Prospectus dated September 20, 1996
PROSPECTUS
One Financial Center
Boston, Massachusetts 02111
(800) 221-4795
STANDISH EQUITY ASSET FUND
("Equity Fund")
Seeks to achieve long-term growth of capital through investment primarily
in equity securities of companies which appear to be undervalued.
STANDISH SMALL CAPITALIZATION
EQUITY ASSET FUND
("Small Cap Fund")
Seeks to achieve long-term growth of capital through investment primarily
in equity securities of small companies which appear to be undervalued.
STANDISH FIXED INCOME ASSET FUND
("Fixed Income Fund")
Primarily seeks to achieve a high level of current income, consistent with
preserving principal and liquidity, and secondarily seeks capital appreciation
when market factors such as declining interest rates indicate that capital
appreciation may be available without significant risk to principal.
STANDISH GLOBAL FIXED INCOME ASSET FUND
("Global Fixed Income Fund")
Seeks to maximize total return while realizing a market level of income,
consistent with preserving principal and liquidity.
-----------------------------
The Equity, Small Cap, Fixed Income and Global Fixed Income Funds
(collectively, the "Funds") are members of the Standish, Ayer & Wood family of
funds. The Equity, Small Cap and Fixed Income Funds are each organized as a
separate diversified investment series of Standish, Ayer & Wood Investment Trust
(the "Trust"), an open-end management investment company. Global Fixed Income
Fund is organized as a separate non-diversified investment series of the Trust.
UNLIKE OTHER MUTUAL FUNDS WHICH DIRECTLY ACQUIRE AND MANAGE THEIR OWN
PORTFOLIOS OF SECURITIES, EACH FUND SEEKS TO ACHIEVE ITS INVESTMENT OBJECTIVE BY
INVESTING ALL OF ITS INVESTABLE ASSETS ("INVESTABLE ASSETS") IN ITS
CORRESPONDING PORTFOLIO ("PORTFOLIO") WHICH IS A SEPARATE MUTUAL FUND WITH AN
IDENTICAL INVESTMENT OBJECTIVE. Each Portfolio is a series of Standish, Ayer &
Wood Master Portfolio (the "Portfolio Trust"), which is also an open-end
management investment company. See "Special Information Concerning the Hub and
Spoke(R) Master-Feeder Fund Structure" on Page 13.
<PAGE>
This combined Prospectus is intended to set forth concisely the information
about the Funds and the Trust that a prospective investor should know before
investing. Investors are encouraged to read this Prospectus and retain it for
future reference. Additional information about the Funds and the Trust is
contained in a combined Statement of Additional Information which has been filed
with the Securities and Exchange Commission (the "SEC") and is available upon
request and without charge by calling or writing to Standish Funds Distributor,
L.P. (the "Principal Underwriter") at the telephone number or address set forth
above. The Statement of Additional Information bears the same date as this
Prospectus and is incorporated by reference into this Prospectus.
Shares of the Funds are not deposits or obligations of, or guaranteed or
endorsed by, any bank or other insured depository institution, and are not
insured by the Federal Deposit Insurance Corporation, the Federal Reserve Board
or any other government agency. An investment in shares of the Funds involves
investment risks, including possible loss of principal.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
Shares of the Funds may be purchased by entities ("Account Administrators")
that provide omnibus accounting services for groups of individuals who
beneficially own Fund shares ("Omnibus Accounts"). Omnibus Accounts include
pension and retirement plans (such as 401(k) plans, 457 plans and 403(b) plans),
and programs through which personal and/or account maintenance services are
provided to groups of individuals whether or not such individuals invest on a
tax-deferred basis. Individual investors may only purchase Fund shares through
their Omnibus Account Administrators. See "Purchase of Shares" on page 14 for
further information. Please contact the Principal Underwriter for information
regarding other mutual funds in the Standish, Ayer & Wood Group of Funds.
No sales commissions or other transaction charges are imposed by the Trust
or the Principal Underwriter, although Account Administrators may impose such
charges and the Funds may compensate Account Administrators for providing
services for the benefit of participants in the Omnibus Accounts. Unless waived
by the Funds, the minimum initial investment by an Omnibus Account is $100,000.
Each Portfolio has the same investment objective as its corresponding Fund.
Standish Equity Portfolio (the "Equity Portfolio"), in which the Equity
Fund invests all of its Investable Assets, invests primarily in a diversified
portfolio of publicly traded equity securities of United States companies and,
to a lesser extent, of foreign issuers.
Standish Small Capitalization Equity Portfolio (the "Small Cap Portfolio")
in which the Small Cap Fund invests all of its Investable Assets, invests
primarily in a diversified portfolio of publicly traded equity securities of
small companies which appear to be undervalued, including securities being
issued in initial public offerings.
Standish Fixed Income Portfolio (the "Fixed Income Portfolio"), in which
the Fixed Income Fund invests all of its Investable Assets, invests primarily in
a diversified portfolio of investment grade fixed income securities with an
average dollar-weighted maturity of 5 to 13 years.
Standish Global Fixed Income Portfolio (the "Global Fixed Income
Portfolio"), in which the Global Fixed Income Fund invests all of its Investable
Assets, invests primarily in a non-diversified portfolio of investment grade
fixed income securities denominated in foreign currencies and the U.S. dollar.
The Global Fixed Income Portfolio expects its yield to be comparable to the
yield of the general market for such securities. The Global Fixed Income Fund
provides a vehicle through which investors may participate in the Global Bond
markets.
<PAGE>
See "Investment Objective and Policies" for a further discussion of each
Portfolio's investment policies and restrictions.
Standish, Ayer & Wood, Inc., Boston, Massachusetts ("Standish"), is the
investment adviser for the Equity, Small Cap and Fixed Income Portfolios.
Standish International Management Company, L.P., Boston, Massachusetts
("SIMCO"), is the investment adviser for Global Fixed Income Portfolio. Standish
and SIMCO are sometimes referred to herein as the "Adviser."
CONTENTS
Expense Information...........................................3
Investment Objectives and Policies............................4
Other Investment Practices and Policies.......................6
Risk Factors and Suitability.................................11
Special Information Concerning the
Hub and Spoke(R) Master-Feeder Fund Structure.............13
Calculation of Performance Data..............................14
Dividends and Distributions..................................14
Purchase of Shares...........................................14
Calculation of Net Asset Value...............................15
Exchange of Shares...........................................15
Redemption of Shares.........................................16
Management...................................................17
Federal Income Taxes ........................................19
The Funds and the Portfolios.................................19
Principal Underwriter........................................20
Custodian, Transfer Agent and Dividend
Disbursing Agent..........................................20
Independent Accountants......................................20
Legal Counsel................................................21
Appendix A...................................................21
<PAGE>
<TABLE>
<CAPTION>
EXPENSE INFORMATION
Small Fixed Global Fixed
Equity Cap Income Income
Fund Fund Fund Fund
Shareholder Transaction Expenses
<S> <C> <C> <C> <C>
Maximum Sales Load Imposed on Purchases None None None None
Maximum Sales Load Imposed on Reinvested Dividends None None None None
Deferred Sales Load None None None None
Redemption Fees None None None None
Exchange Fee None None None None
Annual Operating Expenses (as a percentage of average net assets)
Management Fees 0.50% 0.60% 0.32% 0.40%
12b-1 Fees None None None None
Service Fees 0.25% 0.25% 0.25% 0.25%
Other Expenses (After Expense Limitation)* 0.27% 0.55% 0.28% 0.35%
---- ---- ---- ----
Total Operating Expenses (After Expense Limitation)* 1.02% 1.40% 0.85% 1.00%
==== ==== ==== ====
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 of years indicated:
Small Fixed Global Fixed
Equity Cap Income Income
Fund Fund Fund Fund
---- ---- ---- ----
After 1 Year $10 $14 $8 $10
After 3 Years $32 $44 $27 $32
</TABLE>
The purpose of the above table is to assist the investor in understanding
the various costs and expenses of the Funds and the Portfolios that an investor
in the Funds will bear directly or indirectly. The 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 based upon estimates of the Funds' expenses for
their initial fiscal years ending December 31, 1996. The Trustees of the Trust
believe that over time the aggregate per share expenses of the Funds and
Portfolios will not be more than the expenses that the Funds would incur if they
were to retain the services of an investment adviser and the Investable Assets
of the Funds were invested directly in the types of securities being held by the
Portfolios.
* Standish has voluntarily agreed to limit each Fund's Total Operating
Expenses (excluding litigation, indemnification, taxes and other extraordinary
expenses) to the following percentages of average daily net assets for the
Funds' fiscal years ending December 31, 1996: Equity Fund--1.25%; Small Cap
Fund--1.40%; Fixed Income Fund--0.85%; and Global Fixed Income Fund--1.00%.
These agreements are voluntary and temporary and may be discontinued or revised
by Standish at any time after December 31, 1996. In the absence of such
agreements, Other Expenses and Total Operating Expenses of the Funds are
estimated to be: Equity Fund--0.27% and 1.02%; Small Cap Fund--0.57% and 1.42%;
Fixed Income Fund--0.39% and 0.96%; and Global Fixed Income Fund--0.68% and
1.33%.
For more information regarding the Funds' and the Portfolios' Expenses, see
"Management--Investment Adviser of the Portfolios" and "Management--Expenses"
herein. The Funds' imposition of a service fee may result in a long-term
shareholder indirectly paying more than the equivalent of the maximum front-end
sales charge permitted under the Rules of Fair Practice of the National
Association of Securities Dealers, Inc.
THE INFORMATION IN THE TABLE AND THE 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%.
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
Each Fund seeks to achieve its investment objective by investing all of its
Investable Assets in its corresponding Portfolio which has the same investment
objective as the Fund. Because of the risk inherent in all investments, there
can be no assurance that the investment objective of any Fund or Portfolio will
be achieved.
See "Risk Factors and Suitability" below in this Prospectus.
Since the investment characteristics of each Fund will relate directly to
those of its corresponding Portfolio, the following is a discussion of the
various investments and investment policies of the Portfolios.
The investment objective of each Fund and Portfolio is not fundamental.
Investment objectives and policies that are not fundamental may be changed by
the Trustees of the Trust and the Trustees of the Portfolio Trust without the
approval of a Fund's or a Portfolio's investors. If a Fund's investment
objective is changed, investors should consider whether the Fund remains an
appropriate investment in light of their then current financial condition. The
Funds' and the Portfolios' investment policies are described further in the
Statement of Additional Information.
Each Portfolio may, but is not required to, utilize various investment
strategies and techniques to hedge various market risks (such as interest rates,
currency exchange rates and broad or specific equity market movements), or to
enhance potential gain. Such strategies and techniques are generally accepted as
part of modern portfolio management and are regularly utilized by many mutual
funds. In the course of pursuing their respective investment objectives, the
Portfolios may: (i) purchase and write (sell) put and call options on
securities, equity and fixed-income indices and other financial instruments;
(ii) purchase and sell financial futures contracts and options thereon; (iii)
enter into repurchase agreements; (iv) enter into various interest rates
transactions such as swaps, caps, floors or collars; (v) enter into various
currency transactions such as currency forward contracts, currency futures
contracts, currency swaps or options on currencies or currency futures; (vi)
make short sales; and (vii) invest in restricted and illiquid securities,
although the Equity and Small Cap Portfolios do not normally so invest. In
addition, the Fixed Income and Global Fixed Income Portfolios may enter into
forward roll transactions and purchase securities on a "when-issued" or delayed
delivery basis. The Global Fixed Income Portfolio may lend its portfolio
securities and the Small Cap Portfolio may invest in other investment companies.
For a description of these investment strategies and techniques, including the
Portfolios' ability to enter into transactions in options, futures and other
types of derivative securities, see "Other Investment Practices and Policies"
below in this Prospectus.
THE EQUITY PORTFOLIO
The Equity Portfolio's investment objective is to achieve long-term growth
of capital through investment primarily in equity and equity-related securities
of companies which appear to be undervalued. Under normal circumstances, at
least 80% of the Equity Portfolio's total assets are invested in such
securities. (Equity and equity-related securities include common stocks,
preferred stocks, securities convertible into common stocks and options, futures
<PAGE>
and other strategic transactions based on common stocks.) The Equity Portfolio
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 assets in such securities that are not so listed or
traded. The Equity Portfolio may also invest in debt securities and preferred
stocks which are convertible into, or exchangeable for, common stocks.
