The Standish Group of
Equity Funds
Standish Equity Fund
Standish International Equity Fund
Standish Small Capitalization Equity Fund
Standish Small Capitalization Equity Fund II
Prospectus
<PAGE>
Standish Group of Equity Funds
The Standish Group of Equity Funds includes the Standish Equity Fund, the
Standish Small Capitalization Equity Fund, the Standish Small Capitalization
Equity Fund II and the Standish International Equity Fund. Each Fund is
organized as a separate diversified investment series of Standish, Ayer & Wood
Investment Trust, an open end investment company. The Equity Fund, Small
Capitalization Equity Fund and Small Capitalization Equity Fund II invest
exclusively in the Standish Equity Portfolio, Standish Small Capitalization
Equity Portfolio and Standish Small Capitalization Equity Portfolio II,
respectively, each an open end investment company. Standish, Ayer & Wood, Inc.
("Standish") is the investment adviser to the Equity Portfolio, the Small
Capitalization Equity Portfolio, and the Small Capitalization Equity Portfolio
II. Standish International Management Company, L.P. ("SIMCO"), Boston,
Massachusetts, is the investment adviser to the International Equity Fund.
Standish and SIMCO are referred to in the Prospectus as the "Adviser" or the
"Advisers."
Prospective investors can obtain more information about the Funds, including an
application and Investor Guide, by calling Standish Fund Distributors, L.P. at
(800) 729-0066.
The Advisers seek to add value by capturing improving business momentum at
reasonable valuations. Their style blends quantitative and fundamental analysis
to find those stocks or markets where estimates of earnings are being revised
upwards but whose valuation does not yet reflect this positive trend. Standish
has been providing investment counseling to mutual funds, other institutional
investors and high net worth individuals for more than sixty years. Standish
offers a broad array of investment services that includes U.S., international
and global management of fixed income and equity securities for mutual funds and
separate accounts. SIMCO serves as Standish's international research and
investment arm for both debt and equity securities in all countries outside of
the United States. Privately held by twenty-one employee/directors and
headquartered in Boston, Massachusetts, Standish employs over eighty investment
professionals with a total staff of more than two hundred.
This Prospectus sets forth concisely the information about the Funds that a
prospective investor should know before investing and should be retained for
future reference. Additional information has been filed with the Securities and
Exchange Commission in a Statement of Additional Information dated April 30,
1997, as amended or supplemented from time to time. The Statement of Additional
Information is incorporated by reference into this Prospectus and is available
without charge upon request from (800)729-0066.
Shares of the Funds are not deposits or obligations of, or guaranteed or
endorsed by, any bank or other insured depository institution, and are not
insured by the Federal Deposit Insurance Corporation, the Federal Reserve Board
or any other government agency. An investment in shares of the Funds involves
investment risks, including possible loss of principal.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Shares of the Funds are not available for sale in every state. This Prospectus
is not intended to be an offer to sell shares, nor may an offer to purchase
shares be accepted from investors, in those states where shares of the Funds may
not legally be sold. Contact Standish Fund Distributors to determine whether the
Funds are available for sale in your state.
Table of Contents
Fund Comparison Highlights ................................................3
Expense Information .......................................................4
Financial Highlights ......................................................5
Investment Objectives and Policies ........................................9
The Equity Fund ...........................................................9
The Small Capitalization Equity Fund ......................................10
The Small Capitalization Equity Fund II ...................................10
The International Equity Fund .............................................10
Description of Securities and Related Risks ...............................11
Investment Techniques and Related Risks ...................................13
Information about the Master-Feeder Structure .............................15
Calculation of Performance Data ...........................................15
Dividends and Distributions ...............................................16
Purchase of Shares ........................................................16
Net Asset Value ...........................................................16
Exchange of Shares ........................................................17
Redemption of Shares ......................................................17
Management ................................................................18
Federal Income Taxes ......................................................20
The Funds and Their Shares ................................................20
Custodians ................................................................20
Transfer Agent and Dividend Disbursing Agent ..............................21
Independent Accountants ...................................................21
Legal Counsel .............................................................21
Tax Certification Instructions ............................................21
<PAGE>
Fund Comparison Highlights
The following table highlights information contained in this Prospectus and is
qualified in its entirety by the more detailed information contained within. For
a complete description of each Fund's distinct investment objective and
policies, see "Investment Objectives and Policies," "Description of Securities
and Related Risks" and "Investment Techniques and Related Risks." There can be
no assurance that a Fund's investment objective will be achieved.
<TABLE>
<CAPTION>
Equity Fund Small Capitalization Small Capitalization International
Equity Fund Equity Fund II Equity Fund
<S> <C> <C> <C> <C>
Investment Objective Long-term growth of Long-term growth of Long-term growth of Long-term capital
capital through capital through capital. Seeks to growth through
investment primarily investment primarily achieve that objective investment in a
in equity and in equity and through investment diversified
equity-related equity-related primarily in equity portfolio of
securities of securities of small and equity related foreign equity
companies which capitalization securities of small securities
appear to be companies capitalization
undervalued companies
Key Strategy Emphasize stocks Emphasize rapidly Emphasize rapidly Emphasize stocks
believed to offer growing, high quality growing, high quality and markets
above average companies with companies with believed to offer
potential for capital market capitalizations market capitalizations above average
growth through the less than $700 million less than $1 billion potential for
use of statistical that are involved with that are involved with capital growth
modeling techniques value added products value added products through the use of
and fundamental or services or services statistical
analysis modeling
techniques
Market Capitalization No limit; general $700 million or less $1 billion or less No limit; general
of Companies Focused range is medium to range is medium to
on by the Fund large capitalization large capitalization
Foreign Securities Yes; no limit for Yes; limited to 15% Yes; limited to 15% Yes; without limit,
securities listed on a of total assets of total assets including up to
U.S. exchange or 25% of total assets
traded in the U.S. in securities of
over-the-counter issuers located in
("OTC") market but emerging markets
limited to 10% of
total assets for
foreign securities
which are not so
listed or traded
Benchmark Index S&P 500 Russell 2000, Russell Russell 2000, Russell EAFE Index
2000 Growth and 2000 Growth and
S&P 500 S&P 500
</TABLE>
<PAGE>
Expense Information
Total operating expenses are based on expenses for each Fund's fiscal year ended
December 31, 1996. Total operating expenses for the Equity Fund include expenses
of the Fund and the Equity Portfolio, for the Small Capitalization Equity Fund
include expenses of the Fund and the Small Capitalization Equity Portfolio, and
for the Small Capitalization Equity Fund II include expenses of the Fund and the
Small Capitalization Equity Portfolio II. The Trusts' Trustees believe that
total operating expenses of the Equity Fund, the Small Capitalization Equity
Fund and the Small Capitalization Equity Fund II are approximately equal to or
less than what would be the case if the Funds did not invest all of their
investable assets in their corresponding Portfolios.
<TABLE>
<CAPTION>
Shareholder Transaction Expenses
<S> <C> <C> <C> <C>
Maximum Sales Load Imposed on Purchases None None None None
Maximum Sales Load Imposed on Reinvested Dividends None None None None
Deferred Sales Load None None None None
Redemption Fees None None None None
Annual Operating Expenses
(as a percentage of average net assets)
Management Fees (after applicable limitation) 0.49%* 0.59%* 0.00%* 0.21%*
12b-1 Fees None None None None
Other Expenses (after applicable expense limitation)+ 0.22%* 0.16% 0.00%* 0.79%
------------- ------------- ------------- -------------
Total Operating Expenses (after applicable expense limitation) 0.71%* 0.75%* 0.00%* 1.00%*
============= ============= =============================
</TABLE>
*The Advisers have voluntarily and temporarily agreed to limit certain expenses
of the Small Cap II Fund and International Equity Fund. In the absence of such
agreements, the Management Fees, Other Expenses and Total Operating Expenses (as
a percentage of average daily net assets for the fiscal year ended December 31,
1996) would have been: Small Cap Fund -- 0.60%, 0.16%, and 0.76%; Small Cap II
Fund -- 0.60%, 1.55% and 2.15%; and International Equity Fund -- 0.50%, 0.79%
and 1.29%. The Adviser may revise or discontinue these agreements at any time
although they have no current intentions to do so.
+Other Expenses include custodian and transfer agent fees, registration costs,
payments for insurance, and audit and legal services.
Example
Hypothetically assume that each Fund's annual return is 5% and that its total
operating expenses are exactly as described. For every $1,000 invested, an
investor would have paid the following expenses if an account were closed after
the number of years indicated:
<TABLE>
<CAPTION>
Equity Fund Small Capitalization Small Capitalization International
Equity Fund Equity Fund II Equity Fund
<S> <C> <C> <C> <C>
After 1 Year $7 $8 $0 $10
After 3 Years 23 25 0 32
After 5 Years 41 43 0 55
After 10 Years 91 95 0 122
</TABLE>
The purpose of the table is to assist investors in understanding the various
costs and expenses that an investor in each Fund will bear directly or
indirectly. The example is included solely for illustrative purposes and should
not be considered a representation of future performance or expenses. Actual
expenses may be more or less than those shown. See "Management" for additional
information about each Fund's expenses.
<PAGE>
Financial Highlights
The financial highlights for periods after 1992 have been audited by Coopers &
Lybrand L.L.P., independent accountants, whose reports, together with the
Financial Statements of the Funds, are incorporated into the Statement of
Additional Information. Financial highlights for prior periods were audited by
other independent accountants. The Funds' annual reports, which contain
additional information about Fund performance, may be obtained from Standish
Fund Distributors without charge.
<TABLE>
<CAPTION>
Equity Fund Year Ended December 31,
1996 1995 1994 1993 1992*
Net asset value - beginning of period $34.81 $28.66 $30.89 $26.28 $25.66
-------------- ------------ ------------ ------------ ------------
Income from investment operations
<S> <C> <C> <C> <C> <C>
Net investment income $0.60 $0.76 $0.45 $0.50 $0.56
Net realized and unrealized gain (loss)
on investments 8.52 9.94 (1.62) 5.57 1.81
-------------- ------------ ------------ ------------ ------------
Total from investment operations $9.12 $10.70 ($1.17) $6.07 $2.37
-------------- ------------ ------------ ------------ ------------
Less distributions declared to shareholders
From net investment income (0.56) (0.78) (0.44) (0.47) (0.54)
From realized gain on investments (4.58) (3.77) (0.62) (0.99) (1.19)
From paid-in capital -- -- -- -- (0.02)
-------------- ------------ ------------ ------------ ------------
Total distributions declared to shareholders (5.14) (4.55) ($1.06) ($1.46) ($1.75)
-------------- ------------ ------------ ------------ ------------
Net asset value - end of period $38.79 $34.81 $28.66 $30.89 $26.28
============== ============ ============ ============ ============
Total return3 26.84% 37.55% (3.78%) 20.79% 9.52%
Ratios (to average daily net assets)/Supplemental Data
Net assets at end of period (000 omitted) $105,855 $88,532 $86,591 $72,916 $14,679
Expenses**1 0.71% 0.69% 0.70% 0.80% 0.00%
Net investment income** 1.53% 2.05% 1.55% 1.29% 2.52%
Portfolio turnover2 41% 159% 182% 192% 92%
Average Commission Rate2 0.0499
** For the year ended December 31, 1996 and the three-year period ended
December 31, 1993, Standish did not impose a portion of its advisory fee. If
this voluntary reduction had not been undertaken, the net investment income
per share and the ratios would have been:
Net Investment Income per share $0.59 $0.47 $0.34
Ratios (to average net assets)
Expenses 0.72% 0.97% 1.00%
Net Investment Income 1.52% 1.12% 1.52%
<PAGE>
Equity Fund Year Ended December 31,
1991*+
Net asset value - beginning of period $20.00
-----------
Income from investment operations
Net investment income $0.46
Net realized and unrealized gain (loss)
on investments 6.17
-----------
Total from investment operations $6.63
-----------
Less distributions declared to shareholders
From net investment income (0.35)
From realized gain on investments (0.62)
From paid-in capital --
-----------
Total distributions declared to shareholders ($0.97)
-----------
Net asset value - end of period $25.66
===========
Total return3 33.45%t
Ratios (to average daily net assets)/Supplemental Data
Net assets at end of period (000 omitted) $7,498
Expenses**1 1.00%t
Net investment income** 1.92%t
Portfolio turnover2 86%
Average Commission Rate2
** For the year ended December 31, 1996 and the three-year period ended
December 31, 1993, Standish did not impose a portion of its advisory fee. If
this voluntary reduction had not been undertaken, the net investment income
per share and the ratios would have been:
Net Investment Income per share $0.23
Ratios (to average net assets)
Expenses 1.99%
Net Investment Income 0.93%
t Computed on an annualized basis.
* Audited by other auditors.
+ For the period from January 2, 1991 (start of business) to December 31,
1991.
1 Includes the Fund's share of the Standish Equity Portfolio's allocated
expenses for the period from May 3, 1996 through December 31, 1996.
2 Portfolio turnover and average broker commission rate represents activity
while the Fund was making investments directly in securities. The portfolio
turnover and average broker commission rate for the period since the Fund
transferred substantially all of its investable assets to the Portfolio are
78% and $0.0483, respectively, as shown in the Standish Equity Portfolio's
financial statements included in the Statement of Additional Information.
3 The Fund's performance benchmark is the S&P 500 Index. See "Calculation of
Performance Data" for a description of the S&P 500 Index. The average annual
total return of the S&P 500 Index for each year since the Fund's inception
was as follows (this total return information is not audited):
Total Return: 1996 1995 1994 1993 1992 1991
S&P 500 22.96% 37.58% 1.32% 10.08% 7.63% 30.47%
<PAGE>
Small Capitalization Equity Fund Year Ended December 31,
1996 1995 1994 1993
Net asset value - beginning of period $53.46 $42.15 $48.97 $39.83
-------------- ------------- ------------- -------------------
Income from investment operations
Net investment income (loss) -- -- -- ($0.07)
Net realized and unrealized gain (loss) on investments 9.29 12.57 ($1.84) 11.31
-------------- ------------- ------------- -------------------
Total from investment operations 9.29 $12.57 ($1.84) $11.24
-------------- ------------- ------------- -------------------
Less distributions declared to shareholders
From net investment income -- -- -- --
From realized gains on investments ($9.79) ($1.26) (4.98) ($2.1)
From paid-in capital -- -- -- --
-------------- ------------- -------------
Total distributions declared to shareholders ($9.79) ($1.26) (4.98) ($2.10)
-------------- ------------- ------------- -------------------
Net asset value - end of period $52.96 $53.46 $42.15 $48.97
============== ============= ============= ===================
Total return3 17.36% 29.83% (3.66%) 28.21%
Ratios (to average net assets)/Supplemental Data
Net assets at end of period (000 omitted) $244,131 $180,470 $107,591 $85,141
Expenses1 0.75%** 0.75% 0.79% 0.88%
Net investment income (0.44%)** (0.030%) (0.027%) (0.018%)
Portfolio turnover 2 28% 112% 130% 144%
Average Broker Commission Rate2 $0.045 -- -- --
<PAGE>
Small Capitalization Equity Fund Year Ended December 31,
1992* 1991* 1990*+
Net asset value - beginning of period $39.99 $27.57 $26.24
------------- ------------- -------------
Income from investment operations
Net investment income (loss) ($0.11) ($0.04) $0.01
Net realized and unrealized gain (loss) on investments 4.00 17.87 1.33
------------- ------------- -------------
Total from investment operations $3.89 $17.83 $1.34
------------- ------------- -------------
Less distributions declared to shareholders
From net investment income -- -- ($0.01)
From realized gains on investments (4.05) ($5.35) --
From paid-in capital -- ($0.06) --
------------- -------------
Total distributions declared to shareholders (4.05) ($5.41) ($0.01)
------------- ------------- -------------
Net asset value - end of period $39.83 $39.99 $27.57
============= ============= =============
Total return3 9.74% 64.71% 15.35%t
Ratios (to average net assets)/Supplemental Data
Net assets at end of period (000 omitted) $50,950 $35,418 $13,273
Expenses1 1.04% 0.87% 1.48%t
Net investment income (0.038%) (0.015%) 0.17%t
Portfolio turnover 2 101% 96% 13%
Average Broker Commission Rate2 -- -- --
- ----------------
t Computed on an annualized basis.
* Audited by other auditors.
** For the period from January 1, 1996 to May 3, 1996, Standish did not impose
a portion of its advisory fee. If this voluntary reduction had not been
undertaken, the net investment income per share and the ratios would have
been:
Net investment income per share ($0.01) Ratios (to average net assets):
Expenses 0.076%
Net investment income (0.045%)
+ For the period from August 31, 1990 (start of business) to December 31, 1990.
1 Includes the Fund's share of Standish Small Capitalization Equity Portfolio's
allocated expenses for the period from May 3, 1996 through December 31, 1996.
2 Portfolio turnover and average broker commission rate represents activity
while the Fund was making investments directly in securities. The portfolio
turnover and average broker commission rate for the period since the Fund
transferred substantially all of its investable assets to the Portfolio are
76% and $0.0434 as shown in the Standish Small Capitalization Portfolio's
financial statements included in the Statement of Additional Information.
3 The Fund's performance benchmarks are the S&P 500 Index, the Russell 2000
Index and the Russell 2000 Growth Index. See "Calculation of Performance
Data" for a description of these indices. The average annual total return of
these indices for each year since the Fund's inception was as follows (this
total return information is not audited):
Total Return: 1996 1995 1994 1993 1992 1991 1990
------------- ---- ---- ---- ---- ---- ---- ----
S&P 500 22.96% 37.58% 1.32% 10.08% 7.63% 39.47% (3.16%)
Russell 2000 16.53% 28.44% (1.83%) 10.89% 18.42% 41.64% (19.52%)
Russell 2000 Growth 11.26% 31.04% (2.43%) 13.36% 7.77% 51.19% (17.41%)
<PAGE>
Small Capitalization Equity Fund II For the period December 23, 1996 (commencement of 0perations)
through December 31, 1996
Net asset value - beginning of period $20.00
-----------------------
Income from investment operations
Net investment income (1) $0.00
Net realized and unrealized gain (loss) on investments 0.39
Total from investment operations $0.39
-----------------------
Less distributions declared to shareholders
From net investment income
From realized gains on investments --
From paid-in capital --
-----------------------
Total distributions declared to shareholders --
Net asset value - end of period $20.39
=======================
Total return1 --
Ratios (to average net assets)/Supplemental Data
Net assets at end of period (000 omitted) $484
Expenses1* N/A2
Net investment income N/A2
- ----------------
* Computed on an annualized basis.
1 Includes the Fund's share of Portfolio allocated expenses.
2 Ratios are not meaningful due to the short period of operations. All expenses were reimbursed by Standish.
3 The Fund's performance benchmarks are the S&P 500 Index, the Russell 2000
Index and the Russell 2000 Growth Index. See "Calculation of Performance
Data" for a description of these indices. The average annual total return of
these indices for 1996, the year in which the Fund commenced operations, was
as follows (this total return information is not audited): Total Return:
S&P 500 22.96%
Russell 2000 16.53%
Russell 2000 Growth 11.26%
<PAGE>
International Equity Fund Year Ended December 31,
1996 1995 1994 1993 1992* 1991*
Net asset value $23.54 $23.12 $26.74 $19.78 $22.20 $20.16
------------ ------------- -------------- ------------- ------------ ------------
- --beginning of period
Income from
investment operations
Net investment income $0.47 $0.04 $0.21 $0.26 $0.26 ($0.33)
Net realized and unrealized $1.28 $0.45 ($2.08) $7.29 ($2.47) $2.02
------------ ------------- -------------- ------------- ------------ ------------
gain (loss) on investments
------------ ------------- -------------- ------------- ------------ ------------
Total from investment $1.75 $0.49 ($1.87) $7.55 ($2.21) $2.35
------------ ------------- -------------- ------------- ------------ ------------
operations
Less distributions declared
to shareholders
From net investment income ($0.51) -- ($0.12) ($0.23) ($0.21) $0.30
In excess of net
investment income -- -- -- ($0.36) -- --
From realized gains ($1.53) $0.07 ($1.63) -- -- ($0.01)
------------ ------------- -------------- ------------- ------------ ------------
on investments
Total distributions declared ($2.04) ($0.07) ($1.75) ($0.59) ($0.21) ($0.31)
------------ ------------- -------------- ------------- ------------ ------------
to shareholders
Net asset value $23.25 $23.54 $23.12 $26.74 $19.78 $22.20
============ ============= ============== ============= ============ ============
--end of period
Total return2 7.44% 2.14% (6.99%) 38.27% (9.95%) 11.73%
Net assets at end of $47,739 $59,473 $104,435 $92,419 $56,539 $47,077
period (000 omitted)
Ratios (to average net assets)/
Supplemental Data
Expenses 0.50%** 1.22% 1.23% 1.34% 1.53% 1.54%
Net investment income 1.80%** 1.76% 1.52% 1.09% 1.18% 1.30%
Portfolio turnover 163% 108% 75% 98% 98% 27%
Average Broker Commission
Rate Per Share $0.0092
<PAGE>
International Equity Fund Year Ended December 31,
1990* 1989* 1988*+
Net asset value $23.10 $20.07 $20.00
------------- ------------ -------------
- --beginning of period
Income from
investment operations
Net investment income $0.55 $0.49 $0.06
Net realized and unrealized ($2.67) $3.23 $0.01
------------- ------------ -------------
gain (loss) on investments
------------- ------------ -------------
Total from investment ($2.12) $3.72 $0.07
------------- ------------ -------------
operations
Less distributions declared
to shareholders
From net investment income ($0.41) ($0.50) --
In excess of net
investment income -- -- --
From realized gains ($0.41) ($0.19) --
------------- ------------ -------------
on investments
Total distributions declared ($0.82) ($0.69) $0.00
------------- ------------ -------------
to shareholders
Net asset value $20.16 $23.10 $20.07
============= ============ =============
--end of period
Total return2 (9.44%) 18.79% 5.32% t
Net assets at end of $24,872 $19,141 $10,158
period (000 omitted)
Ratios (to average net assets)/
Supplemental Data
Expenses 1.60% 1.60% 1.60% t
Net investment income 2.19% 2.29% 3.90% t
Portfolio turnover 48% 38% 0%
Average Broker Commission
Rate Per Share
- ----------------
t Computed on an annualized basis.
* Audited by other auditors.
** Standish voluntarily waived a portion of its investment advisory fee. Had
this action not been undertaken, the net investment income per share and the
ratios would have been:
Net investment income per share $0.27 Ratios (to average net assets):
Expenses 1.29%
Net investment income 1.01%
+ For the period from August 31, 1988 (start of business) to December 31,
1988.
1 Amount represents the average commission per share paid to brokers on the
purchase and sale of portfolio securities.
2 The Fund's performance benchmark is the Europe, Asia, Far-East ("EAFE")
Index. See "Calculation of Performance Data" for a description of the EAFE
Index. The average annual total return of the EAFE Index for each year since
the Fund's inception was as follows (this total return information is not
audited):
Total Return: 1996 1995 1994 1993 1992 1991 1990 1989 1988
EAFE 6.04% 11.22% 7.79% 32.57% (12.19%) (12.12%) (23.43%) 10.61% 0.60%
</TABLE>
<PAGE>
Investment Objectives and Policies
Investment Strategy
Each Fund is an actively managed diversified portfolio consisting primarily of
equity and equity-related securities. Each Fund is managed to achieve long-term
growth of capital. The Equity Fund seeks to achieve its objective by investing
primarily in equity and equity-related securities of companies which appear to
be undervalued. The Small Capitalization Equity Fund ("Small Cap Fund") and the
Small Capitalization Equity Fund II ("Small Cap II Fund") seek to achieve their
respective objectives by focusing on equity and equity-related securities of
small capitalization companies. The Small Cap Fund invests primarily in
securities of companies with market capitalizations less than $700 million while
the Small Cap II Fund invests primarily in securities of companies with market
capitalizations less than $1 billion. The International Equity Fund seeks to
achieve its objective by investing in a diversified portfolio of foreign equity
securities. The Equity Fund, the Small Cap Fund and the Small Cap II Fund each
invests all of its investable assets in a corresponding Portfolio. These Funds
are sometimes referred to in this Prospectus as the Standish Feeder Funds. This
structure, where one fund invests all of its investable assets in another
investment company, is described below under the caption "Information About The
Master-Feeder Structure."
The Advisers seek to add value to portfolios of securities by finding companies
with improving business momentum whose securities have reasonable valuations.
For the Equity Fund and the International Equity Fund, the Advisers utilize both
quantitative and fundamental analysis to find stocks whose estimates of earnings
are being revised upwards but whose valuation does not yet reflect this positive
trend. For the Small Cap and Small Cap II Funds, Standish emphasizes small
capitalization companies that have developed strong sector or industry positions
and have produced solid balance sheets.
The equity and equity-related securities in which each Fund invests include
exchange-traded and over-the-counter common and preferred stocks but may also
include warrants, rights, convertible securities, depositary receipts,
depositary shares, trust certificates, shares of other investment companies,
limited partnership interests and equity participations. These equity securities
may be issued by U.S. or foreign companies, although not all Funds invest to the
same extent in securities of foreign issuers. Please refer to each Fund's
specific investment objective and policies and "Description of Securities and
Related Risks" for a more comprehensive list of permissible securities and
investments.
* * *
Each Fund's specific investment objective, policies and strategies are set forth
below to assist the investor in differentiating each Fund's unique
characteristics. Because of the uncertainty inherent in all investments, no
assurance can be given that a Fund will achieve its investment objective. See
"Description of Securities and Related Risks" and "Investment Techniques and
Related Risks" below for additional information.
The Equity Fund
The investment objective and characteristics of the Equity Fund correspond
directly to those of the Equity Portfolio in which the Fund invests all of its
investable assets. The following is a discussion of the investment objective and
policies of the Equity Portfolio.
Investment Objective. The Equity Portfolio's investment objective is to achieve
long-term growth of capital through investment primarily in equity and
equity-related securities of companies which appear to be undervalued.
Principal Investments. Under normal circumstances, at least 80% of the Equity
Portfolio's total assets will be invested in equity and equity-related
securities.
Investment Strategies. The Equity Portfolio follows a disciplined investment
strategy, emphasizing stocks which Standish believes offer above average
potential for capital growth. Although the precise application of the discipline
will vary according to market conditions, Standish intends to use statistical
modeling techniques that utilize stock specific factors (e.g., current price
earnings ratios, stability of earnings growth, forecasted changes in earnings
growth, trends in consensus analysts' estimates, and measures of earnings
results relative to expectations) to identify equity securities that are
attractive as purchase candidates. Once identified, these securities will be
subject to further fundamental analysis by Standish's professional staff before
they are included in the Equity Portfolio's holdings. Securities selected for
inclusion in the Equity Portfolio's holdings will represent various industries
and sectors.
Other Investments. When Standish believes that foreign markets offer above
average growth potential, the Equity Portfolio may invest without limit in
equity and equity-related securities of foreign issuers that are listed on a
United States securities exchange or traded in the U.S. OTC market. The
Portfolio may not invest more than 10% of its total assets in such securities
which are not so listed or traded.
The Equity Portfolio may invest in debt securities and preferred stocks which
are convertible into, or exchangeable for, common stocks. These securities will
be rated Aaa, Aa or A by Moody's Investor Service, Inc., or AAA, AA, or A by
Standard and Poor's Ratings Group, Duff and Phelps, Inc. or Fitch Investors
Service, Inc., or, if unrated, determined by Standish to be of comparable credit
quality. Up to 5% of the Equity Portfolio's total assets invested in convertible
debt securities and preferred stocks may be rated Baa by Moody's or BBB by
Standard & Poor's, Duff, or Fitch. The Equity Portfolio may enter into
repurchase agreements, engage in short selling and invest in restricted and
illiquid securities, although it intends to invest in restricted and illiquid
<PAGE>
securities on an occasional basis only. The Equity Portfolio may purchase and
sell put and call options, enter into futures contracts on U.S. equity indices,
purchase and sell options on such futures contracts and engage in currency
transactions. See "Description of Securities and Related Risks" and "Investment
Techniques and Related Risks" below for additional information.
The Small Capitalization Equity Fund
The investment objective and characteristics of the Small Cap Fund correspond
directly to those of the Small Capitalization Equity Portfolio ("Small Cap
Portfolio") in which the Fund invests all of its investable assets. The
following is a discussion of the investment objectives and policies of the Small
Cap Portfolio.
Investment Objective. The Small Cap Portfolio's investment objective is to
achieve long-term growth of capital through investment primarily in equity and
equity-related securities of small capitalization companies.
