As filed with the Securities and Exchange Commission on May 1, 1996
Registration Nos. 33-8214
811-4813
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /X/
Pre-Effective Amendment No. / /
Post-Effective Amendment No. 75 /X/
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 /X/
Amendment No. 78 /X/
(Check appropriate box or boxes.)
---------------
Standish, Ayer & Wood Investment Trust
(Exact Name of Registrant as Specified in Charter)
One Financial Center, Boston, Massachusetts 02111
(Address of Principal Executive Offices)
Registrant's Telephone Number, including Area Code: (617) 375-1760
ERNEST V. KLEIN, Esq.
Hale and Dorr
60 State Street
Boston, Massachusetts 02109
(Name and Address of Agent for Service)
It is proposed that this filing will become effective:
/ / Immediately upon filing pursuant to Rule 485(b)
/X/ On May 1, 1996 pursuant to Rule 485(b)
/ / 60 days after filing pursuant to Rule 485(a)(1)
/ / 0n May 1, 1996 pursuant to Rule 485(a)(1)
/ / 75 days after filing pursuant to Rule 485(a)(2)
/ / 0n (date) pursuant to Rule 485(a)(2)
The Registrant has registered an indefinite number of shares under the
Securities Act of 1933, as amended, pursuant to Rule 24f-2 under the Investment
Company Act of 1940, as amended. The Rule 24f-2 Notice for the fiscal year ended
December 31, 1995 was filed on or about February 27, 1996.
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STANDISH, AYER & WOOD INVESTMENT TRUST*
Standish Controlled Maturity Fund
Standish Fixed Income Fund II
Standish International Fixed Income Fund
Standish Massachusetts Intermediate Tax Exempt Bond Fund
Standish Securitized Fund
Standish Short-Term Asset Reserve Fund
Cross-Reference Sheet Pursuant to Rule 495(a)
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Part A Prospectus
Form Item Cross-Reference
- - --------- ---------------
Item 1. Cover Page Cover Page
Item 2. Synopsis "Expense Information"
Item 3. Condensed Financial "Financial Highlights"
Information
Item 4. General Description Cover Page, "The Fund
of Registrant and Its Shares" and "Investment
Objective and Policies"
Item 5. Management of the Fund "Management" and "Custodian,
Transfer Agent and Dividend Disbursing Agent"
Item 6. Capital Stock and "The Fund and Its Shares",
Other Securities "Purchase of Shares",
"Redemption of Shares", "Dividends and Distributions"
and "Federal Income Taxes"
Item 7. Purchase of Securities Cover Page and "Purchase of
Being Offered Shares"
Item 8. Redemption or "Redemption of Shares"
Repurchase
Item 9. Pending Legal Not Applicable
Proceedings
- - -------------
* This Post-Effective Amendment to the Registrant's Registration Statement is
being filed with respect to the series of the Registrant set forth above and
does not affect the Prospectuses and Statements of Additional Information of any
additional series of the Registrant.
<PAGE>
Statement of Additional
Part B Information Cross-
Form Item Reference
--------- ---------
Item 10. Cover Page Cover Page
Item 11. Table of Contents "Contents"
Item 12. General Information
and History Not Applicable
Item 13. Investment Objectives "Investment Objective
and Policies and Policies" and "Investment
Restrictions"
Item 14. Management of the Fund "Management"
Item 15. Control Persons and "Management"
Principal Holders
of Securities
Item 16. Investment Advisory and "Management"
Other Services
Item 17. Brokerage Allocation "Portfolio Transactions"
Item 18. Capital Stock and "The Fund and Its Shares"
Other Securities
Item 19. Purchase, Redemption "Redemption of Shares" and
and Pricing of "Determination of Net Asset
Securities Being Value"
Offered
Item 20. Tax Status "Taxation"
Item 21. Underwriters Not Applicable
Item 22. Calculation of "Calculation of Performance
Performance Data Data"
Item 23. Financial Statements "Experts and Financial Statements"
</TABLE>
<PAGE>
Prospectus dated May 1, 1996
PROSPECTUS
STANDISH CONTROLLED MATURITY FUND
One Financial Center
Boston, Massachusetts 02111
(800) 221-4795
Standish Controlled Maturity Fund (the "Fund") is one fund in the Standish,
Ayer & Wood family of funds. The Fund is organized as a separate diversified
investment series of Standish, Ayer & Wood Investment Trust (the "Trust"), an
open-end management investment company. The Fund is designed primarily, but not
exclusively, for tax-exempt institutional investors, such as pension and
profit-sharing plans, foundations and endowments.
The Fund's investment objective is to maximize total return, consistent
with preserving principal and liquidity. As a component of this objective, the
Fund seeks a relatively high level of current income. The Fund seeks to achieve
its investment objective primarily through investing in an actively managed
portfolio of investment grade fixed-income securities. Under normal market
conditions, the Fund maintains an average dollar-weighted effective portfolio
maturity not exceeding five years. Standish, Ayer & Wood, Inc., Boston,
Massachusetts, is the Fund's investment adviser (the "Adviser").
Investors may purchase shares of the Fund from the Trust's principal
underwriter, Standish Fund Distributors, L.P. (the "Principal Underwriter"), at
the address and phone number listed above without a sales commission or other
transaction charges. Unless waived by the Fund, the minimum initial investment
is $100,000. Additional investments may be made in amounts of at least $5,000.
This Prospectus is intended to set forth concisely the information about
the Fund and the Trust that a prospective investor should know before investing.
Investors are encouraged to read this Prospectus and retain it for future
reference. Additional information about the Fund and the Principal Underwriter
is contained in a Statement of Additional Information which has been filed with
the Securities and Exchange Commission (the "SEC") and is available upon request
and without charge by calling or writing to the Principal Underwriter at the
telephone number or address listed above. The Statement of Additional
Information bears the same date as this Prospectus and is incorporated by
reference into this Prospectus.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK OR OTHER INSURED DEPOSITORY INSTITUTION, AND ARE NOT
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD
OR ANY OTHER GOVERNMENT AGENCY. AN INVESTMENT IN SHARES OF THE FUND INVOLVES
INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
CONTENTS
Expense Information...........................................2
Financial Highlights..........................................3
Investment Objective and Policies.............................4
Risk Factors and Suitability..................................7
Calculation of Performance Data...............................8
Dividends and Distributions...................................8
Purchase of Shares............................................8
Exchange of Shares............................................9
Redemption of Shares..........................................9
Management...................................................10
Federal Income Taxes.........................................11
The Fund and Its Shares......................................12
Custodian, Transfer Agent and Dividend-Disbursing Agent......13
Independent Accountants......................................13
Legal Counsel................................................13
Tax Certification Instructions...............................13
1
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EXPENSE INFORMATION
Shareholder Transaction Expenses
Maximum Sales Load Imposed on Purchases None
Maximum Sales Load Imposed on Reinvested Dividends None
Deferred Sales Load None
Redemption Fees None
Exchange Fee None
Annual Fund Operating Expenses (as a percentage of average net assets)
Management Fees (after expense limitation) 0.00%*
12b-1 Fees None
Other Expenses (after expense limitation) 0.45%*
Total Fund Operating Expenses (after expense limitation) 0.45%*
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Example: 1 year 3 years
- - -----------------------------------------------------------------------------------------------
You would pay the following expenses on a $1,000 investment,
assuming (1) 5% annual return and (2) redemption at the end
of each time period: $5 $14
</TABLE>
The purpose of the above table is to assist investors in understanding the
various costs and expenses of the Fund that an investor in the Fund will bear
directly or indirectly. See "Management-Investment Adviser" and
"Management-Expenses." The figures shown in the caption "Other Expenses," which
includes, among other things, custodian and transfer agent fees, registration
costs and payments for insurance and audit and legal services, and in the
hypothetical example are based on estimates of the Fund's expenses for its first
full fiscal year ending December 31, 1996.
* The Adviser has voluntarily agreed to limit Total Fund Operating Expenses
of the Fund (excluding litigation, indemnification and other extraordinary
expenses) to 0.45% of the Fund's average daily net assets. In the absence of
such agreement, Management Fees, Other Expenses and Total Fund Operating
Expenses are estimated to be approximately 0.35%, 2.16% and 2.51%, respectively,
of the Fund's average daily net assets. This agreement is voluntary and
temporary and may be discontinued or revised by the Adviser at any time.
THE INFORMATION IN THE TABLE AND HYPOTHETICAL EXAMPLE ABOVE SHOULD NOT BE
CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY
BE GREATER OR LESS THAN THOSE SHOWN. MOREOVER, WHILE THE EXAMPLE ASSUMES A 5%
ANNUAL RETURN, THE FUND'S ACTUAL PERFORMANCE WILL VARY AND MAY RESULT IN AN
ACTUAL RETURN GREATER OR LESS THAN 5%.
2
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FINANCIAL HIGHLIGHTS
The financial highlights for the period ended December 31, 1995 have been
audited by Coopers & Lybrand L.L. P., independent accountants, whose report,
together with the Financial Statements of the Fund, is incorporated into the
Statement of Additional Information.
For the Period
July 3, 1995
(start of business)
to December 31, 1995
----------------------
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Net asset value - beginning of period $20.00
----------------------
Income from investment operations
Net investment income $ 0.57
Net realized and unrealized gain (loss) 0.24
----------------------
Total from investment operations $ 0.81
----------------------
Less distributions declared to shareholders
From net investment income ($0.57)
----------------------
Total distributions declared to shareholders ($0.57)
----------------------
Net asset value - end of period $ 20.24
======================
Total return 4.20% x
Net assets at end of period (000 omitted) $8,881
Ratios (to average daily net assets)/Supplemental Data
Expenses * 0.40% y
Net investment income * 6.29% y
Portfolio turnover 127% z
* The investment adviser voluntarily waived its investment advisory fee and
reimbursed the Fund for a portion of its operating expenses. Had these
actions not been taken, the net investment income per share and the ratios
would have been:
Net investment income per share $0.38
Ratios (to average daily net assets):
Expenses 2.51% y
Net investment income 4.18% y
x The total return for the period is not annualized.
y Computed on an annualized basis.
z The turnover ratio for the period is not annualized.
</TABLE>
Further information about the performance of the Fund is contained in the
Fund's Annual Report, which may be obtained from the Principal Underwriter
without charge.
3
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to maximize total return, consistent
with preserving principal and liquidity. As a component of this objective, the
Fund seeks a relatively high level of current income. The Fund seeks to achieve
its investment objective primarily through investing in an actively managed
portfolio of investment grade fixed-income securities. Under normal market
conditions, the Fund maintains an average dollar-weighted effective portfolio
maturity not exceeding five years. Because of the uncertainty inherent in all
investments, no assurance can be given that the Fund will achieve its investment
objective. The Fund's investment policies are described further in the Statement
of Additional Information.
The Fund may invest in a broad range of fixed-income securities, including
bonds, notes, mortgage-backed and asset-backed securities, preferred stock and
convertible debt securities issued by U.S. corporations or other entities or by
the U.S. Government or its agencies, authorities, instrumentalities or sponsored
enterprises. Under normal market conditions, at least 65% of the Fund's total
assets will be invested in such securities. The Fund may purchase securities
that pay interest on a fixed, variable, floating (including inverse floating),
contingent, in-kind or deferred basis.
Although the Fund is intended primarily for tax-exempt institutional
investors and will be managed without regard to potential tax considerations,
the Fund may invest up to 5% of its net assets in tax-exempt securities, such as
state and municipal bonds, if the Adviser believes they will provide competitive
returns. The Fund's distributions of the interest it earns from such securities
will not be tax-exempt. The Fund may adopt a temporary defensive position during
adverse market conditions by investing without limit in high quality money
market instruments, including short-term U.S. Government securities, negotiable
certificates of deposit, non-negotiable fixed time deposits, bankers'
acceptances, floating-rate notes and repurchase agreements.
The Fund invests exclusively in investment grade fixed-income securities,
i.e., securities which, at the date of investment, are rated within the four
highest grades as determined by Moody's Investors Service, Inc. ("Moody's")
(Aaa, Aa, A or Baa) or by Standard & Poor's Ratings Group ("Standard & Poor's"),
Duff & Phelps, Inc. ("Duff") or Fitch Investors Service, Inc. ("Fitch") (AAA,
AA, A or BBB) or their respective equivalent ratings or, if not rated,
determined by the Adviser to be of equivalent credit quality to securities so
rated. Securities rated Baa by Moody's or BBB by Standard & Poor's, Duff or
Fitch and unrated securities of equivalent credit quality are considered medium
grade obligations with speculative characteristics. Adverse changes in economic
conditions or other circumstances are more likely to weaken the issuer's
capacity to pay interest and repay principal on these securities than is the
case for issuers of higher rated securities. It is anticipated that the average
dollar-weighted rated credit quality of the securities in the Fund's portfolio
will be Aa or AA according to Moody's and Standard & Poor's, Duff or Fitch
ratings, respectively, or comparable credit quality as determined by the
Adviser. In the case of a security that is rated differently by two or more
rating services, the higher rating is used in computing the Fund's average
dollar-weighted credit quality. In the event the rating on a security held in
the Fund's portfolio is downgraded below investment grade by a rating service,
such action will be considered by the Adviser in its evaluation of the overall
investment merits of that security, but will not necessarily result in the sale
of the security.
4
<PAGE>
In order to achieve its investment objective, the Fund seeks to add value
by selecting undervalued investments, thus taking advantage of lower prices and
higher yields, rather than by varying the average maturity of its portfolio to
reflect interest rate forecasts. Under normal market conditions, the maximum
average-dollar weighted effective maturity of the Fund's portfolio will not
exceed five years. Although there is no limit on the maturity of any individual
security purchased by the Fund, the Fund will normally invest in securities with
final maturities, average lives or interest rate reset frequencies of ten years
or less.
Corporate Debt Obligations
The Fund may invest in corporate debt obligations, including obligations of
industrial, utility and financial issuers. In addition to obligations of
corporations, corporate debt obligations include bank obligations and zero
coupon securities, issued by financial institutions and corporations. The Fund's
investments in corporate debt securities will be rated, at the date of
investment, investment grade. Corporate debt obligations are subject to the risk
of an issuer's inability to meet principal and interest payments on the
obligations and may also be subject to price volatility due to such factors as
market interest rates, market perception of the creditworthiness of the issuer
and general market liquidity. See "Risk Factors and Suitability" for a further
discussion of the risks associated with investments in corporate debt
securities.
U.S. Government Securities
The Fund may invest in all types of U.S. Government securities, including
obligations issued or guaranteed by the U.S. Government or its agencies,
authorities, instrumentalities or sponsored enterprises. Some U.S. Government
securities, such as Treasury bills, notes and bonds, which differ only in their
interest rates, maturities and times of issuance, are supported by the full
faith and credit of the United States of America. Others, such as obligations
issued or guaranteed by U.S. Government agencies, authorities, instrumentalities
or sponsored enterprises are supported either by (a) the full faith and credit
of the U.S. Government (such as securities of the Small Business
Administration), (b) the right of the issuer to borrow from the U.S. Treasury
(such as securities of the Federal Home Loan Banks), (c) the discretionary
authority of the U.S. Government to purchase the agency's obligations (such as
securities of the Federal National Mortgage Association), or (d) only the credit
of the issuer.
The Fund may also invest in separately traded principal and interest
components of securities guaranteed or issued by the U.S. Government or its
agencies, instrumentalities or sponsored enterprises if such components are
traded independently under the Separate Trading of Registered Interest and
Principal of Securities program ("STRIPS") or any similar program sponsored by
the U.S. Government. The Fund may invest in U.S.
Government securities which are zero coupon or deferred interest securities.
5
<PAGE>
Asset-Backed Securities
The Fund may invest in asset-backed securities, which represent
participations in, or are secured by and payable from, assets such as motor
vehicle installment sale contracts, installment loan contracts, leases of
various types of real and personal property, receivables from revolving credit
(credit card) agreements and other categories of receivables. Asset-backed
securities may also be collateralized by a portfolio of U.S. Government
securities, but are not direct obligations of the U.S. Government, its agencies
or instrumentalities. Payments or distributions of principal and interest on
asset-backed securities may be guaranteed up to certain amounts and for a
certain time period by a letter of credit or a pool insurance policy issued by a
financial institution, or other credit enhancements may be present; however,
privately issued obligations collateralized by a portfolio of privately issued
asset-backed securities do not involve any government-related guaranty or
insurance.
Asset-backed securities can be structured in several ways, the most common
of which has been a "pass-through" model. A certificate representing a
fractional undivided beneficial interest in a trust or corporation created
solely for the purpose of holding the trust's assets is issued to the
asset-backed security holder. The certificate entitles the holder thereof to the
right to receive a percentage of the interest and principal payments on the
terms and according to the schedule established by the trust instrument. A
servicing agent collects amounts due on the underlying assets for the account of
the trust, which distributes such amounts to the security holders.
As an alternative structure, the issuer of asset-backed securities
effectively transforms an asset-backed pool into obligations consisting of
several different maturities. Instead of holding an undivided interest in trust
assets, the purchaser of the asset-backed security holds a bond collateralized
by the underlying assets. The bonds are serviced by cash flows from the
underlying assets, a specified fraction of all cash received (less a fixed
servicing fee) being allocated first to pay interest and then to retire
principal.
Asset-backed securities present certain risks similar to (as discussed
below) and in addition to those presented by mortgage-backed securities.
Asset-backed securities generally do not have the benefit of a security interest
in collateral that is comparable to mortgage assets and there is the possibility
that, in some cases, recoveries on repossessed collateral may not be available
to support payments on these securities. Asset-backed securities, however, are
not generally subject to the risks associated with prepayments of principal on
the underlying loans.
Mortgage-Backed Securities
The Fund may invest in mortgage-backed securities. Mortgage-backed
securities represent direct or indirect participations in or obligations
collateralized by and payable from mortgage loans secured by real property. Each
mortgage pool underlying mortgage-backed securities will consist of mortgage
loans evidenced by promissory notes secured by first mortgages or first deeds of
trust or other similar security instruments creating a first lien on real
property. An investment in mortgage-backed securities involves certain risks.
Mortgage-backed securities are often subject to more rapid repayment than their
stated maturity dates would indicate as a result of the pass-through or
prepayments of principal on the underlying loans which may increase the
volatility of such investments relative to similarly rated debt securities.
During periods of declining interest rates, prepayment of loans underlying
mortgage-backed securities can be expected to accelerate and thus impair the
Fund's ability to reinvest the returns of principal at comparable yields. During
periods of rising interest rates, reduced prepayment rates may extend the
average life of mortgage-backed securities and increase the Fund's exposure to
rising interest rates. Accordingly, the market values of such securities will
vary with changes in market interest rates generally and in yield differentials
among various kinds of U.S. Government securities and other mortgage-backed
securities.
6
<PAGE>
Mortgage Pass-Through Securities
The Fund may invest in mortgage pass-through securities, which are fixed or
adjustable rate mortgage-backed securities that provide for monthly payments
that are a "pass-through" of the monthly interest and principal payments
(including any prepayments) made by the individual borrowers on the pooled
mortgage loans, net of any fees or other amounts paid to any guarantor,
administrator and/or servicer of the underlying mortgage loans.
Multiple Class Mortgage-Backed Securities and Collateralized Mortgage
Obligations
The Fund may invest in collateralized mortgage obligations ("CMOs"), which
are multiple class mortgage-backed securities. CMOs provide an investor with a
specified interest in the cash flow from a pool of underlying mortgages or of
other mortgage-backed securities. CMOs are issued in multiple classes, each with
a specified fixed or adjustable interest rate and a final distribution date. In
most cases, payments of principal are applied to the CMO classes in the order of
their respective stated maturities, so that no principal payments will be made
on a CMO class until all other classes having an earlier stated maturity date
are paid in full. Sometimes, however, CMO classes are "parallel pay" (i.e.,
payments of principal are made to two or more classes concurrently).
Eurodollar and Yankee Dollar Investments
The Fund may invest in Eurodollar and Yankee Dollar instruments. Eurodollar
instruments are bonds that pay interest and principal in U.S. dollars held in
banks outside the United States, primarily in Europe. Eurodollar instruments are
usually issued on behalf of multinational companies and foreign governments by
large underwriting groups composed of banks and issuing houses from many
countries. Yankee dollar instruments are U.S. dollar denominated bonds typically
issued in the U.S. by, among others, foreign governments and their agencies and
foreign banks and corporations. These investments involve risks that are
different from investments in securities issued by U.S. issuers, including
potential unfavorable political and economic developments, different tax
provisions, seizure of foreign deposits, currency controls, interest limitations
or other governmental restrictions which might affect payment of principal or
interest.
7
<PAGE>
Strategic Transactions
The Fund may, but is not required to, utilize various other investment
strategies as described below to hedge various market risks (such as interest
rates and broad or specific fixed-income market movements), to manage the
effective maturity or duration of fixed-income securities, or to enhance
potential gain. Such strategies are generally accepted as part of modern
portfolio management and are regularly utilized by many mutual funds and other
institutional investors. Techniques and instruments used by the Fund may change
over time as new instruments and strategies are developed or regulatory changes
occur.
In the course of pursuing its investment objective, the Fund may purchase
and sell (write) exchange-listed and over-the-counter put and call options on
securities, indices and other financial instruments; purchase and sell financial
futures contracts and options thereon; and enter into various interest rate
transactions such as swaps, caps, floors or collars (collectively, all the above
are called "Strategic Transactions"). Strategic Transactions may be used in an
attempt to protect against possible changes in the market value of securities
held in or to be purchased for the Fund's portfolio resulting from securities
markets or interest rate fluctuations, to protect the Fund's unrealized gains in
the value of its portfolio securities, to facilitate the sale of such securities
for investment purposes, to manage the effective maturity or duration of the
Fund's portfolio, or to establish a position in the derivatives markets as a
temporary substitute for purchasing or selling particular securities. In
addition to the hedging transactions referred to in the preceding sentence,
Strategic Transactions may also be used to enhance potential gain in
circumstances where hedging is not involved although the Fund will attempt to
limit its net loss exposure resulting from Strategic Transactions entered into
for such purposes to not more than 1% of the Fund's net assets at any one time
and, to the extent necessary, the Fund will close out transactions in order to
comply with this limitation. (Transactions such as writing covered call options
are considered to involve hedging for the purposes of this limitation.) In
calculating the Fund's net loss exposure from such Strategic Transactions, an
unrealized gain from a particular Strategic Transaction position would be netted
against an unrealized loss from a related Strategic Transaction position. For
example, if the Adviser believes that short-term interest rates as indicated in
the forward yield curve are too high, the Fund may take a short position in a
near-term Eurodollar futures contract and a long position in a longer-dated
Eurodollar futures contract. Under such circumstances, any unrealized loss in
the near-term Eurodollar futures position would be netted against any unrealized
gain in the longer-dated Eurodollar futures position (and vice versa) for
purposes of calculating the Fund's net loss exposure. The ability of the Fund to
utilize these Strategic Transactions successfully will depend on the Adviser's
ability to predict pertinent market and interest rate movements, which cannot be
assured. The Fund will comply with applicable regulatory requirements when
implementing these strategies, techniques and instruments. The Fund's activities
involving Strategic Transactions may be limited by the requirements of
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"), for
qualification as a regulated investment company.
8
<PAGE>
Strategic Transactions have risks associated with them including possible
default by the other party to the transaction, illiquidity and, to the extent
the Adviser's view as to certain market or interest rate movements is incorrect,
the risk that the use of such Strategic Transactions could result in losses
greater than if they had not been used. The writing of put and call options may
result in losses to the Fund, force the purchase or sale, respectively, of
portfolio securities at inopportune times or for prices higher than (in the case
of purchases due to the exercise of put options) or lower than (in the case of
sales due to the exercise of call options) current market values, limit the
amount of appreciation the Fund can realize on its investments or cause the Fund
to hold a security it might otherwise sell. The use of options and futures
transactions entails certain other risks. In particular, the variable degree of
correlation between price movements of futures contracts and price movements in
the related portfolio position of the Fund creates the possibility that losses
on the hedging instrument may be greater than gains in the value of the Fund's
position. The writing of options could significantly increase the Fund's
portfolio turnover rate and, therefore, associated brokerage commissions or
spreads. In addition, futures and options markets may not be liquid in all
circumstances and certain over-the-counter options may have no markets. As a
result, in certain markets, the Fund might not be able to close out a
transaction without incurring substantial losses, if at all. Although the use of
futures and options transactions for hedging should tend to minimize the risk of
loss due to a decline in the value of the hedged position, at the same time, in
certain circumstances, they tend to limit any potential gain which might result
from an increase in value of such position. The loss incurred by the Fund in
writing options on futures and entering into futures transactions is potentially
unlimited; however, as described above, the Fund will attempt to limit its net
loss exposure resulting from Strategic Transactions entered into for non-hedging
purposes to not more than 1% of its net assets at any one time. Futures markets
are highly volatile and the use of futures may increase the volatility of the
Fund's net asset value. Finally, entering into futures contracts would create a
greater ongoing potential financial risk than would purchases of options where
the exposure is limited to the cost of the initial premium. Losses resulting
from the use of Strategic Transactions would reduce net asset value and the net
result may be less favorable than if the Strategic Transactions had not been
utilized. See the Statement of Additional Information for further information
regarding the Fund's use of Strategic Transactions.
When-Issued Securities and "Delayed Delivery" Securities
The Fund may commit up to 15% of its net assets to purchase securities on a
"when-issued" or "delayed delivery" basis. Although the Fund would generally
purchase securities on a when-issued or delayed delivery basis with the
intention of actually acquiring the securities, the Fund may dispose of a
when-issued or delayed delivery security prior to settlement if the Adviser
deems it appropriate to do so. The payment obligation and the interest rate on
these securities will be fixed at the time the Fund enters into the commitment,
but no income will accrue to the Fund until they are delivered and paid for.
Unless the Fund has entered into an offsetting agreement to sell the securities,
cash or liquid, high grade debt securities equal to the amount of the Fund's
commitment will be segregated and maintained with the custodian for the Fund to
secure the Fund's obligation and in order to partially offset the leverage
inherent in these securities. The market value of the securities when they are
delivered may be less than the amount paid by the Fund.
9
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Repurchase Agreements
The Fund may invest up to 25% of its net assets in repurchase agreements
under normal circumstances. Repurchase agreements acquired by the Fund will
always be fully collateralized as to principal and interest by money market
instruments and will be entered into only with commercial banks, brokers and
dealers considered creditworthy by the Adviser. If the other party or "seller"
of a repurchase agreement defaults, the Fund might suffer a loss to the extent
that the proceeds from the sale of the underlying securities and other
collateral held by the Fund in connection with the related repurchase agreement
are less than the repurchase price. In addition, in the event of bankruptcy of
the seller or failure of the seller to repurchase the securities as agreed, the
Fund could suffer losses, including loss of interest on or principal of the
security and costs associated with delay and enforcement of the repurchase
agreement.
Forward Roll Transactions
In order to enhance current income, the Fund may enter into forward roll
transactions with respect to mortgage-backed securities to the extent of 10% of
its net assets. In a forward roll transaction, the Fund sells a mortgage-backed
security to a financial institution, such as a bank or broker-dealer, and
simultaneously agrees to repurchase a similar security from the institution at a
later date at an agreed-upon price. The mortgage-backed securities that are
repurchased will bear the same interest rate as those sold, but generally will
be collateralized by different pools of mortgages with different prepayment
histories than those sold. During the period between the sale and repurchase,
the Fund will not be entitled to receive interest and principal payments on the
securities sold. Proceeds of the sale will be invested in short-term
instruments, such as repurchase agreements or other short-term securities, and
the income from these investments, together with any additional fee income
received on the sale and the amount gained by repurchasing the securities in the
future at a lower purchase price, will generate income and gain for the Fund
which is intended to exceed the yield on the securities sold. Forward roll
transactions involve the risk that the market value of the securities sold by
the Fund may decline below the repurchase price of those securities. At the time
the Fund enters into a forward roll transaction, it will place in a segregated
custodial account cash or liquid, high grade debt securities having a value
equal to the repurchase price (including accrued interest) and will subsequently
monitor the account to insure that the equivalent value is maintained.
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Illiquid and Restricted Securities
The Fund may not invest more than 15% of its total assets in securities
that are subject to restrictions on resale ("restricted securities") under the
Securities Act of 1933, as amended ("1933 Act"), including securities eligible
for resale in reliance on Rule 144A under the 1933 Act. In addition, the Fund
will not invest more than 15% of its net assets in illiquid investments, which
include securities that are not readily marketable, repurchase agreements
maturing in more than seven days, time deposits with a notice or demand period
of more than seven days, swap transactions, certain over-the-counter options,
and restricted securities, unless it is determined, based upon continuing review
of the trading markets for the specific restricted security, that such
restricted security is eligible for resale under Rule 144A and is liquid. The
Board of Trustees has adopted guidelines and delegated to the Adviser the daily
function of determining and monitoring the liquidity of restricted securities.
The Board of Trustees, however, retains oversight focusing on factors such as
valuation, liquidity and availability of information and is ultimately
responsible for such determinations. Investing in restricted securities eligible
for resale pursuant to Rule 144A could have the effect of increasing the level
of illiquidity in the Fund to the extent that qualified institutional buyers
become for a time uninterested in purchasing these restricted securities. The
purchase price and subsequent valuation of restricted and illiquid securities
normally reflect a discount, which may be significant, from the market price of
comparable securities for which a liquid market exists.
Portfolio Turnover
It is expected that the portfolio turnover rate of the Fund will not exceed
200% in the coming year. A rate of turnover of 100% would occur if the value of
the lesser of purchases and sales of portfolio securities for a particular year
equaled the average monthly value of portfolio securities owned during the year
(excluding short-term securities). A high rate of portfolio turnover (100% or
more) involves a correspondingly greater amount of brokerage commissions and
other costs which must be borne directly by the Fund and thus indirectly by its
shareholders. It may also result in the realization of larger amounts of net
short-term capital gains, distributions from which are taxable to shareholders
as ordinary income and may, under certain circumstances, make it more difficult
for the Fund to qualify as a regulated investment company under the Code.
Investment Restrictions
The foregoing investment policies, including the Fund's investment
objective, are non-fundamental policies which may be changed by the Trust's
Board of Trustees without the approval of shareholders. If there is a change in
the Fund's investment objective, shareholders should consider whether the Fund
remains an appropriate investment in light of their then current financial
positions and needs. The Fund has adopted certain fundamental policies which may
not be changed without the approval of the Fund's shareholders. See "Investment
Restrictions" in the Statement of Additional Information.
If any percentage restriction described above is adhered to at the time of
investment, a subsequent increase or decrease in the percentage resulting from a
change in the value of the Fund's assets will not constitute a violation of the
restriction.
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RISK FACTORS AND SUITABILITY
The Fund is designed primarily for tax-exempt institutional investors such
as pension or profit-sharing plans, foundations and endowments which seek to
maximize total return and, secondarily, seek a relatively high level of current
income, consistent with preserving principal and liquidity and whose
beneficiaries are in a position to benefit from the tax-deferred reinvestment of
the quarterly income dividends and any capital gains distributions paid by the
Fund. The Fund may also be suitable for other investors, depending upon their
investment goals and financial and tax positions. Although the price of the
Fund's shares may fluctuate more than short-term money market instruments, the
Fund will seek to keep such volatility below that of longer-term debt securities
by limiting its average portfolio maturity. Because of the uncertainty inherent
in all investments, no assurance can be given that the Fund will achieve its
investment objective.
Yields on debt securities depend on a variety of factors, such as general
conditions in the money and bond markets, and the size, maturity and rating of a
particular issue. Debt securities with longer maturities tend to produce higher
yields and are generally subject to greater potential capital appreciation and
depreciation. The market prices of debt securities in which the Fund invests,
and therefore the Fund's net asset value, usually vary depending upon available
yields, rising when interest rates decline and declining when interest rates
rise.
Because the Fund's investments are interest rate sensitive, the Fund's
performance will depend in large part upon the ability of the Fund to respond to
fluctuations in market prices and interest rates and to utilize appropriate
strategies to maximize returns to the Fund, while attempting to minimize the
risks associated with its invested capital. Operating results will also depend
upon the availability of opportunities for the investment of the Fund's assets,
including purchases and sales of suitable securities. The Fund's use of
Strategic Transactions (including options, futures, options on futures and
swaps) involves certain risks, including a possible lack of correlation between
changes in the value of hedging instruments and the portfolio assets being
hedged, the potential illiquidity of the markets for derivative instruments, the
risks arising from the margin requirements and related leverage factors
associated with such transactions. The use of these management techniques to
increase total return involves the risk of loss if the Adviser is incorrect in
its expectation of fluctuations in securities prices or interest rates. See
"Strategic Transactions."
CALCULATION OF PERFORMANCE DATA
From time to time the Fund may advertise its total return and yield. Both
total return and yield figures are based on historical earnings and are not
intended to indicate future performance. The "total return" of the Fund refers
to the average annual compounded rates of return over 1, 5 and 10 year periods
(or any shorter period since inception) that would equate an initial amount
invested at the beginning of a stated period to the ending redeemable value of
the investment. The calculation assumes the reinvestment of all dividends and
distributions, includes all recurring fees that are charged to all shareholder
accounts and deducts all nonrecurring charges at the end of each period.
The "yield" of the Fund is computed by dividing the net investment income
per share earned during the period stated in the advertisement by the maximum
offering price (net asset value) per share on the last day of the period (using
the average number of shares entitled to receive dividends). For the purpose of
determining net investment income, the calculation includes among expenses of
the Fund all recurring fees that are charged to all shareholder accounts and any
nonrecurring charges for the period stated.
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The Fund may from time to time advertise one or more additional
measurements of performance, including but not limited to historical total
returns, distribution returns, non-standardized yield, results of actual or
hypothetical investments, changes in dividends, distributions or share values,
or any graphic illustration of such data. In addition, the Fund may from time to
time compare its performance with that of other mutual funds with similar
investment objectives, to relevant indices, and to performance rankings prepared
by recognized mutual fund statistical services and may compare its performance
to alternative investment or savings vehicles and/or to indices or indicators of
economic activity. This data may cover any period of the Fund's operations and
may or may not include the impact of taxes or other factors.
DIVIDENDS AND DISTRIBUTIONS
Dividends on shares of the Fund from net investment income will be declared
and distributed quarterly. Dividends from short-term and long-term capital
gains, if any, after reduction by capital losses, will be declared and
distributed at least annually. Dividends from net investment income and capital
gains distributions, if any, are automatically reinvested in additional shares
of the Fund unless the shareholder elects to receive them in cash.
PURCHASE OF SHARES
Shares of the Fund may be purchased directly from the Principal
Underwriter, which offers the Fund's shares to the public on a continuous basis.
Shares are sold at the net asset value per share next computed after the
purchase order and payment for the shares is received in good order by the
Principal Underwriter and payment for the shares is received by the Fund's
custodian. Please see the Fund's account application or call the Principal
Underwriter for instructions on how to make payment of shares to the Fund's
custodian. Unless waived by the Fund, the minimum initial investment is
$100,000. Additional investments may be made in amounts of at least $5,000.
Shares of the Fund may also be purchased through securities dealers. Orders
for the purchase of Fund shares received by dealers by the close of regular
trading on the New York Stock Exchange on any business day and transmitted to
the Principal Underwriter or its agent by the close of its business day
(normally 4:00 p.m., New York City time) will be effected as of the close of
trading on the New York Stock Exchange on that day, provided that payment for
the shares is also received by the Fund's custodian on that day. Otherwise,
orders will be effected at the net asset value per share determined on the next
business day. It is the responsibility of dealers to transmit orders so that
they will be received by the Principal Underwriter before the close of its
business day. Shares of the Fund purchased through dealers may be subject to
transaction fees, no part of which will be received by the Fund or the Adviser.
The Fund's net asset value per share is computed each day on which the New
York Stock Exchange is open as of the close of regular trading on the exchange
(currently 4:00 p.m., New York City time). The net asset value per share is
calculated by determining the value of all the Fund's assets, subtracting all
liabilities and dividing the result by the total number of shares outstanding.
Portfolio securities are valued at the last sale prices, on the valuation day,
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on the exchange or national securities market on which they are primarily
traded. Securities not listed on an exchange or national securities market, or
securities for which there were no reported transactions, are valued at the last
quoted bid prices. Securities for which quotations are not readily available and
all other assets are valued at fair value as determined in good faith by the
Adviser in accordance with procedures approved by the Trustees. Money market
instruments with less than sixty days remaining to maturity when acquired by the
Fund are valued on an amortized cost basis unless the Trustees determine that
amortized cost does not represent fair value. If the Fund acquires a money
market instrument with more than sixty days remaining to its maturity, it is
valued at current market value until the sixtieth day prior to maturity and will
then be valued at amortized cost based upon the value on such date unless the
Trustees determine during such sixty-day period that amortized cost does not
represent fair value.
In the sole discretion of the Adviser, the Fund may accept securities
instead of cash for the purchase of shares of the Fund. The Adviser will
determine that any securities acquired in this manner are consistent with the
investment objective, policies and restrictions of the Fund. The securities will
be valued in the manner stated above. The purchase of shares of the Fund for
securities instead of cash may cause an investor who contributed them to realize
taxable gain or loss with respect to the securities transferred to the Fund.
The Trust reserves the right in its sole discretion (i) to suspend the
offering of the Fund's shares, (ii) to reject purchase orders when in the best
interest of the Fund and (iii) to modify or eliminate the minimum initial
investment in Fund shares. The Fund's investment minimums do not apply to
accounts for which the Adviser or any of its affiliates serves as investment
adviser or to employees of the Adviser or any of its affiliates or to members of
such persons' immediate families. The Fund's investment minimums apply to the
aggregate value invested in omnibus accounts rather than to the investment of
the underlying participants in such omnibus accounts.
EXCHANGE OF SHARES
Shares of the Fund may be exchanged for shares of one or more other funds
in the Standish, Ayer & Wood family of funds. Shares of the Fund redeemed in an
exchange transaction are valued at their net asset value next determined after
the exchange request is received by the Principal Underwriter or its agent.
Shares of a fund purchased in an exchange transaction are sold at their net
asset value next determined after the exchange request is received by the
Principal Underwriter or its agent and payment for the shares is received by the
fund into which your shares are to be exchanged. Until receipt of the purchase
price by the fund into which your shares are to be exchanged (which may take up
to three business days), your money will not be invested. To obtain a current
prospectus for any of the other funds in the Standish, Ayer & Wood family of
funds, please call the Principal Underwriter at (800) 221-4795. Please consider
the differences in investment objectives and expenses of a fund as described in
its prospectus before making an exchange.
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Written Exchanges
Shares of the Fund may be exchanged by written order to the Principal
Underwriter, One Financial Center, Boston, Massachusetts 02111. A written
exchange request must (a) state the name of the current Fund, (b) state the name
of the fund into which the current Fund shares will be exchanged, (c) state the
number of shares or the dollar amount to be exchanged, (d) identify the
shareholder's account numbers in both funds and (e) be signed by each registered
owner exactly as the shares are registered. Signature(s) must be guaranteed as
listed under "Written Redemption" below.
Telephonic Exchanges
Shareholders who elect telephonic privileges may exchange shares by calling
the Principal Underwriter at (800) 221-4795. Telephonic privileges are not
available to shareholders automatically. Proper identification will be required
for each telephonic exchange. Please see "Telephone Transactions" below for more
information regarding telephonic transactions.
General Exchange Information
All exchanges are subject to the following exchange restrictions: (i) the
fund into which shares are being exchanged must be registered for sale in your
state; (ii) exchanges may be made only between funds that are registered in the
same name, address and, if applicable, taxpayer identification number; and (iii)
unless waived by the Trust, the amount to be exchanged must satisfy the minimum
account size of the fund to be exchanged into. Exchange requests will not be
processed until payment for the shares of the current Fund have been received by
the Fund's custodian. The exchange privilege may be changed or discontinued and
may be subject to additional limitations upon sixty (60) days' notice to
shareholders, including certain restrictions on purchases by market-timer
accounts.
REDEMPTION OF SHARES
Shares of the Fund may be redeemed by any of the methods described below at
the net asset value per share next determined after receipt by the Principal
Underwriter or its agent of a redemption request in proper form. Redemptions
will not be processed until a completed Share Purchase Application and payment
for the shares to be redeemed have been received.
Written Redemption
Shares of the Fund may be redeemed by written order to the Principal
Underwriter, One Financial Center, 26th Floor, Boston, Massachusetts 02111. A
written redemption request must (a) state the name of the Fund and the number of
shares or the dollar amount to be redeemed, (b) identify the shareholder's
account number and (c) be signed by each registered owner exactly as the shares
are registered. Signature(s) must be guaranteed by a member of either the
Securities Transfer Association's STAMP program or the New York Stock Exchange's
Medallion Signature Program or by any one of the following institutions,
provided that such institution meets credit standards established by Investors
Bank & Trust Company, the Fund's transfer agent: (i) a bank; (ii) a securities
broker or dealer, including a government or municipal securities broker or
dealer, that is a member of a clearing corporation or has net capital of at
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least $100,000; (iii) a credit union having authority to issue signature
guarantees; (iv) a savings and loan association, a building and loan
association, a cooperative bank, or a federal savings bank or association; or
(v) a national securities exchange, a registered securities exchange or a
clearing agency. Additional supporting documents may be required in the case of
estates, trusts, corporations, partnerships and other shareholders that are not
individuals. Redemption proceeds will normally be paid by check mailed within
three business days of receipt by the Principal Underwriter of a written
redemption request in proper form. If shares to be redeemed were recently
purchased by check, the Fund may delay transmittal of redemption proceeds until
such time as it has assured itself that good funds have been collected for the
purchase of such shares. This may take up to fifteen (15) days in the case of
payments made by check.
Telephonic Redemption
Shareholders who elect telephonic privileges may redeem shares by calling
the Principal Underwriter at (800) 221-4795. Telephonic privileges are not
available to shareholders automatically. Redemption proceeds will be mailed or
wired in accordance with the shareholder's instruction on the account
application to a pre-designated account. Redemption proceeds will normally be
paid promptly after receipt of telephonic instructions, but no later than three
business days thereafter, except as described above for shares purchased by
check. Redemption proceeds will be sent only by check payable to the shareholder
of record at the address of record, unless the shareholder has indicated, in the
initial application for the purchase of shares, a commercial bank to which
redemption proceeds may be sent by wire. These instructions may be changed
subsequently only in writing, accompanied by a signature guarantee, and
additional documentation in the case of shares held by a corporation or other
entity or by a fiduciary such as a trustee or executor. Wire charges, if any,
will be deducted from redemption proceeds. Proper identification will be
required for each telephonic redemption.
Repurchase Order
In addition to telephonic and written redemption of Fund shares, the
Principal Underwriter may accept telephone orders from brokers or dealers for
the repurchase of Fund shares. The repurchase price is the net asset value per
share next determined after receipt of the repurchase order by the Principal
Underwriter and the payment for the shares by the Fund's custodian. Brokers and
dealers are obligated to transmit repurchase orders to the Principal Underwriter
prior to the close of the Principal Underwriter's business day (normally 4:00
p.m.). Brokers and dealers may charge for their services in connection with a
repurchase of Fund shares, but neither the Fund nor the Principal Underwriter
imposes a charge for share repurchases.
Telephone Transactions
By maintaining an account that is eligible for telephonic exchange and
redemption privileges, the shareholder authorizes the Adviser, the Principal
Underwriter, the Fund and the Fund's custodian to act upon instructions of any
person to redeem and/or exchange shares from the shareholder's account. Further,
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<PAGE>
the shareholder acknowledges that, as long as the Fund employs reasonable
procedures to confirm that telephonic instructions are genuine, and follows
telephonic instructions that it reasonably believes to be genuine, neither the
Adviser, nor the Principal Underwriter, nor the Trust, nor the Fund, nor the
Fund's custodian, nor their respective officers or employees, will be liable for
any loss, expense or cost arising out of any request for a telephonic redemption
or exchange, even if such transaction results from any fraudulent or
unauthorized instructions. Depending upon the circumstances, the Fund intends to
employ personal identification or written confirmation of transactions
procedures, and if it does not, the Fund may be liable for any losses due to
unauthorized or fraudulent instructions. All telephone transaction requests will
be recorded. Shareholders may experience delays in exercising telephone
transaction privileges during periods of abnormal market activity. Accordingly,
during periods of volatile economic and market conditions, shareholders may wish
to consider transmitting redemption and exchange requests in writing.
* * * *
The proceeds paid upon redemption or repurchase may be more or less than
the cost of the shares, depending upon the market value of the Fund's portfolio
investments at the time of redemption or repurchase. The Fund intends to pay
cash for all shares redeemed, but under certain conditions, the Fund may make
payments wholly or partially in portfolio securities.
Because of the cost of maintaining shareholder accounts, the Fund may
redeem, at net asset value, the shares in any account which has a value of less
than $50,000 as a result of redemptions or transfers. Before doing so, the Fund
will notify the shareholder that the value of the shares in the account is less
than the specified minimum and will allow the shareholder 30 days to make an
additional investment in an amount which will increase the value of the account
to at least $50,000. The Fund may eliminate duplicate mailings of Fund materials
to shareholders that have the same address of record.
MANAGEMENT
Trustees
The Fund is a separate investment series of Standish, Ayer & Wood
Investment Trust, a Massachusetts business trust. Under the terms of the
Agreement and Declaration of Trust establishing the Trust, which is governed by
the laws of The Commonwealth of Massachusetts, the Trustees of the Trust are
ultimately responsible for the management of its business and affairs.
Investment Adviser
Standish, Ayer & Wood, Inc. (the "Adviser"), One Financial Center, Boston,
Massachusetts 02111, serves as investment adviser to the Fund pursuant to an
investment advisory agreement and manages the Fund's investments and affairs
subject to the supervision of the Trustees of the Trust. The Adviser is a
Massachusetts corporation incorporated in 1933 and is a registered investment
adviser under the Investment Advisers Act of 1940. The Adviser provides fully
discretionary management services and counseling and advisory services to a
broad range of clients throughout the United States.
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The Adviser provides fully discretionary management services and counseling
and advisory services to a broad range of clients throughout the United States
and abroad. As of March 31, 1996, the Adviser or its affiliate, Standish
International Management Company, L.P. ("SIMCO"), served as the investment
adviser to each of the following fourteen funds in the Standish, Ayer & Wood
family of funds:
Net Assets
Funds (March 31, 1996)
- - --------------------------------------------------------------------------------
Standish Controlled Maturity Fund $ 9,042,346
Standish Equity Portfolio 98,282,505
Standish Fixed Income Portfolio 2,299,158,500
Standish Fixed Income Fund II 10,102,031
Standish Global Fixed Income Portfolio 149,048,965
Standish Intermediate Tax Exempt Bond Fund 31,199,236
Standish International Equity Fund 51,980,946
Standish International Fixed Income Fund 761,073,675
Standish Massachusetts Intermediate
Tax Exempt Bond Fund 32,270,691
Standish Securitized Fund 53,357,787
Standish Short-Term Asset Reserve Fund 272,188,970
Standish Small Capitalization Equity Portfolio 196,260,876
Standish Small Cap Tax-Sensitive Equity Fund 1,588,743
Standish Tax-Sensitive Equity Fund 1,261,111
Corporate pension funds are the largest asset under active management by
Standish. Standish's clients also include charitable and educational endowment
funds, financial institutions, trusts and individual investors. As of March 31,
1996, Standish managed approximately $29 billion in assets.
The Fund's portfolio manager is Howard B. Rubin. During the past five
years, Mr. Rubin has served as Director and Vice President of the Adviser.
Subject to the supervision and direction of the Trustees, the adviser
manages the Fund's portfolio in accordance with its stated investment objective
and polices, recommends investment decisions for the Fund, places orders to
purchase and sell securities on behalf of the Fund, administers the affairs of
the Fund and permits the Fund to use the name "Standish." For these services the
Fund pays a fee monthly at the annual rate of 0.35% of the Fund's average daily
net assets. For the period from July 3, 1995 (commencement of operations)
through December 31, 1995, the Adviser voluntarily agreed not to impose its
advisory fee which would have amounted to $11,617.
Expenses
Expenses of the Trust which relate to more than one series are allocated
among such series by the Adviser and SIMCO in an equitable manner, primarily on
the basis of relative net asset values. The Principal Underwriter bears all
expenses of its operations other than those incurred by the Adviser under the
investment advisory agreement. Among other expenses, the Fund will pay
investment advisory fees; bookkeeping, share pricing and shareholder servicing
fees and expenses; custodian fees and expenses; legal and auditing fees;
expenses of prospectuses, statements of additional information and shareholder
reports which are furnished to shareholders; registration and reporting fees and
expenses; and Trustees' fees and expenses. The Principal Underwriter bears
without subsequent reimbursement the distribution expenses attributable to the
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offering and sale of Fund shares. The Adviser has voluntarily agreed to limit
Total Fund Operating Expenses of the Fund (excluding litigation, indemnification
and other extraordinary expenses) to 0.45% of the Fund's average daily net
assets. This agreement is voluntary and temporary and may be discontinued or
revised by the Adviser at any time. The Adviser has also agreed to limit the
Fund's total operating expenses (excluding brokerage commissions, taxes and
extraordinary expenses) to the permissible limit applicable in any state in
which shares of the Fund are then qualified for sale. For the period from July
3, 1995 (commencement of operations) through December 31, 1995, expenses borne
by the Fund totalled $13,277 which represented 0.40% of the Fund's average daily
net assets after an expense reduction of $71,911.
Portfolio Transactions
Subject to the supervision of the Trustees of the Trust, the Adviser
selects the brokers and dealers that execute orders to purchase and sell
portfolio securities for the Fund. The Adviser will generally seek to obtain the
best available price and most favorable execution with respect to all
transactions for the Fund.
Subject to the consideration of best price and execution and to applicable
regulations, the receipt of research and sales of Fund shares may also be
considered factors in the selection of brokers and dealers that execute orders
to purchase and sell portfolio securities for the Fund.
FEDERAL INCOME TAXES
The Fund intends to elect to be treated and to qualify for taxation as a
"regulated investment company" under the Internal Revenue Code of 1986, as
amended (the "Code"). If it qualifies for treatment as a regulated investment
company, the Fund will not be subject to federal income tax on income (including
capital gains) distributed to shareholders in the form of dividends or capital
gain distributions in accordance with certain timing requirements of the Code.
The Fund will be subject to a nondeductible 4% excise tax under the Code to
the extent that it fails to meet certain distribution requirements with respect
to each calendar year. Certain distributions made in order to satisfy the Code's
distribution requirements may be declared by the Fund during October, November
or December of the year but paid during the following January. Such
distributions will be taxable to shareholders as if received on December 31 of
the year the distributions are declared, rather than the year in which the
distributions are received.
Shareholders which are taxable entities or persons will be subject to
federal income tax on dividends and capital gain distributions made by the Fund.
Dividends paid by the Fund from net investment income and any excess of net
short-term capital gain over net long-term capital loss will be taxable to
shareholders as ordinary income, whether received in cash or Fund shares. Only
the portion of such dividends, if any, attributable to certain dividends the
Fund receives with respect to its preferred stock investments is expected to
qualify, subject to satisfaction of applicable holding period and other
requirements, for the corporate dividends received deduction under the Code.
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Dividends paid by the Fund from net capital gain (the excess of net long-term
capital gain over net short-term capital loss), called "capital gain
distributions," will be taxable to shareholders as long-term capital gains,
whether received in cash or Fund shares and without regard to how long the
shareholder has held shares of the Fund. Capital gain distributions do not
qualify for the corporate dividends received deduction. Dividends and capital
gain distributions may also be subject to state and local or foreign taxes.
Redemptions and repurchases of shares are taxable events on which a
shareholder may recognize a gain or loss. Special rules recharacterize as
long-term any losses on the sale or exchange of Fund shares with a tax holding
period of six months or less, to the extent the shareholder received a capital
gain distribution with respect to such shares.
Individuals and certain other classes of shareholders may be subject to 31%
backup withholding of federal income tax on dividends, capital gain
distributions, and the proceeds of redemptions or repurchases of shares, if they
fail to furnish the Fund with their correct taxpayer identification number and
certain certifications or if they are otherwise subject to backup withholding.
Individuals, corporations and other shareholders that are not U.S. persons under
the Code are subject to different tax rules and may be subject to nonresident
alien withholding at the rate of 30% (or a lower rate provided by an applicable
tax treaty) on amounts treated as ordinary dividends from the Fund and, unless a
current IRS Form W-8 or an acceptable substitute is furnished to the Fund, to
backup withholding on certain payments from the Fund.
A state income (and possibly local income and/or intangible property) tax
exemption is generally available to the extent the Fund's distributions are
derived from interest on (or, in the case of intangibles taxes, the value of its
assets is attributable to) certain U.S. Government obligations, provided in some
states that certain thresholds for holdings of such obligations and/or reporting
requirements are satisfied.
After the close of each calendar year, the Fund will send a notice to
shareholders that provides information about the federal tax status of
distributions to shareholders for such calendar year.
THE FUND AND ITS SHARES
The Fund is a separate investment series of Standish, Ayer & Wood
Investment Trust, an unincorporated business trust organized under the laws of
The Commonwealth of Massachusetts pursuant to an Agreement and Declaration of
Trust dated August 13, 1986. Under the Agreement and Declaration of Trust, the
Trustees have authority to issue an unlimited number of shares of beneficial
interest, par value $.01 per share, of the Fund. Each share of the Fund is
entitled to one vote. All Fund shares have equal rights with regard to voting,
redemption, dividends, distributions and liquidation, and shareholders of the
Fund have the right to vote as a separate class with respect to certain matters
under the Investment Company Act of 1940 and the Agreement and Declaration of
Trust. Shares of the Fund do not have cumulative voting rights. Fractional
shares have proportional voting rights and participate in any distributions and
dividends. When issued, each Fund share will be fully paid and nonassessable.
Shareholders of the Fund do not have preemptive or conversion rights.
Certificates representing shares of the Fund will not be issued.
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At February 1, 1996, more than 25% of the then outstanding shares of the
Fund were held by Essex County Gas Company, 7 North Hunt Road, Amesbury, MA,
which were deemed to control the Fund.
The Trust has established fourteen series that currently offer their shares
to the public and may establish additional series at any time. Each series is a
separate taxpayer, eligible to qualify as a separate regulated investment
company for federal income tax purposes. The calculation of the net asset value
of a series and the tax consequences of investing in a series will be determined
separately for each series.
The Trust is not required to hold annual meetings of shareholders. Special
meetings of shareholders may be called from time to time for purposes such as
electing or removing Trustees, changing a fundamental policy, or approving an
investment advisory agreement.
If less than two-thirds of the Trustees holding office have been elected by
shareholders, a special meeting of shareholders of the Trust will be called to
elect Trustees. Under the Agreement and Declaration of Trust and the Investment
Company Act of 1940, the record holders of not less than two-thirds of the
outstanding shares of the Trust may remove a Trustee by votes cast in person or
by proxy at a meeting called for the purpose or by a written declaration filed
with each of the Trust's custodian banks. Except as described above, the
Trustees will continue to hold office and may appoint successor Trustees.
Whenever ten or more shareholders of the Trust who have been such for at least
six months, and who hold in the aggregate shares having a net asset value of at
least $25,000 or at least 1% of the outstanding shares, whichever is less, apply
to the Trustees in writing stating that they wish to communicate with other
shareholders with a view to obtaining signatures to a request for a meeting, and
such application is accompanied by a form of communication and request which
they wish to transmit, the Trustees shall within five (5) business days after
receipt of such application either (1) afford to such applicants access to a
list of the names and addresses of all shareholders as recorded on the books of
the Trust; or (2) inform such applicants as to the approximate number of
shareholders of record and the approximate cost of mailing to them the proposed
communication or form of request. Immediately prior to the effectiveness of this
Prospectus, the Adviser owned all of the outstanding shares of the Fund.
Inquiries concerning the Fund should be made by contacting the Principal
Underwriter at the address and telephone number listed on the cover of this
Prospectus.
21
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CUSTODIAN, TRANSFER AGENT AND DIVIDEND-DISBURSING AGENT
Investors Bank & Trust Company, 24 Federal Street, Boston, Massachusetts
02110, serves as the Fund's transfer agent and dividend-disbursing agent and as
custodian of all cash and securities of the Fund.
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P., One Post Office Square, Boston, Massachusetts
02109, serves as independent accountants for the Trust and will audit the Fund's
financial statements annually.
LEGAL COUNSEL
Hale and Dorr, 60 State Street, Boston, Massachusetts 02109, is legal
counsel to the Trust, the Principal Underwriter and the Adviser.
- - --------------------------------------------------------------------------------
No dealer, salesman or other person has been authorized to
give any information or to make any representations other than those contained
in this Prospectus or in the Statement of Additional Information, and, if given
or made, such other information or representations must not be relied upon as
having been authorized by the Trust. This Prospectus does not constitute an
offering in any jurisdiction in which such offering may not be lawfully made.
22
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TAX CERTIFICATION INSTRUCTIONS
Federal law requires that taxable distributions and distributions and
proceeds of redemptions and exchanges be reported to the IRS and that 31% be
withheld if you fail to provide your correct Taxpayer Identification Number
(TIN) and the TIN-related certificates contained in the Account Purchase
Application (Application) or you are otherwise subject to backup withholding.
The Fund will not impose backup withholding as a result of your failure to make
any certification, except the certifications in the Application that directly
relate to your TIN and backup withholding status. Amounts withheld and forwarded
to the IRS can be credited as a payment of tax when completing your Federal
income tax return.
For most individual taxpayers, the TIN is the social security number.
Special rules apply for certain accounts. For example, for an account
established under the Uniform Gift to Minors Act, the TIN of the minor should be
furnished. If you do not have a TIN, you may apply for one using forms available
at local offices of the Social Security Administration or the IRS, and you
should write "Applied For" in the space for a TIN on the Application.
Recipients exempt from backup withholding, including corporations and
certain other entities, should provide their TIN and underline "exempt" in
section 2(a) of the TIN section of the Application to avoid possible erroneous
withholding. Non-resident aliens and foreign entities may be subject to
withholding of up to 30% on certain distributions received from the Fund and
must provide certain certifications on IRS Form W-8 to avoid backup withholding
with respect to other payments. For further information, see Code Sections 1441,
1442 and 3406 and/or consult your tax adviser.
23
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STANDISH CONTROLLED MATURITY FUND
Investment Adviser
Standish, Ayer & Wood, Inc.
One Financial Center
Boston, Massachusetts 02111
Principal Underwriter
Standish Fund Distributors, L.P.
One Financial Center
Boston, Massachusetts 02111
Custodian
Investors Bank & Trust Company
24 Federal Street
Boston, Massachusetts 02110
Independent Accountants
Coopers & Lybrand L.L.P.
One Post Office Square
Boston, Massachusetts 02109
Legal Counsel
Hale and Dorr
60 State Street
Boston, Massachusetts 02109
24
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May 1, 1996
STANDISH CONTROLLED MATURITY FUND
One Financial Center
Boston, Massachusetts 02111
(800) 221-4795
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information is not a prospectus, but expands
upon and supplements the information contained in the Prospectus dated May 1,
1996, as amended and/or supplemented from time to time (the "Prospectus"), of
Standish Controlled Maturity Fund (the "Fund"), a separate investment series of
Standish, Ayer & Wood Investment Trust (the "Trust"). This Statement of
Additional Information should be read in conjunction with the Prospectus which
may be obtained without charge from Standish Fund Distributors, L.P., the
Trust's principal underwriter (the "Principal Underwriter"), by calling the
telephone number or writing to the address listed above.
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND IS
AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY IF PRECEDED OR
ACCOMPANIED BY AN EFFECTIVE PROSPECTUS.
CONTENTS
Investment Objectives and Policies............................2
Investment Restrictions.......................................7
Calculation of Performance Data...............................8
Management...................................................10
Redemption of Shares.........................................15
Portfolio Transactions.......................................15
Federal Income Taxes.........................................16
Determination of Net Asset Value.............................17
The Fund and Its Shares......................................18
Additional Information.......................................18
Experts and Financial Statements.............................18
Financial Statements.........................................19
1
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INVESTMENT OBJECTIVES AND POLICIES
The Fund's Prospectus describes the investment objectives of the Fund and
summarizes the investment policies it will follow. The following discussion
supplements the description of the Fund's investment policies in the Prospectus.
Maturity and Duration
The effective maturity of an individual portfolio security in which the
Fund invests is defined as the period remaining until the earliest date when the
Fund can recover the principal amount of such security through mandatory
redemption or prepayment by the issuer, the exercise by the Fund of a put
option, demand feature or tender option granted by the issuer or a third party
or the payment of the principal on the stated maturity date. The effective
maturity of variable rate securities is calculated by reference to their coupon
resent dates. Thus, the effective maturity of a security may be substantially
shorter than its final stated maturity. Unscheduled prepayments of principal
have the effect of shortening the effective maturities of securities in general
and mortgage-backed securities in particular. Prepayment rates are influenced by
changes in current interest rates and a variety of economic, geographic, social
and other factors and cannot be predicted with certainty. In general,
securities, such as mortgage-backed securities, may be subject to greater
prepayment rates in a declining interest rate environment. Conversely, in an
increasing interest rate environment, the rate of prepayment may be expected to
decrease. A higher than anticipated rate of unscheduled principal prepayments on
securities purchased at a premium or a lower than anticipated rate of
unscheduled payments on securities purchased at a discount may result in a lower
yield (and total return) to the Fund than was anticipated at the time the
securities were purchased. The Fund's reinvestment of unscheduled prepayments
may be made at rates higher or lower than the rate payable on such security,
thus affecting the return realized by the Fund.
Under normal market conditions, the Fund will maintain an option-adjusted
duration in the range of plus or minus 25% of the duration of the Merril Lynch
1-3 Year U.S. Treasury Index. Duration of an individual portfolio security is a
measure of the security's price sensitivity taking into account expected cash
flow and prepayments under a wide range of interest rate scenarios. In computing
the duration of its portfolio, the Fund will have to estimate the duration of
obligations that are subject to prepayment or redemption by the issuer taking
into account the influence of interest rates on prepayments and coupon flows.
The Fund may use various techniques to shorten or lengthen the option-adjusted
duration of its portfolio, including the acquisition of debt obligations at a
premium or discount, and the use of mortgage and interest rate swaps, caps,
floors and collars.
Money Market Instruments and Repurchase Agreements
Money market instruments include short-term U.S. Government securities,
commercial paper (promissory notes issued by corporations to finance their
short-term credit needs), negotiable certificates of deposit, non-negotiable
fixed time deposits, bankers' acceptances and repurchase agreements
collateralized by such instruments.
U.S. Government securities include securities which are direct obligations
of the U.S. Government backed by the full faith and credit of the United States,
and securities issued by agencies and instrumentalities of the U.S. Government,
which may be guaranteed by the U.S. Treasury or supported by the issuer's right
to borrow from the Treasury or may be backed by the credit of the federal agency
2
<PAGE>
or instrumentality itself. Agencies and instrumentalities of the U.S. Government
include, but are not limited to, Federal Land Banks, the Federal Farm Credit
Bank, the Central Bank for Cooperatives, Federal Intermediate Credit Banks,
Federal Home Loan Banks and the Federal National Mortgage Association.
Investments in commercial paper will be rated Prime-1 by Moody's Investors
Service, Inc. ("Moody's") or A-1 by Standard & Poor's Ratings Group ("Standard &
Poor's") or Duff 1+ by Duff & Phelps, which are the highest ratings assigned by
these rating services (even if rated lower by one or more of the other
agencies), or which, if not rated or rated lower by one or more of the agencies
and not rated by the other agency or agencies, are judged by the Adviser to be
of equivalent credit quality to the securities so rated.
A repurchase agreement is an agreement under which the Fund acquires money
market instruments (generally U.S. Government securities) from a commercial
bank, broker or dealer, subject to resale to the seller at an agreed-upon price
and date (normally the next business day). The resale price reflects an
agreed-upon interest rate effective for the period the instruments are held by
the Fund and is unrelated to the interest rate on the instruments. The
instruments acquired by the Fund (including accrued interest) must have an
aggregate market value in excess of the resale price and will be held by the
custodian bank for the Fund until they are repurchased. In evaluating whether to
enter a repurchase agreement, the investment adviser, Standish, Ayer & Wood,
Inc. (the "Adviser"), will carefully consider the creditworthiness of the seller
pursuant to procedures reviewed and approved by the Trust's Board of Trustees.
The use of repurchase agreements involves certain risks. For example, if
the seller defaults on its obligation to repurchase the instruments acquired by
the Fund at a time when their market value has declined, the Fund may incur a
loss. If the seller becomes insolvent or subject to liquidation or
reorganization under bankruptcy or other laws, a court may determine that the
instruments acquired by the Fund are collateral for a loan by the Fund and
therefore are subject to sale by the trustee in bankruptcy. Finally, it is
possible that the Fund may not be able to substantiate its interest in the
instruments it acquires. While the Trustees acknowledge these risks, it is
expected that they can be controlled through careful documentation and
monitoring.
Strategic Transactions
The Fund may, but is not required to, utilize various other investment
strategies as described below to hedge various market risks (such as interest
rates and broad or specific fixed-income market movements), to manage the
effective maturity of fixed-income securities, or to enhance potential gain.
Such strategies are generally accepted as part of modern portfolio management
and are regularly utilized by many mutual funds and other institutional
investors. Techniques and instruments used by the Fund may change over time as
new instruments and strategies are developed or regulatory changes occur.
3
<PAGE>
In the course of pursuing its investment objectives, the Fund may purchase
and sell (write) exchange-listed and over-the-counter put and call options on
securities, indices and other financial instruments; purchase and sell financial
futures contracts and options thereon; enter into various interest rate
transactions such as swaps, caps, floors or collars (collectively, all the above
are called "Strategic Transactions"). Strategic Transactions may be used in an
attempt to protect against possible changes in the market value of securities
held in or to be purchased for the Fund's portfolio resulting from securities
markets or interest rate fluctuations, to protect the Fund's unrealized gains in
the value of its portfolio securities, to facilitate the sale of such securities
for investment purposes, to manage the effective maturity or duration of the
Fund's portfolio, or to establish a position in the derivatives markets as a
temporary substitute for purchasing or selling particular securities. In
addition to the hedging transactions referred to in the preceding sentence,
Strategic Transactions may also be used to enhance potential gain in
circumstances where hedging is not involved although the Fund will attempt to
limit its net loss exposure resulting from Strategic Transactions entered into
for such purposes to not more than 1% of the Fund's net assets at any one time
and, to the extent necessary, the Fund will close out transactions in order to
comply with this limitation. (Transactions such as writing covered call options
are considered to involve hedging for the purposes of this limitation.) In
calculating the Fund's net loss exposure from such Strategic Transactions, an
unrealized gain from a particular Strategic Transaction position would be netted
against an unrealized loss from a related Strategic Transaction position. For
example, if the Adviser believes that short-term interest rates as indicated in
the forward yield curve are too high, the Fund may take a short position in a
near-term Eurodollar futures contract and a long position in a longer-dated
Eurodollar futures contract. Under such circumstances, any unrealized loss in
the near-term Eurodollar futures position would be netted against any unrealized
gain in the longer-dated Eurodollar futures position (and vice versa) for
purposes of calculating the Fund's net loss exposure. The ability of the Fund to
utilize these Strategic Transactions successfully will depend on the Adviser's
ability to predict pertinent market and interest rate movements, which cannot be
assured. The Fund will comply with applicable regulatory requirements when
implementing these strategies, techniques and instruments. The Fund's activities
involving Strategic Transactions may be limited by the requirements of
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Internal
Revenue Code"), for qualification as a regulated investment company.
Risks of Strategic Transactions
The use of Strategic Transactions has associated risks including possible
default by the other party to the transaction, illiquidity and, to the extent
the Adviser's view as to certain market or interest rate movements is incorrect,
the risk that the use of such Strategic Transactions could result in losses
greater than if they had not been used. The writing of put and call options may
result in losses to the Fund, force the purchase or sale, respectively, of
portfolio securities at inopportune times or for prices higher than (in the case
4
<PAGE>
of purchases due to the exercise of put options) or lower than (in the case of
sales due to the exercise of call options) current market values, limit the
amount of appreciation the Fund can realize on its investments or cause the Fund
to hold a security it might otherwise sell. The use of options and futures
transactions entails certain other risks. In particular, the variable degree of
correlation between price movements of futures contracts and price movements in
the related portfolio position of the Fund creates the possibility that losses
on the hedging instrument may be greater than gains in the value of the Fund's
position. The writing of options could significantly increase the Fund's
portfolio turnover rate and, therefore, associated brokerage commissions or
spreads. In addition, futures and options markets may not be liquid in all
circumstances and certain over-the-counter options may have no markets. As a
result, in certain markets, the Fund might not be able to close out a
transaction without incurring substantial losses, if at all. Although the use of
futures and options transactions for hedging should tend to minimize the risk of
loss due to a decline in the value of the hedged position, at the same time, in
certain circumstances, they tend to limit any potential gain which might result
from an increase in value of such position. The loss incurred by the Fund in
writing options on futures and entering into futures transactions is potentially
unlimited; however, as described above, the Fund will attempt to limit its net
loss exposure resulting from Strategic Transactions entered into for non-hedging
purposes to not more than 1% of its net assets at any one time. Futures markets
are highly volatile and the use of futures may increase the volatility of the
Fund's net asset value. Finally, entering into futures contracts would create a
greater ongoing potential financial risk than would purchases of options where
the exposure is limited to the cost of the initial premium. Losses resulting
from the use of Strategic Transactions would reduce net asset value and the net
result may be less favorable than if the Strategic Transactions had not been
utilized.
General Characteristics of Options
Put options and call options typically have similar structural
characteristics and operational mechanics regardless of the underlying
instrument on which they are purchased or sold. Thus, the following general
discussion relates to each of the particular types of options discussed in
greater detail below. In addition, many Strategic Transactions involving options
require segregation of the Fund's assets in special accounts, as described below
under "Use of Segregated Accounts."
A put option gives the purchaser of the option, in consideration for the
payment of a premium, the right to sell, and the writer the obligation to buy
(if the option is exercised), the underlying security, commodity, index or other
instrument at the exercise price. For instance, the Fund's purchase of a put
option on a security might be designed to protect its holdings in the underlying
instrument (or, in some cases, a similar instrument) against a substantial
decline in the market value by giving the Fund the right to sell such instrument
at the option exercise price. A call option, in consideration for the payment of
a premium, gives the purchaser of the option the right to buy, and the seller
the obligation to sell (if the option is exercised), the underlying instrument
at the exercise price. The Fund may purchase a call option on a security,
futures contract, index or other instrument to seek to protect the Fund against
an increase in the price of the underlying instrument that it intends to
purchase in the future by fixing the price at which it may purchase such
instrument. An American style put or call option may be exercised at any time
during the option period while a European style put or call option may be
5
<PAGE>
exercised only upon expiration or during a fixed period prior thereto. The Fund
is authorized to purchase and sell exchange listed options and over-the-counter
options ("OTC" options). Exchange listed options are issued by a regulated
intermediary such as the Options Clearing Corporation ("OCC"), which guarantees
the performance of the obligations of the parties to such options. The
discussion below uses the OCC as an example but is also applicable to other
financial intermediaries.
With certain exceptions, exchange listed options generally settle by
physical delivery of the underlying security, although in the future cash
settlement may become available. Index options and Eurodollar instruments are
cash settled for the net amount, if any, by which the option is in-the-money
(i.e., where the value of the underlying instrument exceeds, in the case of a
call option, or is less than, in the case of a put option, the exercise price of
the option) at the time the option is exercised. Frequently, rather than taking
or making delivery of the underlying instrument through the process of
exercising the option, listed options are closed by entering into offsetting
purchase or sale transactions that do not result in ownership of the new option.
The Fund's ability to close out its position as a purchaser or seller of an
exchange listed put or call option is dependent, in part, upon the liquidity of
the option market. There is no assurance that a liquid option market on an
exchange will exist. In the event that the relevant market for an option on an
exchange ceases to exist, outstanding options on that exchange would generally
continue to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours
during which the underlying financial instruments are traded. To the extent that
the option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct agreement with
the Counterparty. In contrast to exchange listed options, which generally have
standardized terms and performance mechanics, all the terms of an OTC option,
including such terms as method of settlement, term, exercise price, premium,
guarantees and security, are set by negotiation of the parties. The Fund will
generally sell (write) OTC options that are subject to a buy-back provision
permitting the Fund to require the Counterparty to sell the option back to the
Fund at a formula price within seven days. (To the extent that the Fund does not
do so, the OTC options are subject to the Fund's restriction on investments in
illiquid securities.) The Fund expects generally to enter into OTC options that
have cash settlement provisions, although it is not required to do so.
Unless the parties provide for it, there is no central clearing or guaranty
function in the OTC option market. As a result, if the Counterparty fails to
make delivery of the security or other instrument underlying an OTC option it
has entered into with the Fund or fails to make a cash settlement payment due in
accordance with the terms of that option, the Fund will lose any premium it paid
for the option as well as any anticipated benefit of the transaction.
6
<PAGE>
Accordingly, the Adviser must assess the creditworthiness of each such
Counterparty or any guarantor or credit enhancement of the Counterparty's credit
to determine the likelihood that the terms of the OTC option will be satisfied.
The Fund will engage in OTC option transactions only with U.S. Government
securities dealers recognized by the Federal Reserve Bank of New York as
"Primary dealers," or broker dealers, domestic banks or other financial
institutions which have received, combined with any credit enhancements, a
long-term debt rating of A from Standard & Poor's or Moody's or an equivalent
rating from any other nationally recognized statistical rating organization
("NRSRO") or which issue debt that is determined to be of equivalent credit
quality by the Adviser. The staff of the Securities and Exchange Commission
("SEC") currently takes the position that, absent the buy-back provisions
discussed above, OTC options purchased by the Fund, and portfolio securities
"covering" the amount of the Fund's obligation pursuant to an OTC option sold by
it (the cost of the sell-back plus the in-the-money amount, if any) are
illiquid, and are subject to the Fund's limitation on investing no more than 15%
of its assets in illiquid securities. However, for options written with "primary
dealers" pursuant to an agreement requiring a closing purchase transaction at a
formula price, the amount which is considered to be illiquid may be calculated
by reference to a formula price.
If the Fund sells (writes) a call option, the premium that it receives may
serve as a partial hedge, to the extent of the option premium, against a
decrease in the value of the underlying securities or instruments in its
portfolio or will increase the Fund's income. The sale (writing) of put options
can also provide income.
The Fund may purchase and sell (write) call options on securities including
U.S. Treasury and agency securities, mortgage-backed and asset-backed
securities, corporate debt securities, equity securities (including convertible
securities) and Eurodollar instruments that are traded on U.S. and foreign
securities exchanges and in the over-the-counter markets, and on securities
indices and futures contracts. All calls sold by the Fund must be "covered"
(i.e., the Fund must own the securities or the futures contract subject to the
call) or must meet the asset segregation requirements described below as long as
the call is outstanding. In addition, the Fund may cover a written call option
or put option by entering into an offsetting forward contract and/or by
purchasing an offsetting option or any other option which, by virtue of its
exercise price or otherwise, reduces the Fund's net exposure on its written
option position.
Even though the Fund will receive the option premium to help offset any
loss, the Fund may incur a loss if the exercise price is below the market price
for the security subject to the call at the time of exercise. A call sold by the
Fund also exposes the Fund during the term of the option to possible loss of
opportunity to realize appreciation in the market price of the underlying
security or instrument and may require the Fund to hold a security or instrument
which it might otherwise have sold.
7
<PAGE>
The Fund may purchase and sell (write) put options on securities including
U.S. Treasury and agency securities, mortgage-backed and asset-backed
securities, corporate debt securities, equity securities (including convertible
securities) and Eurodollar instruments (whether or not it holds the above
securities in its portfolio), and on securities indices and futures contracts.
The Fund will not sell put options if, as a result, more than 50% of the Fund's
assets would be required to be segregated to cover its potential obligations
under such put options other than those with respect to futures and options
thereon. In selling put options, there is a risk that the Fund may be required
to buy the underlying security at a price above the market price.
Options on Securities Indices and Other Financial Indices
The Fund may also purchase and sell (write) call and put options on
securities indices and other financial indices. Options on securities indices
and other financial indices are similar to options on a security or other
instrument except that, rather than settling by physical delivery of the
underlying instrument, they settle by cash settlement. For example, an option on
an index gives the holder the right to receive, upon exercise of the option, an
amount of cash if the closing level of the index upon which the option is based
exceeds, in the case of a call, or is less than, in the case of a put, the
exercise price of the option (except if, in the case of an OTC option, physical
delivery is specified). This amount of cash is equal to the differential between
the closing price of the index and the exercise price of the option, which also
may be multiplied by a formula value. The seller of the option is obligated, in
return for the premium received, to make delivery of this amount. In addition to
the methods described above, the Fund may cover call options on a securities
index by owning securities whose price changes are expected to be similar to
those of the underlying index, or by having an absolute and immediate right to
acquire such securities without additional cash consideration (or for additional
cash consideration held in a segregated account by its custodian) upon
conversion or exchange of other securities in its portfolio.
General Characteristics of Futures
The Fund may enter into financial futures contracts or purchase or sell put
and call options on such futures. Futures are generally bought and sold on the
commodities exchanges where they are listed and involve payment of initial and
variation margin as described below. All futures contracts entered into by the
Fund are traded on U.S. exchanges or boards of trade that are licensed and
regulated by the Commodity Futures Trading Commission ("CFTC") or on certain
foreign exchanges.
The sale of futures contracts creates a firm obligation by the Fund, as
seller, to deliver to the buyer the specific type of financial instrument called
for in the contract at a specific future time for a specified price (or, with
respect to index futures and Eurodollar instruments, the net cash amount). The
purchase of futures contracts creates a corresponding obligation by the Fund, as
purchaser to purchase a financial instrument at a specified time and price.
Options on futures contracts are similar to options on securities except that an
option on a futures contract gives the purchaser the right, in return for the
premium paid, to assume a position in a futures contract and obligates the
seller to deliver such position, if the option is exercised.
8
<PAGE>
The Fund's use of financial futures and options thereon will in all cases
be consistent with applicable regulatory requirements and in particular the
regulations of the CFTC relating to exclusions from regulation as a commodity
pool operator. Those regulations currently provide that the Fund may use
commodity futures and option positions (i) for bona fide hedging purposes
without regard to the percentage of assets committed to margin and option
premiums, or (ii) for other purposes permitted by the CTFC to the extent that
the aggregate initial margin and option premiums required to establish such
non-hedging positions (net of the amount that the positions were "in the money"
at the time of purchase) do not exceed 5% of the liquidation value (i.e., the
net asset value) of the Fund's portfolio, after taking into account unrealized
profits and losses on such positions. Typically, maintaining a futures contract
or selling an option thereon requires the Fund to deposit, with a financial
intermediary for the benefit of a futures commission merchant, as security for
its obligations an amount of cash or other specified assets (initial margin)
which initially is typically 1% to 10% of the face amount of the contract (but
may be higher in some circumstances). Additional cash or assets (variation
margin) may be required to be deposited directly with the futures commission
merchant thereafter on a daily basis as the value of the contract fluctuates.
The purchase of an option on financial futures involves payment of a premium for
the option without any further obligation on the part of the Fund. If the Fund
exercises an option on a futures contract it will be obligated to post initial
margin (and potential subsequent variation margin) for the resulting futures
position just it would for any position. Futures contracts and options thereon
are generally settled by entering into an offsetting transaction but there can
be no assurance that the position can be offset prior to settlement at an
advantageous price, nor that delivery will occur. The segregation requirements
with respect to futures contracts and options thereon are described below.
Combined Transactions
The Fund may enter into multiple transactions, including multiple options
transactions, multiple futures transactions, and multiple interest rate
transactions, structured notes and any combination of futures, options, and
interest rate transactions (component transactions), instead of a single
Strategic Transaction, as part of a single or combined strategy when, in the
opinion of the Adviser it is in the best interests of the Fund to do so. A
combined transaction will usually contain elements of risk that are present in
each of its component transactions. Although combined transactions are normally
entered into based on the Adviser's judgment that the combined strategies will
reduce risk or otherwise more effectively achieve the desired portfolio
management goal, it is possible that the combination will instead increase such
risks or hinder achievement of the portfolio management objective.
Swaps, Caps, Floors and Collars
Among the Strategic Transactions into which the Fund may enter are interest
rate and index swaps and the purchase or sale of related caps, floors and
collars. The Fund expects to enter into these transactions primarily for hedging
purposes, including, but not limited to, preserving a return or spread on a
particular investment or portion of its portfolio, as a duration management
technique or protecting against an increase in the price of securities the Fund
anticipates purchasing at a later date. Swaps, caps, floors and collars may also
9
<PAGE>
be used to enhance potential gain in circumstances where hedging is not involved
although, as described above, the Fund will attempt to limit its net loss
exposure resulting from swaps, caps, floors and collars and other Strategic
Transactions entered into for such purposes to not more than 1% of the Fund's
net assets at any one time. The Fund will not sell interest rate caps or floors
where it does not own securities or other instruments providing the income
stream the Fund may be obligated to pay. Interest rate swaps involve the
exchange by the Fund with another party of their respective commitments to pay
or receive interest (e.g., an exchange of floating rate payments for fixed rate
payments with respect to a notional amount of principal). An index swap is an
agreement to swap cash flows on a notional amount based on changes in the values
of the reference indices. The purchase of a cap entitles the purchaser to
receive payments on a notional principal amount from the party selling such cap
to the extent that a specified index exceeds a predetermined interest rate or
amount. The purchase of a floor entitles the purchaser to receive payments on a
notional principal amount from the party selling such floor to the extent that a
specified index falls below a predetermined interest rate or amount. A collar is
a combination of a cap and a floor that preserves a certain rate of return
within a predetermined range of interest rates or values.
The Fund will usually enter into swaps on a net basis (i.e., the two
payment streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with the Fund receiving or paying, as the case may
be, only the net amount of the two payments). The Fund will not enter into any
swap, cap, floor or collar transaction unless, at the time of entering into such
transaction, the unsecured long-term debt of the Counterparty, combined with any
credit enhancements, is rated at least A by Standard & Poor's or Moody's or has
an equivalent rating from an NRSRO or which issue debt that is determined to be
of equivalent credit quality by the Adviser. If there is a default by the
Counterparty, the Fund may have contractual remedies pursuant to the agreements
related to the transaction. The swap market has grown substantially in recent
years with a large number of banks and investment banking firms acting both as
principals and as agents utilizing standardized swap documentation. As a result,
the swap market has become relatively liquid. Caps, floors and collars are more
recent innovations for which standardized documentation has not yet been fully
developed. Swaps, caps, floors and collars are considered illiquid for purposes
of the Fund's policy regarding illiquid securities, unless it is determined,
based upon continuing review of the trading markets for the specific security,
that such security is liquid. The Board of Trustees has adopted guidelines and
delegated to the Adviser the daily function of determining and monitoring the
liquidity of swaps, caps, floors and collars. The Board of Trustees, however,
retains oversight focusing on factors such as valuation, liquidity and
availability of information and is ultimately responsible for such
determinations. The staff of the SEC currently takes the position that swaps,
caps, floors and collars are illiquid, and are subject to the Fund's limitation
on investing in illiquid securities.
10
<PAGE>
Eurodollar Contracts
The Fund may make investments in Eurodollar contracts. Eurodollar contracts
are U.S. dollar-denominated futures contracts or options thereon which are
linked to the London Interbank Offered Rate ("LIBOR"), although foreign
currency-denominated instruments are available from time to time. Eurodollar
futures contracts enable purchasers to obtain a fixed rate for the lending of
funds and sellers to obtain a fixed rate for borrowings. The Fund might use
Eurodollar futures contracts and options thereon to hedge against changes in
LIBOR, to which many interest rate swaps and fixed income instruments are
linked.
Use of Segregated Accounts
The Fund will hold securities or other instruments whose values are
expected to offset its obligations under the Strategic Transactions. The Fund
will not enter into Strategic Transactions that expose the Fund to an obligation
to another party unless it owns either (i) an offsetting position in securities
or other options, futures contracts or other instruments or (ii) cash,
receivables or liquid, high grade debt securities with a value sufficient to
cover its potential obligations. The Fund may have to comply with any applicable
regulatory requirements designed to make sure that mutual funds do not use
leverage in Strategic Transactions, and if required, will set aside cash and
other assets in a segregated account with its custodian bank in the amount
prescribed. In that case, the Fund's custodian would maintain the value of such
segregated account equal to the prescribed amount by adding or removing
additional cash or other assets to account for fluctuations in the value of the
account and the Fund's obligations on the related Strategic Transactions. Assets
held in a segregated account would not be sold while the Strategic Transaction
is outstanding, unless they are replaced with similar assets. As a result, there
is a possibility that segregation of a large percentage of the Fund's assets
could impede portfolio management or the Fund's ability to meet redemption
requests or other current obligations.
"When-Issued" and "Delayed Delivery" Securities
The Fund may commit up to 15% of its net assets to purchase securities on a
"when-issued" and "delayed delivery" basis, which means that delivery and
payment for the securities will normally take place 15 to 45 days after the date
of the transaction. The payment obligation and interest rate on the securities
are fixed at the time the Fund enters into the commitment, but interest will not
accrue to the Fund until delivery of and payment for the securities. Although
the Fund will only make commitments to purchase "when-issued" and "delayed
delivery" securities with the intention of actually acquiring the securities,
the Fund may sell the securities before the settlement date if deemed advisable
by the Adviser. Unless the Fund has entered into an offsetting agreement to sell
the securities, cash or liquid, high-grade debt obligations with a market value
equal to the amount of the Fund's commitment will be segregated with the
custodian bank for the Fund. If the market value of these securities declines,
additional cash or securities will be segregated daily so that the aggregate
market value of the segregated securities equals the amount of the Fund's
commitment.
11
<PAGE>
Securities purchased on a "when-issued" and "delayed delivery" basis may
have a market value on delivery which is less than the amount paid by the Fund.
Changes in market value may be based upon the public's perception of the
creditworthiness of the issuer or changes in the level of interest rates.
Generally, the value of "when-issued" securities will fluctuate inversely to
changes in interest rates, i.e., they will appreciate in value when interest
rates fall and will depreciate in value when interest rates rise.
Portfolio Turnover
It is not the policy of the Fund to purchase or sell securities for trading
purposes. However, the Fund places no restrictions on portfolio turnover and it
may sell any portfolio security with- out regard to the period of time it has
been held, except as may be necessary to maintain its status as a regulated
investment company under the Internal Revenue Code. The Fund may therefore
generally change its portfolio investments at any time in accordance with the
Adviser's appraisal of factors affecting any particular issuer or market, or the
economy in general.
INVESTMENT RESTRICTIONS
The Fund has adopted the following fundamental policies in addition to
those described under "Investment Objectives and Policies-Investment
Restrictions" in the Prospectus. The Fund's fundamental policies cannot be
changed unless the change is approved by the lesser of (i) 67% or more of the
voting securities present at a meeting, if the holders of more than 50% of the
outstanding voting securities of the Fund are present or represented by proxy,
or (ii) more than 50% of the outstanding voting securities of the Fund. The Fund
may not:
1. Invest more than 25% of the current value of its total assets in any
single industry, provided that this restriction shall not apply to U.S.
Government securities or mortgage-backed securities issued or guaranteed
as to principal or interest by the U.S. Government, its agencies or
instrumentalities.
2. Issue senior securities, except as permitted by paragraphs 3, 7 and 8
below. For purposes of this restriction, the issuance of shares of
beneficial interest in multiple classes or series, the deferral of
trustees' fees, the purchase or sale of options, futures contracts,
forward commitments and repurchase agreements entered into in accordance
with the Fund's investment policies or within the meaning of paragraph 6
below, are not deemed to be senior securities.
3. Borrow money, except (i) from banks for temporary or short-term purposes
or for the clearance of transactions in amounts not to exceed 33 1/3% of
the value of the Fund's total assets (including the amount borrowed) taken
at market value, (ii) in connection with the redemption of Fund shares or
to finance failed settlements of portfolio trades without immediately
liquidating portfolio securities or other assets; (iii) in order to
fulfill commitments or plans to purchase additional securities pending the
anticipated sale of other portfolio securities or assets and (iv) the Fund
may enter into reverse repurchase agreements and forward roll
transactions. For purposes of this investment restriction, investments in
short sales, futures contracts, options on futures contracts, securities
or indices and forward commitments shall not constitute borrowing.
12
<PAGE>
4. Underwrite the securities of other issuers, except to the extent that, in
connection with the disposition of portfolio securities, the Fund may be
deemed to be an underwriter under the Securities Act of 1933.
5. Purchase or sell real estate except that the Fund may (i) acquire or lease
office space for its own use, (ii) invest in securities of issuers that
invest in real estate or interests therein, (iii) invest in securities
that are secured by real estate or interests therein, (iv) purchase and
sell mortgage-related securities and (v) hold and sell real estate
acquired by the Fund as a result of the ownership of securities.
6. Purchase securities on margin (except that the Fund may obtain such
short-term credits as may be necessary for the clearance of purchases and
sales of securities).
7. Purchase or sell commodities or commodity contracts, except the Fund may
purchase and sell options on securities, securities indices and currency,
futures contracts on securities, securities indices and currency and
options on such futures, forward foreign currency exchange contracts,
forward commitments, securities index put or call warrants and repurchase
agreements entered into in accordance with the Fund's investment policies.
8. Make loans, except that the Fund (1) may lend portfolio securities in
accordance with the Fund's investment policies up to 33 1/3% of the Fund's
total assets taken at market value, (2) enter into repurchase agreements,
and (3) purchase all or a portion of an issue of debt securities, bank
loan participation interests, bank certificates of deposit, bankers'
acceptances, debentures or other securities, whether or not the purchase
is made upon the original issuance of the securities.
For purposes of the fundamental investment restriction (1) regarding
industry concentration, the Adviser generally classifies issuers by industry in
accordance with classifications set forth in the Directory of Companies Filing
Annual Reports With The Securities and Exchange Commission. In the absence of
such classification or if the Adviser determines in good faith based on its own
information that the economic characteristics affecting a particular issuer make
it more appropriately considered to be engaged in a different industry, the
Adviser may classify an issuer according to its own sources. For instance,
personal credit finance companies and business credit finance companies are
deemed to be separate industries and wholly-owned finance companies are
considered to be in the industry of their parents if their activities are
primarily related to financing the activities of their parents.
The following restrictions are not fundamental policies and may be changed
by the Trustees without shareholder approval, in accordance with applicable
laws, regulations or regulatory policy. The Fund may not:
A. Make short sales of securities unless (a) after effect is given to any
such short sale, the total market value of all securities sold short would
not exceed 5% of the value of the Fund's net assets or (b) at all times
during which a short position is open it owns an equal amount of such
securities, or by virtue of ownership of convertible or exchangeable
securities it has the right to obtain through the conversion or exchange
of such other securities an amount equal to the securities sold short.
13
<PAGE>
B. Invest in companies for the purpose of exercising control or management.
C. Purchase securities of any other investment company if, as a result, (i)
more than 10% of the Fund's assets would be invested in securities of
other investment companies, (ii) such purchase would result in more than
3% of the total outstanding voting securities of any one such investment
company being held by the Fund or (iii) more than 5% of the Fund's assets
would be invested in any one such investment company. The Fund will not
purchase the securities of any open-end investment company except when
such purchase is part of a plan of merger, consolidation, reorganization
or purchase of substantially all of the assets of any other investment
company, or purchase the securities of any closed-end investment company
except in the open market where no commission or profit to a sponsor or
dealer results from the purchase, other than customary brokerage fees. The
Fund has no current intention of investing in other investment companies.
D. Invest in interests in oil, gas or other exploration or development
programs; however, this policy will not prohibit the acquisition of
securities of companies engaged in the production or transmission of oil,
gas, or other minerals.
E. Invest more than 5% of the assets of the Fund in the securities of any
issuers which, together with their corporate parents, have records of less
than three years' continuous operation, including the operation of any
predecessor, excluding obligations issued or guaranteed by the U.S.
Government or its agencies and securities fully collateralized by such
securities and excluding securities which have been rated investment grade
by at least one nationally recognized statistical rating organization.
F. Invest in securities of any company if any officer or director (Trustee)
of the Trust or of the Adviser owns more than .5% of the outstanding
securities of such company and such officers and directors (Trustees) own
in the aggregate more than 5% of the securities of such company.
G. Invest in securities which are illiquid if, as a result, more than 15% of
its net assets would consist of such securities, including repurchase
agreements maturing in more than seven days, securities that are not
readily marketable, restricted securities not eligible for resale pursuant
to Rule 144A under the 1933 Act, purchased OTC options, certain assets
used to cover written OTC options, and privately issued stripped
mortgage-backed securities.
H. Invest more than 15% of its total assets in restricted securities,
including those eligible for resale under Rule 144A under the 1933 Act.
I. Purchase securities while outstanding bank borrowings exceed 5% of the
Fund's net assets.
J. Invest in real estate limited partnership interests, other than real
estate investment trusts organized as limited partnerships.
K. Purchase or sell (write) options, except pursuant to the limitations
described above.
14
<PAGE>
If any percentage restriction described above is adhered to at the time of
investment, a subsequent increase or decrease in the percentage resulting from a
change in the value of the Fund's assets will not constitute a violation of the
restriction, except with respect to restriction (F) above.
In order to permit the sale of shares of the Fund in certain states, the
Board may, in its sole discretion, adopt restrictions on investment policy more
restrictive than those described above. Should the Board determine that any such
more restrictive policy is no longer in the best interest of the Fund and its
shareholders, the Fund may cease offering shares in the state involved and the
Board may revoke such restrictive policy. Moreover, if the states involved shall
no longer require any such restrictive policy, the Board may, in its sole
discretion, revoke such policy.
CALCULATION OF PERFORMANCE DATA
As indicated in the Prospectus, the Fund may, from time to time, advertise
certain total return and yield information. The average annual total return of
the Fund for a period is computed by subtracting the net asset value per share
at the beginning of the period from the net asset value per share at the end of
the period (after adjusting for the reinvestment of any income dividends and
capital gain distributions), and dividing the result by the net asset value per
share at the beginning of the period. In particular, the average annual total
return of the Fund ("T") is computed by using the redeemable value at the end of
a specified period of time ("ERV") of a hypothetical initial investment of
$1,000 ("P") over a period of time ("n") according to the formula P(1+T)n=ERV.
Yield quotations shares are computed by dividing the net investment income
per share during a base period of 30 days, or one month, by the maximum offering
price (net asset value) per share of the Fund on the last day of such base
period in accordance with the following formula:
Yield = 2[((A - B + 1)/CD)^6 - 1]
Where: a = interest earned during the period
b = net expenses accrued for the period
c = the average daily number of shares outstanding
during the period that were entitled to receive
dividends
d = the maximum offering price per share (net asset
value) on the last day of the period
For purposes of calculating interest earned on debt obligations as provided
in item "a" above:
(i) The yield to maturity of each obligation held by the Fund is computed
based on the market value of the obligation (including actual accrued
interest, if any) at the close of business each day during the 30-day base
period, or, with respect to obligations purchased during the month, the
purchase price (plus actual accrued interest, if any) on settlement date,
and with respect to obligations sold during the month the sale price (plus
actual accrued interest, if any) between the trade and settlement dates.
15
<PAGE>
(ii) The yield to maturity of each obligation is then divided by 360 and the
resulting quotient is multiplied by the market value of the obligation
(including actual accrued interest, if any) to determine the interest
income on the obligation for each day. The yield to maturity calculation
has been made on each obligation during the 30 day base period.
(iii) Interest earned on all debt obligations during the 30-day or one month
period is then totaled.
(iv) The maturity of an obligation with a call provision(s) is the next call
date on which the obligation reasonably may be expected to be called or,
if none, the maturity date.
With respect to the treatment of discount and premium on mortgage or other
receivables-backed obligations which are expected to be subject to monthly
payments of principal and interest ("pay downs"), the Fund accounts for gain or
loss attributable to actual monthly pay downs as an increase or decrease to
interest income during the period. In addition, the Fund may elect (i) to
amortize the discount or premium remaining on a security, based on the cost of
the security, to the weighted average maturity date, if such information is
available, or to the remaining term of the security, if the weighted average
maturity date is not available, or (ii) not to amortize the discount or premium
remaining on a security.
The Fund may also quote non-standardized yield, such as yield-to-maturity
("YTM"). YTM represents the rate of return an investor will receive if a
long-term, interest bearing investment, such as a bond, is held to its maturity
date. YTM does not take into account purchase price, redemption value, time to
maturity, coupon yield, and the time between interest payments.
16
<PAGE>
In addition to average annual return and yield quotations, the Fund may
quote quarterly and annual performance on a net (with management and
administration fees deducted) and gross basis as follows:
Quarter/Year Net Gross
- - --------------------------------------------------------------------------------
3Q95 1.55% 1.64%
4Q95 2.61 2.70
1995 4.20 4.38
These performance quotations should not be considered as representative of
the Fund's performance for any specified period in the future.
The Fund's performance may be compared in sales literature to the
performance of other mutual funds having similar objectives or to standardized
indices or other measures of investment performance. In particular, the Fund may
compare its performance to the Merrill Lynch 1-3 Year U.S. Treasury Index, the
Merrill Lynch 1-5 Year U.S. Treasury Index and the Merrill Lynch 1 Year Treasury
Bill Index. Comparative performance may also be expressed by reference to a
ranking prepared by a mutual fund monitoring service or by one or more
newspapers, newsletters or financial periodicals. Performance comparisons may be
useful to investors who wish to compare the Fund's past performance to that of
other mutual funds and investment products. Of course, past performance is not a
guarantee of future results.
The Fund's average annual total return for the period from July 3, 1995
(commencement of operations) through December 31, 1995 was 4.20% and the Fund's
average annualized yield for the 30-day period ended December 31, 1995 was
5.82%.
17
<PAGE>
MANAGEMENT
Trustees and Officers
The Trustees and executive officers of the Trust are listed below. All
executive officers of the Trust are affiliates of Standish, Ayer & Wood, Inc.,
the Fund's investment adviser.
<TABLE>
<CAPTION>
Name, Address and Date of Birth Position Held Principal Occupation
With Trust During Past 5 Years
- - --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
*D. Barr Clayson, 7/29/35 Vice President and Trustee Vice President and Managing Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.;
One Financial Center Chairman and Director,
Boston, MA 02111 Standish International
Management Company, L.P.
Samuel C. Fleming, 9/30/40 Trustee Chairman of the Board
c/o Decision Resources, Inc. and Chief Executive Officer,
1100 Winter Street Decision Resources, Inc.;
Waltham, MA 02154 through 1989, Senior V.P.
Arthur D. Little
Benjamin M. Friedman, 8/5/44 Trustee William Joseph Maier
c/o Harvard University Professor of Political Economy,
Cambridge, MA 02138 Harvard University
John H. Hewitt, 4/11/35 Trustee Trustee, The Peabody Foundation; Trustee,
P.O. Box 307 Visiting Nurse Alliance of Vermont
So. Woodstock, VT 05071 and New Hampshire
*Edward H. Ladd, 1/3/38 Trustee and Vice President Chairman of the Board
c/o Standish, Ayer & Wood, Inc. and Managing Director,
One Financial Center Standish, Ayer & Wood, Inc. since 1990;
Boston, MA 02111 formerly President of Standish, Ayer & Wood, Inc.
Director of
Standish International Management Company, L.P.
Caleb Loring III, 11/14/43 Trustee Trustee, Essex Street Associates
c/o Essex Street Associates (family investment trust office);
P.0. Box 5600 Director, Holyoke Mutual Insurance Company
Beverly Farms, MA 01915
*Richard S. Wood, 5/21/54 President and Trustee Vice President, Secretary,
c/o Standish, Ayer & Wood, Inc. and Managing Director,
One Financial Center Standish, Ayer & Wood, Inc.;
Boston, MA 02111 Executive Vice President and Director,
Standish International Management Company, L.P.
Richard C. Doll, 7/8/48 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center Vice President and Director,
Boston, MA 02111 Standish International Management Company, L.P.
James E. Hollis III, 11/21/48 Executive Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
David W. Murray, 5/5/40 Treasurer and Secretary Vice President, Treasurer and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center Treasurer,
Boston, MA 02111 Standish International Management Company, L.P.
18
<PAGE>
Name, Address and Date of Birth Position Held Principal Occupation
With Trust During Past 5 Years
- - --------------------------------------------------------------------------------------------------------------------
Caleb F. Aldrich, 9/20/57 Vice President Vice President and Managing Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA O2111
Beverly E. Banfield, 7/6/56 Vice President Vice President and Compliance Officer,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.;
One Financial Center Assistant Vice President and Compliance Officer,
Boston, MA 02111 Freedom Capital Management Corp.
(1989-1992)
Nicholas S. Battelle, 6/24/42 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Walter M. Cabot, 1/16/33 Vice President Senior Advisor and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.;
One Financial Center prior to 1991, President,
Boston, MA 02111 Harvard Management Company
Senior Advisor and Director of
Standish International Management Company, L.P.
David H. Cameron, 11/2/55 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center Director of
Boston, MA 02111 Standish International Management
Company, L.P.
Karen K. Chandor, 2/13/50 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Lavinia B. Chase, 6/4/46 Vice President Vice President,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Susan B. Coan, 5/1/52 Vice President Vice President,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA O2111
W. Charles Cook II, 7/16/63 Vice President Vice President,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center Vice President,
Boston, MA 02111 Standish International Management Company, L.P.
Joseph M. Corrado, 5/13/55 Vice President Vice President and Associate Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
19
<PAGE>
Name, Address and Date of Birth Position Held Principal Occupation
With Trust During Past 5 Years
- - --------------------------------------------------------------------------------------------------------------------
Dolores S. Driscoll, 2/17/48 Vice President Vice President and Managing Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center Director,
Boston, MA 02111 Standish International Management Company, L.P.
Mark A. Flaherty, 4/24/59 Vice President Vice President,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center Vice President
Boston, MA 02111 Standish International Management Company, L.P.
Maria D. Furman, 2/3/54 Vice President Vice President and Managing Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center Vice President and Director,
Boston, MA 02111 Standish International Management Company, L.P.
Anne P. Herrmann, 1/26/56 Vice President Mutual Fund Administrator,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Ann S. Higgins, 4/8/35 Vice President Vice President,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Denise B. Kneeland, 8/19/51 Vice President Senior Operations, Manager,
c/o Standish, Ayer &Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center since December 1995 formerly
Boston, MA 02111 Vice President Scudder, Stevens and Clark
Raymond J. Kubiak, 9/3/57 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Phillip D. Leonardi, 4/24/62 Vice President Vice President, Standish, Ayer & Wood, Inc.
c/o Standish, Ayer & Wood, Inc. since November 1993; formerly, Investment Sales,
One Financial Center Cigna Corporation (1993) and
Boston, MA 02111 Travelers Corporation (1984-1993)
Laurence A. Manchester, 5/24/43 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
George W. Noyes, 11/12/44 Vice President President and Managing Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center Director of
Boston, MA 02111 Standish International Management Company, L.P.
Arthur H. Parker, 8/12/35 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Jennifer A. Pline, 3/8/60 Vice President Vice President,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
20
<PAGE>
Name, Address and Date of Birth Position Held Principal Occupation
With Trust During Past 5 Years
- - --------------------------------------------------------------------------------------------------------------------
Howard B. Rubin, 10/29/59 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center Executive Vice President and Director
Boston, MA 02111 Standish International Management Company, L.P.
Michael C. Schoeck, 10/24/55 Vice President Vice President,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc. since August, 1993;
One Financial Center formerly, Vice President,
Boston, MA 02111 Commerzbank, Frankfurt, Germany
Vice President,
Standish International Management Company, L.P.
Austin C. Smith, 7/25/52 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Stephen A. Smith, 3/13/49 Vice President Vice President, since November 2, 1993;
c/o Standish, Ayer & Wood, Inc. formerly, Standish, Ayer & Wood, Inc. Consultant
One Financial Center Cambridge Associates
Boston, MA 02111
David C. Stuehr, 3/1/58 Vice President Vice President,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
James W. Sweeney, 5/15/59 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center Executive Vice President and Director,
Boston, MA 02111 Standish International Management Company, L.P.
Ralph S. Tate, 4/2/47 Vice President Vice President and Managing Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc. since April, 1990;
One Financial Center formerly Vice President, Aetna Life & Casualty
Boston, MA 02111 President and Director,
Standish International Management Company, L.P.
Michael W. Thompson, 3/31/56 Vice President Vice President and Associate Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Christopher W. Van Alstyne, 3/24/60 Vice President Vice President,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.;
One Financial Center Formerly Regional Marketing Director,
Boston, MA 02111 Gabelli-O'Connor Fixed Income Management
*Indicates that Trustee is an interested person of the Trust for purposes
of the 1940 Act. Compensation of Trustees and Officers
</TABLE>
The Fund pays no compensation to the Trust's Trustees affiliated with the
Adviser or to the Trust's officers. None of the Trust's Trustees or officers
have engaged in any financial transactions (other than the purchase or
redemption of the Fund's shares) with the Trust or the Adviser.
The following table sets forth all compensation paid to the Trust's
Trustees as of the fiscal year ended December 31, 1995 and estimates the amount
of such fees to be paid by the Fund during its current fiscal year:
21
<PAGE>
<TABLE>
<CAPTION>
Pension or Retirement Total Compensation
Aggregate Compensation Benefits Accrued as from Fund and
Name of Trustee from the Fund Part of Fund's Expenses Other Funds in Complex*
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
D. Barr Clayson $0 $0 $0
Phyllis L. Cothran** 0 0 0
Richard C. Doll*** 0 0 0
Samuel C. Fleming 63 0 46,000
Benjamin M. Friedman 143 41,750
John H. Hewitt 143 0 41,750
Edward H. Ladd 0 0 0
Caleb Loring, III 143 0 41,750
Richard S. Wood 0 0 0
---------
* As of the date of this Statement of Additional Information, there were
18 mutual funds in the fund complex.
** Ms. Cothran resigned as a Trustee effective January 31, 1995.
*** Mr. Doll resigned as a Trustee effective December 6, 1995.
</TABLE>
Certain Shareholders
At February 1, 1996, the Trustees and officers of the Trust as a group
beneficially owned (i.e., had voting and/or investment power) less than 1% of
the then outstanding shares of the Fund. At that date, no person beneficially
owned 5% or more of the outstanding shares of the Fund except:
Percentage of
Name and Address Outstanding Shares
- - --------------------------------------------------------------------------------
Essex County Gas Company 49%
7 North Hunt Road
P.O. Box 500
Amesbury, MA 01913
San Francisco Opera Association 19%
301 Van Ness Avenue
San Francisco, CA 94102
Mr. Ian M. Cumming 8%
Cumming Foundation
Leucadia National Corporation
529 East South Temple
Salt Lake City, UT 84102
The John Darnaby Cumming Trust 5%
Leucadia National Corporation
529 East South Temple
Salt Lake City, UT 84102
The David Edward Cumming Trust 5%
Leucadia National Corporation
529 East South Temple
Salt Lake City, UT 84102
Ian M. Cumming IRA 5%
529 East South Temple
Salt Lake City, UT 84102
22
<PAGE>
Investment Adviser
Standish, Ayer & Wood, Inc. serves as investment adviser to the Fund
pursuant to a written investment advisory agreement. The Adviser is a
Massachusetts corporation organized in 1933 and is registered under the
Investment Advisers Act of 1940.
The following, constituting all of the Directors and all of the
shareholders of the Adviser, are the controlling persons of the Adviser: Caleb
F. Aldrich, Nicholas S. Battelle, Walter M. Cabot, Sr., David H. Cameron, Karen
K. Chandor, D. Barr Clayson, Richard C. Doll, Dolores S. Driscoll, Mark A.
Flaherty, Maria D. Furman, James E. Hollis III, Raymond J. Kubiak, Edward H.
Ladd, Laurence A. Manchester, David W. Murray, George W. Noyes, Arthur H.
Parker, Howard B. Rubin, David C. Stuehr, Austin C. Smith, Ralph S. Tate, James
J. Sweeney and Richard S. Wood.
Certain services provided by the Adviser under the advisory agreement are
described in the Prospectus. In addition to those services, the Adviser provides
the Fund with office space for managing its affairs, with the services of
required executive personnel, and with certain clerical services and facilities.
These services are provided without reimbursement by the Fund for any costs
incurred. Under the investment advisory agreement, the Fund pays to the Adviser
a fee at the rate of 0.35% of the Fund's average daily net assets. This fee is
paid monthly. For services to the Fund during the fiscal period from July 3,
1995 (commencement of operations) through December 31, 1995, the Adviser
voluntarily agreed not to impose its advisory fees which would have amounted to
$11,617.
The Adviser has voluntarily agreed to limit certain "Total Fund Operating
Expenses" (excluding litigation, indemnification and other extraordinary
expenses) to 0.45% per annum of the Fund's average daily net assets. This
agreement is voluntary and temporary and may be discontinued or revised by the
Adviser at any time. If such Total Fund Operating Expenses exceed the voluntary
expense limitation, the compensation due to the Adviser shall be reduced by the
amount of the excess, by a reduction or refund thereof at the time such
compensation is payable after the end of each calendar month during the year in
which the limitation is in effect, subject to readjustment during the year.
23
<PAGE>
Pursuant to the investment advisory agreement, the Fund bears expenses of
its operations other than those incurred by the Adviser pursuant to the
investment advisory agreement. Among other expenses, the Fund will pay share
pricing and shareholder servicing fees and expenses; custodian fees and
expenses; legal and auditing fees and expenses; expenses of prospectuses,
statements of additional information and shareholder reports; registration and
reporting fees and expenses; and Trustees' fees and expenses. The advisory
agreement provides that if the total expenses of the Fund in any fiscal year
exceed the most restrictive expense limitation applicable to the Fund in any
state in which shares of the Fund are then qualified for sale, the compensation
due the Adviser shall be reduced by the amount of the excess, by a reduction or
refund thereof at the time such compensation is payable after the end of each
calendar month during the fiscal year, subject to readjustment during the year.
Currently, the most restrictive state expense limitation provision limits the
Fund's expenses to 2 1/2% the first $30 million of average net assets, 2% of the
next $70 million of such net assets and 1 1/2% of such net assets in excess of
$100 million.
Unless terminated as provided below, the investment advisory agreement
continues in full force and effect until June 1, 1997 and for successive periods
of one year thereafter, but only as long as each such continuance after June 1,
1997 is approved annually (i) by either the Trustees of the Trust or by vote of
a majority of the outstanding voting securities (as defined in the 1940 Act) of
the Fund, and, in either event (ii) by vote of a majority of the Trustees of the
Trust who are not parties to the investment advisory agreement or "interested
persons" (as defined in the 1940 Act) of any such party, cast in person at a
meeting called for the purpose of voting on such approval. The investment
advisory agreement may be terminated at any time without the payment of any
penalty by vote of the Trustees of the Trust or by vote of a majority of the
outstanding voting securities (as defined in the 1940 Act) of the Fund or by the
Adviser, on sixty days' written notice to the other parties. The investment
advisory agreement terminates in the event of its assignment as defined in the
1940 Act.
In an attempt to avoid any potential conflict with portfolio transactions
for the Fund, the Adviser and the Trust have adopted extensive restrictions on
personal securities trading by personnel of the Adviser and its affiliates.
These restrictions include: pre-clearance of all personal securities
transactions and a prohibition of purchasing initial public offerings of
securities. These restrictions are a continuation of the basic principle that
the interests of the Fund and its shareholders come before those of the Adviser,
its affiliates and their employees.
Distributor of the Trust
Standish Fund Distributors, L.P. (the "Principal Underwriter"), an
affiliate of the Adviser, serves as the Trust's exclusive principal underwriter
and holds itself available to receive purchase orders for the Fund's shares. In
that capacity, the Principal Underwriter has been granted the right, as agent of
the Trust, to solicit and accept orders for the purchase of the Fund's shares in
accordance with the terms of the Underwriting Agreement between the Trust and
the Principal Underwriter. Pursuant to the Underwriting Agreement, the Principal
Underwriter has agreed to use its best efforts to obtain orders for the
continuous offering of the Fund's shares. The Principal Underwriter receives no
commissions or other compensation for its services, and has not received any
24
<PAGE>
such amounts in any prior year. The Underwriting Agreement shall continue in
effect with respect to the Fund until two years after its execution and for
successive periods of one year thereafter only if it is approved at least
annually thereafter (i) by a vote of the holders of a majority of the Fund's
outstanding shares or by the Trustees of the Trust or (ii) by a vote of a
majority of the Trustees of the Trust who are not "interested persons" (as
defined by the 1940 Act) of the parties to the Underwriting Agreement, cast in
person at a meeting called for the purpose of voting on such approval. The
Underwriting Agreement will terminate automatically if assigned by either party
thereto and is terminable at any time without penalty by a vote of a majority of
the Trustees of the Trust, a vote of a majority of the Trustees who are not
"interested persons" of the Trust, or by a vote of the holders of a majority of
the Fund's outstanding shares, in any case without payment of any penalty on not
more than 60 days' written notice to the other party. The offices of the
Principal Underwriter are located at One Financial Center, 26th Floor, Boston,
Massachusetts 02111.
REDEMPTION OF SHARES
Detailed information on redemption of shares is included in the Prospectus.
The Fund may suspend the right to redeem shares or postpone the date of
payment upon redemption for more than seven days (i) for any period during which
the New York Stock Exchange is closed (other than customary weekend or holiday
closings) or trading on the exchange is restricted; (ii) for any period during
which an emergency exists as a result of which disposal by the Fund of
securities owned by it or determination by the Fund of the value of its net
assets is not reasonably practicable; or (iii) for such other periods as the
Securities and Exchange Commission may permit for the protection of shareholders
of the Fund.
The Fund intends to pay redemption proceeds in cash for all shares
redeemed, but under certain conditions, the Fund may make payment wholly or
partly in portfolio securities. Portfolio securities paid upon redemption of
Fund shares will be valued at their then current market value. The Fund has
elected to be governed by the provisions of Rule 18f-1 under the 1940 Act which
limits the Fund's obligation to make cash redemption payments to any shareholder
during any 90-day period to the lesser of $250,000 or 1% of the Fund's net asset
value at the beginning of such period. An investor may incur brokerage costs in
converting portfolio securities received upon redemption to cash.
PORTFOLIO TRANSACTIONS
The Adviser is responsible for placing the Fund's portfolio transactions
and will do so in a manner deemed fair and reasonable to the Fund and not
according to any formula. The primary consideration in all portfolio
transactions will be prompt execution of orders in an efficient manner at the
most favorable price. In selecting broker-dealers and in negotiating
commissions, the Adviser will consider the firm's reliability, the quality of
its execution services on a continuing basis and its financial condition. When
more than one firm is believed to meet these criteria, preference may be given
to firms which also sell shares of the Fund. In addition, if the Adviser
determines in good faith that the amount of commissions charged by a broker is
reasonable in relation to the value of the brokerage and research services
25
<PAGE>
provided by such broker, the Fund may pay commissions to such broker in an
amount greater than the amount another firm may charge. Research services may
include (i) furnishing advice as to the value of securities, the advisability of
investing in, purchasing or selling securities, and the availability of
securities or purchasers or sellers of securities, (ii) furnishing analyses and
reports concerning issuers, industries, securities, economic factors and trends,
portfolio strategy, and the performance of accounts, and (iii) effecting
securities transactions and performing functions incidental thereto (such as
clearance, settlement and custody). Research services furnished by firms through
which the Fund effects its securities transactions may be used by the Adviser in
servicing its other accounts; not all of these services may be used by the
Adviser in connection with the Fund. The investment advisory fee paid by the
Fund under the advisory agreement will not be reduced as a result of the
Adviser's receipt of research services.
For the fiscal period from July 3, 1995 (commencement of operations)
through December 31, 1995, the Fund did not pay any brokerage commissions.
The Adviser also places portfolio transactions for other advisory accounts.
The Adviser will seek to allocate portfolio transactions equitably whenever
concurrent decisions are made to purchase or sell securities for the Fund and
another advisory account. In some cases, this procedure could have an adverse
effect on the price or the amount of securities available to the Fund. In making
such allocations, the main factors considered by the Adviser will be the
respective investment objectives, the relative size of portfolio holdings of the
same or comparable securities, the availability of cash for investment, the size
of investment commitments generally held, and opinions of the persons
responsible for recommending the investment.
FEDERAL INCOME TAXES
Each series of the Trust, including the Fund, is treated as a separate
entity for accounting and tax purposes. The Fund intends to elect and to qualify
to be treated as a "regulated investment company" under Subchapter M of the
Internal Revenue Code, and intends to continue to so qualify in the future. As
such and by complying with the applicable provisions of the Internal Revenue
Code regarding the sources of its income, the timing of its distributions, and
the diversification of its assets, the Fund will not be subject to Federal
income tax on its investment company taxable income (i.e., all taxable income,
after reduction by deductible expenses, other than its "net capital gain," which
is the excess, if any, of its net long-term capital gain over its net short-term
capital loss) and net capital gain which are distributed to shareholders at
least annually in accordance with the timing requirements of the Internal
Revenue Code.
The Fund will be subject to a 4% non-deductible federal excise tax on
certain amounts not distributed (and not treated as having been distributed) on
a timely basis in accordance with annual minimum distribution requirements. The
Fund intends under normal circumstances to avoid liability for such tax by
satisfying such distribution requirements.
The Fund is not subject to Massachusetts corporate excise or franchise
taxes. Provided that the Fund qualifies as a regulated investment company under
the Internal Revenue Code, it will also not be required to pay any Massachusetts
income tax.
26
<PAGE>
The Fund will not distribute net capital gains realized in any year to the
extent that a capital loss is carried forward from prior years against such
gain. For federal income tax purposes, the Fund is permitted to carry forward a
net capital loss in any year to offset its own net capital gains, if any, during
the eight years following the year of the loss. To the extent subsequent net
capital gains are offset by such losses, they would not result in federal income
tax liability to the Fund and, as noted above, would not be distributed as such
to shareholders.
If the Fund invests in certain zero coupon securities, increasing rate
securities or, in general, other securities with original issue discount (or
with market discount if the Fund elects to include market discount in income
currently), the Fund must accrue income on such investments prior to the receipt
of the corresponding cash payments. However, the Fund must distribute, at least
annually, all or substantially all of its net income, including such accrued
income, to shareholders to qualify as a regulated investment company under the
Internal Revenue Code and avoid federal income and excise taxes. Therefore, the
Fund may have to dispose of its portfolio securities under disadvantageous
circumstances to generate cash, or may have to leverage itself by borrowing the
cash, to satisfy distribution requirements.
Limitations imposed by the Internal Revenue Code on regulated investment
companies like the Fund may restrict the Fund's ability to enter into futures
and options transactions.
Certain options and futures transactions undertaken by the Fund may cause
the Fund to recognize gains or losses from marking to market even though its
positions have not been sold or terminated and affect the character as long-term
or short-term (or, in the case of certain options and futures, as ordinary
income or loss) and timing of some capital gains and losses realized by the
Fund. Any net mark to market gains may also have to be distributed to satisfy
the distribution requirements referred to above even though no corresponding
cash amounts may concurrently be received, possibly requiring the disposition of
portfolio securities or borrowing to obtain the necessary cash. Also, certain of
the Fund's losses on its transactions involving options or futures contracts
and/or offsetting portfolio positions may be deferred rather than being taken
into account currently in calculating the Fund's taxable income or gain. Certain
of the applicable tax rules may be modified if the Fund is eligible and chooses
to make one or more of certain tax elections that may be available. These
transactions may therefore affect the amount, timing and character of the Fund's
distributions to shareholders. The Fund will take into account the special tax
rules (including consideration of available elections) applicable to options or
futures contracts in order to minimize any potential adverse tax consequences.
The federal income tax rules applicable to mortgage dollar rolls and
interest rate swaps, caps, floors and collars are unclear in certain respects,
and the Fund may be required to account for these instruments under tax rules in
a manner that, under certain circumstances, may limit its transactions in these
instruments.
Due to possible unfavorable consequences under present tax law, the Fund
does not currently intend to acquire "residual" interests in real estate
mortgage investment conduits ("REMICs"), although the Fund may acquire "regular"
interests in REMICs.
27
<PAGE>
Distributions from the Fund's current or accumulated earnings and profits
("E&P"), as computed for Federal income tax purposes, will be taxable as
described in the Fund's Prospectus whether taken in shares or in cash.
Distributions, if any, in excess of E&P will constitute a return of capital,
which will first reduce an investor's tax basis in Fund shares and thereafter
(after such basis is reduced to zero) will generally give rise to capital gains.
Shareholders electing to receive distributions in the form of additional shares
will have a cost basis for federal income tax purposes in each share so received
equal to the amount of cash they would have received had they elected to receive
the distributions in cash, divided by the number of shares received.
The Fund's distributions to its corporate shareholders would potentially
qualify in their hands for the corporate dividends received deduction, subject
to certain holding period requirements and limitations on debt financing under
the Code, only to the extent the Fund earned dividend income from stock
investments in U.S. domestic corporations. Although the Fund is not expected to
concentrate its investments in such stock, the Fund is permitted to acquire
preferred stocks, and it is therefore possible that a portion of its
distributions, attributable to the dividends it receives with respect to such
preferred stocks, may qualify for the dividends received deduction. Such
qualifying portion, if any, may affect a corporate shareholder's liability for
alternative minimum tax and/or result in basis reductions in certain
circumstances.
At the time of an investor's purchase of Fund shares, a portion of the
purchase price is often attributable to undistributed net investment income
and/or realized or unrealized appreciation in the Fund's portfolio.
Consequently, subsequent distributions from such income and/or appreciation may
be taxable to such investor even if the net asset value of the investor's shares
is, as a result of the distributions, reduced below the investor's cost for such
shares, and the distributions in reality represent a return of a portion of the
purchase price.
Upon a redemption (including a repurchase) of shares of the Fund, a
shareholder may realize a taxable gain or loss, depending upon the difference
between the redemption proceeds and the shareholder's tax basis in his shares.
Such gain or loss will be treated as capital gain or loss if the shares are
capital assets in the shareholder's hands and will be long-term or short-term,
depending upon the shareholder's tax holding period for the shares. Any loss
realized on a redemption may be disallowed to the extent the shares disposed of
are replaced within a period of 61 days beginning 30 days before and ending 30
days after the shares are disposed of, such as pursuant to automatic dividend
reinvestments. In such a case, the basis of the shares acquired will be adjusted
to reflect the disallowed loss. Any loss realized upon the redemption of shares
with a tax holding period of six months or less will be treated as a long-term
capital loss to the extent of any amounts treated as distributions of long-term
capital gain with respect to such shares.
Different tax treatment, including penalties on certain excess
contributions and deferrals, certain pre-retirement and post-retirement
distributions and certain prohibited transactions, is accorded to accounts
maintained as qualified retirement plans. Shareholders should consult their tax
advisers for more information.
28
<PAGE>
The foregoing discussion relates solely to U.S. Federal income tax law as
applicable to U.S. persons (i.e., U.S. citizens or residents and U.S. domestic
corporations, partnerships, trusts or estates) subject to tax under such law.
The discussion does not address special tax rules applicable to certain classes
of investors, such as tax-exempt entities, insurance companies, and financial
institutions. Dividends, capital gain distributions, and ownership of or gains
realized on the redemption (including an exchange) of Fund shares may also be
subject to state and local taxes. Shareholders should consult their own tax
advisers as to the Federal, state or local tax consequences of ownership of
shares of, and receipt of distributions from, the Fund in their particular
circumstances.
Non-U.S. investors not engaged in a U.S. trade or business with which their
investment in the Fund is effectively connected will be subject to U.S. Federal
income tax treatment that is different from that described above. These
investors may be subject to nonresident alien withholding tax at the rate of 30%
(or a lower rate under an applicable tax treaty) on amounts treated as ordinary
dividends from the Fund and, unless an effective IRS Form W-8 or authorized
substitute is on file, to 31% backup withholding on certain other payments from
the Fund. Non-U.S. investors should consult their tax advisers regarding such
treatment and the application of foreign taxes to an investment in the Fund.
DETERMINATION OF NET ASSET VALUE
The Fund's net asset value is calculated each day on which the New York
Stock Exchange is open. Currently the New York Stock Exchange is not open on
weekends, New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas. The net asset value
of the Fund's shares is determined as of the close of regular trading on the New
York Stock Exchange (currently 4:00 p.m., New York City time) and is computed by
dividing the value of all securities and other assets of the Fund less all
liabilities by the number of shares outstanding, and adjusting to the nearest
cent per share. Expenses and fees, including the investment advisory fee, are
accrued daily and taken into account for the purpose of determining net asset
value.
Portfolio securities are valued at the last sale prices, on the valuation
day, on the exchange or national securities market on which they are primarily
traded. Securities not listed on an exchange or national securities market, or
securities for which there were no reported transactions, are valued at the last
quoted bid prices. Securities for which quotations are not readily available and
all other assets are valued at fair value as determined by the Adviser in
accordance with procedures approved by the Trustees.
Money market instruments with less than sixty days remaining to maturity
when acquired by the Fund are valued on an amortized cost basis. If the Fund
acquires a money market instrument with more than sixty days remaining to its
maturity, it is valued at current market value until the sixtieth day prior to
maturity and will then be valued at amortized cost based upon the value on such
date unless the Trustees determine during such sixty-day period that amortized
cost does not represent fair value.
29
<PAGE>
THE FUND AND ITS SHARES
The Fund is an investment series of Standish, Ayer & Wood Investment Trust,
an unincorporated business trust organized under the laws of The Commonwealth of
Massachusetts pursuant to an Agreement and Declaration of Trust dated August 13,
1986, as amended from time to time (the "Declaration"). Under the Declaration,
the Trustees have authority to issue an unlimited number of shares of beneficial
interest, par value $.01 per share, of the Fund. Each share represents an equal
proportionate interest in the Fund with each other share and is entitled to such
dividends and distributions as are declared by the Trustees. Shareholders are
not entitled to any preemptive, conversion or subscription rights. All shares,
when issued, will be fully paid and non-assessable by the Trust. Upon any
liquidation of the Fund, shareholders are entitled to share pro rata in the net
assets available for distribution.
Pursuant to the Declaration, the Trustees may create additional funds by
establishing additional series of shares in the Trust. The establishment of
additional series would not affect the interests of current shareholders in the
Fund. As of the date of this Statement of Additional Information, the Trustees
have established fourteen other series of the Trust that publicly offer their
shares. Pursuant to the Declaration, the Board may establish and issue multiple
classes of shares for each series of the Trust. As of the date of this Statement
of Additional Information, the Trustees do not have any plan to establish
multiple classes of shares for the Fund. Pursuant to the Declaration of Trust
and subject to shareholder approval (if then required), the Trustees may
authorize the Fund to invest all of its investable assets in a single open-end
investment company that has substantially the same investment objectives,
policies and restrictions as the Fund. As of the date of this Statement of
Additional Information, the Board does not have any plan to authorize the Fund
to so invest its assets.
All Fund shares have equal rights with regard to voting, and shareholders
of the Fund have the right to vote as a separate class with respect to matters
as to which their interests are not identical to those of shareholders of other
classes of the Trust, including the approval of an investment advisory contract
and any change of investment policy requiring the approval of shareholders.
30
<PAGE>
Under Massachusetts law, shareholders of the Trust could, under certain
circumstances, be held liable for the obligations of the Trust. However, the
Declaration disclaims shareholder liability for acts or obligations of the Trust
and requires that notice of this disclaimer be given in each agreement,
obligation or instrument entered into or executed by the Trust or a Trustee. The
Declaration also provides for indemnification from the assets of the Trust for
all losses and expenses of any Trust shareholder held liable for the obligations
of the Trust. Thus, the risk of a shareholder incurring a financial loss on
account of its liability as a shareholder of the Trust is limited to
circumstances in which both inadequate insurance existed and the Trust would be
unable to meet its obligations. The possibility that these circumstances would
occur is remote. Upon payment of any liability incurred by the Trust, the
shareholder paying the liability will be entitled to reimbursement from the
general assets of the Trust. The Declaration also provides that no series of the
Trust is liable for the obligations of any other series. The Trustees intend to
conduct the operations of the Trust to avoid, to the extent possible, ultimate
liability of shareholders for liabilities of the Trust.
ADDITIONAL INFORMATION
The Fund's Prospectus and this Statement of Additional Information omit
certain information contained in the registration statement filed with the
Securities and Exchange Commission, which may be obtained from the Commission's
principal office at 450 Fifth Street, N.W., Washington, D.C. 20549, upon payment
of the fee prescribed by the rules and regulations promulgated by the
Commission.
EXPERTS AND FINANCIAL STATEMENTS
The Fund's financial statements for the period from July 3, 1995
(commencement of operations) through December 31, 1995 attached to and
incorporated into this Statement of Additional Information have been audited by
Coopers & Lybrand L.L.P., independent accountants, as set forth in their report
appearing elsewhere herein, and have been so included in reliance upon the
report of Coopers & Lybrand L.L.P. as experts in accounting and auditing.
Coopers & Lybrand L.L.P. will audit the Fund's financial statements for the
fiscal year ending December 31, 1996.
31
<PAGE>
Standish, Ayer & Wood Investment Trust
Standish Controlled Maturity Fund Series
Financial Statements for the Period
July 3, 1995 (start of business) to
December 31, 1995
1
<PAGE>
Standish, Ayer & Wood Investment Trust
Chairman's Message
January 29, 1996
Dear Standish, Ayer & Wood Investment Trust Shareholder:
I am pleased to have an opportunity to review the major developments at
Standish, Ayer & Wood during this past year as they relate to the activities of
the Investment Trust. The major news for our clients in 1995 was the spectacular
performance of the U.S. investment markets. While we would, of course, like to
claim credit for producing the full extent of these splendid returns, the
reality is obvious: The markets themselves are beyond our control. For the year
as a whole, U.S. stocks, as represented by the Standard and Poor's 500 Index,
produced a total return of 37.6%, and higher grade intermediate-term bonds, as
represented by the Lehman Brothers Aggregate Index, provided a total return of
18.5%. Nearly as surprising, stock and bond prices marched steadily upward
throughout the year, a persistent and almost uninterrupted advance.
Even after the subdued markets of 1994, neither we nor most other investment
managers expected 1995 to be anywhere near as good as it turned out to be. In
this context, we are generally pleased by our investment performance. In most
asset classes, we kept pace with or modestly exceeded market returns. We adhered
to our established investment philosophies, which are designed to add reasonably
consistent increments of value. Our clients seem to be pleased by our efforts as
we continue to have very little client turnover.
As a firm, we have registered moderate growth during the year. Reflecting some
flow of new clients as well as market appreciation, our clients' assets under
management at the end of 1995 totalled $29.4 billion, an increase from $24.4
billion at the end of 1994. We are particularly pleased by the growth in new
assets managed for insurance companies and by the increases in assets of both
large capitalization and small capitalization U.S. common stocks.
The asset class of greatest disappointment in 1995 was international equities.
Not only did the asset class continue to provide subpar returns, but our
portfolios underperformed the international equity markets. These results
reflect judgments early in 1995 to hedge a portion of the currency exposure back
to dollars and to have a moderate stake in emerging markets. While we believe we
have rectified those problems, we are not satisfied with the results and are
working vigorously to improve future performance. We are also counseling our
clients not to lose faith in the international equity asset class despite its
recent disappointing returns.
The figure for total Standish assets under management includes about $1.6
billion managed in conjunction with Standish International Management Company,
L.P. (SIMCO), our affiliate that manages overseas assets for domestic clients
and U.S. assets for overseas clients. It also includes $3.9 billion in the
Standish Investment Trust, our mutual fund organization. In addition, the asset
total reflects an increase over the last few years in the assets we manage in
private, non-mutual fund vehicles.