The Equity Portfolio will follow a disciplined investment strategy,
emphasizing stocks which the Adviser believes to offer above average potential
for capital growth. Although the precise application of the discipline will vary
according to market conditions, the Adviser intends to use statistical modeling
techniques that utilize stock specific factors, such as current price earnings
ratios, stability of earnings growth, forecasted changes in earnings growth,
trends in consensus analysts' estimates, and measures of earnings results
relative to expectations, to identify equity securities that are attractive as
purchase candidates. Once identified, these securities will be subject to
further fundamental analysis by the Adviser's professional staff before they are
included in the Equity Portfolio's holdings. Securities selected for inclusion
in the Equity Portfolio's holdings will represent various industries and
sectors. Foreign securities will be selected for investment by the Equity
Portfolio if the Adviser believes these securities will offer above average
capital growth potential. The Equity Portfolio will attempt to reduce risk by
diversifying its investments within the investment policies set forth above.
For further information concerning the securities in which the Equity
Portfolio may invest and the investment strategies and techniques it may employ
and their associated risks, see "Other Investment Practices and Policies" and
"Risk Factors and Suitability" below in this Prospectus.
THE SMALL CAP PORTFOLIO
The Small Cap Portfolio's investment objective is to achieve long-term
growth of capital through investment primarily in equity and equity-related
securities of small capitalization companies. Under normal circumstances, at
least 80% of the Small Cap Portfolio's total assets will be invested in such
securities. (Equity and equity-related securities include common stocks,
preferred stocks, securities convertible into common stocks and options, futures
and other strategic transactions based on common stocks.) The Small Cap
Portfolio invests primarily in publicly traded securities, including securities
issued in initial public offerings. The Small Cap Portfolio may invest up to 15%
of its net assets in foreign equity securities, including securities of foreign
issuers that are listed on a U.S. exchange or traded in the U.S.
over-the-counter market and sponsored and unsponsored American Depositary
Receipts ("ADRs").
The common stocks of small capitalization companies in which the Small Cap
Portfolio invests have market capitalizations up to and including $700 million.
Market capitalization is determined by multiplying the number of fully diluted
equity shares by the current market price per share. Morningstar Mutual Funds, a
leading mutual fund monitoring service, includes in the small-cap category all
funds that invest in companies with median market capitalizations of less than
<PAGE>
$1 billion. The Small Cap Portfolio expects to emphasize investments in
companies involved with value added products or services in expanding
industries. At times, particularly when the Adviser believes that securities of
small capitalization companies are overvalued, the Small Cap Portfolio's
portfolio may include securities of larger, more mature companies, provided that
the value of the securities of such larger, more mature companies shall not
exceed 20% of the Portfolio's total assets. The Portfolio will attempt to reduce
risk by diversifying its investments within the investment policy set forth
above. The Portfolio may participate in initial public offerings for previously
privately held companies which are expected to have market capitalizations of up
to $700 million after the consummation of the offering and whose securities are
expected to be liquid after the offering. Such companies may have a more limited
operating history and/or less experienced management than other companies in
which the Portfolio invests, which may pose additional risks.
For further information concerning the securities in which the Small Cap
Portfolio may invest and the investment strategies and techniques it may employ
and the associated risks, see "Other Investment Practices and Policies" and
"Risk Factors and Suitability" below in this Prospectus.
THE FIXED INCOME PORTFOLIO
The Fixed Income Portfolio's investment objective is primarily to achieve a
high level of current income, consistent with conserving principal and
liquidity, and secondarily to seek capital appreciation when changes in interest
rates or other economic conditions indicate that capital appreciation may be
available without significant risk to principal. Such capital appreciation may
result from an improvement in the credit standing of an issuer whose securities
are held by the Fixed Income Portfolio or from a decline in interest rates or
from a combination of both factors. The Fixed Income Portfolio will seek to
achieve its investment objective primarily through investing in a diversified
portfolio of fixed-income securities, generally of investment grade, with an
average dollar-weighted maturity of five to thirteen years. The Fixed Income
Portfolio may also invest to a limited extent in non-investment grade
securities.
The Fixed Income Portfolio may invest in a broad range of fixed-income
securities, including bonds, notes, mortgage-backed and asset-backed securities,
preferred stock and convertible debt securities. The Fixed Income Portfolio may
purchase securities that pay interest on a fixed, variable, floating (including
inverse floating), contingent, in-kind or deferred basis. Under normal market
conditions, at least 65% of the Fixed Income Portfolio's total assets will be
invested in such securities. Because the Fixed Income Portfolio seeks a high
level of current income, the possibility that it will exercise the conversion
options of any high yield convertible debt securities it acquires is remote.
Investors should be aware that investing in mortgage-backed securities involves
risks of fluctuation in yields and market prices and of early prepayments on the
underlying mortgages.
The Fixed Income Portfolio will normally invest in U.S. dollar-denominated
securities, but may invest up to 20% of its total assets in securities
denominated in foreign currencies; provided, however, that at any particular
time, no more than 10% of the Fixed Income Portfolio's total assets will be
invested in foreign securities which are not subject to currency hedging
transactions back into U.S. dollars.
<PAGE>
Although the Fixed Income Portfolio will be managed without regard to
potential tax considerations, the Fixed Income Portfolio may invest up to 10% of
its total assets in tax-exempt securities, such as state and municipal bonds, if
the Adviser believes they will provide competitive returns. The Fixed Income
Fund's distributions of its allocable portion of the interest that the Fixed
Income Portfolio earns from such securities will not be tax-exempt.
The Fixed Income Portfolio will not have more than 25% of the current value
of its total assets invested in any single industry, provided that this
restriction shall not apply to U.S. Government securities, including mortgage
pass-through securities (GNMAs). Rather, the Fixed Income Portfolio will invest
in a broad range of bond market sectors, especially those deemed by the Adviser
to be undervalued and consequently underpriced and offering higher yields
relative to the market as a whole. Such sectors include mortgage pass-throughs,
electric, telephone and gas utilities, industrials, bank holding companies,
Eurodollar bonds and original issue discount bonds (i.e., bonds which are
offered by an issuer at a discount from their stated par value and which,
because of uncertainty about their quality, are potentially more volatile). In
order to achieve its investment objective, the Fixed Income Portfolio will seek
to add value by selecting undervalued investments, thus taking advantage of
lower prices and higher yields, rather than by varying the maturities of its
portfolio investments to reflect interest rate forecasts.
For further information concerning the securities in which the Fixed Income
Portfolio may invest and the investment strategies and techniques it may employ
and their associated risks, see "Other Investment Practices and Policies" and
"Risk Factors and Suitability" below in this Prospectus.
THE GLOBAL FIXED INCOME PORTFOLIO
The Global Fixed Income Portfolio's investment objective is to maximize
total return while realizing a market level of income, consistent with
preserving principal and liquidity. The Global Fixed Income Portfolio will seek
to achieve its investment objective primarily through investing in a portfolio
of fixed-income securities, generally of investment grade, denominated in
foreign currencies and the U.S. dollar. Because some of the Global Fixed Income
Portfolio's investments will be denominated in foreign currencies, including
bonds denominated in the European Currency Unit ("ECU"), exchange rates may have
a significant impact on the performance of the Global Fixed Income Portfolio.
The Global Fixed Income Portfolio may also invest to a limited extent in
non-investment grade securities.
The Global Fixed Income Portfolio may invest in a broad range of
fixed-income securities denominated in foreign currencies and U.S. dollars,
including bonds, notes, mortgage-backed and asset-backed, convertible debt
securities, preferred stock (including convertible preferred stock), structured
notes and debt securities issued or guaranteed by national, provincial, state or
other governments with taxing authority or by their agencies or by supranational
<PAGE>
entities. The Global Fixed Income Portfolio will invest in other types of fixed
income securities expected to be developed in the future, if the Adviser
determines that such investment is consistent with the Global Fixed Income
Portfolio's investment objective and policies. (The Global Fixed Income Fund
will supplement this Prospectus and, if appropriate, the Statement of Additional
Information before the Global Fixed Income Portfolio makes any such investments
to a significant extent.) Supranational entities include international
organizations designated or supported by governmental entities to promote
economic reconstruction or development, and international banking institutions
and related government agencies. Examples of supranational entities are the
International Bank for Reconstruction and Development (the World Bank), the
European Steel and Coal Community, the Asian Development Bank and the
Inter-American Development Bank.
The Global Fixed Income Portfolio expects to emphasize foreign government
and agency securities, securities of U.S. companies denominated in foreign
currencies, U.S. Government and agency securities, mortgage-backed and
asset-backed securities and securities of foreign companies denominated in U.S.
dollars or foreign currencies. Investors should be aware that investing in
mortgage-backed securities involves risks of fluctuation in yields and market
prices and of early prepayments on the underlying mortgages. The Global Fixed
Income Portfolio may invest in securities that pay interest on a fixed,
variable, floating (including inverse floating), contingent, in-kind or deferred
basis. The Global Fixed Income Portfolio may also invest in unlisted warrants to
purchase fixed income securities. (Warrants are substantially the same as call
options in their nature, use and effect, except that warrants are generally of a
longer term and are issued by the issuer of the underlying security, rather than
by an option writer. See "General Characteristics of Options" in the Statement
of Additional Information.)
While under normal circumstances, at least 65% of the Global Fixed Income
Portfolio's total assets will be invested in the fixed-income securities of
issuers located or primarily doing business in at least three different
countries, the Global Fixed Income Portfolio generally intends to invest in
securities of issuers in no fewer than eight different countries. The Global
Fixed Income Portfolio may, however, invest a substantial portion of its assets
in one or more of those eight countries. The Global Fixed Income Portfolio is a
"non-diversified" fund and may invest a greater portion of its assets in
securities of any one issuer than can a diversified fund. See "Risk Factors and
Suitability" for a description of the risks associated with investments in
foreign securities, including securities of companies in countries with emerging
economies or securities markets, and the Portfolio's non-diversified status.
In pursuing the Global Fixed Income Portfolio's investment objective, the
Adviser intends to emphasize intermediate-term economic fundamentals relating to
various countries in the international economy, rather than evaluate day-to-day
fluctuations in particular currency and bond markets. The Adviser will review
the economic conditions and prospects relating to various countries in the
international economy and evaluate the available yield differentials with a view
toward maximizing total return.
<PAGE>
For further information concerning the securities in which the Global Fixed
Income Portfolio may invest and the investment strategies and techniques it may
employ and their associated risks, see "Other Investment Practices and Policies"
and "Risk Factors and Suitability" below in this Prospectus.
OTHER INVESTMENT PRACTICES AND POLICIES
Mortgage-Backed Pass-Through Securities
The Fixed Income and Global Fixed Income Portfolios may invest in
mortgage-backed "pass-through" securities. Mortgage-backed "pass-through"
securities are subject to regular payments and early prepayments of principal,
which will affect a Fund's current and total returns. It is not possible to
predict accurately the life of a particular issue of mortgage-backed
"pass-through" securities held by a Portfolio. The actual life of any
mortgage-backed "pass-through" security is likely to be substantially shorter
than the original average maturity of the mortgage pool underlying the security
because unscheduled early prepayments of principal on the security owned by a
Portfolio will result from the prepayment, refinancing or foreclosure of the
underlying mortgage loans in the mortgage pool.
For example, mortgagors may increase the rate at which they prepay their
mortgages when interest rates decline sufficiently to encourage refinancing. A
Portfolio, when the monthly payments (which may include unscheduled prepayments)
on a security are passed-through to it, may be able to reinvest them only at a
lower rate of interest. Because of the regular scheduled payments of principal
and the early unscheduled prepayments of principal, mortgage-backed
"pass-through" securities are less effective than other types of obligations as
a means of locking in attractive long-term interest rates. As a result, this
type of security may have less potential for capital appreciation during periods
of declining interest rates than other U.S. Government securities of comparable
maturities, although many issues of mortgage-backed "pass-through" securities
may have a comparable risk of decline in market value during periods of rising
interest rates. Although a security purchased at a premium above its par value
may carry a higher stated rate of return, both a scheduled payment of principal,
which will be made at par, and an unscheduled prepayment of principal generally
will decrease current and total returns and will accelerate the recognition of
income which, when distributed to Fund shareholders, will be taxable as ordinary
income.