Principal Investments. Under normal circumstances, at least 80% of the Small Cap
Portfolio's total assets will be invested in equity and equity-related
securities of small capitalization companies. The Small Cap Portfolio will focus
its investments in small capitalization companies that have market
capitalizations less than $700 million. When Standish believes that securities
of small capitalization companies are overvalued, the Small Cap Portfolio may
invest in securities of larger, more mature companies, provided that such
investments do not exceed 20% of the Portfolio's total assets. The Small Cap
Portfolio may participate in initial public offerings for previously privately
held companies which are expected to have market capitalizations less than $700
million after the consummation of the offering, and whose securities are
expected to be liquid after the offering.
Investment Strategies. The Small Cap Portfolio will pursue investments in
rapidly growing, high quality companies that are involved with value added
products or services. These companies will have market capitalizations less than
$700 million, although the Small Cap Portfolio may include securities of larger,
more mature companies. Companies with small market capitalizations may have more
limited operating histories and/or less experienced management than larger
capitalization companies and may pose additional risks.
Other Investments. When Standish believes that foreign markets offer above
average growth potential, the Small Cap Portfolio may invest up to 15% of its
total assets in equity and equity-related securities of foreign issuers,
including issuers located in emerging markets. The Small Cap Portfolio may enter
into repurchase agreements, engage in short selling and invest in restricted and
illiquid securities, although it intends to invest in restricted and illiquid
securities on an occasional basis only. The Small Cap Portfolio may purchase and
sell put and call options, enter into futures contracts, purchase and sell
options on such futures contracts and engage in currency transactions. See
"Description of Securities and Related Risks" and "Investment Techniques and
Related Risks" below for additional information.
The Small Capitalization Equity Fund II
The investment objective and characteristics of the Small Cap II Fund correspond
directly to those of the Small Capitalization Equity Portfolio II ("Small Cap II
Portfolio") in which the Fund invests all of its investable assets. The
following is a discussion of the investment objectives and policies of the Small
Cap II Portfolio.
Investment Objective. The Small Cap II Portfolio's investment objective is to
achieve long term growth of capital. The Portfolio seeks to achieve its
objective through investment primarily in equity and equity-related securities
of small capitalization companies.
Principal Investments. Under normal circumstances, at least 80% of the Small Cap
II Portfolio's total assets will be invested in equity and equity-related
securities of small capitalization companies. The Small Cap II Portfolio will
focus its investments in small capitalization companies on those with market
values less than $1 billion. When Standish believes that securities of small
capitalization companies are overvalued, the Small Cap II Portfolio may invest
in securities of larger, more mature companies, provided that such investments
do not exceed 20% of the Portfolio's total assets. The Small Cap II Portfolio
may participate in initial public offerings for previously privately held
companies which are generally expected to have market capitalizations less than
$1 billion after the consummation of the offering, and whose securities are
expected to be liquid after the offering.
Investment Strategies. The Small Cap II Portfolio will pursue investments in
rapidly growing, high quality companies that are involved with value added
products or services. These companies will have market capitalizations less than
$1 billion. Companies with small market capitalizations may have more limited
operating histories and/or less experienced management than larger
capitalization companies and may pose additional risks.
Other Investments. When Standish believes that foreign markets offer above
average growth potential, the Small Cap II Portfolio may invest up to 15% of its
total assets in equity and equity-related securities of foreign issuers,
including issuers located in emerging markets. The Small Cap II Portfolio may
enter into repurchase agreements, engage in short selling and is permitted to
invest in restricted and illiquid securities, although it intends to invest in
restricted and illiquid securities on an occasional basis only. The Small Cap II
Portfolio may also purchase and sell put and call options, enter into futures
contracts, purchase and sell options on such futures contracts and engage in
currency transactions. See "Description of Securities and Related Risks" and
"Investment Techniques and Related Risks" below for additional information.
The International Equity Fund
Investment Objective. The International Equity Fund's investment objective is to
obtain long-term capital growth through investment in a diversified portfolio of
foreign equity securities. Capital growth is expected to result primarily from
appreciation of the equity securities held in the Fund's portfolio; however, the
Fund may take advantage of changes in currency exchange rates in an effort to
realize additional capital appreciation. Income received on the Fund's
investments is incidental to the Fund's primary objective to obtain long-term
capital growth.
<PAGE>
Principal Investments. Under normal circumstances, at least 65% of the
International Equity Fund's total assets will be invested in equity and
equity-related securities of companies located in the foreign countries
represented in the Morgan Stanley Capital International World Index (the "MSCI
Index") and the Europe, Australia, Far East Index (the "EAFE Index"), Canada
and, to a limited extent, emerging markets. The Fund intends to be invested in a
broad range of foreign countries, but is not required to invest in each country
represented in the EAFE Index or to invest in those countries in accordance with
their weightings in the EAFE Index. The Fund intends to invest in a minimum of
five countries.
Up to 25% of the Fund's total assets may be invested in securities of issuers
doing business in emerging markets, provided that not more than 5% of the Fund's
total assets may be invested in issuers located in any one emerging market.
SIMCO considers an emerging equity market to be any country that is not
represented in the MSCI World Index, which is an index of stocks in developed
markets.
Investment Strategy. The Fund follows a disciplined investment strategy,
emphasizing stocks and markets which SIMCO believes offer above average
potential for capital growth. Although the precise application of the discipline
varies according to market conditions, SIMCO uses statistical modeling
techniques that utilize stock and market specific factors to identify equity
securities and markets that are attractive as purchase candidates. These factors
include current and historical price multiple ratios and trends in consensus
analysis estimates. Once identified, these securities and markets are subject to
further review by the Fund's portfolio manager before they are included in the
Fund's portfolio. Securities selected for inclusion in the Fund's portfolio will
represent various industries and sectors.
Other Investments. The Fund may invest in fixed income securities such as bonds,
notes, Eurodollar securities and other debt obligations issued by the U.S.
government, its agencies, authorities and sponsored enterprises, foreign
governments and their political subdivisions, and corporate issuers located in
or doing business in foreign countries. These fixed income securities will be
rated at the time of investment A or better by Moody's, Standard & Poor's, Duff
or Fitch or, if unrated, determined by SIMCO to be of comparable credit quality.
The Fund may invest in preferred stocks of an issuer of any credit quality if
the common stocks of the issuer are not available to the Fund for investment.
The Fund may enter into repurchase agreements, engage in short selling and
invest in restricted and illiquid securities. The Fund may purchase and sell put
and call options, enter into futures contracts, purchase and sell options on
such futures contracts and engage in currency transactions. See "Description of
Securities and Related Risks" and "Investment Techniques and Related Risks"
below for additional information.
Description of Securities and Related Risks
The following sections include descriptions of specific securities and the risks
that are associated with the purchase of a particular type of security or the
utilization of a specific investment technique. For purposes of the discussion
in this section and the "Investment Techniques and Related Risks" section of
this Prospectus, the use of the term "Fund" or "Funds" refers to each of the
Equity Portfolio, the Small Cap Portfolio, the Small Cap II Portfolio and the
International Equity Fund, unless otherwise noted.
Common Stocks. Common stocks are shares of a corporation or other entity that
entitle the holder to a pro rata share of the profits of the corporation, if
any, without preference over any other shareholder or class of shareholders,
including holders of the entity's preferred stock and other senior equity.
Common stock usually carries with it the right to vote and frequently an
exclusive right to do so.
Small Capitalization Stocks. The Small Cap and Small Cap II Portfolios invest
primarily, and the other Funds may invest to a lesser extent, in securities of
small capitalization companies. Although investments in small capitalization
companies may present greater opportunities for growth, they also involve
greater risks than are customarily associated with investments in larger, more
established companies. The securities of small companies may be subject to more
volatile market movements than securities of larger, more established companies.
Smaller companies may have limited product lines, markets or financial
resources, and they may depend upon a limited or less experienced management
group. The securities of small capitalization companies may be traded only on
the over-the-counter market or on a regional securities exchange and may not be
traded daily or in the volume typical of trading on a national securities
exchange. As a result, the disposition by a Portfolio of securities in order to
meet redemptions or otherwise may require the Portfolio to sell securities at a
discount from market prices, over a longer period of time or during periods when
disposition is not desirable.
Convertible Securities Convertible debt securities and preferred stock entitle
the holder to acquire the issuer's stock by exchange or purchase for a
predetermined rate. Convertible securities are subject both to the credit and
interest rate risks associated with fixed income securities and to the stock
market risk associated with equity securities. Warrants. Warrants acquired by a
Fund entitle it to buy common stock from the issuer at a specified price and
time. Warrants are subject to the same market risks as stocks, but may be more
volatile in price. A Fund's investment in warrants will not entitle it to
receive dividends or exercise voting rights and will become worthless if the
warrants cannot be profitably exercised before their expiration dates.
Foreign Securities. The International Equity Fund may invest in foreign
securities without limit. The Small Cap Portfolio and the Small Cap II Portfolio
limit their investments in foreign securities to 15% of their respective total
assets, including securities of foreign issuers that trade on a U.S. exchange or
in the U.S. OTC market. The Equity Portfolio may invest without limit in foreign
securities which trade on a U.S. exchange or in the U.S. OTC market, but is
limited to 10% of total assets on those foreign securities which are not so
listed or traded.
<PAGE>
Investing in Foreign Securities. Investing in the securities of foreign issuers
involves risks that are not typically associated with investing in U.S.
dollar-denominated securities of domestic issuers. Investments in foreign
issuers may be affected by changes in currency rates, changes in foreign or U.S.
laws or restrictions applicable to such investments and in exchange control
regulations (e.g., currency blockage). A decline in the exchange rate of the
currency (i.e., weakening of the currency against the U.S. dollar) in which a
portfolio security is quoted or denominated relative to the U.S. dollar would
reduce the value of the portfolio security. Commissions on transactions in
foreign securities may be higher than those for similar transactions on domestic
stock markets. In addition, clearance and settlement procedures may be different
in foreign countries and, in certain markets, such procedures have on occasion
been unable to keep pace with the volume of securities transactions, thus making
it difficult to conduct such transactions.
Foreign issuers are not generally subject to uniform accounting, auditing and
financial reporting standards comparable to those applicable to U.S. issuers.
There may be less publicly available information about a foreign issuer than
about a U.S. issuer. In addition, there is generally less government regulation
of foreign markets, companies and securities dealers than in the U.S. Most
foreign securities markets may have substantially less trading volume than U.S.
securities markets and securities of many foreign issuers are less liquid and
more volatile than securities of comparable U.S. issuers. Furthermore, with
respect to certain foreign countries, there is a possibility of nationalization,
expropriation or confiscatory taxation, imposition of withholding or other taxes
on dividend or interest payments (or in some cases, capital gains), limitations
on the removal of funds or other assets, political or social instability or
diplomatic developments which could affect investments in those countries.
Currency Risks. The U.S. dollar value of securities denominated in a foreign
currency will vary with changes in currency exchange rates, which can be
volatile. Accordingly, changes in the value of the currencies in which a Fund's
investments are denominated relative to the U.S. dollar will affect the Fund's
net asset value. Exchange rates are generally affected by the forces of supply
and demand in the international currency markets, the relative merits of
investing in different countries and the intervention or failure to intervene of
U.S. or foreign governments and central banks. Some countries in emerging
markets also may have managed currencies, which are not free floating against
the U.S. dollar. In addition, emerging markets are subject to the risk of
restrictions upon the free conversion of their currencies into other currencies.
Any devaluations relative to the U.S. dollar in the currencies in which a Fund's
securities are quoted would reduce the Fund's net asset value per share.
The International Equity Fund may invest any portion of its assets in securities
denominated in a particular currency. The portion of the International Equity
Fund's assets invested in securities denominated in non-U.S. currencies will
vary depending on market conditions.
Each Fund may enter into forward foreign currency exchange contracts and cross
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 and cross-currency futures contracts
to hedge against changes in foreign currency exchange rates, although the
Equity, the Small Cap and Small Cap II Portfolios have no current intention to
engage in such transactions. A forward foreign currency exchange 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. A
cross-currency forward contract is a forward contract that uses one currency
which historically moves in relation to a second currency to hedge against
changes in that second currency. See "Strategic Transactions" within the
"Investment Techniques and Related Risks" section for a further discussion of
the risks associated with currency transactions.
Emerging Markets. The International Equity Fund is permitted to invest up to 25%
of its total assets in issuers located in emerging markets. The Equity, Small
Cap and Small Cap II Portfolios may invest up to 10% of their total assets in
issuers located in emerging markets generally and up to 3% of their total assets
in issuers of any one specific emerging market country. Investments in emerging
markets involve 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 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).
Depositary Receipts and Depositary Shares. Depositary receipts and depositary
shares are typically issued by a U.S. or foreign bank or trust company and
evidence ownership of underlying securities of a U.S. or foreign issuer.
Unsponsored programs are organized independently and without the cooperation of
the issuer of the underlying securities. As a result, available information
concerning the issuer may not be as current as for sponsored depositary
instruments and their prices may be more volatile than if they were sponsored by
the issuers of the underlying securities. Examples of such investments include,
but are not limited to, American Depositary Receipts and Shares ("ADRs" and
"ADSs"), Global Depositary Receipts and Shares ("GDRs" and "GDSs") and European
Depository Receipts and Shares ("EDRs" and "EDSs").
<PAGE>
Money Market Instruments and Short-Term Securities. Although each Fund intends
to stay invested in equity and equity-related securities to the extent practical
in light of its objective, each Fund may, under normal market conditions,
establish and maintain cash balances and may purchase money market instruments
with maturities of less than one year and short-term interest-bearing fixed
income securities with maturities of one to three years ("Short-Term
Obligations") to maintain liquidity to meet redemptions. The Small Cap Portfolio
and Small Cap II Portfolio may hold up to 20% of their total assets in money
market instruments and Short-Term Obligations without regard to the liquidity
needs of their portfolios. Each Fund may also maintain cash balances and invest
in money market instruments and Short-Term Obligations without limitation as a
temporary defensive measure.
Money market instruments in which the Funds invest will be rated at the time of
purchase P-1 by Moody's or A-1 or Duff-1 by Standard & Poor's, Duff and Fitch
or, if unrated, determined by the Adviser to be of comparable quality. Money
market instruments and Short-Term Obligations include obligations issued or
guaranteed by the U.S. Government or any of its agencies and instrumentalities,
U.S. and foreign commercial paper, bank obligations, repurchase agreements and
other debt obligations of U.S. and foreign issuers. At least 95% of a Fund's
assets that are invested in Short-Term Obligations must be invested in
obligations rated at the time of purchase Aaa, Aa, A or P-1 by Moody's or AAA,
AA, A, A-1 or Duff-1 by Standard & Poor's, Duff or Fitch or, if unrated,
determined by the Adviser to be of comparable credit quality. Up to 5% of a
Fund's total assets invested in Short-Term Obligations may be invested in
obligations rated Baa by Moody's or BBB by Standard & Poor's, Duff or Fitch or,
if unrated, determined by the Adviser to be of comparable credit quality.
Generally, U.S. Government securities include U.S. Treasury obligations and
obligations issued or guaranteed by U.S. Government agencies, instrumentalities
or sponsored enterprises which are supported by (a) the full faith and credit of
the U.S. Treasury, (b) the right of the issuer to borrow from the U.S. Treasury,
(C) the discretionary authority of the U.S. Government to purchase certain
obligations of the issuer, or (d) only the credit of the agency. No assurance
can be given that the U.S. Government will provide financial support to U.S.
Government agencies, instrumentalities or sponsored enterprises in the future.
U.S. Government securities also include Treasury receipts, zero coupon bonds,
deferred interest securities and other stripped U.S. Government securities,
where the interest and principal components of stripped U.S. Government
securities are traded independently ("STRIPS").
Securities rated within the top three investment grade ratings (i.e., Aaa, Aa, A
or P-1 by Moody's or AAA, AA, A, A-1 or Duff-1 by Standard & Poor's, Duff or
Fitch) are generally regarded as high grade obligations. Securities rated Baa by
Moody's or BBB by Standard & Poor's, Duff or Fitch are generally considered
medium grade obligations and have some speculative characteristics. Adverse
changes in economic conditions or other circumstances are more likely to weaken
the medium grade issuer's capability to pay interest and repay principal than is
the case for high grade securities. If a security is rated differently by two or
more rating agencies, the Adviser uses the highest rating to determine its
rating category. If the rating of a security held by a Fund is downgraded below
the minimum rating, the Adviser will determine whether to retain that security
in the Fund's portfolio.
Investment Techniques and Related Risks
Strategic Transactions. Each Fund may, but is not required to, utilize various
investment strategies to seek to hedge market risks (such as interest rates,
currency exchange rates and broad or specific equity market movements), or to
enhance potential gain. Such strategies are generally accepted as part of modern
portfolio management and are regularly utilized by many mutual funds and other
institutional investors. Techniques and instruments used by each Fund may change
over time as new instruments and strategies are developed or regulatory changes
occur.
In the course of pursuing their investment objectives, each Fund may purchase
and sell (write) exchange-listed and over-the-counter put and call options on
securities, equity indices and other financial instruments; purchase and sell
financial futures contracts and options thereon; and, to the extent a Fund
invests in foreign securities, enter into currency transactions such as forward
foreign currency exchange contracts, currency futures contracts, currency swaps
and 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 a Fund's portfolio resulting from securities
markets, currency exchange rate fluctuations, to seek to protect a Fund's
unrealized gains in the value of portfolio securities, to facilitate the sale of
such securities for investment purposes, or to establish a position in the
derivatives markets as a temporary substitute for purchasing or selling
particular securities. In addition to the hedging transactions referred to in
the preceding sentence, Strategic Transactions may also be used to enhance
potential gain in circumstances where hedging is not involved.
The ability of a Fund to utilize Strategic Transactions successfully will depend
on Standish's ability to predict pertinent market and interest rate movements,
which cannot be assured. Each Fund will comply with applicable regulatory
requirements when implementing these strategies, techniques and instruments. The
Funds' activities involving Strategic Transactions may be limited by the
requirements of 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, interest rate or currency 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 a 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 a Fund can realize on its investments
or cause a Fund to hold a security it might otherwise sell.
<PAGE>
The use of options and futures transactions entails certain other risks. Futures
markets are highly volatile and the use of futures may increase the volatility
of a Fund's net asset value. In particular, the variable degree of correlation
between price movements of futures contracts and price movements in the related
portfolio position of a Fund creates the possibility that losses on the hedging
instrument may be greater than gains in the value of the Fund's position. The
writing of options could significantly increase a Fund's portfolio turnover rate
and 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, a
Fund might not be able to close out a transaction without incurring substantial
losses. Losses resulting from the use of Strategic Transactions could reduce net
asset value and the net result may be less favorable than if the Strategic
Transactions had not been utilized. 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 position, at the same time, such transactions can
limit any potential gain which might result from an increase in value of such
position. The loss incurred by a Fund in writing options on futures and entering
into futures transactions is potentially unlimited.
The use of currency transactions can result in a 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. Each Fund will attempt to limit its net loss exposure resulting from
Strategic Transactions entered into for non-hedging purposes to 3% of net
assets. In calculating a Fund's net loss exposure from such Strategic
Transactions, an unrealized gain from a particular Strategic Transaction would
be netted against an unrealized loss from a related position. See the Statement
of Additional Information for further information regarding the use of Strategic
Transactions.
Repurchase Agreements. Each Fund (except the International Equity Fund) may
invest up to 10% of its net assets in repurchase agreements. The International
Equity Fund is not subject to the same limit, except that investments in
repurchase agreements maturing in more than 7 days are subject to the Fund's 15%
limit on investments in illiquid securities. In a repurchase agreement, a Fund
buys a security at one price and simultaneously agrees to sell it back at a
higher price. Delays or losses could result if the other party to the agreement
defaults or becomes insolvent. Repurchase agreements acquired by a 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.
Short Sales. Each Fund may engage in short sales and short sales against the
box. In a short sale, a Fund sells a security it does not own in anticipation of
a decline in the market value of that security. In a short sale against the box,
a Fund either owns or has the right to obtain at no extra cost the security sold
short. The broker holds the proceeds of the short sale until the settlement
date, at which time the Fund delivers the security (or an identical security) to
cover the short position. The Fund receives the net proceeds from the short
sale. When a Fund enters into a short sale other than against the box, the Fund
must first borrow the security to make delivery to the buyer and must place cash
or liquid assets in a segregated account with the Fund's custodian that is
marked to market daily. Short sales other than against the box involve unlimited
exposure to loss. 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 a Fund's net assets.
Restricted and Illiquid Securities. Each Fund may invest up to 15% of its net
assets in illiquid securities; however, the Equity Portfolio, the Small Cap
Portfolio and Small Cap II Portfolio invest in these securities only on an
occasional basis. Illiquid securities are those 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 certain restricted securities. Based upon
continuing review of the trading markets for a specific restricted security, the
security may be determined to be eligible for resale to qualified institutional
buyers pursuant to Rule 144A under the Securities Act of 1933 and, therefore, to
be liquid. Also, certain illiquid securities may be determined to be liquid if
they are found to satisfy certain relevant liquidity requirements.
The Boards of Trustees have adopted guidelines and delegated to the Adviser the
daily function of determining and monitoring the liquidity of portfolio
securities, including restricted and illiquid securities. The Boards of
Trustees, however, retain oversight and are ultimately responsible for such
determinations. The purchase price and subsequent valuation of illiquid
securities normally reflect a discount, which may be significant, from the
market price of comparable securities for which a liquid market exists.
Investments in Other Investment Companies. Each Fund is permitted to invest up
to 10% of its total assets in shares of investment companies and up to 5% of its
total assets in any one investment company as long as that investment does not
represent more than 3% of the total voting stock of the acquired investment
company. Investments in the securities of other investment companies may involve
duplication of advisory fees and other expenses. Because certain emerging
markets are closed to investment by foreigners, the Funds may invest in issuers
in those markets primarily through specifically authorized investment funds. In
addition, each Fund may invest in investment companies that are designed to
replicate the composition and performance of a particular index. For example,
Standard & Poor's Depositary Receipts ("SPDERS") are exchange-traded shares of a
<PAGE>
closed-end investment company designed to replicate the price performance and
dividend yield of the Standard & Poor's 500 Composite Stock Price Index. Another
example is World Equity Benchmark Series ("WEBS") which are exchange traded
shares of open-end investment companies designed to replicate the composition
and performance of publicly traded issuers in particular countries. Investments
in index baskets involve the same risks associated with a direct investment in
the types of securities included in the baskets.
Portfolio Turnover. A high rate of portfolio turnover (100% or more) involves
correspondingly higher transaction costs which must be borne directly by a Fund
and thus indirectly by its shareholders. It may also result in a 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. See "Financial Highlights" for each Fund's
portfolio turnover rates.
Short-Term Trading. Each Fund will sell a portfolio security without regard to
the length of time such security has been held if, in Standish's view, the
security meets the criteria for disposal.
Investment Restrictions. The investment objectives of the Portfolios and the
Small Capitalization Equity Fund II are not fundamental and may be changed by
the Boards of Trustees without the approval of shareholders. The investment
objectives of the Equity Fund, the International Equity Fund and the Small
Capitalization Equity Fund are fundamental and may not be changed without a vote
of the applicable Fund's shareholders. If there is a change in a Fund's
investment objectives, shareholders should consider whether the Fund remains an
appropriate investment in light of their current financial situation. Each
Portfolio's and Fund's investment policies set forth in this Prospectus are
non-fundamental and may be changed without shareholder approval, except that the
Equity Fund's 10% limit on repurchase agreements is fundamental. Each Fund and
Portfolio has adopted fundamental policies which may not be changed without the
approval of the Funds' shareholders. See "Investment Restrictions" in the
Statement of Additional Information. If any percentage restriction is adhered to
at the time of investment, a subsequent increase or decrease in the percentage
resulting from a change in the value of a Fund's assets will not constitute a
violation of the restriction.
Information About the Master-Feeder Structure
Each Standish Feeder Fund seeks to achieve its investment objective by investing
all of its investable assets in its corresponding Portfolio, which has an
identical investment objective. Each of the Standish Feeder Funds is a feeder
fund and its corresponding Portfolio is the master fund in a so-called
master-feeder structure. The International Equity Fund purchases securities
directly and maintains its own individual portfolio.
In addition to the Standish Feeder Funds, other feeder funds may invest in these
Portfolios, and information about these other feeder funds is available from
Standish Fund Distributors. The other feeder funds invest in the Portfolios on
the same terms as the Funds and bear a proportionate share of the Portfolios'
expenses. The other feeder funds may sell shares on different terms and under a
different pricing structure than the Funds, which may produce different
investment results.
There are certain risks associated with an investment in a master-feeder
structure. Large scale redemptions by other feeder funds in a Portfolio may
reduce the diversification of a Portfolio's investments, reduce economies of
scale and increase a Portfolio's operating expenses. If the Portfolio Trust's
Board of Trustees approves a change to the investment objective of a Portfolio
that is not approved by the Trust's Board of Trustees, a Fund would be required
to withdraw its investment in the Portfolio and engage the services of an
investment adviser or find a substitute master fund. Withdrawal of a Fund's
interest in its Portfolio might cause the Fund to incur expenses it would not
otherwise be required to pay.
If a Fund is requested to vote on a matter affecting the Portfolio in which it
invests, the Fund will call a meeting of its shareholders to vote on the matter.
The Fund will then vote on the matter at the meeting of the Portfolio's
investors in the same proportion that the Fund's shareholders voted on the
matter. The Fund will vote those shares held by its shareholders who did not
vote in the same proportion as those Fund shareholders who did vote on the
matter.
A majority of the Trustees who are not "interested persons" (as defined in the
1940 Act) of the Trust or the Portfolio Trust, as the case may be, have adopted
procedures reasonably appropriate to deal with potential conflicts of interest
arising from the fact that the same individuals are trustees of the Trust and of
the Portfolio Trust.
Calculation of Performance Data
From time to time, each Fund may advertise its annual total return which is
determined by computing the average annual percentage change in the value of
$1,000 invested at the maximum public offering price for specified periods
ending with the most recent calendar quarter, assuming reinvestment of all
dividends and distributions at net asset value. The total return calculation
assumes a complete redemption of the investment at the end of the relevant
period. Each Fund may also from time to time advertise total return on a
cumulative, average, year-by-year or other basis for various specified periods
by means of quotations, charts, graphs or schedules.
From time to time, a Fund may compare its performance in publications with that
of other mutual funds with similar investment objectives, to stock and other
relevant indices, and to performance rankings prepared by recognized mutual fund
statistical services. In addition, a Fund's performance may be compared to
alternative investment or savings vehicles or to indices or indicators of
economic activity.
<PAGE>
The EAFE Index. The EAFE Index is a market capitalization weighted foreign
securities index which is widely used to measure the performance of European,
Australian, and Far Eastern stock markets. The EAFE Index currently includes
over 1,000 companies drawn from the following 20 countries: Australia, Austria,
Belgium, Denmark, Finland, France, Germany, Hong Kong, Ireland, Italy, Japan,
Malaysia, The Netherlands, New Zealand, Norway, Singapore, Spain, Sweden,
Switzerland and the United Kingdom.
The S&P 500 Index. The S&P 500 Index is a market weighted compilation of 500
common stocks selected on a statistical basis by Standard & Poor's. Total return
for the S&P 500 Index assumes reinvestment of dividends. The S&P 500 Index is
typically composed of issues in the following sectors: industrial, financial,
public utilities and transportation. Most stocks that comprise the S&P 500 Index
are traded on the New York Stock Exchange, although some are traded on the
American Stock Exchange and in the over-the-counter market.
The Russell 2000 Index. The Russell 2000 Index is composed of approximately
2,000 small capitalization common stocks and is generally representative of
unmanaged small capitalization stocks in the U.S. markets. A company's stock
market capitalization is the total market value of its floating outstanding
shares.
The Russell 2000 Growth Index. The Russell 2000 Growth Index is composed of
approximately 2,000 small capitalization common stocks and is generally
considered to be representative of those Russell 2000 companies with higher
price-to-book ratios and forecasted growth.
Dividends and Distributions
The Funds' dividends from short-term and long-term capital gains, if any, after
reduction by capital losses, will be declared and distributed at least annually,
as will dividends from net investment income. In determining the amounts of its
dividends, the Equity Fund, Small Cap Fund and Small Cap II Fund will take into
account their share of the income, gain or loss, expense, and any other tax
items of its corresponding Portfolio. Dividends from net investment income and
capital gains distributions, if any, are automatically reinvested in additional
shares of the applicable Fund unless the shareholder elects to receive them in
cash.