We introduced two new mutual funds at mid-year 1995, namely the Standish Fixed
Income Fund II (which is designed to parallel the Standish Fixed Income Fund but
exclude the purchase of both nondollar bonds and below-investment-grade
securities), and the Standish Controlled Maturity Fund (which is designed for
investors who wish less volatility and interest rate risk than traditional
intermediate-maturity bonds).
At the beginning of 1996, we introduced two additional mutual funds, the
Standish Tax-Sensitive Equity Fund and the Standish Small Cap Tax-Sensitive
Equity Fund. At Standish we have noted for some time the adverse impact for
taxable investors of high portfolio turnover, which triggers capital gains,
possibly including short-term gains that may result in an even greater tax
liability for investors. We believe there is a major opportunity through both
separate account management and these funds to improve aftertax returns by
limiting the portfolio turnover and managing capital gains.
2
<PAGE>
During 1995, Standish acquired all remaining interests in the business of the
joint venture between Consolidated Investment Corp. (CIC) and Standish, entered
into over seven years ago. Consolidated had been formed by Trigon (previously
Blue Cross/Blue Shield of Virginia) to manage shorter-term taxable and tax
exempt fixed income portfolios. We and Trigon agreed that it was best to have
this unit operating under one owner.
Standish continues to be proud of its structure as an independent management
firm with ownership in the hands of investment professionals active in the
business. There were no changes during 1995 either in corporate structure or in
the people who own the enterprise.
We appreciate the opportunity to serve you, and we remain confident that we have
the resources and the organization to do a superior job. We will be working hard
to fulfill your expectations in 1996.
Sincerely yours,
Edward H. Ladd
Chairman
3
<PAGE>
Standish, Ayer & Wood Investment Trust
Standish Controlled Maturity Fund Series
Management Discussion
In sharp contrast to 1994, the past twelve months will be remembered as one of
the finest years ever for fixed income investors as nearly every sector of the
bond market produced impressive returns. Since its inception on July 3, 1995,
the Standish Controlled Maturity Fund provided a 4.20% after expense
reimbursement return, versus 4.06% for the Merrill Lynch 1-3 Year Treasury
Index.
During the second half of 1995, the U.S Treasury Market continued to rally as
investors reacted favorably to inflation statistics and growing evidence of an
economic slowdown. From a relative return standpoint, it was a favorable period
for the Fund as our sector allocations added additional value to the portfolio.
Since inception, the Fund has maintained an over-weighted posture in corporate
bonds which were steady contributors despite fears of an economic slowdown and
relatively heavy new issue supply. Our strategy of focusing on the fundamental
credit quality of well-valued companies added measurably to absolute and
relative returns.
Mortgage and asset backed securities also play an important role in the
management of the Fund. The securitzed component of the portfolio has added
marginally to relative returns since inception. With interest rates having
fallen by over 200 basis points in 1995, the perceived risk of increasing
prepayments inhibited mortgages from keeping pace with other sectors of the bond
market. Going into the new year, we continue to view mortgages as attractive and
look to take advantage of historically cheap valuations.
The Fund's objective continues to be to provide attractive total returns
consistent with a short to intermediate portfolio maturity and duration. This is
evidenced by the returns generated with an average maturity of 2.9 years and an
average duration of 2.01 in line with the comparative benchmark. Our value added
from portfolio management should come predominantly from the attractive
corporate bonds and securitized instruments purchased for the fund. The degree
to which spreads fluctuate in the bond market will impact portfolio returns as
well as security selection.
As we enter 1996, we believe that the bond market is fully or near fully valued.
We acknowledge that the economy is slowing and that inflation pressures are
modest but believe that the market is already discounting much of this favorable
news. Consequently, we are projecting that up front yield will be a more
important determinant of absolute return going forward and believe that we have
positioned the Fund well for an environment of more stable or modestly higher
interest rates.
We thank you for your confidence as shareholders in joining us in the
commencement of the Fund, and hope that this information is helpful to you in
reviewing your overall investment strategies. A graph on the accompanying page
shows the cumulative performance of the Fund versus its relative benchmarks.
Howard B. Rubin
4
<PAGE>
Standish, Ayer & Wood Investment Trust
Standish Controlled Maturity Fund Series
Comparison of Change in Value of $100,000 Investment in
Standish Controlled Maturity Fund and Merrill Lynch 1-3 Year Index
The following is a description of the graphical chart omitted from electronic
format:
This line chart shows the cumulative performance of the Standish Controlled
Maturity Fund compared with the Merrill Lynch 1-3 Year Index for the period July
3, 1995 to December 31, 1995, based upon a $100,000 investment. Also included is
the average annual total return since inception.
5
<PAGE>
<TABLE>
<CAPTION>
Standish, Ayer & Wood Investment Trust
Standish Controlled Maturity Fund Series
Portfolio of Investments
December 31, 1995
Par Value
Security Rate Maturity Value (Note 1A)
- - ------------------------------------------------------- -------- ---------------- ---------------- ----------------
Bonds-99.3%
- - --------------------------------------------------------
Asset Backed Securities-15.1%
- - --------------------------------------------------------
<S> <C> <C> <C> <C>
Advanta Home Equity Trust Loan 92-2A1 7.15 % 06/25/08 30,792 $ 31,317
AFC Home Equity Loan Trust 93-2 6.00 01/20/13 25,527 25,120
Capital Auto Receivables Trust 93-1A7 5.35 02/17/98 56,930 56,690
Contimortgage Home Equity Loan 95-3A2 6.86 07/15/10 100,000 101,531
Equicon Home Equity 95-2A2 6.50 07/18/10 100,000 100,156
Equicredit Home Equity 93-4A 5.73 12/15/08 82,149 80,455
Equicredit Home Equity 95-4A2 6.35 10/15/09 120,000 121,031
Greentree Financial Corp. 92-2A2 7.05 01/15/18 50,000 50,750
Greentree Manuf Houses 93-2A2 6.10 07/15/18 75,000 75,469
Greentree Securities Trust 94-A 6.90 02/15/04 113,897 114,680
Greentree Securities Trust 95-A 7.25 07/15/05 44,443 45,068
Home Equity Loan Trust 92-2A 6.65 11/20/12 15,352 15,405
MBNA MasterCard Trust 91-1A 7.75 10/15/98 60,000 60,919
Merrill Lynch Mortgage Investments 92-DA2 7.40 07/15/17 67,623 68,321
Old Stone Credit Corp. Home Equity Trust 92-3A2 6.30 09/25/07 77,432 77,578
Old Stone Credit Corp. Home Equity Trust 92-4A 6.55 11/25/07 22,533 22,694
Remodeler's Home Improvement Trust 1995-3A2 6.80 12/20/07 50,000 50,625
Security Pacific National Bank Home Equity 91-2B 8.15 06/15/20 37,319 38,340
The Money Store Home Equity 92-B 6.90 07/15/07 34,763 35,180
The Money Store Home Equity 93-DA1 5.68 02/15/09 88,363 86,016
The Money Store Home Equity 94-DA4 8.75 09/15/20 25,000 26,550
World Omni Auto Lease 94-BA 7.95 01/25/01 50,000 51,266
----------------
$ 1,335,161
----------------
Bank Bonds-7.0%
- - --------------------------------------------------------
Bank of Boston Notes 9.50 08/15/97 75,000 $ 79,544
Capital One Bank Notes 6.39 06/29/98 50,000 50,602
Capital One Bank Notes 6.66 08/17/98 75,000 76,401
Chase Manhattan Corp. Notes 7.50 12/01/97 50,000 51,697
Citicorp Notes 8.42 02/12/97 125,000 128,725
First Union Corp. Notes 9.45 06/15/99 100,000 111,270
First USA Bank Notes 5.75 01/15/99 100,000 99,707
Fleet Bank Notes 7.25 10/15/97 25,000 25,712
----------------
$ 623,658
----------------
Convertible Bonds-0.7%
- - --------------------------------------------------------
Hanson America Notes 2.39 03/01/01 75,000 $ 62,438
----------------
6
<PAGE>
Portfolio of Investments
(continued)
Par Value
Security Rate Maturity Value (Note 1A)
- - ------------------------------------------------------- -------- ---------------- ---------------- ----------------
Eurodollar Bonds-2.2%
- - --------------------------------------------------------
Forte PLC 7.75 12/19/96 120,000 $ 122,203
Inco Notes 9.75 04/29/96 25,000 25,285
Westpac Banking Group Notes 8.00 05/28/96 50,000 50,421
----------------
$ 197,909
----------------
Finance Bonds-22.0%
- - --------------------------------------------------------
Associated Corp. Notes 6.88 01/15/97 50,000 $ 50,580
Caterpillar Finance Notes 6.10 07/15/99 100,000 101,335
Chrysler Financial Notes 5.38 10/15/98 50,000 49,278
CIT Group Holdings Notes 7.63 12/05/96 25,000 25,431
Equity Residential Properties Reit Ltd 144A Notes (2) 8.50 05/15/99 50,000 52,997
Federal Realty Investment Trust Notes 8.88 01/15/00 60,000 65,578
Finova Notes 8.50 02/15/99 100,000 107,197
Fleet Financial Group Notes 6.00 10/26/98 75,000 75,938
Ford Motor Credit Global Notes 5.63 01/15/99 125,000 124,376
General Motors Acceptance Corp. Notes 7.85 05/08/97 50,000 51,469
General Motors Acceptance Corp. Notes 7.00 08/15/97 25,000 25,536
General Motors Acceptance Corp. Notes 7.75 04/15/97 25,000 25,649
Goldman Sachs Group Notes 6.20 12/15/00 150,000 150,878
International Lease Financial Co. Notes 6.13 11/01/99 150,000 151,656
Meditrust Reit Notes 7.38 07/15/00 50,000 51,531
Morgan Stanley Group Notes 8.00 10/15/96 100,000 101,660
Salomon Inc. Notes 6.82 07/26/99 75,000 76,136
Salomon Inc. Notes 7.00 01/20/98 50,000 50,598
Smith Barney Notes 5.63 11/15/98 50,000 49,814
Smith Barney Notes 6.00 03/15/97 50,000 50,201
Spieker Property Notes 6.65 12/15/00 75,000 75,138
Taubman Realty Group Notes 8.00 06/15/99 100,000 103,627
Transamerica Financial Notes 9.88 01/01/98 125,000 135,034
United Co. Financial Notes 7.00 07/15/98 120,000 122,100
USF&G Notes 7.00 05/15/98 25,000 25,558
Wellsford Reit Notes 7.25 08/15/00 50,000 52,624
----------------
$ 1,951,919
----------------
Industrial Bonds-10.7%
- - --------------------------------------------------------
ADT Operations Notes 8.25 08/01/00 75,000 $ 79,781
Georgia Pacific Notes 9.85 06/15/97 75,000 79,073
Hertz Corp. Notes 9.50 05/15/98 125,000 135,013
ITT Destinations Notes 6.25 11/15/00 100,000 100,906
Martin Marietta Corp. Notes 8.50 03/01/96 75,000 75,320
News America Holdings Corp. Notes 7.50 03/01/00 150,000 157,763
Occidental Petroleum Corp. Notes 5.90 11/09/98 50,000 50,187
7
<PAGE>
Portfolio of Investments
(continued)
Par Value
Security Rate Maturity Value (Note 1A)
- - ------------------------------------------------------- -------- ---------------- ---------------- ----------------
Industrial Bonds (continued)
- - --------------------------------------------------------
Purity Supreme Notes 11.75 08/01/99 100,000 109,500
Time Warner Inc. Notes 7.95 02/01/00 150,000 158,128
----------------
$ 945,671
----------------
Pass Thru Securities-6.5%
- - --------------------------------------------------------
FHLMC Gold 7.50 03/01/97-08/01/00 235,775 $ 240,790
FHLMC 8.00 02/01/00 38,022 38,877
FHLMC 10.50 07/01/15 2,327 2,569
GNMA (3) 9.00 12/15/24-01/15/26 241,358 256,017
Resolution Trust Corp. 92-12A-2A 7.50 08/25/23 16,850 17,002
Resolution Trust Corp. 92-M2-A4 8.47 03/25/20 4,057 4,052
Resolution Trust Corp. 92-M3-A1 7.75 07/25/30 11,376 11,611
Resolution Trust Corp. 92-M3-A2 8.63 07/25/30 6,426 6,568
----------------
$ 577,486
----------------
Public Utility Bonds-0.9%
- - --------------------------------------------------------
Systems Energy Resources Notes 7.38 10/01/00 25,000 $ 25,095
Systems Energy Resources Notes 7.63 04/01/99 50,000 51,858
----------------
$ 76,953
----------------
U.S. Treasury Bonds-29.8%
- - --------------------------------------------------------
U.S. Treasury Notes 4.38 08/15/96 110,000 $ 109,416
U.S. Treasury Notes 5.13 11/30/98 595,000 593,542
U.S. Treasury Notes 5.25 07/31/98 500,000 500,155
U.S. Treasury Notes 6.63 03/31/97 100,000 101,656
U.S. Treasury Notes 6.75 05/31/97 1,155,000 1,178,816
U.S. Treasury Notes 6.88 10/31/96 100,000 101,281
U.S. Treasury Notes 7.13 02/29/00 25,000 26,613
U.S. Treasury Notes 7.25 08/31/96 30,000 30,366
----------------
$ 2,641,845
----------------
Variable Interest Bonds-2.8%
- - --------------------------------------------------------
ERP Operating Notes 6.63 12/22/97 50,000 $ 50,676
FNMA Super Floater 2*5yr Cmt 4.82 04/29/96 50,000 49,124
Ford Motor Credit Corp. Notes 4.82 07/12/96 25,000 24,813
Health & Rehab REIT Notes 6.66 07/13/99 75,000 74,465
Merrill Lynch Corp. Notes 5.54 04/07/97 50,000 49,811
----------------
$ 248,889
----------------
Variable Rate Collateralized Bonds-0.1%
- - --------------------------------------------------------
Collateralized Mortgage Obligation Trust 13-A 6.38 01/20/03 9,477 $ 9,423
----------------
8
<PAGE>
Portfolio of Investments
(continued)
Par Value
Security Rate Maturity Value (Note 1A)
- - ------------------------------------------------------- -------- ---------------- ---------------- ----------------
Variable Rate Pass Thrus-0.6%
- - --------------------------------------------------------
Resolution Trust Corp. 92-7 A-1AA 6.83 03/25/22 56,885 $ 56,813
----------------
Yankee Bonds-0.9%
- - --------------------------------------------------------
Brascan Ltd. Notes 7.38 10/01/02 75,000 $ 77,577
----------------
Total Bonds $ 8,805,742
----------------
(identified cost $8,739,740)
Short Term Obligations-1.0%
- - --------------------------------------------------------
Repurchase Agreement-0.5%
- - --------------------------------------------------------
Prudential-Bache repurchase agreement
dated 12/29/95, 5.39% due 1/2/96 to pay
$40,888 (Collateralized by Federal National
Mortgage Association, 9.00%, due 9/1/22
Market Value $41,680), at cost. $40,863 $ 40,863
----------------
U.S. Government Securities-0.5%
- - --------------------------------------------------------
U.S. Treasury Bills (1) 5.16 06/27/96 $50,000 $ 48,783
----------------
Total Short Term Obligations $ 89,646
----------------
(identified cost $88,587)
Total Investments-100.3% $ 8,895,388
----------------
(identified cost $8,829,327)
Other assets, less liabilities-(0.3%) $ (27,541)
----------------
Net Assets- 100% $ 8,867,847
================
1 Rate noted is yield to maturity, unaudited.
2 This security is restricted but eligible for resale under 144a.
3 Included in this pool of securities are when issued securities identified in Note 6.
The following abbreviations are used in this portfolio:
AFC Alliance Funding Corporation
FHLMC Federal Home Loan Mortgage Company
GNMA Government National Mortgage Association
FNMA Federal National Mortgage Association
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
Standish, Ayer & Wood Investment Trust
Standish Controlled Maturity Fund Series
Statement of Assets and Liabilities
December 31, 1995
<S>
Assets <C> <C>
Investments, at value (Note 1A)(identified cost, $8,829,327) $8,895,388
Cash 1,606
Receivable for investments sold 216
Interest receivable 116,756
Deferred organization expenses (Note 1 E) 10,560
Receivable from investment advisor (Note 2) 60,294
------------------
Total assets $9,084,820
Liabilities
Distribution payable $97,427
Payable for delayed delivery transactions (Note 6) 80,180
Payable to custodian 8,773
Accrued expenses and other liabilities 30,593
------------------
Total liabilities 216,973
------------------
Net Assets $8,867,847
==================
Net Assets consist of
Paid-in capital $8,796,690
Accumulated undistributed net realized gain (loss) 5,096
Net unrealized appreciation (depreciation) 66,061
------------------
Total $8,867,847
==================
Shares of beneficial interest outstanding 438,093
==================
Net asset value, offering price, and redemption price per share $20.24
==================
(Net assets/Shares outstanding)
10
<PAGE>
Standish, Ayer & Wood Investment Trust
Standish Controlled Maturity Fund Series
Statement of Operations
For the Period July 3, 1995 (start of business) to December 31, 1995
Investment income
Interest income $226,617
Expenses
Investment advisory fee (Note 2) $11,617
Accounting, custody and transfer agent fees 32,502
Registration costs 4,331
Audit services 27,800
Legal fees 7,476
Amortization of organization expense 1,139
Miscellaneous 323
--------------
Total expenses $85,188
--------------
Deduct:
Waiver of investment advisory fee $11,617
Reimbursement of Fund operating expenses 60,294
--------------
Total waiver of investment advisory fee and reimbursement of operating expenses $71,911
--------------
Net expenses 13,277
-------------
Net investment income $213,340
-------------
Realized and unrealized gain (loss)
Realized gain (loss)
Investment securities $15,239
Change in net unrealized appreciation (depreciation)
Investment securities 66,061
-------------
Net gain (loss) $81,300
-------------
Net increase (decrease) in net assets from operations $294,640
=============
11
<PAGE>
Standish, Ayer & Wood Investment Trust
Standish Controlled Maturity Fund Series
Statement of Changes in Net Assets
For the Period July 3, 1995
(start of business)
to December 31, 1995
---------------------------
Increase (decrease) in Net Assets
From operations
Net investment income $213,340
Net realized gain (loss) 15,239
Change in net unrealized appreciation (depreciation) 66,061
------------------
Net increase (decrease) in net assets from operations $294,640
------------------
Distributions to shareholders
From net investment income ($213,237)
From realized gains (10,245)
------------------
Total distributions to shareholders ($223,482)
------------------
Fund share (principal) transactions (Note 4)
Net proceeds from sale of shares $9,300,102
Net asset value of shares issued to shareholders in 68,587
payment of distributions declared
Cost of shares redeemed (572,000)
------------------
Increase (decrease) in net assets from Fund share transactions $8,796,689
------------------
Net increase (decrease) in net assets $8,867,847
Net Assets
At beginning of period 0
------------------
At end of period $8,867,847
==================
12
<PAGE>
Standish, Ayer & Wood Investment Trust
Standish Controlled Maturity Fund Series
Financial Highlights
For the Period
July 3, 1995
(start of business)
to December 31, 1995
----------------------
Net asset value - beginning of period $20.00
----------------------
Income from investment operations
Net investment income $ 0.57
Net realized and unrealized gain (loss) 0.24
----------------------
Total from investment operations $ 0.81
----------------------
Less distributions declared to shareholders
From net investment income ($0.57)
----------------------
Total distributions declared to shareholders ($0.57)
----------------------
Net asset value - end of period $ 20.24
======================
Total return 4.20% x
Ratios (to average daily net assets)/Supplemental Data
Expenses * 0.40% y
Net investment income * 6.29% y
Portfolio turnover 127% z
Net assets at end of period (000 omitted) $8,881
* The investment adviser voluntarily waived its investment advisory fee and
reimbursed the Fund for a portion of its operating expenses. Had these
actions not been taken, the net investment income per share and the ratios
would have been:
Net investment income per share $0.38
Ratios (to average daily net assets):
Expenses 2.51% y
Net investment income 4.18% y
x The total return for the period is not annualized.
y Computed on an annualized basis.
z The turnover ratio for the period is not annualized.
</TABLE>
13
<PAGE>
Standish, Ayer & Wood Investment Trust
Standish Controlled Maturity Fund Series
Notes to Financial Statements
(1).....Significant Accounting Policies:
Standish, Ayer & Wood Investment Trust (Trust) is organized as a
Massachusetts business trust and is registered under the Investment
Company Act of 1940, as amended, as an open-end, management investment
company. Standish Controlled Maturity Series (Fund) is a separate
diversified investment series of the Trust.
The following is a summary of significant accounting policies
consistently followed by the Fund in the preparation of its financial
statements. The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and
disclosures in the financial statements. Actual results could differ
from those estimates.
A. Investment security valuations--
Securities for which quotations are readily available are valued at the
last sale price, or if no sale, at the closing bid price in the
principal market in which such securities are normally traded.
Securities (including restricted securities) for which quotations are
not readily available are valued primarily using dealer-supplied
valuations or at their fair value as determined in good faith under
consistently applied procedures under the general supervision of the
Board of Trustees.
Short-term instruments with less than sixty-one days remaining to
maturity when acquired by the Fund are valued on an amortized cost
basis. If the Fund acquires a short-term instrument with more than
sixty days remaining to its maturity, it is valued at current market
value until the sixtieth day prior to maturity and will then be valued
at amortized cost based upon the value on such date unless the trustees
determine during such sixty-day period that amortized cost does not
represent fair value.
B. Repurchase agreements--
It is the policy of the Fund to require the custodian bank to take
possession, to have legally segregated in the Federal Reserve Book
Entry System, or to have segregated within the custodian bank's vault,
all securities held as collateral in support of repurchase agreement
investments. Additionally, procedures have been established by the Fund
to monitor on a daily basis, the market value of the repurchase
agreement's underlying investments to ensure the existence of a proper
level of collateral.
C. Securities transactions and income--
Securities transactions are recorded as of the trade date. Realized
gains and losses from securities sold are recorded on the identified
cost basis. Interest income is determined on the basis of interest
accrued, adjusted for accretion of discount and amoritization of
premium on debt securities when required for federal income tax
purposes.
D. Federal taxes--
As a qualified regulated investment company under Subchapter M of the
Internal Revenue Code the Fund is not subject to income taxes to the
extent that it distributes all of its taxable income for its fiscal
year.
E. Deferred organization expense--
Costs incurred by the Fund in connection with its organization and
initial registration are being amortized, on a straight-line basis,
through June, 2000.
F. Distributions to shareholders-
Distributions to shareholders are recorded on the ex-dividend date.
Income and capital gain distributions are determined in accordance with
income tax regulations which may differ from generally accepted
accounting principles. Permanent book and tax basis differences
relating to shareholder distributions will result in reclassifications
to paid-in-capital.
14
<PAGE>
(2).....Investment Advisory Fee:
The investment advisory fee paid to Standish, Ayer & Wood, Inc. (SA&W)
for overall investment advisory and administrative services, and
general office facilities, is paid monthly at the annual rate of 0.35%
of the Fund's average daily net assets. The investment adviser
voluntarily agreed to limit the Fund's total operating expense to 0.40%
of the Fund's average daily net assets for the Fund's fiscal year ended
December 31, 1995. For the period ended December 31, 1995, the
investment adviser voluntarily waived its investment advisory fee of
$11,617 and reimbursed the Fund for $60,294 of operating expenses. The
Fund pays no compensation directly to its trustees who are affiliated
with the investment adviser or to its officers, all of whom receive
renumeration for their services to the Fund from the investment
adviser. Certain of the trustees and officers of the Trust are partners
or officers of SA&W.
(3).....Purchases and Sales of Investments:
Purchases and sales of investments, other than short-term obligations
were as follows:
<TABLE>
<CAPTION>
Purchases Sales
<S> <C> <C>
Investments (non-U.S. government securities) $7,318,073 $1,975,125
================= =================
U.S. Government securities $7,769,178 $4,344,490
================= =================
</TABLE>
(4).....Shares of Beneficial Interest:
The Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest having a
par value of one cent per share. Transactions in Fund shares were as
follows:
<TABLE>
<CAPTION>
For the Period
July 3, 1995
(start of business)
to December 31, 1995
---------------------------
<S> <C>
Shares sold 462,667
Shares issued to shareholders in payment of distributions declared 3,396
Shares redeemed (27,970)
---------------------------
Net increase 438,093
===========================
</TABLE>
On July 3, 1995, securities with a fair market value of
$4,386,455 were contributed to the Fund by a shareholder. In return for
such securities, the shareholder received shares of the Fund.
At December 31, 1995, one shareholder was record owner of approximately
50% of the total outstanding shares of the Fund.
<TABLE>
<CAPTION>
(5).....Federal Income Tax Basis of Investment Securities:
The cost and unrealized appreciation (depreciation) in value of the
investment securities owned at December 31, 1995, as computed on a
federal income tax basis, are as follows:
<S> <C>
Aggregate cost $8,829,327
======================
Gross unrealized appreciation $70,292
Gross unrealized depreciation (4,231)
----------------------
Net unrealized appreciation $66,061
======================
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
(6).....Delayed Delivery Transactions:
The Fund may purchase securities on a when-issued or forward commitment
basis. Payment and delivery may take place a month or more after the
date of the transactions. The price of the underlying securities and
the date when the securities will be delivered and paid for are fixed
at the time the transaction is negotiated. The Fund instructs its
custodian to segregate securities having a value at least equal to the
amount of the purchase commitment. At December 31, 1995, the Fund had
entered into the following delayed delivery transaction:
Type Security Settlement Date Amount
- - -------------------- --------------------------------------------------- ------------------------ -------------------
<S> <C> <C>
Buy GNMA 01/22/26 $80,180
===================
Total delayed delivery securities $80,180
===================
</TABLE>
16
<PAGE>
Report of Independent Accountants
To the Trustees of Standish, Ayer & Wood Investment Trust and the Shareholders
of Standish Controlled Maturity Fund Series:
We have audited the accompanying statement of assets and liabilities of
Standish, Ayer & Wood Investment Trust: Standish Controlled Maturity Fund Series
(the "Fund"), including the schedule of portfolio investments, as of December
31, 1995, and the related statement of operations, changes in net assets and the
financial highlights for the period from July 3, 1995 (start of business) to
December 31, 1995. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements and financial highlights are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of securities owned as of December 31, 1995 by
correspondence with the custodian and brokers. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Standish, Ayer & Wood Investment Trust: Standish Controlled Maturity Fund Series
as of December 31, 1995, the results of its operations, changes in net assets
and the financial highlights for the period from July 3, 1995 (start of
business) to December 31, 1995, in conformity with generally accepted accounting
principles.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
February 13, 1996
Report of Independent Accountants
17
<PAGE>
Standish, Ayer & Wood Investment Trust
One Financial Center
Boston, MA 02111
(800) 221-4795
18
<PAGE>
Prospectus dated May 1, 1996
PROSPECTUS
STANDISH FIXED INCOME FUND II
One Financial Center
Boston, Massachusetts 02111
(800) 221-4795
Standish Fixed Income Fund II (the "Fund") is one fund in the Standish,
Ayer & Wood family of funds. The Fund is organized as a separate diversified
investment series of Standish, Ayer & Wood Investment Trust (the "Trust"), an
open-end management investment company. The Fund is designed primarily, but not
exclusively, for tax-exempt institutional investors, such as pension and
profit-sharing plans, foundations and endowments.
The Fund's investment objective is to maximize total return, consistent
with preserving principal and liquidity. As a component of this objective, the
Fund seeks a relatively high level of current income. The Fund seeks to achieve
its investment objective primarily through investing in an actively managed
portfolio of investment grade fixed-income securities. Under normal market
conditions, the Fund maintains an average dollar-weighted effective portfolio
maturity from five to thirteen years. Standish, Ayer & Wood, Inc., Boston,
Massachusetts, is the Fund's investment adviser (the "Adviser").
Investors may purchase shares of the Fund from the Trust's principal
underwriter, Standish Fund Distributors, L.P. (the "Principal Underwriter"), at
the address and phone number listed above without a sales commission or other
transaction charges. Unless waived by the Fund, the minimum initial investment
is $100,000. Additional investments may be made in amounts of at least $5,000.
This Prospectus is intended to set forth concisely the information about
the Fund and the Trust that a prospective investor should know before investing.
Investors are encouraged to read this Prospectus and retain it for future
reference. Additional information about the Fund and the Trust is contained in a
Statement of Additional Information which has been filed with the Securities and
Exchange Commission (the "SEC") and is available upon request and without charge
by calling or writing to the Principal Underwriter at the telephone number or
address listed above. The Statement of Additional Information bears the same
date as this Prospectus and is incorporated by reference into this Prospectus.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK OR OTHER INSURED DEPOSITORY INSTITUTION, AND ARE NOT
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD
OR ANY OTHER GOVERNMENT AGENCY. AN INVESTMENT IN SHARES OF THE FUND INVOLVES
INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
Contents
Expense Information...........................................2
Financial Highlights..........................................3
Investment Objective and Policies.............................4
Risk Factors and Suitability..................................7
Calculation of Performance Data...............................8
Dividends and Distributions...................................8
Purchase of Shares............................................8
Exchange of Shares............................................9
Redemption of Shares..........................................9
Management...................................................10
Federal Income Taxes.........................................11
The Fund and Its Shares......................................12
Custodian, Transfer Agent and Dividend-Disbursing Agent......13
Independent Accountants......................................13
Legal Counsel................................................13
Tax Certification Instructions...............................14
1
<PAGE>
EXPENSE INFORMATION
Shareholder Transaction Expenses
Maximum Sales Load Imposed on Purchases None
Maximum Sales Load Imposed on Reinvested Dividends None
Deferred Sales Load None
Redemption Fees None
Exchange Fee None
Annual Fund Operating Expenses (as a percentage of average net assets)
Management Fees (after expense limitation) 0.00%
12b-1 Fees None
Other Expenses 0.50%
Total Fund Operating Expenses (after expense limitation) 0.50%
<TABLE>
<CAPTION>
<S> <C> <C>
Example: 1 year 3 years
- - -----------------------------------------------------------------------------------------------
You would pay the following expenses on a $1,000 investment,
assuming (1) 5% annual return and (2) redemption at the end
of each time period: $4 $13
</TABLE>
The purpose of the above table is to assist investors in understanding the
various costs and expenses of the Fund that an investor in the Fund will bear
directly or indirectly. See "Management-Investment Adviser" and
"Management-Expenses." The Fund is newly organized and has no operating history.
The figures shown in the caption "Other Expenses," which includes, among other
things, custodian and transfer agent fees, registration costs and payments for
insurance and audit and legal services, and in the hypothetical example are
based on estimates of the Fund's expenses for its first full fiscal year ending
December 31, 1996.
* The Adviser has voluntarily agreed to limit Total Fund Operating Expenses
of the Fund (excluding litigation, indemnification and other extraordinary
expenses) to 0.50% of the Fund's average daily net assets. In the absence of
such agreement, Management Fees, Other Expenses and Total Fund Operating
Expenses are estimated to be approximately 0.40%, 0.89% and 1.29%, respectively,
of the Fund's average daily net assets. This agreement is voluntary and
temporary and may be discontinued or revised by the Adviser at any time.
THE INFORMATION IN THE TABLE AND HYPOTHETICAL EXAMPLE ABOVE SHOULD NOT BE
CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY
BE GREATER OR LESS THAN THOSE SHOWN. MOREOVER, WHILE THE EXAMPLE ASSUMES A 5%
ANNUAL RETURN, THE FUND'S ACTUAL PERFORMANCE WILL VARY AND MAY RESULT IN AN
ACTUAL RETURN GREATER OR LESS THAN 5%.
2
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights for the year ended December 31, 1995 have been
audited by Coopers & Lybrand L.L.P., independent accountants, whose report,
together with the financial statements of the Fund, is incorporated into the
Statement of Additional Information.
<TABLE>
<CAPTION>
Standish, Ayer & Wood Investment Trust
Standish Fixed Income Fund II Series
Financial Highlights
For the Period
July 3, 1995
(start of business) to
December 31, 1995
-----------------------
<S> <C>
Net asset value - beginning of period $20.00
------------
Income from investment operations
Net investment income* $0.53
Net realized and unrealized gain (loss) 0.64
------------
Total from investment operations $1.17
------------
Less distributions declared to shareholders
From net investment income $0.53
From realized gains 0.12
------------
Total distributions declared to shareholders $0.65
------------
Net asset value - end of period $20.52
============
Total return 5.79% z
Net assets at end of period (000 omitted) $8,046
Ratios (to average net daily assets)/Supplemental Data
Expenses * 0.40% t
Net investment income * 6.64% t
Portfolio turnover 389% y
* The investment adviser voluntarily waived its investment advisory fee and,
reimbursed the fund for a portion of its operating expenses. Had these
actions not been taken, the net investment income per share and the ratios
would have been:
Net investment income per share $0.29
Ratios (to average net daily assets):
Expenses 1.29% t
Net investment income 5.75% t
t Computed on an annualized basis.
y The turnover ratio for the period is not annualized.
z The total return ratio for the period is not annualized.
</TABLE>
Further information about the performance of the Fund is contained in the
Fund's Annual Report, which may be obtained from the Principal Underwriter
without charge.
3
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to maximize total return, consistent
with preserving principal and liquidity. As a component of this objective, the
Fund seeks a relatively high level of current income. The Fund seeks to achieve
its investment objective primarily through investing in a diversified portfolio
of investment grade fixed-income securities. Under normal market conditions, the
Fund maintains an average dollar-weighted effective portfolio maturity from five
to thirteen years. Because of the uncertainty inherent in all investments, no
assurance can be given that the Fund will achieve its investment objective. The
Fund's investment policies are described further in the Statement of Additional
Information.
The Fund may invest in a broad range of fixed-income securities, including
bonds, notes, mortgage-backed and asset-backed securities, preferred stock and
convertible debt securities issued by U.S. corporations or other entities or by
the U.S. Government or its agencies, authorities, instrumentalities or sponsored
enterprises. Under normal market conditions, at least 65% of the Fund's total
assets will be invested in such securities. The Fund may purchase securities
that pay interest on a fixed, variable, floating (including inverse floating),
contingent, in-kind or deferred basis.
Although the Fund is intended primarily for tax-exempt institutional
investors and will be managed without regard to potential tax considerations,
the Fund may invest up to 5% of its net assets in tax-exempt securities, such as
state and municipal bonds, if the Adviser believes they will provide competitive
returns. The Fund's distributions of the interest it earns from such securities
will not be tax-exempt. The Fund may adopt a temporary defensive position during
adverse market conditions by investing without limit in high quality money
market instruments, including short-term U.S. Government securities, negotiable
certificates of deposit, non-negotiable fixed time deposits, bankers'
acceptances, floating-rate notes and repurchase agreements.
The Fund invests exclusively in investment grade fixed-income securities,
i.e., securities which, at the date of investment, are rated within the four
highest grades as determined by Moody's Investors Service, Inc. ("Moody's")
(Aaa, Aa, A or Baa) or by Standard & Poor's Ratings Group ("Standard & Poor's")
Duff & Phelps, Inc. ("Duff") or Fitch Investors Service, Inc. ("Fitch") (AAA,
AA, A or BBB) or their respective equivalent ratings or, if not rated,
determined by the Adviser to be of equivalent credit quality to securities so
rated. Securities rated Baa by Moody's or BBB by Standard & Poor's, Duff or
Fitch and unrated securities of equivalent credit quality are considered medium
grade obligations with speculative characteristics. Adverse changes in economic
conditions or other circumstances are more likely to weaken the issuer's
capacity to pay interest and repay principal on these securities than is the
case for issuers of higher rated securities. It is anticipated that the average
dollar-weighted rated credit quality of the securities in the Fund's portfolio
will be Aa or AA according to Moody's and Standard & Poor's, Duff or Fitch
ratings, respectively, or comparable credit quality as determined by the
Adviser. In the case of a security that is rated differently by two or more
rating services, the higher rating is used in computing the Fund's average
dollar-weighted credit quality. The Fund intends to emphasize investments in
fixed-income securities that have the potential to be upgraded by a rating
service. In the event, however, that the rating on a security held in the Fund's
portfolio is downgraded below investment grade by a rating service, such action
will be considered by the Adviser in its evaluation of the overall investment
merits of that security, but will not necessarily result in the sale of the
security.
4
<PAGE>
In order to achieve its investment objective, the Fund seeks to add value
by selecting undervalued investments, thus taking advantage of lower prices and
higher yields, rather than by varying the average maturity of its portfolio to
reflect interest rate forecasts. Under normal market conditions, the average
dollar-weighted effective maturity of the Fund's portfolio will be in a range
from five to thirteen years. There is no limit on the maturity of any individual
security purchased by the Fund.
Corporate Debt Obligations
The Fund may invest in corporate debt obligations, including obligations of
industrial, utility and financial issuers. In addition to obligations of
corporations, corporate debt obligations include bank obligations and zero
coupon securities issued by financial institutions and corporations. The Fund's
investments in corporate debt securities will be rated, at the date of
investment, investment grade. Corporate debt obligations are subject to the risk
of an issuer's inability to meet principal and interest payments on the
obligations and may also be subject to price volatility due to such factors as
market interest rates, market perception of the creditworthiness of the issuer
and general market liquidity. See "Risk Factors and Suitability" for a further
discussion of the risks associated with investments in corporate debt
securities.
U.S. Government Securities
The Fund may invest in all types of U.S. Government securities, including
obligations issued or guaranteed by the U.S. Government or its agencies,
authorities, instrumentalities or sponsored enterprises. Some U.S. Government
securities, such as Treasury bills, notes and bonds, which differ only in their
interest rates, maturities and times of issuance, are supported by the full
faith and credit of the United States of America. Others, such as obligations
issued or guaranteed by U.S. Government agencies, authorities, instrumentalities
or sponsored enterprises are supported either by (a) the full faith and credit
of the U.S. Government (such as securities of the Small Business
Administration), (b) the right of the issuer to borrow from the U.S. Treasury
(such as securities of the Federal Home Loan Banks), (c) the discretionary
authority of the U.S. Government to purchase the agency's obligations (such as
securities of the Federal National Mortgage Association), or (d) only the credit
of the issuer.
The Fund may also invest in separately traded principal and interest
components of securities guaranteed or issued by the U.S. Government or its
agencies, instrumentalities or sponsored enterprises if such components are
traded independently under the Separate Trading of Registered Interest and
Principal of Securities program ("STRIPS") or any similar program sponsored by
the U.S. Government. The Fund may invest in U.S. Government securities which are
zero coupon or deferred interest securities.
5
<PAGE>
Asset-Backed Securities
The Fund may invest in asset-backed securities, which represent
participations in, or are secured by and payable from, assets such as motor
vehicle installment sale contracts, installment loan contracts, leases of
various types of real and personal property, receivables from revolving credit
(credit card) agreements and other categories of receivables. Asset-backed
securities may also be collateralized by a portfolio of U.S. Government
securities, but are not direct obligations of the U.S. Government, its agencies
or instrumentalities. Payments or distributions of principal and interest on
asset-backed securities may be guaranteed up to certain amounts and for a
certain time period by a letter of credit or a pool insurance policy issued by a
financial institution, or other credit enhancements may be present; however,
privately issued obligations collateralized by a portfolio of privately issued
asset-backed securities do not involve any government-related guaranty or
insurance.
Asset-backed securities can be structured in several ways, the most common
of which has been a "pass-through" model. A certificate representing a
fractional undivided beneficial interest in a trust or corporation created
solely for the purpose of holding the trust's assets is issued to the
asset-backed security holder. The certificate entitles the holder thereof the
right to receive a percentage of the interest and principal payments on the
terms and according to the schedule established by the trust instrument. A
servicing agent collects amounts due on the underlying assets for the account of
the trust, which distributes such amounts to the security holders.
As an alternative structure, the issuer of asset-backed securities
effectively transforms an asset-backed pool into obligations consisting of
several different maturities. Instead of holding an undivided interest in trust
assets, the purchaser of the asset-backed security holds a bond collateralized
by the underlying assets. The bonds are serviced by cash flows from the
underlying assets, a specified fraction of all cash received (less a fixed
servicing fee) being allocated first to pay interest and then to retire
principal.
Asset-backed securities present certain risks similar to (as discussed
below) and in addition to those presented by mortgage-backed securities.
Asset-backed securities generally do not have the benefit of a security interest
in collateral that is comparable to mortgage assets and there is the possibility
that, in some cases, recoveries on repossessed collateral may not be available
to support payments on these securities. Asset-backed securities, however, are
not generally subject to the risks associated with prepayments of principal on
the underlying loans.
Mortgage-Backed Securities
The Fund may invest in mortgage-backed securities. Mortgage-backed
securities represent direct or indirect participations in or obligations
collateralized by and payable from mortgage loans secured by real property. Each
mortgage pool underlying mortgage-backed securities will consist of mortgage
loans evidenced by promissory notes secured by first mortgages or first deeds of
trust or other similar security instruments creating a first lien on real
property. An investment in mortgage-backed securities involves certain risks.
Mortgage-backed securities are often subject to more rapid repayment than their
stated maturity dates would indicate as a result of the pass-through or
prepayments of principal on the underlying loans which may increase the
volatility of such investments relative to similarly rated debt securities.
During periods of declining interest rates, prepayment of loans underlying
mortgage-backed securities can be expected to accelerate and thus impair the
Fund's ability to reinvest the returns of principal at comparable yields. During
periods of rising interest rates, reduced prepayment rates may extend the
average life of mortgage-backed securities and increase the Fund's exposure to
rising interest rates. Accordingly, the market values of such securities will
vary with changes in market interest rates generally and in yield differentials
among various kinds of U.S. Government securities and other mortgage-backed
securities.
6
<PAGE>
Mortgage Pass-Through Securities
The Fund may invest in mortgage pass-through securities, which are fixed or
adjustable rate mortgage-backed securities that provide for monthly payments
that are a "pass-through" of the monthly interest and principal payments
(including any prepayments) made by the individual borrowers on the pooled
mortgage loans, net of any fees or other amounts paid to any guarantor,
administrator and/or servicer of the underlying mortgage loans.
Multiple Class Mortgage-Backed Securities and Collateralized Mortgage
Obligations The Fund may invest in collateralized mortgage obligations
("CMOs"), which are multiple class
mortgage-backed securities. CMOs provide an investor with a specified interest
in the cash flow from a pool of underlying mortgages or of other mortgage-backed
securities. CMOs are issued in multiple classes, each with a specified fixed or
adjustable interest rate and a final distribution date. In most cases, payments
of principal are applied to the CMO classes in the order of their respective
stated maturities, so that no principal payments will be made on a CMO class
until all other classes having an earlier stated maturity date are paid in full.
Sometimes, however, CMO classes are "parallel pay" (i.e., payments of principal
are made to two or more classes concurrently).
Eurodollar and Yankee Dollar Investments
The Fund may invest in Eurodollar and Yankee Dollar instruments. Eurodollar
instruments are bonds that pay interest and principal in U.S. dollars held in
banks outside the United States, primarily in Europe. Eurodollar instruments are
usually issued on behalf of multinational companies and foreign governments by
large underwriting groups composed of banks and issuing houses from many
countries. Yankee dollar instruments are U.S. dollar denominated bonds typically
issued in the U.S. by, among others, foreign governments and their agencies and
foreign banks and corporations. These investments involve risks that are
different from investments in securities issued by U.S. issuers, including
potential unfavorable political and economic developments, different tax
provisions, seizure of foreign deposits, currency controls, interest limitations
or other governmental restrictions which might affect payment of principal or
interest.
7
<PAGE>
Strategic Transactions
The Fund may, but is not required to, utilize various other investment
strategies as described below to hedge various market risks (such as interest
rates and broad or specific fixed-income market movements), to manage the
effective maturity or duration of fixed-income securities, or to enhance
potential gain. Such strategies are generally accepted as part of modern
portfolio management and are regularly utilized by many mutual funds and other
institutional investors. Techniques and instruments used by the Fund may change
over time as new instruments and strategies are developed or regulatory changes
occur.
In the course of pursuing its investment objective, the Fund may purchase
and sell (write) exchange-listed and over-the-counter put and call options on
securities, indices and other financial instruments; purchase and sell financial
futures contracts and options thereon; enter into various interest rate
transactions such as swaps, caps, floors or collars (collectively, all the above
are called "Strategic Transactions"). Strategic Transactions may be used in an
attempt to protect against possible changes in the market value of securities
held in or to be purchased for the Fund's portfolio resulting from securities
markets or interest rate fluctuations, to protect the Fund's unrealized gains in
the value of its portfolio securities, to facilitate the sale of such securities
for investment purposes, to manage the effective maturity or duration of the
Fund's portfolio, or to establish a position in the derivatives markets as a
temporary substitute for purchasing or selling particular securities. In
addition to the hedging transactions referred to in the preceding sentence,
Strategic Transactions may also be used to enhance potential gain in
circumstances where hedging is not involved although the Fund will attempt to
limit its net loss exposure resulting from Strategic Transactions entered into
for such purposes to not more than 1% of the Fund's net assets at any one time
and, to the extent necessary, the Fund will close out transactions in order to
comply with this limitation. (Transactions such as writing covered call options
are considered to involve hedging for the purposes of this limitation.) In
calculating the Fund's net loss exposure from such Strategic Transactions, an
unrealized gain from a particular Strategic Transaction position would be netted
against an unrealized loss from a related Strategic Transaction position. For
example, if the Adviser believes that short-term interest rates as indicated in
the forward yield curve are too high, the Fund may take a short position in a
near-term Eurodollar futures contract and a long position in a longer-dated
Eurodollar futures contract. Under such circumstances, any unrealized loss in
the near-term Eurodollar futures position would be netted against any unrealized
gain in the longer-dated Eurodollar futures position (and vice versa) for
purposes of calculating the Fund's net loss exposure. The ability of the Fund to
utilize these Strategic Transactions successfully will depend on the Adviser's
ability to predict pertinent market and interest rate movements, which cannot be
assured. The Fund will comply with applicable regulatory requirements when
implementing these strategies, techniques and instruments. The Fund's activities
involving Strategic Transactions may be limited by the requirements of
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"), for
qualification as a regulated investment company.
Strategic Transactions have risks associated with them including possible
default by the other party to the transaction, illiquidity and, to the extent
the Adviser's view as to certain market or interest rate movements is incorrect,
the risk that the use of such Strategic Transactions could result in losses
greater than if they had not been used. The writing of put and call options may
result in losses to the Fund, force the purchase or sale, respectively, of
8
<PAGE>
portfolio securities at inopportune times or for prices higher than (in the case
of purchases due to the exercise of put options) or lower than (in the case of
sales due to the exercise of call options) current market values, limit the
amount of appreciation the Fund can realize on its investments or cause the Fund
to hold a security it might otherwise sell. The use of options and futures
transactions entails certain other risks. In particular, the variable degree of
correlation between price movements of futures contracts and price movements in
the related portfolio position of the Fund creates the possibility that losses
on the hedging instrument may be greater than gains in the value of the Fund's
position. The writing of options could significantly increase the Fund's
portfolio turnover rate and, therefore, associated brokerage commissions or
spreads. In addition, futures and options markets may not be liquid in all
circumstances and certain over-the-counter options may have no markets. As a
result, in certain markets, the Fund might not be able to close out a
transaction without incurring substantial losses, if at all. Although the use of
futures and options transactions for hedging should tend to minimize the risk of
loss due to a decline in the value of the hedged position, at the same time, in
certain circumstances, they tend to limit any potential gain which might result
from an increase in value of such position. The loss incurred by the Fund in
writing options on futures and entering into futures transactions is potentially
unlimited; however, as described above, the Fund will attempt to limit its net
loss exposure resulting from Strategic Transactions entered into for non-hedging
purposes to not more than 1% of its net assets at any one time. Futures markets
are highly volatile and the use of futures may increase the volatility of the
Fund's net asset value. Finally, entering into futures contracts would create a
greater ongoing potential financial risk than would purchases of options where
the exposure is limited to the cost of the initial premium. Losses resulting
from the use of Strategic Transactions would reduce net asset value and the net
result may be less favorable than if the Strategic Transactions had not been
utilized. See the Statement of Additional Information for further information
regarding the Fund's use of Strategic Transactions.
When-Issued Securities and "Delayed Delivery" Securities
The Fund may commit up to 15% of its net assets to purchase securities on a
"when-issued" or "delayed delivery" basis. Although the Fund would generally
purchase securities on a when-issued or delayed delivery basis with the
intention of actually acquiring the securities, the Fund may dispose of a
when-issued or delayed delivery security prior to settlement if the Adviser
deems it appropriate to do so. The payment obligation and the interest rate on
these securities will be fixed at the time the Fund enters into the commitment,
but no income will accrue to the Fund until they are delivered and paid for.
Unless the Fund has entered into an offsetting agreement to sell the securities,
cash or liquid, high grade debt securities equal to the amount of the Fund's
commitment will be segregated and maintained with the custodian for the Fund to
secure the Fund's obligation and in order to partially offset the leverage
inherent in these securities. The market value of the securities when they are
delivered may be less than the amount paid by the Fund.
9
<PAGE>
Repurchase Agreements
The Fund may invest up to 15% of its net assets in repurchase agreements
under normal circumstances. Repurchase agreements acquired by the Fund will
always be fully collateralized as to principal and interest by money market
instruments and will be entered into only with commercial banks, brokers and
dealers considered creditworthy by the Adviser. If the other party or "seller"
of a repurchase agreement defaults, the Fund might suffer a loss to the extent
that the proceeds from the sale of the underlying securities and other
collateral held by the Fund in connection with the related repurchase agreement
are less than the repurchase price. In addition, in the event of bankruptcy of
the seller or failure of the seller to repurchase the securities as agreed, a
Fund could suffer losses, including loss of interest on or principal of the
security and costs associated with delay and enforcement of the repurchase
agreement.
Forward Roll Transactions
In order to enhance current income, the Fund may enter into forward roll
transactions with respect to mortgage-backed securities to the extent of 10% of
its net assets. In a forward roll transaction, the Fund sells a mortgage-backed
security to a financial institution, such as a bank or broker-dealer, and
simultaneously agrees to repurchase a similar security from the institution at a
later date at an agreed-upon price. The mortgage-backed securities that are
repurchased will bear the same interest rate as those sold, but generally will
be collateralized by different pools of mortgages with different prepayment
histories than those sold. During the period between the sale and repurchase,
the Fund will not be entitled to receive interest and principal payments on the
securities sold. Proceeds of the sale will be invested in short-term
instruments, such as repurchase agreements or other short-term securities, and
the income from these investments, together with any additional fee income
received on the sale and the amount gained by repurchasing the securities in the
future at a lower purchase price, will generate income and gain for the Fund
which is intended to exceed the yield on the securities sold. Forward roll
transactions involve the risk that the market value of the securities sold by
the Fund may decline below the repurchase price of those securities. At the time
the Fund enters into a forward roll transaction, it will place in a segregated
custodial account cash or liquid, high grade debt securities having a value
equal to the repurchase price (including accrued interest) and will subsequently
monitor the account to insure that the equivalent value is maintained.
Illiquid and Restricted Securities
The Fund may not invest more than 15% of its total assets in securities
that are subject to restrictions on resale ("restricted securities") under the
Securities Act of 1933, as amended ("1933 Act"), including securities eligible
for resale in reliance on Rule 144A under the 1933 Act. In addition, the Fund
will not invest more than 15% of its net assets in illiquid investments, which
include securities that are not readily marketable, repurchase agreements
maturing in more than seven days, time deposits with a notice or demand period
of more than seven days, swap transactions, certain over-the-counter options,
and restricted securities, unless it is determined, based upon continuing review
of the trading markets for the specific restricted security, that such
restricted security is eligible for resale under Rule 144A and is liquid. The
Board of Trustees has adopted guidelines and delegated to the Adviser the daily
10
<PAGE>
function of determining and monitoring the liquidity of restricted securities.
The Board of Trustees, however, retains oversight focusing on factors such as
valuation, liquidity and availability of information and is ultimately
responsible for such determinations. Investing in restricted securities eligible
for resale pursuant to Rule 144A could have the effect of increasing the level
of illiquidity in the Fund to the extent that qualified institutional buyers
become for a time uninterested in purchasing these restricted securities. The
purchase price and subsequent valuation of restricted and illiquid securities
normally reflect a discount, which may be significant, from the market price of
comparable securities for which a liquid market exists.
Portfolio Turnover
It is expected that the portfolio turnover rate of the Fund will not exceed
200% in the coming year. A rate of turnover of 100% would occur if the value of
the lesser of purchases and sales of portfolio securities for a particular year
equaled the average monthly value of portfolio securities owned during the year
(excluding short-term securities). A high rate of portfolio turnover (100% or
more) involves a correspondingly greater amount of brokerage commissions and
other costs which must be borne directly by the Fund and thus indirectly by its
shareholders. It may also result in the realization of larger amounts of net
short-term capital gains, distributions from which are taxable to shareholders
as ordinary income and may, under certain circumstances, make it more difficult
for the Fund to qualify as a regulated investment company under the Code.
Investment Restrictions
The foregoing investment policies, including the Fund's investment
objective, are non-fundamental policies which may be changed by the Trust's
Board of Trustees without the approval of shareholders. If there is a change in
the Fund's investment objective, shareholders should consider whether the Fund
remains an appropriate investment in light of their then current financial
positions and needs. The Fund has adopted certain fundamental policies which may
not be changed without the approval of the Fund's shareholders. See "Investment
Restrictions" in the Statement of Additional Information.
If any percentage restriction described above is adhered to at the time of
investment, a subsequent increase or decrease in the percentage resulting from a
change in the value of the Fund's assets will not constitute a violation of the
restriction.
RISK FACTORS AND SUITABILITY
The Fund is designed primarily for tax-exempt institutional investors such
as pension or profit-sharing plans, foundations and endowments which seek to
maximize total return and, secondarily, seek a relatively high level of current
income, consistent with preserving principal and liquidity and whose
beneficiaries are in a position to benefit from the tax-deferred reinvestment of
the quarterly income dividends and any capital gains distributions paid by the
Fund. The Fund may also be suitable for other investors, depending upon their
investment goals and financial and tax positions. Although the price of the
Fund's shares may fluctuate more than short-term money market instruments, the
Fund will seek to keep such volatility below that of longer-term debt securities
by limiting its average portfolio maturity. Because of the uncertainty inherent
in all investments, no assurance can be given that the Fund will achieve its
investment objective.
11
<PAGE>
Yields on debt securities depend on a variety of factors, such as general
conditions in the money and bond markets, and the size, maturity and rating of a
particular issue. Debt securities with longer maturities tend to produce higher
yields and are generally subject to greater potential capital appreciation and
depreciation. The market prices of debt securities in which the Fund invests,
and therefore the Fund's net asset value, usually vary depending upon available
yields, rising when interest rates decline and declining when interest rates
rise.
Because the Fund's investments are interest rate sensitive, the Fund's
performance will depend in large part upon the ability of the Fund to respond to
fluctuations in market prices and interest rates and to utilize appropriate
strategies to maximize returns to the Fund, while attempting to minimize the
risks associated with its invested capital. Operating results will also depend
upon the availability of opportunities for the investment of the Fund's assets,
including purchases and sales of suitable securities. The Fund's use of
Strategic Transactions (including options, futures, options on futures and
swaps) involves certain risks, including a possible lack of correlation between
changes in the value of hedging instruments and the portfolio assets being
hedged, the potential illiquidity of the markets for derivative instruments, the
risks arising from the margin requirements and related leverage factors
associated with such transactions. The use of these management techniques to
increase total return involves the risk of loss if the Adviser is incorrect in
its expectation of fluctuations in securities prices or interest rates. See
"Strategic Transactions."
CALCULATION OF PERFORMANCE DATA
From time to time the Fund may advertise its total return and yield. Both
total return and yield figures are based on historical earnings and are not
intended to indicate future performance. The "total return" of the Fund refers
to the average annual compounded rates of return over 1, 5 and 10 year periods
(or any shorter period since inception) that would equate an initial amount
invested at the beginning of a stated period to the ending redeemable value of
the investment. The calculation assumes the reinvestment of all dividends and
distributions, includes all recurring fees that are charged to all shareholder
accounts and deducts all nonrecurring charges at the end of each period.
The "yield" of the Fund is computed by dividing the net investment income
per share earned during the period stated in the advertisement by the maximum
offering price (net asset value) per share on the last day of the period (using
the average number of shares entitled to receive dividends). For the purpose of
determining net investment income, the calculation includes among expenses of
the Fund all recurring fees that are charged to all shareholder accounts and any
nonrecurring charges for the period stated.
The Fund may from time to time advertise one or more additional
measurements of performance, including but not limited to historical total
returns, distribution returns, non-standardized yield, results of actual or
hypothetical investments, changes in dividends, distributions or share values,
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or any graphic illustration of such data. In addition, the Fund may from time to
time compare its performance with that of other mutual funds with similar
investment objectives, to relevant indices, and to performance rankings prepared
by recognized mutual fund statistical services and may compare its performance
to alternative investment or savings vehicles and/or to indices or indicators of
economic activity. This data may cover any period of the Fund's operations and
may or may not include the impact of taxes or other factors.
DIVIDENDS AND DISTRIBUTIONS
Dividends on shares of the Fund from net investment income will be declared
and distributed quarterly. Dividends from short-term and long-term capital
gains, if any, after reduction by capital losses, will be declared and
distributed at least annually. Dividends from net investment income and capital
gains distributions, if any, are automatically reinvested in additional shares
of the Fund unless the shareholder elects to receive them in cash.
PURCHASE OF SHARES
Shares of the Fund may be purchased directly from the Principal
Underwriter, which offers the Fund's shares to the public on a continuous basis.
Shares are sold at the net asset value per share next computed after the
purchase order is received in good order by the Principal Underwriter and
payment for the shares is received by the Fund's custodian. Please see the
Fund's account application or call the Principal Underwriter for instructions on
how to make payment of shares to the Fund's custodian. Unless waived by the
Fund, the minimum initial investment is $100,000. Additional investments may be
made in amounts of at least $5,000.
Shares of the Fund may also be purchased through securities dealers. Orders
for the purchase of Fund shares received by dealers by the close of regular
trading on the New York Stock Exchange on any business day and transmitted to
the Principal Underwriter or its agent by the close of its business day
(normally 4:00 p.m., New York City time) will be effected as of the close of
trading on the New York Stock Exchange on that day provided that payment for the
shares is also received by the Fund's custodian on that day. Otherwise, orders
will be effected at the net asset value per share determined on the next
business day. It is the responsibility of dealers to transmit orders so that
they will be received by the Principal Underwriter. Shares of the Fund purchased
through dealers may be subject to transaction fees, no part of which will be
received by the Fund, the Principal Underwriter or the Adviser.
The Fund's net asset value per share is computed each day on which the New
York Stock Exchange is open as of the close of regular trading on the exchange
(currently 4:00 p.m., New York City time). The net asset value per share is
calculated by determining the value of all the Fund's assets, subtracting all
liabilities and dividing the result by the total number of shares outstanding.
Portfolio securities are valued at the last sale prices, on the valuation day,
on the exchange or national securities market on which they are primarily
traded. Securities not listed on an exchange or national securities market, or
securities for which there were no reported transactions, are valued at the last
quoted bid prices. Securities for which quotations are not readily available and
all other assets are valued at fair value as determined in good faith by the
Adviser in accordance with procedures approved by the Trustees. Money market
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instruments with less than sixty days remaining to maturity when acquired by the
Fund are valued on an amortized cost basis unless the Trustees determine that
amortized cost does not represent fair value. If the Fund acquires a money
market instrument with more than sixty days remaining to its maturity, it is
valued at current market value until the sixtieth day prior to maturity and will
then be valued at amortized cost based upon the value on such date unless the
Trustees determine during such sixty-day period that amortized cost does not
represent fair value.
In the sole discretion of the Adviser, the Fund may accept securities
instead of cash for the purchase of shares of the Fund. The Adviser will
determine that any securities acquired in this manner are consistent with the
investment objective, policies and restrictions of the Fund. The securities will
be valued in the manner stated above. The purchase of shares of the Fund for
securities instead of cash may cause an investor who contributed them to realize
taxable gain or loss with respect to the securities transferred to the Fund.
The Trust reserves the right in its sole discretion (i) to suspend the
offering of the Fund's shares, (ii) to reject purchase orders when in the best
interest of the Fund and (iii) to modify or eliminate the minimum initial
investment in Fund shares. The Fund's investment minimums do not apply to
accounts for which the Adviser or any of its affiliates serves as investment
adviser or to employees of the Adviser or any of its affiliates or to members of
such persons' immediate families. The Fund's investment minimums apply to the
aggregate value invested in omnibus accounts rather than to the investment of
the underlying participants in such omnibus accounts.
EXCHANGE OF SHARES
Shares of the Fund may be exchanged for shares of one or more other funds
in the Standish, Ayer & Wood family of funds. Shares of the Fund redeemed in an
exchange transaction are valued at their net asset value next determined after
the exchange request is received by the Principal Underwriter or its agent.
Shares of a fund purchased in an exchange transaction are sold at their net
asset value next determined after the exchange request is received by the
Principal Underwriter or its agent and payment for the shares is received by the
fund into which your shares are to be exchanged. Until receipt of the purchase
price by the fund into which your shares are to be exchanged (which may take up
to three business days), your money will not be invested. To obtain a current
prospectus for any of the other funds in the Standish, Ayer & Wood family of
funds, please call the Principal Underwriter at (800) 221-4795. Please consider
the differences in investment objectives and expenses of a fund as described in
its prospectus before making an exchange.
Written Exchanges
Shares of the Fund may be exchanged by written order to the Principal
Underwriter, One Financial Center, Boston, Massachusetts 02111. A written
exchange request must (a) state the name of the current Fund, (b) state the name
of the fund into which the current Fund shares will be exchanged, (c) state the
number of shares or the dollar amount to be exchanged, (d) identify the
shareholder's account numbers in both funds and (e) be signed by each registered
owner exactly as the shares are registered. Signature(s) must be guaranteed as
listed under "Written Redemption" below.
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Telephonic Exchanges
Shareholders who elect telephonic privileges may exchange shares by calling
the Principal Underwriter at (800) 221-4795. Telephonic privileges are not
available to shareholders automatically. Proper identification will be required
for each telephonic exchange. Please see "Telephone Transactions" below for more
information regarding telephonic transactions.
General Exchange Information
All exchanges are subject to the following exchange restrictions: (i) the
fund into which shares are being exchanged must be registered for sale in your
state; (ii) exchanges may be made only between funds that are registered in the
same name, address and, if applicable, taxpayer identification number; and (iii)
unless waived by the Trust, the amount to be exchanged must satisfy the minimum
account size of the fund to be exchanged into. Exchange requests will not be
processed until payment for the shares of the current Fund have been received by
the Fund's custodian. The exchange privilege may be changed or discontinued and
may be subject to additional limitations upon sixty (60) days' notice to
shareholders, including certain restrictions on purchases by market-timer
accounts.
REDEMPTION OF SHARES
Shares of the Fund may be redeemed by any of the methods described below at
the net asset value per share next determined after receipt by the Principal
Underwriter or its agent of a redemption request in proper form. Redemptions
will not be processed until a completed Share Purchase Application and payment
for the shares to be redeemed have been received.
Written Redemption
Shares of the Fund may be redeemed by written order to the Principal
Underwriter, One Financial Center, 26th Floor, Boston, Massachusetts 02111. A
written redemption request must (a) state the name of the Fund and the number of
shares or the dollar amount to be redeemed, (b) identify the shareholder's
account number and (c) be signed by each registered owner exactly as the shares
are registered. Signature(s) must be guaranteed by a member of either the
Securities Transfer Association's STAMP program or the New York Stock Exchange's
Medallion Signature Program or by any one of the following institutions,
provided that such institution meets credit standards established by Investors
Bank & Trust Company, the Fund's transfer agent: (i) a bank; (ii) a securities
broker or dealer, including a government or municipal securities broker or
dealer, that is a member of a clearing corporation or has net capital of at
least $100,000; (iii) a credit union having authority to issue signature
guarantees; (iv) a savings and loan association, a building and loan
15
<PAGE>
association, a cooperative bank, or a federal savings bank or association; or
(v) a national securities exchange, a registered securities exchange or a
clearing agency. Additional supporting documents may be required in the case of
estates, trusts, corporations, partnerships and other shareholders that are not
individuals. Redemption proceeds will normally be paid by check mailed within
three business days of receipt by the Principal Underwriter of a written
redemption request in proper form. If shares to be redeemed were recently
purchased by check, the Fund may delay transmittal of redemption proceeds until
such time as it has assured itself that good funds have been collected for the
purchase of such shares. This may take up to fifteen (15) days in the case of
payments made by check.
Telephonic Redemption
Shareholders who elect telephonic privileges may redeem shares by calling
the Principal Underwriter at (800) 221-4795. Telephonic privileges are not
available to shareholders automatically. Redemption proceeds will be mailed or
wired in accordance with the shareholder's instruction on the account
application to a pre-designated account. Redemption proceeds will normally be
paid promptly after receipt of telephonic instructions, but no later than three
business days thereafter, except as described above for shares purchased by
check. Redemption proceeds will be sent only by check payable to the shareholder
of record at the address of record, unless the shareholder has indicated, in the
initial application for the purchase of shares, a commercial bank to which
redemption proceeds may be sent by wire. These instructions may be changed
subsequently only in writing, accompanied by a signature guarantee, and
additional documentation in the case of shares held by a corporation or other
entity or by a fiduciary such as a trustee or executor. Wire charges, if any,
will be deducted from redemption proceeds. Proper identification will be
required for each telephonic redemption.
Repurchase Order
In addition to telephonic and written redemption of Fund shares, the
Principal Underwriter may accept telephone orders from brokers or dealers for
the repurchase of Fund shares. The repurchase price is the net asset value per
share next determined after receipt of the repurchase order by the Principal
Underwriter and the payment for the shares by the Fund's custodian. Brokers and
dealers are obligated to transmit repurchase orders to the Principal Underwriter
prior to the close of the Principal Underwriter's business day (normally 4:00
p.m.). Brokers and dealers may charge for their services in connection with a
repurchase of Fund shares, but neither the Fund nor the Principal Underwriter
imposes a charge for share repurchases.
Telephone Transactions
By maintaining an account that is eligible for telephonic exchange and
redemption privileges, the shareholder authorizes the Adviser, the Principal
Underwriter, the Fund and the Fund's custodian to act upon instructions of any
person to redeem and/or exchange shares from the shareholder's account. Further,
the shareholder acknowledges that, as long as the Fund employs reasonable
procedures to confirm that telephonic instructions are genuine, and follows
telephonic instructions that it reasonably believes to be genuine, neither the
Adviser, nor the Principal Underwriter, nor the Trust, nor the Fund, nor the
Fund's custodian, nor their respective officers or employees, will be liable for
any loss, expense or cost arising out of any request for a telephonic redemption
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<PAGE>
or exchange, even if such transaction results from any fraudulent or
unauthorized instructions. Depending upon the circumstances, the Fund intends to
employ personal identification or written confirmation of transactions
procedures, and if it does not, the Fund may be liable for any losses due to
unauthorized or fraudulent instructions. All telephone transaction requests will
be recorded. Shareholders may experience delays in exercising telephone
transaction privileges during periods of abnormal market activity. Accordingly,
during periods of volatile economic and market conditions, shareholders may wish
to consider transmitting redemption and exchange requests in writing.
* * * *
The proceeds paid upon redemption or repurchase may be more or less than
the cost of the shares, depending upon the market value of the Fund's portfolio
investments at the time of redemption or repurchase. The Fund intends to pay
cash for all shares redeemed, but under certain conditions, the Fund may make
payments wholly or partially in portfolio securities.
Because of the cost of maintaining shareholder accounts, the Fund may
redeem, at net asset value, the shares in any account which has a value of less
than $50,000 as a result of redemptions or transfers. Before doing so, the Fund
will notify the shareholder that the value of the shares in the account is less
than the specified minimum and will allow the shareholder 30 days to make an
additional investment in an amount which will increase the value of the account
to at least $50,000. The Fund may eliminate duplicate mailings of Fund materials
to shareholders that have the same address of record.
MANAGEMENT
Trustees
The Fund is a separate investment series of Standish, Ayer & Wood
Investment Trust, a Massachusetts business trust. Under the terms of the
Agreement and Declaration of Trust establishing the Trust, which is governed by
the laws of The Commonwealth of Massachusetts, the Trustees of the Trust are
ultimately responsible for the management of its business and affairs.
Investment Adviser
Standish, Ayer & Wood, Inc. (the "Adviser"), One Financial Center, Boston,
Massachusetts 02111, serves as investment adviser to the Fund pursuant to an
investment advisory agreement and manages the Fund's investments and affairs
subject to the supervision of the Trustees of the Trust. The Adviser is a
Massachusetts corporation incorporated in 1933 and is a registered investment
adviser under the Investment Advisers Act of 1940. The Adviser provides fully
discretionary management services and counseling and advisory services to a
broad range of clients throughout the United States and abroad. As of March 31,
1996, the Adviser or its affiliate, Standish International Management Company,
L.P. ("SIMCO"), served as the investment adviser to each of the following
fourteen funds in the Standish, Ayer & Wood family of funds:
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Net Assets
Fund (March 31, 1996)
- - --------------------------------------------------------------------------------
Standish Controlled Maturity Fund $ 9,042,346
Standish Equity Portfolio 98,282,505
Standish Fixed Income Portfolio 2,299,158,500
Standish Fixed Income Fund II 10,102,031
Standish Global Fixed Income Portfolio 149,048,965
Standish Intermediate Tax Exempt Bond Fund 31,199,236
Standish International Equity Fund 51,980,946
Standish International Fixed Income Fund 761,073,675
Standish Massachusetts Intermediate
Tax Exempt Bond Fund 32,270,691
Standish Securitized Fund 53,357,787
Standish Short-Term Asset Reserve Fund 272,188,970
Standish Small Capitalization Equity Portfolio 196,260,876
Standish Small Cap Tax-Sensitive Equity Fund 1,588,743
Standish Tax-Sensitive Equity Fund 1,261,111
Corporate pension funds are the largest asset under active management by
Standish. Standish's clients also include charitable and educational endowment
funds, financial institutions, trusts and individual investors. As of March 31,
1996, Standish managed approximately $29 billion in assets.
The Fund's portfolio managers are Caleb F. Aldrich and David C. Stuehr.
During the past five years, Mr. Aldrich has served as a Director of the Adviser.
Mr. Stuehr has served as a Director of the Adviser since January, 1995 and,
prior thereto, Mr. Stuehr served as a Vice President (since 1992) and an
Assistant Vice President of the Adviser.
Subject to the supervision and direction of the Trustees, the Adviser
manages the Fund's portfolio in accordance with its stated investment objective
and policies, recommends investment decisions for the Fund, places orders to
purchase and sell securities on behalf of the Fund, administers the affairs of
the Fund and permits the Fund to use the name "Standish." For these services the
Fund pays a fee monthly at the annual rate of 0.40% of the Fund's average daily
net assets. For the period from July 3, 1995 (commencement of operations)
through December 31, 1995, the Adviser voluntarily agreed not to impose any
advisory fee, which would have amounted to $42,628.
Expenses
Expenses of the Trust which relate to more than one series are allocated
among such series by the Adviser and SIMCO in an equitable manner, primarily on
the basis of relative net asset values. The Fund bears all expenses of its
operations other than those incurred by the Adviser under the investment
advisory agreement. Among other expenses, the Fund will pay investment advisory
fees; bookkeeping, share pricing and shareholder servicing fees and expenses;
custodian fees and expenses; legal and auditing fees; expenses of prospectuses,
statements of additional information and shareholder reports which are furnished
to shareholders; registration and reporting fees and expenses; and Trustees'
fees and expenses. The Principal Underwriter bears without subsequent
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<PAGE>
reimbursement the distribution expenses attributable to the offering and sale of
Fund shares. The Adviser has voluntarily agreed to limit Total Fund Operating
Expenses of the Fund (excluding litigation, indemnification and other
extraordinary expenses) to 0.50% of the Fund's average daily net assets. This
agreement is voluntary and temporary and may be discontinued or revised by the
Adviser at any time. The Adviser has also agreed to limit the Fund's total
operating expenses (excluding brokerage commissions, taxes and extraordinary
expenses) to the permissible limit applicable in any state in which shares of
the Fund are then qualified for sale. For the period from July 3, 1995
(commencement of operations) through December 31, 1995, expenses borne by the
Fund totalled $42,629, which represented 0.40% of the Fund's average daily net
assets after an expense reduction of $94,417.
Portfolio Transactions
Subject to the supervision of the Trustees of the Trust, the Adviser
selects the brokers and dealers that execute orders to purchase and sell
portfolio securities for the Fund. The Adviser will generally seek to obtain the
best available price and most favorable execution with respect to all
transactions for the Fund.
Subject to the consideration of best price and execution and to applicable
regulations, the receipt of research and sales of Fund shares may also be
considered factors in the selection of brokers and dealers that execute orders
to purchase and sell portfolio securities for the Fund.
FEDERAL INCOME TAXES
The Fund intends to elect to be treated and to qualify for taxation as a
"regulated investment company" under the Internal Revenue Code of 1986, as
amended (the "Code"). If it qualifies for treatment as a regulated investment
company, the Fund will not be subject to federal income tax on income (including
capital gains) distributed to shareholders in the form of dividends or capital
gain distributions in accordance with certain timing requirements of the Code.
The Fund will be subject to a nondeductible 4% excise tax under the Code to
the extent that it fails to meet certain distribution requirements with respect
to each calendar year. Certain distributions made in order to satisfy the Code's
distribution requirements may be declared by the Fund during October, November
or December of the year but paid during the following January. Such
distributions will be taxable to shareholders as if received on December 31 of
the year the distributions are declared, rather than the year in which the
distributions are received.
Shareholders which are taxable entities or persons will be subject to
federal income tax on dividends and capital gain distributions made by the Fund.
Dividends paid by the Fund from net investment income and any excess of net
short-term capital gain over net long-term capital loss will be taxable to
shareholders as ordinary income, whether received in cash or Fund shares. Only
the portion of such dividends, if any, attributable to certain dividends the
Fund receives with respect to its preferred stock investments is expected to
qualify, subject to satisfaction of applicable holding period and other
requirements, for the corporate dividends received deduction under the Code.
Dividends paid by the Fund from net capital gain (the excess of net long-term
capital gain over net short-term capital loss), called "capital gain
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<PAGE>
distributions," will be taxable to shareholders as long-term capital gains,
whether received in cash or Fund shares and without regard to how long the
shareholder has held shares of the Fund. Capital gain distributions do not
qualify for the corporate dividends received deduction. Dividends and capital
gain distributions may also be subject to state and local or foreign taxes.
Redemptions and repurchases of shares are taxable events on which a
shareholder may recognize a gain or loss. Special rules recharacterize as
long-term any losses on the sale or exchange of Fund shares with a tax holding
period of six months or less, to the extent the shareholder received a capital
gain distribution with respect to such shares.
Individuals and certain other classes of shareholders may be subject to 31%
backup withholding of federal income tax on dividends, capital gain
distributions, and the proceeds of redemptions or repurchases of shares, if they
fail to furnish the Fund with their correct taxpayer identification number and
certain certifications or if they are otherwise subject to backup withholding.
Individuals, corporations and other shareholders that are not U.S. persons under
the Code are subject to different tax rules and may be subject to nonresident
alien withholding at the rate of 30% (or a lower rate provided by an applicable
tax treaty) on amounts treated as ordinary dividends from the Fund and, unless a
current IRS Form W-8 or an acceptable substitute is furnished to the Fund, to
backup withholding on certain payments from the Fund.
A state income (and possibly local income and/or intangible property) tax
exemption is generally available to the extent the Fund's distributions are
derived from interest on (or, in the case of intangibles taxes, the value of its
assets is attributable to) certain U.S. Government obligations, provided in some
states that certain thresholds for holdings of such obligations and/or reporting
requirements are satisfied.
After the close of each calendar year, the Fund will send a notice to
shareholders that provides information about the federal tax status of
distributions to shareholders for such calendar year.
THE FUND AND ITS SHARES
The Fund is a separate investment series of Standish, Ayer & Wood
Investment Trust, an unincorporated business trust organized under the laws of
The Commonwealth of Massachusetts pursuant to an Agreement and Declaration of
Trust dated August 13, 1986. Under the Agreement and Declaration of Trust, the
Trustees have authority to issue an unlimited number of shares of beneficial
interest, par value $.01 per share, of the Fund. Each share of the Fund is
entitled to one vote. All Fund shares have equal rights with regard to voting,
redemption, dividends, distributions and liquidation, and shareholders of the
Fund have the right to vote as a separate class with respect to certain matters
under the Investment Company Act of 1940 and the Agreement and Declaration of
Trust. Shares of the Fund do not have cumulative voting rights. Fractional
shares have proportional voting rights and participate in any distributions and
dividends. When issued, each Fund share will be fully paid and nonassessable.
Shareholders of the Fund do not have preemptive or conversion rights.
Certificates representing shares of the Fund will not be issued.
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At February 1, 1996, more than 25% of the then outstanding shares of the
Fund were held by each of Miss Porter's School, 60 Main Street, Farmington, CT
and Houston General Insurance, P.O. Box 2932, Fort Worth, TX, which were deemed
to control the Fund.
The Trust has established fourteen series that currently offer their shares
to the public and may establish additional series at any time. Each series is a
separate taxpayer, eligible to qualify as a separate regulated investment
company for federal income tax purposes. The calculation of the net asset value
of a series and the tax consequences of investing in a series will be determined
separately for each series.
The Trust is not required to hold annual meetings of shareholders. Special
meetings of shareholders may be called from time to time for purposes such as
electing or removing Trustees, changing a fundamental policy, or approving an
investment advisory agreement.
If less than two-thirds of the Trustees holding office have been elected by
shareholders, a special meeting of shareholders of the Trust will be called to
elect Trustees. Under the Agreement and Declaration of Trust and the Investment
Company Act of 1940, the record holders of not less than two-thirds of the
outstanding shares of the Trust may remove a Trustee by votes cast in person or
by proxy at a meeting called for the purpose or by a written declaration filed
with each of the Trust's custodian banks. Except as described above, the
Trustees will continue to hold office and may appoint successor Trustees.
Whenever ten or more shareholders of the Trust who have been such for at least
six months, and who hold in the aggregate shares having a net asset value of at
least $25,000 or at least 1% of the outstanding shares, whichever is less, apply
to the Trustees in writing stating that they wish to communicate with other
shareholders with a view to obtaining signatures to a request for a meeting, and
such application is accompanied by a form of communication and request which
they wish to transmit, the Trustees shall within five (5) business days after
receipt of such application either (1) afford to such applicants access to a
list of the names and addresses of all shareholders as recorded on the books of
the Trust; or (2) inform such applicants as to the approximate number of
shareholders of record and the approximate cost of mailing to them the proposed
communication or form of request. Immediately prior to the effectiveness of this
Prospectus, the Adviser owned all of the outstanding shares of the Fund.
Inquiries concerning the Fund should be made by contacting the Principal
Underwriter at the address and telephone number listed on the cover of this
Prospectus.
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CUSTODIAN, TRANSFER AGENT AND DIVIDEND-DISBURSING AGENT
Investors Bank & Trust Company, 24 Federal Street, Boston, Massachusetts
02110, serves as the Fund's transfer agent and dividend-disbursing agent and as
custodian of all cash and securities of the Fund.
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P., One Post Office Square, Boston, Massachusetts
02109, serves as independent accountants for the Trust and will audit the Fund's
financial statements annually.
LEGAL COUNSEL
Hale and Dorr, 60 State Street, Boston, Massachusetts 02109, is legal
counsel to the Trust, the Principal Underwriter and the Adviser.
- - --------------------------------------------------------------------------------
No dealer, salesman or other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus or in the Statement of Additional Information, and, if given or made,
such other information or representations must not be relied upon as having been
authorized by the Trust. This Prospectus does not constitute an offering in any
jurisdiction in which such offering may not be lawfully made.
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<PAGE>
TAX CERTIFICATION INSTRUCTIONS
Federal law requires that taxable distributions and proceeds of redemptions
and exchanges be reported to the IRS and that 31% be withheld if you fail to
provide your correct Taxpayer Identification Number (TIN) and the TIN-related
certifications contained in the Account Purchase Application (Application) or
you are otherwise subject to backup withholding. The Fund will not impose backup
withholding as a result of your failure to make any certification, except the
certifications in the Application that directly relate to your TIN and backup
withholding status. Amounts withheld and forwarded to the IRS can be credited as
a payment of tax when completing your Federal income tax return.
For most individual taxpayers, the TIN is the social security number.
Special rules apply for certain accounts. For example, for an account
established under the Uniform Gift to Minors Act, the TIN of the minor should be
furnished. If you do not have a TIN, you may apply for one using forms available
at local offices of the Social Security Administration or the IRS, and you
should write "Applied For" in the space for a TIN on the Application.
Recipients exempt from backup withholding, including corporations and
certain other entities, should provide their TIN and underline "exempt" in
section 2(a) of the TIN section of the Application to avoid possible erroneous
withholding. Non-resident aliens and foreign entities may be subject to
withholding of up to 30% on certain distributions received from the Fund and
must provide certain certifications on IRS Form W-8 to avoid backup withholding
with respect to other payments. For further information, see Code Sections 1441,
1442 and 3406 and/or consult your tax adviser.
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STANDISH FIXED INCOME FUND II
Investment Adviser
Standish, Ayer & Wood, Inc.
One Financial Center
Boston, Massachusetts 02111
Principal Underwriter
Standish Fund Distributors, L.P.
One Financial Center
Boston, Massachusetts 02111
Custodian
Investors Bank & Trust Company
24 Federal Street
Boston, Massachusetts 02110
Independent Accountants
Coopers & Lybrand L.L.P.
One Post Office Square
Boston, Massachusetts 02109
Legal Counsel
Hale and Dorr
60 State Street
Boston, Massachusetts 02109
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May 1, 1996
STANDISH FIXED INCOME FUND II
One Financial Center
Boston, Massachusetts 02111
(800) 221-4795
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information is not a prospectus, but expands
upon and supplements the information contained in the Prospectus dated May 1,
1996, as amended and/or supplemented from time to time (the "Prospectus"), of
Standish Fixed Income Fund II (the "Fund"), a separate investment series of
Standish, Ayer & Wood Investment Trust (the "Trust"). This Statement of
Additional Information should be read in conjunction with the Prospectus which
may be obtained without charge from Standish Fund Distributors, L.P., the
Trust's principal underwriter (the "Principal Underwriter"), by calling the
telephone number or writing to the address listed above. THIS STATEMENT OF
ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND IS AUTHORIZED FOR DISTRIBUTION TO
PROSPECTIVE INVESTORS ONLY IF PRECEDED OR ACCOMPANIED BY AN EFFECTIVE
PROSPECTUS.
CONTENTS
Investment Objectives and Policies............................2
Investment Restrictions.......................................7
Calculation of Performance Data...............................8
Management...................................................10
Redemption of Shares.........................................15
Portfolio Transactions.......................................15
Federal Income Taxes.........................................16
Determination of Net Asset Value.............................17
The Fund and Its Shares......................................18
Additional Information.......................................18
Experts and Financial Statements.............................18
Financial Statements.........................................19
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INVESTMENT OBJECTIVES AND POLICIES
The Fund's Prospectus describes the investment objectives of the Fund and
summarizes the investment policies it will follow. The following discussion
supplements the description of the Fund's investment policies in the Prospectus.
Maturity and Duration
The effective maturity of an individual portfolio security in which the
Fund invests is defined as the period remaining until the earliest date when the
Fund can recover the principal amount of such security through mandatory
redemption or prepayment by the issuer, the exercise by the Fund of a put
option, demand feature or tender option granted by the issuer or a third party
or the payment of the principal on the stated maturity date. The effective
maturity of variable rate securities is calculated by reference to their coupon
resent dates. Thus, the effective maturity of a security may be substantially
shorter than its final stated maturity. Unscheduled prepayments of principal
have the effect of shortening the effective maturities of securities in general
and mortgage-backed securities in particular. Prepayment rates are influenced by
changes in current interest rates and a variety of economic, geographic, social
and other factors and cannot be predicted with certainty. In general,
securities, such as mortgage-backed securities, may be subject to greater
prepayment rates in a declining interest rate environment. Conversely, in an
increasing interest rate environment, the rate of prepayment may be expected to
decrease. A higher than anticipated rate of unscheduled principal prepayments on
securities purchased at a premium or a lower than anticipated rate of
unscheduled payments on securities purchased at a discount may result in a lower
yield (and total return) to the Fund than was anticipated at the time the
securities were purchased. The Fund's reinvestment of unscheduled prepayments
may be made at rates higher or lower than the rate payable on such security,
thus affecting the return realized by the Fund.
Under normal market conditions, the Fund will maintain an option-adjusted
duration in the range of plus or minus 15% of the duration of the Lehman
Government/Corporate Index. Duration of an individual portfolio security is a
measure of the security's price sensitivity taking into account expected cash
flow and prepayments under a wide range of interest rate scenarios. In computing
the duration of its portfolio, the Fund will have to estimate the duration of
obligations that are subject to prepayment or redemption by the issuer taking
into account the influence of interest rates on prepayments and coupon flows.
The Fund may use various techniques to shorten or lengthen the option-adjusted
duration of its portfolio, including the acquisition of debt obligations at a
premium or discount, and the use of mortgage swaps and interest rate swaps,
caps, floors and collars.
Money Market Instruments and Repurchase Agreements
Money market instruments include short-term U.S. Government securities,
commercial paper (promissory notes issued by corporations to finance their
short-term credit needs), negotiable certificates of deposit, non-negotiable
fixed time deposits, bankers' acceptances and repurchase agreements
collateralized by such instruments.
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U.S. Government securities include securities which are direct obligations
of the U.S. Government backed by the full faith and credit of the United States,
and securities issued by agencies and instrumentalities of the U.S. Government,
which may be guaranteed by the U.S. Treasury or supported by the issuer's right
to borrow from the Treasury or may be backed by the credit of the federal agency
or instrumentality itself. Agencies and instrumentalities of the U.S. Government
include, but are not limited to, Federal Land Banks, the Federal Farm Credit
Bank, the Central Bank for Cooperatives, Federal Intermediate Credit Banks,
Federal Home Loan Banks and the Federal National Mortgage Association.
Investments in commercial paper will be rated Prime-1 by Moody's Investors
Service, Inc. ("Moody's") or A-1 by Standard & Poor's Ratings Group ("Standard &
Poor's") or Duff 1+ by Duff & Phelps, which are the highest ratings assigned by
these rating services (even if rated lower by one or more of the other
agencies), or which, if not rated or rated lower by one or more of the agencies
and not rated by the other agency or agencies, are judged by the Adviser to be
of equivalent credit quality to the securities so rated.
A repurchase agreement is an agreement under which the Fund acquires money
market instruments (generally U.S. Government securities) from a commercial
bank, broker or dealer, subject to resale to the seller at an agreed-upon price
and date (normally the next business day). The resale price reflects an
agreed-upon interest rate effective for the period the instruments are held by
the Fund and is unrelated to the interest rate on the instruments. The
instruments acquired by the Fund (including accrued interest) must have an
aggregate market value in excess of the resale price and will be held by the
custodian bank for the Fund until they are repurchased. In evaluating whether to
enter a repurchase agreement, the investment adviser, Standish, Ayer & Wood,
Inc. (the "Adviser"), will carefully consider the creditworthiness of the seller
pursuant to procedures reviewed and approved by the Trust's Board of Trustees.
The use of repurchase agreements involves certain risks. For example, if
the seller defaults on its obligation to repurchase the instruments acquired by
the Fund at a time when their market value has declined, the Fund may incur a
loss. If the seller becomes insolvent or subject to liquidation or
reorganization under bankruptcy or other laws, a court may determine that the
instruments acquired by the Fund are collateral for a loan by the Fund and
therefore are subject to sale by the trustee in bankruptcy. Finally, it is
possible that the Fund may not be able to substantiate its interest in the
instruments it acquires. While the Trustees acknowledge these risks, it is
expected that they can be controlled through careful documentation and
monitoring.
Strategic Transactions
The Fund may, but is not required to, utilize various other investment
strategies as described below to hedge various market risks (such as interest
rates and broad or specific fixed-income market movements), to manage the
effective maturity of fixed-income securities, or to enhance potential gain.
Such strategies are generally accepted as part of modern portfolio management
and are regularly utilized by many mutual funds and other institutional
investors. Techniques and instruments used by the Fund may change over time as
new instruments and strategies are developed or regulatory changes occur.
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In the course of pursuing its investment objectives, the Fund may purchase
and sell (write) exchange-listed and over-the-counter put and call options on
securities, indices and other financial instruments; purchase and sell financial
futures contracts and options thereon; enter into various interest rate
transactions such as swaps, caps, floors or collars (collectively, all the above
are called "Strategic Transactions"). Strategic Transactions may be used in an
attempt to protect against possible changes in the market value of securities
held in or to be purchased for the Fund's portfolio resulting from securities
markets or interest rate fluctuations, to protect the Fund's unrealized gains in
the value of its portfolio securities, to facilitate the sale of such securities
for investment purposes, to manage the effective maturity or duration of the
Fund's portfolio, or to establish a position in the derivatives markets as a
temporary substitute for purchasing or selling particular securities. In
addition to the hedging transactions referred to in the preceding sentence,
Strategic Transactions may also be used to enhance potential gain in
circumstances where hedging is not involved although the Fund will attempt to
limit its net loss exposure resulting from Strategic Transactions entered into
for such purposes to not more than 1% of the Fund's net assets at any one time
and, to the extent necessary, the Fund will close out transactions in order to
comply with this limitation. (Transactions such as writing covered call options
are considered to involve hedging for the purposes of this limitation.) In
calculating the Fund's net loss exposure from such Strategic Transactions, an
unrealized gain from a particular Strategic Transaction position would be netted
against an unrealized loss from a related Strategic Transaction position. For
example, if the Adviser believes that short-term interest rates as indicated in
the forward yield curve are too high, the Fund may take a short position in a
near-term Eurodollar futures contract and a long position in a longer-dated
Eurodollar futures contract. Under such circumstances, any unrealized loss in
the near-term Eurodollar futures position would be netted against any unrealized
gain in the longer-dated Eurodollar futures position (and vice versa) for
purposes of calculating the Fund's net loss exposure. The ability of the Fund to
utilize these Strategic Transactions successfully will depend on the Adviser's
ability to predict pertinent market and interest rate movements, which cannot be
assured. The Fund will comply with applicable regulatory requirements when
implementing these strategies, techniques and instruments. The Fund's activities
involving Strategic Transactions may be limited by the requirements of
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Internal
Revenue Code"), for qualification as a regulated investment company.
Risks of Strategic Transactions
The use of Strategic Transactions has associated risks including possible
default by the other party to the transaction, illiquidity and, to the extent
the Adviser's view as to certain market or interest rate movements is incorrect,
the risk that the use of such Strategic Transactions could result in losses
greater than if they had not been used. The writing of put and call options may
result in losses to the Fund, force the purchase or sale, respectively, of
portfolio securities at inopportune times or for prices higher than (in the case
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of purchases due to the exercise of put options) or lower than (in the case of
sales due to the exercise of call options) current market values, limit the
amount of appreciation the Fund can realize on its investments or cause the Fund
to hold a security it might otherwise sell. The use of options and futures
transactions entails certain other risks. In particular, the variable degree of
correlation between price movements of futures contracts and price movements in
the related portfolio position of the Fund creates the possibility that losses
on the hedging instrument may be greater than gains in the value of the Fund's
position. The writing of options could significantly increase the Fund's
portfolio turnover rate and, therefore, associated brokerage commissions or
spreads. In addition, futures and options markets may not be liquid in all
circumstances and certain over-the-counter options may have no markets. As a
result, in certain markets, the Fund might not be able to close out a
transaction without incurring substantial losses, if at all. Although the use of
futures and options transactions for hedging should tend to minimize the risk of
loss due to a decline in the value of the hedged position, at the same time, in
certain circumstances, they tend to limit any potential gain which might result
from an increase in value of such position. The loss incurred by the Fund in
writing options on futures and entering into futures transactions is potentially
unlimited; however, as described above, the Fund will attempt to limit its net
loss exposure resulting from Strategic Transactions entered into for non-hedging
purposes to not more than 1% of its net assets at any one time. Futures markets
are highly volatile and the use of futures may increase the volatility of the
Fund's net asset value. Finally, entering into futures contracts would create a
greater ongoing potential financial risk than would purchases of options where
the exposure is limited to the cost of the initial premium. Losses resulting
from the use of Strategic Transactions would reduce net asset value and the net
result may be less favorable than if the Strategic Transactions had not been
utilized.
General Characteristics of Options
Put options and call options typically have similar structural
characteristics and operational mechanics regardless of the underlying
instrument on which they are purchased or sold. Thus, the following general
discussion relates to each of the particular types of options discussed in
greater detail below. In addition, many Strategic Transactions involving options
require segregation of the Fund's assets in special accounts, as described below
under "Use of Segregated Accounts."
A put option gives the purchaser of the option, in consideration for the
payment of a premium, the right to sell, and the writer the obligation to buy
(if the option is exercised), the underlying security, commodity, index or other
instrument at the exercise price. For instance, the Fund's purchase of a put
option on a security might be designed to protect its holdings in the underlying
instrument (or, in some cases, a similar instrument) against a substantial
decline in the market value by giving the Fund the right to sell such instrument
at the option exercise price. A call option, in consideration for the payment of
a premium, gives the purchaser of the option the right to buy, and the seller
the obligation to sell (if the option is exercised), the underlying instrument
at the exercise price. The Fund may purchase a call option on a security,
futures contract, index or other instrument to seek to protect the Fund against
an increase in the price of the underlying instrument that it intends to
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purchase in the future by fixing the price at which it may purchase such
instrument. An American style put or call option may be exercised at any time
during the option period while a European style put or call option may be
exercised only upon expiration or during a fixed period prior thereto. The Fund
is authorized to purchase and sell exchange listed options and over-the-counter
options ("OTC" options). Exchange listed options are issued by a regulated
intermediary such as the Options Clearing Corporation ("OCC"), which guarantees
the performance of the obligations of the parties to such options. The
discussion below uses the OCC as an example but is also applicable to other
financial intermediaries.
With certain exceptions, exchange listed options generally settle by
physical delivery of the underlying security, although in the future cash
settlement may become available. Index options and Eurodollar instruments are
cash settled for the net amount, if any, by which the option is in-the-money
(i.e., where the value of the underlying instrument exceeds, in the case of a
call option, or is less than, in the case of a put option, the exercise price of
the option) at the time the option is exercised. Frequently, rather than taking
or making delivery of the underlying instrument through the process of
exercising the option, listed options are closed by entering into offsetting
purchase or sale transactions that do not result in ownership of the new option.
The Fund's ability to close out its position as a purchaser or seller of an
exchange listed put or call option is dependent, in part, upon the liquidity of
the option market. There is no assurance that a liquid option market on an
exchange will exist. In the event that the relevant market for an option on an
exchange ceases to exist, outstanding options on that exchange would generally
continue to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours
during which the underlying financial instruments are traded. To the extent that
the option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct agreement with
the Counterparty. In contrast to exchange listed options, which generally have
standardized terms and performance mechanics, all the terms of an OTC option,
including such terms as method of settlement, term, exercise price, premium,
guarantees and security, are set by negotiation of the parties. The Fund will
generally sell (write) OTC options that are subject to a buy-back provision
permitting the Fund to require the Counterparty to sell the option back to the
Fund at a formula price within seven days. (To the extent that the Fund does not
do so, the OTC options are subject to the Fund's restriction on investments in
illiquid securities.) The Fund expects generally to enter into OTC options that
have cash settlement provisions, although it is not required to do so.
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Unless the parties provide for it, there is no central clearing or guaranty
function in the OTC option market. As a result, if the Counterparty fails to
make delivery of the security or other instrument underlying an OTC option it
has entered into with the Fund or fails to make a cash settlement payment due in
accordance with the terms of that option, the Fund will lose any premium it paid
for the option as well as any anticipated benefit of the transaction.
Accordingly, the Adviser must assess the creditworthiness of each such
Counterparty or any guarantor or credit enhancement of the Counterparty's credit
to determine the likelihood that the terms of the OTC option will be satisfied.
The Fund will engage in OTC option transactions only with U.S. Government
securities dealers recognized by the Federal Reserve Bank of New York as
"Primary dealers," or broker dealers, domestic banks or other financial
institutions which have received, combined with any credit enhancements, a
long-term debt rating of A from Standard & Poor's or Moody's or an equivalent
rating from any other nationally recognized statistical rating organization
("NRSRO") or which issue debt that is determined to be of equivalent credit
quality by the Adviser. The staff of the Securities and Exchange Commission
("SEC") currently takes the position that, absent the buy-back provisions
discussed above, OTC options purchased by the Fund, and portfolio securities
"covering" the amount of the Fund's obligation pursuant to an OTC option sold by
it (the cost of the sell-back plus the in-the-money amount, if any) are
illiquid, and are subject to the Fund's limitation on investing no more than 15%
of its assets in illiquid securities. However, for options written with "primary
dealers" pursuant to an agreement requiring a closing purchase transaction at a
formula price, the amount which is considered to be illiquid may be calculated
by reference to a formula price.
If the Fund sells (writes) a call option, the premium that it receives may
serve as a partial hedge, to the extent of the option premium, against a
decrease in the value of the underlying securities or instruments in its
portfolio or will increase the Fund's income. The sale (writing) of put options
can also provide income.
The Fund may purchase and sell (write) call options on securities including
U.S. Treasury and agency securities, mortgage-backed and asset-backed
securities, corporate debt securities, equity securities (including convertible
securities) and Eurodollar instruments that are traded on U.S. and foreign
securities exchanges and in the over-the-counter markets, and on securities
indices and futures contracts. All calls sold by the Fund must be "covered"
(i.e., the Fund must own the securities or the futures contract subject to the
call) or must meet the asset segregation requirements described below as long as
the call is outstanding. In addition, the Fund may cover a written call option
or put option by entering into an offsetting forward contract and/or by
purchasing an offsetting option or any other option which, by virtue of its
exercise price or otherwise, reduces the Fund's net exposure on its written
option position.
Even though the Fund will receive the option premium to help offset any
loss, the Fund may incur a loss if the exercise price is below the market price
for the security subject to the call at the time of exercise. A call sold by the
Fund also exposes the Fund during the term of the option to possible loss of
opportunity to realize appreciation in the market price of the underlying
security or instrument and may require the Fund to hold a security or instrument
which it might otherwise have sold.
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The Fund may purchase and sell (write) put options on securities including
U.S. Treasury and agency securities, mortgage-backed and asset-backed
securities, corporate debt securities, equity securities (including convertible
securities) and Eurodollar instruments (whether or not it holds the above
securities in its portfolio), and on securities indices and futures contracts.
The Fund will not sell put options if, as a result, more than 50% of the Fund's
assets would be required to be segregated to cover its potential obligations
under such put options other than those with respect to futures and options
thereon. In selling put options, there is a risk that the Fund may be required
to buy the underlying security at a price above the market price.
Options on Securities Indices and Other Financial Indices
The Fund may also purchase and sell (write) call and put options on
securities indices and other financial indices. Options on securities indices
and other financial indices are similar to options on a security or other
instrument except that, rather than settling by physical delivery of the
underlying instrument, they settle by cash settlement. For example, an option on
an index gives the holder the right to receive, upon exercise of the option, an
amount of cash if the closing level of the index upon which the option is based
exceeds, in the case of a call, or is less than, in the case of a put, the
exercise price of the option (except if, in the case of an OTC option, physical
delivery is specified). This amount of cash is equal to the differential between
the closing price of the index and the exercise price of the option, which also
may be multiplied by a formula value. The seller of the option is obligated, in
return for the premium received, to make delivery of this amount. In addition to
the methods described above, the Fund may cover call options on a securities
index by owning securities whose price changes are expected to be similar to
those of the underlying index, or by having an absolute and immediate right to
acquire such securities without additional cash consideration (or for additional
cash consideration held in a segregated account by its custodian) upon
conversion or exchange of other securities in its portfolio.
General Characteristics of Futures
The Fund may enter into financial futures contracts or purchase or sell put
and call options on such futures. Futures are generally bought and sold on the
commodities exchanges where they are listed and involve payment of initial and
variation margin as described below. All futures contracts entered into by the
Fund are traded on U.S. exchanges or boards of trade that are licensed and
regulated by the Commodity Futures Trading Commission ("CFTC") or on certain
foreign exchanges.
The sale of futures contracts creates a firm obligation by the Fund, as
seller, to deliver to the buyer the specific type of financial instrument called
for in the contract at a specific future time for a specified price (or, with
respect to index futures and Eurodollar instruments, the net cash amount). The
purchase of futures contracts creates a corresponding obligation by the Fund, as
purchaser to purchase a financial instrument at a specified time and price.
Options on futures contracts are similar to options on securities except that an
option on a futures contract gives the purchaser the right, in return for the
premium paid, to assume a position in a futures contract and obligates the
seller to deliver such position, if the option is exercised.
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The Fund's use of financial futures and options thereon will in all cases
be consistent with applicable regulatory requirements and in particular the
regulations of the CFTC relating to exclusions from regulation as a commodity
pool operator. Those regulations currently provide that the Fund may use
commodity futures and option positions (i) for bona fide hedging purposes
without regard to the percentage of assets committed to margin and option
premiums, or (ii) for other purposes permitted by the CTFC to the extent that
the aggregate initial margin and option premiums required to establish such
non-hedging positions (net of the amount that the positions were "in the money"
at the time of purchase) do not exceed 5% of the liquidation value (i.e., the
net asset value) of the Fund's portfolio, after taking into account unrealized
profits and losses on such positions. Typically, maintaining a futures contract
or selling an option thereon requires the Fund to deposit, with a financial
intermediary for the benefit of a futures commission merchant, as security for
its obligations an amount of cash or other specified assets (initial margin)
which initially is typically 1% to 10% of the face amount of the contract (but
may be higher in some circumstances). Additional cash or assets (variation
margin) may be required to be deposited directly with the futures commission
merchant thereafter on a daily basis as the value of the contract fluctuates.
The purchase of an option on financial futures involves payment of a premium for
the option without any further obligation on the part of the Fund. If the Fund
exercises an option on a futures contract it will be obligated to post initial
margin (and potential subsequent variation margin) for the resulting futures
position just it would for any position. Futures contracts and options thereon
are generally settled by entering into an offsetting transaction but there can
be no assurance that the position can be offset prior to settlement at an
advantageous price, nor that delivery will occur. The segregation requirements
with respect to futures contracts and options thereon are described below.
Combined Transactions
The Fund may enter into multiple transactions, including multiple options
transactions, multiple futures transactions, and multiple interest rate
transactions, structured notes and any combination of futures, options, and
interest rate transactions (component transactions), instead of a single
Strategic Transaction, as part of a single or combined strategy when, in the
opinion of the Adviser it is in the best interests of the Fund to do so. A
combined transaction will usually contain elements of risk that are present in
each of its component transactions. Although combined transactions are normally
entered into based on the Adviser's judgment that the combined strategies will
reduce risk or otherwise more effectively achieve the desired portfolio
management goal, it is possible that the combination will instead increase such
risks or hinder achievement of the portfolio management objective.
Swaps, Caps, Floors and Collars
Among the Strategic Transactions into which the Fund may enter are interest
rate and index swaps and the purchase or sale of related caps, floors and
collars. The Fund expects to enter into these transactions primarily for hedging
purposes, including, but not limited to, preserving a return or spread on a
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particular investment or portion of its portfolio, as a duration management
technique or protecting against an increase in the price of securities the Fund
anticipates purchasing at a later date. Swaps, caps, floors and collars may also
be used to enhance potential gain in circumstances where hedging is not involved
although, as described above, the Fund will attempt to limit its net loss
exposure resulting from swaps, caps, floors and collars and other Strategic
Transactions entered into for such purposes to not more than 1% of the Fund's
net assets at any one time. The Fund will not sell interest rate caps or floors
where it does not own securities or other instruments providing the income
stream the Fund may be obligated to pay. Interest rate swaps involve the
exchange by the Fund with another party of their respective commitments to pay
or receive interest (e.g., an exchange of floating rate payments for fixed rate
payments with respect to a notional amount of principal). An index swap is an
agreement to swap cash flows on a notional amount based on changes in the values
of the reference indices. The purchase of a cap entitles the purchaser to
receive payments on a notional principal amount from the party selling such cap
to the extent that a specified index exceeds a predetermined interest rate or
amount. The purchase of a floor entitles the purchaser to receive payments on a
notional principal amount from the party selling such floor to the extent that a
specified index falls below a predetermined interest rate or amount. A collar is
a combination of a cap and a floor that preserves a certain rate of return
within a predetermined range of interest rates or values.
The Fund will usually enter into swaps on a net basis (i.e., the two
payment streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with the Fund receiving or paying, as the case may
be, only the net amount of the two payments). The Fund will not enter into any
swap, cap, floor or collar transaction unless, at the time of entering into such
transaction, the unsecured long-term debt of the Counterparty, combined with any
credit enhancements, is rated at least A by Standard & Poor's or Moody's or has
an equivalent rating from an NRSRO or which issue debt that is determined to be
of equivalent credit quality by the Adviser. If there is a default by the
Counterparty, the Fund may have contractual remedies pursuant to the agreements
related to the transaction. The swap market has grown substantially in recent
years with a large number of banks and investment banking firms acting both as
principals and as agents utilizing standardized swap documentation. As a result,
the swap market has become relatively liquid. Caps, floors and collars are more
recent innovations for which standardized documentation has not yet been fully
developed. Swaps, caps, floors and collars are considered illiquid for purposes
of the Fund's policy regarding illiquid securities, unless it is determined,
based upon continuing review of the trading markets for the specific security,
that such security is liquid. The Board of Trustees has adopted guidelines and
delegated to the Adviser the daily function of determining and monitoring the
liquidity of swaps, caps, floors and collars. The Board of Trustees, however,
retains oversight focusing on factors such as valuation, liquidity and
availability of information and is ultimately responsible for such
determinations. The staff of the SEC currently takes the position that swaps,
caps, floors and collars are illiquid, and are subject to the Fund's limitation
on investing in illiquid securities.
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Eurodollar Contracts
The Fund may make investments in Eurodollar contracts. Eurodollar contracts
are U.S. dollar-denominated futures contracts or options thereon which are
linked to the London Interbank Offered Rate ("LIBOR"), although foreign
currency-denominated instruments are available from time to time. Eurodollar
futures contracts enable purchasers to obtain a fixed rate for the lending of
funds and sellers to obtain a fixed rate for borrowings. The Fund might use
Eurodollar futures contracts and options thereon to hedge against changes in
LIBOR, to which many interest rate swaps and fixed income instruments are
linked.
Use of Segregated Accounts
The Fund will hold securities or other instruments whose values are
expected to offset its obligations under the Strategic Transactions. The Fund
will not enter into Strategic Transactions that expose the Fund to an obligation
to another party unless it owns either (i) an offsetting position in securities
or other options, futures contracts or other instruments or (ii) cash,
receivables or liquid, high grade debt securities with a value sufficient to
cover its potential obligations. The Fund may have to comply with any applicable
regulatory requirements designed to make sure that mutual funds do not use
leverage in Strategic Transactions, and if required, will set aside cash and
other assets in a segregated account with its custodian bank in the amount
prescribed. In that case, the Fund's custodian would maintain the value of such
segregated account equal to the prescribed amount by adding or removing
additional cash or other assets to account for fluctuations in the value of the
account and the Fund's obligations on the underlying Strategic Transaction.
Assets held in a segregated account would not be sold while the Strategic
Transaction is outstanding, unless they are replaced with similar assets. As a
result, there is a possibility that segregation of a large percentage of the
Fund's assets could impede portfolio management or the Fund's ability to meet
redemption requests or other current obligations.
"When-Issued" and "Delayed Delivery" Securities
The Fund may commit up to 15% of its net assets to purchase securities on a
"when-issued" and "delayed delivery" basis, which means that delivery and
payment for the securities will normally take place 15 to 45 days after the date
of the transaction. The payment obligation and interest rate on the securities
are fixed at the time the Fund enters into the commitment, but interest will not
accrue to the Fund until delivery of and payment for the securities. Although
the Fund will only make commitments to purchase "when-issued" and "delayed
delivery" securities with the intention of actually acquiring the securities,
the Fund may sell the securities before the settlement date if deemed advisable
by the Adviser. Unless the Fund has entered into an offsetting agreement to sell
the securities, cash or liquid, high-grade debt obligations with a market value
equal to the amount of the Fund's commitment will be segregated with the
custodian bank for the Fund. If the market value of these securities declines,
additional cash or securities will be segregated daily so that the aggregate
market value of the segregated securities equals the amount of the Fund's
commitment.
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Securities purchased on a "when-issued" and "delayed delivery" basis may
have a market value on delivery which is less than the amount paid by the Fund.
Changes in market value may be based upon the public's perception of the
creditworthiness of the issuer or changes in the level of interest rates.
Generally, the value of "when-issued" securities will fluctuate inversely to
changes in interest rates, i.e., they will appreciate in value when interest
rates fall and will depreciate in value when interest rates rise.
Portfolio Turnover
It is not the policy of the Fund to purchase or sell securities for trading
purposes. However, the Fund places no restrictions on portfolio turnover and it
may sell any portfolio security without regard to the period of time it has been
held, except as may be necessary to maintain its status as a regulated
investment company under the Internal Revenue Code. The Fund may therefore
generally change its portfolio investments at any time in accordance with the
Adviser's appraisal of factors affecting any particular issuer or market, or the
economy in general.
INVESTMENT RESTRICTIONS
The Fund has adopted the following fundamental policies in addition to
those described under "Investment Objectives and Policies-Investment
Restrictions" in the Prospectus. The Fund's fundamental policies cannot be
changed unless the change is approved by the lesser of (i) 67% or more of the
voting securities present at a meeting, if the holders of more than 50% of the
outstanding voting securities of the Fund are present or represented by proxy,
or (ii) more than 50% of the outstanding voting securities of the Fund. The Fund
may not:
1. Invest more than 25% of the current value of its total assets in any
single industry, provided that this restriction shall not apply to U.S.
Government securities or mortgage-backed securities issued or guaranteed
as to principal or interest by the U.S. Government, its agencies or
instrumentalities.
2. Issue senior securities, except as permitted by paragraphs 3, 7 and 8
below. For purposes of this restriction, the issuance of shares of
beneficial interest in multiple classes or series, the deferral of
trustees' fees, the purchase or sale of options, futures contracts,
forward commitments and repurchase agreements entered into in accordance
with the Fund's investment policies or within the meaning of paragraph 6
below, are not deemed to be senior securities.
3. Borrow money, except (i) from banks for temporary or short-term purposes
or for the clearance of transactions in amounts not to exceed 33 1/3% of
the value of the Fund's total assets (including the amount borrowed) taken
at market value, (ii) in connection with the redemption of Fund shares or
to finance failed settlements of portfolio trades without immediately
liquidating portfolio securities or other assets; (iii) in order to
fulfill commitments or plans to purchase additional securities pending the
anticipated sale of other portfolio securities or assets and (iv) the Fund
may enter into reverse repurchase agreements and forward roll
transactions. For purposes of this investment restriction, investments in
short sales, futures contracts, options on futures contracts, securities
or indices and forward commitments shall not constitute borrowing.
12
<PAGE>
4. Underwrite the securities of other issuers, except to the extent that, in
connection with the disposition of portfolio securities, the Fund may be
deemed to be an underwriter under the Securities Act of 1933.
5. Purchase or sell real estate except that the Fund may (i) acquire or lease
office space for its own use, (ii) invest in securities of issuers that
invest in real estate or interests therein, (iii) invest in securities
that are secured by real estate or interests therein, (iv) purchase and
sell mortgage-related securities and (v) hold and sell real estate
acquired by the Fund as a result of the ownership of securities.
6. Purchase securities on margin (except that the Fund may obtain such
short-term credits as may be necessary for the clearance of purchases and
sales of securities).
7. Purchase or sell commodities or commodity contracts, except the Fund may
purchase and sell options on securities, securities indices and currency,
futures contracts on securities, securities indices and currency and
options on such futures, forward foreign currency exchange contracts,
forward commitments, securities index put or call warrants and repurchase
agreements entered into in accordance with the Fund's investment policies.
8. Make loans, except that the Fund (1) may lend portfolio securities in
accordance with the Fund's investment policies up to 33 1/3% of the Fund's
total assets taken at market value, (2) enter into repurchase agreements,
and (3) purchase all or a portion of an issue of debt securities, bank
loan participation interests, bank certificates of deposit, bankers'
acceptances, debentures or other securities, whether or not the purchase
is made upon the original issuance of the securities.
For purposes of the fundamental investment restriction (1) regarding
industry concentration, the Adviser generally classifies issuers by industry in
accordance with classifications set forth in the Directory of Companies Filing
Annual Reports With The Securities and Exchange Commission. In the absence of
such classification or if the Adviser determines in good faith based on its own
information that the economic characteristics affecting a particular issuer make
it more appropriately considered to be engaged in a different industry, the
Adviser may classify an issuer according to its own sources. For instance,
personal credit finance companies and business credit finance companies are
deemed to be separate industries and wholly-owned finance companies are
considered to be in the industry of their parents if their activities are
primarily related to financing the activities of their parents.
The following restrictions are not fundamental policies and may be changed
by the Trustees without shareholder approval, in accordance with applicable
laws, regulations or regulatory policy. The Fund may not:
13
<PAGE>
A. Make short sales of securities unless (a) after effect is given to any
such short sale, the total market value of all securities sold short would
not exceed 5% of the value of the Fund's net assets or (b) at all times
during which a short position is open it owns an equal amount of such
securities, or by virtue of ownership of convertible or exchangeable
securities it has the right to obtain through the conversion or exchange
of such other securities an amount equal to the securities sold short.
B. Invest in companies for the purpose of exercising control or management.
C. Purchase securities of any other investment company if, as a result, (i)
more than 10% of the Fund's assets would be invested in securities of
other investment companies, (ii) such purchase would result in more than
3% of the total outstanding voting securities of any one such investment
company being held by the Fund or (iii) more than 5% of the Fund's assets
would be invested in any one such investment company. The Fund will not
purchase the securities of any open-end investment company except when
such purchase is part of a plan of merger, consolidation, reorganization
or purchase of substantially all of the assets of any other investment
company, or purchase the securities of any closed-end investment company
except in the open market where no commission or profit to a sponsor or
dealer results from the purchase, other than customary brokerage fees. The
Fund has no current intention of investing in other investment companies.
D. Invest in interests in oil, gas or other exploration or development
programs; however, this policy will not prohibit the acquisition of
securities of companies engaged in the production or transmission of oil,
gas, or other minerals.
E. Invest more than 5% of the assets of the Fund in the securities of any
issuers which, together with their corporate parents, have records of less
than three years' continuous operation, including the operation of any
predecessor, excluding obligations issued or guaranteed by the U.S.
Government or its agencies and securities fully collateralized by such
securities and excluding securities which have been rated investment grade
by at least one nationally recognized statistical rating organization.
F. Invest in securities of any company if any officer or director (Trustee)
of the Trust or of the Adviser owns more than .5% of the outstanding
securities of such company and such officers and directors (Trustees) own
in the aggregate more than 5% of the securities of such company.
G. Invest in securities which are illiquid if, as a result, more than 15% of
its net assets would consist of such securities, including repurchase
agreements maturing in more than seven days, securities that are not
readily marketable, restricted securities not eligible for resale pursuant
to Rule 144A under the 1933 Act, purchased OTC options, certain assets
used to cover written OTC options, and privately issued stripped
mortgage-backed securities.
H. Invest more than 15% of its total assets in restricted securities,
including those eligible for resale under Rule 144A under the 1933 Act.
I. Purchase securities while outstanding bank borrowings exceed 5% of the
Fund's net assets.
J. Invest in real estate limited partnership interests, other than real
estate investment trusts organized as limited partnerships.
K. Purchase or sell (write) options, except pursuant to the limitations
described above.
14
<PAGE>
If any percentage restriction described above is adhered to at the time of
investment, a subsequent increase or decrease in the percentage resulting from a
change in the value of the Fund's assets will not constitute a violation of the
restriction, except with respect to restriction (F) above.
In order to permit the sale of shares of the Fund in certain states, the
Board may, in its sole discretion, adopt restrictions on investment policy more
restrictive than those described above. Should the Board determine that any such
more restrictive policy is no longer in the best interest of the Fund and its
shareholders, the Fund may cease offering shares in the state involved and the
Board may revoke such restrictive policy. Moreover, if the states involved shall
no longer require any such restrictive policy, the Board may, in its sole
discretion, revoke such policy.
CALCULATION OF PERFORMANCE DATA
As indicated in the Prospectus, the Fund may, from time to time, advertise
certain total return and yield information. The average annual total return of
the Fund for a period is computed by subtracting the net asset value per share
at the beginning of the period from the net asset value per share at the end of
the period (after adjusting for the reinvestment of any income dividends and
capital gain distributions), and dividing the result by the net asset value per
share at the beginning of the period. In particular, the average annual total
return of the Fund ("T") is computed by using the redeemable value at the end of
a specified period of time ("ERV") of a hypothetical initial investment of
$1,000 ("P") over a period of time ("n") according to the formula P(1+T)n=ERV.
Yield quotations shares are computed by dividing the net investment income
per share during a base period of 30 days, or one month, by the maximum offering
price (net asset value) per share of the Fund on the last day of such base
period in accordance with the following formula:
Yield = 2[((A - B + 1)/CD)^6 - 1]
Where: a= interest earned during the period
b= net expenses accrued for the period
c= the average daily number of shares outstanding during the
period that were entitled to receive dividends
d= the maximum offering price per share (net asset value) on the
last day of the period
For purposes of calculating interest earned on debt obligations as provided
in item "a" above:
(i) The yield to maturity of each obligation held by the Fund is computed
based on the market value of the obligation (including actual accrued
interest, if any) at the close of business each day during the 30-day base
period, or, with respect to obligations purchased during the month, the
purchase price (plus actual accrued interest, if any) on settlement date,
and with respect to obligations sold during the month the sale price (plus
actual accrued interest, if any) between the trade and settlement dates.
15
<PAGE>
(ii) The yield to maturity of each obligation is then divided by 360 and the
resulting quotient is multiplied by the market value of the obligation
(including actual accrued interest, if any) to determine the interest
income on the obligation for each day. The yield to maturity calculation
has been made on each obligation during the 30 day base period.
(iii) Interest earned on all debt obligations during the 30-day or one month
period is then totaled.
(iv) The maturity of an obligation with a call provision(s) is the next call
date on which the obligation reasonably may be expected to be called or,
if none, the maturity date.
With respect to the treatment of discount and premium on mortgage or other
receivables-backed obligations which are expected to be subject to monthly
payments of principal and interest ("pay downs"), the Fund accounts for gain or
loss attributable to actual monthly pay downs as an increase or decrease to
interest income during the period. In addition, the Fund may elect (i) to
amortize the discount or premium remaining on a security, based on the cost of
the security, to the weighted average maturity date, if such information is
available, or to the remaining term of the security, if the weighted average
maturity date is not available, or (ii) not to amortize the discount or premium
remaining on a security.
The Fund may also quote non-standardized yield, such as yield-to-maturity
("YTM"). YTM represents the rate of return an investor will receive if a
long-term, interest bearing investment, such as a bond, is held to its maturity
date. YTM does not take into account purchase price, redemption value, time to
maturity, coupon yield, and the time between interest payments.
In addition to average annual return and yield quotations, the Fund may
quote quarterly and annual performance on a net (with management and
administration fees deducted) and gross basis as follows:
Quarter/Year Net Gross
- - --------------------------------------------------------------------------------
3Q95 1.35 1.44
4Q95 4.38 4.48
1995 5.79 5.97
Performance quotations should not be considered as representative of the
Fund's performance for any specified period in the future.
16
<PAGE>
The Fund's performance may be compared in sales literature to the
performance of other mutual funds having similar objectives or to standardized
indices or other measures of investment performance. In particular, the Fund may
compare its performance to the Lehman Government/Corporate Index, which is
generally considered to be representative of the performance of all domestic,
dollar denominated, fixed rate, investment grade bonds, and the Lehman Brothers
Aggregate Index which is composed of securities from the Lehman Brothers
Government/Corporate Bond Index, Mortgage Backed Securities Index and Yankee
Bond Index, and is generally considered to be representative of all unmanaged,
domestic, dollar denominated, fixed rate investment grade bonds. Comparative
performance may also be expressed by reference to a ranking prepared by a mutual
fund monitoring service or by one or more newspapers, newsletters or financial
periodicals. Performance comparisons may be useful to investors who wish to
compare the Fund's past performance to that of other mutual funds and investment
products. Of course, past performance is not a guarantee of future results.
The Fund's average annual total return for the period from July 3, 1995
(commencement of operations) through December 31, 1995 was 5.79% and the Fund's
average annualized yield for the 30 day period ended December 31, 1995 was
6.91%.
17
<PAGE>
MANAGEMENT
Trustees and Officers
The Trustees and executive officers of the Trust are listed below. All
executive officers of the Trust are affiliates of Standish, Ayer & Wood, Inc.,
the Fund's investment adviser.
<TABLE>
<CAPTION>
Name, Address and Date of Birth Position Held Principal Occupation
With Trust During Past 5 Years
- - --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
*D. Barr Clayson, 7/29/35 Vice President and Trustee Vice President and Managing Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.;
One Financial Center Chairman and Director,
Boston, MA 02111 Standish International
Management Company, L.P.
Samuel C. Fleming, 9/30/40 Trustee Chairman of the Board
c/o Decision Resources, Inc. and Chief Executive Officer,
1100 Winter Street Decision Resources, Inc.;
Waltham, MA 02154 through 1989, Senior V.P.
Arthur D. Little
Benjamin M. Friedman, 8/5/44 Trustee William Joseph Maier
c/o Harvard University Professor of Political Economy,
Cambridge, MA 02138 Harvard University
John H. Hewitt, 4/11/35 Trustee Trustee, The Peabody Foundation; Trustee,
P.O. Box 307 Visiting Nurse Alliance of Vermont
So. Woodstock, VT 05071 and New Hampshire
*Edward H. Ladd, 1/3/38 Trustee and Vice President Chairman of the Board
c/o Standish, Ayer & Wood, Inc. and Managing Director,
One Financial Center Standish, Ayer & Wood, Inc. since 1990;
Boston, MA 02111 formerly President of Standish, Ayer & Wood, Inc.
Director of
Standish International Management Company, L.P.
Caleb Loring III, 11/14/43 Trustee Trustee, Essex Street Associates
c/o Essex Street Associates (family investment trust office);
P.0. Box 5600 Director, Holyoke Mutual Insurance Company
Beverly Farms, MA 01915
*Richard S. Wood, 5/21/54 President and Trustee Vice President, Secretary,
c/o Standish, Ayer & Wood, Inc. and Managing Director,
One Financial Center Standish, Ayer & Wood, Inc.;
Boston, MA 02111 Executive Vice President and Director,
Standish International Management Company, L.P.
Richard C. Doll, 7/8/48 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center Vice President and Director,
Boston, MA 02111 Standish International Management Company, L.P.
James E. Hollis III, 11/21/48 Executive Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
David W. Murray, 5/5/40 Treasurer and Secretary Vice President, Treasurer and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center Treasurer,
Boston, MA 02111 Standish International Management Company, L.P.
18
<PAGE>
Name, Address and Date of Birth Position Held Principal Occupation
With Trust During Past 5 Years
- - --------------------------------------------------------------------------------------------------------------------
Caleb F. Aldrich, 9/20/57 Vice President Vice President and Managing Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA O2111
Beverly E. Banfield, 7/6/56 Vice President Vice President and Compliance Officer,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.;
One Financial Center Assistant Vice President and Compliance Officer,
Boston, MA 02111 Freedom Capital Management Corp.
(1989-1992)
Nicholas S. Battelle, 6/24/42 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Walter M. Cabot, 1/16/33 Vice President Senior Advisor and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.;
One Financial Center prior to 1991, President,
Boston, MA 02111 Harvard Management Company
Senior Advisor and Director of
Standish International Management Company, L.P.
David H. Cameron, 11/2/55 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center Director of
Boston, MA 02111 Standish International Management
Company, L.P.
Karen K. Chandor, 2/13/50 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Lavinia B. Chase, 6/4/46 Vice President Vice President,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Susan B. Coan, 5/1/52 Vice President Vice President,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA O2111
W. Charles Cook II, 7/16/63 Vice President Vice President,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center Vice President,
Boston, MA 02111 Standish International Management Company, L.P.
Joseph M. Corrado, 5/13/55 Vice President Vice President and Associate Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
19
<PAGE>
Name, Address and Date of Birth Position Held Principal Occupation
With Trust During Past 5 Years
- - --------------------------------------------------------------------------------------------------------------------
Dolores S. Driscoll, 2/17/48 Vice President Vice President and Managing Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center Director,
Boston, MA 02111 Standish International Management Company, L.P.
Mark A. Flaherty, 4/24/59 Vice President Vice President,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center Vice President
Boston, MA 02111 Standish International Management Company, L.P.
Maria D. Furman, 2/3/54 Vice President Vice President and Managing Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center Vice President and Director,
Boston, MA 02111 Standish International Management Company, L.P.
Anne P. Herrmann, 1/26/56 Vice President Mutual Fund Administrator,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Ann S. Higgins, 4/8/35 Vice President Vice President,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Denise B. Kneeland, 8/19/51 Vice President Senior Operations, Manager,
c/o Standish, Ayer &Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center since December 1995 formerly
Boston, MA 02111 Vice President Scudder, Stevens and Clark
Raymond J. Kubiak, 9/3/57 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Phillip D. Leonardi, 4/24/62 Vice President Vice President, Standish, Ayer & Wood, Inc.
c/o Standish, Ayer & Wood, Inc. since November 1993; formerly, Investment Sales,
One Financial Center Cigna Corporation (1993) and
Boston, MA 02111 Travelers Corporation (1984-1993)
Laurence A. Manchester, 5/24/43 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
George W. Noyes, 11/12/44 Vice President President and Managing Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center Director of
Boston, MA 02111 Standish International Management Company, L.P.
Arthur H. Parker, 8/12/35 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Jennifer A. Pline, 3/8/60 Vice President Vice President,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
20
<PAGE>
Name, Address and Date of Birth Position Held Principal Occupation
With Trust During Past 5 Years
- - --------------------------------------------------------------------------------------------------------------------
Howard B. Rubin, 10/29/59 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center Executive Vice President and Director
Boston, MA 02111 Standish International Management Company, L.P.
Michael C. Schoeck, 10/24/55 Vice President Vice President,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc. since August, 1993;
One Financial Center formerly, Vice President,
Boston, MA 02111 Commerzbank, Frankfurt, Germany
Vice President,
Standish International Management Company, L.P.
Austin C. Smith, 7/25/52 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Stephen A. Smith, 3/13/49 Vice President Vice President, since November 2, 1993;
c/o Standish, Ayer & Wood, Inc. formerly, Standish, Ayer & Wood, Inc. Consultant
One Financial Center Cambridge Associates
Boston, MA 02111
David C. Stuehr, 3/1/58 Vice President Vice President,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
James W. Sweeney, 5/15/59 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center Executive Vice President and Director,
Boston, MA 02111 Standish International Management Company, L.P.
Ralph S. Tate, 4/2/47 Vice President Vice President and Managing Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc. since April, 1990;
One Financial Center formerly Vice President, Aetna Life & Casualty
Boston, MA 02111 President and Director,
Standish International Management Company, L.P.
Michael W. Thompson, 3/31/56 Vice President Vice President and Associate Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Christopher W. Van Alstyne, 3/24/60 Vice President Vice President,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.;
One Financial Center Formerly Regional Marketing Director,
Boston, MA 02111 Gabelli-O'Connor Fixed Income Management
*Indicates that Trustee is an interested person of the Trust for purposes
of the 1940 Act. Compensation of Trustees and Officers
</TABLE>
21
<PAGE>
Compensation of Trustees and Officers
The Fund pays no compensation to the Trust's Trustees affiliated with the
Adviser or the Trust's officers. None of the Trust's Trustees or officers have
engaged in any financial transactions (other than the purchase or redemption of
the Fund's shares) with the Trust or the Adviser.
The following table sets forth all compensation paid to the Trust's
Trustees as of the Fund's fiscal year ended December 31, 1995:
<TABLE>
<CAPTION>
Pension or Retirement Total Compensation
Aggregate Compensation Benefits Accrued as from Fund and
Name of Trustee from the Fund Part of Fund's Expenses Other Funds in Complex*
- - ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
D. Barr Clayson $0 $0 $0
Phyllis L. Cothran** 0 0 0
Richard C. Doll*** 0 0 0
Samuel C. Fleming 142 0 46,000
Benjamin M. Friedman 132 0 41,750
John H. Hewitt 132 0 41,750
Edward H. Ladd 0 0 0
Caleb Loring, III 132 0 41,750
Richard S. Wood 0 0 0
- - ------------
* As of the date of this Statement of Additional Information, there were 18 mutual funds in the fund complex.
** Ms. Cothran resigned as a Trustee effective January 31, 1995.
*** Mr. Doll resigned as a Trustee effective December 6, 1995.
</TABLE>
Certain Shareholders
At February 1, 1996, the Trustees and officers of the Trust as a group
beneficially owned (i.e., had voting and/or investment power) less than 1% of
the then outstanding shares of the Fund. At that date, no person beneficially
owned 5% or more of the outstanding shares of the Fund except:
Percentage of
Name and Address Outstanding Shares
---------------- ------------------
Miss Porter's School 38%
60 Main Street
Farmington, CT 06032
Houston General Insurance Empl. 33%
P. O. Box 2932
Fort Worth, TX 76113
Life Technologies, Inc. Pension Plan 21%
EAMCO
c/o Riggs National Bank
Attn: Mutual Funds Desk
P. O. Box 96211
Washington, DC 20090-6211
The Peabody Foundation, Inc. 7%
Seaward Management Corporation
10 Post Office Square
Boston, MA 02109
22
<PAGE>
Investment Adviser
Standish, Ayer & Wood, Inc. serves as investment adviser to the Fund
pursuant to a written investment advisory agreement. The Adviser is a
Massachusetts corporation organized in 1933 and is registered under the
Investment Advisers Act of 1940.
The following, constituting all of the Directors and all of the
shareholders of the Adviser, are the controlling persons of the Adviser: Caleb
F. Aldrich, Nicholas S. Battelle, Walter M. Cabot, Sr., David H. Cameron, Karen
K. Chandor, D. Barr Clayson, Richard C. Doll, Dolores S. Driscoll, Mark A.
Flaherty, Maria D. Furman, James E. Hollis III, Raymond J. Kubiak, Edward H.
Ladd, Laurence A. Manchester, David W. Murray, George W. Noyes, Arthur H.
Parker, Howard B. Rubin, David C. Stuehr, Austin C. Smith, Ralph S. Tate, James
J. Sweeney and Richard S. Wood.
Certain services provided by the Adviser under the advisory agreement are
described in the Prospectus. In addition to those services, the Adviser provides
the Fund with office space for managing its affairs, with the services of
required executive personnel, and with certain clerical services and facilities.
These services are provided without reimbursement by the Fund for any costs
incurred. Under the investment advisory agreement, the Fund pays to the Adviser
a fee at the annual rate of 0.40% of the Fund's average daily net assets. This
fee is paid monthly. For services to the Fund during the fiscal period from July
3, 1995 (commencement of operations) through December 31, 1995, the Adviser
voluntarily agreed not to impose any investment advisory fee, which would have
amounted to $42,628.