Collateralized Mortgage Obligations
The Fixed Income and Global Fixed Income Portfolios may invest in
collateralized mortgage obligations ("CMOs"). The issuer of a CMO effectively
transforms a mortgage pool into obligations comprised of several different
maturities, thus creating mortgage securities that appeal to short-term and
intermediate-term investors as well as the more traditional long-term mortgage
investor. CMOs are debt securities issued by Federal Home Loan Mortgage
Corporation, Federal National Mortgage Corporation and by non-governmental
financial institutions and other mortgage lenders and are generally fully
collateralized by a pool of mortgages held under an indenture. CMOs are issued
<PAGE>
in a number of classes or series which have different maturities and are
generally retired in sequence. CMOs are designed to be retired as the underlying
mortgage loans in the mortgage pool are repaid. In the event of sufficient early
prepayments on such mortgages, the class or series of CMO first to mature
generally will be retired prior to its maturity. Thus, the early retirement of a
particular class or series of a CMO held by a Portfolio would affect its
corresponding Fund's current and total returns in the manner indicated above.
In making investments in CMOs, the Adviser will take into account the
following considerations: the total return on CMOs will vary with interest
rates, which cannot be predicted; the maturity of CMOs is variable and is not
known at the time of purchase; prepayments on CMOs will depend upon prevailing
interest rates and CMOs may have a shorter life than expected; and, because CMOs
are relatively new securities and have not been in existence through all market
cycles, the risks of investing in CMOs are not fully known.
Securities Ratings and Portfolio Credit Quality
The convertible debt securities and preferred stocks in which the Equity
Portfolio may invest will generally be rated high quality, i.e., securities
which, at the date of investment, are rated within the three highest grades as
determined by Moody's Investors Service, Inc. ("Moody's") (Aaa, Aa or A) or by
Standard & Poor's Ratings Group ("Standard & Poor's") (AAA, AA or A) or if, not
rated, are determined by the Adviser to be of comparable credit quality. Up to
5% of the Equity Portfolio's total assets invested in convertible debt
securities and preferred stocks may be rated Baa by Moody's or BBB by Standard &
Poor's or, if not rated, are determined to be of comparable credit quality by
the Adviser.
The Fixed Income and Global Fixed Income Portfolios will generally invest
in investment grade fixed-income securities, i.e., securities which, at the date
of investment, are rated within the four highest grades as determined by Moody's
(Aaa, Aa, A or Baa) or by Standard & Poor's, or solely with respect to Global
Fixed Income Portfolio, Duff & Phelps, Inc. ("Duff & Phelps") or IBAC, Inc.
("IBAC") (AAA, AA, A or BBB) or their respective equivalent ratings or, if not
rated, are determined by the Adviser to be of comparable credit quality.
Securities rated Baa by Moody's or BBB by Standard & Poor's, Duff & Phelps or
IBAC and unrated securities of comparable credit quality are considered medium
grade obligations with speculative characteristics. Adverse changes in economic
conditions or other circumstances are more likely to weaken the issuer's
capacity to pay interest and repay principal on these securities than is the
case for issuers of higher rated securities.
The Fixed Income and Global Fixed Income Portfolios may invest up to 15% of
their respective net assets in securities rated, at the date of investment,
either Ba by Moody's or BB by Standard & Poor's, or solely with respect to
Global Fixed Income Portfolio, Duff & Phelps or IBAC or, if not rated, are
determined by the Adviser to be of comparable credit quality ("BB Rated
Securities"). BB Rated Securities are classified in the highest category of
non-investment grade securities. Such securities may be considered to be
high-yield securities ("junk bonds"), carry a high degree of risk and are
considered speculative by the major credit rating agencies. The Fixed Income and
Global Fixed Income Portfolios intend to avoid what they perceive to be the most
speculative areas of the BB Rated Securities universe. See "Risk Factors and
Suitability" for a description of risks associated with investments in BB Rated
Securities.
<PAGE>
It is anticipated that the average dollar weighted rated credit quality of
the securities in the Fixed Income and Global Fixed Income Portfolios'
portfolios will be in a range of Aa to A according to the ratings of Moody's or
AA to A according to the ratings of Standard & Poor's, or solely with respect to
Global Fixed Income Portfolio, Duff & Phelps or IBAC, or of comparable credit
quality as determined by the Adviser.
In the case of a security that is rated differently by the rating services,
the highest rating is used in connection with the Portfolios' policies involving
securities ratings. In the event that the rating on a security held in a
Portfolio's portfolio is downgraded by a rating service, such action will be
considered by the Adviser in its evaluation of the overall investment merits of
that security, but will not necessarily result in the sale of the security. In
determining whether securities are of comparable credit quality, the Adviser may
take into account, but will not rely entirely on, ratings assigned by foreign
rating agencies. In the case of unrated sovereign, subnational and sovereign
related debt of foreign countries, the Adviser may take into account, but will
not rely entirely on, the ratings assigned to the issuers of such securities.
Appendix A to this Prospectus sets forth excerpts from the descriptions of
ratings of corporate debt securities and sovereign, subnational and sovereign
related debt of foreign countries.
Short Term Debt Securities; Money Market Instruments
The Portfolios may establish and maintain cash balances for temporary
defensive purposes without limitation in the event of, or in anticipation of, a
general decline in the market prices of securities in which they invest. Each
Portfolio may also establish and maintain cash balances for liquidity to meet
shareholder redemptions (the Small Cap Portfolio will limit such investments to
20% of its total assets unless it is in a temporary defensive position). A
Portfolio's cash balances may be invested in money market instruments and
short-term interest bearing securities that are rated investment grade in the
case of the Equity and Small Cap Portfolios or high quality in the case of the
Fixed Income and Global Fixed Income Portfolios. Such securities and instruments
include, without limitation, short-term U.S. Government securities (direct
obligations of the U.S. Government backed by the full faith and credit of the
United States and securities issued by agencies and instrumentalities of the
U.S. Government), U.S. and foreign commercial paper, negotiable certificates of
deposit, non-negotiable fixed time deposits, bankers' acceptances and repurchase
agreements.
The Equity and Small Cap Portfolios' investments in money market securities
(i.e., securities with maturities of less than one year) will be limited to
securities which are rated P-1 by Moody's or A-1 by Standard & Poor's. The
Equity and Small Cap Portfolios will invest at least 95% of their respective
assets that are invested in short-term interest-bearing securities (i.e.,
securities with maturities of one to three years) in securities which are rated
at the time of investment Aaa, Aa or A by Moody's or AAA, AA, or A by Standard &
<PAGE>
Poor's or, if not rated, are determined by the Adviser to be of comparable
quality. Up to 5% of the Equity and Small Cap Portfolios' assets invested in
such short-term securities may be invested in securities which are rated Baa by
Moody's or BBB by Standard & Poor's or, if not rated, are of comparable
investment quality in the opinion of the Adviser.
Repurchase Agreements
The Equity, Small Cap, Fixed Income and Global Fixed Income Portfolios may
invest up to 10%, 10%, 5% and 25%, respectively, of their net assets in
repurchase agreements under normal circumstances. Repurchase agreements acquired
by a Portfolio will always be fully collateralized as to principal and interest
by money market instruments and will be entered into only with commercial banks,
brokers and dealers considered creditworthy by the Adviser. If the other party
or "seller" of a repurchase agreement defaults, a Portfolio might suffer a loss
to the extent that the proceeds from the sale of the underlying securities and
other collateral held by the Portfolio in connection with the related repurchase
agreement are less than the repurchase price. In addition, in the event of
bankruptcy of the seller or failure of the seller to repurchase the securities
as agreed, a Portfolio could suffer losses, including loss of interest on or
principal of the security and costs associated with delay and enforcement of the
repurchase agreement.
Strategic Transactions
Each Portfolio may, but is not required to, utilize various other
investment strategies as described below to hedge various market risks (such as
interest rates, currency exchange rates, and broad or specific equity or
fixed-income market movements), to manage the effective maturity or duration of
fixed-income securities, or to enhance potential gain. Such strategies are
generally accepted as part of modern portfolio management and are regularly
utilized by many mutual funds and other institutional investors. Techniques and
instruments used by the Portfolios may change over time as new instruments and
strategies are developed or as regulatory changes occur.
In the course of pursuing their investment objectives, the Portfolios may
purchase and sell (write) exchange-listed and over-the-counter put and call
options on securities, equity and fixed-income indices and other financial
instruments; purchase and sell financial futures contracts and options thereon;
enter into various interest rate transactions such as swaps, caps, floors or
collars; and enter into various currency transactions such as currency forward
contracts, currency futures contracts, currency swaps or options on currencies
or currency futures (collectively, all the above are called "Strategic
Transactions"). Strategic Transactions may be used in an attempt to protect
against possible changes in the market value of securities held or to be
purchased by a Portfolio resulting from securities market or currency exchange
rate fluctuations, to protect a Portfolio's unrealized gains in the value of its
portfolio securities, to facilitate the sale of such securities for investment
purposes, to manage the effective maturity or duration of the Fixed Income and
Global Fixed Income Portfolios' holdings, or to establish a position in the
derivatives markets as a temporary substitute for purchasing or selling
<PAGE>
particular securities. In addition to the hedging transactions referred to in
the preceding sentence, Strategic Transactions may be used to enhance potential
gain in circumstances where hedging is not involved although each Portfolio will
attempt to limit its net loss exposure resulting from Strategic Transactions
entered into for such purposes to not more than 3% of its net assets at any one
time and, to the extent necessary, the Portfolios 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 Portfolio's net loss exposure from such Strategic Transactions,
an unrealized gain from a particular Strategic Transaction position would be
netted against an unrealized loss from a related Strategic Transaction position.
For example, if the Adviser anticipates that the Belgian franc will appreciate
relative to the French franc, the Global Fixed Income Portfolio may take a long
forward currency position in the Belgian franc and a short foreign currency
position in the French franc. Under such circumstances, any unrealized loss in
the Belgian franc position would be netted against any unrealized gain in the
French franc position (and vice versa) for purposes of calculating the Global
Fixed Income Portfolio's net loss exposure. The ability of the Portfolios to
utilize these Strategic Transactions successfully will depend on the Adviser's
ability to predict pertinent market movements, which cannot be assured. The
Portfolios will comply with applicable regulatory requirements when implementing
these strategies, techniques and instruments. The Portfolios' activities
involving Strategic Transactions may be limited to enable the Funds to comply
with the requirements of Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code"), for qualification as a regulated investment company.
When-Issued and "Delayed Delivery" Securities
The Fixed Income and Global Fixed Income Portfolios may commit up to 15%
and 25%, respectively, of their net assets to purchase securities on a
"when-issued" or "delayed delivery" basis. Although a Portfolio would generally
purchase securities on a when-issued or delayed delivery basis with the
intention of actually acquiring the securities, the Portfolios may dispose of a
when-issued or delayed delivery security prior to settlement if the Adviser
deems it appropriate to do so. The payment obligation and the interest rate on
these securities will be fixed at the time that a Portfolio enters into the
commitment, but no income will accrue to the Portfolio until they are delivered
and paid for. Unless a Portfolio has entered into an offsetting agreement to
sell the securities, cash or liquid securities equal to the amount of the
Portfolio's commitment will be segregated with the Portfolios' custodian, to
secure the Portfolio's obligations and to ensure that it is not leveraged.
Securities purchased on a "when-issued" basis may have a market value on
delivery which is less than the amount paid by a Portfolio. Changes in market
value may be based upon the public's perception of the creditworthiness of the
issuer or changes in the level of interest rates. Generally, the value of
"when-issued" securities will fluctuate inversely to changes in interest rates,
i.e., they will appreciate in value when interest rates fall and will depreciate
in value when interest rates rise.
