A call option sold by a Fund also exposes the Fund
during the term of the option to possible loss of opportunity to realize
appreciation in the market price of the underlying security or instrument and
may require the Fund to hold a security or instrument which it might otherwise
have sold.
Each Fund may purchase and sell (write) put options on equity (Equity
and Small Cap Funds) and debt (Tax Exempt Fund) securities including U.S.
Treasury and agency securities, municipal notes and bonds (Tax Exempt Fund) and
Eurodollar instruments (whether or not it holds the above securities in its
portfolio), and on securities indices, currencies (Equity and Small Cap Funds)
and futures contracts. A Fund will not sell put options if, as a result, more
than 50% of the Fund's assets would be required to be segregated to cover its
potential obligations under such put options other than those with respect to
futures and options thereon. In selling put options, there is a risk that a Fund
may be required to buy the underlying security at a price above the market
price.
Options on Securities Indices and Other Financial Indices
Each Fund may also purchase and sell (write) call and put options on
securities indices and other financial indices. Options on securities indices
and other financial indices are similar to options on a security or other
instrument except that, rather than settling by physical delivery of the
underlying instrument, they settle by cash settlement. For example, an option on
an index gives the holder the right to receive, upon exercise of the option, an
amount of cash if the closing level of the index upon which the option is based
exceeds, in the case of a call, or is less than, in the case of a put, the
exercise price of the option (except if, in the case of an OTC option, physical
delivery is specified). This amount of cash is equal to the differential between
the closing price of the index and the exercise price of the option, which also
may be multiplied by a formula value. The seller of the option is obligated, in
return for the premium received, to make delivery of this amount upon exercise
of the option. In addition to the methods described above, the Funds may cover
call options on a securities index by owning securities whose price changes are
expected to be similar to those of the underlying index, or by having an
absolute and immediate right to acquire such securities without additional cash
consideration (or for additional cash consideration held in a segregated account
by the custodian) upon conversion or exchange of other securities in their
portfolios.
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General Characteristics of Futures
Each Fund may enter into financial futures contracts or purchase or
sell put and call options on such futures. Futures are generally bought and sold
on the commodities exchanges where they are listed and involve payment of
initial and variation margin as described below. The sale of futures contracts
creates a firm obligation by a Fund, as seller, to deliver to the buyer the
specific type of financial instrument called for in the contract at a specific
future time for a specified price (or, with respect to index futures and
Eurodollar instruments, the net cash amount). The purchase of futures contracts
creates a corresponding obligation by a Fund, as purchaser, to purchase a
financial instrument at a specific time and price. Options on futures contracts
are similar to options on securities except that an option on a futures contract
gives the purchaser the right in return for the premium paid to assume a
position in a futures contract and obligates the seller to deliver such position
upon exercise of the option.
The Funds' use of financial futures and options thereon will in all
cases be consistent with applicable regulatory requirements and in particular
the regulations of the Commodity Futures Trading Commission relating to
exclusions from regulation as a commodity pool operator. Those regulations
currently provide that the Funds may use commodity futures and option positions
(i) for bona fide hedging purposes without regard to the percentage of assets
committed to margin and option premiums, or (ii) for other purposes permitted by
the SEC to the extent that the aggregate initial margin and option premiums
required to establish such non-hedging positions (net the amount the positions
were "in the money" at the time of purchase) do not exceed 5% of each Fund's
respective net asset value, after taking into account unrealized profits and
losses on such positions. Typically, maintaining a futures contract or selling
an option thereon requires a Fund to deposit with its custodian for the benefit
of a futures commission merchant, as security for its obligations an amount of
cash or other specified assets (initial margin) which initially is typically 1%
to 10% of the face amount of the contract (but may be higher in some
circumstances). Additional cash or assets (variation margin) may be required to
be deposited directly with the futures commission merchant thereafter on a daily
basis as the value of the contract fluctuates. The purchase of an option on
financial futures involves payment of a premium for the option without any
further obligation on the part of the Funds. If a Fund exercises an option on a
futures contract it will be obligated to post initial margin (and potential
subsequent variation margin) for the resulting futures position just as it would
for any position. Futures contracts and options thereon are generally settled by
entering into an offsetting transaction but there can be no assurance that the
position can be offset prior to settlement at an advantageous price, nor that
delivery will occur. The segregation requirements with respect to futures
contracts and options thereon are described below.
Combined Transactions
Each Fund may enter into multiple transactions, including multiple
options transactions, multiple futures transactions, and multiple interest rate
transactions, structured notes and any combination of futures, options, currency
(Equity and Small Cap Funds), multiple currency transactions (including forward
currency contracts) (Equity and Small Cap Funds) and interest rate transactions
("component" transactions), instead of a single Strategic Transaction, as part
of a single or combined strategy when, in the opinion of the Adviser it is in
the best interests of the Fund to do so. A combined transaction will usually
contain elements of risk that are present in each of its component transactions.
Although combined transactions are normally entered into based on the Adviser's
judgment that the combined strategies will reduce risk or otherwise more
effectively achieve the desired portfolio management goal, it is possible that
the combination will instead increase such risks or hinder achievement of the
portfolio management objective.
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Currency Transactions
The Equity and Small Cap Funds may engage in currency transactions with
Counterparties in order to hedge the value of portfolio holdings denominated in
particular currencies against fluctuations in relative value or to enhance
potential gain. Currency transactions include currency contracts, exchange
listed currency futures, exchange listed and OTC options on currencies, and
currency swaps. A forward currency contract involves a privately negotiated
obligation to purchase or sell (with delivery generally required) a specific
currency at a future date, which may be any fixed number of days from the date
of the contract agreed upon by the parties, at a price set at the time of the
contract. A currency swap is an agreement to exchange cash flows based on the
notional (agreed-upon) difference among two or more currencies and operates
similarly to an interest rate swap, which is described below. A Fund may enter
into over-the-counter currency transactions with Counterparties which have
received, combined with any credit enhancements, a long term debt rating of A by
S&P or Moody's, respectively, or that have an equivalent rating from a NRSRO or
(except for OTC currency options) whose obligations are determined to be of
equivalent credit quality by the Adviser.
The Equity and Small Cap Funds' dealings in forward currency contracts
and other currency transactions such as futures, options, options on futures and
swaps will generally be limited to hedging involving either specific
transactions or portfolio positions. See "Strategic and Derivative
Transactions." Transaction hedging is entering into a currency transaction with
respect to specific assets or liabilities of a Fund, which will generally arise
in connection with the purchase or sale of its portfolio securities or the
receipt of income therefrom. Position hedging is entering into a currency
transaction with respect to portfolio security positions denominated or
generally quoted in that currency.
A Fund will not enter into a transaction to hedge currency exposure to
an extent greater, after netting all transactions intended wholly or partially
to offset other transactions, than the aggregate market value (at the time of
entering into the transaction) of the securities held in its portfolio that are
denominated or generally quoted in or currently convertible into such currency,
other than with respect to proxy hedging as described below.
Each of the Equity and Small Cap Funds may also cross-hedge currencies
by entering into transactions to purchase or sell one or more currencies that
are expected to decline in value in relation to other currencies to which the
Fund has or in which the Fund expects to have portfolio exposure. For example, a
Fund may hold a French security and the Adviser may believe that French francs
will deteriorate against German marks. The Fund would sell French francs to
reduce its exposure to that currency and buy German marks. This strategy would
be a hedge against a decline in the value of French francs, although it would
expose the Fund to declines in the value of the German mark relative to the U.S.
dollar.
To reduce the effect of currency fluctuations on the value of existing
or anticipated holdings of portfolio securities, the Equity and Small Cap Funds
may also engage in proxy hedging. Proxy hedging is often used when the currency
to which the Fund's portfolio is exposed is difficult to hedge or to hedge
against the dollar. Proxy hedging entails entering into a forward contract to
sell a currency whose changes in value are generally considered to be linked to
a currency or currencies in which certain of a Fund's portfolio securities are
or are expected to be denominated, and to buy U.S. dollars. The amount of the
contract would not exceed the value of the Fund's securities denominated in
linked currencies. For example, if the Adviser considers that the Austrian
schilling is linked to the German deutschemark (the "D-mark"), a Fund holds
securities denominated in schillings and the Adviser believes that the value of
schillings will decline against the U.S. dollar, the Adviser may enter into a
contract to sell D-marks and buy dollars. Proxy hedging involves some of the
same risks and considerations as other transactions with similar instruments.
Currency transactions can result in losses to the Funds if the currency being
hedged fluctuates in value to a degree or in a direction that is not
anticipated. Further, there is the risk that the perceived linkage between
various currencies may not be present or may not be present during the
particular time that the Funds are engaging in proxy hedging. If a Fund enters
into a currency hedging transaction, the Fund will comply with the asset
segregation requirements described below.
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Risks of Currency Transactions
Currency transactions are subject to risks different from those of
other portfolio transactions. Because currency control is of great importance to
the issuing governments and influences economic planning and policy, purchases
and sales of currency and related instruments can be negatively affected by
government exchange controls, blockages, and manipulations or exchange
restrictions imposed by governments. These can result in losses to a Fund if it
is unable to deliver or receive currency or funds in settlement of obligations
and could also cause hedges it has entered into to be rendered useless,
resulting in full currency exposure as well as incurring transaction costs.
Buyers and sellers of currency futures are subject to the same risks that apply
to the use of futures generally. Further, settlement of a currency futures
contract for the purchase of most currencies must occur at a bank based in the
issuing nation. Trading options on currency futures is relatively new, and the
ability to establish and close out positions on such options is subject to the
maintenance of a liquid market which may not always be available. Currency
exchange rates may fluctuate based on factors extrinsic to that country's
economy.