Purchase of Shares
Shares of the Funds may be purchased from Standish Fund Distributors, which
offers the Funds' 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 Standish Fund Distributors and payment for the shares is
received by the Fund's custodians (the "Custodians"). Investors Bank & Trust
Company serves as custodian for the Equity Fund, Small Cap Fund and Small Cap II
Fund and Morgan Stanley Trust Company serves as custodian for the International
Equity Fund. Please see each Fund's account application or call (800) 221-4795
for instructions on how to make payment for shares of the Funds. Each Fund
requires minimum initial investments of $100,000. Additional investments must be
in amounts of at least $10,000. Certificates for Fund shares are not issued.
Shares of the Funds may also be purchased through securities dealers. Orders for
the purchase of Fund shares received by dealers by the close of regular trading
on the New York Stock Exchange ("NYSE") on any business day and transmitted to
Standish Funds Distributor 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 NYSE on that day, if payment for the shares is also
received by the Custodians that day. Otherwise, orders will be effected at the
net asset value per share determined on the next business day. It is the
responsibility of dealers to transmit orders so they will be received by
Standish Fund Distributors before the close of its business day. Shares of a
Fund purchased through dealers may be subject to transaction fees on purchase or
redemption, no part of which will be received by the Funds, Standish Fund
Distributors or the Advisers.
In the sole discretion of the Trust, each Fund may accept securities instead of
cash for the purchase of shares. The Trust will ask the applicable Adviser to
determine that any securities acquired by the Funds in this manner are
consistent with the investment objective, policies and restrictions of the
applicable Fund. The securities will be valued in the manner stated below. The
purchase of shares of a Fund by 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 a Fund's shares, (ii) to reject purchase orders when in the best interest of
a Fund, (iii) to modify or eliminate the minimum initial or subsequent
investment in Fund shares and (iv) to eliminate duplicate mailings of Fund
material to shareholders who reside at the same address. A Fund's investment
minimums do not apply to accounts for which Standish or any of its affiliates
serves as investment adviser or to employees of Standish or any of its
affiliates or to members of such persons' immediate families. A Fund's
investment minimums apply to the aggregate value invested in omnibus accounts
rather than to the investment of the underlying participants in the omnibus
accounts.
Net Asset Value
Each Fund's net asset value per share is computed each day on which the NYSE is
open as of the close of regular trading on the NYSE (normally 4:00 p.m., New
York City time). The net asset value per share is calculated by determining the
value of all a Fund's assets (the value of their investments in the
corresponding Portfolio and other assets in the case of the Standish Feeder
Funds), 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 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 accurate market prices are not readily
<PAGE>
available and all other assets are valued at fair value as determined in good
faith by the applicable Adviser in accordance with procedures approved by the
Trustees. Money market instruments with less than sixty days remaining to
maturity when acquired by a Fund are valued on an amortized cost basis unless
the Trustees determine that amortized cost does not represent fair value. If a
Fund acquires a money market instrument with more than sixty days remaining to
its maturity, it is valued at current market value until the sixtieth day prior
to maturity and will then be valued at amortized cost based upon the value on
such date unless the Trustees determine during such sixty-day period that
amortized cost does not represent fair value.
Portfolio securities traded on more than one U.S. national securities exchange
or on a U.S. exchange and a foreign securities exchange are valued at the last
sale price from the exchange representing the principal market for such
securities on the business day when such value is determined. The value of all
assets and liabilities expressed in foreign currencies will be converted into
U.S. dollar values at currency exchange rates determined by Investors Bank and
Trust Company, the Funds' transfer agent, to be representative of fair levels at
times prior to the close of trading on the NYSE. If such rates are not
available, the rate of exchange will be determined in good faith under
procedures established by the Trustees. Trading in securities on European and
Far Eastern securities exchanges and over-the-counter markets is normally
completed well before the close of business on the NYSE and may not take place
on all business days that the NYSE is open and may take place on days when the
NYSE is closed. Events affecting the values of portfolio securities that occur
between the time their prices are determined and the close of regular trading on
the NYSE will not be reflected in the Funds' calculation of net asset values
unless the Adviser determines that the particular event would materially affect
net asset value, in which case an adjustment will be made.
Exchange of Shares
Shares of the Funds may be exchanged for shares of one or more other funds in
the Standish fund family subject to the terms and restrictions imposed on the
purchase of shares of such funds. Shares of a fund redeemed in an exchange
transaction are valued at the net asset value next determined after the exchange
request is received by Standish Fund Distributors or its agent. Shares of a fund
purchased in an exchange transaction are valued at the net asset value next
determined after the exchange request is received by Standish Fund Distributors
or its agent and payment for the shares is received by the fund into which
shares are to be exchanged. Until receipt of the purchase price by the fund into
which 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 fund family, please call (800) 221-4795. Please
consider the differences in investment objectives and expenses of a fund as
described in its prospectus before making an exchange.
Written Exchanges. Shares of the Funds may be exchanged by written order to
Standish Fund Distributors, P.O. Box 1407, Boston, Massachusetts 02205-1407. 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 described under "Written Redemption" below.
Telephone Exchanges. Shareholders who elect telephone privileges may exchange
shares by calling Standish Fund Distributors at (800) 221-4795. Telephone
privileges are not available to shareholders automatically. Proper
identification will be required for each telephone exchange. Please see
"Telephone Transactions" below for more information regarding telephone
transactions.
General Exchange Information. All exchanges are subject to the following
exchange restrictions: (i) the fund into which shares are being exchanged must
be lawfully available for sale in your state; (ii) exchanges may be made only
between funds that are registered in the same name, address and, if applicable,
taxpayer identification number; and (iii) unless waived by the Trust, the amount
to be exchanged must satisfy the minimum account size of the fund to be
exchanged into. Exchange requests will not be processed until payment for the
shares of the current Fund has been received by Standish Fund Distributors. The
exchange privilege may be changed or discontinued and may be subject to
additional limitations upon sixty (60) days' notice to shareholders, including
certain restrictions on purchases by market-timer accounts.
Redemption of Shares
Shares of the Funds may be redeemed or repurchased by the methods described
below at the net asset value per share next determined after receipt by Standish
Fund Distributors or its agent of a redemption or repurchase request in proper
form. Redemptions will not be processed until a completed account application
and payment for the shares to be redeemed have been received.
Written Redemption. Shares of each Fund may be redeemed by written order to
Standish Fund Distributors, P.O. Box 1407, Boston, Massachusetts 02205-1407. 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 NYSE's Medallion
Signature Program or by any one of the following institutions, provided that the
institution meets credit standards established by Investors Bank & Trust
Company, the Funds' transfer agent: (i) a bank; (ii) a securities broker or
dealer, including a government or municipal securities broker or dealer, that is
a member of a clearing corporation or has net capital of at least $100,000;
(iii) a credit union having authority to issue signature guarantees; (iv) a
<PAGE>
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. Standish Fund
Distributors reserves the right to waive the requirement that signatures be
guaranteed. 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 Standish Fund Distributors of a written
redemption request in proper form. If shares to be redeemed were recently
purchased by check, the Funds may delay transmittal of redemption proceeds until
such time as they are assured that good funds have been collected for the
purchase of the shares. This may take up to fifteen (15) days in the case of
payments made by check.
Telephone Redemption. Shareholders who elect telephone privileges may redeem
shares by calling Standish Fund Distributors at (800) 221-4795. Telephone
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 telephone 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 telephone redemption.
Repurchase Order. In addition to written redemption of Fund shares, Standish
Fund Distributors may accept telephone orders from brokers or dealers for the
repurchase of Fund shares. Brokers and dealers are obligated to transmit
repurchase orders to Standish Fund Distributors promptly prior to the close of
Standish Fund Distributors' business day (normally 4:00 p.m.). Brokers or
dealers may charge for their services in connection with a repurchase of Fund
shares, but neither the Trust nor Standish Fund Distributors imposes a charge
for share repurchases.
Telephone Transactions. By maintaining an account that is eligible for telephone
exchange and redemption privileges, the shareholder authorizes the Advisers,
Standish Fund Distributors, the Trust and the Custodians to act upon
instructions of any person to redeem and/or exchange shares from the
shareholder's account. Further, the shareholder acknowledges that, as long as
the Funds employ reasonable procedures to confirm that telephone instructions
are genuine, and follow telephone instructions that they reasonably believe to
be genuine, neither the Advisers, Standish Fund Distributors, the Trust, the
applicable Fund, the Custodians, nor their respective officers or employees,
will be liable for any loss, expense or cost arising out of any request for a
telephone redemption or exchange, even if such transaction results from any
fraudulent or unauthorized instructions.
Depending upon the circumstances, the Funds intend to employ personal
identification or written confirmation of transaction procedures, and if they do
not, a 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. During these periods, shareholders should
transmit redemption and exchange requests in writing.
* * *
The proceeds paid upon redemption or repurchase may be more or less than the
cost of the shares, depending upon the market value of the applicable Fund's or
Portfolio's portfolio investments at the time of redemption or repurchase. The
Funds intend to pay cash for all shares redeemed, but under certain conditions,
the Funds may make payments wholly or partially in securities for this purpose.
Please see the Statement of Additional Information for further information.
Each Fund may redeem, at net asset value, the shares in any account which has a
value of less than $25,000 as a result of redemptions or transfers. Before doing
so, the Fund will notify the shareholder that the value of the shares in the
account is less than the specified minimum and will allow the shareholder 30
days to make an additional investment to increase the value of the account to an
amount equal to or above the stated minimums.
Management
Trustees. Each Fund is a separate investment series of the Trust, a
Massachusetts business trust. Under the terms of the Agreement and Declaration
of Trust establishing the Trust, the Trustees of the Trust are ultimately
responsible for the management of its business and affairs. Each Portfolio is a
separate investment series of the Standish, Ayer & Wood Master Portfolio
("Portfolio Trust"), a master trust fund organized under the laws of the State
of New York. Under the terms of the Declaration of Trust, each Portfolio's
affairs are managed under the supervision of the Portfolio Trust's Trustees. See
"Management" in the Statement of Additional Information for more information
about the Trustees and officers of the Trust and the Portfolio Trust.
Investment Advisers. Standish, One Financial Center, Boston, Massachusetts
02111, serves as investment adviser to the Equity Portfolio, Small Cap Portfolio
and Small Cap II Portfolio pursuant to separate investment advisory agreements.
Standish is a Massachusetts corporation incorporated in 1933 and is a registered
investment adviser under the Investment Advisers Act of 1940.
<PAGE>
SIMCO, One Financial Center, Boston, Massachusetts 02111, serves as investment
adviser to the International Equity Fund pursuant to an investment advisory
agreement and manages the International Equity Fund's investments and affairs
subject to the supervision of the Trustees of the Trust. SIMCO is a Delaware
limited partnership which was organized in 1991 and is a registered investment
adviser under the Investment Advisers Act of 1940. The general partner of SIMCO
is Standish, which holds a 99.98% partnership interest. The limited partners,
who each hold a 0.01% interest in SIMCO, are Walter M. Cabot, Sr., Director and
Senior Adviser to Standish, and D. Barr Clayson, Chairman of the Board and a
Director of SIMCO and a Managing Director of Standish. Ralph S. Tate, a Managing
Director of Standish, is President and a Director of SIMCO. Richard S. Wood,
Vice President and a Managing Director of Standish and the President of the
Trust, is the Executive Vice President and a Director of SIMCO.
Standish and SIMCO 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, 1997, Standish or SIMCO managed
approximately $31 billion of assets. The Equity Portfolio's portfolio managers
are Ralph S. Tate and David C. Cameron. Mr. Tate and Mr. Cameron have been
primarily responsible for the day-to-day management of the Fund's portfolio
since its inception in January 1991 and of the Portfolio's portfolio since the
Fund's conversion to the master-feeder structure on May 3, 1996. During the past
five years, Mr. Tate has served as a Managing Director of Standish (since 1995)
and President of SIMCO (since 1996) and both Messrs. Tate and Cameron have
served as a Director and Vice President of Standish and a Director of SIMCO
(since 1995 for Mr. Cameron).
The International Equity Fund's portfolio manager is Remi J. Browne, who has
been primarily responsible for the day-to-day management of the Fund's portfolio
since December 1996. During the past five years, Mr. Browne has served as Vice
President and Chief Investment Officer of SIMCO and Vice President of Standish
since 1996 and as Managing Director of Ark Asset Management Company, New York,
prior thereto.
The Small Capitalization Equity Portfolio's portfolio manager is Nicholas S.
Battelle. Mr. Battelle has been primarily responsible for the day-to-day
management of the Fund's portfolio since its inception in August, 1990 and of
the Portfolio's portfolio since the Fund's conversion to the master-feeder fund
structure on May 3, 1996. During the past five years, Mr. Battelle has served as
a Vice President as well as a Director of Standish.
The Small Capitalization Equity Portfolio II's portfolio has two portfolio
managers: Mr. Nicholas S. Battelle and Mr. Andrew L. Beja. Mr. Battelle has been
primarily responsible for the day-to-day management of the Portfolio since 1990.
During the past five years, Mr. Battelle has served as a Vice President as well
as a Director of Standish. Mr. Beja has been associated with Standish since
March 1996 as Senior Analyst on the small capitalization company team and is a
Vice President of Standish. Prior to joining Standish, Mr. Beja was a Vice
President and analyst at Advest, Inc. from 1985-1996.
Subject to the supervision and direction of the Trustees of the Trust and the
Portfolio Trust, Standish manages the Portfolios' investments and SIMCO manages
the International Equity Fund's investments in accordance with their respective
investment objectives and policies, recommend investment decisions, place orders
to purchase and sell securities and permit the Portfolios' and the Funds to use
the name "Standish." For these services, each Portfolio pays Standish and the
International Equity Fund pays SIMCO a monthly fee at a stated annual percentage
rate of such Portfolio's ("Fund's") average daily net asset value:
Actual Rate
Contractual Paid for the
Advisory Fee Year Ended
Annual Rate December 31, 1996
Equity Portfolio 0.50% 0.50%
Small Cap Equity Portfolio 0.60% 0.60%
Small Cap Equity II Portfolio 0.60% 0.00%*
International Equity Fund 0.80% 0.00%*
- ----------
*The applicable Adviser has voluntarily and temporarily agreed to limit total
expenses (excluding brokerage commissions, taxes and extraordinary expenses) of
the Small Cap II Fund and the International Equity Fund to 0.00% and 1.00%,
respectively, of the applicable Fund's average daily net assets. (The
International Equity Fund was subject to a different expense limitation prior to
April 1, 1997.) The Advisers may terminate or revise these agreements at any
time although they have no current intention to do so. If an expense limit is
exceeded, the compensation due to an Adviser shall be proportionately reduced by
the amount of such excess by a reduction or refund thereof, subject to
readjustment during the period during which such limit is in place.
Administrator. Standish serves as administrator to the Equity Fund, Small Cap
Fund and Small Cap II Fund. As administrator, Standish manages the affairs of
these Funds, provides all necessary office space and services of executive
personnel for administering the affairs of the Funds, and allows these Funds to
use the name "Standish." For these services, Standish currently does not receive
any additional compensation. The Trustees of the Trust may determine in the
future to compensate Standish for its administrative services.
Expenses. Each Portfolio and each Fund bears the expenses of its respective
operations other than those incurred by the respective Adviser under the
investment advisory agreements or the administration agreement.
Each Portfolio pays investment advisory fees; bookkeeping, share pricing and
custodian fees and expenses; expenses of notices and reports to interest
holders; and expenses of the Portfolio's administrator. Each Standish Feeder
Fund pays shareholder servicing fees and expenses, expenses of prospectuses,
statements of additional information and shareholder reports which are furnished
to existing shareholders. Each Standish Feeder Fund and its corresponding
Portfolio pays legal and auditing fees; registration and reporting fees and
expenses. The International Equity Fund, since it does not invest in a
corresponding portfolio, bears all of the expenses listed above for both the
Portfolios and the Funds. Expenses of the Trust which relate to more than one
series are allocated among such series by Standish in an equitable manner.
<PAGE>
Standish Fund Distributors bears the distribution expenses attributable to the
offering and sale of Fund shares without subsequent reimbursement.
Each Fund's total annual operating expenses for the fiscal year ended December
31, 1996 are described above under the caption "Financial Highlights."
Portfolio Transactions. Subject to the supervision of the Trustees of the Trust
and the Portfolio Trust, the Advisers select the brokers and dealers that
execute orders to purchase and sell portfolio securities for the Portfolios and
the International Equity Fund. The Advisers will generally seek to obtain the
best available price and most favorable execution with respect to all
transactions for the Portfolios and the International Equity Fund. The Advisers
may also consider the extent to which a broker or dealer provides research to
the Advisers and the number of Fund shares sold by the broker or dealer in
making their selection.
Federal Income Taxes
Each Fund is a separate entity for federal tax purposes and 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, each 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.
Shareholders which are taxable entities or persons will be subject to federal
income tax on dividends and capital gain distributions made by the Funds.
Dividends paid by a 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 reinvested in Fund shares. No portion of such dividends paid
by the International Equity Fund is expected to qualify for the corporate
dividends received deduction under the Code. A portion of such dividends paid by
the other Funds will generally qualify for that deduction, subject to certain
requirements and limitations under the Code. Dividends paid by a 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 reinvested
in 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 (including exchanges) and
repurchases of shares are taxable events on which a shareholder may recognize a
gain or loss.
The International Equity Fund and the Portfolios may be subject to foreign taxes
with respect to income or gains from certain foreign investments, which will
reduce the yield or return from such investments. The International Equity Fund
may, but the other Funds are not likely to, qualify to elect to pass certain
qualifying foreign taxes through to shareholders. If this election is made,
shareholders would include their shares of qualified foreign taxes in their
gross incomes (in addition to any actual dividends and distributions) and might
be entitled to a corresponding federal income tax credit or deduction.
Shareholders will receive appropriate information from the Trust if this
election is made for any year.
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 applicable 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 Funds
and, unless a current IRS Form W-8 or an acceptable substitute is furnished to
the applicable Fund, to backup withholding on certain payments from that Fund.
After the close of each calendar year, the Funds will send a notice to
shareholders that provides information about the federal tax status of
distributions to shareholders for such calendar year.
The Funds and Their Shares
The Trust was organized on August 13, 1986 as a Massachusetts business trust. In
addition to the Funds offered in this Prospectus, the Trust offers other series
to the public. Shareholders of each Fund are entitled to one full or fractional
vote for each share of that Fund. There is no cumulative voting and shares have
no preemption or conversion rights. All series of the Trust vote together except
as provided in the 1940 Act or the Declaration of Trust. The Trust does not
intend to hold annual meetings of shareholders. The Trustees will call special
meetings of shareholders to the extent required by the Trust's Declaration of
Trust or the 1940 Act. The 1940 Act requires the Trustees, under certain
circumstances, to call a meeting to allow shareholders to vote on the removal of
a Trustee and to assist shareholders in communicating with each other.
Certificates for Fund shares are not issued.
The Portfolio Trust was organized on January 18, 1996 as a New York trust. In
addition to the Portfolios, the Portfolio Trust offers interests in other series
to certain qualified investors. See "Information about the Master-Feeder
Structure" above for additional information about the Portfolio Trust.
Inquiries concerning the Funds should be made by contacting Standish Fund
Distributors at the address and telephone number listed on the back cover of
this Prospectus.
Custodians
Investors Bank & Trust Company, John Hancock Tower, 200 Clarendon Street,
Boston, Massachusetts 02116, serves as custodian for all cash and securities of
the Portfolios and the Equity Fund, Small Cap Equity Fund and Small Cap Equity
II Fund.
<PAGE>
Morgan Stanley Trust Company, One Pierrepont Plaza, Brooklyn, New York 11201,
serves as custodian for all cash and securities of the International Equity
Fund.
Transfer Agent and Dividend Disbursing Agent
Investors Bank & Trust Company, John Hancock Tower, 200 Clarendon Street,
Boston, Massachusetts 02116, serves as the Funds' transfer agent, dividend
disbursing agent and Investors Bank & Trust, Boston and Toronto, Canada, also
provides accounting services to the Funds.
Independent Accountants
Coopers & Lybrand L.L.P., One Post Office Square, Boston, Massachusetts 02109
and Coopers & Lybrand, P.O. Box 219, Grand Cayman, Cayman Islands, BWI, serves
as independent accountants for the Trust and the Portfolio Trust, respectively,
and will audit the Funds' and Portfolios' financial statements annually.
Legal Counsel
Hale and Dorr LLP, 60 State Street, Boston, Massachusetts 02109, is legal
counsel to the Trust, the Portfolio Trust and Standish and its affiliates.
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. A 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 Funds 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.
<PAGE>
Standish Group of Equity Funds
Investment Adviser
Standish, Ayer & Wood, Inc.
One Financial Center
Boston, Massachusetts 02111
(Equity Fund, Small Capitalization Equity Fund and
Small Capitalization Equity Fund II)
Investment Adviser
Standish International Management Company, L.P.
One Financial Center
Boston, Massachusetts 02111
(International Equity Fund)
Principal Underwriter
Standish Fund Distributors, L.P.
One Financial Center
Boston, Massachusetts 02111
Custodian
Investors Bank & Trust Company
John Hancock Tower
200 Clarendon Street
Boston, Massachusetts 02116
(Equity Fund, Small Capitalization Equity Fund and
Small Capitalization Equity Fund II)
Independent Accountants
Coopers & Lybrand L.L.P.
One Post Office Square
Boston, Massachusetts 02109
Custodian
Morgan Stanley Trust Company
One Pierrepont Plaza
Brooklyn, New York 11201
(Standish International Equity Fund)
Legal Counsel
Hale and Dorr LLP
60 State Street
Boston, Massachusetts 02109
<PAGE>
May 1, 1997
STANDISH GROUP OF EQUITY FUNDS
STANDISH EQUITY FUND
STANDISH INTERNATIONAL EQUITY FUND
STANDISH SMALL CAPITALIZATION EQUITY FUND
STANDISH SMALL CAPITALIZATION EQUITY FUND II
One Financial Center
Boston, Massachusetts 02111
(800) 729-0066
STATEMENT OF ADDITIONAL INFORMATION
This combined Statement of Additional Information is not a prospectus, but
expands upon and supplements the information contained in the combined
Prospectus dated May 1, 1997, as amended and/or supplemented from time to time
(the "Prospectus"), of the Standish Equity Fund ("Equity Fund"), the Standish
Small Capitalization Equity Fund ("Small Capitalization Fund"), the Standish
Small Capitalization Equity Fund II ("Small Capitalization II Fund") and the
Standish International Equity Fund ("International Equity Fund"), each 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, a copy of which may be obtained without charge by writing
or calling the Trust's principal underwriter, Standish Fund Distributors, L.P.
(the "Principal Underwriter"), at the address and phone number set forth above.
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND IS
AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY IF PRECEDED OR
ACCOMPANIED BY AN EFFECTIVE PROSPECTUS.
CONTENTS
Investment Objective and Policies..........................2
Investment Restrictions....................................8
Calculation of Performance Data...........................11
Management ...............................................14
Redemption of Shares......................................21
Portfolio Transactions....................................21
Brokerage Commissions.....................................22
Determination of Net Asset Value..........................22
The Funds and Their Shares................................23
The Portfolio and its Investors...........................23
Taxation..................................................23
Additional Information....................................26
Experts and Financial Statements..........................26
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The Prospectus describes the investment objectives and policies of each
Fund. The following discussion supplements the description of the Funds'
investment policies in the Prospectus.
The Equity Fund invests all of its investible assets in the Standish Equity
Portfolio (the "Equity Portfolio"). The Small Capitalization Equity Fund invests
all of its investible assets in the Standish Small Capitalization Equity
Portfolio (the "Small Capitalization Portfolio"). The Small Capitalization
Equity Fund II invests all of its investible assets in the Standish Small
Capitalization Equity Portfolio II (the "Small Capitalization II Portfolio").
These three Funds are sometimes referred to in this Statement of Additional
Information as Standish Feeder Funds.
Each Portfolio is a series of the Standish, Ayer and Wood Master Portfolio
(the "Portfolio Trust"), an open-end management investment company, and each
Portfolio has the same investment objective and restrictions as its
corresponding Fund. Standish, Ayer and Wood, Inc. ("Standish") is the investment
adviser to the Portfolios. Standish International Management Company, L.P.
("SIMCO") is the investment adviser to the International Equity Fund. Both
Standish and SIMCO are sometimes referred to herein as the "Adviser" or
collectively as the "Advisers".
The Prospectus describes the investment objective of the Standish Feeder
Funds and the Portfolios and summarizes the investment policies they will
follow. Since the investment characteristics of the Standish Feeder Funds
correspond directly to those of their respective Portfolios, the following
discusses the various investment techniques employed by the Portfolios. See the
Prospectus for a more complete description of each Fund's and each Portfolio's
investment objective, policies and restrictions. For purposes of the discussion
in this section of this Statement of Additional Information, the use of the term
"Fund" or "Funds" refers to each of the Equity Portfolio, the Small
Capitalization Portfolio, the Small Capitalization II Portfolio and the
International Equity Fund, unless otherwise noted.
Suitability and Risk Factors
An investor should not expect, and the Funds do not intend, that each Fund
will provide an investment program which meets all of the requirements of that
investor. The companies in which the Small Capitalization and Small
Capitalization II Portfolios invest generally reinvest their earnings, and
dividend income should not be expected. Also, notwithstanding the Funds' ability
to spread risk by holding securities of a number of companies, shareholders
should be able and be prepared to bear the risk of investment losses which may
accompany the investments contemplated by each Fund.
Common Stocks
The common stocks of small growth companies in which the Small
Capitalization Portfolio invests typically have market capitalizations up to
$700 million. The common stocks of the companies in which the Small
Capitalization II Portfolio invests typically have market capitalizations up to
$1 billion. Morningstar Mutual Funds, a leading mutual fund monitoring service,
includes in the small-cap category all funds with median portfolio market
capitalizations of less than $ 1 billion. Their investments are expected to
emphasize companies involved with value added products or services in expanding
industries. At times, particularly when Standish believes that the securities of
small companies are overvalued, their portfolios may include securities of
<PAGE>
larger, more mature companies, provided that the value of the securities of such
larger, more mature companies shall not exceed 20% of each Portfolio's total
assets. Both Portfolios will attempt to reduce risk by diversifying their
investments within the investment policies set forth in the Prospectus and will
invest in publicly traded equity securities and, excluding equity securities
received as distributions on portfolio securities, will not normally hold equity
securities which are restricted as to disposition under federal securities laws
or are otherwise illiquid or not readily marketable.
Foreign Securities
Foreign securities may be purchased and sold on foreign stock exchanges or
in over-the-counter markets (but persons affiliated with a Fund will not act as
principal in such purchases and sales). Foreign stock markets are generally not
as developed or efficient as those in the United States. While growing in
volume, they usually have substantially less volume than the New York Stock
Exchange, and securities of some foreign companies are less liquid and more
volatile than securities of comparable United States companies. Fixed
commissions on foreign stock exchanges are generally higher than negotiated
commissions on United States exchanges, although each Fund will endeavor to
achieve the most favorable net results on its portfolio transactions. There is
generally less government supervision and regulation of stock exchanges, brokers
and listed companies abroad than in the United States.
The dividends and interest payable on certain foreign securities may be
subject to foreign withholding taxes and in some cases capital gains from such
securities may also be subject to foreign tax, thus reducing the net amount of
income or gain available for distribution to a Fund's shareholders.
Investors should understand that the expense ratio of each Fund may be
higher than that of investment companies investing exclusively in domestic
securities because of the cost of maintaining the custody of foreign securities.
The Funds may invest in foreign securities which take the form of sponsored
and unsponsored American Depository Receipts and Shares ("ADRs" and "ADSs"),
Global Depository Receipts and Shares ("GDRs" and "GDSs") and European
Depository Receipts and Shares ("EDRs" and "EDSs") or other similar instruments
representing securities of foreign issuers (together, "Depository Receipts" and
"Depository Shares"). ADRs and ADSs represent the right to receive securities of
foreign issuers deposited in a domestic bank or a correspondent bank. Prices of
ADRs and ADSs are quoted in U.S. dollars and are traded in the United States on
exchanges or over-the-counter and are sponsored and issued by domestic banks.