<PAGE>
Forward Roll Transactions
In order to enhance current income, the Fixed Income and Global Fixed
Income Portfolios may enter into forward roll transactions with respect to
mortgage-backed securities to the extent of 10% and 5%, respectively, of their
total assets. In a forward roll transaction, a Portfolio sells a mortgage-backed
security to a financial institution, such as a bank or broker-dealer, and
simultaneously agrees to repurchase a similar security from the institution at a
later date at an agreed-upon price. The mortgage-backed securities that are
repurchased will bear the same interest rate as those sold, but generally will
be collateralized by different pools of mortgages with different prepayment
histories than those sold. During the period between the sale and repurchase, a
Portfolio will not be entitled to receive interest and principal payments on the
securities sold. Proceeds of the sale will be invested in short-term
instruments, such as repurchase agreements or other short-term securities, and
the income from these investments, together with any additional fee income
received on the sale and the amount gained by repurchasing the securities in the
future at a lower purchase price, will generate income and gain for the
Portfolio which is intended to exceed the yield on the securities sold. Forward
roll transactions involve the risk that the market value of the securities sold
by a Portfolio may decline below the repurchase price of those securities. At
the time that a Portfolio enters into a forward roll transaction, it will place
in a segregated custodial account cash or liquid obligations having a value
equal to the repurchase price (including accrued interest) and will subsequently
monitor the account to ensure that the equivalent value is maintained. The use
of forward roll transactions involves leverage, which allows any investment
gains made with additional monies received (in excess of the cost of the roll
transaction) to increase the net asset value of a Portfolio's interests faster
than would otherwise be the case. On the other hand, if the additional monies
received are invested in ways that do not fully recover the costs of such
transactions to a Portfolio, the net asset value of the Portfolio would fall
faster than would otherwise be the case.
Illiquid and Restricted Securities
The Fixed Income and Global Fixed Income Portfolios may invest up to 15% of
their respective net assets in illiquid investments and securities that are
subject to restrictions on resale (i.e., private placements) under the
Securities Act of 1933, as amended (the "1933 Act), including securities
eligible for resale in reliance on Rule 144A under the 1933 Act ("restricted
securities"). Although the Equity and Small Cap Portfolios do not normally
invest in equity securities that are restricted as to disposition by federal
securities laws or are otherwise illiquid, the Equity and Small Cap Portfolios
may so invest up to 15% of their respective net assets when, in the opinion of
the Adviser, investment opportunities represented 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 certain restricted securities, unless it is determined, based upon
continuing review of the trading markets for the specific restricted security,
that such restricted security is eligible for resale under Rule 144A and is
liquid. The Board of Trustees of the Portfolio Trust has adopted guidelines and
delegated to the Adviser the daily function of determining and monitoring the
liquidity of restricted securities. The Board of Trustees, however, retains
oversight focusing on factors such as valuation, liquidity and availability of
<PAGE>
information and is ultimately responsible for such determinations. Investing in
restricted securities eligible for resale pursuant to Rule 144A could have the
effect of increasing the level of illiquidity in a Portfolio to the extent that
qualified institutional buyers become for a time uninterested in purchasing
these restricted securities. The purchase price and subsequent valuation of
restricted and illiquid securities normally reflect a discount, which may be
significant, from the market price of comparable securities for which a liquid
market exists.
Short-Selling
Each Portfolio may make short sales, which are transactions in which a
Portfolio sells a security it does not own in anticipation of a decline in the
market value of that security. To complete such a transaction, a Portfolio must
borrow the security to make delivery to the buyer. The Portfolio then is
obligated to replace the security borrowed by purchasing it at the market price
at the time of replacement. The price at such time may be more or less than the
price at which the security was sold by the Portfolio. Until the security is
replaced, the Portfolio is required to pay to the lender amounts equal to any
dividends or interest which accrue during the period of the loan. To borrow the
security, the Portfolio also may be required to pay a premium, which would
increase the cost of the security sold. The proceeds of the short sale will be
retained by the broker, to the extent necessary to meet margin requirements,
until the short position is closed out.
Until a Portfolio replaces a borrowed security in connection with a short
sale, the Portfolio will: (a) maintain daily a segregated account not with the
broker, containing cash or liquid securities, at such a level that the amount
deposited in the account plus the amount deposited with the broker as collateral
will equal the current value of the security sold short; or (b) otherwise cover
its short position.
The Portfolios 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 giving effect to any such
short sale, the total market value of all securities sold short by a Portfolio
would exceed 5% of the value of the Portfolio's net assets.
In addition to the short sales discussed above, the Portfolios may make
short sales "against the box." A short sale is against-the-box if a Portfolio,
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 securities of the same issuer
as the securities sold short. The proceeds of a short sale are held by a broker
until the settlement date at which time the Portfolio delivers the security to
close the short position. The Portfolio receives the net proceeds from the short
sale.
<PAGE>
Other Investment Companies
The Small Cap Portfolio may invest up to 10% of its total assets in the
securities of other investment companies but may not invest more than 5% of its
total assets in the securities of any one investment company or acquire more
than 3% of the voting securities of any other investment company. For example,
the Small Cap Portfolio may invest in Standard & Poor's Depositary Receipts
(commonly referred to as "Spiders"), which are exchange-traded shares of a
closed-end investment company that are designed to replicate the price
performance and dividend yield of the Standard & Poor's 500 Composite Stock
Price Index. The Small Cap Portfolio will indirectly bear its proportionate
share of any management fees and other expenses paid by investment companies in
which it invests in addition to the advisory fees paid by the Portfolio.
However, to the extent that the Small Cap Portfolio invests in a registered
open-end investment company, the Adviser will not impose its advisory fees on
the portion of the Portfolio's assets so invested.
Securities Loans
In order to realize additional income, the Global Fixed Income Portfolio
may lend a portion of the securities in its portfolio to broker-dealers and
financial institutions, who from time to time may wish to borrow securities,
generally to carry out transactions for which they have contracted. The market
value of securities loaned by the Global Fixed Income Portfolio may not exceed
20% of the value of its total assets, with a 10% limit for any single borrower.
In order to secure their obligations to return securities borrowed from the
Global Fixed Income Portfolio, borrowers will deposit collateral with the Global
Fixed Income Portfolio's custodian equal to at least 100% of the market value of
the borrowed securities, and the collateral will be "marked to market" daily. As
is the case with any extension of credit, portfolio securities loans involve
certain risks in the event a borrower should fail financially, including delays
or inability to recover the loaned securities or foreclose against the
collateral. The Adviser, under the supervision of the Portfolio Trust's Board of
Trustees, monitors the creditworthiness of the parties to whom the Global Fixed
Income Portfolio makes securities loans.
Portfolio Turnover
It is not the policy of any Portfolio to purchase or sell securities for
trading purposes. However, the Portfolios are not subject to any restriction on
portfolio turnover and may sell any portfolio security without regard to the
period of time it has been held. The Portfolios may therefore generally change
their portfolios' investments at any time in accordance with the Adviser's
appraisal of factors affecting any particular issuer or market, or the economy
in general.
The portfolio turnover rates for Equity, Small Cap, Fixed Income and Global
Fixed Income Portfolios are not expected to be in excess of 200%, 150%, 200% and
250%, respectively, on an annual basis. A rate of turnover of 100% would occur,
for example, if the value of the lesser of purchases and sales of portfolio
securities for a particular year equaled the average monthly value of portfolio
securities owned during the year (excluding short-term securities). A high rate
of portfolio turnover involves a correspondingly greater amount of transaction
costs which must be borne directly by the Portfolios and thus indirectly by the
Funds and their shareholders. It may also result in the realization of larger
<PAGE>
amounts of net short-term capital gains, the Funds' distributions from which are
taxable to shareholders of the Funds as ordinary income and may, under certain
circumstances, make it more difficult for the Funds to qualify as regulated
investment companies under the Code.
Investment Restrictions
Each Fund and Portfolio has adopted certain fundamental restrictions which
may not be changed without the approval of the Fund's shareholders or
Portfolio's investors, as the case may be. Each Fund has the same investment
restrictions as its corresponding Portfolio, except that each Fund may invest
substantially all of its Investable Assets in an open-end management investment
company with substantially the same investment objective as the Fund. References
below to the Portfolios' investment restrictions also include the Funds'
investment restrictions. These policies provide, among other things, that each
Portfolio may not: (i) with respect to at least 50% of the Global Fixed Income
Portfolio's total assets and at least 75% of the Equity, Small Cap and Fixed
Income Portfolios' total assets, invest more than 5% of total assets in the
securities of any one issuer (other than the U.S. Government, its agencies or
instrumentalities) or acquire more than 10% of the outstanding voting securities
of any issuer; (ii) issue senior securities, borrow money or securities, pledge
or mortgage its assets or, with respect to Equity and Small Cap Portfolios only,
enter into reverse repurchase agreements, except that each Portfolio may (a)
borrow money from banks as a temporary measure for extraordinary or emergency
purposes (but not for investment purposes) in an amount up to 15% of the current
value of its total assets, (b) enter into forward roll transactions (Fixed
Income and Global Fixed Income Portfolios only), and (c) pledge its assets to an
extent not greater than 15% of the current value of its total assets to secure
such borrowings; however as a matter of non-fundamental policy, a Portfolio may
not make any additional investments while its outstanding borrowings (bank
borrowings with respect to Fixed Income Portfolio only) exceed 5% of the current
value of its total assets; or (iii) lend portfolio securities, except that (x)
the Global Fixed Income Portfolio may lend its portfolio securities with a value
up to 20% of its total assets (with a 10% limit for any borrower) and the Fixed
Income Portfolio may lend portfolio up to 33-1/3% of its total assets taken at
market value and (y) the Portfolios may enter repurchase agreements.
No Portfolio will invest more than 25% of the current value of its total
assets in any single industry, provided that this restriction shall not apply to
debt securities issued or guaranteed by the U.S. Government or its agencies or
instrumentalities.
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 or Portfolio's assets will not constitute a
violation of the restriction. Certain non-fundamental restrictions and
additional fundamental restrictions adopted by the Funds and the Portfolios are
described in the Statement of Additional Information.
<PAGE>
RISK FACTORS AND SUITABILITY
None of the Funds is intended to provide an investment program meeting all
of the requirements of an investor. The Funds are not appropriate investments
for investors seeking complete stability of principal. Additionally,
notwithstanding each Portfolio's ability to spread risk by holding securities of
a number of portfolio companies, investors should invest in the Funds only if
they are able and prepared to bear the risk of investment losses which may
accompany the investments contemplated by the Portfolios. The utilization of
Strategic Transactions and short sales also involve special risks, as discussed
below in the correspondingly captioned sections.
The Funds are designed primarily for investors in Omnibus Accounts who seek
to maximize total return and who may be in a position to benefit from the
reinvestment of the income dividends (if any), which will be declared and
distributed quarterly by the Fixed Income and Global Fixed Income Funds, and any
capital gains distributions paid by the Funds on a tax-deferred basis. The Funds
may also be suitable for other investors, depending upon their investment goals
and financial and tax positions. The companies in which the Equity and Small Cap
Portfolios invest generally reinvest their earnings, and dividend distributions
by the Equity and Small Cap Funds should not be expected.
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 held by the Portfolios
usually vary depending upon available yields, rising when interest rates decline
and declining when interest rates rise. Therefore, to the extent that a
Portfolio invests in debt securities, the value of shares of a Fund investing in
the Portfolio can generally be expected to fluctuate accordingly.
Foreign Securities
The Global Fixed Income Portfolio invests primarily, and the Equity, Small
Cap and Fixed Income Portfolios may invest to a lesser extent, in foreign
securities. Investing in securities of foreign companies which are generally
denominated in foreign currencies and utilizing foreign currency transactions
involves certain risks of political, economic and legal conditions and
developments not typically associated with investing in United States companies.
Such conditions or developments might include favorable or unfavorable changes
in currency exchange rates, exchange control regulations (including currency
blockage), civil disorder, expropriation of assets of companies in which a
Portfolio invests, nationalization of such companies, imposition of withholding
taxes on dividend or interest payments, and possible difficulty in obtaining and
enforcing judgments against a foreign issuer. Also, foreign securities may not
be as liquid as, and may be more volatile than, comparable domestic securities.