The Adviser has voluntarily agreed to limit certain "Total Fund Operating
Expenses" (excluding litigation, indemnification and other extraordinary
expenses) to 0.50% of the Fund's average daily net assets. This agreement is
voluntary and temporary and may be discontinued or revised by the Adviser at any
time.
Pursuant to the investment advisory agreement, the Fund bears expenses of
its operations other than those incurred by the Adviser pursuant to the
investment advisory agreement. Among other expenses, the Fund will pay share
pricing and shareholder servicing fees and expenses; custodian fees and
expenses; legal and auditing fees and expenses; expenses of prospectuses,
23
<PAGE>
statements of additional information and shareholder reports; registration and
reporting fees and expenses; and Trustees' fees and expenses. The advisory
agreement provides that if the total expenses of the Fund in any fiscal year
exceed the most restrictive expense limitation applicable to the Fund in any
state in which shares of the Fund are then qualified for sale, the compensation
due the Adviser shall be reduced by the amount of the excess, by a reduction or
refund thereof at the time such compensation is payable after the end of each
calendar month during the fiscal year, subject to readjustment during the year.
Currently, the most restrictive state expense limitation provision limits the
Fund's expenses to 2 1/2% the first $30 million of average net assets, 2% of the
next $70 million of such net assets and 1 1/2% of such net assets in excess of
$100 million.
Unless terminated as provided below, the investment advisory agreement
continues in full force and effect until June 1, 1997 and for successive periods
of one year thereafter, but only as long as each such continuance after June 1,
1997 is approved annually (i) by either the Trustees of the Trust or by vote of
a majority of the outstanding voting securities (as defined in the 1940 Act) of
the Fund, and, in either event (ii) by vote of a majority of the Trustees of the
Trust who are not parties to the investment advisory agreement or "interested
persons" (as defined in the 1940 Act) of any such party, cast in person at a
meeting called for the purpose of voting on such approval. The investment
advisory agreement may be terminated at any time without the payment of any
penalty by vote of the Trustees of the Trust or by vote of a majority of the
outstanding voting securities (as defined in the 1940 Act) of the Fund or by the
Adviser, on sixty days' written notice to the other parties. The investment
advisory agreement terminates in the event of its assignment as defined in the
1940 Act.
In an attempt to avoid any potential conflict with portfolio transactions
for the Fund, the Adviser and the Trust have adopted extensive restrictions on
personal securities trading by personnel of the Adviser and its affiliates.
These restrictions include: pre-clearance of all personal securities
transactions and a prohibition of purchasing initial public offerings of
securities. These restrictions are a continuation of the basic principle that
the interests of the Fund and its shareholders come before those of the Adviser,
its affiliates, and their employees.
Distributor of the Trust
Standish Fund Distributors, L.P. (the "Principal Underwriter"), an
affiliate of the Adviser, serves as the Trust's exclusive principal underwriter
and holds itself available to receive purchase orders for the Fund's shares. In
that capacity, the Principal Underwriter has been granted the right, as agent of
the Trust, to solicit and accept orders for the purchase of the Fund's shares in
accordance with the terms of the Underwriting Agreement between the Trust and
the Principal Underwriter. Pursuant to the Underwriting Agreement, the Principal
Underwriter has agreed to use its best efforts to obtain orders for the
continuous offering of the Fund's shares. The Principal Underwriter receives no
commissions or other compensation for its services, and has not received any
such amounts in any prior year. The Underwriting Agreement shall continue in
effect with respect to the Fund until two years after its execution and for
successive periods of one year thereafter only if it is approved at least
24
<PAGE>
annually thereafter (i) by a vote of the holders of a majority of the Fund's
outstanding shares or by the Trustees of the Trust or (ii) by a vote of a
majority of the Trustees of the Trust who are not "interested persons" (as
defined by the 1940 Act) of the parties to the Underwriting Agreement, cast in
person at a meeting called for the purpose of voting on such approval. The
Underwriting Agreement will terminate automatically if assigned by either party
thereto and is terminable at any time without penalty by a vote of a majority of
the Trustees of the Trust, a vote of a majority of the Trustees who are not
"interested persons" of the Trust, or by a vote of the holders of a majority of
the Fund's outstanding shares, in any case without payment of any penalty on not
more than 60 days' written notice to the other party. The offices of the
Principal Underwriter are located at One Financial Center, 26th Floor, Boston,
Massachusetts 02111.
REDEMPTION OF SHARES
Detailed information on redemption of shares is included in the Prospectus.
The Fund may suspend the right to redeem shares or postpone the date of
payment upon redemption for more than seven days (i) for any period during which
the New York Stock Exchange is closed (other than customary weekend or holiday
closings) or trading on the exchange is restricted; (ii) for any period during
which an emergency exists as a result of which disposal by the Fund of
securities owned by it or determination by the Fund of the value of its net
assets is not reasonably practicable; or (iii) for such other periods as the
Securities and Exchange Commission may permit for the protection of shareholders
of the Fund.
The Fund intends to pay redemption proceeds in cash for all shares
redeemed, but under certain conditions, the Fund may make payment wholly or
partly in portfolio securities. Portfolio securities paid upon redemption of
Fund shares will be valued at their then current market value. The Fund has
elected to be governed by the provisions of Rule 18f-1 under the 1940 Act which
limits the Fund's obligation to make cash redemption payments to any shareholder
during any 90-day period to the lesser of $250,000 or 1% of the Fund's net asset
value at the beginning of such period. An investor may incur brokerage costs in
converting portfolio securities received upon redemption to cash.
PORTFOLIO TRANSACTIONS
The Adviser is responsible for placing the Fund's portfolio transactions
and will do so in a manner deemed fair and reasonable to the Fund and not
according to any formula. The primary consideration in all portfolio
transactions will be prompt execution of orders in an efficient manner at the
most favorable price. In selecting broker-dealers and in negotiating
commissions, the Adviser will consider the firm's reliability, the quality of
its execution services on a continuing basis and its financial condition. When
more than one firm is believed to meet these criteria, preference may be given
to firms which also sell shares of the Fund. In addition, if the Adviser
determines in good faith that the amount of commissions charged by a broker is
reasonable in relation to the value of the brokerage and research services
provided by such broker, the Fund may pay commissions to such broker in an
amount greater than the amount another firm may charge. Research services may
include (i) furnishing advice as to the value of securities, the advisability of
investing in, purchasing or selling securities, and the availability of
securities or purchasers or sellers of securities, (ii) furnishing analyses and
reports concerning issuers, industries, securities, economic factors and trends,
25
<PAGE>
portfolio strategy, and the performance of accounts, and (iii) effecting
securities transactions and performing functions incidental thereto (such as
clearance, settlement and custody). Research services furnished by firms through
which the Fund effects its securities transactions may be used by the Adviser in
servicing its other accounts; not all of these services may be used by the
Adviser in connection with the Fund. The investment advisory fee paid by the
Fund under the advisory agreement will not be reduced as a result of the
Adviser's receipt of research services.
For the fiscal period from July 3, 1995 (commencement of operations)
through December 31, 1995, brokerage commissions paid by the Fund on portfolio
transactions totalled $90,240.
The Adviser also places portfolio transactions for other advisory accounts.
The Adviser will seek to allocate portfolio transactions equitably whenever
concurrent decisions are made to purchase or sell securities for the Fund and
another advisory account. In some cases, this procedure could have an adverse
effect on the price or the amount of securities available to the Fund. In making
such allocations, the main factors considered by the Adviser will be the
respective investment objectives, the relative size of portfolio holdings of the
same or comparable securities, the availability of cash for investment, the size
of investment commitments generally held, and opinions of the persons
responsible for recommending the investment.
FEDERAL INCOME TAXES
Each series of the Trust, including the Fund, is treated as a separate
entity for accounting and tax purposes. The Fund intends to elect and to qualify
to be treated as a "regulated investment company" under Subchapter M of the
Internal Revenue Code, and intends to continue to so qualify in the future. As
such and by complying with the applicable provisions of the Internal Revenue
Code regarding the sources of its income, the timing of its distributions, and
the diversification of its assets, the Fund will not be subject to Federal
income tax on its investment company taxable income (i.e., all taxable income,
after reduction by deductible expenses, other than its "net capital gain," which
is the excess, if any, of its net long-term capital gain over its net short-term
capital loss) and net capital gain which are distributed to shareholders at
least annually in accordance with the timing requirements of the Internal
Revenue Code.
The Fund will be subject to a 4% non-deductible federal excise tax on
certain amounts not distributed (and not treated as having been distributed) on
a timely basis in accordance with annual minimum distribution requirements. The
Fund intends under normal circumstances to avoid liability for such tax by
satisfying such distribution requirements.
The Fund is not subject to Massachusetts corporate excise or franchise
taxes. Provided that the Fund qualifies as a regulated investment company under
the Internal Revenue Code, it will also not be required to pay any Massachusetts
income tax.
26
<PAGE>
The Fund will not distribute net capital gains realized in any year to the
extent that a capital loss is carried forward from prior years against such
gain. For federal income tax purposes, the Fund is permitted to carry forward a
net capital loss in any year to offset its own net capital gains, if any, during
the eight years following the year of the loss. To the extent subsequent net
capital gains are offset by such losses, they would not result in federal income
tax liability to the Fund and, as noted above, would not be distributed as such
to shareholders.
If the Fund invests in certain zero coupon securities, increasing rate
securities or, in general, other securities with original issue discount (or
with market discount if the Fund elects to include market discount in income
currently), the Fund must accrue income on such investments prior to the receipt
of the corresponding cash payments. However, the Fund must distribute, at least
annually, all or substantially all of its net income, including such accrued
income, to shareholders to qualify as a regulated investment company under the
Internal Revenue Code and avoid federal income and excise taxes. Therefore, the
Fund may have to dispose of its portfolio securities under disadvantageous
circumstances to generate cash, or may have to leverage itself by borrowing the
cash, to satisfy distribution requirements.
Limitations imposed by the Internal Revenue Code on regulated investment
companies like the Fund may restrict the Fund's ability to enter into futures
and options transactions.
Certain options and futures transactions undertaken by the Fund may cause
the Fund to recognize gains or losses from marking to market even though its
positions have not been sold or terminated and affect the character as long-term
or short-term (or, in the case of certain options and futures, as ordinary
income or loss) and timing of some capital gains and losses realized by the
Fund. Any net mark to market gains may also have to be distributed to satisfy
the distribution requirements referred to above even though no corresponding
cash amounts may concurrently be received, possibly requiring the disposition of
portfolio securities or borrowing to obtain the necessary cash. Also, certain of
the Fund's losses on its transactions involving options or futures contracts
and/or offsetting portfolio positions may be deferred rather than being taken
into account currently in calculating the Fund's taxable income or gain. Certain
of the applicable tax rules may be modified if the Fund is eligible and chooses
to make one or more of certain tax elections that may be available. These
transactions may therefore affect the amount, timing and character of the Fund's
distributions to shareholders. The Fund will take into account the special tax
rules (including consideration of available elections) applicable to options or
futures contracts in order to minimize any potential adverse tax consequences.
The federal income tax rules applicable to mortgage dollar rolls and
interest rate swaps, caps, floors and collars are unclear in certain respects,
and the Fund may be required to account for these instruments under tax rules in
a manner that, under certain circumstances, may limit its transactions in these
instruments.
Due to possible unfavorable consequences under present tax law, the Fund
does not currently intend to acquire "residual" interests in real estate
mortgage investment conduits ("REMICs"), although the Fund may acquire "regular"
interests in REMICs.
27
<PAGE>
Distributions from the Fund's current or accumulated earnings and profits
("E&P"), as computed for Federal income tax purposes, will be taxable as
described in the Fund's Prospectus whether taken in shares or in cash.
Distributions, if any, in excess of E&P will constitute a return of capital,
which will first reduce an investor's tax basis in Fund shares and thereafter
(after such basis is reduced to zero) will generally give rise to capital gains.
Shareholders electing to receive distributions in the form of additional shares
will have a cost basis for federal income tax purposes in each share so received
equal to the amount of cash they would have received had they elected to receive
the distributions in cash, divided by the number of shares received.
The Fund's distributions to its corporate shareholders would potentially
qualify in their hands for the corporate dividends received deduction, subject
to certain holding period requirements and limitations on debt financing under
the Code, only to the extent the Fund earned dividend income from stock
investments in U.S. domestic corporations. Although the Fund is not expected to
concentrate its investments in such stock, the Fund is permitted to acquire
preferred stocks, and it is therefore possible that a portion of its
distributions, attributable to the dividends it receives with respect to such
preferred stocks, may qualify for the dividends received deduction. Such
qualifying portion, if any, may affect a corporate shareholder's liability for
alternative minimum tax and/or result in basis reductions in certain
circumstances.
At the time of an investor's purchase of Fund shares, a portion of the
purchase price is often attributable to undistributed net investment income
and/or realized or unrealized appreciation in the Fund's portfolio.
Consequently, subsequent distributions from such income and/or appreciation may
be taxable to such investor even if the net asset value of the investor's shares
is, as a result of the distributions, reduced below the investor's cost for such
shares, and the distributions in reality represent a return of a portion of the
purchase price.
Upon a redemption (including a repurchase) of shares of the Fund, a
shareholder may realize a taxable gain or loss, depending upon the difference
between the redemption proceeds and the shareholder's tax basis in his shares.
Such gain or loss will be treated as capital gain or loss if the shares are
capital assets in the shareholder's hands and will be long-term or short-term,
depending upon the shareholder's tax holding period for the shares. Any loss
realized on a redemption may be disallowed to the extent the shares disposed of
are replaced within a period of 61 days beginning 30 days before and ending 30
days after the shares are disposed of, such as pursuant to automatic dividend
reinvestments. In such a case, the basis of the shares acquired will be adjusted
to reflect the disallowed loss. Any loss realized upon the redemption of shares
with a tax holding period of six months or less will be treated as a long-term
capital loss to the extent of any amounts treated as distributions of long-term
capital gain with respect to such shares.
Different tax treatment, including penalties on certain excess
contributions and deferrals, certain pre-retirement and post-retirement
distributions and certain prohibited transactions, is accorded to accounts
maintained as qualified retirement plans. Shareholders should consult their tax
advisers for more information.
28
<PAGE>
The foregoing discussion relates solely to U.S. Federal income tax law as
applicable to U.S. persons (i.e., U.S. citizens or residents and U.S. domestic
corporations, partnerships, trusts or estates) subject to tax under such law.
The discussion does not address special tax rules applicable to certain classes
of investors, such as tax-exempt entities, insurance companies, and financial
institutions. Dividends, capital gain distributions, and ownership of or gains
realized on the redemption (including an exchange) of Fund shares may also be
subject to state and local taxes. Shareholders should consult their own tax
advisers as to the Federal, state or local tax consequences of ownership of
shares of, and receipt of distributions from, the Fund in their particular
circumstances.
Non-U.S. investors not engaged in a U.S. trade or business with which their
investment in the Fund is effectively connected will be subject to U.S. Federal
income tax treatment that is different from that described above. These
investors may be subject to nonresident alien withholding tax at the rate of 30%
(or a lower rate under an applicable tax treaty) on amounts treated as ordinary
dividends from the Fund and, unless an effective IRS Form W-8 or authorized
substitute is on file, to 31% backup withholding on certain other payments from
the Fund. Non-U.S. investors should consult their tax advisers regarding such
treatment and the application of foreign taxes to an investment in the Fund.
DETERMINATION OF NET ASSET VALUE
The Fund's net asset value is calculated each day on which the New York
Stock Exchange is open. Currently the New York Stock Exchange is not open on
weekends, New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas. The net asset value
of the Fund's shares is determined as of the close of regular trading on the New
York Stock Exchange (currently 4:00 p.m., New York City time) and is computed by
dividing the value of all securities and other assets of the Fund less all
liabilities by the number of shares outstanding, and adjusting to the nearest
cent per share. Expenses and fees, including the investment advisory fee, are
accrued daily and taken into account for the purpose of determining net asset
value.
Portfolio securities are valued at the last sale prices, on the valuation
day, on the exchange or national securities market on which they are primarily
traded. Securities not listed on an exchange or national securities market, or
securities for which there were no reported transactions, are valued at the last
quoted bid prices. Securities for which quotations are not readily available and
all other assets are valued at fair value as determined by the Adviser in
accordance with procedures approved by the Trustees.
Money market instruments with less than sixty days remaining to maturity
when acquired by the Fund are valued on an amortized cost basis. If the Fund
acquires a money market instrument with more than sixty days remaining to its
maturity, it is valued at current market value until the sixtieth day prior to
maturity and will then be valued at amortized cost based upon the value on such
date unless the Trustees determine during such sixty-day period that amortized
cost does not represent fair value.
29
<PAGE>
THE FUND AND ITS SHARES
The Fund is an investment series of Standish, Ayer & Wood Investment Trust,
an unincorporated business trust organized under the laws of The Commonwealth of
Massachusetts pursuant to an Agreement and Declaration of Trust dated August 13,
1986 as amended from time to time (the "Declaration"). Under the Declaration,
the Trustees have authority to issue an unlimited number of shares of beneficial
interest, par value $.01 per share, of the Fund. Each share represents an equal
proportionate interest in the Fund with each other share and is entitled to such
dividends and distributions as are declared by the Trustees. Shareholders are
not entitled to any preemptive, conversion or subscription rights. All shares,
when issued, will be fully paid and non-assessable by the Trust. Upon any
liquidation of the Fund, shareholders are entitled to share pro rata in the net
assets available for distribution.
Pursuant to the Declaration, the Trustees may create additional funds by
establishing additional series of shares in the Trust. The establishment of
additional series would not affect the interests of current shareholders in the
Fund. As of the date of this Statement of Additional Information, the Trustees
have established fourteen other series of the Trust that publicly offer their
shares. Pursuant to the Declaration, the Board may establish and issue multiple
classes of shares for each series of the Trust. As of the date of this Statement
of Additional Information, the Trustees do not have any plan to establish
multiple classes of shares for the Fund. Pursuant to the Declaration of Trust
and subject to shareholder approval (if then required), the Trustees may
authorize the Fund to invest all of its investable assets in a single open-end
investment company that has substantially the same investment objectives,
policies and restrictions as the Fund. As of the date of this Statement of
Additional Information, the Board does not have any plan to authorize the Fund
to so invest its assets.
All Fund shares have equal rights with regard to voting, and shareholders
of the Fund have the right to vote as a separate class with respect to matters
as to which their interests are not identical to those of shareholders of other
classes of the Trust, including the approval of an investment advisory contract
and any change of investment policy requiring the approval of shareholders.
30
<PAGE>
Under Massachusetts law, shareholders of the Trust could, under certain
circumstances, be held liable for the obligations of the Trust. However, the
Agreement and Declaration of Trust disclaims shareholder liability for acts or
obligations of the Trust and requires that notice of this disclaimer be given in
each agreement, obligation or instrument entered into or executed by the Trust
or a Trustee. The Declaration also provides for indemnification from the assets
of the Trust for all losses and expenses of any Trust shareholder held liable
for the obligations of the Trust. Thus, the risk of a shareholder incurring a
financial loss on account of its liability as a shareholder of the Trust is
limited to circumstances in which both inadequate insurance existed and the
Trust would be unable to meet its obligations. The possibility that these
circumstances would occur is remote. Upon payment of any liability incurred by
the Trust, the shareholder paying the liability will be entitled to
reimbursement from the general assets of the Trust. The Declaration also
provides that no series of the Trust is liable for the obligations of any other
series. The Trustees intend to conduct the operations of the Trust to avoid, to
the extent possible, ultimate liability of shareholders for liabilities of the
Trust.
ADDITIONAL INFORMATION
The Fund's Prospectus and this Statement of Additional Information omit
certain information contained in the registration statement filed with the
Securities and Exchange Commission, which may be obtained from the Commission's
principal office at 450 Fifth Street, N.W., Washington, D.C. 20549, upon payment
of the fee prescribed by the rules and regulations promulgated by the
Commission.
EXPERTS AND FINANCIAL STATEMENTS
The Fund's financial statments for the period from July 3, 1995
(commencement of operations) through December 31, 1995 attached to and
incorporated into this Statement of Additional Information have been audited by
Coopers & Lybrand L.L.P., independent accountants, as set forth in their report
appearing elsewhere herein, and have been so included in reliance upon the
report of Coopers & Lybrand L.L.P., as experts in accounting and auditing.
Coopers & Lybrand L.L.P., will audit the Fund's financial statements for the
fiscal year ending December 31, 1996.
31
<PAGE>
Standish, Ayer & Wood Investment Trust
Standish Fixed Income Fund II Series
Financial Statements for the Period
July 3, 1995 (start of business) to
December 31, 1995
1
<PAGE>
Standish, Ayer & Wood Investment Trust
Chairman's Message
January 29, 1996
Dear Standish, Ayer & Wood Investment Trust Shareholder:
I am pleased to have an opportunity to review the major developments at
Standish, Ayer & Wood during this past year as they relate to the activities of
the Investment Trust. The major news for our clients in 1995 was the spectacular
performance of the U.S. investment markets. While we would, of course, like to
claim credit for producing the full extent of these splendid returns, the
reality is obvious: The markets themselves are beyond our control. For the year
as a whole, U.S. stocks, as represented by the Standard and Poor's 500 Index,
produced a total return of 37.6%, and higher grade intermediate-term bonds, as
represented by the Lehman Brothers Aggregate Index, provided a total return of
18.5%. Nearly as surprising, stock and bond prices marched steadily upward
throughout the year, a persistent and almost uninterrupted advance.
Even after the subdued markets of 1994, neither we nor most other investment
managers expected 1995 to be anywhere near as good as it turned out to be. In
this context, we are generally pleased by our investment performance. In most
asset classes, we kept pace with or modestly exceeded market returns. We adhered
to our established investment philosophies, which are designed to add reasonably
consistent increments of value. Our clients seem to be pleased by our efforts as
we continue to have very little client turnover.
As a firm, we have registered moderate growth during the year. Reflecting some
flow of new clients as well as market appreciation, our clients' assets under
management at the end of 1995 totalled $29.4 billion, an increase from $24.4
billion at the end of 1994. We are particularly pleased by the growth in new
assets managed for insurance companies and by the increases in assets of both
large capitalization and small capitalization U.S. common stocks.
The asset class of greatest disappointment in 1995 was international equities.
Not only did the asset class continue to provide subpar returns, but our
portfolios underperformed the international equity markets. These results
reflect judgments early in 1995 to hedge a portion of the currency exposure back
to dollars and to have a moderate stake in emerging markets. While we believe we
have rectified those problems, we are not satisfied with the results and are
working vigorously to improve future performance. We are also counseling our
clients not to lose faith in the international equity asset class despite its
recent disappointing returns.
The figure for total Standish assets under management includes about $1.6
billion managed in conjunction with Standish International Management Company,
L.P. (SIMCO), our affiliate that manages overseas assets for domestic clients
and U.S. assets for overseas clients. It also includes $3.9 billion in the
Standish Investment Trust, our mutual fund organization. In addition, the asset
total reflects an increase over the last few years in the assets we manage in
private, non-mutual fund vehicles.
We introduced two new mutual funds at mid-year 1995, namely the Standish Fixed
Income Fund II (which is designed to parallel the Standish Fixed Income Fund but
exclude the purchase of both nondollar bonds and below-investment-grade
securities), and the Standish Controlled Maturity Fund (which is designed for
investors who wish less volatility and interest rate risk than traditional
intermediate-maturity bonds).
At the beginning of 1996, we introduced two additional mutual funds, the
Standish Tax-Sensitive Equity Fund and the Standish Small Cap Tax-Sensitive
Equity Fund. At Standish we have noted for some time the adverse impact for
taxable investors of high portfolio turnover, which triggers capital gains,
possibly including short-term gains that may result in an even greater tax
liability for investors. We believe there is a major opportunity through both
separate account management and these funds to improve aftertax returns by
limiting the portfolio turnover and managing capital gains.
2
<PAGE>
During 1995, Standish acquired all remaining interests in the business of the
joint venture between Consolidated Investment Corp. (CIC) and Standish, entered
into over seven years ago. Consolidated had been formed by Trigon (previously
Blue Cross/Blue Shield of Virginia) to manage shorter-term taxable and tax
exempt fixed income portfolios. We and Trigon agreed that it was best to have
this unit operating under one owner.
Standish continues to be proud of its structure as an independent management
firm with ownership in the hands of investment professionals active in the
business. There were no changes during 1995 either in corporate structure or in
the people who own the enterprise.
We appreciate the opportunity to serve you, and we remain confident that we have
the resources and the organization to do a superior job. We will be working hard
to fulfill your expectations in 1996.
Sincerely yours,
Edward H. Ladd
Chairman
3
<PAGE>
Standish, Ayer & Wood Investment Trust
Standish Fixed Income Fund II Series
Management Discussion
Following a dismal 1994, the fixed income market in 1995 began with a strong
rally driven by investor perceptions of slowing economic growth and controlled
inflation. The rally was interrupted early in the third quarter by some brief
signs of economic strength but eventually resumed to finish the year on a strong
note. In addition, the rally received a special boost from the Federal Reserve
on December 19th--a 25 basis point reduction in the Federal Funds rate. In spite
of extreme market volatility, 1995 bond market returns--as reflected by the
Lehman Aggregate and Government Corporate indices, provided total returns of
18.47% and 19.24%, respectively.
Since its July 3rd, 1995, inception date, the Fund provided a 5.79% return after
expense reimbursement versus the 6.31% return of the Lehman Aggregate--the
Fund's primary performance benchmark, and 6.66% for the Lehman Government
Corporate index. The adverse impact of transaction costs which impacted first
quarter results are viewed as a one time event and, in fact, during the fourth
quarter, the Fund outperformed the Aggregate index by 12 basis points.
Since inception, the Fund has maintained an overweighted posture in corporate
bonds--a sector that proved to be a steady return contributor throughout the
third and fourth quarters. Going forward, our corporate strategy continues to
focus on purchasing well-valued securities that are improving in credit quality.
While the mortgage component of the Fund added marginally to returns on a since
inception basis during 1995--due largely to the overall downtrend in rates
during the second half of the year, we continue to maintain an overweighted
position relative to the Aggregate index. Going into 1996, we continue to view
mortgages as attractive.
As we enter 1996, we acknowledge that the economy is slowing and that inflation
pressures are modest, but believe that the market appears to be discounting much
of this favorable news. As a result, we expect that our yield advantage going
into the year will be a more important determinant of absolute return going
forward as opposed to the significant capital appreciation that enhanced total
return in 1995. We believe that the Fund is well positioned for an environment
of more stable or modestly higher interest rates.
As always, we thank you for your continued confidence as shareholders and hope
that this information is helpful to you in reviewing your overall investment
strategies.
David C. Stuehr
4
<PAGE>
Standish, Ayer & Wood Investment Trust
Standish Fixed Income Fund II Series
Comparison of Change in Value of $100,000 Investment in
Standish Fixed Income Fund II, Lehman Gov't/Corp Index and Lehman
Aggregate Index
The following is a description of the graphical chart omitted from electronic
format:
This line chart shows the cumulative performance of the Standish Fixed Income
Fund II compared with the Lehman Gov't/Corp Index and Lehman Aggregate Index for
the period July 3, 1995 to December 31, 1995, based upon a $100,000 investment.
Also included is the average annual total return since inception.
5
<PAGE>
<TABLE>
<CAPTION>
Standish, Ayer & Wood Investment Trust
Standish Fixed Income Fund II Series
Portfolio of Investments
December 31, 1995
Par Value
Security Rate Maturity Value (Note 1A)
- - ------------------------------------------------------------ --------- -------------------- --------------- ---------------
Bonds-99.8%
- - ------------------------------------------------------------
Asset Backed Securities-2.5%
- - ------------------------------------------------------------
<S> <C> <C> <C> <C>
Greentree Securities Trust 95-A 7.25% 07/15/05 88,886 $90,136
UCFC Home Equity Loan Trust 94 DA-4 8.78 02/10/16 100,000 106,344
---------------
$196,480
---------------
Finance Bonds-22.7%
- - ------------------------------------------------------------
Avalon Property REIT Notes 7.38 09/15/02 100,000 $103,148
Bear Stearns Co. Notes 6.75 08/15/00 100,000 102,839
Duke Realty REIT Notes 7.38 09/22/05 100,000 103,133
ERP REIT Notes * 8.50 05/15/99 75,000 79,495
Fairfax Financial Holdings Ltd. Notes 8.25 10/01/15 100,000 107,109
Goldman Sachs Inc. Notes 6.38 06/15/00 200,000 202,358
Meditrust REIT Notes 7.38 07/15/00 100,000 103,063
Merry Land Co. REIT Notes 7.25 10/01/02 100,000 104,250
New England Mutual Life Notes * 7.88 02/15/24 50,000 51,875
Salomon Inc. Notes 7.00 01/20/98 100,000 101,195
Shopping Center REIT Notes 6.75 01/15/04 250,000 249,375
Smith Barney Inc. Notes 6.63 06/01/00 100,000 102,723
Spieker Property Notes 6.65 12/15/00 100,000 100,185
Taubman Realty Group Notes 8.00 06/15/99 100,000 103,627
United Co. Financial Notes 9.35 11/01/99 100,000 109,872
Wellsford Residential Property Notes 7.75 08/15/05 100,000 105,245
---------------
$1,829,492
---------------
Industrial Bonds-19.4%
- - ------------------------------------------------------------
ADT Operations Notes 8.25 08/01/00 100,000 $106,376
Federated Department Stores Notes 8.13 10/15/02 200,000 201,000
Methanex Notes 7.75 08/15/05 100,000 106,075
News America Holdings Corp. Notes 9.50 07/15/24 150,000 184,103
Owens Illinois Corp. Notes 11.00 12/01/03 200,000 226,000
Purity Supreme Corp. Notes 11.75 08/01/99 200,000 219,000
Ralcorp Holdings Notes 8.75 09/15/04 100,000 112,109
Time Warner Inc. Notes 9.15 02/01/23 150,000 170,106
Viacom Inc. Notes 7.75 06/01/05 225,000 238,943
---------------
$1,563,712
---------------
Original Issue Discount Bonds-1.5%
- - ------------------------------------------------------------
U.S. Treasury Principal Strips 0.00 11/15/18 500,000 $121,445
---------------
$121,445
---------------
Pass Thru Securities-47.9%
- - ------------------------------------------------------------
FNMA 7.00 09/01/25 910,843 $918,239
FNMA 7.50 08/01/25-09/01/25 1,233,508 1,263,950
GNMA 7.00 10/15/25 443,330 448,593
GNMA 7.50 09/15/25-10/15/25 511,942 526,662
GNMA 9.00 01/15/25 432,913 458,615
Resolution Trust Corp. 95-2 7.45 09/15/25 241,576 239,990
---------------
$3,856,049
---------------
6
<PAGE>
Portfolio of Investments
(continued)
Par Value
Security Rate Maturity Value (Note 1A)
- - ------------------------------------------------------------ --------- -------------------- --------------- ---------------
Public Utility Bonds-1.3%
- - ------------------------------------------------------------
Systems Energy Resources Corp. Notes 7.38% 10/01/00 100,000 $100,378
---------------
$100,378
---------------
U.S. Treasury Bonds-2.0%
- - ------------------------------------------------------------
U.S. Treasury Bonds 8.13 08/15/19 50,000 $62,867
U.S. Treasury Notes 5.13 11/30/98 100,000 99,672
---------------
$162,539
---------------
Yankee Bonds-2.5%
- - ------------------------------------------------------------
Banponce Notes 6.75 12/15/05 100,000 $101,260
London Insurance Group Notes 6.88 09/15/05 100,000 103,000
---------------
$204,260
---------------
Total Bonds $ 8,034,355
---------------
(identified cost $7,805,881)
Short Term Obligations-4.3%
- - ------------------------------------------------------------
Repurchase Agreement-4.3%
- - ------------------------------------------------------------
Prudential-Bache repurchase agreement
dated 12/29/95, 5.39% due 1/2/96 to pay
$349,636.53 (Collateralized by Federal
National Mortgage Association, 9.00%, due 9/1/22 $349,427 $349,427
---------------
Market Value $356,416), at cost.
Total Short Term Obligations $349,427
---------------
(identified cost $349,427)
Total Investments-104.1% $8,383,782
---------------
(identified cost $8,155,308)
Other assets, less liabilities-(4.1%) ($337,298)
---------------
Net Assets- 100% $8,046,484
===============
* This security is restricted but eligible for resale under 144a
The following abbreviations are used in this portfolio:
FNMA- Federal National Mortgage Association
GNMA- Government National Mortgage Association
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
Standish, Ayer & Wood Investment Trust
Standish Fixed Income Fund II Series
Statement of Assets and Liabilities
December 31, 1995
Assets
<S> <C> <C>
Investments, at value (Note 1A) (identified cost, $8,155,308) $8,383,782
Cash 8,032
Receivable for investments sold (Note 4) 19,828,591
Interest receivable 350,885
Deferred organization expenses (Note 1E) 11,190
Receivable from investment advisor (Note 2) 51,789
-----------------
Total assets $28,634,269
Liabilities
Distribution payable $553,985
Payable for Fund shares redeemed (Note 4) 19,977,636
Accrued trustee fees (Note 2) 283
Accrued expenses and other liabilities 55,881
----------------
Total liabilities $20,587,785
-----------------
Net Assets $8,046,484
=================
Net Assets consist of
Paid-in capital $7,185,432
Accumulated undistributed net realized gain (loss) 632,578
Net unrealized appreciation (depreciation) 228,474
-----------------
Total $8,046,484
=================
Shares of beneficial interest outstanding 392,216
-----------------
Net asset value, offering price, and redemption price per share $20.52
=================
(Net assets/Shares outstanding)
8
<PAGE>
Standish, Ayer & Wood Investment Trust
Standish Fixed Income Fund II Series
Statement of Operations
For the Period July 3, 1995 (start of business) to December 31, 1995
Investment income
Interest income $750,353
Expenses
Investment advisory fee (Note 2) $42,628
Trustees fees (Note 2) 688
Accounting, custody and transfer agent fees 36,047
Registration costs 12,996
Audit services 34,874
Legal fees 7,826
Amortization of organization expense (Note 1E) 1,209
Miscellaneous 778
-----------------
Total expenses $137,046
Deduct:
Waiver of investment advisory fee $42,628
Reimbursement of Fund operating expenses 51,789
-----------------
Total waiver / reimbursement of Fund expenses (Note 2) $94,417
-----------------
Net expenses 42,629
-----------------
Net investment income $707,724
-----------------
Realized and unrealized gain (loss)
Net realized gain (loss)
Investment securities $806,785
Change in net unrealized appreciation (depreciation)
Investment securities 228,474
-----------------
Net gain (loss) $1,035,259
-----------------
Net increase (decrease) in net assets from operations $1,742,983
-----------------
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
Standish, Ayer & Wood Investment Trust
Standish Fixed Income Fund II Series
Statement of Changes in Net Assets
For the Period
July 3, 1995
(start of business) to
December 31, 1995
------------------
Increase (decrease) in Net Assets
From operations
<S> <C>
Net investment income $707,724
Net realized gain (loss) 806,785
Change in net unrealized appreciation (depreciation) 228,474
-------------
Net increase (decrease) in net assets from operations $1,742,983
-------------
Distributions to shareholders
From net investment income ($705,113)
From net realized gains (176,818)
-------------
Total distributions to shareholders ($881,931)
-------------
Fund share (principal) transactions (Note 4)
Net proceeds from sale of shares $27,181,697
Net asset value of shares issued to shareholders in
payment of distributions declared 327,947
Cost of shares redeemed (20,324,212)
-------------
Increase (decrease) in net assets from Fund share transactions $7,185,432
-------------
Net increase (decrease) in net assets $8,046,484
Net Assets
At beginning of period 0
-------------
At end of period $8,046,484
=============
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
Standish, Ayer & Wood Investment Trust
Standish Fixed Income Fund II Series
Financial Highlights
For the Period
July 3, 1995
(start of business) to
December 31, 1995
-----------------------
<S> <C>
Net asset value - beginning of period $20.00
------------
Income from investment operations
Net investment income* $0.53
Net realized and unrealized gain (loss) 0.64
------------
Total from investment operations $1.17
------------
Less distributions declared to shareholders
From net investment income $0.53
From realized gains 0.12
------------
Total distributions declared to shareholders $0.65
------------
Net asset value - end of period $20.52
============
Total return 5.79% z
Ratios (to average net daily assets)/Supplemental Data
Expenses * 0.40% t
Net investment income * 6.64% t
Portfolio turnover 389% y
Net assets at end of period (000 omitted) $8,046
* The investment adviser voluntarily waived its investment advisory fee and,
reimbursed the fund for a portion of its operating expenses. Had these
actions not been taken, the net investment income per share and the ratios
would have been:
Net investment income per share $0.29
Ratios (to average net daily assets):
Expenses 1.29% t
Net investment income 5.75% t
t Computed on an annualized basis.
y The turnover ratio for the period is not annualized.
z The total return ratio for the period is not annualized.
</TABLE>
11
<PAGE>
Standish, Ayer & Wood Investment Trust
Standish Fixed Income Fund II Series
Notes to Financial Statements
(1) Significant Accounting Policies:
Standish, Ayer & Wood Investment Trust (the "Trust") is organized as a
Massachusetts business trust and is registered under the Investment
Company Act of 1940, as amended, as an open-end, management investment
company. Standish Fixed Income Fund II (the "Fund") is a separate
diversified investment series of the Trust.
The following is a summary of significant accounting policies followed
by the Fund in the preparation of the financial statements. The
preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts and disclosures in the
financial statements. Actual results could differ from those estimates.
A. Investment security valuations--
Securities for which quotations are readily available are valued at the
last sale price, or if no sale price, at the closing bid price in the
principal market in which such securities are normally traded.
Securities (including restricted securities) for which quotations are
not readily available are valued primarily using dealer-supplied
valuations or at their fair value as determined in good faith under
consistently applied procedures under the general supervision of the
Board of Trustees.
Short-term instruments with less than sixty-one days remaining to
maturity when acquired by the Fund are valued at amortized cost basis.
If the Fund acquires a short-term instrument with more than sixty days
remaining to its maturity, it is valued at current market value until
the sixtieth day prior to maturity and will then be valued at amortized
cost based upon the value on such date unless the trustees determine
during such sixty-day period that amortized cost does not represent
fair value.
B. Repurchase agreements--
It is the policy of the Fund to require the custodian bank to take
possession, to have legally segregated in the Federal Reserve Book
Entry System, or to have segregated within the custodian bank's vault,
all securities held as collateral in support of repurchase agreement
investments. Additionally, procedures have been established by the Fund
to monitor on a daily basis, the market value of the repurchase
agreement's underlying investments to ensure the existence of a proper
level of collateral.
C. Securities transactions and income--
Securities transactions are recorded as of the trade date. Realized
gains and losses from securities sold are recorded on the identified
cost basis. Interest income is determined on the basis of interest
accrued, adjusted for accretion of discount on debt securities when
required for federal income tax purposes.
D. Federal taxes--
As a qualified regulated investment company under Subchapter M of the
Internal Revenue Code the Fund is not subject to income taxes to the
extent that it distributes all of its taxable income for its fiscal
year.
E. Deferred organization expense--
Costs incurred by the Fund in connection with its organization and
initial registration are being amortized, on a straight-line basis,
through June, 2000.
F. Distributions to shareholders-
Distributions to shareholders are recorded on the ex-dividend date.
Income and capital gain distributions are determined in accordance with
income tax regulations which may differ from generally accepted
accounting principles. These differences are primarily due to differing
treatments for foreign currency transactions. Permanent book and tax
basis differences relating to shareholder distributions will result in
reclassifications to paid-in-capital.
12
<PAGE>
(2).....Investment Advisory Fee:
The investment advisory fee paid to Standish, Ayer & Wood, Inc. (SA&W)
for overall investment advisory and administrative services, and
general office facilities, is paid monthly at the annual rate of 0.40%
of the Fund's average daily net assets. The investment adviser
voluntarily agreed to limit the Fund's total operating expense to 0.40%
of the Fund's average daily net assets for the Fund's fiscal year ended
December 31, 1995. For the period ended December 31, 1995, the
investment adviser voluntarily waived its investment advisory fee of
$42,628, and reimbursed the Fund for $51,788 of its operating expenses.
The Fund pays no compensation directly to its trustees who are
affiliated with the investment adviser or to its officers, all of whom
receive renumeration for their services to the Fund from the investment
adviser. Certain of the trustees and officers of the Trust are partners
or officers of SA&W.
(3).....Purchases and Sales of Investments:
Purchases and sales of investments, other than short-term obligations
were as follows:
<TABLE>
<CAPTION>
Purchases Sales
------------------ ------------------
<S> <C> <C>
U.S. government securities $46,170,026 $42,587,728
================== ==================
Investments (non-U.S. government securities) $17,647,437 $14,242,583
================== ==================
</TABLE>
(4).....Shares of Beneficial Interest:
The Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest having a
par value of one cent per share. Transactions in Fund shares were as
follows:
For the Period
July 3, 1995
(start of business) to
December 31, 1995
-----------------
Shares sold 1,367,590
Shares issued to shareholders in payment 16,103
of distributions declared
Shares redeemed (991,477)
-----------------
Net increase 392,216
=================
On August 15, 1995, securities with a fair market value of $7,132,126 were
contributed to the Fund by shareholders. In return for such securities,
shareholders received shares of the Fund.
On December 29, 1995, a significant investor in the Fund exchanged 974,519
shares of the Fund for an equivalent dollar value of shares of Standish Fixed
Income Fund, a separate series of the Trust. This exchange totalled $19,977,636
and represented approximately 71% of the Fund's net assets immediately prior to
the transaction.
To facilitate the exchange transaction and to avoid the associated brokerage
commissions, the Fund executed a series of interfund security trades aggregating
$20,078,486 with the Standish Fixed Income Fund. These trades were executed at
the current market values on December 29, 1995 and in accordance with the Funds'
procedures established pursuant to Rule 17a-7 under the Investment Company Act
of 1940.
At December 31, 1995, two shareholders were record owners of approxmately 49%
and 42%, respectively, of the total outstanding shares of the Fund.
13
<PAGE>
(5) Federal Income Tax Basis of Investment Securities:
The cost and unrealized appreciation (depreciation) in value of the
investment securities owned at December 31, 1995, as computed on a
federal income tax basis, are as follows:
Aggregate cost $8,155,308
===================
Gross unrealized appreciation $229,474
Gross unrealized depreciation (1,000)
-------------------
Net unrealized appreciation $228,474
===================
14
<PAGE>
To the Trustees of Standish, Ayer & Wood Investment Trust and the Shareholders
of Standish Fixed Income Fund II Series:
We have audited the accompanying statement of assets and liabilities of
Standish, Ayer & Wood Investment Trust: Standish Fixed Income Fund II Series
(the "Fund"), including the schedule of portfolio investments, as of December
31, 1995, and the related statement of operations, changes in net assets and the
financial highlights for the period July 3, 1995 (start of business) to December
31, 1995. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements and financial highlights are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of securities owned as of December 31, 1995 by
correspondence with the custodian. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Standish, Ayer & Wood Investment Trust: Standish Fixed Income Fund II Series as
of December 31, 1995, the results of its operations, the changes in net assets
and the financial highlights for the period July 3, 1995 (start of business) to
December 31, 1995, in conformity with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
February 13, 1996
Report of Independent Accountants
15
<PAGE>
Standish, Ayer & Wood Investment Trust
One Financial Center
Boston, MA 02111
(800) 221-4795
16
<PAGE>
Prospectus dated May 1, 1996
PROSPECTUS
STANDISH INTERNATIONAL FIXED INCOME FUND
One Financial Center
Boston, Massachusetts 02111
(800) 221-4795
Standish International Fixed Income Fund (the "Fund") is one Fund in the
Standish, Ayer & Wood family of funds. The Fund is organized as a separate
non-diversified investment series of Standish, Ayer & Wood Investment Trust (the
"Trust"), an open-end management investment company.
The Fund is designed primarily, but not exclusively, for tax-exempt
institutional investors, such as pension and profit-sharing plans, foundations
and endowments. The Fund's investment objective is to maximize total return
while realizing a market level of income, consistent with preserving principal
and liquidity. The Fund seeks to achieve its investment objective primarily
through investing in a portfolio of investment grade fixed-income securities
denominated in foreign and United States currencies. The Fund provides a vehicle
through which investors may participate in the international bond markets. See
"Investment Objective and Policies." Standish International Management Company,
L.P., Boston, Massachusetts, is the Fund's investment adviser (the "Adviser").
Investors may purchase shares of the Fund from the Trust's principal
underwriter, Standish Fund Distributors, L.P. (the "Principal Underwriter"), at
the address and phone number listed above without a sales commission or other
transaction charges. Unless waived by the Fund, the minimum initial investment
is $100,000. Additional investments may be made in amounts of at least $5,000.
This Prospectus is intended to set forth concisely the information about
the Fund and the Trust that a prospective investor should know before investing.
Investors are encouraged to read this Prospectus and retain it for future
reference. Additional information about the Fund and the Trust is contained in a
Statement of Additional Information which has been filed with the Securities and
Exchange Commission (the "SEC") and is available upon request and without charge
by calling or writing to the Principal Underwriter at the telephone number or
address listed above. The Statement of Additional Information bears the same
date as this Prospectus and is incorporated by reference into this Prospectus.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK OR OTHER INSURED DEPOSITORY INSTITUTION, AND ARE NOT
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD
OR ANY OTHER GOVERNMENT AGENCY. AN INVESTMENT IN SHARES OF THE FUND INVOLVES
INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL. THESE SECURITIES HAVE
NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR
ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
CONTENTS
Expense Information...........................................2
Financial Highlights..........................................3
Investment Objective and Policies.............................4
Risk Factors and Suitability..................................8
Calculation of Performance Data...............................8
Dividends and Distributions...................................9
Purchase of Shares............................................9
Exchange of Shares............................................9
Redemption of Shares.........................................10
Management...................................................11
Federal Income Taxes.........................................12
The Fund and Its Shares......................................12
Custodian, Transfer Agent and Dividend Disbursing Agent......13
Independent Accountants......................................13
Legal Counsel................................................13
Appendix A...................................................13
Tax Certification Instructions...............................15
1
<PAGE>
EXPENSE INFORMATION
Shareholder Transaction Expenses
Maximum Sales Load Imposed on Purchases None
Maximum Sales Load Imposed on Reinvested Dividends None
Deferred Sales Load None
Redemption Fees None
Exchange Fee None
Annual Fund Operating Expenses (as a percentage of average net assets)
Management Fees 0.40%
12b-1 Fees None
Other Expenses 0.11%
Total Fund Operating Expenses 0.51%
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Example 1 year 3 years 5 years 10 years
- - -------------------------------------------------------------------------------------------------------------------------------
You would pay the following expenses on a $1,000 investment,
assuming (1) 5% annual return and (2) redemption at the end
of each time period: $5 $16 $29 $64
</TABLE>
The purpose of the above table is to assist the investor in understanding
the various costs and expenses of the Fund that an investor in the Fund will
bear directly or indirectly. See "Management -- Investment Adviser" and
"Management -- Expenses." The figure shown in the caption "Other Expenses,"
which includes, among other things, custodian and transfer agent fees,
registration costs and payments for insurance and audit and legal services, is
based on expenses for the Fund's fiscal year ended December 31, 1995.
THE INFORMATION IN THE TABLE AND HYPOTHETICAL EXAMPLE ABOVE SHOULD NOT BE
CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY
BE GREATER OR LESS THAN THOSE SHOWN. MOREOVER, WHILE THE EXAMPLE ASSUMES A 5%
ANNUAL RETURN, THE FUND'S ACTUAL PERFORMANCE WILL VARY AND MAY RESULT IN AN
ACTUAL RETURN GREATER OR LESS THAN 5%.
2
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights for the years ended December 31, 1993, 1994 and
1995 have been audited by Coopers & Lybrand L.L.P., independent accountants,
whose report, together with the financial statements of the Fund, is
incorporated into the Statement of Additional Information.
<TABLE>
<CAPTION>
Standish, Ayer & Wood Investment Trust
Standish International Fixed Income Fund Series
Financial Highlights
Year Ended December 31,
-----------------------------------------------------------------
1995 1994 1993 1992* 1991 *, +
---------- ------------ ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net asset value - beginning of period $21.30 $24.22 $21.20 $22.05 $20.00
---------- ------------ ----------- ---------- ----------
Income from investment operations
Net investment income $1.96 $1.71 $2.03 $2.01 $1.55
Net realized and unrealized gain (loss) 1.84 (3.93) 2.90 (0.25) 1.44
---------- ------------ ----------- ---------- ----------
Total from investment operations $3.80 ($2.22) $4.93 $1.76 $2.99
---------- ------------ ----------- ---------- ----------
Less distributions declared to shareholders
From net investment income ($1.89) ($0.20) ($1.53) ($2.03) ($0.04)
From realized gain - - (0.26) (0.54) (0.90)
In excess of net realized gain - - - (0.04) -
In excess of net investment income - - (0.12) - -
Tax return of capital - (0.50) - - -
---------- ------------ ----------- ---------- ----------
Total distributions declared to shareholders ($1.89) ($0.70) ($1.91) ($2.61) ($0.94)
---------- ------------ ----------- ---------- ----------
Net asset value - end of period $23.21 $21.30 $24.22 $21.20 $22.05
========== ============ =========== ========== ==========
Total return 18.13% (9.22%) 23.77% 8.07% 15.11%t
Net assets at end of period (000 omitted) $803,537 $1,069,416 $1,131,201 $384,660 $72,697
Ratios (to average net assets)/Supplemental Data:
Expenses 0.51% 0.51% 0.51% 0.59% 0.80%t
Net investment income 8.09% 7.69% 7.53% 8.37% 8.00%t
Portfolio turnover 165% 158% 98% 175% 319%
t Computed on an annualized basis.
+ For the period from January 2, 1991 (start of business) to December 31, 1991.
* Audited by other auditors.
</TABLE>
Further information about the performance of the Fund is contained in the
Fund's Annual Report, which may be obtained from the Principal Underwriter
without charge.
3
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to maximize total return while realizing
a market level of income, consistent with preserving principal and liquidity.
The Fund seeks to achieve its investment objective primarily through investing
in a non-diversified portfolio of investment grade fixed-income securities
denominated in foreign and United States currencies. Because the Fund will
invest in securities denominated in foreign currencies, including bonds
denominated in the European Currency Unit ("ECU"), exchange rates may have a
significant impact on the performance of the Fund. Because of the uncertainty
inherent in all investments, no assurance can be given that the Fund will
achieve its investment objective. The investment objective and fundamental
investment policies of the Fund may not be changed by the Trustees of the Trust
without the approval of shareholders. The Fund's investment policies and
restrictions are described further in the Statement of Additional Information
and are not fundamental unless so designated.
Investment Policies
The Fund may invest in a broad range of fixed-income securities denominated
in foreign currencies and U.S. dollars, including bonds, notes, mortgage-backed
and asset-backed securities, preferred stock (including convertible preferred
stock), convertible debt securities, structured notes and debt securities issued
or guaranteed by national, provincial, state or other governments with taxing
authority or by their agencies or by supranational entities. The Fund may invest
in securities that pay interest on a fixed, variable, floating (including
inverse floating), contingent, in-kind or deferred basis. Under normal market
conditions, at least 65% of the total value of the Fund's assets will be
invested in such securities denominated in foreign currencies. Supranational
entities include international organizations designated or supported by
governmental entities to promote economic reconstruction or development, and
international banking institutions and related government agencies. Examples of
supranational entities are the International Bank for Reconstruction and
Development (the World Bank), the European Steel and Coal Community, the Asian
Development Bank and the Inter-American Development Bank.
The Fund expects to emphasize foreign government and agency securities,
securities of U.S. companies denominated in foreign currencies, U.S. Government
and agency securities, mortgage-backed and asset-backed securities and
securities of companies denominated in U.S. dollars. The Fund intends to spread
investments broadly among countries. The Fund will normally include securities
of no fewer than five different countries; however, while maintaining
investments in five countries, the Fund may invest a substantial portion of its
assets in one or more of those five countries. Investors should be aware that
investing in mortgage-backed securities involves risks of fluctuation in yields
and market prices and of early prepayments on the underlying mortgages. See
"Risk Factors and Suitability" for a description of the risks associated with
investments in foreign securities.
Ratings
The Fund will generally invest in investment grade fixed-income securities,
i.e., securities which, at the date of investment, are rated within the four
highest grades as determined by Moody's Investors Service, Inc. ("Moody's")
4
<PAGE>
(Aaa, Aa, A or Baa) or by Standard & Poor's Ratings Group ("Standard & Poor's"),
Duff & Phelps, Inc. ("Duff & Phelps") or IBAC, Inc. ("IBAC") (AAA, AA, A or BBB)
or their respective equivalent ratings or, if not rated, judged by the Adviser
to be of equivalent credit quality to securities so rated. Securities rated Baa
by Moody's or BBB by Standard & Poor's, Duff & Phelps or IBAC and unrated
securities of equivalent credit quality are considered medium grade obligations
with speculative characteristics. Adverse changes in economic conditions or
other circumstances are more likely to weaken the issuer's capacity to pay
interest and repay principal on these securities than is the case for issuers of
higher rated securities.
The Fund may invest up to 5% of its net assets in securities rated, at the
date of investment, either Ba by Moody's or BB by Standard & Poor's, Duff &
Phelps or IBAC or, if not rated, judged by the Adviser to be of equivalent
credit quality to securities so rated ("BB Rated Securities"). Securities rated
Ba by Moody's or BB by Standard & Poor's, Duff & Phelps or IBAC are classified
in the highest category of non-investment grade securities. Such securities may
be considered to be high-yield securities, carry a high degree of risk and are
considered speculative by the major credit rating agencies. The Fund intends to
avoid what it perceives to be the most speculative areas of the BB Rated
Securities universe. See "Risk Factors and Suitability" for a description of the
risks associated with investments in BB Rated Securities.
It is anticipated that the average dollar-weighted rated credit quality of
the securities in the Fund's portfolio will be Aa or AA according to Moody's,
Standard & Poor's, Duff & Phelps or IBAC ratings, respectively, or comparable
credit quality as determined by the Adviser. In the case of a security that is
rated differently by the rating services, the higher rating is used in computing
the Fund's average dollar-weighted credit quality and in connection with the
Fund's policy regarding BB Rated Securities. In the event that the rating on a
security held in the Fund's portfolio is downgraded by a rating service, such
action will be considered by the Adviser in its evaluation of the overall
investment merits of that security, but will not necessarily result in the sale
of the security. In determining whether securities are of equivalent credit
quality, the Adviser may take into account, but will not rely entirely on,
ratings assigned by foreign rating agencies. In the case of unrated sovereign,
subnational and sovereign related debt of foreign countries, the Adviser may
take into account, but will not rely entirely on, the ratings assigned to the
issuers of such securities. Appendix A sets forth excerpts from the descriptions
of ratings of corporate debt securities and sovereign, subnational and sovereign
related debt of foreign countries.
The Fund may establish and maintain cash balances for liquidity purposes.
The Fund may also establish and maintain cash balances for temporary defensive
purposes without limitation in the event of, or in anticipation of, a general
decline in the market prices of the securities in which it invests. The Fund's
cash balances may be invested in U.S. and non-dollar denominated high quality
short-term money-market instruments, including, but not limited to, government
obligations, certificates of deposit, bankers' acceptances, commercial paper,
short-term corporate debt securities and repurchase agreements.
In pursuing the Fund's investment objective, the Adviser intends to
emphasize intermediate-term economic fundamentals relating to various countries
in the international economy, rather than evaluate day-to-day fluctuations in
particular currency and bond markets. Credit analysis of the issuers of the
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particular securities will also be less important than macroeconomic
considerations. The Adviser will review the economic conditions and prospects
relating to various countries in the international economy and evaluate the
available yield differentials with a view toward maximizing total return.
Strategic Transactions
The Fund may, but is not required to, utilize various other investment
strategies as described below to hedge various market risks (such as interest
rates, currency exchange rates, and broad or specific equity or fixed-income
market movements), to manage the effective maturity or duration of fixed-income
securities, or to enhance potential gain. Such strategies are generally accepted
as part of modern portfolio management and are regularly utilized by many mutual
funds and other institutional investors. Techniques and instruments used by the
Fund may change over time as new instruments and strategies are developed or
regulatory changes occur.
In the course of pursuing its investment objective, the Fund may purchase
and sell (write) exchange-listed and over-the-counter put and call options on
securities, equity and fixed-income indices and other financial instruments;
purchase and sell financial futures contracts and options thereon; enter into
various interest rate transactions such as swaps, caps, floors or collars; and
enter into various currency transactions such as currency forward contracts,
currency futures contracts, currency swaps or options on currencies or currency
futures (collectively, all the above are called "Strategic Transactions").
Strategic Transactions may be used in an attempt to protect against possible
changes in the market value of securities held in or to be purchased for the
Fund's portfolio resulting from securities market or currency exchange rate
fluctuations, to protect the Fund's unrealized gains in the value of its
portfolio securities, to facilitate the sale of such securities for investment
purposes, to manage the effective maturity or duration of the Fund's portfolio,
or to establish a position in the derivatives markets as a temporary substitute
for purchasing or selling particular securities. In addition to the hedging
transactions referred to in the preceding sentence, Strategic Transactions may
also be used to enhance potential gain in circumstances where hedging is not
involved although the Fund will attempt to limit its net loss exposure resulting
from Strategic Transactions entered into for such purposes to not more than 3%
of the Fund's net assets at any one time and, to the extent necessary, the Fund
will close out transactions in order to comply with this limitation.
(Transactions such as writing covered call options are considered to involve
hedging for the purposes of this limitation.) In calculating the Fund's net loss
exposure from such Strategic Transactions, an unrealized gain from a particular
Strategic Transaction position would be netted against an unrealized loss from a
related Strategic Transaction position. For example, if the Adviser anticipates
that the Belgian franc will appreciate relative to the French franc, the Fund
may take a long forward currency position in the Belgian franc and a short
foreign currency position in the French franc. Under such circumstances, any
unrealized loss in the Belgian franc position would be netted against any
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<PAGE>
unrealized gain in the French franc position (and vice versa) for purposes of
calculating the Fund's net loss exposure. The ability of the Fund to utilize
these Strategic Transactions successfully will depend on the Adviser's ability
to predict pertinent market movements, which cannot be assured. The Fund will
comply with applicable regulatory requirements when implementing these
strategies, techniques and instruments. The Fund's activities involving
Strategic Transactions may be limited by the requirements of Subchapter M of the
Internal Revenue Code of 1986, as amended (the "Code"), for qualification as a
regulated investment company.
Strategic Transactions have risks associated with them including possible
default by the other party to the transaction, illiquidity and, to the extent
the Adviser's view as to certain market movements is incorrect, the risk that
the use of such Strategic Transactions could result in losses greater than if
they had not been used. The writing of put and call options may result in losses
to the Fund, force the purchase or sale, respectively, of portfolio securities
at inopportune times or for prices higher than (in the case of purchases due to
the exercise of put options) or lower than (in the case of sales due to the
exercise of call options) current market values, limit the amount of
appreciation the Fund can realize on its investments or cause the Fund to hold a
security it might otherwise sell. The use of currency transactions can result in
the Fund incurring losses as a result of a number of factors including the
imposition of exchange controls, suspension of settlements, or the inability to
deliver or receive a specified currency. The use of options and futures
transactions entails certain other risks. In particular, the variable degree of
correlation between price movements of futures contracts and price movements in
the related portfolio position of the Fund creates the possibility that losses
on the hedging instrument may be greater than gains in the value of the Fund's
position. The writing of options could significantly increase the Fund's
portfolio turnover rate and, therefore, associated brokerage commissions or
spreads. In addition, futures and options markets may not be liquid in all
circumstances and certain over-the-counter options may have no markets. As a
result, in certain markets, the Fund might not be able to close out a
transaction without incurring substantial losses, if at all. Although the use of
futures and options transactions for hedging should tend to minimize the risk of
loss due to a decline in the value of the hedged position, at the same time, in
certain circumstances, these transactions tend to limit any potential gain which
might result from an increase in value of such position. The loss incurred by
the Fund in writing options on futures and entering into futures transactions is
potentially unlimited; however, as described above, the Fund will attempt to
limit its net loss exposure resulting from Strategic Transactions entered into
for non-hedging purposes to not more than 3% of its net assets at any one time.
Futures markets are highly volatile and the use of futures may increase the
volatility of the Fund's net asset value. Finally, entering into futures
contracts would create a greater ongoing potential financial risk than would
purchases of options where the exposure is limited to the cost of the initial
premium. Losses resulting from the use of Strategic Transactions would reduce
net asset value and the net result may be less favorable than if the Strategic
Transactions had not been utilized. Further information concerning the Fund's
Strategic Transactions is set forth in the Statement of Additional Information.
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Non-Diversified Company
The Fund is a "non-diversified" investment company so that with respect to
50% of its assets it will be able to invest more than 5% of its assets in
obligations of one or more issuers, while being limited with respect to the
other half of its assets to investments not exceeding 5% of the Fund's total
assets. (A "diversified" investment company would be required under the
Investment Company Act of 1940, as amended (the "1940 Act"), to maintain at
least 75% of its assets in cash (including foreign currency), cash items, U.S.
Government securities, and other securities limited per issuer to not more than
5% of the investment company's total assets.) In order to qualify as a regulated
investment company under the Code, the Fund, among other things, may not invest
more than 25% of its assets in obligations of any one issuer (other than U.S.
Government securities). In any event, the Fund does not intend to invest more
than 5% of its assets in the securities of any one issuer unless such securities
are issued or guaranteed by a national government or are deemed by the Adviser
to be of comparable credit quality. The Fund does not believe that the credit
risk inherent in the obligations of stable foreign governments is significantly
greater than that of U.S. Government obligations. As a "non-diversified"
investment company, the Fund may invest a greater proportion of its assets in
the securities of a smaller number of issuers and therefore may be subject to
greater market and credit risk than a more broadly diversified fund.
The Fund will not have more than 25% of the current value of its total
assets invested in any single industry, provided that this restriction shall not
apply to debt securities issued or guaranteed by the U.S. Government or its
agencies or instrumentalities.
Illiquid and Restricted Securities
The Fund may not invest more than 15% of its net assets in illiquid
investments and securities that are subject to restrictions on resale (i.e.,
private placements or "restricted securities") under the Securities Act of 1933,
as amended ("1933 Act"), including securities eligible for resale in reliance on
Rule 144A under the 1933 Act. Illiquid investments include securities that are
not readily marketable, repurchase agreements maturing in more than seven days,
time deposits with a notice or demand period of more than seven days, certain
over-the-counter options, and restricted securities, unless it is determined,
based upon continuing review of the trading markets for the specific restricted
security, that such restricted security is eligible for resale under Rule 144A
and is liquid. The Board of Trustees has adopted guidelines and delegated to the
Adviser the daily function of determining and monitoring the liquidity of
restricted securities. The Board of Trustees, however, retains oversight
focusing on factors such as valuation, liquidity and availability of information
and is ultimately responsible for such determinations. Investing in restricted
securities eligible for resale pursuant to Rule 144A could have the effect of
increasing the level of illiquidity in the Fund to the extent that qualified
institutional buyers become for a time uninterested in purchasing these
restricted securities. The purchase price and subsequent valuation of restricted
and illiquid securities normally reflect a discount, which may be significant,
from the market price of comparable securities for which a liquid market exists.
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Portfolio Turnover
Portfolio turnover is not expected to exceed 250% on an annual basis. A
rate of turnover of 100% would occur, for example, if the value of the lesser of
purchases and sales of portfolio securities for a particular year equaled the
average monthly value of portfolio securities owned during the year (excluding
short-term securities). A high rate of portfolio turnover involves a
correspondingly greater amount of transaction costs which must be borne directly
by the Fund and thus indirectly by its shareholders. It may also result in the
realization of larger amounts of net short-term capital gains, distributions
from which are taxable to shareholders as ordinary income and may, under certain
circumstances, make it more difficult for the Fund to qualify as a regulated
investment company under the Code. The Fund's portfolio turnover rates are
listed in the section captioned "Financial Highlights."
Short-Selling
The Fund may make short sales, which are transactions in which the Fund
sells a security it does not own in anticipation of a decline in the market
value of that security. To complete such a transaction, the Fund must borrow the
security to make delivery to the buyer. The Fund then is obligated to replace
the security borrowed by purchasing it at the market price at the time of
replacement. The price at such time may be more or less than the price at which
the security was sold by the Fund. Until the security is replaced, the Fund is
required to pay to the lender amounts equal to any dividends or interest which
accrue during the period of the loan. To borrow the security, the Fund also may
be required to pay a premium, which would increase the cost of the security
sold. The proceeds of the short sale will be retained by the broker, to the
extent necessary to meet margin requirements, until the short position is closed
out.
Until the Fund replaces a borrowed security in connection with a short
sale, the Fund will: (a) maintain daily a segregated account not with the
broker, containing cash or U.S. Government securities, at such a level that the
amount deposited in the account plus the amount deposited with the broker as
collateral will equal the current value of the security sold short or (b)
otherwise cover its short position.
The Fund will incur a loss as a result of the short sale if the price of
the security increases between the date of the short sale and the date on which
the Fund replaces the borrowed security. The Fund will realize a gain if the
security declines in price between those dates by an amount greater than premium
and transaction costs. This result is the opposite of what one would expect from
a cash purchase of a long position in a security. The amount of any gain will be
decreased, and the amount of any loss increased, by the amount of any premium or
amounts in lieu of dividends or interest the Fund may be required to pay in
connection with a short sale.
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The Fund's loss on a short sale as a result of an increase in the price of
a security sold short is potentially unlimited. The Fund may purchase call
options to provide a hedge against an increase in the price of a security sold
short by the Fund. When the Fund purchases a call option it must pay a premium
to the person writing the option and a commission to the broker selling the
option. If the option is exercised by the Fund, the premium and the commission
paid may be more than the amount of the brokerage commission charged if the
security were to be purchased directly. See "Strategic Transactions" above.
The Fund anticipates that the frequency of short sales will vary
substantially in different periods, and it does not intend that any specified
portion of its assets, as a matter of practice, will be in short sales. However,
no securities will be sold short if, giving effect to any such short sale, the
total market value of all securities sold short would exceed 5% of the value of
the Fund's net assets.
In addition to the short sales discussed above, the Fund may make short
sales "against the box," a transaction in which the Fund enters into a short
sale of a security which the Fund owns. The proceeds of the short sale are held
by a broker until the settlement date at which time the Fund delivers the
security to close the short position. The Fund receives the net proceeds from
the short sale.
Forward Roll Transactions
In order to enhance current income, the Fund may enter into forward roll
transactions with respect to mortgage-backed securities to the extent of 10% of
its net assets. In a forward roll transaction, the Fund sells a mortgage-backed
security to a financial institution, such as a bank or broker-dealer, and
simultaneously agrees to repurchase a similar security from the institution at a
later date at an agreed-upon price. The mortgage-backed securities that are
repurchased will bear the same interest rate as those sold, but generally will
be collateralized by different pools of mortgages with different prepayment
histories than those sold. During the period between the sale and repurchase,
the Fund will not be entitled to receive interest and principal payments on the
securities sold. Proceeds of the sale will be invested in short-term
instruments, such as repurchase agreements or other short term securities, and
the income from these investments, together with any additional fee income
received on the sale and the amount gained by repurchasing the securities in the
future at a lower purchase price, will generate income and gain for the Fund
exceeding the yield on the securities sold. Forward roll transactions involve
the risk that the market value of the securities sold by the Fund may decline
below the repurchase price of those securities. At the time the Fund enters into
a forward roll transaction, it will place in a segregated custodial account
cash, or liquid, high-grade debt obligations having a value equal to the
repurchase price (including accrued interest) and will subsequently monitor the
account to insure that the equivalent value is maintained.
When-Issued and "Delayed Delivery" Securities
The Fund may commit up to 25% of its net assets to purchase securities on a
"when-issued" or "delayed delivery" basis, but will only do so with the
intention of actually acquiring the securities. The payment obligation and the
interest rate on these securities will be fixed at the time the Fund enters into
the commitment, but no income will accrue to the Fund until they are delivered
and paid for. Unless the Fund has entered into an offsetting agreement to sell
the securities, cash or liquid, high-grade debt securities equal to the amount
of the Fund's commitment will be segregated with the custodian for the Fund, to
secure the Fund's obligation and to ensure that it is not leveraged. The market
value of the securities when they are delivered may be less than the amount paid
by the Fund.
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Securities purchased on a "when-issued" basis may have a market value on
delivery which is less than the amount paid by the Fund. Changes in market value
may be based upon the public's perception of the creditworthiness of the issuer
or changes in the level of interest rates. Generally, the value of "when-issued"
securities will fluctuate inversely to changes in interest rates, i.e., they
will appreciate in value when interest rates fall and will depreciate in value
when interest rates rise.
Repurchase Agreements
The Fund may invest up to 25% of its net assets in repurchase agreements
under normal circumstances. In no event will the Fund invest more than an
aggregate of 15% of its assets in repurchase agreements that are not terminable
within seven days. Repurchase agreements acquired by the Fund will always be
fully collateralized as to principal and interest by money market instruments
and will be entered into only with commercial banks, brokers and dealers
considered creditworthy by the Adviser. If the other party or "seller" of a
repurchase agreement defaults, the Fund might suffer a loss to the extent that
the proceeds from the sale of the underlying securities and other collateral
held by the Fund in connection with the related repurchase agreement are less
than the repurchase price. In addition, in the event of bankruptcy of the seller
or failure of the seller to repurchase the securities as agreed, a Fund could
suffer losses, including loss of interest on or principal of the security and
costs associated with delay and enforcement of the repurchase agreement.
Securities Loans
In order to realize additional income, the Fund may lend a portion of the
securities in its portfolio to broker-dealers and financial institutions, who
from time to time may wish to borrow securities, generally to carry out
transactions for which they have contracted. The market value of securities
loaned by the Fund may not exceed 20% of the value of the Fund's total assets,
with a 10% limit for any single borrower.
In order to secure their obligations to return securities borrowed from the
Fund, borrowers will deposit collateral equal to at least 100% of the market
value of the borrowed securities, and the collateral will be "marked to market"
daily. As is the case with any extension of credit, portfolio securities loans
involve certain risks in the event a borrower should fail financially, including
delays or inability to recover the loaned securities or foreclose against the
collateral. The Adviser, under the supervision of the Fund's Board of Trustees,
monitors the creditworthiness of the parties to whom the Fund makes securities
loans.
Investment Restrictions
The Fund has adopted certain fundamental policies which may not be changed
without the approval of the Fund's shareholders. These policies provide, among
other things, that the Fund may not: (i) invest, with respect to at least 50% of
its total assets, more than 5% in the securities of any one issuer (other than
the U.S. Government, its agencies or instrumentalities) or acquire more than 10%
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of the outstanding voting securities of any issuer; (ii) issue senior
securities, borrow money or securities or pledge or mortgage its assets, except
that the Fund may (a) borrow money from banks as a temporary measure for
extraordinary or emergency purposes (but not for investment purposes) in an
amount up to 15% of the current value of its total assets, (b) enter into
forward roll transactions, and (c) pledge its assets to an extent not greater
than 15% of the current value of its total assets to secure such borrowings;
however, the Fund may not make any additional investments while its outstanding
bank borrowings exceed 5% of the current value of its total assets; or (iii)
lend portfolio securities, except that the Fund may lend its portfolio
securities with a value up to 20% of its total assets (with a 10% limit for any
borrower) and may enter into repurchase agreements with respect to 25% of the
value of its net assets.
If any percentage restriction described above is adhered to at the time of
investment, a subsequent increase or decrease in the percentage resulting from a
change in the value of the Fund's assets will not constitute a violation of the
restriction. Certain non-fundamental policies and additional fundamental
policies adopted by the Fund are described in the Statement of Additional
Information.
RISK FACTORS AND SUITABILITY
The Fund is not an appropriate investment for investors seeking complete
stability of principal. The Fund is designed primarily for tax-exempt
institutional investors such as pension or profit-sharing plans, foundations and
endowments which seek to maximize total return and whose beneficiaries are in a
position to benefit from the reinvestment of the quarterly income dividends and
any capital gains distributions paid by the Fund on a tax-deferred basis. The
Fund may also be suitable for other investors, depending upon their investment
goals and financial and tax positions. Investing in foreign securities may
involve a higher degree of risk than investing in domestic securities. Shares of
the Fund should not be regarded as a complete investment program.
Yields on debt securities depend on a variety of factors, such as general
conditions in the money and bond markets, and the size, maturity and rating of a
particular issue. Debt securities with longer maturities tend to produce higher
yields and are generally subject to greater potential capital appreciation and
depreciation. The market prices of debt securities usually vary depending upon
available yields, rising when interest rates decline and declining when interest
rates rise.
Foreign Securities
Investing in securities of foreign companies and securities denominated in
foreign currencies and utilizing foreign currency transactions involves certain
risks of political, economic and legal conditions and developments not typically
associated with investing in securities of U.S. companies. Such conditions or
developments might include unfavorable changes in currency exchange rates,
exchange control regulations (including currency blockage), expropriation of
assets of companies in which the Fund invests, nationalization of such
companies, imposition of withholding taxes on dividend or interest payments, and
possible difficulty in obtaining and enforcing judgments against a foreign
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issuer. Also, foreign securities may not be as liquid and may be more volatile
than comparable domestic securities. Furthermore, issuers of foreign securities
are subject to different, often less comprehensive, accounting, reporting and
disclosure requirements than domestic issuers. The Fund, in connection with its
purchases and sales of foreign securities, other than securities denominated in
United States dollars, will incur transaction costs in converting currencies.
Brokerage commissions in foreign countries are generally fixed, and other
transaction costs related to securities exchanges are generally higher than in
the United States. Most foreign securities of the Fund are held by foreign
subcustodians that satisfy certain eligibility requirements. However, foreign
subcustodian arrangements are significantly more expensive than domestic
custody. In addition, foreign settlement of securities transactions is subject
to local law and custom that is not, generally, as well established or as
reliable as U.S. regulation and custom applicable to settlements of securities
transactions and, accordingly, there is generally perceived to be a greater risk
of loss in connection with securities transactions in many foreign countries.
Emerging Markets
The Fund may invest in countries with emerging economies or securities
markets ("Emerging Markets"). Investments in Emerging Markets involves risks in
addition to those generally associated with investments in foreign securities.
Political and economic structures in many Emerging Markets may be undergoing
significant evolution and rapid development, and such countries may lack the
social, political and economic stability characteristics of more developed
countries. As a result, the risks described above relating to investments in
foreign securities, including the risks of nationalization or expropriation of
assets, may be heightened. In addition, unanticipated political or social
developments may affect the values of the Fund's investments and the
availability to the Fund of additional investments in such Emerging Markets. The
small size and inexperience of the securities markets in certain Emerging
Markets and the limited volume of trading in securities in those markets may
make the Fund's investments in such countries less liquid and more volatile than
investments in countries with more developed securities markets (such as the
U.S., Japan and most Western European countries).
CALCULATION OF PERFORMANCE DATA
From time to time the Fund may advertise its yield and total return. Both
yield and total return figures are based on historical earnings and are not
intended to indicate future performance. The "total return" of the Fund refers
to the average annual compounded rates of return over 1, 5 and 10 year periods
(or any shorter period since inception) that would equate an initial amount
invested at the beginning of a stated period to the ending redeemable value of
the investment. The calculation assumes the reinvestment of all dividends and
distributions, includes all recurring fees that are charged to all shareholder
accounts and deducts all nonrecurring charges at the end of each period.
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The "yield" of the Fund is computed by dividing the net investment income
per share earned during the period stated in the advertisement by the maximum
offering price per share on the last day of the period (using the average number
of shares entitled to receive dividends). For the purpose of determining net
investment income, the calculation includes among expenses of the Fund all
recurring fees that are charged to all shareholder accounts and any nonrecurring
charges for the period stated.
From time to time, the Fund may compare its performance with that of other
mutual funds with similar investment objectives, to bond and other relevant
indices, and to performance rankings prepared by recognized mutual fund
statistical services. In addition, the Fund's performance may be compared to
alternative investment or savings vehicles and/or to indices or indicators of
economic activity.
DIVIDENDS AND DISTRIBUTIONS
Dividends on shares of the Fund from net investment income will be declared
and distributed quarterly. Dividends from short-term and long-term capital
gains, if any, after reduction by capital losses, will be declared and
distributed at least annually. Dividends from net investment income and from
short-term and long-term capital gains, if any, are automatically reinvested in
additional shares of the Fund unless the shareholder elects to receive them in
cash.
PURCHASE OF SHARES
Shares of the Fund may be purchased directly from the Principal
Underwriter, which offers the Fund's shares to the public on a continuous basis.
Shares are sold at the net asset value per share next computed after the
purchase order is received in good order by the Principal Underwriter and
payment for the shares is received by the Fund's custodian. Please see the
Fund's account application or call the Principal Underwriter for instructions on
how to make payment of shares to the Fund's custodian. Unless waived by the
Fund, the minimum initial investment is $100,000. Additional investments may be
made in amounts of at least $5,000.
Shares of the Fund may also be purchased through securities dealers. Orders
for the purchase of Fund shares received by dealers by the close of regular
trading on the New York Stock Exchange on any business day and transmitted to
the Principal Underwriter or its agent by the close of its business day
(normally 4:00 p.m., New York City time) will be effected as of the close of
regular trading on the New York Stock Exchange on that day, provided that
payment for the shares is also received by the Fund's custodian on that day.
Otherwise, orders will be effected at the net asset value per share determined
on the next business day. It is the responsibility of dealers to transmit orders
so that they will be received by the Principal Underwriter before the close of
its business day. Shares of the Fund purchased through dealers may be subject to
transaction fees, no part of which will be received by the Fund, the Principal
Underwriter or the Adviser.
The Fund's net asset value per share is computed each day on which the New
York Stock Exchange is open as of the close of regular trading (currently 4:00
p.m., New York City time). The net asset value per share is calculated by
determining the value of all the Fund's assets, subtracting all liabilities and
dividing the result by the total number of shares outstanding. The Fund values
short-term obligations with maturities of 60 days or less at original cost plus
either accrued interest or amortized discount unless the Trustees determine that
such methods do not approximate fair value. All other investments are valued at
market value or, where market quotations are not readily available, at fair
value as determined in good faith by the Adviser in accordance with procedures
approved by the Trustees of the Trust. Additional information concerning the
Fund's valuation policies is contained in the Statement of Additional
Information.
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In the sole discretion of the Adviser, the Fund may accept securities
instead of cash for the purchase of shares of the Fund. The Adviser will
determine that any securities acquired in this manner are consistent with the
investment objective, policies and restrictions of the Fund. The securities will
be valued in the manner stated above. The purchase of shares of the Fund for
securities instead of cash may cause an investor who contributed them to realize
a taxable gain or loss with respect to the securities transferred to the Fund.
The Trust reserves the right in its sole discretion (i) to suspend the
offering of the Fund's shares, (ii) to reject purchase orders when in the best
interest of the Fund and (iii) to modify or eliminate the minimum initial
investment in Fund shares. The Fund's investment minimums do not apply to
accounts for which the Adviser or any of its affiliates serves as investment
adviser or to employees of the Adviser or any of its affiliates or to members of
such persons' immediate families. The Fund's investment minimums apply to the
aggregate value invested in omnibus accounts rather than to the investment of
the underlying participants in such omnibus accounts.
EXCHANGE OF SHARES
Shares of the Fund may be exchanged for shares of one or more other funds
in the Standish, Ayer & Wood family of funds. Shares of the Fund redeemed in an
exchange transaction are valued at their net asset value next determined after
the exchange request is received by the Principal Underwriter or its agent.
Shares of a fund purchased in an exchange transaction are sold at their net
asset value next determined after the exchange request is received by the
Principal Underwriter or its agent and payment for the shares is received by the
fund into which your shares are to be exchanged. Until receipt of the purchase
price by the fund into which your shares are to be exchanged (which may take up
to three business days), your money will not be invested. To obtain a current
prospectus for any of the other funds in the Standish, Ayer & Wood family of
funds, please call the Principal Underwriter at (800) 221-4795. Please consider
the differences in investment objectives and expenses of a fund as described in
its prospectus before making an exchange.
Written Exchanges
Shares of the Fund may be exchanged by written order to the Principal
Underwriter, One Financial Center, Boston, Massachusetts 02111. A written
exchange request must (a) state the name of the current Fund, (b) state the name
of the fund into which the current Fund shares will be exchanged, (c) state the
number of shares or the dollar amount to be exchanged, (d) identify the
shareholder's account numbers in both funds and (e) be signed by each registered
owner exactly as the shares are registered. Signature(s) must be guaranteed as
listed under "Written Redemption" below.
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Telephonic Exchanges
Shareholders who elect telephonic privileges may exchange shares by calling
the Principal Underwriter at (800) 221-4795. Telephonic privileges are not
available to shareholders automatically. Proper identification will be required
for each telephonic exchange. Please see "Telephone Transactions" below for more
information regarding telephonic transactions.
General Exchange Information
All exchanges are subject to the following exchange restrictions: (i) the
fund into which shares are being exchanged must be registered for sale in your
state; (ii) exchanges may be made only between funds that are registered in the
same name, address and, if applicable, taxpayer identification number; and (iii)
unless waived by the Trust, the amount to be exchanged must satisfy the minimum
account size of the fund to be exchanged into. Exchange requests will not be
processed until payment for the shares of the current Fund have been received by
the Fund's custodian. The exchange privilege may be changed or discontinued and
may be subject to additional limitations upon sixty (60) days' notice to
shareholders, including certain restrictions on purchases by market-timer
accounts.
REDEMPTION OF SHARES
Shares of the Fund may be redeemed by any of the methods described below at
the net asset value per share next determined after receipt by the Principal
Underwriter or its agent of a redemption request in proper form. Redemptions
will not be processed until a completed Share Purchase Application and payment
for the shares to be redeemed have been received.
Written Redemption
Shares of the Fund may be redeemed by written order to the Principal
Underwriter, One Financial Center, 26th Floor, Boston, Massachusetts 02111. A
written redemption request must (a) state the name of the Fund and the number of
shares or the dollar amount to be redeemed, (b) identify the shareholder's
account number and (c) be signed by each registered owner exactly as the shares
are registered. Signature(s) must be guaranteed by a member of either the
Securities Transfer Association's STAMP program or the New York Stock Exchange's
Medallion Signature Program or by any one of the following institutions,
provided that such institution meets credit standards established by Investors
Bank & Trust Company, the Fund's transfer agent: (i) a bank; (ii) a securities
broker or dealer, including a government or municipal securities broker or
dealer, that is a member of a clearing corporation or has net capital of at
least $100,000; (iii) a credit union having authority to issue signature
guarantees; (iv) a savings and loan association, a building and loan
association, a cooperative bank, or a federal savings bank or association; or
(v) a national securities exchange, a registered securities exchange or a
clearing agency. Additional supporting documents may be required in the case of
estates, trusts, corporations, partnerships and other shareholders that are not
individuals. Redemption proceeds will normally be paid by check mailed within
three business days of receipt by the Principal Underwriter of a written
redemption request in proper form. If shares to be redeemed were recently
purchased by check, the Fund may delay transmittal of redemption proceeds until
such time as it has assured itself that good funds have been collected for the
purchase of such shares. This may take up to fifteen (15) days in the case of
payments made by check.
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Telephonic Redemption
Shareholders who elect telephonic privileges may redeem shares by calling
the Principal Underwriter at (800) 221-4795. Telephonic privileges are not
available to shareholders automatically. Redemption proceeds will be mailed or
wired in accordance with the shareholder's instruction on the account
application to a pre-designated account. Redemption proceeds will normally be
paid promptly after receipt of telephonic instructions, but no later than three
business days thereafter, except as described above for shares purchased by
check. Redemption proceeds will be sent only by check payable to the shareholder
of record at the address of record, unless the shareholder has indicated, in the
initial application for the purchase of shares, a commercial bank to which
redemption proceeds may be sent by wire. These instructions may be changed
subsequently only in writing, accompanied by a signature guarantee, and
additional documentation in the case of shares held by a corporation or other
entity or by a fiduciary such as a trustee or executor. Wire charges, if any,
will be deducted from redemption proceeds. Proper identification will be
required for each telephonic redemption.
Repurchase Order
In addition to telephonic and written redemption of Fund shares, the
Principal Underwriter may accept telephone orders from brokers or dealers for
the repurchase of Fund shares. The repurchase price is the net asset value per
share next determined after receipt of the repurchase order by the Principal
Underwriter and the payment for the shares by the Fund's custodian. Brokers and
dealers are obligated to transmit repurchase orders to the Principal Underwriter
prior to the close of the Principal Underwriter's business day (normally 4:00
p.m.). Brokers and dealers may charge for their services in connection with a
repurchase of Fund shares, but neither the Fund nor the Principal Underwriter
imposes a charge for share repurchases.
Telephone Transactions
By maintaining an account that is eligible for telephonic exchange and
redemption privileges, the shareholder authorizes the Adviser, the Principal
Underwriter, the Fund and the Fund's custodian to act upon instructions of any
person to redeem and/or exchange shares from the shareholder's account. Further,
the shareholder acknowledges that, as long as the Fund employs reasonable
procedures to confirm that telephonic instructions are genuine, and follows
telephonic instructions that it reasonably believes to be genuine, neither the
Adviser, nor the Principal Underwriter, nor the Trust, nor the Fund, nor the
Fund's custodian, nor their respective officers or employees, will be liable for
any loss, expense or cost arising out of any request for a telephonic redemption
or exchange, even if such transaction results from any fraudulent or
unauthorized instructions. Depending upon the circumstances, the Fund intends to
employ personal identification or written confirmation of transactions
procedures, and if it does not, the Fund may be liable for any losses due to
unauthorized or fraudulent instructions. All telephone transaction requests will
be recorded. Shareholders may experience delays in exercising telephone
transaction privileges during periods of abnormal market activity. Accordingly,
during periods of volatile economic and market conditions, shareholders may wish
to consider transmitting redemption and exchange requests in writing.
* * * *
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The proceeds paid upon redemption or repurchase may be more or less than
the cost of the shares, depending upon the market value of the Fund's portfolio
investments at the time of redemption or repurchase. The Fund intends to pay
cash for all shares redeemed, but under certain conditions, the Fund may make
payments wholly or partially in portfolio securities.
Because of the cost of maintaining shareholder accounts, the Fund may
redeem, at net asset value, the shares in any account if the value of such
shares has decreased to less than $50,000 as a result of redemptions or
transfers. Before doing so, the Fund will notify the shareholder that the value
of the shares in the account is less than the specified minimum and will allow
the shareholder 30 days to make an additional investment in an amount which will
increase the value of the account to at least $50,000. The Fund may eliminate
duplicate mailings of Fund materials to shareholders that have the same address
of record.
MANAGEMENT
Trustees
The Fund is a separate investment series of Standish, Ayer & Wood
Investment Trust, a Massachusetts business trust. Under the terms of the
Agreement and Declaration of Trust establishing the Trust, which is governed by
the laws of The Commonwealth of Massachusetts, the Trustees of the Trust are
ultimately responsible for the management of its business and affairs.
Investment Adviser
Standish International Management Company, L.P. (the "Adviser"), One
Financial Center, Boston, MA 02111, serves as investment adviser to the Fund
pursuant to an investment advisory agreement and manages the Fund's investments
and affairs subject to the supervision of the Trustees of the Trust. The Adviser
is a Delaware limited partnership which was organized in 1991 and is a
registered investment adviser under the Investment Advisers Act of 1940. The
general partner of the Adviser is Standish, Ayer & Wood, Inc. ("Standish"), One
Financial Center, Boston, MA 02111, which holds a 99.98% partnership interest.
The limited partners, who each hold a 0.01% interest in the Adviser, are Walter
M. Cabot, Sr., Chairman of the Board of the Adviser and a Senior Adviser to
Standish, and D. Barr Clayson, the President of the Adviser and a Managing
Director of Standish. Richard S. Wood, a Vice President and Director of Standish
and the President of the Trust, is the Executive Vice President of the Adviser.
Standish and the Adviser provide fully discretionary management services and
counseling and advisory services to a broad range of clients throughout the
United States and abroad. As of March 31, 1996, Standish or the Adviser served
as the investment adviser to each of the following fourteen funds in the
Standish, Ayer & Wood family of funds:
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Net Assets
Fund (March 31, 1996)
- - --------------------------------------------------------------------------------
Standish Controlled Maturity Fund $ 9,042,346
Standish Equity Portfolio 98,282,505
Standish Fixed Income Portfolio 2,299,158,500
Standish Fixed Income Fund II 10,102,031
Standish Global Fixed Income Portfolio 149,048,965
Standish Intermediate Tax Exempt Bond Fund 31,199,236
Standish International Equity Fund 51,980,946
Standish International Fixed Income Fund 761,073,675
Standish Massachusetts Intermediate
Tax Exempt Bond Fund 32,270,691
Standish Securitized Fund 53,357,787
Standish Short-Term Asset Reserve Fund 272,188,970
Standish Small Capitalization Equity Portfolio 196,260,876
Standish Small Cap Tax-Sensitive Equity Fund 1,588,743
Standish Tax-Sensitive Equity Fund 1,261,111
Corporate pension funds are the largest asset under active management
by Standish. Standish's clients also include charitable and educational
endowment funds, financial institutions, trusts and individual investors.
As of March 31, 1996, Standish managed approximately $29 billion in assets.
The Fund's portfolio manager is Richard S. Wood, who has been primarily
responsible for the day-to-day management of the Fund's portfolio since its
inception in January, 1991. During the past five years, Mr. Wood has served as a
Director and Vice President of Standish.
Subject to the supervision and direction of the Trustees, the Adviser
manages the Fund's portfolio in accordance with its stated investment objective
and policies, recommends investment decisions for the Fund, places orders to
purchase and sell securities on behalf of the Fund, administers the affairs of
the Fund and permits the Fund to use the name "Standish." For these services,
the Fund pays a fee monthly at the annual rate of 0.40% of the Fund's average
daily net asset value. The Adviser has voluntarily agreed to limit the Fund's
total annual operating expenses (excluding brokerage commissions, taxes and
extraordinary expenses) to 0.80% of the Fund's average daily net assets. The
Adviser may discontinue or modify such limitation in the future at its
discretion, although it has no current intention to do so. The Adviser has also
agreed to limit the Fund's total operating expenses (excluding brokerage
commissions, taxes and extraordinary expenses) to the permissible limit
applicable in any state in which shares of the Fund are then qualified for sale.
If the expense limit is exceeded, the compensation due the Adviser for such
fiscal year shall be proportionately reduced by the amount of such excess by a
reduction or refund thereof at the time such compensation is payable after the
end of each calendar month, subject to readjustment during the fiscal year. For
the year ended December 31, 1995, the Fund paid advisory fees to the Adviser at
the annual rate of 0.40% of the Fund's average daily net assets.
Expenses
The Fund bears all expenses of its operations other than those incurred by
the Adviser under the investment advisory agreement. Among other expenses, the
Fund will pay investment advisory fees; bookkeeping, share pricing and
shareholder servicing fees and expenses; custodian fees and expenses; legal and
auditing fees; expenses of prospectuses, statements of additional information
19
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and shareholder reports which are furnished to shareholders; registration and
reporting fees and expenses; and Trustees' fees and expenses. The Adviser bears
without subsequent reimbursement the distribution expenses attributable to the
offering and sale of Fund shares. Expenses of the Trust which relate to more
than one series are allocated among such series by the Adviser and Standish in
an equitable manner. For the fiscal year ended December 31, 1995, expenses borne
by the Fund represented 0.51% of the Fund's average daily net assets.
Portfolio Transactions
Subject to the supervision of the Trustees of the Trust, the Adviser
selects the brokers and dealers that execute orders to purchase and sell
portfolio securities for the Fund. The Adviser will generally seek to obtain the
best available price and most favorable execution with respect to all
transactions for the Fund.
Subject to the consideration of best price and execution and to applicable
regulations, the receipt of research and sales of Fund shares may also be
considered factors in the selection of brokers and dealers that execute orders
to purchase and sell portfolio securities for the Fund.
FEDERAL INCOME TAXES
The Fund presently qualifies and intends to continue to qualify for
taxation as a "regulated investment company" under the Code. If it qualifies for
treatment as a regulated investment company, the Fund will not be subject to
federal income tax on income (including capital gains) distributed to
shareholders in the form of dividends or capital gain distributions in
accordance with certain timing requirements of the Code.
The Fund will be subject to a nondeductible 4% excise tax under the Code to
the extent that it fails to meet certain distribution requirements with respect
to each calendar year. Certain distributions made in order to satisfy the Code's
distribution requirements may be declared by the Fund during October, November
or December of the year but paid during the following January. Such
distributions will be taxable to taxable shareholders as if received on December
31 of the year the distributions are declared, rather than the year in which the
distributions are received.
Shareholders which are taxable entities or persons will be subject to
federal income tax on dividends and capital gain distributions made by the Fund.
Dividends paid by the Fund from net investment income, certain net foreign
currency gains, and any excess of net short-term capital gain over net long-term
capital loss will be taxable to shareholders as ordinary income, whether
received in cash or Fund shares. No portion of such dividends is expected to
qualify for the corporate dividends received deduction under the Code. Dividends
paid by the Fund from net capital gain (the excess of net long-term capital gain
over net short-term capital loss), called "capital gain distributions," will be
taxable to shareholders as long-term capital gains, whether received in cash or
Fund shares and without regard to how long the shareholder has held shares of
the Fund. Capital gain distributions do not qualify for the corporate dividends
received deduction. Dividends and capital gain distributions may also be subject
to state and local or foreign taxes.
20
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The Fund anticipates that it will be subject to foreign withholding taxes
or other foreign taxes on income (possibly including capital gains) on certain
of its foreign investments, which will reduce the yield or return from those
investments. Such taxes may be reduced or eliminated pursuant to an income tax
treaty in some cases.
The Fund may qualify to make an election to pass the qualifying foreign
taxes it pays through to its shareholders, who would then include their share of
such taxes in their gross incomes (in addition to the actual dividends and
capital gain distributions received from the Fund) and might be entitled,
subject to certain conditions and limitations under the Code, to a federal
income tax credit or deduction for their share of such taxes. Tax-exempt
shareholders generally will not benefit from this election. If the Fund makes
this election, it will provide necessary information to its shareholders
regarding any foreign taxes passed through to them. If the Fund does not make
this election, it may deduct the foreign taxes it pays in computing the net
income it must distribute to shareholders to satisfy the Code's distribution
requirements.
Redemptions and repurchases of shares are taxable events on which a
shareholder may recognize a gain or loss. Special rules recharacterize as
long-term any losses on the sale or exchange of Fund shares with a tax holding
period of six months or less, to the extent the shareholder received a capital
gain distribution with respect to such shares.
Individuals and certain other classes of shareholders may be subject to 31%
backup withholding of federal income tax on dividends, capital gain
distributions, and the proceeds of redemptions or repurchases of shares, if they
fail to furnish the Fund with their correct taxpayer identification number and
certain certifications or if they are otherwise subject to backup withholding.
Individuals, corporations and other shareholders that are not U.S. persons under
the Code are subject to different tax rules and may be subject to nonresident
alien withholding at the rate of 30% (or a lower rate provided by an applicable
tax treaty) on amounts treated as ordinary dividends from the Fund and, unless a
current IRS Form W-8 or an acceptable substitute is furnished to the Fund, to
backup withholding on certain payments from the Fund.
A state income (and possibly local income and/or intangible property) tax
exemption is generally available to the extent, if any, the Fund's distributions
are derived from interest on (or, in the case of intangibles taxes, the value of
its assets is attributable to) certain U.S. Government obligations, provided in
some states that certain thresholds for holdings of such obligations and/or
reporting requirements are satisfied.
After the close of each calendar year, the Fund will send a notice to
shareholders that provides information about the federal tax status of
distributions to shareholders for such calendar year.
THE FUND AND ITS SHARES
The Fund is a separate investment series of Standish, Ayer & Wood
Investment Trust, an unincorporated business trust organized under the laws of
The Commonwealth of Massachusetts pursuant to an Agreement and Declaration of
Trust dated August 13, 1986. Under the Agreement and Declaration of Trust, the
Trustees have authority to issue an unlimited number of shares of beneficial
interest, par value $.01 per share, of the Fund. Each share of the Fund is
entitled to one vote. All Fund shares have equal rights with regard to voting,
redemption, dividends, distributions and liquidation, and shareholders of the
Fund have the right to vote as a separate class with respect to certain matters
21
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under the 1940 Act and the Agreement and Declaration of Trust. Shares of the
Fund do not have cumulative voting rights. Fractional shares have proportional
voting rights and participate in any distributions and dividends. When issued,
each Fund share will be fully paid and nonassessable. Shareholders of the Fund
do not have preemptive or conversion rights. Certificates representing shares of
the Fund will not be issued.
The Trust has established fourteen series that currently offer their shares
to the public and may establish additional series at any time. Each series is a
separate taxpayer, eligible to qualify as a separate regulated investment
company for federal income tax purposes. The calculation of the net asset value
of a series and the tax consequences of investing in a series will be determined
separately for each series.
The Trust is not required to hold annual meetings of shareholders. Special
meetings of shareholders may be called from time to time for purposes such as
electing or removing Trustees, changing a fundamental policy, or approving an
investment advisory agreement.
If less than two-thirds of the Trustees holding office have been elected by
shareholders, a special meeting of shareholders of the Trust will be called to
elect Trustees. Under the Agreement and Declaration of Trust and the 1940 Act,
the record holders of not less than two-thirds of the outstanding shares of the
Trust may remove a Trustee by votes cast in person or by proxy at a meeting
called for the purpose or by a written declaration filed with each of the
Trust's custodian banks. Except as described above, the Trustees will continue
to hold office and may appoint successor Trustees. Whenever ten or more
shareholders of the Trust who have been such for at least six months, and who
hold in the aggregate shares having a net asset value of at least $25,000 or
which represent at least 1% of the outstanding shares, whichever is less, apply
to the Trustees in writing stating that they wish to communicate with other
shareholders with a view to obtaining signatures to request a meeting, and such
application is accompanied by a form of communication and request which they
wish to transmit, the Trustees shall within five (5) business days after receipt
of such application either (1) afford to such applicants access to a list of the
names and addresses of all shareholders as recorded on the books of the Trust;
or (2) inform such applicants as to the approximate number of shareholders of
record and the approximate cost of mailing to them the proposed communication or
form of request.
22
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Inquiries concerning the Fund should be made by contacting the Principal
Underwriter at the address and telephone number listed on the cover of this
Prospectus.
CUSTODIAN, TRANSFER AGENT AND
DIVIDEND DISBURSING AGENT
Investors Bank & Trust Company, 24 Federal Street,
Boston, Massachusetts 02111, serves as the Fund's transfer agent and dividend
disbursing agent and as custodian of all cash and securities of the Fund.
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P., One Post Office Square, Boston, Massachusetts
02109, serves as independent accountants for the Trust and will audit the Fund's
financial statements annually.
LEGAL COUNSEL
Hale and Dorr, 60 State Street, Boston, Massachusetts 02109, is legal
counsel to the Trust and to the Adviser and Standish.
--------------------
No dealer, salesman or other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus or in the Statement of Additional Information, and, if given or made,
such other information or representations must not be relied upon as having been
authorized by the Trust. This Prospectus does not constitute an offering in any
jurisdiction in which such offering may not be lawfully made.
23
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APPENDIX A
KEY TO MOODY'S RATINGS FOR CORPORATE BONDS AND SOVEREIGN, SUBNATIONAL AND
SOVEREIGN RELATED ISSUERS
Aaa -Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred
to as "gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position
of such issues.
Aa -Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities
or fluctuation of protective elements may be of greater amplitude or
there may be other elements present which make the long term risks
appear somewhat larger than in Aaa securities.
A -Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate but
elements may be present which suggest a susceptibility to impairment
sometime in the future.
Baa -Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest
payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics
as well.
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Ba -Bonds which are rated Ba are judged to have speculative elements. Their
future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not
well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class.
STANDARD & POOR'S RATINGS FOR
CORPORATE BONDS
AAA -Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA -Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A -Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher
rated categories.
BBB -Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than in higher
rated categories.
BB -Debt rated BB is regarded, on balance, as predominantly speculative
with respect to capacity to pay interest and repay principal in
accordance with the terms of the obligation. While such debt will likely
have some quality and protective characteristics, these are outweighed
by large uncertainties or major risk exposures to adverse conditions.
STANDARD & POOR'S CHARACTERISTICS OF
SOVEREIGN DEBT OF FOREIGN COUNTRIES
AAA -Stable, predictable governments with demonstrated track record of
responding flexibly to changing economic and political circumstances
-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
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-Established trend of integration into global trade and financial system
-Economies are smaller, less prosperous and generally more vulnerable to
adverse external influences (e.g.,protection and terms of trade shocks)
,but
-Usually rapid growth in output and per capita incomes
-Manageable through variable fiscal deficits, government debt and
inflation
-Usually low but variable debt.
BB -Political factors a source of major uncertainty, either because system
is in transition or due to external threats, or both, often in
environment of rapid economic and social change
-Integration into global trade and financial system growing but untested
-Low to moderate income developing economies but variable performance
and quite vulnerable to adverse external influences
-Variable to high fiscal deficits, government debt and inflation
-Very high and variable debt, often graduates of Brady plan but track
record not well established.
BBB -Political factors a source of significant uncertainty, either because
system is in transition or due to external threats, or both, often in
environment of rapid economic and social change
-Integration into global trade and financial system growing but untested
-Economies less prosperous and often more vulnerable to adverse external
influences
-Variable to high fiscal deficits, government debt and inflation
-High and variable external debt
BB -Political factors a source of major uncertainty, either because system
is in transition or due to external threats, or both, often in
environment of rapid economic and social change
-Integration into global trade and financial system growing but untested
-Low to moderate income developing economies, but variable performance
and quite vulnerable to adverse external influences
-Variable to high fiscal deficits, government debt and inflation
-Very high and variable debt, often graduates of Brady Plan but track
record not well established.
DESCRIPTION OF DUFF & PHELPS RATINGS FOR CORPORATE BONDS AND FOR SOVEREIGN,
SUBNATIONAL AND SOVEREIGN
RELATED ISSUERS
AAA -Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
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.
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BBB -Below average protection factors but still considered sufficient for
prudent investment. Considerable variability in risk during economic
cycles.
BB -Below investment grade but deemed likely to meet obligations when due.
Present or prospective financial protection factors fluctuate according
to industry conditions or company fortunes. Overall quality may move up
or down frequently within this category.
IBAC LONG-TERM RATINGS FOR CORPORATE BONDS AND FOR SOVEREIGN, SUBNATIONAL AND
SOVEREIGN RELATED ISSUES
AAA -Obligations for which there is the lowest expectation of investment
risk. Capacity for timely repayment of principal and interest is
substantial, such that adverse changes in business, economic or
financial conditions are unlikely to increase investment risk
substantially.
AA -Obligations for which there is a very low expectation of investment
risk, Capacity for timely repayment of principal and interest is
substantial. Adverse changes in business, economic or financial
conditions may increase investment risk, albeit not very significantly.
A -Obligations for which there is a low expectation of investment risk.
Capacity for timely repayment of principal and interest is strong,
although adverse changes in business, economic or financial conditions
may lead to increased investment risk.
BBB -Obligations for which there is currently a low expectation of
investment risk. Capacity for timely repayment of principal and interest
is adequate, although adverse changes in business, economic or financial
conditions are more likely to lead to increased investment risk than for
obligations in other categories.
BB -Obligations for which there is a possibility of investment risk
developing. Capacity for timely repayment of principal and interest
exists, but is susceptible over time to adverse changes in business,
economic or financial conditions.
* * *
In the case of sovereign, subnational and sovereign related issuers, the
Fund uses the rating service's foreign currency or domestic (local) currency
rating depending upon how a security in the Fund's portfolio is denominated. In
the case where the Fund holds a security denominated in a domestic (local)
currency and the rating service does not provide a domestic (local) currency
rating for the issuer, the Fund will use the foreign currency rating for the
issuer; in the case where the Fund holds a security denominated in a foreign
currency and the rating service does not provide a foreign currency rating for
the issuer, the Fund will treat the security as being unrated.
27
<PAGE>
TAX CERTIFICATION INSTRUCTIONS
Federal law requires that taxable distributions and proceeds of redemptions
and exchanges be reported to the IRS and that 31% be withheld if you fail to
provide your correct Taxpayer Identification Number (TIN) and the TIN-related
certifications contained in the Account Purchase Application (Application) or
you are otherwise subject to backup withholding. The Fund will not impose backup
withholding as a result of your failure to make any certification, except the
certifications in the Application that directly relate to your TIN and backup
withholding status. Amounts withheld and forwarded to the IRS can be credited as
a payment of tax when completing your Federal income tax return.
For most individual taxpayers, the TIN is the social security number.
Special rules apply for certain accounts. For example, for an account
established under the Uniform Gift to Minors Act, the TIN of the minor should be
furnished. If you do not have a TIN, you may apply for one using forms available
at local offices of the Social Security Administration or the IRS, and you
should write "Applied For" in the space for a TIN on the Application.
Recipients exempt from backup withholding, including corporations and
certain other entities, should provide their TIN and underline "exempt" in
section 2(a) of the TIN section of the Application to avoid possible erroneous
withholding. Non-resident aliens and foreign entities may be subject to
withholding of up to 30% on certain distributions received from the Fund and
must provide certain certifications on IRS Form W-8 to avoid backup withholding
with respect to other payments. For further information, see Code Sections 1441,
1442 and 3406 and/or consult your tax adviser.
28
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STANDISH INTERNATIONAL FIXED INCOME FUND
Investment Adviser
Standish International Management Company, L.P.
One Financial Center
Boston, Massachusetts 02111
Principal Underwriter
Standish Fund Distributors, L.P.
One Financial Center
Boston, Massachusetts 02111
Custodian
Investors Bank & Trust Company
24 Federal Street
Boston, Massachusetts 02110
Independent Accountants
Coopers & Lybrand L.L.P.
One Post Office Square
Boston, Massachusetts 02109
Legal Counsel
Hale and Dorr
60 State Street
Boston, Massachusetts 02109
29
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May 1, 1996
STANDISH INTERNATIONAL FIXED INCOME FUND
One Financial Center
Boston, Massachusetts 02111
(800) 221-4795
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information is not a prospectus, but expands
upon and supplements the information contained in the Prospectus dated May 1,
1996, as amended and/or supplemented from time to time (the "Prospectus") of
Standish International Fixed Income Fund (the "Fund"), a separate investment
series of Standish, Ayer & Wood Investment Trust (the "Trust"). This Statement
of Additional Information should be read in conjunction with the Fund's
Prospectus which may be obtained without charge by writing or calling the
Standish Fund Distributors, L.P., the Trust's principal underwriter (the
"Principal Underwriter"), at the address and phone number set forth above.
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND IS
AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY IF PRECEDED OR
ACCOMPANIED BY AN EFFECTIVE PROSPECTUS.
CONTENTS
Investment Objective and Policies.............................2
Investment Restrictions.......................................7
Calculation of Performance Data...............................8
Management...................................................10
Redemption of Shares.........................................15
Portfolio Transactions.......................................15
Determination of Net Asset Value.............................16
The Fund and Its Shares......................................16
Taxation.....................................................17
Additional Information.......................................19
Experts and Financial Statements.............................19
Financial Statements.........................................20
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INVESTMENT OBJECTIVE AND POLICIES
The Fund's Prospectus describes the investment objective of the Fund and
summarizes the investment policies it will follow. The following discussion
supplements the description of the Fund's investment policies in the Prospectus.
See the Prospectus for a more complete description of the Fund's investment
objective, policies and restrictions.
Money Market Instruments and Repurchase Agreements
Money market instruments include short-term U.S. and foreign Government
securities, commercial paper (promissory notes issued by corporations to finance
their short-term credit needs), negotiable certificates of deposit,
non-negotiable fixed time deposits, bankers' acceptances and repurchase
agreements.
U.S. Government securities include securities which are direct obligations
of the U.S. Government backed by the full faith and credit of the United States,
and securities issued by agencies and instrumentalities of the U.S. Government,
which may be guaranteed by the U.S. Treasury or supported by the issuer's right
to borrow from the Treasury or may be backed by the credit of the federal agency
or instrumentality itself. Agencies and instrumentalities of the U.S. Government
include, but are not limited to, Federal Land Banks, the Federal Farm Credit
Bank, the Central Bank for Cooperatives, Federal Intermediate Credit Banks,
Federal Home Loan Banks and the Federal National Mortgage Association.
Investments in commercial paper will be rated "Prime-1" by Moody's
Investors Service, Inc. ("Moody's") or "A-1" by Standard & Poor's Rating Group
("S&P"), or Duff 1+ by Duff & Phelps, which are the highest ratings assigned by
these rating services (even if rated lower by one or more of the other
agencies), or which, if not rated or rated lower by one or more of the agencies
and not rated by the other agency or agencies, are judged by Standish
International Management Company, L.P. (the "Adviser") to be of equivalent
quality to the securities so rated. In determining whether securities are of
equivalent quality, the Adviser may take into account, but will not rely
entirely on, ratings assigned by foreign rating agencies.
A repurchase agreement is an agreement under which the Fund acquires money
market instruments (generally U.S. Government securities) from a commercial
bank, broker or dealer, subject to resale to the seller at an agreed-upon price
and date (normally the next business day). The resale price reflects an
agreed-upon interest rate effective for the period the instruments are held by
the Fund and is unrelated to the interest rate on the instruments. The
instruments acquired by the Fund (including accrued interest) must have an
aggregate market value in excess of the resale price and will be held by the
custodian bank for the Fund until they are repurchased. The Trustees will
monitor the standards that the Adviser will use in reviewing the
creditworthiness of any party to a repurchase agreement with the Fund.
The use of repurchase agreements involves certain risks. For example, if
the seller defaults on its obligation to repurchase the instruments acquired by
the Fund at a time when their market value has declined, the Fund may incur a
loss. If the seller becomes insolvent or subject to liquidation or
reorganization under bankruptcy or other laws, a court may determine that the
instruments acquired by the Fund are collateral for a loan by the Fund and
therefore are subject to sale by the trustee in bankruptcy. Finally, it is
possible that the Fund may not be able to substantiate its interest in the
instruments it acquires. While the Trustees acknowledge these risks, it is
expected that they can be controlled through careful documentation and
monitoring.
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Strategic Transactions
The Fund may, but is not required to, utilize various other investment
strategies as described below to hedge various market risks (such as interest
rates, currency exchange rates, and broad or specific equity or fixed-income
market movements), to manage the effective maturity or duration of fixed-income
securities, or to enhance potential gain. Such strategies are generally accepted
as part of modern portfolio management and are regularly utilized by many mutual
funds and other institutional investors. Techniques and instruments used by the
Fund may change over time as new instruments and strategies are developed or
regulatory changes occur.
In the course of pursuing its investment objective, the Fund may purchase
and sell (write) exchange-listed and over-the-counter put and call options on
securities, equity and fixed-income indices and other financial instruments;
purchase and sell financial futures contracts and options thereon; enter into
various interest rate transactions such as swaps, caps, floors or collars; and
enter into various currency transactions such as currency forward contracts,
currency futures contracts, currency swaps or options on currencies or currency
futures (collectively, all the above are called "Strategic Transactions").
Strategic Transactions may be used in an attempt to protect against possible
changes in the market value of securities held in or to be purchased for the
Fund's portfolio resulting from securities market or currency exchange rate
fluctuations, to protect the Fund's unrealized gains in the value of its
portfolio securities, to facilitate the sale of such securities for investment
purposes, to manage the effective maturity or duration of the Fund's portfolio,
or to establish a position in the derivatives markets as a temporary substitute
for purchasing or selling particular securities. In addition to the hedging
transactions referred to in the preceding sentence, Strategic Transactions may
also be used to enhance potential gain in circumstances where hedging is not
involved although the Fund will attempt to limit its net loss exposure resulting
from Strategic Transactions entered into for such purposes to not more than 3%
of the Fund's net assets at any one time and, to the extent necessary, the Fund
will close out transactions in order to comply with this limitation.
(Transactions such as writing covered call options are considered to involve
hedging for the purposes of this limitation.) In calculating the Fund's net loss
exposure from such Strategic Transactions, an unrealized gain from a particular
Strategic Transaction position would be netted against an unrealized loss from a
related Strategic Transaction position. For example, if the Adviser anticipates
that the Belgian franc will appreciate relative to the French franc, the Fund
may take a long forward currency position in the Belgian franc and a short
foreign currency position in the French franc. Under such circumstances, any
unrealized loss in the Belgian franc position would be netted against any
unrealized gain in the French franc position (and vice versa) for purposes of
calculating the Fund's net loss exposure. The ability of the Fund to utilize
these Strategic Transactions successfully will depend on the Adviser's ability
to predict pertinent market movements, which cannot be assured. The Fund will
comply with applicable regulatory requirements when implementing these
strategies, techniques and instruments. The Fund's activities involving
Strategic Transactions may be limited by the requirements of Subchapter M of the
Internal Revenue Code of 1986, as amended (the "Code"), for qualification as a
regulated investment company.
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Risks of Strategic Transactions
The use of Strategic Transactions has associated risks including possible
default by the other party to the transaction, illiquidity and, to the extent
the Adviser's view as to certain market movements is incorrect, the risk that
the use of such Strategic Transactions could result in losses greater than if
they had not been used. The writing of put and call options may result in losses
to the Fund, force the purchase or sale, respectively, of portfolio securities
at inopportune times or for prices higher than (in the case of purchases due to
the exercise of put options) or lower than (in the case of sales due to the
exercise of call options) current market values, limit the amount of
appreciation the Fund can realize on its investments or cause the Fund to hold a
security it might otherwise sell. The use of currency transactions can result in
the Fund incurring losses as a result of a number of factors including the
imposition of exchange controls, suspension of settlements, or the inability to
deliver or receive a specified currency. The use of options and futures
transactions entails certain other risks. In particular, the variable degree of
correlation between price movements of futures contracts and price movements in
the related portfolio position of the Fund creates the possibility that losses
on the hedging instrument may be greater than gains in the value of the Fund's
position. The writing of options could significantly increase the Fund's
portfolio turnover rate and, therefore, associated brokerage commissions or
spreads. In addition, futures and options markets may not be liquid in all
circumstances and certain over-the-counter options may have no markets. As a
result, in certain markets, the Fund might not be able to close out a
transaction without incurring substantial losses, if at all. Although the use of
futures and options transactions for hedging should tend to minimize the risk of
loss due to a decline in the value of the hedged position, at the same time, in
certain circumstances, they tend to limit any potential gain which might result
from an increase in value of such position. The loss incurred by the Fund in
writing options on futures and entering into futures transactions is potentially
unlimited; however, as described above, the Fund will attempt to limit its net
loss exposure resulting from Strategic Transactions entered into for non-hedging
purposes to not more than 3% of its net assets at any one time. Futures markets
are highly volatile and the use of futures may increase the volatility of the
Fund's net asset value. Finally, entering into futures contracts would create a
greater ongoing potential financial risk than would purchases of options where
the exposure is limited to the cost of the initial premium. Losses resulting
from the use of Strategic Transactions would reduce net asset value and the net
result may be less favorable than if the Strategic Transactions had not been
utilized.
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General Characteristics of Options
Put options and call options typically have similar structural
characteristics and operational mechanics regardless of the underlying
instrument on which they are purchased or sold. Thus, the following general
discussion relates to each of the particular types of options discussed in
greater detail below. In addition, many Strategic Transactions involving options
require segregation of the Fund's assets in special accounts, as described below
under "Use of Segregated Accounts."
A put option gives the purchaser of the option, in consideration for the
payment of a premium, the right to sell, and the writer the obligation to buy
(if the option is exercised), the underlying security, commodity, index,
currency or other instrument at the exercise price. For instance, the Fund's
purchase of a put option on a security might be designed to protect its holdings
in the underlying instrument (or, in some cases, a similar instrument) against a
substantial decline in the market value by giving the Fund the right to sell
such instrument at the option exercise price. A call option, in consideration
for the payment of a premium, gives the purchaser of the option the right to
buy, and the seller the obligation to sell (if the option is exercised), the
underlying instrument at the exercise price. The Fund may purchase a call option
on a security, futures contract, index, currency or other instrument to seek to
protect the Fund against an increase in the price of the underlying instrument
that it intends to purchase in the future by fixing the price at which it may
purchase such instrument. An American style put or call option may be exercised
at any time during the option period while a European style put or call option
may be exercised only upon expiration or during a fixed period prior thereto.
The Fund is authorized to purchase and sell exchange listed options and
over-the-counter options ("OTC options"). Exchange listed options are issued by
a regulated intermediary such as the Options Clearing Corporation ("OCC"), which
guarantees the performance of the obligations of the parties to such options.
The discussion below uses the OCC as an example, but is also applicable to other
financial intermediaries.
With certain exceptions, exchange listed options generally settle by
physical delivery of the underlying security or currency, although in the future
cash settlement may become available. Index options and Eurodollar instruments
are cash settled for the net amount, if any, by which the option is
"in-the-money" (i.e., where the value of the underlying instrument exceeds, in
the case of a call option, or is less than, in the case of a put option, the
exercise price of the option) at the time the option is exercised. Frequently,
rather than taking or making delivery of the underlying instrument through the
process of exercising the option, listed options are closed by entering into
offsetting purchase or sale transactions that do not result in ownership of the
new option.
The Fund's ability to close out its position as a purchaser or seller of an
exchange listed put or call option is dependent, in part, upon the liquidity of
the option market. There is no assurance that a liquid option market on an
exchange will exist. In the event that the relevant market for an option on an
exchange ceases to exist, outstanding options on that exchange would generally
continue to be exercisable in accordance with their terms.
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The hours of trading for listed options may not coincide with the hours
during which the underlying financial instruments are traded. To the extent that
the option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct agreement with
the Counterparty. In contrast to exchange listed options, which generally have
standardized terms and performance mechanics, all the terms of an OTC option,
including such terms as method of settlement, term, exercise price, premium,
guarantees and security, are set by negotiation of the parties. The Fund will
generally sell (write) OTC options (other than OTC currency options) that are
subject to a buy-back provision permitting the Fund to require the Counterparty
to sell the option back to the Fund at a formula price within seven days. To the
extent that the Fund does not do so, the OTC options are subject to the Fund's
restriction on illiquid securities. The Fund expects generally to enter into OTC
options that have cash settlement provisions, although it is not required to do
so.
Unless the parties provide for it, there is no central clearing or guaranty
function in the OTC option market. As a result, if the Counterparty fails to
make delivery of the security, currency or other instrument underlying an OTC
option it has entered into with the Fund or fails to make a cash settlement
payment due in accordance with the terms of that option, the Fund will lose any
premium it paid for the option as well as any anticipated benefit of the
transaction. Accordingly, the Adviser must assess the creditworthiness of each
such Counterparty or any guarantor or credit enhancement of the Counterparty's
credit to determine the likelihood that the terms of the OTC option will be
satisfied. The Fund will engage in OTC option transactions only with U.S.
Government securities dealers recognized by the Federal Reserve Bank of New York
as "primary dealers", or broker-dealers, domestic or foreign banks or other
financial institutions which have received, combined with any credit
enhancements, a long-term debt rating of A from S&P or Moody's or an equivalent
rating from any other nationally recognized statistical rating organization
("NRSRO") or which issue debt that is determined to be of equivalent credit
quality by the Adviser. The staff of the Securities and Exchange Commission (the
"SEC") currently takes the position that, absent the buy-back provisions
discussed above, OTC options purchased by the Fund, and portfolio securities
"covering" the amount of the Fund's obligation pursuant to an OTC option sold by
it (the cost of the sell-back plus the in-the-money amount, if any) are
illiquid, and are subject to the Fund's limitation on investing in illiquid
securities. However, for options written with "primary dealers" in U.S.
Government securities pursuant to an agreement requiring a closing purchase
transaction at a formula price, the amount which is considered to be illiquid
may be calculated by reference to a formula price.
If the Fund sells (writes) a call option, the premium that it receives may
serve as a partial hedge, to the extent of the option premium, against a
decrease in the value of the underlying securities or instruments in its
portfolio or will increase the Fund's income. The sale (writing) of put options
can also provide income.
6
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The Fund may purchase and sell (write) call options on securities including
U.S. Treasury and agency securities, mortgage-backed securities, corporate debt
securities, equity securities (including convertible securities) and Eurodollar
instruments that are traded on U.S. and foreign securities exchanges and in the
over-the-counter markets, and on securities indices, currencies and futures
contracts. All calls sold by the Fund must be "covered" (i.e., the Fund must own
the securities or the futures contract subject to the call) or must meet the
asset segregation requirements described below as long as the call is
outstanding. Even though the Fund will receive the option premium to help offset
any loss, the Fund may incur a loss if the exercise price is below the market
price for the security subject to the call at the time of exercise. A call sold
by the Fund also exposes the Fund during the term of the option to possible loss
of opportunity to realize appreciation in the market price of the underlying
security or instrument and may require the Fund to hold a security or instrument
which it might otherwise have sold.
The Fund may purchase and sell (write) put options on securities including
U.S. Treasury and agency securities, mortgage backed securities, foreign
sovereign debt, corporate debt securities, equity securities (including
convertible securities) and Eurodollar instruments (whether or not it holds the
above securities in its portfolio), and on securities indices, currencies and
futures contracts. The Fund will not sell put options if, as a result, more than
50% of the Fund's assets would be required to be segregated to cover its
potential obligations under such put options other than those with respect to
futures and options thereon. In selling put options, there is a risk that the
Fund may be required to buy the underlying security at a price above the market
price.
Options on Securities Indices and Other Financial Indices
The Fund may also purchase and sell (write) call and put options on
securities indices and other financial indices. Options on securities indices
and other financial indices are similar to options on a security or other
instrument except that, rather than settling by physical delivery of the
underlying instrument, they settle by cash settlement. For example, an option on
an index gives the holder the right to receive, upon exercise of the option, an
amount of cash if the closing level of the index upon which the option is based
exceeds, in the case of a call, or is less than, in the case of a put, the
exercise price of the option (except if, in the case of an OTC option, physical
delivery is specified). This amount of cash is equal to the differential between
the closing price of the index and the exercise price of the option, which also
may be multiplied by a formula value. The seller of the option is obligated, in
return for the premium received, to make delivery of this amount upon exercise
of the option. In addition to the methods described above, the Fund may cover
call options on a securities index by owning securities whose price changes are
expected to be similar to those of the underlying index, or by having an
absolute and immediate right to acquire such securities without additional cash
consideration (or for additional cash consideration held in a segregated account
by its custodian) upon conversion or exchange of other securities in its
portfolio.
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General Characteristics of Futures
The Fund may enter into financial futures contracts or purchase or sell put
and call options on such futures. Futures are generally bought and sold on the
commodities exchanges where they are listed and involve payment of initial and
variation margin as described below. The sale of futures contracts creates a
firm obligation by the Fund, as seller, to deliver to the buyer the specific
type of financial instrument called for in the contract at a specific future
time for a specified price (or, with respect to index futures and Eurodollar
instruments, the net cash amount). The purchase of futures contracts creates a
corresponding obligation by the Fund, as purchaser, to purchase a financial
instrument at a specific time and price. Options on futures contracts are
similar to options on securities except that an option on a futures contract
gives the purchaser the right in return for the premium paid to assume a
position in a futures contract and obligates the seller to deliver such position
upon exercise of the option.
The Fund's use of financial futures and options thereon will in all cases
be consistent with applicable regulatory requirements and in particular the
regulations of the Commodity Futures Trading Commission (the "CTFC") relating to
exclusions from regulation as a commodity pool operator. Those regulations
currently provide that the Fund may use commodity futures and option positions
(i) for bona fide hedging purposes without regard to the percentage of assets
committed to margin and option premiums, or (ii) for other purposes permitted by
the CTFC to the extent that the aggregate initial margin and option premiums
required to establish such non-hedging positions (net if the amount the
positions were "in the money" at the time of purchase) do not exceed 5% of the
net asset value of the Fund's portfolio, after taking into account unrealized
profits and losses on such positions. Typically, maintaining a futures contract
or selling an option thereon requires the Fund to deposit, with its custodian
for the benefit of a futures commission merchant, as security for its
obligations an amount of cash or other specified assets (initial margin) which
initially is typically 1% to 10% of the face amount of the contract (but may be
higher in some circumstances). Additional cash or assets (variation margin) may
be required to be deposited directly with the futures commission merchant
thereafter on a daily basis as the value of the contract fluctuates. The
purchase of an option on financial futures involves payment of a premium for the
option without any further obligation on the part of the Fund. If the Fund
exercises an option on a futures contract it will be obligated to post initial
margin (and potential subsequent variation margin) for the resulting futures
position just as it would for any position. Futures contracts and options
thereon are generally settled by entering into an offsetting transaction but
there can be no assurance that the position can be offset prior to settlement at
an advantageous price, nor that delivery will occur. The segregation
requirements with respect to futures contracts and options thereon are described
below.
Currency Transactions
The Fund may engage in currency transactions with Counterparties in order
to hedge the value of portfolio holdings denominated in particular currencies
against fluctuations in relative value or to enhance potential gain. Currency
transactions include currency contracts, exchange listed currency futures,
8
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exchange listed and OTC options on currencies, and currency swaps. A forward
currency contract involves a privately negotiated obligation to purchase or sell
(with delivery generally required) a specific currency at a future date, which
may be any fixed number of days from the date of the contract agreed upon by the
parties, at a price set at the time of the contract. A currency swap is an
agreement to exchange cash flows based on the notional (agreed-upon) difference
among two or more currencies and operates similarly to an interest rate swap,
which is described below. A Fund may enter into over-the-counter currency
transactions with Counterparties which have received, combined with any credit
enhancements, a long term debt rating of A by S&P or Moody's, respectively, or
that have an equivalent rating from a NRSRO or (except for OTC currency options)
whose obligations are determined to be of equivalent credit quality by the
Adviser.
The Fund's dealings in forward currency contracts and other currency
transactions such as futures, options, options on futures and swaps will
generally be limited to hedging involving either specific transactions or
portfolio positions. See, "Strategic Transactions". Transaction hedging is
entering into a currency transaction with respect to specific assets or
liabilities of the Fund, which will generally arise in connection with the
purchase or sale of its portfolio securities or the receipt of income therefrom.
Position hedging is entering into a currency transaction with respect to
portfolio security positions denominated or generally quoted in that currency.
The Fund will not enter into a transaction to hedge currency exposure to an
extent greater, after netting all transactions intended wholly or partially to
offset other transactions, than the aggregate market value (at the time of
entering into the transaction) of the securities held in its portfolio that are
denominated or generally quoted in or currently convertible into such currency,
other than with respect to proxy hedging as described below.
The Fund may also cross-hedge currencies by entering into transactions to
purchase or sell one or more currencies that are expected to decline in value in
relation to other currencies to which the Fund has or in which the Fund expects
to have portfolio exposure. For example, the Fund may hold a French government
bond and the Adviser may believe that French francs will deteriorate against
German marks. The Fund would sell French francs to reduce its exposure to that
currency and buy German marks. This strategy would be a hedge against a decline
in the value of French francs, although it would expose the Fund to declines in
the value of the German mark relative to the U.S. dollar.
To reduce the effect of currency fluctuations on the value of existing or
anticipated holdings of portfolio securities, the Fund may also engage in proxy
hedging. Proxy hedging is typically used when the currency to which the Fund's
portfolio is exposed is difficult to hedge or to hedge against the dollar. Proxy
hedging entails entering into a forward contract to sell a currency whose
changes in value are generally considered to be linked to a currency or
currencies in which certain of the Fund's portfolio securities are or are
expected to be denominated, and to buy U.S. dollars. The amount of the contract
would not exceed the value of the Fund's securities denominated in linked
currencies. For example, if the Adviser considers that the Austrian schilling is
linked to the German deutschemark (the "D-mark"), the Fund holds securities
denominated in schillings and the Adviser believes that the value of schillings
will decline against the U.S. dollar, the Adviser may enter into a contract to
sell D-marks and buy dollars. Proxy hedging involves some of the same risks and
considerations as other transactions with similar instruments. Currency
transactions can result in losses to the Fund if the currency being hedged
fluctuates in value to a degree or in a direction that is not anticipated.
Further, there is the risk that the perceived linkage between various currencies
may not be present or may not be present during the particular time that the
Fund is engaging in proxy hedging. If the Fund enters into a currency hedging
transaction, the Fund will comply with the asset segregation requirements
described below.
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Risks of Currency Transactions
Currency transactions are subject to risks different from those of other
portfolio transactions. Because currency control is of great importance to the
issuing governments and influences economic planning and policy, purchases and
sales of currency and related instruments can be negatively affected by
government exchange controls, blockages, and manipulations or exchange
restrictions imposed by governments. These can result in losses to the Fund if
it is unable to deliver or receive currency or funds in settlement of
obligations and could also cause hedges it has entered into to be rendered
useless, resulting in full currency exposure as well as incurring transaction
costs. Buyers and sellers of currency futures are subject to the same risks that
apply to the use of futures generally. Further, settlement of a currency futures
contract for the purchase of most currencies must occur at a bank based in the
issuing nation. Trading options on currency futures is relatively new, and the
ability to establish and close out positions on such options is subject to the
maintenance of a liquid market which may not always be available. Currency
exchange rates may fluctuate based on factors extrinsic to that country's
economy.
Combined Transactions
The Fund may enter into multiple transactions, including multiple options
transactions, multiple futures transactions, multiple currency transactions
(including forward currency contracts) and multiple interest rate transactions,
structured notes and any combination of futures, options, currency and interest
rate transactions ("component transactions") instead of a single Strategic
Transaction, as part of a single or combined strategy when, in the opinion of
the Adviser it is in the best interests of the Fund to do so. A combined
transaction will usually contain elements of risk that are present in each of
its component transactions. Although combined transactions are normally entered
into based on the Adviser's judgment that the combined strategies will reduce
risk or otherwise more effectively achieve the desired portfolio management
goal, it is possible that the combination will instead increase such risks or
hinder achievement of the portfolio management objective.
Swaps, Caps, Floors and Collars
Among the Strategic Transactions into which the Fund may enter are interest
rate, currency and index swaps and the purchase or sale of related caps, floors
and collars. The Fund expects to enter into these transactions primarily for
hedging purposes, including, but not limited to, preserving a return or spread
on a particular investment or portion of its portfolio, protecting against
currency fluctuations, as a duration management technique or protecting against
an increase in the price of securities the Fund anticipates purchasing at a
later date. Swaps, caps, floors and collars may also be used to enhance
potential gain in circumstances where hedging is not involved although, as
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described above, the Fund will attempt to limit its net loss exposure resulting
from swaps, caps, floors and collars and other Strategic Transactions entered
into for such purposes to not more than 3% of the Fund's net assets at any one
time. The Fund will not sell interest rate caps, floors or collars where it does
not own securities or other instruments providing the income stream the Fund may
be obligated to pay. Interest rate swaps involve the exchange by the Fund with
another party of their respective commitments to pay or receive interest, e.g.,
an exchange of floating rate payments for fixed rate payments with respect to a
notional amount of principal. A currency swap is an agreement to exchange cash
flows on a notional amount of two or more currencies based on the relative value
differential among them and an index swap is an agreement to swap cash flows on
a notional amount based on changes in the values of the reference indices. The
purchase of a cap entitles the purchaser to receive payments on a notional
principal amount from the party selling such cap to the extent that a specified
index exceeds a predetermined interest rate or amount. The purchase of a floor
entitles the purchaser to receive payments on a notional principal amount from
the party selling such floor to the extent that a specified index falls below a
predetermined interest rate or amount. A collar is a combination of a cap and a
floor that preserves a certain rate of return within a predetermined range of
interest rates or values.