EDRs and EDSs and GDRs and GDSs are receipts evidencing an arrangement with a
non-U.S. bank. EDRs and EDSs and GDRs and GDSs are not necessarily quoted in the
same currency as the underlying security. To the extent that a Fund acquires
Depository Receipts or Shares through banks which do not have a contractual
relationship with the foreign issuer of the security underlying the Depository
Receipts or Shares to issue and service such Depository Receipts or Shares
<PAGE>
(unsponsored Depository Receipts or Shares), there may be an increased
possibility that the Fund would not become aware of and be able to respond to
corporate actions, such as stock splits or rights offerings involving the
foreign issuer, in a timely manner. In addition, certain benefits which may be
associated with the security underlying the Depository Receipt or Share may not
inure to the benefit of the holder of such Depository Receipt or Share. Further,
the lack of information may result in inefficiencies in the valuation of such
instruments. Investment in Depository Receipts or Shares does not eliminate all
the risks inherent in investing in securities of non-U.S. issuers. The market
value of Depository Receipts or Shares is dependent upon the market value of the
underlying securities and fluctuations in the relative value of the currencies
in which the Depository Receipt or Share and the underlying securities are
quoted. However, by investing in Depository Receipts or Shares, such as ADRs or
ADSs, that are quoted in U.S. dollars, a Fund will avoid currency risks during
the settlement period for purchases and sales.
Strategic Transactions
Each Fund may, but is not required to, utilize various other investment
strategies as described below to seek to hedge various market risks (such as
interest rates, currency exchange rates, and broad or specific equity market
movements), or to enhance potential gain. Such strategies are generally accepted
as part of modern portfolio management and are regularly utilized by many mutual
funds and other institutional investors. Techniques and instruments used by the
Funds may change over time as new instruments and strategies are developed or
regulatory changes occur.
In the course of pursuing its investment objective, a Fund may purchase and
sell (write) exchange-listed and over-the-counter put and call options on
securities, equity, indices and other financial instruments; purchase and sell
financial futures contracts and options thereon; enter into various interest
rate transactions such as swaps, caps, floors or collars; and enter into various
currency transactions such as currency forward contracts, currency futures
contracts, currency swaps or options on currencies or currency futures
(collectively, all the above are called "Strategic Transactions"). Strategic
Transactions may be used in an attempt to protect against possible changes in
the market value of securities held in or to be purchased for a Fund's portfolio
resulting from securities market or currency exchange rate fluctuations, to
protect a Fund's unrealized gains in the value of its portfolio securities, to
facilitate the sale of such securities for investment purposes, or to establish
a position in the derivatives markets as a temporary substitute for purchasing
or selling particular securities. In addition to the hedging transactions
referred to in the preceding sentence, Strategic Transactions may also be used
to enhance potential gain in circumstances where hedging is not involved
although each Fund will attempt to limit its net loss exposure resulting from
<PAGE>
Strategic Transactions entered into for such purposes to not more than 3% of its
net assets at any one time and, to the extent necessary, each 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 each 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 a Fund
is underweighted in cyclical stocks and overweighted in consumer stocks, the
Fund may buy a cyclical index call option and sell a cyclical index put option
and sell a consumer index call option and buy a consumer index put option. Under
such circumstances, any unrealized loss in the cyclical position would be netted
against any unrealized gain in the consumer position (and vice versa) for
purposes of calculating the Fund's net loss exposure. The ability of a Fund to
utilize these Strategic Transactions successfully will depend on the Adviser's
ability to predict pertinent market movements, which cannot be assured. Each
Fund will comply with applicable regulatory requirements when implementing these
strategies, techniques and instruments. A 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
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 a 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 a Fund
can realize on its investments or cause a Fund to hold a security it might
otherwise sell. The use of currency transactions can result in a 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, a
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 a Fund in writing options on futures and entering
into futures transactions is potentially unlimited; however, as described above,
each Fund will attempt to limit its net loss exposure resulting from Strategic
Transactions entered into for non-hedging purposes to not more than 3% of its
net assets at any one time. Futures markets are highly volatile and the use of
<PAGE>
futures may increase the volatility of a 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 a 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, a Fund's purchase of a
put option on a security might be designed to protect its holdings in the
underlying instrument (or, in some cases, a similar instrument) against a
substantial decline in the market value by giving the Fund the right to sell
such instrument at the option exercise price. A call option, in consideration
for the payment of a premium, gives the purchaser of the option the right to
buy, and the seller the obligation to sell (if the option is exercised), the
underlying instrument at the exercise price. A Fund may purchase a call option
on a security, 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.
Each 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.
<PAGE>
A Fund's ability to close out its position as a purchaser or seller of an
exchange listed put or call option is dependent, in part, upon the liquidity of
the option market. There is no assurance that a liquid option market on an
exchange will exist. In the event that the relevant market for an option on an
exchange ceases to exist, outstanding options on that exchange would generally
continue to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours
during which the underlying financial instruments are traded. To the extent that
the option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct 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. A 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. OTC options purchased by a Fund, and
portfolio securities covering the amount of a 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 subject to each Fund's restriction on illiquid securities, unless
determined to be liquid in accordance with procedures adopted by the Boards of
Trustees. For OTC 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. Each 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 an OTC option. As a result, if the Counterparty fails to make
delivery of the security, currency or other instrument underlying an OTC option
it has entered into with a Fund or fails to make a cash settlement payment due
in accordance with the terms of that option, the Fund will lose any premium it
paid for the option as well as any anticipated benefit of the transaction.
Accordingly, the Adviser must assess the creditworthiness of each such
Counterparty or any guarantor or credit enhancement of the Counterparty's credit
to determine the likelihood that the terms of the OTC option will be satisfied.
A 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 Investors Service, Inc. ("Moody's") or an equivalent rating
from any other nationally recognized statistical rating organization ("NRSRO")
or which issue debt that is determined to be of equivalent credit quality by the
Adviser.
<PAGE>
If a Fund sells (writes) a call option, the premium that it receives may
serve as a partial hedge, to the extent of the option premium, against a
decrease in the value of the underlying securities or instruments in its
portfolio or will increase the Fund's income. The sale (writing) of put options
can also provide income.
Each Fund may purchase and sell (write) call options on 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 a 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. In addition,
each 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 a Fund also exposes the Fund during
the term of the option to possible loss of opportunity to realize appreciation
in the market price of the underlying security or instrument and may require the
Fund to hold a security or instrument which it might otherwise have sold.
Each Fund may purchase and sell (write) put options on securities including
equity securities (including convertible securities) and Eurodollar instruments
(whether or not it holds the above securities in its portfolio), and on
securities indices, currencies and futures contracts. A Fund will not sell put
options if, as a result, more than 50% of the Fund's assets would be required to
be segregated to cover its potential obligations under such put options other
than those with respect to futures and options thereon. In selling put options,
there is a risk that a Fund may be required to buy the underlying security at a
price above the market price.
Options on Securities Indices and Other Financial Indices
Each Fund may also purchase and sell (write) call and put options on
securities indices and other financial indices. Options on securities indices
and other financial indices are similar to options on a security or other
instrument except that, rather than settling by physical delivery of the
underlying instrument, they settle by cash settlement. For example, an option on
an index gives the holder the right to receive, upon exercise of the option, an
amount of cash if the closing level of the index upon which the option is based
exceeds, in the case of a call, or is less than, in the case of a put, the
exercise price of the option (except if, in the case of an OTC option, physical
delivery is specified). This amount of cash is equal to the differential between
the closing price of the index and the exercise price of the option, which also
may be multiplied by a formula value. The seller of the option is obligated, in
return for the premium received, to make delivery of this amount upon exercise
of the option. In addition to the methods described above, each 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
<PAGE>
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
Each Fund may enter into financial futures contracts or purchase or sell
put and call options on such futures. Futures are generally bought and sold on
the commodities exchanges where they are listed and involve payment of initial
and variation margin as described below. All futures contracts entered into by a
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 a
Fund, as seller, to deliver to the buyer the specific type of financial
instrument called for in the contract at a specific future time for a specified
price (or, with respect to index futures and Eurodollar instruments, the net
cash amount). The purchase of futures contracts creates a corresponding
obligation by a Fund, as purchaser to purchase a financial instrument at a
specific time and price. Options on futures contracts are similar to options on
securities except that an option on a futures contract gives the purchaser the
right in return for the premium paid to assume a position in a futures contract
and obligates the seller to deliver such position upon exercise of the option.
Each 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 a 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 the positions were "in the money" at the time of purchase) do not
exceed 5% of the net asset value of the Fund, after taking into account
unrealized profits and losses on such positions. Typically, maintaining a
futures contract or selling an option thereon requires a Fund to deposit with
its custodian for the benefit of a futures commission merchant, or directly with
the 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 a Fund exercises an option on a
futures contract it will be obligated to post initial margin (and potential
subsequent variation margin) for the resulting futures position just as it would
for any position. Futures contracts and options thereon are generally settled by
entering into an offsetting transaction but there can be no assurance that the
position can be offset prior to settlement at an advantageous price, nor that
delivery will occur. The segregation requirements with respect to futures
contracts and options thereon are described below.
<PAGE>
Currency Transactions
Each Fund may engage in currency transactions with Counterparties to seek
to hedge the value of portfolio holdings denominated in particular currencies
against fluctuations in relative value or to enhance potential gain. Currency
transactions include currency contracts, exchange listed currency futures,
exchange listed and OTC options on currencies, and currency swaps. A forward
currency contract involves a privately negotiated obligation to purchase or sell
(with delivery generally required) a specific currency at a future date, which
may be any fixed number of days from the date of the contract agreed upon by the
parties, at a price set at the time of the contract. A currency swap is an
agreement to exchange cash flows based on the notional (agreed-upon) difference
among two or more currencies and operates similarly to an interest rate swap,
which is described below. A Fund may enter into over-the-counter currency
transactions with Counterparties which have received, combined with any credit
enhancements, a long term debt rating of A by S&P or Moody's, respectively, or
that have an equivalent rating from a NRSRO or (except for OTC currency options)
whose obligations are determined to be of equivalent credit quality by the
Adviser.
Each Fund's transactions in forward currency contracts and other currency
transactions such as futures, options, options on futures and swaps will
generally be limited to hedging involving either specific transactions or
portfolio positions. See, "Strategic Transactions." Transaction hedging is
entering into a currency transaction with respect to specific assets or
liabilities of a Fund, which will generally arise in connection with the
purchase or sale of its portfolio securities or the receipt of income therefrom.
Position hedging is entering into a currency transaction with respect to
portfolio security positions denominated or generally quoted in that currency.
A Fund will not enter into a transaction to hedge currency exposure to an
extent greater, after netting all transactions intended wholly or partially to
offset other transactions, than the aggregate market value (at the time of
entering into the transaction) of the securities held in its portfolio that are
denominated or generally quoted in or currently convertible into such currency,
other than with respect to proxy hedging as described below.
Each 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, a Fund may hold a French security and
the Adviser may believe that French francs will deteriorate against German
marks. The Fund would sell French francs to reduce its exposure to that currency
and buy German marks. This strategy would be a hedge against a decline in the
value of French francs, although it would expose the Fund to declines in the
value of the German mark relative to the U.S. dollar.
<PAGE>
To seek to reduce the effect of currency fluctuations on the value of
existing or anticipated holdings of portfolio securities, a Fund may also engage
in proxy hedging. Proxy hedging is often used when the currency to which a
Fund's portfolio is exposed is difficult to hedge or to hedge against the U.S.
dollar. Proxy hedging entails entering into a forward contract to sell a
currency whose changes in value are generally considered to be linked to a
currency or currencies in which certain of a Fund's portfolio securities are or
are expected to be denominated, and to buy U.S. dollars. The amount of the
contract would not exceed the value of the portfolio 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"), and a portfolio
contains 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 a 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 a 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 a Fund if it
is unable to deliver or receive currency or funds in settlement of obligations
and could also cause hedges it has entered into to be rendered useless,
resulting in full currency exposure as well as incurring transaction costs.
Buyers and sellers of currency futures are subject to the same risks that apply
to the use of futures generally. Further, settlement of a currency futures
contract for the purchase of most currencies must occur at a bank based in the
issuing nation. Trading options on currency futures is relatively new, and the
ability to establish and close out positions on such options is subject to the
maintenance of a liquid market which may not always be available. Currency
exchange rates may fluctuate based on factors extrinsic to that country's
economy.
Combined Transactions
Each 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 each 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.
<PAGE>
Swaps, Caps, Floors and Collars
Among the Strategic Transactions into which each Fund may enter are
interest rate, currency and index swaps and the purchase or sale of related
caps, floors and collars. Each 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, or protecting against an increase in
the price of securities a 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, each
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 its net assets at any one time. A Fund will not
sell interest rate caps or floors where it does not own securities or other
instruments providing the income stream the Fund may be obligated to pay.
Interest rate swaps involve the exchange by 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.
A 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. A 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
<PAGE>
of each Fund's policy regarding illiquid securities, unless it is determined,
based upon continuing review of the trading markets for the specific security,
that such security is liquid. The Boards of Trustees of the Trust and the
Portfolio Trust have adopted guidelines and delegated to the Adviser the daily
function of determining and monitoring the liquidity of swaps, caps, floors and
collars. The Boards of Trustees, however, retain oversight focusing on factors
such as valuation, liquidity and availability of information and are 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
each Fund's limitation on investing in illiquid securities.
Eurodollar Contracts
Each Fund may make investments in Eurodollar contracts. Eurodollar
contracts are U.S. dollar-denominated futures contracts or options thereon which
are linked to the London Interbank Offered Rate ("LIBOR"), although foreign
currency-denominated instruments are available from time to time. Eurodollar
futures contracts enable purchasers to obtain a fixed rate for the lending of
funds and sellers to obtain a fixed rate for borrowings. A Fund might use
Eurodollar futures contracts and options thereon to hedge against changes in
LIBOR, to which many interest rate swaps and fixed income instruments are
linked.
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 a Fund's ability to act upon economic
events occurring in foreign markets during non-business hours in the United
States, (iii) the imposition of different exercise and settlement terms and
procedures and margin requirements than in the United States, (iv) lower trading
volume and liquidity, and (v) other complex foreign political, legal and
economic factors. At the same time, Strategic Transactions may offer advantages
such as trading in instruments that are not currently traded in the United
States or arbitrage possibilities not available in the United States.
Use of Segregated Accounts
Each Fund will hold securities or other instruments whose values are
expected to offset its obligations under the Strategic Transactions. A Fund will
cover Strategic Transactions as required by interpretive positions of the SEC. A
Fund will not enter into Strategic Transactions that expose the Fund to an
obligation to another party unless it owns either (i) an offsetting position in
securities or other options, futures contracts or other instruments or (ii)
cash, receivables or liquid securities with a value sufficient to cover its
potential obligations. A Fund may have to comply with any applicable regulatory
requirements for Strategic Transactions, and if required, will set aside cash
and other assets in a segregated account with its custodian bank in the amount
prescribed. In that case, the Funds' custodian would maintain the value of such
segregated account equal to the prescribed amount by adding or removing
<PAGE>
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 a
Fund's assets could impede portfolio management or the Fund's ability to meet
redemption requests or other current obligations.
Money Market Instruments and Repurchase Agreements
When the Adviser considers investments in equity securities to present
excessive risks and to maintain liquidity for redemptions, each Fund may invest
all or a portion of its assets in money market instruments or short-term
interest-bearing securities. They may also invest uncommitted cash in such
instruments and securities.
Money market instruments include short-term U.S. government securities,
U.S. and foreign commercial paper (promissory notes issued by corporations to
finance their short term credit needs), negotiable certificates of deposit,
nonnegotiable fixed time deposits, bankers' acceptances and repurchase
agreements.
U.S. government securities include securities which are direct obligations
of the U.S. government backed by the full faith and credit of the United States,
and securities issued by agencies and instrumentalities of the U.S. government,
which may be guaranteed by the U.S. Treasury or supported by the issuer's right
to borrow from the Treasury or may be backed by the credit of the federal agency
or instrumentality itself. Agencies and instrumentalities of the U.S. government
include, but are not limited to, Federal Land Banks, the Federal Farm Credit
Bank, the Central Bank for Cooperatives, Federal Intermediate Credit Banks,
Federal Home Loan Banks and the Federal National Mortgage Association.
A repurchase agreement is an agreement under which a Fund acquires money
market instruments (generally U.S. government securities, bankers' acceptances
or certificates of deposit) from a commercial bank, broker or dealer, subject to
resale to the seller at an agreed-upon price and date (normally the next
business day). The resale price reflects an agreed-upon interest rate effective
for the period the instruments are held by a Fund and is unrelated to the
interest rate on the instruments. The instruments acquired by the Funds
(including accrued interest) must have an aggregate market value in excess of
the resale price and will be held by the Funds' custodian bank until they are
repurchased. The Trustees will monitor the standards which the Adviser will use
in reviewing the creditworthiness of any party to a repurchase agreement with
the Funds.
The use of repurchase agreements involves certain risks. For example, if
the seller defaults on its obligation to repurchase the instruments acquired by
a Fund at a time when their market value has declined, the Fund may incur a
loss. If the seller becomes insolvent or subject to liquidation or
reorganization under bankruptcy or other laws, a court may determine that the
instruments acquired by a Fund are collateral for a loan by the Fund and
therefore are subject to sale by the trustee in bankruptcy. Finally, it is
possible that a Fund may not be able to substantiate its interest in the
instruments it acquires. While the Trustees acknowledge these risks, it is
expected that they can be controlled through careful documentation and
monitoring.
<PAGE>
Short-Term Debt Securities
For defensive or temporary purposes, each Fund may invest in investment
grade money market instruments and short-term interest-bearing securities. Such
securities may be used to invest uncommitted cash balances, to maintain
liquidity to meet shareholder redemptions, or to take a defensive position
against potential stock market declines. These investments will include U.S.
Government obligations and obligations issued or guaranteed by any U.S.
Government agencies or instrumentalities, instruments of U.S. and foreign banks
(including negotiable certificates of deposit, nonnegotiable fixed time deposits
and bankers' acceptances), repurchase agreements, prime commercial paper of U.S.
and foreign companies, and debt securities that make periodic interest payments
at variable or floating rates.
Yields on debt securities depend on a variety of factors, such as general
conditions in the money and bond markets, and the size, maturity and rating of a
particular issue. Debt securities with longer maturities tend to produce higher
yields and are generally subject to greater potential capital appreciation and
depreciation. The market prices of debt securities usually vary depending upon
available yields, rising when interest rates decline and declining when interest
rates rise.
Portfolio Turnover
Each 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 enable the Fund to maintain its status as a regulated
investment company under the Internal Revenue Code. A Fund may therefore
generally change its 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 Funds and the Portfolios have adopted the following fundamental
policies. Each Fund's and Portfolio's fundamental policies cannot be changed
unless the change is approved by a "vote of the outstanding voting securities"
of the Fund or the Portfolio, as the case may be, which phrase as used herein
means the lesser of (i) 67% or more of the voting securities of the Fund or the
Portfolio present at a meeting, if the holders of more than 50% of the
outstanding voting securities of the Fund or the Portfolio are present or
represented by proxy, or (ii) more than 50% of the outstanding voting securities
of the Fund or the Portfolio.
Standish Equity Fund and Equity Portfolio
As a matter of fundamental policy, the Equity Portfolio (Equity Fund) may
not:
1. Invest more than 25% of the current value of its total assets in any single
industry, provided that this restriction shall not apply to U.S. government
securities.
<PAGE>
2. Underwrite the securities of other issuers, except to the extent that, in
connection with the disposition of portfolio securities, the Portfolio
(Fund) may be deemed to be an underwriter under the Securities Act of
1933.
3. Purchase real estate or real estate mortgage loans.
4. Purchase securities on margin (except that the Portfolio (Fund) may obtain
such short-term credits as may be necessary for the clearance of purchases
and sales of securities).
5. Purchase or sell commodities or commodity contracts (except futures
contracts and options on such futures contracts and foreign currency
exchange transactions).
6. With respect to at least 75% of its total assets, invest more than 5% in
the securities of any one issuer (other than the U.S. Government, its
agencies or instrumentalities) or acquire more than 10% of the outstanding
voting securities of any issuer.
7. Issue senior securities, borrow money, enter into reverse repurchase
agreements or pledge or mortgage its assets, except that the Portfolio
(Fund) may borrow from banks in an amount up to 15% of the current value
of its total assets as a temporary measure for extraordinary or emergency
purposes (but not investment purposes), and pledge its assets to an extent
not greater than 15% of the current value of its total assets to secure
such borrowings; however, the Fund may not make any additional investments
while its outstanding borrowings exceed 5% of the current value of its
total assets.
8. Make loans of portfolio securities, except that the Portfolio (Fund) may
enter into repurchase agreements and except that the Fund may enter into
repurchase agreements with respect to 10% of the value of its net assets.
The following restrictions are not fundamental policies and may be changed
by the Trustees of the Portfolio Trust (Trust) without investor approval, in
accordance with applicable laws, regulations or regulatory policy. The Portfolio
(Fund) may not:
a. Invest in the securities of an issuer for the purpose of exercising control
or management, but it may do so where it is deemed advisable to protect or
enhance the value of an existing investment.
b. Purchase the securities of any other investment company except to the
extent permitted by the 1940 Act.
c. Invest more than 15% of its net assets in securities which are illiquid.
d. Purchase additional securities if the Fund's borrowings exceed 5% of its
net assets (this restriction is fundamental with respect to the Fund, but
not the Portfolio).
Notwithstanding any fundamental or non-fundamental policy, the Equity Fund
may invest all of its assets (other than assets which are not "investment
securities" (as defined in the 1940 Act) or are excepted by the SEC) in an
open-end management investment company with substantially the same investment
objective as the Equity Fund.
<PAGE>
International Equity Fund
As a matter of fundamental policy, the International Equity Fund may not:
1. With respect to at least 75% of its total assets, invest more than 5% in
the securities of any one issuer (other than the U.S. Government, its
agencies or instrumentalities) or acquire more than 10% of the outstanding
voting securities of any issuer.
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.
3. Make loans, except that the Fund may purchase or hold a portion of an
issue of publicly distributed debt instruments, purchase negotiable
certificates of deposit and bankers' acceptances, and enter into
repurchase agreements.
4. Invest more than 25% of the current value of its total assets in any
single industry (not including obligations of the U.S. Government or its
agencies and 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. Invest in the securities of an issuer for the purpose of exercising control
or management, but it may do so where it is deemed advisable to protect or
enhance the value of an existing investment.
b. Purchase the securities of any other investment company except to the
extent permitted by the 1940 Act.
c. Invest more than 15% of its assets in securities which are illiquid.
<PAGE>
Small Capitalization Equity Fund and Small Capitalization Equity Portfolio
As a matter of fundamental policy, the Small Capitalization Portfolio
(Small Capitalization Fund) may not:
1. Invest more than 25% of the current value of its total assets in any single
industry, provided that this restriction shall not apply to U.S. Government
securities.
2. Underwrite the securities of other issuers, except to the extent that, in
connection with the disposition of portfolio securities, the Portfolio
(Fund) may be deemed to be an underwriter under the Securities Act of
1933.
3. Purchase real estate or real estate mortgage loans.
4. Purchase securities on margin (except that the Portfolio (Fund) may obtain
such short-term credits as may be necessary for the clearance of purchases
and sales of securities).
5. Purchase or sell commodities or commodity contracts except that the
Portfolio (Fund) may purchase and sell financial futures contracts and
options on financial futures contracts and engage in foreign currency
exchange transactions.
6. With respect to at least 75% of its total assets, invest more than 5% in
the securities of any one issuer (other than the U.S. Government, its
agencies or instrumentalities) or acquire more than 10% of the outstanding
voting securities of any issuer.
7. Issue senior securities, borrow money, enter into reverse repurchase
agreements or pledge or mortgage its assets, except that the Portfolio
(Fund) may borrow from banks in an amount up to 15% of the current value
of its total assets as a temporary measure for extraordinary or emergency
purposes (but not investment purposes), and pledge its assets to an extent
not greater than 15% of the current value of its total assets to secure
such borrowings; however, the Fund may not make any additional investments
while its outstanding borrowings exceed 5% of the current value of its
total assets.
8. Make loans of portfolio securities, except that the Portfolio (Fund) may
enter into repurchase agreements with respect to 10% of the value of its
net assets.
The following restrictions are not fundamental policies and may be changed
by the Trustees of the Portfolio Trust (Trust) without investor approval, in
accordance with applicable laws, regulations or regulatory policy. The Portfolio
(Fund) may not:
a. Invest in the securities of an issuer for the purpose of exercising control
or management, but it may do so where it is deemed advisable to protect or
enhance the value of an existing investment.
b. Purchase the securities of any other investment company except to the
extent permitted by the 1940 Act.
c. Invest more than 15% of its net assets in securities which are illiquid.
d. Purchase additional securities if the Fund's borrowings exceed 5% of its
net assets (this restriction is fundamental with respect to the Fund, but
not the Portfolio).
<PAGE>
Notwithstanding any fundamental or non-fundamental policy, the Small
Capitalization Fund may invest all of its assets (other than assets which are
not "investment securities" (as defined in the 1940 Act) or are excepted by the
SEC) in an open-end management investment company with substantially the same
investment objective as the Small Capitalization Fund.
Small Capitalization Equity Fund II and Small Capitalization Equity Portfolio II
As a matter of fundamental policy, the Small Capitalization Portfolio II
(Small Capitalization Fund II) 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. For purposes of this restriction, borrowing money
in accordance with paragraph 3 below, making loans in accordance with
paragraph 8 below, the issuance of shares of beneficial interest in
multiple classes or series, the deferral of trustees' fees, the purchase or
sale of options, futures contracts, forward commitments and repurchase
agreements entered into in accordance with the Portfolio's (Fund's)
investment policies or within the meaning of paragraph 6 below, are not
deemed to be senior securities.
3. Borrow money, except in amounts not to exceed 33 1/3% of the value of the
Portfolio's (Fund's) total assets (including the amount borrowed) taken at
market value (i) from banks for temporary or short-term purposes or for the
clearance of transactions, (ii) in connection with the redemption of
portfolio 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 Portfolio (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.
4. Underwrite the securities of other issuers, except to the extent that, in
connection with the disposition of portfolio securities, the Portfolio
(Fund) may be deemed to be an underwriter under the Securities Act of
1933.
5. Purchase or sell real estate except that the Portfolio (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 Portfolio (Fund) as a result of the ownership of
securities.
<PAGE>
6. Purchase securities on margin (except that the Portfolio (Fund) may obtain
such short-term credits as may be necessary for the clearance of purchases
and sales of securities).
7. Purchase or sell commodities or commodity contracts, except the Portfolio
(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 Portfolio's (Fund's)
investment policies.
8. Make loans, except that the Portfolio (Fund) (1) may lend portfolio
securities in accordance with the Portfolio's (Fund's) investment policies
up to 33 1/3% of the Portfolio's (Fund's) total assets taken at market
value, (2) enter into repurchase agreements, and (3) purchase all or a
portion of an issue of debt securities, bank loan participation interests,
bank certificates of deposit, bankers' acceptances, debentures or other
securities, whether or not the purchase is made upon the original issuance
of the securities.
9. With respect to 75% of its total assets, purchase securities of an issuer
(other than the U.S. Government, its agencies, instrumentalities or
authorities or repurchase agreements collateralized by U.S. Government
securities and other investment companies), if: (a) such purchase would
cause more than 5% of the Portfolio's (Fund's) total assets taken at
market value to be invested in the securities of such issuer; or (b) such
purchase would at the time result in more than 10% of the outstanding
voting securities of such issuer being held by the Portfolio (Fund).
For purposes of the fundamental investment restriction (1) regarding
industry concentration, the adviser generally classifies issuers by industry in
accordance with classifications set forth in the Directory of Companies Filing
Annual Reports With The Securities and Exchange Commission. In the absence of
such classification or if the Adviser determines in good faith based on its own
information that the economic characteristics affecting a particular issuer make
it more appropriately considered to be engaged in a different industry, the
Adviser may classify an issuer according to its own sources. For instance,
personal credit finance companies and business credit finance companies are
deemed to be separate industries and wholly-owned finance companies are
considered to be in the industry of their parents if their activities are
primarily related to financing the activities of their parents.
The following restrictions are not fundamental policies and may be changed
by the Trustees of the Portfolio Trust (Trust) without investor approval in
accordance with applicable laws, regulations or regulatory policy. The Portfolio
(Fund) may not:
a. Invest in the securities of an issuer for the purpose of exercising control
or management, but it may do so where it is deemed advisable to protect or
enhance the value of an existing investment.
<PAGE>
b. Purchase the securities of any other investment company except to the
extent permitted by the 1940 Act.
c. Invest more than 15% of its net assets in securities which are illiquid.
d. Purchase additional securities if the Fund's borrowings exceed 5% of the
its net assets.
Notwithstanding any fundamental or non-fundamental policy, the Small
Capitalization Fund II may invest all of its assets (other than assets which are
not "investment securities" (as defined in the 1940 Act) or are excepted by the
SEC) in an open-end investment company with substantially the same investment
objective as the Fund.