Furthermore, issuers of foreign securities are subject to different, often less
comprehensive, accounting, reporting and disclosure requirements than domestic
<PAGE>
issuers. A Portfolio, in connection with its purchases and sales of foreign
securities, other than securities denominated in U.S. dollars, will incur
transaction costs in converting currencies. Also, foreign custodial costs
relating to a Portfolio's portfolio securities are higher than domestic
custodial costs. 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 a
Portfolio's investments on such exchanges, may not be settled promptly and
therefore such investments may be less liquid and subject to the risk of
fluctuating currency exchange rates pending settlement.
Emerging Markets
The Global Fixed Income Portfolio, and to a lesser extent the Small Cap
Portfolio, may invest in countries with emerging economies or securities markets
("Emerging Markets"). Investment in Emerging Markets involves risks in addition
to those generally associated with investments in foreign securities. Political
and economic structures in many Emerging Markets may be undergoing significant
evolution and rapid development, and such countries may lack the social,
political and economic stability characteristics of more developed countries. As
a result, the risks described above relating to investments in foreign
securities, including the risks of nationalization or expropriation of assets,
may be heightened. In addition, unanticipated political or social developments
may affect the values of the Global Fixed Income and Small Cap Portfolios'
investments and the availability to the Portfolios of additional investments in
such Emerging Markets. The small size and inexperience of the securities markets
in certain Emerging Markets and the limited volume of trading in securities in
those markets may make the Global Fixed Income and Small Cap Portfolios'
investments in such countries less liquid and more volatile than investments in
countries with more developed securities markets (such as the U.S., Japan or
most Western European countries).
Small Capitalization Companies
The Small Cap Portfolio invests primarily, and the Equity Portfolio may
invest to a lesser extent, in equity securities issued by companies with small
market capitalizations. Although investments in small capitalization companies
may present greater opportunities for growth, they also involve greater risks
than are customarily associated with investments in larger, more established
companies. The securities of small companies may be subject to more volatile
market movements than securities of larger, more established companies. Smaller
companies may have limited product lines, markets or financial resources, and
they may depend upon a limited or less experienced management group. The
securities of small companies may be traded only on the over-the-counter market
or on a regional securities exchange and may not be traded daily or in the
volume typical of trading on a national securities exchange. As a result, the
disposition by a Portfolio of securities of small capitalization companies in
order to meet redemptions or otherwise may require the Portfolio to sell such
securities at a discount from market prices, over a longer period of time or
during periods when disposition is not desirable.
<PAGE>
BB Rated Securities
The Fixed Income and Global Fixed Income Portfolios may invest up to 15% of
their respective net assets in BB Rated Securities. Investing in BB Rated
Securities involves a higher degree of credit risk (the risk that the issuer
will not make interest or principal payments when due) than investing in higher
rated securities. In the event of an unanticipated default on a BB Rated
Security, a Portfolio will experience a reduction in its income, and could
expect a decline in the market value of the securities so affected. More careful
analysis of the financial condition of each issuer of BB Rated Securities is
therefore necessary. During an economic downturn or substantial period of rising
interest rates, highly leveraged issuers may experience financial stress which
would adversely affect their ability to service their principal and interest
payment obligations, to meet projected business goals and to obtain additional
financing. Periods of economic or political uncertainty and change can be
expected to result in volatility in prices of these securities.
BB Rated Securities generally offer a higher yield, but may be subject to a
higher risk of default in interest or principal payments, than higher rated
securities. The market prices of BB Rated Securities are generally less
sensitive to interest rate changes than higher rated securities, but are
generally more sensitive to adverse economic or political changes or, in the
case of corporate issuers, to individual company developments. BB Rated
Securities also may have less liquid markets than higher rated securities, and
their liquidity, as well as their value, may be more severely affected by
adverse economic conditions. Adverse publicity and investor perceptions of the
market, as well as newly enacted or proposed legislation, may also have a
negative impact on the market for BB Rated Securities.
Short-Selling
A Portfolio will incur a loss as a result of a short sale if the price of
the security increases between the date of the short sale and the date on which
the Portfolio replaces the borrowed security. A Portfolio will realize a gain if
the security declines in prices 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 along 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 Portfolio may
be required to pay in connection with a short sale.
A Portfolio's loss on a short sale as a result of an increase in the price
of a security sold short is potentially unlimited. The Portfolios may purchase
call options to provide a hedge against an increase in the price of a security
sold short. When a Portfolio purchases a call option it must pay a premium to
the person writing the option and a commission to the broker selling the option.
If the options are exercised by the Portfolio, the premium and the commission
paid may be more than the amount of the brokerage commission charged if the
security were to be purchased directly.
Strategic Transactions
Strategic Transactions have risks associated with them including possible
default by the other party to the transaction, illiquidity and, to the extent
the Adviser's view as to certain market movements is incorrect, the risk that
<PAGE>
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 Portfolios, 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 Portfolios can realize on their investments or cause
the Portfolios to hold a security they might otherwise sell. The use of currency
transactions can result in the Portfolios 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
Portfolio creates the possibility that losses on the hedging instrument may be
greater than gains in the value of the Portfolio's position. The writing of
options could significantly increase a Portfolio's portfolio turnover rate and,
therefore, associated brokerage commissions or spreads. In addition, futures and
options markets may not be liquid in all circumstances and certain
over-the-counter options may have no markets. As a result, in certain markets,
the Portfolios 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
Portfolios in writing options on futures and entering into futures transactions
is potentially unlimited; however, as described above, each Portfolio will
attempt to limit its net loss exposure resulting from Strategic Transactions
entered into for non-hedging purposes to not more than 3% of its net assets at
any one time. Futures markets are highly volatile and the use of futures may
increase the volatility of the Portfolios' 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 the Funds' net asset values and the net result may be less favorable than
if Strategic Transactions had not been utilized. Further information concerning
the Portfolios' Strategic Transactions is set forth in the Statement of
Additional Information.
Non-Diversified Status (Global Fixed Income Fund and Portfolio)
The Global Fixed Income Portfolio and the Global Fixed Income Fund are
"non-diversified" investment companies so that with respect to 50% of total
assets, each will be able to invest more than 5% of its assets in obligations of
one or more issuers, while being limited with respect to the other half of its
assets to investments not exceeding 5% of total assets. As a "non-diversified"
<PAGE>
investment company, the Global Fixed Income Portfolio may invest a greater
proportion of its assets in the securities of a smaller number of issuers and,
therefore, may be subject to greater market and credit risk than a more broadly
diversified fund. ("Diversified" investment companies, such as the Equity, Small
Cap and Fixed Income Funds and Portfolios, are required under the Investment
Company Act of 1940, as amended (the "1940 Act"), to maintain at least 75% of
total assets in cash (including foreign currency), cash items, U.S. Government
securities, and other securities limited per issuer to not more than 5% of the
investment company's total assets.) In order for the Global Fixed Income Fund to
qualify as a regulated investment company under the Code, the Global Fixed
Income Fund, among other things, may not invest more than 25% of its total
assets (including its share of the assets of the Global Fixed Income Portfolio),
at the close of each quarter of the Global Fixed Income Fund's taxable year, in
obligations of any one issuer (other than U.S. Government securities), and the
investments held by the Global Fixed Income Portfolio must be limited
accordingly. The same tax restrictions apply to the other Funds and,
consequently, Portfolios. In any event, the Global Fixed Income Portfolio does
not intend to invest more than 5% of its assets in the securities of any one
issuer unless such securities are issued or guaranteed by a national government
or are deemed by the Adviser to be of comparable credit quality. The Global
Fixed Income Portfolio does not believe that the credit risk inherent in the
obligations of stable foreign governments is significantly greater than that of
U.S. Government obligations.
SPECIAL INFORMATION CONCERNING THE HUB AND SPOKE(R) MASTER-FEEDER FUND
STRUCTURE (1)
Unlike other mutual funds which directly acquire and manage their own
portfolio securities, each Fund seeks to achieve its investment objective by
investing all of its Investable Assets in its corresponding Portfolio which has
the same investment objective as the Fund. Each Portfolio in turn invests
primarily in securities consistent with that objective. Therefore, an investor's
interest in a Portfolio's securities is indirect. In addition to selling
beneficial interests to the Funds, the Portfolios may sell beneficial interests
to other mutual funds or institutional investors. Such investors will invest in
the Portfolios on the same terms and conditions and will pay a proportionate
share of the Portfolios' expenses. However, the other investors investing in the
Portfolios are not required to sell their shares at the same public offering
price as the Funds due to the imposition of sales commissions and variations in
other operating expenses. Therefore, investors in the Funds should be aware that
these differences may result in differences in returns experienced by investors
in the different funds that invest in the Portfolios. Such differences in
returns are also present in other mutual fund structures. Information concerning
other holders of interests in the Portfolios is available from the Adviser at
(800) 221-4795. The Hub and Spoke master-feeder fund structure has been
developed relatively recently, so investors should carefully consider this
investment approach.
(1) Hub and Spoke(R) is a registered service mark of Signature Financial Group,
Inc.
<PAGE>
Smaller funds investing in a Portfolio may be materially affected by the
actions of larger funds investing in that Portfolio. For example, if a large
fund withdraws from a Portfolio, the remaining funds may experience higher pro
rata operating expenses, thereby producing lower returns (however, this
possibility exists as well for traditionally structured funds that have large
institutional investors). Additionally, because a Portfolio would have fewer
assets in such a case, it may become less diversified, resulting in increased
portfolio risk. Also, funds with a greater pro rata ownership in a Portfolio
could have effective voting control of the operations of the Portfolio. Except
as permitted by the SEC, whenever the Trust is requested to vote on matters
pertaining to a Portfolio (other than a vote by a Fund to continue the
operations of its corresponding Portfolio upon the withdrawal of another
investor in the Portfolio), the Trust will hold a meeting of shareholders of the
applicable Fund and will cast all of its votes in the same proportion as the
votes of the Fund's shareholders. The percentage of the Trust's votes
representing Fund shareholders not voting will be voted by the Trustees or
officers of the Trust in the same proportion as Fund shareholders who do, in
fact, vote. Fund shareholders who do not vote will not affect the Trust's votes
at any Portfolio's meeting.
Certain changes in a Portfolio's investment objective, policies or
restrictions may require the applicable Fund to withdraw its interest in the
Portfolio. Any such withdrawal could result in a distribution "in kind" of
portfolio securities (as opposed to a cash distribution from the Portfolio) to
the extent permitted by the 1940 Act or the rules adopted thereunder. If
securities are distributed, a Fund could incur brokerage, tax or other charges
in converting the securities to cash. In addition, the distribution in kind may
result in a less diversified portfolio of investments or adversely affect the
liquidity of the Fund. Notwithstanding the above, there are other means for
meeting redemption requests, such as borrowing.
Each Fund may withdraw its investment from its corresponding Portfolio at
any time if the Board of Trustees of the Trust determines that it is in the best
interests of the shareholders of the Fund to do so (including if a Fund's and
its corresponding Portfolio's investment objectives were not substantially the
same). Upon any such withdrawal, the Board of Trustees of the Trust would
consider what action might be taken, including investing all the Investable
Assets of the Fund in another pooled investment entity having substantially the
same investment objective as the Fund or retaining an investment adviser to
manage directly the Fund's assets in accordance with its investment policies
described above with respect to its corresponding Portfolio. In any event, Fund
shareholders will receive 30 days prior written notice with respect to any
change in a Fund's or a Portfolio's investment objective. See "Investment
Objective and Policies" for a description of the fundamental policies of the
Portfolios that cannot be changed without approval by the "vote of a majority of
the outstanding voting securities" (as defined in the 1940 Act) of the
Portfolios.
<PAGE>
For descriptions of the investment objective, policies and restrictions of
each Portfolio, see "Investment Objective and Policies" herein. For descriptions
of the management and expenses of the Portfolios, see "Management" herein and in
the Statement of Additional Information.
CALCULATION OF PERFORMANCE DATA
From time to time each Fund may advertise its total return and the Fixed
Income and Global Fixed Income Funds may advertise their yields. Both yield and
total return figures are based on historical earnings and are not intended to
indicate future performance. The "total return" of the Funds refers to the
average annual compounded rates of return over 1, 5 and 10 year periods (or any
shorter period since inception) that would equate an initial amount invested at
the beginning of a stated period to the ending redeemable value of the
investment. The calculation assumes the reinvestment of all dividends and
distributions, includes all recurring fees that are charged to all shareholder
accounts and deducts all nonrecurring charges at the end of each period.