Swaps, Caps, Floors, Spreads and Collars
Among the Strategic Transactions into which each of the Funds may enter
are interest rate, currency rate (Equity and Small Cap Funds only) and index
swaps and the purchase or sale of related caps, floors, spreads and collars. The
Funds expect to enter into these transactions primarily for hedging purposes,
including, but not limited to, preserving a return or spread on a particular
investment or portion of its portfolio, protecting against currency fluctuations
(Equity and Small Cap Funds only) as a duration management technique (Tax Exempt
Fund only) or protecting against an increase in the price of securities a Fund
anticipates purchasing at a later date. Swaps, caps, floors, spreads and collars
may also be used to enhance potential gain in circumstances where hedging is not
involved although, as described above, a Fund's net loss exposure resulting from
swaps, caps, floors, spreads and collars and other Strategic Transactions
entered into for such purposes will not exceed 3% of the Funds' respective net
assets at any one time. A Fund will not sell interest rate caps or floors where
it does not own securities or other instruments providing the income stream the
Fund may be obligated to pay. Interest rate swaps involve the exchange by a Fund
with another party of their respective commitments to pay or receive interest,
e.g., an exchange of floating rate payments for fixed rate payments with respect
to a notional amount of principal. A currency swap is an agreement to exchange
cash flows on a notional amount of two or more currencies based on the relative
value differential among them. An index swap is an agreement to swap cash flows
on a notional amount based on changes in the values of the reference indices.
The purchase of a cap entitles the purchaser to receive payments on a notional
principal amount from the party selling such cap to the extent that a specified
index exceeds a predetermined interest rate or amount. The purchase of a floor
entitles the purchaser to receive payments on a notional principal amount from
the party selling such floor to the extent that a specified index falls below a
predetermined interest rate or amount. A collar or a spread is a combination of
a cap and a floor that preserves a certain rate of return within a predetermined
range of interest rates or values.
The Funds will usually enter into swaps on a net basis, i.e., the two
payment streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with a Fund receiving or paying, as the case may
be, only the net amount of the two payments. The Funds will not enter into any
swap, cap, floor, spread or collar transaction unless, at the time of entering
into such transaction, the unsecured long-term debt of the Counterparty,
combined with any credit enhancements, is rated at least A by S&P or Moody's or
has an equivalent rating from an NRSRO or the Counterparty issues debt that is
determined to be of equivalent credit quality by the Adviser. If there is a
default by the Counterparty, a Fund may have contractual remedies pursuant to
the agreements related to the transaction. The swap market has grown
substantially in recent years with a large number of banks and investment
banking firms acting both as principals and as agents utilizing standardized
swap documentation. As a result, the swap market has become relatively liquid.
Caps, floors, spreads and collars are more recent innovations for which
standardized documentation has not yet been fully developed. Swaps, caps,
floors, spreads and collars are considered illiquid for purposes of each Fund's
policy regarding illiquid securities, unless it is determined, based upon
continuing review of the trading markets for the specific security, that such
security is liquid. The Board of Trustees has adopted guidelines and delegated
to the Adviser the daily function of determining and monitoring the liquidity of
swaps, caps, floors, spreads and collars. The Board of Trustees, however,
retains oversight focusing on factors such as valuation, liquidity and
availability of information and is ultimately responsible for such
determinations. The staff of the SEC currently takes the position that swaps,
caps, floors, spreads and collars are illiquid, and are subject to each Fund's
limitation on investing in illiquid securities.
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Eurodollar Contracts
Each Fund may make investments in Eurodollar contracts. Eurodollar
contracts are U.S. dollar-denominated futures contracts or options thereon which
are linked to the London Interbank Offered Rate ("LIBOR"), although foreign
currency-denominated instruments are available from time to time. Eurodollar
futures contracts enable purchasers to obtain a fixed rate for the lending of
funds and sellers to obtain a fixed rate for borrowings. A Fund might use
Eurodollar futures contracts and options thereon to hedge against changes in
LIBOR, to which many interest rate swaps and fixed income instruments are
linked.
Use of Segregated Accounts
Each Fund will hold securities or other instruments whose values are
expected to offset its obligations under the Strategic Transactions. A Fund will
not enter into Strategic Transactions that expose the Fund to an obligation to
another party unless it owns either (i) an offsetting position in securities or
other options, futures contracts or other instruments or (ii) cash, receivables
or liquid, high grade debt securities with a value sufficient to cover its
potential obligations. The Funds may have to comply with any applicable
regulatory requirements designed to make sure that mutual funds do not use
leverage in Strategic Transactions, and if required, will set aside cash and
other assets in a segregated account with the custodian bank in the amount
prescribed. In that case, the Funds' custodian would maintain the value of such
segregated account equal to the prescribed amount by adding or removing
additional cash or other assets to account for fluctuations in the value of the
account. Assets held in a segregated account would not be sold while the
Strategic Transaction is outstanding, unless they are replaced with similar
assets. As a result, there is a possibility that segregation of a large
percentage of a Fund's assets could impede portfolio management or a Fund's
ability to meet redemption requests or other current obligations.
"When-Issued" and "Delayed Delivery" Securities
The Tax Exempt Fund may commit up to 40% of its net assets to purchase
securities on a "when-issued" and "delayed delivery" basis, which means that
delivery and payment for the securities will normally take place 15 to 45 days
after the date of the transaction. The payment obligation and interest rate on
the securities are fixed at the time the Fund enters into the commitment, but
interest will not accrue to the Fund until delivery of and payment for the
securities. Although the Tax Exempt Fund will only make commitments to purchase
"when- issued" and "delayed delivery" securities with the intention of actually
acquiring the securities, the Fund may sell the securities before the settlement
date if deemed advisable by the Adviser.
Unless the Tax Exempt Fund has entered into an offsetting agreement to
sell the securities purchased on a when issued or delayed delivery basis, cash
or liquid, high-grade debt obligations with a market value at least equal to the
amount of the Fund's commitment will be segregated with the Fund's custodian
bank. If the market value of these securities declines, additional cash or
securities will be segregated daily so that the aggregate market value of the
segregated securities equals the amount of the Fund's commitment.
Securities purchased on a "when-issued" and "delayed delivery" basis
may have a market value on delivery which is less than the amount paid by the
Tax Exempt Fund. Changes in market value may be based upon the public's
perception of the creditworthiness of the issuer or changes in the level of
interest rates. Generally, the value of "when-issued" securities will fluctuate
inversely to changes in interest rates, i.e., they will appreciate in value when
interest rates fall and will depreciate in value when interest rates rise. The
Tax Exempt Fund may sell portfolio securities on a delayed delivery basis. The
market value of the securities when they are delivered may be more than the
amount to be received by the Fund.
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Other Investment Companies
The Equity and Small Cap Funds may each, subject to authorization by
the Trustees, invest all of its investable assets in the securities of a single
open-end registered investment company (a "Portfolio"). If authorized by the
Trustees, a Fund would seek to achieve its investment objective by investing in
a Portfolio, which Portfolio would invest in a portfolio of securities that
complies with the Fund's investment objectives, policies and restrictions. The
Trustees do not intend to authorize investing in this manner at this time.
INVESTMENT RESTRICTIONS
Each Fund has adopted certain fundamental and non-fundamental policies
in addition to those described under "Investment Objectives and Policies" in the
Prospectus. A Fund's fundamental policies cannot be changed unless the change is
approved by the lesser of (i) 67% or more of the voting securities present at a
meeting, if the holders of more than 50% of the outstanding voting securities of
that Fund are present or represented by proxy, or (ii) more than 50% of the
outstanding voting securities of that Fund. A Fund's non- fundamental policies
may be changed by the Board of Trustees, without shareholder approval, in
accordance with applicable laws, regulations or regulatory policy.
Standish Intermediate Tax Exempt Bond Fund
As a matter of fundamental policy, the Tax Exempt Fund may not:
1. Underwrite the securities of other issuers, except to the
extent that, in connection with the disposition of portfolio
securities, the Fund may be deemed to be an underwriter under
the Securities Act of 1933.
2. Purchase real estate or real estate mortgage loans, although
the Fund may purchase marketable securities of companies which
deal in real estate, real estate mortgage loans or interests
therein and may purchase, hold and sell real estate acquired
as a result of ownership of securities or other instruments.
3. Purchase securities on margin (except that the Fund may obtain
such short-term credits as may be necessary for the clearance
of purchases and sales of securities).
4. Purchase or sell commodities or commodity contracts except
that the Fund may purchase and sell financial futures
contracts and options on financial futures contracts.
5. Invest, with respect to at least 75% of its total assets, more
than 5% in the securities of any one issuer (other than the
U.S. Government, its agencies or instrumentalities) or acquire
more than 10% of the outstanding voting securities of any
issuer.
6. Issue senior securities, borrow money or pledge or mortgage
its assets, except that the Fund may borrow from banks as a
temporary measure for extraordinary or emergency purposes (but
not investment purposes) in an amount up to 15% of the current
value of its total assets, and pledge its assets to an extent
not greater than 15% of the current value of its total assets
to secure such borrowings; however, the Fund may not make any
additional investments while its outstanding borrowings exceed
5% of the current value of its total assets.
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7. Lend portfolio securities, except that the Fund may enter into
repurchase agreements which are terminable within 7 days.
8. Invest more than an aggregate of 15% of the net assets of the
Fund in securities subject to legal or contractual
restrictions on resale or for which there are no readily
available market quotations or in other illiquid securities.