If any percentage restriction described above is adhered to at the time of
investment, a subsequent increase or decrease in the percentage resulting from a
change in the value of a Fund's or a Portfolio's assets will not constitute a
violation of the restriction.
CALCULATION OF PERFORMANCE DATA
As indicated in the Prospectus, each Fund may, from time to time, advertise
certain total return and yield information. The average annual total return of a
Fund for a period is computed by subtracting the net asset value per share at
the beginning of the period from the net asset value per share at the end of the
period (after adjusting for the reinvestment of any income dividends and capital
gain distributions), and dividing the result by the net asset value per share at
the beginning of the period. In particular, the Funds' average annual total
return ("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 Funds' average annual total return for the one-, five- and ten-year (or
life-of-the-Fund, if shorter) periods ended December 31, 1996 and average
annualized yield for the 30-day period ended December 31, 1996 were as follows:
Average Annual Total Return
Fund 1-Year 5-Year 10-Year
- ---- ------ ------ -------
Equity Fund 26.84% 17.31% 19.84%1
----- ----- -----
Small Capitalization
Equity Fund 17.36% 15.61% 22.28%2
----- ----- -----
Small Capitalization
Equity Fund II 1.90%3 N/A N/A
International Equity Fund 7.44% 4.91% 5.42%4
- ---------------------------
1 Equity Fund commenced operations on June 2, 1991.
2 Small Capitalization Equity Fund commenced operations on September 1, 1990.
3 Small Capitalization Equity Fund II commenced operations on December 23, 1996.
4 International Equity Fund commenced operations on December 8, 1988.
<PAGE>
These performance quotations should not be considered as representative of
any Fund's performance for any specified period in the future.
In addition to average annual return quotations, the Funds may quote
quarterly and annual performance on a net (with management and administration
fees deducted) and gross basis as follows:
Equity Fund
Quarter/Year Net Gross
- --------------------------------------------------------------------------------
1Q91 16.30% 16.50%
2Q91 (2.76) (2.53)
3Q91 6.15 6.42
4Q91 11.09 11.34
1991 36.36 34.62
1Q92 (2.77) (2.52)
2Q92 (2.63) (2.38)
3Q92 4.03 4.28
4Q92 11.20 10.74
1992 9.52 9.52
1Q93 7.71 7.91
2Q93 2.76 2.96
3Q93 6.64 6.84
4Q93 2.34 2.54
1993 20.79 21.72
1Q94 (2.30) (2.13)
2Q94 (3.14) (2.96)
3Q94 3.22 3.40
4Q94 (1.50) (1.33)
1994 (3.78) (3.10)
1Q95 8.76 8.93
2Q95 11.10 11.28
3Q95 9.56 9.74
4Q95 3.90 4.09
1995 37.55 38.46
1Q96 6.84 6.99
2Q96 2.69 2.87
3Q96 4.96 5.17
4Q96 10.16 10.33
1996 26.84 27.71
Small Capitalization Equity Fund
Quarter/Year Net Gross
- --------------------------------------------------------------------------------
1Q91 28.41% 28.68%
2Q91 2.87 3.12
3Q91 12.58 12.73
4Q91 10.74 10.94
1991 64.71 65.95
<PAGE>
Quarter/Year Net Gross
- --------------------------------------------------------------------------------
1Q92 3.16 3.38
2Q92 (12.15) (11.92)
3Q92 7.23 7.52
4Q92 12.91 13.20
1992 9.74 10.83
1Q93 0.62 0.84
2Q93 3.45 3.70
3Q93 14.45 14.67
4Q93 7.63 7.83
1993 28.21 29.30
1Q94 (3.48) (3.29)
2Q94 (4.39) (4.19)
3Q94 5.90 6.11
4Q94 (1.42) (1.22)
1994 (3.66) (2.88)
1Q95 6.03 6.22
2Q95 2.55 2.73
3Q95 16.17 16.36
4Q95 2.80 2.98
1995 29.83 30.77
1Q96 6.60 6.80
2Q96 10.27 10.47
3Q96 (2.98) (2.80)
4Q96 (2.91) (3.11)
1996 17.36 18.24
Small Capitalization Equity Fund II
Quarter/Year Net Gross
- --------------------------------------------------------------------------------
4Q96 1.90% 1.90%
International Equity Fund
Quarter/Year Net Gross
- --------------------------------------------------------------------------------
1Q89 (0.75)% (0.05)%
2Q89 1.16 1.25
3Q89 11.97 12.37
4Q89 5.67 5.70
1989 18.79 20.20
1Q90 (0.10) 0.29
2Q90 5.81 6.21
3Q90 (18.32) (17.92)
4Q90 4.90 5.31
1990 (9.44) (7.93)
1Q91 6.65 6.96
2Q91 (3.03) (2.70)
3Q91 6.77 7.12
<PAGE>
Quarter/Year Net Gross
- --------------------------------------------------------------------------------
4Q91 1.18 1.64
1991 11.73 13.31
1Q92 (5.09) (4.75)
2Q92 0.62 1.05
3Q92 (5.20) (4.03)
4Q92 (0.55) (0.16)
1992 0.95 0.55
1Q93 7.23 7.57
2Q93 3.11 3.48
3Q93 8.45 8.77
4Q93 15.32 15.64
1993 38.27 40.01
1Q94 (5.87) (5.57)
2Q94 (0.06) 0.22
3Q94 2.84 3.17
4Q94 (3.87) (3.59)
1994 (6.99) (5.83)
1Q95 (5.07) (4.78)
2Q95 2.57 2.86
3Q95 2.41 2.68
4Q95 2.31 2.68
1995 2.01 3.26
1Q96 2.38 2.51
2Q96 4.89 5.02
3Q96 (1.15) (1.03)
4Q96 1.22 1.34
1996 7.44 7.97
These performance quotations should not be considered as representative of
a Fund's performance for any specified period in the future. Each Fund's
performance may be compared in sales literature to the performance of other
mutual funds having similar objectives or to standardized indices or other
measures of investment performance. In particular, the Equity Fund may compare
its performance to the S&P 500 Index, which is generally considered to be
representative of the performance of unmanaged common stocks that are publicly
traded in the United States securities markets. The Small Capitalization Fund
and Small Capitalization II Fund may compare their performances to the Russell
2000 Index, which is generally considered to be representative of unmanaged
small capitalization stocks in the United States markets, the Russell 2000
Growth Index, which is generally considered to be representative of those
Russell 2000 companies with higher price-to-book ratios and forecasted growth,
and the S&P 500 Index. The International Equity Fund may compare its performance
to Morgan Stanley Capital International Index ("MSCI") and the Europe,
Australia, Far East Index ("EAFE"). The EAFE-Index is generally considered to be
representative of the performance of unmanaged common stocks that are publicly
traded in European, Australian and Far Eastern securities markets and is based
on month-end market capitalization. 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 a Fund's past
performance to that of other mutual funds and investment products. Of course,
past performance is not a guarantee of future results.
<PAGE>
<TABLE>
<CAPTION>
MANAGEMENT
Trustees and Officers of the Trust and Portfolio Trust
The Trustees and executive officers of the Trust are listed below. The
Trustees of the Portfolio Trust are identical to the Trustees of the Trust. The
officers of the Portfolio Trust are Messrs. Clayson, Ladd, Wood, Hollis and
Martin, and Ms. Banfield, Chase, Herrmann and Kneeland, who hold the same office
with the Portfolio Trust as with the Trust. All executive officers of the Trust
and the Portfolio Trust are affiliates of Standish, Ayer & Wood, Inc., the
Portfolio and the Fund's investment adviser.
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 and
c/o Standish, Ayer & Wood, Inc. Managing Director, Standish, Ayer &
One Financial Center 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.O. 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 and Treasurer Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
<PAGE>
Name, Address and Date of Birth Position Held Principal Occupation
With Trust During Past 5 Years
- ---------------------------------------------------------------------------------------------------------------
Anne P. Herrmann, 1/26/56 Vice President and Secretary Mutual Fund Administrator,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Paul G. Martins, 3/10/56 Vice President Vice President, Standish, Ayer & Wood, Inc.
c/o Standish, Ayer & Wood, Inc. since October 1996; formerly Senior Vice President,
One Financial Center Treasurer and Chief Financial Officer
Boston, MA 02111 of Liberty Financial Bank Group (1993-95);
prior to 1993, Corporate Controller,
The Berkeley Financial Group
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 02111
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
Boston, MA 02111 Compliance Officer,
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
Remi Browne, 10/15/53 Vice President Vice President, Standish, Ayer & Wood, Inc
c/o Standish, Ayer & Wood, Inc. Vice President and Chief Investment Officer
One Financial Center of Standish International Management
Boston, MA 02111 Company, L.P., prior to
August 1996, Managing Director
Ark Asset Management Company
Walter M. Cabot, 1/16/33 Vice President Senior Adviser 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 Adviser 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 and Associate Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
<PAGE>
Name, Address and Date of Birth Position Held Principal Occupation
With Trust During Past 5 Years
- ---------------------------------------------------------------------------------------------------------------
Susan B. Coan, 5/1/52 Vice President Vice President and Director
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 and Associate Director,
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
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, Standish International
Boston, MA 02111 Management Company, L.P.
Mark A. Flaherty, 4/24/59 Vice President Vice President and Director,
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.
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,
One Financial Center Investment Sales,
Boston, MA 02111 Cigna Corporation (1993) and
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
<PAGE>
Name, Address and Date of Birth Position Held Principal Occupation
With Trust During Past 5 Years
- ---------------------------------------------------------------------------------------------------------------
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
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.
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
David C. Stuehr, 3/1/58 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Ralph S. Tate, 4/2/47 Vice President Vice President and Managing Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc. since
One Financial Center April, 1990; formerly Vice
Boston, MA 02111 President, Aetna Life & Casualty
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.
</TABLE>
<PAGE>
Compensation of Trustees and Officers
Neither the Trust nor the Portfolio Trust pays compensation to the Trustees
of the Trust or the Portfolio Trust that are affiliated with Standish or to the
Trust's and Portfolio Trust's officers. None of the Trustees or officers have
engaged in any financial transactions (other than the purchase or redemption of
the Funds' shares) with the Trust, the Portfolio Trust or the Adviser during the
year ended December 31, 1996.
The following table sets forth all compensation paid to the Trust's and the
Portfolio Trust's Trustees as of the Funds' fiscal years ended December 31,
1996:
<TABLE>
<CAPTION>
Aggregate Compensation from the Funds
Pension or
Retirement
Benefits
Accrued as Total Compensation
Small Small Part of from Funds and
Equity Capitalization Capitalization International Funds' Portfolio and Other
Name of Trustee Fund** Equity Fund** Equity Fund II** Equity Fund Expenses Funds in Complex*
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
D. Barr Clayson $0 $0 $0 $0 $0 $0
Samuel C. Fleming $851 $1,887 $2 $624 $0 $49,250
Benjamin M. Friedman $787 $1,743 $2 $576 $0 $45,500
John H. Hewitt $787 $1,743 $2 $576 $0 $45,500
Edward H. Ladd $0 $0 $0 $0 $0 $0
Caleb Loring, III $787 $1,743 $2 $576 $0 $45,500
Richard S. Wood $0 $0 $0 $0 $0 $0
* As of the date of this Statement of Additional Information there were 20 funds in the fund complex. Total
compensation is presented for the calendar year ended December 31, 1996.
** The Fund bears its pro rata allocation of Trustees' fees paid by its
corresponding Portfolio to the Trustees of the Portfolio Trust.
</TABLE>
Certain Shareholders
Except as noted below for the Small Capitalization II Fund, at February 1,
1997, Trustees and officers of the Trust and the Portfolio Trust as a group
beneficially owned (i.e., had voting and/or investment power) less than 1% of
the then outstanding shares of each Fund. The Trustees and Officers of the Trust
as a group beneficially owned approximately 95% of the then outstanding shares
of the Small Capitalization II Fund at that date. At February 1, 1997, the
Equity Fund, Small Capitalization Fund and Small Capitalization II Fund, each
beneficially owned approximately 100% of the then outstanding interests of the
Equity Portfolio, Small Capitalization Portfolio and Small Capitalization II
Portfolio, respectively, and therefore controlled their corresponding
Portfolios. Also at that date, no person beneficially owned 5% or more of the
then outstanding shares of any Fund except:
<PAGE>
Equity Fund
Percentage of
Name and Address Outstanding Shares
- --------------------------------------------------------------------------------
Saturn & Co. 14%
FBO The Boston Home
P.O. Box 1537
Boston, MA 02205
Shipley Company, Inc. 8%
455 Forest Street
Marlborough, MA 01752
Teamsters Local Union 918 Pension Fund 5%
2137-47 Utica Avenue
Brooklyn, NY 11234
Small Capitalization Equity Fund
Percentage of
Name and Address Outstanding Shares
- --------------------------------------------------------------------------------
Bingham, Dana & Gould 8%
Trust Department
150 Federal Street
Boston, MA 02110
Rosemount Aerospace Profit Sharing Plan 6%
Norwest Bank Minnesota, N.A. Trustee
733 Marquette Avenue MS 0036
Minneapolis, MN 55479
Citibank, FSB as Trustee for Lutheran
Health Systems Employee's Pension Plan 6%
c/o Citibank
111 Wall Street, 20th Floor
New York, NY 10043
Small Capitalization Equity Fund II
Percentage of
Name and Address Outstanding Shares
- --------------------------------------------------------------------------------
Edward H. Ladd 10%
c/o Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Christina D. Wood* 20%
c/o Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
<PAGE>
Dolores S. Driscoll 10%
c/o Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Richard C. Doll 10%
c/o Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Maria D. Furman 6%
c/o Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Arthur H. Parker 6%
c/o Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
James E. Hollis 6%
c/o Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Walter M. Cabot 6%
c/o Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
George W. Noyes 5%
c/o Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Dorothy G. Battelle+
c/o Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
*Christina D. Wood is the wife of Richard S. Wood, President and Trustee of the
Trust
+Dorothy G. Battelle is the wife of Nicholas S. Battelle, a Vice President of
the Trust
International Equity Fund
Percentage of
Name and Address Outstanding Shares
- --------------------------------------------------------------------------------
Allendale Mutual Insurance Co. 8%
P. O. Box 7500
Johnston, RI 02919
NationsBank of Texas, NA 7%
TTEE FBO
Keystone Thermometrics Master Trust
P.O. BOX 831575
Dallas, TX 75283
Lumber Mutual Insurance 7%
One Speen Street
Framingham, MA 01701
First Union National Bank 7%
Cannon Foundation
a/c# 1028851439
401 S. Tryon St. CMG 1151
Charlotte, NC 28288
<PAGE>
Fletcher Allen Health Care Depreciation Fund 7%
One Burlington Square
Burlington, VT 05401
Trustees of Reservations 6%
572 Essex STreet
Beverly, MA 01915
OLSEN & Co. 6%
P.O. Box 92800
Rochester, NY 14692
Bingham Dana & Gould 5%
Trust Department
150 Federal Street
Boston, MA 02110
*Because the shareholder beneficially owned more than 25% of the then
outstanding shares of the indicated Fund, the shareholder was considered to
control such Fund. As a controlling person, the shareholder may be able to
determine whether a proposal submitted to the shareholders of such Fund will be
approved or disapproved.
Investment Adviser
Standish serves as the adviser to the Equity Portfolio, Small
Capitalization Portfolio and Small Capitalization II Portfolio pursuant to
written investment advisory agreements. Prior to the close of business on May 3,
1996, Standish managed directly the assets of the Equity and Small
Capitalization Funds pursuant to investment advisory agreements. These
agreements were terminated by Equity and Small Capitalization Funds on such date
subsequent to the approval by the Funds' shareholders on March 29, 1996 to
implement certain changes in the Funds' investment restrictions which enable the
Funds to invest all of their investable assets in the Equity Portfolio and Small
Capitalization Portfolio, respectively. Standish 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 Standish, are the Standish 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, George W. Noyes, Arthur H. Parker, Howard B.
Rubin, Austin C. Smith, David C. Stuehr, Ralph S. Tate, and Richard S. Wood.
SIMCO serves as investment adviser to the International Equity Fund
pursuant to an investment advisory agreement. SIMCO is a Delaware limited
partnership which was organized in 1991 and is a registered investment adviser
under the Investment Advisers Act of 1940. The general partner of SIMCO is
Standish, which holds a 99.98% partnership interest. The limited partners, who
each hold a 0.01% interest in SIMCO, are Walter M. Cabot, Sr., a Director and
Adviser to SIMCO and a Director and Senior Adviser to Standish, and D. Barr
Clayson, Chairman of the Board of SIMCO and a Managing Director of Standish.
Ralph S. Tate, a Managing Director of Standish, is President and a Director of
SIMCO. Richard S. Wood, a Vice President and director of Standish and the
President of the Trust, is the Executive Vice President of SIMCO.
<PAGE>
Certain services provided by the Adviser under the advisory agreements are
described in the Prospectus. These services are provided without reimbursement
by the Portfolios or the International Equity Fund for any costs incurred. In
addition to those services, the Adviser provides the Intermittent Equity Fund
(but not the Portfolios) with office space for managing their affairs, with the
services of required executive personnel, and with certain clerical services and
facilities. Under the investment advisory agreements, the Adviser is paid a fee
based upon a percentage of the Intermittent Equity Fund's or the applicable
Portfolio's average daily net asset value computed as set forth below. The
advisory fees are payable monthly.
Contractual Advisory Fee Rate
(as a percentage of
Fund average daily net assets)
- --------------------------------------------------------------------------------
Equity Portfolio 0.50%
Small Capitalization
Equity Portfolio 0.60%
Small Capitalization
Equity Portfolio II 0.60%
International Equity Fund 0.80%
During the last three fiscal years ended December 31, the Funds and the
Portfolios paid advisory fees in the following amounts:
Fund 1994 1995 1996
- --------------------------------------------------------------------------------
Equity Fund 422,731 555,164 163,5301
Equity Portfolio N/A N/A 345,3012
Small Capitalization
Equity Fund 557,359 871,879 396,7961
Small Capitalization
Equity Portfolio N/A N/A 920,7422
Small Capitalization
Equity Fund II N/A N/A 03
Small Capitalization
Equity Portfolio II N/A N/A 62
International Equity Fund 841,166 704,283 7,841
------------------------
1 Equity Fund and Small Capitalization Fund were converted to the
master/feeder fund structure on May 3, 1996 and do not pay directly
advisory fees after that date. Each such Fund bears its pro rata allocation
of its corresponding Portfolio's expenses, including advisory fees.
2 The Equity Portfolio and Small Capitalization Portfolio commenced
operations on April 26, 1996.
3 The Small Capitalization Equity II commenced operations on December 23,
1996. The Adviser voluntarily agreed not to impose its advisory fee for the
period through December 31, 1996.
Pursuant to the investment advisory agreements, each Portfolio and the
International Equity Fund bears expenses of its operations other than those
incurred by the Adviser pursuant to the investment advisory agreement. Among
other expenses, and the International Equity Fund and the Portfolios will pay
share pricing and shareholder servicing fees and expenses; custodian fees and
<PAGE>
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.
Unless terminated as provided below, the investment advisory agreements
continue in full force and effect from year to year but only so long as each
such continuance is approved annually (i) by either the Trustees of the Trust or
the Portfolio Trust (as applicable) or by the "vote of a majority of the
outstanding voting securities" of the International Equity Fund or the
applicable Portfolio, and, in either event (ii) by vote of a majority of the
Trustees of the Trust or the Portfolio Trust (as applicable) who are not parties
to the investment advisory agreement or "interested persons" (as defined in the
1940 Act) of any such party, cast in person at a meeting called for the purpose
of voting on such approval. Each investment advisory agreement may be terminated
at any time without the payment of any penalty by vote of the Trustees of the
Trust or the Portfolio Trust or by the "vote of a majority of the outstanding
voting securities" of the International Equity Fund or the applicable Portfolio
or by the Adviser, on sixty days' written notice to the other parties. The
investment advisory agreements terminate in the event of their assignment as
defined in the 1940 Act.
In an attempt to avoid any potential conflict with portfolio transactions
for the International Equity Fund and the Portfolios, the Adviser, the Principal
Underwriter, the Trust and the Portfolio Trust have each adopted extensive
restrictions on personal securities trading by personnel of the Adviser and its
affiliates. These restrictions include: pre-clearance of all personal securities
transactions and a prohibition of purchasing initial public offerings of
securities. These restrictions are a continuation of the basic principle that
the interests of the International Equity Fund and its shareholders, and the
Portfolios and their investors, come before those of the Adviser and its
employees.
Administrator of the Fund
Standish also serves as the administrator ("Fund Administrator") to the
Equity Fund, Small Capitalization Fund and Small Capitalization II Fund pursuant
to written administration agreements with the Trust on behalf of these Funds.
Certain services provided by the Fund Administrator under the administration
agreements are described in the Prospectus. For these services, the Fund
Administrator currently does not receive any additional compensation. The
Trustees of the Trust may, however, determine in the future to compensate the
Fund Administrator for its administrative services. Each of the Equity Fund,
Small Capitalization Fund and Small Capitalization II Fund's administration
agreements can be terminated by either party on not more than sixty days'
written notice.
Administrator of the Portfolio
IBT Trust Company (Cayman) Ltd., P.O. Box 501, Grand Cayman, Cayman
Islands, BWI, serves as the administrator to each of the Portfolios (the
"Portfolio Administrator") pursuant to written administration agreements with
the Portfolio Trust on behalf of each Portfolio. The Portfolio Administrator
provides the Portfolio Trust with office space for managing its affairs, and
<PAGE>
with certain clerical services and facilities. For its services to the Portfolio
Trust, the Portfolio Administrator currently receives a fee from each Portfolio
in the amount of $7,500 annually. The Portfolios' administration agreements can
be terminated by either party on not more than sixty days' written notice.
Distributor of the Funds
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 each 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 each 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 each 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 each 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, with respect to a Fund, by a vote of the
holders of a majority of the Fund's outstanding shares, in any case without
payment of any penalty on not more than 60 days' written notice to the other
party. The offices of the Principal Underwriter are located at One Financial
Center, 26th Floor, Boston, Massachusetts 02111.
REDEMPTION OF SHARES
Detailed information on redemption of shares is included in the Prospectus.
The Trust may suspend the right to redeem Fund shares or postpone the date of
payment upon redemption for more than seven days (i) for any period during which
the New York Stock Exchange is closed (other than customary weekend or holiday
closings) or trading on the exchange is restricted; (ii) for any period during
which an emergency exists as a result of which disposal by a Fund of securities
owned by it or determination by a Fund of the value of its net assets is not
reasonably practicable; or (iii) for such other periods as the SEC may permit
for the protection of shareholders of a Fund.
The Trust intends to pay redemption proceeds in cash for all Fund shares
redeemed but, under certain conditions, the Trust may make payment wholly or
partly in portfolio securities, in conformity with a rule of the SEC. Portfolio
securities paid upon redemption of Fund shares will be valued at their then
current market value. The Trust, on behalf of each of its series, has elected to
be governed by the provisions of Rule 18f-1 under the 1940 Act which limits each
Fund's obligation to make cash redemption payments to any shareholder during any
<PAGE>
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. Each Portfolio
has advised the Trust that the Portfolio will not redeem in-kind except in
circumstances in which the applicable Fund is permitted to redeem in-kind or
except in the event the applicable Fund completely withdraws its interest from
the Portfolio.
PORTFOLIO TRANSACTIONS
The Adviser is responsible for placing the International Equity Fund's and
each Portfolio's portfolio transactions and will do so in a manner deemed fair
and reasonable to the International Equity Fund and the Portfolios 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 Funds. 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 International Equity Fund and the Portfolios 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 International Equity Fund and the
Portfolios effect their securities transactions may be used by the Adviser in
servicing other accounts; not all of these services may be used by the Adviser
in connection with the Fund or the Portfolio generating the soft dollar credits.
The investment advisory fee paid by the International Equity Fund and the
Portfolios under the investment advisory agreements will not be reduced as a
result of the Adviser's receipt of research services.
The Adviser also places portfolio transactions for other advisory accounts.
The Adviser will seek to allocate portfolio transactions equitably whenever
concurrent decisions are made to purchase or sell securities for the
International Equity Fund or a Portfolio and another advisory account. In some
cases, this procedure could have an adverse effect on the price or the amount of
securities available to the International Equity Fund or a Portfolio. In making
such allocations, the main factors considered by the Adviser will be the
respective investment objectives, the relative size of portfolio holdings of the
same or comparable securities, the availability of cash for investment, the size
of investment commitments generally held, and opinions of the persons
responsible for recommending the investment.
<PAGE>
BROKERAGE COMMISSIONS
Aggregate Brokerage
Commissions Paid by the Fund or
portfolio transactions
- --------------------------------------------------------------------------------
Equity Fund 422,731 555,164 163,5301
Fund 1994 1995 1996
Equity Fund1 $287,545 $416,680 $80,855
Equity Portfolio2 N/A N/A $148,8715
Small Capitalization
Equity Fund3 $512,334 $859,777 $162,096
Small Capitalization
Equity Portfolio N/A N/A $255,3465
Small Capitalization
Equity Fund II4 N/A N/A N/A
Small Capitalization
Equity Portfolio II N/A N/A $3,480
International Equity Fund $240,006 $439,738 $286,838
1 The Fund was converted to the master-feeder structure on May 3, 1996 and does
not directly pay brokerage commissions after that date. The Fund bears its
pro rata share of brokerage commissions paid by its corresponding Portfolio.
2 At December 31, 1996, the Portfolio held the following amounts of securities
of its regular brokers or dealers: Travelers, $1,574,000.
3 The Fund was converted to the master-feeder structure on May 3, 1996 and does
not directly pay brokerage commissions after that date. The Fund bears its
pro rata share of brokerage commissions paid by its corresponding Portfolio.
4 The Fund is a Feeder Fund in the master-feeder structure and does not
directly pay brokerage commissions but bears its pro rata share of brokerage
commissions paid by its corresponding Portfolio.
5 The Portfolio commenced operations on May 3, 1996.
DETERMINATION OF NET ASSET VALUE
Each Fund's net asset value is calculated each day on which the New York
Stock Exchange is open (a "Business Day"). Currently, the New York Stock
Exchange is not open on weekends, New Year's Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
The net asset value of each Fund's shares is determined as of the close of
regular trading on the New York Stock Exchange (normally 4:00 p.m., New York
City time) and is computed by dividing the value of all securities and other
assets of a Fund (substantially all of which, in the case of the Equity Fund,
Small Capitalization Fund and Small Capitalization II Fund will be represented
by the Fund's interest in its corresponding Portfolio) less all liabilities by
the applicable number of Fund shares outstanding, and adjusting to the nearest
cent per share. Expenses and fees of each Fund are accrued daily and taken into
account for the purpose of determining net asset value.
<PAGE>
The value of a Portfolio's net assets (i.e., the value of its securities
and other assets less its liabilities, including expenses payable or accrued) is
determined at the same time and on the same days as the net asset value per
share of the Equity, Small Capitalization and Small Capitalization II Funds is
determined. Each investor in a Portfolio may add to or reduce its investment in
the Portfolio on each Business Day. As of 4:00 p.m. (Eastern time) on each
Business Day, the value of each investor's interest in a Portfolio will be
determined by multiplying the net asset value of the Portfolio by the percentage
representing that investor's share of the aggregate beneficial interests in the
Portfolio. Any additions or reductions which are to be effected on that day will
then be effected. The investor's percentage of the aggregate beneficial
interests in a Portfolio will then be recomputed as the percentage equal to the
fraction (i) the numerator of which is the value of such investor's investment
in the Portfolio as of 4:00 p.m. on such day plus or minus, as the case may be,
the amount of net additions to or reductions in the investor's investment in the
Portfolio effected on such day, and (ii) the denominator of which is the
aggregate net asset value of the Portfolio as of 4:00 p.m. on such day plus or
minus, as the case may be, the amount of the net additions to or reductions in
the aggregate investments in the Portfolio by all investors in the Portfolio.
The percentage so determined will then be applied to determine the value of the
investor's interest in a Portfolio as of 4:00 p.m. on the following Business
Day.
Portfolio securities are valued at the last sale prices on the exchange or
national securities market on which they are primarily traded. Securities not
listed on an exchange or national securities market, or securities for which
there were no reported transactions, are valued at the last quoted bid price.
Securities for which quotation are not readily available and all other assets
are valued at fair value as determined in good faith at the direction of the
Trustees.
Money market instruments with less than sixty days remaining to maturity
when acquired by a Fund or Portfolio are valued on an amortized cost basis. If a
Fund acquires a money market instrument with more than sixty days remaining to
its maturity, it is valued at current market value until the sixtieth day prior
to maturity and will then be valued at amortized cost based upon the value on
such date unless the Trustees of the Trust or the Portfolio Trust determine
during such sixty-day period that amortized cost does not represent fair value.