The "yield" of the Fixed Income and Global Fixed Income Funds is computed
by dividing the net investment income per share earned during the period stated
in the advertisement by the maximum offering price per share on the last day of
the period (using the average number of shares entitled to receive dividends).
For the purpose of determining net investment income, the calculation includes
among expenses of the Funds all recurring fees that are charged to all
shareholder accounts and any nonrecurring charges for the period stated.
From time to time, each Fund may compare its performance with that of other
mutual funds with similar investment objectives, to stock, bond and other
relevant indices, and to performance rankings prepared by recognized mutual fund
statistical services. In addition, each Fund's performance may be compared to
alternative investment or savings vehicles and/or to indices or indicators of
economic activity.
DIVIDENDS AND DISTRIBUTIONS
The Fixed Income and Global Fixed Income Funds' dividends from net
investment income will be declared and distributed quarterly. The Equity and
Small Cap Funds' dividends from net investment income (if any) will be declared
and distributed at least annually. Each Fund's dividends from short-term and
long-term capital gains, if any, after reduction by capital losses, will be
declared and distributed at least annually. In determining the amounts of its
dividends, each Fund will take into account its share of the income, gains or
losses, expenses, and any other tax items of its corresponding Portfolio.
Dividends from net investment income and from short-term and long-term capital
gains, if any, are automatically reinvested in additional shares of the
applicable Fund unless the shareholder elects to receive them in cash.
PURCHASE OF SHARES
Who may purchase Fund shares?
Shares of the Funds may be purchased only for the account of Omnibus
Accounts. Because individuals may not purchase Fund shares directly, all orders
to purchase Fund shares must be made through the Account Administrator of your
Omnibus Account. If the monies you wish to invest in the Funds are maintained in
a retirement plan sponsored by your employer, please consult with your employer
for information about how to purchase Fund shares. If the monies you wish to
invest in the Funds are maintained in a self-administered retirement plan,
please consult with your Account Administrator for information about how to
purchase Fund shares.
How may Account Administrators invest in the Funds for the account of their
Omnibus Accounts?
In order to make an initial investment in a Fund, Account Administrators
must establish an account with the Funds by furnishing to the Principal
Underwriter the information in the Account Application Form included with this
Prospectus. Account Administrators may purchase Fund shares for Omnibus Accounts
from the Principal Underwriter on any day during which the Funds and the New
York Stock Exchange (the "Exchange") are open for business (a "Business Day").
What is the minimum investment in Fund Shares?
Unless waived by the Trust, the minimum initial investment by an Omnibus
Account in each Fund is $100,000.
The Funds' investment minimums do not apply to accounts for which the
Adviser or any of its affiliates serves as investment adviser. The Funds'
investment minimums apply to the aggregate value invested in Omnibus Accounts
rather than to the investment of the underlying participants in the Omnibus
Accounts.
At what price are Fund shares offered?
Fund shares are sold at the net asset value per share next computed after
the purchase order is received in good order by the Principal Underwriter or its
agent (including Account Administrators); provided that payment for such shares
is received by the Custodian by 12:00 p.m., New York City Time on the next
Business Day.
May Fund shares be acquired in exchange for securities?
In the sole discretion of the Trust, each Fund may accept securities
instead of cash for the purchase of Fund shares. The Trust will ask the Adviser
to determine that any securities acquired by a Fund in this manner are
consistent with the investment objective, policies and restrictions of the
Fund's corresponding Portfolio. The securities will be valued in the manner
stated below with respect to how the Portfolios value their portfolio
securities. The purchase of Fund shares for securities instead of cash may cause
an investor who contributed them to recognize 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.
Other Purchase Information.
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 a Fund and (iii) to modify or eliminate the minimum initial
investment in Fund shares. Fund shares purchased by Account Administrators for
Omnibus Accounts may be subject to transaction fees, no part of which will be
received by the Funds, the Principal Underwriter or the Adviser.
<PAGE>
CALCULATION OF NET ASSET VALUE
Each Fund's net asset value per share is computed each Business Day as of
the close of regular trading on the Exchange (currently 4:00 p.m., New York City
time). Each Fund's net asset value per share is calculated by determining the
value of its assets (i.e., the value of its investment in its corresponding
Portfolio and other assets), subtracting all of its liabilities and dividing the
result by the total number of shares outstanding. For purpose of calculating
each Portfolio's net asset value, equity 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 securities not listed on an exchange or
national securities market, or securities for which there are no reported
transactions, are valued at the last quoted bid prices. Fixed income securities
(other than money market instruments) for which accurate market prices are
readily available are valued at their current market value on the basis of
quotations, which may be furnished by pricing services or provided by dealers in
such securities. Equity and fixed income securities for which accurate market
prices are not readily available and other assets are valued at fair value as
determined in good faith by the Adviser in accordance with procedures approved
by the Trustees of the Portfolio Trust, which may include the use of yield
equivalents or matrix pricing for fixed income securities. The Portfolios value
short-term obligations with maturities of 60 days or less at original cost plus
either accrued interest or amortized discount unless the Trustees of the
Portfolio Trust determine that such methods do not approximate fair value.
Generally, trading in foreign securities is substantially completed each
day at various times prior to the close of regular trading on the New York Stock
Exchange. The values of such securities in the Portfolios' portfolios and used
in computing the net asset value of the Funds' shares are determined as of such
times. Foreign currency exchange rates are also generally determined prior to
the close of regular trading on the New York Stock Exchange. Occasionally,
events which affect the values of such securities and such exchange rates may
occur between the times at which they are determined and the close of regular
trading on the New York Stock Exchange and will therefore not be reflected in
the computation of a Fund's net asset value. If events materially affecting the
value of such securities occur during such period, then these securities are
valued at their fair value as determined in good faith in accordance with
procedures approved by the Trustees of the Portfolio Trust. Additional
information concerning the Portfolios' valuation policies is contained in the
Statement of Additional Information.
EXCHANGE OF SHARES
May Fund shares be exchanged for shares of other mutual funds?
Subject to the terms of your Omnibus Account, shares of any Fund may be
exchanged for shares of any other Fund described in this Prospectus on any
Business Day. Please consider the differences in investment objectives and
expenses of a Fund as described in this Prospectus before making an exchange.
<PAGE>
Do sales charges apply to exchanges?
As is the case with initial purchases of Fund shares, exchanges of Fund
shares are made without the imposition of a sales charge.
How may I make an exchange?
Because Fund shares are held for the account of Omnibus Accounts only, all
orders to exchange Fund shares must be made through your Account Administrator.
If the Fund shares you wish to exchange are held for the account of a retirement
plan sponsored by your employer, please consult with your employer for
information about how to exchange Fund shares. If the Fund shares you wish to
exchange are maintained in a self-administered retirement plan, please consult
with your Account Administrator for information about how to exchange Fund
shares.
General Exchange Information
Exchange requests received by the Principal Underwriter or its agent prior
to the close of regular trading of the New York Stock Exchange (currently 4:00
p.m., New York City time) will be effective on that Business Day. 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 Fund accounts that are registered in the same
name, address and, if applicable, taxpayer identification number; and (iii)
unless waived by the Trust, the amount to be exchanged must satisfy the minimum
account size of the Fund to be exchanged into. Exchange requests will not be
processed until payment for the shares of the current Fund has been received by
the Custodian. The exchange privilege may be changed or discontinued and may be
subject to additional limitations upon sixty (60) days' notice to shareholders,
including certain restrictions on purchases by market-timer accounts.
Telephonic Exchanges
Omnibus Accounts are automatically authorized to have telephonic exchange
privileges unless the Account Administrator indicates otherwise on the Account
Application or by writing to the Principal Underwriter. Account Administrators
may exchange shares by calling the Principal Underwriter at (800) 221-4795.
Proper identification will be required for each telephonic exchange. Please see
"Telephone Transactions" below for more information regarding telephonic
transactions.
Written Exchanges
Account Administrators may exchange Fund shares by written order to the
Principal Underwriter, One Financial Center, Boston, Massachusetts 02111. A
written exchange request must (a) state the name of the current Fund, (b) state
the name of the Fund into which the current Fund shares will be exchanged, (c)
state the number of shares or the dollar amount to be exchanged, (d) identify
the shareholder's account numbers in both Funds and (e) be signed by each
registered owner exactly as the shares are registered. Signature(s) must be
guaranteed as listed under "Written Redemption" below.
<PAGE>
REDEMPTION OF SHARES
How may Fund shares be redeemed?
Subject to the restrictions (if any) imposed by your Omnibus Account, you
can arrange to sell or "redeem" some or all of your shares on any Business Day.
All orders to redeem Fund shares must be made through your Account
Administrator. If the Fund shares you wish to redeem are held for the account of
a retirement plan sponsored by your employer, please consult with your employer
for information about how to redeem Fund shares. If the Fund shares you wish to
redeem are maintained in an IRA or other self-administered retirement plan,
please consult with your Account Administrator for information about how to
redeem Fund shares.
Account Administrators may redeem Fund shares by any of the methods
described below at the net asset value per share next determined after receipt
by the Principal Underwriter or its agent of a redemption request in proper
form. Redemptions will not be processed until a completed Share Purchase
Application and payment for the shares to be redeemed have been received.
Telephonic Redemption
Omnibus Accounts are automatically authorized to have telephonic redemption
privileges unless the Account Administrator indicates otherwise on the Account
Application or by writing to the Principal Underwriter. Account Administrators
may redeem shares by calling the Principal Underwriter at (800) 221-4795.
Redemption proceeds will be mailed or wired in accordance with the Account
Administrator's instruction on the account application to a pre-designated
account. Redemption proceeds will normally be paid promptly after receipt of
telephonic instructions, but no later than three Business Days thereafter.
Redemption proceeds will be sent only by check payable to the Omnibus Account of
record at the address of record, unless the Account Administrator 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. Wire charges, if any, will be deducted from redemption
proceeds.
Proper identification will be required for each telephonic redemption.
Written Redemption
Account Administrators may redeem Fund shares by written order to the
Principal Underwriter, Attn: Mutual Fund Department, One Financial Center, 26th
Floor, Boston, Massachusetts 02111. A written redemption request must (a) state
the name of the Fund and the number of shares or the dollar amount to be
redeemed, (b) identify the Omnibus Account's account number with the Fund and
(c) be signed by each registered owner exactly as the shares are registered.
Signature(s) must be guaranteed by a member of either the Securities Transfer
Association's STAMP program or the New York Stock Exchange's Medallion Signature
Program or by any one of the following institutions, provided that such
institution meets credit standards established by Investors Bank and Trust
Company, the 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;
<PAGE>
(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. Redemption proceeds will normally be paid
by check mailed within three Business Days of receipt by the Principal
Underwriter of a written redemption request in proper form.
Telephone Transactions
By maintaining an account that is eligible for telephonic exchange and
redemption privileges, the Account Administrator authorizes the Adviser, the
Principal Underwriter, the Trust and the Custodian to act upon instructions of
any person to redeem and/or exchange shares from the shareholder's account.
Further, the Account Administrator acknowledges on behalf of the Omnibus Account
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 Principal
Underwriter, nor the Trust, nor the Funds, nor the 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. Account Administrators may
experience delays in exercising telephone transaction privileges during periods
of abnormal market activity. Accordingly, during periods of volatile economic
and market conditions, Account Administrators 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
Portfolio'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
withdrawn from the applicable Portfolio for this purpose. 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 if the value of such
shares has decreased to less than $50,000 as a result of redemptions or
transfers. Before doing so, the applicable Fund will notify the Account
Administrator that the value of the shares in the account is less than the
specified minimum and will allow the shareholder 30 days to make an additional
investment in an amount which will increase the value of the account to at least
$50,000. Each Fund may eliminate duplicate mailings of Fund materials to
shareholders that have the same address of record.
<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.
Each Portfolio is a separate investment series of Standish, Ayer & Wood
Master Portfolio, a master trust fund organized under the laws of the State of
New York. Under the terms of the Declaration of Trust establishing the Master
Portfolio Trust, the affairs of the Portfolios are managed under the supervision
of the Trustees of the Portfolio Trust.