The Fund will usually enter into swaps on a net basis, i.e., the two
payment streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with the Fund receiving or paying, as the case may
be, only the net amount of the two payments. The Fund will not enter into any
swap, cap, floor or collar transaction unless, at the time of entering into such
transaction, the unsecured long-term debt of the Counterparty, combined with any
credit enhancements, is rated at least A by S&P or Moody's or has an equivalent
rating from an NRSRO or which issue debt that is determined to be of equivalent
credit quality by the Adviser. If there is a default by the Counterparty, the
Fund may have contractual remedies pursuant to the agreements related to the
transaction. The swap market has grown substantially in recent years with a
large number of banks and investment banking firms acting both as principals and
as agents utilizing standardized swap documentation. As a result, the swap
market has become relatively liquid. Caps, floors and collars are more recent
innovations for which standardized documentation has not yet been fully
developed. Swaps, caps, floors and collars are considered illiquid for purposes
of the Fund's policy regarding illiquid securities, unless it is determined,
based upon continuing review of the trading markets for the specific security,
that such security is liquid. The Board of Trustees has adopted guidelines and
delegated to the Adviser the daily function of determining and monitoring the
liquidity of swaps, caps, floors and collars. The Board of Trustees, however,
retains oversight focusing on factors such as valuation, liquidity and
availability of information and is ultimately responsible for such
determinations. The staff of the SEC currently takes the position that swaps,
caps, floors and collars are illiquid, and are subject to the Fund's limitation
on investing in illiquid securities.
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Eurodollar Contracts
The Fund may make investments in Eurodollar contracts. Eurodollar contracts
are U.S. dollar-denominated futures contracts or options thereon which are
linked to the London Interbank Offered Rate ("LIBOR"), although foreign
currency-denominated instruments are available from time to time. Eurodollar
futures contracts enable purchasers to obtain a fixed rate for the lending of
funds and sellers to obtain a fixed rate for borrowings. The Fund might use
Eurodollar futures contracts and options thereon to hedge against changes in
LIBOR, to which many interest rate swaps and fixed income instruments are
linked.
Risks of Strategic Transactions Outside the United States
When conducted outside the United States, Strategic Transactions may not be
regulated as rigorously as in the United States, may not involve a clearing
mechanism and related guarantees, and are subject to the risk of governmental
actions affecting trading in, or the prices of, foreign securities, currencies
and other instruments. The value of such positions also could be adversely
affected by: (i) lesser availability than in the United States of data on which
to make trading decisions, (ii) delays in the Fund's ability to act upon
economic events occurring in foreign markets during non-business hours in the
United States, (iii) the imposition of different exercise and settlement terms
and procedures and margin requirements than in the United States, (iv) lower
trading volume and liquidity, and (v) other complex foreign political, legal and
economic factors. At the same time, Strategic Transactions may offer advantages
such as trading in instruments that are not currently traded in the United
States or arbitrage possibilities not available in the United States.
Use of Segregated Accounts
The Fund will hold securities or other instruments whose values are
expected to offset its obligations under the Strategic Transactions. The Fund
will not enter into Strategic Transactions that expose the Fund to an obligation
to another party unless it owns either (i) an offsetting position in securities
or other options, futures contracts or other instruments or (ii) cash,
receivables or liquid, high grade debt securities with a value sufficient to
cover its potential obligations. The Fund may have to comply with any applicable
regulatory requirements designed to make sure that mutual funds do not use
leverage in Strategic Transactions, and if required, will set aside cash and
other assets in a segregated account with its custodian bank in the amount
prescribed. In that case, the Fund's custodian would maintain the value of such
segregated account equal to the prescribed amount by adding or removing
additional cash or other assets to account for fluctuations in the value of the
account and the Fund's obligations on the underlying Strategic Transactions.
Assets held in a segregated account would not be sold while the Strategic
Transaction is outstanding, unless they are replaced with similar assets. As a
result, there is a possibility that segregation of a large percentage of the
Fund's assets could impede portfolio management or the Fund's ability to meet
redemption requests or other current obligations.
12
<PAGE>
"When-Issued" and "Delayed Delivery" Securities
The Fund may commit up to 25% of its net assets to purchase securities on a
"when-issued" or "delayed delivery" basis, which means that delivery and payment
for the securities will normally take place 15 to 45 days after the date of the
transaction. The payment obligation and interest rate on the securities are
fixed at the time the Fund enters into the commitment, but interest will not
accrue to the Fund until delivery of and payment for the securities. Although
the Fund will only make commitments to purchase "when-issued" and "delayed
delivery" securities with the intention of actually acquiring the securities,
the Fund may sell the securities before the settlement date if deemed advisable
by the Adviser. Unless the Fund has entered into an offsetting agreement to sell
the securities purchased on a "when-issued" or "forward commitment" basis, cash
or liquid, high-grade debt obligations with a market value equal to the amount
of the Fund's commitment will be segregated with the Fund's custodian bank. If
the market value of these securities declines, additional cash or securities
will be segregated daily so that the aggregate market value of the segregated
securities equals the amount of the Fund's commitment.
Securities purchased on a "when-issued" and "delayed delivery" basis may
have a market value on delivery which is less than the amount paid by the Fund.
Changes in market value may be based upon the public's perception of the
creditworthiness of the issuer or changes in the level of interest rates.
Generally, the value of "when-issued" securities will fluctuate inversely to
changes in interest rates, i.e., they will appreciate in value when interest
rates fall and will decline in value when interest rates rise.
Portfolio Turnover
It is not the policy of the Fund to purchase or sell securities for trading
purposes. However, the Fund places no restrictions on portfolio turnover and it
may sell any portfolio security without regard to the period of time it has been
held, except as may be necessary to maintain its status as a regulated
investment company under the Code. The Fund may therefore generally change its
portfolio investments at any time in accordance with the Adviser's appraisal of
factors affecting any particular issuer or market, or relevant economic
conditions.
INVESTMENT RESTRICTIONS
The Fund has adopted the following fundamental policies in addition to
those described under "Investment Objective and Policies -- Investment
Restrictions" in the Prospectus. The Fund's fundamental policies cannot be
changed unless the change is approved by the lesser of (i) 67% or more of the
voting securities present at a meeting, if the holders of more than 50% of the
outstanding voting securities of the Fund are present or represented by proxy,
or (ii) more than 50% of the outstanding voting securities of the Fund. The Fund
may not:
1. Invest, with respect to at least 50% of its total assets, more than 5% in
the securities of any one issuer (other than the U.S. Government, its
agencies or instrumentalities) or acquire more than 10% of the outstanding
voting securities of any issuer.
13
<PAGE>
2. Issue senior securities, borrow money or securities or pledge or mortgage
its assets, except that the Fund may (a) borrow money from banks as a
temporary measure for extraordinary or emergency purposes (but not for
investment purposes) in an amount up to 15% of the current value of its
total assets, (b) enter into forward roll transactions, and (c) pledge its
assets to an extent not greater than 15% of the current value of its total
assets.
3. Lend portfolio securities, except that the Fund may lend its portfolio
securities with a value up to 20% of its total assets (with a 10% limit
for any borrower) and may enter into repurchase agreements with respect to
25% of the value of its net assets.
4. Invest more than 25% of the current value of its total assets in any
single industry, provided that this restriction shall not apply to debt
securities issued or guaranteed by the United States government or its
agencies or instrumentalities.
5. Underwrite the securities of other issuers, except to the extent that, in
connection with the disposition of portfolio securities, the Fund may be
deemed to be an underwriter under the Securities Act of 1933.
6. Purchase real estate or real estate mortgage loans, although the Fund may
purchase marketable securities of companies which deal in real estate,
real estate mortgage loans or interests therein.
7. Purchase securities on margin (except that the Fund may obtain such
short-term credits as may be necessary for the clearance of purchases and
sales of securities).
8. Purchase or sell commodities or commodity contracts except that the Fund
may purchase and sell financial futures contracts and options on financial
futures contracts and engage in foreign currency exchange transactions.
The following restrictions are not fundamental policies and may be changed
by the Trustees without shareholder approval, in accordance with applicable
laws, regulations or regulatory policy. The Fund may not:
a. Make short sales of securities unless (a) after effect is given to any
such short sale, the total market value of all securities sold short would
not exceed 5% of the value of the Fund's net assets or (b) at all times
during which a short position is open it owns an equal amount of such
securities, or by virtue of ownership of convertible or exchangeable
securities it has the right to obtain through the conversion or exchange
of such other securities an amount equal to the securities sold short.
b. Invest in companies for the purpose of exercising control or management.
c. Purchase the securities of other investment companies, provided that the
Fund may make such a purchase (a) in the open market involving no
commission or profit to a sponsor or dealer (other than the customary
broker's commission), provided that immediately thereafter (i) not more
than 10% of the Fund's total assets would be invested in such securities,
(ii) not more than 5% of the Fund's total assets would be invested in the
securities of any one investment company and (iii) not more than 3% of the
voting stock of any one investment company would be owned by the Fund, or
(b) as part of a merger, consolidation, or acquisition of assets.
14
<PAGE>
15
<PAGE>
d. Purchase or write options, except as described under "Strategic
Transactions."
e. Invest in interests in oil, gas or other exploration or development
programs.
f. Invest more than 5% of the assets of the Fund in the securities of any
issuers which together with their corporate parents have records of less
than three years' continuous operation, including the operation of any
predecessor, other than debt securities issued or guaranteed by U.S. or
foreign national, provincial, state or other governments with taxing
authority or by their agencies or by supranational entities and securities
fully collateralized by such securities.
g. Invest in securities of any company if any officer or director (trustee)
of the Fund or of the Fund's investment adviser owns more than 1/2 of 1%
of the outstanding securities of such company and such officers and
directors (trustees) own in the aggregate more than 5% of the securities
of such company.
h. Invest more than an aggregate of 15% of the net assets
of the Fund in (a) repurchase agreements which are not terminable within
seven days, (b) securities subject to legal or contractual restrictions on
resale or for which there are no readily available market quotations and
(c) in other illiquid securities, including nonnegotiable fixed time
deposits.
Purchases of securities of other investment companies permitted under
restriction (c) above could cause the Fund to pay additional management and
advisory fees and distribution fees.
If any percentage restriction described above is adhered to at the time of
investment, a subsequent increase or decrease in the percentage resulting from a
change in the value of the Fund's assets will not constitute a violation of the
restriction, except with respect to restriction (g) above.
In order to permit the sale of shares of the Fund in certain states, the
Board may, in its sole discretion, adopt restrictions on investment policy more
restrictive than those described above. Should the Board determine that any such
more restrictive policy is no longer in the best interest of the Fund and its
shareholders, the Fund may cease offering shares in the state involved and the
Board may revoke such restrictive policy. Moreover, if the states involved shall
no longer require any such restrictive policy, the Board may, in its sole
discretion, revoke such policy.
CALCULATION OF PERFORMANCE DATA
As indicated in the Prospectus, the Fund may, from time to time, advertise
certain total return information. The average annual total return of the Fund
for a period is computed by subtracting the net asset value per share at the
beginning of the period from the net asset value per share at the end of the
period (after adjusting for the reinvestment of any income dividends and capital
gain distributions), and dividing the result by the net asset value per share at
the beginning of the period. In particular, the average annual total return of
the Fund ("T") is computed by using the redeemable value at the end of a
specified period of time ("ERV") of a hypothetical initial investment of $1,000
("P") over a period of time ("n") according to the formula P(1+T)n=ERV.
16
<PAGE>
The average annual total return quotations for the Fund for the year ended
December 31, 1995 and since inception (January 2, 1991 to December 31, 1995) are
18.13% and 10.55%, respectively. The Fund's average annualized yield for the 30
day period ended December 31, 1995 was 6.80%. These performance quotations
should not be considered as representative of the Fund's performance for any
specified period in the future.
The yield of the Fund is computed by dividing the net investment income per
share earned during the period stated in the advertisement by the maximum
offering price per share on the last day of the period. For the purpose of
determining net investment income, the calculation includes, among expenses of
the Fund, all recurring fees that are charged to all shareholder accounts and
any non-recurring charges for the period stated. In particular, yield is
determined according to the following formula:
Yield = 2[((A - B + 1)/CD)^6 - 1]
Where: A equals dividends and interest earned during the period; B equals
net expenses accrued for the period; C equals average daily number of shares
outstanding during the period that were entitled to receive dividends; D equals
the maximum offering price per share on the last day of the period.
The Fund may also quote non-standardized yield, such as yield-to-maturity
("YTM"). YTM represents the rate of return an investor will receive if a
long-term, interest bearing investment, such as a bond, is held to its maturity
date. YTM does not take into account purchase price, redemption value, time to
maturity, coupon yield, and the time between interest payments.
In addition to average annual return quotations, the Fund may quote
quarterly and annual performance on a net (with management and administration
fees deducted) and gross basis as follows:
17
<PAGE>
Quarter/Year Net Gross
- - --------------------------------------------------------------------------------
1Q91 (2.90)% (2.75)%
2Q91 (1.76) (1.48)
3Q91 9.99 10.18
4Q91 9.69 9.84
1991 15.07 15.95
1Q92 (2.43) 2.26
2Q92 9.45 9.59
3Q92 4.30 4.44
4Q92 (2.97) (2.82)
1992 8.07 8.71
1Q93 6.18 6.31
2Q93 5.41 5.54
3Q93 5.26 5.40
4Q93 5.06 5.18
1993 23.77 24.38
1Q94 (5.78) (5.66)
2Q94 (4.48) (4.35)
3Q94 (0.95) (0.82)
4Q94 1.84 1.97
1994 (9.22) (8.74)
1Q95 2.59 2.72
2Q95 4.71 4.84
3Q95 4.01 4.16
4Q95 5.74 5.88
1995 18.13 18.75
Performance quotations should not be considered as representative of the
Fund's performance for any specified period in the future.
The Fund's performance may be compared in sales literature to the
performance of other mutual funds having similar objectives or to standardized
indices or other measures of investment performance. In particular, the Fund may
compare its performance to the J.P. Morgan Non-U.S. Government Bond Index, which
is generally considered to be representative of unmanaged government bonds in
foreign markets, and the Lehman Brothers Aggregate Index which is composed of
securities from the Lehman Brothers Government/Corporate Bond Index, Mortgage
Backed Securities Index and Yankee BondIndex, and is generally considered to be
representative of all unmanaged, domestic, dollar denominated, fixed rate
investment grade bonds. Comparative performance may also be expressed by
reference to a ranking prepared by a mutual fund monitoring service or by one or
more newspapers, newsletters or financial periodicals. Performance comparisons
may be useful to investors who wish to compare the Fund's past performance to
that of other mutual funds and investment products. Of course, past performance
is not a guarantee of future results.
18
<PAGE>
<TABLE>
<CAPTION>
Name, Address and Date of Birth Position Held Principal Occupation
With Trust During Past 5 Years
- - --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
*D. Barr Clayson, 7/29/35 Vice President and Trustee Vice President and Managing Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.;
One Financial Center Chairman and Director,
Boston, MA 02111 Standish International
Management Company, L.P.
Samuel C. Fleming, 9/30/40 Trustee Chairman of the Board
c/o Decision Resources, Inc. and Chief Executive Officer,
1100 Winter Street Decision Resources, Inc.;
Waltham, MA 02154 through 1989, Senior V.P.
Arthur D. Little
Benjamin M. Friedman, 8/5/44 Trustee William Joseph Maier
c/o Harvard University Professor of Political Economy,
Cambridge, MA 02138 Harvard University
John H. Hewitt, 4/11/35 Trustee Trustee, The Peabody Foundation; Trustee,
P.O. Box 307 Visiting Nurse Alliance of Vermont
So. Woodstock, VT 05071 and New Hampshire
*Edward H. Ladd, 1/3/38 Trustee and Vice President Chairman of the Board
c/o Standish, Ayer & Wood, Inc. and Managing Director,
One Financial Center Standish, Ayer & Wood, Inc. since 1990;
Boston, MA 02111 formerly President of Standish, Ayer & Wood, Inc.
Director of
Standish International Management Company, L.P.
Caleb Loring III, 11/14/43 Trustee Trustee, Essex Street Associates
c/o Essex Street Associates (family investment trust office);
P.0. Box 5600 Director, Holyoke Mutual Insurance Company
Beverly Farms, MA 01915
*Richard S. Wood, 5/21/54 President and Trustee Vice President, Secretary,
c/o Standish, Ayer & Wood, Inc. and Managing Director,
One Financial Center Standish, Ayer & Wood, Inc.;
Boston, MA 02111 Executive Vice President and Director,
Standish International Management Company, L.P.
Richard C. Doll, 7/8/48 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center Vice President and Director,
Boston, MA 02111 Standish International Management Company, L.P.
James E. Hollis III, 11/21/48 Executive Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
David W. Murray, 5/5/40 Treasurer and Secretary Vice President, Treasurer and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center Treasurer,
Boston, MA 02111 Standish International Management Company, L.P.
19
<PAGE>
Name, Address and Date of Birth Position Held Principal Occupation
With Trust During Past 5 Years
- - --------------------------------------------------------------------------------------------------------------------
Caleb F. Aldrich, 9/20/57 Vice President Vice President and Managing Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA O2111
Beverly E. Banfield, 7/6/56 Vice President Vice President and Compliance Officer,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.;
One Financial Center Assistant Vice President and Compliance Officer,
Boston, MA 02111 Freedom Capital Management Corp.
(1989-1992)
Nicholas S. Battelle, 6/24/42 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Walter M. Cabot, 1/16/33 Vice President Senior Advisor and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.;
One Financial Center prior to 1991, President,
Boston, MA 02111 Harvard Management Company
Senior Advisor and Director of
Standish International Management Company, L.P.
David H. Cameron, 11/2/55 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center Director of
Boston, MA 02111 Standish International Management
Company, L.P.
Karen K. Chandor, 2/13/50 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Lavinia B. Chase, 6/4/46 Vice President Vice President,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Susan B. Coan, 5/1/52 Vice President Vice President,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA O2111
W. Charles Cook II, 7/16/63 Vice President Vice President,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center Vice President,
Boston, MA 02111 Standish International Management Company, L.P.
Joseph M. Corrado, 5/13/55 Vice President Vice President and Associate Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
20
<PAGE>
Name, Address and Date of Birth Position Held Principal Occupation
With Trust During Past 5 Years
- - --------------------------------------------------------------------------------------------------------------------
Dolores S. Driscoll, 2/17/48 Vice President Vice President and Managing Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center Director,
Boston, MA 02111 Standish International Management Company, L.P.
Mark A. Flaherty, 4/24/59 Vice President Vice President,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center Vice President
Boston, MA 02111 Standish International Management Company, L.P.
Maria D. Furman, 2/3/54 Vice President Vice President and Managing Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center Vice President and Director,
Boston, MA 02111 Standish International Management Company, L.P.
Anne P. Herrmann, 1/26/56 Vice President Mutual Fund Administrator,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Ann S. Higgins, 4/8/35 Vice President Vice President,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Denise B. Kneeland, 8/19/51 Vice President Senior Operations, Manager,
c/o Standish, Ayer &Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center since December 1995 formerly
Boston, MA 02111 Vice President Scudder, Stevens and Clark
Raymond J. Kubiak, 9/3/57 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Phillip D. Leonardi, 4/24/62 Vice President Vice President, Standish, Ayer & Wood, Inc.
c/o Standish, Ayer & Wood, Inc. since November 1993; formerly, Investment Sales,
One Financial Center Cigna Corporation (1993) and
Boston, MA 02111 Travelers Corporation (1984-1993)
Laurence A. Manchester, 5/24/43 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
George W. Noyes, 11/12/44 Vice President President and Managing Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center Director of
Boston, MA 02111 Standish International Management Company, L.P.
Arthur H. Parker, 8/12/35 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Jennifer A. Pline, 3/8/60 Vice President Vice President,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
21
<PAGE>
Name, Address and Date of Birth Position Held Principal Occupation
With Trust During Past 5 Years
- - --------------------------------------------------------------------------------------------------------------------
Howard B. Rubin, 10/29/59 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center Executive Vice President and Director
Boston, MA 02111 Standish International Management Company, L.P.
Michael C. Schoeck, 10/24/55 Vice President Vice President,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc. since August, 1993;
One Financial Center formerly, Vice President,
Boston, MA 02111 Commerzbank, Frankfurt, Germany
Vice President,
Standish International Management Company, L.P.
Austin C. Smith, 7/25/52 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Stephen A. Smith, 3/13/49 Vice President Vice President, since November 2, 1993;
c/o Standish, Ayer & Wood, Inc. formerly, Standish, Ayer & Wood, Inc. Consultant
One Financial Center Cambridge Associates
Boston, MA 02111
David C. Stuehr, 3/1/58 Vice President Vice President,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
James W. Sweeney, 5/15/59 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center Executive Vice President and Director,
Boston, MA 02111 Standish International Management Company, L.P.
Ralph S. Tate, 4/2/47 Vice President Vice President and Managing Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc. since April, 1990;
One Financial Center formerly Vice President, Aetna Life & Casualty
Boston, MA 02111 President and Director,
Standish International Management Company, L.P.
Michael W. Thompson, 3/31/56 Vice President Vice President and Associate Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Christopher W. Van Alstyne, 3/24/60 Vice President Vice President,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.;
One Financial Center Formerly Regional Marketing Director,
Boston, MA 02111 Gabelli-O'Connor Fixed Income Management
*Indicates that Trustee is an interested person of the Trust for purposes
of the 1940 Act. Compensation of Trustees and Officers
</TABLE>
22
<PAGE>
Compensation of Trustees and Officers
The Fund pays no compensation to the Trust's Trustees or officers. None of
the Trust's Trustees or officers have engaged in any financial transactions
(other than the purchase or redemption of the Fund's shares) with the Trust or
the Adviser.
The following table sets forth all compensation paid to the Trust's
Trustees as of the Fund's fiscal year ended December 31, 1995:
<TABLE>
<CAPTION>
Pension or Retirement Total Compensation
Aggregate Compensation Benefits Accrued as from Fund and
Name of Trustee from the Fund Part of Fund's Expenses Other Funds in Complex*
- - --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
D. Barr Clayson $0 $0 $0
Phyllis L. Cothran** 0 0 0
Richard C. Doll*** 0 0 0
Samuel C. Fleming 10,610 0 46,000
Benjamin M. Friedman 9,590 0 41,750
John H. Hewitt 9,590 0 41,750
Edward H. Ladd 0 0 0
Caleb Loring, III 9,590 0 41,750
Richard S. Wood 0 0 0
* As of the date of this Statement of Additional Information, there were 18 funds in the fund complex.
** Ms. Cothran resigned as a Trustee effective January 31, 1995.
*** Mr. Doll resigned as a Trustee effective December 6, 1995.
</TABLE>
Certain Shareholders
At February 1, 1996, Trustees and officers of the Trust as a group
beneficially owned (i.e., had voting and/or investment power) less than 1% of
the then outstanding shares of the Fund. At that date, each of the following
persons beneficially owned 5% or more of the then outstanding shares of the
Fund:
Percentage of
Name and Addres Outstanding Shares
- - --------------------------------------------------------------------------------
Bell Atlantic Master Trust Pension 8%
Bell Atlantic Tower
1717 Arch Street
Philadelphia, PA 19103
American Telephone & Telegraph Co. 10%
Master Pension Trust
c/o Citibank
111 Wall Street
New York, NY 10005
Maryland State Retirement & Pension System 7%
Room 701
301 West Preston Street
Baltimore, MD
Investment Adviser
Standish International Management Company, L.P. (the "Adviser") serves as
investment adviser to the Fund pursuant to a written investment advisory
agreement with the Trust. The Adviser is a Delaware limited partnership
organized in 1991 and is registered under the 1940 Act. The General Partner of
the Adviser is Standish, Ayer & Wood, Inc. ("Standish"), One Financial Center,
Boston, MA 02111, which holds a 99.98% partnership interest. The Limited
Partners, who each hold a 0.01% interest in the Adviser, are Walter M. Cabot,
Sr., Senior Adviser and a Director to Standish, and D. Barr Clayson, the
Chairman of the Adviser and a Managing Director of Standish. The Adviser
succeeded Standish as the Fund`s investment adviser as of October 1, 1991.
23
<PAGE>
The following, constituting all of the Directors and all of the
shareholders of Standish, are Standish's controlling persons: Caleb F. Aldrich,
Nicholas S. Battelle, Walter M. Cabot, Sr., David H. Cameron, Karen K. Chandor,
D. Barr Clayson, Richard C. Doll, Dolores S. Driscoll, Mark A. Flaherty, Maria
D. Furman, James E. Hollis III, Raymond J. Kubiak, Edward H. Ladd, Laurence A.
Manchester, David W. Murray, George W. Noyes, Arthur H. Parker, Howard B. Rubin,
Austin C. Smith, David C. Stuehr, James J. Sweeney, Ralph S. Tate and Richard S.
Wood.
Certain services provided by the Adviser under the advisory agreement are
described in the Prospectus. In addition to those services, the Adviser provides
the Fund with office space for managing its affairs, with the services of
required executive personnel, and with certain clerical services and facilities.
These services are provided without reimbursement by the Fund for any costs
incurred. Under the investment advisory agreement, the Adviser is paid a fee
based on a percentage of the Fund's average net daily asset value computed as
described in the Prospectus. This fee is paid monthly. The rate at which the fee
is paid is described in the Prospectus.
Pursuant to the investment advisory agreement, the Fund bears expenses of
its operations other than those incurred by the Adviser pursuant to the
investment advisory agreement. Among other expenses, the Fund will pay share
pricing and shareholder servicing fees and expenses; custodian fees and
expenses; legal and auditing fees and expenses; expenses of prospectuses,
statements of additional information and shareholder reports provided to
existing shareholders; registration and reporting fees and expenses; and
Trustees' fees and expenses. The investment advisory agreement provides that if
the total annual operating expenses of the Fund (excluding brokerage
commissions, taxes and extraordinary expenses) in any fiscal year exceed the
permissible expense limitation applicable to the Fund in any state in which
shares of the Fund are then qualified for sale, the compensation due the Adviser
shall be reduced by the amount of the excess, by a reduction or refund thereof
at the time such compensation is payable after the end of each calendar month
during the fiscal year, subject to readjustment during the year. The Adviser has
voluntarily agreed to limit the Fund's total operating expenses (excluding
brokerage commissions, taxes and extraordinary expenses) to 0.80% of the Fund's
average daily net assets. The Adviser may discontinue or modify such limitation
in the future at its discretion, although it has no current intention to do so.
For the years ended December 31, 1993, 1994 and 1995 advisory fees payable to
the Adviser totalled $2,820,789, $4,420,708, $3,916,500 respectively.
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Unless terminated as provided below, the investment advisory agreement
continues in full force and effect for successive periods of one year, but only
so long as each such continuance is approved annually (i) by either the Trustees
of the Trust or by vote of a majority of the outstanding voting securities (as
defined in the 1940 Act) of the Fund, and, in either event (ii) by vote of a
majority of the Trustees of the Trust who are not parties to the investment
advisory agreement or "interested persons" (as defined in the 1940 Act) of any
such party, cast in person at a meeting called for the purpose of voting on such
approval. The investment advisory agreement may be terminated at any time
without the payment of any penalty by vote of the Trustees of the Trust or by
vote of a majority of the outstanding voting securities (as defined in the 1940
Act) of the Fund or by the Adviser, on sixty days' written notice to the other
parties. The investment advisory agreement terminates in the event of its
assignment as defined in the 1940 Act.
In an attempt to avoid any potential conflict with portfolio transactions
for the Fund, the Adviser and the Trust have adopted extensive restrictions on
personal securities trading by personnel of the Adviser and its affiliates.
These restrictions include: pre-clearance of all personal securities
transactions and a prohibition of purchasing initial public offerings of
securities. These restrictions are a continuation of the basic principle that
the interests of the Fund and its shareholders come before those of the Adviser,
its affiliates and their employees.
Distributor of the Trust
Standish Fund Distributors, L.P. (the "Principal Underwriter"), an
affiliate of the Adviser, serves as the Trust's exclusive principal underwriter
and holds itself available to receive purchase orders for the Fund's shares. In
that capacity, the Principal Underwriter has been granted the right, as agent of
the Trust, to solicit and accept orders for the purchase of the Fund's shares in
accordance with the terms of the Underwriting Agreement between the Trust and
the Principal Underwriter. Pursuant to the Underwriting Agreement, the Principal
Underwriter has agreed to use its best efforts to obtain orders for the
continuous offering of the Fund's shares. The Principal Underwriter receives no
commissions or other compensation for its services, and has not received any
such amounts in any prior year. The Underwriting Agreement shall continue in
effect with respect to the Fund until two years after its execution and for
successive periods of one year thereafter only if it is approved at least
annually thereafter (i) by a vote of the holders of a majority of the Fund's
outstanding shares or by the Trustees of the Trust or (ii) by a vote of a
majority of the Trustees of the Trust who are not "interested persons" (as
defined by the 1940 Act) of the parties to the Underwriting Agreement, cast in
person at a meeting called for the purpose of voting on such approval. The
Underwriting Agreement will terminate automatically if assigned by either party
thereto and is terminable at any time without penalty by a vote of a majority of
the Trustees of the Trust, a vote of a majority of the Trustees who are not
"interested persons" of the Trust, or by a vote of the holders of a majority of
the Fund's outstanding shares, in any case without payment of any penalty on not
more than 60 days' written notice to the other party. The offices of the
Principal Underwriter are located at One Financial Center, 26th Floor, Boston,
Massachusetts 02111.
25
<PAGE>
REDEMPTION OF SHARES
Detailed information on redemption of shares is included in the Prospectus.
The Fund may suspend the right to redeem shares or postpone the date of
payment upon redemption for more than seven days (i) for any period during which
the New York Stock Exchange is closed (other than customary weekend or holiday
closings) or trading on the exchange is restricted; (ii) for any period during
which an emergency exists as a result of which disposal by the Fund of
securities owned by it or determination by the Fund of the value of its net
assets is not reasonably practicable; or (iii) for such other periods as the SEC
may permit for the protection of shareholders of the Fund.
The Fund intends to pay in cash for all shares redeemed but, under certain
conditions, the Fund may make payment wholly or partly in portfolio securities.
Portfolio securities paid upon redemption of Fund shares will be valued at their
then current market value. The Fund has elected to be governed by the provisions
of Rule 18f-1 under the 1940 Act which limits the Fund's obligation to make cash
redemption payments to each shareholder during any 90-day period to the lesser
of $250,000 or 1% of the Fund's net asset value at the beginning of such period.
An investor may incur brokerage costs in converting portfolio securities
received upon redemption to cash.
PORTFOLIO TRANSACTIONS
The Adviser is responsible for placing the Fund's portfolio transactions
and will do so in a manner deemed fair and reasonable to the Fund and not
according to any formula. The primary consideration in all portfolio
transactions will be prompt execution of orders in an efficient manner at the
most favorable price. Many transactions in foreign equity securities are
executed by broker-dealers in foreign countries in which commission rates are
fixed and, therefore, are not negotiable (as such rates are in the United
States) and are generally higher than in the United States. In selecting brokers
and in negotiating commissions, the Adviser will consider the firm's
reliability, the quality of its execution services on a continuing basis and its
financial condition. When more than one firm is believed to meet these criteria,
preference may be given to firms which also sell shares of the Fund. In
addition, if the Adviser determines in good faith that the amount of commissions
charged by a broker is reasonable in relation to the value of the brokerage and
research services provided by such broker, the Fund may pay commissions to such
broker in an amount greater than the amount another firm may charge. Research
services may include (i) furnishing advice as to the value of securities, the
26
<PAGE>
advisability of investing in, purchasing or selling securities, and the
availability of securities or purchasers or sellers of securities, (ii)
furnishing analyses and reports concerning issuers, industries, securities,
economic factors and trends, portfolio strategy, and the performance of
accounts, and (iii) effecting securities transactions and performing functions
incidental thereto (such as clearance, settlement and custody). Research
services furnished by firms through which the Fund effects its securities
transactions may be used by the Adviser in servicing other accounts; not all of
these services may be used by the Adviser in connection with the Fund. The
investment advisory fee paid by the Fund under the investment advisory agreement
will not be reduced as a result of the Adviser's receipt of research services.
The Adviser also places portfolio transactions for other advisory accounts.
The Adviser will seek to allocate portfolio transactions equitably whenever
concurrent decisions are made to purchase or sell securities by the Fund and
another advisory account. In some cases, this procedure could have an adverse
effect on the price or the amount of securities available to the Fund. In making
such allocations, the main factors considered by the Adviser will be the
respective investment objectives, the relative size of portfolio holdings of the
same or comparable securities, the availability of cash for investment, the size
of investment commitments generally held, and opinions of the persons
responsible for recommending the investment.
DETERMINATION OF NET ASSET VALUE
The Fund's net asset value is calculated each day on which the New York
Stock Exchange is open as of the close of regular trading (currently 4:00 p.m.
New York time). Currently, the New York Stock Exchange is not open weekends, New
Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving Day and Christmas. The net asset value of the Fund's shares is
determined as of the close of regular trading on the New York Stock Exchange
(currently 4:00 p.m., New York City time) and is computed by dividing the value
of all securities and other assets of the Fund less all liabilities by the
number of shares outstanding, and rounding to the nearest cent per share.
Expenses and fees, including the investment advisory fee, are accrued daily and
taken into account for the purpose of determining net asset value.
Portfolio securities are valued at the last sale prices on the exchange or
national securities market on which they are primarily traded. Securities not
listed on an exchange or national securities market, or securities for which
there were no reported transactions, are valued at the last quoted bid price.
Securities for which quotations are not readily available and all other assets
are valued at fair value as determined in good faith by the Adviser in
accordance with procedures approved by the Trustees.
Money market instruments with less than 60 days remaining to maturity when
acquired by the Fund are valued on an amortized cost basis. This is accomplished
by valuing the instrument at cost and then assuming a constant amortization to
maturity of any premium or discount. If the Fund acquires a money market
instrument with more than 60 days remaining to its maturity, it is valued at
current market value until the 60th day prior to maturity, and will then be
valued at amortized cost based upon the value on such date unless the Trustees
determine during such 60-day period that amortized cost does not represent fair
value.
27
<PAGE>
Generally, trading in foreign securities is substantially completed each
day at various times prior to the close of regular trading on the New York Stock
Exchange. The values of such securities used in computing the net asset value of
the Fund's shares are determined as of such times. Foreign currency exchange
rates are also generally determined prior to the close of regular trading on the
New York Stock Exchange. Occasionally, events which affect the values of such
securities and such exchange rates may occur between the times at which they are
determined and the close of regular trading on the New York Stock Exchange and
will therefore not be reflected in the computation of the Fund's net asset
value. If events materially affecting the value of such securities occur during
such period, then these securities are valued at their fair value as determined
in good faith by the Trustees.
THE FUND AND ITS SHARES
The Fund is an investment series of Standish, Ayer & Wood Investment Trust,
an unincorporated business trust organized under the laws of The Commonwealth of
Massachusetts pursuant to an Agreement and Declaration of Trust dated August 13,
1986 as amended from time to time (the "Declaration"). Under the Declaration,
the Trustees have authority to issue an unlimited number of shares of beneficial
interest, par value $.01 per share, of the Fund. Each share represents an equal
proportionate interest in the Fund with each other share and is entitled to such
dividends and distributions as are declared by the Trustees. Shareholders are
not entitled to any preemptive, conversion or subscription rights. All shares,
when issued, will be fully paid and non-assessable by the Trust. Upon any
liquidation of the Fund, shareholders are entitled to share pro rata in the net
assets available for distribution.
Pursuant to the Declaration, the Trustees may create additional funds by
establishing additional series of shares in the Trust. The establishment of
additional series would not affect the interests of current shareholders in the
Fund. As of the date of this Statement of Additional Information, the Trustees
have established fourteen other series of the Trust that publicly offer their
shares. Pursuant to the Declaration, the Board may establish and issue multiple
classes of shares for each series of the Trust. As of the date of this Statement
of Additional Information, the Trustees do not have any plan to establish
multiple classes of shares for the Fund. Pursuant to the Declaration of Trust
and subject to shareholder approval (if then required), the Trustees may
authorize the Fund to invest all of its investable assets in a single open-end
investment company that has substantially the same investment objectives,
policies and restrictions as the Fund. As of the date of this Statement of
Additional Information, the Board does not have any plan to authorize the Fund
to so invest its assets.
All Fund shares have equal rights with regard to voting, and shareholders
of the Fund have the right to vote as a separate class with respect to matters
as to which their interests are not identical to those of shareholders of other
investment series of the Trust, including the approval of an investment advisory
contract and any change of investment policy requiring the approval of
shareholders.
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Under Massachusetts law, shareholders of the Trust could, under certain
circumstances, be held liable for the obligations of the Trust. However, the
Declaration disclaims shareholder liability for acts or obligations of the Trust
and requires that notice of this disclaimer be given in each agreement,
obligation or instrument entered into or executed by the Trust or a Trustee. The
Declaration also provides for indemnification from the assets of the Trust for
all losses and expenses of any Trust shareholder held liable for the obligations
of the Trust. Thus, the risk of a shareholder incurring a financial loss on
account of his or its liability as a shareholder of the Trust is limited to
circumstances in which both inadequate insurance existed and the Trust would be
unable to meet its obligations. The possibility that these circumstances would
occur is remote. Upon payment of any liability incurred by the Trust, the
shareholder paying the liability will be entitled to reimbursement from the
general assets of the Trust. The Declaration also provides that no series of the
Trust is liable for the obligations of any other series. The Trustees intend to
conduct the operations of the Trust to avoid, to the extent possible, ultimate
liability of shareholders for liabilities of the Trust.
TAXATION
Each series of the Trust, including the Fund, is treated as a separate
entity for accounting and tax purposes. The Fund has qualified and elected to be
treated as a "regulated investment company" under Subchapter M of the Internal
Revenue Code of 1986, as amended (the "Code"), and intends to continue to so
qualify in the future. As such and by complying with the applicable provisions
of the Code regarding the sources of its income, the timing of its
distributions, and the diversification of its assets, the Fund will not be
subject to Federal income tax on its investment company taxable income (i.e.,
all income, after reduction by deductible expenses, other than its "net capital
gain," which is the excess, if any, of its net long-term capital gain over its
net short-term capital loss) and net capital gain which are distributed to
shareholders at least annually in accordance with the timing requirements of the
Code.
The Fund will be subject to a 4% non-deductible federal excise tax on
certain amounts not distributed (and not treated as having been distributed) on
a timely basis in accordance with annual minimum distribution requirements. The
Fund intends under normal circumstances to avoid liability for such tax by
satisfying such distribution requirements.
The Fund is not subject to Massachusetts corporate excise or franchise
taxes. Provided that the Fund qualifies as a regulated investment company under
the Internal Revenue Code, it will also not be required to pay any Massachusetts
income tax.
The Fund will not distribute net capital gains realized in any year to the
extent that a capital loss is carried forward from prior years against such
gain. For federal income tax purposes, the Fund is permitted to carry forward a
net capital loss in any year to offset its own net capital gains, if any, during
the eight years following the year of the loss. To the extent subsequent net
capital gains are offset by such losses, they would not result in federal income
tax liability to the Fund and, as noted above, would not be distributed as such
to shareholders. The Fund has $5,704,684 of capital loss carryforwards, which
expire on December 31, 2002, available to offset future net capital gains.
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If the Fund invests in certain zero coupon securities, increasing rate
securities or, in general, other securities with original issue discount (or
with market discount if the Fund elects to include market discount in income
currently), the Fund must accrue income on such investments prior to the receipt
of the corresponding cash payments. However, the Fund must distribute, at least
annually, all or substantially all of its net income, including such accrued
income, to shareholders to qualify as a regulated investment company under the
Internal Revenue Code and avoid federal income and excise taxes. Therefore, the
Fund may have to dispose of its portfolio securities under disadvantageous
circumstances to generate cash, or may have to leverage itself by borrowing the
cash, to satisfy distribution requirements.
Limitations imposed by the Internal Revenue Code on regulated investment
companies like the Fund may restrict the Fund's ability to enter into futures,
options and currency forward transactions.
Certain options, futures and forward foreign currency transactions
undertaken by the Fund may cause the Fund to recognize gains or losses from
marking to market even though its positions have not been sold or terminated and
affect the character as long-term or short-term (or, in the case of certain
currency forwards, options and futures, as ordinary income or loss) and timing
of some capital gains and losses realized by the Fund. Also, certain of the
Fund's losses on its transactions involving options, futures or forward
contracts and/or offsetting portfolio positions may be deferred rather than
being taken into account currently in calculating the Fund's taxable income or
gain. Certain of the applicable tax rules may be modified if the Fund is
eligible and chooses to make one or more of certain tax elections that may be
available. These transactions may therefore affect the amount, timing and
character of the Fund's distributions to shareholders. The Fund will take into
account the special tax rules (including consideration of available elections)
applicable to options, futures or forward contracts in order to minimize any
potential adverse tax consequences.
The federal income tax rules applicable to forward roll transactions,
interest rate or currency swaps, caps, floors and collars are unclear in certain
respects, and the Fund may be required to account for these instruments under
tax rules in a manner that, under certain circumstances, may limit its
transactions in these instruments.
If the Fund acquires stock in certain non-U.S. corporations that receive at
least 75% of their annual gross income from passive sources (such as interest,
dividends, rents, royalties or capital gain) or hold at least 50% of their
assets in investments producing such passive income ("passive foreign investment
companies"), the Fund could be subject to Federal income tax and additional
interest charges on "excess distributions" received from such companies or gain
from the sale of stock in such companies, even if all income or gain actually
received by the Fund is timely distributed to its shareholders. The Fund would
not be able to pass through to its shareholders any credit or deduction for such
a tax. Certain elections may, if available, ameliorate these adverse tax
consequences, but any such election would require the Fund to recognize taxable
income or gain without the concurrent receipt of cash. The Fund may limit and/or
manage its stock holdings in passive foreign investment companies to minimize
its tax liability or maximize its return from these investments.
30
<PAGE>
Foreign exchange gains and losses realized by the Fund in connection with
certain transactions involving foreign currency-denominated debt securities,
certain foreign currency futures and options, foreign currency forward
contracts, foreign currencies, or payables or receivables denominated in a
foreign currency are subject to Section 988 of the Code, which generally causes
such gains and losses to be treated as ordinary income and losses and may affect
the amount, timing and character of distributions to shareholders. Any such
transactions that are not directly related to the Fund's investment in stock or
securities, possibly including speculative currency positions or currency
derivatives not used for hedging purposes, may increase the amount of gain it is
deemed to recognize from the sale of certain investments held for less than
three months, which gain is limited under the Code to less than 30% of its
annual gross income, and could under future Treasury regulations produce income
not among the types of "qualifying income" from which the Fund must derive at
least 90% of its annual gross income.
The Fund may be subject to withholding and other taxes imposed by foreign
countries with respect to its investments in foreign securities. Tax conventions
between certain countries and the U.S. may reduce or eliminate such taxes.
Investors may be entitled to claim U.S. foreign tax credits with respect to such
taxes, subject to certain provisions and limitations contained in the Code.
Specifically, if more than 50% of the value of the Fund's total assets at the
close of any taxable year consists of stock or securities of foreign
corporations, the Fund may file an election with the Internal Revenue Service
pursuant to which shareholders of the Fund will be required to (i) include in
ordinary gross income (in addition to taxable dividends actually received) their
pro rata shares of foreign income taxes paid by the Fund even though not
actually received by them, and (ii) treat such respective pro rata portions as
foreign income taxes paid by them.
If the Fund makes this election, shareholders may then deduct such pro rata
portions of foreign income taxes in computing their taxable incomes, or,
alternatively, use them as foreign tax credits, subject to applicable
limitations, against their U.S. Federal income taxes. Shareholders who do not
itemize deductions for Federal income tax purposes will not, however, be able to
deduct their pro rata portion of foreign income taxes paid by the Fund, although
such shareholders will be required to include their share of such taxes in gross
income. Shareholders who claim a foreign tax credit for such foreign taxes may
be required to treat a portion of dividends received from the Fund as a separate
category of income for purposes of computing the limitations on the foreign tax
credit. Tax-exempt shareholders will ordinarily not benefit from this election.
Each year that the Fund files the election described above, it shareholders will
be notified of the amount of (i) each shareholder's pro rata share of foreign
income taxes paid by the Fund and (ii) the portion of Fund dividends which
represents income from each foreign country.
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<PAGE>
Due to possible unfavorable consequences under present tax law, the Fund
does not currently intend to acquire "residual" interests in real estate
mortgage investment conduits ("REMICs"), although the Fund may acquire "regular"
interests in REMICs.
Distributions from the Fund's current or accumulated earnings and profits
("E&P"), as computed for Federal income tax purposes, will be taxable as
described in the Fund's Prospectus whether taken in shares or in cash.
Distributions, if any, in excess of E&P will constitute a return of capital,
which will first reduce an investor's tax basis in Fund shares and thereafter
(after such basis is reduced to zero) will generally give rise to capital gains.
Shareholders electing to receive distributions in the form of additional shares
will have a cost basis for federal income tax purposes in each share so received
equal to the amount of cash they would have received had they elected to receive
the distributions in cash, divided by the number of shares received.
At the time of an investor's purchase of Fund shares, a portion of the
purchase price is often attributable to undistributed net investment income
and/or realized or unrealized appreciation in the Fund's portfolio.
Consequently, subsequent distributions from such income and/or appreciation may
be taxable to such investor even if the net asset value of the investor's shares
is, as a result of the distributions, reduced below the investor's cost for such
shares, and the distributions in reality represent a return of a portion of the
purchase price.
Upon a redemption (including a repurchase) of shares of the Fund, a
shareholder may realize a taxable gain or loss, depending upon the difference
between the redemption proceeds and the shareholder's tax basis in his shares.
Such gain or loss will be treated as capital gain or loss if the shares are
capital assets in the shareholder's hands and will be long-term or short-term,
depending upon the shareholder's tax holding period for the shares. Any loss
realized on a redemption may be disallowed to the extent the shares disposed of
are replaced within a period of 61 days beginning 30 days before and ending 30
days after the shares are disposed of, such as pursuant to automatic dividend
reinvestments. In such a case, the basis of the shares acquired will be adjusted
to reflect the disallowed loss. Any loss realized upon the redemption of shares
with a tax holding period of six months or less will be treated as a long-term
capital loss to the extent of any amounts treated as distributions of long-term
capital gain with respect to such shares.
Different tax treatment, including penalties on certain excess
contributions and deferrals, certain pre-retirement and post-retirement
distributions and certain prohibited transactions, is accorded to accounts
maintained as qualified retirement plans. Shareholders should consult their tax
advisers for more information.
The foregoing discussion relates solely to U.S. Federal income tax law as
applicable to U.S. persons (i.e., U.S. citizens or residents and U.S. domestic
corporations, partnerships, trusts or estates) subject to tax under such law.
The discussion does not address special tax rules applicable to certain classes
of investors, such as tax-exempt entities, insurance companies, and financial
institutions. Dividends, capital gain distributions, and ownership of or gains
realized on the redemption (including an exchange) of Fund shares may also be
subject to state and local taxes. Shareholders should consult their own tax
advisers as to the Federal, state or local tax consequences of ownership of
shares of, and receipt of distributions from, the Fund in their particular
circumstances.
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Non-U.S. investors not engaged in a U.S. trade or business with which their
investment in the Fund is effectively connected will be subject to U.S. Federal
income tax treatment that is different from that described above. These
investors may be subject to nonresident alien withholding tax at the rate of 30%
(or a lower rate under an applicable tax treaty) on amounts treated as ordinary
dividends from the Fund and, unless an effective IRS Form W-8 or authorized
substitute is on file, to 31% backup withholding on certain other payments from
the Fund. Non-U.S. investors should consult their tax advisers regarding such
treatment and the application of foreign taxes to an investment in the Fund.
ADDITIONAL INFORMATION
The Fund's Prospectus and this Statement of Additional Information omit
certain information contained in the registration statement filed with the
Securities and Exchange Commission, which may be obtained from the Commission's
principal office at 450 Fifth Street, N.W., Washington, D.C. 20549, upon payment
of the fee prescribed by the rules and regulations promulgated by the
Commission.
EXPERTS AND FINANCIAL STATEMENTS
The financial statements for the fiscal years ended December 31, 1994 and
1995 included in this Statement of Additional Information have been audited by
Coopers & Lybrand L.L.P., independent accountants, as set forth in their report
appearing elsewhere herein, and have been so included in reliance upon the
authority of the report of Coopers & Lybrand L.L.P. as experts in accounting and
auditing. The Fund's financial highlights for the fiscal year ended December 31,
1992 and for the period from January 2, 1991 (commencement of operations)
through December 31, 1991 were audited by Deloitte & Touche LLP, independent
auditors, and have been similarly included in reliance upon the expertise of
that firm. Coopers & Lybrand L.L.P., independent accountants, will audit the
Fund's financial statements for the fiscal year ending December 31, 1996.
33
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Standish, Ayer & Wood Investment Trust
Standish International Fixed Income Fund Series
Financial Statements for the Year Ended
December 31, 1995
1
<PAGE>
Standish, Ayer & Wood Investment Trust
Chairman's Message
January 29, 1996
Dear Standish, Ayer & Wood Investment Trust Shareholder:
I am pleased to have an opportunity to review the major developments at
Standish, Ayer & Wood during this past year as they relate to the activities of
the Investment Trust. The major news for our clients in 1995 was the spectacular
performance of the U.S. investment markets. While we would, of course, like to
claim credit for producing the full extent of these splendid returns, the
reality is obvious: The markets themselves are beyond our control. For the year
as a whole, U.S. stocks, as represented by the Standard and Poor's 500 Index,
produced a total return of 37.6%, and higher grade intermediate-term bonds, as
represented by the Lehman Brothers Aggregate Index, provided a total return of
18.5%. Nearly as surprising, stock and bond prices marched steadily upward
throughout the year, a persistent and almost uninterrupted advance.
Even after the subdued markets of 1994, neither we nor most other investment
managers expected 1995 to be anywhere near as good as it turned out to be. In
this context, we are generally pleased by our investment performance. In most
asset classes, we kept pace with or modestly exceeded market returns. We adhered
to our established investment philosophies, which are designed to add reasonably
consistent increments of value. Our clients seem to be pleased by our efforts as
we continue to have very little client turnover.
As a firm, we have registered moderate growth during the year. Reflecting some
flow of new clients as well as market appreciation, our clients' assets under
management at the end of 1995 totalled $29.4 billion, an increase from $24.4
billion at the end of 1994. We are particularly pleased by the growth in new
assets managed for insurance companies and by the increases in assets of both
large capitalization and small capitalization U.S. common stocks.
The asset class of greatest disappointment in 1995 was international equities.
Not only did the asset class continue to provide subpar returns, but our
portfolios underperformed the international equity markets. These results
reflect judgments early in 1995 to hedge a portion of the currency exposure back
to dollars and to have a moderate stake in emerging markets. While we believe we
have rectified those problems, we are not satisfied with the results and are
working vigorously to improve future performance. We are also counseling our
clients not to lose faith in the international equity asset class despite its
recent disappointing returns.
The figure for total Standish assets under management includes about $1.6
billion managed in conjunction with Standish International Management Company,
L.P. (SIMCO), our affiliate that manages overseas assets for domestic clients
and U.S. assets for overseas clients. It also includes $3.9 billion in the
Standish Investment Trust, our mutual fund organization. In addition, the asset
total reflects an increase over the last few years in the assets we manage in
private, non-mutual fund vehicles.
We introduced two new mutual funds at mid-year 1995, namely the Standish Fixed
Income Fund II (which is designed to parallel the Standish Fixed Income Fund but
exclude the purchase of both nondollar bonds and below-investment-grade
securities), and the Standish Controlled Maturity Fund (which is designed for
investors who wish less volatility and interest rate risk than traditional
intermediate-maturity bonds).
At the beginning of 1996, we introduced two additional mutual funds, the
Standish Tax-Sensitive Equity Fund and the Standish Small Cap Tax-Sensitive
Equity Fund. At Standish we have noted for some time the adverse impact for
taxable investors of high portfolio turnover, which triggers capital gains,
possibly including short-term gains that may result in an even greater tax
liability for investors. We believe there is a major opportunity through both
separate account management and these funds to improve aftertax returns by
limiting the portfolio turnover and managing capital gains.
During 1995, Standish acquired all remaining interests in the business of the
joint venture between Consolidated Investment Corp. (CIC) and Standish, entered
into over seven years ago. Consolidated had been formed by Trigon (previously
Blue Cross/Blue Shield of Virginia) to manage shorter-term taxable and tax
exempt fixed income portfolios. We and Trigon agreed that it was best to have
this unit operating under one owner.
Standish continues to be proud of its structure as an independent management
firm with ownership in the hands of investment professionals active in the
business. There were no changes during 1995 either in corporate structure or in
the people who own the enterprise.
We appreciate the opportunity to serve you, and we remain confident that we have
the resources and the organization to do a superior job. We will be working hard
to fulfill your expectations in 1996.
Sincerely yours,
Edward H. Ladd
Chairman
2
<PAGE>
Standish, Ayer & Wood Investment Trust
Standish International Fixed Income Fund Series
Management Discussion
International bond markets recovered strongly in 1995 from historically weak
returns the previous year. Slower economic growth and subdued inflation
throughout the developed world provided the impetus for one of the most
impressive rallies fixed income securities have seen in recent years. The
Standish International Fixed Income Fund participated fully in the rally,
returning 18.3% for 1995.
Over the year as a whole, the major bond markets turned in remarkably similar
performance, but the pattern of returns varied significantly. As 1995 opened,
the U.S. and the leading European economies were still enjoying fairly robust
growth, and the risk of higher inflation was a widespread concern. In this
period of relatively tight money, most countries with large budget deficits or
capital shortages, such as Italy and Australia, struggled, while Japan, the
leading exporter of capital, rallied sharply, pushing already extremely low
yields more than 1% lower. The Yen appreciated dramatically as well, putting
intense pressure on export industries and the entire Japanese economy, which is
still struggling from a protracted recession.
By mid-year, the pattern of market behavior had reversed, with European markets
now reacting to a marked slowdown in economic activity and surprisingly subdued
inflation. Central banks around the world, led by the German Bundesbank and the
Bank of Japan, eased short-term interest rates aggressively. As liquidity
conditions improved, higher yielding countries began to outperform, with
Scandinavian and Southern European markets leading the way. Meanwhile, the surge
in Japanese bonds could not be sustained despite aggressive buying of securities
by the Japanese central bank. The dollar also recovered fully from a 20% plunge
against the Yen, finally ending slightly stronger on the year. In 1995, the
dollar did fall about 8% against the Deutschemark and other European currencies
closely linked to the German currency.
Underweighted positions in Japan and an overweighting in Europe caused the
Standish International Fixed Income Fund to underperform the J.P. Morgan Non
U.S. Hedged Index early in the year, but these same positions contributed to our
substantial outperformance versus the index from mid-year. Meanwhile, our
holding in corporate and mortgage securities in many of the world's markets
increased yield throughout the year and further enhanced performance, as the
yield differentials on many of our non-sovereign holdings tightened to their
comparable government alternatives. For the year as a whole, the Fund modestly
underperformed its benchmark.
With global interest rates having fallen so far in recent months, the outlook
for 1996 is mixed. Continued economic weakness and subdued inflation in the
major world economies provide a positive fundamental backdrop for fixed income
securities, but a great deal of the supportive news for bonds is already
discounted. Short of the onset of an unexpected deep global recession, which
would add to a decline in inflation, it will be virtually impossible for the
markets to match their 1995 performance. However, inflation-adjusted yields
remain reasonably attractive, and there is good opportunity to enhance return by
hedging lower yielding currencies, such as the Deutschemark and the Yen back
into dollars. We intend to emphasize currency hedging as a way to seek increased
returns, reduced volatility and protection against the risk of capital loss
should the still-undervalued U.S.
dollar continue its recent recovery.
We have successfully used various derivatives throughout the year to hedge
existing portfolio positions or create unlevered cash substitutes. We continue
to believe that, when used in a conservative manner and monitored closely,
derivatives are an efficient tool allowing us rebalance global portfolio
positions.
Richard S. Wood
3
<PAGE>
Standish, Ayer & Wood Investment Trust
Standish International Fixed Income Fund Series
Comparison of Change in Value of $100,000 Investment in
Standish International Fixed Income Fund, the J.P. Morgan Hedged Non-U.S.
Government Bond Index and the Lehman Aggregate Index
The following is a description of the graphical chart omitted from electronic
format:
This line chart shows the cumulative performance of the Standish International
Fixed Income Fund compared with the J.P. Morgan Hedged Non-U.S. Government Bond
Index and the Lehman Aggregate Index for the period January 2, 1991 to December
31, 1995, based upon a $100,000 investment. Also included are the average annual
total returns for one year, five year, and since inception.
4
<PAGE>
<TABLE>
<CAPTION>
Standish, Ayer & Wood Investment Trust
Standish International Fixed Income Fund Series
Portfolio of Investments
December 31, 1995
Par Value
Security Rate Maturity Value + (Note 1A)
- - ---------------------------------------------------------- -------------- ---------------- ------------------ -----------------
Foreign Denominated Bonds - 97.0%
- - ---------------------------------------------------------------
Australia - 6.3%
- - ---------------------------------------------------------------
<S> <C> <C> <C> <C>
Govt. of Australia Notes 6.75 11/15/06 3,000,000 $ 1,991,831
Govt. of Australia Notes 7.50 07/15/05 12,700,000 9,004,468
Govt. of South Australia Finance Notes 0.00 12/21/15 13,200,000 1,754,379
News America Holdings Corp. Notes 8.63 02/07/14 19,000,000 12,414,600
New South Wales Treasury Notes 0.00 09/05/05 2,300,000 747,141
New South Wales Treasury Notes 0.00 09/03/10 6,450,000 1,399,861
New South Wales Treasury Notes 0.00 11/23/20 12,750,000 1,188,093
State Electric Commission of Victoria Notes 0.00 01/11/06 20,150,000 6,246,374
State Electric Commission of Victoria Notes 0.00 01/11/11 46,000,000 9,344,808
Union Bank Of Norway 0.00 05/22/96 7,268,000 5,199,950
Victoria Public Authority Notes 0.00 08/31/11 5,500,000 1,057,691
-------------------
$ 50,349,196
-------------------
Belgium - 1.1%
- - ---------------------------------------------------------------
Govt. of Belgium Notes 6.50 03/31/05 251,100,000 $ 8,392,675
-------------------
Canada - 3.5%
- - ---------------------------------------------------------------
Govt. of Canada General Residual Strips 0.00 12/01/98 18,400,000 $ 11,281,289
Govt. of Canada Notes 7.75 09/01/99 5,400,000 4,134,857
Govt. of Canada Notes 8.50 03/01/00 7,700,000 6,055,641
Govt. of Canada Notes 8.50 04/01/02 5,300,000 4,227,187
Inco LTD Notes 15.75 07/15/06 996,000 2,310,539
-------------------
$ 28,009,513
-------------------
Denmark - 15.4%
- - ---------------------------------------------------------------
BRF Byggeriets Real Kredit 8.00 10/01/24 2,802,000 $ 491,671
BRF Byggeriets Real Kredit 11.00 10/01/17 234,000 45,216
BRF Byggeriets Real Kredit 11.00 10/01/20 127,000 24,540
General Electric Notes 6.75 04/25/00 4,300,000 3,195,795
KFW International Notes 6.75 06/20/05 5,100,000 3,660,820
Kreditforeningen Denmark 8.00 10/01/24 761,000 133,534
Kreditforeningen Denmark 10.00 10/01/07 25,780,000 4,923,562
Kreditforeningen Denmark 11.00 10/01/17 519,000 100,287
Nykredit 7.00 10/01/26 311,586,000 50,361,859
Nykredit 8.00 10/01/26 169,350,000 29,487,776
Nykredit 9.00 10/01/26 1,164,000 212,618
Nykredit 10.00 10/01/07 2,430,000 464,091
Nykredit 10.00 10/01/10 16,525,000 3,156,007
Nykredit 11.00 10/01/17 172,000 33,236
Realkredit 8.00 10/01/26 19,808,000 3,449,034
Realkredit 9.00 10/01/26 21,414,000 3,911,511
Realkredit 10.00 10/01/26 107,745,000 19,816,418
-------------------
$ 123,467,975
-------------------
5
<PAGE>
Portfolio of Investments
(continued)
Par Value
Security Rate Maturity Value + (Note 1A)
- - ---------------------------------------------------------- -------------- ---------------- ------------------ -----------------
Finland - 1.7%
- - ---------------------------------------------------------------
Republic of Finland 9.50 03/15/04 53,000,000 $ 13,859,929
-------------------
France - 7.1%
- - ---------------------------------------------------------------
Credit Foncier Notes 7.75 08/13/98 3,000,000 $ 4,717,243
Mexican Par Bonds 6.63 12/31/19 153,600,000 17,253,591
Republic of France Oat Strips 0.00 10/25/98 51,000,000 8,949,708
Republic of France Oat Strips 0.00 04/25/99 106,500,000 18,101,419
Republic of France Oat 7.75 10/25/05 36,150,000 7,930,533
-------------------
$ 56,952,494
-------------------
Germany - 10.2%
- - ---------------------------------------------------------------
Baden Wurttemberg Notes 6.20 11/22/13 16,000,000 $ 11,162,923
Depfa Finance Notes 7.00 06/01/05 10,000,000 7,228,462
Deutschland Republic Notes 6.00 06/20/16 17,200,000 11,033,375
Deutschland Republic Notes 6.25 01/04/24 29,050,000 18,845,101
Deutschland Republic Notes 6.75 07/15/04 10,900,000 7,971,336
Deutschland Republic Notes 7.38 01/03/05 7,300,000 5,550,438
Deutschland Republic Notes 8.00 07/22/02 5,300,000 4,163,285
Ibrd Global Notes 7.13 04/12/05 7,000,000 5,178,149
Lkb Badwurttenberg Notes 6.50 09/15/08 14,950,000 10,530,751
-------------------
$ 81,663,820
-------------------
Italy - 4.5%
- - ---------------------------------------------------------------
Abbey National Notes 10.00 08/24/00 8,791,000,000 $ 5,307,795
Bank Nederlandse Notes 10.50 06/18/03 6,400,000,000 3,916,124
Govt. of Italy Btps 8.50 08/01/04 8,100,000,000 4,498,584
Govt. of Italy Btps 8.50 01/01/99 14,700,000,000 8,891,233
Govt. of Italy Btps 8.50 04/01/99 14,250,000,000 8,568,832
Govt. of Italy Btps 9.50 01/01/05 8,625,000,000 5,084,353
-------------------
$ 36,266,921
-------------------
New Zealand - 4.7%
- - ---------------------------------------------------------------
Fletcher Challenge Notes 10.00 04/30/05 7,000,000 $ 4,878,349
Fletcher Challenge Notes 11.25 12/15/02 13,000,000 9,500,413
Fletcher Challenge Notes 14.50 09/30/00 8,500,000 6,736,975
Govt. of New Zealand 8.00 07/15/98 13,000,000 8,528,898
Govt. of New Zealand 8.00 11/15/06 6,000,000 4,129,729
Govt. of New Zealand Property Service 7.25 03/15/99 1,500,000 947,119
Lion Nathan Notes 0.00 09/01/97 5,793,293 3,253,242
-------------------
$ 37,974,725
-------------------
Norway - 4.5%
- - ---------------------------------------------------------------
Kingdom of Norway 9.00 01/31/99 39,000,000 $ 6,756,695
Sparebanken Notes 12.75 10/26/02 2,500,000 433,792
6
<PAGE>
Portfolio of Investments
(continued)
Par Value
Security Rate Maturity Value + (Note 1A)
- - ---------------------------------------------------------- -------------- ---------------- ------------------ -----------------
Norway - (Continued)
- - ---------------------------------------------------------------
Uni Storebrand Notes 11.15 01/15/02 88,860,000 16,495,004
Vesta Forsikring Notes 9.50 08/25/00 20,500,000 3,507,949
Vital Forsikring Notes 7.85 09/22/03 59,000,000 9,342,333
-------------------
$ 36,535,773
-------------------
Spain - 9.7%
- - ---------------------------------------------------------------
Castilla Junta Notes 8.30 11/29/01 473,000,000 $ 3,776,466
Junta de Andalucia Notes 11.10 12/02/05 1,350,000,000 11,667,485
Kingdom of Spain Notes 7.40 07/30/99 1,795,000,000 13,936,711
Kingdom of Spain Notes 10.00 02/28/05 3,154,500,000 26,266,347
Kingdom of Spain Notes 11.30 01/15/02 997,000,000 8,814,105
Kingdom of Spain Notes* 12.25 03/25/00 1,529,500,000 13,787,980
-------------------
$ 78,249,094
-------------------
Sweden 5.9%
- - ---------------------------------------------------------------
Fulmar Mtge #1 7.65 11/01/00 40,707,945 $ 6,045,717
Govt. of Sweden Notes 10.25 05/05/00 153,000,000 24,692,721
Govt. of Sweden Notes 10.25 05/05/03 99,800,000 16,528,297
-------------------
$ 47,266,735
-------------------
Thailand 2.4%
- - ---------------------------------------------------------------
Finance One Bills Of Exchange 0.00 04/27/96 160,000,000 $ 6,135,511
Thai Farmers Bank Notes 6.99 12/23/96 10,000,000 382,839
Thai Investment Co. Bills of Exchange 0.00 10/28/96 160,000,000 5,805,917
Thai Investment Co. Bills of Exchange 0.00 10/29/96 180,000,000 6,529,771
Thai Investment Co. Bills of Exchange 0.00 10/31/96 15,000,000 543,835
-------------------
$ 19,397,873
-------------------
United Kingdom - 10.5%
- - ---------------------------------------------------------------
Elf Enterprise Notes 8.75 06/27/06 9,950,000 $ 15,321,644
Hanson Trust Notes 10.00 04/18/06 6,350,000 10,963,728
Lasmo Notes 7.75 10/04/05 250,000 349,060
Royal Bank Of Scotland Notes 9.63 06/22/15 2,380,000 3,882,110
Salomon Inc. Notes 7.75 01/10/04 7,950,000 11,012,545
Smithkline Beecham Corp. Notes 8.13 11/25/98 6,730,000 10,755,052
U.K. Gilt Treasury Notes 6.00 08/10/99 3,162,000 4,800,061
U.K. Gilt Treasury Notes 8.75 08/25/17 3,050,000 5,233,379
U.K. Gilt Treasury Notes 9.00 03/03/00 5,960,000 9,980,916
U.K. Gilt Treasury Notes 9.50 01/15/99 7,200,000 12,060,973
-------------------
$ 84,359,468
-------------------
European Currency Unit - 9.5%
- - ---------------------------------------------------------------
Govt. of Italy Strips 0.00 03/07/99 5,920,000 $ 6,157,154
Republic of France Oat 6.75 04/25/02 19,440,000 25,057,843
Republic of France Oat 7.50 04/25/05 25,930,000 34,209,039
7
<PAGE>
Portfolio of Investments
(continued)
Par Value
Security Rate Maturity Value + (Note 1A)
- - ---------------------------------------------------------- -------------- ---------------- ------------------ -----------------
European Currency Unit - (Continued)
- - ---------------------------------------------------------------
Republic of France Oat 8.25 04/25/22 8,175,000 11,129,010
-------------------
$ 76,553,046
-------------------
Total Foreign Denominated Bonds $ 779,299,237
-------------------
(identified cost, $748,533,029)
Principal
Purchased Options - 0.4% Amount Value
- - ---------------------------------------------------------------
Deliver/Receive, Exercise Price, Expiration of Contracts (Note 1A)
- - --------------------------------------------------------------- ------------------ -------------------
Put Belgian Govt., 7.0% Str 104.68, 4/2/96 1,020,000,000 $ 65,280
Call German Govt., 6.875% Str 105.19 3/19/96 12,213,000 82,438
Call German Govt., 7.375% Str 105.91 09/16/96 36,000,000 844,272
Put Danish Govt., 7.00% Str 96.58, 1/11/96 191,800,000 17,262
Put French Govt., 7.75% Str 105.05, 2/27/96 115,310,000 91,671
Call Japanese Govt., 3.60% Str 106.057, 2/1/96 1,690,000,000 5,070
DEM Put/USD Call, Str 1.445, 2/28/96 23,800,000 359,856
CHF Put/SEK Call Str 5.84%, 10/30/96 16,560,000 304,091
JPY Put/ESB Call Str 1.20, 10/30/96 1,800,000,000 379,800
JPY Put/ITL Call Str 15.67, 10/30/96 1,800,000,000 505,800
JPY Put/ITL Call Str 15.70, 12/12/96 2,167,390,000 489,830
-------------------
Total Options (premiums paid $3,037,403) $ 3,145,370
-------------------
Short Term Obligations 0.1%
- - ---------------------------------------------------------------
Par Value
Repurchase Agreement 0.1% Value (Note 1A)
- - --------------------------------------------------------------- ------------------ -------------------
Prudential Bache repurchase agreement dated
12/29/95, 5.39% due 1/2/96 to pay $705,094
(Collateralized by Federal National Mortgage
Assn. 9.0%, due 9/1/22, Market Value $718,766) at cost $ 704,671 $ 704,671
Total Short Term Obligations $ 704,671
------------------
(identified cost $ 704,671)
Total Investments - 97.5% $ 783,149,278
------------------
(identified cost $752,275,103)
Principal
Written Options - (0.1)% Amount Value
Deliver/Receive, Exercise Price, Expiration of Contracts (Note 1A)
- - --------------------------------------------------------------- ------------------ -------------------
Put German Govt., 6.5% Str 101.43, 1/11/96 (49,600,000) $ (6,894)
Put German Govt., 6.5% Str 101.23, 2/27/96 (33,720,000) (89,156)
Call German Govt., 7.375% Str 105.91, 3/15/96 (36,000,000) (854,281)
Put German Govt., 6.125% Str 103.12, 4/2/96 (48,150,000) (46,898)
8
<PAGE>
Portfolio of Investments
(continued)
Principal
Amount Value
Security of Contracts (Note 1A)
- - --------------------------------------------------------------- ------------------ -------------------
Deliver/Receive, Exercise Price, Expiration (Continued)
- - ---------------------------------------------------------------
DEM Put/USD Call Str 1.50, 2/28/96 (23,800,000) (112,336)
USD Put/DEM Call Str 1.38, 2/28/96 (23,800,000) (159,936)
SEK Put/CHF Call Str 6.50, 10/30/96 (16,560,000) (149,172)
ESB Put/JPY Call Str 1.40 10/30/96 (1,800,000,000) (138,600)
ITL Put/JPY Call Str 19.50 10/30/96 (1,800,000,000) (135,000)
-------------------
Total Options Written (premiums received $2,222,946) $ (1,692,273)
-------------------
Other assets, less liabilities - 2.6% 22,079,870
-------------------
Net Assets - 100% $ 803,536,875
===================
+ The principal amounts of these bonds are stated in the currency of the country
of the classification.
* Denotes all or part of a security pledged as a margin deposit (see Note 6).
Definition of currencies:
CHF- Swiss Franc
DEM- German Deutschemark
ESP- Spanish Pesetas
ITL- Italian Lira
JPY- Japanese Yen
SEK- Swedish Krona
USD- United States Dollar
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
Standish, Ayer & Wood Investment Trust
Standish International Fixed Income Fund Series
Statement of Assets and Liabilities
December 31, 1995
Assets
<S> <C> <C>
Investments, at value (Note 1A) (identified cost, $752,275,103) $783,149,278
Cash and foreign currency, at value (cost, $361,155) 362,082
Receivable for investments sold 12,257,233
Interest receivable 27,869,444
Unrealized appreciation on forward foreign currency
exchange contracts (Note 6) 13,588,097
Other assets 8,262
---------------
Total assets $837,234,396
Liabilities
Distribution payable $12,978,542
Payable for investments purchased 10,217,938
Payable for Fund shares redeemed 1,240,075
Written options outstanding, at value (premiums received, $2,222,946) (Note 6) 1,692,273
Unrealized depreciation on forward foreign currency
exchange contracts (Note 6) 7,139,273
Payable for daily variation margin on financial futures contracts (Note 6) 29,308
Accrued investment advisory fee (Note 2) 260,664
Accrued trustee fees (Note 2) 8,237
Accrued expenses and other liabilities 131,211
---------------
Total liabilities 33,697,521
---------------
Net Assets $803,536,875
===============
Net assets consist of
Paid-in capital $754,303,698
Undistributed net investment income (loss) 2,477,089
Accumulated undistributed net realized gain (loss) 9,146,707
Net unrealized appreciation (depreciation) 37,609,381
---------------
Total $803,536,875
===============
Shares of beneficial interest outstanding 34,623,407
===============
Net asset value, offering price, and redemption price per share $23.21
===============
(Net assets/Shares outstanding)
10
<PAGE>
Standish, Ayer & Wood Investment Trust
Standish International Fixed Income Fund Series
Statement of Operations
Year Ended December 31, 1995
Investment income
Interest income (net of withholding taxes of $244,822 ) $84,285,898
Expenses
Investment advisory fee (Note 2) $3,916,500
Trustees fees (Note 2) 35,356
Accounting, custody, and transfer agent fees 889,071
Registration costs 26,133
Audit services 65,090
Legal services 15,696
Insurance expense 30,038
Amortization of organization expense (Note 1F) 4,010
Miscellaneous 43,448
--------------
Total expenses 5,025,342
--------------
Net investment income $79,260,556
--------------
Realized and unrealized gain (loss)
Net realized gain (loss)
Investment securities $61,957,100
Written options 4,738,553
Financial futures 282,975
Interest rate swaps (5,324,536)
Foreign currency and foreign exchange contracts (43,298,437)
--------------
Net realized gain (loss) $18,355,655
Change in net unrealized appreciation (depreciation)
Investment securities $53,627,384
Written options (858,844)
Financial futures 365,312
Interest rate swaps 6,464,421
Translation of assets and liabilities in foreign currencies,
and foreign exchange contracts 3,129,006
--------------
Change in net unrealized appreciation (depreciation) 62,727,279
--------------
Net gain (loss) $81,082,934
--------------
Net increase (decrease) in net assets from operations $160,343,490
==============
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
Standish, Ayer & Wood Investment Trust
Standish International Fixed Income Fund Series
Statement of Changes in Net Assets
Year Ended December 31,
--------------------------------------------
1995 1994
--------------------- ---------------------
Increase (decrease) in Net Assets
From operations
<S> <C> <C>
Net investment income $79,260,556 $85,162,141
Net realized gain (loss) 18,355,655 (108,330,383)
Change in net unrealized appreciation (depreciation) 62,727,279 (85,574,100)
--------------------- ---------------------
Net increase (decrease) in net assets from operations $160,343,490 ($108,742,342)
--------------------- ---------------------
Distributions to shareholders
From net investment income ($69,501,890) ($9,595,934)
Tax return of capital - (24,801,499)
--------------------- ---------------------
Total distributions to shareholders ($69,501,890) ($34,397,433)
--------------------- ---------------------
Fund share (principal) transactions (Note 4)
Net proceeds from sale of shares $79,384,197 $305,987,929
Net asset value of shares issued to shareholders in
payment of distributions declared 47,953,848 23,065,825
Cost of shares redeemed (484,059,233) (247,698,457)
--------------------- ---------------------
Increase (decrease) in net assets from Fund share transactions ($356,721,188) $81,355,297
--------------------- ---------------------
Net increase (decrease) in net assets ($265,879,588) ($61,784,478)
Net assets:
At beginning of period $1,069,416,463 $1,131,200,941
--------------------- ---------------------
At end of period (including undistributed net investment
income of $2,477,089 and $0 at December 31, 1995 and
December 31, 1994 respectively) $803,536,875 $1,069,416,463
===================== =====================
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
Standish, Ayer & Wood Investment Trust
Standish International Fixed Income Fund Series
Financial Highlights
Year Ended December 31,
-----------------------------------------------------------------
1995 1994 1993 1992* 1991 *, +
---------- ------------ ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net asset value - beginning of period $21.30 $24.22 $21.20 $22.05 $20.00
---------- ------------ ----------- ---------- ----------
Income from investment operations
Net investment income $1.96 $1.71 $2.03 $2.01 $1.55
Net realized and unrealized gain (loss) 1.84 (3.93) 2.90 (0.25) 1.44
---------- ------------ ----------- ---------- ----------
Total from investment operations $3.80 ($2.22) $4.93 $1.76 $2.99
---------- ------------ ----------- ---------- ----------
Less distributions declared to shareholders
From net investment income ($1.89) ($0.20) ($1.53) ($2.03) ($0.04)
From realized gain - - (0.26) (0.54) (0.90)
In excess of net realized gain - - - (0.04) -
In excess of net investment income - - (0.12) - -
Tax return of capital - (0.50) - - -
---------- ------------ ----------- ---------- ----------
Total distributions declared to shareholders ($1.89) ($0.70) ($1.91) ($2.61) ($0.94)
---------- ------------ ----------- ---------- ----------
Net asset value - end of period $23.21 $21.30 $24.22 $21.20 $22.05
========== ============ =========== ========== ==========
Total return 18.13% (9.22%) 23.77% 8.07% 15.11%t
Ratios (to average net assets)/Supplemental Data:
Expenses 0.51% 0.51% 0.51% 0.59% 0.80%t
Net investment income 8.09% 7.69% 7.53% 8.37% 8.00%t
Portfolio turnover 165% 158% 98% 175% 319%
Net assets at end of period (000 omitted) $803,537 $1,069,416 $1,131,201 $384,660 $72,697
t Computed on an annualized basis.
+ For the period from January 2, 1991 (start of business) to December 31, 1991.
* Audited by other auditors.
</TABLE>
13
<PAGE>
Standish, Ayer & Wood Investment Trust
Standish International Fixed Income Fund Series
Notes to Financial Statements
1)......Significant Accounting Policies:
Standish, Ayer & Wood Investment Trust (the "Trust") is organized as a
Massachusetts business trust and is registered under the Investment
Company Act of 1940, as amended, as an open-end, management investment
company. Standish International Fixed Income Fund (the "Fund") is a
separate non-diversified investment series of the Trust.
The following is a summary of significant accounting policies
consistently followed by the Fund in the preparation of its financial
statements. The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and
disclosures in the financial statements. Actual results could differ
from those estimates.
A. Investment security valuations--
Securities for which quotations are readily available are valued at the
last sale, or if no sale price, at the closing bid price in the
principal market in which such securities are normally traded.
Securities (including restricted securities) for which quotations are
not readily available are valued primarily using dealer-supplied
valuations or at their fair value as determined in good faith under
consistently applied procedures under the general supervision of the
Board of Trustees.
Short term instruments with less than sixty-one days remaining to
maturity when acquired by the Fund are valued at amortized cost. If the
Fund acquires a short term instrument with more than sixty days
remaining to its maturity, it is valued at current market value until
the sixtieth day prior to maturity and will then be valued at amortized
cost based upon the value on such date unless the trustees determine
during such sixty-day period that amortized cost does not represent
fair value.
B. Repurchase agreements--
It is the policy of the Fund to require the custodian bank to take
possession, to have legally segregated in the Federal Reserve Book
Entry System or to have segregated within the custodian bank's vault,
all securities held as collateral in support of repurchase agreement
investments. Additionally, procedures have been established by the Fund
to monitor on a daily basis, the market value of the repurchase
agreement's underlying investments to ensure the existence of a proper
level of collateral.
C. Securities transactions and income--
Securities transactions are recorded as of trade date. Interest income
is determined on the basis of interest accrued, adjusted for
amortization of premium or discount on long-term debt securities when
required for federal income tax purposes. Realized gains and losses
from securities sold are recorded on the identified cost basis. The
Fund does not isolate that portion of the results of operations
resulting from changes in foreign exchange rates on investments from
the fluctuations arising from changes in market prices of securities
held. Such fluctuations are included with the net realized and
unrealized gain or loss from investments.
D. Federal taxes--
As a qualified regulated investment company under Subchapter M of the
Internal Revenue Code the Fund is not subject to income taxes to the
extent that it distributes all of its taxable income for its fiscal
year.
E. Foreign currency transactions--
Investment security valuations, other assets and liabilities initially
expressed in foreign currencies are converted into U.S. dollars based
upon current exchange rates. Purchases and sales of foreign investment
securities and income and expenses are converted into U.S. dollars
based upon currency exchange rates prevailing on the respective dates
of such transactions.
Section 988 of the Internal Revenue Code provides that gains or losses
on certain transactions attributable to fluctuations in foreign
currency exchange rates must be treated as ordinary income or loss. For
financial statement purposes, such amounts are included in net realized
gains or losses.
F. Deferred organization expense-- Costs incurred by the Fund in
connection with its organization and initial registration were
amortized, on a straight-line basis, through December 1995.
14
<PAGE>
G. Distributions to shareholders-
Distributions to shareholders are recorded on the ex-dividend date.
Distributions in excess of net realized gain on investments, written
options, and foreign currency arise because of certain timing
differences.
Income and capital gain distributions are determined in accordance with
income tax regulations which may differ from generally accepted
accounting principles. These differences are primarily due to differing
treatments for foreign currency transactions. Permanent book and tax
basis differences relating to shareholder distributions will result in
reclassifications to paid-in-capital.
(2).....Investment Advisory Fee:
The investment advisory fee paid to Standish International Management
Company, L.P. (SIMCO) for overall investment advisory and
administrative services, and general office facilities, is paid monthly
at the annual rate of 0.4% of the Fund's average daily net assets. The
advisory agreement provides that if the total annual operating expenses
of the Fund (excluding brokerage commissions, taxes and extraordinary
expenses) in any fiscal year exceed the lower of (a) 0.8% of the Fund's
average weekly net assets or (b) the permissible expense limitation
applicable to the Fund in any state in which shares of the Fund are
then qualified for sale, the compensation due the adviser shall be
reduced by the amount of the excess. The Fund pays no compensation
directly to its trustees who are affiliated with the investment adviser
or to its officers, all of whom receive remuneration for their services
to the Fund from the investment adviser. Certain of the trustees and
officers of the Trust are partners or officers of SIMCO.
(3).....Purchases and Sales of Investments:
Purchases and proceeds from sales of investments, other than short-term
investments, were as follows:
<TABLE>
<CAPTION>
Purchases Sales
------------------- -------------------
<S> <C> <C>
Investments (non-U.S. government securities) $1,467,290,667 $1,825,181,443
=================== ===================
U.S. government securities $41,298,850 $60,465,932
=================== ===================
</TABLE>
(4).....Shares of Beneficial Interest:
The Declaration of Trust permits the trustees to issue an unlimited
number of full and fractional shares of beneficial interest having a
par value of one cent per share. Transactions in Fund shares were as
follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
1995 1994
---------------- ----------------
<S> <C> <C>
Shares sold 3,493,337 13,441,882
Shares issued to shareholders in
payment of distributions declared 2,095,788 1,054,606
Shares redeemed (21,174,451) (10,995,570)
---------------- ----------------
Net increase (decrease) (15,585,326) 3,500,918
================ ================
</TABLE>
(5).....Federal Income Tax Basis of Investment Securities:
The cost and unrealized appreciation (depreciation) in value of the
investment securities owned at December 31, 1995, as computed on a
federal income tax basis, are as follows:
Aggregate cost $752,357,266
=================
Gross unrealized appreciation $38,785,185
Gross unrealized depreciation (7,993,173)
-----------------
Net unrealized appreciation (depreciation) $30,792,012
=================
(6).....Financial Instruments:
In general, the following instruments are used for hedging purposes as
described below. However, the instruments may also be used to enhance
potential gain in circumstances where hedging is not involved. The
nature, risks and objectives of these instruments are set forth more
fully in the Fund's Prospectus and Statement of Additional Information.
The Fund trades the following instruments with off-balance sheet risk:
Options--
Call and put options give the holder the right to purchase or sell,
respectively, a security or currency at a specified price on or before
a certain date. The Fund uses options to hedge against risks of market
exposure and changes in security prices and foreign currencies, as well
as to enhance returns. Options, both held and written by the Fund, are
reflected in the accompanying Statement of Assets and Liabilities at
market value.
Premiums received from writing options which expire are treated as
realized gains. Premiums received from writing options which are
exercised or are closed are added to or offset against the proceeds or
amount paid on the transaction to determine the realized gain or loss.
If a put option written by the Fund is exercised, the premium reduces
the cost basis of the securities purchased by the Fund. The Fund, as
writer of an option, has no control over whether the underlying
securities may be sold (call) or purchased (put) and as a result bears
the market risk of an unfavorable change in the price of the security
underlying the written option. A summary of such transactions for the
year ended December 31, 1995 is as follows:
<TABLE>
<CAPTION>
Written Put Option Transactions
- - -------------------------------------------------------------------------------------------------------
Number
of Contracts Premiums
-------------- -------------------
<S> <C> <C>
Outstanding, beginning of period 8 $3,010,239
Options written 22 7,068,972
Options exercised (1) (143,520)
Options expired (16) (5,356,067)
Options closed (9) (3,607,266)
-------------- -------------------
Outstanding, end of period 4 $972,358
============== ===================
Written Call Option Transactions
- - -------------------------------------------------------------------------------------------------------
Number
of Contracts Premiums
-------------- -------------------
Outstanding, beginning of period 2 $704,300
Options written 23 5,416,848
Options exercised (2) (200,997)
Options expired (10) (3,923,016)
Options closed (11) (1,545,933)
-------------- -------------------
Outstanding, end of period 2 $451,202
============== ===================
Written Cross Currency Option Transactions
- - -------------------------------------------------------------------------------------------------------
Number
of Contracts Premiums
-------------- -------------------
Outstanding, beginning of period 3 $2,188,456
Options written 6 1,220,292
Options exercised 0 (0)
Options expired (2) (1,252,789)
Options closed (4) (1,356,573)
-------------- -------------------
Outstanding, end of period 3 $799,386
============== ===================
</TABLE>
15
<PAGE>
Forward currency exchange contracts--
The Fund may enter into forward foreign currency and cross currency
exchange contracts for the purchase or sale of a specific foreign
currency at a fixed price on a future date. Risks may arise upon
entering these contracts from the potential inability of counterparties
to meet the terms of their contracts and from unanticipated movements
in the value of a foreign currency relative to the U.S. dollar and
other foreign currencies. The forward foreign currency and cross
currency exchange contracts are marked to market using the forward
foreign currency rate of the underlying currency and any gains or
losses are recorded for financial statement purposes as unrealized
until the contract settlement date. Forward currency exchange contracts
are used by the Fund primarily to protect the value of the Fund's
foreign securities from adverse currency movements.
At December 31, 1995, the Fund held the following forward foreign
currency and cross currency exchange contracts:
<TABLE>
<CAPTION>
Forward Foreign Currency Contracts
Local U.S. $ U.S. $ U.S. $
Principal Contract Market Aggregate Unrealized
Contracts to Receive Amount Value Date Value Face Amount Gain/(Loss)
- - ---------------------------- ----------------- ------------------- -------------- ---------------- -------------
<S> <C> <C> <C> <C> <C>
Canadian Dollar 6,141,965 2/9/96 $4,497,565 $4,517,812 ($20,247)
Swiss Franc 35,278,500 1/12/96 30,604,766 30,362,768 241,998
German Deutsche Mark 58,819,690 1/30/96 - 3/11/96 41,032,206 41,102,332 (70,126)
Danish Krone 22,104,000 1/2/96-3/14/96 3,976,825 3,982,880 (6,055)
Spanish Peseta 1,784,595,046 2/7/96 - 2/15/96 14,585,348 14,477,897 107,451
Finnish Markka 12,542,339 1/5/96 2,879,060 2,958,518 (79,458)
Great British Pound 29,013,965 1/4/96 - 3/28/96 44,980,447 45,232,278 (251,831)
Italian Lira 50,575,257,600 1/12/96 31,763,988 31,087,860 676,128
Netherlands Guilder 9,579,681 2/16/96 5,971,055 5,971,439 (384)
European Currency Unit 9,003,737 1/3/96 - 1/4/96 11,509,817 11,561,084 (51,267)
-------------- ---------------- -------------
$191,801,077 $191,254,868 $546,209
============== ================ =============
Local U.S. $ U.S. $
Principal Contract Market Aggregate Unrealized
Contracts to Deliver Amount Value Date Value Face Amount Gain/(Loss)
- - ---------------------------- ----------------- ------------------- -------------- ---------------- -------------
Australian Dollar 65,358,547 2/5/96 - 2/8/96 $48,430,836 $49,348,137 $917,301
Belgian Franc 259,486,740 3/12/96 8,819,960 8,731,929 (88,031)
Canadian Dollar 38,814,319 2/9/96-3/25/96 28,427,512 28,498,244 70,732
Swiss Franc 35,278,500 1/12/96 30,604,766 31,087,857 483,091
German Deutsche Mark 179,753,932 1/5/96 - 3/11/96 125,355,088 127,405,237 2,050,149
Danish Krone 660,974,681 1/2/96 - 3/29/96 118,969,380 119,717,481 748,101
Spanish Peseta 10,625,187,043 2/7/96 - 3/7/96 86,762,404 86,231,066 (531,338)
Finnish Markka 75,894,556 1/5/96 - 3/28/96 17,460,148 17,763,948 303,800
French Franc 260,074,339 1/29/96 - 3/27/96 53,046,283 52,673,998 (372,285)
Great British Pound 94,531,678 1/3/96 - 3/28/96 146,526,543 148,206,826 1,680,283
Italian Lira 104,835,683,540 1/12/96 - 3/7/96 65,731,570 64,989,197 (742,373)
Netherlands Guilder 9,579,681 2/16/96 5,971,055 6,071,928 100,873
Norwegian Krone 243,953,833 1/12/96 - 3/29/96 38,489,266 38,806,790 317,524
New Zealand Dollar 29,267,681 3/7/96 - 3/26/96 18,986,629 18,849,208 (137,421)
Swedish Krona 337,547,423 1/23/96 - 3/21/96 50,451,421 50,626,216 174,795
European Currency Unit 58,527,140 1/4/96 - 3/29/96 74,792,388 75,833,398 1,041,010
-------------- ---------------- -------------
$918,825,249 $924,841,460 $6,016,211
============== ================ =============
Forward Foreign Cross Currency Contracts
U.S. $ U.S. $ U.S. $
Market Market Contract Unrealized
Contracts to Deliver Value In Exchange For Value Value Date Gain/(Loss)
- - ---------------------------- ----------------- ------------------- -------------- ---------------- -------------
Belgian Franc $50,881,362 German Deutsche Mark $50,646,057 1/9/96 - 3/29/96 ($235,305)
German Deutsche Mark 33,230,738 Belgian Franc 33,693,742 1/9/96 463,004
French Franc 32,217,284 German Deutsche Mark 31,875,989 2/1/96 - 2/6/96 (341,295)
----------------- -------------- -------------
$116,329,384 $116,215,788 ($113,596)
================= ============== =============
</TABLE>
16
<PAGE>
Futures contracts--
The Fund may enter into financial futures contracts for the delayed
sale or delivery of securities or contracts based on financial indices
at a fixed price on a future date. The Fund is required to deposit
either in cash or securities an amount equal to a certain percentage of
the contract amount. Subsequent payments are made or received by the
Fund each day, dependent on the daily fluctuations in the value of the
underlying security, and are recorded for financial statement purposes
as unrealized gains or losses by the Fund. There are several risks in
connection with the use of futures contracts as a hedging device. The
change in value of futures contracts primarily corresponds with the
value of their underlying instruments or indices, which may not
correlate with changes in the value of hedged investments. In addition,
there is the risk that the Fund may not be able to enter into a closing
transaction because of an illiquid secondary market. The Fund enters
into financial futures transactions primarily to manage its exposure to
certain markets and to changes in security prices and foreign
currencies. At December 31, 1995, the Fund held the following futures
contract:
<TABLE>
<CAPTION>
Expiration Underlying Face Unrealized
Contract Position Date Amount at Value Gain/(Loss)
- - ----------------------------------------------- ---------- ---------- ------------------ ----------
<S> <C> <C> <C> <C>
Australian 10 Year (112 contracts) short 3/16/96 $10,428,116 ($540)
</TABLE>
Interest rate swap contracts--
Interest rate swaps involve the exchange by the Fund with another party
of their respective commitments to pay or receive interest, e.g., an
exchange of floating rate payments for fixed rate payments with respect
to a notional amount of principal. Credit and market risk exist with
respect to these instruments. The Fund expects to enter into these
transactions primarily for hedging purposes including, but not limited
to, preserving a return or spread on a particular investment or portion
of its portfolio, protecting against currency fluctuations, as a
duration management technique or protecting against an increase in the
price of securities the Fund anticipates purchasing at a later date.
There were no open interest rate swap contracts at December 31, 1995.
17
<PAGE>
Report of Independent Auditor
To the Trustees of Standish, Ayer & Wood Investment Trust and the Shareholders
of Standish International Fixed Income Fund Series:
We have audited the accompanying statement of assets and liabilities of
Standish, Ayer & Wood Investment Trust: Standish International Fixed Income Fund
Series (the "Fund"), including the schedule of portfolio investments, as of
December 31, 1995, and the related statement of operations for the year then
ended, and changes in net assets for each of the two years in the period then
ended and financial highlights for each of the three years in the period then
ended. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits. The financial highlights for each of the two years in the period to
December 31, 1992, were audited by other auditors whose report, dated February
12, 1993, expressed an unqualified opinion on such financial highlights.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1995 by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Standish, Ayer & Wood Investment Trust: Standish International Fixed Income Fund
Series as of December 31, 1995, the results of its operations for the year then
ended, the changes in its net assets for each of the two years in the period
then ended, and financial highlights for each of the three years in the period
then ended, in conformity with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
February 13, 1996
18
<PAGE>
Prospectus dated May 1, 1996
PROSPECTUS
STANDISH MASSACHUSETTS INTERMEDIATE TAX EXEMPT BOND FUND
One Financial Center
Boston, Massachusetts 02111
(800) 221-4795
Standish Massachusetts Intermediate Tax Exempt Bond Fund (the "Fund") is
one fund in the Standish, Ayer & Wood family of funds. The Fund is organized as
a separate investment series of Standish, Ayer & Wood Investment Trust (the
"Trust"), an open-end management investment company.
The Fund is designed for Massachusetts investors in the upper income tax
brackets who are seeking a higher level of Massachusetts and federally tax-free
income than is normally provided by short-term investments, and more price
stability than investments in long-term municipal bonds. The Fund's investment
objective is to provide a high level of interest income exempt from
Massachusetts and federal income taxes, while seeking preservation of
shareholders' capital, through investing the Fund's assets in investment grade
intermediate-term municipal securities. Municipal bonds in which the Fund
invests will be rated, at the time of investment, within the four highest
ratings by Moody's Investors Service, Inc. ("Moody's"), Standard & Poor's
Ratings Group ("S&P") or Fitch Investors Service, Inc. ("Fitch") or, if unrated,
determined by Standish, Ayer & Wood, Inc. (the "Adviser"), the Fund's investment
adviser, to be of comparable credit quality to the securities so rated. See
"Investment Objective and Policies."
Investors may purchase shares of the Fund from the Trust's principal
underwriter, Standish Fund Distributors, L.P. (the "Principal Underwriter"), at
the address and phone number listed above without a sales commission or other
transaction charges. Unless waived by the Fund, the minimum initial investment
is $100,000. Additional investments may be made in amounts of at least $5,000.
This Prospectus is intended to set forth concisely the information about
the Fund and the Trust that a prospective investor should know before investing.
Investors are encouraged to read this Prospectus and retain it for future
reference. Additional information about the Fund and the Trust is contained in a
Statement of Additional Information which has been filed with the Securities and
Exchange Commission and is available upon request and without charge by calling
or writing to the Principal Underwriter at the telephone number or address
listed above. The Statement of Additional Information bears the same date as
this Prospectus and is incorporated by reference into this Prospectus.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK OR OTHER INSURED DEPOSITORY INSTITUTION, AND ARE NOT
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD
OR ANY OTHER GOVERNMENT AGENCY. AN INVESTMENT IN SHARES OF THE FUND INVOLVES
INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
CONTENTS
Expense Information...........................................2
Financial Highlights..........................................3
Investment Objectives and Policies............................4
Risk Factors and Suitability .................................7
Calculation of Performance Data...............................8
Dividends and Distributions...................................8
Purchase of Shares............................................8
Exchange of Shares............................................9
Redemption of Shares..........................................9
Management...................................................10
Federal Income Taxes.........................................11
Massachusetts Income Taxes...................................12
The Fund and Its Shares......................................12
Custodian, Transfer Agent and Dividend Disbursing Agent......13
Independent Accountants......................................13
Legal Counsel................................................13
Appendix.....................................................14
Tax Certification Instructions...............................15
1
<PAGE>
EXPENSE INFORMATION
Shareholder Transaction Expenses
Maximum Sales Load Imposed on Purchases None
Maximum Sales Load Imposed on Reinvested Dividends None
Deferred Sales Load None
Redemption Fees None
Exchange Fee None
Annual Fund Operating Expenses (as a percentage of average net assets)
Management Fees (after expense limitation) 0.33%
12b-1 Fees None
Other Expenses 0.32%
Total Fund Operating Expenses (after expense limitation) 0.65%
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Example 1 yr. 3 yrs. 5 yrs. 10 yrs.
- - ------- ----- ------ ------ -------
You would pay the following expenses on a $1,000 investment,
assuming (1) 5% annual return and (2) redemption at the end
of each time period: $7 $21 $36 $81
</TABLE>
The purpose of the above table is to assist the investor in understanding
the various costs and expenses of the Fund that an investor in the Fund will
bear directly or indirectly. See "Management -- Investment Adviser" and
"Management -- Expenses." The figure shown in the caption "Other Expenses,"
which includes, among other things, custodian and transfer agent fees,
registration costs and payments for insurance and audit and legal services, is
based upon expenses for the fiscal year ended December 31, 1995, during which
time the Adviser did not impose a portion of its fee. On February 9, 1996, the
Fund changed its fiscal year end from December 31 to September 30.
*The Adviser has voluntarily agreed to limit Total Fund Operating Expenses
of the Fund (excluding brokerage commissions, taxes, litigation,
indemnification, and other extraordinary expenses) to 0.65% of the Fund's
average daily net assets. This agreement is voluntary and temporary and may be
discontinued or revised by the Adviser at any time. In the absence of such
agreement, the Management Fees and the Total Fund Operating Expenses would have
been 0.40% and 0.72%, respectively, for the fiscal year ended December 31, 1995.
THE INFORMATION IN THE TABLE AND HYPOTHETICAL EXAMPLE ABOVE SHOULD NOT BE
CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY
BE GREATER OR LESS THAN THOSE SHOWN. MOREOVER, WHILE THE EXAMPLE ASSUMES A 5%
ANNUAL RETURN, THE FUND'S ACTUAL PERFORMANCE WILL VARY AND MAY RESULT IN AN
ACTUAL RETURN OF GREATER OR LESS THAN 5%.
2
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights for the years ended December 31, 1993, 1994 and
1995 have been audited by Coopers & Lybrand L.L.P., independent accountants,
whose report, together with the financial statements of the Fund, is
incorporated into the Statement of Additional Information.
<TABLE>
<CAPTION>
Standish, Ayer & Wood Investment Trust
Standish Massachusetts Intermediate Tax Exempt Bond Fund
Series
Financial Highlights
November 2, 1992
Year ended December 31, (start of business) to
------------------------------------------
1995 1994 1993 December 31, 1992*
----------- ---------- ----------- ------------------------
<S> <C> <C> <C> <C>
Net asset value - beginning of period $19.55 $21.31 $20.32 $20.00
----------- ---------- ----------- ----------------
Income from investment operations
Net investment income** $0.94 $0.94 $0.92 $0.13
Net realized and unrealized gain (loss) $1.47 ($1.75) $1.13 $0.32
----------- ---------- ----------- ----------------
Total from investment operations $2.41 ($0.81) $2.05 $0.45
----------- ---------- ----------- ----------------
Less distributions declared to shareholders
From net investment income ($0.94) ($0.94) ($0.92) ($0.13)
From realized gains -- ($0.01) ($0.14) ---
----------- ---------- ----------- ----------------
Total distributions declared to shareholders ($0.94) ($0.95) ($1.06) ($0.13)
----------- ---------- ----------- ----------------
Net asset value - end of period $21.02 $19.55 $21.31 $20.32
=========== ========== =========== ================
Total return 12.64% (3.84%) 10.24% 13.85% t
Net assets at end of period (000 omitted) $32,565 $27,776 $29,627 $6,537
Ratios (to average net assets)/Supplemental Data
Expenses ** 0.65% 0.65% 0.65% 0.65% t
Net investment income ** 4.71% 4.67% 4.35% 4.05% t
Portfolio turnover 77.00% 84.00% 94.00% 31.00%
** The investment adviser did not impose a portion of its advisory fee. If
this reduction had not been undertaken, the net investment income per
share and the ratios would have been:
Net investment income per share $0.95 $0.91 $0.86 $0.11
Ratios (to average net assets):
Expenses 0.72% 0.78% 0.95% 1.37% t
Net investment income 4.78% 4.54% 4.05% 3.33% t
* Audited by other auditors
t Computed on an annualized basis
</TABLE>
Further information about the performance of the Fund is contained in the
Fund's Annual Report, which may be obtained from the Principal Underwriter
without charge.
3
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to provide a high level of interest
income exempt from Massachusetts and federal income taxes, while seeking
preservation of shareholders' capital, through investing the Fund's assets in
investment grade intermediate-term municipal securities. The Fund seeks to
achieve its objective by investing in a non-diversified portfolio of municipal
securities of issuers located in Massachusetts and other qualifying issuers
(including Puerto Rico, the U.S. Virgin Islands and Guam), the interest on which
is, in the opinion of bond counsel to the issuer, excluded from gross income for
federal income tax purposes and is exempt from Massachusetts personal income tax
("Massachusetts Municipal Securities"). Because of the uncertainty inherent in
all investments, no assurance can be given that the Fund will achieve its
investment objective. The investment objective of the Fund is a fundamental
policy which may not be changed without shareholder approval.
Although the Fund may invest in investment grade Massachusetts Municipal
Securities, it intends to emphasize high quality intermediate-term Massachusetts
Municipal Securities. The dollar-weighted average effective maturity of the
Fund's portfolio will be in a range of three to ten years. However, the Fund may
purchase individual securities with effective maturities which are outside of
this range. Generally, a mutual fund with an average maturity longer than the
Fund will tend to have a higher yield, but will exhibit greater share price
volatility; a fund with a shorter maturity will have a lower yield but will
offer more price stability. The Fund's emphasis on high quality securities is
expected to limit its share price volatility. Because the Fund holds investment
grade municipal securities, the income earned on shares of the Fund will tend to
be less than it might be on a portfolio emphasizing lower quality securities.
The Fund may invest, without percentage limitations, in municipal bonds
rated at the time of purchase within one of the four highest municipal ratings
by Moody's (Aaa, Aa, A, Baa), S&P (AAA, AA, A, BBB) or Fitch (AAA, AA, A, BBB)
or, if not rated, determined by the Adviser to be of comparable credit quality
to the securities so rated. The Fund may invest in municipal notes rated MIG-1
or MIG-2 by Moody's or at least SP-1 or SP-2 by S&P or in municipal notes that
are not rated, provided that, in the opinion of the Adviser, such notes are of
comparable credit quality. In the case of a security that is rated differently
by two or more rating services, the higher rating is used; provided, however,
all securities purchased must also meet the credit standards of the Adviser.
Securities rated Baa by Moody's or BBB by S&P or Fitch may have some speculative
characteristics and changes in economic conditions or other circumstances are
more likely to lead to weakened capacity to make interest payments and repay
principal than is the case with higher grade securities. Prior to acquiring
unrated securities, the Adviser considers the terms of the offering and various
other factors in order to initially determine whether the securities are
consistent with the Fund's investment objective and policies and thereafter to
determine the issuer's comparative credit rating. In the event the rating on a
security held in the Fund's portfolio is downgraded by a rating service, such
action will be considered by the Adviser in its evaluation of the overall
investment merits of that security, but will not necessarily result in a sale of
the security. A description of the ratings is contained in the Appendix to this
Prospectus.
4
<PAGE>
The Fund is a non-diversified investment company so that, as a fundamental
investment policy, with respect to 50% of the Fund's total assets, the Fund may
not invest more than 5% of the value of its total assets in securities of any
one issuer or acquire more than 10% of the voting securities of an issuer. This
limitation does not apply to investments issued or guaranteed by the U.S.
Government or its agencies or instrumentalities and does not apply to the other
50% of the Fund's total assets. In order to qualify as a "Regulated Investment
Company" under the Internal Revenue Code, the Fund must, among other
requirements, not invest more than 25% of its assets in the securities of a
single issuer as of the close of each quarter of its taxable year. See "Federal
and Massachusetts Income Taxes."
Although it is authorized to do so, the Fund does not expect to invest more
than 25% of its assets in any one of the following sectors of the municipal
securities market: hospitals, ports, airports, colleges and universities,
turnpikes and toll roads, housing bonds, lease rental bonds, industrial revenue
bonds or pollution control bonds. For the purposes of this limitation,
securities whose credit is enhanced by bond insurance, letters of credit or
other means are not considered to belong to a particular sector.
As a fundamental policy, at least 80% of the Fund's net assets will
normally be invested in Massachusetts Municipal Securities and, during normal
market conditions, at least 65% of the Fund's net assets will be invested in
municipal bonds. There may be certain occasions, however, during which more than
20% of the Fund's assets may be invested in other instruments. In unusual
circumstances, as a temporary defensive measure, the Fund may invest in taxable,
fixed income obligations and/or municipal securities other than Massachusetts
Municipal Securities, when the Adviser believes that market conditions, such as
rising interest rates or other adverse factors, would cause serious erosion of
portfolio value. In addition, the Fund may also invest up to 20% of its net
assets in taxable, fixed income obligations and/or municipal securities other
than Massachusetts Municipal Securities when there is a yield disparity between
these other instruments and Massachusetts Municipal Securities on an after tax
basis. These other investments will generally be of comparable credit quality
and maturity to the Massachusetts Municipal Securities in which the Fund invests
and will be limited primarily to obligations issued or guaranteed by the U.S.
Government, its agencies, instrumentalities or authorities; investment grade
corporate debt securities; municipal securities other than Massachusetts
Municipal Securities; prime commercial paper; certain certificates of deposit of
domestic banks; and repurchase agreements, secured by U.S. Government
securities, with maturities not in excess of seven days. To the extent that
income dividends include income from taxable sources, a portion of a
shareholder's dividend income will be subject to federal and/or Massachusetts
tax. See "Federal and Massachusetts Income Taxes."
Municipal securities include debt obligations issued to obtain funds for
various public purposes, including the construction of a variety of public
facilities such as bridges, highways, housing, hospitals, mass transportation,
schools, streets and water and sewer works. Other public purposes for which
municipal securities or bonds may be issued include the refunding of outstanding
obligations, obtaining funds for general operating expenses and the obtaining of
funds to loan to other public institutions and facilities. In addition, certain
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types of industrial revenue bonds are, or have been under prior law, issued by
or on behalf of public authorities to obtain funds to provide privately operated
housing facilities, sports facilities, convention or trade show facilities,
airport, mass transit, port or parking facilities, air or water pollution
control facilities and certain local facilities for water supply, gas,
electricity, or sewage and solid waste disposal. Some of these bonds may be
"private activity bonds," the interest on which is treated as a tax preference
item for purposes of the federal alternative minimum tax. Such bonds are
sometimes referred to as "AMT Bonds" and are treated as taxable obligations for
the purposes of the Fund's policies. See "Federal and Massachusetts Income
Taxes."
Municipal bonds are issued in order to meet long-term capital needs and
generally have maturities of more than one year when issued. The two principal
classifications of municipal bonds are "general obligation" and "revenue" bonds.
General obligation bonds are secured by the pledge of the municipality's faith,
credit and taxing power for the payment of principal and interest, and are
considered the safest type of municipal bond. Revenue bonds are payable only
from the revenues derived from a particular project or facility and are
generally dependent solely on a specific revenue source. Industrial revenue
bonds are a specific type of revenue bond backed by the credit and security of a
private user. Assessment bonds, which are issued by a specially created district
or project area which levies a tax (generally on its taxable property) to pay
for an improvement or project, may be considered to belong to either category.
There are, of course, other variations in the safety of municipal bonds, both
within a particular classification and between classifications, depending on
numerous factors. The Fund is not limited with respect to the categories of
municipal securities it may acquire.
Municipal securities also include municipal notes, which are generally
issued to satisfy short-term capital needs and have maturities of one year or
less. Municipal notes include tax anticipation notes, revenue anticipation
notes, bond anticipation notes and construction loan notes. The Fund may also
invest in variable rate demand instruments, which are securities with long
stated maturities, but demand features that allow the holder to demand 100% of
the principal plus interest within one to seven days. The coupon varies daily,
weekly or monthly with the market. The price remains at par, which provides
stability to the portfolio while earning market yields. For federal income tax
purposes, the income earned from municipal securities may be entirely tax free,
taxable or subject only to the federal alternative minimum tax.
Strategic Transactions
The Fund may, but is not required to, utilize various other investment
strategies as described below to hedge various market risks (such as interest
rates and broad or specific fixed-income market movements), to manage the
effective maturity or duration of fixed-income securities, or to enhance
potential gain. Such strategies are generally accepted as part of modern
portfolio management and are regularly utilized by many mutual funds and other
institutional investors. Techniques and instruments used by the Fund may change
over time as new instruments and strategies are developed or regulatory changes
occur.
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In the course of pursuing its investment objective, the Fund may purchase
and sell (write) exchange-listed and over-the-counter put and call options on
securities, fixed-income indices and other financial instruments; purchase and
sell financial futures contracts and options thereon; and enter into various
interest rate transactions such as swaps, caps, floors or collars (collectively,
all the above are called "Strategic Transactions"). Strategic Transactions may
be used in an attempt to protect against possible changes in the market value of
securities held in or to be purchased for the Fund's portfolio resulting from
securities markets fluctuations, to protect the Fund's unrealized gains in the
value of its portfolio securities, to facilitate the sale of such securities for
investment purposes, to manage the effective maturity or duration of the Fund's
portfolio, or to establish a position in the derivatives markets as a temporary
substitute for purchasing or selling particular securities. In addition to the
hedging transactions referred to in the preceding sentence, Strategic
Transactions may also be used to enhance potential gain in circumstances where
hedging is not involved although the Fund will attempt to limit its net loss
exposure resulting from Strategic Transactions entered into for such purposes to
not more than 3% of the Fund's net assets at any one time and, to the extent
necessary, the Fund will close out transactions in order to comply with this
limitation. (Transactions such as writing covered call options are considered to
involve hedging for the purposes of this limitation.) In calculating the Fund's
net loss exposure from such Strategic Transactions, an unrealized gain from a
particular Strategic Transaction position would be netted against an unrealized
loss from a related Strategic Transaction position. For example, if the Adviser
believes that short-term interest rates as indicated in the forward yield curve
are too high, the Fund may take a short position in a near-term Eurodollar
futures contract and a long position in a longer-dated Eurodollar futures
contract. Under such circumstances, any unrealized loss in the near-term
Eurodollar futures position would be netted against any unrealized gain in the
longer-dated Eurodollar futures position (and vice versa) for purposes of
calculating the Fund's net loss exposure. The ability of the Fund to utilize
these Strategic Transactions successfully will depend on the Adviser's ability
to predict pertinent market movements, which cannot be assured. The Fund will
comply with applicable regulatory requirements when implementing these
strategies, techniques and instruments. The Fund's activities involving
Strategic Transactions may be limited by the requirements of Subchapter M of the
Internal Revenue Code of 1986, as amended (the "Code"), for qualification as a
regulated investment company.
Strategic Transactions have risks associated with them including possible
default by the other party to the transaction, illiquidity and, to the extent
the Adviser's view as to certain market movements is incorrect, the risk that
the use of such Strategic Transactions could result in losses greater than if
they had not been used. The writing of put and call options may result in losses
to the Fund, force the purchase or sale, respectively, of portfolio securities
at inopportune times or for prices higher than (in the case of purchases due to
the exercise of put options) or lower than (in the case of sales due to the
exercise of call options) current market values, limit the amount of
appreciation the Fund can realize on its investments or cause the Fund to hold a
security it might otherwise sell. The use of options and futures transactions
entails certain other risks. In particular, the variable degree of correlation
between price movements of futures contracts and price movements in the related
portfolio position of the Fund creates the possibility that losses on the
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hedging instrument may be greater than gains in the value of the Fund's
position. The writing of options could significantly increase the Fund's
portfolio turnover rate and, therefore, associated brokerage commissions or
spreads. In addition, futures and options markets may not be liquid in all
circumstances and certain over-the-counter options may have no markets. As a
result, in certain markets, the Fund might not be able to close out a
transaction without incurring substantial losses, if at all. Although the use of
futures and options transactions for hedging should tend to minimize the risk of
loss due to a decline in the value of the hedged position, at the same time, in
certain circumstances, these transactions tend to limit any potential gain which
might result from an increase in value of such position. The loss incurred by
the Fund in writing options on futures and entering into futures transactions is
potentially unlimited; however, as described above, the Fund will attempt to
limit its net loss exposure resulting from Strategic Transactions entered into
for non-hedging purposes to not more than 3% of its net assets at any one time.
Futures markets are highly volatile and the use of futures may increase the
volatility of the Fund's net asset value. Finally, entering into futures
contracts would create a greater ongoing potential financial risk than would
purchases of options where the exposure is limited to the cost of the initial
premium. Losses resulting from the use of Strategic Transactions would reduce
net asset value and the net result may be less favorable than if the Strategic
Transactions had not been utilized. Distributions by the Fund of any net income
or gains from its Strategic Transactions will be taxable to investors. Further
information concerning the Fund's Strategic Transactions is set forth in the
Statement of Additional Information.
When-Issued Securities and "Delayed Delivery" Securities
The Fund may commit up to 40% of its net assets to purchase securities on a
"when-issued" or "delayed delivery" basis, but will only do so with the
intention of actually acquiring the securities. The payment obligation and the
interest rate on these securities will be fixed at the time the Fund enters into
the commitment, but no income will accrue to the Fund until they are delivered
and paid for. Unless the Fund has entered into an offsetting agreement to sell
the securities, cash or liquid, high grade debt securities assets equal to the
amount of the Fund's commitment will be segregated with the custodian for the
Fund to secure the Fund's obligation and to ensure that it is not leveraged. The
market value of the securities when they are delivered may be less than the
amount paid by the Fund. The Fund may sell portfolio securities on a delayed
delivery basis. The market value of the securities when they are delivered may
be more than the amount to be received by the Fund.
Repurchase Agreements
The Fund may invest up to 15% of its net assets in repurchase agreements
under normal circumstances. Repurchase agreements acquired by the Fund will
always be fully collateralized as to principal and interest by money market
instruments and will be entered into only with commercial banks, brokers and
dealers considered creditworthy by the Adviser. If the other party or "seller"
of a repurchase agreement defaults, the Fund might suffer a loss to the extent
that the proceeds from the sale of the underlying securities and other
collateral held by the Fund in connection with the related repurchase agreement
are less than the repurchase price. In addition, in the event of bankruptcy of
the seller or failure of the seller to repurchase the securities as agreed, the
Fund could suffer losses, including loss of interest on or principal of the
security and costs associated with delay and enforcement of the repurchase
agreement. Distributions by the Fund of any income from repurchase agreements
will be taxable to investors.
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Stand-By Commitments and Other Puts
To facilitate liquidity, the Fund may enter into "stand-by commitments"
permitting it to resell municipal securities to the original seller at a
specified price. Stand-by commitments generally involve no cost. Any such costs
may, however, reduce yields.
Third Party Puts
The Fund may also purchase long-term fixed rate bonds which have been
coupled with an option granted by a third party financial institution allowing
the Fund at specified intervals to tender or put its bonds to the institution
and receive the face value thereof. These third party puts are available in
several different forms, may be represented by custodial receipts or trust
certificates and may be combined with other features. The financial institution
granting the put option does not provide credit enhancement, and typically, if
there is a default on or significant downgrading of the bond, or a loss of its
tax-exempt status, the put option will terminate automatically and the risk to
the Fund will be that of holding a long-term bond. These third party puts will
not be considered to shorten the Fund's maturity.
Investment Restrictions
The Fund has adopted certain fundamental policies which may not be changed
without the approval of the Fund's shareholders. These policies provide, among
other things, that the Fund may not: (i) invest, with respect to at least 50% of
its total assets, more than 5% in the securities of any one issuer (other than
the U.S. Government, its agencies or instrumentalities) or acquire more than 10%
of the outstanding voting securities of any issuer (in determining the issuer of
a tax-exempt security, identification of the issuer will be based upon a
determination of the source of assets and revenues committed to meeting interest
and principal payments of each security); (ii) issue senior securities, borrow
money or pledge or mortgage its assets, except that the Fund may borrow from
banks as a temporary measure for extraordinary or emergency purposes (but not
investment purposes) in an amount up to 15% of the current value of its total
assets, and pledge its assets to an extent not greater than 15% of the current
value of its total assets to secure such borrowings; however, the Fund may not
make any additional investments while its outstanding borrowings exceed 5% of
the current value of its total assets; (iii) lend portfolio securities, except
that the Fund may enter into repurchase agreements which are terminable within
seven days; or (iv) invest more than an aggregate of 15% of the net assets of
the Fund in securities subject to legal or contractual restrictions on resale or
for which there are no readily available market quotations or in other illiquid
securities.
If any percentage restriction described above is adhered to at the time of
investment, a subsequent increase or decrease in the percentage resulting from a
change in the value of the Fund's assets will not constitute a violation of the
restriction. Certain non-fundamental policies and additional fundamental
policies adopted by the Fund are described in the Statement of Additional
Information.
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RISK FACTORS AND SUITABILITY
The Fund is designed for investors in the upper income tax brackets who are
seeking a higher level of Massachusetts and federal tax-free income than is
normally provided by tax-free money market or other short-term investments and
more price stability than investments in long-term municipal bonds. The Fund may
also be suitable for other investors, depending upon their investment goals and
financial and tax positions. Generally, a mutual fund with an average maturity
longer than the Fund will tend to have a higher yield, but will exhibit greater
share price volatility; a fund with a shorter maturity will have a lower yield
but will offer more price stability. The Fund's emphasis on high quality
securities is expected to limit its share price volatility.
The classification of the Fund under the Investment Company Act of 1940 as
a "non-diversified" investment company allows it to invest more than 5% of its
assets in the securities of any issuer, subject to certain limitations under the
Code. Because of the relatively small number of issues of Massachusetts
obligations, the Fund is likely to invest a greater percentage of its assets in
the securities of a single issuer than is an investment company which invests in
a broad range of municipal obligations. Therefore, the Fund would be more
susceptible than a diversified fund to any single adverse economic or political
occurrence or development affecting Massachusetts issuers. The Fund will also be
subject to an increased risk of loss if the issuer is unable to make interest or
principal payments or if the market value of such securities declines. It is
also possible that there will not be sufficient availability of suitable
Massachusetts Municipal Securities for the Fund to achieve its objective of
providing income exempt from Massachusetts taxes.
The market value of the Fund's investments will change in response to
changes in interest rates and other factors. During periods of falling interest
rates, the values of long-term fixed-income securities generally rise.
Conversely, during periods of rising interest rates, the values of such
securities generally decline. Changes by recognized rating services in their
ratings of tax-exempt securities and in the ability of an issuer to make
payments of interest and repayments of principal will also affect the value of
these investments. Changes in the value of portfolio securities will not affect
cash income derived from those securities but will affect the Fund's net asset
value.
Certain Risk Considerations Relating to Massachusetts
The Fund is non-diversified and invests primarily in securities issued by
The Commonwealth of Massachusetts, its political subdivisions, including cities
and towns, and its public authorities. Therefore, the economic and financial
condition of the Commonwealth and its authorities and municipalities will have a
significant impact on the Fund's net asset value, yield and investment
performance. The availability of federal funds may affect the economic and
financial condition of the Commonwealth.
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<PAGE>
In the late 1980s, The Commonwealth of Massachusetts began to suffer a
period of economic decline. Key sections of the economy, such as real estate,
construction, banking and financial services, high technology and defense
related industries either contracted or grew at very slow rates. Consequently,
personal income growth slowed and employment declined. By 1990, the
Commonwealth's unemployment rate significantly exceeded the national average. In
turn, these economic factors contributed to considerable financial problems for
the Commonwealth. Over the period 1987-1990, tax revenues failed to meet
budgeted forecasts and spending in several major expenditure categories grew at
relatively high rates. Sizeable operating deficits occurred in each of these
years, and the Commonwealth at times covered the deficits by borrowing funds in
the capital markets. During 1989-1990, Moody's and S&P downgraded their credit
ratings on Massachusetts' bonds from Aa and AA+ to Baa and BBB, respectively.
In fiscal year 1991, a combination of tax rate increases and tightened
expenditure controls helped to stabilize the Commonwealth's financial condition.
State government closed the year with a modest operating loss. Fiscal year 1992
financial reports showed a small surplus. In response to the improvement in
financial operations, Moody's and S&P upgraded the Commonwealth's general
obligation bonds to A and A, respectively. During the two most recent fiscal
years, 1994 and 1995, economic conditions have generally stabilized, although
some sectors remain weak. Financial operations also appear to have stabilized.
Currently, the rating assigned to the Commonwealth's general obligation bonds by
Moody's is A1 and the comparable rating assigned by S&P is A+. Fitch's current
rating for the Commonwealth's general obligation bonds is A+. However, the
Commonwealth's debt ratios are high relative to other states, and state
government has amassed a large unfunded pension liability. Over the course of
time, downturns in economic and financial conditions are likely to recur.
The financial position of the Commonwealth may have an impact on other
issuers of tax-exempt obligations who receive support from the Commonwealth
including municipalities and various public agencies. The Commonwealth may also
choose to implement regulations which could affect the financial condition of
issuers of tax-exempt securities. For example, changes to laws which regulate
rate setting procedures for health care providers in Massachusetts which were
enacted in 1992 may prove detrimental to some hospitals.
Proposition 2 1/2 is a property tax limitation initiative passed by
Massachusetts voters in 1980. In general, Proposition 2 1/2 constrains the
ability of cities and town to raise property tax revenues, virtually the only
local-source revenue available, and this may lead to adverse consequences on the
financial condition of some municipalities. Under Proposition 2 1/2, many cities
and towns were required to reduce their property tax levies to a stated
percentage of the full and fair cash value of their taxable real estate and
personal property. It limited the amount by which the total property taxes
assessed by all cities and towns may increase from year to year.
Limitations on Commonwealth tax revenues have been established both by
legislation enacted in 1986 and by public approval of an initiative petition in
1986. The two measures are inconsistent in several respects, including the
methods of calculating the limits and the exclusions from the limits. The
initiative petition, which took effect on December 4, 1986, contains no
exclusion for debt service on municipal obligations of the Commonwealth.
Commonwealth tax revenues in fiscal years subsequent to passage of the
initiative were lower than the limit set by either the initiative petition or
the legislative enactment. The Executive Office for Administration and Finance
of the Commonwealth has estimated that Commonwealth tax revenues will not reach
the limit imposed by either the initiative petition or the legislative enactment
in fiscal year 1995.
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Massachusetts Municipal Securities also include obligations of the
governments of Puerto Rico, the Virgin Islands and Guam to the extent that
interest on these obligations is exempt from Massachusetts state personal income
tax. The Fund will not invest more than 10% of its net assets in the obligations
of each of the Virgin Islands and Guam, but may invest without limitation in the
obligations of Puerto Rico. Accordingly, the Fund may be adversely affected by
local political and economic conditions and developments within Puerto Rico
affecting the issuers of such obligations. The economy of Puerto Rico is
dominated by the manufacturing and service sectors. Although the economy of
Puerto Rico expanded significantly from 1984 thorough 1989, the rate of this
expansion slowed in 1990 and remains weak. Although the Puerto Rico unemployment
rate has declined substantially since 1985, the seasonally adjusted rate of
unemployment for February 1995 was approximately 12.3%.
CALCULATION OF PERFORMANCE DATA
From time to time the Fund may advertise its yield, tax equivalent yield
and total return, all of which are based on historical earnings and are not
intended to indicate future performance. The "total return" of the Fund refers
to the average annual compounded rates of return over 1, 5 and 10-year periods
(or any shorter period since inception) that would equate an initial amount
invested at the beginning of a stated period to the ending redeemable value of
the investment. The calculation assumes the reinvestment of all dividends and
distributions, includes all recurring fees that are charged to all shareholder
accounts and deducts all nonrecurring charges at the end of each period.
The "yield" of the Fund is computed by dividing the net investment income
per share earned during the period stated in the advertisement by the maximum
offering price per share on the last day of the period (using the average number
of shares entitled to receive dividends). For the purpose of determining net
investment income, the calculation includes among expenses of the Fund all
recurring fees that are charged to all shareholder accounts and any nonrecurring
charges for the period stated.
Tax equivalent yield demonstrates the yield from a taxable investment
necessary to produce an after-tax yield equivalent to that of a fund which
invests primarily in tax-exempt obligations. It is computed by dividing the
tax-exempt portion of the Fund's yield (calculated as indicated below) by one,
minus a stated income tax rate that reflects combined federal and Massachusetts
income tax rates (assuming full deductibility of Massachusetts income taxes on
the investor's Federal income tax return and adding the product to the taxable
portion (if any) of the Fund's yield.
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TAXABLE EQUIVALENT YIELD TABLE
Combined
Federal
and MA Taxable Equivalent Rates Based on
Marginal Tax-Exempt Yield of:
Tax Rate* 4% 5% 6% 7% 8% 9% 10%
- - --------------------------------------------------------------------------------
39.28% 6.59% 8.23% 9.88% 11.53% 13.18% 14.82% 16.47%
43.68% 7.10% 8.88% 10.65% 12.43% 14.20% 15.98% 17.76%
46.85% 7.53% 9.41% 11.29% 13.17% 15.05% 16.93% 18.81%
*Assuming a Massachusetts tax rate of 12% and federal tax rates of 31%, 36% and
39.6%, respectively.
From time to time, the Fund may compare its performance with that of other
mutual funds with similar investment objectives, to bond and other relevant
indices, and to performance rankings prepared by recognized mutual fund
statistical services. In addition, the Fund's performance may be compared to
alternative investment or savings vehicles and/or to indices or indicators of
economic activity.
DIVIDENDS AND DISTRIBUTIONS
Dividends on shares of the Fund from net investment income will be declared
daily and distributed monthly. Dividends from short-term and long-term capital
gains, if any, after reduction by capital losses, will be declared and
distributed at least annually. Dividends from net investment income and capital
gains distributions, if any, are automatically reinvested in additional shares
of the Fund unless the shareholder elects to receive them in cash.
PURCHASE OF SHARES
Shares of the Fund may be purchased directly from the Principal
Underwriter, which offers the Fund's shares to the public on a continuous basis.
Shares are sold at the net asset value per share next computed after the
purchase order is received in good order by the Principal Underwriter and
payment for the shares is received by the Fund's custodian. Please see the
Fund's account application or call the Principal Underwriter for instructions on
how to make payment of shares to the Fund's custodian. Unless waived by the
Fund, the minimum initial investment is $100,000. Additional investments may be
made in amounts of at least $5,000.
Shares of the Fund may also be purchased through securities dealers. Orders
for the purchase of Fund shares received by dealers by the close of regular
trading on the New York Stock Exchange on any business day and transmitted to
the Principal Underwriter or its agent by the close of its business day
(normally 4:00 p.m., New York City time) will be effected as of the close of
regular trading on the New York Stock Exchange on that day, provided that
payment for the shares is also received by the Fund's custodian on that day.
Otherwise, orders will be effected at the net asset value per share determined
on the next business day. It is the responsibility of dealers to transmit orders
so that they will be received by the Principal Underwriter before the close of
its business day. Shares of the Fund purchased through dealers may be subject to
transaction fees, no part of which will be received by the Fund, the Principal
Underwriter or the Adviser.
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The Fund's net asset value per share is computed each day on which the New
York Stock Exchange is open as of the close of regular trading (currently 4:00
p.m., New York City time). The net asset value per share is calculated by
determining the value of all the Fund's assets, subtracting all liabilities and
dividing the result by the total number of shares outstanding. Municipal
securities are valued by the Adviser or by an independent pricing service
approved by the Trustees, which uses information with respect to transactions in
bonds, quotations from bond dealers, market transactions in comparable
securities and various relationships between securities in determining value.
The Fund believes that reliable market quotations for municipal securities are
generally not readily available for purposes of valuing its portfolio
securities. As a result, it is likely that most of the valuations made by the
Adviser or provided by such pricing service will be based upon fair value
determined on the basis of the factors listed above (which also include the use
of yield equivalents or matrix pricing). Taxable securities are valued at the
last sale prices, on the valuation day, on the exchange or national securities
market on which they are primarily traded; taxable securities not listed on an
exchange or national securities market, or securities for which there were no
reported transactions, are valued at the last quoted bid prices. Securities for
which quotations are not readily available and all other assets are valued at
fair value as determined in good faith by the Adviser in accordance with
procedures approved by the Trustees. Money market instruments with less than 60
days remaining to maturity when acquired by the Fund are valued on an amortized
cost basis unless the Trustees determine that amortized cost does not represent
fair value. If the Fund acquires a money market instrument with more than 60
days remaining to its maturity, it is valued at current market value until the
sixtieth day prior to maturity and will then be valued at amortized cost based
upon its value on such date unless the Trustees determine during such 60-day
period that amortized cost does not represent fair value.
In the sole discretion of the Adviser, the Fund may accept securities
instead of cash for the purchase of shares of the Fund. The Adviser will
determine that any securities acquired in this manner are consistent with the
investment objective, policies and restrictions of the Fund. The securities will
be valued in the manner stated above. The purchase of shares of the Fund for
securities instead of cash may cause an investor who contributed them to realize
a taxable gain or loss with respect to the securities transferred to the Fund.
The Trust reserves the right in its sole discretion (i) to suspend the
offering of the Fund's shares, (ii) to reject purchase orders when in the best
interest of the Fund and (iii) to modify or eliminate the minimum initial
investment in Fund shares. The Fund's investment minimums do not apply to
accounts for which the Adviser or any of its affiliates serves as investment
adviser or to employees of the Adviser or any of its affiliates or to members of
such persons' immediate families. The Fund's investment minimums apply to the
aggregate value invested in omnibus accounts rather than to the investment of
the underlying participants in such omnibus accounts.
EXCHANGE OF SHARES
Shares of the Fund may be exchanged for shares of one or more other funds
in the Standish, Ayer & Wood family of funds. Shares of the Fund redeemed in an
exchange transaction are valued at their net asset value next determined after
the exchange request is received by the Principal Underwriter or its agent.
Shares of a fund purchased in an exchange transaction are sold at their net
asset value next determined after the exchange request is received by the
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Principal Underwriter or its agent and payment for the shares is received by the
fund into which your shares are to be exchanged. Until receipt of the purchase
price by the fund into which your shares are to be exchanged (which may take up
to three business days), your money will not be invested. To obtain a current
prospectus for any of the other funds in the Standish, Ayer & Wood family of
funds, please call the Principal Underwriter at (800) 221-4795. Please consider
the differences in investment objectives and expenses of a fund as described in
its prospectus before making an exchange.