Generally, trading in securities on foreign exchanges is substantially
completed each day at various times prior to the close of regular trading on the
New York Stock Exchange. If a security's primary exchange is outside the U.S.,
the value of such security used in computing the net asset value of a Fund's
shares is 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 Funds' 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 of the Trust or the Portfolio Trust.
<PAGE>
THE FUNDS AND THEIR SHARES
Each Fund is an investment series of the Trust, an unincorporated business
trust organized under the laws of The Commonwealth of Massachusetts pursuant to
an Agreement and Declaration of Trust dated August 13, 1986. Under the Agreement
and Declaration of Trust, the Trustees of the Trust have authority to issue an
unlimited number of shares of beneficial interest, par value $.01 per share, of
each Fund. Each share of a Fund represents an equal proportionate interest in
the Fund with each other share and is entitled to such dividends and
distributions as are declared by the Trustees. 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 a Fund,
shareholders of that Fund 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 any
Fund. The Trustees have established other series of the Trust. 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 Funds. Pursuant to the Declaration of Trust and subject to
shareholder approval (if then required by applicable law), the Trustees may
authorize each 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 Equity, Small Capitalization and Small
Capitalization II Funds invest all of their investible assets in other open-end
investment companies.
All Fund shares have equal rights with regard to voting, and shareholders
of a Fund have the right to vote as a separate class with respect to matters as
to which their interests are not identical to those of shareholders of other
classes of the Trust, including the approval of an investment advisory contract
and any change of investment policy requiring the approval of shareholders.
Under Massachusetts law, shareholders of the Trust could, under certain
circumstances, be held liable for the obligations of the Trust. However, the
Agreement and Declaration of Trust disclaims shareholder liability for acts or
obligations of the Trust and requires that notice of this disclaimer be given in
each agreement, obligation or instrument entered into or executed by the Trust
or a Trustee. The Declaration also provides for indemnification from the assets
of the Trust for all losses and expenses of any Trust shareholder held liable
for the obligations of the Trust. Thus, the risk of a shareholder incurring a
financial loss on account of his or its liability as a shareholder of the Trust
is limited to circumstances in which the Trust would be unable to meet its
obligations. The possibility that these circumstances would occur is remote.
Upon payment of any liability incurred by the Trust, the shareholder paying the
liability will be entitled to reimbursement from the general assets of the
Trust. The Declaration also provides that no series of the Trust is liable for
<PAGE>
the obligations of any other series. The Trustees intend to conduct the
operations of the Trust to avoid, to the extent possible, ultimate liability of
shareholders for liabilities of the Trust.
Except as described below, whenever the Trust is requested to vote on a
fundamental policy of or matters pertaining to a Portfolio, the Trust will hold
a meeting of the associated Fund's shareholders and will cast its vote
proportionately as instructed by the Fund's shareholders. Fund shareholders who
do not vote will not affect the Trust's votes at the Portfolio meeting. The
percentage of the Trust's votes representing Fund shareholders not voting will
be voted by the Trustees of the Trust in the same proportion as the Fund
shareholders who do, in fact, vote. Subject to applicable statutory and
regulatory requirements, a Fund would not request a vote of its shareholders
with respect to (a) any proposal relating to the Portfolio, which proposal, if
made with respect to the Fund, would not require the vote of the shareholders of
the Fund, or (b) any proposal with respect to the Portfolio that is identical in
all material respects to a proposal that has previously been approved by
shareholders of the Fund. Any proposal submitted to holders in a Portfolio, and
that is not required to be voted on by shareholders of the Fund, would
nonetheless be voted on by the Trustees of the Trust.
THE PORTFOLIO AND ITS INVESTORS
Each Portfolio is a series of Standish, Ayer & Wood Master Portfolio, a
newly formed trust and, like their corresponding Fund, is an open-end management
investment company under the Investment Company Act of 1940, as amended. The
Portfolio Trust was organized as a master trust fund under the laws of the State
of New York on January 18, 1996.
Interests in a Portfolio have no preemptive or conversion rights, and are
fully paid and non-assessable, except as set forth in the Prospectus. A
Portfolio normally will not hold meetings of holders of such interests except as
required under the 1940 Act. A Portfolio would be required to hold a meeting of
holders in the event that at any time less than a majority of its Trustees
holding office had been elected by holders. The Trustees of a Portfolio continue
to hold office until their successors are elected and have qualified. Holders
holding a specified percentage of interests in a Portfolio may call a meeting of
holders in the Portfolio for the purpose of removing any Trustee. A Trustee of
the Portfolio may be removed upon a majority vote of the interests held by
holders in the Portfolio qualified to vote in the election. The 1940 Act
requires a Portfolio to assist its holders in calling such a meeting. Upon
liquidation of a Portfolio, holders in a Portfolio would be entitled to share
pro rata in the net assets of a Portfolio available for distribution to holders.
Each holder in the Portfolio is entitled to a vote in proportion to its
percentage interest in the Portfolio.
TAXATION
Each series of the Trust, including each Funds, is treated as a separate
entity for accounting and tax purposes. Each Fund has qualified and elected or
intends to elect to be treated as a "regulated investment company" ("RIC") under
Subchapter M of the Code, and intends to continue to so qualify in the future.
As such and by complying with the applicable provisions of the Code regarding
the sources of its income, the timing of its distributions, and the
diversification of its assets, each 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
<PAGE>
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.
Each Portfolio is treated as a partnership for federal income tax purposes.
As such, a Portfolio is not subject to federal income taxation. Instead, the
corresponding Fund must take into account, in computing its federal income tax
liability (if any), its share of the Portfolio's income, gains, losses,
deductions, credits and tax preference items, without regard to whether it has
received any cash distributions from the Portfolio. Because the Equity Fund,
Small Capitalization Fund and Small Capitalization II Fund invest their assets
in the Equity, Small Capitalization and Small Capitalization II Portfolios,
respectively, each Portfolio normally must satisfy the applicable source of
income and diversification requirements in order for the corresponding Fund to
satisfy them. Each Portfolio will allocate at least annually among its
investors, including the corresponding Fund each investor's distributive share
of that Portfolio's net investment income, net realized capital gains, and any
other items of income, gain, loss, deduction or credit. Each Portfolio will make
allocations to the corresponding Fund in a manner intended to comply with the
Code and applicable regulations and will make moneys available for withdrawal at
appropriate times and in sufficient amounts to enable the corresponding Fund to
satisfy the tax distribution requirements that apply to it and that must be
satisfied in order for the Fund to avoid Federal income and/or excise tax. For
purposes of applying the requirements of the Code regarding qualification as a
RIC, the Equity Fund, Small Capitalization Fund and Small Capitalization II Fund
each will be deemed (i) to own its proportionate share of each of the assets of
the corresponding Portfolio and (ii) to be entitled to the gross income of the
corresponding Portfolio attributable to such share.
Each 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. Each
Fund intends under normal circumstances to seek to avoid liability for such tax
by satisfying such distribution requirements. Certain distributions made in
order to satisfy the Code's distribution requirements may be declared by the
Funds during October, November or December of the year but paid during the
following January. Such distributions will be taxable to taxable shareholders as
if received on December 31 of the year the distributions are declared, rather
than the year in which the distributions are received.
Each Fund is not subject to Massachusetts corporate excise or franchise
taxes. Provided that the Funds qualify as regulated investment companies under
the Code, they will also not be required to pay any Massachusetts income tax.
Each 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, a 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. .
<PAGE>
Limitations imposed by the Code on regulated investment companies like the
Funds may restrict a Fund's or a Portfolio's ability to enter into futures,
options or currency forward transactions.
Certain options, futures or currency forward transactions undertaken by a
Fund or a Portfolio may cause the Fund or Portfolio to recognize gains or losses
from marking to market even though the Fund's or Portfolio's positions have not
been sold or terminated and affect the character as long-term or short-term (or,
in the case of certain options, futures or forward contracts relating to foreign
currency, as ordinary income or loss) and timing of some capital gains and
losses realized by the International Equity Fund or realized by a Portfolio and
allocable to the corresponding Fund. Any net mark to market gains may also have
to be distributed by a Fund 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 losses on transactions involving
options, futures or forward contracts and/or offsetting or successor positions
may be deferred rather than being taken into account currently in calculating
the Funds' taxable income or gain. Certain of the applicable tax rules may be
modified if a Fund or a Portfolio is eligible and chooses to make one or more of
certain tax elections that may be available. These transactions may affect the
amount, timing and character of a Fund's distributions to shareholders. Each
Fund will take into account the special tax rules applicable to options, futures
or forward contracts in order to minimize any potential adverse tax
consequences.
The Federal income tax rules applicable to currency swaps or interest rate
swaps, caps, floors and collars are unclear in certain respects, and a Fund or
Portfolio may be required to account for these instruments under tax rules in a
manner that, under certain circumstances, may limit its transactions in these
instruments.
Foreign exchange gains and losses realized by a Portfolio and the
International Equity Fund in connection with certain transactions, if any,
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
Fund distributions to shareholders. In some cases, elections may be available
that would alter this treatment. Any such transactions that are not directly
related to the Portfolios' or the International Equity 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 a Fund is deemed to recognize from the sale of certain investments held for
less than three months, which gain (or share of such gain in the case of the
Equity Fund, Small Capitalization Fund and Small Capitalization II Fund plus any
such gain the Funds may realize from other sources) is limited under the Code to
less than 30% of each Fund's gross income for its taxable year, and could under
future Treasury regulations produce income not among the types of "qualifying
income" from which each Fund must derive at least 90% of its gross income for
its taxable year.
<PAGE>
Each Portfolio and the International Equity Fund may be subject to
withholding and other taxes imposed by foreign countries with respect to
investments in foreign securities. Tax conventions between certain countries and
the U.S. may reduce or eliminate such taxes in some cases. Investors in a Fund
would be entitled to claim U.S. foreign tax credits with respect to such taxes,
subject to certain provisions and limitations contained in the Code, only if
more than 50% of the value of the applicable Fund's total assets (in the case of
a Fund that invests in a Portfolio, taking into account its allocable share of
the Portfolio's assets) at the close of any taxable year were to consist of
stock or securities of foreign corporations and the Fund were to file an
election with the Internal Revenue Service. Because the investments of the
Portfolios are such that each Fund that invests in a Portfolio expects that it
generally will not meet this 50% requirement, shareholders of each such Fund
generally will not directly take into account the foreign taxes, if any, paid by
the corresponding Portfolio and will not be entitled to any related tax
deductions or credits. Such taxes will reduce the amounts these Funds would
otherwise have available to distribute.
The International Equity Fund may meet the 50% threshold referred to in the
previous paragraph and may therefore 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 International Equity 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
International Equity 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 International Equity 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
(if any) that the International Equity Fund files the election described above,
its shareholders will be notified of the amount of (i) each shareholder's pro
rata share of foreign income taxes paid by the Fund and (ii) the portion of Fund
dividends which represents income from each foreign country.
If a Portfolio or the International Equity Fund acquires stock in certain
foreign 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 relevant Fund could be
subject to Federal income tax and additional interest charges on "excess
distributions" actually or constructively received from such companies or gain
<PAGE>
from the actual or deemed sale of stock in such companies, even if all income or
gain actually realized is timely distributed to its shareholders. They would not
be able to pass through to their shareholders any credit or deduction for such a
tax. Certain elections may, if available, ameliorate these adverse tax
consequences, but any such election would require them to recognize taxable
income or gain without the concurrent receipt of cash. The Portfolios and the
International Equity Fund may limit and/or manage stock holdings, if any, in
passive foreign investment companies to minimize each Fund's tax liability or
maximize its return from these investments.
Distributions from a Fund's current or accumulated earnings and profits
("E&P"), as computed for Federal income tax purposes, will be taxable as
described in the Funds' Prospectus whether taken in shares or in cash.
Distributions, if any, in excess of E&P will constitute a return of capital,
which will first reduce an investor's tax basis in Fund shares and thereafter
(after such basis is reduced to zero) will generally give rise to capital gains.
Shareholders electing to receive distributions in the form of additional shares
will have a cost basis for federal income tax purposes in each share so received
equal to the amount of cash they would have received had they elected to receive
the distributions in cash, divided by the number of shares received.
For purposes of the dividends received reduction available to corporations,
dividends received by a Portfolio and allocable to its corresponding Fund, if
any, from U.S. domestic corporations in respect of the stock of such
corporations held by the Portfolio, for U.S. Federal income tax purposes, for at
least a minimum holding period, generally 46 days, and distributed and
designated by the Fund may be treated as qualifying dividends. The International
Equity Fund is unlikely to earn a substantial amount of qualifying dividends,
but the Portfolios' dividend income, if any, probably will generally qualify for
this deduction. Corporate shareholders must meet the minimum holding period
requirements referred to above with respect to their shares of the applicable
Fund in order to qualify for the deduction and, if they borrow to acquire or
otherwise incur debt attributable to such shares, may be denied a portion of the
dividends received deduction. The entire qualifying dividend, including the
otherwise deductible amount, will be included in determining the excess (if any)
of a corporate shareholder's adjusted current earnings over its alternative
minimum taxable income, which may increase its alternative minimum tax
liability.
Additionally, any corporate shareholder should consult its tax adviser
regarding the possibility that its basis in its shares may be reduced, for
Federal income tax purposes, by reason of "extraordinary dividends" received
with respect to the shares, for the purpose of computing its gain or loss on
redemption or other disposition of the shares.
At the time of an investor's purchase of Fund shares, a portion of the
purchase price may be attributable to undistributed net investment income and/or
realized or unrealized appreciation in the Fund's portfolio (or share of a
Portfolio's portfolio). Consequently, subsequent distributions by a Fund on such
shares 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
<PAGE>
distributions, reduced below the investor's cost for such shares, and the
distributions economically represent a return of a portion of the purchase
price.
Upon a redemption (including a repurchase) of shares of a 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 generally 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,
subject to the rules described below. Any loss realized on a redemption may be
disallowed to the extent the shares disposed of are replaced with other shares
of the same 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.
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. A state income (and possibly local income
and/or intangible property) tax exemption is generally available to the extent,
if any, a Fund's distributions are derived from interest on (or, in the case of
intangible property taxes, the value of its assets is attributable to)
investments in certain U.S. Government obligations, provided in some states that
<PAGE>
certain thresholds for holdings of such obligations and/or reporting
requirements are satisfied. Shareholders should consult their tax advisers
regarding the applicable requirements in their particular states, including the
effect, if any, of the Fixed Income Fund's indirect ownership (through the
Portfolio) of any such obligations, as well as the Federal, and any other state
or local, tax consequences of ownership of shares of, and receipt of
distributions from, a Fund 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 adviser regarding such
treatment and the application of foreign taxes to an investment in the Funds.
ADDITIONAL INFORMATION
The Prospectus and this Statement of Additional Information omit certain
information contained in the registration statement filed with the SEC, which
may be obtained from the SEC's principal office at 450 Fifth Street, N.W.,
Washington, D.C. 20549, upon payment of the fee prescribed by the rules and
regulations promulgated by the Commission.
EXPERTS AND FINANCIAL STATEMENTS
Except as noted in the next sentence, each Fund's financial statements
contained in the 1996 Annual Reports of the Funds have been audited by Coopers &
Lybrand L.L.P., independent accountants, and are incorporated by reference into
and attached to this Statement of Additional Information. Financial highlights
of Equity Fund, International Equity Fund and Small Capitalization Fund for
periods from commencement of operations through December 31, 1992 were audited
by Deloitte & Touche, LLP, independent auditors. The Equity Portfolio, Small
Capitalization Portfolio and Small Capitalization II Portfolio's financial
statements contained in their corresponding Fund's 1996 Annual Report have been
audited by Coopers & Lybrand, an affiliate of Coopers & Lybrand L.L.P.
<PAGE>
The Standish Group of
Fixed Income Funds
Standish Fixed
Income Fund
Standish Fixed
Income Fund II
Standish Short-Term
Asset Reserve Fund
Standish Controlled Maturity Fund
Standish Securitized Fund
Prospectus
................................................................................
Standish Group of Fixed Income Funds
................................................................................
The Standish Group of Fixed Income Funds includes the Standish Fixed Income
Fund, Standish Fixed Income Fund II, Standish Short-Term Asset Reserve Fund,
Standish Controlled Maturity Fund and Standish Securitized Fund. Each Fund is
organized as a separate diversified investment series of Standish, Ayer & Wood
Investment Trust, an open end investment company. The Fixed Income Fund invests
solely in the Standish Fixed Income Portfolio, an open end investment company.
Standish, Ayer & Wood, Inc. is the investment adviser to the Fixed Income
Portfolio and the Fixed Income Fund II, Short-Term Asset Reserve Fund,
Controlled Maturity Fund and Securitized Fund.
Prospective investors can obtain more information about the Funds, including
an application and Investor Guide, by calling Standish Fund Distributors, L.P.
at (800) 729-0066.
Standish's primary investment management and research focus is at the
security and industry/sector level. Standish seeks to add value to each Fund's
portfolio by selecting undervalued investments, rather than by varying the
average maturity of a Fund's portfolio to reflect interest rate forecasts.
Standish utilizes fundamental credit and sector valuation techniques to evaluate
what it considers to be less efficient markets and sectors of the fixed income
marketplace in an attempt to select securities with the potential for the
highest return. Standish has been providing investment counseling to mutual
funds, other institutional investors and high net worth individuals for more
than sixty years. Standish offers a broad array of investment services that
includes U.S., international and global management of fixed income and equity
securities for mutual funds and separate accounts. Privately held by twenty-one
employee/directors and headquartered in Boston, Massachusetts, the firm employs
over eighty investment professionals with a total staff of more than two
hundred.
This Prospectus sets forth concisely the information about the Funds that a
prospective investor should know before investing and should be retained for
future reference. Additional information has been filed with the Securities and
Exchange Commission in a Statement of Additional Information dated May 1, 1997,
as amended or supplemented from time to time. The Statement of Additional
Information is incorporated by reference into this Prospectus and is available
without charge upon request from (800) 729-0066.
Shares of the Funds are not deposits or obligations of, or guaranteed or
endorsed by, any bank or other insured depository institution, and are not
insured by the Federal Deposit Insurance Corporation, the Federal Reserve Board
or any other government agency. An investment in shares of the Funds involves
investment risks, including possible loss of principal.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Shares of the Funds are not available for sale in every state. This
Prospectus is not intended to be an offer to sell shares, nor may an offer to
purchase shares be accepted from investors, in those states where shares of the
Funds may not legally be sold. Contact Standish Fund Distributors to determine
whether the Funds are available for sale in your state.
<PAGE>
Table of Contents
Fund Comparison Highlights ...................................................3
Expense Information ..........................................................4
Financial Highlights .........................................................5
Investment Objectives and Policies ..........................................10
The Fixed Income Fund ....................................................10
The Fixed Income Fund II .................................................11
The Short-Term Asset Reserve Fund ........................................11
The Controlled Maturity Fund .............................................11
The Securitized Fund .....................................................11
Description of Securities and Related Risks .................................12
General Risks ..........................................................12
Specific Risks .........................................................12
Investment Techniques and Related Risks .....................................15
Information about the Master-Feeder Structure ...............................18
Calculation of Performance Data .............................................18
Dividends and Distributions .................................................20
Purchase of Shares ..........................................................20
Net Asset Value .............................................................21
Exchange of Shares ..........................................................21
Redemption of Shares ........................................................22
Management ..................................................................23
Federal Income Taxes ........................................................24
The Funds and Their Shares ..................................................24
Custodian, Transfer Agent and Dividend Disbursing Agent .....................25
Independent Accountants .....................................................25
Legal Counsel ...............................................................25
Tax Certification Instructions ..............................................25
<PAGE>
Fund Comparison Highlights
The following table highlights information contained in this Prospectus and
is qualified in its entirety by the more detailed information contained within.
For a complete description of each Fund's distinct investment objective and
policies, see "Investment Objectives and Policies," "Description of Securities
and Related Risks" and "Investment Techniques and Related Risks." There can be
no assurance that a Fund's investment objective will be achieved.
<TABLE>
<CAPTION>
Fixed Income Fixed Income Short-Term Controlled Securitized
Fund Fund II Asset Reserve Maturity Fund Fund
Fund
<S> <C> <C> <C> <C> <C>
Primary Types of Fixed income Fixed income Money market Fixed income Mortgage-related
Obligations securities of (i) securities of U.S. instruments and securities of U.S. and
U.S. and foreign corporations and short-term fixed corporations and asset-backed
governments, and other entities, income securities other entities, securities of
(ii) U.S. and and U.S. of (i) U.S. and and U.S. U.S. and
foreign government foreign government foreign
corporations governments, governments
and (ii) U.S. and and
foreign banks corporations
and corporations
Credit Quality Primarily Exclusively Exclusively Exclusively Primarily high
investment grade; investment grade; investment investment grade; grade; up to
up to 15% of total emphasis on grade; up to 15% emphasis on 15% of total
assets in obligations likely of total assets obligations likely assets in
obligations rated to be upgraded in medium grade to be upgraded medium grade
Ba, BB or
equivalent
Investment Grade No Yes Yes Yes Yes
Only
Average Portfolio Aa/AA Aa/AA Aa/AA Aa/AA Aa/AA
Quality
Average Effective 5-13 years 5-13 years 6-15 months Not more than 5 3-15 years;
Portfolio Maturity maximum of 18 years varies due to
(Dollar-Weighted) months prepayment rate
Foreign Securities Yes; up to 20% of No No; limited No Yes; up to 10%
total assets exception for of total assets
(including issuers money market primarily in
located in obligations of Canadian and
emerging foreign banks European
markets); no more and prime issuers
than 10% of total commercial
assets not subject paper of foreign
to currency companies
hedging
Benchmark Lehman Brothers Lehman Brothers IBC/Donoghue Merrill Lynch 1-3 Lehman
Aggregate Bond Aggregate Bond All Taxable year Treasury Brothers
Index Index Money Market Index Aggregate
Index Index and
Lehman
Brothers
Mortgage Index
</TABLE>
<PAGE>
Expense Information
Total operating expenses are based on expenses for each Fund's fiscal year
ended December 31, 1996. Total operating expenses for the Fixed Income Fund
include expenses of the Fund and the Standish Fixed Income Portfolio
("Portfolio"). The Trust's Trustees believe that the Fixed Income Fund's total
operating expenses are approximately equal to or less than what would be the
case if the Fund did not invest all of its investable assets in the Fixed Income
Portfolio.
<TABLE>
<CAPTION>
Fixed Fixed Short-Term Controlled Securitized Fund
Income Income Asset Maturity Fund
Fund Fund II Reserve
Fund
Shareholder Transaction Expenses
<S> <C> <C> <C> <C> <C>
Maximum Sales Load Imposed on Purchases None None None None None
Maximum Sales Load Imposed on Reinvested None None None None None
Dividends
Deferred Sales Load None None None None None
Redemption Fees None None None None None
Annual Operating Expenses
(as a percentage of average net assets)
Management Fees (after applicable limitation) 0.32% 0.00% * 0.25% 0.00% * 0.20% *
12b-1 Fees None None None None None
Other Expenses (after applicable expense 0.06% 0.40% * 0.10% 0.40% * 0.25% *
limitation)+
---------- ---------- ----------- --------------- ---------------
Total Operating Expenses
(after applicable expense limitation) 0.38% 0.40% 0.35% 0.40% 0.45%
========== ========== =========== =============== ===============
</TABLE>
*Standish has voluntarily and temporarily agreed to limit certain expenses of
Fixed Income Fund II, Controlled Maturity Fund and Securitized Fund. In the
absense of such agreements, the Management Fees, Other Expenses and Total
Operating Expenses (as a percentage of average net assets for the fiscal year
ended December 31, 1996) would have been: Fixed Income Fund II-- 0.40%, 0.66%
and 1.06%; Controlled Maturity Fund--0.35%, 0.90% and 1.25%; and Securitized
Fund--0.25%, 0.26% and 0.51%. Standish may revise or discontinue these
agreements at any time although it has no current intentions to do so.
+Other expenses include custodian and transfer agent fees, registration costs,
payments for insurance, and audit and legal services.
Example
Hypothetically assume that each Fund's annual return is 5% and that its total
operating expenses are exactly as described. For every $1,000 invested, an
investor would have paid the following expenses if an account were closed after
the number of years indicated:
<TABLE>
<CAPTION>
Fixed Fixed Short-Term Controlled Securitized Fund
Income Income Asset Maturity Fund
Fund Fund II Reserve
Fund
<S> <C> <C> <C> <C> <C>
After 1 Year $4 $4 $4 $4 $5
After 3 Years 12 13 11 13 14
After 5 Years 21 22 20 22 25
After 10 Years 48 51 44 51 57
</TABLE>
The purpose of the table is to assist investors in understanding the various
costs and expenses that an investor in each Fund will bear directly or
indirectly. The example is included solely for illustrative purposes and should
not be considered a representation of future performance or expenses. Actual
expenses may be more or less than those shown. See "Management" for additional
information about each Fund's expenses.
<PAGE>
Financial Highlights
The financial highlights for periods after 1992 have been audited by Coopers
& Lybrand L.L.P., independent accountants, whose reports, together with the
Financial Statements of the Funds, are incorporated into the Statement of
Additional Information. Financial highlights for prior periods were audited by
other independent accountants. The Funds' annual reports, which contain
additional information about Fund performance, may be obtained from Standish
Fund Distributors without charge.
<TABLE>
<CAPTION>
Fixed Income Fund Year Ended December 31,
1996(3) 1995 1994 1993 1992*
<S> <C> <C> <C> <C> <C>
Net asset value - beginning of period $20.92 $18.91 $21.25 $20.55 $20.96
--------------- ---------------- ---------------- ---------------- --------------
Income from investment operations
Net investment income $1.46 $1.35 $1.25 $1.50 $1.59
Net realized and unrealized gain
(loss) (0.37) 2.08 (2.29) 1.45 (0.18)
--------------- ---------------- ---------------- ---------------- --------------
Total from investment operations $1.09 $3.43 ($1.04) $2.95 $1.41
Less distributions declared
to shareholders
From net investment income ($1.48) ($1.42) ($1.10) ($1.51) ($1.52)
In excess of net investment income -- -- -- (0.04) --
From net realized gain on investments -- -- (0.04) (0.70) (0.30)
Tax return of capital -- -- (0.16) -- --
--------------- ---------------- ---------------- ---------------- --------------
Total distributions declared to shareholders ($1.48) ($1.42) ($1.30) ($2.25) ($1.82)
--------------- ---------------- ---------------- ---------------- --------------
Net asset value - end of period $20.53 $20.92 $18.91 $21.25 $20.55
=============== ================ ================ ================ ==============
Total return4 5.48% 18.54% (4.86)% 14.64% 6.88%
Ratios (to average daily net assets)/
Supplemental Data
Net assets at end of period (000 omitted) $2,603,628 $2,267,107 $1,642,933 $1,307,099 $919,909
Expenses1 0.38% 0.38% 0.38% 0.40% 0.41%
Net investment income 7.13% 7.80% 7.25% 7.07% 7.61%
Portfolio turnover2 49.00% 132.00% 122.00% 150.00% 217.00%
<PAGE>
Fixed Income Fund Year Ended December 31,
1991* 1990* 1989* 1988* 1987*@
Net asset value - beginning of period $19.56 $19.54 $18.84 $18.99 $20.00
------------- ------------- ------------- ------------- -------------
Income from investment operations
Net investment income $1.68 $1.76 $1.81 $1.72 $1.17
Net realized and unrealized gain
(loss) 1.66 (0.05) 0.69 (0.13) (1.07)
------------- ------------- ---------------------------- -------------
Total from investment operations $3.34 $1.71 $2.50 $1.59 $0.10
Less distributions declared
to shareholders
From net investment income ($1.49) ($1.69) ($1.80) ($1.74) ($1.11)
In excess of net investment income -- -- -- -- --
From net realized gain on investments (0.45) -- -- -- --
Tax return of capital -- -- -- -- --
------------- ------------- ------------- ------------- -------------
Total distributions declared to shareholders ($1.94) ($1.69) ($1.80) ($1.74) ($1.11)
------------- ------------- ------------- ------------- -------------
Net asset value - end of period $20.96 $19.56 $19.54 $18.84 $18.99
============= ============= ============= ============= =============
Total return4 17.65% 9.23% 13.75% 8.53% 0.083% t
Ratios (to average daily net assets)/
Supplemental Data
Net assets at end of period (000 omitted) $631,457 $397,267 $264,874 $198,836 $156,834
Expenses1 0.46% 0.49% 0.53% 0.54% 0.59% t
Net investment income 8.28% 9.07% 9.26% 8.94% 8.16% t
Portfolio turnover2 176.00% 107.00% 106.00% 119.00% 73.00%
t Computed on an annualized basis.