As a matter of non-fundamental policy, the Tax Exempt Fund may not:
A. Make short sales of securities.
B. Invest in companies for the purpose of exercising control or
management.
C. Purchase securities of any other investment company except as
part of a merger, consolidation or acquisition of assets.
D. Purchase or write options, except as described under
"Strategic and Derivative Transactions."
E. Invest in interests in oil, gas or other exploration or
development programs or mineral leases; however, this policy
will not prohibit the acquisition of securities of companies
engaged in the production or transmission of oil, gas, or
other minerals.
F. Invest more than 5% of the assets of the Fund in the
securities of any issuers which together with their corporate
parents have records of less than three years' continuous
operation, including the operation of any predecessor, other
than obligations issued or guaranteed by the U.S. Government
or its agencies, municipal securities which are rated by at
least one nationally recognized municipal bond rating service,
and securities fully collateralized by such securities.
G. Invest in securities of any company if any officer or director
(Trustee) of the Trust or of the Fund's investment adviser
owns more than 1/2 of 1% of the outstanding securities of such
company and such officers and directors (Trustees) own in the
aggregate more than 5% of the securities of such company.
H. Enter into repurchase agreements with respect to more than 15%
of its net assets.
I. Purchase warrants of any issuer, if, as a result of such
purchase, more than 2% of the value of the Fund's total assets
would be invested in warrants which are not listed on an
exchange or more than 5% of the value of the total assets of
the Fund would be invested in warrants generally, whether or
not so listed. For these purposes, warrants are to be valued
at the lesser of cost or market, but warrants acquired by the
Fund in units with or attached to debt securities shall be
deemed to be without value.
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As a matter of non-fundamental policy, the Tax Exempt Fund may not own
more than 10% of the outstanding voting securities of any one issuer. Because
municipal securities are not voting securities, there is no limit on the
percentage of a single issuer's municipal bonds which the Tax Exempt Fund may
own so long as, as to 75% of its total assets, it does not invest more than 5%
of its total assets in the securities of the issuer. Consequently, the Tax
Exempt Fund may invest in a greater percentage of the outstanding securities of
a single issuer than would an investment company which invests in voting
securities.
Although it is allowed to do so, the Tax Exempt Fund does not expect to
invest in securities (other than securities of the U.S. Government, its agencies
or instrumentalities and municipal securities) if more than 25% of the current
value of its total assets would be invested in a single industry. Although
governmental issuers of municipal securities are not considered part of any
"industry," municipal securities backed only by the assets and revenues of
nongovernmental users may, for this purpose, be deemed to be issued by such
nongovernmental users (e.g., industrial development bonds) and constitute an
"industry." Thus, the Tax Exempt Fund does not expect that more than 25% of its
assets will be invested in obligations deemed to be issued by nongovernmental
users in any one industry (e.g., industrial development bonds for health care
facilities) and in taxable obligations of issuers in the same industry. However,
it is possible that the Tax Exempt Fund may invest more than 25% of its assets
in a broader sector of the market for municipal securities.
Determining the issuer of a tax-exempt security will be based upon the
source of assets and revenues committed to meeting interest and principal
payments of each security. A security guaranteed or otherwise backed by full
faith and credit of a governmental entity would generally be considered to
represent a separate security issued by such guaranteeing entity and by the
primary obligor. However, a guarantee of a security shall not be deemed to be a
security issued by the guarantor if the value of all securities guaranteed by
the guarantor and owned by the Tax Exempt Fund is less than 10% of the value of
the total assets of the Fund. Securities backed only by the assets and revenues
of nongovernmental users will be deemed to be issued by such nongovernmental
users.
Standish Tax-Sensitive Equity Fund and Standish Small Cap
Tax-Sensitive Equity Fund
As a matter of fundamental policy, each of the Standish Small Cap Tax-Sensitive
Equity Fund and Standish Tax-Sensitive Equity Fund may not:
1. Invest more than 25% of the current value of its total assets
in any single industry, provided that this restriction shall
not apply to U.S. Government securities or mortgage-backed
securities issued or guaranteed as to principal or interest by
the U.S. Government, its agencies or instrumentalities;
provided, however, that the Fund may invest all or part of its
investable assets in an open-end registered investment company
with substantially the same investment objective, policies and
restrictions as the Fund.
2. Issue senior securities. For purposes of this restriction,
borrowing money in accordance with paragraph 3 below, making
loans in accordance with paragraph 8 below, the issuance of
shares of beneficial interest in multiple classes or series,
the deferral of trustees' fees, the purchase or sale of
options, futures contracts, forward commitments and repurchase
agreements entered into in accordance with the Fund's
investment policies or within the meaning of paragraph 6
below, are not deemed to be senior securities.
3. Borrow money, except in amounts not to exceed 33 1/3% of the
value of the Fund's total assets (including the amount
borrowed) taken at market value (i) from banks for temporary
or short-term purposes or for the clearance of transactions,
(ii) in connection with the redemption of Fund shares or to
finance failed settlements of portfolio trades without
immediately liquidating portfolio securities or other assets;
(iii) in order to fulfill commitments or plans to purchase
additional securities pending the anticipated sale of other
portfolio securities or assets and (iv) the Fund may enter
into reverse repurchase agreements and forward roll
transactions. For purposes of this investment restriction,
investments in short sales, futures contracts, options on
futures contracts, securities or indices and forward
commitments shall not constitute borrowing.
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4. Underwrite the securities of other issuers, except to the
extent that, in connection with the disposition of portfolio
securities, the Fund may be deemed to be an underwriter under
the Securities Act of 1933; provided, however, that the Fund
may invest all or part of its investable assets in an open-end
registered investment company with substantially the same
investment objective, policies and restrictions as the Fund.
5. Purchase or sell real estate except that the Fund may (i)
acquire or lease office space for its own use, (ii) invest in
securities of issuers that invest in real estate or interests
therein, (iii) invest in securities that are secured by real
estate or interests therein, (iv) purchase and sell
mortgage-related securities and (v) hold and sell real estate
acquired by the Fund as a result of the ownership of
securities.
6. Purchase securities on margin (except that the Fund may obtain
such short-term credits as may be necessary for the clearance
of purchases and sales of securities).
7. Purchase or sell commodities or commodity contracts, except
the Fund may purchase and sell options on securities,
securities indices and currency, futures contracts on
securities, securities indices and currency and options on
such futures, forward foreign currency exchange contracts,
forward commitments, securities index put or call warrants and
repurchase agreements entered into in accordance with the
Fund's investment policies.
8. Make loans, except that the Fund (1) may lend portfolio
securities in accordance with the Fund's investment policies
up to 33 1/3% of the Fund's total assets taken at market
value, (2) enter into repurchase agreements, and (3) purchase
all or a portion of an issue of debt securities, bank loan
participation interests, bank certificates of deposit,
bankers' acceptances, debentures or other securities, whether
or not the purchase is made upon the original issuance of the
securities.
9. With respect to 75% of its total assets, purchase securities
of an issuer (other than the U.S. Government, its agencies,
instrumentalities or authorities or repurchase agreements
collateralized by U.S. Government securities and other
investment companies), if:
a. such purchase would cause more than 5% of the Fund's
total assets taken at market value to be invested in
the securities of such issuer; or
b. such purchase would at the time result in more than
10% of the outstanding voting securities of such
issuer being held by the Fund;
provided, however, that the Fund may invest all or part of its
investable assets in an open-end registered investment company
with substantially the same investment objective, policies and
restrictions as the Fund.
For purposes of the fundamental investment restriction (1) regarding
industry concentration, the Adviser generally classifies issuers by industry in
accordance with classifications set forth in the Directory of Companies Filing
Annual Reports With The Securities and Exchange Commission. In the absence of
such classification or if the Adviser determines in good faith based on its own
information that the economic characteristics affecting a particular issuer make
it more appropriately considered to be engaged in a different industry, the
Adviser may classify an issuer according to its own sources. For instance,
personal credit finance companies and business credit finance companies are
deemed to be separate industries and wholly-owned finance companies are
considered to be in the industry of their parents if their activities are
primarily related to financing the activities of their parents.
17
<PAGE>
As a matter of non-fundamental policy, each of the Standish Tax-Sensitive Equity
Fund and Standish Small Cap Tax-Sensitive Equity Fund may not:
A. Make short sales of securities unless (i) either (a) after
effect is given to any such short sale, the total market value
of all securities sold short would not exceed 5% of the value
of the Fund's net assets or (b) at all times during which a
short position is open it owns an equal amount of such
securities, or by virtue of ownership of convertible or
exchangeable securities it has the right to obtain through the
conversion or exchange of such other securities an amount
equal to the securities sold short, (ii) the securities sold
short are listed on a national securities exchange and (iii)
the value of the securities of any one issuer in which the
Fund is short may not exceed 2% of the Fund's net assets or 2%
of the securities of any class of any issuer.
B. Invest in companies for the purpose of exercising control or
management.
C. Purchase a security of other investment companies, except when
the purchase is part of a plan of merger, consolidation,
reorganization or acquisition or except by purchase in the
open market where no commission or profit to a sponsor or
dealer results from the purchase other than customary brokers'
commissions and then only if, as a result, (i) more than 10%
of the Fund's assets would be invested in securities of other
investment companies, (ii) more than 3% of the total
outstanding voting securities of any one such investment
company would be held by the Fund or (iii) more than 5% of the
Fund's assets would be invested in any one such investment
company; provided, however, that the Fund may invest all or
part of its investable assets in an open-end registered
investment company with substantially the same investment
objective, policies and restrictions as the Fund.