Written Exchanges
Shares of the Fund may be exchanged by written order to the Principal
Underwriter, One Financial Center, Boston, Massachusetts 02111. A written
exchange request must (a) state the name of the current Fund, (b) state the name
of the fund into which the current Fund shares will be exchanged, (c) state the
number of shares or the dollar amount to be exchanged, (d) identify the
shareholder's account numbers in both funds and (e) be signed by each registered
owner exactly as the shares are registered. Signature(s) must be guaranteed as
listed under "Written Redemption" below.
Telephonic Exchanges
Shareholders who elect telephonic privileges may exchange shares by calling
the Principal Underwriter at (800) 221-4795. Telephonic privileges are not
available to shareholders automatically. Proper identification will be required
for each telephonic exchange. Please see "Telephone Transactions" below for more
information regarding telephonic transactions.
General Exchange Information
All exchanges are subject to the following exchange restrictions: (i) the
fund into which shares are being exchanged must be registered for sale in your
state; (ii) exchanges may be made only between funds that are registered in the
same name, address and, if applicable, taxpayer identification number; and (iii)
unless waived by the Trust, the amount to be exchanged must satisfy the minimum
account size of the fund to be exchanged into. Exchange requests will not be
processed until payment for the shares of the current Fund have been received by
the Fund's custodian. The exchange privilege may be changed or discontinued and
may be subject to additional limitations upon sixty (60) days' notice to
shareholders, including certain restrictions on purchases by market-timer
accounts.
REDEMPTION OF SHARES
Shares of the Fund may be redeemed by any of the methods described below at
the net asset value per share next determined after receipt by the Principal
Underwriter or its agent of a redemption request in proper form. Redemptions
will not be processed until a completed Share Purchase Application and payment
for the shares to be redeemed have been received.
Written Redemption
Shares of the Fund may be redeemed by written order to the Principal
Underwriter, One Financial Center, 26th Floor, Boston, Massachusetts 02111. A
written redemption request must (a) state the name of the Fund and the number of
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shares or the dollar amount to be redeemed, (b) identify the shareholder's
account number and (c) be signed by each registered owner exactly as the shares
are registered. Signature(s) must be guaranteed by a member of either the
Securities Transfer Association's STAMP program or the New York Stock Exchange's
Medallion Signature Program or by any one of the following institutions,
provided that such institution meets credit standards established by Investors
Bank & Trust Company, the Fund's transfer agent: (i) a bank; (ii) a securities
broker or dealer, including a government or municipal securities broker or
dealer, that is a member of a clearing corporation or has net capital of at
least $100,000; (iii) a credit union having authority to issue signature
guarantees; (iv) a savings and loan association, a building and loan
association, a cooperative bank, or a federal savings bank or association; or
(v) a national securities exchange, a registered securities exchange or a
clearing agency. Additional supporting documents may be required in the case of
estates, trusts, corporations, partnerships and other shareholders that are not
individuals. Redemption proceeds will normally be paid by check mailed within
three business days of receipt by the Principal Underwriter of a written
redemption request in proper form. If shares to be redeemed were recently
purchased by check, the Fund may delay transmittal of redemption proceeds until
such time as it has assured itself that good funds have been collected for the
purchase of such shares. This may take up to fifteen (15) days in the case of
payments made by check.
Telephonic Redemption
Shareholders who elect telephonic privileges may redeem shares by calling
the Principal Underwriter at (800) 221-4795. Telephonic privileges are not
available to shareholders automatically. Redemption proceeds will be mailed or
wired in accordance with the shareholder's instruction on the account
application to a pre-designated account. Redemption proceeds will normally be
paid promptly after receipt of telephonic instructions, but no later than three
business days thereafter, except as described above for shares purchased by
check. Redemption proceeds will be sent only by check payable to the shareholder
of record at the address of record, unless the shareholder has indicated, in the
initial application for the purchase of shares, a commercial bank to which
redemption proceeds may be sent by wire. These instructions may be changed
subsequently only in writing, accompanied by a signature guarantee, and
additional documentation in the case of shares held by a corporation or other
entity or by a fiduciary such as a trustee or executor. Wire charges, if any,
will be deducted from redemption proceeds. Proper identification will be
required for each telephonic redemption.
Repurchase Order
In addition to telephonic and written redemption of Fund shares, the
Principal Underwriter may accept telephone orders from brokers or dealers for
the repurchase of Fund shares. The repurchase price is the net asset value per
share next determined after receipt of the repurchase order by the Principal
Underwriter and the payment for the shares by the Fund's custodian. Brokers and
dealers are obligated to transmit repurchase orders to the Principal Underwriter
prior to the close of the Principal Underwriter's business day (normally 4:00
p.m.). Brokers and dealers may charge for their services in connection with a
repurchase of Fund shares, but neither the Fund nor the Principal Underwriter
imposes a charge for share repurchases.
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Telephone Transactions
By maintaining an account that is eligible for telephonic exchange and
redemption privileges, the shareholder authorizes the Adviser, the Principal
Underwriter, the Fund and the Fund's custodian to act upon instructions of any
person to redeem and/or exchange shares from the shareholder's account. Further,
the shareholder acknowledges that, as long as the Fund employs reasonable
procedures to confirm that telephonic instructions are genuine, and follows
telephonic instructions that it reasonably believes to be genuine, neither the
Adviser, nor the Principal Underwriter, nor the Trust, nor the Fund, nor the
Fund's custodian, nor their respective officers or employees, will be liable for
any loss, expense or cost arising out of any request for a telephonic redemption
or exchange, even if such transaction results from any fraudulent or
unauthorized instructions. Depending upon the circumstances, the Fund intends to
employ personal identification or written confirmation of transactions
procedures, and if it does not, the Fund may be liable for any losses due to
unauthorized or fraudulent instructions. All telephone transaction requests will
be recorded. Shareholders may experience delays in exercising telephone
transaction privileges during periods of abnormal market activity. Accordingly,
during periods of volatile economic and market conditions, shareholders may wish
to consider transmitting redemption and exchange requests in writing.
* * * *
The proceeds paid upon redemption or repurchase may be more or less than
the cost of the shares, depending upon the market value of the Fund's portfolio
investments at the time of redemption or repurchase. The Fund intends to pay
cash for all shares redeemed, but under certain conditions, the Fund may make
payments wholly or partially in portfolio securities.
Because of the cost of maintaining shareholder accounts, the Fund may
redeem, at net asset value, the shares in any account which has a value of less
than $10,000 as a result of redemptions or transfers. Before doing so, the Fund
will notify the shareholder that the value of the shares in the account is less
than the specified minimum and will allow the shareholder 30 days to make an
additional investment in an amount which will increase the value of the account
to at least $10,000. The Fund may eliminate duplicate mailings of Fund materials
to shareholders that have the same address of record.
MANAGEMENT
Trustees
The Fund is a separate investment series of Standish, Ayer & Wood
Investment Trust, a Massachusetts business trust. Under the terms of the
Agreement and Declaration of Trust establishing the Trust, which is governed by
the laws of The Commonwealth of Massachusetts, the Trustees of the Trust are
ultimately responsible for the management of its business and affairs.
Investment Adviser
Standish, Ayer & Wood, Inc. (the "Adviser"), One Financial Center, Boston,
Massachusetts 02111, serves as investment adviser to the Fund pursuant to an
investment advisory agreement and manages the Fund's investments and affairs
subject to the supervision of the Trustees of the Trust. The Adviser is a
Massachusetts corporation incorporated in 1933 and is a registered investment
adviser under the Investment Advisers Act of 1940.
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The Adviser provides fully discretionary management services and counseling
and advisory services to a broad range of clients throughout the United States
and abroad. As of March 31, 1996, the Adviser or its affiliate, Standish
International Management Company, L.P. ("SIMCO"), served as the investment
adviser to each of the following fourteen funds in the Standish, Ayer & Wood
family of funds:
Net Assets
Funds (March 31, 1996)
- - --------------------------------------------------------------------------------
Standish Controlled Maturity Fund $ 9,042,346
Standish Equity Portfolio 98,282,505
Standish Fixed Income Portfolio 2,299,158,500
Standish Fixed Income Fund II 10,102,031
Standish Global Fixed Income Portfolio 149,048,965
Standish Intermediate Tax Exempt Bond Fund 31,199,236
Standish International Equity Fund 51,980,946
Standish International Fixed Income Fund 761,073,675
Standish Massachusetts Intermediate
Tax Exempt Bond Fund 32,270,691
Standish Securitized Fund 53,357,787
Standish Short-Term Asset Reserve Fund 272,188,970
Standish Small Capitalization Equity Portfolio 196,260,876
Standish Small Cap Tax-Sensitive Equity Fund 1,588,743
Standish Tax-Sensitive Equity Fund 1,261,111
Corporate pension funds are the largest asset under active management by
Standish. Standish's clients also include charitable and educational endowment
funds, financial institutions, trusts and individual investors. As of March 31,
1996, Standish managed approximately $29 billion in assets.
The Fund's portfolio managers are Maria D. Furman and Raymond J. Kubiak,
who have been primarily responsible for the day-to-day management of the Fund's
portfolio since its inception in November, 1992. During the past five years, Ms.
Furman has served as a Director and Vice President of the Adviser and Mr. Kubiak
has been a Vice President of the Adviser.
Subject to the supervision and direction of the Trustees, the Adviser
manages the Fund's portfolio in accordance with its stated investment objective
and policies, recommends investment decisions for the Fund, places orders to
purchase and sell securities on behalf of the Fund, administers the affairs of
the Fund and permits the Fund to use the name "Standish." For these services,
the Fund pays a fee monthly at the annual rate of 0.40% of average daily net
assets. The Adviser has voluntarily agreed to limit the Fund's aggregate annual
operating expenses (excluding brokerage commissions, taxes and extraordinary
expenses) to 0.65% of the Fund's average daily net assets. The Adviser may
discontinue or modify such limitation in the future at its discretion, although
it has no current intention to do so. The Adviser has also agreed to limit the
Fund's total operating expenses (excluding brokerage commissions, taxes and
18
<PAGE>
extraordinary expenses) to the permissible limit applicable in any state in
which shares of the Fund are then qualified for sale. If the expense limit is
exceeded, the compensation due the Adviser for such fiscal year shall be
proportionately reduced by the amount of such excess by a reduction or refund
thereof at the time such compensation is payable after the end of each calendar
month, subject to readjustment during the fiscal year. For the fiscal year ended
December 31, 1995, the advisory fees paid to the Adviser totalled $124,213,
which represented 0.40% of the Fund's average daily net assets. During this
period the Adviser voluntarily agreed not to impose $21,818 of its fee.
Expenses
The Fund bears all expenses of its operations other than those incurred by
the Adviser under the investment advisory agreement. Among other expenses, the
Fund will pay investment advisory fees; bookkeeping, share pricing and
shareholder servicing fees and expenses; custodian fees and expenses; legal and
auditing fees; expenses of prospectuses, statements of additional information
and shareholder reports which are furnished to shareholders; registration and
reporting fees and expenses; and Trustees' fees and expenses. The Principal
Underwriter bears without subsequent reimbursement the distribution expenses
attributable to the offering and sale of Fund shares. Expenses of the Trust
which relate to more than one series are allocated among such series by the
Adviser and SIMCO in an equitable manner, primarily on the basis of relative net
asset values. For the year ended December 31, 1995, expenses borne by the Fund
amounted to $223,173 which represented 0.65% of the Fund's average daily net
assets after an expense reduction of $21,818.
Portfolio Transactions
It is not anticipated that the Fund will incur a significant amount of
brokerage expenses because municipal securities are generally traded on a "net"
basis in principal transactions without the addition or deduction of brokerage
commissions or transfer taxes. Subject to the supervision of the Trustees of the
Trust, the Adviser selects the brokers and dealers that execute orders to
purchase and sell portfolio securities for the Fund. The Adviser will generally
seek to obtain the best available price and most favorable execution with
respect to all transactions for the Fund.
Subject to the consideration of best price and execution and to applicable
regulations, the receipt of research and sales of Fund shares may also be
considered factors in the selection of brokers and dealers that execute orders
to purchase and sell portfolio securities for the Fund.
FEDERAL INCOME TAXES
The Fund presently qualifies and intends to continue to qualify for
taxation as a "regulated investment company" under the Code. If it qualifies for
treatment as a regulated investment company, the Fund will not be subject to
federal income tax on income (including capital gains) distributed to
shareholders in the form of dividends or capital gain distributions in
accordance with certain timing requirements of the Code.
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The Fund will be subject to a nondeductible 4% excise tax under the Code to
the extent that it fails to meet certain distribution requirements with respect
to each calendar year. Certain distributions made in order to satisfy the Code's
distribution requirements may be declared by the Fund during October, November
or December of the year but paid during the following January. Such
distributions will be treated by taxable shareholders as if received on December
31 of the year the distributions are declared, rather than the year in which the
distributions are received.
The Fund intends to satisfy applicable requirements of the Code so that its
distributions to shareholders of the tax-exempt interest it earns will qualify
as "exempt-interest dividends," which shareholders are entitled to treat as
tax-exempt interest. Any portion of an exempt-interest dividend that is
attributable to the interest the Fund receives on certain tax-exempt obligations
that are "private activity bonds" and, for corporate shareholders, the entire
exempt-interest dividend, may increase a shareholder's liability, if any, for
alternative minimum tax.
Shareholders receiving social security benefits and certain railroad
retirement benefits may be subject to Federal income tax on a portion of such
benefits as a result of receiving investment income, including tax-exempt income
(such as exempt-interest dividends) and other dividends paid by the Fund. Shares
of the Fund may not be an appropriate investment for persons who are
"substantial users" of facilities financed by industrial development or private
activity bonds, or persons related to "substantial users." Consult your tax
advisor if you think this may apply to you.
Shareholders which are taxable entities or persons will be subject to
federal income tax on capital gain distributions from the Fund and on any other
dividends they receive from the Fund that are not exempt-interest dividends.
Dividends paid by the Fund from any taxable net investment income, such as
interest income from taxable debt obligations, accrued market discount
recognized by the Fund, or repurchase agreements, and any excess of net
short-term capital gain over net long-term capital loss will be taxable to
shareholders as ordinary income, whether received in cash or Fund shares.
Dividends paid by the Fund from net capital gain (the excess of net long-term
capital gain over net short-term capital loss), called "capital gain
distributions," will be taxable to shareholders as long-term capital gains,
whether received in cash or Fund shares and without regard to how long the
shareholder has held shares of the Fund. None of the Fund's exempt-interest
dividends, taxable income dividends or capital gain distributions will qualify
for the corporate dividends received deduction. Except as described below under
"Massachusetts Income Taxes," dividends and capital gain distributions may also
be subject to state and local or foreign taxes.
Redemptions and repurchases of shares are taxable events on which a
shareholder may recognize a gain or loss. Special rules disallow any losses on
the sale or exchange of Fund shares with a tax holding period of six months or
less, to the extent the shareholder received exempt-interest dividends with
respect to such shares, and recharacterize as long-term any such losses that are
not disallowed to the extent of any capital gain distributions received with
respect to such shares.
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<PAGE>
Individuals and certain other classes of shareholders may be subject to 31%
backup withholding of federal income tax on taxable dividends, capital gain
distributions, and the proceeds of redemptions or repurchases of shares, if they
fail to furnish the Fund with their correct taxpayer identification number and
certain certifications or if they are otherwise subject to backup withholding.
Individuals, corporations and other shareholders that are not U.S. persons under
the Code are subject to different tax rules and may be subject to nonresident
alien withholding at the rate of 30% (or a lower rate provided by an applicable
tax treaty) on amounts treated as ordinary taxable dividends from the Fund and,
unless a current IRS Form W-8 or an acceptable substitute is furnished to the
Fund, to backup withholding on certain payments from the Fund.
MASSACHUSETTS INCOME TAXES
To the extent that the Fund's exempt-interest dividends are derived from
interest on tax-exempt obligations of the Commonwealth of Massachusetts and its
political subdivisions or Puerto Rico, the U.S. Virgin Islands or Guam and are
properly designated as such, these distributions will also be exempt from
Massachusetts personal income tax. For Massachusetts personal income tax
purposes, dividends from the Fund's taxable net investment income (if any),
federally tax-exempt income from obligations not described in the preceding
sentence, and net short-term capital gains, if any, will generally be taxable as
ordinary income, whether received in cash or additional shares. However, any
dividends that are properly designated as attributable to interest the Fund
receives on direct U.S. Government obligations will not be subject to
Massachusetts personal income tax. Capital gain distributions are generally
taxable as long-term capital gains, regardless of how long shareholders have
held their Fund shares. However, a portion of such a capital gain distribution
will be exempt from Massachusetts personal income tax if it is properly
designated as attributable to gains realized on the sale of certain tax-exempt
bonds issued pursuant to Massachusetts statutes that specifically exempt such
gains from Massachusetts taxation. These bonds are relatively few in number.
Dividends from net investment income (including exempt-interest dividends) and
from net long-term and short-term capital gains will be subject to, and shares
of the Fund will be included in the net worth of intangible property
corporations for purposes of, the Massachusetts corporation excise tax if
received by a corporation subject to such tax.
After the close of each calendar year, the Fund will send a notice to
shareholders that provides information about the federal and Massachusetts tax
status of distributions to shareholders for such calendar year.
THE FUND AND ITS SHARES
The Fund is a separate investment series of Standish, Ayer & Wood
Investment Trust, an unincorporated business trust organized under the laws of
The Commonwealth of Massachusetts pursuant to an Agreement and Declaration of
Trust dated August 13, 1986. Under the Agreement and Declaration of Trust, the
Trustees have authority to issue an unlimited number of shares of beneficial
interest, par value $.01 per share, of the Fund. Each share of the Fund is
entitled to one vote. All Fund shares have equal rights with regard to voting,
redemption, dividends, distributions and liquidation, and shareholders of the
Fund have the right to vote as a separate class with respect to certain matters
under the Investment Company Act of 1940 and the Agreement and Declaration of
Trust. Shares of the Fund do not have cumulative voting rights. Fractional
shares have proportional voting rights and participate in any distributions and
dividends. When issued, each Fund share will be fully paid and nonassessable by
the Trust. Shareholders of the Fund do not have preemptive or conversion rights.
Certificates representing shares of the Fund will not be issued.
21
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At December 31, 1995, more than 25% of the then outstanding shares of the
Fund were held by BDG & Co., c/o Bingham, Dana & Gould Trust Department, 150
Federal Street, Boston, MA, which was deemed to control the Fund.
The Trust has established fourteen series that currently offer their shares
to the public and may establish additional series at any time. Each series is a
separate taxpayer, eligible to qualify as a separate regulated investment
company for federal income tax purposes. The calculation of the net asset value
of a series and the tax consequences of investing in a series will be determined
separately for each series.
The Trust is not required to hold annual meetings of shareholders. Special
meetings of shareholders may be called from time to time for purposes such as
electing or removing Trustees, changing a fundamental policy, or approving an
investment advisory agreement.
If less than two-thirds of the Trustees holding office have been elected by
shareholders, a special meeting of shareholders of the Trust will be called to
elect Trustees. Under the Agreement and Declaration of Trust and the Investment
Company Act of 1940, the record holders of not less than two-thirds of the
outstanding shares of the Trust may remove a Trustee by votes cast in person or
by proxy at a meeting called for the purpose or by a written declaration filed
with each of the Trust's custodian banks. Except as described above, the
Trustees will continue to hold office and may appoint successor Trustees.
Whenever ten or more shareholders of the Trust who have been such for at least
six months, and who hold in the aggregate shares having a net asset value of at
least $25,000 or at least 1% of the outstanding shares, whichever is less, apply
22
<PAGE>
to the Trustees in writing stating that they wish to communicate with other
shareholders with a view to obtaining signatures to request a meeting, and such
application is accompanied by a form of communication and request which they
wish to transmit, the Trustees shall within five (5) business days after receipt
of such application either (1) afford to such applicants access to a list of the
names and addresses of all shareholders as recorded on the books of the Trust;
or (2) inform such applicants as to the approximate number of shareholders of
record and the approximate cost of mailing to them the proposed communication or
form of request.
Inquiries concerning the Fund should be made by contacting at the Principal
Underwriter at the address and telephone number listed on the cover of this
Prospectus.
CUSTODIAN, TRANSFER AGENT AND
DIVIDEND-DISBURSING AGENT
Investors Bank & Trust Company, 24 Federal Street, Boston, Massachusetts
02110, serves as the Fund's transfer agent and dividend-disbursing agent and as
custodian of all cash and securities of the Fund.
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P., One Post Office Square, Boston, Massachusetts
02109, serves as independent accountants for the Trust and will audit the Fund's
financial statements annually.
LEGAL COUNSEL
Hale and Dorr, 60 State Street, Boston, Massachusetts 02109, is legal
counsel to the Trust and to the Adviser.
- - --------------------------------------------------------------------------------
No dealer, salesman or other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus or in the Statement of Additional Information, and, if given or made,
such other information or representations must not be relied upon as having been
authorized by the Trust. This Prospectus does not constitute an offering in any
jurisdiction in which such offering may not be lawfully made.
23
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APPENDIX A
MOODY'S MUNICIPAL BOND RATINGS
Aaa -Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred
to as "gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position
of such issues.
Aa -Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities
or fluctuation of protective elements may be of greater amplitude or
there may be other elements present which make the long-term risks
appear somewhat larger than in Aaa securities.
A -Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate but
elements may be present which suggest a susceptibility to impairment
sometime in the future.
Baa -Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest
payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics
as well.
MOODY'S MUNICIPAL NOTE RATINGS
MIG-1 -Notes which are rated MIG-1 are of the best quality, enjoying strong
protection from established cash flows of funds for their servicing or
by established and broad based access to the market for refinancing, or
both.
MIG-2 -Bonds which are rated MIG-2 are of high quality, with margins of
protection ample, although not as large as in the MIG-1 group.
S & P'S MUNICIPAL BOND RATINGS
AAA -Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
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AA -Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A -Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher
rated categories.
BBB -Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than in higher
rated categories.
S & P'S MUNICIPAL NOTE RATINGS
SP-1 -Notes rated SP-1 indicate a very strong capacity to pay principal and
interest. A "plus" is added for those issues determined to possess
overwhelming safety characteristics.
SP-2 -Notes rated SP-2 indicate a satisfactory capacity to pay principal and
interest.
FITCH'S MUNICIPAL BOND RATINGS
AAA -Bonds rated AAA are considered to be investment grade and of the
highest credit quality. The obligor has an exceptionally strong ability
to pay interest and repay principal, which is unlikely to be affected by
reasonably foreseeable events.
AA -Bonds rated AA are considered to be investment grade and of very high
credit quality. The obligor's ability to pay interest and repay
principal is very strong, although not quite as strong as bonds rated
"AAA."
A -Bonds rated A are considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes
in economic conditions and circumstances than bonds with higher ratings.
BBB -Bonds rated BBB are considered to be investment grade and satisfactory
credit quality. The obligor's ability to pay interest and repay
principal is considered to be adequate. Adverse changes in economic
conditions and circumstances, however, are more likely to have adverse
effects on these bonds and, therefore, impair timely payment. The
likelihood that the ratings of these bonds will fall below investment
grade is higher than for bonds with higher ratings.
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<PAGE>
TAX CERTIFICATION INSTRUCTIONS
Federal law requires that taxable distributions and proceeds of
redemptions and exchanges be reported to the IRS and that 31% be withheld if you
fail to provide your correct Taxpayer Identification Number (TIN) and the
TIN-related certifications contained in the Account Purchase Application
(Application) or you are otherwise subject to backup withholding. The Fund will
not impose backup withholding as a result of your failure to make any
certification, except the certifications in the Application that directly relate
to your TIN and backup withholding status. Amounts withheld and forwarded to the
IRS can be credited as a payment of tax when completing your Federal income tax
return.
For most individual taxpayers, the TIN is the social security number.
Special rules apply for certain accounts. For example, for an account
established under the Uniform Gift to Minors Act, the TIN of the minor should be
furnished. If you do not have a TIN, you may apply for one using forms available
at local offices of the Social Security Administration or the IRS, and you
should write "Applied For" in the space for a TIN on the Application.
Recipients exempt from backup withholding, including corporations and
certain other entities, should provide their TIN and underline "exempt" in
section 2(a) of the TIN section of the Application to avoid possible erroneous
withholding. Non-resident aliens and foreign entities may be subject to
withholding of up to 30% on certain distributions received from the Fund and
must provide certain certifications on IRS Form W-8 to avoid backup withholding
with respect to other payments. For further information, see Code Sections 1441,
1442 and 3406 and/or consult your tax adviser.
26
<PAGE>
STANDISH MASSACHUSETTS INTERMEDIATE TAX EXEMPT BOND FUND
Investment Adviser
Standish, Ayer & Wood, Inc.
One Financial Center
Boston, Massachusetts 02111
Principal Underwriter
Standish Fund Distributors, L.P.
One Financial Center
Boston, Massachusetts 02111
Custodian
Investors Bank & Trust Company
24 Federal Street
Boston, Massachusetts 02110
Independent Accountants
Coopers & Lybrand L.L.P.
One Post Office Square
Boston, Massachusetts 02109
Legal Counsel
Hale and Dorr
60 State Street
Boston, Massachusetts 02109
27
<PAGE>
May 1, 1996
STANDISH MASSACHUSETTS INTERMEDIATE TAX EXEMPT BOND FUND
One Financial Center
Boston, Massachusetts 02111
(800) 221-4795
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information is not a prospectus, but expands
upon and supplements the information contained in the Prospectus dated May 1,
1996, as amended and/or supplemented from time to time (the "Prospectus"), of
Standish Massachusetts Intermediate Tax Exempt Bond Fund (the "Fund"), a
separate investment series of Standish, Ayer & Wood Investment Trust (the
"Trust"). This Statement of Additional Information should be read in conjunction
with the Fund's Prospectus a copy of which may be obtained without charge by
writing or calling Standish Fund Distributors, L.P., the Trust's principal
underwriter (the "Principal Underwriter") at the address and phone number set
forth above.
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND IS
AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY IF PRECEDED OR
ACCOMPANIED BY AN EFFECTIVE PROSPECTUS.
CONTENTS
Investment Objective and Policies.............................2
Investment Restrictions......................................12
Calculation of Performance Data..............................13
Management...................................................15
Redemption of Shares.........................................20
Portfolio Transactions.......................................20
Determination of Net Asset Value.............................21
Federal and Massachusetts Income Taxes.......................21
The Fund and Its Shares......................................23
Additional Information.......................................24
Experts and Financial Statements.............................24
Financial Statements.........................................25
1
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The Fund's Prospectus describes the investment objective of the Fund and
summarizes the investment policies it will follow. The following discussion
supplements the description of the Fund's investment policies in the Prospectus.
See the Prospectus for a more complete description of the Fund's investment
objective, policies and restrictions.
The Fund will maintain an effective portfolio maturity of between three and
ten years. This means that the dollar weighted average duration of the Fund's
portfolio investments will be less than the duration of a U.S. Treasury
obligation with a remaining stated maturity of three to ten years. Duration
represents the weighted average maturity of expected cash flows (i.e., interest
and principal payments) on one or more debt obligations, discounted to their
present values. The duration of an obligation is always less than or equal to
its stated maturity and is related to the degree of the volatility in the market
value of the obligation. In computing the duration of its portfolio, the Fund
will have to estimate the duration of debt obligations that are subject to
prepayment or redemption by the issuer, based on projected cash flows from such
obligations. Subject to the requirement that the effective portfolio maturity
will not exceed ten years, the Fund may invest in individual debt obligations of
any maturity, including obligations with a remaining stated maturity of less
than three or more than ten years. For purposes of the Fund's investment policy,
an instrument will be treated as having a maturity earlier than its stated
maturity date if the instrument has technical features (such as puts or demand
features) or a variable rate of interest which, in the judgment of Standish,
Ayer & Wood, Inc. (the "Adviser"), the Fund's investment adviser, will result in
the instrument being valued in the market as though it has the earlier maturity.
Because the Fund holds investment grade municipal securities, the income
earned on shares of the Fund will tend to be less than it might be on a
portfolio emphasizing lower quality securities. Municipal obligations are
subject to the provisions of bankruptcy, insolvency and other laws affecting the
rights and remedies of creditors, such as the Federal Bankruptcy Code, and laws
which may be enacted by Congress or state legislatures extending the time for
payment of principal or interest, or both, or imposing other constraints upon
enforcement of such obligations or upon municipalities to levy taxes. There is
also the possibility that as a result of litigation or other conditions the
power or ability of any one or more issuers to pay when due principal of and
interest on its or their municipal obligations may be materially affected.
Although the Fund's quality standards are designed to minimize the credit risk
of investing in the Fund, that risk cannot be entirely eliminated.
Municipal Notes
Municipal notes are generally issued to provide for short-term capital
needs and generally have maturities of one year or less. Municipal notes
include: tax anticipation notes; revenue anticipation notes; bond anticipation
notes; and construction loan notes.
Tax anticipation notes are sold to finance working capital needs of
municipalities. They are generally payable from specific tax revenues expected
to be received at a future date. Revenue anticipation notes are issued in
expectation of receipt of other types of revenue such as Federal revenues
available under the Federal Revenue Sharing Program. Tax anticipation notes and
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revenue anticipation notes are generally issued in anticipation of various
seasonal revenues such as income, sales, use, and business taxes. Bond
anticipation notes are sold to provide interim financing. These notes are
generally issued in anticipation of long-term financing in the market. In most
cases, these monies provide for the repayment of the notes. Construction loan
notes are sold to provide construction financing. After the projects are
successfully completed and accepted, many projects receive permanent financing
through the Federal Housing Administration under "Fannie Mae" (the Federal
National Mortgage Association) or "Ginnie Mae" (the Government National Mortgage
Association). There are, of course, a number of other types of notes in which
the Fund may invest which are issued for different purposes and secured
differently from those described above.
Municipal Bonds
Municipal bonds are issued to meet longer term capital needs and generally
have maturities of more than one year when issued. The two principal
classifications of municipal bonds are: "General Obligation" Bonds and "Revenue"
Bonds.
Issuers of General Obligation Bonds include states, counties, cities, towns
and regional districts. The proceeds of these obligations are used to fund a
wide range of public projects including the construction or improvement of
schools, highways and roads, water and sewer systems and a variety of other
public purposes. The basic security of General Obligation Bonds is the issuer's
pledge of its full faith, credit and taxing power for the payment of principal
and interest. The taxes that can be levied for the payment of debt service may
be limited or unlimited as to rate or amount or special assessments.
The principal security for a Revenue Bond is generally the net revenues
derived from a particular facility or group of facilities or, in some cases,
from the proceeds of a special excise or other specific revenue source. Revenue
Bonds have been issued to fund a wide variety of capital projects including:
electric, gas, water and sewer systems; highways, bridges and tunnels; port and
airport facilities; colleges and universities; and hospitals. Although the
principal security behind these bonds varies widely, many provide additional
security in the form of a debt service reserve fund whose monies may also be
used to make principal and interest payments on the issuer's obligations.
Housing finance authorities have a wide range of security including partially or
fully insured, rent subsidized and/or collateralized mortgages, and/or the net
revenues from housing or other public projects. In addition to a debt service
reserve fund, some authorities provide further security in the form of a state's
ability (without obligation) to make up deficiencies in the debt service reserve
fund. Lease rental revenue bonds issued by a state or local authority for
capital projects are secured by annual lease rental payments from the state or
locality to the authority sufficient to cover debt service on the authority's
obligations.
Industrial Development and Pollution Control Bonds (which are types of
private activity bonds), although nominally issued by municipal authorities, are
generally not secured by the taxing power of the municipality but are secured by
the revenues of the authority derived from payments by the industrial user.
Under federal tax legislation, certain types of Industrial Development Bonds and
Pollution Control Bonds may no longer be issued on a tax-exempt basis, although
previously-issued bonds of these types and certain refundings of such bonds are
not affected.
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Other Municipal Securities
There is a variety of hybrid and special types of municipal securities as
well as numerous differences in the security of municipal securities both within
and between the two principal classifications above.
Variable Rate Demand Instruments
The Fund may purchase variable rate demand instruments that are tax-exempt
municipal obligations providing for a periodic adjustment in the interest rate
paid on the instrument according to changes in interest rates generally. These
instruments also permit the Fund to demand payment of the unpaid principal
balance plus accrued interest upon a specified number of days' notice to the
issuer or its agent. The demand feature may be backed by a bank letter of credit
or guarantee issued with respect to such instrument. A bank that issues a
repurchase commitment may receive a fee from the Fund for this arrangement. The
issuer of a variable rate demand instrument may have a corresponding right to
prepay in its discretion the outstanding principal of the instrument plus
accrued interest upon notice comparable to that required for the holder to
demand payment.
The variable rate demand instruments that the Fund may purchase are payable
on demand on not more than seven calendar days' notice. The terms of the
instruments provide that interest rates are adjustable at intervals ranging from
daily up to six months, and the adjustments are based upon the current interest
rate environment as provided in the respective instruments. The Adviser will
select the variable rate demand instruments that the Fund will purchase in
accordance with procedures approved by the Trustees to minimize credit risks.
The Adviser may determine that an unrated variable rate demand instrument meets
the Fund's quality criteria by reason of being backed by a letter of credit or
guarantee issued by a bank that meets the quality criteria of the Fund. Thus,
either the credit of the issuer of the municipal obligation or the guarantor
bank or both will meet the quality standards of the Fund.
The interest rate of the underlying variable rate demand instruments may
change with changes in interest rates generally, but the variable rate nature of
these instruments should decrease changes in value due to interest rate
fluctuations. Accordingly, as interest rates decrease or increase, the potential
for capital gain and the risk of capital loss on the disposition of portfolio
securities are less than would be the case with a comparable portfolio of fixed
income securities. Because the adjustment of interest rates on the variable rate
demand instruments is made in relation to movements of the applicable rate
adjustment index, the variable rate demand instruments are not comparable to
long-term fixed interest rate securities. Accordingly, interest rates on the
variable rate demand instruments may be higher or lower than current market
rates for fixed rate obligations of comparable quality with similar final
maturities.
The maturity of the variable rate demand instruments held by the Fund will
ordinarily be deemed to be the longer of (1) the notice period required before
the Fund is entitled to receive payment of the principal amount of the
instrument or (2) the period remaining until the instrument's next interest rate
adjustment.
* * * *
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An entire issue of Municipal Securities may be purchased by one or a small
number of institutional investors such as the Fund. Thus, the issue may not be
said to be publicly offered. Unlike securities which must be registered under
the Securities Act of 1933 prior to offer and sale unless an exemption from such
registration is available, municipal securities which are not publicly offered
may nevertheless be readily marketable. A secondary market exists for many
municipal securities which were not publicly offered initially.
Securities purchased for the Fund are subject to the limitations on
holdings of securities which are not readily marketable contained in the Fund's
investment restrictions. The Adviser determines whether a municipal security is
readily marketable based on whether it may be sold in a reasonable time
consistent with the customs of the municipal markets (usually seven days) at a
price (or interest rate) which accurately reflects its value. The Adviser
believes that the quality standards applicable to the Fund's investments enhance
marketability. In addition, stand-by commitments and demand obligations also
enhance marketability.
Money Market Instruments and Repurchase Agreements
The money market instruments in which the Fund may invest include
short-term U.S. Government securities, commercial paper (promissory notes issued
by corporations to finance their short-term credit needs), negotiable
certificates of deposit, non-negotiable fixed time deposits, bankers'
acceptances and repurchase agreements.
U.S. Government securities include securities which are direct obligations
of the U.S. Government backed by the full faith and credit of the United States,
and securities issued by agencies and instrumentalities of the U.S. Government,
which may be guaranteed by the U.S. Treasury or supported by the issuer's right
to borrow from the U.S. Treasury or may be backed by the credit of the federal
agency or instrumentality itself. Agencies and instrumentalities of the U.S.
Government include, but are not limited to, Federal Land Banks, the Federal Farm
Credit Bank, the Central Bank for Cooperatives, Federal Intermediate Credit
Banks, Federal Home Loan Banks and the Federal National Mortgage Association.
Investments in commercial paper will be rated Prime-1 by Moody's Investors
Service, Inc. ("Moody's") or A-1 by Standard & Poor's Ratings Group ("S&P") or
Duff 1+ by Duff & Phelps, Inc. ("Duff & Phelps"), which are the highest ratings
assigned by these rating services (even if rated lower by one or more of the
other agencies), or which, if not rated or rated lower by one or more of the
agencies and not rated by the other agency or agencies, are judged by the
Adviser to be of equivalent quality to the securities so rated. In determining
whether securities are of equivalent quality, the Adviser may take into account,
but will not rely entirely on, ratings assigned by foreign rating agencies.
A repurchase agreement is an agreement under which the Fund acquires money
market instruments (generally U.S. Government securities) from a commercial
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bank, broker or dealer, subject to resale to the seller at an agreed-upon price
and date (normally the next business day). The resale price reflects an
agreed-upon interest rate effective for the period the instruments are held by
the Fund and is unrelated to the interest rate on the instruments. The
instruments acquired by the Fund (including accrued interest) must have an
aggregate market value in excess of the resale price and will be held by the
custodian bank for the Fund until they are repurchased. The Trustees will
monitor the standards which the Adviser will use in reviewing the
creditworthiness of any party to a repurchase agreement with the Fund.
The use of repurchase agreements involves certain risks. For example, if
the seller defaults on its obligation to repurchase the instruments acquired by
the Fund at a time when their market value has declined, the Fund may incur a
loss. If the seller becomes insolvent or subject to liquidation or
reorganization under bankruptcy or other laws, a court may determine that the
instruments acquired by the Fund are collateral for a loan by the Fund and
therefore are subject to sale by the trustee in bankruptcy. Finally, it is
possible that the Fund may not be able to substantiate its interest in the
instruments it acquires. While the Trustees acknowledge these risks, it is
expected that they can be controlled through careful documentation and
monitoring.
Strategic Transactions
The Fund may, but is not required to, utilize various other investment
strategies as described below to hedge various market risks (such as interest
rates and broad or specific fixed-income market movements), to manage the
effective maturity or duration of fixed-income securities, or to enhance
potential gain. Such strategies are generally accepted as part of modern
portfolio management and are regularly utilized by many mutual funds and other
institutional investors. Techniques and instruments used by the Fund may change
over time as new instruments and strategies are developed or regulatory changes
occur.
In the course of pursuing its investment objective, the Fund may purchase
and sell (write) exchange-listed and over-the-counter put and call options on
securities, fixed-income indices and other financial instruments; purchase and
sell financial futures contracts and options thereon; and enter into various
interest rate transactions such as swaps, caps, floors or collars (collectively,
all the above are called "Strategic Transactions"). Strategic Transactions may
be used in an attempt to protect against possible changes in the market value of
securities held in or to be purchased for the Fund's portfolio resulting from
securities markets fluctuations, to protect the Fund's unrealized gains in the
value of its portfolio securities, to facilitate the sale of such securities for
investment purposes, to manage the effective maturity or duration of the Fund's
portfolio, or to establish a position in the derivatives markets as a temporary
substitute for purchasing or selling particular securities. In addition to the
hedging transactions referred to in the preceding sentence, Strategic
Transactions may also be used to enhance potential gain in circumstances where
hedging is not involved although the Fund will attempt to limit its net loss
exposure resulting from Strategic Transactions entered into for such purposes to
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not more than 3% of the Fund's net assets at any one time and, to the extent
necessary, the Fund will close out transactions in order to comply with this
limitation. (Transactions such as writing covered call options are considered to
involve hedging for the purposes of this limitation.) In calculating the Fund's
net loss exposure from such Strategic Transactions, an unrealized gain from a
particular Strategic Transaction position would be netted against an unrealized
loss from a related Strategic Transaction position. For example, if the Adviser
believes that short term interest rates as indicated in the forward yield curve
are too high, the Fund may take a short position in a near-term Eurodollar
futures contract and a long position in a longer-dated Eurodollar futures
contract. Under such circumstances, any unrealized loss in the near-term
Eurodollar futures position would be netted against any unrealized gain in the
longer-dated Eurodollar futures position (and vice versa) for purposes of
calculating the Fund's net loss exposure. The ability of the Fund to utilize
these Strategic Transactions successfully will depend on the Adviser's ability
to predict pertinent market movements, which cannot be assured. The Fund will
comply with applicable regulatory requirements when implementing these
strategies, techniques and instruments. The Fund's activities involving
Strategic Transactions may be limited by the requirements of Subchapter M of the
Internal Revenue Code of 1986, as amended (the "Code"), for qualification as a
regulated investment company.
Risks of Strategic Transactions
The use of Strategic Transactions has associated risks including possible
default by the other party to the transaction, illiquidity and, to the extent
the Adviser's view as to certain market movements is incorrect, the risk that
the use of such Strategic Transactions could result in losses greater than if
they had not been used. The writing of put and call options may result in losses
to the Fund, force the purchase or sale, respectively, of portfolio securities
at inopportune times or for prices higher than (in the case of purchases due to
the exercise of put options) or lower than (in the case sales due to the
exercise of call options) current market values, limit the amount of
appreciation the Fund can realize on its investments or cause the Fund to hold a
security it might otherwise sell. The use of options and futures transactions
entails certain other risks. In particular, the variable degree of correlation
between price movements of futures contracts and price movements in the related
portfolio position of the Fund creates the possibility that losses on the
hedging instrument may be greater than gains in the value of the Fund's
position. The writing of options could significantly increase the Fund's
portfolio turnover rate and, therefore, associated brokerage commissions or
spreads. In addition, futures and options markets may not be liquid in all
circumstances and certain over-the-counter options may have no markets. As a
result, in certain markets, the Fund might not be able to close out a
transaction without incurring substantial losses, if at all. Although the use of
futures and options transactions for hedging should tend to minimize the risk of
loss due to a decline in the value of the hedged position, at the same time, in
certain circumstances, they tend to limit any potential gain which might result
from an increase in value of such position. The loss incurred by the Fund in
writing options on futures and entering into futures transactions is potentially
unlimited; however, as described above, the Fund will attempt to limit its net
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loss exposure resulting from Strategic Transactions entered into for non-hedging
purposes to not more than 3% of its net assets at any one time. Futures markets
are highly volatile and the use of futures may increase the volatility of the
Fund's net asset value. Finally, entering into futures contracts would create a
greater ongoing potential financial risk than would purchases of options where
the exposure is limited to the cost of the initial premium. Losses resulting
from the use of Strategic Transactions would reduce net asset value and the net
result may be less favorable than if the Strategic Transactions had not been
utilized.
General Characteristics of Options
Put options and call options typically have similar structural
characteristics and operational mechanics regardless of the underlying
instrument on which they are purchased or sold. Thus, the following general
discussion relates to each of the particular types of options discussed in
greater detail below. In addition, many Strategic Transactions involving options
require segregation of the Fund's assets in special accounts, as described below
under "Use of Segregated Accounts."
A put option gives the purchaser of the option, in consideration for the
payment of a premium, the right to sell, and the writer the obligation to buy
(if the option is exercised) the underlying security, commodity, index, or other
instrument at the exercise price. For instance, the Fund's purchase of a put
option on a security might be designed to protect its holdings in the underlying
instrument (or, in some cases, a similar instrument) against a substantial
decline in the market value by giving the Fund the right to sell such instrument
at the option exercise price. A call option, in consideration for the payment of
a premium, gives the purchaser of the option the right to buy, and the seller
the obligation to sell (if the option is exercised), the underlying instrument
at the exercise price. The Fund may purchase a call option on a security,
futures contract, index or other instrument to seek to protect the Fund against
an increase in the price of the underlying instrument that it intends to
purchase in the future by fixing the price at which it may purchase such
instrument. An American style put or call option may be exercised at any time
during the option period while a European style put or call option may be
exercised only upon expiration or during a fixed period prior thereto. The Fund
is authorized to purchase and sell exchange listed options and over-the-counter
options ("OTC options"). Exchange listed options are issued by a regulated
intermediary such as the Options Clearing Corporation ("OCC"), which guarantees
the performance of the obligations of the parties to such options. The
discussion below uses the OCC as an example, but is also applicable to other
financial intermediaries.
With certain exceptions, exchange listed options generally settle by
physical delivery of the underlying security, although in the future cash
settlement may become available. Index options and Eurodollar instruments are
cash settled for the net amount, if any, by which the option is "in-the-money"
(i.e., where the value of the underlying instrument exceeds, in the case of a
call option, or is less than, in the case of a put option, the exercise price of
the option) at the time the option is exercised. Frequently, rather than taking
or making delivery of the underlying instrument through the process of
exercising the option, listed options are closed by entering into offsetting
purchase or sale transactions that do not result in ownership of the new option.
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The Fund's ability to close out its position as a purchaser or seller of an
exchange listed put or call option is dependent, in part, upon the liquidity of
the option market. There is no assurance that a liquid option market on an
exchange will exist. In the event that the relevant market for an option on an
exchange ceases to exist, outstanding options on that exchange would generally
continue to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours
during which the underlying financial instruments are traded. To the extent that
the option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct agreement with
the Counterparty. In contrast to exchange listed options, which generally have
standardized terms and performance mechanics, all the terms of an OTC option,
including such terms as method of settlement, term, exercise price, premium,
guarantees and security, are set by negotiation of the parties. The Fund will
generally sell (write) OTC options that are subject to a buy-back provision
permitting the Fund to require the Counterparty to sell the option back to the
Fund at a formula price within seven days. (To the extent that the Fund does not
do so, the OTC options are subject to the Fund's restriction on illiquid
securities.) The Fund expects generally to enter into OTC options that have cash
settlement provisions, although it is not required to do so.
Unless the parties provide for it, there is no central clearing or guaranty
function in the OTC option market. As a result, if the Counterparty fails to
make delivery of the security or other instrument underlying an OTC option it
has entered into with the Fund or fails to make a cash settlement payment due in
accordance with the terms of that option, the Fund will lose any premium it paid
for the option as well as any anticipated benefit of the transaction.
Accordingly, the Adviser must assess the creditworthiness of each such
Counterparty or any guarantor or credit enhancement of the Counterparty's credit
to determine the likelihood that the terms of the OTC option will be satisfied.
The Fund will engage in OTC option transactions only with U.S. Government
securities dealers recognized by the Federal Reserve Bank of New York as
"primary dealers", or broker dealers, domestic or foreign banks or other
financial institutions which have received, combined with any credit
enhancements, a long-term debt rating of A from S&P or Moody's or an equivalent
rating from any other nationally recognized statistical rating organization
("NRSRO") or which issue debt that is determined to be of equivalent credit
quality by the Adviser. The staff of the Securities and Exchange Commission (the
"SEC") currently takes the position that, absent the buy-back provisions
discussed above, OTC options purchased by the Fund, and portfolio securities
"covering" the amount of the Fund's obligation pursuant to an OTC option sold by
it (the cost of the sell-back plus the in-the-money amount, if any) are
illiquid, and are subject to the Fund's limitation on investing in illiquid
securities. However, for options written with "primary dealers" in U.S.
Government securities pursuant to an agreement requiring a closing purchase
transaction at a formula price, the amount which is considered to be illiquid
may be calculated by reference to a formula price.
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If the Fund sells (writes) a call option, the premium that it receives may
serve as a partial hedge, to the extent of the option premium, against a
decrease in the value of the underlying securities or instruments in its
portfolio or will increase the Fund's income. The sale (writing) of put options
can also provide income.
The Fund may purchase and sell (write) call options on securities including
U.S. Treasury and agency securities, municipal notes and bonds and Eurodollar
instruments that are traded on U.S. and foreign securities exchanges and in the
over-the-counter markets, and on securities indices and futures contracts. All
calls sold by the Fund must be "covered" (i.e., the Fund must own the securities
or futures contract subject to the call) or must meet the asset segregation
requirements described below as long as the call is outstanding. Even though the
Fund will receive the option premium to help offset any loss, the Fund may incur
a loss if the exercise price is below the market price for the security subject
to the call at the time of exercise. A call sold by the Fund exposes the Fund
also during the term of the option to possible loss of opportunity to realize
appreciation in the market price of the underlying security or instrument and
may require the Fund to hold a security or instrument which it might otherwise
have sold.
The Fund may purchase and sell (write) put options on securities including
U.S. Treasury and agency securities, municipal notes and bonds and Eurodollar
instruments (whether or not it holds the above securities in its portfolio), and
on securities indices and futures contracts. The Fund will not sell put options
if, as a result, more than 50% of the Fund's assets would be required to be
segregated to cover its potential obligations under such put options other than
those with respect to futures and options thereon. In selling put options, there
is a risk that the Fund may be required to buy the underlying security at a
price above the market price.
Options on Securities Indices and Other Financial Indices
The Fund may also purchase and sell (write) call and put options on
securities indices and other financial indices. Options on securities indices
and other financial indices are similar to options on a security or other
instrument except that, rather than settling by physical delivery of the
underlying instrument, they settle by cash settlement. For example, an option on
an index gives the holder the right to receive, upon exercise of the option, an
amount of cash if the closing level of the index upon which the option is based
exceeds, in the case of a call, or is less than, in the case of a put, the
exercise price of the option (except if, in the case of an OTC option, physical
delivery is specified). This amount of cash is equal to the differential between
the closing price of the index and the exercise price of the option, which also
may be multiplied by a formula value. The seller of the option is obligated, in
return for the premium received, to make delivery of this amount. In addition to
the methods described above, the Fund may cover call options on a securities
index by owning securities whose price changes are expected to be similar to
those of the underlying index, or by having an absolute and immediate right to
acquire such securities without additional cash consideration (or for additional
cash consideration held in a segregated account by its custodian) upon
conversion or exchange of other securities in its portfolio.
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General Characteristics of Futures
The Fund may enter into financial futures contracts or purchase or sell put
and call options on such futures. Futures are generally bought and sold on the
commodities exchanges where they are listed and involve payment of initial and
variation margin as described below. The sale of futures contracts creates a
firm obligation by the Fund, as seller, to deliver to the buyer the specific
type of financial instrument called for in the contract at a specific future
time for a specified price (or, with respect to index futures and Eurodollar
instruments, the net cash amount). The purchase of futures contracts creates a
corresponding obligation by the Fund, as purchaser to purchase a financial
instrument at a specific time and price. Options on futures contracts are
similar to options on securities except that an option on a futures contract
gives the purchaser the right in return for the premium paid to assume a
position in a futures contract and obligates the seller to deliver such position
upon exercise of the option.
The Fund's use of financial futures and options thereon will in all cases
be consistent with applicable regulatory requirements and in particular the
regulations of the Commodity Futures Trading Commission (the "CTFC") relating to
exclusions from regulation as a commodity pool operator. Those regulations
currently provide that the Fund may use commodity futures and option positions
(i) for bona fide hedging purposes without regard to the percentage of assets
committed to margin and option premiums, or (ii) for other purposes permitted by
the CFTC to the extent that the aggregate initial margin and option premiums
required to establish such non-hedging positions (net of the amount that the
positions were "in the money" at the time of purchase) do not exceed 5% of the
net asset value of the Fund's portfolio, after taking into account unrealized
profits and losses on such positions. Typically, maintaining a futures contract
or selling an option thereon requires the Fund to deposit, with its custodian
for the benefit of a futures commission merchant, as security for its
obligations an amount of cash or other specified assets (initial margin) which
initially is typically 1% to 10% of the face amount of the contract (but may be
higher in some circumstances). Additional cash or assets (variation margin) may
be required to be deposited directly with the futures commission merchant
thereafter on a daily basis as the value of the contract fluctuates. The
purchase of an option on financial futures involves payment of a premium for the
option without any further obligation on the part of the Fund. If the Fund
exercises an option on a futures contract it will be obligated to post initial
margin (and potential subsequent variation margin) for the resulting futures
position just as it would for any position. Futures contracts and options
thereon are generally settled by entering into an offsetting transaction but
there can be no assurance that the position can be offset prior to settlement at
an advantageous price, nor that delivery will occur. The segregation
requirements with respect to futures contracts and options thereon are described
below.
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Combined Transactions
The Fund may enter into multiple transactions, including multiple options
transactions, multiple futures transactions, and multiple interest rate
transactions, structured notes and any combination of futures, options and
interest rate transactions ("component transactions"), instead of a single
Strategic Transaction, as part of a single or combined strategy when, in the
opinion of the Adviser it is in the best interests of the Fund to do so. A
combined transaction will usually contain elements of risk that are present in
each of its component transactions. Although combined transactions are normally
entered into based on the Adviser's judgment that the combined strategies will
reduce risk or otherwise more effectively achieve the desired portfolio
management goal, it is possible that the combination will instead increase such
risks or hinder achievement of the portfolio management objective.
Swaps, Caps, Floors and Collars
Among the Strategic Transactions into which the Fund may enter are interest
rate and index swaps and the purchase or sale of related caps, floors and
collars. The Fund expects to enter into these transactions primarily for hedging
purposes, including, but not limited to, preserving a return or spread on a
particular investment or portion of its portfolio, as a duration management
technique or protecting against an increase in the price of securities the Fund
anticipates purchasing at a later date. Swaps, caps, floors and collars may also
be used to enhance potential gain in circumstances where hedging is not involved
although, as described above, the Fund's net loss exposure resulting from swaps,
caps, floors and collars and other Strategic Transactions entered into for such
purposes will not exceed 3% of the Fund's net assets at any one time. The Fund
will not sell interest rate caps or floors where it does not own securities or
other instruments providing the income stream the Fund may be obligated to pay.
Interest rate swaps involve the exchange by the Fund with another party of their
respective commitments to pay or receive interest, e.g., an exchange of floating
rate payments for fixed rate payments with respect to a notional amount of
principal. An index swap is an agreement to swap cash flows on a notional amount
based on changes in the values of the reference indices. The purchase of a cap
entitles the purchaser to receive payments on a notional principal amount from
the party selling such cap to the extent that a specified index exceeds a
predetermined interest rate or amount. The purchase of a floor entitles the
purchaser to receive payments on a notional principal amount from the party
selling such floor to the extent that a specified index falls below a
predetermined interest rate or amount. A collar is a combination of a cap and a
floor that preserves a certain rate of return within a predetermined range of
interest rates or values.
The Fund will usually enter into swaps on a net basis, i.e., the two
payment streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with the Fund receiving or paying, as the case may
be, only the net amount of the two payments. The Fund will not enter into any
swap, cap, floor or collar transaction unless, at the time of entering into such
transaction, the unsecured long-term debt of the Counterparty, combined with any
credit enhancements, is rated at least A by S&P or Moody's or has an equivalent
rating from an NRSRO or the Counterparty issues debt that is determined to be of
equivalent credit quality by the Adviser. If there is a default by the
Counterparty, the Fund may have contractual remedies pursuant to the agreements
related to the transaction. The swap market has grown substantially in recent
years with a large number of banks and investment banking firms acting both as
principals and as agents utilizing standardized swap documentation. As a result,
the swap market has become relatively liquid. Caps, floors and collars are more
recent innovations for which standardized documentation has not yet been fully
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developed. Swaps, caps, floors and collars are considered illiquid for purposes
of the Fund's policy regarding illiquid securities, unless it is determined,
based upon continuing review of the trading markets for the specific security,
that such security is liquid. The Board of Trustees has adopted guidelines and
delegated to the Adviser the daily function of determining and monitoring the
liquidity of swaps, caps, floors and collars. The Board of Trustees, however,
retains oversight focusing on factors such as valuation, liquidity and
availability of information and is ultimately responsible for such
determinations.
The Staff of the SEC currently takes the position that swaps, caps, floors
and collars are illiquid, and are subject to the Fund's limitation on investing
in illiquid securities.
Eurodollar Contracts
The Fund may make investments in Eurodollar contracts. Eurodollar contracts
are U.S. dollar-denominated futures contracts or options thereon which are
linked to the London Interbank Offered Rate ("LIBOR"), although foreign
currency-denominated instruments are available from time to time. Eurodollar
futures contracts enable purchasers to obtain a fixed rate for the lending of
funds and sellers to obtain a fixed rate for borrowings. The Fund might use
Eurodollar futures contracts and options thereon to hedge against changes in
LIBOR, to which many interest rate swaps and fixed income instruments are
linked.
Use of Segregated Accounts
The Fund will not use leverage in Strategic Transactions. The Fund will
hold securities or other instruments whose values are expected to offset its
obligations under the Strategic Transactions. The Fund will not enter into
Strategic Transactions that expose the Fund to an obligation to another party
unless it owns either (i) an offsetting position in securities or other options,
futures contracts or other instruments or (ii) cash, receivables or liquid, high
grade debt securities with a value sufficient to cover its potential
obligations. The Fund may have to comply with any applicable regulatory
requirements designed to make sure that mutual funds do not use leverage in
Strategic Transactions, and if required, will set aside cash and other assets in
a segregated account with its custodian bank in the amount prescribed. In that
case, the Fund's custodian would maintain the value of such segregated account
equal to the prescribed amount by adding or removing additional cash or other
assets to account for fluctuations in the value of the account and the Fund's
obligations on the underlying Strategic Transactions. Assets held in a
segregated account would not be sold while the Strategic Transaction is
outstanding, unless they are replaced with similar assets. As a result, there is
a possibility that segregation of a large percentage of the Fund's assets could
impede portfolio management or the Fund's ability to meet redemption requests or
other current obligations.
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"When-Issued" and "Delayed Delivery" Securities
The Fund may commit up to 40% of its net assets to purchase securities on a
"when-issued" and "delayed delivery" basis, which means that delivery and
payment for the securities will normally take place 15 to 45 days after the date
of the transaction. The payment obligation and interest rate on the securities
are fixed at the time the Fund enters into the commitment, but interest will not
accrue to the Fund until delivery of and payment for the securities. Although
the Fund will only make commitments to purchase "when-issued" and "delayed
delivery" securities with the intention of actually acquiring the securities,
the Fund may sell the securities before the settlement date if deemed advisable
by the Adviser.
Unless the Fund has entered into an offsetting agreement to sell the
securities purchased on a "when-issued" or "delayed delivery basis", cash or
liquid, high-grade debt obligations with a market value at least equal to the
amount of the Fund's commitment will be segregated with the custodian bank for
the Fund. If the market value of these securities declines, additional cash or
securities will be segregated daily so that the aggregate market value of the
segregated securities equals the amount of the Fund's commitment.
Securities purchased on a "when-issued" and "delayed delivery" basis may
have a market value on delivery which is less than the amount paid by the Fund.
Changes in market value may be based upon the public's perception of the
creditworthiness of the issuer or changes in the level of interest rates.
Generally, the value of "when-issued" securities will fluctuate inversely to
changes in interest rates, i.e., they will appreciate in value when interest
rates fall and will depreciate in value when interest rates rise.
The Fund may sell portfolio securities on a delayed delivery basis. The
market value of the securities when they are delivered may be more than the
amount to be received by the Fund.
Special Considerations Relating to Massachusetts Municipal Securities
The financial condition of the Commonwealth of Massachusetts (the
"Commonwealth"), its public authorities and local governments could affect the
market values and marketability of, and therefore the net asset value per share
and the interest income of, the Fund, or result in the default of existing
obligations, including obligations which may be held by the Fund. The following
section provides only a brief summary of the complex factors affecting the
financial condition of Massachusetts, and is based on information obtained from
the Commonwealth, as publicly available on the date of this Statement of
Additional Information. The information contained in such publicly available
documents has not been independently verified. It should be noted that the
creditworthiness of obligations issued by local issuers may be unrelated to the
creditworthiness of the Commonwealth, and that there is no obligation on the
part of the Commonwealth to make payment on such local obligations in the event
of default in the absence of a specific guarantee or pledge provided by the
Commonwealth.
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Economic Factors Summary
Annual budgeted revenues increased by approximately 0.7% in fiscal 1992 and
7.1% in fiscal 1993. Annual budgeted revenues increased from fiscal 1993 to
fiscal 1994 by approximately 5.7% and by approximately 5.4% in fiscal 1995.
Annual budgeted revenues are projected to increase by 4.5% in fiscal 1996.
Annual budgeted expenditures decreased from fiscal 1991 to fiscal 1992 by
approximately 1.7%, increased by approximately 9.5% in fiscal 1993, increased by
approximately 5.6% in fiscal 1994 and increased by approximately 4.7% in fiscal
1995. Annual budgeted expenditures are estimated to increase by approximately
4.5% in fiscal 1996. Ending fund balances in the budgeted operating funds for
fiscal 1990 were negative $1.104 billion. For fiscal 1991, these funds attained
positive ending balances of $237.1 million, of which $59.2 million was reserved
in the Commonwealth's Stabilization Fund pursuant to state finance law. Fiscal
1992 ended with positive fund balances of $549.4 million, including $230.4
million in the Stabilization Fund. Fiscal 1993 ended with positive fund balances
of $562.5 million, including $309.5 million in the Stabilization Fund. Fiscal
1994 ended with fund balances of $589.3 million, including $382.9 million in the
Stabilization Fund. Fiscal 1995 ended with fund balances of $721.9 million,
including $425.4 in the Stabilization Fund. Fiscal 1996 is estimated to end with
fund balances of approximately $549.4 million, including $446.4 million in the
Stabilization Fund. This would be a 23.5% decrease from fiscal 1995.
1992 Fiscal Year
Fiscal 1992 ended with an excess of revenues over expenditure of $312.3
million and a positive fund balance of $549.4 million, including $230.4 million
in the Stabilization Fund. Budgeted revenues increased approximately 7% from
fiscal 1991. Budgeted expenditures were 1.7% lower than fiscal 1991 budgeted
expenditures, or $13.42 billion. Spending for certain human services was higher
than initially estimated, including an increase of $268.7 million for the
Medicaid program and $50 million for mental retardation requirements. Fiscal
1992 budgeted expenditures for Medicaid were $2.818 billion, or 1.9% higher than
fiscal 1991. This increase compared favorably with the 19% average annual growth
rate of Medicaid expenditures for fiscal years 1988 through 1991.
Appropriations for the General Relief and the Group Health Insurance
programs were among the appropriations reduced by the Governor prior to signing
the fiscal 1992 budget. The Legislature overrode the Governor's $376 million
reduction of the Group Health Insurance appropriation, which would have
increased the state employee and retiree share of health insurance costs from
10% to 25%. The General Relief program was abolished and replaced by Emergency
Aid to the Elderly, Disabled and Children, which is estimated to have reduced
expenditures in fiscal 1992 by $55.1 million, or $29.1% from the prior year.
After payment in full of the quarterly Local Aid distribution of $514
million, retirement of the Commonwealth's outstanding commercial paper, and
certain other short-term borrowings, the Commonwealth reported a year-end cash
position of approximately $731 million.
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1993 Fiscal Year
The Commonwealth ended fiscal 1993 with a surplus of revenues over
expenditures of $13.1 million and aggregate ending operating fund balance of
approximately $526.5 million. Budgeted revenues and other sources increased 4.7%
over fiscal 1992 and totaled approximately $14.710 billion, representing a 9.5%
increase over the prior fiscal year.
After payment of all Local Aid and retirement of short-term debt, the
Commonwealth showed a year-end cash position of approximately $662.2 million, as
compared to a projected $485.1 million.
1994 Fiscal Year
The Commonwealth is in the process of closing its fiscal 1994 financial
records. Financial information for fiscal year 1994 is unaudited.
The Department of Revenue's preliminary figures indicate fiscal 1994 tax
revenue collections were $10.606 billion, $88 million below the Department of
Revenue's fiscal year 1994 tax revenue estimate of $10.694 billion. Fiscal 1994
tax revenue collections were $676 million above fiscal 1993 tax revenues of
$9.930 billion. Budgeted revenues and other sources, including non-tax revenues,
collected in fiscal 1994 were estimated by the Executive Office for
Administration and Finance to have been approximately $15.551 billion. Budgeted
expenditures and other uses of funds in fiscal 1994 were approximately $15.533
billion.
As of June 30, 1994, the Commonwealth showed a year-end cash position of
approximately $757 million, as compared to a projected position of $599 million.
In June, 1993, the Legislature adopted and the Governor signed into law
comprehensive education reform legislation. This legislation required an
increase in expenditures for education purposes above fiscal 1993 base spending
of $1.288 billion of approximately $175 million in fiscal 1994; The Executive
Office for Administration and Finance expects the annual increases in
expenditures above the fiscal 1993 base spending of $1.288 billion to be
approximately $396 million in fiscal 1995, $632 million in fiscal 1996 and $875
million in fiscal 1997. Additional annual increases are also expected in later
fiscal years. The fiscal 1995 budget as signed by the Governor includes $396
million in appropriations to satisfy this legislation.
1995 Fiscal Year
The Commonwealth has closed its fiscal 1995 financial records and published
its audited financial information. Fiscal 1995 tax revenue collections were
approximately $11.163 billion, approximately $12 million above the Department of
Revenue's revised fiscal year 1995 tax revenue estimate of $11.151 billion,
approximately $556 million, or 5.2%, above fiscal 1994 tax revenues of $10.607
billion. Budgeted revenues and other sources, including non-tax revenues,
collected in fiscal 1995 were approximately $16.387 billion, approximately $837
million, or 5.4%, above fiscal 1994 budgeted revenues of $15.550 billion.
Budgeted expenditures and other uses of funds in fiscal 1995 were approximately
$16.251 billion, approximately $728 million , or 4.7%, above fiscal 1994
budgeted expenditures and uses of $15.523 billion. The Commonwealth ended fiscal
1995 with an operating gain of $137 million and an ending fund balance of $726
million.
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Budgeted revenues and other sources to be collected in fiscal 1996 are
estimated by the Executive Office for Administration and Finance to be
approximately $16.778 billion. This amount includes estimated fiscal 1996 tax
revenues of $11.653 billion, which is approximately $490 million, or 4.3% higher
than fiscal 1995 tax revenues.
In connection with his proposal to reorganize state government, the
Governor also announced on November 1, 1995 that he would propose to reduce the
personal income tax rate on earned income from 5.95% to 5.45%. Legislation to
effectuate such tax reduction is expected to be filed by the Governor in
January, 1996 in conjunction with the filing of his budget recommendations for
fiscal 1997. The cost to the Commonwealth of the proposed tax reduction has been
estimated to be approximately $500 million per year.
1996 Fiscal Year
The fiscal 1996 budget is based on numerous spending and revenue estimates,
the achievement of which cannot be assured. The budget was enacted by the
Legislature on June 12, 1995 and signed by the Governor on June 21, 1995. Fiscal
1996 appropriations in the Annual Appropriations Act total approximately $16.847
billion, including approximately $25 million in gubernatorial vetoes overridden
by the legislature. In the final supplemental budget for fiscal 1995, approved
on August 24, 1995, another $71.1 million of appropriations were continued for
use in fiscal 1996. The Executive Office for Administration and Finance projects
that fiscal 1996 spending will total approximately $16.998 billion, a $739
million, or 4.5%, increase over fiscal 1995 spending. The largest single
spending increase in the fiscal 1996 budget is approximately $232 million to
continue funding the comprehensive education reform legislation enacted in 1993.
Budgeted revenues and other sources to be collected in fiscal 1996 are
estimated by the Executive Office for Administration and Finance to be
approximately $16.778 billion. This amount includes estimated fiscal 1996 tax
revenues of $11.653 billion, which is approximately $490 million, or 4.3%,
higher than fiscal 1995 tax revenues. The tax revenue projection is based upon
the consensus estimate of approximately $11.639 billion, adjusted for certain
revenue maximization initiatives included in the fiscal 1996 budget totaling $16
million and tax reductions of approximately $2 million resulting from enactment
of bank tax reform legislation in July, 1995. Through September, 1995, tax
revenue collections have totalled approximately $2.805 billion, approximately
$169.8 million, or 6.5%, greater than tax revenue collections for the same
period in fiscal 1995.
Fiscal 1996 non-tax revenues are projected to total approximately $5.173
billion, approximately $55 million, or 1.1%, less than fiscal 1995 non-tax
revenues of approximately $5.228 billion. Federal reimbursements are projected
to increase by approximately $22 million, or 0.7%, from approximately $2.960
billion in fiscal 1995 to approximately $2.982 billion in fiscal 1996, primarily
as a result of increased reimbursements for Medicaid spending, offset by a
reduction in reimbursements received in fiscal 1995 for one-time Medicaid
expenses incurred in fiscal 1994 and fiscal 1995.
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Fiscal 1996 departmental revenues are projected to decline by approximately
$112 million, or 8.3%, from approximately $1,353 billion in fiscal 1995 to
approximately $1.241 billion in fiscal 1996. Major changes in projected non-tax
revenues for fiscal 1996 include a decline in motor vehicle license and
registration fees of approximately $52 million, due mainly to alternate-year
licensing patterns and the delayed impact of the 1991 change to a five-year
driver's license renewal period, a reduction of approximately $17 million in
abandoned property revenues (due to a one-time increase in abandoned property
collections in fiscal 1995 resulting from a change in the Commonwealth's
abandoned property laws) and a decrease of approximately $45 million due to
non-recurring revenues received in fiscal 1995 from hospitals and nursing homes
as part of Medicaid final rate settlements and other reimbursements by municipal
hospitals to the state. These and a number of other smaller reductions are
partially offset by projected increases in departmental revenues of
approximately $20 million due to revenue maximization initiatives included in
the fiscal 1996 budget.
Cash Flow
As of June 30, 1995, the Commonwealth showed a cash position of
approximately $372.5 million, based on preliminary unaudited figures, not
including the Stabilization Fund. This compares to a projected position of
$353.0 million. The fiscal 1995 year-end cash position reflects approximately
$102.9 million in advance payments for fiscal 1996 expenses and approximately
$239.0 million in capital expenditures for which the Commonwealth had not yet
issued bonds or notes to reimburse itself.
The State Treasurer's current cash flow projection for fiscal 1996 contains
monthly forecasts through the end of the fiscal year and projects a year-end
cash position of approximately $388.4 million. This projection is based upon the
budget enacted by the Legislature for fiscal 1996 and incudes a $145 million
contingency reserve. The projection assumes that $115 million in advance
payments for fiscal 1997 expenses will be made prior to June 30, 1996.
The current cash flow projection anticipates no need for the Commonwealth
to borrow for operating needs under its commercial paper program during fiscal
1996. The Commonwealth currently has outstanding $190 million of commercial
paper issued as bond anticipation notes, which are expected to be retired with
the proceeds of bonds issued during fiscal 1996. The Sate Treasurer may issue
additional bond anticipation notes periodically during fiscal 1996 depending on
the timing of future bond sales.
The year-end cash position projected for fiscal 1996 is likely to differ
from the estimated ending balance for the Commonwealth's budgeted operating
funds for fiscal 1996 due to timing differences and the effect of certain
non-budget items.
Revenues
In order to fund its programs and services, the Commonwealth collects a
variety of taxes and receives revenues from other non tax sources, including the
federal government and various fees, fines, court revenues, assessments,
reimbursements, interest earnings and transfers from its non-budgeted funds. In
fiscal 1994, approximately 68.2% of the Commonwealth's annual revenues were
derived from state taxes. In addition, the federal government provided
approximately 18.7% of annual revenues, with the remaining 13.1% provided from
departmental revenues and transfers from non-budgeted funds.
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The major components of state taxes are the income tax, which accounts for
55% of total projected tax revenues in fiscal 1995, the sales and use tax, which
accounted for 22%, and the business corporations tax, which accounted for
approximately 8%. Other tax and excise sources account for the remaining 15% of
total fiscal 1995 tax revenues.
Income Tax
The Commonwealth assesses personal income taxes at flat rates, according to
classes of income, after specified deductions and exemptions. A rate of 5.95% is
applied to income from employment, professions, trades, businesses,
partnerships, rents, royalties, taxable pensions and annuities and interest from
Massachusetts banks; and a rate of 12% is applied to other interest (although
interest on obligations of the United States and of the Commonwealth and its
political subdivisions is exempt), dividends; and a rate ranging from 12% on
capital gains from the sale of assets held for one year and less to 0% on
capital gains from the sale of certain assets held more than six years.
It should be noted that the Massachusetts Water Resources Authority is
undertaking capital projects for the construction and rehabilitation of sewage
collection and treatment facilities in order to bring wastewater discharges into
Boston Harbor into compliance with federal and state pollution control
requirements. The harbor cleanup project is estimated to cost $3.5 billion in
1994 dollars. Work in the project began in 1988 and is expected to be completed
in 1999, with the most significant expenditures occurring between 1990 and 1999.
The majority of the project's expenditures will be paid for by local
communities, in the form of user fees, with federal and state sources making up
the difference.
Under Chapter 151 of the Acts of 1990 up to 15% of state income tax revenue
is pledged to the payment of debt service on approximately $1.045 billion of
outstanding Fiscal Recovery Bonds issued pursuant to Chapter 151.
Partially as a result of income tax rate increases, state income tax
revenues increased from fiscal 1990 to $.,045 billion (excluding $298.3 million
collected pursuant to certain 1989 tax legislation) in fiscal 1991. These
figures represent an increase of approximately 13.0%. State income tax revenues
in fiscal 1992 were $5.337 billion, which represents an increase.
Limitations on Tax Revenues
In Massachusetts efforts to limit and reduce levels of taxation have been
underway for several years. Limits were established on state tax revenues by
legislation enacted on October 25, 1986 and by an initiative petition approved
by the voters on November 4, 1986. The two measures are inconsistent in several
respects.
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Chapter 62F, which was added to the General Laws by initiative petition in
November 1986, establishes a state tax revenue growth limit for each fiscal year
equal to the average positive rate of growth in total wages and salaries in the
Commonwealth, as reported by the federal government, during the three calendar
years immediately preceding the end of such fiscal year. Chapter 62F also
requires that allowable state tax revenues be reduced by the aggregate amount
received by local governmental. units from any newly authorized or increased
local option taxes or excises. Any excess in state tax revenue collections for a
given fiscal year over the prescribed limit, as determined by the State Auditor,
is to be applied as a credit against the then current personal income tax
liability of all taxpayers in the Commonwealth in proportion to the personal
income tax liability of all taxpayers in the Commonwealth for the immediately
preceding tax year. Unlike Chapter 29, as described below, the initiative
petition did not exclude principal and interest payments on Commonwealth debt
obligations from the scope of its tax limit. However, the preamble contained in
Chapter 62F provides that "although not specifically required by anything
contained in this chapter, it is assumed that from allowable state tax revenues
as defined herein the Commonwealth will give priority attention to the funding
of state financial assistance to local governmental units, obligations under the
state governmental pension systems, and payment of principal and interest on
debt and other obligations of the Commonwealth."
The legislation enacted in October 1986, which added Chapter 29B to the
General Laws, also establishes an allowable state revenue growth factor by
reference to total wages and salaries in the Commonwealth. However, rather than
utilizing a three-year average wage and salary growth rate, as used by Chapter
62F, Chapter 29B utilizes an allowable state revenue growth factor equal to
one-third of the positive percentage gain in Massachusetts wages and salaries,
as reported by the federal government, during the three calendar years
immediately preceding the end of a given fiscal year. Additionally, unlike
Chapter 62F, Chapter 29B allows for an increase in maximum state tax revenue to
fund an increase in local aid and excludes from its definition of state tax
revenues (i) income derived from local option taxes and excises, and (ii)
revenues needed to fund debt service costs.
Tax revenues in fiscal 1991 through fiscal 1995 were lower than the limit
set by either Chapter 62F or Chapter 29B. The Executive Office for
Administration and Finance currently estimates that state tax revenues in fiscal
1996 will not reach the limit imposed by either of these statutes.
Commonwealth Programs and Services
Fiscal 1992 budgeted expenditures were $13.420 billion, representing a
decline of 1.7% from the level of budgeted expenditures in fiscal 1991. Fiscal
1993 budgeted expenditures were $14.696 billion, an increase of 9.6% from fiscal
1992. Fiscal 1994 budgeted expenditures were $15.533 billion, an increase of
5.7% from fiscal 1993. Fiscal 1995 budgeted expenditures were $16.259 billion,
an increase of 4.7% from 1994. The Governor's proposed fiscal 1996 budget
recommends budgeted expenditures of $16.259 billion, an increase of 4.5% over
fiscal 1995 expenditures.
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Local Aid
In November 1980, voters in the Commonwealth approved a statewide tax
limitation initiative petition, commonly known as Proposition 2 1/2, to
constrain levels of property taxation and to limit the charges and fees imposed
on cities and towns by certain governmental entities, including county
governments. Proposition 2 1/2, is not a provision of the state constitution and
accordingly is subject to amendment or repeal by the Legislature. Proposition 2
1/2, as amended to date, limits the property taxes that may be levied by any
city or town in any fiscal year to the lesser of (i) 2.5% of the full and fair
cash valuation of the real estate and personal property therein, and (ii) 2.5%
over the previous year's levy limit plus any growth in the tax base from certain
new construction and parcel subdivisions. Proposition 2 1/2 also limits any
increase in the charges and fees assessed by certain governmental entities,
including county governments, on cities and towns to the sum of (1) 2.5% of the
total charges and fees imposed in the preceding fiscal year, and (ii) any
increase in charges for services customarily provided locally or services
obtained by the city or town at its option. The law contains certain override
provisions and, in addition, permits debt service on specific bonds and notes
and expenditures for identified capital project to be excluded from the limits
by a majority vote at a general or special election. At the time Proposition 2
1/2 was enacted, many cities and towns had property tax levels in excess of the
limit and were therefore required to roll back property taxes with a concurrent
loss of revenues. Between fiscal 1981 and fiscal 1993, the aggregate property
tax levy grew from $3.347 billion to $5.249 billion, representing an increase of
approximately 56.8%. By contrast according to federal Bureau of Labor
Statistics, the consumer price index for all urban consumers in Boston grew
during the same period by approximately 80%.
Commonwealth Financial Support for Local Governments
During the 1980's, the Commonwealth increased payments to its cities, towns
and regional school districts ("Local Aid) to mitigate the impact of Proposition
2 1/2 on local programs and services. In fiscal 1996, approximately 19.1% of the
Commonwealth's budget is estimated to be allocated to Local Aid. Local Aid
payments to cities, towns and regional school districts take the form of both
direct and indirect assistance.
Direct Local Aid decreased from $2.608 billion in fiscal 1991 to $2.359
billion in fiscal 1992, increased to $2.547 billion in fiscal 1993, and
increased to $2.727 billion in fiscal 1994. Fiscal 1995 expenditures for direct
Local Aid will be $2.976 billion, which is an increase of approximately 9.1%
above the fiscal 1994 level. It is estimated that fiscal 1996 expenditures for
direct Local Aid will be $3.242 billion, which is an increase of approximately
8.9% above the fiscal 1995 level.
Debt Service
During the 1980's, state financed capital expenditures grew substantially.
Capital spending by the Commonwealth in the Capital Projects Funds rose from
approximately $600.0 million in fiscal 1987 to $971.0 million in fiscal 1989. In
November 1988, the Executive Office for Administration and Finance established
an administrative limit on state financed capital spending in the Capital
Projects Funds of $925.0 million per fiscal year. Capital expenditures were
$847.0 million, $694.1 million, $575.9 million, $760.9 million and $902.2
million in fiscal 1991, fiscal 1992, fiscal 1993, fiscal 1994 and fiscal 1995,
respectively. Capital expenditures are projected to be approximately $894.0
million in fiscal 1996.
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The growth of capital expenditures during the 1980s accounts for the
significant rise in annual debt service expenditures since fiscal 1989. Payments
for debt service on Commonwealth general obligation bonds and notes increased at
an average annual rate of approximately 22.2%, from $770.9 million in fiscal
1990 to $942.3 million in fiscal 1991. Debt service payments in fiscal 1992 were
$898.3 million, representing a 47% decrease from fiscal 1991, which resulted
from a $261.0 million one-time reduction achieved through the issuance of
refunding bonds in September and October 1991. Debt service expenditures for
fiscal 1993, fiscal 1994 and fiscal 1995 were $1.14 billion, $1.155 billion and
$1.230 billion, respectively, and are projected to be $1.196 billion for fiscal
1996. The amounts noted represent debt service payments on Commonwealth debt
(including the Fiscal Recovery Bonds and the Special Obligation Bonds) but do
not include debt service on notes issued to finance certain Medicaid related
liabilities, which were paid in full from non-budgeted Funds. Also excluded are
debt service contract assistance payments to the MBTA ($205.9 million projected
in fiscal 1996), the Massachusetts Convention Center Authority ($24.6 million
projected in fiscal 1996), the Massachusetts Government Land Bank ($6.0 million
projected in fiscal 1996), the Massachusetts Water Pollution Abatement Trust
($16.6 million projected in fiscal 1996) and grants to municipalities under the
school building assistance program to defray a portion of the debt service costs
on local school bonds ($174.9 million projected in fiscal 1996).
In January 1990, legislation was enacted to impose a limit on debt service
in Commonwealth budgets beginning in fiscal 1991. The law, as amended, which is
codified as Section 60B of Chapter 29 of the General Laws, provides that no more
than 10% of the total appropriations in any fiscal year may be expended for
payment of interest and principal on general obligation debt (excluding the
Fiscal Recovery Bonds) of the Commonwealth. This law may be amended or repealed
by the Legislature or may be superseded in the General Appropriation Act for any
year.
It should be noted that the Massachusetts Water Resources Authority is
undertaking capital projects for the construction and rehabilitation of sewage
collection and treatment facilities in order to bring wastewater discharges into
Boston Harbor into compliance with federal and state pollution control
requirements. The harbor cleanup project is estimated to cost $3.5 billion in
1994 dollars. Work in the project began in 1988 and is expected to be completed
in 1999, with the most significant expenditures occurring between 1990 and 1999.
The majority of the project's expenditures will be paid for by local
communities, in the form of user fees, with federal and state sources making up
the difference.
Ratings
In September, 1992, Standard & Poor's raised its ratings on the
Commonwealth's general obligation debt and related guaranteed bonds from "BBB"
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to "A." Moody's also revised its rating from "Baa" to "A" and Fitch Investor's
maintained its "A" rating with a stable trend. In October, 1993, Standard &
Poor's and Fitch Investors raised Massachusetts' general obligation rating from
"A" to "A+." Moody's currently rates the Commonwealth's general obligation debt
to A1. No assurance can be given that the rating agencies will not further
adjust their ratings or their outlooks. A ratings change would probably affect
the value of the Commonwealth's general obligations as well as those of other
entities which rely on the Commonwealth for partial or full funding.
Portfolio Turnover
It is not the policy of the Fund to purchase or sell securities for trading
purposes. However, in order to take advantage of market opportunities to achieve
a higher total return than would be available from an unmanaged portfolio of
securities, the Fund places no restrictions on portfolio turnover and it may
sell any portfolio security without regard to the period of time it has been
held, except as may be necessary to maintain its status as a regulated
investment company under the Code. The Fund may, therefore generally change its
portfolio investments at any time in accordance with the Adviser's appraisal of
factors affecting any particular issuer or market, or the economy in general. A
rate of turnover of 100% would occur if the value of the lesser of purchases and
sales of portfolio securities for a particular year equaled the average monthly
value of portfolio securities owned during the year (excluding short-term
securities). A high rate of portfolio turnover (100% or more) involves a
correspondingly greater amount of brokerage commissions and other costs which
must be borne directly by the Fund and thus indirectly by its shareholders. It
may also result in the realization of larger amounts of net short-term capital
gains, distributions from which are taxable to shareholders as ordinary income
and may, under certain circumstances, make it more difficult for the Fund to
qualify as a regulated investment company under the Code.
INVESTMENT RESTRICTIONS
The Fund has adopted the following fundamental policies in addition to
those described under "Investment Objective and Policies--Investment
Restrictions" in the Prospectus. The Fund's fundamental policies cannot be
changed unless the change is approved by the lesser of (i) 67% or more of the
voting securities present at a meeting, if the holders of more than 50% of the
outstanding voting securities of the Fund are present or represented by proxy,
or (ii) more than 50% of the outstanding voting securities of the Fund. The Fund
may not:
1. Invest, with respect to at least 50% of its total assets, more than 5% in
the securities of any one issuer (other than the U.S. Government, its
agencies or instrumentalities) or acquire more than 25% of the outstanding
voting securities of any issuer (in determining the issuer of a tax-exempt
security, identification of the issuer will be based upon a determination
of the source of assets and revenues committed to meeting interest and
principal payments of each security).
2. Issue senior securities, borrow money or pledge or mortgage its assets,
except that the Fund may borrow from banks as a temporary measure for
extraordinary or emergency purposes (but not investment purposes) in an
amount up to 15% of the current value of its total assets, and pledge its
assets to an extent not greater than 15% of the current value of its total
assets to secure such borrowings; however, the Fund may not make any
additional investments while its outstanding borrowings exceed 5% of the
current value of its total assets.
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3. Lend portfolio securities, except that the Fund may enter into repurchase
agreements which are terminable within seven days.
4. Invest more than an aggregate of 15% of the net assets of the Fund in
securities subject to legal or contractual restrictions on resale or for
which there are no readily available market quotations or in other
illiquid securities.
5. Underwrite the securities of other issuers, except to the extent that, in
connection with the disposition of portfolio securities, the Fund may be
deemed to be an underwriter under the Securities Act of 1933.
6. Purchase real estate or real estate mortgage loans, although the Fund may
purchase marketable securities of companies which deal in real estate,
real estate mortgage loans or interests therein and may purchase, hold and
sell real estate acquired as a result of ownership of securities or other
instruments.
7. Purchase securities on margin (except that the Fund may obtain such
short-term credits as may be necessary for the clearance of purchases and
sales of securities).
8. Purchase or sell commodities or commodity contracts except that the Fund
may purchase and sell financial futures contracts and options on financial
futures contracts.
The following restrictions are not fundamental policies and may be changed
by the Trustees without shareholder approval, in accordance with applicable
laws, regulations or regulatory policy. The Fund may not:
a. Make short sales of securities.
b. Invest in companies for the purpose of exercising control or management.
c. Purchase securities of any other investment company except as part of a
merger, consolidation or acquisition of assets.
d. Purchase or write options, except as described under "Strategic
Transactions."
e. Invest in interests in oil, gas or other exploration or development
programs.
f. Invest more than 5% of the assets of the Fund in the securities of any
issuers which together with their corporate parents have records of less
than three years' continuous operation, including the operation of any
predecessor, other than obligations issued or guaranteed by the U.S.
Government or its agencies, municipal securities which are rated by at
least one nationally recognized municipal bond rating service, and
securities fully collateralized by such securities.
g. Invest in securities of any company if any officer or director (Trustee)
of the Trust or of the Fund's investment adviser owns more than 1/2 of 1%
of the outstanding securities of such company and such officers and
directors (Trustees) own in the aggregate more than 5% of the securities
of such company.
h. Enter into repurchase agreements with respect to more than 15% of the
value of its net assets. If any percentage restriction described above is
adhered to at the time of investment, a subsequent increase or decrease in
the percentage resulting from a change in the value of the Fund's assets
will not constitute a violation of the restriction, except with respect to
restriction (g) above.
24
<PAGE>
In order to permit the sale of shares of the Fund in certain states, the
Board may, in its sole discretion, adopt restrictions on investment policy more
restrictive than those described above. Should the Board determine that any such
more restrictive policy is no longer in the best interest of the Fund and its
shareholders, the Fund may cease offering shares in the state involved and the
Board may revoke such restrictive policy. Moreover, if the states involved shall
no longer require any such restrictive policy, the Board may, in its sole
discretion, revoke such policy.
The Fund does not expect to own more than 25% of the outstanding voting
securities of any one issuer. Because municipal securities are not voting
securities, there is no limit on the percentage of a single issuer's municipal
bonds which the Fund may own except as described in the Prospectus under
"Investment Objectives and Policies." Consequently, the Fund may invest in a
greater percentage of the outstanding securities of a single issuer than would
an investment company which invests in voting securities.
Although it is allowed to do so, the Fund does not expect to invest in
securities (other than securities of the U.S. Government, its agencies and
instrumentalities and municipal securities) if more than 25% of its total assets
would be invested in a single industry. Although governmental issuers of
municipal securities are not considered part of any "industry," municipal
securities backed only by the assets and revenues of nongovernmental users
constitute an "industry." Thus, the Fund does not expect that more than 25% of
the Fund's assets will be invested in obligations deemed to be issued by
nongovernmental users in any one industry (e.g., industrial development bonds
for health care facilities) and in taxable obligations of issuers in the same
industry. However, it is possible that the Fund may invest more than 25% of its
assets in a broader sector of the market for municipal securities.
Determining the issuer of a tax-exempt security, will be based upon the
source of assets and revenues committed to meeting interest and principal
payments of each security. Massachusetts Municipal Securities backed only by the
assets and revenues of nongovernmental users will be deemed to be issued by such
nongovernmental users. Any Massachusetts Municipal Security guaranteed or
otherwise backed by full faith and credit of a governmental entity would
generally be considered to represent a separate security issued by such
guaranteeing
CALCULATION OF PERFORMANCE DATA
As indicated in the Prospectus, the Fund may, from time to time, advertise
certain yield, tax equivalent yield and total return information. The average
annual total return of the Fund for a period is computed by subtracting the net
asset value per share at the beginning of the period from the net asset value
per share at the end of the period (after adjusting for the reinvestment of any
income dividends and capital gain distributions), and dividing the result by the
net asset value per share at the beginning of the period. In particular, the
average annual total return of the Fund ("T") is computed by using the
redeemable value at the end of a specified period of time ("ERV") of a
hypothetical initial investment of $1,000 ("P") over a period of time ("n")
according to the formula P(1+T)n=ERV.
25
<PAGE>
The yield of the Fund is computed by dividing the net investment income per
share earned during the period stated in the advertisement by the maximum
offering price per share on the last day of the period. For the purpose of
determining net investment income, the calculation includes, among expenses of
the Fund, all recurring fees that are charged to all shareholder accounts and
any non-recurring charges for the period stated. In particular, the yield is
determined according to the following formula:
Yield = 2[((A - B + 1)/CD)^6 - 1]
Where: A equals dividends and interest earned during the period; B equals
net expenses accrued for the period; C equals average daily number of shares
outstanding during the period that were entitled to receive dividends; D equals
the maximum offering price per share on the last day of the period.
Tax equivalent yield is the net annualized taxable yield needed to produce
a specified tax exempt yield at a given tax rate based on a specified 30-day (or
one month) period, assuming semi-annual compounding of income. The taxable
equivalent yield for the Fund is based upon the Fund's current tax-exempt yield
and an investor's marginal tax rate. The formula is:
Portfolio's Tax-Free Yield = Taxable
100% - Marginal Tax Rate Equivalent Yield
The average annual total return quotation for the Fund since inception
(November 2, 1992 to December 31, 1995) and for the year ended December 31,
1995, respectively, were 6.54% and 12.64%, respectively, and the average
annualized yield and the tax equivalent yield for the thirty day period ended
December 31, 1995 were 4.38% and 8.24%, respectively, assuming a combined
federal and Massachusetts tax rate of 46.85%.
The Fund may also quote non-standardized yield, such as yield-to-maturity
("YTM"). YTM represents that rate of return an investor will receive if a
long-term, interest bearing investment, such as a bond, is held to its maturity
date. YTM does not take into account purchase price, redemption value, time to
maturity, coupon yield, and the time between interest payments.
In addition to average annual return, yield and tax equivalent yield
quotations, the Fund may quote quarterly and annual performance on a net (with
management and administration fees deducted) and gross basis as follows:
26
<PAGE>
Quarter/Year Net Gross
- - --------------------------------------------------------------------------------
1992 2.27% 2.43%
1Q93 2.88 3.04
2Q93 2.72 2.88
3Q93 2.74 2.90
4Q93 1.55 1.71
1993 10.24 10.95
1Q94 (4.20) (4.04)
2Q94 1.02 1.18
3Q94 0.50 0.67
4Q94 (1.12) (0.96)
1994 (3.84) (3.20)
1Q95 4.86 5.02
2Q95 2.01 2.18
3Q95 2.69 2.87
4Q95 2.54 2.70
1995 12.64 13.38
These performance quotations should not be considered as representative of
the Fund's performance for any specified period in the future.
The Fund's performance may be compared in sales literature to the
performance of other mutual funds having similar objectives or to standardized
indices or other measures of investment performance. In particular, the Fund may
compare its performance to various indices (or particular components thereof),
which are generally considered to be representative of the performance of
municipal securities such as the Lehman Muni 3-5-7-10 Index. Comparative
performance may also be expressed by reference to a ranking prepared by a mutual
fund monitoring service or by one or more newspapers, newsletters or financial
periodicals. Performance comparisons may be useful to investors who wish to
compare the Fund's past performance to that of other mutual funds and investment
products. Of course, past performance is not a guarantee of future results.
27
<PAGE>
MANAGEMENT
Trustees and Officers
The Trustees and executive officers of the Trust are listed below. All
executive officers of the Trust are affiliates of Standish, Ayer & Wood, Inc.,
the Fund's investment adviser.
<TABLE>
<CAPTION>
Name, Address and Date of Birth Position Held Principal Occupation
With Trust During Past 5 Years
- - --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
*D. Barr Clayson, 7/29/35 Vice President and Trustee Vice President and Managing Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.;
One Financial Center Chairman and Director,
Boston, MA 02111 Standish International
Management Company, L.P.
Samuel C. Fleming, 9/30/40 Trustee Chairman of the Board
c/o Decision Resources, Inc. and Chief Executive Officer,
1100 Winter Street Decision Resources, Inc.;
Waltham, MA 02154 through 1989, Senior V.P.
Arthur D. Little
Benjamin M. Friedman, 8/5/44 Trustee William Joseph Maier
c/o Harvard University Professor of Political Economy,
Cambridge, MA 02138 Harvard University
John H. Hewitt, 4/11/35 Trustee Trustee, The Peabody Foundation; Trustee,
P.O. Box 307 Visiting Nurse Alliance of Vermont
So. Woodstock, VT 05071 and New Hampshire
*Edward H. Ladd, 1/3/38 Trustee and Vice President Chairman of the Board
c/o Standish, Ayer & Wood, Inc. and Managing Director,
One Financial Center Standish, Ayer & Wood, Inc. since 1990;
Boston, MA 02111 formerly President of Standish, Ayer & Wood, Inc.
Director of
Standish International Management Company, L.P.
Caleb Loring III, 11/14/43 Trustee Trustee, Essex Street Associates
c/o Essex Street Associates (family investment trust office);
P.0. Box 5600 Director, Holyoke Mutual Insurance Company
Beverly Farms, MA 01915
*Richard S. Wood, 5/21/54 President and Trustee Vice President, Secretary,
c/o Standish, Ayer & Wood, Inc. and Managing Director,
One Financial Center Standish, Ayer & Wood, Inc.;
Boston, MA 02111 Executive Vice President and Director,
Standish International Management Company, L.P.
Richard C. Doll, 7/8/48 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center Vice President and Director,
Boston, MA 02111 Standish International Management Company, L.P.
James E. Hollis III, 11/21/48 Executive Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
David W. Murray, 5/5/40 Treasurer and Secretary Vice President, Treasurer and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center Treasurer,
Boston, MA 02111 Standish International Management Company, L.P.
28
<PAGE>
Name, Address and Date of Birth Position Held Principal Occupation
With Trust During Past 5 Years
- - --------------------------------------------------------------------------------------------------------------------
Caleb F. Aldrich, 9/20/57 Vice President Vice President and Managing Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA O2111
Beverly E. Banfield, 7/6/56 Vice President Vice President and Compliance Officer,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.;
One Financial Center Assistant Vice President and Compliance Officer,
Boston, MA 02111 Freedom Capital Management Corp.
(1989-1992)
Nicholas S. Battelle, 6/24/42 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Walter M. Cabot, 1/16/33 Vice President Senior Advisor and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.;
One Financial Center prior to 1991, President,
Boston, MA 02111 Harvard Management Company
Senior Advisor and Director of
Standish International Management Company, L.P.
David H. Cameron, 11/2/55 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center Director of
Boston, MA 02111 Standish International Management
Company, L.P.
Karen K. Chandor, 2/13/50 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Lavinia B. Chase, 6/4/46 Vice President Vice President,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Susan B. Coan, 5/1/52 Vice President Vice President,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA O2111
W. Charles Cook II, 7/16/63 Vice President Vice President,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center Vice President,
Boston, MA 02111 Standish International Management Company, L.P.
Joseph M. Corrado, 5/13/55 Vice President Vice President and Associate Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
29
<PAGE>
Name, Address and Date of Birth Position Held Principal Occupation
With Trust During Past 5 Years
- - --------------------------------------------------------------------------------------------------------------------
Dolores S. Driscoll, 2/17/48 Vice President Vice President and Managing Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center Director,
Boston, MA 02111 Standish International Management Company, L.P.
Mark A. Flaherty, 4/24/59 Vice President Vice President,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center Vice President
Boston, MA 02111 Standish International Management Company, L.P.
Maria D. Furman, 2/3/54 Vice President Vice President and Managing Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center Vice President and Director,
Boston, MA 02111 Standish International Management Company, L.P.
Anne P. Herrmann, 1/26/56 Vice President Mutual Fund Administrator,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Ann S. Higgins, 4/8/35 Vice President Vice President,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Denise B. Kneeland, 8/19/51 Vice President Senior Operations, Manager,
c/o Standish, Ayer &Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center since December 1995 formerly
Boston, MA 02111 Vice President Scudder, Stevens and Clark
Raymond J. Kubiak, 9/3/57 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Phillip D. Leonardi, 4/24/62 Vice President Vice President, Standish, Ayer & Wood, Inc.
c/o Standish, Ayer & Wood, Inc. since November 1993; formerly, Investment Sales,
One Financial Center Cigna Corporation (1993) and
Boston, MA 02111 Travelers Corporation (1984-1993)
Laurence A. Manchester, 5/24/43 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
George W. Noyes, 11/12/44 Vice President President and Managing Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center Director of
Boston, MA 02111 Standish International Management Company, L.P.
Arthur H. Parker, 8/12/35 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Jennifer A. Pline, 3/8/60 Vice President Vice President,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
30
<PAGE>
Name, Address and Date of Birth Position Held Principal Occupation
With Trust During Past 5 Years
- - --------------------------------------------------------------------------------------------------------------------
Howard B. Rubin, 10/29/59 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center Executive Vice President and Director
Boston, MA 02111 Standish International Management Company, L.P.
Michael C. Schoeck, 10/24/55 Vice President Vice President,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc. since August, 1993;
One Financial Center formerly, Vice President,
Boston, MA 02111 Commerzbank, Frankfurt, Germany
Vice President,
Standish International Management Company, L.P.
Austin C. Smith, 7/25/52 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Stephen A. Smith, 3/13/49 Vice President Vice President, since November 2, 1993;
c/o Standish, Ayer & Wood, Inc. formerly, Standish, Ayer & Wood, Inc. Consultant
One Financial Center Cambridge Associates
Boston, MA 02111
David C. Stuehr, 3/1/58 Vice President Vice President,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
James W. Sweeney, 5/15/59 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center Executive Vice President and Director,
Boston, MA 02111 Standish International Management Company, L.P.
Ralph S. Tate, 4/2/47 Vice President Vice President and Managing Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc. since April, 1990;
One Financial Center formerly Vice President, Aetna Life & Casualty
Boston, MA 02111 President and Director,
Standish International Management Company, L.P.
Michael W. Thompson, 3/31/56 Vice President Vice President and Associate Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Christopher W. Van Alstyne, 3/24/60 Vice President Vice President,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.;
One Financial Center Formerly Regional Marketing Director,
Boston, MA 02111 Gabelli-O'Connor Fixed Income Management
*Indicates that Trustee is an interested person of the Trust for purposes
of the 1940 Act. Compensation of Trustees and Officers
</TABLE>
Compensation of Trustees and Officers
The Fund pays no compensation to the Trust's Trustees affiliated with the
Adviser or to the Trust's officers. None of the Trust's Trustees or officers
engaged in any financial transactions (other than the purchase or redemption of
the Fund's shares) with the Trust or the Adviser during the fiscal year ended
December 31, 1995.
The following table sets forth all compensation paid to the Trust's
Trustees as of the Fund's fiscal year ended December 31, 1995:
<TABLE>
<CAPTION>
Pension or Retirement Total Compensation
Aggregate Compensation Benefits Accrued as from Fund and
Name of Trustee from the Fund Part of Fund's Expenses Other Funds in Complex*
- - ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
D. Barr Clayson $0 $0 $0
Phyllis L. Cothran** 0 0 0
Richard C. Doll*** 0 0 0
Samuel C. Fleming 380 0 46,000
Benjamin M. Friedman 345 0 41,750
John H. Hewitt 345 0 41,750
Edward H. Ladd 0 0 0
Caleb Loring, III 345 0 41,750
Richard S. Wood 0 0 0
* As of the date of this Statement of Additional Information, there were 18 funds in the fund complex.
** Ms. Cothran resigned as a Trustee effective January 31, 1995.
*** Mr. Doll resigned as a Trustee effective December 6, 1995.
</TABLE>
Certain Shareholders
At February 1, 1996, Trustees and officers of the Trust as a group
beneficially owned (i.e., had voting and/or investment power) less than 1% of
the then outstanding shares of the Fund. At that date, each of the following
persons beneficially owned 5% or more of the then outstanding shares of the
Fund:
Percentage of
Name and Address Outstanding Shares
- - --------------------------------------------------------------------------------
BDG & Co. 48%
Bingham Dana & Gould
Trust Department
150 Federal Street
Boston, MA 02110
Investment Adviser
Standish, Ayer & Wood, Inc. (the "Adviser") serves as investment adviser to
the Fund pursuant to a written investment advisory agreement with the Trust. The
Adviser is a Massachusetts corporation organized in 1933 and is registered under
the Investment Advisers Act of 1940.
The following, constituting all of the Directors and all of the
shareholders of the Adviser, are the Adviser's controlling persons: Caleb F.
Aldrich, Nicholas S. Battelle, Walter M. Cabot, Sr., David H. Cameron, Karen K.
Chandor, D. Barr Clayson, Richard C. Doll, Dolores S. Driscoll, Mark A.
Flaherty, Maria D. Furman, James E. Hollis III, Raymond J. Kubiak, Edward H.
Ladd, Laurence A. Manchester, David W. Murray, George W. Noyes, Arthur H.
Parker, Howard B. Rubin, Austin C. Smith, David C. Stuehr, James J. Sweeney,
Ralph S. Tate, and Richard S. Wood.
31
<PAGE>
Certain services provided by the Adviser under the advisory agreement are
described in the Prospectus. In addition to those services, the Adviser provides
the Fund with office space for managing its affairs, with the services of
required executive personnel, and with certain clerical services and facilities.
These services are provided without reimbursement by the Fund for any costs
incurred. Under the investment advisory agreement, the Adviser is paid a fee
based upon a percentage of the Fund's average daily net asset value computed as
described in the Prospectus. This fee is paid monthly. The rate and time at
which the fee is paid is described in the Prospectus. For the fiscal years ended
December 31, 1993, 1994 and 1995, the Adviser agreed not to impose $54,041,
$39,874 and $21,818 of its fees of $70,908, $18,562 and $124,213, respectively.
Pursuant to the investment advisory agreement, the Fund bears expenses of
its operations other than those incurred by the Adviser pursuant to the
investment advisory agreement. Among other expenses, the Fund will pay share
pricing and shareholder servicing fees and expenses; custodian fees and
expenses; legal and auditing fees and expenses; expenses of prospectuses,
statements of additional information and shareholder reports; registration and
reporting fees and expenses; and Trustees' fees and expenses. The advisory
agreement provides that if the total expenses of the Fund in any fiscal year
(excluding brokerage commissions, taxes and extraordinary expenses) exceed the
most restrictive expense limitation applicable to the Fund in any state in which
shares of the Fund are then qualified for sale, the compensation due the Adviser
shall be reduced by the amount of the excess, by a reduction or refund thereof
at the time such compensation is payable after the end of each calendar month
during the fiscal year, subject to readjustment during the year. Currently, the
most restrictive state expense limitation provision limits the Fund's expenses
to 2 1/2% of the first $30 million of average net assets, 2% of the next $70
million of such net assets and 1 1/2% of such net assets in excess of $100
million. The Adviser has voluntarily agreed to limit the Fund's total operating
expenses (excluding brokerage commissions, taxes and extraordinary expenses) to
0.65% of the Fund's average daily net assets. The Adviser may discontinue or
modify such limitation in the future at its discretion, although it has no
current intention to do so.
32
<PAGE>
Unless terminated as provided below, the investment advisory agreement
remains in full force and effect for two years and continues in full force and
effect for successive periods of one year thereafter, but only as long as each
such continuance is approved annually (i) by either the Trustees of the Trust or
by vote of a majority of the outstanding voting securities (as defined in the
1940 Act) of the Fund, and, in either event (ii) by vote of a majority of the
Trustees of the Trust who are not parties to the investment advisory agreement
or "interested persons" (as defined in the 1940 Act) of any such party, cast in
person at a meeting called for the purpose of voting on such approval. The
investment advisory agreement may be terminated at any time without the payment
of any penalty by vote of the Trustees of the Trust or by vote of a majority of
the outstanding voting securities (as defined in the 1940 Act) of the Fund or by
the Adviser, on sixty days' written notice to the other parties. The investment
advisory agreement terminates in the event of its assignment as defined in the
1940 Act.
In an attempt to avoid any potential conflict with portfolio transactions
for the Fund, the Adviser and the Trust have adopted extensive restrictions on
personal securities trading by personnel of the Adviser and its affiliates.
These restrictions include pre-clearance of all personal securities transactions
and a prohibition of purchasing initial public offerings of securities. These
restrictions are a continuation of the basic principle that the interests of the
Fund and its shareholders come before those of the Adviser, its affiliates and
their employees.
Distributor of the Trust
Standish Fund Distributors, L.P. (the "Principal Underwriter"), an
affiliate of the Adviser, serves as the Trust's exclusive principal underwriter
and holds itself available to receive purchase orders for the Fund's shares. In
that capacity, the Principal Underwriter has been granted the right, as agent of
the Trust, to solicit and accept orders for the purchase of the Fund's shares in
accordance with the terms of the Underwriting Agreement between the Trust and
the Principal Underwriter. Pursuant to the Underwriting Agreement, the Principal
Underwriter has agreed to use its best efforts to obtain orders for the
continuous offering of the Fund's shares. The Principal Underwriter receives no
commissions or other compensation for its services, and has not received any
such amounts in any prior year. The Underwriting Agreement shall continue in
effect with respect to the Fund until two years after its execution and for
successive periods of one year thereafter only if it is approved at least
annually thereafter (i) by a vote of the holders of a majority of the Fund's
outstanding shares or by the Trustees of the Trust or (ii) by a vote of a
majority of the Trustees of the Trust who are not "interested persons" (as
defined by the 1940 Act) of the parties to the Underwriting Agreement, cast in
person at a meeting called for the purpose of voting on such approval. The
Underwriting Agreement will terminate automatically if assigned by either party
thereto and is terminable at any time without penalty by a vote of a majority of
the Trustees of the Trust, a vote of a majority of the Trustees who are not
"interested persons" of the Trust, or by a vote of the holders of a majority of
the Fund's outstanding shares, in any case without payment of any penalty on not
more than 60 days' written notice to the other party. The offices of the
Principal Underwriter are located at One Financial Center, 26th Floor, Boston,
Massachusetts 02111.
33
<PAGE>
REDEMPTION OF SHARES
Detailed information on redemption of shares is included in the Prospectus.
The Fund may suspend the right to redeem shares or postpone the date of
payment upon redemption for more than seven days (i) for any period during which
the New York Stock Exchange is closed (other than customary weekend or holiday
closings) or trading on the exchange is restricted; (ii) for any period during
which an emergency exists as a result of which disposal by the Fund of
securities owned by it or determination by the Fund of the value of its net
assets is not reasonably practicable; or (iii) for such other periods as the SEC
may permit for the protection of shareholders of the Fund.
The Fund intends to pay redemption proceeds in cash for all shares redeemed
but, under certain conditions, the Fund may make payment wholly or partly in
portfolio securities. Portfolio securities paid upon redemption of Fund shares
will be valued at their then current market value. The Fund has elected to be
governed by the provisions of Rule 18f-1 under the 1940 Acts which limits the
Fund's obligation to make cash redemption payments to any shareholder during any
90-day period to the lesser of $250,000 or 1% of the Fund's net asset value at
the beginning of such period. An investor may incur brokerage costs in
converting portfolio securities received upon redemption to cash.
PORTFOLIO TRANSACTIONS
The Adviser is responsible for placing the Fund's portfolio transactions
and will do so in a manner deemed fair and reasonable to the Fund and not
according to any formula. The primary consideration in all portfolio
transactions will be prompt execution of orders in an efficient manner at the
most favorable price. In selecting broker-dealers and in negotiating
commissions, the Adviser will consider the firm's reliability, the quality of
its execution services on a continuing basis and its financial condition. When
more than one firm is believed to meet these criteria, preference may be given
to firms which also sell shares of the Fund. In addition, if the Adviser
determines in good faith that the amount of commissions charged by a broker is
reasonable in relation to the value of the brokerage and research services
provided by such broker, the Fund may pay commissions to such broker in an
amount greater than the amount another firm may charge. Research services may
include (i) furnishing advice as to the value of securities, the advisability of
investing in, purchasing or selling securities, and the availability of
securities or purchasers or sellers of securities, (ii) furnishing analyses and
reports concerning issuers, industries, securities, economic factors and trends,
portfolio strategy, and the performance of accounts, and (iii) effecting
securities transactions and performing functions incidental thereto (such as
clearance and settlement). Research services furnished by firms through which
the Fund effects its securities transactions may be used by the Adviser in
servicing other accounts; not all of these services may be used by the Adviser
in connection with the Fund. The investment advisory fee paid by the Fund under
the advisory agreement will not be reduced as a result of the Adviser's receipt
of research services.
34
<PAGE>
The Adviser also places portfolio transactions for other advisory accounts.
The Adviser will seek to allocate portfolio transactions equitably whenever
concurrent decisions are made to purchase or sell securities for the Fund and
another advisory account. In some cases, this procedure could have an adverse
effect on the price or the amount of securities available to the Fund. In making
such allocations, the main factors considered by the Adviser will be the
respective investment objectives, the relative size of portfolio holdings of the
same or comparable securities, the availability of cash for investment, the size
of investment commitments generally held, and opinions of the persons
responsible for recommending the investment.
DETERMINATION OF NET ASSET VALUE
The Fund's net asset value is calculated each business day on which the New
York Stock Exchange is open as of the close of regular trading (currently 4:00
p.m. New York City time). Currently the New York Stock Exchange is not open on
weekends, New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas. The net asset value
of the Fund's shares is determined as of the close of regular trading on the New
York Stock Exchange (currently 4:00 p.m., New York City time) and is computed by
dividing the value of all securities and other assets of the Fund less all
liabilities by the number of shares outstanding, and adjusting to the nearest
cent per share. Expenses and fees, including the investment advisory fee, are
accrued daily and taken into account for the purpose of determining net asset
value.
FEDERAL AND MASSACHUSETTS INCOME TAXES
Federal Income Taxation
Each series of the Trust, including the Fund, is treated as a separate
entity for accounting and tax purposes. The Fund has qualified and elected to be
treated as a "regulated investment company" under Subchapter M of the Internal
Revenue Code of 1986, as amended (the "Code"), and intends to continue to so
qualify in the future. As such and by complying with the applicable provisions
of the Code regarding the sources of its income, the timing of its
distributions, and the diversification of its assets, the Fund will not be
subject to Federal income tax on its investment company taxable income (i.e.,
all taxable income, after reduction by deductible expenses, other than its "net
capital gain," which is the excess, if any, of its net long-term capital gain
over its net short-term capital loss), net tax-exempt interest, and net capital
gain which are distributed to shareholders at least annually in accordance with
the timing requirements of the Code.
The Fund will be subject to a 4% non-deductible federal excise tax on
certain taxable amounts not distributed (and not treated as having been
distributed) on a timely basis in accordance with annual minimum distribution
requirements. The Fund intends under normal circumstances to avoid liability for
such tax by satisfying such distribution requirements.
35
<PAGE>
The Fund will not distribute net long-term capital gains realized in any
year to the extent that a capital loss is carried forward from prior years
against such gain. For federal income tax purposes, the Fund is permitted to
carry forward a net capital loss in any year to offset its own net capital
gains, if any, during the eight years following the year of the loss. To the
extent subsequent net capital gains are offset by such losses, they would not
result in federal income tax liability to the Fund and, as noted above, would
not be distributed as such to shareholders. The Fund has $429,385 of capital
loss carryforwards, which expire in 2002, available to offset future net capital
gains.
If the Fund invests in certain zero coupon securities, increasing rate
securities or, in general, other securities with original issue discount (or
with market discount if the Fund elects to include market discount in income
currently), the Fund must accrue income on such investments prior to the receipt
of the corresponding cash payments. However, the Fund must distribute, at least
annually, all or substantially all of its net taxable and tax-exempt income,
including such accrued income, to shareholders to qualify as a regulated
investment company under the Code and avoid federal income and excise taxes.
Therefore, the Fund may have to dispose of its portfolio securities under
disadvantageous circumstances to generate cash, or may have to leverage itself
by borrowing the cash, to satisfy distribution requirements.
Limitations imposed by the Code on regulated investment companies like the
Fund may restrict the Fund's ability to enter into futures and options
transactions.
Certain options and futures transactions undertaken by the Fund may cause
the Fund to recognize gains or losses from marking to market even though its
positions have not been sold or terminated and affect the character as long-term
or short-term and timing of some capital gains and losses realized by the Fund.
Also, certain of the Fund's losses on its transactions involving options or
futures contracts and/or offsetting portfolio positions may be deferred rather
than being taken into account currently in calculating the Fund's taxable gains.
Certain of the applicable tax rules may be modified if the Fund is eligible and
chooses to make one or more of certain tax elections that may be available.
These transactions may therefore affect the amount, timing and character of the
Fund's distributions to shareholders. The Fund will take into account the
special tax rules (including consideration of available elections) applicable to
options and futures contracts in order to minimize any potential adverse tax
consequences.
The federal income tax rules applicable to interest rate swaps, caps,
floors and collars are unclear in certain respects, and the Fund may be required
to account for these instruments under tax rules in a manner that, under certain
circumstances, may limit its transactions in these instruments.
Distributions from the Fund's current or accumulated earnings and profits
("E&P"), as computed for federal income tax purposes, will be taxable as
described in the Fund's Prospectus whether taken in shares or in cash. Amounts
that are not allowable as a deduction in computing taxable income, including
expenses associated with earning tax-exempt interest income, do not reduce
current E&P for this purpose.
Taxable distributions include distributions attributable to income or gains
from the Fund's taxable investments or transactions, including (i) gains from
the sale of portfolio securities or the right to when-issued securities prior to
issuance or from options or futures transactions and (ii) income attributable to
repurchase agreements, securities lending, recognized market discount, interest
rate swaps, caps, floors or collars, and a portion of the discount from certain
stripped tax-exempt obligations or their coupons.
36
<PAGE>
Distributions, if any, in excess of E&P will constitute a return of
capital, which will first reduce an investor's tax basis in Fund shares and
thereafter (after such basis is reduced to zero) will generally give rise to
capital gains. Shareholders electing to receive distributions in the form of
additional shares will have a cost basis for federal income tax purposes in each
share so received equal to the amount of cash they would have received had they
elected to receive the distributions in cash, divided by the number of shares
received.
Distributions of tax-exempt interest ("exempt-interest dividends") timely
designated as such by the Fund will be treated as tax-exempt interest under the
Code, provided that the Fund qualifies as a regulated investment company and at
least 50% of the value of its assets at the end of each quarter of its taxable
year is invested in tax-exempt obligations. Shareholders are required to report
their receipt of tax-exempt interest, including such distributions, on their
federal income tax returns. The portion of the Fund's distributions designated
as exempt-interest dividends may differ from the actual percentage that its
tax-exempt income comprises of its total income during the period of any
particular shareholder's investment. The Fund will report to shareholders the
amount designated as exempt-interest dividends for each year.
Interest income from certain types of tax-exempt obligations that are
private activity bonds in which the Fund may invest is treated as an item of tax
preference for purposes of the federal alternative minimum tax. To the extent
that the Fund invests in these types of tax-exempt obligations, shareholders
will be required to treat as an item of tax preference for federal alternative
minimum purposes that part of the Fund's exempt-interest dividends which is
derived from interest on these tax-exempt obligations. Exempt-interest dividends
derived from interest income from tax-exempt obligations that are not private
activity bonds may also be included in determining corporate "adjusted current
earnings" for purposes of computing the alternative minimum tax liability, if
any, of corporate shareholders of the Fund.
The Fund purchases tax-exempt obligations which are generally accompanied
by an opinion of bond counsel to the effect that interest on such securities is
not included in gross income for federal income tax purposes and, in most cases,
is exempt from Massachusetts income tax. It is not economically feasible to, and
the Fund therefore does not, make any additional independent inquiry into
whether such securities are in fact tax-exempt. Bond counsels' opinions will
generally be based in part upon covenants by the issuers and related parties
regarding continuing compliance with federal tax requirements. Tax laws enacted
during the last decade not only had the effect of limiting the purposes for
which tax-exempt bonds could be issued and reducing the supply of such bonds,
but also increased the number and complexity of requirements that must be
satisfied on a continuing basis in order for bonds to be and remain tax-exempt.
If the issuer of a bond or a user of a bond-financed facility fails to comply
with such requirements at any time, interest on the bond could become taxable,
retroactive to the date the obligation was issued. In that event, a portion of
the Fund's distributions attributable to interest the Fund received on such bond
for the current year and for prior years could be characterized or
recharacterized as taxable income.
37
<PAGE>
The Fund may purchase municipal obligations together with the right to
resell the securities to the seller at an agreed upon price or yield within a
specified period prior to the maturity date of the securities. Such a right to
resell is commonly known as a "put" and is also referred to as a "standby
commitment." The Fund may pay for a standby commitment either separately, in
cash, or in the form of a higher price for the securities which are acquired
subject to the standby commitment, thus increasing the cost of securities and
reducing the yield otherwise available. Additionally, the Fund may purchase
beneficial interests in municipal obligations held by trusts, custodial
arrangements or partnerships and/or combined with third-party puts or other
types of features such as interest rate swaps; those investments may require the
Fund to pay "tender fees" or other fees for the various features provided.
The Internal Revenue Service (the "Service") has issued a revenue ruling to
the effect that, under specified circumstances, a registered investment company
will be the owner of tax-exempt municipal obligations acquired subject to a put
option. The Service has also issued private letter rulings to certain taxpayers
(which do not serve as precedent for other taxpayers) to the effect that
tax-exempt interest received by a regulated investment company with respect to
such obligations will be tax-exempt in the hands of the company and may be
distributed to its shareholders as exempt-interest dividends. The Service has
subsequently announced that it will not ordinarily issue advance ruling letters
as to the identity of a true owner of property in cases involving the sale of
securities or participation interests therein if the purchaser has the right to
cause the security, or the participation interest therein, to be purchased by
either the seller or a third party. The Fund intends to take the position that
it is the owner of any municipal obligations acquired subject to a standby
commitment or other third party put and that tax-exempt interest earned with
respect to such municipal obligations will be tax-exempt in its hands. There is
no assurance that the Service will agree with such position in any particular
case. Additionally, the federal income tax treatment of certain other aspects of
these investments, including the treatment of tender fees paid by the Fund, in
relation to various regulated investment company tax provisions is unclear.
However the Adviser intends to manage the Fund's portfolio in a manner designed
to minimize any adverse impact from the tax rules applicable to these
investments.
Interest on indebtedness incurred by a shareholder to purchase or carry
shares of the Fund will not be deductible for federal income tax purposes to the
extent it is deemed related to exempt-interest dividends paid by the Fund.
Pursuant to published guidelines, the Service may deem indebtedness to have been
incurred for the purpose of purchasing or carrying shares of the Fund even
though the borrowed funds may not be directly traceable to the purchase of
shares.
38
<PAGE>
At the time of an investor's purchase of Fund shares, a portion of the
purchase price is often attributable to realized or unrealized appreciation in
the Fund's portfolio. Consequently, subsequent distributions from such
appreciation may be taxable to such investor even if the net asset value of the
investor's shares is, as a result of the distributions, reduced below the
investor's cost for such shares, and the distributions in reality represent a
return of a portion of the purchase price.
Upon a redemption (including a repurchase) of shares of the Fund, a
shareholder may realize a taxable gain or loss, depending upon the difference
between the redemption proceeds and the shareholder's tax basis in his shares.
Such gain or loss will be treated as capital gain or loss if the shares are
capital assets in the shareholder's hands and will (except as described below)
be long-term or short-term, depending upon the shareholder's tax holding period
for the shares. Any loss realized on a redemption may be disallowed to the
extent the shares disposed of are replaced within a period of 61 days beginning
30 days before and ending 30 days after the shares are disposed of, such as
pursuant to automatic dividend reinvestments. In such a case, the basis of the
shares acquired will be adjusted to reflect the disallowed loss. Any loss
realized upon the redemption of shares with a tax holding period of six months
or less will be disallowed to the extent of all exempt-interest dividends paid
with respect to such shares and, if not thus disallowed, will be treated as a
long-term capital loss to the extent of any amounts treated as distributions of
long-term capital gain with respect to such shares.
The foregoing discussion relates solely to U.S. Federal income tax law as
applicable to U.S. persons (i.e., U.S. citizens or residents and U.S. domestic
corporations, partnerships, trusts or estates) subject to tax under such law.
The discussion does not address special tax rules applicable to certain classes
of investors, such as tax-exempt entities, insurance companies, and financial
institutions. Dividends, capital gain distributions, and ownership of or gains
realized on the redemption (including an exchange) of Fund shares may also be
subject to state and local taxes. Shareholders should consult their own tax
advisers as to the Federal, state or local tax consequences of ownership of
shares of, and receipt of distributions from, the Fund in their particular
circumstances.
Non-U.S. investors not engaged in a U.S. trade or business with which their
investment in the Fund is effectively connected will be subject to U.S. Federal
income tax treatment that is different from that described above. These
investors may be subject to nonresident alien withholding tax at the rate of 30%
(or a lower rate under an applicable tax treaty) on amounts treated as ordinary
dividends from the Fund and, unless an effective IRS Form W-8 or authorized
substitute is on file, to 31% backup withholding on certain other payments from
the Fund. Non-U.S. investors should consult their tax advisers regarding such
treatment and the application of foreign taxes to an investment in the Fund.
Massachusetts Income Taxation
Distributions from the Fund will be treated for Massachusetts tax purposes
as described in the Fund's prospectus, whether taken in cash or reinvested in
additional shares.
39
<PAGE>
Recent tax legislation provides that, beginning in 1996, long-term capital
gains will generally be taxed in Massachusetts on a sliding scale at rates
ranging from 5% to 0%, with the applicable tax rate declining as the tax holding
period of the asset (beginning on the later of January 1, 1995 or the date of
actual acquisition) increases from more than one year to more than six years.
This legislation may be challenged in court as violative of the Massachusetts
Constitution, and it is not possible to predict whether any such challenge will
be successful. The legislation does not specify, and it is accordingly not
clear, what Massachusetts tax rate will be applicable to a mutual fund's capital
gain dividends, i.e., distributions from the excess of its net long-term capital
gain over its net short-term capital loss that are treated as long-term capital
gains under the Code, for taxable years beginning after 1995.
The Fund is not subject to Massachusetts corporate excise or franchise
taxes. Provided that the Fund qualifies as a regulated investment company under
the Code, it will also not be required to pay any Massachusetts income tax.
THE FUND AND ITS SHARES
The Fund is an investment series of Standish, Ayer & Wood Investment Trust,
an unincorporated business trust organized under the laws of The Commonwealth of
Massachusetts pursuant to an Agreement and Declaration of Trust dated August 13,
1986, as amended from time to time (the "Declaration"). Under the Declaration,
the Trustees have authority to issue an unlimited number of shares of beneficial
interest, par value $.01 per share, of the Fund. Each share represents an equal
proportionate interest in the Fund with each other share and is entitled to such
dividends and distributions as are declared by the Trustees. Shareholders are
not entitled to any preemptive, conversion or subscription rights. All shares,
when issued, will be fully paid and non-assessable by the Trust. Upon any
liquidation of the Fund, shareholders are entitled to share pro rata in the net
assets available for distribution.
Pursuant to the Declaration, the Trustees may create additional funds by
establishing additional series of shares in the Trust. The establishment of
additional series would not affect the interests of current shareholders in the
Fund. As of the date of this Statement of Additional Information, the Trustees
have established fourteen other series of the Trust that publicly offer their
shares. Pursuant to the Declaration, the Board may establish and issue multiple
classes of shares for each series of the Trust. As of the date of this Statement
of Additional Information, the Trustees do not have any plan to establish
multiple classes of shares for the Fund. Pursuant to the Declaration of Trust
and subject to shareholder approval (if then required), the Trustees may
authorize the Fund to invest all of its investable assets in a single open-end
investment company that has substantially the same investment objectives,
policies and restrictions as the Fund. As of the date of this Statement of
Additional Information, the Board does not have any plan to authorize the Fund
to so invest its assets.
All Fund shares have equal rights with regard to voting, and shareholders
of the Fund have the right to vote as a separate class with respect to matters
as to which their interests are not identical to those of shareholders of other
investment series of the Trust, including the approval of an investment advisory
contract and any change of investment policy requiring the approval of
shareholders.
40
<PAGE>
Under Massachusetts law, shareholders of the Trust could, under certain
circumstances, be held liable for the obligations of the Trust. However, the
Declaration disclaims shareholder liability for acts or obligations of the Trust
and requires that notice of this disclaimer be given in each agreement,
obligation or instrument entered into or executed by the Trust or a Trustee. The
Declaration also provides for indemnification from the assets of the Trust for
all losses and expenses of any Trust shareholder held liable for the obligations
of the Trust. Thus, the risk of a shareholder incurring a financial loss on
account of his or its liability as a shareholder of the Trust is limited to
circumstances in which both inadequate insurance existed and the Trust would be
unable to meet its obligations. The possibility that these circumstances would
occur is remote. Upon payment of any liability incurred by the Trust, the
shareholder paying the liability will be entitled to reimbursement from the
general assets of the Trust. The Declaration also provides that no series of the
Trust is liable for the obligations of any other series. The Trustees intend to
conduct the operations of the Trust to avoid, to the extent possible, ultimate
liability of shareholders for liabilities of the Trust.
ADDITIONAL INFORMATION
The Fund's Prospectus and this Statement of Additional Information omit
certain information contained in the registration statement filed with the
Securities and Exchange Commission, which may be obtained from the Commission's
principal office at 450 Fifth Street, N.W., Washington, D.C. 20549, upon payment
of the fee prescribed by the rules and regulations promulgated by the
Commission.
EXPERTS AND FINANCIAL STATEMENTS
The financial statements for the fiscal years ended December 31, 1994 and
1995 included in this Statement of Additional Information have been audited by
Coopers & Lybrand L.L.P., independent accountants, as set forth in their report
appearing elsewhere herein, and have been so included in reliance upon the
authority of the report of Coopers & Lybrand L.L.P. as experts in accounting and
auditing. The Fund's financial highlights for the period from November 2, 1992
(commencement of operations) through December 31, 1992 were audited by Deloitte
& Touche LLP, independent auditors, and have been similarly included in reliance
upon the expertise of that firm. Coopers & Lybrand L.L.P., independent
accountants, will audit the Fund's financial statements for the fiscal year
ending December 31, 1996.
41
<PAGE>
Standish, Ayer & Wood Investment Trust
Standish Massachusetts Intermediate
Tax Exempt Bond Fund Series
Financial Statements for the Year Ended
December 31, 1995
1
<PAGE>
Standish, Ayer & Wood Investment Trust
Chairman's Message
January 29, 1996
Dear Standish, Ayer & Wood Investment Trust Shareholder:
I am pleased to have an opportunity to review the major developments at
Standish, Ayer & Wood during this past year as they relate to the activities of
the Investment Trust. The major news for our clients in 1995 was the spectacular
performance of the U.S. investment markets. While we would, of course, like to
claim credit for producing the full extent of these splendid returns, the
reality is obvious: The markets themselves are beyond our control. For the year
as a whole, U.S. stocks, as represented by the Standard and Poor's 500 Index,
produced a total return of 37.6%, and higher grade intermediate-term bonds, as
represented by the Lehman Brothers Aggregate Index, provided a total return of
18.5%. Nearly as surprising, stock and bond prices marched steadily upward
throughout the year, a persistent and almost uninterrupted advance.
Even after the subdued markets of 1994, neither we nor most other investment
managers expected 1995 to be anywhere near as good as it turned out to be. In
this context, we are generally pleased by our investment performance. In most
asset classes, we kept pace with or modestly exceeded market returns. We adhered
to our established investment philosophies, which are designed to add reasonably
consistent increments of value. Our clients seem to be pleased by our efforts as
we continue to have very little client turnover.
As a firm, we have registered moderate growth during the year. Reflecting some
flow of new clients as well as market appreciation, our clients' assets under
management at the end of 1995 totalled $29.4 billion, an increase from $24.4
billion at the end of 1994. We are particularly pleased by the growth in new
assets managed for insurance companies and by the increases in assets of both
large capitalization and small capitalization U.S. common stocks.
The asset class of greatest disappointment in 1995 was international equities.
Not only did the asset class continue to provide subpar returns, but our
portfolios underperformed the international equity markets. These results
reflect judgments early in 1995 to hedge a portion of the currency exposure back
to dollars and to have a moderate stake in emerging markets. While we believe we
have rectified those problems, we are not satisfied with the results and are
working vigorously to improve future performance. We are also counseling our
clients not to lose faith in the international equity asset class despite its
recent disappointing returns.
The figure for total Standish assets under management includes about $1.6
billion managed in conjunction with Standish International Management Company,
L.P. (SIMCO), our affiliate that manages overseas assets for domestic clients
and U.S. assets for overseas clients. It also includes $3.9 billion in the
Standish Investment Trust, our mutual fund organization. In addition, the asset
total reflects an increase over the last few years in the assets we manage in
private, non-mutual fund vehicles.
We introduced two new mutual funds at mid-year 1995, namely the Standish Fixed
Income Fund II (which is designed to parallel the Standish Fixed Income Fund but
exclude the purchase of both nondollar bonds and below-investment-grade
securities), and the Standish Controlled Maturity Fund (which is designed for
investors who wish less volatility and interest rate risk than traditional
intermediate-maturity bonds).
At the beginning of 1996, we introduced two additional mutual funds, the
Standish Tax-Sensitive Equity Fund and the Standish Small Cap Tax-Sensitive
Equity Fund. At Standish we have noted for some time the adverse impact for
taxable investors of high portfolio turnover, which triggers capital gains,
possibly including short-term gains that may result in an even greater tax
liability for investors. We believe there is a major opportunity through both
separate account management and these funds to improve aftertax returns by
limiting the portfolio turnover and managing capital gains.
2
<PAGE>
During 1995, Standish acquired all remaining interests in the business of the
joint venture between Consolidated Investment Corp. (CIC) and Standish, entered
into over seven years ago. Consolidated had been formed by Trigon (previously
Blue Cross/Blue Shield of Virginia) to manage shorter-term taxable and tax
exempt fixed income portfolios. We and Trigon agreed that it was best to have
this unit operating under one owner.
Standish continues to be proud of its structure as an independent management
firm with ownership in the hands of investment professionals active in the
business. There were no changes during 1995 either in corporate structure or in
the people who own the enterprise.
We appreciate the opportunity to serve you, and we remain confident that we have
the resources and the organization to do a superior job. We will be working hard
to fulfill your expectations in 1996.