A majority of the Trustees who are not "interested persons" (as defined in
the 1940 Act) of the Trust or the Portfolio Trust, as the case may be, have
adopted written procedures reasonably appropriate to deal with potential
conflicts of interest arising from the fact that the same individuals are
trustees of the Trust and of the Portfolio Trust, up to and including creating
separate boards of trustees. See "Management" in the Statement of Additional
Information for more information about the Trustees and officers of the Trust
and the Portfolio Trust.
Investment Adviser of the Portfolios
Standish, Ayer & Wood, Inc., One Financial Center, Boston, Massachusetts
02111, serves as investment adviser to the Equity, Small Cap and Fixed Income
Portfolios pursuant to separate investment advisory agreements with the
Portfolio Trust. Standish is a Massachusetts corporation incorporated in 1933
and is a registered investment adviser under the Investment Advisers Act of
1940. Standish International Management Company, L.P., One Financial Center,
Boston, MA 02111, serves as investment adviser to the Global Fixed Income
Portfolio pursuant to an investment advisory agreement with the Portfolio Trust.
SIMCO is a Delaware limited partnership which was organized in 1991 and is a
registered investment adviser under the Investment Advisers Act of 1940. The
general partner of SIMCO is Standish which holds a 99.98% partnership interest.
The limited partners of SIMCO, who each hold a 0.01% interest, are Walter M.
Cabot, Sr., Senior Adviser and Director of SIMCO and to Standish, D. Barr
Clayson, Chairman of the Board of SIMCO and a Managing Director of Standish, and
Ralph S. Tate, President of SIMCO and Managing Director of Standish. The Adviser
manages the Portfolios' investments and affairs subject to the supervision of
the Trustees of the Portfolio Trust.
The Adviser provides fully discretionary management services and counseling
and advisory services to a broad range of clients throughout the United States
and abroad. As of June 30, 1996, Standish or SIMCO served as the investment
adviser to each of the following fourteen funds in the Standish, Ayer & Wood
family of funds:
<PAGE>
Net Assets
(June 30, 1996)
- --------------------------------------------------------------------------------
Standish Fixed Income Fund $2,330,943,636
Standish Securitized Fund 51,142,760
Standish STAR Fund 274,065,358
Standish International Fixed Income Fund 723,923,893
Standish Global Fixed Income Fund 150,738,298
Standish Equity Fund 97,624,452
Standish Small Capitalization Equity Fund 227,395,024
Standish International Equity Fund 47,319,648
Standish Massachusetts Intermediate Tax
Exempt Bond Fund 33,947,617
Standish Intermediate Tax Exempt
Bond Fund 33,788,093
Standish Fixed Income Fund II Fund 9,223,860
Standish Controlled Maturity Fund 9,633,574
Standish Tax-Sensitive Equity Fund 1,877,394
Standish Small Cap Tax-Sensitive Equity Fund 4,872,798
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 June 30, 1996, the Adviser managed approximately $29 billion in assets.
The Equity Portfolio's portfolio managers are Ralph S. Tate and David C.
Cameron. Mr. Tate and Mr. Cameron have been primarily responsible for the
day-to-day management of the Equity Portfolio's portfolio since January, 1991
(which, prior to May 3, 1996, included the direct management of Standish Equity
Fund's portfolio). During the past five years, Messrs. Tate and Cameron have
each served as a Director and Vice President of Standish. Mr. Tate has also
served as a Managing Director of Standish since 1996.
The Small Cap Portfolio's portfolio manager is Nicholas S. Battelle. Mr.
Battelle has been primarily responsible for the day-to-day management of the
Small Cap Portfolio's portfolio since August, 1990 (which, prior to May 3, 1996,
included the direct management of Standish Small Capitalization Equity Fund's
portfolio). During the past five years, Mr. Battelle has served as a Director
and Vice President of Standish.
The Fixed Income Portfolio's portfolio manager is Caleb F. Aldrich. Mr.
Aldrich has been primarily responsible for the day-to-day management of the
Fixed Income Portfolio's portfolio since January 1, 1993 (which, prior to May 3,
1996, included the direct management of Standish Fixed Income Fund's portfolio).
During the past five years, Mr. Aldrich has served as a Managing Director (since
1996), Director (since 1992) and Vice President of the Adviser.
The Global Fixed Income Portfolio's portfolio manager is Richard S. Wood.
Mr. Wood has been primarily responsible for the day-to-day management of the
Global Fixed Income Portfolio's portfolio since January 3, 1994 (which, prior to
May 3, 1996, included the direct management of Standish Global Fixed Income
Fund's portfolio). During the past five years, Mr. Wood has served as a Managing
Director (since 1996), Vice President and Director of Standish, President of the
Trust and Executive Vice President of SIMCO.
<PAGE>
Subject to the supervision and direction of the Trustees of the Portfolio
Trust, the applicable Adviser manages each Portfolio in accordance with its
stated investment objective and policies, recommends investment decisions for
the Portfolios, places orders to purchase and sell securities on behalf of the
Portfolios and allows the Portfolios to use the name "Standish." For its
advisory services to the Portfolios, the applicable Adviser receives a monthly
fee equal on an annual basis to the following percentages of each Portfolio's
average daily net assets:
Equity Portfolio....................0.50%
Small Cap Portfolio.................0.60%
Fixed Income Portfolio..............0.40% of the first
$250 million;
0.35% of the next
$250 million; and
0.30% of average daily
net asset in excess of
$500 million
Global Fixed Income Portfolio.......0.40%
Administrator of the Funds
Standish serves as administrator to each Fund pursuant to an administration
agreement. As administrator, Standish manages the affairs of the Funds, provides
all necessary office space and services of executive personnel for administering
the affairs of the Funds, and allows the Funds to use the name "Standish." For
these services Standish does not receive any compensation. The Trustees of the
Trust may, however, determine in the future to compensate Standish for its
administrative services.
Service Plans
The Trust, on behalf of each Fund, has adopted a service plan pursuant to
which each Fund pays service fees at an aggregate annual rate of up to 0.25% of
a Fund's average daily net assets. The service fee is payable for the benefit of
the participants in the Omnibus Accounts that are shareholders in the Funds and
is intended to be compensation to Account Administrators for providing personal
services and/or account maintenance services to participants in Omnibus Accounts
who are the beneficial owners of Fund shares. The Trust, on behalf of the
applicable Fund, will make quarterly payments to Account Administrators, for the
benefit of their Omnibus Accounts, based on the average net asset value of the
Fund shares that are attributable to the Omnibus Accounts. Account
Administrators that are fiduciaries or parties in interest to Omnibus Accounts
subject to the Employee Retirement Income Security Act of 1974 should consult
with their legal advisers regarding the receipt of service fees. See the
Statement of Additional Information for further information.
<PAGE>
Expenses
The Portfolios and Funds, as the case may be, are responsible for all of
their respective costs and expenses not expressly stated to be payable by the
Adviser under the Portfolios' investment advisory agreements or by Standish
under the Funds' administration agreement. Among other expenses, the Portfolios
will pay investment advisory fees; bookkeeping, share pricing and custodian fees
and expenses; expenses of notices and reports to interest-holders; and the
expenses of the Portfolios' administrator. The Funds will pay shareholder
servicing fees and expenses; service fees; expenses of prospectuses, statements
of additional information and reports which are furnished to shareholders. Each
Fund and Portfolio will pay legal and auditing fees; registration and reporting
fees and expenses; and Trustees' fees and expenses. The Trust's Principal
Underwriter, Standish Funds Distributor, L.P., bears without subsequent
reimbursement from the Funds the distribution expenses attributable to the
offering and sale of Fund shares. Expenses of the Trust or the Portfolio Trust
which relate to more than one of their respective series are allocated among
such series by Standish in an equitable manner.
Standish has voluntarily agreed to limit each Fund's Total Operating
Expenses (excluding litigation, indemnification, taxes and other extraordinary
expenses) to the following percentages of average daily net assets for the
Funds' fiscal years ending December 31, 1996: Equity Fund--1.25%; Small Cap
Fund--1.40%; Fixed Income Fund--0.85% and Global Fixed Income Fund--1.00%. These
agreements are voluntary and temporary and may be discontinued or revised by
Standish at any time after December 31, 1996.
In addition, Standish has agreed in the administration agreement to limit
each Fund's aggregate annual operating expenses (excluding litigation,
indemnification, taxes and other extraordinary expenses) to the permissible
limit applicable in any state in which shares of the Funds are then qualified
for sale. The Adviser has also agreed in the advisory agreements to limit Small
Cap Portfolio's and Global Fixed Income Portfolio's total annual operating
expenses (excluding brokerage commissions, taxes and extraordinary expenses) to
1.50% and 0.65%, respectively, of each such Portfolio's average daily net
assets. If any expense limit is exceeded, the compensation due Standish or
SIMCO, as the case may be, for such fiscal year shall be proportionately reduced
by the amount of such excess by a reduction or refund thereof at the time such
compensation is payable after the end of each calendar month, subject to
readjustment during such fiscal year.
Portfolio Transactions
Subject to the supervision of the Trustees of the Portfolio Trust, the
Adviser selects the brokers and dealers that execute orders to purchase and sell
portfolio securities for each Portfolio. The Adviser will generally seek to
obtain the best available price and most favorable execution with respect to all
transactions for the Portfolios.
Subject to the consideration of best price and execution and to applicable
regulations, the receipt of research and sales of Fund shares may also be
considered factors in the selection of brokers and dealers that execute orders
to purchase and sell portfolio securities for the Portfolios.
<PAGE>
FEDERAL INCOME TAXES
Each Fund intends to elect and to qualify for taxation as a "regulated
investment company" under the Code and to continue to qualify for such treatment
for each taxable year. If a Fund qualifies for treatment as a regulated
investment company, it will not be subject to federal income tax on income
(including capital gains) distributed to shareholders in the form of dividends
or capital gain distributions in accordance with certain timing requirements of
the Code.
A Fund will be subject to a nondeductible 4% excise tax under the Code to
the extent that it fails to meet certain distribution requirements with respect
to each calendar year. Certain distributions made in order to satisfy the Code's
distribution requirements may be declared by the Funds during October, November
or December of the year but paid during the following January. Such
distributions will be taxable to taxable shareholders as if received on December
31 of the year the distributions are declared, rather than the year in which the
distributions are received.
Shareholders which are taxable entities or persons will be subject to
federal income tax on dividends and capital gain distributions made by the
Funds. These dividends and distributions will be attributable to each Fund's
allocable share of the net income and net long-term and short-term capital gains
of its corresponding Portfolio and will also take into account any expenses
incurred or income earned directly. Dividends paid by the Funds 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. Except
for Global Fixed Income Portfolio, a portion, but usually a small portion, of
such dividends may qualify for the corporate dividends received deduction under
the Code. Dividends paid by the Funds 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 Funds. Capital gain distributions do not
qualify for the corporate dividends received deduction. Dividends and capital
gain distributions may also be subject to state and local or foreign taxes.
Each Portfolio anticipates that it will be subject to foreign withholding
taxes or other foreign taxes on income (possibly including capital gains) on
certain of its foreign investments, which will reduce the yield or return from
those investments. Such taxes may be reduced or eliminated pursuant to an income
tax treaty in some cases.
The Equity, Small Cap and Fixed Income Funds anticipate that they generally
will not qualify to pass their allocable shares of such foreign taxes and any
associated tax deductions or credits through to their shareholders. The Global
Fixed Income Fund may qualify to make an election to pass its allocable share of
qualifying foreign taxes paid by the Global Fixed Income Portfolio through to
Global Fixed Income Fund shareholders, who would then include their share of
such taxes in their gross incomes (in addition to the actual dividends and
capital gain distributions received from the Global Fixed Income Fund) and might
be entitled, subject to certain conditions and limitations under the Code, to a
federal income tax credit or deduction for their share of such taxes. Tax-exempt
shareholders generally will not benefit from this election. If the Global Fixed
<PAGE>
Income Fund makes this election, it will provide necessary information to its
shareholders regarding any foreign taxes passed through to them. If the Global
Fixed Income Fund does not make this election, it may deduct its allocable share
of the foreign taxes paid by the Global Fixed Income Portfolio in computing the
net income the Global Fixed Income Fund must distribute to shareholders to
satisfy the Code's distribution requirements.