D. Invest in interests in oil, gas or other exploration or
development programs or mineral leases; however, this policy
will not prohibit the acquisition of securities of companies
engaged in the production or transmission of oil, gas, or
other minerals.
E. Invest more than 5% of the assets of the Fund in the
securities of any issuers which, together with their corporate
parents, have records of less than three years' continuous
operation, including the operation of any predecessor,
excluding obligations issued or guaranteed by the U.S.
Government or its agencies and securities fully collateralized
by such securities and excluding securities which have been
rated investment grade by at least one nationally recognized
statistical rating organization; provided, however, that the
Fund may invest all or part of its investable assets in an
open-end investment company with substantially the same
investment objective, policies and restrictions as the Fund.
F. Invest in restricted securities or securities which are
illiquid if, as a result, more than 15% of its net assets
would consist of such securities, including repurchase
agreements maturing in more than seven days, securities that
are not readily marketable, restricted securities not eligible
for resale pursuant to Rule 144A under the 1933 Act, purchased
OTC options, certain assets used to cover written OTC options,
and privately issued stripped mortgage-backed securities;
provided that the Fund may invest all or part of its
investable assets in an open-end investment company with
substantially the same investment objective, policies and
restrictions as the Fund.
18
<PAGE>
G. Invest in securities of any company if any officer or director
(Trustee) of the Trust or of the Adviser owns more than .5% of
the outstanding securities of such company and such officers
and directors (Trustees) own in the aggregate more than 5% of
the securities of such company.
H. Purchase securities while outstanding bank borrowings exceed
5% of the Fund's net assets.
I. Invest in real estate limited partnership interests, other
than real estate investment trusts organized as limited
partnerships.
J. Purchase or sell (write) options, except pursuant to the
limitations described above.
K. Purchase warrants of any issuer, if, as a result of such
purchase, more than 2% of the value of the Fund's total assets
would be invested in warrants which are not listed on an
exchange or more than 5% of the value of the total assets of
the Fund would be invested in warrants generally, whether or
not so listed. For these purposes, warrants are to be valued
at the lesser of cost or market, but warrants acquired by the
Fund in units with or attached to debt securities shall be
deemed to be without value.
The Equity and Small Cap Funds have no current intention of lending
portfolio securities or entering into reverse repurchase agreements or forward
roll transactions. None of the Funds have any current intention to borrow money
for other than temporary of emergency purposes.
Notwithstanding any other fundamental or non-fundamental investment
restriction or policy, the Equity and Small Cap Funds may each invest all of its
assets in the securities of a single open-end registered investment company with
substantially the same fundamental investment objectives, restrictions and
policies as the Fund.
---------------------
If any percentage restriction described above is adhered to at the time
of investment, a subsequent increase or decrease in the percentage resulting
from a change in the value of a Fund's assets will not constitute a violation of
the restriction, except with respect to restriction letter G above.
In order to permit the sale of shares of the Funds in certain states,
the Board may, in its sole discretion, adopt restrictions of investment policy
more restrictive than those described above. Should the Board determine that any
such more restrictive policy is no longer in the best interest of a Fund and its
shareholders, the Fund may cease offering shares in the state involved and the
Board may revoke such restrictive policy. Moreover, if the states involved shall
no longer require any such restrictive policy, the Board may, in its sole
discretion, revoke such policy.
CALCULATION OF PERFORMANCE DATA
As indicated in the Prospectus, each Fund may, from time to time,
advertise certain total return information and the Tax Exempt Fund may also
advertise certain yield and tax equivalent yield information. The average annual
total return of a Fund for a period is computed by subtracting the net asset
value per share at the beginning of the period from the net asset value per
share at the end of the period (after adjusting for the reinvestment of any
income dividends and capital gain distributions), and dividing the result by the
net asset value per share at the beginning of the period. In particular, the
average annual total return of a Fund ("T") is computed by using the redeemable
value at the end of a specified period of time ("ERV") of a hypothetical initial
investment of $1,000 ("P") over a period of time ("n") according to the formula
P(1+T)^n=ERV.
19
<PAGE>
The yield of the Tax Exempt Fund is computed by dividing the net
investment income per share earned during the period stated in the advertisement
by the maximum offering price per share on the last day of the period. For the
purpose of determining net investment income, the calculation includes, among
expenses of the Tax Exempt Fund, all recurring fees that are charged to all
shareholder accounts and any non-recurring charges for the period stated. In
particular, the yield is determined according to the following formula:
Yield = (2 [(A - B + 1)^6 - 1])/C D
Where: A equals dividends and interest earned during the period; B equals net
expenses accrued for the period; C equals average daily number of shares
outstanding during the period that were entitled to receive dividends; D equals
the maximum offering price per share on the last day of the period.
Tax equivalent yield is the net annualized taxable yield needed to
produce a specified tax exempt yield at a given tax rate based on a specified
30-day (or one month) period, assuming semi-annual compounding of income. The
taxable equivalent yield for the Tax Exempt Fund is based upon the Fund's
current tax-exempt yield and an investor's marginal tax rate. The formula is:
Portfolio's Tax-Free Yield
-------------------------- = Taxable Equivalent Yield
100% - Marginal Tax Rate
The average annual total return quotation for the Tax Exempt Fund since
inception (November 2, 1992 to June 30, 1995) and for the one year period ended
June 30, 1995 were 6.5% and (6.3%), respectively, and the average annualized
yield for the thirty day period ended June 30, 1995 was 4.96%. The Tax Exempt
Fund's tax equivalent yield for the thirty day period ended June 30, 1995 was
6.88%, assuming a federal income tax rate of 39.6%.
The Tax Exempt Fund may also quote non-standardized yield, such as
yield-to-maturity ("YTM"). YTM represents the rate of return an investor will
receive if a long-term, interest bearing investment, such as a bond, is held to
its maturity date. YTM does not take into account purchase price, redemption
value, time to maturity, coupon yield, and the time between interest payments.
In addition to average annual return and yield and tax equivalent yield
(Tax Exempt Fund) quotations, each Fund may quote quarterly and annual
performance on a net (with management fees and other operating expenses
deducted) and gross basis. The Tax Exempt Fund's net and gross performance is as
follows:
Quarter/Year Net Gross
------------ --- -----
1992 2.79% 2.95%
1Q93 3.46% 3.62%
2Q93 2.63% 2.79%
3Q93 2.94% 3.10%
4Q93 1.35% 1.51%
1993 10.78% 11.47%
1Q94 -3.95% -3.79%
2Q94 1.67% 1.83%
3Q94 0.98% 1.15%
4Q94 -1.29% -1.13%
1994 -2.68% -2.02%
1Q95 4.61% 4.77%
2Q95 1.95% 2.12%
3Q95 2.76% 2.95%
20
<PAGE>
These performance quotations should not be considered as representative
of the Tax Exempt Fund's performance for any specified period in the future.
Each Fund's performance may be compared in sales literature to the
performance of other mutual funds having similar objectives or to standardized
indices or other measures of investment performance. In particular, the Tax
Exempt Fund may compare its performance to various indices (or particular
components thereof), which are generally considered to be representative of the
performance of all municipal securities such as the Lehman Muni 3-5-7-10 Index.
The Equity and Small Cap Funds may each compare their respective performance to
the S&P 500 Index, which is generally considered to be representative of the
performance of unmanaged common stocks that are publicly traded in the United
States securities markets. In addition, the Small Cap Fund may compare its
performance to the Russell 2000 Index, which is generally considered to be
representative of unmanaged small capitalization stocks in the United States
markets. Comparative performance may also be expressed by reference to a ranking
prepared by a mutual fund monitoring service or by one or more newspapers,
newsletters or financial periodicals. Performance comparisons may be useful to
investors who wish to compare the Fund's past performance to that of other
mutual funds and investment products. Of course, past performance is not a
guarantee of future results.
MANAGEMENT
Trustees and Officers
The Trustees and executive officers of the Trust are listed below. All
executive officers of the Trust are affiliates of Standish, Ayer & Wood, Inc.,
each Fund's investment adviser.
<TABLE>
<CAPTION>
<S> <C> <C>
Position Held Principal Occupation
Name and Address With Trust During Past 5 Years
- ---------------- ------------ -------------------
*D. Barr Clayson Vice President Vice President and
c/o Standish, Ayer & and Trustee Managing Director,
Wood, Inc. Standish, Ayer &
One Financial Center Wood, Inc.; President,
Boston, MA 02111 Standish International
Management Company,
L.P.
*Richard C. Doll Vice President Vice President and
c/o Standish, Ayer & and Trustee Director, Standish,
Wood, Inc. Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Samuel C. Fleming Trustee Chairman of the Board
c/o Decision and Chief Executive
Resources, Inc. Officer, Decision
1100 Winter Street Resources, Inc.
Waltham, MA 02154 through 1989, Senior
V.P. Arthur D. Little
21
<PAGE>
Benjamin M. Friedman Trustee William Joseph Maier
c/o Harvard University Professor of Political
Cambridge, MA 02138 Economy, Harvard
University
John H. Hewitt Trustee Trustee, The Peabody
P. O. Box 307 Foundation; Trustee,
So. Woodstock, VT 05071 Visiting Nurse
Alliance of Vermont
New Hampshire
*Edward H. Ladd Trustee and Chairman of the Board
c/o Standish, Ayer Vice President and Managing Director,
& Wood, Inc. Standish, Ayer & Wood,
One Financial Center Inc. since 1990;
Boston, MA 02111 formerly President of
Standish, Ayer & Wood,
Inc.