* Audited by other auditors.
@ For the period from March 27, 1987 (start of business) to December 31, 1987.
1 Includes the Fund's share of the Standish Fixed Income Portfolio's allocated
expenses for the period from May 3, 1996 to December 31, 1996.
2 Portfolio turnover represents the rate of portfolio activity for the period
while the Fund was making investments directly in securities. The Portfolio
turnover rate for the period since the Fund transferred substantially all of
its investable assets to the Portfolio is 69%, as shown in the Standish Fixed
income Portfolio's financial statements included in the Statement of
Additional Information.
3 Calculated based on average shares outstanding.
4 The Fund's performance benchmark is the Lehman Brothers Aggregate Index. See
"Calculation of Performance Data" for a description of the index. The average
annual total return of this index for each year since the Fund's inception
was as follows (this total return information is not audited):
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Total Return:
Lehman Brothers 3.61% 18.47% (2.92)% 9.75% 7.40% 16.00% 8.95% 14.53% 7.89% 1.08%
Aggregate Index
<PAGE>
Fixed Income Fund II Year Endeded For the Period July 3, 1995
December 31, 1996 (start of business) to December 31, 1995
Net asset value - beginning of period $20.52 $20.00
--------------------------- -------------------------------
Income from investment operations
Net investment income $1.16 $0.53
Net realized and unrealized gain (loss) (0.52) 0.64
--------------------------- -------------------------------
Total from investment operations $0.64 $1.17
Less distributions declared to shareholders
From net investment income ($1.15) ($0.53)
In excess of net investment income -- (0.12)
From net realized gains on investments (1.28) --
--------------------------- -------------------------------
Total distributions declared to shareholders ($2.43) $0.65
--------------------------- -------------------------------
Net asset value - end of period $18.73 $20.52
=========================== ===============================
Total return1 3.77% 5.79%
Ratios (to average daily net assets)/Supplemental Data
Net assets at end of period (000 omitted) $35,485 $8,046
Expenses* 0.40% 0.40%t
Net investment income* 6.57% 6.64%t
Portfolio turnover 124.00% 389.00%
* 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 ratios would have been:
Net investment income per share $1.04 $0.29
Ratios (to average daily net assets):
Expenses 1.06% 1.29%t
Net investment income 5.91% 5.75%t
t Computed on an annualized basis
1 The Fund's performance benchmark is the Lehman Brothers Aggregate Index. See
"Calculation of Performance Data" for a description of the index. The
average annual total return of the index for each year since the Fund's
inception was as follows (this total return information is not audited):
1996 1995
Total Return:
Lehman Brothers 3.61% 6.31%
Aggregate Index
<PAGE>
Short-Term Asset Reserve Fund Year Ended December 31,
1996 1995 1994 1993 1992*
Net asset value - beginning of period $19.55 $19.22 $19.79 $19.96 $20.46
------------- -------------- -------------- ---------------- --------------
Income from investment operations
Net investment income $1.11 $1.13 $1.01 $1.31 $1.35
Net realized and unrealized gain
(loss) on investments (0.40) 0.33 (0.57) (0.17) (0.48)
------------- -------------- -------------- ---------------- --------------
Total from investment operations $1.07 $1.46 $0.44 $1.14 $0.87
Less distributions declared
to shareholders
From net investment income ($1.12) ($1.12) ($1.01) ($1.31) ($1.35)
In excess of net investment income -- (0.01) -- -- --
From net realized gain on investments -- -- -- -- (0.02)
------------- -------------- -------------- ---------------- --------------
Total distributions declared to shareholders ($1.12) ($1.13) ($1.01) ($1.31) ($1.37)
------------- -------------- -------------- ---------------- --------------
Net asset value - end of period $19.50 $19.55 $19.22 $19.79 $19.96
============= ============== ============== ================ ==============
Total return1 5.62% 7.85% 2.27% 5.08% 4.33%
Ratios (to average daily net assets)/
Supplemental Data
Net assets at end of period $194,074 $243,500 $277,017 $275,080 $289,969
(000 omitted)
Expenses 0.35% 0.33% 0.33% 0.33% 0.37%
Net investment income 5.75% 5.95% 5.24% 5.82% 6.60%
Portfolio turnover 156.00% 208.00% 154.00% 182.00% 167.00%
<PAGE>
Short-Term Asset Reserve Fund Year Ended December 31,
1991* 1990* 1989*@
Net asset value - beginning of period $20.20 $20.14 $20.00
------------- ------------- -------------
Income from investment operations
Net investment income $1.47 $1.66 $1.69
Net realized and unrealized gain
(loss) on investments 0.37 0.07 0.14
------------- ------------- -------------
Total from investment operations $1.84 $1.73 $1.83
Less distributions declared
to shareholders
From net investment income ($1.47) ($1.66) ($1.69)
In excess of net investment income -- -- --
From net realized gain on investments (0.11) 0.01 --
------------- ------------- -------------
Total distributions declared to shareholders ($1.58) ($1.67) ($1.69)
------------- ------------- -------------
Net asset value - end of period $20.46 $20.20 $20.14
============= ============= =============
Total return1 9.41% 8.96% 9.54%t
Ratios (to average daily net assets)/
Supplemental Data
Net assets at end of period $266,256 $105,303 $66,167
(000 omitted)
Expenses 0.38% 0.45% 0.50%t
Net investment income 7.17% 8.17% 8.52%t
Portfolio turnover 134.00% 128.00% 132.00%
t Computed on an annualized basis.
* Audited by other auditors.
@ For the period from January 3, 1989 (start of business) to December 31, 1989.
1 The Fund's performance benchmark is the IBC/Donoghue Money Market Average/All
Taxable Index. See "Calculation of Performance Data" for a description of the
benchmark. The average annual total return of this benchmark for each year
since the Fund's inception was as follows (this total return information is
not audited):
1996 1995 1994 1993 1992 1991 1990 1989
---- ---- ---- ---- ---- ---- ---- ----
Total Return:
IBC/Donoghue 4.90% 5.50% 3.74% 2.71% 3.39% 5.79% 7.82% 8.90%
Money Market
Average/All Taxable Index
<PAGE>
Controlled Maturity Fund Year Ended December 31, 1996 For the Period July 3, 1995
(start of business) to December 31, 1995
Net asset value - beginning of period $20.24 $20.00
-------------------------- ------------------------------
Income from investment operations
Net investment income $1.27 $0.57
Net realized and unrealized gain (loss) (0.27) 0.24
-------------------------- ------------------------------
Total from investment operations $1.00 $0.81
Less distributions declared to shareholders
From net investment income ($1.24) ($0.57)
From net realized gains on investments (0.01) --
-------------------------- ------------------------------
Total distributions declared to shareholders ($1.25) ($0.57)
-------------------------- ------------------------------
Net asset value - end of period $19.99 $20.24
========================== ==============================
Total return1 5.13% 4.20%
Ratios (to average daily net assets)/Supplemental Data
Net assets at end of period (000 omitted) $12,525 $8,868
Expenses* 0.40% 0.40%y
Net investment income* 6.60% 6.29%y
Portfolio turnover 107.00% 127.00%
* 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 $1.11 $0.38
Ratios (to average daily net assets):
Expenses 1.25% 2.51%y
Net investment income 5.75% 4.18%y
y Computed on an annualized basis
1 The Fund's performance benchmark is the Merrill Lynch 1-3 Year U.S. Treasury
Index. See "Calculation of Performance Data" for a description of the index.
The average annual total return of the Index for each year since the Fund's
inception was as follows (this total return information is not audited):
1996 1995
Total Return:
Merrill Lynch 1-3 4.98% 4.06%
Year U.S. Treasury Index
<PAGE>
Securitized Fund Year Ended December 31,
1996 1995 1994 1993 1992*
Net asset value - beginning of period $20.25 $18.61 $20.24 $20.14 $20.97
------------- ------------- ------------- ------------- -------------
Income from investment operations
Net investment income $1.43 $1.32 $1.42 $1.45 $1.43
Net realized and unrealized gain
(loss) on investments (0.57) 1.66 (1.86) 0.54 (0.61)
------------- ------------- ------------- ------------- -------------
Total from investment operations $0.86 $2.98 ($0.44) $1.99 $0.82
Less distributions declared
to shareholders
From net investment income ($1.41) ($1.34) ($1.19) ($1.48) ($1.57)
In excess of net investment income -- -- -- (0.05) --
From net realized gain on investments -- -- -- (0.36) (0.07)
In excess of net realized gain on investments -- -- -- -- (0.01)
------------- ------------- ------------- ------------- -------------
Total distributions declared to shareholders ($1.41) ($1.34) ($1.19) ($1.89) ($1.65)
------------- ------------- ------------- ------------- -------------
Net asset value - end of period $19.70 $20.25 $18.61 $20.24 $20.14
============= ============= ============= ============= =============
Total return1 4.41% 16.32% (2.16)% 10.02% 4.07%
Ratios (to average net assets)/
Supplemental Data
Net assets at end of period $50,617 $55,201 $53,779 $78,054 $90,460
(000 omitted)
Expenses# 0.45% 0.45% 0.45% 0.45% 0.45%
Net investment income# 6.99% 6.78% 6.79% 6.75% 6.94%
Portfolio turnover 212.00% 225.00% 138.00% 130.00% 301.00%
<PAGE>
Securitized Fund Year Ended December 31,
1991* 1990* 1989*@
Net asset value - beginning of period $20.48 $20.15 $20.00
------------- ------------- ------------
Income from investment operations
Net investment income $1.71 $1.80 $0.60
Net realized and unrealized gain
(loss) on investments 1.37 0.40 0.20
------------- ------------- ------------
Total from investment operations $3.08 $2.20 $0.80
Less distributions declared
to shareholders
From net investment income ($1.55) ($1.70) $0.60
In excess of net investment income -- -- --
From net realized gain on investments (1.04) (0.17) --
In excess of net realized gain on investments -- (0.05)
------------- ------------- ------------
Total distributions declared to shareholders ($2.59) ($1.87) $0.55
------------- ------------- ------------
Net asset value - end of period $20.97 $20.48 $21.35
============= ============= ============
Total return1 15.57% 11.47% 11.90%
Ratios (to average net assets)/
Supplemental Data
Net assets at end of period $78,570 $67,278 $31,427
(000 omitted)
Expenses# 0.45% 0.45% 0.45%+
Net investment income# 8.03% 8.88% 8.46%+
Portfolio turnover 324.00% 146.00% 1.00%
+ Computed on an annualized basis.
* Audited by other auditors.
@ For the period from August 31, 1989 (start of business) to December 31,
1989.
# Standish 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 $1.40 $1.22 $1.41 $1.44 $1.42 $1.70 $1.79 $0.59
Ratios (to average net assets):
Expenses 0.51% 0.51% 0.49% 0.48% 0.51% 0.49% 0.51% 0.59%
Net investment income 6.93% 6.72% 6.76% 6.72% 6.88% 7.99% 8.82% 8.32%
1 The Fund's performance benchmarks are Salomon Shearson's Mortgage Index and
the Lehman Brothers Aggregate Index. See "Calculation of Performance Data"
for a description of these Indices. The average annual total return of these
Indices for each year since the Fund's inception was as follows (this total
return information is not audited):
1996 1995 1994 1993 1992 1991 1990 1989
---- ---- ---- ---- ---- ---- ---- ----
Total Return:
Lehman Brothers Mortgage Index 5.36% 16.79% (1.61)% 6.84% 6.95% 15.71% 10.73% 4.73%
Lehman Brothers Aggregate Index 3.61% 18.47% (2.92)% 9.75% 7.40% 16.00% 8.95% 4.24%
</TABLE>
<PAGE>
Investment Objectives and Policies
Investment Strategy
Each Fund is an actively managed diversified portfolio consisting primarily
of fixed income securities. Each Fund is managed to maximize total return
consistent with preserving principal and liquidity, except for the Fixed Income
Fund and the Short-Term Asset Reserve Fund, which are managed primarily to
achieve a high level of current income consistent with preservation of principal
and liquidity.
Standish's primary investment management and research focus is at the
security and industry/sector level. Standish seeks to add value to each Fund's
portfolio by selecting undervalued investments, rather than by varying the
average maturity of a Fund's portfolio to reflect interest rate forecasts.
Standish utilizes fundamental credit and sector valuation techniques to evaluate
what it considers to be less efficient markets and sectors of the fixed income
marketplace in an attempt to select securities with the potential for the
highest return.
Securities. Fixed income securities in which each Fund invests include bonds,
notes (including structured or hybrid notes), mortgage-backed securities,
asset-backed securities, convertible securities, Eurodollar and Yankee Dollar
instruments, preferred stocks and money market instruments. These fixed income
securities may be issued by U.S. and foreign corporations or entities, U.S. and
foreign banks, the U.S. Government, its agencies, authorities, instrumentalities
or sponsored enterprises, and foreign governments and their political
subdivisions, although not all Funds invest in securities of foreign issuers.
Each Fund purchases securities that pay interest on a fixed, variable, floating,
inverse floating, contingent, in-kind or deferred basis. Each Fund may enter
into repurchase agreements and forward dollar roll transactions, may purchase
zero coupon and deferred payment securities and may buy securities on a
when-issued or delayed delivery basis. Please refer to each Fund's specific
investment objective and policies and the "Description of Securities" section
for a more comprehensive list of permissible securities and investments.
Credit Quality. The Short-Term Asset Reserve Fund invests primarily in fixed
income securities that are considered high grade at the time of purchase and
each other Fund invests primarily in fixed income securities that are considered
investment grade at the time of purchase. Investment grade securities are those
that are rated at least Baa by Moody's Investors Service, Inc. or BBB by
Standard & Poor's Ratings Group, Duff & Phelps, Inc. or Fitch Investors Service,
Inc. or, if unrated, determined by Standish to be of comparable credit quality.
High grade securities are those that are rated within the top three investment
grade ratings (i.e., Aaa, Aa, A or P-1 by Moody's or AAA, AA, A, A-1 or Duff-1
by Standard & Poor's, Duff or Fitch). Foreign securities in which the Fixed
Income Portfolio and the Securitized Fund invest are rated by IBCA, Ltd., in
addition to the above listed ratings organizations. IBCA uses the same ratings
system as does Standard & Poor's, Duff and Fitch. If a security is rated
differently by two or more rating agencies, Standish uses the highest rating to
compute a Fund's credit quality and also to determine its rating category. In
the case of unrated sovereign and subnational debt of foreign countries,
Standish may take into account, but will not rely entirely on, the ratings
assigned to the issuers of such securities. If the rating of a security held by
a Fund is downgraded below the minimum rating required for the particular Fund,
Standish will determine whether to retain that security in a Fund's portfolio.
Securities rated Baa or P-2 by Moody's or BBB, A-2 or Duff-2 by Standard &
Poor's, Duff or Fitch are generally considered medium grade obligations and have
some speculative characteristics. Adverse changes in economic conditions or
other circumstances are more likely to weaken the medium grade issuer's
capability to pay interest and repay principal than is the case for high grade
securities. The Fixed Income Fund may invest up to 15% of its total assets in
below investment grade fixed income securities rated Ba by Moody's or BB by
Standard & Poor's, Duff or Fitch, or, if unrated, determined by Standish to be
of comparable credit quality. Below investment grade securities, commonly
referred to as "junk bonds," carry a higher degree of risk than medium grade
securities and are considered speculative by the rating agencies. Standish
attempts to select for the Funds those medium grade and investment grade fixed
income securities that have the potential for upgrade.
Maturity. Each Fund generally invests in securities with final maturities,
average lives or interest rate reset frequencies of 15 years (10 years for the
Controlled Maturity Fund) or less. Up to 90% of Short-Term Asset Reserve Fund's
portfolio securities will have an average life of 3.25 years or less.
* * *
Each Fund's specific investment objective and policies are set forth below
and will assist the investor in differentiating each Fund's unique
characteristics. Because of the uncertainty inherent in all investments, no
assurance can be given that a Fund will achieve its investment objective. See
"Description of Securities and Related Risks" and "Investment Techniques and
Related Risks" below for additional information.
The Fixed Income Fund
The investment objective and characteristics of the Fixed Income Fund
corresponded directly to those of the Standish Fixed Income Portfolio in which
the Fund invests all of its investable assets. This structure, where one fund
invests all of its investable assets in another investment company, is described
under the caption "Information About the Master-Feeder Structure" below. The
following is a discussion of the investment objectives and policies of the Fixed
Income Portfolio.
<PAGE>
Investment Objective. The Portfolio's investment objective is primarily to
achieve a high level of current income, consistent with conserving principal and
liquidity, and secondarily to seek capital appreciation when changes in interest
rates or other economic conditions indicate that capital appreciation may be
available without significant risk to principal.
Securities. Under normal market conditions, substantially all, and at least
65%, of the Portfolio's total assets are invested in investment grade fixed
income securities. The Portfolio may invest up to 20% of its total assets in
fixed income securities of foreign corporations and foreign governments and
their political subdivisions, including securities of issuers located in
emerging markets. No more than 10% of the Portfolio's total assets will be
invested in foreign securities not subject to currency hedging transactions back
into U.S. dollars. The Portfolio may also engage in short selling. See
"Description of Securities and Related Risks" and "Investment Techniques and
Related Risks" below for additional information.
Credit Quality. The Portfolio invests primarily in investment grade fixed
income securities. The Portfolio may invest up to 15% of its total assets in
securities rated Ba by Moody's or BB by Standard and Poor's, Duff or Fitch, or,
if unrated, determined by Standish to be of comparable credit quality. The
average dollar-weighted credit quality of the Portfolio's portfolio is expected
to be Aa according to Moody's or AA according to Standard & Poor's, Duff or
Fitch.
Maturity. Under normal market conditions, the Portfolio's average
dollar-weighted effective portfolio maturity will vary from five to thirteen
years.
The Fixed Income Fund II
Investment Objective. The Fixed Income Fund II'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.
Securities. Under normal market conditions, substantially all and at least
65% of the Fund's total assets are invested in investment grade fixed income
securities. See "Description of the Securities and Related Risks" and
"Investment Techniques and Related Risks" for additional information.
Credit Quality. The Fund invests exclusively in investment grade fixed income
securities. The average dollar-weighted credit quality of the Fund's portfolio
is expected to be Aa according to Moody's or AA according to Standard & Poor's,
Duff or Fitch.
Maturity. Under normal market conditions, the Fund's average dollar-weighted
effective portfolio maturity will vary from five to thirteen years.
The Short-Term Asset Reserve Fund
Investment Objective. The Short-Term Asset Reserve Fund's investment
objective is to achieve a high level of current income consistent with
preserving principal and liquidity.
Securities. The Fund invests in a broad range of investment grade money
market instruments and short-term fixed income securities. The Fund may also
invest in tax-exempt securities and prime commercial paper of U.S. and foreign
companies, and may enter into reverse repurchase agreements. The Fund limits its
investments in preferred stock to 10% of its total assets.
Credit Quality. The Fund invests primarily in high grade securities, cash and
cash equivalents. The Fund may also invest up to 15% of its total assets in
securities rated Baa or P-2 by Moody's or BBB, A-2 or Duff-2 by Standard and
Poor's, Duff or Fitch, or, if unrated, determined by Standish to be of
comparable credit quality. The average dollar-weighted credit quality of the
Fund is expected to be at least Aa according to Moody's or AA according to
Standard & Poor's, Duff or Fitch.
Maturity. All securities held by the Fund will have an effective or remaining
maturity of 3.25 years or less from the date of settlement, except that up to
10% of the Fund's total assets may be represented by securities with effective
maturities or redemption dates, put dates or coupon dates of between 3.25 and
five years. The maturity limitation does not apply to U.S. Treasury notes or
bonds with maturities of longer than 3.25 years, which 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. The Fund's
average dollar-weighted effective portfolio maturity will not exceed 18 months.
The Controlled Maturity Fund
Investment Objective. The Controlled Maturity 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.
Securities. Under normal market conditions, substantially all and at least
65% of the Fund's total assets are invested in investment grade fixed income
securities.
Credit Quality. The Fund invests exclusively in investment grade fixed income
securities. The average dollar-weighted credit quality of the Fund's portfolio
is expected to be Aa according to Moody's or AA according to Standard & Poor's,
Duff or Fitch.
Maturity. Under normal market conditions, the Fund's average dollar-weighted
effective portfolio maturity will not exceed five years. The Fund generally
invests in securities with final maturities, average lives or interest rate
frequencies of 10 years or less.
The Securitized Fund
Investment Objective. The Securitized 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. 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.
<PAGE>
Securities. Under normal market conditions, at least 65% of the Fund's total
assets are invested in mortgage-related and asset-backed securities.
Mortgage-related securities include directly placed mortgages, mortgage-backed
securities, collateralized mortgage obligations and other pass-through
securities, and mortgage derivatives. Asset-backed securities 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. In order to
preserve principal and liquidity, up to 35% of the Fund's total assets may
normally be invested in U.S. Treasury and government agency notes and bonds,
certificates of deposit, money market instruments and repurchase agreements.
Under normal market conditions, up to 10% of the Fund's total assets may be
invested in mortgage-related and other securities of foreign governments or
companies denominated in currencies other than the U.S. dollar. The Fund expects
to limit its investments in foreign securities to issuers in Canada and Europe
but is not required to do so. The Fund may enter into forward foreign currency
exchange contracts and cross currency forward contracts to seek to hedge against
changes in foreign currency exchange rates. See "Strategic Transactions" below.
Credit Quality. The Fund invests primarily in high grade mortgage-related and
asset-backed securities. The Fund may, however, invest up to 15% of its total
assets in securities rated Baa by Moody's or BBB by Standard and Poor's, Duff or
Fitch, or, if unrated, determined by Standish to be of comparable credit
quality. The average dollar-weighted credit quality of the Fund's portfolio is
expected to be Aa according to Moody's or AA according to Standard & Poor's,
Duff or Fitch.
Maturity. The Fund's average dollar-weighted effective portfolio maturity
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 and 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 repayments and interest
rates may give some high-yielding mortgage-related securities less potential for
return and value than conventional bonds with comparable maturities. The Fund
expects that the average life of securities held by it will be from three to
fifteen years.
Description of Securities and Related Risks
For purposes of the discussion in this section and in the "Investment
Techniques and Related Risks" section of this Prospectus, the use of the term
"Funds" includes the Fixed Income Portfolio, unless otherwise noted.
General Risks
Investments in the Funds involve certain risks. Each Fund invests primarily
in the fixed income securities described above and is subject to risks
associated with investments in such securities. These risks include interest
rate risk, default risk and call and extension risk. The Fixed Income Portfolio
and the Securitized Fund are also subject to risks associated with direct
investments in foreign securities as described under the "Specific Risks"
section..
Interest Rate Risk. When interest rates decline, the market value of fixed
income securities tends to increase. Conversely, when interest rates increase,
the market value of fixed income securities tends to decline. The volatility of
a security's market value will differ depending upon the security's duration,
the issuer and the type of instrument.
Default Risk/Credit Risk. Investments in fixed income securities are subject
to the risk that the issuer of the security could default on its obligations
causing a Fund to sustain losses on such investments. A default could impact
both interest and principal payments.
Call Risk and Extension Risk. Fixed income securities may be subject to both
call risk and extension risk. Call risk exists when the issuer may exercise its
right to pay principal on an obligation earlier than scheduled which would cause
cash flows to be returned earlier than expected. This typically results when
interest rates have declined and a Fund will suffer from having to reinvest in
lower yielding securities. Extension risk exists when the issuer may exercise
its right to pay principal on an obligation later than scheduled which would
cause cash flows to be returned later than expected. This typically results when
interest rates have increased and a Fund will suffer from the inability to
invest in higher yield securities.
Specific Risks
The following sections include descriptions of specific risks that are
associated with a Fund's purchase of a particular type of security or the
utilization of a specific investment technique.
Corporate Debt Obligations. Each Fund may invest in corporate debt
obligations and zero coupon securities issued by financial institutions and
corporations, including obligations of industrial, utility, banking and other
financial issuers. 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.
U.S. Government Securities. Each Fund may invest in U.S. Government
securities. Generally, these securities include U.S. Treasury obligations and
obligations issued or guaranteed by U.S. Government agencies, instrumentalities
or sponsored enterprises which are supported by (a) the full faith and credit of
the U.S. Treasury (such as the Government National Mortgage Association
("GNMA")), (b) the right of the issuer to borrow from the U.S. Treasury (such as
securities of the Student Loan Marketing Association ("SLMA")), (c) the
discretionary authority of the U.S. Government to purchase certain obligations
of the issuer (such as the Federal National Mortgage Association ("FNMA") and
Federal Home Loan Mortgage Corporation ("FHLMC"), or (d) only the credit of the
agency. No assurance can be given that the U.S. Government will provide
financial support to U.S. Government agencies, instrumentalities or sponsored
enterprises in the future. U.S. Government securities also include Treasury
receipts, zero coupon bonds, deferred interest securities and other stripped
U.S. Government securities, where the interest and principal components of
stripped U.S. Government securities are traded independently ("STRIPS").
<PAGE>
Mortgage-Backed Securities. Each Fund may invest in privately issued
mortgage-backed securities and mortgage-backed securities issued or guaranteed
by the U.S. Government or any of its agencies, instrumentalities or sponsored
enterprises, including, but not limited to, GNMA, FNMA or FHLMC. Mortgage-backed
securities represent direct or indirect participations in, or are collateralized
by and payable from, mortgage loans secured by real property. Mortgagors can
generally prepay interest or principal on their mortgages whenever they choose.
Therefore, mortgage-backed securities are often subject to more rapid repayment
than their stated maturity date would indicate as a result of principal
prepayments on the underlying loans. This can result in significantly greater
price and yield volatility than is the case with traditional fixed income
securities. During periods of declining interest rates, prepayments can be
expected to accelerate, and thus impair a Fund's ability to reinvest the returns
of principal at comparable yields. Conversely, in a rising interest rate
environment, a declining prepayment rate will extend the average life of many
mortgage-backed securities, increase a Fund's exposure to rising interest rates
and prevent a Fund from taking advantage of such higher yields.
GNMA securities are backed by the full faith and credit of the U.S.
Government, which means that the U.S. Government guarantees that the interest
and principal will be paid when due. FNMA securities and FHLMC securities are
not backed by the full faith and credit of the U.S. Government; however, these
enterprises have the ability to obtain financing from the U.S. Treasury. See the
Statement of Additional Information for additional descriptions of GNMA, FNMA
and FHLMC certificates.
Multiple class securities include collateralized mortgage obligations
("CMOs") and Real Estate Mortgage Investment Conduit ("REMIC") pass-through or
participation certificates. CMOs provide an investor with a specified interest
in the cash flow from a pool of underlying mortgages or other mortgage-backed
securities. CMOs are issued in multiple classes, each with a specified fixed or
floating interest rate and a final scheduled 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. A REMIC is a CMO that qualifies for special tax treatment under
the Internal Revenue Code of 1986, as amended ("Code"), and invests in certain
mortgages principally secured by interests in real property and other permitted
investments. The Funds do not intend to purchase residual interests in REMICs.
Stripped mortgage-backed securities ("SMBS") are derivative multiple class
mortgage-backed securities. SMBS are usually structured with two different
classes; one that receives 100% of the interest payments and the other that
receives 100% of the principal payments from a pool of mortgage loans. If the
underlying mortgage loans experience prepayments of principal at a rate
different from what was anticipated, a Fund may fail to fully recoup its initial
investment in these securities. Although the market for SMBS is increasingly
liquid, certain SMBS may not be readily marketable and will be considered
illiquid for purposes of each Fund's limitation on investments in illiquid
securities. The market value of the class consisting entirely of principal
payments generally is unusually volatile in response to changes in interest
rates. The yields on a class of SMBS that receives all or most of the interest
from mortgage loans are generally higher than prevailing market yields on other
mortgage-backed securities because their cash flow patterns are more volatile
and there is a greater risk that the initial investment will not be fully
recouped. The Short-Term Asset Reserve Fund does not invest in SMBS.
Direct Investment in Mortgage Loans. The Securitized Fund may invest directly
in mortgage loans securing commercial and residential real estate. When the Fund
invests directly in mortgage loans, the Fund, rather than a financial
intermediary, becomes the mortgagee with respect to such mortgage loans. Direct
investments in mortgage loans 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. Investing directly in mortgage loans 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 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.