Sincerely yours,
Edward H. Ladd
Chairman
3
<PAGE>
Standish, Ayer & Wood Investment Trust
Standish Massachusetts Intermediate Tax Exempt Bond Fund
Series
Management Discussion
1995 proved to be a superb year for fixed income investors. Nearly all bond
market sectors turned in excellent total returns for the year, and municipal
bonds were no exception. High returns were primarily the result of the steep
decline in interest rates that occurred throughout the year. The 10 year
maturity U.S. Treasury Note began the year at a yield of 7.83%, and closed the
year out at 5.58%. The yield of typical top quality 10 year municipal bonds
responded by falling from 5.80% at the beginning of the year to 4.65% at year
end. Interest rate declines were driven by evidence that some sectors of the
economy were slowing down and that inflation remain subdued. The Federal Reserve
reversed its tight monetary stance and began to lower short term interest rates
during the summer. All in all, a better year could not have been hoped for by
bondholders, particularly after the tough-going of 1994.
The tax-exempt market did experience some periods of high volatility, however,
and "tax rate risk" re-emerged to cause municipals to underperform Treasuries.
The most important "event" in this respect was the release of some news articles
in April suggesting that the momentum to enact a "flat tax" was gaining ground.
As originally introduced, the flat tax proposals would eliminate income taxes on
dividend and interest, thereby negating the incentive for investors to purchase
tax exempt bonds. Prices of municipal bonds dropped on this news, but regained a
significant amount of the decline over the remainder of the year. Lack of new
issue supply helped to support prices during much of the year; by many
estimates, the municipal market actually declined in size last year as more
bonds were redeemed than issued.
The Fund's total return for the year was 12.64%, slightly behind that of our
benchmark index of 12.93%. Our underperformance is largely the result of a more
conservative posture than the index with respect to the future direction of
interest rates. Our philosophy has been to not make large interest rate bets,
and we continue to adhere to this approach. Our heavier weighting in revenue
bond sectors was a positive for the year, as was our underweighting in
pre-refunded bonds. In our judgement, the Massachusetts market has performed
about on par with the national market. Improvement in the credit quality of the
Commonwealth and related issuers has been offset by continued troubles in the
health care sector, an important component of the Massachusetts marketplace.
With most quality and sector spreads extremely tight and the size of the market
actually getting smaller, it has become increasingly difficult to outperform the
index. Accordingly, during 1995 we have increased the size and quality of our
research and trading staffs, and have re-doubled our efforts to find quality,
high yielding securities for inclusion into the portfolio.
Raymond J. Kubiak Maria D. Furman
4
<PAGE>
Standish, Ayer & Wood Investment Trust
Standish Massachusetts Intermediate Tax Exempt Bond Fund
Series
Comparison of Change in Value of $100,000 Investment in
Standish Massachusetts
Intermediate Tax Exempt Bond Fund and the Lehman
Muni 3-5-7-10 Index
The following is a description of the graphical chart omitted from electronic
format:
This line chart shows the cumulative performance of the Standish Massachusetts
Intermediate Tax Exempt Bond Fund compared with the Lehman Muni 3-5-7-10 Index
for the period January 2, 1992 to December 31, 1995, based upon a $100,000
investment. Also included are the average annual total returns for one year,
three year, and since inception.
5
<PAGE>
<TABLE>
<CAPTION>
Standish, Ayer & Wood Investment Trust
Standish Massachusetts Intermediate Tax Exempt Bond Fund
Series
Portfolio of Investments
December 31, 1995
Par Value
Security Rate Maturity Value (Note 1A)
- - --------------------------------------------------------------- ------- ------------ -------------- -------------------
Bonds- 98.4%
- - ---------------------------------------------------------------
General Obligations- 27.8%
- - ---------------------------------------------------------------
<S> <C> <C> <C> <C>
Amesbury MA State Qualified 5.30 06/01/03 540,000 $ 552,825
Brockton MA State Qualified 5.70 06/15/02 160,000 168,200
Brockton MA State Qualified 5.95 06/15/04 160,000 170,800
Brockton MA State Qualified 6.13 06/15/18 250,000 255,000
Brockton, MA 5.55 12/15/03 270,000 269,662
Brockton, MA 5.65 12/15/04 300,000 300,000
Commonwealth of Massachusetts 6.25 07/01/02 750,000 825,937
Commonwealth of Massachusetts 6.50 08/01/01 480,000 530,400
Commonwealth of Massachusetts 7.50 12/01/00 200,000 227,000
Lawrence MA State Qualified 5.13 09/15/03 1,250,000 1,270,312
Lowell MA State Qualified 5.20 08/15/96 300,000 302,640
Lowell MA State Qualified 6.00 08/15/99 775,000 813,750
Mass Bay Transportation Authority 6.25 03/01/04 475,000 524,875
Mass Bay Transportation Authority 6.45 03/01/00 500,000 541,875
Mass College Building State Guarantee 7.50 05/01/06 500,000 612,500
Mass College Building State Guarantee 7.50 05/01/07 250,000 306,875
University of Mass Building Authority State Guarantee 6.63 05/01/07 1,000,000 1,155,000
Worcester MA 5.80 08/01/98 200,000 206,500
-------------------
$ 9,034,151
-------------------
Government Backed/Government Guaranteed- 1.4%
- - ---------------------------------------------------------------
MA HEFA Newton Wellesley Hospital 8.00 07/01/98 400,000 $ 445,000
-------------------
Housing Revenue- 2.6%
- - ---------------------------------------------------------------
Mass HFA Residential Development FNMA 6.88 11/15/11 500,000 $ 542,500
Mass HFA Single Family 8.25 06/01/14 300,000 309,600
-------------------
$ 852,100
-------------------
Insured Bonds- 19.8%
- - ---------------------------------------------------------------
Chelsea MA School District AMBAC 6.00 06/15/02 225,000 $ 244,125
Chelsea MA School District AMBAC 6.00 06/15/04 750,000 819,375
Commonwealth of Massachusetts MBIA 6.90 10/01/00 200,000 221,500
Lynn MA FSA 6.60 01/15/01 250,000 272,187
MA HEFA Cooley Hospital AMBAC 5.25 11/15/10 500,000 499,375
Mass Educational Loan Authority AMBAC 5.25 07/01/99 545,000 562,031
Milford MA AMBAC 5.13 12/15/14 500,000 489,375
New Bedford MA AMBAC 6.00 10/15/05 575,000 627,469
6
<PAGE>
Portfolio of Investments
(continued)
Par Value
Security Rate Maturity Value (Note 1A)
- - --------------------------------------------------------------- ------- ------------ -------------- -------------------
Insured Bonds (continued)
- - ---------------------------------------------------------------
Rockport MA AMBAC 6.80 12/15/03 300,000 333,000
South Essex MA Sewer District MBIA 7.50 06/01/05 570,000 683,288
University of Lowell Building Authority AMBAC 6.75 11/01/04 1,000,000 1,147,500
Worcester MA MBIA 6.00 07/01/05 500,000 543,125
-------------------
$ 6,442,350
-------------------
LOC GIC- 11.1%
- - ---------------------------------------------------------------
Mass IFA Amesbury LOC: State Street Bank 5.35 09/01/00 500,000 $ 507,500
Mass IFA Human Development LOC: Shawmut 6.25 04/15/09 850,000 879,750
Mass IFA IBEW LOC: State Street 5.88 01/01/05 225,000 233,437
Mass IFA Morgan Memorial LOC: Barclays 4.38 10/01/13 1,125,000 1,120,781
Northborough MA IFA LOC: Bank of Boston 5.75 09/01/02 860,000 883,650
-------------------
$ 3,625,118
-------------------
Lease Revenue- 3.0%
- - ---------------------------------------------------------------
Puerto Rico Housing Bank Appropriation 5.13 12/01/04 250,000 $ 248,438
Puerto Rico Housing Bank Appropriation 5.13 12/01/05 750,000 744,375
-------------------
$ 992,813
-------------------
Revenue Bonds- 32.7%
- - ---------------------------------------------------------------
Mass HEFA Anna Jaques Hospital 5.75 10/01/98 440,000 $ 448,800
Mass HEFA Central New England Health System 4.50 08/01/96 250,000 250,428
Mass HEFA Central New England Health System 5.75 08/01/03 500,000 503,125
Mass HEFA Charlton Hospital 7.00 07/01/00 300,000 325,875
Mass HEFA Charlton Hospital 7.10 07/01/01 300,000 330,750
Mass HEFA Daughters of Charity Hospital 5.50 07/01/04 600,000 630,750
Mass HEFA Melrose Wakefiled Hospital 5.10 07/01/97 200,000 202,250
Mass HEFA Melrose Wakefiled Hospital 6.35 07/01/06 310,000 327,825
Mass HEFA New England Baptist Hospital 7.30 07/01/11 715,000 762,369
Mass HEFA Youville Hospital HFA Secured 6.13 02/15/15 700,000 734,125
Mass IFA Brooks School 5.60 07/01/05 245,000 259,700
Mass IFA Brooks School 5.90 07/01/13 410,000 427,938
Mass IFA Clark University 6.45 07/01/01 300,000 328,500
Mass IFA Loomis Project 6.50 07/01/02 350,000 362,688
Mass IFA Resource Recovery 6.15 07/01/02 1,000,000 1,057,500
Mass IFA Springfield College 4.50 09/15/97 630,000 633,150
Mass IFA Springfield College 4.90 09/15/99 715,000 723,044
Mass Water Resource Authority 4.90 12/01/02 1,000,000 1,023,750
7
<PAGE>
Portfolio of Investments
(continued)
Par Value
Security Rate Maturity Value (Note 1A)
- - --------------------------------------------------------------- ------- ------------ -------------- -------------------
Revenue Bonds (continued)
- - ---------------------------------------------------------------
Mass Water Resource Authority 7.25 04/01/01 200,000 224,750
Mass Wholesale Electric 6.38 07/01/01 300,000 328,875
New England Loan Marketing MA Student Loan 5.80 03/01/02 725,000 765,781
-------------------
$ 10,651,973
-------------------
Total Bonds $ 32,043,505
-------------------
(identified cost $31,100,455)
Short Term Obligations- 0.4%
- - ---------------------------------------------------------------
LOC- 0.3%
- - ---------------------------------------------------------------
Massachusetts LOC: ABN Amro Bank 4.75 12/01/97 100,000 $ 100,000
-------------------
Repurchase Agreement- 0.1%
- - ---------------------------------------------------------------
Prudential Bache repurchase agreement dated 12/29/95, 5.39% due 1/2/96 to pay
$37,294 (Collateralized by Federal National Mortgage Association, 9.00%, due
9/1/22,
market value $38,017) at cost $ 37,271 $ 37,271
-------------------
Total Short Term Obligations $ 137,271
-------------------
(identified cost $137,271)
Total Investments- 98.8% $ 32,180,776
-------------------
(identified cost $31,237,726)
Other assets, less liabilities- 1.2% $ 384,261
-------------------
Net Assets- 100% $ 32,565,037
===================
The following abbreviations are used in this portfolio:
AMBAC- American Municipal Bond Assurance Corp. IBEW- International Brotherhood of Electrical Workers
FSA- Financial Security Association IFA- Industrial Finance Authority
HEFA- Health & Educational Facilities Authority LOC- Letter of Credit
HFA- Housing Finance Agency MBIA- Municipal Bond Insurance Association
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
Standish, Ayer & Wood Investment Trust
Standish Massachusetts Intermediate Tax Exempt Bond Fund
Series
Statement of Assets and Liabilities
December 31, 1995
Assets
<S> <C> <C>
Investments, at value (Note 1A)(identified cost, $31,237,726) $32,180,776
Receivable for investments sold 25,000
Interest receivable 517,649
Deferred organizational expenses (Note 1E) 5,253
Other assets 220
----------------
Total assets $32,728,898
Liabilities
Distribution payable $88,498
Payable for Fund shares redeemed 25,000
Accrued investment advisory fee (Note 3) 24,464
Accrued trustee fees (Note 3) 328
Accrued expenses and other liabilities 25,571
----------------
Total liabilities 163,861
----------------
Net Assets $32,565,037
================
Net Assets consist of
Paid-in capital $32,230,262
Accumulated undistributed net realized gain (loss) (608,275)
Net unrealized appreciation (depreciation) 943,050
----------------
Total $32,565,037
================
Shares of beneficial interest outstanding 1,549,512
================
Net asset value, offering price, and redemption price per share
(Net assets/Shares outstanding) $21.02
================
9
<PAGE>
Standish, Ayer & Wood Investment Trust
Standish Massachusetts Intermediate Tax Exempt Bond Fund
Series
Statement of Operations
Year Ended December 31, 1995
Investment income
Interest income $1,653,234
Expenses
Investment advisory fee (Note 3) $124,213
Trustees fees (Note 3) 1,222
Accounting, custody and transfer agent fees 72,031
Registration costs 3,208
Audit services 16,088
Legal services 1,240
Insurance expense 797
Amortization of organization expense (Note 1E) 2,850
Miscellaneous 1,524
----------------
Total expenses $223,173
Deduct:
Waiver of investment advisory fee (Note 3) 21,818
----------------
Net expenses 201,355
----------------
Net investment income $1,451,879
----------------
Realized and unrealized gain (loss)
Net realized gain (loss)
Investment securities ($132,384)
Financial futures (11,785)
----------------
Net realized gain (loss) ($144,169)
Change in net unrealized appreciation (depreciation)
Investment securities 2,339,720
----------------
Net gain (loss) $2,195,551
----------------
Net increase (decrease) in net assets from operations $3,647,430
================
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
Standish, Ayer & Wood Investment Trust
Standish Massachusetts Intermediate Tax Exempt Bond Fund
Series
Statement of Changes in Net Assets
Year Ended December 31,
----------------------------------
1995 1994
---------------- ----------------
Increase (decrease) in Net Assets
From operations
<S> <C> <C>
Net investment income $1,451,879 $1,384,665
Net realized gain (loss) (144,169) (464,105)
Change in net unrealized appreciation (depreciation) 2,339,720 (2,123,372)
---------------- ----------------
Net increase (decrease) in net assets from operations $3,647,430 ($1,202,812)
---------------- ----------------
Distributions to shareholders
From net investment income ($1,451,879) ($1,384,665)
From realized capital gains -- ($10,471)
---------------- ----------------
Total distributions to shareholders ($1,451,879) ($1,395,136)
---------------- ----------------
Fund share (principal) transactions (Note 5)
Net proceeds from sale of shares $10,781,062 $10,055,521
Net asset value of shares issued to shareholders in
371,483 181,704
Cost of shares redeemed (8,558,571) (9,490,499)
---------------- ----------------
Increase (decrease) in net assets from Fund share transactions $2,593,974 $746,726
---------------- ----------------
Net increase (decrease) in net assets $4,789,525 ($1,851,222)
Net Assets
At beginning of period 27,775,512 29,626,734
---------------- ----------------
At end of period $32,565,037 $27,775,512
================ ================
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
Standish, Ayer & Wood Investment Trust
Standish Massachusetts Intermediate Tax Exempt Bond Fund
Series
Financial Highlights
November 2, 1992
Year ended December 31, (start of business) to
------------------------------------------
1995 1994 1993 December 31, 1992*
----------- ---------- ----------- ------------------------
<S> <C> <C> <C> <C>
Net asset value - beginning of period $19.55 $21.31 $20.32 $20.00
----------- ---------- ----------- ----------------
Income from investment operations
Net investment income** $0.94 $0.94 $0.92 $0.13
Net realized and unrealized gain (loss) $1.47 ($1.75) $1.13 $0.32
----------- ---------- ----------- ----------------
Total from investment operations $2.41 ($0.81) $2.05 $0.45
----------- ---------- ----------- ----------------
Less distributions declared to shareholders
From net investment income ($0.94) ($0.94) ($0.92) ($0.13)
From realized gains -- ($0.01) ($0.14) ---
----------- ---------- ----------- ----------------
Total distributions declared to shareholders ($0.94) ($0.95) ($1.06) ($0.13)
----------- ---------- ----------- ----------------
Net asset value - end of period $21.02 $19.55 $21.31 $20.32
=========== ========== =========== ================
Total return 12.64% (3.84%) 10.24% 13.85% t
Ratios (to average net assets)/Supplemental Data
Expenses ** 0.65% 0.65% 0.65% 0.65% t
Net investment income ** 4.71% 4.67% 4.35% 4.05% t
Portfolio turnover 77.00% 84.00% 94.00% 31.00%
Net assets at end of period (000 omitted) $32,565 $27,776 $29,627 $6,537
** The investment adviser did not impose a portion of its advisory fee. If
this reduction had not been undertaken, the net investment income per
share and the ratios would have been:
Net investment income per share $0.95 $0.91 $0.86 $0.11
Ratios (to average net assets):
Expenses 0.72% 0.78% 0.95% 1.37% t
Net investment income 4.78% 4.54% 4.05% 3.33% t
* Audited by other auditors
t Computed on an annualized basis
</TABLE>
12
<PAGE>
Standish, Ayer & Wood Investment Trust
Standish Massachusetts Intermediate Tax Exempt Bond
Fund Series
Notes to Financial Statements
(1).....Significant Accounting Policies:
Standish, Ayer & Wood Investment Trust (Trust) is organized as a
Massachusetts business trust and is registered under the Investment
Company Act of 1940, as amended, as an open-end, management investment
company. Standish Massachusetts Intermediate Tax Exempt Bond Fund
(Fund) is a separate non-diversified investment series of the Trust.
The following is a summary of significant accounting policies followed
by the Fund in the preparation of the financial statements. The
preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts and disclosures in the
financial statements. Actual results could differ from those estimates.
A. Investment security valuations -
Municipal bonds are normally valued on the basis of valuations
furnished by a pricing service. Taxable obligations, if any, for which
price quotations are readily available are normally valued at the mean
between the latest available bid and ask prices. Securities for which
valuations or market quotations are not readily available are valued at
their fair value as determined in good faith by the investment adviser
in accordance with procedures approved by the trustees.
Short term instruments with less than sixty-one days remaining to
maturity when acquired by the Fund are valued on an amortized cost
basis. If the Fund acquires a short term instrument with more than
sixty days remaining to its maturity, it is valued at current market
value until the sixtieth day prior to maturity and will then be valued
at amortized cost based upon the value on such date unless the trustees
determine during such sixty-day period that amortized cost does not
represent fair value.
Since the Fund may invest a substantial portion of its assets in
issuers located in one state, it will be more susceptible to factors
adversely affecting issuers of that state than would be a comparable
general tax-exempt mutual fund. In order to reduce the risk associated
with such factors, the Fund invests in securities that are backed by
bond insurance of various financial guaranty assurance agencies. At
December 31, 1995, 19.8% of the Fund's investments are of such
securities.
B. Repurchase agreements--
It is the policy of the Fund to require the custodian bank to take
possession, to have legally segregated in the Federal Reserve Book
Entry System, or to have segregated within the custodian bank's vault,
all securities held as collateral in support of repurchase agreement
investments. Additionally, procedures have been established by the Fund
to monitor on a daily basis, the market value of the repurchase
agreement's underlying investments to ensure the existence of a proper
level of collateral.
C. Securities transactions and income--
Securities transactions are recorded as of the trade date. Interest
income is determined on the basis of interest accrued, adjusted for
amortization of premium or discount on long-term debt securities when
required for federal income tax purposes. Realized gains and losses
from securities sold are recorded on the identified cost basis.
D. Federal taxes--
As a qualified regulated investment company under Subchapter M of the
Internal Revenue Code the Fund is not subject to income taxes to the
extent that it distributes all of its taxable income for its fiscal
year. Dividends paid by the Fund from net interest earned on tax-exempt
municipal bonds are not includable by shareholders as gross income for
Federal income tax purposes because the Fund intends to meet certain
requirements of the Internal Revenue Code applicable to regulated
investment companies which will enable the Fund to pay exempt-interest
dividends. The portion of such interest, in any, earned on private
activity bonds issued after August 7, 1986 may be considered a tax
preference item to shareholders.
At December 31, 1995, the Fund, for federal income tax purposes, had a
capital loss carryover of $608,275 which will reduce the Fund's taxable
income arising from future net realized gain on investments, if any, to
the extent permitted by the Internal Revenue Code and thus will reduce
the amount of distributions to shareholders which would otherwise be
necessary to relieve the Fund of any liability for federal income tax.
Such capital loss carryover will expire on December 31, 2003 ($178,890)
and December 31, 2002 ($429,385).
13
<PAGE>
E. Deferred organization expense--
Costs incurred by the Fund in connection with its organization and
initial registration are being amortized, on a straight-line basis,
through October, 1997.
(2).....Distributions to Shareholders:
Distributions on shares of the Fund are declared daily from net
investment income and distributed monthly. Net capital gains, if any,
are distributed annually. Distributions from net investment income and
capital gains, if any, are automatically reinvested in additional
shares of the Fund unless the shareholder elects to receive them in
cash. Distributions are recorded on the ex-dividend date. Income and
capital gain distributions are determined in accordance with income tax
regulations which may differ from generally accepted accounting
principles. Permanent book and tax basis differences relating to
shareholder distributions will result in reclassifications to paid-in
capital.
(3).....Investment Advisory Fee:
The investment advisory fee paid to Standish, Ayer & Wood, Inc. (SA&W)
for overall investment advisory and administrative services, and
general office facilities, is paid quarterly at the annual rate of
0.40% of the Fund's average daily net assets. The investment adviser
has agreed that the total Fund operating expenses for any fiscal year
will not exceed 0.65% of the Fund's average daily net assets. For the
year ended December 31, 1995, the investment adviser did not impose
$21,818 of its fee to the Fund which is reflected as a reduction of
expenses on the Statement of Operations. The Fund pays no compensation
directly to its trustees who are affiliated with the investment adviser
or to its officers, all of whom receive remuneration for their services
to the Fund from the investment adviser. Certain of the trustees and
officers of the Fund are directors or officers of SA&W.
(4).....Purchases and Sales of Investments:
<TABLE>
<CAPTION>
Purchases and sales of investments, other than short-term obligations,
were as follows:
Purchases Sales
----------------- -----------------
<S> <C> <C>
Investments (non-U.S. government securities) $26,333,975 $23,520,553
================= ================
</TABLE>
(5).....Shares of Beneficial Interest:
The Declaration of Trust permits the trustees to issue an unlimited
number of full and fractional shares of beneficial interest having a
par value of one cent per share. Transactions in Fund shares were as
follows:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1995 1994
---------------- ----------------
<S> <C> <C>
Shares sold 534,346 500,726
Shares issued to shareholders in payment
of distributions declared 18,097 9,020
Shares redeemed (423,607) (479,585)
---------------- ----------------
Net increase 128,836 30,161
================ ================
At December 31, 1995, one shareholder was record owner of approximately
48% of the total outstanding shares of the Fund.
</TABLE>
14
<PAGE>
(6).....Federal Income Tax Basis of Investment Securities:
The cost and unrealized appreciation (depreciation) in value of the
investment securities owned at December 31, 1995, as computed on a
federal income tax basis, are as follows:
Aggregate cost $31,237,726
----------------
Gross unrealized appreciation $975,951
Gross unrealized depreciation ($32,901)
----------------
Net unrealized appreciation $943,050
================
(7).....Financial Instruments:
In general, the following instruments are used for hedging purposes as
described below. However, these instruments may also be used to enhance
potential gain in circumstances where hedging is not involved. The
nature, risks and objectives of these investments are set forth more
fully in the Fund's Prospectus and Statement of Additional Information.
The Fund trades the following financial instruments with off-balance
sheet risk:
Futures contracts--
The Fund may enter into financial futures contracts for the delayed
sale or delivery of securities or contracts based on financial indices
at a fixed price on a future date. The Fund is required to deposit
either in cash or securities an amount equal to a certain percentage of
the contract amount. Subsequent payments are made or received by the
Fund each day, dependent on the daily fluctuations in the value of the
underlying security, and are recorded for financial statement purposes
as unrealized gains or losses by the Fund. There are several risks in
connection with the use of futures contracts as a hedging device. The
change in value of futures contracts primarily corresponds with the
value of their underlying instruments or indices, which may not
correlate with changes in the value of hedged investments. In addition,
there is the risk that the Fund may not be able to enter into a closing
transaction because of an illiquid secondary market. The Fund enters
into financial futures transactions primarily to manage its exposure to
certain markets and to changes in security prices and foreign
currencies.
At December 31, 1995, the fund held no open futures contracts.
- - --------------------------------------------------------------------------------
Federal Income Tax Information (Unaudited)
Of the distributions paid by the Fund from net investment income for
the year ended December 31, 1995, $1,442,830 is tax exempt for regular
Federal income tax purposes.
15
<PAGE>
Report of Independent Accountants
To the Trustees of Standish, Ayer & Wood Investment Trust and the Shareholders
of Standish Massachusetts Intermediate Tax Exempt Bond Fund Series:
We have audited the accompanying statement of assets and liabilities of
Standish, Ayer & Wood Investment Trust: Standish Massachusetts Intermediate Tax
Exempt Bond Fund Series (the "Fund"), including the schedule of portfolio
investments, as of December 31, 1995, and the related statement of operations
for the year then ended, and changes in net assets for the two years then ended
and the financial highlights for each of the three years in the period then
ended. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits. The financial highlights for the period from November 2, 1992 (start of
business) to December 31, 1992, presented herein, were audited by other
auditors, whose report, dated February 12, 1993, expressed an unqualified
opinion on such financial highlights.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1995 by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Standish, Ayer & Wood Investment Trust: Standish Massachusetts Intermediate Tax
Exempt Bond Fund Series as of December 31, 1995, the results of its operations
for the year then ended and the changes in net assets for the two years then
ended and the financial highlights for each of the three years in the period
then ended, in conformity with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
February 13, 1996
16
<PAGE>
Prospectus dated May 1, 1996
PROSPECTUS
STANDISH SECURITIZED FUND
One Financial Center
Boston, Massachusetts 02111
(800) 221-4795
Standish Securitized Fund (the "Fund") is one fund in the Standish, Ayer &
Wood family of funds. The Fund is organized as a separate diversified investment
series of Standish, Ayer & Wood Investment Trust (the "Trust"), an open-end
management investment company.
The Fund's investment objective is to maximize total return, consistent
with preserving principal and liquidity, through both capital appreciation and
the generation of current income. In pursuing its objective, the Fund seeks
capital appreciation when market factors, such as declining interest rates,
indicate that capital appreciation may be available without significant risk to
principal. The Fund seeks to achieve its investment objective primarily through
investing in a diversified portfolio of mortgage-related and asset-backed
securities. (A "securitized" asset refers to a security collateralized by a pool
of mortgages, credit card or automobile receivables or other assets.) See
"Investment Objective and Policies." Standish, Ayer & Wood, Inc., Boston,
Massachusetts, is the Fund's investment adviser (the "Adviser"). Because of the
uncertainty inherent in all investments, no assurance can be given that the Fund
will achieve its investment objective.
Investors may purchase shares of the Fund from the Trust's principal
underwriter, Standish Fund Distributors, L.P. (the "Principal Underwriter"), at
the address and phone number listed above without a sales commission or other
transaction charges. Unless waived by the Fund, the minimum initial investment
is $1,000,000. Additional investments may be made in amounts of at least
$50,000.
This Prospectus is intended to set forth concisely the information about
the Fund and the Trust that a prospective investor should know before investing.
Investors are encouraged to read this Prospectus and retain it for future
reference. Additional information about the Fund and the Trust is contained in a
Statement of Additional Information which has been filed with the Securities and
Exchange Commission and is available upon request and without charge by calling
or writing to the Principal Underwriter at the telephone number or address
listed above. The Statement of Additional Information bears the same date as
this Prospectus and is incorporated by reference into this Prospectus.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK OR OTHER INSURED DEPOSITORY INSTITUTION, AND ARE NOT
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD
OR ANY OTHER GOVERNMENT AGENCY. AN INVESTMENT IN SHARES OF THE FUND INVOLVES
INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
CONTENTS
Highlights of this Prospectus.................................2
Expense Information...........................................3
Financial Highlights..........................................4
Investment Objective and Policies.............................5
Risk Factors and Suitability.................................11
Calculation of Performance Data..............................11
Dividends and Distributions..................................11
Purchase of Shares...........................................11
Exchange of Shares...........................................12
Redemption of Shares.........................................12
Management...................................................13
Federal Income Taxes.........................................14
The Fund and Its Shares......................................15
Custodian, Transfer Agent and Dividend Disbursing Agent......16
Independent Accountants......................................16
Legal Counsel................................................16
Appendix A...................................................16
Tax Certification Instructions...............................17
1
<PAGE>
HIGHLIGHTS OF THIS PROSPECTUS
The Fund is a separate investment series of Standish, Ayer & Wood
Investment Trust, a Massachusetts business trust. See "The Fund and Its Shares"
in this Prospectus.
The Trust has established fourteen series that currently offer their shares
to the public and may establish additional series at any time. Each series is a
separate taxpayer, eligible to qualify as a separate regulated investment
company for federal tax purposes. The calculation of the net asset value of a
series and the determination of the tax consequences of investing in a series
will be determined separately for each series.
Investment Objective and Policies
The Fund's investment objective is to maximize total return, consistent
with preserving principal and liquidity, through both capital appreciation and
the generation of current income. In pursuing its objective, the Fund seeks
capital appreciation when market factors, such as declining interest rates,
indicate that capital appreciation may be available without significant risk to
principal. Under normal market conditions, at least 65% of the total value of
the Fund's assets are invested in mortgage-related and asset-backed securities.
Although mortgage-related securities may have stated maturities of up to 40
years, in practice, prepayments of the principal of and interest on the
mortgages underlying the securities will make the effective maturity of the
securities shorter. Unscheduled prepayments are likely to increase in periods
when interest rates are declining. Because the Fund may be able to invest
amounts received as a result of such prepayments only at a lower interest rate,
some high-yielding mortgage-related securities may have less potential for
return and value than conventional bonds with comparable maturities. Conversely,
in a rising interest rate environment, a declining prepayment rate will extend
the average life of many mortgage-related securities. Extending the average life
of a mortgage-related security increases the risk of depreciation due to future
increases in market interest rates. The Fund may engage in a variety of options
and futures transactions. These investment strategies and policies involve
certain special risks. See "Investment Objective and Policies" and "Strategic
Transactions" in this Prospectus.
Securitized Assets Generally
The Fund will invest in securities that are collateralized by a pool of
mortgages, credit card or automobile receivables or other assets (collectively,
"Securitized Assets"). Securitized Assets arise through the grouping by
governmental, government-related and private organizations of loans, receivables
and other assets originated by various lenders. Interests in pools of these
assets differ from other forms of debt securities, which normally provide for
periodic payment of interest in fixed amounts with principal paid at maturity or
specified call dates. Instead, Securitized Assets provide periodic payments
which generally consist of both interest and principal payments. The estimated
life of a Securitized Asset and the average maturity of a portfolio including
such assets varies with the prepayment experience with respect to the underlying
debt instruments.
Investment in a mutual fund holding Securitized Assets, such as the Fund,
involves special risk considerations. These include the fact that the Fund's net
asset value per share will fluctuate as the value of its portfolio securities
2
<PAGE>
changes in response to changing market rates of interest, principal prepayments
and other factors. Prepayment rates can vary widely, generally in response to
changes in the prevailing level of interest rates, although other economic and
demographic factors also may be involved. For example, falling interest rates
generally result in a faster rate of prepayments of mortgage loans while rising
interest rates generally slow the rate of prepayments. An acceleration in
prepayments in response to sharply falling interest rates will shorten the
security's average maturity and limit the potential appreciation in the
security's value relative to a conventional debt security. As a result,
Securitized Assets are not as effective in locking in high long-term yields.
Conversely, in periods of sharply rising rates, prepayments generally slow,
increasing the security's average life and its potential for price depreciation.
Securitized Assets purchased at either premiums or discounts have an
additional element of uncertainty which may impact their performance.
Acceleration of prepayments will have an adverse effect upon the total return of
securities purchased at a premium while a slowing of prepayments will have a
positive effect. Acceleration of prepayments will have a positive effect upon
the total return of securities purchased at a discount, while a slowing of
prepayments will have a negative effect.
The credit characteristics of Securitized Assets differ in a number of
respects from those of traditional debt securities. The credit quality of most
Securitized Assets depends primarily upon the credit quality of the assets
underlying such securities, how well the entity issuing the securities is
insulated from the credit risk of the originator or any other affiliated
entities, and the amount and quality of any credit support provided to such
securities. Securitized Assets purchased by the Fund generally will consist of
obligations issued or guaranteed as to principal and interest by the U.S.
Government or by agencies or instrumentalities thereof or rated, at the date of
investment, A or better by Moody's Investors Service, Inc. ("Moody's") or by
Standard & Poor's Ratings Group ("Standard & Poor's") or, if not rated, are
determined to be of comparable credit quality by the Adviser. See "Ratings."
Subsequent to its purchase, a rated Securitized Asset may be assigned a lower
rating or may cease to be rated which may result in a loss of value and
liquidity. An adverse change in or cessation of a rating would not require the
disposition of the instrument, but the Adviser will consider such an event in
determining whether the Fund should continue to hold the security.
Because the Fund generally will be investing in mortgage-related securities
and other types of Securitized Assets, it may be affected by risks or problems
peculiar to mortgage finance, such as the effects of government regulation and
tax policy, as well as those peculiar to the financing of the instruments
underlying other types of Securitized Assets.
Investment Adviser
Standish, Ayer & Wood, Inc. (the "Adviser") serves as investment adviser to
the Fund and to the other series of the Trust. The Fund pays the Adviser for its
services a monthly fee at the annual rate of 0.25% of the first $500,000,000 of
average daily net asset value and 0.20% of average daily net asset value in
excess of $500,000,000. See "Management -- Investment Adviser" in this
Prospectus.
3
<PAGE>
Purchase of Shares
The Principal Underwriter offers shares of the Fund for sale at net asset
value. Unless waived by the Fund, the minimum initial investment is $1,000,000.
Additional investments may be made in amounts of at least $50,000. No sales load
is imposed on the purchase of the Fund's shares. See "Purchase of Shares" in
this Prospectus.
Redemption of Shares
The Fund's shares may be redeemed, at the net asset value per share next
determined after receipt of a redemption request in proper form, by (1) written,
wire or telephone order to the Principal Underwriter or (2) wire or telephone
order from brokers or dealers for the repurchase of the Fund's shares. Upon 30
days' notice to a shareholder, the Fund may redeem, at net asset value, the
shares in any account which has a value of less than $50,000. See "Redemption of
Shares" in this Prospectus.
- - --------------------------------------------------------------------------------
EXPENSE INFORMATION
Shareholder Transaction Expenses
Maximum Sales Load Imposed on Purchases None
Maximum Sales Load Imposed on Reinvested Dividends None
Deferred Sales Load None
Redemption Fees None
Exchange Fee None
Annual Fund Operating Expenses (as a percentage of average net assets)
Management Fees (after expense limitation) 0.19%
12b-1 Fees None
Other Expenses 0.26%
Total Fund Operating Expenses (after expense limitation) 0.45%
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Example 1 year 3 years 5 years 10 years
- - -------------------------------------------------------------------------------------------------------------------------------
You would pay the following expenses on a $1,000 investment,
assuming (1) 5% annual return and (2) redemption at the end
of each time period: $5 $14 $25 $57
</TABLE>
The purpose of the above table is to assist the investor in understanding
the various costs and expenses of the Fund that an investor in the Fund will
bear directly or indirectly. See "Management -- Investment Adviser" and
"Management -- Expenses." The figure shown in the caption "Other Expenses,"
which includes, among other things, custodian and transfer agent fees,
registration costs and payments for insurance and audit and legal services, is
based upon the Fund's expenses for the fiscal year ended December 31, 1995
during which the Adviser did not impose a portion of its fee.
*The Adviser has voluntarily agreed to limit Total Fund Operating Expenses
of the Fund (excluding brokerage commissions, taxes, litigation,
indemnification, and other extraordinary expenses) to 0.45% of the Fund's
average daily net assets. This agreement is voluntary and temporary and may be
discontinued or revised by the Adviser at any time. In the absence of such
agreement, the Management Fees and Total Fund Operating Expenses would have been
0.25% and 0.51%, respectively, of the Fund's average daily net assets for the
fiscal year ended December 31, 1995.
THE INFORMATION IN THE TABLE AND HYPOTHETICAL EXAMPLE ABOVE SHOULD NOT BE
CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY
BE GREATER OR LESSER THAN THOSE SHOWN. MOREOVER, WHILE THE EXAMPLE ASSUMES A 5%
ANNUAL RETURN, THE FUND'S ACTUAL PERFORMANCE WILL VARY AND MAY RESULT IN AN
ACTUAL RETURN GREATER OR LESS THAN 5%.
4
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights for the years ended December 31, 1993, 1994 and
1995 have been audited by Coopers & Lybrand L.L.P., independent accountants,
whose report, together with the financial statements of the Fund, is
incorporated into the Statement of Additional Information.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------------
1995 1994 1993 1992* 1991* 1990* 1989*+
--------- --------- --------- --------- -------------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value - beginning of period $18.61 $20.24 $20.14 $20.97 $20.48 $20.15 $20.00
--------- --------- --------- --------- --------- --------- ---------
Income from investment operations
Net investment income+ $1.32 $1.42 $1.45 $1.43 $1.71 $1.80 $0.60
Net realized and unrealized gain (loss) on investments 1.66 (1.86) 0.54 (0.61) 1.37 0.40 0.20
--------- --------- --------- --------- --------- --------- ---------
Total from investment operations $2.98 ($0.44) $1.99 $0.82 $3.08 $2.20 $0.80
--------- --------- --------- --------- --------- --------- ---------
Less distributions declared to shareholders
From net investment income ($1.34) ($1.19) ($1.48) ($1.57) ($1.55) ($1.70) $0.60
In excess of net investment income - - (0.05) - - - -
From net realized gain - - (0.36) (0.07) (1.04) (0.17) -
From Paid-in capital - - - - - - (0.05)
In excess of net realized gain - - - (0.01) - - -
--------- --------- --------- --------- --------- --------- ---------
Total distributions declared to shareholders ($1.34) ($1.19) ($1.89) ($1.65) ($2.59) ($1.87) $0.55
--------- --------- --------- --------- --------- --------- ---------
Net asset value - end of period $20.25 $18.61 $20.24 $20.14 $20.97 $20.48 $21.35
========= ========= ========= ========= ========= ========= =========
Total return 16.32% (2.16%) 10.02% 4.07% 15.57% 11.47% 11.90% t
Net assets at end of period (000 omitted) $55,201 $53,779 $78,054 $90,460 $78,570 $67,278 $31,427
Ratios (to average net assets)/Supplemental Data
Expenses** 0.45% 0.45% 0.45% 0.45% 0.45% 0.45% 0.45% t
Net investment income** 6.78% 6.79% 6.75% 6.94% 8.03% 8.88% 8.46% t
Portfolio turnover 225% 138% 130% 301% 324% 146% 1%
+ The investment adviser did not impose a portion of its advisory fee. If
this voluntary reduction had not been undertaken, the net investment
income per share and the ratios would have been:
Net investment income per share $1.22 $1.41 $1.44 $1.42 $1.70 $1.79 $0.59
Ratios (to average net assets):
Expenses 0.51% 0.49% 0.48% 0.51% 0.49% 0.51% 0.59% t
Net Investment Income 6.72% 6.76% 6.72% 6.88% 7.99% 8.82% 8.32% t
t Computed on an annualized basis.
* Audited by other auditors.
+ For the period from August 31, 1989 (start of business) to December 31,
1989.
</TABLE>
Further information about the performance of the Fund is contained in the
Fund's Annual Report, which may be obtained from the Principal Underwriter
without charge.
5
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
Investment Objective
The Fund's investment objective is to maximize total return, consistent
with preserving principal and liquidity, through both capital appreciation and
the generation of current income. In pursuing its objective, the Fund seeks
capital appreciation when market factors, such as declining interest rates,
indicate that capital appreciation may be available without significant risk to
principal. Such capital appreciation may result from a change in the yield
spread of an issuer whose securities are held by the Fund or from a decline in
interest rates or from a combination of both factors. The Fund seeks to achieve
its investment objective primarily through investing in a diversified portfolio
of mortgage-related and asset-backed securities, including securities issued by
governmental, government-related and private organizations. The Fund may
purchase and sell options and may use futures contracts and put and call options
on such contracts and engage in other active management techniques.
See "Strategic Transactions."
Because interest yields on securities and opportunities to realize net
gains from option and futures transactions may vary from time to time due to
general economic and market conditions, and many other factors, it is
anticipated that the Fund's current return will fluctuate. Fluctuations in the
value of portfolio securities will have a minimal effect on interest income on
existing portfolio securities but will be reflected in the Fund's net asset
value. Thus, a decrease in interest rates will generally result in an increase
in the value of the Fund's shares. Conversely, during periods of rising interest
rates, the value of the Fund's shares will generally decline. The magnitude of
these fluctuations will generally be greater at times when the Fund's average
maturity is longer. Because of the uncertainty inherent in all investments, no
assurance can be given that the Fund will achieve its investment objective. The
investment objective and policies of the Fund may be changed by the Trustees
without the approval of shareholders. The Fund's investment policies are
described further in the Statement of Additional Information.
Investment Policies
Under normal market conditions, at least 65% of the total value of the
Fund's assets is invested in mortgage-related and asset-backed securities. The
Fund may invest in a broad range of mortgage-backed securities of the
"pass-through" type, including GNMA Certificates, FHLMC Participation
Certificates and FNMA Mortgage-Backed Certificates. The Fund may also purchase
collateralized mortgage obligations, mortgage-backed securities, whole loans,
other pass-through securities and mortgage derivatives (such as mortgage
STRIPs), all of which may be issued by governmental or non-governmental entities
such as banks and other mortgage lenders. Non-government securities may offer a
higher yield but may also be subject to greater price fluctuation than
government securities. Other types of mortgage-related securities can be
expected to be developed in the future, and the Fund may invest in them if the
Adviser determines that the investment is consistent with the Fund's investment
objective and policies. The Fund also intends to invest in asset-backed
securities, which represent participations in, or are secured by and payable
from, assets such as motor vehicle installment sale contracts, installment loan
contracts, leases of various types of real and personal property, receivables
from revolving credit (credit card) agreements and other categories of
receivables.
6
<PAGE>
The balance of the Fund's assets will normally be invested in U.S. Treasury
and agency notes and bonds, certificates of deposit, money market instruments
and repurchase agreements, in furtherance of the Fund's objective to preserve
liquidity and principal. The Fund may adopt a temporary defensive position when
the Adviser considers market conditions to be adverse by investing substantially
all of its assets in money market instruments, including short-term U.S.
Government securities, negotiable certificates of deposit, non-negotiable fixed
time deposits, bankers' acceptances, floating-rate notes, repurchase agreements
and prime commercial paper.
The average maturity of the Fund's portfolio will vary depending upon the
maturity of its investments. Mortgage-related securities, when they are issued,
have stated maturities of up to 40 years, depending on the length of the
mortgages underlying the securities. In practice, scheduled or unscheduled early
prepayments of principal and interest on the underlying mortgages will make the
effective maturity of the securities shorter. A security based on a pool of 40
year mortgages may have an average life as short as two years. The relationship
between mortgage prepayments and interest rates may give some high-yielding
mortgage-related securities less potential for return and value than
conventional bonds with comparable maturities.
Mortgage-Backed Pass-Through Securities
Mortgage-backed "pass-through" securities are subject to regular payments
of principal and early prepayments of principal, which will affect the Fund's
current and total returns. While it is not possible to predict accurately the
life of a particular issue of a mortgage-backed "pass-through" security held by
the Fund, the actual life of any such security is likely to be substantially
less than the original average maturity of the mortgage pool underlying the
security because unscheduled early prepayments of principal on the security
owned by the Fund will result from the prepayment, refinancing or foreclosure of
the underlying mortgage loans in the mortgage pool. For example, mortgagors may
speed up the rate at which they prepay their mortgages when interest rates
decline sufficiently to encourage refinancing. When the monthly payments (which
may include unscheduled prepayments) on such a security are passed through to
the Fund, the Fund may be able to reinvest them only at a lower rate of
interest. Because of the regular scheduled payments of principal and the early
unscheduled prepayments of principal, the mortgage-backed "pass-through"
security is less effective than other types of obligations as a means of
"locking-in" attractive long-term interest rates. As a result, this type of
security may have less potential for capital appreciation during periods of
declining interest rates than other U.S. Government securities of comparable
maturities, although many issues of mortgage-backed "pass-through" securities
may have a comparable risk of decline in market value during periods of rising
interest rates. Although a security purchased at a premium above its par value
may carry a higher stated rate of return, both a scheduled payment of principal,
which will be made at par, and an unscheduled prepayment of principal generally
will decrease current and total returns and will accelerate the recognition of
income, distributions from which will be taxable to shareholders as ordinary
income.
7
<PAGE>
GNMA Certificates
GNMA Certificates are mortgage-backed securities representing an undivided
interest in a pool of mortgage loans. These loans, which are issued by lenders
such as mortgage bankers, commercial banks and savings and loan associations,
are either insured by the Federal Housing Administration or the Farmers Home
Administration or guaranteed by the Veterans Administration. A "pool" or group
of such mortgages is assembled and, after being approved by the Government
National Mortgage Association ("GNMA"), interests in the pool are offered to
investors through securities dealers. Once such a pool is approved by GNMA, the
timely payment of interest and principal on the Certificates issued representing
such pool is guaranteed by the full faith and credit of the U.S. Government. As
mortgage-backed securities, GNMA Certificates differ from bonds in that the
principal is paid back by the borrower over the length of the loan rather than
returned in a lump sum at maturity. GNMA Certificates are called "pass-through"
securities because a pro-rata share of both regular interest and principal
payments, as well as unscheduled early prepayments, on the underlying mortgage
pool is passed through monthly to the holder of the Certificate (i.e., the
Fund). Since the unscheduled prepayment rate of the underlying mortgage pool
covered by a "pass-through" security cannot be predicted with certainty, the
average life of a particular issue of GNMA Certificates cannot be accurately
predicted, although the Fund expects that the average life of the GNMA
Certificates held by the Fund will be approximately twelve years.
FHLMC Participation Certificates
The Federal Home Loan Mortgage Corporation ("FHLMC"), a corporate
instrumentality of the U.S. Government which was created for the purpose of
increasing the availability of mortgage credit for residential housing, issues
participation certificates ("PCs") representing undivided interests in FHLMC's
mortgage portfolio. While FHLMC guarantees timely payment of interest and
ultimate collection of the principal of its PCs, its PCs are not backed by the
full faith and credit of the U.S. Government. FHLMC PCs differ from GNMA
Certificates in that mortgages underlying the PCs are mostly "conventional"
mortgages rather than mortgages insured or guaranteed by a federal agency or
instrumentality. However, in several other respects, such as the monthly
pass-through of interest and principal (including unscheduled prepayments) and
the unpredictability of future unscheduled prepayments on the underlying
mortgage pools, FHLMC PCs are similar to GNMA Certificates.
FNMA Mortgage-Backed Certificates
The Federal National Mortgage Association ("FNMA"), a federally chartered
corporation owned entirely by private stockholders, (i) purchases both
conventional and federally insured or guaranteed residential mortgages secured
by properties consisting of one-family to four-family dwelling units from
various entities, including savings and loan associations, savings banks,
commercial banks, credit unions and mortgage banks, and (ii) packages pools of
such mortgages in the form of pass-through securities generally called FNMA
Mortgage-Backed Certificates, which are guaranteed as to timely payment of
principal and interest by FNMA but are not backed by the full faith and credit
of the U.S. Government. Like GNMA Certificates and FHLMC PCs, these pass-through
securities are subject to the unpredictability of unscheduled prepayments on the
underlying mortgage pools.
8
<PAGE>
Collateralized Mortgage Obligations (CMOs)
The issuer of a CMO effectively transforms a mortgage pool into obligations
comprised of several different maturities, thus creating mortgage securities
that appeal to short and intermediate term investors as well as the more
traditional long-term mortgage investor. CMOs are debt securities issued by
FHLMC, FNMA and by non-governmental financial institutions and other mortgage
lenders and are generally fully collateralized by a pool of mortgages held under
an indenture. CMOs are issued in a number of classes or series which have
different maturities and are generally retired in sequence. CMOs are designed to
be retired as the underlying mortgage loans in the mortgage pool are repaid. In
the event of sufficient early prepayments on such mortgages, the class or series
of CMO first to mature generally will be retired prior to its maturity. Thus,
the early retirement of a particular class or series of a CMO held by the Fund
would affect the Fund's current and total returns in the manner indicated above.
Real Estate Mortgage Investment Conduits (REMICs)
A REMIC is a non-governmental entity formed for the purpose of holding a
fixed pool of mortgages secured by an interest in real property, and of issuing
multiple classes of interests therein to investors such as the Fund.
Stripped Mortgage-Backed Securities (STRIPs)
STRIPs are types of mortgage-backed securities issued by certain government
agencies, such as FNMA and FHLMC, and by investment banks. They are created by
dividing the cash flows from a pool of mortgages or mortgage securities and
allocating specified portions of the monthly interest and principal to two or
more new STRIP securities. For example, a FNMA 9% pass-through security can be
"stripped" to produce two new securities, one with a 6% coupon and the other
with a 12% coupon, by directing more interest from the underlying collateral to
the security with the higher coupon and less to the security with the lower
coupon. The Fund would invest in the security with the lower coupon if it
expected interest rates to decline and in the security with the higher coupon if
it expected interest rates to rise. The ratio of interest to principal can be
varied to create a wide range of securities.
In some cases, a STRIP security will receive all of the interest and none
of the principal payments, while another will receive all of the principal
payments and none of the interest payments. These types of STRIPs are known as
interest-only and principal-only STRIPs (IO and PO STRIPs, respectively). A PO
STRIP bears some resemblance to a zero coupon bond. It sells at a discount and
pays no interest. If the underlying obligation is prepaid, no interest is
received at all. IO and PO STRIPs are very sensitive to interest rate changes.
IO STRIPs rise and PO STRIPs fall in price when interest rates are rising; IO
STRIPs fall and PO STRIPs rise in price when interest rates are declining. The
reason for this is that declining interest rates lead to faster mortgage
prepayments as homeowners buy new homes or refinance their mortgages, while
rising rates result in slower prepayment rates. Faster prepayments reduce the
principal balance of the underlying collateral more rapidly, resulting in
smaller interest payments in the future but returning principal at a faster rate
and hence enhancing the value of a PO STRIP. Conversely, slower prepayments mean
that interest payments will be greater in future periods because of the greater
size of unpaid principal, thus enhancing the value of the IO STRIP.
9
<PAGE>
In accordance with procedures adopted by the Board of Trustees, the Adviser
may determine whether or not a particular government issued IO or PO STRIP
backed by fixed rate mortgages is liquid. Private IO and PO STRIPs are
considered illiquid for purposes of the Fund's investment restrictions.
Direct Investments in Mortgages
The Fund may invest directly in mortgages securing commercial and
residential real estate. When the Fund invests directly in mortgages, the Fund,
rather than a financial intermediary, becomes the mortgagee with respect to such
mortgage loans. Direct investments in mortgages are available from lending
institutions which group together a number of mortgages for resale (usually from
10 to 50 mortgages) and which act as servicing agents for the purchaser with
respect to, among other things, the receipt of principal and interest payments.
The seller generally does not provide any insurance covering the payment of
interest on or repayment of principal of the mortgages, but such insurance may
be purchased by the mortgagor. However, the payment of any such insurance
premiums would reduce the Fund's yield. At present, direct investments in
mortgages are considered to be illiquid by the Adviser and are subject to the
Fund's policy of not investing more than 15% of its net assets in illiquid
investments.
Investing directly in mortgages may involve certain risks and
characteristics not applicable to investments in other securities. Such risks
include delays and difficulties in recovering and reselling the collateral
securing the mortgage loan during foreclosure proceedings, limitations pursuant
to Federal bankruptcy and state insolvency laws and other state laws in
enforcing a personal judgment against a borrower following foreclosure to make
up any deficiency not realized on sale of the collateral, and the application of
Federal and state laws limiting interest rates that may be charged by the lender
and the lender's ability to accelerate the maturity of the mortgage loan.
Asset-Backed Securities
The Fund may invest in asset-backed securities, which represent
participations in, or are secured by and payable from, assets such as motor
vehicle installment sale contracts, installment loan contracts, leases of
various types of real and personal property, receivables from revolving credit
(credit card) agreements and other categories of receivables. Asset-backed
securities may also be collateralized by a portfolio of U.S. Government
securities, but are not direct obligations of the U.S. Government, its agencies
or instrumentalities. Payments or distributions of principal and interest on
asset-backed securities may be guaranteed up to certain amounts and for a
certain time period by a letter of credit or a pool insurance policy issued by a
financial institution, or other credit enhancements may be present; however,
privately issued obligations collateralized by a portfolio of privately issued
asset-backed securities do not involve any government-related guaranty or
insurance. Such securities are like mortgage-related securities in that they
represent an interest in the cash flow from a pool of underlying receivables.
However, unlike mortgage-related securities, the collateral underlying the
security consists of debt incurred to purchase personal property rather than
real property. In addition, the maturity of the debt involved is much shorter in
duration than that of conventional mortgages and involves less likelihood of
refinancing and unscheduled prepayments.
10
<PAGE>
Such securities can be structured in several ways, the most common of which
has been a "pass-through" model similar to that of GNMA Certificates. A
certificate representing a fractional undivided beneficial interest in a trust
or corporation created solely for the purpose of holding the trust assets is
issued to the security holder. The certificate entitles the holder thereof the
right to receive a percentage of the interest and principal payments on the
terms and according to the schedule established by the trust instrument. A
servicing agent collects amounts due on the sales contracts or credit card
receivables for the account of the trust, which distributes such amounts to the
security holders.
An alternative structure for such securities is similar to that of the
collateralized mortgage obligations described above. Instead of holding an
undivided interest in trust assets, the purchaser of the security holds a bond
collateralized by the underlying assets. The bonds are serviced by cash flows
from the underlying assets, a specified fraction of all cash received (less a
servicing fee) being allocated first to pay interest and then to retire
principal. Unlike the "pass-through" certificates, payments of principal and
interest to security holders is not dependent on prepayments, although
prepayments alter the yield and average life of the bonds.
Restricted and Illiquid Securities
The Fund may invest up to 15% of its net assets in "restricted"
mortgage-related and other securities that are subject to restrictions on resale
(i.e., private placements) under the Securities Act of 1933 ("restricted
securities") and in illiquid investments. Illiquid investments include
securities that are not readily marketable, repurchase agreements maturing in
more than seven days, certain over-the-counter options, certain restricted
securities, direct investments in mortgages and certain STRIPs. Normally, at the
time of purchase the Fund will seek to obtain the agreement of the issuer or
seller of restricted securities to effect at least one registration of the
securities without expense to the Fund. The necessity for effecting registration
under the Securities Act of 1933 means that substantial delays and expenses are
usually incurred in the disposition of restricted securities. The Fund's
holdings would, accordingly, be subject, for an extended period, to any adverse
market conditions, including those that may develop after a decision to dispose
of the securities is made.
Inverse Floating Rate Securities
The Fund may invest in inverse floating rate securities. The interest rate
on an inverse floater resets in the opposite direction from the market rate of
interest to which the inverse floater is indexed. An inverse floater may be
considered to be leveraged to the extent that its interest rate varies by a
magnitude that exceeds the magnitude of the change in the index rate of
interest. The higher the degree of leverage of an inverse floater, the greater
the volatility of its market value.
11
<PAGE>
Ratings
The Fund will generally invest in mortgage-related or other securities
which are rated, at the time of investment, A or better by Moody's or by
Standard & Poor's, indicating that the securities exhibit adequate protection of
principal and interest payments, or which, if not rated are determined to be of
comparable investment quality by the Adviser. The Fund may, however, invest up
to 15% of its net assets in securities which are rated, at the time of
investment, as low as Baa by Moody's or BBB by Standard & Poor's, or which, if
not rated are judged by the Adviser to be of equivalent credit quality to the
securities so rated. Securities rated Baa by Moody's or BBB by Standard & Poor's
may have some speculative characteristics and changes in economic conditions or
other circumstances are more likely to lead to weakened capacity to make
principal and interest payments than is the case with higher grade securities.
It is anticipated that the average dollar-weighted quality of the Fund's
portfolio will normally be Aa or AA according to Moody's and Standard & Poor's
ratings, respectively, or of comparable quality as determined by the Adviser.
Appendix A sets forth excerpts from the descriptions of ratings of debt
securities. The Fund expects that substantially all of the publicly traded
securities in which it expects to invest will be rated by one or both of the
rating agencies. In the case of a security that is rated differently by the two
rating services, the higher rating is used in applying the 15% limit set forth
above and in computing the Fund's average dollar weighted credit quality. In the
event that the rating on a security held in the Fund's portfolio is downgraded
below investment grade by a rating service, such action will be considered by
the Adviser in its evaluation of the overall investment merits of that security,
but will not necessarily result in the sale of the security.
Maturities
Although the average life of a particular mortgage-related or asset-backed
security cannot be predicted because of the possibility of prepayment, the Fund
expects that the average life of securities held by it will be from three to
fifteen years.
Foreign Securities
The Fund will normally invest in U.S. dollar denominated securities, but
may invest up to 10% of its total assets in mortgage-related and other
securities (such as government and asset-backed securities) denominated in other
currencies. The Fund expects that its foreign securities portfolio will contain
primarily Canadian and European securities. Investing in securities denominated
in foreign currencies involves additional risks such as changes in currency
exchange rates and exchange control regulations, costs related to conversion
between currencies, differences between foreign and domestic auditing and
accounting standards and practices, and less publicly-available information
about a foreign issuer.
The Fund may enter into foreign currency forward contracts with banks or
other foreign currency brokers or dealers to purchase or sell foreign currencies
at a future date, and may purchase and sell foreign currency futures contracts
to hedge against changes in foreign currency exchange rates. A foreign currency
forward contract is a negotiated agreement between the contracting parties to
exchange a specified amount of currency at a specified future time at a
specified rate. See "Strategic Transactions."
12
<PAGE>
Portfolio Turnover and Short-Term Trading
Securities may be sold in anticipation of a market decline (a rise in
interest rates) or purchased in anticipation of a market rise (a decline in
interest rates) and later sold. In addition, a security may be sold and another
purchased at approximately the same time to take advantage of what the Fund
believes to be a temporary disparity in the normal yield relationship between
the two securities. Yield disparities may occur for reasons not directly related
to the investment quality of particular issues or the general movement of
interest rates, such as changes in the overall demand for or supply of various
types of fixed-income securities or changes in the investment objectives of
investors. A rate of turnover of 100% would occur, for example, if the value of
the lesser of purchases and sales of portfolio securities for a particular year
equaled the average monthly value of portfolio securities (excluding short-term
securities) owned during the year. A high rate of portfolio turnover involves a
correspondingly greater amount of brokerage commissions and other costs which
must be borne directly by the Fund and thus indirectly by its shareholders. It
may also result in the realization of larger amounts of net short-term capital
gains, distributions from which are taxable to shareholders as ordinary income
and may, under certain circumstances, make it more difficult for the Fund to
qualify as a regulated investment company under the Internal Revenue Code of
1986, as amended (the "Code").
Strategic Transactions
The Fund may, but is not required to, utilize various other investment
strategies as described below to hedge various market risks (such as interest
rates, currency exchange rates, and broad or specific equity or fixed-income
market movements), to manage the effective maturity or duration of fixed-income
securities, or to enhance potential gain. Such strategies are generally accepted
as part of modern portfolio management and are regularly utilized by many mutual
funds and other institutional investors. Techniques and instruments used by the
Fund may change over time as new instruments and strategies are developed or
regulatory changes occur.
In the course of pursuing its investment objective, the Fund may purchase
and sell (write) exchange-listed and over-the-counter put and call options on
securities, equity and fixed-income indices and other financial instruments;
purchase and sell financial futures contracts and options thereon; enter into
various interest rate transactions such as swaps, caps, floors or collars; and
enter into various currency transactions such as currency forward contracts,
currency futures contracts, currency swaps or options on currencies or currency
futures (collectively, all the above are called "Strategic Transactions").
Strategic Transactions may be used in an attempt to protect against possible
changes in the market value of securities held in or to be purchased for the
Fund's portfolio resulting from securities markets or currency exchange rate
fluctuations, to protect the Fund's unrealized gains in the value of its
portfolio securities, to facilitate the sale of such securities for investment
purposes, to manage the effective maturity or duration of the Fund's portfolio,
or to establish a position in the derivatives markets as a temporary substitute
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for purchasing or selling particular securities. In addition to the hedging
transactions referred to in the preceding sentence, Strategic Transactions may
also be used to enhance potential gain in circumstances where hedging is not
involved although the Fund will attempt to limit its net loss exposure resulting
from Strategic Transactions entered into for such purposes to not more than 3%
of the Fund's net assets at any one time and, to the extent necessary, the Fund
will close out transactions in order to comply with this limitation.
(Transactions such as writing covered call options are considered to involve
hedging for the purposes of this limitation.) In calculating the Fund's net loss
exposure from such Strategic Transactions, an unrealized gain from a particular
Strategic Transaction position would be netted against an unrealized loss from a
related Strategic Transaction position. For example, if the Adviser anticipates
that the Belgian franc will appreciate relative to the French franc, the Fund
may take a long forward currency position in the Belgian franc and a short
foreign currency position in the French franc. Under such circumstances, any
unrealized loss in the Belgian franc position would be netted against any
unrealized gain in the French franc position (and vice versa) for purposes of
calculating the Fund's net loss exposure. The ability of the Fund to utilize
these Strategic Transactions successfully will depend on the Adviser's ability
to predict pertinent market movements, which cannot be assured. The Fund will
comply with applicable regulatory requirements when implementing these
strategies, techniques and instruments. The Fund's activities involving
Strategic Transactions may be limited by the requirements of Subchapter M of the
Code for qualification as a regulated investment company.
Strategic Transactions have risks associated with them including possible
default by the other party to the transaction, illiquidity and, to the extent
the Adviser's view as to certain market movements is incorrect, the risk that
the use of such Strategic Transactions could result in losses greater than if
they had not been used. The writing of put and call options may result in losses
to the Fund, force the purchase or sale, respectively, of portfolio securities
at inopportune times or for prices higher than (in the case of purchases due to
the exercise of put options) or lower than (in the case of sales due to the
exercise of call options) current market values, limit the amount of
appreciation the Fund can realize on its investments or cause the Fund to hold a
security it might otherwise sell. The use of currency transactions can result in
the Fund incurring losses as a result of a number of factors, including the
imposition of exchange controls, suspension of settlements, or the inability to
deliver or receive a specified currency. The use of options and futures
transactions entails certain other risks. In particular, the variable degree of
correlation between price movements of futures contracts and price movements in
the related portfolio position of the Fund creates the possibility that losses
on the hedging instrument may be greater than gains in the value of the Fund's
position. The writing of options could significantly increase the Fund's
portfolio turnover rate and, therefore, associated brokerage commissions or
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spreads. In addition, futures and options markets may not be liquid in all
circumstances and certain over-the-counter options may have no markets. As a
result, in certain markets, the Fund might not be able to close out a
transaction without incurring substantial losses, if at all. Although the use of
futures and options transactions for hedging should tend to minimize the risk of
loss due to a decline in the value of the hedged position, at the same time, in
certain circumstances, these transactions tend to limit any potential gain which
might result from an increase in value of such position. The loss incurred by
the Fund in writing options on futures and entering into futures transactions is
potentially unlimited; however, as described above, the Fund will attempt to
limit its net loss exposure resulting from Strategic Transactions entered into
for non-hedging purposes to not more than 3% of its net assets at any one time.
Futures markets are highly volatile and the use of futures may increase the
volatility of the Fund's net asset value. Finally, entering into futures
contracts would create a greater ongoing potential financial risk than would
purchases of options where the exposure is limited to the cost of the initial
premium. Losses resulting from the use of Strategic Transactions would reduce
net asset value and the net result may be less favorable than if the Strategic
Transactions had not been utilized. Further information concerning the Fund's
Strategic Transactions is set forth in the Statement of Additional Information.
Short-Selling
The Fund may make short sales, which are transactions in which the Fund
sells a security it does not own in anticipation of a decline in the market
value of that security. To complete such a transaction, the Fund must borrow the
security to make delivery to the buyer. The Fund then is obligated to replace
the security borrowed by purchasing it at the market price at the time of
replacement. The price at such time may be more or less than the price at which
the security was sold by the Fund. Until the security is replaced, the Fund is
required to pay to the lender amounts equal to any dividends or interest which
accrue during the period of the loan. To borrow the security, the Fund also may
be required to pay a premium, which would increase the cost of the security
sold. The proceeds of the short sale will be retained by the broker, to the
extent necessary to meet margin requirements, until the short position is closed
out.
Until the Fund replaces a borrowed security in connection with a short
sale, the Fund will: (a) maintain daily a segregated account not with the
broker, containing cash or U.S. Government securities, at such a level that the
amount deposited in the account plus the amount deposited with the broker as
collateral will equal the current value of the security sold short; or (b)
otherwise cover its short position.
The Fund will incur a loss as a result of the short sale if the price of
the security increases between the date of the short sale and the date on which
the Fund replaces the borrowed security. The Fund will realize a gain if the
security declines in price between those dates by an amount greater than premium
and transaction costs. This result is the opposite of what one would expect from
a cash purchase of a long position in a security. The amount of any gain will be
decreased, and the amount of any loss increased, by the amount of any premium or
amounts in lieu of dividends or interest the Fund may be required to pay in
connection with a short sale.
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The Fund's loss on a short sale as a result of an increase in the price of
a security sold short is potentially unlimited. The Fund may purchase call
options to provide a hedge against an increase in the price of a security sold
short by the Fund. When the Fund purchases a call option it must pay a premium
to the person writing the option and a commission to the broker selling the
option. If the option is exercised by the Fund, the premium and the commission
paid may be more than the amount of the brokerage commission charged if the
security were to be purchased directly. See "Strategic Transactions" above.
The Fund anticipates that the frequency of short sales will vary
substantially in different periods, and it does not intend that any specified
portion of its assets, as a matter of practice, will be in short sales. However,
no securities will be sold short if, after giving effect to any such short sale,
the total market value of all securities sold short would exceed 5% of the value
of the Fund's net assets.
In addition to the short sales discussed above, the Fund may make short
sales "against the box," a transaction in which the Fund enters into a short
sale of a security which the Fund owns. The proceeds of the short sale are held
by a broker until the settlement date at which time the Fund delivers the
security to close the short position. The Fund receives the net proceeds from
the short sale.
Forward Roll Transactions
In order to enhance current income, the Fund may enter into forward roll
transactions with respect to mortgage-backed securities. In a forward roll
transaction, the Fund sells a mortgage-backed security to a financial
institution, such as a bank or broker-dealer, and simultaneously agrees to
repurchase a similar security from the institution at a later date at an
agreed-upon price. The mortgage-backed securities that are repurchased will bear
the same interest rate as those sold, but generally will be collateralized by
different pools of mortgages with different prepayment histories than those
sold. During the period between the sale and repurchase, the Fund will not be
entitled to receive interest and principal payments on the securities sold.
Proceeds of the sale will be invested in short-term instruments, such as
repurchase agreements or other short-term securities, and the income from these
investments, together with any additional fee income received on the sale and
the amount gained by repurchasing the securities in the future at a lower
purchase price, will generate income and gain for the Fund which is intended to
exceed the yield on the securities sold. Forward roll transactions involve the
risk that the market value of the securities sold by the Fund may decline below
the repurchase price of those securities. At the time the Fund enters into a
forward roll transaction, it will place in a segregated custodial account cash,
or liquid, high grade debt obligations having a value equal to the repurchase
price (including accrued interest) and will subsequently monitor the account to
insure that the equivalent value is maintained. The Fund may commit up to 25% of
its net assets to forward roll transactions, when-issued securities and forward
commitments.
The use of forward roll transactions involves leverage. Leverage allows any
investment gains made with the additional monies received (in excess of the
costs of the forward roll transaction) to increase the net asset value of the
Fund's shares faster than would otherwise be the case. On the other hand, if the
additional monies received are invested in ways that do not fully recover the
costs of such transactions to the Fund, the net asset value of the Fund would
fall faster than would otherwise be the case.
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When-Issued Securities and Forward Commitments
The Fund may purchase securities on a "when-issued" basis, which means that
delivery and payment for the securities will normally take place 15 to 60 days
after the date of the transaction. The payment obligation and interest rate on
the securities are fixed at the time the Fund enters into the commitment, but
interest will not accrue to the Fund until delivery of and payment for the
securities. Although the Fund will only make commitments to purchase
"when-issued" securities with the intention of actually acquiring the
securities, the Fund may sell the securities before the settlement date if
deemed advisable by the Adviser. Unless the Fund has entered into an offsetting
agreement to sell the securities, cash or liquid, high grade debt obligations
with a market value equal to the amount of the Fund's commitment will be
segregated with the Fund's custodian bank. If the market value of these
securities declines, additional cash or securities will be segregated daily so
that their aggregate market value equals the amount of the Fund's commitment.
Securities purchased on a "when-issued" basis may have a market value on
delivery which is less than the amount paid by the Fund. Changes in market value
may be based upon the public's perception of the creditworthiness of the issuer
or changes in the level of interest rates. Generally, the value of "when-issued"
securities will fluctuate inversely to changes in interest rates, i.e., they
will appreciate in value when interest rates fall and will depreciate in value
when interest rates rise.
The Fund may also enter into contracts to purchase securities for a fixed
price at a future date beyond the customary settlement time if the Fund holds
and maintains until the settlement date in a segregated account cash or liquid,
high grade debt obligations in an amount sufficient to meet the purchase price,
or if the Fund enters into offsetting contracts for the forward sale of other
securities it owns. Such contracts are customarily referred to as "forward
commitments" and involve a risk of loss if the value of the security to be
purchased declines prior to the settlement date.
The Fund may commit up to 25% of its net assets to forward roll
transactions, when-issued securities and forward commitments.
Repurchase Agreements
The Fund may invest up to 15% of its net assets in repurchase agreements
under normal circumstances. The Fund's repurchase transactions are usually
overnight. In no event will more than 15% of the Fund's net assets be invested
in repurchase transactions of more than seven days' duration together with other
illiquid assets. Repurchase agreements acquired by the Fund will always be fully
collateralized as to principal and interest by money market instruments and will
be entered only into with commercial banks, brokers and dealers considered
creditworthy by the Adviser. If the other party or "seller" of a repurchase
agreement defaults, the Fund might suffer a loss to the extent that the proceeds
from the sale of the underlying securities and other collateral held by the Fund
in connection with the related repurchase agreement are less than the repurchase
price. In addition, in the event of bankruptcy of the seller or failure of the
seller to repurchase the securities as agreed, a Fund could suffer losses,
including loss of interest on or principal of the security and costs associated
with delay and enforcement of the repurchase agreement.
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Investment Restrictions
The Fund has adopted certain fundamental policies which may not be changed
without the approval of the Fund's shareholders. These policies provide, among
other things, that the Fund may not: (i) invest, with respect to at least 75% of
its total assets, more than 5% in the securities of any one issuer (other than
the U.S. Government, its agencies or instrumentalities) or acquire more than 10%
of the outstanding voting securities of any issuer; (ii) issue senior
securities, borrow money or securities or pledge or mortgage its assets, except
that the Fund may (a) borrow money from banks as a temporary measure for
extraordinary or emergency purposes (but not for investment purposes) in an
amount up to 15% of the current value of its total assets, (b) enter into
forward roll transactions and (c) pledge its assets to an extent not greater
than 15% of the current value of its total assets to secure such borrowings;
however, the Fund may not make any additional investments while its outstanding
bank borrowings exceed 5% of the current value of its total assets; (iii) lend
portfolio securities, except that the Fund may enter into repurchase agreements
with respect to 15% of the value of its net assets.
If any percentage restriction described above is adhered to at the time of
investment, a subsequent increase or decrease in the percentage resulting from a
change in the value of the Fund's assets will not constitute a violation of the
restriction. Certain non-fundamental policies and additional fundamental
policies adopted by the Fund are described in the Statement of Additional
Information.
RISK FACTORS AND SUITABILITY
The Fund is not intended to provide an investment program meeting all of
the requirements of an investor. Notwithstanding the Fund's ability to diversify
and spread risk by holding securities of a number of issuers, shareholders
should be able and prepared to bear the risk of investment losses which may
accompany the investments contemplated by the Fund.
The Fund's net asset value per share can generally be expected to fluctuate
inversely with fluctuations in interest rates.
The Fund's investments in STRIPs, direct investments in mortgages,
restricted and illiquid securities, foreign securities and the utilization of
Strategic Transactions and short selling involve special risks, as discussed
above in the correspondingly captioned sections.
CALCULATION OF PERFORMANCE DATA
From time to time the Fund may advertise its total return and yield. Both
total return and yield figures are based on historical earnings and are not
intended to indicate future performance. The "total return" of the Fund refers
to the average annual compounded rates of return over 1, 5 and 10 year periods
(or any shorter period since inception) that would equate an initial amount
invested at the beginning of a stated period to the ending redeemable value of
the investment. The calculation assumes the reinvestment of all dividends and
distributions, includes all recurring fees that are charged to all shareholder
accounts and deducts all nonrecurring charges at the end of each period.
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The "yield" of the Fund is computed by dividing the net investment income
per share earned during the period stated in the advertisement by the maximum
offering price per share on the last day of the period (using the average number
of shares entitled to receive dividends). For the purpose of determining net
investment income the calculation includes among expenses of the Fund all
recurring fees that are charged to all shareholder accounts and any nonrecurring
charges for the period stated.
From time to time, the Fund may compare its performance with that of other
mutual funds with similar investment objectives, to relevant indices, and to
performance rankings prepared by recognized mutual fund statistical services. In
addition, the Fund's performance may be compared to alternative investment or
savings vehicles and/or to indices or indicators of economic activity.
DIVIDENDS AND DISTRIBUTIONS
Dividends on shares of the Fund from net investment income will be declared
and distributed quarterly. Dividends from short-term and long-term capital
gains, if any, after reduction by capital losses, will be declared and
distributed at least annually. Dividends from net investment income and capital
gains distributions, if any, are automatically reinvested in additional shares
of the Fund unless the shareholder elects to receive them in cash.
PURCHASE OF SHARES
Shares of the Fund may be purchased directly from the Principal
Underwriter, which offers the Fund's shares to the public on a continuous basis.
Shares are sold at the net asset value per share next computed after the
purchase order is received in good order by the Principal Underwriter or its
agent and payment for the shares is received by the Fund's custodian. Please see
the Fund's account application or call the Principal Underwriter for
instructions on how to make payment of shares to the Fund's custodian. Unless
waived by the Fund, the minimum initial investment is $1,000,000. Additional
investments may be made in amounts of at least $50,000.
Shares of the Fund may also be purchased through securities dealers. Orders
for the purchase of Fund shares received by dealers by the close of regular
trading on the New York Stock Exchange on any business day and transmitted to
the Principal Underwriter by the close of its business day (normally 4:00 p.m.,
New York City time) will be effected as of the close of regular trading on the
New York Stock Exchange on that day, provided that payment for the shares is
also received by the Fund's custodian on that day. Otherwise, orders will be
effected at the net asset value per share determined on the next business day.
It is the responsibility of dealers to transmit orders so that they will be
received by the Principal Underwriter before the close of its business day.
Shares of the Fund purchased through dealers may be subject to transaction fees,
no part of which will be received by the Fund, the Principal Underwriter or the
Adviser.
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The Fund's net asset value per share is computed each day on which the New
York Stock Exchange is open as of the close of regular trading (currently 4:00
p.m., New York City time). The net asset value per share is calculated by
determining the value of all the Fund's assets, subtracting all liabilities and
dividing the result by the total number of shares outstanding. Portfolio
securities are valued at the last sale prices, on the valuation day, on the
exchange or national securities market on which they are primarily traded.
Securities not listed on an exchange or national securities market, or
securities for which there were no reported transactions, are valued at the last
quoted bid prices. Securities for which quotations are not readily available and
all other assets are valued at fair value as determined in good faith by the
Adviser in accordance with procedures approved by the Trustees. Money market
instruments with less than sixty days remaining to maturity when acquired by the
Fund are valued on an amortized cost basis unless the Trustees determine that
amortized cost does not represent fair value. If the Fund acquires a money
market instrument with more than sixty days remaining to its maturity, it is
valued at current market value until the sixtieth day prior to maturity and will
then be valued at amortized cost based upon the value on such date unless the
Trustees determine during such sixty-day period that amortized cost does not
represent fair value.
In the sole discretion of the Adviser, the Fund may accept securities
instead of cash for the purchase of shares of the Fund. The Adviser will
determine that any securities acquired in this manner are consistent with the
investment objective, policies and restrictions of the Fund. The securities will
be valued in the manner stated above. The purchase of shares of the Fund for
securities instead of cash may cause an investor who contributed them to realize
a taxable gain or loss with respect to the securities transferred to the Fund.
The Trust reserves the right in its sole discretion (i) to suspend the
offering of the Fund's shares, (ii) to reject purchase orders when in the best
interest of the Fund and (iii) to modify or eliminate the minimum initial
investment in Fund shares. The Fund's investment minimums do not apply to
accounts for which the Adviser or any of its affiliates serves as investment
adviser or to employees of the Adviser or any of its affiliates or to members of
such persons' immediate families. The Fund's investment minimums apply to the
aggregate value invested in omnibus accounts rather than to the investment of
the underlying participants in such omnibus accounts.
EXCHANGE OF SHARES
Shares of the Fund may be exchanged for shares of one or more other funds
in the Standish, Ayer & Wood family of funds. Shares of the Fund redeemed in an
exchange transaction are valued at their net asset value next determined after
the exchange request is received by the Principal Underwriter or its agent.
Shares of a fund purchased in an exchange transaction are sold at their net
asset value next determined after the exchange request is received by the
Principal Underwriter or its agent and payment for the shares is received by the
fund into which your shares are to be exchanged. Until receipt of the purchase
price by the fund into which your shares are to be exchanged (which may take up
to three business days), your money will not be invested. To obtain a current
prospectus for any of the other funds in the Standish, Ayer & Wood family of
funds, please call the Principal Underwriter at (800) 221-4795. Please consider
the differences in investment objectives and expenses of a fund as described in
its prospectus before making an exchange.
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Written Exchanges
Shares of the Fund may be exchanged by written order to the Principal
Underwriter, One Financial Center, Boston, Massachusetts 02111. A written
exchange request must (a) state the name of the current Fund, (b) state the name
of the fund into which the current Fund shares will be exchanged, (c) state the
number of shares or the dollar amount to be exchanged, (d) identify the
shareholder's account numbers in both funds and (e) be signed by each registered
owner exactly as the shares are registered. Signature(s) must be guaranteed as
listed under "Written Redemption" below.
Telephonic Exchanges
Shareholders who elect telephonic privileges may exchange shares by calling
the Principal Underwriter at (800) 221-4795. Telephonic privileges are not
available to shareholders automatically. Proper identification will be required
for each telephonic exchange. Please see "Telephone Transactions" below for more
information regarding telephonic transactions.
General Exchange Information
All exchanges are subject to the following exchange restrictions: (i) the
fund into which shares are being exchanged must be registered for sale in your
state; (ii) exchanges may be made only between funds that are registered in the
same name, address and, if applicable, taxpayer identification number; and (iii)
unless waived by the Trust, the amount to be exchanged must satisfy the minimum
account size of the fund to be exchanged into. Exchange requests will not be
processed until payment for the shares of the current Fund have been received by
the Fund's custodian. The exchange privilege may be changed or discontinued and
may be subject to additional limitations upon sixty (60) days' notice to
shareholders, including certain restrictions on purchases by market-timer
accounts.
REDEMPTION OF SHARES
Shares of the Fund may be redeemed by any of the methods described below at
the net asset value per share next determined after receipt by the Principal
Underwriter or its agent of a redemption request in proper form. Redemptions
will not be processed until a completed Share Purchase Application and payment
for the shares to be redeemed have been received.
Written Redemption
Shares of the Fund may be redeemed by written order to the Principal
Underwriter, One Financial Center, 26th Floor, Boston, Massachusetts 02111. A
written redemption request must (a) state the name of the Fund and the number of
shares or the dollar amount to be redeemed, (b) identify the shareholder's
account number and (c) be signed by each registered owner exactly as the shares
are registered. Signature(s) must be guaranteed by a member of either the
Securities Transfer Association's STAMP program or the New York Stock Exchange's
Medallion Signature Program or by any one of the following institutions,
provided that such institution meets credit standards established by Investors
Bank & Trust Company, the Fund's transfer agent: (i) a bank; (ii) a securities
broker or dealer, including a government or municipal securities broker or
dealer, that is a member of a clearing corporation or has net capital of at
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least $100,000; (iii) a credit union having authority to issue signature
guarantees; (iv) a savings and loan association, a building and loan
association, a cooperative bank, or a federal savings bank or association; or
(v) a national securities exchange, a registered securities exchange or a
clearing agency. Additional supporting documents may be required in the case of
estates, trusts, corporations, partnerships and other shareholders that are not
individuals. Redemption proceeds will normally be paid by check mailed within
three business days of receipt by the Principal Underwriter of a written
redemption request in proper form. If shares to be redeemed were recently
purchased by check, the Fund may delay transmittal of redemption proceeds until
such time as it has assured itself that good funds have been collected for the
purchase of such shares. This may take up to fifteen (15) days in the case of
payments made by check.
Telephonic Redemption
Shareholders who elect telephonic privileges may redeem shares by calling
the Principal Underwriter at (800) 221-4795. Telephonic privileges are not
available to shareholders automatically. Redemption proceeds will be mailed or
wired in accordance with the shareholder's instruction on the account
application to a pre-designated account. Redemption proceeds will normally be
paid promptly after receipt of telephonic instructions, but no later than three
business days thereafter, except as described above for shares purchased by
check. Redemption proceeds will be sent only by check payable to the shareholder
of record at the address of record, unless the shareholder has indicated, in the
initial application for the purchase of shares, a commercial bank to which
redemption proceeds may be sent by wire. These instructions may be changed
subsequently only in writing, accompanied by a signature guarantee, and
additional documentation in the case of shares held by a corporation or other
entity or by a fiduciary such as a trustee or executor. Wire charges, if any,
will be deducted from redemption proceeds. Proper identification will be
required for each telephonic redemption.
Repurchase Order
In addition to telephonic and written redemption of Fund shares, the
Principal Underwriter may accept telephone orders from brokers or dealers for
the repurchase of Fund shares. The repurchase price is the net asset value per
share next determined after receipt of the repurchase order by the Principal
Underwriter and the payment for the shares by the Fund's custodian. Brokers and
dealers are obligated to transmit repurchase orders to the Principal Underwriter
prior to the close of the Principal Underwriter's business day (normally 4:00
p.m.). Brokers and dealers may charge for their services in connection with a
repurchase of Fund shares, but neither the Fund nor the Principal Underwriter
imposes a charge for share repurchases.
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Telephone Transactions
By maintaining an account that is eligible for telephonic exchange and
redemption privileges, the shareholder authorizes the Adviser, the Principal
Underwriter, the Fund and the Fund's custodian to act upon instructions of any
person to redeem and/or exchange shares from the shareholder's account. Further,
the shareholder acknowledges that, as long as the Fund employs reasonable
procedures to confirm that telephonic instructions are genuine, and follows
telephonic instructions that it reasonably believes to be genuine, neither the
Adviser, nor the Principal Underwriter, nor the Trust, nor the Fund, nor the
Fund's custodian, nor their respective officers or employees, will be liable for
any loss, expense or cost arising out of any request for a telephonic redemption
or exchange, even if such transaction results from any fraudulent or
unauthorized instructions. Depending upon the circumstances, the Fund intends to
employ personal identification or written confirmation of transactions
procedures, and if it does not, the Fund may be liable for any losses due to
unauthorized or fraudulent instructions. All telephone transaction requests will
be recorded. Shareholders may experience delays in exercising telephone
transaction privileges during periods of abnormal market activity. Accordingly,
during periods of volatile economic and market conditions, shareholders may wish
to consider transmitting redemption and exchange requests in writing.
* * * *
The proceeds paid upon redemption or repurchase may be more or less than
the cost of the shares, depending upon the market value of the Fund's portfolio
investments at the time of redemption or repurchase. The Fund intends to pay
cash for all shares redeemed, but under certain conditions, the Fund may make
payments wholly or partially in portfolio securities.
Because of the cost of maintaining shareholder accounts, the Fund may
redeem, at net asset value, the shares in any account which has a value of less
than $50,000 as a result of redemptions or transfers. Before doing so, the Fund
will notify the shareholder that the value of the shares in the account is less
than the specified minimum and will allow the shareholder 30 days to make an
additional investment in an amount which will increase the value of the account
to at least $50,000. The Fund may eliminate duplicate mailings of Fund materials
to shareholders that have the same address of record.
MANAGEMENT
Trustees
The Fund is a separate investment series of Standish, Ayer & Wood
Investment Trust, a Massachusetts business trust. Under the terms of the
Agreement and Declaration of Trust establishing the Trust, which is governed by
the laws of The Commonwealth of Massachusetts, the Trustees of the Trust are
ultimately responsible for the management of its business and affairs.
Investment Adviser
Standish, Ayer & Wood, Inc. ("the Adviser"), One Financial Center, Boston,
Massachusetts 02111, serves as investment adviser to the Fund pursuant to an
investment advisory agreement and manages the Fund's investments and affairs
subject to the supervision of the Trustees of the Trust. The Adviser is a
Massachusetts corporation incorporated in 1933 and is a registered investment
adviser under the Investment Advisers Act of 1940.
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The Adviser provides fully discretionary management services and counseling
and advisory services to a broad range of clients throughout the United States
and abroad. As of March 31, 1996, the Adviser or its affiliate, Standish
International Management Company, L.P. ("SIMCO"), served as the investment
adviser to each of the following
fourteen funds in the Standish, Ayer & Wood family of funds:
Net Assets
Fund (March 31, 1996)
- - --------------------------------------------------------------------------------
Standish Controlled Maturity Fund $ 9,042,346
Standish Equity Portfolio 98,282,505
Standish Fixed Income Portfolio 2,299,158,500
Standish Fixed Income Fund II 10,102,031
Standish Global Fixed Income Portfolio 149,048,965
Standish Intermediate Tax Exempt Bond Fund 31,199,236
Standish International Equity Fund 51,980,946
Standish International Fixed Income Fund 761,073,675
Standish Massachusetts Intermediate
Tax Exempt Bond Fund 32,270,691
Standish Securitized Fund 53,357,787
Standish Short-Term Asset Reserve Fund 272,188,970
Standish Small Capitalization Equity Portfolio 196,260,876
Standish Small Cap Tax-Sensitive Equity Fund 1,588,743
Standish Tax-Sensitive Equity Fund 1,261,111
Corporate pension funds are the largest asset under active management by
Standish. Standish's clients also include charitable and educational endowment
funds, financial institutions, trusts and individual investors. As of March 31,
1996, Standish managed approximately $29 billion in assets.
The Fund's portfolio managers are Dolores S. Driscoll and James J. Sweeney,
who have been primarily responsible for the day-to-day management of the Fund's
portfolio since its inception in August, 1989. During the past five years, Ms.
Driscoll, who is also President of the Fund, has served as a Managing Director
of the Adviser. Mr. Sweeney has served as a Director (since 1992) and Vice
President of the Adviser during this period.
Subject to the supervision and direction of the Trustees of the Trust, the
Adviser manages the Fund's portfolio in accordance with its stated investment
objective and policies, recommends investment decisions for the Fund, places
orders to purchase and sell securities on behalf of the Fund, administers the
affairs of the Fund and permits the Fund to use the name "Standish." For these
services, the Fund pays a fee monthly at the annual rate of 0.25% of the first
$500,000,000 of average daily net asset value and 0.20% of such average daily
net asset value in excess of $500,000,000. The Adviser has voluntarily agreed to
limit the Fund's total annual operating expenses (excluding brokerage
24
<PAGE>
commissions, taxes, litigation, indemnification and other extraordinary
expenses) to 0.45% of average daily net assets. The Adviser may discontinue or
modify such limitation in the future at its discretion, although it has no
current intention to do so. The Adviser has also agreed to limit the Fund's
total operating expenses (excluding brokerage commissions, taxes and
extraordinary expenses) to the permissible limit applicable in any state in
which shares of the Fund are then qualified for sale. If any expense limit is
exceeded, the compensation due the Adviser in such fiscal year shall be
proportionately reduced by the amount of such excess by a reduction or refund
thereof at the time such compensation is payable after the end of each calendar
month, subject to readjustment during the fiscal year. For the fiscal year ended
December 31, 1995, advisory fees paid by the Fund represented 0.19% of the
Fund's average daily net assets, after a fee reduction of $31,998.
Expenses
The Fund bears all expenses of its operations other than those incurred by
the Adviser under the investment advisory agreement. Among other expenses, the
Fund will pay investment advisory fees; bookkeeping, share pricing and
shareholder servicing fees and expenses; custodian fees and expenses; legal and
auditing fees; expenses of prospectuses, statements of additional information
and shareholder reports which are furnished to shareholders; registration and
reporting fees and expenses; and Trustees' fees and expenses. The Principal
Underwriter bears without subsequent reimbursement the distribution expenses
attributable to the offering and sale of Fund shares. Expenses of the Trust
which relate to more than one series are allocated among such series by the
Adviser and SIMCO in an equitable manner. For the fiscal year ended December 31,
1995, expenses borne by the Fund represented 0.45% of average daily net assets,
after an expense reduction of $31,998.
Portfolio Transactions
Subject to the supervision of the Trustees of the Trust, the Adviser
selects the brokers and dealers that execute orders to purchase and sell
portfolio securities for the Fund. The Adviser will generally seek to obtain the
best available price and most favorable execution with respect to all
transactions for the Fund.
Subject to the consideration of best price and execution and to applicable
regulations, the receipt of research and sales of Fund shares may also be
considered factors in the selection of brokers and dealers that execute orders
to purchase and sell portfolio securities for the Fund.
FEDERAL INCOME TAXES
The Fund presently qualifies and intends to continue to qualify for
taxation as a "regulated investment company" under the Code. If it qualifies for
treatment as a regulated investment company, the Fund will not be subject to
federal income tax on income (including capital gains) distributed to
shareholders in the form of dividends or capital gain distributions in
accordance with certain timing requirements of the Code.
The Fund will be subject to nondeductible 4% excise tax under the Code to
the extent that it fails to meet certain distribution requirements with respect
to each calendar year. Certain distributions made in order to satisfy the Code's
distribution requirements may be declared by the Fund during October, November
or December of the year but paid during the following January. Such
distributions will be taxable to taxable shareholders as if received on December
31 of the year the distributions are declared, rather than the year in which the
distributions are received.
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<PAGE>
Shareholders which are taxable entities or persons will be subject to
federal income tax on dividends and capital gain distributions made by the Fund.
Dividends paid by the Fund from net investment income, certain net foreign
currency gains, and any excess of net short-term capital gain over net long-term
capital loss will be taxable to shareholders as ordinary income, whether
received in cash or Fund shares. No portion of such dividends is expected to
qualify for the corporate dividends received deduction under the Code. Dividends
paid by the Fund from net capital gain (the excess of net long-term capital gain
over net short-term capital loss), called "capital gain distributions," will be
taxable to shareholders as long-term capital gains, whether received in cash or
Fund shares and without regard to how long the shareholder has held shares of
the Fund. Capital gain distributions do not qualify for the corporate dividends
received deduction. Dividends and capital gain distributions may also be subject
to state and local or foreign taxes.
The Fund anticipates that it may be subject to foreign withholding taxes or
other foreign taxes on income (possibly including capital gains) on certain
foreign investments (if any), which will reduce the yield on or return from
those investments. Such taxes may be reduced or eliminated pursuant to an income
tax treaty in some cases. The Fund does not expect to qualify to pass such
foreign taxes and any associated tax deductions or credits through to its
shareholders.
Redemptions and repurchases of shares are taxable events on which a
shareholder may recognize a gain or loss. Special rules recharacterize as
long-term any losses on the sale or exchange of Fund shares with a tax holding
period of six months or less, to the extent the shareholder received a capital
gain distribution with respect to such shares.
Individuals and certain other classes of shareholders may be subject to 31%
backup withholding of federal income tax on dividends, capital gain
distributions, and the proceeds of redemptions or repurchases of shares, if they
fail to furnish the Fund with their correct taxpayer identification number and
certain certifications or if they are otherwise subject to backup withholding.
Individuals, corporations and other shareholders that are not U.S. persons under
the Code are subject to different tax rules and may be subject to nonresident
alien withholding at the rate of 30% (or a lower rate provided by an applicable
tax treaty) on amounts treated as ordinary dividends from the Fund and, unless a
current IRS Form W-8 or an acceptable substitute is furnished to the Fund, to
backup withholding on certain payments from the Fund.
A state income (and possibly local income and/or intangible property) tax
exemption is generally available to the extent the Fund's distributions are
derived from interest on (or, in the case of intangibles taxes, the value of its
assets is attributable to) certain U.S. Government obligations, provided in some
states that certain thresholds for holdings of such obligations and/or reporting
requirements are satisfied.
After the close of each calendar year, the Fund will send a notice to
shareholders that provides information about the federal tax status of
distributions to shareholders for such calendar year.
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<PAGE>
THE FUND AND ITS SHARES
The Fund is a separate investment series of Standish, Ayer & Wood
Investment Trust, an unincorporated business trust organized under the laws of
The Commonwealth of Massachusetts pursuant to an Agreement and Declaration of
Trust dated August 13, 1986. Under the Agreement and Declaration of Trust, the
Trustees have authority to issue an unlimited number of shares of beneficial
interest, par value $.01 per share, of the Fund. Each share of the Fund is
entitled to one vote. All Fund shares have equal rights with regard to voting,
redemption, dividends, distributions and liquidation, and shareholders of the
Fund have the right to vote as a separate class with respect to certain matters
under the Investment Company Act of 1940 and the Agreement and Declaration of
Trust. Shares of the Fund do not have cumulative voting rights. Fractional
shares have proportional voting rights and participate in any distributions and
dividends. When issued, each Fund share will be fully paid and nonassessable.
Shareholders of the Fund do not have preemptive or conversion rights.
Certificates representing shares of the Fund will not be issued.
At December 31, 1995, Allendale Mutual Insurance Company, Allendale Park,
Johnston, Rhode Island 02919, had sole voting and investment power with respect
to more than 25% of the then outstanding shares of the Fund, and was deemed to
beneficially own such shares and to control the Fund.
The Trust has established fourteen series that currently offer their shares
to the public and may establish additional series at any time. Each series is a
separate taxpayer, eligible to qualify as a separate regulated investment
company for federal income tax purposes. The calculation of the net asset value
of a series and the tax consequences of investing in a series will be determined
separately for each series.
The Trust is not required to hold annual meetings of shareholders. Special
meetings of shareholders may be called from time to time for purposes such as
electing or removing Trustees, changing a fundamental policy, or approving an
investment advisory agreement.
If less than two-thirds of the Trustees holding office have been elected by
shareholders, a special meeting of shareholders of the Trust will be called to
elect Trustees. Under the Agreement and Declaration of Trust and the Investment
Company Act of 1940, the record holders of not less than two-thirds of the
outstanding shares of the Trust may remove a Trustee by votes cast in person or
by proxy at a meeting called for the purpose or by a written declaration filed
with each of the Trust's custodian banks. Except as described above, the
Trustees will continue to hold office and may appoint successor Trustees.
Whenever ten or more shareholders of the Trust who have been such for at least
six months, and who hold in the aggregate shares having a net asset value of at
least $25,000 or at least 1% of the outstanding shares, whichever is less, apply
to the Trustees in writing stating that they wish to communicate with other
shareholders with a view to obtaining signatures to request a meeting, and such
application is accompanied by a form of communication and request which they
wish to transmit, the Trustees shall within five (5) business days after receipt
of such application either (1) afford to such applicants access to a list of the
names and addresses of all shareholders as recorded on the books of the Trust;
or (2) inform such applicants as to the approximate number of shareholders of
record and the approximate cost of mailing to them the proposed communication or
form of request.
27
<PAGE>
Inquiries concerning the Fund should be made by contacting the Principal
Underwriter at the address and telephone number listed on the cover of this
Prospectus.
CUSTODIAN, TRANSFER AGENT AND
DIVIDEND DISBURSING AGENT
Investors Bank & Trust Company, 24 Federal Street, Boston, Massachusetts
02110, serves as the Fund's transfer agent and dividend disbursing agent and as
custodian of all cash and securities of the Fund.
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P., One Post Office Square, Boston, Massachusetts
02109, serves as independent accountants for the Trust and will audit the Fund's
financial statements annually.
LEGAL COUNSEL
Hale and Dorr, 60 State Street, Boston, Massachusetts 02109, is legal
counsel to the Trust and to the Adviser.
- - --------------------------------------------------------------------------------
No dealer, salesman or other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus or in the Statement of Additional Information, and, if given or made,
such other information or representations must not be relied upon as having been
authorized by the Trust. This Prospectus does not constitute an offering in any
jurisdiction in which such offering may not be lawfully made.
- - --------------------------------------------------------------------------------
28
<PAGE>
APPENDIX A KEY TO MOODY'S CORPORATE
BOND RATINGS
Aaa -Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred
to as "gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position
of such issues.
Aa -Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities
or fluctuation of protective elements may be of greater amplitude or
there may be other elements present which make the long term risks
appear somewhat larger than in Aaa securities.
A -Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate but
elements may be present which suggest a susceptibility to impairment
sometime in the future.
Baa -Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest
payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics
as well.
STANDARD & POOR'S RATINGS DEFINITIONS
AAA -Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA -Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A -Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher
rated categories.
BBB -Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than in higher
rated categories.
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<PAGE>
TAX CERTIFICATION INSTRUCTIONS
Federal law requires that taxable distributions and proceeds of redemptions
and exchanges be reported to the IRS and that 31% be withheld if you fail to
provide your correct Taxpayer Identification Number (TIN) and the TIN-related
certifications contained in the Account Purchase Application (Application) or
you are otherwise subject to backup withholding. The Fund will not impose backup
withholding as a result of your failure to make any certification, except the
certifications in the Application that directly relate to your TIN and backup
withholding status. Amounts withheld and forwarded to the IRS can be credited as
a payment of tax when completing your Federal income tax return.
For most individual taxpayers, the TIN is the social security number.
Special rules apply for certain accounts. For example, for an account
established under the Uniform Gift to Minors Act, the TIN of the minor should be
furnished. If you do not have a TIN, you may apply for one using forms available
at local offices of the Social Security Administration or the IRS, and you
should write "Applied For" in the space for a TIN on the Application.
Recipients exempt from backup withholding, including corporations and
certain other entities, should provide their TIN and underline "exempt" in
section 2(a) of the TIN section of the Application to avoid possible erroneous
withholding. Non-resident aliens and foreign entities may be subject to
withholding of up to 30% on certain distributions received from the Fund and
must provide certain certifications on IRS Form W-8 to avoid backup withholding
with respect to other payments. For further information, see Code Sections 1441,
1442 and 3406 and/or consult your tax adviser.
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<PAGE>
STANDISH SECURITIZED FUND
Investment Adviser
Standish, Ayer & Wood, Inc.
One Financial Center
Boston, Massachusetts 02111
Principal Underwriter
Standish Fund Distributors, L.P.
One Financial Center
Boston, Massachusetts 02111
Custodian
Investors Bank & Trust Company
24 Federal Street
Boston, Massachusetts 02110
Independent Accountants
Coopers & Lybrand L.L.P
One Post Office Square
Boston, Massachusetts 02109
Legal Counsel
Hale and Dorr
60 State Street
Boston, Massachusetts 02109
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<PAGE>
May 1, 1996
STANDISH SECURITIZED FUND
One Financial Center
Boston, Massachusetts 02111
(800) 221-4795
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information is not a prospectus, but expands
upon and supplements the information contained in the Prospectus dated May 1,
1996, as amended and/or supplemented from time to time (the "Prospectus"), of
Standish Securitized Fund (the "Fund"), a separate investment series of
Standish, Ayer & Wood Investment Trust (the "Trust"). This Statement of
Additional Information should be read in conjunction with the Fund's Prospectus,
a copy which may be obtained without charge from Standish Fund Distributors,
L.P., the Trust's principal underwriter (the "Principal Underwriter"), at the
address or phone number set forth above.
THE STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND IS
AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY IF PRECEDED OR
ACCOMPANIED BY AN EFFECTIVE PROSPECTUS.
CONTENTS
Investment Objective and Policies ............................2
Investment Restrictions.......................................9
Calculation of Performance Data..............................10
Management...................................................12
Redemption of Shares.........................................17
Portfolio Transactions.......................................17
Federal Income Taxes.........................................18
Determination of Net Asset Value.............................19
The Fund and Its Shares......................................20
Additional Information.......................................20
Experts and Financial Statements.............................20
Financial Statements........................................21
1
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The Fund's Prospectus describes the investment objective of the Fund and
summarizes the investment policies it will follow. The following discussion
supplements the description of the Fund's investment policies in the Prospectus.
See the Prospectus for a more complete description of the Fund's investment
objective, policies and restrictions.
Mortgage-Related Obligations
Some of the characteristics of mortgage-related obligations and the issuers
or guarantors of such securities are described below.
Life of Mortgage-Related Obligations
The average life of mortgage-related obligations is likely to be
substantially less than the stated maturities of the mortgages in the mortgage
pools underlying such securities. Prepayments or refinancing of principal by
mortgagors and mortgage foreclosures will usually result in the return of the
greater part of principal invested long before the maturity of the mortgages in
the pool.
As prepayment rates of individual mortgage pools will vary widely, it is
not possible to predict accurately the average life of a particular issue of
mortgage-related obligations. However, with respect to GNMA Certificates,
statistics published by the FHA are normally used as an indicator of the
expected average life of an issue. The actual life of a particular issue of GNMA
Certificates, however, will depend on the coupon rate of the underlying
mortgages, with higher interest rate mortgages being more prone to prepayment or
refinancing.
GNMA Certificates
The Government National Mortgage Association ("GNMA") was established in
1968 when the Federal National Mortgage Association ("FNMA") was separated into
two organizations, GNMA and FNMA. GNMA is a wholly-owned government corporation
within the Department of Housing and Urban Development. GNMA developed the first
mortgage-backed pass-through instrument in 1970 for Farmers Home
Administration-FMHA-insured, Federal Housing Administration-FHA-insured and for
Veterans Administration-or VA-guaranteed mortgages ("government mortgages").
GNMA purchases government mortgages and occasionally conventional mortgages
to support the housing market. GNMA is known primarily, however, for its role as
guarantor of pass-through securities collateralized by government mortgages.
Under the GNMA securities guarantee program, government mortgages that are
pooled must be less than one year old by the date GNMA issues its commitment.
Loans in a single pool must be of the same type in terms of interest rate and
maturity. The minimum size of a pool is $1 million for single-family mortgages
and $500,000 for manufactured housing and project loans.
Under the GNMA II program, loans with different interest rates can be
included in a single pool and mortgages originated by more than one lender can
be assembled in a pool. In addition, loans made by a single lender can be
packaged in a custom pool (a pool containing loans with specific characteristics
or requirements).
2
<PAGE>
GNMA Guarantee
The National Housing Act authorizes GNMA to guarantee the timely payment of
principal of and interest on securities backed by a pool of mortgages insured by
FHA or FMHA, or guaranteed by VA. The GNMA guarantee is backed by the full faith
and credit of the United States. GNMA is also empowered to borrow without
limitation from the U.S. Treasury if necessary to make any payments required
under its guarantee.
Yield Characteristics of GNMA Certificates
The coupon rate of interest on GNMA Certificates is lower than the interest
rate paid on the VA-guaranteed, FMHA-insured or FHA-insured mortgages underlying
the Certificates, but only by the amount of the fees paid to GNMA and the
issuer. For the most common type of mortgage pool, containing single-family
dwelling mortgages, GNMA receives an annual fee of 0.06% of the outstanding
principal for providing its guarantee, and the issuer is paid an annual fee of
0.44% for assembling the mortgage pool and for passing through monthly payments
of interest and principal to GNMA Certificate holders.
The coupon rate by itself, however, does not indicate the yield which will
be earned on the GNMA Certificates for several reasons. First, GNMA Certificates
may be issued at a premium or discount, rather than at par, and, after issuance,
GNMA Certificates may trade in the secondary market at a premium or discount.
Second, interest is paid monthly, rather than semi-annually as with traditional
bonds. Monthly compounding has the effect of raising the effective yield earned
on GNMA Certificates. Finally, the actual yield of each GNMA Certificate is
influenced by the prepayment experience of the mortgage pool underlying the GNMA
Certificate. If mortgagors prepay their mortgages, the principal returned to
GNMA Certificate holders may be reinvested at higher or lower rates.
Market for GNMA Certificates
Since the inception of the GNMA mortgage-backed securities program in 1970,
the amount of GNMA Certificates outstanding has grown rapidly. The size of the
market and the active participation in the secondary market by securities
dealers and many types of investors make the GNMA Certificates a highly liquid
instrument. Prices of GNMA Certificates are readily available from securities
dealers and depend on, among other things, the level of market rates, the GNMA
Certificate's coupon rate and the prepayment experience of the pools of
mortgages backing each GNMA Certificate.
FHLMC Participation Certificates
The Federal Home Loan Mortgage Corporation ("FHLMC") was created by the
Emergency Home Finance Act of 1970. It is a private corporation, initially
capitalized by the Federal Home Loan Bank System, charged with supporting the
mortgage lending activities of savings and loan associations by providing an
active secondary market for conventional mortgages. To finance its mortgage
purchases, FHLMC issues FHLMC Participation Certificates and Collateralized
Mortgage Obligations ("CMOs").
Participation Certificates represent an undivided interest in a pool of
mortgage loans. FHLMC purchases whole loans or participations on 30-year and
15-year fixed-rate mortgages, adjustable-rate mortgages ("ARMs") and home
improvement loans. Under certain programs, it will also purchase FHA and VA
mortgages.
3
<PAGE>
Loans pooled for FHLMC must have a minimum coupon rate equal to the
Participation Certificate rate specified at delivery, plus a required spread for
the corporation and a minimum servicing fee, generally 0.375% (37.5 basis
points). The maximum coupon rate on loans is 2% (200 basis points) in excess of
the minimum eligible coupon rate for Participation Certificates.
FHLMC requires a minimum commitment of $1 million in mortgages but imposes
no maximum amount. Negotiated deals require a minimum commitment of $10 million.
FHLMC guarantees timely payment of the interest and the ultimate payment of
principal of its Participation Certificates. This guarantee is backed by
reserves set aside to protect against losses due to default.
The FHLMC CMO is divided into varying maturities with prepayment set
specifically for holders of the shorter term securities. The CMO is designed to
respond to investor concerns about early repayment of mortgages.
FHLMC's CMOs are general obligations, and FHLMC will be required to use its
general funds to make principal and interest payments on CMOs if payments
generated by the underlying pool of mortgages are insufficient to pay principal
and interest on the CMO.
A CMO is a cash-flow bond in which mortgage payments from underlying
mortgage pools pay principal and interest to CMO bondholders. The CMO is
structured to address two major shortcomings associated with traditional
pass-through securities: payment frequency and prepayment risk. Traditional
pass-through securities pay interest and amortized principal on a monthly basis
whereas CMOs normally pay principal and interest semi-annually. In addition,
mortgage-backed securities carry the risk that individual mortgagors in the
mortgage pool may exercise their prepayment privileges, leading to irregular
cash flow and uncertain average lives, durations and yields.
A typical CMO structure contains four tranches, which are generally
referred to as classes A, B, C and Z. Each tranche is identified by its coupon
and maturity. The first three classes are usually current interest-bearing bonds
paying interest on a quarterly or semi-annual basis, while the fourth Class Z,
is an accrual bond. Amortized principal payments and prepayments from the
underlying mortgage collateral redeem principal of the CMO sequentially;
payments from the mortgages first redeem principal on the Class A bonds. When
principal of the Class A bonds has been redeemed, the payments then redeem
principal on the Class B bonds. This pattern of using principal payments to
redeem each bond sequentially continues until the Class C bonds have been
retired. At this point, Class Z bonds begin paying interest and amortized
principal on their accrued value.
The final tranche of a CMO is usually a deferred interest bond, commonly
referred to as the Z bond. This bond accrues interest at its coupon rate but
does not pay this interest until all previous tranches have been fully retired.
While earlier classes remain outstanding, interest accrued on the Z bond is
compounded and added to the outstanding principal. The deferred interest period
ends when all previous tranches are retired, at which point the Z bond pays
periodic interest and principal until it matures. The Adviser would purchase a Z
bond for the Fund if it expected interest rates to decline.
4
<PAGE>
FNMA Securities
FNMA was created by the National Housing Act of 1938. In 1968, the agency
was separated into two organizations, GNMA to support a secondary market for
government mortgages and FNMA to act as a private corporation supporting the
housing market.
FNMA pools may contain fixed-rate conventional loans on one-to-four-family
properties. Seasoned FHA and VA loans, as well as conventional growing equity
mortgages, are eligible for separate pools. FNMA will consider other types of
loans for securities pooling on a negotiated basis.
A single pool may include mortgages with different loan-to-value ratios and
interest rates, though rates may not vary beyond two percentage points.
Privately-Issued Mortgage Loan Pools
Savings associations, commercial banks and investment bankers issue
pass-through securities secured by a pool of mortgages.
Generally, only conventional mortgages on single-family properties are
included in private issues, though seasoned loans and variable rate mortgages
are sometimes included. Private placements allow purchasers to negotiate terms
of transactions. Maximum amounts for individual loans may exceed the loan limit
set for government agency purchases. Pool size may vary, but the minimum is
usually $20 million for public offerings and $10 million for private placements.
Privately-issued mortgage-related obligations do not carry government or
quasi-government guarantees. Rather, mortgage pool insurance generally is used
to insure against credit losses that may occur in the mortgage pool. Pool
insurance protects against credit losses to the extent of the coverage in force.
Each mortgage, regardless of original loan-to-value ratio, is insured to 100% of
principal, interest and other expenses, to a total aggregate loss limit stated
on the policy. The aggregate loss limit of the policy generally is 5% to 7% of
the original aggregate principal of the mortgages included in the pool.
In addition to the insurance coverage to protect against defaults on the
underlying mortgages, mortgage-backed securities can be protected against the
nonperformance or poor performance of servicers. Performance bonding of
obligations such as those of the servicers under the origination, servicing or
other contractual agreement will protect the value of the pool of insured
mortgages and enhance the marketability.
The rating received by a mortgage security will be a major factor in its
marketability. For public issues, a rating is always required, but it may be
optional for private placements depending on the demands of the marketplace and
investors.
Before rating an issue, a rating agency such as Standard & Poor's Ratings
Group ("Standard & Poor's") or Moody's Investors Service, Inc. ("Moody's") will
consider several factors, including: the creditworthiness of the issuer; the
issuer's track record as an originator and servicer; the type, term and
characteristics of the mortgages, as well as loan-to-value ratio and loan
amounts; the insurer and the level of mortgage insurance and hazard insurance
provided. Where an equity reserve account or letter of credit is offered, the
rating agency will also examine the adequacy of the reserve and the strength of
the issuer of the letter of credit.
5
<PAGE>
Strategic Transactions
The Fund may, but is not required to, utilize various other investment
strategies as described below to hedge various market risks (such as interest
rates, currency exchange rates, and broad or specific equity or fixed-income
market movements), to manage the effective maturity or duration of fixed-income
securities, or to enhance potential gain. Such strategies are generally accepted
as part of modern portfolio management and are regularly utilized by many mutual
funds and other institutional investors. Techniques and instruments used by the
Fund may change over time as new instruments and strategies are developed or
regulatory changes occur.
In the course of pursuing its investment objective, the Fund may purchase
and sell (write) exchange-listed and over-the-counter put and call options on
securities, equity and fixed-income indices and other financial instruments;
purchase and sell financial futures contracts and options thereon; enter into
various interest rate transactions such as swaps, caps, floors or collars; and
enter into various currency transactions such as currency forward contracts,
currency futures contracts, currency swaps or options on currencies or currency
futures (collectively, all the above are called "Strategic Transactions").
Strategic Transactions may be used in an attempt to protect against possible
changes in the market value of securities held in or to be purchased for the
Fund's portfolio resulting from securities markets or currency exchange rate
fluctuations, to protect the Fund's unrealized gains in the value of its
portfolio securities, to facilitate the sale of such securities for investment
purposes, to manage the effective maturity or duration of the Fund's portfolio,
or to establish a position in the derivatives markets as a temporary substitute
for purchasing or selling particular securities. In addition to the hedging
transactions referred to in the preceding sentence, Strategic Transactions may
also be used to enhance potential gain in circumstances where hedging is not
involved although the Fund will attempt to limit its net loss exposure resulting
from Strategic Transactions entered into for such purposes to not more than 3%
of the Fund's net assets at any one time and, to the extent necessary, the Fund
will close out transactions in order to comply with this limitation.
(Transactions such as writing covered call options are considered to involve
hedging for the purposes of this limitation.) In calculating the Fund's net loss
exposure from such Strategic Transactions, an unrealized gain from a particular
Strategic Transaction position would be netted against an unrealized loss from a
related Strategic Transaction position. The ability of the Fund to utilize these
Strategic Transactions successfully will depend on the ability of Standish, Ayer
& Wood (the "Adviser") to predict pertinent market movements, which cannot be
assured. The Fund will comply with applicable regulatory requirements when
implementing these strategies, techniques and instruments. The Fund's activities
involving Strategic Transactions may be limited by the requirements of
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Internal
Revenue Code"), for qualification as a regulated investment company.
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Risks of Strategic Transactions
The use of Strategic Transactions has associated risks including possible
default by the other party to the transaction, illiquidity and, to the extent
the Adviser's view as to certain market movements is incorrect, the risk that
the use of such Strategic Transactions could result in losses greater than if
they had not been used. The writing of put and call options may result in losses
to the Fund, force the purchase or sale, respectively, of portfolio securities
at inopportune times or for prices higher than (in the case of put options) or
lower than (in the case of call options) current market values, limit the amount
of appreciation the Fund can realize on its investments or cause the Fund to
hold a security it might otherwise sell. The use of currency transactions can
result in the Fund incurring losses as a result of a number of factors,
including the imposition of exchange controls, suspension of settlements, or the
inability to deliver or receive a specified currency. The use of options and
futures transactions entails certain other risks. In particular, the variable
degree of correlation between price movements of futures contracts and price
movements in the related portfolio position of the Fund creates the possibility
that losses on the hedging instrument may be greater than gains in the value of
the Fund's position. The writing of options could significantly increase the
Fund's portfolio turnover rate and, therefore, associated brokerage commissions
or spreads. In addition, futures and options markets may not be liquid in all
circumstances and certain over-the-counter options may have no markets. As a
result, in certain markets, the Fund might not be able to close out a
transaction without incurring substantial losses, if at all. Although the use of
futures and options transactions for hedging should tend to minimize the risk of
loss due to a decline in the value of the hedged position, at the same time, in
certain circumstances, these transactions tend to limit any potential gain which
might result from an increase in value of such position. The loss incurred by
the Fund in writing options on futures and entering into futures transactions is
potentially unlimited, however as described above, the Fund will attempt to
limit its net loss exposure resulting from Strategic Transactions entered into
for non-hedging purposes to not more than 3% of its net assets at any one time.
Futures markets are highly volatile and the use of futures may increase the
volatility of the Fund's net asset value. Finally, entering into futures
contracts would create a greater ongoing potential financial risk than would
purchases of options where the exposure is limited to the cost of the initial
premium. Losses resulting from the use of Strategic Transactions would reduce
net asset value and the net result may be less favorable than if the Strategic
Transactions had not been utilized.
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General Characteristics of Options
Put options and call options typically have similar structural
characteristics and operational mechanics regardless of the underlying
instrument on which they are purchased or sold. Thus, the following general
discussion relates to each of the particular types of options discussed in
greater detail below. In addition, many Strategic Transactions involving options
require segregation of the Fund's assets in special accounts, as described below
under "Use of Segregated Accounts."
A put option gives the purchaser of the option, in consideration for the
payment of a premium, the right to sell, and the writer the obligation to buy
(if the option is exercised), the underlying security, commodity, index,
currency or other instrument at the exercise price. For instance, the Fund's
purchase of a put option on a security might be designed to protect its holdings
in the underlying instrument (or, in some cases, a similar instrument) against a
substantial decline in the market value by giving the Fund the right to sell
such instrument at the option exercise price. A call option, in consideration
for the payment of a premium, gives the purchaser of the option the right to
buy, and the seller the obligation to sell (if the option is exercised), the
underlying instrument at the exercise price. The Fund may purchase a call option
on a security, financial future, index, currency or other instrument to seek to
protect the Fund against an increase in the price of the underlying instrument
that it intends to purchase in the future by fixing the price at which it may
purchase such instrument. An American style put or call option may be exercised
at any time during the option period while a European style put or call option
may be exercised only upon expiration or during a fixed period prior thereto.
The Fund is authorized to purchase and sell exchange listed options and
over-the-counter options ("OTC options"). Exchange listed options are issued by
a regulated intermediary such as the Options Clearing Corporation ("OCC"), which
guarantees the performance of the obligations of the parties to such options.
The discussion below uses the OCC as an example, but is also applicable to other
financial intermediaries.
With certain exceptions, exchange listed options generally settle by
physical delivery of the underlying security or currency, although in the future
cash settlement may become available. Index options and Eurodollar instruments
are cash settled for the net amount, if any, by which the option is
"in-the-money" (i.e., where the value of the underlying instrument exceeds, in
the case of a call option, or is less than, in the case of a put option, the
exercise price of the option) at the time the option is exercised. Frequently,
rather than taking or making delivery of the underlying instrument through the
process of exercising the option, listed options are closed by entering into
offsetting purchase or sale transactions that do not result in ownership of the
new option.
The Fund's ability to close out its position as a purchaser or seller of an
exchange listed put or call option is dependent, in part, upon the liquidity of
the option market. There is no assurance that a liquid option market on an
exchange will exist. In the event that the relevant market for an option on an
exchange ceases to exist, outstanding options on that exchange would generally
continue to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours
during which the underlying financial instruments are traded. To the extent that
the option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
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OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct agreement with
the Counterparty. In contrast to exchange listed options, which generally have
standardized terms and performance mechanics, all the terms of an OTC option,
including such terms as method of settlement, term, exercise price, premium,
guarantees and security, are set by negotiation of the parties. The Fund will
generally sell (write) OTC options (other than OTC currency options) that are
subject to a buy-back provision permitting the Fund to require the Counterparty
to sell the option back to the Fund at a formula price within seven days. (To
the extent that the Fund does not do so, the OTC options are subject to the
Fund's restriction on illiquid securities.) The Fund expects generally to enter
into OTC options that have cash settlement provisions, although it is not
required to do so.
Unless the parties provide for it, there is no central clearing or guaranty
function in the OTC option market. As a result, if the Counterparty fails to
make delivery of the security, currency or other instrument underlying an OTC
option it has entered into with the Fund or fails to make a cash settlement
payment due in accordance with the terms of that option, the Fund will lose any
premium it paid for the option as well as any anticipated benefit of the
transaction. Accordingly, the Adviser must assess the creditworthiness of each
such Counterparty or any guarantor or credit enhancement of the Counterparty's
credit to determine the likelihood that the terms of the OTC option will be
satisfied. The Fund will engage in OTC option transactions only with U.S.
Government securities dealers recognized by the Federal Reserve Bank of New York
as "primary dealers", or broker dealers, domestic or foreign banks or other
financial institutions which have received, combined with any credit
enhancements, a long-term debt rating of A from Standard & Poor's or Moody's or
an equivalent rating from any other nationally recognized statistical rating
organization ("NRSRO") or that issue long-term debt determined to be of
equivalent credit quality by the Adviser. The staff of the Securities and
Exchange Commission ("SEC") currently takes the position that, absent the
buy-back provisions discussed above, OTC options purchased by the Fund, and
portfolio securities "covering" the amount of the Fund's obligation pursuant to
an OTC option sold by it (the cost of the sell-back plus the in-the-money
amount, if any) are illiquid, and are subject to the Fund's limitation on
investing no more than 15% of its net assets in illiquid securities. However,
for options written with "primary dealers" in U.S. Government securities
pursuant to an agreement requiring a closing transaction at a formula price, the
amount which is considered to be illiquid may be calculated by reference to a
formula price.
If the Fund sells (writes) a call option, the premium that it receives may
serve as a partial hedge, to the extent of the option premium, against a
decrease in the value of the underlying securities or instruments in its
portfolio or will increase the Fund's income. The sale (writing) of put options
can also provide income.
The Fund may purchase and sell (write) call options on securities including
U.S. Treasury and agency securities, mortgage-backed securities, corporate debt
securities, equity securities (including convertible securities) and Eurodollar
instruments that are traded on U.S. and foreign securities exchanges and in the
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<PAGE>
over-the-counter markets, and on securities indices, currencies and futures
contracts. All calls sold by the Fund must be "covered" (i.e., the Fund must own
the securities or futures contract subject to the call) or must meet the asset
segregation requirements described below as long as the call is outstanding.
Even though the Fund will receive the option premium to help protect it against
loss, a call sold by the Fund exposes the Fund during the term of the option to
possible loss of opportunity to realize appreciation in the market price of the
underlying security or instrument and may require the Fund to hold a security or
instrument which it might otherwise have sold.
The Fund may purchase and sell (write) put options on securities including
U.S. Treasury and agency securities, mortgage backed securities, foreign
sovereign debt, corporate debt securities, equity securities (including
convertible securities) and Eurodollar instruments (whether or not it holds the
above securities in its portfolio), and on securities indices, currencies and
futures contracts. The Fund will not sell put options if, as a result, more than
50% of the Fund's assets would be required to be segregated to cover its
potential obligations under such put options other than those with respect to
futures and options thereon. In selling put options, there is a risk that the
Fund may be required to buy the underlying security at a disadvantageous price
above the market price.
Options on Securities Indices and Other Financial Indices
The Fund may also purchase (write) and sell call and put options on
securities indices and other financial indices. Options on securities indices
and other financial indices are similar to options on a security or other
instrument except that, rather than settling by physical delivery of the
underlying instrument, they settle by cash settlement. For example, an option on
an index gives the holder the right to receive, upon exercise of the option, an
amount of cash if the closing level of the index upon which the option is based
exceeds, in the case of a call, or is less than, in the case of a put, the
exercise price of the option (except if, in the case of an OTC option, physical
delivery is specified). This amount of cash is equal to the differential between
the closing price of the index and the exercise price of the option, which also
may be multiplied by a formula value. The seller of the option is obligated, in
return for the premium received, to make delivery of this amount. In addition to
the methods described above, the Fund may cover call options on a securities
index by owning securities whose price changes are expected to be similar to
those of the underlying index, or by having an absolute and immediate right to
acquire such securities without additional cash consideration (or for additional
cash consideration held in a segregated account by its custodian) upon
conversion or exchange of other securities in its portfolio.
General Characteristics of Futures
The Fund may enter into financial futures contracts or purchase or sell put
and call options on such futures. Futures are generally bought and sold on the
commodities exchanges where they are listed with payment of initial and
variation margin as described below. The sale of futures contracts creates a
firm obligation by the Fund, as seller, to deliver to the buyer the specific
type of financial instrument called for in the contract at a specific future
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<PAGE>
time for a specified price (or, with respect to index futures and Eurodollar
instruments, the net cash amount). The purchase of futures contracts creates a
corresponding obligation by the Fund, as purchaser. Options on futures contracts
are similar to options on securities except that an option on a futures contract
gives the purchaser the right in return for the premium paid to assume a
position in a futures contract and obligates the seller to deliver such
position.
The Fund's use of financial futures and options thereon will in all cases
be consistent with applicable regulatory requirements and in particular the
regulations of the Commodity Futures Trading Commission (the "CTFC") relating to
exclusions from regulation as a commodity pool operator. Those regulations
currently provide that the Fund may use commodity futures and option positions
(i) for bona fide hedging purposes without regard to the percentage of assets
committed to margin and option premiums, or (ii) for other purposes permitted by
the CTFC to the extent that the aggregate initial margin and option premiums
required to establish such non-hedging positions (net of the amount the
positions were "in the money" at the time of purchase) do not exceed 5% of the
net asset value of the Fund's portfolio, after taking into account unrealized
profits and losses on such positions. Typically, maintaining a futures contract
or selling an option thereon requires the Fund to deposit with a financial
intermediary as security for its obligations an amount of cash or other
specified assets (initial margin) which initially is typically 1% to 10% of the
face amount of the contract (but may be higher in some circumstances).
Additional cash or assets (variation margin) may be required to be deposited
thereafter on a daily basis as the value of the contract fluctuates. The
purchase of an option on financial futures involves payment of a premium for the
option without any further obligation on the part of the Fund. If the Fund
exercises an option on a futures contract it will be obligated to post initial
margin (and potential subsequent variation margin) for the resulting futures
position just as it would for any position. Futures contracts and options
thereon are generally settled by entering into an offsetting transaction but
there can be no assurance that the position can be offset prior to settlement at
an advantageous price, nor that delivery will occur. The segregation
requirements with respect to futures contracts and options thereon are described
below.
Currency Transactions
The Fund may engage in currency transactions with Counterparties in order
to hedge the value of portfolio holdings denominated in particular currencies
against fluctuations in relative value or to enhance potential gain. Currency
transactions include forward currency contracts, exchange listed currency
futures, exchange listed and OTC options on currencies, and currency swaps. A
forward currency contract involves a privately negotiated obligation to purchase
or sell (with delivery generally required) a specific currency at a future date,
which may be any fixed number of days from the date of the contract agreed upon
by the parties, at a price set at the time of the contract. A currency swap is
an agreement to exchange cash flows based on the notional (agreed-upon)
difference among two or more currencies and operates similarly to an interest
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<PAGE>
rate swap, which is described below. A Fund may enter into over-the-counter
currency transactions with Counterparties which have received, combined with any
credit enhancements, a long term debt rating of A by Standard & Poor's or
Moody's, respectively, or that have an equivalent rating from a NRSRO or (except
for OTC currency options) are determined to be of equivalent credit quality by
the Adviser.
The Fund's dealings in forward currency contracts and other currency
transactions such as futures, options, options on futures and swaps will
generally be limited to hedging involving either specific transactions or
portfolio positions. See "Strategic Transactions." Transaction hedging is
entering into a currency transaction with respect to specific assets or
liabilities of the Fund, which will generally arise in connection with the
purchase or sale of its portfolio securities or the receipt of income therefrom.
Position hedging is entering into a currency transaction with respect to
portfolio security positions denominated or generally quoted in that currency.
The Fund will not enter into a transaction to hedge currency exposure to an
extent greater, after netting all transactions intended wholly or partially to
offset other transactions, than the aggregate market value (at the time of
entering into the transaction) of the securities held in its portfolio that are
denominated or generally quoted in or currently convertible into such currency,
other than with respect to proxy hedging as described below.
The Fund may also cross-hedge currencies by entering into transactions to
purchase or sell one or more currencies that are expected to decline in value to
other currencies to which the Fund has or in which the Fund expects to have
portfolio exposure. For example, the Fund may hold a French government bond and
the Adviser may believe that French francs will deteriorate against German
marks. The Fund would sell French francs to reduce its exposure to that currency
and buy German marks. This strategy would be a hedge against a decline in the
value of French francs, although it would expose the Fund to declines in the
value of the German mark relative to the U.S. dollar.
To reduce the effect of currency fluctuations on the value of existing or
anticipated holdings of portfolio securities, the Fund may also engage in proxy
hedging. Proxy hedging is primarily used when the currency to which the Fund's
portfolio is exposed is difficult to hedge or to hedge against the dollar. Proxy
hedging entails entering into a forward contract to sell a currency whose
changes in value are generally considered to be linked to a currency or
currencies in which certain of the Fund's portfolio securities are or are
expected to be denominated, and to buy U.S. dollars. The amount of the contract
would not exceed the value of the Fund's securities denominated in linked
currencies. For example, if the Adviser considers that the Austrian schilling is
linked to the German deutsche mark (the "D-mark"), the Fund holds securities
denominated in schillings and the Adviser believes that the value of schillings
will decline against the U.S. dollar, the Adviser may enter into a contract to
sell D-marks and buy dollars. Proxy hedging involves some of the same risks and
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considerations as other transactions with similar instruments. Currency
transactions can result in losses to the Fund if the currency being hedged
fluctuates in value to a degree or in a direction that is not anticipated.
Further, there is the risk that the perceived linkage between various currencies
may not be present or may not be present during the particular time that the
Fund is engaging in proxy hedging. If the Fund enters into a currency hedging
transaction, the Fund will comply with the asset segregation requirements
described below.
Risks of Currency Transactions
Currency transactions are subject to risks different from those of other
portfolio transactions. Because currency control is of great importance to the
issuing governments and influences economic planning and policy, purchases and
sales of currency and related instruments can be negatively affected by
government exchange controls, blockages, and manipulations or exchange
restrictions imposed by governments. These can result in losses to the Fund if
it is unable to deliver or receive currency or funds in settlement of
obligations and could also cause hedges it has entered into to be rendered
useless, resulting in full currency exposure as well as incurring transaction
costs. Buyers and sellers of currency futures are subject to the same risks that
apply to the use of futures generally. Further, settlement of a currency futures
contract for the purchase of most currencies must occur at a bank based in the
issuing nation. Trading options on currency futures is relatively new, and the
ability to establish and close out positions on such options is subject to the
maintenance of a liquid market which may not always be available. Currency
exchange rates may fluctuate based on factors extrinsic to that country's
economy.
Combined Transactions
The Fund may enter into multiple transactions, including multiple options
transactions, multiple futures transactions, multiple currency transactions
(including forward currency contracts) and multiple interest rate transactions,
structured notes and any combination of futures, options, currency and interest
rate transactions ("component" transactions), instead of a single Strategic
Transaction, as part of a single or combined strategy when, in the opinion of
the Adviser it is in the best interests of the Fund to do so. A combined
transaction will usually contain elements of risk that are present in each of
its component transactions. Although combined transactions are normally entered
into based on the Adviser's judgment that the combined strategies will reduce
risk or otherwise more effectively achieve the desired portfolio management
goal, it is possible that the combination will instead increase such risks or
hinder achievement of the portfolio management objective.
Swaps, Caps, Floors and Collars
Among the Strategic Transactions into which the Fund may enter are interest
rate, currency and index swaps and the purchase or sale of related caps, floors
and collars. The Fund expects to enter into these transactions primarily for
hedging purposes, including, but not limited to, preserving a return or spread
on a particular investment or portion of its portfolio, protecting against
currency fluctuations, as a duration management technique or protecting against
an increase in the price of securities the Fund anticipates purchasing at a
later date. Swaps, caps, floors and collars may also be used to enhance
potential gain in circumstances where hedging is not involved although, as
described above, the Fund will attempt to limit its net loss exposure resulting
from swaps, caps, floors and collars and other Strategic Transactions entered
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into for such purposes to not more than 3% of the Fund's net assets at any one
time. The Fund will not sell interest rate caps, floors or collars where it does
not own securities or other instruments providing the income stream the Fund may
be obligated to pay. Interest rate swaps involve the exchange by the Fund with
another party of their respective commitments to pay or receive interest, e.g.,
an exchange of floating rate payments for fixed rate payments with respect to a
notional amount of principal. A currency swap is an agreement to exchange cash
flows on a notional amount of two or more currencies based on the relative value
differential among them and an index swap is an agreement to swap cash flows on
a notional amount based on changes in the values of the reference indices. The
purchase of a cap entitles the purchaser to receive payments on a notional
principal amount from the party selling such cap to the extent that a specified
index exceeds a predetermined interest rate or amount. The purchase of a floor
entitles the purchaser to receive payments on a notional principal amount from
the party selling such floor to the extent that a specified index falls below a
predetermined interest rate or amount. A collar is a combination of a cap and a
floor that preserves a certain rate of return within a predetermined range of
interest rates or values.