Caleb Loring III Trustee Trustee, Essex Street
c/o Essex Street Associates (family
Associates investment trust
P.O. Box 5600 office); Director,
Beverly Farms, MA 01915 Holyoke Mutual Insurance
Company
*Richard S. Wood President Vice President,
c/o Standish, Ayer & and Trustee Secretary and Director,
Wood, Inc. Standish, Ayer & Wood,
One Financial Center Inc.; Executive Vice
Boston, MA 02111 President, Standish
International
Management Company,
L.P.
James E. Hollis III Executive Vice Vice President and
c/o Standish, Ayer & President Director,
Wood, Inc. Standish, Ayer & Wood,
One Financial Center Inc.
Boston, MA 02111
David W. Murray Treasurer and Vice President, Treasurer
c/o Standish, Ayer & Secretary and Director, Standish,
Wood, Inc. Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
22
<PAGE>
Caleb F. Aldrich Vice President Vice President and
c/o Standish, Ayer & Director,
Wood, Inc. Standish, Ayer & Wood,
One Financial Center Inc.
Boston, MA 02111
Beverly E. Banfield Vice President Vice President and
c/o Standish, Ayer & Compliance Officer,
Wood, Inc. Standish, Ayer & Wood,
One Financial Center Inc.; and
Boston, MA 02111 Assistant Vice President
Compliance Officer,
Freedom Capital
Management Corp.
(1989-1992)
Nicholas S. Battelle Vice President Vice President and
c/o Standish, Ayer & Director,
Wood, Inc. Standish, Ayer & Wood,
One Financial Center Inc.
Boston, MA 02111
Walter M. Cabot Vice President Senior Advisor and
c/o Standish, Ayer & Director,
Wood, Inc. Standish, Ayer & Wood,
One Financial Center Inc.;
Boston, MA 02111 prior to 1991, President,
Harvard Management
Company
David H. Cameron Vice President Vice President and
c/o Standish, Ayer & Director,
Wood, Inc. Standish, Ayer & Wood,
One Financial Center Inc.
Boston, MA 02111
Karen K. Chandor Vice President Vice President and
c/o Standish, Ayer & Director,
Wood, Inc. Standish, Ayer & Wood,
One Financial Center Inc.
Boston, MA 02111
Lavinia B. Chase Vice President Vice President, Standish,
c/o Standish, Ayer & Ayer & Wood, Inc.
Wood, Inc.
One Financial Center
Boston, MA 02111
23
<PAGE>
Susan B. Coan Vice President Vice President, Standish,
c/o Standish, Ayer & Ayer & Wood, Inc.
Wood, Inc.
One Financial Center
Boston, MA 02111
W. Charles Cook II Vice President Vice President, Standish,
c/o Standish, Ayer & Ayer & Wood, Inc.
Wood, Inc.
One Financial Center
Boston, MA 02111
James W. Copley, Jr. Vice President Senior Portfolio
c/o Standish, Ayer & Manager, Standish, Ayer &
Wood, Inc. Wood, Inc. (since June 30,
One Financial Center 1995); President and Director,
Boston, MA 02111 Consolidated Investment
Corporation; Vice-President-
Funds Management,
Consolidated Healthcare,
Inc.
Joseph M. Corrado Vice President Vice President, Standish,
c/o Standish, Ayer & Ayer & Wood, Inc.
Wood, Inc.
One Financial Center
Boston, MA 02111
Dolores S. Driscoll Vice President Vice President and
c/o Standish, Ayer & Managing
Wood, Inc. Director, Standish, Ayer &
One Financial Center Wood, Inc.
Boston, MA 02111
Anne P. Herrmann Vice President Mutual Fund
c/o Standish, Ayer & Administrator;
Wood, Inc. formerly Portfolio
One Financial Center Accountant, Standish,
Boston, MA 02111 Ayer & Wood, Inc.
Ann S. Higgins Vice President Vice President, Standish,
c/o Standish, Ayer & Ayer & Wood, Inc.
Wood, Inc.
One Financial Center
Boston, MA 02111
24
<PAGE>
Raymond J. Kubiak Vice President Vice President and
c/o Standish, Ayer & Director, Standish,
Wood, Inc. Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Maria D. Furman Vice President Vice President and
c/o Standish, Ayer & Director,
Wood, Inc. Standish, Ayer & Wood,
One Financial Center Inc.
Boston, MA 02111
Phillip D. Leonardi Vice President Vice President, Standish,
c/o Standish, Ayer & Ayer & Wood, Inc. since
Wood, Inc. November 1993; formerly,
One Financial Center Investment Sales, Cigna
Boston, MA 02111 Corporation (1993) and
Travelers Corporation
(1984-1993)
Laurence A. Manchester Vice President Vice President and
c/o Standish, Ayer & Director,
Wood, Inc. Standish, Ayer & Wood,
One Financial Center Inc.
Boston, MA 02111
George W. Noyes Vice President President and Managing
c/o Standish, Ayer & Director, Standish, Ayer &
Wood, Inc. Wood, Inc.
One Financial Center
Boston, MA 02111
Arthur H. Parker Vice President Vice President and
c/o Standish, Ayer & Director,
Wood, Inc. Standish, Ayer & Wood,
One Financial Center Inc.
Boston, MA 02111
Jennifer A. Pline Vice President Vice President, Standish,
c/o Standish, Ayer & Ayer & Wood, Inc.
Wood, Inc.
One Financial Center
Boston, MA 02111
Howard B. Rubin Vice President Vice President and
c/o Standish, Ayer & Director,
Wood, Inc. Standish, Ayer & Wood,
One Financial Center Inc.
Boston, MA 02111
25
<PAGE>
Michael C. Schoeck Vice President Vice President, Standish,
c/o Standish, Ayer & Ayer & Wood, Inc. since
Wood, Inc. August, 1993; formerly,
One Financial Center Vice President,
Boston, MA 02111 Commerzbank, Frankfurt,
Germany
Austin C. Smith Vice President Vice President and
c/o Standish, Ayer & Director,
Wood, Inc. Standish, Ayer & Wood,
One Financial Center Inc.
Boston, MA 02111
Stephen A. Smith Vice President Vice President, Standish,
c/o Standish, Ayer & Ayer & Wood, Inc. since
Wood, Inc. November, 1993; formerly,
One Financial Center Consultant, Cambridge
Boston, MA 02111 Associates
James W. Sweeney Vice President Vice President and
c/o Standish, Ayer & Director,
Wood, Inc. Standish, Ayer & Wood,
One Financial Center Inc.
Boston, MA 02111
Ralph S. Tate Vice President Vice President and
c/o Standish, Ayer & Director,
Wood, Inc. Standish, Ayer & Wood,
One Financial Center Inc. since April, 1990;
Boston, MA 02111 formerly Vice President, Aetna Life & Casualty
Michael W. Thompson Vice President Vice President, Standish,
c/o Standish, Ayer & Ayer & Wood, Inc.
Wood, Inc.
One Financial Center
Boston, MA 02111
- ------------
* Indicates that Trustee is an interested person of the Trust for
purposes of the Investment Company Act of 1940, as amended (the "1940
Act").
</TABLE>
Compensation of Trustees and Officers
The Funds pay no compensation to the Trust's Trustees affiliated with
the Adviser or to the Trust's officers. None of the Trust's Trustees or officers
have engaged in any financial transactions with the Trust or the Adviser during
the Tax Exempt Fund's fiscal year ended December 31, 1994.
The following table sets forth all compensation paid to the Trust's
Trustees as of the Tax Exempt Fund's fiscal year ended December 31, 1994 and
estimates the amount of such fees to be paid by the Equity and Small Cap Funds
during their initial fiscal years ending September 30, 1996:
26
<PAGE>
<TABLE>
<CAPTION>
Pension or
Estimated Estimated Retirement Total
Aggregate Aggregate Aggregate Benefits Compensation
Compensation Compensation Compensation Accrued as from Fund and
from the from the from the Small Part of Other Funds in
Name of Trustee Tax Exempt Fund Equity Fund* Cap Fund* Fund's Expenses Complex**
- --------------- --------------- ------------ --------- --------------- ------------
<S> <C> <C> <C> <C> <C>
D. Barr Clayson $0 $0 $0 $0 $0
Phyllis L. Cothran*** 0 0 0 0 0
Richard C. Doll 0 0 0 0 0
Samuel C. Fleming 330 53 53 0 41,750
Benjamin M. Friedman 290 47 47 0 36,750
John H. Hewitt 290 47 47 0 36,750
Edward H. Ladd 0 0 0 0 0
Caleb Loring, III 290 47 47 0 36,750
Richard S. Wood 0 0 0 0 0
- -------------
* Estimated. The Equity and Small Cap Funds are newly organized and have
not paid any Trustees' fees.
** As of the date of this Statement of Additional Information, there were
14 mutual funds in the fund complex, all of which are series of the
Trust.
*** Ms. Cothran resigned as a Trustee effective January 31, 1995.
</TABLE>
Certain Shareholders
At October 1, 1995, the Trustees and officers of the Trust as a group
beneficially owned (i.e., had voting and/or investment power) less than 1% of
the then outstanding shares of each Fund. At that date, each of the following
persons beneficially owned 5% or more of the then outstanding shares of the Tax
Exempt Fund:
Percentage of
Name and Address Outstanding Shares
- ---------------- ------------------
BDG & Co. 28%
Bingham Dana & Gould
Trust Development
150 Federal Street
Boston, MA 02110
Old Kent Bank & Morris Kaplan Co. 14%
TTEEs of the Morris Kaplan Trust
1/13/64
105 South York Road
Elmhurst, IL 60126
Stephanie L. Hascoe 1972 5%
Trust
Hascoe Associates, Inc.