Redemptions and repurchases of shares are taxable events on which a
shareholder may recognize a gain or loss. Special rules recharacterize as
long-term any losses on the sale or exchange of Fund shares with a tax holding
period of six months or less, to the extent the shareholder received a capital
gain distribution with respect to such shares.
Individuals and certain other classes of shareholders may be subject to 31%
backup withholding of federal income tax on dividends, capital gain
distributions, and the proceeds of redemptions or repurchases of shares, if they
fail to furnish their correct taxpayer identification number and certain
certifications required by the Internal Revenue Service ("IRS") or if they are
otherwise subject to backup withholding. Individuals, corporations and other
shareholders that are not U.S. persons under the Code are subject to different
tax rules and may be subject to nonresident alien withholding tax at the rate of
30% (or a lower rate provided by an applicable tax treaty) on amounts treated as
ordinary dividends from the Funds and, unless a current IRS Form W-8 or an
acceptable substitute is furnished, to backup withholding on certain payments
from the Fund.
A state income (and possibly local income and/or intangible property) tax
exemption is generally available to the extent, if any, the Funds' distributions
are derived from interest on (or, in the case of intangibles taxes, the value of
its assets is attributable to) investments in certain U.S. Government
obligations, provided in some states that certain thresholds for holdings of
such obligations and/or reporting requirements are satisfied. Shareholders
should consult their tax advisers regarding the applicable requirements in their
particular states, including the effect, if any, of the Funds' indirect
ownership (through the Portfolios) of any such obligations.
After the close of each calendar year, the Funds will send
a notice to shareholders that provides information about the federal tax status
of distributions to shareholders for such calendar year.
THE FUNDS AND THE PORTFOLIOS
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 1940 Act and the Agreement and Declaration of Trust. Fund shares do
not have cumulative voting rights. Fractional shares have proportional voting
<PAGE>
rights and participate in any distributions and dividends. When issued, Fund
shares will be fully paid and nonassessable. Shareholders of the Funds do not
have preemptive or conversion rights. Certificates representing Fund shares will
not be issued.
The Trust has established eighteen series that currently offer their shares
to the public and may establish additional series at any time. Each series is a
separate taxpayer, eligible to qualify as a separate regulated investment
company for federal income tax purposes. The calculation of the net asset value
of a series and the tax consequences of investing in a series will be determined
separately for each series.
The Trust is not required to hold annual meetings of shareholders. Special
meetings of shareholders may be called from time to time for purposes such as
electing or removing Trustees, changing a fundamental policy, or approving an
investment advisory agreement.
If less than two-thirds of the Trustees holding office have been elected by
shareholders, a special meeting of shareholders of the Trust will be called to
elect Trustees. Under the Agreement and Declaration of Trust and the 1940 Act,
the record holders of not less than two-thirds of the outstanding shares of the
Trust may remove a Trustee by votes cast in person or by proxy at a meeting
called for the purpose or by a written declaration filed with each of the
Trust's custodian banks. Except as described above, the Trustees will continue
to hold office and may appoint successor Trustees. Whenever ten or more
shareholders of the Trust who have been such for at least six months, and who
hold in the aggregate shares having a net asset value of at least $25,000 or
which represent at least 1% of the outstanding shares, whichever is less, apply
to the Trustees in writing stating that they wish to communicate with other
shareholders with a view to obtaining signatures to request a meeting, and such
application is accompanied by a form of communication and request which they
wish to transmit, the Trustees shall within five (5) Business Days after receipt
of such application either (1) afford to such applicants access to a list of the
names and addresses of all shareholders as recorded on the books of the Trust;
or (2) inform such applicants as to the approximate number of shareholders of
record and the approximate cost of mailing to them the proposed communication or
form of request.
Each Portfolio is a series of Standish, Ayer & Wood Master Portfolio, an
open-end management investment company. The Portfolio Trust's Declaration of
Trust provides that the Portfolio Trust may establish and designate separate
series of the Portfolio Trust. The Portfolio Trust has established four series
and may establish additional series at any time. The Portfolio Trust's
Declaration of Trust also provides that the Funds and other entities investing
in the Portfolios (e.g., other investment companies, insurance company separate
accounts and common and commingled trust funds) will not be liable for the
obligations of the Portfolios, although they will bear the risk of loss of their
entire respective interests in the Portfolios. However, there is a risk that
interest-holders in the Portfolios may be held personally liable as partners for
the Portfolios' obligations. Because the Portfolio Trust's Declaration of Trust
<PAGE>
disclaims interest-holder liability and provides for indemnification against
such liability, the risk of the Funds incurring financial loss on account of
such liability is limited to circumstances in which both inadequate insurance
existed and the Portfolios themselves were unable to meet their obligations. As
such, it is unlikely that the Funds would experience liability from the
investment structure itself. In any event, shareholders of the Funds will
continue to remain shareholders of a Massachusetts business trust, and the risk
of such a person incurring liability by reason of being a shareholder of the
Funds is remote. The interests in the Portfolio Trust are divided into separate
series, such as the Portfolios. No series of the Portfolio Trust has any
preference over any other series.
Investors in a Portfolio will not be involved in any vote specifically
involving only another series of the Portfolio Trust. Investors of all of the
series of the Portfolio Trust will, however, vote together to elect Trustees of
the Portfolio Trust and for certain other matters affecting the Portfolio Trust.
As provided by the 1940 Act, under certain circumstances, the interest-holders
of one or more series could control the outcome of these votes.
Inquiries by an individual concerning a particular Fund should be made by
contacting his or her Account Administrator. 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.
PRINCIPAL UNDERWRITER
Standish Funds Distributor, L.P., One Financial Center, 26th Floor, Boston,
Massachusetts 02111, serves as the Trust's principal underwriter.
CUSTODIAN, TRANSFER AGENT AND DIVIDEND DISBURSING AGENT
Investors Bank & Trust Company, 89 South Street, Boston, Massachusetts,
serves as each Fund's transfer agent and dividend disbursing agent and as
custodian of all cash and securities of the Funds and the Portfolios.
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P., One Post Office Square, Boston, Massachusetts
02109 and Coopers & Lybrand, P.O. Box 219, Grand Cayman, Cayman Islands, BWI,
serve as independent accountants for the Trust and the Portfolio Trust,
respectively, and will annually audit each Fund's and each Portfolio's
respective financial statements.
<PAGE>
LEGAL COUNSEL
Hale and Dorr, 60 State Street, Boston, Massachusetts 02109, is legal
counsel to the Trust, the Portfolio Trust and
the Adviser and the Adviser's affiliates.
- --------------------------------------------------------------------------------
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.
APPENDIX A
KEY TO MOODY'S RATINGS FOR CORPORATE BONDS AND FOR SOVEREIGN, SUBNATIONAL AND
SOVEREIGN RELATED ISSUERS
Aaa-Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa-Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long term risks appear somewhat larger than in Aaa securities.
A-Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa-Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba-Bonds which are rated Ba are judged to have speculative elements. Their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
<PAGE>
STANDARD & POOR'S RATINGS DEFINITIONS FOR CORPORATE BONDS
AAA-Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA-Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A-Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB-Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB-Debt rated BB is regarded, on balance, as predominantly speculative with
respect to capacity to pay interest and repay principal in accordance with the
terms of the obligation. While such debt will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or major
risk exposures to adverse conditions.
STANDARD & POOR'S CHARACTERISTICS OF SOVEREIGN DEBT OF
FOREIGN COUNTRIES
AAA-Stable, predictable governments with demonstrated track record of
responding flexibly to changing economic and political circumstances
- -Key players in the global trade and financial system
- -Prosperous and resilient economies, high per capita incomes
- -Low fiscal deficits and government debt, low inflation
- -Low external debt
AA-Stable, predictable governments with demonstrated track record of
responding to changing economic and political circumstances -Tightly integrated
into global trade and financial system -Differ from AAAs only to a small degree
because: -Economies are smaller, less prosperous and generally more vulnerable
to adverse external influences (e.g., protection and terms of trade shocks)
- -More variable fiscal deficits, government debt and inflation -Moderate to high
external debt.
A-Politics evolving toward more open, predictable forms of governance in
environment of rapid economic and social change -Established trend of
integration into global trade and financial system -Economies are smaller, less
prosperous and generally more vulnerable to adverse external influences (e.g.,
protection and terms of trade shocks), but -Usually rapid growth in output and
per capita incomes-Manageable through variable fiscal deficits, government debt
and inflation -Usually low but variable debt.
<PAGE>
BB-Political factors a source of major uncertainty, either because system
is in transition or due to external threats, or both, often in environment of
rapid economic and social change -Integration into global trade and financial
system growing but untested -Low to moderate income developing economies but
variable performance and quite vulnerable to adverse external influences
- -Variable to high fiscal deficits, government debt and inflation -Very high and
variable debt, often graduates of Brady plan but track record not well
established.
DESCRIPTION OF DUFF & PHELPS RATINGS FOR CORPORATE BONDS AND FOR SOVEREIGN,
SUBNATIONAL AND SOVEREIGN RELATED ISSUERS
AAA-Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA-High credit quality. Protection factors are strong. Risk is modest but
may vary slightly from time to time because of economic conditions.
A-Protection factors are average but adequate. However, risk factors are
more variable and greater in periods of economic stress.
BBB-Below average protection factors but still considered sufficient for
prudent investment. Considerable variability in risk during economic cycles.
BB-Below investment grade but deemed likely to meet obligations when due.
Present or prospective financial protection factors fluctuate according to
industry conditions or company fortunes. Overall quality may move up or down
frequently within this category.
<PAGE>
IBAC LONG TERM RATINGS FOR CORPORATE BONDS AND FOR SOVEREIGN, SUBNATIONAL AND
SOVEREIGN RELATED ISSUES
AAA-Obligations for which there is the lowest expectation of investment
risk. Capacity for timely repayment of principal and interest is substantial,
such that adverse changes in business, economic or financial conditions are
unlikely to increase investment risk substantially.
AA-Obligations for which there is a very low expectation of investment
risk. Capacity for timely repayment of principal and interest is substantial.
Adverse changes in business, economic or financial conditions may increase
investment risk, albeit not very significantly.
A-Obligations for which there is a low expectation of investment risk.
Capacity for timely repayment of principal and interest is strong, although
adverse changes in business, economic or financial conditions may lead to
increased investment risk.
BBB-Obligations for which there is currently a low expectation of
investment risk. Capacity for timely repayment of principal and interest is
adequate, although adverse changes in business, economic or financial conditions
are more likely to lead to increased investment risk than for obligations in
other categories.
BB-Obligations for which there is a possibility of investment risk
developing. Capacity for timely repayment of principal and interest exists, but
is susceptible over time to adverse changes in business, economic or financial
conditions.
* * *
In the case of sovereign, subnational and sovereign related issuers, the
Portfolios used the foreign currency or domestic (local) currency rating
depending upon how the portfolio security is denominated. In the case where the
Portfolio holds a security denominated in a domestic (local) currency and one of
the rating services does not provide a domestic (local) currency rating for the
issuer, the Portfolio will use the foreign currency rating for the issuer; in
the case where a Portfolio holds a security denominated in a foreign currency
and one of the rating services does not provide a foreign currency rating for
the issuer, the Portfolio will treat the security as being unrated.
<PAGE>
Investment Adviser
(Equity, Small Cap and Fixed Income Portfolios)
Standish, Ayer & Wood, Inc.
One Financial Center
Boston, Massachusetts 02111
Investment Adviser
(Global Fixed Income Portfolio)
Standish International Management Company, L.P.
One Financial Center
Boston, Massachusetts 02111
Custodian
Investors Bank & Trust Company
89 South Street
Boston, Massachusetts 02110
Principal Underwriter
Standish Funds Distributors, L.P.
One Financial Center
Boston, Massachusetts 02111
Independent Accountants
Coopers & Lybrand, L.L.P.
One Post Office Square
Boston, Massachusetts 02109
Legal Counsel
Hale and Dorr
60 State Street
Boston, Massachusetts 02109
STANDISH EQUITY ASSET FUND
STANDISH SMALL CAPITALIZATION
EQUITY ASSET FUND
STANDISH FIXED INCOME ASSET FUND
STANDISH GLOBAL FIXED INCOME ASSET FUND