The Fund will usually enter into swaps on a net basis, i.e., the two
payment streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with the Fund receiving or paying, as the case may
be, only the net amount of the two payments. The Fund will not enter into any
swap, cap, floor or collar transaction unless, at the time of entering into such
transaction, the unsecured long-term debt of the Counterparty, combined with any
credit enhancements, is rated at least A by S&P or Moody's or has an equivalent
rating from a NRSRO or is determined to be of equivalent credit quality by the
Adviser. If there is a default by the Counterparty, the Fund may have
contractual remedies pursuant to the agreements related to the transaction. The
swap market has grown substantially in recent years with a large number of banks
and investment banking firms acting both as principals and as agents utilizing
standardized swap documentation. As a result, the swap market has become
relatively liquid. Caps, floors and collars are more recent innovations for
which standardized documentation has not yet been fully developed. Swaps, caps,
floors and collars are considered illiquid for purposes of the Fund's policy
regarding illiquid securities, unless it is determined, based upon continuing
review of the trading markets for the specific security, that such security is
liquid. The Board of Trustees has adopted guidelines and delegated to the
Adviser the daily function of determining and monitoring the liquidity of swaps,
caps, floors and collars. The Board of Trustees, however, retains oversight
focusing on factors such as valuation, liquidity and availability of information
and is ultimately responsible for such determinations. The Staff of the SEC
currently takes the position that swaps, caps, floors and collars are illiquid,
and are subject to the Fund's limitation on investing in illiquid securities.
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Eurodollar Instruments
The Fund may make investments in Eurodollar instruments. Eurodollar
instruments are U.S. dollar-denominated futures contracts or options thereon
which are linked to the London Interbank Offered Rate ("LIBOR"), although
foreign currency-denominated instruments are available from time to time.
Eurodollar futures contracts enable purchasers to obtain a fixed rate for the
lending of funds and sellers to obtain a fixed rate for borrowings. The Fund
might use Eurodollar futures contracts and options thereon to hedge against
changes in LIBOR, to which many interest rate swaps and fixed income instruments
are linked.
Risks of Strategic Transactions Outside the United States
When conducted outside the United States, Strategic Transactions may not be
regulated as rigorously as in the United States, may not involve a clearing
mechanism and related guarantees, and are subject to the risk of governmental
actions affecting trading in, or the prices of, foreign securities, currencies
and other instruments. The value of such positions also could be adversely
affected by: (i) lesser availability than in the United States of data on which
to make trading decisions, (ii) delays in the Fund's ability to act upon
economic events occurring in foreign markets during non-business hours in the
United States, (iii) the imposition of different exercise and settlement terms
and procedures and margin requirements than in the United States, (iv) lower
trading volume and liquidity, and (v) other complex foreign political, legal and
economic factors. At the same time, Strategic Transactions may offer advantages
such as trading in instruments that are not currently traded in the United
States or arbitrage possibilities not available in the United States.
Use of Segregated Accounts
The Fund will hold securities or other instruments whose values are
expected to offset its obligations under the Strategic Transactions. The Fund
will not enter into Strategic Transactions that expose the Fund to an obligation
to another party unless it owns either (i) an offsetting position in securities
or other options, futures contracts or other instruments or (ii) cash,
receivables or liquid, high grade debt securities with a value sufficient to
cover its potential obligations. The Fund may have to comply with any applicable
regulatory requirements designed to make sure that mutual funds do not use
leverage in Strategic Transactions, and if required, will set aside cash and
other assets in a segregated account with its custodian bank in the amount
prescribed. In that case, the Fund's custodian would maintain the value of such
segregated account equal to the prescribed amount by adding or removing
additional cash or other assets to account for fluctuations in the value of the
account and the Fund's obligations on the underlying Strategic Transaction.
Assets held in a segregated account would not be sold while the Strategic
Transaction is outstanding, unless they are replaced with similar assets. As a
result, there is a possibility that segregation of a large percentage of the
Fund's assets could impede portfolio management or the Fund's ability to meet
redemption requests or other current obligations.
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Money Market Instruments and Repurchase Agreements
Money market instruments include short-term U.S. Government securities,
commercial paper (promissory notes issued by corporations to finance their
short-term credit needs), negotiable certificates of deposit, non-negotiable
fixed time deposits, bankers' acceptances, floating rate notes and repurchase
agreements.
U.S. Government securities include securities which are direct obligations
of the U.S. Government backed by the full faith and credit of the United States,
and securities issued by agencies and instrumentalities of the U.S. Government,
which may be guaranteed by the U.S. Treasury or supported by the issuer's right
to borrow from the Treasury and may be backed by the credit of the federal
agency or instrumentality itself. Agencies and instrumentalities of the U.S.
Government include, but are not limited to Federal Land Banks, the Federal Farm
Credit Bank, the Central Bank for Cooperatives, Federal Intermediate Credit
Banks, Federal Home Loan Banks and the Federal National Mortgage Association.
Investments in commercial paper will be rated "Prime-1" by Moody's or "A-1"
by Standard & Poor's , or Duff 1+ by Duff & Phelps, which are the highest
ratings assigned by these rating services (even if rated lower by one or more of
the other agencies), or which, if not rated or rated lower by one or more of the
agencies and not rated by the other agency or agencies, are judged by the
Adviser to be of equivalent quality to the securities so rated. In determining
whether securities are of equivalent quality, the Adviser may take into account,
but will not rely entirely on, ratings assigned by foreign rating agencies.
A repurchase agreement is an agreement under which the Fund acquires money
market instruments (generally U.S. Government securities, bankers' acceptances
or certificates of deposit) from a commercial bank, broker or dealer, subject to
resale to the seller at an agreed-upon price and date (normally the next
business day). The resale price reflects an agreed-upon interest rate effective
for the period the instruments are held by the Fund and is unrelated to the
interest rate on the instruments. The instruments acquired by the Fund
(including accrued interest) must have an aggregate market value in excess of
the resale price and will be held by the Fund's custodian bank until they are
repurchased. The Trustees will consider the standards which the Adviser will use
in reviewing the creditworthiness of any party to a repurchase agreement with
the Fund.
The use of repurchase agreements involves certain risks. For example, if
the seller defaults on its obligation to repurchase the instruments acquired by
the Fund at a time when their market value has declined, the Fund may incur a
loss. If the seller becomes insolvent or subject to liquidation or
reorganization under bankruptcy or other laws, a court may determine that the
instruments acquired by the Fund are collateral for a loan by the Fund and
therefore are subject to sale by the trustee in bankruptcy. Finally, it is
possible that the Fund may not be able to substantiate its interest in the
instruments it acquires. While the Trustees acknowledge these risks, it is
expected that they can be controlled through careful documentation and
monitoring.
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Portfolio Turnover
It is not the policy of the Fund to purchase or sell securities for trading
purposes. However, the Fund places no restrictions on portfolio turnover and it
may sell any portfolio security without regard to the period of time it has been
held, except as may be necessary to maintain its status as a regulated
investment company under the Internal Revenue Code.
The Fund may therefore generally change its portfolio investments at
any time in accordance with the Adviser's appraisal of factors affecting any
particular issuer or market, or the economy in general.
INVESTMENT RESTRICTIONS
The Fund has adopted the following fundamental policies in addition to
those described under "Investment Objective and Policies & Investment
Restrictions" in the Prospectus. The Fund's fundamental policies cannot be
changed unless the change is approved by the lesser of (i) 67% or more of the
voting securities present at a meeting, if the holders of more than 50% of the
outstanding voting securities of the Fund are present or represented by proxy,
or (ii) more than 50% of the outstanding voting securities of the Fund. The Fund
may not:
1. Invest, with respect to at least 75% of its total assets, more than 5% in
the securities of any one issuer (other than the U.S. Government, its
agencies or instrumentalities) or acquire more than 10% of the outstanding
voting securities of any issuer.
2. Issue senior securities, borrow money or securities or pledge or mortgage
its assets, except that the Fund may (a) borrow money from banks as a
temporary measure for extraordinary or emergency purposes (but not for
investment purposes) in an amount up to 15% of the current value of its
total assets, (b) enter into forward roll transactions and (c) pledge its
assets to an extent not greater than 15% of the current value of its total
assets to secure such borrowings; however, the Fund may not make any
additional investments while its outstanding bank borrowings exceed 5% of
the current value of its total assets.
3. Lend portfolio securities, except that the Fund may enter into repurchase
agreements with respect to 15% of the value of its net assets.
4. Invest more than 25% of the current value of its total assets in any
single industry except the real estate industry.
5. Underwrite the securities of other issuers, except to the extent that in
connection with the disposition of portfolio securities the Fund may be
deemed to be an underwriter under the Securities Act of 1933.
6. Purchase securities on margin (except that the Fund may obtain such
short-term credits as may be necessary for the clearance of purchases and
sales of securities).
7. Purchase or sell commodities, commodity contracts, or real estate, except
that the Fund may purchase and sell obligations which are secured by real
estate or by mortgages on real estate, securities of issuers which invest
or deal in real estate, or have a call on real estate or are convertible
into real estate, and the Fund may purchase and sell financial futures
contracts and options on financial futures contracts and engage in foreign
currency exchange transactions.
17
<PAGE>
8. Purchase the securities of other investment companies, except that the
Fund may make such a purchase (a) in the open market involving no
commission or profit to a sponsor or dealer (other than the customary
broker's commission), provided that immediately thereafter (i) not more
than 10% of the Fund's total assets would be invested in such securities,
(ii) not more than 5% of the Fund's total assets would be invested in the
securities of any one investment company and (iii) not more than 3% of the
voting stock of any one investment company would be owned by the Fund, or
(b) as part of a merger, consolidation, or acquisition of assets.
The following restrictions are not fundamental policies and may be changed
by the Trustees without shareholder approval, in accordance with applicable
laws, regulations or regulatory policy. The Fund may not:
a. Make short sales of securities unless (a) after effect is given to any
such short sale, the total market value of all securities sold short would
not exceed 5% of the value of the Fund's net assets or (b) at all times
during which a short position is open it owns an equal amount of such
securities, or by virtue of ownership of convertible or exchangeable
securities it has the right to obtain through the conversion or exchange
of such other securities an amount equal to the securities sold short.
b. Invest in companies for the purpose of exercising control or management.
c. Purchase or write options, except as described under "Strategic
Transactions".
d. Invest in interests in oil, gas or other exploration or development
programs.
e. Invest more than 5% of the assets of the Fund in the securities of any
issuers which together with their corporate parents have records of less
than three years' continuous operation, including the operation of any
predecessor, other than obligations issued or guaranteed by the U.S.
Government or its agencies or insured in full or in part by a private
mortgage insurer, and securities fully collateralized by such securities.
f. Invest in securities of any company if any officer or director (Trustee)
of the Trust or of the Fund's investment adviser owns more than 1/2 of 1%
of the outstanding securities of such company and such officers and
directors (Trustees) own in the aggregate more than 5% of the securities
of such company.
g. Invest more than an aggregate of 15% of the net assets of the Fund in (a)
repurchase agreements which are not terminable within seven days, (b)
securities subject to legal or contractual restrictions on resale or for
which there are no readily available market quotations, and (c) in other
illiquid securities.
18
<PAGE>
If any percentage restriction described above is adhered to at the time of
investment, a subsequent increase or decrease in the percentage resulting from a
change in the value of the Fund's assets will not constitute a violation of the
restriction, except with respect to restriction (f) above.
In order to permit the sale of shares of the Fund in certain states, the
Board may, in its sole discretion, adopt restrictions on investment policy more
restrictive than those described above. Should the Board determine that any such
more restrictive policy is no longer in the best interest of the Fund and its
shareholders, the Fund may cease offering shares in the state involved and the
Board may revoke such restrictive policy. Moreover, if the states involved shall
no longer require any such restrictive policy, the Board may, in its sole
discretion, revoke such policy.
CALCULATION OF PERFORMANCE DATA
As indicated in the Prospectus, the Fund may, from time to time, advertise
certain total return and yield information. The average annual total return of
the Fund for a period is computed by subtracting the net asset value per share
at the beginning of the period from the net asset value per share at the end of
the period (after adjusting for the reinvestment of any income dividends and
capital gain distributions), and dividing the result by the net asset value per
share at the beginning of the period. In particular, the average annual total
return of the Fund ("T") is computed by using the redeemable value at the end of
a specified period of time ("ERV") of a hypothetical initial investment of
$1,000 ("P") over a period of time ("n") according to the formula P(1+T)n=ERV.
The yield of the Fund is computed by dividing the net investment income per
share earned during the period stated in the advertisement by the maximum
offering price per share on the last day of the period. For the purpose of
determining net investment income, the calculation includes, among expenses of
the Fund, all recurring fees that are charged to all shareholder accounts and
any non-recurring charges for the period stated. In particular, yield is
determined according to the following formula:
Yield = 2[((A - B + 1)/CD)^6 - 1]
Where: A equals dividends and interest earned during the period; B equals
expenses accrued for the period (net of reimbursements); C equals average daily
number of shares outstanding during the period that were entitled to receive
dividends; D equals the maximum offering price per share on the last day of the
period.
The average annual total return quotations for the Fund for the one and
five year periods ended December 31, 1995, and since inception (August 31, 1989
to December 31, 1995) are 16.32%, 8.53% and 9.20%, respectively, and the average
annualized yield for the thirty day period ended December 31, 1995 was 6.89%.
The Fund may also quote non-standardized yield, such as yield-to-maturity
("YTM"). YTM represents the rate of return an investor will receive if a
long-term, interest bearing investment, such as a bond, is held to its maturity
date. YTM does not take into account purchase price, redemption value, time to
maturity, coupon yield, and the time between interest payments.
19
<PAGE>
In addition to average annual return and yield quotations, the Fund may
quote quarterly and annual performance on a net (with management and
administration fees deducted) and gross basis as follows:
Quarter/Year Net Gross
- - --------------------------------------------------------------------------------
3/89 0.00% (0.04)%
4/89 4.01 4.17
1989 4.01 4.21
1/90 0.45 0.57
2/90 3.58 3.69
3/90 1.29 1.40
4/90 5.79 5.91
1990 11.49 11.99
1/91 2.89 3.00
2/91 1.84 1.95
3/91 5.16 5.27
4/91 4.90 5.03
1991 15.57 16.10
1/92 (1.58) (1.47)
2/92 4.38% 4.49%
3/92 1.80 1.91
4/92 (.49) (.38)
1992 4.07 4.52
1/93 4.37 4.48
2/93 2.56 2.67
3/93 2.38 2.49
4/93 0.38 0.49
1993 10.02 10.48
1/94 (2.53) (2.42)
2/94 (0.83) (0.72)
3/94 0.89 1.00
4/94 0.33 0.44
1994 (2.16) (1.72)
1/95 4.78 4.89
2/95 5.31 5.43
3/95 2.16 2.27
4/95 3.19 3.32
1995 16.32 16.85
20
<PAGE>
These performance quotations should not be considered as representative of
the Fund's performance for any specified period in the future.
The Fund's performance may be compared in sales literature to the
performance of other mutual funds having similar objectives or to standardized
indices or other measures of investment performance. In particular, the Fund may
compare its performance to the Salomon Mortgage Index and the Shearson Mortgage
Index, which are considered to be representative of the performance of fixed
rate securitized mortgage pools of GNMA, FNMA and FHLMC securities, and the
Lehman Brothers Aggregate Index which is composed of securities from the Lehman
Brothers Government/Corporate Bond Index, Mortgage Backed Securities Index and
Yankee Bond Index, and is generally considered to be representative of all
unmanaged, domestic, dollar denominated, fixed rate investment grade bonds.
Comparative performance may also be expressed by reference to a ranking prepared
by a mutual fund monitoring service or by one or more newspapers, newsletters or
financial periodicals. Performance comparisons may be useful to investors who
wish to compare the Fund's past performance to that of other mutual funds and
investment products. Of course, past performance is not a guarantee of future
results.
21
<PAGE>
MANAGEMENT
Trustees and Officers
The Trustees and executive officers of the Trust are listed below. All
executive officers of the Trust are affiliates of Standish, Ayer & Wood, Inc.,
the Fund's investment adviser.
<TABLE>
<CAPTION>
Name, Address and Date of Birth Position Held Principal Occupation
With Trust During Past 5 Years
- - --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
*D. Barr Clayson, 7/29/35 Vice President and Trustee Vice President and Managing Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.;
One Financial Center Chairman and Director,
Boston, MA 02111 Standish International
Management Company, L.P.
Samuel C. Fleming, 9/30/40 Trustee Chairman of the Board
c/o Decision Resources, Inc. and Chief Executive Officer,
1100 Winter Street Decision Resources, Inc.;
Waltham, MA 02154 through 1989, Senior V.P.
Arthur D. Little
Benjamin M. Friedman, 8/5/44 Trustee William Joseph Maier
c/o Harvard University Professor of Political Economy,
Cambridge, MA 02138 Harvard University
John H. Hewitt, 4/11/35 Trustee Trustee, The Peabody Foundation; Trustee,
P.O. Box 307 Visiting Nurse Alliance of Vermont
So. Woodstock, VT 05071 and New Hampshire
*Edward H. Ladd, 1/3/38 Trustee and Vice President Chairman of the Board
c/o Standish, Ayer & Wood, Inc. and Managing Director,
One Financial Center Standish, Ayer & Wood, Inc. since 1990;
Boston, MA 02111 formerly President of Standish, Ayer & Wood, Inc.
Director of
Standish International Management Company, L.P.
Caleb Loring III, 11/14/43 Trustee Trustee, Essex Street Associates
c/o Essex Street Associates (family investment trust office);
P.0. Box 5600 Director, Holyoke Mutual Insurance Company
Beverly Farms, MA 01915
*Richard S. Wood, 5/21/54 President and Trustee Vice President, Secretary,
c/o Standish, Ayer & Wood, Inc. and Managing Director,
One Financial Center Standish, Ayer & Wood, Inc.;
Boston, MA 02111 Executive Vice President and Director,
Standish International Management Company, L.P.
Richard C. Doll, 7/8/48 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center Vice President and Director,
Boston, MA 02111 Standish International Management Company, L.P.
James E. Hollis III, 11/21/48 Executive Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
David W. Murray, 5/5/40 Treasurer and Secretary Vice President, Treasurer and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center Treasurer,
Boston, MA 02111 Standish International Management Company, L.P.
22
<PAGE>
Name, Address and Date of Birth Position Held Principal Occupation
With Trust During Past 5 Years
- - --------------------------------------------------------------------------------------------------------------------
Caleb F. Aldrich, 9/20/57 Vice President Vice President and Managing Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA O2111
Beverly E. Banfield, 7/6/56 Vice President Vice President and Compliance Officer,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.;
One Financial Center Assistant Vice President and Compliance Officer,
Boston, MA 02111 Freedom Capital Management Corp.
(1989-1992)
Nicholas S. Battelle, 6/24/42 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Walter M. Cabot, 1/16/33 Vice President Senior Advisor and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.;
One Financial Center prior to 1991, President,
Boston, MA 02111 Harvard Management Company
Senior Advisor and Director of
Standish International Management Company, L.P.
David H. Cameron, 11/2/55 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center Director of
Boston, MA 02111 Standish International Management
Company, L.P.
Karen K. Chandor, 2/13/50 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Lavinia B. Chase, 6/4/46 Vice President Vice President,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Susan B. Coan, 5/1/52 Vice President Vice President,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA O2111
W. Charles Cook II, 7/16/63 Vice President Vice President,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center Vice President,
Boston, MA 02111 Standish International Management Company, L.P.
Joseph M. Corrado, 5/13/55 Vice President Vice President and Associate Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
23
<PAGE>
Name, Address and Date of Birth Position Held Principal Occupation
With Trust During Past 5 Years
- - --------------------------------------------------------------------------------------------------------------------
Dolores S. Driscoll, 2/17/48 Vice President Vice President and Managing Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center Director,
Boston, MA 02111 Standish International Management Company, L.P.
Mark A. Flaherty, 4/24/59 Vice President Vice President,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center Vice President
Boston, MA 02111 Standish International Management Company, L.P.
Maria D. Furman, 2/3/54 Vice President Vice President and Managing Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center Vice President and Director,
Boston, MA 02111 Standish International Management Company, L.P.
Anne P. Herrmann, 1/26/56 Vice President Mutual Fund Administrator,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Ann S. Higgins, 4/8/35 Vice President Vice President,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Denise B. Kneeland, 8/19/51 Vice President Senior Operations, Manager,
c/o Standish, Ayer &Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center since December 1995 formerly
Boston, MA 02111 Vice President Scudder, Stevens and Clark
Raymond J. Kubiak, 9/3/57 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Phillip D. Leonardi, 4/24/62 Vice President Vice President, Standish, Ayer & Wood, Inc.
c/o Standish, Ayer & Wood, Inc. since November 1993; formerly, Investment Sales,
One Financial Center Cigna Corporation (1993) and
Boston, MA 02111 Travelers Corporation (1984-1993)
Laurence A. Manchester, 5/24/43 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
George W. Noyes, 11/12/44 Vice President President and Managing Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center Director of
Boston, MA 02111 Standish International Management Company, L.P.
Arthur H. Parker, 8/12/35 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Jennifer A. Pline, 3/8/60 Vice President Vice President,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
24
<PAGE>
Name, Address and Date of Birth Position Held Principal Occupation
With Trust During Past 5 Years
- - --------------------------------------------------------------------------------------------------------------------
Howard B. Rubin, 10/29/59 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center Executive Vice President and Director
Boston, MA 02111 Standish International Management Company, L.P.
Michael C. Schoeck, 10/24/55 Vice President Vice President,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc. since August, 1993;
One Financial Center formerly, Vice President,
Boston, MA 02111 Commerzbank, Frankfurt, Germany
Vice President,
Standish International Management Company, L.P.
Austin C. Smith, 7/25/52 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Stephen A. Smith, 3/13/49 Vice President Vice President, since November 2, 1993;
c/o Standish, Ayer & Wood, Inc. formerly, Standish, Ayer & Wood, Inc. Consultant
One Financial Center Cambridge Associates
Boston, MA 02111
David C. Stuehr, 3/1/58 Vice President Vice President,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
James W. Sweeney, 5/15/59 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center Executive Vice President and Director,
Boston, MA 02111 Standish International Management Company, L.P.
Ralph S. Tate, 4/2/47 Vice President Vice President and Managing Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc. since April, 1990;
One Financial Center formerly Vice President, Aetna Life & Casualty
Boston, MA 02111 President and Director,
Standish International Management Company, L.P.
Michael W. Thompson, 3/31/56 Vice President Vice President and Associate Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Christopher W. Van Alstyne, 3/24/60 Vice President Vice President,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.;
One Financial Center Formerly Regional Marketing Director,
Boston, MA 02111 Gabelli-O'Connor Fixed Income Management
*Indicates that Trustee is an interested person of the Trust for purposes
of the 1940 Act. Compensation of Trustees and Officers
</TABLE>
25
<PAGE>
Compensation of Trustees and Officers
The Fund pays no compensation to the Trust's Trustees affiliated with the
Adviser or the Trust's officers. None of the Trust's Trustees or officers have
engaged in any financial transactions (other than the purchase or redemption of
the Fund's shares) with the Trust or the Adviser.
The following table sets forth all compensation paid to the Trust's
Trustees as of the Fund's fiscal year ended December 31, 1995:
<TABLE>
<CAPTION>
Pension or Retirement Total Compensation
Aggregate Compensation Benefits Accrued as from Fund and
Name of Trustee from the Fund Part of Fund's Expenses Other Funds in Complex*
- - --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
D. Barr Clayson $0 $0 $0
Phyllis L. Cothran** 0 0 0
Richard C. Doll*** 0 0 0
Samuel C. Fleming 658 0 46,000
Benjamin M. Friedman 600 0 41,750
John H. Hewitt 600 0 41,750
Edward H. Ladd 0 0 0
Caleb Loring, III 600 0 41,750
Richard S. Wood 0 0 0
* As of the date of this Statement of Additional Information there were 18 funds in the fund complex.
** Ms. Cothran resigned as a Trustee effective January 31, 1995.
*** Mr. Doll regisned as a trustee effective December 6, 1995.
</TABLE>
Certain Shareholders
At February 1, 1996, Trustees and officers of the Trust as a group
beneficially owned (i.e., had voting and/or investment power) less than 1% of
the then outstanding shares of the Fund. At that date, each of the following
persons beneficially owned 5% or more of the then outstanding shares of the
Fund:
Percentage of
Name and Address Outstanding Shares
- - --------------------------------------------------------------------------------
Allendale Mutual Insurance Company 76%
Allendale Park
P.O. Box 7500
Johnston, RI 02919
Colonial Williamsburg Pension 9%
The Colonial Williamsburg Foundation
P.O. Box C
Williamsburg, VA 23187
Potter & Co. A/C 43922020 7%
Bank of Boston
150 Royall Way
Canton, MA
26
<PAGE>
As long as Allendale Mutual Insurance Company is entitled to vote so large
a percentage of the outstanding shares of the Fund, that Company will determine
whether a proposal submitted to the shareholders of the Fund will be approved or
disapproved.
Investment Adviser
Standish, Ayer & Wood, Inc. serves as investment adviser to the Fund
pursuant to a written investment advisory agreement. The Adviser is a
Massachusetts corporation organized in 1933 and is registered under the
Investment Advisers Act of 1940.
The following, constituting all of the Directors and all of the
shareholders of the Adviser, are the controlling persons of the Adviser: Caleb
F. Aldrich, Nicholas S. Battelle, Walter M. Cabot, Sr., David H. Cameron, Karen
K. Chandor, D. Barr Clayson, Richard C. Doll, Dolores S. Driscoll, Mark A.
Flaherty, James E. Hollis III, Raymond J. Kubiak, Edward H. Ladd, Laurence A.
Manchester, David W. Murray, George W. Noyes, Maria D. Furman, Arthur H. Parker,
Howard B. Rubin, David C. Stuehr, Austin C. Smith, James J. Sweeney and Richard
S. Wood.
Certain services provided by the Adviser under the advisory agreement are
described in the Prospectus. In addition to those services, the Adviser provides
the Fund with office space for managing its affairs, with the services of
required executive personnel, and with certain clerical services and facilities.
These services are provided without reimbursement by the Fund for any costs
incurred. Under the investment advisory agreement, the Adviser is paid a fee
based upon a percentage of the Fund's average daily net asset value computed as
described in the Prospectus. This fee is paid monthly. The Adviser has
voluntarily agreed to limit the Fund's total operating expenses (excluding
brokerage commissions, taxes and extraordinary expenses) to 0.45% of the Fund's
average daily net assets. The Adviser may discontinue or modify such limitation
in the future at its discretion, although it has no current intention to do so.
For services to the Fund for the fiscal year ended December 31, 1993, the
Adviser voluntarily did not impose $28,494 of its fee, which would otherwise
have been $218,785. For services to the Fund for the fiscal year ended December
31, 1994, the Adviser voluntarily did not impose $24,168, of its fee, which
would otherwise have been $173,421. For services to the Fund for the fiscal year
ended December 1, 1995, the Adviser voluntarily did not impose $31,998 of its
fee, which would otherwise have been $139,890.
27
<PAGE>
Pursuant to the investment advisory agreement, the Fund bears expenses of
its operations other than those incurred by the Adviser pursuant to the
investment advisory agreement. Among other expenses, the Fund will pay share
pricing and shareholder servicing fees and expenses; custodian fees and
expenses; legal and auditing fees and expenses; expenses of prospectuses,
statements of additional information and shareholder reports; registration and
reporting fees and expenses; and Trustees' fees and expenses. The advisory
agreement provides that if the total expenses of the Fund in any fiscal year
exceed the most restrictive expense limitation applicable to the Fund in any
state in which shares of the Fund are then qualified for sale, the compensation
due the Adviser shall be reduced by the amount of the excess, by a reduction or
refund thereof at the time such compensation is payable after the end of each
calendar month during the fiscal year, subject to readjustment during the year.
Currently, the most restrictive state expense limitation provision limits the
Fund's expenses to 2 1/2% the first $30 million of average net assets, 2% of the
next $70 million of such net assets and 1 1/2% of such net assets in excess of
$100 million.
Unless terminated as provided below, the investment advisory agreement
continues in full force and effect for successive periods of one year, but only
so long as each such continuance is approved annually (i) by either the Trustees
of the Trust or by vote of a majority of the outstanding voting securities (as
defined in the 1940 Act) of the Fund, and, in either event (ii) by vote of a
majority of the Trustees of the Trust who are not parties to the investment
advisory agreement or "interested persons" (as defined in the 1940 Act) of any
such party, cast in person at a meeting called for the purpose of voting on such
approval. The investment advisory agreement may be terminated at any time
without the payment of any penalty by vote of the Trustees of the Trust or by
vote of a majority of the outstanding voting securities (as defined in the 1940
Act) of the Fund or by the Adviser, on sixty days' written notice to the other
parties. The investment advisory agreement terminates in the event of its
assignment as defined in the 1940 Act.
In an attempt to avoid any potential conflict with portfolio transactions
for the Fund, the Adviser and the Trust have adopted extensive restrictions on
personal securities trading by personnel of the Adviser and its affiliates.
These restrictions include: pre-clearance of all personal securities
transactions and a prohibition of purchasing initial public offerings of
securities. These restrictions are a continuation of the basic principle that
the interests of the Fund and its shareholders come before those of the Adviser,
its affiliates and their employees.
Distributor of the Trust
Standish Fund Distributors, L.P. (the "Principal Underwriter"), an
affiliate of the Adviser, serves as the Trust's exclusive principal underwriter
and holds itself available to receive purchase orders for the Fund's shares. In
that capacity, the Principal Underwriter has been granted the right, as agent of
the Trust, to solicit and accept orders for the purchase of the Fund's shares in
accordance with the terms of the Underwriting Agreement between the Trust and
the Principal Underwriter. Pursuant to the Underwriting Agreement, the Principal
28
<PAGE>
Underwriter has agreed to use its best efforts to obtain orders for the
continous offering of the Fund's shares. The Principal Underwriter receives no
commissions or other compensation for its services, and has not received any
such amounts in any prior year. The Underwriting Agreement shall continue in
effect with respect to the Fund until two years after its execution and for
successive periods of one year thereafter only if it is approved at least
annually thereafter (i) by a vote of the holders of a majority of the Fund's
outstanding shares or by the Trustees of the Trust or (ii) by a vote of a
majority of the Trustees of the Trust who are not "interested persons" (as
defined by the 1940 Act) of the parties to the Underwriting Agreement, cast in
person at a meeting called for the purpose of voting on such approval. The
Underwriting Agreement will terminate automatically if assigned by either party
thereto and is terminable at any time without penalty by a vote of a majority of
the Trustees of the Trust, a vote of a majority of the Trustees who are not
"interested persons" of the Trust, or by a vote of the holders of a majority of
the Fund's outstanding shares, in any case without payment of any penalty on not
more than 60 days' written notice to the other party. The offices of the
Principal Underwriter are located at One Financial Center, 26th Floor, Boston,
Massachusetts 02111.
REDEMPTION OF SHARES
Detailed information on redemption of shares is included in the Prospectus.
The Fund may suspend the right to redeem shares or postpone the date of
payment upon redemption for more than seven days (i) for any period during which
the New York Stock Exchange is closed (other than customary weekend or holiday
closings) or trading on the exchange is restricted; (ii) for any period during
which an emergency exists as a result of which disposal by the Fund of
securities owned by it or determination by the Fund of the value of its net
assets is not reasonably practicable; or (iii) for such other periods as the
Securities and Exchange Commission may permit for the protection of shareholders
of the Fund.
The Fund intends to pay in cash for all shares redeemed, but under certain
conditions, the Fund may make payment wholly or partly in portfolio securities.
Portfolio securities paid upon redemption of Fund shares will be valued at their
then current market value. The Fund has elected to be governed by the provisions
of Rule 18f-1 under the 1940 Act which limits the Fund's obligtion to make cash
redemption payments to any shareholder during any 90-day period to the lesser of
$250,000 or 1% of the Fund's net asset value at the beginning of such period. An
investor may incur brokerage costs in converting portfolio securities received
upon redemption to cash.
PORTFOLIO TRANSACTIONS
The Adviser is responsible for placing the Fund's portfolio transactions
and will do so in a manner deemed fair and reasonable to the Fund and not
according to any formula. The primary consideration in all portfolio
transactions will be prompt execution of orders in an efficient manner at the
most favorable price. In selecting broker-dealers and in negotiating
commissions, the Adviser will consider the firm's reliability, the quality of
its execution services on a continuing basis and its financial condition. When
more than one firm is believed to meet these criteria, preference may be given
to firms which also sell shares of the Fund. In addition, if the Adviser
determines in good faith that the amount of commissions charged by a broker is
reasonable in relation to the value of the brokerage and research services
29
<PAGE>
provided by such broker, the Fund may pay commissions to such broker in an
amount greater than the amount another firm may charge. Research services may
include (i) furnishing advice as to the value of securities, the advisability of
investing in, purchasing or selling securities, and the availability of
securities or purchasers or sellers of securities, (ii) furnishing analyses and
reports concerning issuers, industries, securities, economic factors and trends,
portfolio strategy, and the performance of accounts, and (iii) effecting
securities transactions and performing functions incidental thereto (such as
clearance, settlement and custody). Research services furnished by firms through
which the Fund effects its securities transactions may be used by the Adviser in
servicing its other accounts; not all of these services may be used by the
Adviser in connection with the Fund. The investment advisory fee paid by the
Fund under the advisory agreement will not be reduced as a result of the
Adviser's receipt of research services.
The Adviser also places portfolio transactions for other advisory accounts.
The Adviser will seek to allocate portfolio transactions equitably whenever
concurrent decisions are made to purchase or sell securities for the Fund and
another advisory account. In some cases, this procedure could have an adverse
effect on the price or the amount of securities available to the Fund. In making
such allocations, the main factors considered by the Adviser will be the
respective investment objectives, the relative size of portfolio holdings of the
same or comparable securities, the availability of cash for investment, the size
of investment commitments generally held, and opinions of the persons
responsible for recommending the investment.
FEDERAL INCOME TAXES
Each series of the Trust, including the Fund, is treated as a separate
entity for accounting and tax purposes. The Fund has qualified and elected to be
treated as a "regulated investment company" under Subchapter M of the Internal
Revenue Code of 1986, as amended (the "Code"), and intends to continue to so
qualify in the future. As such and by complying with the applicable provisions
of the Code regarding the sources of its income, the timing of its
distributions, and the diversification of its assets, the Fund will not be
subject to Federal income tax on its investment company taxable income (i.e.,
all income, after reduction by deductible expenses, other than its "net capital
gain," which is the excess, if any, of its net long-term capital gain over its
net short-term capital loss) and net capital gain which are distributed to
shareholders at least annually in accordance with the timing requirements of the
Code.
The Fund will be subject to a 4% non-deductible federal excise tax on
certain amounts not distributed (and not treated as having been distributed) on
a timely basis in accordance with annual minimum distribution requirements. The
Fund intends under normal circumstances to avoid liability for such tax by
satisfying such distribution requirements.
The Fund is not subject to Massachusetts corporate excise or franchise
taxes. Provided that the Fund qualifies as a regulated investment company under
the Code, it will also not be required to pay any Massachusetts income tax.
30
<PAGE>
The Fund will not distribute net long-term capital gains realized in any
year to the extent that a capital loss is carried forward from prior years
against such gain. For federal income tax purposes, the Fund is permitted to
carry forward a net capital loss in any year to offset its own net capital
gains, if any, during the eight years following the year of the loss. To the
extent subsequent net capital gains are offset by such losses, they would not
result in federal income tax liability to the Fund and, as noted above, would
not be distributed as such to shareholders. The Fund has $1,745,441 of capital
loss carryforwards, which expire on December 31, 2002, available to offset
future net capital gains.
If the Fund invests in certain zero coupon securities, increasing rate
securities or, in general, other securities with original issue discount (or
with market discount if the Fund elects to include market discount in income
currently), the Fund must accrue income on such investments prior to the receipt
of the corresponding cash payments. However, the Fund must distribute, at least
annually, all or substantially all of its net income, including such accrued
income, to shareholders to qualify as a regulated investment company under the
Code and avoid federal income and excise taxes. Therefore, the Fund may have to
dispose of its portfolio securities under disadvantageous circumstances to
generate cash, or may have to leverage itself by borrowing the cash, to satisfy
distribution requirements.
Limitations imposed by the Code on regulated investment companies like the
Fund may restrict the Fund's ability to enter into futures, options and currency
forward transactions.
Certain options, futures and forward foreign currency transactions
undertaken by the Fund may cause the Fund to recognize gains or losses from
marking to market even though its positions have not been sold or terminated and
affect the character as long-term or short-term (or, in the case of certain
currency forwards, options and futures, as ordinary income or loss) and timing
of some capital gains and losses realized by the Fund. Any net mark to market
gains may also have to be distributed to satisfy the distribution requirements
referred to above even though no corresponding cash amounts may concurrently be
received, possibly requiring the disposition of portfolio securities or
borrowing to obtain the necessary cash. Also, certain of the Fund's losses on
its transactions involving options, futures or forward contracts and/or
offsetting portfolio positions may be deferred rather than being taken into
account currently in calculating the Fund's taxable income or gain. Certain of
the applicable tax rules may be modified if the Fund is eligible and chooses to
make one or more of certain tax elections that may be available. These
transactions may therefore affect the amount, timing and character of the Fund's
distributions to shareholders. The Fund will take into account the special tax
rules (including consideration of available elections) applicable to options,
futures or forward contracts in order to minimize any potential adverse tax
consequences.
The federal income tax rules applicable to mortgage dollar rolls and
interest rate or currency swaps, caps, floors and collars are unclear in certain
respects, and the Fund may be required to account for these instruments under
tax rules in a manner that, under certain circumstances, may limit its
transactions in these instruments.
31
<PAGE>
Foreign exchange gains and losses realized by the Fund in connection with
certain transactions involving foreign currency-denominated debt securities, if
any, certain foreign currency futures and options, foreign currency forward
contracts, foreign currencies, or payables or receivables denominated in a
foreign currency are subject to Section 988 of the Code, which generally causes
such gains and losses to be treated as ordinary income and losses and may affect
the amount, timing and character of distributions to shareholders. Any such
transactions that are not directly related to the Fund's investment in stock or
securities, possibly including speculative currency positions or currency
derivatives not used for hedging purposes, may increase the amount of gain it is
deemed to recognize from the sale of certain investments held for less than
three months, which gain is limited under the Code to less than 30% of its
annual gross income, and could under future Treasury regulations produce income
not among the types of "qualifying income" from which the Fund must derive at
least 90% of its annual gross income.
The Fund may be subject to withholding and other taxes imposed by foreign
countries with respect to its investments in foreign securities. Tax conventions
between certain countries and the U.S. may reduce or eliminate such taxes.
Investors would be entitled to claim U.S. foreign tax credits with respect to
such taxes, subject to certain provisions and limitations contained in the Code,
only if more than 50% of the value of the Fund's total assets at the close of
any taxable year were to consist of stock or securities of foreign corporations
and the Fund were to file an election with the Internal Revenue Service. Because
the Fund will not meet this 50% requirement, investors will not directly take
into account the foreign taxes, if any, paid by the Fund, and will not be
entitled to any related tax deductions or credits. Such taxes will reduce the
amounts the Fund would otherwise have available to distribute.
Due to possible unfavorable consequences under present tax law, the Fund
does not currently intend to acquire "residual" interests in real estate
mortgage investment conduits ("REMICs"), although the Fund may acquire "regular"
interests in REMICs.
Distributions from the Fund's current or accumulated earnings and profits
("E&P"), as computed for Federal income tax purposes, will be taxable as
described in the Fund's Prospectus whether taken in shares or in cash.
Distributions, if any, in excess of E&P will constitute a return of capital,
which will first reduce an investor's tax basis in Fund shares and thereafter
(after such basis is reduced to zero) will generally give rise to capital gains.
Shareholders electing to receive distributions in the form of additional shares
will have a cost basis for federal income tax purposes in each share so received
equal to the amount of cash they would have received had they elected to receive
the distributions in cash, divided by the number of shares received.
At the time of an investor's purchase of Fund shares, a portion of the
purchase price is often attributable to undistributed net investment income
and/or realized or unrealized appreciation in the Fund's portfolio.
Consequently, subsequent distributions from such income and/or appreciation may
be taxable to such investor even if the net asset value of the investor's shares
is, as a result of the distributions, reduced below the investor's cost for such
shares, and the distributions in reality represent a return of a portion of the
purchase price.
32
<PAGE>
Upon a redemption (including a repurchase) of shares of the Fund, a
shareholder may realize a taxable gain or loss, depending upon the difference
between the redemption proceeds and the shareholder's tax basis in his shares.
Such gain or loss will be treated as capital gain or loss if the shares are
capital assets in the shareholder's hands and will be long-term or short-term,
depending upon the shareholder's tax holding period for the shares. Any loss
realized on a redemption may be disallowed to the extent the shares disposed of
are replaced within a period of 61 days beginning 30 days before and ending 30
days after the shares are disposed of, such as pursuant to automatic dividend
reinvestments. In such a case, the basis of the shares acquired will be adjusted
to reflect the disallowed loss. Any loss realized upon the redemption of shares
with a tax holding period of six months or less will be treated as a long-term
capital loss to the extent of any amounts treated as distributions of long-term
capital gain with respect to such shares.
Different tax treatment, including penalties on certain excess
contributions and deferrals, certain pre-retirement and post-retirement
distributions and certain prohibited transactions, is accorded to accounts
maintained as qualified retirement plans. Shareholders should consult their tax
advisers for more information.
The foregoing discussion relates solely to U.S. Federal income tax law as
applicable to U.S. persons (i.e., U.S. citizens or residents and U.S. domestic
corporations, partnerships, trusts or estates) subject to tax under such law.
The discussion does not address special tax rules applicable to certain classes
of investors, such as tax-exempt entities, insurance companies, and financial
institutions. Dividends, capital gain distributions, and ownership of or gains
realized on the redemption (including an exchange) of Fund shares may also be
subject to state and local taxes. Shareholders should consult their own tax
advisers as to the Federal, state or local tax consequences of ownership of
shares of, and receipt of distributions from, the Funds in their particular
circumstances.
Non-U.S. investors not engaged in a U.S. trade or business with which their
investment in a Fund is effectively connected will be subject to U.S. Federal
income tax treatment that is different from that described above. These
investors may be subject to nonresident alien withholding tax at the rate of 30%
(or a lower rate under an applicable tax treaty) on amounts treated as ordinary
dividends from the Fund and, unless an effective IRS Form W-8 or authorized
substitute is on file, to 31% backup withholding on certain other payments from
the Fund. Non-U.S. investors should consult their tax advisers regarding such
treatment and the application of foreign taxes to an investment in the Fund.
DETERMINATION OF NET ASSET VALUE
The Fund's net asset value is calculated each day on which the New York
Stock Exchange is open. Currently the New York Stock Exchange is not open on
weekends, New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas. The net asset value
of the Fund's shares is determined as of the close of regular trading on the New
York Stock Exchange (currently 4:00 p.m., New York City time) and is computed by
dividing the value of all securities and other assets of the Fund less all
liabilities by the number of shares outstanding, and adjusting to the nearest
cent per share. Expenses and fees, including the investment advisory fee, are
accrued daily and taken into account for the purpose of determining net asset
value.
33
<PAGE>
Portfolio securities are valued at the last sale prices, on the valuation
day, on the exchange or national securities market on which they are primarily
traded. Securities not listed on an exchange or national securities market, or
securities for which there were no reported transactions, are valued at the last
quoted bid prices. Securities for which quotations are not readily available and
all other assets are valued at fair value as determined by the Adviser in
accordance with procedures approved by the Trustees.
Money market instruments with less than sixty days remaining to maturity
when acquired by the Fund are valued on an amortized cost basis. If the Fund
acquires a money market instrument with more than sixty days remaining to its
maturity, it is valued at current market value until the sixtieth day prior to
maturity and will then be valued at amortized cost based upon the value on such
date unless the Trustees determine during such sixty-day period that amortized
cost does not represent fair value.
THE FUND AND ITS SHARES
The Fund is an investment series of Standish, Ayer & Wood Investment Trust,
an unincorporated business trust organized under the laws of The Commonwealth of
Massachusetts pursuant to an Agreement and Declaration of Trust dated August 13,
1986 as amended from time to time (the "Declaration"). Under the Declaration,
the Trustees have authority to issue an unlimited number of shares of beneficial
interest, par value $.01 per share, of the Fund. Each share represents an equal
proportionate interest in the Fund with each other share and is entitled to such
dividends and distributions as are declared by the Trustees. Shareholders are
not entitled to any preemptive, conversion or subscription rights. All shares,
when issued, will be fully paid and non-assessable by the Trust. Upon any
liquidation of the Fund, shareholders are entitled to share pro rata in the net
assets available for distribution.
Pursuant to the Declaration, the Trustees may create additional funds by
establishing additional series of shares in the Trust. The establishment of
additional series would not affect the interests of current shareholders in the
Fund. As of the date of this Statement of Additional Information, the Trustees
have established fourteen other series of the Trust that publicly offer their
shares. Pursuant to the Declaration, the Board may establish and issue multiple
classes of shares for each series of the Trust. As of the date of this Statement
of Additional Information, the Trustees do not have any plan to establish
multiple classes of shares for the Fund. Pursuant to the Declaration of Trust
and subject to shareholder approval (if then required), the Trustees may
authorize the Fund to invest all of its investable assets in a single open-end
investment company that has substantially the same investment objectives,
policies and restrictions as the Fund. As of the date of this Statement of
Additional Information, the Board does not have any plan to authorize the Fund
to so invest its assets.
34
<PAGE>
All Fund shares have equal rights with regard to voting, and shareholders
of the Fund have the right to vote as a separate class with respect to matters
as to which their interests are not identical to those of shareholders of other
classes of the Trust, including the approval of an investment advisory contract
and any change of investment policy requiring the approval of shareholders.
Under Massachusetts law, shareholders of the Trust could, under certain
circumstances, be held liable for the obligations of the Trust. However, the
Agreement and Declaration of Trust disclaims shareholder liability for acts or
obligations of the Trust and requires that notice of this disclaimer be given in
each agreement, obligation or instrument entered into or executed by the Trust
or a Trustee. The Declaration also provides for indemnification from the assets
of the Trust for all losses and expenses of any Trust shareholder held liable
for the obligations of the Trust. Thus, the risk of a shareholder incurring a
financial loss on account of its liability as a shareholder of the Trust is
limited to circumstances in which both inadequate insurance existed and the
Trust would be unable to meet its obligations. The possibility that these
circumstances would occur is remote. Upon payment of any liability incurred by
the Trust, the shareholder paying the liability will be entitled to
reimbursement from the general assets of the Trust. The Declaration also
provides that no series of the Trust is liable for the obligations of any other
series. The Trustees intend to conduct the operations of the Trust to avoid, to
the extent possible, ultimate liability of shareholders for liabilities of the
Trust.
ADDITIONAL INFORMATION
The Fund's Prospectus and this Statement of Additional Information omit
certain information contained in the registration statement filed with the
Securities and Exchange Commission, which may be obtained from the Commission's
principal office at 450 Fifth Street, N.W., Washington, D.C. 20549, upon payment
of the fee prescribed by the rules and regulations promulgated by the
Commission.
EXPERTS AND FINANCIAL STATEMENTS
The financial statements for the fiscal years ended December 31, 1994 and
1995 included in this Statement of Additional Information have been audited by
Coopers & Lybrand L.L.P., independent accountants, as set forth in their report
appearing elsewhere herein, and have been so included in reliance upon the
authority of the report of Coopers & Lybrand L.L.P. as experts in accounting and
auditing. The Fund's financial highlights for the fiscal years ended December
31, 1992, 1991 and 1990 were audited by Deloitte & Touche LLP, independent
auditors, and have been similarly included in reliance upon the expertise of
that firm. Coopers & Lybrand L.L.P., independent accountants, will audit the
Fund's financial statements for the fiscal year ending December 31, 1996.
35
<PAGE>
Standish, Ayer & Wood Investment Trust
Standish Securitized Fund Series
Financial Statements for the Year Ended
December 31, 1995
1
<PAGE>
Standish, Ayer & Wood Investment Trust
Chairman's Message
January 29, 1996
Dear Standish, Ayer & Wood Investment Trust Shareholder:
I am pleased to have an opportunity to review the major developments at
Standish, Ayer & Wood during this past year as they relate to the activities of
the Investment Trust. The major news for our clients in 1995 was the spectacular
performance of the U.S. investment markets. While we would, of course, like to
claim credit for producing the full extent of these splendid returns, the
reality is obvious: The markets themselves are beyond our control. For the year
as a whole, U.S. stocks, as represented by the Standard and Poor's 500 Index,
produced a total return of 37.6%, and higher grade intermediate-term bonds, as
represented by the Lehman Brothers Aggregate Index, provided a total return of
18.5%. Nearly as surprising, stock and bond prices marched steadily upward
throughout the year, a persistent and almost uninterrupted advance.
Even after the subdued markets of 1994, neither we nor most other investment
managers expected 1995 to be anywhere near as good as it turned out to be. In
this context, we are generally pleased by our investment performance. In most
asset classes, we kept pace with or modestly exceeded market returns. We adhered
to our established investment philosophies, which are designed to add reasonably
consistent increments of value. Our clients seem to be pleased by our efforts as
we continue to have very little client turnover.
As a firm, we have registered moderate growth during the year. Reflecting some
flow of new clients as well as market appreciation, our clients' assets under
management at the end of 1995 totalled $29.4 billion, an increase from $24.4
billion at the end of 1994. We are particularly pleased by the growth in new
assets managed for insurance companies and by the increases in assets of both
large capitalization and small capitalization U.S. common stocks.
The asset class of greatest disappointment in 1995 was international equities.
Not only did the asset class continue to provide subpar returns, but our
portfolios underperformed the international equity markets. These results
reflect judgments early in 1995 to hedge a portion of the currency exposure back
to dollars and to have a moderate stake in emerging markets. While we believe we
have rectified those problems, we are not satisfied with the results and are
working vigorously to improve future performance. We are also counseling our
clients not to lose faith in the international equity asset class despite its
recent disappointing returns.
The figure for total Standish assets under management includes about $1.6
billion managed in conjunction with Standish International Management Company,
L.P. (SIMCO), our affiliate that manages overseas assets for domestic clients
and U.S. assets for overseas clients. It also includes $3.9 billion in the
Standish Investment Trust, our mutual fund organization. In addition, the asset
total reflects an increase over the last few years in the assets we manage in
private, non-mutual fund vehicles.
We introduced two new mutual funds at mid-year 1995, namely the Standish Fixed
Income Fund II (which is designed to parallel the Standish Fixed Income Fund but
exclude the purchase of both nondollar bonds and below-investment-grade
securities), and the Standish Controlled Maturity Fund (which is designed for
investors who wish less volatility and interest rate risk than traditional
intermediate-maturity bonds).
At the beginning of 1996, we introduced two additional mutual funds, the
Standish Tax-Sensitive Equity Fund and the Standish Small Cap Tax-Sensitive
Equity Fund. At Standish we have noted for some time the adverse impact for
taxable investors of high portfolio turnover, which triggers capital gains,
possibly including short-term gains that may result in an even greater tax
liability for investors. We believe there is a major opportunity through both
separate account management and these funds to improve aftertax returns by
limiting the portfolio turnover and managing capital gains.
2
<PAGE>
During 1995, Standish acquired all remaining interests in the business of the
joint venture between Consolidated Investment Corp. (CIC) and Standish, entered
into over seven years ago. Consolidated had been formed by Trigon (previously
Blue Cross/Blue Shield of Virginia) to manage shorter-term taxable and tax
exempt fixed income portfolios. We and Trigon agreed that it was best to have
this unit operating under one owner.
Standish continues to be proud of its structure as an independent management
firm with ownership in the hands of investment professionals active in the
business. There were no changes during 1995 either in corporate structure or in
the people who own the enterprise.
We appreciate the opportunity to serve you, and we remain confident that we have
the resources and the organization to do a superior job. We will be working hard
to fulfill your expectations in 1996.
Sincerely yours,
Edward H. Ladd
Chairman
3
<PAGE>
Standish, Ayer & Wood Investment Trust
Standish Securitized Fund Series
Management Discussion
While 1995 was a very positive year for bonds, callable securitized assets
performed less favorably compared to other fixed income sectors. Subject to
increasing prepayment risk as interest rates declined, mortgage returns
generally lagged comparable duration Treasuries. High market volatility was
another negative for the mortgage sector as it increased the value of the
embedded options. The Securitized Fund posted a return net of fees and expenses
of 16.32%, and a gross return of 16.85%. In comparison, the Lehman Mortgage and
Lehman Aggregate Indices returned 16.79% and 18.48%, respectively.
Given the year's dominant theme of declining interest rates, the Fund's strategy
focused on minimizing the negative impact of prepayment risk. The magnitude of
the rally in the first half of the year resulted in rising prepayment
expectations. Mortgage durations shortened considerably and yield spreads
quickly widened. High coupon pass-throughs were particularly hard hit in the
beginning of the year as investors sought to reduce prepayment risk by selling
premiums to buy better call-protected discount mortgages. During this period,
the Fund's bias toward low coupon collateral benefited returns. However, the
substantial downward move in interest rates and subsequent decline in mortgage
durations made it difficult to maintain a longer portfolio duration, compounding
the lag in performance.
Falling interest rates created a very favorable environment for the GNMA
adjustable rate mortgage sector. GNMA ARMS have variable coupons which reset
annually and are limited to 1% adjustments. Their yield spreads are driven by
the degree of "cap" risk embedded in the securities. "Cap" risk refers to the
likelihood that when coupons reset the 1% annual limit will restrict their
adjustment. As interest rates declined, cap risk diminished and yield spreads
narrowed substantially. As the GNMA ARMS sector outperformed Treasuries, we
opportunistically swapped ARMS into discount collateral which we expected to
benefit from eventual spread narrowing.
Market trends, namely lower interest rates and high volatility, continued into
the second half of the year. There was a brief period of stability in the third
quarter during which the mortgage sector performed relatively well versus
Treasuries. During this period, the anticipated call risk of mortgage assets
declined, as did the overly negative sentiment toward mortgages which had
prevailed for the better part of the year. However, the mortgage sector soon
came under pressure again as the bond rally picked up in the fourth quarter. As
we approached year-end, despite the historically wide yield spreads of
mortgages, investors remained cautious to take on additional call risk.
With fairly high market volatility, option strategies were increasingly
attractive during the year. We periodically used options in the Fund with the
primary objective of gaining market exposure within a yield range on the 30 year
bond. Our option strategies conservatively added duration to the portfolio in a
rally to offset the expected shortening of mortgage durations. During 1995, we
opportunistically increased the Fund's position in pass-throughs to take
advantage of the sector's compelling relative value As we ended the year, it was
clear that the performance of the mortgage sector suffered from its lack of
positive convexity in a sizeable market rally. With wide yield spreads and
mortgage durations near their historical lows, much of the negative news for
mortgages appeared to be already priced into the market. Unless prepayments are
much faster than currently anticipated or volatility rises sharply, mortgages
are likely to recover in the coming year. Our coupon posture this past year has
emphasized discount and current coupon collateral with better call protection,
in order to minimize the Fund's convexity risk. We maintain our view that the
mortgage sector is fundamentally undervalued and that prepayment concerns and
spread widening are overdone. We expect the Fund's increased weighting in
pass-throughs to benefit from our outlook of eventual spread narrowing from
today's relatively wide levels.
Dolores S. Driscoll James J. Sweeney
4
<PAGE>
Standish, Ayer & Wood Investment Trust
Standish Securitized Fund Series
Comparison of Change in Value of $1,000,000 Investment in Standish Securitized
Fund,
the Lehman Aggregate Index, and the Lehman Mortgage Index
The following is a description of the graphical chart omitted from electronic
format:
This line chart shows the cumulative performance of the Standish Securitized
Fund compared with the Lehman Aggregate Index and the Lehman Mortgage Index for
the period August 31, 1989 to December 31, 1995, based upon a $1,000,000
investment. Also included are the average annual total returns for one year,
five year, and since inception.
5
<PAGE>
<TABLE>
<CAPTION>
Standish, Ayer & Wood Investment Trust
Standish Securitized Fund Series
Portfolio of Investments
December 31, 1995
Par Value
Security Rate Maturity Value (Note 1A)
- - ---------------------------------------------------------------- ------- -------------------- -------------- ----------------
Bonds - 116.9%
- - ----------------------------------------------------------------
Asset Backed Securities - 4.3%
- - ----------------------------------------------------------------
<S> <C> <C> <C> <C>
CSFB 95-A 7.00 11/15/05 750,000 $ 749,063
Jetts Equipment Trust 95-A B 8.64 05/01/15 995,493 1,078,288
Northwest Airlines Trust #2 10.23 06/21/14 487,692 569,533
----------------
$ 2,396,884
----------------
Collateralized Mortgage Obligations - 6.4%
- - ----------------------------------------------------------------
FNMA I/O Trust 89 8.00 10/01/18 8,206,534 $ 1,702,856
FNMA P/O Trust 108 0.00 03/25/20 883,257 695,289
Merrill Lynch Mortgage Investments Series #94 8.92 11/25/20 795,000 876,344
Midstate Trust II A3 9.35 04/01/98 250,000 259,766
----------------
$ 3,534,255
----------------
Pass Thru Securities - 99.5%
- - ----------------------------------------------------------------
DR Structured Lease Trust 94-K1 7.60 08/15/07 733,899 $ 462,356
Evans Whitycombe Trust 94-A 7.98 08/01/01 1,000,000 1,077,840
FDIC Trust 94- C1 II-C 8.45 09/25/25 500,000 537,031
FHA/USGI #113 7.43 06/01/24 3,883,817 4,073,153
FHLMC Gold 6.50 12/01/25 470,250 464,960
FNMA** 6.50 07/01/25-12/01/25 3,841,126 3,812,374
FNMA 7.00 09/01/23-12/01/25 12,137,342 12,235,897
FNMA** 7.50 01/01/26 6,025,000 6,173,697
FNMA 7.50 10/01/22-09/01/25 481,646 493,569
FNMA 8.00 07/01/25 888,775 920,434
General Motors Acceptance Corp. #15 7.45 05/01/21 1,424,560 1,480,645
GNMA** 7.00 07/15/23-01/15/26 7,883,666 7,977,246
GNMA** 7.00 01/25/26 1,325,000 1,340,728
GNMA 7.50 10/15/22-09/15/25 1,875,476 1,930,207
GNMA 8.00 02/15/23-06/15/23 1,234,754 1,286,462
GNMA 9.00 11/15/24-05/15/25 1,386,104 1,468,397
Lehman Brothers Commercial Conduit Mortgage Trust 7.05 09/25/25 575,000 567,453
Resolution Trust Corp. 91-6 C1 9.00 09/25/28 285,360 293,921
Resolution Trust Corp. 92-12 A2A 7.50 08/25/23 561,658 566,748
Resolution Trust Corp. 92-5 A6*** 9.24 05/25/26 2,150,000 2,223,234
Resolution Trust Corp. 92-C2 A1 9.00 10/25/21 373,918 380,345
Resolution Trust Corp. 92-C7 A1C 7.90 06/25/23 230,952 231,529
Resolution Trust Corp. 92-M4 A1 8.00 09/25/21 605,621 616,030
Resolution Trust Corp. 94-C1 D 8.00 06/25/26 666,504 680,042
Resolution Trust Corp. 94-C2 D AL 8.00 04/25/25 731,552 746,869
Resolution Trust Corp. 95 Cl C 6.90 02/25/27 900,000 892,969
6
<PAGE>
Portfolio of Investments
(continued)
Par Value
Security Rate Maturity Value (Note 1A)
- - ---------------------------------------------------------------- ------- -------------------- -------------- ----------------
Pass Thru Securities (continued)
- - ----------------------------------------------------------------
Resolution Trust Corp. 95-1 A2 C*** 7.50 10/25/28 1,000,000 1,014,688
Sears Mortgage Securities Corp. 87-B 8.00 05/25/17 169,721 170,676
Structured Asset Security Corp. 94-C1 D 6.87 08/25/26 825,000 784,781
----------------
$ 54,904,281
----------------
U.S. Treasury Bonds - 6.7%
- - ----------------------------------------------------------------
U.S. Treasury Notes 6.88 07/31/99 1,700,000 $ 1,785,000
U. S. Treasury Principal Strips 0.00 11/15/99 2,375,000 1,935,910
----------------
$ 3,720,910
----------------
Total Bonds (identified cost $63,309,714) $ 64,556,330
----------------
Principal
Amount of Value
Purchased Options - 0.2% Contracts (Note 1A)
- - ---------------------------------------------------------------- --------- ---------
Deliver/Receive, Exercise Price, Expiration
- - ----------------------------------------------------------------
Call U.S. Treasury Bond, 6.50%, 104.7031, 2/23/96 1,100,000 $ 23,461
Call U.S. Treasury Bond 6.50%, 106.3437, 3/1/96 1,650,000 19,852
Call U.S. Treasury Bond 7.625%, 119.0937, 2/23/96 1,150,000 40,969
----------------
Total Purchased Options(premium paid $60,117)
$ 84,282
----------------
Principal
Short Term Obligations - 3.3% Rate* Amount
- - ---------------------------------------------------------------- ----- ------
Federal Agency Discount Bonds - 1.8%
- - ----------------------------------------------------------------
FHLMC 5.78 01/16/96 1,000,000 $ 995,912
----------------
U.S. Government Securities - 0.7%
- - ----------------------------------------------------------------
U.S. Treasury Bills 5.06 03/14/96 60,000 $ 59,409
U.S. Treasury Bills 4.83 02/15/96 350,000 347,981
----------------
$ 407,390
----------------
Repurchase Agreement - 0.8%
- - ----------------------------------------------------------------
Prudential Bache repurchase agreement dated 12/29/95, 5.39% due 1/2/96 to pay
$426,284 (Collateralized by Federal National Mortgage Assn., 9.00%, due 9/1/22
Market Value $434,616), at cost. 426,093 $ 426,093
----------------
7
<PAGE>
Portfolio of Investments
(continued)
Par Value
Security Rate Maturity Value (Note 1A)
- - ---------------------------------------------------------------- ------- -------------------- -------------- ----------------
Total Short Term Obligations $ 1,829,395
-------------
(identified cost $1,828,941)
Total Investments - 120.4% $ 66,470,007
------------
(identified cost $65,198,772)
Written Options - (0.1%) Principal
- - ---------------------------------------------------------------- Amount of Value
Deliver/Receive, Exercise Price, Expiration Contracts (Note 1A)
- - ---------------------------------------------------------------- --------- --------
Call U.S. Treasury Bond 6.50% 106.7031,2/23/96 (1,100,000) $ (10,828)
Call U.S. Treasury Bond 6.50% 108.3437 3/1/96 (1,650,000) (7,863)
Call U.S. Treasury Bond 7.625% 122.0937 2/23/96 (1,150,000) (20,664)
Put U.S. Treasury Bond 6.50% 101.7031 2/23/96 (1,100,000) (688)
Put U.S. Treasury Bond 6.50% 103.3437, 3/1/96 (1,650,000) (4,383)
-----------------
Total Written Options(premiums received $38,742) $ (44,426)
-----------------
Other assets, less liabilities - (20.3%) ($11,224,882)
-----------------
Net Assets - 100% $ 55,200,699
=================
The following abbreviations are used in this portfolio:
CSFB Credit Suisse First Boston
DR Dillon Read
FDIC Federal Deposit Insurance Corp.
FHA Federal Housing Authority
FHLMC Federal Home Loan Mortgage Corp.
FNMA Federal National Mortgage Association
GNMA Government National Mortgage Association
USGI United States Guaranteed Insured
* Rate noted is yield to maturity
** When issued security (Note 7)
*** Denotes all or part of a security is pledged as a margin deposit (Note 6)
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
Standish, Ayer & Wood Investment Trust
Standish Securitized Fund Series
Statement of Assets and Liabilities
December 31, 1995
<S> <C> <C>
Assets
Investments, at value (Note 1A) (identified cost, $65,198,772) $66,470,007
Interest receivable 417,216
Receivable from investment advisor (Note 2) 12,885
Other assets 421
-------------
Total assets $66,900,529
Liabilities
Distribution payable $1,077,171
Payable for delayed delivery transactions (Note 7) 10,484,023
Payable for fund shares redeemed 6,417
Written options outstanding, at value (premiums received, $38,742) 44,426
Payable for premiums on purchased options 180
Payable for daily variation margin on financial futures contracts (Note 6) 13,500
Accrued investment advisory fee (Note 2) 34,274
Accrued trustee fees (Note 2) 558
Accrued expenses and other liabilities 39,281
-----------
Total liabilities $11,699,830
-------------
Net Assets $55,200,699
=============
Net Assets consist of
Paid-in capital $55,863,898
Distributions in excess of net investment income (163,094)
Accumulated undistributed net realized gain (loss) (1,676,678)
Net unrealized appreciation (depreciation) 1,176,573
-------------
Total $55,200,699
=============
Shares of beneficial interest outstanding 2,725,447
=============
Net asset value, offering price, and redemption price per share $20.25
=============
(Net assets/Shares outstanding)
9
<PAGE>
Standish, Ayer & Wood Investment Trust
Standish Securitized Fund Series
Statement of Operations
Year Ended December 31, 1995
Investment income
Interest income $4,031,340
Expenses
Investment advisory fee (Note 2) $139,890
Trustee fees (Note 2) 2,109
Accounting, custody and transfer agent fees 92,407
Registration costs 8,991
Audit services 32,343
Legal Services 3,150
Insurance expense 1,653
Miscellaneous 2,572
------------------
Total expenses 283,115
Deduct:
Waiver of investment advisory fee (Note 2) 31,998
------------------
Net expenses $251,117
----------------
Net investment income $3,780,223
----------------
Realized and unrealized gain (loss)
Net realized gain (loss)
Investment securities 1,288,909
Written options 8,419
Financial futures (103,444)
Foreign currency and foreign exchange contracts (62,371)
------------------
Net realized gain (loss) $1,131,513
Change in net unrealized appreciation (depreciation)
Investment securities $3,567,312
Written options (5,684)
Financial futures (88,978)
Translation of assets and liabilities in foreign currencies,
and foreign exchange contracts 65,027
------------------
Change in net unrealized appreciation (depreciation) $3,537,677
----------------
Net gain (loss) $4,669,190
----------------
Net increase (decrease) in net assets from operations $8,449,413
================
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
Standish, Ayer & Wood Investment Trust
Standish Securitized Fund Series
Statement of Changes in Net Assets
Year Ended December 31,
--------------------------------------
1995 1994
----------------- ------------------
Increase (decrease) in Net Assets
From operations
<S> <C> <C>
Net investment income $3,780,223 $4,686,399
Net realized gain (loss) 1,131,513 (3,550,817)
Change in net unrealized appreciation (depreciation) 3,537,677 (2,899,724)
----------------- ------------------
Net increase (decrease) in net assets from operations $8,449,413 ($1,764,142)
----------------- ------------------
Distributions to shareholders
From net investment income ($3,731,675) ($4,037,921)
----------------- ------------------
Total distributions to shareholders ($3,731,675) ($4,037,921)
----------------- ------------------
Fund share (principal) transactions (Note 4)
Net proceeds from sale of shares $1,275,000 $3,686,354
Net asset value of shares issued to shareholders in
payment of distributions declared 591,437 1,022,322
Cost of shares redeemed (5,162,432) (23,181,693)
----------------- ------------------
Increase (decrease) in net assets from Fund share transactions ($3,295,995) ($18,473,017)
-----------------
------------------
Net increase (decrease) in net assets $1,421,743 ($24,275,080)
Net assets
At beginning of period $53,778,956 $78,054,036
----------------- ------------------
At end of period (including distributions in excess of
net income of $163,094 and $113,363 at December 31, 1995
and December 31, 1994, respectively) $55,200,699 $53,778,956
================= ==================
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
Standish, Ayer & Wood Investment Trust
Standish Securitized Fund Series
Financial Highlights
Year Ended December 31,
--------------------------------------------------------------------
1995 1994 1993 1992* 1991*
--------- --------- -------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net asset value - beginning of period $18.61 $20.24 $20.14 $20.97 $20.48
---------- ---------- ---------- ---------- ----------
Income from investment operations
Net investment income+ $1.32 $1.42 $1.45 $1.43 $1.71
Net realized and unrealized gain (loss) on investments 1.66 (1.86) 0.54 (0.61) 1.37
---------- ---------- ---------- ---------- ----------
Total from investment operations $2.98 ($0.44) $1.99 $0.82 $3.08
---------- ---------- ---------- ---------- ----------
Less distributions declared to shareholders
From net investment income ($1.34) ($1.19) ($1.48) ($1.57) ($1.55)
In excess of net investment income - - (0.05) - -
From net realized gain - - (0.36) (0.07) (1.04)
In excess of net realized gain - - - (0.01) -
---------- ---------- ---------- ---------- ----------
Total distributions declared to shareholders ($1.34) ($1.19) ($1.89) ($1.65) ($2.59)
---------- ---------- ---------- ---------- ----------
Net asset value - end of period $20.25 $18.61 $20.24 $20.14 $20.97
========== ========== ========== ========== ==========
Total return 16.32% (2.16%) 10.02% 4.07% 15.57%
Ratios (to average net assets)/Supplemental Data
Expenses + 0.45% 0.45% 0.45% 0.45% 0.45%
Net investment income+ 6.78% 6.79% 6.75% 6.94% 8.03%
Portfolio turnover 225% 138% 130% 301% 324%
Net assets at end of period (000 omitted) $55,201 $53,779 $78,054 $90,460 $78,570
+ The investment adviser did not impose a portion of its advisory fee. If
this voluntary reduction had not been undertaken, the net investment
income per share and the ratios would have been:
Net investment income per share $1.22 $1.41 $1.44 $1.42 $1.70
Ratios (to average net assets):
Expenses 0.51% 0.49% 0.48% 0.51% 0.49%
Net Investment Income 6.72% 6.76% 6.72% 6.88% 7.99%
* Audited by other auditors.
</TABLE>
12
<PAGE>
Standish, Ayer & Wood Investment Trust
Standish Securitized Fund Series
Notes to Financial Statements
(1).....Significant Accounting Policies:
Standish, Ayer & Wood Investment Trust (the Trust) is organized as a
Massachusetts business trust and is registered under the Investment
Company Act of 1940, as amended, as an open-end, management investment
company. Standish Securitized Fund (the Fund) is a separate
non-diversified investment series of the Trust.
The following is a summary of significant accounting policies followed
by the Fund in the preparation of the financial statements. The
preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts and disclosures in the
financial statements. Actual results could differ from those estimates.
A. Investment security valuations--
Securities for which quotations are readily available are valued at the
last sale price, or if no sale price, at the closing bid price in the
principal market in which such securities are normally traded.
Securities (including restricted securities) for which quotations are
not readily available are valued primarily using dealer-supplied
valuations or at their fair value as determined in good faith under
consistently applied procedures under the general supervision of the
Board of Trustees.
Short term instruments with less than sixty-one days remaining to
maturity when acquired by the Fund are valued on an amortized cost
basis. If the Fund acquires a short term instrument with more than
sixty days remaining to its maturity, it is valued at current market
value until the sixtieth day prior to maturity and will then be valued
at amortized cost based upon the value on such date unless the trustees
determine during such sixty-day period that amortized cost does not
represent fair value.
B. Repurchase agreements--
It is the policy of the Fund to require the custodian bank to take
possession, to have legally segregated in the Federal Reserve Book
Entry System or to have segregated within the custodian bank's vault,
all securities held as collateral in support of repurchase agreement
investments. Additionally, procedures have been established by the Fund
to monitor on a daily basis, the market value of the repurchase
agreement's underlying investments to ensure the existence of a proper
level of collateral.
C. Securities transactions and income--
Securities transactions are recorded as of the trade date. Interest
income is determined on the basis of interest accrued, adjusted for
amortization of premium or discount on long-term debt securities when
required for federal income tax purposes. Realized gains and losses
from securities sold are recorded on the identified cost basis.
D. Federal taxes--
As a qualified regulated investment company under Subchapter M of the
Internal Revenue Code, the Fund is not subject to income taxes to the
extent that it distributes all of its taxable income for its fiscal
year.
At December 31, 1995, the Fund, for federal income tax purposes, had
capital loss carryover which will reduce the Fund's taxable income
arising from net realized gain on investments, if any, to the extent
permitted by the Internal Revenue Code and thus will reduce the amount
of distributions to shareholders which would otherwise be necessary to
relieve the Fund of any liability for Federal Income Tax. Such capital
loss carryover is $1,745,441 which expires on December 31, 2002.
E. Distributions to shareholders--
Distributions to shareholders are recorded on the ex-dividend date.
Income and capital gain distributions are determined in accordance with
income tax regulations which may differ from generally accepted
accounting principles. These differences are primarily due to differing
treatments for mortgage backed securities and foreign currency
transactions. Permanent book and tax basis differences relating to
shareholder distributions will result in reclassifications to paid-in
capital.
13
<PAGE>
(2).....Investment Advisory Fee:
The investment advisory fee paid to Standish, Ayer & Wood, Inc. (SA&W)
for overall investment advisory and administrative services, and
general office facilities, is paid quarterly at the annual rate of
0.25% of the Fund's average daily net assets. The investment adviser
has agreed that the total Fund operating expenses for any fiscal year
will not exceed 0.45% of the Fund's average daily net assets. For the
year ended December 31, 1995, the investment adviser voluntarily waived
$31,998 of its fee which is reflected as a preliminary reduction of
expenses on the Statement of Operations. The Fund pays no compensation
directly to its trustees who are affiliated with the investment adviser
or to its officers, all of whom receive remuneration for their services
to the Fund from the investment adviser. Certain of the trustees and
officers of the Trust are directors or officers of SA&W.
(3).....Purchases and Sales of Investments:
<TABLE>
<CAPTION>
Purchases and sales of investments, other than short-term obligations,
were as follows:
Purchases Sales
------------------ -----------------
<S> <C> <C>
U.S. government securities $136,691,805 $126,541,491
================= =================
Investments (non-U.S. government securities) $5,209,172 $14,028,295
================= =================
(4).....Shares of Beneficial Interest:
The Declaration of Trust permits the trustees to issue an unlimited
number of full and fractional shares of beneficial interest having a
par value of one cent per share. Transactions in Fund shares were as
follows:
Year Ended December 31,
----------------------------------
1995 1994
--------------- ----------------
<S> <C> <C>
Shares sold 64,329 180,699
Shares issued to shareholders in payment of distributions declared 29,757 53,648
Shares redeemed (258,806) (1,200,040)
---------------- ----------------
Net increase (decrease) (164,720) (965,693)
================ ================
At December 31, 1995, one shareholder, together with its affiliate, was
record owner of approximately 76% of the total outstanding shares of
the Fund.
(5).....Federal Income Tax Basis of Investment Securities:
The cost and unrealized appreciation (depreciation) in value of the
investment securities owned at December 31, 1995, as computed on a
federal income tax basis, are as follows:
<S> <C>
Aggregate Cost $65,198,800
==================
Gross unrealized appreciation $1,727,533
Gross unrealized depreciation (456,326)
-----------------
Net unrealized appreciation $1,271,207
=================
</TABLE>
14
<PAGE>
6)......Financial Instruments
In general, the following instruments are used for hedging purposes as
described below. However, these instruments may also be used to enhance
potential gain in circumstances where hedging is not involved. The
nature, risks and objectives of these investments are set forth more
fully in the Fund's Prospectus and Statement of Additional Information.
The Fund trades the following financial instruments with off-balance
sheet risk:
Options--
Call and put options give the holder the right to purchase or sell,
respectively, a security or currency at a specified price on or before
a certain date. The Fund uses options to hedge against risks of market
exposure and changes in securities prices and foreign currencies, as
well as to enhance returns. Options, both held and written by the Fund,
are reflected in the accompanying Statement of Assets and Liabilities
at market value. Premiums received from writing options which expire
are treated as realized gains.
Premiums received from writing options which are exercised or are
closed are added to or offset against the proceeds or amount paid on
the transaction to determine the realized gain or loss. If a put option
written by the Fund is exercised, the premium reduces the cost basis of
the securities purchased by the Fund. The Fund, as writer of an option,
has no control over whether the underlying securities may be sold
(call) or purchased (put) and as a result bears the market risk of an
unfavorable change in the price of the security underlying the written
option. A summary of written option transactions for the year ended
December 31, 1995 is as follows:
<TABLE>
<CAPTION>
Written Put Option Transactions
Number
of Contracts
(000 Omitted) Premiums
------------------ -----------------
<S> <C> <C>
Outstanding, beginning of period 0 $0
Options written 7,300 30,232
Options exercised 0 0
Options expired (575) (1,797)
Options closed (3,975) (16,619)
------------------ -----------------
Outstanding, end of period 2,750 $11,816
================== =================
Written Call Option Transactions
Number
of Contracts
(000 Omitted) Premiums
------------------ -----------------
Outstanding, beginning of period 0 $0
Options written 8,875 71,814
Options exercised (1,000) (14,062)
Options expired 0 0
Options closed (3,975) (30,826)
------------------ -----------------
Outstanding, end of period 3,900 $26,926
================== =================
</TABLE>
Forward foreign currency and cross currency exchange contracts--
The Fund may enter into forward foreign currency and cross currency
exchange contracts for the purchase or sale of a specific foreign
currency at a fixed price on a future date. Risks may arise upon
entering these contracts from the potential inability of counterparties
to meet the terms of their contracts and from unanticipated movements
in the value of a foreign currency relative to the U.S. dollar and
other foreign currencies. The forward foreign currency and cross
currency exchange contracts are marked to market using the forward
foreign currency rate of the underlying currency and any gains or
losses are recorded for financial statement purposes as unrealized
until the contract settlement date. Forward currency exchange contracts
are used by the Fund primarily to protect the Fund's foreign securities
from adverse currency movements. At December 31, 1995, there were no
open forward foreign currency contracts.
15
<PAGE>
Futures Contracts--
The Fund may enter into financial futures contracts for the delayed
sale or delivery of securities or contracts based on financial indices
at a fixed price on a future date. The Fund is required to deposit
either in cash or securities an amount equal to a certain percentage of
the contract amount. Subsequent payments are made or received by the
Fund each day, dependent on the daily fluctuations in the value of the
underlying security, and are recorded for financial statement purposes
as unrealized gains or losses by the Fund. There are several risks in
connection with the use of futures contracts as a hedging device. The
change in value of futures contracts primarily corresponds with the
value of their underlying instruments or index, which may not correlate
with changes in value of the hedged investments. In addition, there is
the risk that the Fund may not be able to enter into a closing
transaction because of an illiquid secondary market. The Fund enters
into financial futures transactions primarily to manage its exposure to
certain markets and to changes in securities prices and foreign
currencies. At December 31, 1995, the Fund held the following futures
contracts:
<TABLE>
<CAPTION>
Expiration Underlying Face Unrealized
Contract Position Date Amount at Value Gain/(Loss)
- - ----------------------------------- --------- --------- ------------ --------------
<S> <C> <C> <C> <C>
US 10 Year Note (48 contracts) Short 3/29/96 $5,500,500 ($88,978)
============= ==============
At December 31, 1995, the Fund had segregated sufficient cash and/or
securities to cover margin requirements on open futures contracts.
(7).....Delayed Delivery Transactions:
The Fund may purchase securities on a when-issued or forward commitment
basis. Payment and delivery may take place a month or more after the
date of the transactions. The price of the underlying securities and
the date when the securities will be delivered and paid for are fixed
at the time the transaction is negotiated. The Fund instructs its
custodian to segregate securities having a value at least equal to the
amount of the purchase commitment.
At December 31, 1995, the Fund had entered into the following delayed
delivery transactions:
Type Security Settlement Date Amount
- - -------- -------------------------------------------------------- ----------------- ---------------
<S> <C> <C> <C>
Buy GNMA 1/22/96 $2,017,406
Buy FNMA 1/16/96 6,136,086
Buy GNMA 1/22/96 1,331,625
Buy FNMA Dwarf 1/18/96 998,906
</TABLE>
16
<PAGE>
Report of Independent Accountants
To the Trustees of Standish, Ayer & Wood Investment Trust and the Shareholders
of Standish Securitized Fund Series:
We have audited the accompanying statement of assets and liabilities of
Standish, Ayer & Wood Investment Trust: Standish Securitized Fund Series (the
"Fund"), including the schedule of portfolio investments, as of December 31,
1995, and the related statement of operations for the year then ended, changes
in net assets for each of the two years in the period ended, and financial
highlights for each of the three years in the period then ended. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits. The financial
highlights for each of the two years in the period to December 31, 1992, were
audited by other auditors, whose report, dated February 12, 1993, expressed an
unqualified opinion on such financial highlights.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1995 by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Standish, Ayer & Wood Investment Trust: Standish Securitized Fund Series as of
December 31, 1995, the results of its operations for the year then ended, the
changes in net assets for each of the two years in the period then ended, and
financial highlights for each of the three years in the period then ended, in
conformity with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
February 13, 1996
17
<PAGE>
Standish, Ayer & Wood Investment Trust
One Financial Center
Boston, MA 02111
(800) 221-4795
18
<PAGE>
Prospectus dated May 1, 1996
PROSPECTUS
STANDISH SHORT-TERM ASSET RESERVE FUND
One Financial Center
Boston, Massachusetts 02111
(800) 221-4795
Standish Short-Term Asset Reserve Fund (the "Fund") is one fund in the
Standish, Ayer & Wood family of funds. The Fund is organized as a separate
diversified investment series of Standish, Ayer & Wood Investment Trust (the
"Trust"), an open-end management investment company. The Fund is designed for
corporate investors, pension and profit-sharing plans, state and local
governments, foundations, endowment funds and individuals.
The Fund's investment objective is to achieve a high level of current
interest income, consistent with preserving principal and liquidity. The Fund
seeks to achieve its investment objective primarily by investing in a
diversified portfolio of investment grade money market instruments and
short-term fixed income securities with a maximum average dollar-weighted
maturity of eighteen months. The Fund also expects to engage, to a limited
degree, in options and futures transactions. See "Investment Policies."
Standish, Ayer & Wood, Inc. (the "Adviser"), Boston, Massachusetts is the Fund's
investment adviser.
Investors may purchase shares of the Fund from the Trust's principal
underwriter, Standish Fund Distributors, L.P. (the "Principal Underwriter"), at
the address and phone number listed above without a sales commission or other
transaction charges. Unless waived by the Fund, the minimum initial investment
is $1,000,000. Additional investments may be made in amounts of at least
$100,000. The Fund is not a money market fund, the net asset value of its shares
may fluctuate and the Fund may not be able to return dollar-for-dollar the money
invested.
This Prospectus is intended to set forth concisely the information about
the Fund and the Trust that a prospective investor should know before investing.
Investors are encouraged to read this Prospectus and retain it for future
reference. Additional information about the Fund and the Trust is contained in a
Statement of Additional Information which has been filed with the Securities and
Exchange Commission and is available upon request and without charge by calling
or writing to the Principal Underwriter at the telephone number or address
listed above. The Statement of Additional Information bears the same date as
this Prospectus and is incorporated by reference into this Prospectus.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK OR OTHER INSURED DEPOSITORY INSTITUTION, AND ARE NOT
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD
OR ANY OTHER GOVERNMENT AGENCY. AN INVESTMENT IN SHARES OF THE FUND INVOLVES
INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
CONTENTS
Expense Information...........................................2
Financial Highlights..........................................3
Investment Objective and Policies.............................4
Risk Factors and Suitability..................................8
Calculation of Performance Data...............................8
Dividends and Distributions...................................8
Purchase of Shares............................................8
Exchange of Shares............................................9
Redemption of Shares.........................................10
Management...................................................11
Federal Income Taxes.........................................12
The Fund and Its Shares......................................12
Custodian, Transfer Agent and Dividend-Disbursing Agent......13
Independent Accountants......................................13
Legal Counsel................................................13
Appendix A...................................................13
Tax Certification Instructions..............................14
1
<PAGE>
EXPENSE INFORMATION
Shareholder Transaction Expenses
Maximum Sales Load Imposed on Purchases None
Maximum Sales Load Imposed on Reinvested Dividends None
Deferred Sales Load None
Redemption Fees None
Exchange Fee None
Annual Fund Operating Expenses (as a percentage of average net assets)
Management Fees 0.25%
12b-1 Fees None
Other Expenses 0.08%
Total Fund Operating Expenses 0.33%
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Example 1 year 3 years 5 years 10 years
- - -------------------------------------------------------------------------------------------------------------------------------
You would pay the following expenses on a $1,000 investment,
assuming (1) 5% annual return and (2) redemption at the end
of each time period: 3 11 19 42
</TABLE>
The purpose of the above table is to assist the investor in understanding
the various costs and expenses of the Fund that an investor in the Fund will
bear directly or indirectly. See "Management - Investment Adviser" and
"Management - Expenses." The figure shown in the caption "Other Expenses," which
includes, among other things, custodian and transfer agent fees, registration
costs and payments for insurance and audit and legal services, is based upon the
Fund's expenses for the fiscal year ended December 31, 1995.
THE INFORMATION IN THE TABLE AND HYPOTHETICAL EXAMPLE SHOULD NOT BE
CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY
BE GREATER OR LESS THAN THOSE SHOWN. MOREOVER, WHILE THE EXAMPLE ASSUMES A 5%
ANNUAL RETURN, THE FUND'S ACTUAL PERFORMANCE WILL VARY AND MAY RESULT IN AN
ACTUAL RETURN GREATER OR LESS THAN 5%.
2
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights for the years ended December 31, 1993, 1994 and
1995 have been audited by Coopers & Lybrand L.L.P., independent accountants,
whose report, together with the financial statements of the Fund, is
incorporated into the Statement of Additional Information.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------------------------
1995 1994 1993 1992 * 1991 * 1990 * 1989 *+
----------- ----------- ------------- ----------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value - beginning of period $19.22 $19.79 $19.96 $20.46 $20.20 $20.14 $20.00
----------- ----------- ------------- ----------- ---------- ---------- --------
Income from investment operations
Net investment income $1.13 $1.01 $1.31 $1.35 $1.47 $1.66 $1.69
Net realized and unrealized gain (loss) 0.33 (0.57) (0.17) (0.48) 0.37 0.07 0.14
----------- ----------- ------------- ----------- ---------- ---------- --------
on investments
Total from investment operations $1.46 $0.44 $1.14 $0.87 $1.84 $1.73 $1.83
----------- ----------- ------------- ----------- ---------- ---------- --------
Less distributions declared to shareholders
From net investment income ($1.12) ($1.01) ($1.31) ($1.35) ($1.47) ($1.66) ($1.69)
In excess of net investment income (0.01) 0.00 0.00 0.00 0.00 0.00 0.00
From realized gain 0.00 0.00 0.00 (0.02) (0.11) (0.01) 0.00
----------- ----------- ------------- ----------- ---------- ---------- --------
Total distributions declared to shareholders ($1.13) ($1.01) ($1.31) ($1.37) ($1.58) ($1.67) ($1.69)
----------- ----------- ------------- ----------- ---------- ---------- --------
Net asset value - end of period $19.55 $19.22 $19.79 $19.96 $20.46 $20.20 $20.14
=========== =========== ============= =========== ========== ========== ========
Total return 7.85% 2.27% 5.08% 4.33% 9.41% 8.96% 9.54% t
Net assets at end of period (000 omitted) $243,500 $277,017 $275,080 $289,969 $266,256 $105,303 $66,167
Ratios (to average net assets)/Supplemental Data:
Expenses 0.33% 0.33% 0.33% 0.37% 0.38% 0.45% 0.50% t
Net investment income 5.95% 5.24% 5.82% 6.60% 7.17% 8.17% 8.52% t
Portfolio turnover 208% 154% 182% 167% 134% 128% 132%
t Computed on an annualized basis.
* Audited by other auditors.
+ For the period from January 3, 1989 (start of business) to December 31, 1989.
</TABLE>
Further information about the performance of the Fund is contained in the
Fund's Annual Report, which may be obtained from the Principal Underwriter
without charge.
3
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to achieve a high level of current
income consistent with preserving principal and liquidity. The Fund will seek to
achieve its investment objective primarily through investing in a diversified
portfolio of investment grade money market instruments and short-term fixed
income securities whose average dollar-weighted maturity will normally be from
six to fifteen months and will not exceed eighteen months. Because of the
uncertainty inherent in all investments, no assurance can be given that the Fund
will achieve its investment objective. The investment objective and
non-fundamental policies of the Fund may be changed by the Trustees of the Trust
without the approval of shareholders. The Fund's investment policies are
described further in the Statement of Additional Information.
Investment Policies
The Fund may invest in a broad range of investment grade money market
instruments and short-term fixed-income securities. The Fund's investments will
consist of obligations issued or guaranteed by the U.S. Government or any of its
agencies or instrumentalities ("U.S. Government securities"), instruments of
U.S. and foreign banks (including negotiable certificates of deposit,
non-negotiable fixed time deposits and bankers' acceptances), prime commercial
paper of U.S. and foreign companies, collateralized mortgage obligations, other
mortgage-backed securities, asset-backed securities, repurchase agreements, debt
securities that make regular interest payments at variable or floating rates,
structured notes and, from time to time, preferred stock. The Fund may purchase
securities on a when-issued or forward commitment basis and enter into reverse
repurchase agreements. In addition, the Fund expects to engage, to a limited
degree, in forward roll transactions, futures and options transactions and a
variety of interest rate transactions, including swaps, caps and floors.
The Fund will be managed without regard to any potential tax considerations
of its investors. The Fund may invest up to 10% of its total assets in
tax-exempt securities, such as state and municipal bonds, if the Adviser
believes these securities will provide competitive returns.
Ratings
The Fund will invest at least 85% of its assets in securities which are
rated Aaa, Aa, A or P-1 by Moody's Investors Service, Inc. ("Moody's") or AAA,
AA, A or A-1 by Standard & Poor's Ratings Group ("Standard & Poor's") or, if not
rated, determined to be of comparable investment quality by the Adviser. Up to
15% of the Fund's assets may be invested in securities which are rated Baa or
P-2 by Moody's or BBB or A-2 by Standard & Poor's or, if not rated, determined
to be of comparable investment quality by the Adviser. The Fund may invest in a
security so rated by one rating agency although the security may not be rated by
the other rating agency. In the event the rating on a security held in the
Fund's portfolio is downgraded by a rating service, such action will be
considered by the Adviser in its evaluation of the overall investment merits of
that security but will not necessarily result in the sale of the security.
Securities rated BBB by Standard & Poor's or Baa by Moody's may have some
speculative characteristics and changes in economic conditions or other
circumstances are more likely to lead to weakened capacity to make principal and
interest payments than is the case for higher grade bonds. It is anticipated
that the average dollar-weighted credit quality of the securities in the Fund's
portfolio will be at least Aa or AA according to Moody's and Standard & Poor's
ratings, or of comparable quality as determined by the Adviser. In the case of a
security that is rated differently by the two rating services, the higher rating
is used in applying the 15% limit set forth above and in computing the Fund's
average dollar weighted credit quality. Appendix A sets forth excerpts from the
descriptions of ratings of debt securities.
4
<PAGE>
Maturities
All securities held by the Fund will carry a maturity date, redemption
date, put date, coupon reset date or average life of 3.25 years or less from the
date of settlement, except that, with respect to no more than 10% of the Fund's
net assets, such time period may be between 3.25 and 5 years, and such time
period limitation shall not apply to certain U.S. Treasury notes or bonds. (U.S.
Treasury notes or bonds with maturities of longer than 3.25 years may be
purchased by the Fund in conjunction with the sale of note or bond futures
contracts or with certain equivalent options positions which are designed to
hedge the notes or bonds in such a way as to create a synthetic short-term
instrument.) It is anticipated that the Fund's average dollar-weighted maturity
will be relatively short (approximately six months) when the Adviser expects
interest rates to rise and relatively long (approximately fifteen months) when
the Adviser expects interest rates to decline. Under normal conditions, the Fund
expects the dollar-weighted average maturity of the portfolio to be six to
fifteen months. The Fund's dollar-weighted average maturity will not exceed
eighteen months.
U.S. Government Securities
U.S. Government securities are either (i) backed by the full faith and
credit of the U.S. Government (e.g., U.S. Treasury bills), (ii) guaranteed as to
the payment of principal and interest by the U.S. Treasury (e.g., GNMA
mortgaged-backed securities), (iii) supported by the issuing agency's or
instrumentality's right to borrow from the U.S. Treasury (e.g., Federal National
Mortgage Association Discount Notes), or (iv) supported only by the issuing
agency's or instrumentality's own credit (e.g., securities of each of the
Federal Home Loan Banks). Such guarantees of the securities in the Fund,
however, do not guarantee the market value of the shares of the Fund. With
respect to securities supported only by the credit of the issuing agency or
instrumentality or by an additional line of credit with the U.S. Treasury, there
is no guarantee that the U.S. Government will continue to provide support to
such agencies or instrumentalities. Foreign Bank Instruments
The Fund may invest in Eurodollar Certificates of Deposit ("ECDs"),
Eurodollar Time Deposits ("ETDs") and Yankee Certificates of Deposit ("Yankee
CDs") that are subject to risks different than those associated with the
obligations of domestic banks. ECDs are U.S. dollar-denominated certificates of
deposit issued by foreign branches of domestic banks; ETDs are U.S.
dollar-denominated deposits in a foreign branch of a U.S. bank or in a foreign
bank; and Yankee CDs are U.S. dollar-denominated certificates of deposit issued
by a U.S. branch of a foreign bank and held in the U.S. Risks associated with an
investment in these securities include adverse international economic
developments, foreign governmental restrictions that may adversely affect the
payment of principal or interest, foreign withholding or other taxes on interest
income, difficulties in obtaining or enforcing a judgment against the issuing
5
<PAGE>
bank, and the possible impact of interruptions in the flow of international
currency transactions. Different risks may also exist for ECDs, ETDs, and Yankee
CDs because the banks issuing these instruments, or their domestic or foreign
branches, are not necessarily subject to the same regulatory requirements that
apply to domestic banks, such as reserve requirements, loan limitations,
examinations, accounting, auditing, and recordkeeping, and the public
availability of information. These factors will be carefully considered by the
Adviser in selecting investments for the Fund.
Mortgage-Backed Securities
The Fund may invest in mortgage pass-through certificates and
multiple-class pass-through securities, such as collateralized mortgage
obligations. See "Risk Factors and Suitability" for a description of the risks
associated with mortgage-backed securities.
Mortgage-Backed Pass-Through Securities. Mortgage-backed "pass-through
securities" represent participation interests in pools of residential mortgage
loans and are issued by the U.S. Government or private lenders and guaranteed by
the U.S. Government or one of its agencies or instrumentalities.
Collateralized Mortgage Obligations (CMOs). The issuer of a CMO effectively
transforms a mortgage pool into obligations comprised of several different
maturities, thus creating mortgage securities that appeal to short-and
intermediate-term investors as well as the more traditional long-term mortgage
investor. CMOs are debt securities issued by Federal Home Loan Mortgage
Corporation, Federal National Mortgage Corporation and by non-governmental
financial institutions and other mortgage lenders and are generally fully
collateralized by a pool of mortgages held under an indenture. CMOs are issued
in a number of classes or series which have different maturities and generally
are retired in sequence. CMOs are designed to be retired as the underlying
mortgage loans in the mortgage pool are repaid. In making investments in CMOs,
the Adviser will usually select CMOs with a stable average life and will take
into account the following considerations: the total return on CMOs will vary
with interest rates, which cannot be predicted; the maturity of the CMOs is
variable and is not known at the time of purchase; and prepayments on the CMOs
will depend upon prevailing interest rates and the CMOs may have a shorter life
than expected.
Asset-Backed Securities
The Fund may invest in asset-backed securities, which represent
participations in, or are secured by and payable from, assets such as motor
vehicle installment sale contracts, installment loan contracts, leases of
various types of real and personal property, receivables from revolving credit
(credit card) agreements and other categories of receivables. Asset-backed
securities may also be collateralized by a portfolio of U.S. Government
securities, but are not direct obligations of the U.S. Government, its agencies
or instrumentalities. Payments or distributions of principal and interest on
asset-backed securities may be guaranteed up to certain amounts and for a
certain time period by a letter of credit or a pool insurance policy issued by a
financial institution, or other credit enhancements may be present; however,
privately issued obligations collateralized by a portfolio of privately issued
6
<PAGE>
asset-backed securities do not involve any government-related guaranty or
insurance. Such securities are like mortgage-related securities in that they
represent an interest in the cash flow from a pool of underlying receivables.
However, unlike mortgage-related securities, the asset underlying the security
consists of debt incurred to purchase personal property rather than real
property. In addition, the maturity of the debt involved is much shorter in
duration than that of conventional mortgages and involves less likelihood of
refinancing and unscheduled prepayments.
Such securities can be structured in several ways, the most common of which
has been a "pass-through" model. A certificate representing a fractional
undivided beneficial interest in a trust or corporation created solely for the
purpose of holding the trust assets is issued to the security holder. The
certificate entitles the holder thereof the right to receive a percentage of the
interest and principal payments on the terms and according to the schedule
established by the trust instrument. A servicing agent collects amounts due on
the sales contracts or credit card receivables for the account of the trust,
which distributes such amounts to the security holders.
An alternative structure for such securities is similar to that of the
collateralized mortgage obligations described above. Instead of holding an
undivided interest in trust assets, the purchaser of the security holds a bond
collateralized by the underlying assets. The bonds are serviced by cash flows
from the underlying assets, a specified fraction of all cash received (less a
servicing fee) being allocated first to pay interest and then to retire
principal. Unlike the "pass-through" certificate, payments of principal and
interest to security holders are not dependent on prepayments, although
prepayments alter the yield and average life of the bonds.
Forward Roll Transactions
In order to enhance current income, the Fund may enter into forward roll
transactions with respect to mortgage-backed securities to the extent of 10% of
its net assets. In a forward roll transaction, the Fund sells a mortgage-backed
security to a financial institution, such as a bank or broker-dealer, and
simultaneously agrees to repurchase a similar security from the institution at a
later date at an agreed-upon price. The mortgage-backed securities that are
repurchased will bear the same interest rate as those sold, but generally will
be collateralized by different pools of mortgages with different prepayment
histories than those sold. During the period between the sale and repurchase,
the Fund will not be entitled to receive interest and principal payments on the
securities sold. Proceeds of the sale will be invested in short-term
instruments, such as repurchase agreements or other short-term securities, and
the income from these investments, together with any additional fee income
received on the sale and the amount gained by repurchasing the securities in the
future at a lower price, will generate income and gain for the Fund which is
intended to exceed the yield on the securities sold. Forward roll transactions
involve the risk that the market value of the securities sold by the Fund may
decline below the repurchase price of those securities. At the time the Fund
enters into a forward roll transaction, it will place in a segregated custodial
account cash or liquid, high grade debt obligations having a value equal to the
repurchase price (including accrued interest) and will subsequently monitor the
account to insure that the equivalent value is maintained.
7
<PAGE>
Structured or Hybrid Notes
The Fund may invest in "structured" or "hybrid" notes. The distinguishing
feature of a structured or hybrid note is that the amount of interest and/or
principal payable on the note is based on the performance of a benchmark asset
or market other than fixed-income securities or interest rates. Examples of
these benchmarks include stock prices, currency exchange rates and physical
commodity prices. Investing in a structured note allows the Fund to gain
exposure to the benchmark market while fixing the maximum loss that the Fund may
experience in the event that market does not perform as expected. Depending on
the terms of the note, the Fund may forego all or part of the interest and
principal that would be payable on a comparable conventional note; the Fund's
loss cannot exceed this foregone interest and/or principal. An investment in
structured or hybrid notes involves risks similar to those associated with a
direct investment in the benchmark asset.
Preferred Stock
The Fund may, from time to time, invest up to 10% of its total assets in
preferred stock, such as auction rate or fixed rate preferred stock, if the
Adviser believes that such investments would be appropriate substitutes for
money market instruments or other short-term fixed income securities. Any
investment in preferred stock will comply with the Fund's requirements with
regard to ratings and maturities described above.
Strategic Transactions
Consistent with maintaining stability of principal, the Fund may, but is
not required to, utilize various other investment strategies as described below
to hedge various market risks (such as interest rates and broad or specific
fixed-income market movements), to manage the effective maturity or duration of
fixed-income securities, or to enhance potential gain. Such strategies are
generally accepted as part of modern portfolio management and are regularly
utilized by many mutual funds and other institutional investors. Techniques and
instruments used by the Fund may change over time as new instruments and
strategies are developed or regulatory changes occur.
In the course of pursuing its investment objective, the Fund may purchase
and sell (write) exchange-listed and over-the-counter put and call options on
securities, fixed income indices and other financial instruments; purchase and
sell financial futures contracts and options thereon; and enter into various
interest rate transactions such as swaps, caps, floors or collars (collectively,
all the above are called "Strategic Transactions"). Strategic Transactions may
be used in an attempt to protect against possible changes in the market value of
securities held in or to be purchased for the Fund's portfolio resulting from
securities markets fluctuations, to protect the Fund's unrealized gains in the
value of its portfolio securities, to facilitate the sale of such securities for
investment purposes, to manage the effective maturity or duration of the Fund's
portfolio, or to establish a position in the derivatives markets as a temporary
substitute for purchasing or selling particular securities. In addition to the
hedging transactions referred to in the preceding sentence, Strategic
Transactions may also be used to enhance potential gain in circumstances where
hedging is not involved although the Fund will attempt to limit its net loss
exposure resulting from Strategic Transactions entered into for such purposes to
not more than 1% of the Fund's net assets at any one time and, to the extent
necessary, the Fund will close out transactions in order to comply with this
limitation. (Transactions such as writing covered call options are considered to
involve hedging for the purposes of this limitation.) In calculating the Fund's
net loss exposure from such Strategic Transactions, an unrealized gain from a
particular Strategic Transaction position would be netted against an unrealized
loss from a related Strategic Transaction position. For example, if the Adviser
believes that short-term interest rates as indicated in the forward yield curve
are too high, the Fund may take a short position in a near-term Eurodollar
8
<PAGE>
futures contract and a long position in a longer-dated Eurodollar futures
contract. Under such circumstances, any unrealized loss in the near-term
Eurodollar futures position would be netted against any unrealized gain in the
longer-dated Eurodollar futures position (and vice versa) for purposes of
calculating the Fund's net loss exposure. The ability of the Fund to utilize
these Strategic Transactions successfully will depend on the Adviser's ability
to predict pertinent market movements, which cannot be assured. The Fund will
comply with applicable regulatory requirements when implementing these
strategies, techniques and instruments. The Fund's activities involving
Strategic Transactions may be limited by the requirements of Subchapter M of the
Internal Revenue Code of 1986, as amended (the "Code"), for qualification as a
regulated investment company.
Strategic Transactions have risks associated with them including possible
default by the other party to the transaction, illiquidity and, to the extent
the Adviser's view as to certain market movements is incorrect, the risk that
the use of such Strategic Transactions could result in losses greater than if
they had not been used. The writing of put and call options may result in losses
to the Fund, force the purchase or sale, respectively, of portfolio securities
at inopportune times or for prices higher than (in the case of purchases due to
the exercise of put options) or lower than (in the case of sales due to the
exercise of call options) current market values, limit the amount of
appreciation the Fund can realize on its investments or cause the Fund to hold a
security it might otherwise sell. The use of options and futures transactions
entails certain other risks. In particular, the variable degree of correlation
between price movements of futures contracts and price movements in the related
portfolio position of the Fund creates the possibility that losses on the
hedging instrument may be greater than gains in the value of the Fund's
position. The writing of options could significantly increase the Fund's
portfolio turnover rate and, therefore, associated brokerage commissions or
spreads. In addition, futures and options markets may not be liquid in all
circumstances and certain over-the-counter options may have no markets. As a
result, in certain markets, the Fund might not be able to close out a
transaction without incurring substantial losses, if at all. Although the use of
futures and options transactions for hedging should tend to minimize the risk of
loss due to a decline in the value of the hedged position, at the same time, in
certain circumstances, they tend to limit any potential gain which might result
from an increase in value of such position. The loss incurred by the Fund in
writing options on futures and entering into futures transactions is potentially
unlimited; however, as described above, the Fund will attempt to limit its net
loss exposure resulting from Strategic Transactions entered into for non-hedging
purposes to not more than 1% of its net assets at any one time. Futures markets
are highly volatile and the use of futures may increase the volatility of the
Fund's net asset value. Finally, entering into futures contracts would create a
greater ongoing potential financial risk than would purchases of options where
the exposure is limited to the cost of the initial premium. Losses resulting
from the use of Strategic Transactions would reduce net asset value and the net
result may be less favorable than if the Strategic Transactions had not been
utilized.
9
<PAGE>
Further information concerning the Fund's Strategic Trans-actions is set
forth in the Statement of Additional Information.
When-Issued Securities and Forward Commitments
The Fund may commit up to 10% of its net assets to purchase securities on a
"when-issued" basis. Although the Fund would generally purchase securities on a
when-issued basis with the intention of actually acquiring the securities, the
Fund may dispose of a when-issued security prior to settlement if the Adviser
deems it appropriate to do so. The payment obligation and the interest rate on
these securities will be fixed at the time the Fund enters into the commitment,
but no income will accrue to the Fund until they are delivered and paid for.
Unless the Fund has entered into an offsetting agreement to sell the securities,
cash or liquid, high grade debt securities equal to the amount of the Fund's
commitment will be segregated with the Fund's custodian, to secure the Fund's
obligation and to ensure that it is not leveraged. The market value of the
securities when they are delivered may be less than the amount paid by the Fund.
With respect to up to 25% of its net assets, the Fund may also enter into
contracts to purchase securities for a fixed price at a future date beyond the
customary settlement time if the Fund holds and maintains until the settlement
date in a segregated account cash or liquid, high-grade debt obligations in an
amount sufficient to meet the purchase price, or if the Fund enters into
offsetting contracts for the forward sale of other securities it owns. Such
contracts are customarily referred to as "forward commitments" and involve a
risk of loss if the value of the security to be purchased declines prior to the
settlement date.
Repurchase Agreements
The Fund may invest up to 25% of its net assets in repurchase agreements
under normal circumstances. Repurchase agreements acquired by the Fund will
always be fully collateralized as to principal and interest by money market
instruments and will be entered into only with commercial banks, brokers and
dealers considered creditworthy by the Fund. If the other party or "seller" of a
repurchase agreement defaults, the Fund might suffer a loss to the extent that
the proceeds from the sale of the underlying securities and other collateral
held by the Fund in connection with the related repurchase agreement are less
than the repurchase price. In addition, in the event of bankruptcy of the seller
or failure of the seller to repurchase the securities as agreed, the Fund could
suffer losses, including loss of interest on or principal of the security and
costs associated with delay and enforcement of the repurchase agreement.
Reverse Repurchase Agreements
Under a reverse repurchase agreement, the Fund would sell securities and
agree to repurchase them at a mutually agreed upon date and price. The Fund
intends to enter into reverse repurchase agreements to provide cash to satisfy
redemption requests and thereby avoid otherwise having to sell securities during
unfavorable market conditions in order to meet such redemptions. At the time the
Fund enters into a reverse repurchase agreement, it will establish a segregated
account with the Fund's custodian containing liquid, high grade debt securities
having a value not less than the repurchase price (including accrued interest)
and will subsequently monitor the account to maintain such value. Reverse
repurchase agreements involve the risk that the market value of the securities
which the Fund is obligated to repurchase may decline below the repurchase
10
<PAGE>
price. In the event the buyer of securities under a reverse repurchase agreement
files for bankruptcy or becomes insolvent, such buyer or its trustee or receiver
may receive an extension of time to determine whether to enforce the Fund's
obligation to repurchase the securities and the Fund's use of the proceeds of
the reverse repurchase agreement may effectively be restricted pending such
determination. The staff of the Securities and Exchange Commission considers
reverse repurchase agreements to be borrowings by the Fund under the Investment
Company Act of 1940. See "Investment Restrictions."
Portfolio Turnover
Portfolio turnover is not expected to exceed 200% on an annual basis. A
rate of turnover of 100% would occur, for example, if the value of the lesser of
purchases or sales of portfolio securities for a particular year equaled the
average monthly value of portfolio securities owned during the year (excluding
securities with a maturity date of one year or less at the date of acquisition).
A high rate of portfolio turnover (100% or more) involves a correspondingly
higher transaction cost which must be borne directly by the Fund and thus
indirectly by its shareholders. It may also result in the Fund's realization of
larger amounts of short-term capital gains, distributions from which are taxable
to shareholders as ordinary income and may, under certain circumstances, make it
more difficult for the Fund to qualify as a regulated investment company under
the Code.
Investment Restrictions
The Fund has adopted certain fundamental policies which may not be changed
without the approval of the Fund's shareholders. These policies provide, among
other things, that the Fund may not: (i) invest, with respect to at least 75% of
its total assets, more than 5% in the securities of any one issuer (other than
the U.S. Government, its agencies or instrumentalities) or acquire more than 10%
of the outstanding voting securities of any issuer; (ii) issue senior
securities, borrow money or securities, enter into reverse repurchase agreements
or pledge or mortgage its assets, except that the Fund may (a) borrow money from
banks as a temporary measure for extraordinary or emergency purposes (but not
for investment purposes) in an amount up to 15% of the current value of its
total assets, (b) enter into forward roll transactions, (c) enter into reverse
repurchase agreements in an amount up to 15% of the current value of its total
assets, and (d) pledge its assets to an extent not greater than 15% of the
current value of its total assets to secure such borrowings; however, the Fund
may not make any additional investments while its outstanding bank borrowings
exceed 5% of the current value of its total assets; (iii) make loans of
portfolio securities, except that the Fund may enter into repurchase agreements
with respect to 25% of the value of its net assets; or (iv) invest more than 25%
of its total assets in a single industry except that this restriction shall not
apply to government securities. For the purposes of the foregoing restriction,
the industry classification of an asset-backed security is determined by its
underlying assets. For example, certificates for automobile receivables and
certificates for amortizing revolving debts constitute two different industries.
If any percentage restriction described above is adhered to at the time of
investment, a subsequent increase or decrease in the percentage resulting from a
change in the value of the Fund's assets will not constitute a violation of the
restriction. Certain non-fundamental policies and additional fundamental
policies adopted by the Fund are described in the Statement of Additional
Information.
11
<PAGE>
RISK FACTORS AND SUITABILITY
The Fund is not a money market fund and is not an appropriate investment
for investors seeking complete stability of principal. The Fund is designed for
corporate investors, pension and profit-sharing plans, state and local
governments, foundations, endowment funds and individuals. The Fund will attempt
to achieve a higher than money market return for its shareholders. Although the
net asset value of the Fund's shares may fluctuate more than money market
instruments in response to changes in interest rates, the Fund will seek to keep
such volatility below that of longer term debt securities by limiting the
maturity of the securities in its portfolio but may not be able to return
dollar-for-dollar the money invested. See "Investment Objectives and Policies"
above for a further description of the risks associated with an investment in
the Fund.
Yields on debt securities depend on a variety of factors, such as general
conditions in the money and bond markets, and the size, maturity and rating of a
particular issue. Debt securities with longer maturities tend to produce higher
yields and are generally subject to greater potential capital appreciation and
depreciation. The market prices of debt securities usually vary depending upon
available yields, rising when interest rates decline and declining when interest
rates rise.
Mortgage-Backed Securities
Mortgage-backed securities are subject to both regular and early
prepayments of principal, which will affect the value of the securities in the
Fund's portfolio and, therefore, the Fund's current and total returns. While it
is not possible to predict accurately the life of a particular issue of
mortgage-backed securities held by the Fund, the actual life of a
mortgage-backed security is likely to be substantially less than the original
final maturity of the mortgage pool underlying the security because unscheduled
early prepayments of principal on the security owned by the Fund will result
from the prepayment, refinancing or foreclosure of the underlying mortgage loans
in the mortgage pool. For example, mortgagors may speed up the rate at which
they prepay their mortgages when interest rates decline sufficiently to
encourage refinancing. When the monthly payments (which may include unscheduled
prepayments) on a security are paid to the Fund, the Fund may be able to
reinvest them only at a lower rate of interest. Because of the regular scheduled
payments of principal and the early unscheduled prepayments of principal,
mortgage-backed securities, and adjustable rate mortgage-backed securities in
particular, may be less effective than other types of obligations as a means of
locking in attractive long-term interest rates. As a result, this type of
security may have less potential for capital appreciation during periods of
declining interest rates than other U.S. Government securities of comparable
maturities, although many issues of mortgage-backed securities may have a
comparable risk of decline in market value during periods of rising interest
rates. Although a security purchased at a premium above its par value may carry
a higher stated rate of return, both a scheduled payment of principal, which
will be made at par, and an unscheduled prepayment of principal generally will
decrease current and total returns and will accelerate the recognition of
income, distributions from which will be taxable to shareholders as ordinary
income.
Leverage
The use of forward roll transactions and reverse repurchase agreements
involves leverage. Leverage allows any investment gains made with the additional
monies received (in excess of the costs of the forward roll transaction or
reverse repurchase agreement) to increase the net asset value of the Fund's
shares faster than would otherwise be the case. On the other hand, if the
additional monies received are invested in ways that do not fully recover the
costs of such transactions to the Fund, the net asset value of the Fund would
fall faster than would otherwise be the case.
CALCULATION OF PERFORMANCE DATA
From time to time the Fund may advertise its total return and yield. Both
total return and yield figures are based on historical earnings and are not
intended to indicate future performance.
The "total return" of the Fund refers to the average annual compounded
rates of return over 1, 5 and 10 year periods (or any shorter period since
inception) that would equate an initial amount invested at the beginning of a
stated period to the ending redeemable value of the investment. The calculation
assumes the reinvestment of all dividends and distributions, includes all
recurring fees that are charged to all shareholder accounts and deducts all
nonrecurring charges at the end of each period.
The "yield" of the Fund is computed by dividing the net investment income
per share earned during the most recent practicable period stated in the
advertisement by the maximum offering price per share on the last day of the
period (using the average number of shares entitled to receive dividends). For
the purpose of determining net investment income, the calculation includes,
among expenses of the Fund, all recurring fees that are charged to all
shareholder accounts and any nonrecurring charges for the period stated.
From time to time, the Fund may compare its performance with that of other
mutual funds with similar investment objectives, to bond and other relevant
indices, and to performance rankings prepared by recognized mutual fund
statistical services. In addition, the Fund's performance may be compared to
alternative investment or savings vehicles and/or to indices or indicators of
economic activity.
DIVIDENDS AND DISTRIBUTIONS
Dividends on shares of the Fund will be declared daily from net investment
income and distributed monthly. Dividends from short-term and long-term capital
gains, if any, after reduction by capital losses, will be declared and
distributed at least annually. Dividends from net investment income and
distributions from capital gains, if any, are automatically reinvested in
additional shares of the Fund unless the shareholder elects to receive them in
cash.
PURCHASE OF SHARES
Shares of the Fund may be purchased directly from the Principal
Underwriter, which offers the Fund's shares to the public on a continuous basis.
Shares are sold at the net asset value per share next computed after the
purchase order is received in good order by the Principal Underwriter and
payment for the shares is received by the Fund's custodian. Please see the
Fund's account application or call the Principal Underwriter for instructions on
how to make payment of shares to the Fund's custodian. Unless waived by the
Fund, the minimum initial investment is $1,000,000. Additional investments may
be made in amounts of at least $100,000.
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Shares of the Fund may also be purchased through securities dealers. Orders
for the purchase of Fund shares received by dealers by the close of regular
trading on the New York Stock Exchange on any business day and transmitted to
the Principal Underwriter or its agent by the close of its business day
(normally 4:00 p.m., New York City time) will be effected as of the close of
regular trading on the New York Stock Exchange on that day, provided that
payment for the shares is also received by the Fund's custodian on that day.
Otherwise, orders will be effected at the net asset value per share determined
on the next business day. It is the responsibility of dealers to transmit orders
so that they will be received by the Principal Underwriter before the close of
its business day. Shares of the Fund purchased through dealers may be subject to
transaction fees, no part of which will be received by the Fund, the Principal
Underwriter or the Adviser.
The Fund's net asset value per share is computed each day on which the New
York Stock Exchange is open as of the close of regular trading (currently 4:00
p.m., New York City time). The net asset value per share is calculated by
determining the value of all the Fund's assets, subtracting all liabilities and
dividing the result by the total number of shares outstanding. Portfolio
securities for which market quotations are readily available are valued at
current market value. Securities are valued at the last sales prices on the
exchange or national securities market on which they are primarily traded.
Securities not listed on an exchange or national securities market, or
securities for which there were no reported transactions, and CMOs and
asset-backed securities are valued at the last quoted bid prices. Securities for
which quotations are not readily available, and all other assets are valued at
fair value as determined in good faith by the Adviser in accordance with
procedures approved by the Trustees.
The Board of Trustees has approved determining the current market value of
securities with one year or less remaining to maturity on a spread basis. To the
extent this method is employed, it would be used in conjunction with the
periodic use of market quotations. Under the spread process, the Adviser would
determine in good faith the current market value of these portfolio securities
by comparing their quality, maturity and liquidity characteristics to those of
U.S. Treasury bills. Money market instruments with less than sixty days
remaining to maturity when acquired by the Fund may be valued on an amortized
cost basis. If the Fund acquires a money market instrument with more than sixty
days remaining to its maturity, it may be valued at current market value until
the sixtieth day prior to maturity and may then be valued at amortized cost
based upon the value on such date unless the Trustees determine during such
sixty-day period that amortized cost does not represent fair value.
In the sole discretion of the Adviser, the Fund may accept securities
instead of cash for the purchase of shares of the Fund. The Adviser will
determine that any securities acquired in this manner are consistent with the
investment objective, policies and restrictions of the Fund. The securities will
be valued in the manner stated above. The purchase of shares of the Fund for
securities instead of cash may cause an investor who contributes them to realize
a taxable gain or loss with respect to the securities transferred to the Fund.
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The Trust reserves the right in its sole discretion (i) to suspend the
offering of the Fund's shares, (ii) to reject purchase orders when in the best
interest of the Fund and (iii) to modify or eliminate the minimum initial
investment in Fund shares. The Fund's investment minimums do not apply to
accounts for which the Adviser or any of its affiliates serves as investment
adviser or to employees of the Adviser or any of its affiliates or to members of
such persons' immediate families. The Fund's investment minimums apply to the
aggregate value invested in omnibus accounts rather than to the investment of
the underlying participants in such omnibus accounts.
EXCHANGE OF SHARES
Shares of the Fund may be exchanged for shares of one or more other funds
in the Standish, Ayer & Wood family of funds. Shares of the Fund redeemed in an
exchange transaction are valued at their net asset value next determined after
the exchange request is received by the Principal Underwriter or its agent.
Shares of a fund purchased in an exchange transaction are sold at their net
asset value next determined after the exchange request is received by the
Principal Underwriter or its agent and payment for the shares is received by the
fund into which your shares are to be exchanged. Until receipt of the purchase
price by the fund into which your shares are to be exchanged (which may take up
to three business days), your money will not be invested. To obtain a current
prospectus for any of the other funds in the Standish, Ayer & Wood family of
funds, please call the Principal Underwriter at (800) 221-4795. Please consider
the differences in investment objectives and expenses of a fund as described in
its prospectus before making an exchange.
Written Exchanges
Shares of the Fund may be exchanged by written order to the Principal
Underwriter, One Financial Center, Boston, Massachusetts 02111. A written
exchange request must (a) state the name of the current Fund, (b) state the name
of the fund into which the current Fund shares will be exchanged, (c) state the
number of shares or the dollar amount to be exchanged, (d) identify the
shareholder's account numbers in both funds and (e) be signed by each registered
owner exactly as the shares are registered. Signature(s) must be guaranteed as
listed under "Written Redemption" below.
Telephonic Exchanges
Shareholders who elect telephonic privileges may exchange shares by
calling the Principal Underwriter at (800) 221-4795. Telephonic privileges are
not available to shareholders automatically. Proper identification will be
required for each telephonic exchange. Please see "Telephone Transactions" below
for more information regarding telephonic transactions.
General Exchange Information
All exchanges are subject to the following exchange restrictions: (i)
the fund into which shares are being exchanged must be registered for sale in
your state; (ii) exchanges may be made only between funds that are registered in
the same name, address and, if applicable, taxpayer identification number; and
(iii) unless waived by the Trust, the amount to be exchanged must satisfy the
minimum account size of the fund to be exchanged into. Exchange requests will
14
<PAGE>
not be processed until payment for the shares of the current Fund have been
received by the Fund's custodian. The exchange privilege may be changed or
discontinued and may be subject to additional limitations upon sixty (60) days'
notice to shareholders, including certain restrictions on purchases by
market-timer accounts.
REDEMPTION OF SHARES
Shares of the Fund may be redeemed by any of the methods described
below at the net asset value per share next determined after receipt by the
Principal Underwriter or its agent of a redemption request in proper form.
Redemptions will not be processed until a completed Share Purchase Application
and payment for the shares to be redeemed have been received.
Written Redemption
Shares of the Fund may be redeemed by written order to the Principal
Underwriter, One Financial Center, 26th Floor, Boston, Massachusetts 02111. A
written redemption request must (a) state the name of the Fund and the number of
shares or the dollar amount to be redeemed, (b) identify the shareholder's
account number and (c) be signed by each registered owner exactly as the shares
are registered. Signature(s) must be guaranteed by a member of either the
Securities Transfer Association's STAMP program or the New York Stock Exchange's
Medallion Signature Program or by any one of the following institutions,
provided that such institution meets credit standards established by Investors
Bank & Trust Company, the Fund's transfer agent: (i) a bank; (ii) a securities
broker or dealer, including a government or municipal securities broker or
dealer, that is a member of a clearing corporation or has net capital of at
least $100,000; (iii) a credit union having authority to issue signature
guarantees; (iv) a savings and loan association, a building and loan
association, a cooperative bank, or a federal savings bank or association; or
(v) a national securities exchange, a registered securities exchange or a
clearing agency. Additional supporting documents may be required in the case of
estates, trusts, corporations, partnerships and other shareholders that are not
individuals. Redemption proceeds will normally be paid by check mailed within
three business days of receipt by the Principal Underwriter of a written
redemption request in proper form. If shares to be redeemed were recently
purchased by check, the Fund may delay transmittal of redemption proceeds until
such time as it has assured itself that good funds have been collected for the
purchase of such shares. This may take up to fifteen (15) days in the case of
payments made by check.
Telephonic Redemption
Shareholders who elect telephonic privileges may redeem shares by
calling the Principal Underwriter at (800) 221-4795. Telephonic privileges are
not available to shareholders automatically. Redemption proceeds will be mailed
or wired in accordance with the shareholder's instruction on the account
application to a pre-designated account. Redemption proceeds will normally be
paid promptly after receipt of telephonic instructions, but no later than three
business days thereafter, except as described above for shares purchased by
check. Redemption proceeds will be sent only by check payable to the shareholder
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<PAGE>
of record at the address of record, unless the shareholder has indicated, in the
initial application for the purchase of shares, a commercial bank to which
redemption proceeds may be sent by wire. These instructions may be changed
subsequently only in writing, accompanied by a signature guarantee, and
additional documentation in the case of shares held by a corporation or other
entity or by a fiduciary such as a trustee or executor. Wire charges, if any,
will be deducted from redemption proceeds. Proper identification will be
required for each telephonic redemption.
Repurchase Order
In addition to telephonic and written redemption of Fund shares, the
Principal Underwriter may accept telephone orders from brokers or dealers for
the repurchase of Fund shares. The repurchase price is the net asset value per
share next determined after receipt of the repurchase order by the Principal
Underwriter and the payment for the shares by the Fund's custodian. Brokers and
dealers are obligated to transmit repurchase orders to the Principal Underwriter
prior to the close of the Principal Underwriter's business day (normally 4:00
p.m.). Brokers and dealers may charge for their services in connection with a
repurchase of Fund shares, but neither the Fund nor the Principal Underwriter
imposes a charge for share repurchases.
Telephone Transactions
By maintaining an account that is eligible for telephonic exchange and
redemption privileges, the shareholder authorizes the Adviser, the Principal
Underwriter, the Fund and the Fund's custodian to act upon instructions of any
person to redeem and/or exchange shares from the shareholder's account. Further,
the shareholder acknowledges that, as long as the Fund employs reasonable
procedures to confirm that telephonic instructions are genuine, and follows
telephonic instructions that it reasonably believes to be genuine, neither the
Adviser, nor the Principal Underwriter, nor the Trust, nor the Fund, nor the
Fund's custodian, nor their respective officers or employees, will be liable for
any loss, expense or cost arising out of any request for a telephonic redemption
or exchange, even if such transaction results from any fraudulent or
unauthorized instructions. Depending upon the circumstances, the Fund intends to
employ personal identification or written confirmation of transactions
procedures, and if it does not, the Fund may be liable for any losses due to
unauthorized or fraudulent instructions. All telephone transaction requests will
be recorded. Shareholders may experience delays in exercising telephone
transaction privileges during periods of abnormal market activity. Accordingly,
during periods of volatile economic and market conditions, shareholders may wish
to consider transmitting redemption and exchange requests in writing.
* * * *
The proceeds paid upon redemption or repurchase may be more or less than
the cost of the shares, depending upon the market value of the Fund's portfolio
investments at the time of redemption or repurchase. The Fund intends to pay
cash for all shares redeemed, but under certain conditions, the Fund may make
payments wholly or partially in portfolio securities.
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<PAGE>
Because of the cost of maintaining shareholder accounts, the Fund may
redeem, at net asset value, the shares in any account which has a value of less
than $250,000 as a result of redemptions or transfers. Before doing so, the Fund
will notify the shareholder that the value of the shares in the account is less
than the specified minimum and will allow the shareholder 30 days to make an
additional investment in an amount which will increase the value of the account
to at least $250,000. The Fund may eliminate duplicate mailings of Fund
materials to shareholders that have the same address of record.
MANAGEMENT
Trustees
The Fund is a separate investment series of Standish, Ayer & Wood
Investment Trust, a Massachusetts business trust organized on August 13, 1986.
Under the terms of the Agreement and Declaration of Trust establishing the
Trust, which is governed by the laws of The Commonwealth of Massachusetts, the
Trustees of the Trust are ultimately responsible for the management of its
business and affairs.
Investment Adviser
Standish, Ayer & Wood, Inc. (the "Adviser"), One Financial Center, Boston,
Massachusetts 02111, serves as investment adviser to the Fund pursuant to an
investment advisory agreement and manages the Fund's investments and affairs
subject to the supervision of the Trustees of the Trust. The Adviser will, from
time to time, determine jointly the appropriate maturity of the Fund's
portfolio. This determination will be made after a review of economic, interest
rate and yield curve analysis. The Board of Trustees will periodically review
and approve the maturity decisions made by the Adviser.
The Adviser provides fully discretionary management services and counseling
and advisory services to a broad range of clients throughout the United States
and abroad. As of March 31, 1996, the Adviser or its affiliate, Standish
International Management Company, L.P. ("SIMCO"), served as the investment
adviser to each of the following
fourteen funds in the Standish, Ayer & Wood family of funds:
Net Assets
Funds (March 31, 1996)
- - ----- ----------------
Standish Controlled Maturity Fund $ 9,042,346
Standish Equity Portfolio 98,282,505
Standish Fixed Income Portfolio 2,299,158,500
Standish Fixed Income Fund II 10,102,031
Standish Global Fixed Income Portfolio 149,048,965
Standish Intermediate Tax Exempt Bond Fund 31,199,236
Standish International Equity Fund 51,980,946
Standish International Fixed Income Fund 761,073,675
Standish Massachusetts Intermediate
Tax Exempt Bond Fund 32,270,691
Standish Securitized Fund 53,357,787
Standish Short-Term Asset Reserve Fund 272,188,970
Standish Small Capitalization Equity Portfolio 196,260,876
Standish Small Cap Tax-Sensitive Equity Fund 1,588,743
Standish Tax-Sensitive Equity Fund 1,261,111
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<PAGE>
Corporate pension funds are the largest asset under active management
by Standish. Standish's clients also include charitable and educational
endowment funds, financial institutions, trusts and individual investors.
As of March 31, 1996, Standish managed approximately $29 billion in assets.
The Fund's portfolio manager is Jennifer A. Pline, who is primarily
responsible for the day-to-day management of the Fund's portfolio and has served
as a portfolio manager to the Fund since January 1, 1991. During the past five
years, Ms. Pline has served as a Vice President of the Adviser.
Subject to the supervision and direction of the Trustees of the Trust, the
Adviser manages the Fund's portfolio in accordance with its stated investment
objective and policies, recommends investment decisions for the Fund, places
orders to purchase and sell securities on behalf of the Fund, and permits the
Fund to use the name "Standish." The Adviser provides all necessary office space
and services of executive personnel for administering the affairs of the Fund.
For these services, the Fund pays a monthly fee at the annual rate of 0.25% of
average daily net asset value. In addition, the Adviser has agreed to limit the
Fund's aggregate annual operating expenses (excluding brokerage commissions,
taxes and extraordinary expenses) to the lower of (a) 0.50% of the Fund's
average daily net assets, or (b) the permissible limit applicable in any state
in which shares of the Fund are then qualified for sale. If the expense limit is
exceeded, the compensation due the Adviser for such fiscal year shall be
proportionately reduced by the amount of such excess by a reduction or refund
thereof at the time such compensation is payable after the end of each calendar
month, subject to readjustment during the fiscal year. Prior to July 1, 1995,
the Adviser served as co-investment adviser to the Fund with a joint venture
partner of the Adviser. For the fiscal year ended December 31, 1995, advisory
fees represented to 0.25% of the Fund's average daily net assets which were paid
equally to the Adviser and its joint venture partner prior to June 30, 1995 and
entirely to the Adviser thereafter.
Expenses
The Fund bears all expenses of its operations other than those incurred by
the Adviser under the investment advisory agreement. Among other expenses, the
Fund will pay investment advisory fees; bookkeeping, share pricing and
shareholder servicing fees and expenses; custodian fees and expenses; legal and
auditing fees; expenses of prospectuses, statements of additional information
and shareholder reports which are furnished to existing shareholders;
registration and reporting fees and expenses; and Trustees' fees and expenses.
The Principal Underwriter bears, without subsequent reimbursement, the
distribution expenses attributable to the offering and sale of Fund shares.
Expenses of the Trust that relate to more than one series are allocated among
such series by the Adviser in an equitable manner, primarily on the basis of the
net asset values. For the fiscal year ended December 31, 1995, expenses borne by
the Fund represented 0.33% of the Fund's average daily net assets.
Portfolio Transactions
Subject to the supervision of the Trustees of the Trust, the Adviser
selects the brokers and dealers that execute orders to purchase and sell
portfolio securities for the Fund. The Adviser generally seeks to obtain the
best available price and most favorable execution with respect to all
transactions for the Fund.
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<PAGE>
Subject to the consideration of best price and execution and to applicable
regulations, the receipt of research and sales of Fund shares may also be
considered a factor in the selection of brokers and dealers that execute orders
to purchase and sell portfolio securities for the Fund.
FEDERAL INCOME TAXES
The Fund presently qualifies and intends to continue to qualify for
taxation as a "regulated investment company" under the Code. If it qualifies for
treatment as a regulated investment company, the Fund will not be subject to
federal income tax on income (including capital gains) distributed to
shareholders in the form of dividends or capital gain distributions in
accordance with certain timing requirements of the Code.