35 Mason Street
Greenwich, CT 06830
27
<PAGE>
Immediately prior to the commencement of operations, it is expected
that the Adviser will own 100% of the outstanding shares of the Equity and Small
Cap Funds.
Investment Adviser
Standish, Ayer & Wood, Inc. (the "Adviser") serves as investment
adviser to each Fund pursuant to separate written investment advisory agreements
with the Trust. The Adviser is a Massachusetts corporation organized in 1933 and
is registered under the Investment Advisers Act of 1940.
The following, constituting all of the Directors and all of the
shareholders of the Adviser, are the Adviser's controlling persons: Caleb F.
Aldrich, Nicholas S. Battelle, Walter M. Cabot, Sr., David H. Cameron, Karen K.
Chandor, D. Barr Clayson, Richard C. Doll, Dolores S. Driscoll, Mark A.
Flaherty, Maria D. Furman, James E. Hollis III, Raymond J. Kubiak, Edward H.
Ladd, Laurence A. Manchester, David W. Murray, George W. Noyes, Arthur H.
Parker, Howard B. Rubin, Austin C. Smith, David C. Stuehr, James J. Sweeney,
Ralph S. Tate, and Richard S. Wood.
Certain services provided by the Adviser under the investment advisory
agreements are described in the Prospectus. In addition to those services, the
Adviser provides each Fund with office space for managing its affairs, with the
services of required executive personnel, and with certain clerical services and
facilities. These services are provided by the Adviser without reimbursement by
the Funds for any costs incurred. Under each investment advisory agreement, the
Adviser is paid a fee based upon a percentage of each Fund's average daily net
asset value computed as described in the Prospectus. This fee is paid monthly.
With respect to the Tax Exempt Fund: (a) for the period November 2,
1992 (commencement of operations) to December 31, 1992, the Adviser agreed not
to impose $3,149 of its fees and assumed $3,271 of expenses; (b) for the fiscal
year ended December 31, 1993, the Adviser agreed not to impose its fees of
$49,165 and assumed $12,010 of expenses; and (c) for the fiscal year ended
December 31, 1994, the Adviser agreed not to impose $50,193 of its fee, which
would otherwise have been $82,694.
Pursuant to the investment advisory agreements, each Fund bears the
expenses of its operations other than those incurred by the Adviser pursuant to
the investment advisory agreements. Among other expenses, each Fund will pay
share pricing and shareholder servicing fees and expenses; custodian fees and
expenses; legal and auditing fees and expenses; expenses of prospectuses,
statements of additional information and shareholder reports; registration and
reporting fees and expenses; and Trustees' fees and expenses.
The Tax Exempt Fund's investment advisory agreement provides that if
the total expenses of the Tax Exempt Fund in any fiscal year (excluding
brokerage commissions, taxes and extraordinary expenses) exceed the lower of (a)
0.65% of the Fund's average daily net assets, or (b) the most restrictive
expense limitation applicable to the Fund in any state in which shares of the
Fund are then qualified for sale, the compensation due the Adviser from the Tax
Exempt Fund shall be reduced by the amount of the excess, by a reduction or
refund thereof at the time such compensation is payable after the end of each
calendar month during the fiscal year, subject to readjustment during the year.
The Adviser has agreed for the Equity Fund's and Small Cap Fund's
fiscal years ending September 30, 1996 to limit Total Fund Operating Expenses
(excluding litigation, indemnification and other extraordinary expenses) of each
such Fund to the lower of (a) the most restrictive expense limitation limit
applicable to the Fund in any state in which shares of the Fund are then
qualified for sale and (b) 1.00% and 0.90% of the Equity Fund's and Small Cap
Fund's respective average daily net assets. These agreements are voluntary and
temporary and may be discontinued or revised by the Adviser at any time after
September 30, 1996. If the expense limit is exceeded, the compensation due the
Adviser for such fiscal year shall be proportionately reduced by the amount of
such excess by a reduction or refund thereof at the time such compensation is
payable after the end of each calendar month, subject to readjustment during the
fiscal year.
28
<PAGE>
Currently, the most restrictive state expense limitation provision
limits a Fund's expenses to 2 1/2% of the first $30 million of average net
assets, 2% of the next $70 million of such net assets and 1 1/2% of such net
assets in excess of $100 million.
Unless terminated as provided below, the Equity Fund's and the Small
Cap Fund's investment advisory agreements continue in full force and effect
until December 31, 1997 and for successive periods of one year thereafter, and
the Tax Exempt Fund's investment advisory agreement continues in full force and
effect for successive periods of one year, but only as long as each such
continuance is approved annually (i) by either the Trustees of the Trust or by
vote of a majority of the outstanding voting securities (as defined in the 1940
Act) of the applicable Fund, and, in either event (ii) by vote of a majority of
the Trustees of the Trust who are not parties to the investment advisory
agreement or "interested persons" (as defined in the 1940 Act) of any such
party, cast in person at a meeting called for the purpose of voting on such
approval. Each investment advisory agreement may be terminated at any time
without the payment of any penalty by vote of the Trustees of the Trust or by
vote of a majority of the outstanding voting securities (as defined in the 1940
Act) of the applicable Fund or by the Adviser, on sixty days' written notice to
the other parties. The investment advisory agreements terminate in the event of
their "assignment," as defined in the 1940 Act.
In an attempt to avoid any potential conflict with portfolio
transactions for the Funds, the Adviser and the Trust have adopted extensive
restrictions on personal securities trading by personnel of the Adviser and its
affiliates. These restrictions include: pre-clearance of all personal securities
transactions and a prohibition of purchasing initial public offerings of
securities. These restrictions are a continuation of the basic principle that
the interests of the Funds and their shareholders come before those of the
Adviser and its employees.
REDEMPTION OF SHARES
Detailed information on redemption of shares is included in the
Prospectus.
The Trust may suspend the right to redeem Fund shares or postpone the
date of payment upon redemption for more than seven days (i) for any period
during which the New York Stock Exchange is closed (other than customary weekend
or holiday closings) or trading on the exchange is restricted; (ii) for any
period during which an emergency exists as a result of which disposal by a Fund
of securities owned by it or determination by a Fund of the value of its net
assets is not reasonably practicable; or (iii) for such other periods as the SEC
may permit for the protection of shareholders of the Funds.
The Trust intends to pay redemption proceeds in cash for all Fund
shares redeemed but, under certain conditions, the Trust may make payment wholly
or partly in Fund portfolio securities. Portfolio securities paid upon
redemption of Fund shares will be valued at their then current market value. The
Trust has elected to be governed by the provisions of Rule 18f-1 under the 1940
Act which contains a formula for determining the minimum amount of cash which
may be paid as part of any redemption, limiting cash payments to any shareholder
during any 90-day period to the lesser of $250,000 or 1% of a 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.
29
<PAGE>
PORTFOLIO TRANSACTIONS
The Adviser is responsible for placing each Fund's portfolio
transactions and will do so in a manner deemed fair and reasonable to the Funds
and not according to any formula. The primary consideration in all portfolio
transactions will be prompt execution of orders in an efficient manner at the
most favorable price. In selecting broker-dealers and in negotiating
commissions, the Adviser will consider the firm's reliability, the quality of
its execution services on a continuing basis and its financial condition. When
more than one firm is believed to meet these criteria, preference may be given
to firms which also provide research services. These services may include (i)
furnishing advice as to the value of securities, the advisability of investing
in, purchasing or selling securities, and the availability of securities or
purchasers or sellers of securities, (ii) furnishing analyses and reports
concerning issuers, industries, securities, economic factors and trends,
portfolio strategy, and the performance of accounts, and (iii) effecting
securities transactions and performing functions incidental thereto (such as
clearance and settlement). Research services furnished by firms through which
the Funds effect their securities transactions may be used by the Adviser in
servicing other accounts; not all of these services may be used by the Adviser
in connection with the Funds. The investment advisory fees paid by the Funds
under the advisory agreements will not be reduced as a result of the Adviser's
receipt of research services.
The Adviser also places portfolio transactions for other advisory
accounts. The Adviser will seek to allocate portfolio transactions equitably
whenever concurrent decisions are made to purchase or sell securities for a Fund
and another advisory account. In some cases, this procedure could have an
adverse effect on the price or the amount of securities available to the Funds.
In making such allocations, the main factors considered by the Adviser will be
the respective investment objectives, the relative size of portfolio holdings of
the same or comparable securities, the availability of cash for investment, the
size of investment commitments generally held, and opinions of the persons
responsible for recommending the investment.
DETERMINATION OF NET ASSET VALUE
Each Fund's net asset value is calculated each business day on which
the New York Stock Exchange is open. Currently the New York Stock Exchange is
not open on weekends, New Year's Day, Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving Day and Christmas. The net asset
value of a Fund's shares is determined as of the close of regular trading on the
New York Stock Exchange (currently 4:00 p.m., New York time) and is computed by
dividing the value of all securities and other assets of the Fund less all
liabilities by the number of shares outstanding, and adjusting to the nearest
cent per share. Expenses and fees, including the investment advisory fee, are
accrued daily and taken into account for the purpose of determining net asset
value. Portfolio securities are valued in the manner described in the
Prospectus.
FEDERAL INCOME TAXES
Each series of the Trust, including each Fund, is treated as a separate
entity for accounting and tax purposes. The Tax Exempt Fund presently qualifies
and intends to continue to qualify, and each of the Equity and Small Cap Funds
intends to qualify and elect to be treated, as a "regulated investment company"
under Subchapter M of the Code. As such and by complying with the applicable
provisions of the Code regarding the sources of its income, the timing of its
distributions, and the diversification of its assets, a Fund will not be subject
to Federal income tax on its investment company taxable income (i.e., all
income, after reduction by deductible expenses, other than its "net capital
gain," which is the excess, if any, of its net long-term capital gain over its
net short-term capital loss), net tax-exempt interest (if any) and net capital
gain which are distributed to shareholders at least annually in accordance with
the timing requirements of the Code.
Each Fund will be subject to a 4% non-deductible federal excise tax on
certain taxable amounts not distributed (and not treated as having been
distributed) on a timely basis in accordance with annual minimum distribution
requirements. The Funds intend under normal circumstances to avoid liability for
such tax by satisfying such distribution requirements.
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The Funds are not subject to Massachusetts corporate excise or
franchise taxes. Provided that the Funds qualify as regulated investment
companies under the Code, they will also not be required to pay any
Massachusetts income tax.
The Funds will not distribute net capital gains realized in any year to
the extent that a capital loss is carried forward from prior years against such
gain. For federal income tax purposes, each Fund is permitted to carry forward a
net capital loss in any year to offset its own net capital gains, if any, during
the eight years following the year of the loss. To the extent subsequent net
capital gains are offset by such losses, they would not result in federal income
tax liability to the Funds and, as noted above, would not be distributed as such
to shareholders. The Tax Exempt Fund has $29,197 of capital loss carryforwards,
which expire on December 31, 2002, available to offset future net capital gains.
Limitations imposed by the Code on regulated investment companies like
the Funds may restrict a Fund's ability to enter into futures, options and
currency forward transactions.
Certain options, futures and forward foreign currency transactions
(Equity and Small Cap Funds only) undertaken by a Fund may cause the Fund to
recognize gains or losses from marking to market even though its positions have
not been sold or terminated and affect the character as long-term or short-term
(or, in the case of certain currency forwards, options and futures (Equity and
Small Cap Funds only), as ordinary income or loss) and timing of some capital
gains and losses realized by a Fund. Also, certain losses of a Fund on its
transactions involving options, futures or forward contracts and/or offsetting
portfolio positions may be deferred rather than being taken into account
currently in calculating the Fund's taxable income or gain. Certain of the
applicable tax rules may be modified if a Fund is eligible and chooses to make
one or more of certain tax elections that may be available. These transactions
may therefore affect the amount, timing and character of a Fund's distributions
to shareholders. The Funds will take into account the special tax rules
(including consideration of available elections) applicable to options, futures
or forward contracts in order to minimize any potential adverse tax
consequences.
The federal income tax rules applicable to interest rate swaps or
currency swaps (Equity and Small Cap Funds only), and interest rate caps, floors
and collars are unclear in certain respects, and the Funds may be required to
account for these instruments under tax rules in a manner that, under certain
circumstances, may limit their transactions in these instruments.
If either the Equity Fund or the Small Cap Fund acquires stock in
certain non-U.S. corporations that receive at least 75% of their annual gross
income from passive sources (such as interest, dividends, rents, royalties or
capital gain) or hold at least 50% of their assets in investments producing such
passive income ("passive foreign investment companies"), the Fund could be
subject to Federal income tax and additional interest charges on "excess
distributions" received from such companies or gain from the sale of stock in
such companies, even if all income or gain actually received by the Fund is
timely distributed to its shareholders. The Equity and Small Cap Funds would not
be able to pass through to their shareholders any credit or deduction for such a
tax. Certain elections may, if available, ameliorate these adverse tax
consequences, but any such election would require the electing Fund to recognize
taxable income or gain without the concurrent receipt of cash. The Equity and
Small Cap Funds may limit and/or manage their stock holdings in passive foreign
investment companies to minimize their tax liability or maximize their return
from these investments.
Foreign exchange gains and losses realized by the Equity and Small Cap
Funds in connection with certain transactions involving foreign
currency-denominated debt securities, if any, certain foreign currency futures
and options, foreign currency forward contracts, foreign currencies, or payables
or receivables denominated in a foreign currency are subject to Section 988 of
the Code, which generally causes such gains and losses to be treated as ordinary
income and losses and may affect the amount, timing and character of
distributions to shareholders. Any such transactions that are not directly
related to a Fund's investment in stock or securities, possibly including
speculative currency positions or currency derivatives not used for hedging
purposes, may increase the amount of gain it is deemed to recognize from the
sale of certain investments held for less than three months, which gain is
limited under the Code to less than 30% of its annual gross income, and could
under future Treasury regulations produce income not among the types of
"qualifying income" from which each Fund must derive at least 90% of its annual
gross income.
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The Equity and Small Cap Funds may be subject to withholding and other
taxes imposed by foreign countries with respect to their investments in foreign
securities. Tax conventions between certain countries and the U.S. may reduce or
eliminate such taxes. Investors would be entitled to claim U.S. foreign tax
credits with respect to such taxes, subject to certain provisions and
limitations contained in the Code, only if more than 50% of the value of the
Equity Fund's or Small Cap Fund's respective total assets at the close of any
taxable year were to consist of stock or securities of foreign corporations and
the applicable Fund were to file an election with the Internal Revenue Service.
Because the Equity and Small Cap Funds generally do not expect to meet this 50%
requirement, investors generally will not directly take into account the foreign
taxes, if any, paid by the Equity and Small Cap Funds, and will generally not be
entitled to any related tax deductions or credits. Such taxes will reduce the
amounts the Equity and Small Cap Funds would otherwise have available to
distribute.
Distributions from a Fund's current or accumulated earnings and profits
("E&P"), as computed for Federal income tax purposes, will be taxable as
described in the Funds' Prospectus whether taken in shares or in cash. Amounts
that are not allowable as a deduction in computing taxable income, including
expenses associated with earning tax-exempt interest income, do not reduce
current E&P for this purpose. Distributions, if any, in excess of E&P will
constitute a return of capital, which will first reduce an investor's tax basis
in Fund shares and thereafter (after such basis is reduced to zero) will
generally give rise to capital gains. Shareholders electing to receive
distributions in the form of additional shares will have a cost basis for
federal income tax purposes in each share so received equal to the amount of
cash they would have received had they elected to receive the distributions in
cash, divided by the number of shares received.
For purposes of the dividends received deduction available to
corporations, dividends, if any, received by the Equity and Small Cap Funds from
U.S. domestic corporations in respect of the stock of such corporations held by
the Equity and Small Cap Funds, for U.S. Federal income tax purposes, for at
least a minimum holding period, generally 46 days, and distributed and
designated by the Equity and Small Cap Funds may be treated as qualifying
dividends. Distributions by the Tax Exempt Fund will not qualify for the
dividends received deduction. Corporate shareholders must meet the minimum
holding period requirement referred to above with respect to their shares of the
Equity and Small Cap Funds in order to qualify for the deduction and, if they
borrow to acquire such shares, may be denied a portion of the dividends received
deduction. The entire qualifying dividend, including the otherwise deductible
amount, will be included in determining the excess (if any) of a corporate
shareholder's adjusted current earnings over its alternative minimum taxable
income, which may increase its alternative minimum tax liability. Additionally,
any corporate shareholder should consult its tax adviser regarding the
possibility that its basis in its shares may be reduced, for Federal income tax
purposes, by reason of "extraordinary dividends" received with respect to the
shares, for the purpose of computing its gain or loss on redemption or other
disposition of the shares.
Taxable distributions by the Tax Exempt Fund include distributions
attributable to income or gains from the Tax Exempt Fund's taxable investments
or transactions, including (i) gains from the sale of portfolio securities or
the right to when-issued securities prior to issuance or from options or futures
transactions and (ii) income attributable to repurchase agreements, securities
lending, recognized market discount, interest rate swaps, caps, floors or
collars, and a portion of the discount from certain stripped tax-exempt
obligations or their coupons.
Distributions by the Tax Exempt Fund of tax-exempt interest
("exempt-interest dividends") timely designated as such by the Tax Exempt Fund
will be treated as tax-exempt interest under the Code, provided that the Tax
Exempt Fund qualifies as a regulated investment company and at least 50% of the
value of its assets at the end of each quarter of its taxable year is invested
in tax-exempt obligations. Shareholders are required to report their receipt of
tax-exempt interest, including such distributions, on their federal income tax
returns. The portion of the Tax Exempt Fund's distributions designated as
exempt-interest dividends may differ from the actual percentage that its
tax-exempt income comprises of its total income during the period of any
particular shareholder's investment. The Tax Exempt Fund will report to
shareholders the amount designated as exempt-interest dividends for each year.
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Interest income from certain types of tax-exempt obligations that are
private activity bonds in which the Tax Exempt Fund may invest is treated as an
item of tax preference for purposes of the federal alternative minimum tax. To
the extent that the Tax Exempt Fund invests in these types of tax-exempt
obligations, shareholders will be required to treat as an item of tax preference
for federal alternative minimum purposes that part of the Tax Exempt Fund's
exempt-interest dividends which is derived from interest on these tax-exempt
obligations. Exempt-interest dividends derived from interest income from
tax-exempt obligations that are not private activity bonds may also be included
in determining corporate "adjusted current earnings" for purposes of computing
the alternative minimum tax liability, if any, of corporate shareholders of the
Tax Exempt Fund.
If the Tax Exempt Fund invests in certain zero coupon securities,
increasing rate securities or, in general, other securities with original issue
discount (or with market discount if the Tax Exempt Fund elects to include
market discount in income currently), the Tax Exempt Fund must accrue income on
such investments prior to the receipt of the corresponding cash payments.