The Fund will be subject to a nondeductible 4% excise tax under the Code to
the extent that it fails to meet certain distribution requirements with respect
to each calendar year. Certain distributions made in order to satisfy the Code's
distribution requirements may be declared by the Fund during October, November
or December of the year but paid during the following January. Such
distributions will be taxable to taxable shareholders as if received on December
31 of the year the distributions are declared, rather than the year in which the
distributions are received.
Shareholders which are taxable entities or persons will be subject to
federal income tax on dividends and capital gain distributions made by the Fund.
Dividends paid by the Fund from net investment income and from any excess of net
short-term capital gain over net long-term capital loss will be taxable to
shareholders as ordinary income, whether received in cash or Fund shares. No
portion, or only a very small portion, of such dividends is expected to qualify
for the corporate dividends received deduction under the Code. Dividends paid by
the Fund from net capital gain (the excess of net long-term capital gain over
net short-term capital loss), called "capital gain distributions," will be
taxable to shareholders as long-term capital gains, whether received in cash or
Fund shares and without regard to how long the shareholder has held shares of
the Fund. Capital gain distributions do not qualify for the corporate dividends
received deduction. Dividends and capital gain distributions may also be subject
to state and local or foreign taxes.
Redemptions and repurchases of shares are taxable events on which a
shareholder may recognize a gain or loss. Special rules recharacterize as
long-term any losses on the sale or exchange of Fund shares with a tax holding
period of six months or less, to the extent the shareholder received a capital
gain distribution with respect to such shares.
Individuals and certain other classes of shareholders may be subject to 31%
backup withholding of federal income tax on dividends, capital gain
distributions, and the proceeds of redemptions or repurchases of shares, if they
fail to furnish the Fund with their correct taxpayer identification number and
certain certifications or if they are otherwise subject to backup withholding.
Individuals, corporations and other shareholders that are not U.S. persons under
the Code are subject to different tax rules and may be subject to nonresident
alien withholding at the rate of 30% (or a lower rate provided by an applicable
tax treaty) on amounts treated as ordinary dividends from the Fund and, unless a
current IRS Form W-8 or an acceptable substitute is furnished to the Fund, to
backup withholding on certain payments from the Fund.
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A state income (and possibly local income and/or intangible property) tax
exemption is generally available to the extent the Fund's distributions are
derived from interest on (or, in the case of intangibles taxes, the value of its
assets is attributable to) certain U.S. Government obligations, provided in some
states that certain thresholds for holdings of such obligations and/or reporting
requirements are satisfied.
After the close of each calendar year, the Fund will send a notice to
shareholders that provides information about the federal tax status of
distributions to shareholders for such calendar year.
THE FUND AND ITS SHARES
The Fund is a separate investment series of Standish, Ayer & Wood
Investment Trust, an unincorporated business trust organized under the laws of
The Commonwealth of Massachusetts pursuant to an Agreement and Declaration of
Trust dated August 13, 1986. Under the Agreement and Declaration of Trust, the
Trustees have authority to issue an unlimited number of shares of beneficial
interest, par value $.01 per share, of the Fund. Each share of the Fund is
entitled to one vote. All Fund shares have equal rights with regard to voting,
redemption, dividends, distributions and liquidation, and shareholders of the
Fund have the right to vote as a separate class with respect to certain matters
under the Investment Company Act of 1940 and the Agreement and Declaration of
Trust. Shares of the Fund do not have cumulative voting rights. Fractional
shares have proportional voting rights and participate in any distributions and
dividends. When issued, each Fund share will be fully paid and nonassessable.
Shareholders of the Fund do not have preemptive or conversion rights.
Certificates representing shares of the Fund will not be issued.
The Trust has established fourteen series that currently offer their shares
to the public and may establish additional series at any time. Each series is a
separate taxpayer, eligible to qualify as a separate regulated investment
company for federal income tax purposes. The calculation of the net asset value
of a series and the tax consequences of investing in a series will be determined
separately for each series.
The Trust is not required to hold annual meetings of shareholders. Special
meetings of shareholders may be called from time to time for purposes such as
electing or removing Trustees, changing a fundamental policy, or approving an
investment advisory agreement.
If less than two-thirds of the Trustees holding office have been elected by
shareholders, a special meeting of shareholders of the Trust will be called to
elect Trustees. Under the Agreement and Declaration of Trust and the Investment
Company Act of 1940, the record holders of not less than two-thirds of the
outstanding shares of each investment series of the Trust may remove a Trustee
by votes cast in person or by proxy at a meeting called for the purpose or by a
written declaration filed with each of the Trust's custodian banks. Except as
described above, the Trustees will continue to hold office and may appoint
successor Trustees. Whenever ten or more shareholders of the Trust who have been
such for at least six months, and who hold in the aggregate shares having a net
asset value of at least $25,000 or at least 1% of the outstanding shares,
whichever is less, apply to the Trustees in writing stating that they wish to
communicate with other shareholders with a view to obtaining signatures to
request a meeting, and such application is accompanied by a form of
communication and request which they wish to transmit, the Trustees shall within
five (5) business days after receipt of such application either (1) afford to
such applicants access to a list of the names and addresses of all shareholders
as recorded on the books of the Trust; or (2) inform such applicants as to the
approximate number of shareholders of record and the approximate cost of mailing
to them the proposed communication or form of request.
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Inquiries concerning the Fund should be made by contacting the Principal
Underwriter at the address and telephone number listed on the cover of this
Prospectus.
CUSTODIAN, TRANSFER AGENT AND
DIVIDEND-DISBURSING AGENT
Investors Bank & Trust Company, 24 Federal Street, Boston, Massachusetts
02110, serves as the Fund's transfer agent and dividend-disbursing agent and as
custodian of all cash and securities of the Fund.
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P., One Post Office Square, Boston, Massachusetts
02109, serves as independent accountants for the Trust and will audit the Fund's
financial statements annually.
LEGAL COUNSEL
Hale and Dorr, 60 State Street, Boston, Massachusetts 02109, is legal
counsel to the Trust, the Principal Underwriter and the Adviser.
- - --------------------------------------------------------------------------------
No dealer, salesman or other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus or in the Statement of Additional Information, and, if given or made,
such other information or representations must not be relied upon as having been
authorized by the Trust. This Prospectus does not constitute an offering in any
jurisdiction in which such offering may not be lawfully made.
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APPENDIX A
MOODY'S MONEY MARKET INSTRUMENT RATINGS
Issuers rated Prime-1 (or related supporting institutions) have a superior
capacity for repayment of short-term promissory obligations. Prime-1
repayment capacity will normally be evidenced by the following
characteristics: -Leading market positions in well-established industries.
-High rates of return on funds employed. -Conservative capitalization
structures with moderate reliance on debt and ample asset protection.
-Broad margins in earnings coverage of fixed financial charges and high
internal cash generation. -Well-established access to a range of financial
markets and assured sources of alternate liquidity. Issuers rated Prime-2
(or related supporting institutions) have a strong capacity for repayment
of short-term promissory obligations. This will normally be evidenced by
many of the characteristics cited above but to a lesser degree. Earnings
trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still appropriate, may be
more affected by external conditions. Ample alternate liquidity is
maintained.
MOODY'S CORPORATE BOND RATINGS
Aaa -Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to
as "gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position
of such issues.
Aa -Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater amplitude or there
may be other elements present which make the long term risks appear
somewhat larger than in Aaa securities.
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.
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STANDARD & POOR'S MONEY MARKET INSTRUMENT RATINGS
A-1 -This designation indicates that the degree of safety regarding timely
payment is either overwhelming or very strong.
A-2 -Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as high as for issues
designated "A-1."
STANDARD & POOR'S BOND RATINGS
AAA -Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA -Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A -Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions than debt in higher rated
categories.
BBB -Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal
for debt in this category than in higher rated categories.
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TAX CERTIFICATION INSTRUCTIONS
Federal law requires that taxable distributions and proceeds of redemptions
and exchanges be reported to the IRS and that 31% be withheld if you fail to
provide your correct Taxpayer Identification Number (TIN) and the TIN-related
certifications contained in the Account Purchase Application (Application) or
you are otherwise subject to backup withholding. The Fund will not impose backup
withholding as a result of your failure to make any certification, except the
certifications in the Application that directly relate to your TIN and backup
withholding status. Amounts withheld and forwarded to the IRS can be credited as
a payment of tax when completing your Federal income tax return.
For most individual taxpayers, the TIN is the social security number.
Special rules apply for certain accounts. For example, for an account
established under the Uniform Gift to Minors Act, the TIN of the minor should be
furnished. If you do not have a TIN, you may apply for one using forms available
at local offices of the Social Security Administration or the IRS, and you
should write "Applied For" in the space for a TIN on the Application.
Recipients exempt from backup withholding, including corporations and
certain other entities, should provide their TIN and underline "exempt" in
section 2(a) of the TIN section of the Application to avoid possible erroneous
withholding. Non-resident aliens and foreign entities may be subject to
withholding of up to 30% on certain distributions received from the Fund and
must provide certain certifications on IRS Form W-8 to avoid backup withholding
with respect to other payments. For further information, see Code Sections 1441,
1442 and 3406 and/or consult your tax adviser.
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STANDISH SHORT-TERM ASSET RESERVE FUND
Investment Adviser
Standish, Ayer & Wood, Inc.
One Financial Center
Boston, Massachusetts 02111
Principal Underwriter
Standish Fund Distributors, L.P.
One Financial Center
Boston, Massachusetts 02111
Custodian
Investors Bank & Trust Company
24 Federal Street
Boston, Massachusetts 02110
Independent Accountants
Coopers & Lybrand L.L.P.
One Post Office Square
Boston, Massachusetts 02109
Legal Counsel
Hale and Dorr
60 State Street
Boston, Massachusetts 02109
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May 1, 1996
STANDISH SHORT-TERM ASSET RESERVE FUND
One Financial Center
Boston, Massachusetts 02111
(800) 221-4795
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information is not a prospectus, but expands
upon and supplements the information contained in the Prospectus dated May 1,
1996, as amended and/or supplemented from time to time (the "Prospectus"), of
Standish Short-Term Asset Reserve Fund (the "Fund"), a separate investment
series of Standish, Ayer & Wood Investment Trust (the Trust). This Statement of
Additional Information should be read in conjunction with the Fund's Prospectus,
a copy of which may be obtained without charge by writing or calling Standish
Fund Distributors, the Trust's principal underwriter (the "Principal
Underwriter"), at the address and phone number set forth above.
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND IS
AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY IF PRECEDED OR
ACCOMPANIED BY AN EFFECTIVE PROSPECTUS.
CONTENTS
General Information and History...............................2
Investment Objective and Policies............................ 2
Investment Restrictions.......................................7
Calculation of Performance Data...............................8
Management....................................................9
Redemption of Shares.........................................14
Portfolio Transactions.......................................15
Determination of Net Asset Value.............................15
The Fund and Its Shares......................................15
Taxation ....................................................16
Additional Information.......................................17
Experts and Financial Statements.............................17
Financial Statements.........................................18
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GENERAL INFORMATION AND HISTORY
Effective July 1, 1995, the Fund changed its name from Consolidated
Standish Short-Term Asset Reserve Fund to Standish Short-Term Asset Reserve
Fund.
INVESTMENT OBJECTIVE AND POLICIES
The Fund's Prospectus describes the investment objective of the Fund and
summarizes the investment policies it will follow. The following discussion
supplements the description of the Fund's investment policies in the Prospectus.
See the Prospectus for a more complete description of the Fund's investment
objective, policies and restrictions.
Maturity
The effective maturity of an individual portfolio security in which the
Fund invests is defined as the period remaining until the earliest date when the
Fund can recover the principal amount of such security through mandatory
redemption or prepayment by the issuer, the exercise by the Fund of a put
option, demand feature or tender option granted by the issuer or a third party
or the payment of the principal on the stated maturity date. The effective
maturity of variable rate securities is calculated by reference to their coupon
reset dates. Thus, the effective maturity of a security may be substantially
shorter than its final stated maturity. Unscheduled prepayments of principal
have the effect of shortening the effective maturities of securities in general
and mortgage-backed securities in particular. Prepayment rates are influenced by
changes in current interest rates and a variety of economic, geographic, social
and other factors and cannot be predicted with certainty. In general,
securities, such as mortgage-backed securities, may be subject to greater
prepayment rates in a declining interest rate environment. Conversely, in an
increasing interest rate environment, the rate of prepayment may be expected to
decrease. A higher than anticipated rate of unscheduled principal prepayments on
securities purchased at a premium or a lower than anticipated rate of
unscheduled payments on securities purchased at a discount may result in a lower
yield (and total return) to the Fund than was anticipated at the time the
securities were purchased. The Fund's reinvestment of unscheduled prepayments
may be made at rates higher or lower than the rate payable on such security,
thus affecting the return realized by the Fund.
MoneyMarket Instruments and Repurchase Agreements
Money market instruments include short-term U.S. Govern-ment securities,
U.S. and foreign commercial paper (promissory notes issued by corporations to
finance their short-term credit needs), negotiable certificates of deposit,
non-negotiable fixed time deposits, bankers' acceptances and repurchase
agreements.
U.S. Government securities include securities which are direct obligations
of the U.S. Government backed by the full faith and credit of the United States,
and securities issued by agencies and instrumentalities of the U.S. Government,
which may be guaranteed by the U.S. Treasury or supported by the issuer's right
to borrow from the Treasury and may be backed by the credit of the federal
agency or instrumentality itself. Agencies and instrumentalities of the U.S.
Government include, but are not limited to, Federal Land Banks, the Federal Farm
Credit Bank, the Central Bank for Cooperatives, Federal Intermediate Credit
Banks, Federal Home Loan Banks and the Federal National Mortgage Association.
2
<PAGE>
A repurchase agreement is an agreement under which the Fund acquires money
market instruments (generally U.S. Government securities) from a commercial
bank, broker or dealer, subject to resale to the seller at an agreed-upon price
and date (normally the next business day). The resale price reflects an
agreed-upon interest rate effective for the period the instruments are held by
the Fund and is unrelated to the interest rate on the instruments. The
instruments acquired by the Fund (including accrued interest) must have an
aggregate market value in excess of the resale price and will be held by the
Fund's custodian bank until they are repurchased. The Trustees will monitor the
standards that the Adviser, Standish, Ayer & Wood, Inc. (the "Adviser"), will
use in reviewing the creditworthiness of any party to a repurchase agreement
with the Fund.
The use of repurchase agreements involves certain risks. For example, if
the seller defaults on its obligation to repurchase the instruments acquired by
the Fund at a time when their market value has declined, the Fund may incur a
loss. If the seller becomes insolvent or subject to liquidation or
reorganization under bankruptcy or other laws, a court may determine that the
instruments acquired by the Fund are collateral for a loan by the Fund and
therefore are subject to sale by the trustee in bankruptcy. Finally, it is
possible that the Fund may not be able to substantiate its interest in the
instruments it acquires. While the Trustees acknowledge these risks, it is
expected that they can be controlled through careful documentation and
monitoring.
Structured or Hybrid Notes
As more fully described in the Prospectus, the Fund may invest in
structured or hybrid notes. It is expect that not more than 5% of the Fund's net
assets will be at risk as a result of such investments. In addition to the risks
associated with a direct investment in the benchmark asset, investments in
structured and hybrid notes involve the risk that the issuer or counterparty to
the obligation will fail to perform its contractual obligations. Certain
structured or hybrid notes may also be leveraged to the extent that the
magnitude of any change in the interest rate or principal payable on the
benchmark asset is a multiple of the change in the reference price. Leverage
enhances the price volatility of the security and, therefore, the Fund's net
asset value. Further, certain structured or hybrid notes may be illiquid for
purposes of the Fund's limitation on investments in illiquid securities.
Strategic Transactions
Consistent with maintaining stability of principal, the Fund may, but is
not required to, utilize various other investment strategies as described below
to hedge various market risks (such as interest rates and broad or specific
fixed-income market movements), to manage the effective maturity or duration of
fixed-income securities, or to enhance potential gain. Such strategies are
generally accepted as part of modern portfolio management and are regularly
utilized by many mutual funds and other institutional investors. Techniques and
instruments used by the Fund may change over time as new instruments and
strategies are developed or regulatory changes occur.
3
<PAGE>
In the course of pursuing its investment objective, the Fund may purchase
and sell (write) exchange-listed and over-the-counter put and call options on
securities, fixed-income indices and other financial instruments; purchase and
sell financial futures contracts and options thereon; and enter into various
interest rate transactions such as swaps, caps, floors or collars (collectively,
all the above are called "Strategic Transactions"). Strategic Transactions may
be used in an attempt to protect against possible changes in the market value of
securities held in or to be purchased for the Fund's portfolio resulting from
securities markets fluctuations, to protect the Fund's unrealized gains in the
value of its portfolio securities, to facilitate the sale of such securities for
investment purposes, to manage the effective maturity or duration of the Fund's
portfolio, or to establish a position in the derivatives markets as a temporary
substitute for purchasing or selling particular securities. In addition to the
hedging transactions referred to in the preceding sentence, Strategic
Transactions may also be used to enhance potential gain in circumstances where
hedging is not involved although the Fund will attempt to limit its net loss
exposure resulting from Strategic Transactions entered into for such purposes to
not more than 1% of the Fund's net assets at any one time and, to the extent
necessary, the Fund will close out transactions in order to comply with this
limitation. (Transactions such as writing covered call options are considered to
involve hedging for the purposes of this limitation.) In calculating the Fund's
net loss exposure from such Strategic Transactions, an unrealized gain from a
particular Strategic Transaction position would be netted against an unrealized
loss from a related Strategic Transaction position. For example, if the Adviser
believes that short term interest rates as indicated in the forward yield curve
are too high, the Fund may take a short position in a near-term Eurodollar
futures contract and a long position in a longer-dated Eurodollar futures
contract. Under such circumstances, any unrealized loss in the near-term
Eurodollar futures position would be netted against any unrealized gain in the
longer-dated Eurodollar futures position (and vice versa) for purposes of
calculating the Fund's net loss exposure. The ability of the Fund to utilize
these Strategic Transactions successfully will depend on the Adviser's ability
to predict pertinent market movements, which cannot be assured. The Fund will
comply with applicable regulatory requirements when implementing these
strategies, techniques and instruments. The Fund's activities involving
Strategic Transactions may be limited by the requirements of Subchapter M of the
Internal Revenue Code of 1986, as amended (the "Code"), for qualification as a
regulated investment company.
Risks of Strategic Transactions
The use of Strategic Transactions has associated risks including possible
default by the other party to the transaction, illiquidity and, to the extent
the Adviser's view as to certain market movements is incorrect, the risk that
the use of such Strategic Transactions could result in losses greater than if
they had not been used. The writing of put and call options may result in losses
to the Fund, force the purchase or sale, respectively, of portfolio securities
at inopportune times or for prices higher than (in the case of purchases due to
the exercise of put options) or lower than (in the case of sales due to the
4
<PAGE>
exercise of call options) current market values, limit the amount of
appreciation the Fund can realize on its investments or cause the Fund to hold a
security it might otherwise sell. The use of options and futures transactions
entails certain other risks. In particular, the variable degree of correlation
between price movements of futures contracts and price movements in the related
portfolio position of the Fund creates the possibility that losses on the
hedging instrument may be greater than gains in the value of the Fund's
position. The writing of options could significantly increase the Fund's
portfolio turnover rate and, therefore, associated brokerage commissions or
spreads. In addition, futures and options markets may not be liquid in all
circumstances and certain over-the-counter options may have no markets. As a
result, in certain markets, the Fund might not be able to close out a
transaction without incurring substantial losses, if at all. Although the use of
futures and options transactions for hedging should tend to minimize the risk of
loss due to a decline in the value of the hedged position, at the same time, in
certain circumstances, they tend to limit any potential gain which might result
from an increase in value of such position. The loss incurred by the Fund in
writing options on futures and entering into futures transactions is potentially
unlimited; however, as described above, the Fund will attempt to limit its net
loss exposure resulting from Strategic Transactions entered into for non-hedging
purposes to not more than 1% of its net assets at any one time. Futures markets
are highly volatile and the use of futures may increase the volatility of the
Fund's net asset value. Finally, entering into futures contracts would create a
greater ongoing potential financial risk than would purchases of options where
the exposure is limited to the cost of the initial premium. Losses resulting
from the use of Strategic Transactions would reduce net asset value and the net
result may be less favorable than if the Strategic Transactions had not been
utilized.
General Characteristics of Options
Put options and call options typically have similar structural
characteristics and operational mechanics regardless of the underlying
instrument on which they are purchased or sold. Thus, the following general
discussion relates to each of the particular types of options discussed in
greater detail below. In addition, many Strategic Transactions involving options
require segregation of the Fund's assets in special accounts, as described below
under "Use of Segregated Accounts."
A put option gives the purchaser of the option, in consideration for the
payment of a premium, the right to sell, and the writer the obligation to buy
(if the option is exercised), the underlying security, commodity, index, or
other instrument at the exercise price. For instance, the Fund's purchase of a
put option on a security might be designed to protect its holdings in the
underlying instrument (or, in some cases, a similar instrument) against a
substantial decline in the market value by giving the Fund the right to sell
such instrument at the option exercise price. A call option, in consideration
for the payment of a premium, gives the purchaser of the option the right to
buy, and the seller the obligation to sell (if the option is exercised), the
underlying instrument at the exercise price. The Fund may purchase a call option
5
<PAGE>
on a security, futures contract index or other instrument to seek to protect the
Fund against an increase in the price of the underlying instrument that it
intends to purchase in the future by fixing the price at which it may purchase
such instrument. An American style put or call option may be exercised at any
time during the option period while a European style put or call option may be
exercised only upon expiration or during a fixed period prior thereto. The Fund
is authorized to purchase and sell exchange listed options and over-the-counter
options ("OTC options"). Exchange listed options are issued by a regulated
intermediary such as the Options Clearing Corporation ("OCC"), which guarantees
the performance of the obligations of the parties to such options. The
discussion below uses the OCC as an example, but is also applicable to other
financial intermediaries.
With certain exceptions, exchange listed options generally settle by
physical delivery of the underlying security, although in the future cash
settlement may become available. Index options and Eurodollar instruments are
cash settled for the net amount, if any, by which the option is in-the-money
(i.e., where the value of the underlying instrument exceeds, in the case of a
call option, or is less than, in the case of a put option, the exercise price of
the option) at the time the option is exercised. Frequently, rather than taking
or making delivery of the underlying instrument through the process of
exercising the option, listed options are closed by entering into offsetting
purchase or sale transactions that do not result in ownership of the new option.
The Fund's ability to close out its position as a purchaser or seller of an
exchange listed put or call option is dependent, in part, upon the liquidity of
the option market. There is no assurance that a liquid option market on an
exchange will exist. In the event that the relevant market for an option on an
exchange ceases to exist, outstanding options on that exchange would generally
continue to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours
during which the underlying financial instruments are traded. To the extent that
the option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct agreement with
the Counterparty. In contrast to exchange listed options, which generally have
standardized terms and performance mechanics, all the terms of an OTC option,
including such terms as method of settlement, term, exercise price, premium,
guarantees and security, are set by negotiation of the parties. The Fund will
generally sell (write) OTC options that are subject to a buy-back provision
permitting the Fund to require the Counterparty to sell the option back to the
Fund at a formula price within seven days. (To the extent that the Fund does not
do so, the OTC options are subject to the Fund's restriction on illiquid
securities.) The Fund expects generally to enter into OTC options that have cash
settlement provisions, although it is not required to do so.
Unless the parties provide for it, there is no central clearing or guaranty
function in the OTC option market. As a result, if the Counterparty fails to
make delivery of the security or other instrument underlying an OTC option it
has entered into with the Fund or fails to make a cash settlement payment due in
accordance with the terms of that option, the Fund will lose any premium it paid
for the option as well as any anticipated benefit of the transaction.
Accordingly, the Adviser must assess the creditworthiness of each such
6
<PAGE>
Counterparty or any guarantor or credit enhancement of the Counterparty's credit
to determine the likelihood that the terms of the OTC option will be satisfied.
The Fund will engage in OTC option transactions only with U.S. Government
securities dealers recognized by the Federal Reserve Bank of New York as
"primary dealers", or broker dealers, domestic or foreign banks or other
financial institutions which have received, combined with any credit
enhancements, a long-term debt rating of A from Standard & Poor's Ratings Group
("S&P") or Moody's Investor Services, Inc. ("Moody's") or an equivalent rating
from any other nationally recognized statistical rating organization ("NRSRO")
or which issue debt that is determined to be of equivalent credit quality by the
Adviser. The staff of the Securities and Exchange Commission ("SEC") currently
takes the position that, absent the buy-back provision discussed above, OTC
options purchased by the Fund, and portfolio securities "covering" the amount of
the Fund's obligation pursuant to an OTC option sold by it (the cost of the
sell-back plus the in-the-money amount, if any) are illiquid, and are subject to
the Fund's limitation on investing in illiquid securities. However, for options
written with "primary dealers" in U.S. Government securities pursuant to an
agreement requiring a closing purchase transaction at a formula price, the
amount which is considered to be illiquid may be calculated by reference to a
formula price.
If the Fund sells (writes) a call option, the premium that it receives may
serve as a partial hedge, to the extent of the option premium, against a
decrease in the value of the underlying securities or instruments in its
portfolio or will increase the Fund's income. The sale (writing) of put options
can also provide income.
The Fund may purchase and sell (write) call options on securities,
including U.S. Treasury and agency securities, and Eurodollar instruments, that
are traded on U.S. and foreign securities exchanges and in the over-the-counter
markets, and on securities indices and futures contracts. All calls sold by the
Fund must be "covered" (i.e., the Fund must own the securities or the futures
contract subject to the call) or must meet the asset segregation requirements
described below as long as the call is outstanding. Even though the Fund will
receive the option premium to help offset any loss, the Fund may incur a loss if
the exercise price is below the market price for the security subject to the
call at the time of exercise. A call sold by the Fund also exposes the Fund
during the term of the option to possible loss of opportunity to realize
appreciation in the market price of the underlying security or instrument and
may require the Fund to hold a security or instrument which it might otherwise
have sold.
The Fund may purchase and sell (write) put options on securities, including
U.S. Treasury and agency securities, and Eurodollar instruments (whether or not
it holds the above securities in its portfolio), and on securities indices and
futures contracts. The Fund will not sell put options if, as a result, more than
50% of the Fund's assets would be required to be segregated to cover its
potential obligations under such put options other than those with respect to
futures and options thereon. In selling put options, there is a risk that the
Fund may be required to buy the underlying security at a price above the market
price.
7
<PAGE>
Options on Securities Indices and Other Financial Indices
The Fund may also purchase and sell (write) call and put options on
securities indices and other financial indices. Options on securities indices
and other financial indices are similar to options on a security or other
instrument except that, rather than settling by physical delivery of the
underlying instrument, they settle by cash settlement. For example, an option on
an index gives the holder the right to receive, upon exercise of the option, an
amount of cash if the closing level of the index upon which the option is based
exceeds, in the case of a call, or is less than, in the case of a put, the
exercise price of the option (except if, in the case of an OTC option, physical
delivery is specified). This amount of cash is equal to the differential between
the closing price of the index and the exercise price of the option, which also
may be multiplied by a formula value. The seller of the option is obligated, in
return for the premium received, to make delivery of this amount. In addition to
the methods described above, the Fund may cover call options on a securities
index by owning securities whose price changes are expected to be similar to
those of the underlying index, or by having an absolute and immediate right to
acquire such securities without additional cash consideration (or for additional
cash consideration held in a segregated account by its custodian) upon
conversion or exchange of other securities in its portfolio.
General Characteristics of Futures
The Fund may enter into financial futures contracts or purchase or sell put
and call options on such futures. Futures are generally bought and sold on the
commodities exchanges where they are listed and involve payment of initial and
variation margin as described below. The sale of futures contracts creates a
firm obligation by the Fund, as seller, to deliver to the buyer the specific
type of financial instrument called for in the contract at a specific future
time for a specified price (or, with respect to index futures and Eurodollar
instruments, the net cash amount). The purchase of futures contracts creates a
corresponding obligation by the Fund, as purchaser to purchase a financial
instrument at a specified time and price. Options on futures contracts are
similar to options on securities except that an option on a futures contract
gives the purchaser the right in return for the premium paid to assume a
position in a futures contract and obligates the seller to deliver such position
in the event the option is exercised.
The Fund's use of financial futures and options thereon will in all cases
be consistent with applicable regulatory requirements and in particular the
regulations of the Commodity Futures Trading Commission (the "CTFC") relating to
exclusions from regulation as a commodity pool operator. Those regulations
currently provide that the Fund may use commodity futures and option positions
(i) for bona fide hedging purposes without regard to the percentage of assets
committed to margin and option premiums, or (ii) for other purposes permitted by
the CTFC to the extent that the aggregate initial margin and option premiums
required to establish such non-hedging positions (net of the amount the
positions were "in the money" at the time of purchase) do not exceed 5% of the
net asset value of the Fund's portfolio, after taking into account unrealized
profits and losses on such positions. Typically, maintaining a futures contract
or selling an option thereon requires the Fund to deposit, with its custodian
for the benefit of a futures commission merchant, as security for its
8
<PAGE>
obligations an amount of cash or other specified assets (initial margin) which
initially is typically 1% to 10% of the face amount of the contract (but may be
higher in some circumstances). Additional cash or assets (variation margin) may
be required to be deposited directly with the futures commission merchant
thereafter on a daily basis as the value of the contract fluctuates. The
purchase of an option on financial futures involves payment of a premium for the
option without any further obligation on the part of the Fund. If the Fund
exercises an option on a futures contract it will be obligated to post initial
margin (and potential subsequent variation margin) for the resulting futures
position just it would for any position. Futures contracts and options thereon
are generally settled by entering into an offsetting transaction but there can
be no assurance that the position can be offset prior to settlement at an
advantageous price, nor that delivery will occur. The segregation requirements
with respect to futures contracts and options thereon are described below.
Combined Transactions
The Fund may enter into multiple transactions, including multiple options
transactions, multiple futures transactions, and multiple interest rate
transactions, structured notes and any combination of futures, options and
interest rate transactions ("component transactions"), instead of a single
Strategic Transaction, as part of a single or combined strategy when, in the
opinion of the Adviser it is in the best interests of the Fund to do so. A
combined transaction will usually contain elements of risk that are present in
each of its component transactions. Although combined transactions are normally
entered into based on the Adviser's judgment that the combined strategies will
reduce risk or otherwise more effectively achieve the desired portfolio
management goal, it is possible that the combination will instead increase such
risks or hinder achievement of the portfolio management objective.
Swaps, Caps, Floors and Collars
Among the Strategic Transactions into which the Fund may enter are interest
rate and index swaps and the purchase or sale of related caps, floors and
collars. The Fund expects to enter into these transactions primarily for hedging
purposes, including, but not limited to, preserving a return or spread on a
particular investment or portion of its portfolio, protecting against currency
fluctuations, as a duration management technique or protecting against an
increase in the price of securities the Fund anticipates purchasing at a later
date. Swaps, caps, floors and collars may also be used to enhance potential gain
in circumstances where hedging is not involved although, as described above, the
Fund will attempt to limit its net loss exposure resulting from swaps, caps,
floors and collars and other Strategic Transactions entered into for such
purposes to not more than 1% of the Fund's net assets at any one time. The Fund
will not sell interest rate caps or floors where it does not own securities or
other instruments providing the income stream the Fund may be obligated to pay.
Interest rate swaps involve the exchange by the Fund with another party of their
respective commitments to pay or receive interest, e.g., an exchange of floating
rate payments for fixed rate payments with respect to a notional amount of
principal. An index swap is an agreement to swap cash flows on a notional amount
based on changes in the values of the reference indices. The purchase of a cap
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<PAGE>
entitles the purchaser to receive payments on a notional principal amount from
the party selling such cap to the extent that a specified index exceeds a
predetermined interest rate or amount. The purchase of a floor entitles the
purchaser to receive payments on a notional principal amount from the party
selling such floor to the extent that a specified index falls below a
predetermined interest rate or amount. A collar is a combination of a cap and a
floor that preserves a certain rate of return within a predetermined range of
interest rates or values.
The Fund will usually enter into swaps on a net basis, i.e., the two
payment streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with the Fund receiving or paying, as the case may
be, only the net amount of the two payments. The Fund will not enter into any
swap, cap, floor or collar transaction unless, at the time of entering into such
transaction, the unsecured long-term debt of the Counterparty, combined with any
credit enhancements, is rated at least A by S&P or Moody's or has an equivalent
rating from an NRSRO or the Counterparty issues debt that is determined to be of
equivalent credit quality by the Adviser. If there is a default by the
Counterparty, the Fund may have contractual remedies pursuant to the agreements
related to the transaction. The swap market has grown substantially in recent
years with a large number of banks and investment banking firms acting both as
principals and as agents utilizing standardized swap documentation. As a result,
the swap market has become relatively liquid. Caps, floors and collars are more
recent innovations for which standardized documentation has not yet been fully
developed. Swaps, caps, floors and collars are considered illiquid for purposes
of the Fund's policy regarding illiquid securities, unless it is determined,
based upon continuing review of the trading markets for the specific security,
that such security is liquid. The Board of Trustees has adopted guidelines and
delegated to the Adviser the daily function of determining and monitoring the
liquidity of swaps, caps, floors and collars. The Board of Trustees, however,
retains oversight focusing on factors such as valuation, liquidity and
availability of information and is ultimately responsible for such
determinations. The Staff of the SEC currently takes the position that swaps,
caps, floors and collars are illiquid, and are subject to the Fund's limitation
on investing in illiquid securities.
Eurodollar Contracts
The Fund may make investments in Eurodollar contracts. Eurodollar contracts
are U.S. dollar-denominated futures contracts or options thereon which are
linked to the London Interbank Offered Rate ("LIBOR"), although foreign
currency-denominated contracts are available from time to time. Eurodollar
futures contracts enable purchasers to obtain a fixed rate for the lending of
funds and sellers to obtain a fixed rate for borrowings. The Fund might use
Eurodollar futures contracts and options thereon to hedge against changes in
LIBOR, to which many interest rate swaps and fixed income instruments are
linked.
10
<PAGE>
Use of Segregated Accounts
The Fund will hold securities or other instruments whose values are
expected to offset its obligations under the Strategic Transactions. The Fund
will not enter into Strategic Transactions that expose the Fund to an obligation
to another party unless it owns either (i) an offsetting position in securities
or other options, futures contracts or other instruments or (ii) cash,
receivables or liquid, high-grade debt securities with a value sufficient to
cover its potential obligations. The Fund may have to comply with any applicable
regulatory requirements designed to make sure that mutual funds do not use
leverage in Strategic Transactions, and if required, will set aside cash and
other assets in a segregated account with its custodian bank in the amount
prescribed. In that case, the Fund's custodian would maintain the value of such
segregated account equal to the prescribed amount by adding or removing
additional cash or other assets to account for fluctuations in the value of the
account and the Fund's obligations on the related Strategic Transactions. Assets
held in a segregated account would not be sold while the Strategic Transaction
is outstanding, unless they are replaced with similar assets. As a result, there
is a possibility that segregation of a large percentage of the Fund's assets
could impede portfolio management or the Fund's ability to meet redemption
requests or other current obligations.
"When-Issued" and "Forward Commitment" Securities
The Fund may commit up to 10% of its net assets to purchase securities on a
"when-issued" basis, which means that delivery and payment for the securities
will normally take place 15 to 45 days after the date of the transaction. The
payment obligation and interest rate on the securities are fixed at the time the
Fund enters into the commitment, but interest will not accrue to the Fund until
delivery of and payment for the securities. Although the Fund will only make
commitments to purchase "when-issued" securities with the intention of actually
acquiring the securities, the Fund may sell the securities before the settlement
date if deemed advisable by the Adviser.
The Fund may also, with respect to up to 25% of its net assets, enter into
contracts to purchase securities for a fixed price at a future date beyond
customary settlement time.
Unless the Fund has entered into an offsetting agreement to sell the
securities purchased on a "when-issued" or "forward commitment" basis, cash,
U.S. Government securities or other liquid, high-grade debt obligations with a
market value equal to the amount of the Fund's commitment will be segregated
with the Fund's custodian bank. If the market value of these securities
declines, additional cash or securities will be segregated daily so that the
aggregate market value of the segregated securities equals the amount of the
Fund's commitment.
Securities purchased on a "when-issued" or "forward commitment" basis may
have a market value on delivery which is less than the amount paid by the Fund.
Changes in market value may be based upon the public's perception of the
creditworthiness of the issuer or changes in the level of interest rates.
Generally, the value of "when-issued" and "forward commitment" securities will
fluctuate inversely to changes in interest rates, i.e., they will appreciate in
value when interest rates fall and will depreciate in value when interest rates
rise.
11
<PAGE>
Portfolio Turnover
The Fund places no restrictions on portfolio turnover and it may sell any
portfolio security without regard to the period of time it has been held, except
as may be necessary to maintain its status as a regulated investment company
under the Code. The Fund may, therefore, generally change its portfolio
investments at any time in accordance with the Adviser's appraisal of factors
affecting any particular issuer or market, or the economy in general. Portfolio
turnover is not expected to exceed 200% on an annual basis.
INVESTMENT RESTRICTIONS
The Fund has adopted the following fundamental policies in addition to
those described under "Investment Objective and Policies -- Investment
Restrictions" in the Prospectus. The Fund's fundamental policies cannot be
changed unless the change is approved by the lesser of (i) 67% or more of the
voting securities present at a meeting, if the holders of more than 50% of the
outstanding voting securities of the Fund are present or represented by proxy,
or (ii) more than 50% of the outstanding voting securities of the Fund. The Fund
may not:
1. Invest, with respect to at least 75% of its total assets, more than 5% in
the securities of any one issuer (other than the U.S. Government, its
agencies or instrumentalities) or acquire more than 10% of the outstanding
voting securities of any issuer.
2. Issue senior securities, borrow money or securities, enter into reverse
repurchase agreements or pledge or mortgage its assets, except that the
Fund may (a) borrow money from banks as a temporary measure for
extraordinary or emergency purposes (but not for investment purposes) in
an amount up to 15% of the current value of its total assets, (b) enter
into forward roll transactions, (c) enter into reverse repurchase
agreements in an amount up to 15% of the current value of its total
assets, and (d) pledge its assets to an extent not greater than 15% of the
current value of its total assets to secure such borrowings; however, the
Fund may not make any additional investments while its outstanding bank
borrowings exceed 5% of the current value of its total assets.
3. Make loans of portfolio securities, except that the Fund may enter into
repurchase agreements with respect to 25% of the value of its net assets.
4. Invest more than 25% of its total assets in a single industry except that
this restriction shall not apply to government securities. For purposes of
this restriction, the industry classification of an asset-backed security
is determined by its underlying assets. For example, certificates for
automobile receivables and certificates for amortizing revolving debts
constitute two different industries.
5. Underwrite the securities of other issuers, except to the extent that, in
connection with the disposition of portfolio securities, the Fund may be
deemed to be an underwriter under the Securities Act of 1933.
6. Purchase real estate or real estate mortgage loans, although the Fund may
purchase CMOs, mortgage-backed pass-through securities and marketable
securities of companies which deal in real estate.
12
<PAGE>
7. Purchase securities on margin (except that the Fund may obtain such
short-term credits as may be necessary for the clearance of purchases and
sales of securities).
8. Purchase or sell commodities or commodity contracts except that the Fund
may engage in financial futures contracts and related options
transactions.
9. Purchase the securities of other investment companies, provided that the
Fund may make such a purchase (a) in the open market involving no
commission or profit to a sponsor or dealer (other than the customary
broker's commission), provided that immediately thereafter (i) not more
than 10% of the Fund's total assets would be invested in such securities,
(ii) not more than 5% of the Fund's total assets would be invested in the
securities of any one investment company and (iii) not more than 3% of the
voting stock of any one investment company would be owned by the Fund, or
(b) as part of a merger, consolidation, or acquisition of assets.
The following restrictions are not fundamental policies and may be changed
by the Trustees without shareholder approval, in accordance with applicable
laws, regulations or regulatory policy. The Fund may not:
a. Make short sales of securities or purchase securities on margin, but the
Fund may obtain such short-term credits as may be necessary for the
clearance of purchases and sales of securities.
b. Invest in companies for the purpose of exercising control or management.
c. Purchase or write options, except pursuant to the limitations described
above (See "Investment Objective and Policies Strategic Transactions").
d. Invest in interests in oil, gas or other exploration or development
programs.
e. Invest more than 5% of the assets of the Fund in the securities of any
issuers which, together with their corporate parents, have records of less
than three years' continuous operation, including the operation of any
predecessor, other than obligations issued or guaranteed by the U.S.
Government or its agencies, and securities fully collateralized by such
securities.
f. Invest in securities of any company if any officer or director (trustee)
of the Trust or of the Fund's investment adviser owns more than 1/2 of 1%
of the outstanding securities of such company and such officers and
directors (trustees) own in the aggregate more than 5% of the securities
of such company.
g. Invest more than an aggregate of 10% of the net assets of the Fund in (a)
repurchase agreements which are not terminable within seven days, (b)
securities subject to legal or contractual restrictions on resale or for
which there are no readily available market quotations and (c) in other
illiquid securities, including non-negotiable fixed time deposits of
longer than seven days and certain asset-backed securities.
If any percentage restriction described above is adhered to at the time of
investment, a subsequent increase or decrease in the percentage resulting from a
change in the value of the Fund's assets will not constitute a violation of the
restriction, except with respect to restriction (f) above.
13
<PAGE>
In order to permit the sale of shares of the Fund in certain states, the
Board may, in its sole discretion, adopt restrictions on investment policy more
restrictive than those described above. Should the Board determine that any such
more restrictive policy is no longer in the best interest of the Fund and its
shareholders, the Fund may cease offering shares in the state involved and the
Board may revoke such restrictive policy. Moreover, if the states involved shall
no longer require any such restrictive policy, the Board may, in its sole
discretion, revoke such policy.
CALCULATION OF PERFORMANCE DATA
As indicated in the Prospectus, the Fund may, from time to time, advertise
certain total return and yield information. The average annual total return of
the Fund for a period is computed by subtracting the net asset value per share
at the beginning of the period from the net asset value per share at the end of
the period (after adjusting for the reinvestment of any income dividends and
capital gain distributions), and dividing the result by the net asset value per
share at the beginning of the period. In particular, the average annual total
return of the Fund ("T") is computed by using the redeemable value at the end of
a specified period of time ("ERV") of a hypothetical initial investment of
$1,000 ("P") over a period of time ("n") according to the formula P(1+T)n=ERV.
The yield of the Fund is computed by dividing the net investment income per
share earned during the period stated in the advertisement by the maximum
offering price per share on the last day of the period. For the purpose of
determining net investment income, the calculation includes, among expenses of
the Fund, all recurring fees that are charged to all shareholder accounts and
any non-recurring charges for the period stated. In particular, yield is
determined according to the following formula:
Yield = 2[((A - B + 1)/CD)^6 - 1]
Where: A equals dividends and interest earned during the period; B equals
net expenses accrued for the period; C equals average daily number of shares
outstanding during the period that were entitled to receive dividends; D equals
the maximum offering price per share on the last day of the period.
The average annual total return quotations for the Fund for the one and
five year periods ended December 31, 1995, and since inception (January 3, 1989
to December 31, 1995) are 7.85%, 5.76% and 6.74%, respectively, and the average
annualized yield for the thirty day period ended December 31, 1995 was 5.79%.
These performance quotations should not be considered as representative of the
Fund's performance for any specified period in the future.
The Fund may also quote non-standardized yield, such as yield-to-maturity
("YTM"). YTM represents the rate of return an investor will receive if a
long-term, interest-bearing investment, such as a bond, is held to its maturity
date. YTM does not take into account purchase price, redemption value, time to
maturity, coupon yield, and the time between interest payments.
In addition to average annual return and yield quotations, the Fund may
quote quarterly and annual performance on a net (with management fees and other
operating expenses deducted) and gross basis as follows:
14
<PAGE>
Quarter/Year Net Gross
- - --------------------------------------------------------------------------------
1/89 1.58% 1.70%
2/89 3.52 3.64
3/89 1.71 1.82
4/89 2.38 2.51
1989 9.50 10.01
1/90 1.34 1.45
2/90 2.56 2.69
3/90 2.17 2.27
4/90 2.62 2.73
1990 8.97 9.45
1/91 2.10 2.20
2/91 1.97 2.07
3/91 2.62 2.71
4/91 2.39 2.47
1991 9.41 9.79
1/92 0.84% 0.91%
2/92 2.08 2.17
3/92 1.18 1.28
4/92 0.17 0.27
1992 4.33 4.70
Quarter/Year Net Gross
- - --------------------------------------------------------------------------------
1/93 1.90 1.98
2/93 1.10 1.19
3/93 1.20 1.28
4/93 0.78 0.86
1993 5.08 5.41
1/94 0.06 0.14
2/94 0.06 0.14
3/94 1.31 1.39
4/94 0.83 0.91
1994 2.27 2.60
1/95 2.08 2.16
2/95 2.14 2.22
3/95 1.55 1.62
4/95 1.89 1.97
1995 7.85 8.20
15
<PAGE>
These performance quotations should not be considered as representative of
the Fund's performance for any specified period in the future.
The Fund's performance may be compared in sales literature to the
performance of other mutual funds having similar objectives or to standardized
indices or other measures of investment performance. In particular, the Fund may
compare its performance to The IBC/Donoghue Money Market Average/All Taxable
Index, which is generally considered to be representative of the performance of
domestic, taxable money market funds, and the One Year Treasury Bills. However,
the average maturity of the Fund's portfolio is longer than that of a money
market fund and, unlike a money market fund, the net asset value of the Fund's
shares may fluctuate. Comparative performance may also be expressed by reference
to a ranking prepared by a mutual fund monitoring service or by one or more
newspapers, newsletters or financial periodicals. Performance comparisons may be
useful to investors who wish to compare the Fund's past performance to that of
other mutual funds and investment products. Of course, past performance is not a
guarantee of future results.
16
<PAGE>
MANAGEMENT
Trustees and Officers
The Trustees and executive officers of the Trust are listed below. All
executive officers of the Trust are affiliates of Standish, Ayer & Wood, Inc.,
the Fund's investment adviser.
<TABLE>
<CAPTION>
Name, Address and Date of Birth Position Held Principal Occupation
With Trust During Past 5 Years
- - --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
*D. Barr Clayson, 7/29/35 Vice President and Trustee Vice President and Managing Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.;
One Financial Center Chairman and Director,
Boston, MA 02111 Standish International
Management Company, L.P.
Samuel C. Fleming, 9/30/40 Trustee Chairman of the Board
c/o Decision Resources, Inc. and Chief Executive Officer,
1100 Winter Street Decision Resources, Inc.;
Waltham, MA 02154 through 1989, Senior V.P.
Arthur D. Little
Benjamin M. Friedman, 8/5/44 Trustee William Joseph Maier
c/o Harvard University Professor of Political Economy,
Cambridge, MA 02138 Harvard University
John H. Hewitt, 4/11/35 Trustee Trustee, The Peabody Foundation; Trustee,
P.O. Box 307 Visiting Nurse Alliance of Vermont
So. Woodstock, VT 05071 and New Hampshire
*Edward H. Ladd, 1/3/38 Trustee and Vice President Chairman of the Board
c/o Standish, Ayer & Wood, Inc. and Managing Director,
One Financial Center Standish, Ayer & Wood, Inc. since 1990;
Boston, MA 02111 formerly President of Standish, Ayer & Wood, Inc.
Director of
Standish International Management Company, L.P.
Caleb Loring III, 11/14/43 Trustee Trustee, Essex Street Associates
c/o Essex Street Associates (family investment trust office);
P.0. Box 5600 Director, Holyoke Mutual Insurance Company
Beverly Farms, MA 01915
*Richard S. Wood, 5/21/54 President and Trustee Vice President, Secretary,
c/o Standish, Ayer & Wood, Inc. and Managing Director,
One Financial Center Standish, Ayer & Wood, Inc.;
Boston, MA 02111 Executive Vice President and Director,
Standish International Management Company, L.P.
Richard C. Doll, 7/8/48 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center Vice President and Director,
Boston, MA 02111 Standish International Management Company, L.P.
James E. Hollis III, 11/21/48 Executive Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
David W. Murray, 5/5/40 Treasurer and Secretary Vice President, Treasurer and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center Treasurer,
Boston, MA 02111 Standish International Management Company, L.P.
17
<PAGE>
Name, Address and Date of Birth Position Held Principal Occupation
With Trust During Past 5 Years
- - --------------------------------------------------------------------------------------------------------------------
Caleb F. Aldrich, 9/20/57 Vice President Vice President and Managing Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA O2111
Beverly E. Banfield, 7/6/56 Vice President Vice President and Compliance Officer,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.;
One Financial Center Assistant Vice President and Compliance Officer,
Boston, MA 02111 Freedom Capital Management Corp.
(1989-1992)
Nicholas S. Battelle, 6/24/42 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Walter M. Cabot, 1/16/33 Vice President Senior Advisor and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.;
One Financial Center prior to 1991, President,
Boston, MA 02111 Harvard Management Company
Senior Advisor and Director of
Standish International Management Company, L.P.
David H. Cameron, 11/2/55 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center Director of
Boston, MA 02111 Standish International Management
Company, L.P.
Karen K. Chandor, 2/13/50 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Lavinia B. Chase, 6/4/46 Vice President Vice President,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Susan B. Coan, 5/1/52 Vice President Vice President,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA O2111
W. Charles Cook II, 7/16/63 Vice President Vice President,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center Vice President,
Boston, MA 02111 Standish International Management Company, L.P.
Joseph M. Corrado, 5/13/55 Vice President Vice President and Associate Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
18
<PAGE>
Name, Address and Date of Birth Position Held Principal Occupation
With Trust During Past 5 Years
- - --------------------------------------------------------------------------------------------------------------------
Dolores S. Driscoll, 2/17/48 Vice President Vice President and Managing Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center Director,
Boston, MA 02111 Standish International Management Company, L.P.
Mark A. Flaherty, 4/24/59 Vice President Vice President,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center Vice President
Boston, MA 02111 Standish International Management Company, L.P.
Maria D. Furman, 2/3/54 Vice President Vice President and Managing Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center Vice President and Director,
Boston, MA 02111 Standish International Management Company, L.P.
Anne P. Herrmann, 1/26/56 Vice President Mutual Fund Administrator,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Ann S. Higgins, 4/8/35 Vice President Vice President,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Denise B. Kneeland, 8/19/51 Vice President Senior Operations, Manager,
c/o Standish, Ayer &Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center since December 1995 formerly
Boston, MA 02111 Vice President Scudder, Stevens and Clark
Raymond J. Kubiak, 9/3/57 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Phillip D. Leonardi, 4/24/62 Vice President Vice President, Standish, Ayer & Wood, Inc.
c/o Standish, Ayer & Wood, Inc. since November 1993; formerly, Investment Sales,
One Financial Center Cigna Corporation (1993) and
Boston, MA 02111 Travelers Corporation (1984-1993)
Laurence A. Manchester, 5/24/43 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
George W. Noyes, 11/12/44 Vice President President and Managing Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center Director of
Boston, MA 02111 Standish International Management Company, L.P.
Arthur H. Parker, 8/12/35 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Jennifer A. Pline, 3/8/60 Vice President Vice President,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
19
<PAGE>
Name, Address and Date of Birth Position Held Principal Occupation
With Trust During Past 5 Years
- - --------------------------------------------------------------------------------------------------------------------
Howard B. Rubin, 10/29/59 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center Executive Vice President and Director
Boston, MA 02111 Standish International Management Company, L.P.
Michael C. Schoeck, 10/24/55 Vice President Vice President,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc. since August, 1993;
One Financial Center formerly, Vice President,
Boston, MA 02111 Commerzbank, Frankfurt, Germany
Vice President,
Standish International Management Company, L.P.
Austin C. Smith, 7/25/52 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Stephen A. Smith, 3/13/49 Vice President Vice President, since November 2, 1993;
c/o Standish, Ayer & Wood, Inc. formerly, Standish, Ayer & Wood, Inc. Consultant
One Financial Center Cambridge Associates
Boston, MA 02111
David C. Stuehr, 3/1/58 Vice President Vice President,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
James W. Sweeney, 5/15/59 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center Executive Vice President and Director,
Boston, MA 02111 Standish International Management Company, L.P.
Ralph S. Tate, 4/2/47 Vice President Vice President and Managing Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc. since April, 1990;
One Financial Center formerly Vice President, Aetna Life & Casualty
Boston, MA 02111 President and Director,
Standish International Management Company, L.P.
Michael W. Thompson, 3/31/56 Vice President Vice President and Associate Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Christopher W. Van Alstyne, 3/24/60 Vice President Vice President,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.;
One Financial Center Formerly Regional Marketing Director,
Boston, MA 02111 Gabelli-O'Connor Fixed Income Management
*Indicates that Trustee is an interested person of the Trust for purposes
of the 1940 Act. Compensation of Trustees and Officers
</TABLE>
20
<PAGE>
Compensation of Trustees and Officers
The Fund pays no compensation to the Trust's Trustees affiliated with the
Adviser or to the Trust's officers. None of the Trust's Trustees or officers
have engaged in any financial transactions (other than the purchase or
redemption of the Fund's shares) with the Trust or the Adviser.
The following table sets forth all compensation paid to the Trust's
Trustees as of the fiscal year ended December 31, 1995:
<TABLE>
<CAPTION>
Pension or Retirement Total Compensation
Aggregate Compensation Benefits Accrued as from Fund and
Name of Trustee from the Fund Part of Fund's Expenses Other Funds in Complex*
- - --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
D. Barr Clayson $0 $0 $0
Phyllis L. Cothran** 0 0 0
Richard C. Doll*** 0 0 0
Samuel C. Fleming 3,183 0 46,000
Benjamin M. Friedman 2,886 0 41,750
John H. Hewitt 2,886 0 41,750
Edward H. Ladd 0 0 0
Caleb Loring, III 2,886 0 41,750
Richard S. Wood 0 0 0
* As of the date of this Statement of Additional Information, there were 18 funds in the fund complex.
* Ms. Cothran resigned as a Trustee effective January 31, 1995.
** Mr. Doll resigned as a Trustee effective December 6, 1995.
</TABLE>
Certain Shareholders.
At February 1, 1996, Trustees and officers of the Trust as a group
beneficially owned (i.e., had voting and/or investment power) less than 1% of
the then outstanding shares of the Fund. At that date, each of the following
persons beneficially owned 5% or more of the then outstanding shares of the
Fund:
Percentage of
Name and Address Outstanding Shares
- - --------------------------------------------------------------------------------
Virginia Portfolio c/o Peregrin Financial 19%
84 State Street, Suite 900
Boston, MA 02109
Healthkeepers of Virginia 13%
P.O. Box 26623
Richmond, VA 23261
Emory University Cash Reserve 10%
Mr. M. Wayne Coon
Emory University
1762 Clifton Road, Suite 306
Atlanta, GA 30322
Shands Teaching Hospital & Clinics Inc. 7%
Bankers Trust Trustee
P.O. Box 100336
Gainesville, FL 32610
Nature Conservancy 7%
Nature Conservancy Action Fund
1233-A Cedars Court
Charlottesville, VA 23261
The Nature Conservancy Endowment Fund 6%
1815 North Lynn Street
Arlington, VA 22209
Consolidated Holdings Corporation 5%
1105 North Market Street, Suite 1300
P.O. Box 8985
Wilmington, DE 19899
21
<PAGE>
Investment Adviser
Standish, Ayer & Wood, Inc. (the "Adviser") serves as investment adviser to
the Fund pursuant to a written investment advisory agreement. The Adviser is a
Massachusetts corporation organized in 1933 and is registered under the
Investment Advisers Act of 1940.
The following, constituting all of the Directors and all of the
shareholders of the Adviser, are the controlling persons of the Adviser: Caleb
F. Aldrich, Nicholas S. Battelle, Walter M. Cabot, Sr., David H. Cameron, Karen
K. Chandor, D. Barr Clayson, Richard C. Doll, Dolores S. Driscoll, Mark A.
Flaherty, Maria D. Furman, James E. Hollis III, Raymond J. Kubiak, Edward H.
Ladd, Laurence A. Manchester, David W. Murray, George W. Noyes, Arthur H.
Parker, Howard B. Rubin, Austin C. Smith, David C. Stuehr, James J. Sweeney,
Ralph S. Tate, and Richard S. Wood.
22
<PAGE>
Certain services provided by the Adviser under the advisory agreement are
described in the Prospectus. In addition to those services, the Adviser provides
the Fund with office space for managing its affairs, with the services of
required executive personnel, and with certain clerical services and facilities.
These services are provided without reimbursement by the Fund for any costs
incurred. Under the investment advisory agreement, the Adviser is paid a fee
based upon a percentage of the Fund's average daily net asset value computed as
described in the Prospectus. The rate and time at which the fee is paid are
described in the Prospectus. Prior to July 1, 1995, Standish and Consolidated
Investment Corporation ("Consolidated") served as the Fund's co-investment
advisers pursuant to a written investment advisory agreement. For services to
the Fund during the fiscal years ended December 31, 1993 and 1994, and for the
period from January 1, 1995 through June 30, 1995, Standish and Consolidated
received fees of $783,478, $730,191 and $345,111, respectively, which were
shared equally by Standish and Consolidated. For its services as the Fund's sole
investment adviser during the period from July 1, 1995 through December 31,
1995, Standish received fees of $360,018.
Pursuant to the investment advisory agreement, the Fund bears expenses of
its operations other than those incurred by the Adviser pursuant to the
investment advisory agreement. Among other expenses, the Fund will pay share
pricing and shareholder servicing fees and expenses; custodian fees and
expenses; legal and auditing fees and expenses; expenses of prospectuses,
statements of additional information and shareholder reports; registration and
reporting fees and expenses; and Trustees' fees and expenses. The advisory
agreement provides that if the total expenses of the Fund in any fiscal year
exceed the lower of 0.50% of the Fund's average daily net assets or the most
restrictive expense limitation applicable to the Fund in any state in which
shares of the Fund are then qualified for sale, the compensation due the Adviser
shall be reduced by the amount of the excess, by a reduction or refund thereof
at the time such compensation is payable after the end of each calendar month
during the fiscal year, subject to readjustment during the year. Currently, the
most restrictive state expense limitation provision limits the Fund's expenses
to 2 1/2% of the first $30 million of average net assets, 2% of the next $70
million of such net assets and 1 1/2% of such net assets in excess of $100
million.
Unless terminated as provided below, the Investment Advisory Agreement
continues in full force and effect until June 30, 1997 and for successive
periods of one year, but only so long as each such continuance is approved
annually (i) by either the Trustees of the Trust or by vote of a majority of the
outstanding voting securities (as defined in the 1940 Act) of the Fund, and, in
either event (ii) by vote of a majority of the Trustees of the Trust who are not
parties to the Investment Advisory Agreement or "interested persons" (as defined
in the 1940 Act) of any such party, cast in person at a meeting called for the
purpose of voting on such approval. The Investment Advisory Agreement may be
terminated at any time without the payment of any penalty by vote of the
Trustees of the Trust or by vote of a majority of the outstanding voting
securities (as defined in the 1940 Act) of the Fund or by the Investment
Adviser, on sixty days' written notice to the other parties. The Investment
Advisory Agreement terminates in the event of its assignment as defined in the
1940 Act.
23
<PAGE>
In an attempt to avoid any potential conflict with portfolio transactions
for the Fund, the Adviser and the Trust have adopted extensive restrictions on
personal securities trading by personnel of the Adviser and its affiliates.
These restrictions include: pre-clearance of all personal securities
transactions and a prohibition of purchasing initial public offerings of a
security. These restrictions are a continuation of the basic principle that the
interests of the Fund and its shareholders come before those of the Adviser, its
affiliates and their employees.
Distributor of the Trust
Standish Fund Distributors, L.P. (the "Principal Underwriter"), an
affiliate of the Adviser, serves as the Trust's exclusive principal underwriter
and holds itself available to receive purchase orders for the Fund's shares. In
that capacity, the Principal Underwriter has been granted the right, as agent of
the Trust, to solicit and accept orders for the purchase of the Fund's shares in
accordance with the terms of the Underwriting Agreement between the Trust and
the Principal Underwriter. Pursuant to the Underwriting Agreement, the Principal
Underwriter has agreed to use its best efforts to obtain orders for the
continuous offering of the Fund's shares. The Principal Underwriter receives no
commissions or other compensation for its services, and has not received any
such amounts in any prior year. The Underwriting Agreement shall continue in
effect with respect to the Fund until two years after its execution and for
successive periods of one year thereafter only if it is approved at least
annually thereafter (i) by a vote of the holders of a majority of the Fund's
outstanding shares or by the Trustees of the Trust or (ii) by a vote of a
majority of the Trustees of the Trust who are not "interested persons" (as
defined by the 1940 Act) of the parties to the Underwriting Agreement, cast in
person at a meeting called for the purpose of voting on such approval. The
Underwriting Agreement will terminate automatically if assigned by either party
thereto and is terminable at any time without penalty by a vote of a majority of
the Trustees of the Trust, a vote of a majority of the Trustees who are not
"interested persons" of the Trust, or by a vote of the holders of a majority of
the Fund's outstanding shares, in any case without payment of any penalty on not
more than 60 days' written notice to the other party. The offices of the
Principal Underwriter are located at One Financial Center, 26th Floor, Boston,
Massachusetts 02111.
REDEMPTION OF SHARES
Detailed information on redemption of shares is included in the Prospectus.
The Fund may suspend the right to redeem shares or postpone the date of
payment upon redemption for more than seven days (i) for any period during which
the New York Stock Exchange is closed (other than customary weekend or holiday
closings) or trading on the exchange is restricted; (ii) for any period during
which an emergency exists as a result of which disposal by the Fund of
securities owned by it or determination by the Fund of the value of its net
assets is not reasonably practicable; or (iii) for such other periods as the
Securities and Exchange Commission may permit for the protection of shareholders
of the Fund.
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The Fund intends to pay redemption proceeds in cash for all shares redeemed
but, under certain conditions, the Fund may make payment wholly or partly in
portfolio securities. Portfolio securities paid upon redemption of Fund shares
will be valued at their then current market value. The Fund has elected to be
governed by the provisions of Rule 18f-1 under the 1940 Act which limits the
Fund's obligation to make cash redemption payments to any shareholder during any
90-day period to the lesser of $250,000 or 1% of the Fund's net asset value at
the beginning of such period. An investor may incur brokerage costs in
converting portfolio securities received upon redemption to cash.
PORTFOLIO TRANSACTIONS
The Adviser is responsible for placing the Fund's portfolio transactions
and will do so in a manner deemed fair and reasonable to the Fund and not
according to any formula. The primary consideration in all portfolio
transactions will be prompt execution of orders in an efficient manner at the
most favorable price. In selecting broker-dealers and in negotiating
commissions, the Adviser will consider the firm's reliability, the quality of
its execution services on a continuing basis and its financial condition. When
more than one firm is believed to meet these criteria, preference may be given
to firms which also sell shares of the Fund. In addition, if the Adviser
determines in good faith that the amount of commissions charged by a broker is
reasonable in relation to the value of the brokerage and research services
provided by such broker, the Fund may pay commissions to such broker in an
amount greater than the amount another firm may charge. Research services may
include (i) furnishing advice as to the value of securities, the advisability of
investing in, purchasing or selling securities, and the availability of
securities or purchasers or sellers of securities, (ii) furnishing analyses and
reports concerning issuers, industries, securities, economic factors and trends,
portfolio strategy, and the performance of accounts, and (iii) effecting
securities transactions and performing functions incidental thereto (such as
clearance and settlement). Research services furnished by firms through which
the Fund effects its securities transactions may be used by the Adviser in
servicing other accounts; not all of these services may be used by the Adviser
in connection with the Fund. The investment advisory fee paid by the Fund under
the advisory agreement will not be reduced as a result of the Adviser's receipt
of research services.
The Adviser also place portfolio transactions for other advisory accounts.
The Adviser will seek to allocate portfolio transactions equitably whenever
concurrent decisions are made to purchase or sell securities for the Fund and
another advisory account. In some cases, this procedure could have an adverse
effect on the price or the amount of securities available to the Fund. In making
such allocations, the main factors considered by the Adviser will be the
respective investment objectives, the relative size of portfolio holdings of the
same or comparable securities, the availability of cash for investment, the size
of investment commitments generally held, and opinions of the persons
responsible for recommending the investment.
25
<PAGE>
DETERMINATION OF NET ASSET VALUE
The Fund's net asset value per share is computed each day on which the New
York Stock Exchange is open as of the close of regular trading (currently 4:00
p.m. New York City time). Currently the New York Stock Exchange is not open on
weekends, New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas. The net asset value
per share is arrived at by determining the value of all the Fund's assets,
subtracting all liabilities and dividing the result by the total number of
shares outstanding. Portfolio securities for which market quotations are readily
available are valued at current market value. Securities are valued at the last
sales prices on the exchange or national securities market on which they are
primarily traded. Securities not listed on an exchange or national securities
market, or securities for which there were no reported transactions, and CMOs
and asset-backed securities are valued at the last quoted bid prices. Securities
for which quotations are not readily available, and all other assets are valued
at fair value as determined in good faith by the Adviser in accordance with
procedures approved by the Trustees.
The Board of Trustees has approved determining the current market value of
securities with one year or less remaining to maturity on a spread basis which
will be employed in conjunction with the periodic use of market quotations.
Under the spread process, the Adviser determines in good faith the current
market value of these portfolio securities by comparing their quality, maturity
and liquidity characteristics to those of United States Treasury bills. Money
market instruments with less than sixty days remaining to maturity when acquired
by the Fund may be valued on an amortized cost basis. If the Fund acquires a
money market instrument with more than sixty days remaining to its maturity, it
may be valued at current market value until the sixtieth day prior to maturity
and may then be valued at amortized cost based upon the value on such date
unless the Trustees determine during such sixty-day period that amortized cost
does not represent fair value.
THE FUND AND ITS SHARES
The Fund is an investment series of Standish, Ayer & Wood Investment Trust,
an unincorporated business trust organized under the laws of The Commonwealth of
Massachusetts pursuant to an Agreement and Declaration of Trust dated August 13,
1986 as amended from time to time (the "Declaration"). Under the Declaration,
the Trustees have authority to issue an unlimited number of shares of beneficial
interest, par value $.01 per share, of the Fund. Each share represents an equal
proportionate interest in the Fund with each other share and is entitled to such
dividends and distributions as are declared by the Trustees. Shareholders are
not entitled to any preemptive, conversion or subscription rights. All shares,
when issued, will be fully paid and non-assessable by the Trust. Upon any
liquidation of the Fund, shareholders are entitled to share pro rata in the net
assets available for distribution.
Pursuant to the Declaration, the Trustees may create additional funds by
establishing additional series of shares in the Trust. The establishment of
additional series would not affect the interests of current shareholders in the
Fund. As of the date of this Statement of Additional Information, the Trustees
26
<PAGE>
have established fourteen other series of the Trust that publicly offer their
shares. Pursuant to the Declaration, the Board may establish and issue multiple
classes of shares for each series of the Trust. As of the date of this Statement
of Additional Information, the Trustees do not have any plan to establish
multiple classes of shares for the Fund. Pursuant to the Declaration of Trust
and subject to shareholder approval (if then required), the Trustees may
authorize the Fund to invest all of its investable assets in a single open-end
investment company that has substantially the same investment objectives,
policies and restrictions as the Fund. As of the date of this Statement of
Additional Information, the Board does not have any plan to authorize the Fund
to so invest its assets.
All Fund shares have equal rights with regard to voting, and shareholders
of the Fund have the right to vote as a separate class with respect to matters
as to which their interests are not identical to those of shareholders of other
classes of the Trust, including the approval of an investment advisory contract
and any change of investment policy requiring the approval of shareholders.
Under Massachusetts law, shareholders of the Trust could, under certain
circumstances, be held liable for the obligations of the Trust. However, the
Agreement and Declaration of Trust disclaims shareholder liability for acts or
obligations of the Trust and requires that notice of this disclaimer be given in
each agreement, obligation or instrument entered into or executed by the Trust
or a Trustee. The Declaration also provides for indemnification from the assets
of the Fund for all losses and expenses of any Trust shareholder held liable for
the obligations of the Trust. Thus, the risk of a shareholder incurring a
financial loss on account of its liability as a shareholder of the Trust is
limited to circumstances in which both inadequate insurance existed and the
Trust would be unable to meet its obligations. The possibility that these
circumstances would occur is remote. Upon payment of any liability incurred by
the Trust, the shareholder paying the liability will be entitled to
reimbursement from the general assets of the Trust. The Declaration also
provides that no series of the Trust is liable for the obligations of any other
series. The Trustees intend to conduct the operations of the Trust to avoid, to
the extent possible, ultimate liability of shareholders for liabilities of the
Trust.
TAXATION
Each series of the Trust, including the Fund, is treated as a separate
entity for accounting and tax purposes. The Fund has qualified and elected to be
treated as a "regulated investment company" under Subchapter M of the Internal
Revenue Code of 1986, as amended (the "Code"), and intends to continue to so
qualify in the future. As such and by complying with the applicable provisions
of the Code regarding the sources of its income, the timing of its
distributions, and the diversification of its assets, the Fund will not be
subject to Federal income tax on its investment company taxable income (i.e.,
all income, after reduction by deductible expenses, other than its "net capital
gain," which is the excess, if any, of its net long-term capital gain over its
net short-term capital loss) and net capital gain which are distributed to
shareholders in accordance with the timing requirements of the Code.
27
<PAGE>
The Fund will be subject to a 4% non-deductible federal excise tax on
certain amounts not distributed (and not treated as having been distributed) on
a timely basis in accordance with annual minimum distribution requirements. The
Fund intends under normal circumstances to avoid liability for such tax by
satisfying such distribution requirements.
The Fund is not subject to Massachusetts corporate excise or franchise
taxes. Provided that the Fund qualifies as a regulated investment company under
the Code, it will also not be required to pay any Massachusetts income tax.
The Fund will not distribute net capital gains realized in any year to the
extent that a capital loss is carried forward from prior years against such
gain. For federal income tax purposes, the Fund is permitted to carry forward a
net capital loss in any year to offset its own net capital gains, if any, during
the eight years following the year of the loss. To the extent subsequent net
capital gains are offset by such losses, they would not result in federal income
tax liability to the Fund and, as noted above, would not be distributed as such
to shareholders. The Fund has $3,071,161, $1,512,610, $5,263,400, and $568,968
of capital loss carryforwards, which expire on December 31, 2000, December 31,
2001, December 31, 2002, and December 31, 2003, respectively, available to
offset future net capital gains.
If the Fund invests in zero coupon securities, increasing rate securities
or, in general, other securities with original issue discount (or with market
discount if the Fund elects to include market discount in income currently), the
Fund generally must accrue income on such investments prior to the receipt of
the corresponding cash payments. However, the Fund must distribute, at least
annually, all or substantially all of its net income, including such accrued
income, to shareholders to qualify as a regulated investment company under the
Code and avoid federal income and excise taxes. Therefore, the Fund may have to
dispose of its portfolio securities under disadvantageous circumstances to
generate cash, or may have to leverage itself by borrowing the cash, to satisfy
distribution requirements.
Limitations imposed by the Code on regulated investment companies like the
Fund may restrict the Fund's ability to enter into futures and options
transactions.
Certain options and futures transactions undertaken by the Fund may cause
the Fund to recognize gains or losses from marking to market even though its
positions have not been sold or terminated and affect the character as long-term
or short-term and timing of some capital gains and losses realized by the Fund.
Any net mark to market gains may also have to be distributed to satisfy the
distribution requirements referred to above even though no corresponding cash
amounts may concurrently be received, possibly requiring the disposition of
portfolio securities or borrowing to obtain the necessary cash. Also, certain of
the Fund's losses on its transactions involving options or futures contracts
and/or offsetting portfolio positions may be deferred rather than being taken
into account currently in calculating the Fund's taxable income or gain. Certain
of the applicable tax rules may be modified if the Fund is eligible and chooses
to make one or more of certain tax elections that may be available. These
transactions may therefore affect the amount, timing and character of the Fund's
distributions to shareholders. The Fund will take into account the special tax
rules (including consideration of available elections) applicable to options or
futures contracts in order to minimize any potential adverse tax consequences.
28
<PAGE>
The federal income tax rules applicable to forward rolls and interest rate
swaps, floors, caps and collars are unclear in certain respects, and the Fund
may be required to account for these instruments under tax rules in a manner
that, under certain circumstances, may limit its transactions in these
instruments.
Due to possible unfavorable consequences under present tax law, the Fund
does not currently intend to acquire "residual" interests in real estate
mortgage investment conduits ("REMICs"), although the Fund may acquire "regular"
interests in REMICs.
Distributions from the Fund's current or accumulated earnings and profits
("E&P"), as computed for Federal income tax purposes, will be taxable as
described in the Fund's Prospectus whether taken in shares or in cash.
Distributions, if any, in excess of E&P will constitute a return of capital,
which will first reduce an investor's tax basis in Fund shares and thereafter
(after such basis is reduced to zero) will generally give rise to capital gains.
Shareholders electing to receive distributions in the form of additional shares
will have a cost basis for federal income tax purposes in each share so received
equal to the amount of cash they would have received had they elected to receive
the distributions in cash, divided by the number of shares received.
At the time of an investor's purchase of Fund shares, a portion of the
purchase price may be attributable to realized or unrealized appreciation in the
Fund's portfolio. Consequently, subsequent distributions from appreciation may
be taxable to such investor even if the net asset value of the investor's shares
is, as a result of the distributions, reduced below the investor's cost for such
shares, and the distributions in reality represent a return of a portion of the
purchase price.
Upon a redemption (including a repurchase) of shares of the Fund, a
shareholder may realize a taxable gain or loss, depending upon the difference
between the redemption proceeds and the shareholder's tax basis in his shares.
Such gain or loss will be treated as capital gain or loss if the shares are
capital assets in the shareholder's hands and will be long-term or short-term,
depending upon the shareholder's tax holding period for the shares. Any loss
realized on a redemption may be disallowed to the extent the shares disposed of
are replaced with other shares of the Fund within a period of 61 days beginning
30 days before and ending 30 days after the shares are disposed of, such as
pursuant to automatic dividend reinvestments. In such a case, the basis of the
shares acquired will be adjusted to reflect the disallowed loss. Any loss
realized upon the redemption of shares with a tax holding period of six months
or less will be treated as a long-term capital loss to the extent of any amounts
treated as distributions of long-term capital gain with respect to such shares.
Different tax treatment, including penalties on certain excess
contributions and deferrals, certain pre-retirement and post-retirement
distributions and certain prohibited transactions, is accorded to accounts
maintained as qualified retirement plans. Shareholders should consult their tax
adviser for more information.
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<PAGE>
The foregoing discussion relates solely to U.S. Federal income tax law as
applicable to U.S. persons (i.e., U.S. citizens or residents and U.S. domestic
corporations, partnerships, trusts or estates) subject to tax under such law.
The discussion does not address special tax rules applicable to certain classes
of investors, such as tax-exempt entities, insurance companies, and financial
institutions. Dividends, capital gain distributions, and ownership of or gains
realized on the redemption (including an exchange) of Fund shares may also be
subject to state and local taxes. Shareholders should consult their own tax
adviser as to the Federal, state or local tax consequences of ownership of
shares of, and receipt of distributions from, the Fund in their particular
circumstances.
Non-U.S. investors not engaged in a U.S. trade or business with which their
investment in the Fund is effectively connected will be subject to U.S. Federal
income tax treatment that is different from that described above. These
investors may be subject to nonresident alien withholding tax at the rate of 30%
(or a lower rate under an applicable tax treaty) on amounts treated as ordinary
dividends from the Fund and, unless an effective IRS Form W-8 or authorized
substitute is on file, to 31% backup withholding on certain other payments from
the Fund. Non-U.S. investors should consult their tax adviser regarding such
treatment and the application of foreign taxes to an investment in the Fund.
ADDITIONAL INFORMATION
The Fund's Prospectus and this Statement of Additional Information omit
certain information contained in the registration statement filed with the
Securities and Exchange Commission, which may be obtained from the Commission's
principal office at 450 Fifth Street, N.W., Washington, D.C. 20549, upon payment
of the fee prescribed by the rules and regulations promulgated by the
Commission.
EXPERTS AND FINANCIAL STATEMENTS
The financial statements for the fiscal years ended December 31, 1993, 1994
and 1995 included in this Statement of Additional Information have been audited
by Coopers & Lybrand L.L.P., independent accountants, as set forth in their
report appearing elsewhere herein, and have been so included in reliance upon
the authority of the report of Coopers & Lybrand L.L.P. as experts in accounting
and auditing. The Fund's financial highlights for the fiscal years ended
December 31, 1992, 1991 and 1990 were audited by Deloitte & Touche LLP,
independent auditors, and have been similarly included in reliance upon the
expertise of that firm. Coopers & Lybrand L.L.P., independent accountants, will
audit the Fund's financial statements for the year ending December 31, 1996.
30
<PAGE>
Standish, Ayer & Wood Investment Trust
Standish Short-Term Asset Reserve Fund Series
Financial Statements for the Year Ended
December 31, 1995
1
<PAGE>
Standish, Ayer & Wood Investment Trust
Chairman's Message
January 29, 1996
Dear Standish, Ayer & Wood Investment Trust Shareholder:
I am pleased to have an opportunity to review the major developments at
Standish, Ayer & Wood during this past year as they relate to the activities of
the Investment Trust. The major news for our clients in 1995 was the spectacular
performance of the U.S. investment markets. While we would, of course, like to
claim credit for producing the full extent of these splendid returns, the
reality is obvious: The markets themselves are beyond our control. For the year
as a whole, U.S. stocks, as represented by the Standard and Poor's 500 Index,
produced a total return of 37.6%, and higher grade intermediate-term bonds, as
represented by the Lehman Brothers Aggregate Index, provided a total return of
18.5%. Nearly as surprising, stock and bond prices marched steadily upward
throughout the year, a persistent and almost uninterrupted advance.
Even after the subdued markets of 1994, neither we nor most other investment
managers expected 1995 to be anywhere near as good as it turned out to be. In
this context, we are generally pleased by our investment performance. In most
asset classes, we kept pace with or modestly exceeded market returns. We adhered
to our established investment philosophies, which are designed to add reasonably
consistent increments of value. Our clients seem to be pleased by our efforts as
we continue to have very little client turnover.
As a firm, we have registered moderate growth during the year. Reflecting some
flow of new clients as well as market appreciation, our clients' assets under
management at the end of 1995 totalled $29.4 billion, an increase from $24.4
billion at the end of 1994. We are particularly pleased by the growth in new
assets managed for insurance companies and by the increases in assets of both
large capitalization and small capitalization U.S. common stocks.
The asset class of greatest disappointment in 1995 was international equities.
Not only did the asset class continue to provide subpar returns, but our
portfolios underperformed the international equity markets. These results
reflect judgments early in 1995 to hedge a portion of the currency exposure back
to dollars and to have a moderate stake in emerging markets. While we believe we
have rectified those problems, we are not satisfied with the results and are
working vigorously to improve future performance. We are also counseling our
clients not to lose faith in the international equity asset class despite its
recent disappointing returns.
The figure for total Standish assets under management includes about $1.6
billion managed in conjunction with Standish International Management Company,
L.P. (SIMCO), our affiliate that manages overseas assets for domestic clients
and U.S. assets for overseas clients. It also includes $3.9 billion in the
Standish Investment Trust, our mutual fund organization. In addition, the asset
total reflects an increase over the last few years in the assets we manage in
private, non-mutual fund vehicles.
We introduced two new mutual funds at mid-year 1995, namely the Standish Fixed
Income Fund II (which is designed to parallel the Standish Fixed Income Fund but
exclude the purchase of both nondollar bonds and below-investment-grade
securities), and the Standish Controlled Maturity Fund (which is designed for
investors who wish less volatility and interest rate risk than traditional
intermediate-maturity bonds).
At the beginning of 1996, we introduced two additional mutual funds, the
Standish Tax-Sensitive Equity Fund and the Standish Small Cap Tax-Sensitive
Equity Fund. At Standish we have noted for some time the adverse impact for
taxable investors of high portfolio turnover, which triggers capital gains,
possibly including short-term gains that may result in an even greater tax
liability for investors. We believe there is a major opportunity through both
separate account management and these funds to improve aftertax returns by
limiting the portfolio turnover and managing capital gains.
2
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During 1995, Standish acquired all remaining interests in the business of the
joint venture between Consolidated Investment Corp. (CIC) and Standish, entered
into over seven years ago. Consolidated had been formed by Trigon (previously
Blue Cross/Blue Shield of Virginia) to manage shorter-term taxable and tax
exempt fixed income portfolios. We and Trigon agreed that it was best to have
this unit operating under one owner.
Standish continues to be proud of its structure as an independent management
firm with ownership in the hands of investment professionals active in the
business. There were no changes during 1995 either in corporate structure or in
the people who own the enterprise.
We appreciate the opportunity to serve you, and we remain confident that we have
the resources and the organization to do a superior job. We will be working hard
to fulfill your expectations in 1996.
Sincerely yours,
Edward H. Ladd
Chairman
3
<PAGE>
Standish, Ayer & Wood Investment Trust
Standish Short-Term Asset Reserve Fund Series
Management Discussion
For the year ended December 31, 1995, the STAR Fund returned 7.85%,
outperforming the IBC Donoghue Money Market Average at 5.50% and modestly
underperforming the Salomon One year Treasury Bill Index at 8.09%. After one of
the worst environments in recent memory in 1994, we were pleasantly surprised by
the strength in the bond markets during 1995.
During most of 1995, the market rallied very strongly as participants came to
realize that U.S. Economic growth was beginning to slow to a more sustainable
pace, in part because of the rapid increase in interest rates that took place in
1994. Although rates fell across the maturity spectrum in this environment, the
strongest decline was in the shorter maturities-the 3 year Treasury fell 257
basis points in 1995 from 7.78% to 5.21%. In July 1995, the Federal Reserve
acknowledged that we were experiencing a softer economic environment and lowered
the Federal Funds rate by 25 bp. This was followed by another 25 bp cut in
December.
As we entered 1995, the STAR Fund's management team was concerned that rates
would continue to rise as they had during 1994. Thus, we began the year with a
relatively defensive portfolio average maturity of approximately 9 months. As it
became more evident that we were experiencing a weakening economy and that there
was continued room for yields to fall, we gradually extended the Fund's average
maturity to a neutral position of about 11 months. Because of our defensive
posture during the first quarter, the Fund underperformed the Salomon One Year
Treasury index by about 42 bp. However, after the adjustment in maturity, our
performance versus the one year benchmark improved substantially and we were
able to outperform this benchmark by 26 bp during the second half of the year.
Our return attribution model shows that our defensive posture early in the year
was a contributor the underperformance during the first half. After our
experience in 1994, we recognized that while shareholders are looking for
enhanced returns, we needed to have a major focus on limiting the downside risk
in order to avoid a replay of 1994.
The attribution model also shows that our sector decisions added significant
value to the portfolio and almost completely offset our conservative maturity
posture. In particular, our exposure to Floating Rate Securities (currently
about 22% of the portfolio) were a strong contributor during the year as money
market yields remained relatively high in a flattening yield curve environment
and spreads tightened nicely on this sector. Our exposure to corporate bonds and
asset backed securities also had a positive effect on performance.
During the fourth quarter of 1995, we employed a new strategy in the STAR Fund.
On various occasions, we sold covered call options on two year Treasuries as a
conservative way to improve income on the portfolio. The Fund earned about 1 bp
through employing this strategy. We anticipate that we will continue to utilize
this and other derivatives strategies on an opportunistic basis, when we feel
that they can add value to the portfolio.
We entered 1995 with a very steep yield curve for short term rates; the spread
between overnight and 5 year yields was 230 bp. During the year, the short term
yield curve flattened dramatically and at year end this same maturity range was
inverted, with 5 year yields 13 basis points lower than the overnight rate. The
STAR Fund benefitted from this curve reshaping during the first half of the
year, since it had good exposure to securities at the longer end of our maturity
range, i.e. 3-5 years. During the third quarter, we repositioned the Fund that
would take advantage of a steeper yield curve, given our outlook that as the
Federal Reserve continued to ease, short term rates would be likely to fall
further than long term rates. This strategy paid dividends during December and
continues to be a positive during early 1996, as this report is written.
Looking back on 1995, we are pleased at the Fund's absolute total return of
7.85% and at its substantially higher return than money funds, but are
disappointed that we were unable to beat the Salomon One Year Treasury. Going
forward, we feel that the Fund is well positioned for the market environment in
1996, which seems likely to be less favorable than last year. Our long term
performance record continues to be quite good, with a substantial margin of
outperformance relative to money market funds and a modest advantage versus the
One Year Treasury. We continue to believe that this strategy will add good value
over the long term, and we appreciate your support as a shareholder.
Jennifer A. Pline
4
<PAGE>
Standish, Ayer & Wood Investment Trust
Standish Short-Term Asset Reserve Fund Series
Comparison of Change in Value of $1,000,000 Investment in Standish STAR
Fund,
IBC Donoghue Average, and the Salomon One Year Treasury
The following is a description of the graphical chart omitted from electronic
format:
This line chart shows the cumulative performance of the Standish Short-Term
Asset Reserve Fund compared with the IBC Donoghue Average and the Salomon One
Year Treasury for the period January 3, 1989 to December 31, 1995, based upon a
$1,000,000 investment. Also included are the average annual total returns for
one year, five year, and since inception.
5
<PAGE>
<TABLE>
<CAPTION>
Standish, Ayer & Wood Investment Trust
Standish Short-Term Asset Reserve Fund Series
Portfolio of Investments
December 31, 1995
Expected
Maturity Stated Par Value
Security Rate (unaudited) Maturity Value (Note 1A)
- - -------------------------------------------------------- --------- ------------- ------------- -------------- -------------------
Bonds - 98.9%
- - ---------------------------------------------------------
Asset Backed Securities 34.5%
- - ---------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Advanta Home Equity Trust Loan 94-3 A1 7.27% 08/02/96 11/25/08 1,489,839 $ 1,491,933
Advanta Home Equity Trust Loan 93-4A1 5.50 08/19/00 03/25/10 976,596 932,650
Aircraft Lease Portfolio Trust 94-1 A2 7.15 07/07/97 11/15/97 2,826,613 2,871,220
Case Equipment Trust Loan 95-BA2 5.95 10/17/96 09/15/00 5,900,000 5,915,871
Contimortgage Home Equity Loan 94-4 A2 7.96 03/20/97 09/15/09 5,900,000 6,024,667
Equicon Home Equity 94-1 A1 5.15 08/09/96 09/18/11 2,441,528 2,424,559
Equicon Home Equity 95-2 A1 6.45 12/21/96 07/15/10 2,595,810 2,607,167
Equicon Home Equity 95-4 A1 6.15 12/04/96 07/15/04 5,708,100 5,703,636
Equicredit Home Equity 93-4A 5.73 08/24/99 12/15/08 2,924,509 2,864,191
Equicredit Home Equity 94-1 A1 5.80 02/09/00 03/15/09 905,929 889,226
Equicredit Home Equity 94-3A1 6.34 06/12/96 01/15/04 2,409,559 2,412,947
Greentree Acceptance Corp. 93-3A2 4.90 07/31/96 10/15/18 3,290,000 3,270,984
Greentree Financial Corp. 95-DA1 6.05 11/12/96 09/15/25 5,202,558 5,216,709
Greentree Securities Trust 94-A 6.90 04/09/98 02/15/04 2,294,688 2,310,464
Greentree Securities Trust 95-A 7.25 04/03/98 07/15/05 2,155,486 2,185,797
Home Equity Loan Trust 92-2 A 6.65 10/25/97 11/20/12 921,149 924,315
Industry Mortgage Corp. Home Equity 1995-2 A1 144a** 7.02 08/13/96 04/01/08 2,353,657 2,357,187
Merrill Lynch Asset Backed 92-B A2 8.05 10/25/96 04/15/12 3,750,000 3,771,825
Olympic Auto Receivables Trust 95-D A2 5.80 09/22/96 10/15/98 5,900,000 5,911,063
Old Stone Credit Corp. Home Equity Trust 92-4 6.55 08/18/98 11/25/07 901,302 907,780
Security Pacific National Bank Home Equity 91-1 A 7.85 08/11/96 05/15/98 384,936 390,048
Secuity Pacific National Bank Home Equity 91-2 A 8.10 08/06/96 06/15/20 2,034,710 2,052,676
Security Pacific National Bank Home Equity 91-2 B 8.15 12/12/96 06/15/20 2,512,832 2,581,558
The Money Store Home Equity 94-A1 4.88 03/27/97 03/15/08 4,078,211 4,025,969
The Money Store Home Equity 94-CA 1 6.78 07/25/96 09/15/07 1,008,805 1,011,800
The Money Store Home Equity 95-B A2 6.50 10/22/96 10/15/06 5,900,000 5,915,670
TransAmerica Leasing 95-1A 6.40 02/07/97 09/15/01 2,147,295 2,161,295
United Companies Funding Corp. Home Equity Loan Trust 95-B1 6.75 08/28/96 10/10/04 4,879,115 4,894,923
-------------------
$ 84,028,130
Bank Bonds - 7.8%
- - ------------------------------------------------------------
Capital One Notes 8.63 - 01/15/97 5,500,000 $ 5,655,304
Centura Notes 7.95 - 07/25/96 5,125,000 5,186,633
First USA Notes 8.10 - 02/21/97 2,350,000 2,408,868
KeyCorp Notes 7.90 - 04/01/97 1,000,000 1,027,910
NationsBank Corp. Notes 4.75 - 08/15/96 2,330,000 2,316,789
Norwest Bank Notes 9.25 - 05/01/97 1,140,000 1,193,249
World Savings Loan Notes 4.85 - 04/01/96 800,000 798,647
World Savings Loan Notes 5.25 - 02/15/96 500,000 499,566
-------------------
$ 19,086,966
6
<PAGE>
Portfolio of Investments
(continued)
Stated Par Value
Security Rate Reset Date Maturity Value (Note 1A)
- - -------------------------------------------------------- --------- ------------- ------------- -------------- -------------------
Eurodollar Bonds - 2.5%
- - ------------------------------------------------------------
Westpac Banking Group Notes 8.00% - 05/28/96 6,000,000 $ 6,050,520
Extendible Bonds - 0.6%
- - ------------------------------------------------------------
Owens Corning Notes 5.79 12/15/96 12/15/05 1,500,000 $ 1,495,313
Finance Bonds - 10.1%
- - ------------------------------------------------------------
American General Notes 6.70 - 06/16/97 1,400,000 $ 1,416,838
Chrysler Corp. Notes 8.06 - 01/27/97 600,000 614,400
Discover Notes 7.76 - 05/13/97 2,000,000 2,055,940
Discover Notes 7.82 - 05/13/97 1,000,000 1,028,760
Discover Notes 7.81 - 03/18/97 2,400,000 2,461,152
General Motors Acceptance Corp. Notes 7.75 - 02/20/97 5,700,000 5,829,675
Heller Finance Notes 7.75 - 05/15/97 3,350,000 3,435,291
International Lease Finance Co. Notes 4.75 - 07/15/96 1,000,000 995,440
International Lease Finance Co. Notes 5.50 - 04/01/97 800,000 799,256
Morgan Stanley Notes 7.32 - 01/15/97 2,000,000 2,034,960
Salomon Inc. Notes 5.47 - 08/29/97 4,000,000 3,945,480
-------------------
$ 24,617,192
Industrial Bonds - 2.2%
- - ------------------------------------------------------------
Chrysler Corp. Notes 5.02 - 01/27/97 2,000,000 $ 1,985,960
Chrysler Corp. Notes 7.89 - 02/10/97 3,300,000 3,377,121
-------------------
$ 5,363,081
Expected
Maturity
Pass Thru Securities - 4.9% (unaudited)
- - ------------------------------------------------------------ -------------
FDIC Trust 94-C1 Cl. II-A1 6.30 11/30/96 09/25/25 931,730 $ 930,566
FHLMC 8.00 10/31/96 02/01/00-05/01/00 4,685,189 4,790,604
Resolution Trust Corp. 92-CHF B 7.15 09/30/97 12/25/20 2,500,009 2,526,572
Resolution Trust Corp. 92-12 A-2A 7.50 05/15/97 08/25/23 814,405 821,785
SKW Ltd. Partnership 144A Cl D** 7.45 09/30/96 10/15/96 2,775,000 2,784,538
-------------------
$ 11,854,065
U.S. Treasury Notes - 13.2%
- - ------------------------------------------------------------
U.S. Treasury Notes 6.13 - 05/31/97 8,900,000 $ 9,008,456
U.S. Treasury Notes 6.50 - 04/30/97 22,800,000 23,181,170
-------------------
$ 32,189,626
7
<PAGE>
Portfolio of Investments
(continued)
Stated Par Value
Security Rate Reset Date Maturity Value (Note 1A)
- - -------------------------------------------------------- --------- ------------- ------------- -------------- -------------------
Variable Interest Bonds - 21.5%*
- - ------------------------------------------------------------
Baybanks Notes 5.81% 03/23/96 09/30/97 3,500,000 $ 3,492,104
Beneficial California Incorporated Home Equity 94-1 B 6.47 01/28/96 03/29/44 2,358,153 2,361,836
Bear Stearns Notes 5.83 01/16/96 01/14/99 2,800,000 2,761,052
Capital Home Equity 90-1B 6.88 01/28/96 12/31/97 1,843,052 1,856,009
Capital Home Equity 91 1A 6.32 01/25/96 12/25/11 238,372 238,521
Capitol Home Equity 92-1A 6.43 01/25/96 12/25/12 1,036,861 1,039,215
Citicorp Notes 5.83 02/28/96 01/30/98 5,600,000 5,580,288
Discover Notes 5.17 03/11/96 03/10/99 2,800,000 2,751,840
Equity Residential Property Operating Notes 6.63 02/15/96 12/22/97 5,800,000 5,842,630
Ford Motor Credit Corp. Notes 5.54 02/08/96 11/09/98 2,800,000 2,773,596
Goldman Sachs Notes 6.34 01/26/96 01/26/99 3,000,000 3,000,570
Health & Rehab Notes 6.66 01/13/96 07/13/99 2,900,000 2,879,294
Household Finance Corp. 92-2 A1 6.35 01/20/96 10/20/07 533,898 534,902
Merrill Lynch Notes 5.54 01/07/96 04/07/97 6,150,000 6,100,800
Merrill Lynch Home Equity 91-2A2 6.34 01/15/96 04/15/06 1,066,052 1,067,051
Merrill Lynch Home Equity 93-1B 6.00 01/15/96 02/15/03 1,465,892 1,466,809
National City Corp. Notes 6.06 01/30/96 01/31/97 1,500,000 1,499,955
Taubman Reit Notes 6.38 02/03/96 11/03/97 3,025,000 3,014,594
Wells Fargo Corp. Notes 6.06 01/19/96 06/25/97 4,000,000 4,003,800
-------------------
$ 52,264,866
Expected
Maturity
Variable Rate Pass Thrus - 1.6%* (unaudited)
- - ------------------------------------------------------------ -------------
FHLMC 6.89 12/31/96 02/01/23 960,274 $ 981,580
Residential Funding Corp. 92-S25 7.91 08/15/96 07/25/22 1,840,216 1,854,754
Resolution Trust Corp. 92-7 A3 7.57 03/31/96 03/25/22 958,611 965,051
-------------------
$ 3,801,385
Total Bonds (idenitified cost $ 240,138,742) $ 240,751,144
Short Term Obligations 0.2%
- - ------------------------------------------------------------
Repurchase Agreement - 0.2%
- - ------------------------------------------------------------
Prudential Bache repurchase agreement dated
12/29/95, 5.39% due 1/2/96 to pay $394,592
(Collateralized by Federal National Mortgage Assn. 9%, due
9/1/22, market value $402,306) at cost 394,416 $ 394,416
8
<PAGE>
Portfolio of Investments
(continued)
Principal
Amount Value
Security of Contracts (Note 1A)
- - ------------------------------------------------------------ -----------------------------------
Total Short-term Obligations $ 394,416
(identified cost $394,416)
Total Investments - 99.1% $ 241,145,560
(identified cost $240,533,158)
Written Options - (0.0%) Value
- - ------------------------------------------------------------
Deliver/Receive, Exercise Price, Expiration (Note 1A)
- - ------------------------------------------------------------ -------------------
U.S. Treasury Note Call 5.375%, 11/30/97 Str 100.45 1/22/96 (7,000,000) ($4,375)
Total Written Options(Premiums Received $4,922) ($4,375)
Other assets, less liabilities - 0.9% $ 2,358,335
Net Assets - 100% $ 243,499,520
===================
*Interest rate is the rate in effect at December 31, 1995 **This security is
restricted but eligible for resale under 144a
The following abbreviations are used in this portfolio:
FDIC - Federal Deposit Insurance Corp.
FHLMC - Federal Home Loan Mortgage Corp.
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
Standish, Ayer & Wood Investment Trust
Standish Short-Term Asset Reserve Fund Series
Statement of Assets and Liabilities
December 31, 1995
Assets
<S> <C> <C>
Investments, at value (Note 1A) (identified cost, $240,533,158) $241,145,560
Receivable for investments sold 8,803,694
Receivable for Fund shares sold 561,852
Interest receivable 2,604,305
Other assets 2,240
------------------
Total assets $253,117,651
Liabilities
Distribution payable $304,916
Payable for investments purchased 9,059,383
Payable for Fund shares redeemed 45,000
Written Options outstanding, at value (premiums received, $4,922) (Note 7) 4,375
Accrued investment advisory fee (Note 3) 175,475
Accrued trustee fees (Note 3) 2,845
Accrued expenses and other liabilities 26,137
----------------
Total liabilities $9,618,131
------------------
Net Assets $243,499,520
==================
Net Assets consist of
Paid - in capital $253,807,901
Distributions in excess of net investment income (72,090)
Accumulated undistributed net realized gain (loss) (10,489,862)
Net unrealized appreciation (depreciation) 253,571
------------------
Total $243,499,520
==================
Shares of beneficial interest outstanding 12,455,005
==================
Net asset value, offering price, and redemption price per share $19.55
==================
(Net assets/Shares outstanding)
10
<PAGE>
Standish, Ayer & Wood Investment Trust
Standish Short-Term Asset Reserve Fund Series
Statement of Operations
Year Ended December 31, 1995
Income
Interest income $17,344,905
Expenses
Investment advisory fee (Note 3) $705,129
Trustees fees (Note 3) 11,062
Accounting, custody and transfer agent fees 140,799
Registration costs 11,135
Audit services 22,330
Legal services 8,557
Insurance expense 7,966
Miscellaneous 15,848
-------------
Total expenses 922,826
------------------
Net investment income $16,422,079
------------------
Realized and unrealized gain (loss)
Net realized gain (loss)
Investment securities $69,705
Written option transactions 21,784
-------------
Net realized gain (loss) $91,489
Change in net unrealized appreciation (depreciation)
Investment securities and written options 4,729,922
------------------
Net gain (loss) $4,821,411
------------------
Net increase (decrease) in net assets from operations $21,243,490
==================
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
Standish, Ayer & Wood Investment Trust
Standish Short-Term Asset Reserve Fund Series
Statement of Changes in Net Assets
Year Ended December 31,
--------------------------------------
1995 1994
----------------- ------------------
Increase (decrease) in Net Assets
From operations:
<S> <C> <C>
Net investment income $16,422,079 $15,055,881
Net realized gain (loss) 91,489 (4,329,717)
Change in net unrealized appreciation (depreciation) 4,729,922 (4,394,131)
----------------- ------------------
Net increase (decrease) in net assets from operations $21,243,490 $6,332,033
----------------- ------------------
Distributions to shareholders
From net investment income ($16,408,848) ($14,967,931)
In excess of net investment income ($72,090) $0
----------------- ------------------
Total distributions to shareholders ($16,480,938) ($14,967,931)
----------------- ------------------
Fund share (principal) transactions (Note 4)
Net proceeds from sale of shares $224,454,605 $322,349,047
Net asset value of shares issued to shareholders in
payment of distributions declared 11,942,616 12,477,478
Cost of shares redeemed. (274,677,022) (324,253,614)
----------------- ------------------
Increase (decrease) in net assets from Fund share transactions ($38,279,801) $10,572,911
----------------- ------------------
Net increase (decrease) in net assets ($33,517,249) $1,937,013
Net Assets
At beginning of period 277,016,769 275,079,756
----------------- ------------------
At end of period (including distributions in excess of net income of
$72,090 and undistributed net investment income of $3,143, at
December 31, 1995 and 1994, respectively) $243,499,520 $277,016,769
================= ==================
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
Standish, Ayer & Wood Investment Trust
Standish Short-Term Asset Reserve Fund Series
Financial Highlights
Year Ended December 31,
------------------------------------------------------------------
1995 1994 1993 1992 * 1991 *
----------- ----------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Net asset value - beginning of period $19.22 $19.79 $19.96 $20.46 $20.20
----------- ----------- ----------- ---------- -----------
Income from investment operations
Net investment income $1.13 $1.01 $1.31 $1.35 $1.47
Net realized and unrealized gain (loss) 0.33 (0.57) (0.17) (0.48) 0.37
----------- ----------- ----------- ---------- -----------
Total from investment operations $1.46 $0.44 $1.14 $0.87 $1.84
----------- ----------- ----------- ---------- -----------
Less distributions declared to shareholders
From net investment income ($1.12) ($1.01) ($1.31) ($1.35) ($1.47)
In excess of net investment income (0.01) 0.00 0.00 0.00 0.00
From net realized gain 0.00 0.00 0.00 (0.02) (0.11)
----------- ----------- ----------- ---------- -----------
Total distributions declared to shareholders ($1.13) ($1.01) ($1.31) ($1.37) ($1.58)
----------- ----------- ----------- ---------- -----------
Net asset value - end of period $19.55 $19.22 $19.79 $19.96 $20.46
=========== =========== =========== ========== ===========
Total return 7.85% 2.27% 5.08% 4.33% 9.41%
Ratios (to average net assets)/Supplemental Data:
Expenses 0.33% 0.33% 0.33% 0.37% 0.38%
Net investment income 5.95% 5.24% 5.82% 6.60% 7.17%
Portfolio turnover 208% 154% 182% 167% 134%
Net assets at end of period (000 omitted) $243,500 $277,017 $275,080 $289,969 $266,256
* Audited by other auditors.
</TABLE>
13
<PAGE>
Standish, Ayer & Wood Investment Trust
Standish Short-Term Asset Reserve Fund Series
Notes to Financial Statements
(1).....Significant Accounting Policies:
Standish, Ayer & Wood Investment Trust (the "Trust") is organized as a
Massachusetts business trust and is registered under the Investment
Company Act of 1940, as amended, as an open-end, management investment
company. Standish Short-Term Asset Reserve Fund (the "Fund") is a
separate diversified investment series of the Trust.
The following is a summary of significant accounting policies
consistently followed by the Fund in the preparation of its financial
statements. The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and
disclosures in the financial statements. Actual results could differ
from those estimates.
A. Investment security valuations--
Securities for which quotations are readily available are valued at the
last sale price, or if no sale, at the closing bid price in the
principal market in which such securities are normally traded.
Securities (including restricted securities) for which quotations are
not readily available are valued primarily using dealer-supplied
valuations or at their fair value as determined in good faith under
consistently applied procedures under the general supervision of the
Board of Trustees.
Short-term instruments with less than sixty-one days remaining to
maturity when acquired by the Fund are valued on an amortized cost
basis. If the Fund acquires a short-term instrument with more than
sixty days remaining to its maturity, it is valued at current market
value until the sixtieth day prior to maturity and will then be valued
at amortized cost based upon the value on such date unless the trustees
determine during such sixty-day period that amortized cost does not
represent fair value.
B. Repurchase agreements--
It is the policy of the Fund to require the custodian bank to take
possession, to have legally segregated in the Federal Reserve Book
Entry System, or to have segregated within the custodian bank's vault,
all securities held as collateral in support of repurchase agreement
investments. Additionally, procedures have been established by the Fund
to monitor on a daily basis, the market value of the repurchase
agreement's underlying investments to ensure the existence of a proper
level of collateral.
C. Securities transactions and income--
Securities transactions are recorded as of the trade date. Realized
gains and losses from securities sold are recorded on the identified
cost basis. Interest income is determined on the basis of interest
accrued, adjusted for accretion of discount on debt securities when
required for federal income tax purposes. Effective January 1, 1994,
the Fund commenced amortizing premiums on debt securities. The change
in accounting for premiums on debt securities reflects a similar change
by the Fund for federal income tax purposes and, therefore, more
closely conforms net investment income with related distributions. The
cumulative effect of this change in accounting as of December 31, 1993
was not material. This change did not affect the Funds' net assets, net
asset value per share or the net increase (decrease) in net assets from
operations. The impact of the change for the year ended December 31,
1994 was to decrease interest income by $962,757, to increase realized
gain(loss) by $1,106,300 and to decrease unrealized
appreciation(depreciation) by $143,543.
D. Federal taxes--
As a qualified regulated investment company under Subchapter M of the
Internal Revenue Code the Fund is not subject to income taxes to the
extent that it distributes all of its taxable income for its fiscal
year. At December 31, 1995, the Fund, for federal income tax purposes,
had capital loss carryovers which will reduce the Fund's taxable income
arising from future net realized gain on investments, if any, to the
extent permitted by the Internal Revenue Code and thus will reduce the
amount of distributions to shareholders which would otherwise be
necessary to relieve the Fund of any liability for federal income tax.
Such capital loss carryovers are $3,071,161, $1,512,610, $5,263,400 and
$568,968 which expire on December 31, 2000, December 31, 2001, December
31, 2002 and December 31, 2003, respectively.
14
<PAGE>
(2).....Distributions to Shareholders:
Dividends on shares of the Fund are declared daily from net investment
income and distributed monthly. Net capital gains, if any, are
distributed annually. Dividends from net investment income and
distributions from capital gains, if any, are automatically reinvested
in additional shares of the Fund unless the shareholder elects to
receive them in cash. Distributions to shareholders are recorded on the
ex-dividend date.
Income and capital gain distributions are determined in accordance with
income tax regulations which may differ from generally accepted
accounting principles. These differences are primarily due to differing
treatments for mortgage backed securities. Permanent book and tax basis
differences relating to shareholder distributions will result in
reclassifications to paid-in capital.
(3).....Investment Advisory Fee:
Until June 30, 1995, an investment advisory fee was paid to Standish,
Ayer & Wood, Inc. (SA&W) and Consolidated Investment Corporation
(Consolidated) for overall investment advisory and administrative
services, and general office facilities, quarterly at the annual rate
of 0.25% of the Fund's average daily net assets. The investment
advisers had agreed that the total Fund operating expenses for any
fiscal year would not exceed 0.50% of the Fund's average net assets.
The Fund pays no compensation directly to its trustees who are
affiliated with the investment advisers or to its officers, all of whom
receive remuneration for their services to the Fund from the investment
advisers. Certain of the trustees and officers of the Fund are
directors or officers of SA&W. A new investment management contract
became effective June 30, 1995. The terms of the new investment
management contract are identical to the terms of the preexisting
investment management contract except SA&W is the sole investment
adviser to the Fund and receives all, rather than half, of the advisory
fees payable by the Fund.
(4).....Purchases and Sales of Investments:
Purchases and sales of investments, other than short-term obligations
were as follows:
<TABLE>
<CAPTION>
Purchases Sales
----------------- -----------------
<S> <C> <C>
U.S. government securities $267,625,107 $277,324,847
================= =================
Investments (non-U.S. government securities) $282,024,497 $306,797,117
================= =================
</TABLE>
(5).....Shares of Beneficial Interest:
The Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest having a
par value of one cent per share. Transactions in Fund shares were as
follows:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------
1995 1994
------------------ -----------------
<S> <C> <C>
Shares sold 11,547,118 16,539,712
Shares issued to shareholders in payment of distributions declared 614,434 641,798
Shares redeemed (14,122,510) (16,665,314)
------------------ -----------------
Net (decrease) increase (1,960,958) 516,196
================== =================
On June 13, 1995, securities with a fair market value of approximately
$14,268,000 were contributed to the Fund by shareholders. In return for
such securities, shareholders received shares of the Fund.
</TABLE>
(6).....Federal Income Tax Basis of Investment Securities:
The cost and unrealized appreciation (depreciation) in value of the
investment securities owned at December 31, 1995, as computed on a
federal income tax basis, are as follows:
Aggregate Cost $240,612,131
==================
Gross unrealized appreciation $880,891
Gross unrealized depreciation (347,462)
------------------
Net unrealized appreciation $533,429
==================
15
<PAGE>
(7).....Financial Instruments
In general, the following instruments are used for hedging purposes as
described below. However, these instruments may also be used to enhance
potential gain in circumstances where hedging is not involved. The
nature, risks and objectives of these investments are set forth more
fully in the Fund's Prospectus and Statement of Additional Information.
The Fund trades the following financial instruments with off-balance
sheet risk:
Options--
Call and put options give the holder the right to purchase or sell,
respectively, a security or currency at a specified price on or before
a certain date. The Fund uses options to hedge against risks of market
exposure and changes in securities prices and foreign currencies, as
well as to enhance returns. Options, both held and written by the Fund,
are reflected in the accompanying Statement of Assets and Liabilities
at market value.
Premiums received from writing options which expire are treated as
realized gains. Premiums received from writing options which are
exercised or are closed are added to or offset against the proceeds or
amount paid on the transaction to determine the realized gain or loss.
If a put option written by the Fund is exercised, the premium reduces
the cost basis of the securities purchased by the Fund. The Fund, as
writer of an option, has no control over whether the underlying
securities may be sold (call) or purchased (put) and as a result bears
the market risk of an unfavorable change in the price of the security
underlying the written option. A summary of written option transactions
for the year ended December 31, 1995 is as follows:
<TABLE>
<CAPTION>
Written Call Option Transactions
Number
of Contracts
(000 Omitted) Premiums
-------------- ----------------
<S> <C> <C>
Outstanding, beginning of period 0 $0
Options written 35,600 26,707
Options exercised (14,300) (11,172)
Options expired (14,300) (10,613)
Options closed 0 0
-------------- ----------------
Outstanding, end of period 7,000 $4,922
============== ================
</TABLE>
16
<PAGE>
Report of Independent Accountants
To the Trustees of Standish, Ayer & Wood Investment Trust and the Shareholders
of Standish Short-Term Asset Reserve Fund Series:
We have audited the accompanying statement of assets and liabilities of
Standish, Ayer & Wood Investment Trust: Standish Short-Term Asset Reserve Fund
Series (the "Fund"), including the schedule of portfolio investments, as of
December 31, 1995, and the related statement of operations for the year then
ended, changes in net assets for each of the two years in the period then ended
and financial highlights for each of the three years in the period then ended.
These financial statements and financial highlights are the responsibility of
the Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits. The financial
highlights for each of the two years in the period to December 31, 1992,
presented herein, were audited by other auditors, whose report, dated February
12, 1993, expressed an unqualified opinion on such financial highlights.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1995 by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Standish, Ayer & Wood Investment Trust: Standish Short-Term Asset Reserve Fund
Series as of December 31, 1995, the results of its operations for the year then
ended, the changes in net assets for each of the two years in the period then
ended, and financial highlights for each of the three years in the period then
ended, in conformity with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
February 13, 1996
17
<PAGE>
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements:
Financial Highlights of the following series of the Registrant are
included in the related Prospectuses: Standish Controlled Maturity Fund,
Standish Fixed Income Fund II, Standish Securitized Fund, Standish Massachusetts
Intermediate Tax Exempt Bond Fund, Standish Short-Term Asset Reserve Fund and
Standish International Fixed Income Fund.
The following financial statements are included in the Statements of
Additional Information of the above-referenced series of the Registrant:
Schedule of Portfolio Investments
Statement of Assets and Liabilities
Statement of Operations
Statement of Changes In Net Assets
Financial Highlights
Notes to Financial Statements
(b) Exhibits:
(1) Agreement and Declaration of Trust dated August 13, 1986*
(1A) Certificate of Designation of Standish Fixed Income Fund**
(1B) Certificate of Designation of Standish International Fund**
(1C) Certificate of Designation of Standish Securitized Fund**
(1D) Certificate of Designation of Standish Short-Term Asset
Reserve Fund**
(1E) Certificate of Designation of Standish Marathon Fund*
(1F) Certificate of Amendment dated November 21, 1989*
1
<PAGE>
(1G) Certificate of Amendment dated November 29, 1989*
(1H) Certificate of Amendment dated April 24, 1990*
(1I) Certificate of Designation of Standish Equity Fund**
(1J) Certificate of Designation of Standish International Fixed
Income Fund**
(1K) Certificate of Designation of Standish Intermediate Tax Exempt
Bond Fund*
(1L) Certificate of Designation of Standish Massachusetts
Intermediate Tax Exempt Bond Fund*
(1M) Certificate of Designation of Standish Global Fixed Income
Fund*
(1N) Certificate of Designation of Standish Controlled Maturity
Fund and Standish Fixed Income Fund II**
(1O) Certificate of Designation of Standish Tax- Sensitive Small
Cap Equity Fund and Standish Tax-Sensitive Equity Fund**
(2) Bylaws of the Registrant*
(3) Not applicable
(4) Not applicable
(5A) Investment Advisory Agreement between the Registrant and
Standish, Ayer & Wood, Inc. relating to Standish Securitized
Fund**
(5B) Form of Investment Advisory Agreement between the Registrant
and Standish, Ayer & Wood, Inc. relating to Standish
Short-Term Asset Reserve Fund**
(5C) Investment Advisory Agreement between the Registrant and
Standish, Ayer & Wood, Inc. relating to Standish International
Fixed Income Fund**
(5D) Assignment of Investment Advisory Agreement between the
Registrant and Standish, Ayer & Wood, Inc. relating to
Standish International Fixed Income Fund**
2
<PAGE>
(5E) Form of Investment Advisory Agreement between the Registrant
and Standish, Ayer & Wood, Inc. relating to Standish
Intermediate Tax Exempt Bond Fund**
(5F) Investment Advisory Agreement between the Registrant and
Standish, Ayer & Wood, Inc. relating to Standish Massachusetts
Intermediate Tax Exempt Bond Fund**
(5G) Investment Advisory Agreement between the Registrant and
Standish, Ayer & Wood, Inc. relating to Standish Controlled
Maturity Fund**
(5H) Investment Advisory Agreement between the Registrant and
Standish, Ayer & Wood, Inc. relating to Standish Fixed Income
Fund II**
(5I) Investment Advisory Agreement between the Registrant and
Standish, Ayer & Wood, Inc. relating to Standish Small Cap
Tax-Sensitive Equity Fund**
(5J) Investment Advisory Agreement between the Registrant and
Standish, Ayer & Wood, Inc. relating to Standish Tax-Sensitive
Equity Fund**
(6) Underwriting Agreement between the Registrant and Standish
Fund Distributors, L.P.**
(7) Not applicable
(8) Master Custody Agreement between the Registrant and Investors
Bank & Trust Company**
(9A) Transfer Agency and Service Agreement between the Registrant
and Investors Bank & Trust Company**
(9B) Master Administration Agreement between Registrant and
Investors Bank & Trust Company**
(9C) Form of Administrative Services Agreement between Standish,
Ayer & Wood, Inc. and the Registrant on behalf of Standish
Fixed Income Fund, Standish Equity Fund, Standish Small Cap
Equity Fund and Standish Global Fixed Income Fund**
(10A) Opinion and Consent of Counsel for Standish Fixed Income
Fund**
(10B) Opinion and Consent of Counsel for Standish Securitized Fund**
3
<PAGE>
(10C) Opinion and Consent of Counsel for Standish Short-Term Asset
Reserve Fund**
(10D) Opinion and Consent of Counsel for Standish Small
Capitalization Equity Fund (formerly Standish Marathon Fund)**
(10E) Opinion and Consent of Counsel for Standish Equity Fund**
(10F) Opinion and Consent of Counsel for Standish International
Fixed Income Fund**
(10G) Opinion and Consent of Counsel for Standish Intermediate Tax
Exempt Bond Fund**
(10H) Opinion and Consent of Counsel for Standish Massachusetts
Intermediate Tax Exempt Bond Fund**
(10I) Opinion and Consent of Counsel for Standish Global Fixed
Income Fund**
(10J) Opinion and Consent of Counsel for the Registrant**
(11A) Opinion and Consent of Independent Public Accountants***
(11B) Consent of Independent Public Accountants***
(12) Not applicable
(13) Form of Initial Capital Agreement between the Registrant and
Standish, Ayer & Wood, Inc.**
(14) Not applicable
(15) Not applicable
(16) Performance Calculations**
(17A) Financial Data Schedule of Standish Controlled Maturity
Fund***
(17B) Financial Data Schedule of Standish Fixed Income Fund II***
(17C) Financial Data Schedule of Standish Securitized Fund***
(17D) Financial Data Schedule of Standish Massachusetts Intermediate
Tax Exempt Bond Fund***
4
<PAGE>
(17E) Financial Data Schedule of Standish Short-Term Asset Reserve
Fund***
(17F) Financial Data Schedule of Standish International Fixed Income
Fund***
(18) Not applicable
(19A) Power of Attorney for Registrant (Richard S. Wood)**
(19B) Power of Attorney for Registrant (David W. Murray)**
(19C) Power of Attorney for Registrant (Samuel C. Fleming)**
(19D) Power of Attorney for Registrant (Benjamin M. Friedman)**
(19E) Power of Attorney for Registrant (John H. Hewitt)**
(19F) Power of Attorney for Registrant (Edward H. Ladd)**
(19G) Power of Attorney for Registrant (Caleb Loring III)**
(19H) Power of Attorney for Registrant (D. Barr Clayson)**
(19I) Power of Attorney for Standish, Ayer & Wood Master Portfolio
(Richard S. Wood)**
(19J) Power of Attorney for Standish, Ayer & Wood Master Portfolio
(Samuel C. Fleming, Benjamin M. Friedman, John H. Hewitt,
Edward H. Ladd, Caleb Loring III, Richard S. Wood and D. Barr
Clayson)**
--------------------
* Filed as an exhibit to Registration
Statement No. 33-10615 and incorporated
herein by reference thereto.
** Filed as an exhibit to Registration
Statement No. 33-8214 and incorporated
herein by reference thereto.
*** Filed herewith.
Item 25. Persons Controlled by or under Common Control
with Registrant
No person is directly or indirectly controlled by or under common
control with the Registrant.
5
<PAGE>
Item 26. Number of Holders of Securities
Set forth below is the number of record holders, as of April 1, 1996,
of the shares of each series of the Registrant.
Number of Record
Title of Class Holders
-------------- -------
Shares of beneficial interest, par value $.01, of:
Standish Fixed Income Fund 431
Standish Securitized Fund 15
Standish Short-Term Asset 107
Reserve Fund
Standish International Fixed 195
Income Fund
Standish Global Fixed Income Fund 49
Standish Equity Fund 146
Standish Small Capitalization 419
Equity Fund
Standish Massachusetts Intermediate 87
Tax Exempt Bond Fund
Standish Intermediate Tax Exempt 100
Bond Fund
Standish International Equity Fund 207
Standish Controlled Maturity Fund 10
Standish Fixed Income Fund II 4
Standish Small Cap Tax-Sensitive 46
Equity Fund
Standish Tax-Sensitive Equity Fund 24
Item 27. Indemnification
Under the Registrant's Agreement and Declaration of Trust, any past or
present Trustee or officer of the Registrant is indemnified to the fullest
extent permitted by law against liability and all expenses reasonably incurred
by him in connection with any action, suit or proceeding to which he may be a
party or is otherwise involved by reason of his being or having been a Trustee
or officer of the Registrant. The Agreement and Declaration of Trust of the
Registrant does not authorize indemnification where it is determined, in the
manner specified in the Declaration, that such Trustee or officer has not acted
in good faith in the reasonable belief that his actions were in the best
interest of the Registrant. Moreover, the Declaration does not authorize
indemnification where such Trustee or officer is liable to the Registrant or its
shareholders by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of his or her duties.
6
<PAGE>
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to Trustees, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that, in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a Trustee, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by any such Trustee, officer or controlling person
against the Registrant in connection with the securities being registered, and
the Commission is still of the same opinion, the Registrant will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification is against public policy as expressed in the Act and will be
governed by the final adjudication of such issue.
Item 28. Business and Other Connections of Investment Advisers
The business and other connections of the officers and Directors of
Standish, Ayer & Wood, Inc. ("Standish, Ayer & Wood"), the investment adviser to
all series of the Registrant other than Standish International Equity Fund,
Standish Global Fixed Income Fund Standish International Fixed Income Fund are
listed on the Form ADV of Standish, Ayer & Wood as currently on file with the
Commission (File No. 801-584), the text of which is hereby incorporated by
reference.
The business and other connections of the officers and partners of
Standish International Management Company, L.P. ("Standish International"), the
investment adviser to Standish International Equity Fund, Standish Global Fixed
Income Fund and Standish International Fixed Income Fund, are listed on the Form
ADV of Standish International as currently on file with the Commission (File No.
801-639338), the text of which is hereby incorporated by reference.
The following sections of each such Form ADV are incorporated herein by
reference:
(a) Items 1 and 2 of Part 2;
(b) Section IV, Business Background, of
each Schedule D.
7
<PAGE>
Item 29. Principal Underwriter
(a) Standish Fund Distributors, L.P. serves or will serve
as the principal underwriter of each of the series of the Registrant as listed
in Item 26 above.
(b) Directors and Officers of Standish Fund
Distributors, L.P.:
Positions and Offices Positions and Offices
Name with Underwriter with Registrant
- - ---- ---------------- ---------------
James E. Hollis, III Chief Executive Officer Vice President
Beverly E. Banfield Chief Operating Officer Vice President
The General Partner of Standish Fund Distributors, L.P. is Standish,
Ayer & Wood, Inc.
(c) Not applicable.
Item 30. Location of Accounts and Records
The Registrant maintains the records required by Section 31(a) of the
Investment Company Act of 1940 and Rules 31a-1 to 31a-3 inclusive thereunder at
its principal office, located at One Financial Center, Boston, Massachusetts
02111. Certain records, including records relating to the Registrant's
shareholders and the physical possession of its securities, may be maintained
pursuant to Rule 31a-3 at the main offices of the Registrant's transfer and
dividend disbursing agent and custodian.
Item 31. Management Services
Not applicable
Item 32. Undertakings
(a) Not applicable.
(b) With respect to each of Standish Small Cap
Tax-Sensitive Equity Fund and Standish Tax- Sensitive
Equity Fund, the Registrant undertakes to file a
post-effective amendment, using financial statements
which need not be certified, within four to six
months from the effective date of the Post-Effective
Amendment to its Registration Statement registering
shares of such Funds.
8
<PAGE>
(c) The Registrant undertakes to furnish each person to
whom a Prospectus is delivered a copy of Registrant's
latest annual report to shareholders, upon request
and without charge.
9
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this
Post-Effective Amendment to its Registration Statement (which satisfied all the
requirements for filing pursuant to Rule 485(b) under the Securities Act of
1933) to be signed on its behalf by the undersigned, thereunto duly authorized,
in the City of Boston and The Commonwealth of Massachusetts on the 23rd day of
April, 1996.
STANDISH, AYER & WOOD
INVESTMENT TRUST
/s/ David W. Murray
David W. Murray, Treasurer
The term "Standish, Ayer & Wood Investment Trust" means and refers to
the Trustees from time to time serving under the Agreement and Declaration of
Trust of the Registrant dated August 13, 1986, a copy of which is on file with
the Secretary of State of The Commonwealth of Massachusetts. The obligations of
the Registrant hereunder are not binding personally upon any of the Trustees,
shareholders, nominees, officers, agents or employees of the Registrant, but
bind only the trust property of the Registrant, as provided in the Agreement and
Declaration of Trust of the Registrant. The execution of this Registration
Statement has been authorized by the Trustees of the Registrant and this
Registration Statement has been signed by an authorized officer of the
Registrant, acting as such, and neither such authorization by such Trustees nor
such execution by such officer shall be deemed to have been made by any of them,
but shall bind only the trust property of the Registrant as provided in its
Declaration of Trust.
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to the Registration Statement has been signed below by
the following persons in the capacities and on the date indicated.
10
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
Richard S. Wood* Trustee and President April 23, 1996
- - ----------------------
Richard S. Wood (principal executive
officer)
David W. Murray* Treasurer (principal April 23, 1996
- - ----------------------
David W. Murray financial and accounting
officer) and Secretary
D. Barr Clayson* Trustee April 23, 1996
D. Barr Clayson
Samuel C. Fleming* Trustee April 23, 1996
Samuel C. Fleming
Benjamin M. Friedman* Trustee April 23, 1996
Benjamin M. Friedman
John H. Hewitt* Trustee April 23, 1996
John H. Hewitt
Edward H. Ladd* Trustee April 23, 1996
Edward H. Ladd
Caleb Loring III* Trustee April 23, 1996
Caleb Loring III
*By: /s/ David W. Murray
David W. Murray
Attorney-In-Fact
</TABLE>
11
<PAGE>
EXHIBIT INDEX
Exhibit
(11A) Opinion and Consent of Independent Public Accountants
(11B) Consent of Independent Public Accountants
(17A) Financial Data Schedule of Standish Controlled Maturity Fund
(17B) Financial Data Schedule of Standish Fixed Income Fund II
(17C) Financial Data Schedule of Standish Securitized Fund
(17D) Financial Data Schedule of Standish Massachusetts Intermediate Tax
Exempt Bond Fund
(17E) Financial Data Schedule of Standish Short-Term Asset Reserve Fund
(17F) Financial Data Schedule of Standish International Fixed Income
Fund
12
Consent Of Independent Accountants
We consent to the inclusion in Post-Effective Amendment No. 75 to the
Registration Statement on Form N-1A ( 1993 Act File Number 33-8214) of Standish,
Ayer & Wood Investment Trust:
Standish, International Fixed Income Fund Series
Standish, Securitized Fund Series
Standish, Massachusetts Intermediate Tax Exempt Fund Series
Standish, Short Term Asset Reserve Fund Series
Standish, Controlled Maturity Fund Series
Standish, Fixed Income II Series
(the Funds) of our reports dated February 13, 1996, on our audits of the
financial statements and financial highlights of the Funds, which reports are
included in the Annual Reports to Shareholders for the year ended December 31,
1995 which are also included in this Registration Statement.
We also consent to the references to our Firm under the caption "The Funds
Financial Highlights" in the Prospectus and under the caption "Independent
Accountants" in the Statement of Additional Information of the Registration
Statement.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
April 22, 1996
Exhibit 11
INDEPENDENT AUDITORS' CONSENT
We consent in this Post-Effective Amendment No. 75 to Registration Statement No.
33-8214 of Standish, Ayer & Wood Investment Trust (including Standish
Securitized Fund, Standish Short-Term Asset Reserve Fund, Standish Massachusetts
Intermediate Tax Exempt Bond Fund and Standish International Fixed Income Fund)
to the references to us under the heading "Experts and Financial Statements"
appearing in the Statements of Additional Information, which are a part of such
Registration Statement.
Boston, Massachusetts
April 25, 1996
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 13
<NAME> Standish Controlled Maturity Fund
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JUL-3-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 8,829,327
<INVESTMENTS-AT-VALUE> 8,895,388
<RECEIVABLES> 60,510
<ASSETS-OTHER> 128,922
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 9,084,820
<PAYABLE-FOR-SECURITIES> 80,810
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 136,163
<TOTAL-LIABILITIES> 216,973
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 8,796,690
<SHARES-COMMON-STOCK> 0
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 5,096
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 66,061
<NET-ASSETS> 8,867,847
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 226,617
<OTHER-INCOME> 0
<EXPENSES-NET> 13,277
<NET-INVESTMENT-INCOME> 213,340
<REALIZED-GAINS-CURRENT> 15,239
<APPREC-INCREASE-CURRENT> 66,061
<NET-CHANGE-FROM-OPS> 294,640
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 213,237
<DISTRIBUTIONS-OF-GAINS> 10,245
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 462,667
<NUMBER-OF-SHARES-REDEEMED> 27,970
<SHARES-REINVESTED> 3,396
<NET-CHANGE-IN-ASSETS> 8,867,847
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 11,617
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 85,188
<AVERAGE-NET-ASSETS> 6,806,256
<PER-SHARE-NAV-BEGIN> 20
<PER-SHARE-NII> 0.57
<PER-SHARE-GAIN-APPREC> 0.24
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0.57
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 20.24
<EXPENSE-RATIO> 0.40
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 12
<NAME> Standish Fixed Income Fund II
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JUL-3-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 8,155,308
<INVESTMENTS-AT-VALUE> 8,383,782
<RECEIVABLES> 20,231,265
<ASSETS-OTHER> 19,222
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 28,634,269
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 20,587,785
<TOTAL-LIABILITIES> 20,587,785
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 7,185,432
<SHARES-COMMON-STOCK> 0
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 632,578
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 228,474
<NET-ASSETS> 8,046,484
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 750,353
<OTHER-INCOME> 0
<EXPENSES-NET> 42,629
<NET-INVESTMENT-INCOME> 707,724
<REALIZED-GAINS-CURRENT> 806,785
<APPREC-INCREASE-CURRENT> 228,474
<NET-CHANGE-FROM-OPS> 1,742,983
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 705,113
<DISTRIBUTIONS-OF-GAINS> 176,818
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,367,590
<NUMBER-OF-SHARES-REDEEMED> 991,477
<SHARES-REINVESTED> 16,103
<NET-CHANGE-IN-ASSETS> 8,046,484
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 42,628
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 137,046
<AVERAGE-NET-ASSETS> 17,284,680
<PER-SHARE-NAV-BEGIN> 20.00
<PER-SHARE-NII> 0.53
<PER-SHARE-GAIN-APPREC> 0.64
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0.65
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 20.52
<EXPENSE-RATIO> 0.40
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 6
<NAME> Standish International Fixed Income Fund
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-1-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 752,275,103
<INVESTMENTS-AT-VALUE> 783,149,278
<RECEIVABLES> 40,126,677
<ASSETS-OTHER> 13,958,441
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 837,234,396
<PAYABLE-FOR-SECURITIES> 10,217,938
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 23,479,583
<TOTAL-LIABILITIES> 33,697,521
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 754,303,698
<SHARES-COMMON-STOCK> 0
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 2,477,089
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 9,146,707
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 37,609,381
<NET-ASSETS> 803,536,875
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 84,285,898
<OTHER-INCOME> 0
<EXPENSES-NET> 5,025,342
<NET-INVESTMENT-INCOME> 79,260,556
<REALIZED-GAINS-CURRENT> 18,355,655
<APPREC-INCREASE-CURRENT> 62,727,279
<NET-CHANGE-FROM-OPS> 160,343,490
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 69,501,890
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 3,493,337
<NUMBER-OF-SHARES-REDEEMED> 21,174,451
<SHARES-REINVESTED> 2,095,788
<NET-CHANGE-IN-ASSETS> (265,879,588)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (16,490,525)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 3,916,500
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 5,025,342
<AVERAGE-NET-ASSETS> 979,339,175
<PER-SHARE-NAV-BEGIN> 21.30
<PER-SHARE-NII> 1.96
<PER-SHARE-GAIN-APPREC> 1.84
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 1.89
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 23.21
<EXPENSE-RATIO> 0.51
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
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<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 8
<NAME> Standish Mass. Intermediate Tax Exempt Bond Fund
<S> <C>
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<TABLE> <S> <C>
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<NAME> Standish Securitized Fund
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<TABLE> <S> <C>
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<SERIES>
<NUMBER> 3
<NAME> Standish Short Term Asset Reserve Fund
<S> <C>
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