However, the Tax Exempt Fund must distribute, at least annually, all or
substantially all of its net taxable and tax-exempt income, including such
accrued income, to shareholders to qualify as a regulated investment company
under the Code and avoid federal income and excise taxes. Therefore, the Tax
Exempt Fund may have to dispose of its portfolio securities under
disadvantageous circumstances to generate cash, or may have to leverage itself
by borrowing the cash, to satisfy distribution requirements. The Equity and
Small Cap Funds would be subject to the same tax rules but do not expect to
acquire such investments.
The Tax Exempt Fund purchases tax-exempt obligations which are
generally accompanied by an opinion of bond counsel to the effect that interest
on such securities is not included in gross income for federal income tax
purposes. It is not economically feasible to, and the Tax Exempt Fund therefore
does not, make any additional independent inquiry into whether such securities
are in fact tax-exempt. Bond counsels' opinions will generally be based in part
upon covenants by the issuers and related parties regarding continuing
compliance with federal tax requirements. Tax laws enacted during the last
decade not only had the effect of limiting the purposes for which tax-exempt
bonds could be issued and reducing the supply of such bonds, but also increased
the number and complexity of requirements that must be satisfied on a continuing
basis in order for bonds to be and remain tax-exempt. If the issuer of a bond or
a user of a bond-financed facility fails to comply with such requirements at any
time, interest on the bond could become taxable, retroactive to the date the
obligation was issued. In that event, a portion of the Tax Exempt Fund's
distributions attributable to interest the Fund received on such bond for the
current year and for prior years could be characterized or recharacterized as
taxable income.
The Tax Exempt Fund may purchase municipal obligations together with
the right to resell the securities to the seller at an agreed upon price or
yield within a specified period prior to the maturity date of the securities.
Such a right to resell is commonly known as a "put" and is also referred to as a
"standby commitment." The Tax Exempt Fund may pay for a standby commitment
either separately, in cash, or in the form of a higher price for the securities
which are acquired subject to the standby commitment, thus increasing the cost
of securities and reducing the yield otherwise available. Additionally, the Tax
Exempt Fund may purchase beneficial interests in municipal obligations held by
trusts, custodial arrangements or partnerships and/or combined with third-party
puts or other types of features such as interest rate swaps; those investments
may require the Tax Exempt Fund to pay "tender fees" or other fees for the
various features provided.
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The Internal Revenue Service (the "Service") has issued a revenue
ruling to the effect that, under specified circumstances, a registered
investment company will be the owner of tax-exempt municipal obligations
acquired subject to a put option. The Service has also issued private letter
rulings to certain taxpayers (which do not serve as precedent for other
taxpayers) to the effect that tax-exempt interest received by a regulated
investment company with respect to such obligations will be tax-exempt in the
hands of the company and may be distributed to its shareholders as
exempt-interest dividends. The Service has subsequently announced that it will
not ordinarily issue advance ruling letters as to the identity of a true owner
of property in cases involving the sale of securities or participation interests
therein if the purchaser has the right to cause the security, or the
participation interest therein, to be purchased by either the seller or a third
party. The Tax Exempt Fund intends to take the position that it is the owner of
any municipal obligations acquired subject to a standby commitment or other
third party put and that tax-exempt interest earned with respect to such
municipal obligations will be tax-exempt in its hands. There is no assurance
that the Service will agree with such position in any particular case.
Additionally, the federal income tax treatment of certain other aspects of these
investments, including the treatment of tender fees paid by the Tax Exempt Fund,
in relation to various regulated investment company tax provisions is unclear.
However the Adviser intends to manage the Tax Exempt Fund's portfolio in a
manner designed to minimize any adverse impact from the tax rules applicable to
these investments.
Interest on indebtedness incurred by a shareholder to purchase or carry
shares of the Tax Exempt Fund will not be deductible for federal income tax
purposes to the extent it is deemed related to exempt-interest dividends paid by
the Tax Exempt Fund. Pursuant to published guidelines, the Service may deem
indebtedness to have been incurred for the purpose of purchasing or carrying
shares of the Tax Exempt Fund even though the borrowed funds may not be directly
traceable to the purchase of shares.
At the time of an investor's purchase of Fund shares, a portion of the
purchase price is often attributable to undistributed net investment income
(except in the case of the Tax Exempt Fund) and/or realized or unrealized
appreciation in a Fund's portfolio. Consequently, subsequent distributions from
such income and/or appreciation may be taxable to such investor even if the net
asset value of the investor's shares is, as a result of the distributions,
reduced below the investor's cost for such shares, and the distributions in
reality represent a return of a portion of the purchase price.
The Funds may consider the use of equalization accounting for any
taxable year if it would further the goal of reducing taxable distributions to
shareholders for such year. Under equalization accounting, a Fund's earnings and
profits are allocated in part to redemption proceeds paid by the Fund: although
a redeeming shareholder's tax treatment would not be affected by such an
allocation, in certain circumstances the amounts of realized net income and/or
net capital gains the Fund is required to distribute may be reduced through the
use of equalization accounting. Hence, if a Fund determines that it will use
equalization accounting for a particular year, the amount, timing and character
of its distributions for that year may be affected. The Funds would consider
using equalization accounting for a particular year only if they determine that
such use is consistent with their tax objectives and would produce a benefit for
such year that outweighs any additional tax or accounting complexities or costs.
Upon a redemption (including a repurchase) of shares of the Funds, a
shareholder may realize a taxable gain or loss, depending upon the difference
between the redemption proceeds and the shareholder's tax basis in his shares.
Such gain or loss will be treated as capital gain or loss if the shares are
capital assets in the shareholder's hands and will (except as described below)
be long-term or short-term, depending upon the shareholder's tax holding period
for the shares. Any loss realized on a redemption may be disallowed to the
extent the shares disposed of are replaced within a period of 61 days beginning
30 days before and ending 30 days after the shares are disposed of, such as
pursuant to automatic dividend reinvestments. In such a case, the basis of the
shares acquired will be adjusted to reflect the disallowed loss. Any loss
realized upon the redemption of shares with a tax holding period of six months
or less will, with respect to the Tax Exempt Fund, be disallowed to the extent
of all exempt-interest dividends paid with respect to such shares and, with
respect to any Fund, the allowable loss on such a redemption will be treated as
a long-term capital loss to the extent of any amounts treated as distributions
of long-term capital gain with respect to such shares.
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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 Funds in their particular
circumstances.
Non-U.S. investors not engaged in a U.S. trade or business with which
their investment in the Funds is effectively connected will be subject to U.S.
Federal income tax treatment that is different from that described above. These
investors may be subject to nonresident alien withholding tax at the rate of 30%
(or a lower rate under an applicable tax treaty) on amounts treated as ordinary
dividends from the Funds and, unless an effective IRS Form W-8 or authorized
substitute is on file, to 31% backup withholding on certain other payments from
the Funds. Non-U.S. investors should consult their tax advisers regarding such
treatment and the application of foreign taxes to an investment in the Funds.
THE TRUST AND ITS SHARES
Each Fund is an investment series of Standish, Ayer & Wood Investment
Trust, an unincorporated business trust organized under the laws of The
Commonwealth of Massachusetts pursuant to an Agreement and Declaration of Trust
dated August 13, 1986. 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 Funds. Each share of a Fund
represents an equal proportionate interest in the Fund with each other share and
is entitled to such dividends and distributions as are declared by the Trustees.
Upon any liquidation of a Fund, shareholders are entitled to share pro rata in
the net assets available for distribution.
All Fund shares have equal rights with regard to voting, and
shareholders of a Fund have the right to vote as a separate class with respect
to matters as to which their interests are not identical to those of
shareholders of other classes of the Trust, including the approval of an
investment advisory contract and any change of investment policy requiring the
approval of shareholders.
Pursuant to the Declaration of Trust and subject to shareholder
approval (if then required), the Trustees may authorize each Fund to invest all
or part of its investable assets in a single open-end investment company that
has substantially the same investment objectives, policies and restrictions as
the Fund. As of the date of this Statement of Additional Information, the Board
does not have any plan to authorize any Fund to so invest its assets.
Under Massachusetts law, shareholders of the Trust could, under certain
circumstances, be held liable for the obligations of the Trust. However, the
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 Trustees intend to conduct the operations of the Trust to avoid, to
the extent possible, ultimate liability of shareholders for liabilities of the
Trust.
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ADDITIONAL INFORMATION
The Funds' Prospectus and this Statement of Additional Information omit
certain information contained in the Trust's registration statement filed with
the SEC, which may be obtained from the SEC's principal office at 450 Fifth
Street, N.W., Washington, D.C. 20549, upon payment of the fee prescribed by the
rules and regulations promulgated by the SEC.
EXPERTS AND FINANCIAL STATEMENTS
The financial statements of the Tax Exempt Fund for the fiscal years
ended December 31, 1993 and 1994 incorporated by reference from the Tax Exempt
Fund's annual report to shareholders in this Statement of Additional Information
have been audited by Coopers & Lybrand L.L.P., independent accountants, as set
forth in their report appearing elsewhere therein and have been so included in
reliance upon the authority of the report of Coopers & Lybrand L.L.P., as
experts in accounting and auditing. Financial highlights of the Tax Exempt Fund
for the period from November 2, 1992 (commencement of operations) through
December 31, 1992 were audited by Deloitte & Touche LLP, independent auditors,
and have been similarly included in reliance upon the expertise of that firm.
Coopers & Lybrand L.L.P., independent accountants, will audit each Fund's
financial statements for the current fiscal year. Financial information for the
six month period ended June 30, 1995 is unaudited.
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