Unlike mortgage-backed securities which generally represent an interest in a
pool of mortgages, direct investment in a mortgage loan involves pre-payment and
credit risk of an individual issuer and real property, and, consequentially,
requires different investment and credit analysis by Standish. Direct
investments in mortgage loans are illiquid and subject to the Fund's policy of
not investing more than 15% of its net assets in illiquid investments.
Asset-Backed Securities. Each Fund may invest in asset-backed securities. The
principal and interest payments on asset-backed securities are collateralized by
pools of assets such as auto loans, credit card receivables, leases, installment
contracts and personal property. Such asset pools are securitized through the
<PAGE>
use of special purpose trusts or corporations. 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; however, privately issued
obligations collateralized by a portfolio of privately issued asset-backed
securities do not involve any government-related guaranty or insurance. Like
mortgage-backed securities, asset-backed securities are subject to more rapid
prepayment of principal than indicated by their stated maturity which may
greatly increase price and yield volatility. 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 recoveries on repossessed
collateral may not be available to support payments on these securities.
Convertible Securities. Each Fund, other than Securitized Fund, may invest in
convertible securities consisting of bonds, notes, debentures and preferred
stocks. The Short-Term Asset Reserve Fund's investments in preferred stock are
limited to no more than 10% of its total assets. Convertible debt securities and
preferred stock acquired by a Fund entitle the Fund to exchange such instruments
for common stock of the issuer at a predetermined rate. Convertible securities
are subject both to the credit and interest rate risks associated with debt
obligations and to the stock market risk associated with equity securities.
Sovereign Debt Obligations. The Fixed Income Portfolio and Securitized Fund
may invest in sovereign debt obligations, which involve special risks that are
not present in corporate debt obligations. The foreign issuer of the sovereign
debt or the foreign governmental authorities that control the repayment of the
debt may be unable or unwilling to repay principal or interest when due, and a
Fund may have limited recourse in the event of a default. During periods of
economic uncertainty, the market prices of sovereign debt, and the Fund's net
asset value, to the extent it invests in such securities, may be more volatile
than prices of debt obligations of U.S. issuers. In the past, certain foreign
countries have encountered difficulties in servicing their debt obligations,
withheld payments of principal and interest and declared moratoria on the
payment of principal and interest on their sovereign debt.
Below Investment Grade Securities. The Fixed Income Portfolio may invest up
to 15% of its total assets in securities rated below investment grade. Fixed
income securities rated below investment grade generally offer a higher yield,
but may be subject to a higher risk of default in interest or principal payments
than higher rated securities. The market prices of below investment grade
securities are generally less sensitive to interest rate changes than higher
rated securities, but are generally more sensitive to adverse economic or
political changes or, in the case of corporate issuers, to individual company
developments. Below investment grade securities also may have less liquid
markets than higher rated securities, and their liquidity, as well as their
value, may be more severally affected by adverse economic conditions. Adverse
publicity and investor perceptions of the market, as well as newly enacted or
proposed legislation, may also have a negative impact on the market for below
investment grade securities. See the Statement of Additional Information for a
detailed description of the ratings assigned to fixed income securities by
Moody's, Standard & Poor's, Duff and Fitch.
For the fiscal year ended December 31, 1996, the Fixed Income Portfolio's
investments, on an average dollar-weighted basis, calculated at the end of each
month, had the following credit quality characteristics:
Investments Percentage
U.S. Governmental Securities 27.3%
U.S. Government Agency Securities 21.4%
Corporate Bonds:
Aaa or AAA 5.8%
Aa or AA 3.5%
A 10.1%
Baa or BBB 18.5%
Ba or BB 13.4%
-----
100.0%
Inverse Floating Rate Securities. Each Fund may invest in inverse floating
rate securities. Short-Term Asset Reserve Fund will only invest in inverse
floaters that present specific investment opportunities. 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.
Zero Coupon and Deferred Payment Securities. Each Fund may invest in zero
coupon and deferred payment securities. Zero coupon securities are securities
sold at a discount to par value and on which interest payments are not made
during the life of the security. Upon maturity, the holder is entitled to
receive the par value of the security. A Fund is required to accrue income with
respect to these securities prior to the receipt of cash payments. Because a
Fund will distribute this accrued income to shareholders, to the extent that
shareholders elect to receive dividends in cash rather than reinvesting such
dividends in additional shares, the Fund will have fewer assets with which to
purchase income producing securities. Deferred payment securities are securities
that remain zero coupon securities until a predetermined date, at which time the
stated coupon rate becomes effective and interest becomes payable at regular
intervals. Zero coupon and deferred payment securities may be subject to greater
fluctuation in value and may have less liquidity in the event of adverse market
conditions than comparably rated securities paying cash interest at regular
interest payment periods.
Structured or Hybrid Notes. Each 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 it may experience in the event that the 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.
<PAGE>
Foreign Securities. The Fixed Income Portfolio and the Securitized Fund may
invest to a limited degree in securities of foreign governments and companies.
Investing in securities of foreign issuers and securities denominated in foreign
currencies and utilizing foreign currency transactions involve certain risks of
political, economic and legal conditions and developments not typically
associated with investing in United States companies. Such conditions or
developments might include unfavorable changes in currency exchange rates,
exchange control regulations (including currency blockage), expropriation of
assets of companies in which the Fixed Income Portfolio or the Securitized Fund
invests, nationalization of such companies, imposition of withholding or other
taxes on dividend or interest payments (or, in some cases, capital gains), and
possible difficulty in obtaining and enforcing judgments against a foreign
issuer. Also, foreign securities may not be as liquid as, and may be more
volatile than, comparable domestic securities. Furthermore, issuers of foreign
securities are subject to different, often less comprehensive, accounting,
reporting and disclosure requirements than domestic issuers. Although the Fixed
Income Portfolio invests primarily in securities of established issuers based in
developed foreign countries, it may also invest in securities of issuers in
emerging markets countries. Investments in securities of issuers in emerging
markets countries may involve a high degree of risk and many may be considered
speculative. These investments carry all of the risks of investing in securities
of foreign issuers to a heightened degree.
The Fixed Income Portfolio and the Securitized Fund, in connection with the
purchases and sales of foreign securities (other than those denominated in U.S.
dollars) will incur transaction costs in converting currencies. Also, brokerage
costs in purchasing and selling corporate securities in foreign securities
markets are sometimes higher than such costs in comparable transactions in
domestic securities markets, and foreign custodial costs are higher than
domestic custodial costs.
The Fixed Income Portfolio and the Securitized Fund may enter into forward
foreign currency exchange contracts and cross currency forward contracts with
banks or other foreign currency brokers or dealers to purchase or sell foreign
currencies at a future date. The Fixed Income Portfolio and Securitized Fund may
purchase and sell foreign currency futures contracts and cross-currency futures
contracts to seek to hedge against changes in foreign currency exchange rates. A
forward foreign currency exchange 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. A cross-currency forward contract is a forward
contract that uses one currency which historically moves in relation to a second
currency to hedge against changes in that second currency. See "Strategic
Transactions" within the "Investment Techniques and Related Risks" section for a
further discussion of the risks associated with currency transactions.
Eurodollar and Yankee Dollar Investments. Each Fund may invest in Eurodollar
and Yankee Dollar instruments. Eurodollar instruments are bonds of foreign
corporate and government issuers that pay interest and principal in U.S. dollars
held in banks outside the United States, primarily in Europe. Yankee Dollar
instruments are U.S. dollar denominated bonds typically issued in the U.S. by
foreign governments and their agencies and foreign banks and corporations. The
Short-Term Asset Reserve Fund may invest in Eurodollar Certificates of Deposit
("ECDs"), Eurodollar Time Deposits ("ETDs") and Yankee Certificates of Deposit
("Yankee CDs"). 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. These investments involve risks that are different
from investments in securities issued by U.S. issuers, including potential
unfavorable political and economic developments, foreign withholding or other
taxes, seizure of foreign deposits, currency controls, interest limitations or
other governmental restrictions which might affect payment of principal or
interest.
Tax-Exempt Securities. Each Fund is managed without regard to potential tax
consequences. If Standish believes that tax-exempt securities will provide
competitive returns, the Fixed Income Portfolio may invest up to 10% of its
total assets in tax-exempt securities. The Fixed Income II and Controlled
Maturity Funds may invest up to 5% of their net assets and the Short-Term Asset
Reserve Fund may invest up to 10% of its total assets in tax-exempt securities.
A Fund's distributions of interest earned from these investments will be
taxable. The Securitized Fund does not generally invest in tax-exempt
securities.
Investment Techniques and Related Risks
Strategic Transactions. Each Fund may, but is not required to, utilize
various investment strategies to seek to hedge market risks (such as interest
rates, currency exchange 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 each
Fund may change over time as new instruments and strategies are developed or
regulatory changes occur.
<PAGE>
In the course of pursuing its investment objective, each 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; and, to the extent a Fund
invests in foreign securities, enter into currency transactions such as forward
foreign currency exchange contracts, currency futures contracts, currency swaps
and 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 a Fund's portfolio resulting from securities
markets, currency exchange rate or interest rate fluctuations, to seek to
protect a Fund's unrealized gains in the value of portfolio securities, to
facilitate the sale of such securities for investment purposes, to seek to
manage the effective maturity or duration of a 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.
The ability of a Fund to utilize Strategic Transactions successfully will
depend on Standish's ability to predict pertinent market and interest rate
movements, which cannot be assured. Each Fund will comply with applicable
regulatory requirements when implementing these strategies, techniques and
instruments. The Funds' activities involving Strategic Transactions may be
limited by the requirements of 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
Standish's view as to certain market, interest rate or currency 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 a 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 a Fund can realize on its investments
or cause a Fund to hold a security it might otherwise sell.
The use of options and futures transactions entails certain other risks.
Futures markets are highly volatile and the use of futures may increase the
volatility of a Fund's net asset value. In particular, the variable degree of
correlation between price movements of futures contracts and price movements in
the related portfolio position of a Fund creates the possibility that losses on
the hedging instrument may be greater than gains in the value of the Fund's
position. The writing of options could significantly increase a Fund's portfolio
turnover rate and 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, a
Fund might not be able to close out a transaction without incurring substantial
losses. Losses resulting from the use of Strategic Transactions could reduce net
asset value and the net result may be less favorable than if the Strategic
Transactions had not been utilized. Although the use of futures and options
transactions for hedging and managing effective maturity and duration should
tend to minimize the risk of loss due to a decline in the value of the position,
at the same time, such transactions can limit any potential gain which might
result from an increase in value of such position. The loss incurred by a Fund
in writing options on futures and entering into futures transactions is
potentially unlimited.
The use of currency transactions can result in a 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.
Each Fund will attempt to limit its net loss exposure resulting from
Strategic Transactions entered into for non-hedging purposes. The Fixed Income
Portfolio, the Fixed Income Fund II, the Short-Term Asset Reserve Fund, the
Controlled Maturity Fund and the Securitized Fund will attempt to limit net loss
exposure from Strategic Transactions entered into for non-hedging purposes to
3%, 1%, 1%, 1% and 3%, respectively, of net assets. See the Statement of
Additional Information for further information regarding the use of Strategic
Transactions.
When-Issued and Delayed Delivery Securities. The Fixed Income Portfolio, the
Fixed Income Fund II, the Short-Term Asset Reserve Fund and the Controlled
Maturity Fund may invest up to 15%, 15%, 10% and 15%, respectively, of net
assets in when-issued and delayed delivery securities. The Securitized Fund may
invest up to 25% of its net assets, collectively, in when-issued and delayed
delivery securities and forward roll transactions. Although a Fund will
generally purchase securities on a when-issued or delayed delivery basis with
the intention of actually acquiring the securities, the Funds may dispose of
these securities prior to settlement if Standish deems it appropriate to do so.
The payment obligation and interest rate on these securities is fixed at the
time a Fund enters into the commitment, but no income will accrue to the Fund
until they are delivered and paid for. Unless a Fund has entered into an
offsetting agreement to sell the securities, cash or liquid assets equal to the
amount of the Fund's commitment must be segregated and maintained with the
Fund's custodian to secure the Fund's obligation and 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.
Repurchase Agreements. The Fixed Income Portfolio, the Fixed Income Fund II,
the Short-Term Asset Reserve Fund, the Controlled Maturity Fund and the
Securitized Fund may invest up to 5%, 15%, 25%, 25% and 15%, respectively, of
net assets in repurchase agreements. In a repurchase agreement, a Fund buys a
security at one price and simultaneously agrees to sell it back at a higher
price. Delays or losses could result if the other party to the agreement
defaults or becomes insolvent. Repurchase agreements acquired by a Fund will
always be fully collateralized as to principal and interest by U.S. Government
Securities and money market instruments and will be entered into only with
commercial banks, brokers and dealers considered creditworthy by Standish.
<PAGE>
Reverse Repurchase Agreements. The Short-Term Asset Reserve Fund may enter
into reverse repurchase agreements. In a reverse repurchase agreement the Fund
sells securities and agrees to repurchase them at a mutually agreed upon date
and price. At the time the Fund enters into a reverse repurchase agreement, it
will establish a segregated account with its custodian containing cash or liquid
assets having a value not less than the repurchase price (including accrued
interest) that is marked to market daily. Reverse repurchase agreements involve
the risks that the market value of the securities which the Fund is obligated to
repurchase may decline below the repurchase price or that the counterparty may
default on its obligation to repurchase the securities. The staff of the
Securities and Exchange Commission ("SEC") considers reverse repurchase
agreements to be borrowings by the Fund under the Investment Company Act of 1940
("1940 Act"). The Fund intends to enter into reverse repurchase agreements to
provide cash to satisfy redemption requests and avoid liquidating securities
during unfavorable market conditions.
Forward Roll Transactions. To seek to enhance current income, each Fund,
except the Securitized Fund, may invest up to 10% of its net assets in forward
roll transactions involving mortgage-backed securities. The Securitized Fund may
invest up to 25% of its net assets, collectively, in forward roll transaction,
when-issued securities and forward commitments. In a forward roll transaction, a
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 that a Fund enters into a forward roll transaction, it
will place cash or liquid assets in a segregated account that is marked to
market daily having a value equal to the repurchase price (including accrued
interest).
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
a 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 a Fund, the net asset value of the Fund would
fall faster than would otherwise be the case.
Short Sales. The Fixed Income Portfolio and the Securitized Fund may engage
in short sales and short sales against the box. In a short sale, a Fund sells a
security it does not own in anticipation of a decline in the market value of
that security. In a short sale against the box, a Fund either owns or has the
right to obtain at no extra cost the security sold short. The broker holds the
proceeds of the short sale until the settlement date, at which time the Fund
delivers the security (or an identical security) to cover the short position.
The Fund receives the net proceeds from the short sale. When a Fund enters into
a short sale other than against the box, the Fund must first borrow the security
to make delivery to the buyer and must place cash or liquid assets in a
segregated account with the Fund's custodian that is marked to market daily.
Short sales other than against the box involve unlimited exposure to loss. 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 a Fund's net assets.
Restricted and Illiquid Securities. Each Fund may invest up to 15% of its net
assets in illiquid securities, except the Short-Term Asset Reserve Fund, which
is limited to 10% of its net assets. Illiquid securities are those 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 SMBS,
swap transactions, certain over-the-counter options and certain restricted
securities. Based upon continuing review of the trading markets for a specific
restricted security, the security may be determined to be eligible for resale to
qualified institutional buyers pursuant to Rule 144A under the Securities Act of
1933 and, therefore, to be liquid. Also, certain illiquid securities may be
determined to be liquid if they are found to satisfy certain relevant liquidity
requirements.
The Boards of Trustees have adopted guidelines and delegated to Standish the
daily function of determining and monitoring the liquidity of portfolio
securities, including restricted and illiquid securities. The Boards of
Trustees, however, retain oversight and are ultimately responsible for such
determinations. The purchase price and subsequent valuation of 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. A high rate of portfolio turnover (100% or more) involves
correspondingly higher transaction costs which must be borne directly by a Fund
and thus indirectly by its shareholders. It may also result in a 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. See "Financial Highlights" for each Fund's
portfolio turnover rates.
<PAGE>
Short-Term Trading. Each Fund will sell a portfolio secu- rity without regard
to the length of time such security has been held if, in Standish's view, the
security meets the criteria for disposal.
Temporary Defensive Investments. Each Fund may adopt a temporary defensive
position during adverse market conditions by investing without limit in high
quality money market instr-uments, including short-term U.S. Government
securities, nego-tiable certificates of deposit, non-negotiable fixed time
deposits, bankers' acceptances, commercial paper, floating-rate notes and
repurchase agreements. The Short-Term Asset Reserve Fund may also invest in
commercial paper rated A-2 by Moody's or P-2 or Duff-2 by Standard & Poor's,
Duff or Fitch. The Fixed Income Portfolio and the Securitized Fund may purchase
commercial paper of foreign issuers rated P -1 or its equivalent.
Investment Restrictions. The investment objective of the Fixed Income
Portfolio and each Fund (except Fixed Income Fund) is not fundamental and may be
changed by the Board of Trustees without the approval of shareholders. The
investment objective of the Fixed Income Fund is a fundamental policy which may
not be changed without a vote of the Fund's shareholders. If there is a change
in a Fund's investment objective, shareholders should consider whether the Fund
remains an appropriate investment in light of their current financial situation.
Each Fund's and the Fixed Income Portfolio's investment policies set forth in
this Prospectus are non-fundamental and may be changed without shareholder
approval except that the Short-Term Asset Reserve Fund's 15% limit on reverse
repurchase agreements and the Securitized Fund's 15% limit on repurchase
agreements are fundamental. Each Fund and the Fixed Income Portfolio have
adopted fundamental policies which may not be changed without the approval of
the Funds' shareholders. See "Investment Restrictions" in the Statement of
Additional Information. If any percentage restriction is adhered to at the time
of investment, a subsequent increase or decrease in the percentage resulting
from a change in the value of a Fund's assets will not constitute a violation of
the restriction.
Information About the Master-Feeder Structure
The Fixed Income Fund seeks to achieve its investment objective by investing
all of its investable assets in the Fixed Income Portfolio, which has an
identical investment objective. The Fixed Income Fund is a feeder fund and the
Fixed Income Portfolio is the master fund in a so-called master-feeder
structure. The other Funds described in this Prospectus purchase securities
directly and maintain their own individual portfolios.
In addition to the Fixed Income Fund, other feeder funds may invest in the
Fixed Income Portfolio, and information about these other feeder funds is
available from Standish Fund Distributors. The other feeder funds invest in the
Fixed Income Portfolio on the same terms as the Fund and bear a proportionate
share of the Fixed Income Portfolio's expenses. The other feeder funds may sell
shares on different terms and under a different pricing structure than the Fund,
which may produce different investment results.
There are certain risks associated with an investment in a master-feeder
structure. Large scale redemptions by other feeder funds in the Fixed Income
Portfolio may reduce the diversification of the Fixed Income Portfolio's
investments, reduce economies of scale and increase the Fixed Income Portfolio's
operating expenses. If the Fixed Income Portfolio Trust's Board of Trustees
approves a change to the investment objective of the Fixed Income Portfolio that
is not approved by the Trust's Board of Trustees, the Fund would be required to
withdraw its investment in the Fixed Income Portfolio and engage the services of
an investment adviser or find a substitute master fund. Withdrawal of the Fund's
interest in the Fixed Income Portfolio might cause the Fund to incur expenses it
would not otherwise be required to pay.
If the Fund is requested to vote on a matter affecting the Fixed Income
Portfolio, the Fund will call a meeting of the its shareholders to vote on the
matter. The Fund will then vote on the matter at the meeting of the Fixed Income
Portfolio's investors in the same proportion that the Fund's shareholders voted
on the matter. The Fund will vote those shares held by its shareholders who did
not vote in the same proportion as those Fund Shareholders who did vote on the
matter.
A majority of the Trustees who are not "interested persons" (as defined in
the Investment Company Act of 1940) of the Trust or the Portfolio Trust, as the
case may be, have adopted procedures reasonably appropriate to deal with
potential conflicts of interest arising from the fact that the same individuals
are trustees of the Trust and of the Portfolio Trust.
Calculation of Performance Data
From time to time each Fund may advertise its yield and average annual total
return information. Average annual total return is determined by computing the
average annual percentage change in the value of $1,000 invested at the maximum
public offering price for specified periods ending with the most recent calendar
quarter, assuming reinvestment of all dividends and distributions at net asset
value. The total return calculation assumes a complete redemption of the
investment at the end of the relevant period. Each Fund may also from time to
time advertise total return on a cumulative, average, year-by-year or other
basis for various specified periods by means of quotations, charts, graphs or
schedules.
The "yield" of a 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, a Fund may compare its performance in publications with
that of other mutual funds with similar investment objectives, to stock, bond
and other relevant indices, and to performance rankings prepared by recognized
mutual fund statistical services. In addition, a Fund's performance may be
compared to alternative investment or savings vehicles or to indices or
indicators of economic activity.
<PAGE>
Lehman Government/Corporate Index. This index is considered to be
representative of the performance of all domestic, dollar denominated, fixed
rate investment grade bonds.
Lehman Brothers Aggregate Index. This index is composed of securities from
the Lehman Brothers Government/Corporate Bond Index, the Mortgage Backed
Securities Index and the Yankee Bond Index, and is generally considered to be
representative of all unmanaged, domestic, dollar denominated, fixed rate
investment grade bonds.
IBC/Donoghue Money Market Average/All Taxable Index. This index is generally
considered to be representative of the performance of domestic, taxable money
market funds and the One Year Treasury Bills.
Merrill Lynch 1-3 Year and 1-5 Year U.S. Treasury Indices and the 1 Year
Treasury Bill Index. These indices are considered to be representative of the
performance of Treasury Bills and Notes with specific lengths of time to
repayment.
Salomon-Shearson's Mortgage Index. This index is considered to be
representative of the performance of fixed rate securitized mortgage pools of
GNMA, FNMA and FHLNC securities.
The following table sets forth the historical total return performance of all
fee paying, domestic investment grade bond portfolios under discretionary
management by Standish that have substantially similar investment objectives,
policies and strategies as the Fixed Income Fund II (the "Investment Grade Bond
Accounts") as measured by the Standish, Ayer & Wood Active Domestic Bond
Investment Grade Composite (the "Active Domestic Bond Composite"). As of
December 31, 1996, the Active Domestic Bond Composite was composed of three
Investment Grade Bond Accounts with approximately $221 million in assets. The
performance data of the Investment Grade Bond Accounts, as represented by the
Active Domestic Bond Composite, has been computed in accordance with the SEC's
standardized formula. Because the gross performance data does not reflect the
deduction of investment advisory fees paid by the Investment Grade Bond
Accounts, the net performance data may be more relevant to potential investors
in the Fund in their analysis of the historical experience of Standish in
managing fixed-income portfolios with investment objectives, policies and
strategies substantially similar to those of the Fixed Income Fund II.
<TABLE>
<CAPTION>
Standish, Ayer & Wood Active Domestic Bond
Investment Grade Composite Performance
Average Annual
Total Return Cumulative
For the Periods Ended Total Return
December 31, 1996 Since
The Composite 3 Years 5 Years January 1, 1990
<S> <C> <C> <C>
Size Weighted Gross 6.05% 7.63% 87.30%
Size Weighted Net 5.89% 7.43% 85.30%
The Composite 1990 1991 1992 1993 1994 1995 1996
<S> <C> <C> <C> <C> <C> <C> <C>
Equal weighted gross total return 9.95% 18.09% 6.68% 14.02% (4.16%) 18.68% 4.48%
Equal weighted net total return 9.90% 17.94% 6.48% 13.79% (4.36%) 18.50% 4.38%
Size weighted gross total return 9.83% 18.12% 6.69% 13.45% (4.07%) 18.67% 4.78%
Size weighted net total return 9.78% 17.97% 6.49% 13.20% (4.26%) 18.55% 4.60%
</TABLE>
<PAGE>
The performance of the Investment Grade Bond Accounts, as represented by the
Active Domestic Bond Composite, is not that of any of the Funds, including the
Fixed Income Fund II, and is not necessarily indicative of any Fund's future
results. Each Fund's actual total return may vary significantly from the past
and future performance of these Accounts. While the Investment Grade Bond
Accounts incur inflows and outflows of cash from clients, there can be no
assurance that the continuous offering of the Fixed Income Fund II's shares and
the Fixed Income Fund II's obligation to redeem its shares will not impact the
Fund's performance. In the opinion of Standish, so long as the Fixed Income Fund
II has at least $20 million in net assets, the relative difference in the size
between the Fixed Income Fund and the Investment Grade Bond Accounts should not
affect the relevance of the performance of the Investment Grade Bonds Accounts
to a potential investor in the Fixed Income Fund II. Investment returns and the
net asset value of shares of each Fund will fluctuate in response to market and
economic conditions as well as other factors and an investment in a Fund
involves the risk of loss.
The following table sets forth the historical total return performance of all
fee paying, controlled maturity bond portfolios under discretionary management
by Standish that have substantially similar investment objectives, policies and
strategies as the Controlled Maturity Fund (the "Controlled Maturity Accounts")
<PAGE>
as measured by the Standish, Ayer & Wood Controlled Maturity Bond Composite (the
"Controlled Maturity Bond Composite"). As of December 31, 1996, the Controlled
Maturity Bond Composite was composed of 12 Controlled Maturity Accounts with
approximately $439 million in assets. The performance data of the Controlled
Maturity Accounts, as represented by the Controlled Maturity Bond Composite, has
been computed in accordance with the SEC's standardized formula. Because the
gross performance data does not reflect the deduction of investment advisory
fees paid by the Controlled Maturity Accounts, the net performance data may be
more relevant to the potential investors in the Controlled Maturity Fund in
their analysis of the historical experience of Standish in managing fixed-income
portfolios with investment objectives, policies and strategies substantially
similar to those of the Controlled Maturity Fund. The Controlled Maturity Bond
Composite contains the fixed income-only portion of a few multiple asset
accounts. The performance of the Controlled Maturity Bond Composite would be
diminished if cash positions of these accounts were allocated to the Controlled
Maturity Accounts.
<TABLE>
<CAPTION>
Standish, Ayer & Wood Controlled Maturity Bond Composite Performance
Average Annual
Total Return Cumulative
For the Periods Ended Total Return
December 31, 1996 Since
----------------- -----
The Composite 3 Years 5 Years 10 Years January 1, 1986
<S> <C> <C> <C> <C>
Size Weighted Gross 5.2% 7.8% 9.0% 139.9%
Size Weighted Net 5.0% 7.5% 8.5% 227.0%
The Composite 1985 1986 1987 1988 1989 1990 1991 1992 1993
------------- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Equal weighted gross 16.40% 10.60% 4.90% 7.60% 11.80% 9.08% 14.45% 6.80% 9.80%
total return
Equal weighted net 16.13% 10.29% 4.05% 6.85% 11.10% 8.74% 14.10% 6.53% 9.52%
total return
Size weighted gross 9.03% 14.18% 6.65% 9.23%
total return
Size weighted net 8.89% 14.06% 6.54% 9.09%
total return
The Composite 1994 1995 1996
------------- ---- ---- ----
Equal weighted gross (0.61%) 12.21% 5.39%
total return
Equal weighted net (0.87%) 12.06% 5.17%
total return
Size weighted gross (0.21%) 11.75% 5.51%
total return
Size weighted net (0.46%) 11.55% 5.28%
total return
</TABLE>
<PAGE>
The performance of the Controlled Maturity Accounts, as represented by the
Controlled Maturity Bond Composite, is not that of any of the Funds, including
the Controlled Maturity Fund, and is not necessarily indicative of any Fund's
future results. Each Fund's actual total return may vary significantly from the
past and future performance of these Accounts. While the Controlled Maturity
Accounts incur inflows and outflows of cash form clients, there can be no
assurance that the continuous offering of the Controlled Maturity Fund's shares
and the Controlled Maturity Fund's obligation to redeem its shares will not
impact the Fund's performance. In the opinion of Standish, so long as the
Controlled Maturity Fund has at lest $5 million in net assets, the relative
difference in the size between the Controlled Maturity Fund and the Controlled
Maturity Accounts should not affect the relevance of the performance of the
Controlled Maturity Accounts to a potential investor in the Controlled Maturity
Fund. Investment returns and the net asset value of shares of each Fund will
fluctuate in response to market and economic conditions as well as other factors
and an investment in a Fund involves the risk of loss.
Average Annual Total Return
July 3, 1995
Year Ended through
December 31, 1996 December 31, 1996
----------------- -----------------
Fixed Income Fund II 3.77%1 6.41%1
Controlled Maturity Fund 5.13%1 6.26%1
1The Adviser voluntarily agreed not to impose its advisory fee and reimbursed
the Funds for their operating expenses during the periods indicated. Had these
arrangements not been in effect, each Fund's total return would be lower.
Performance data is based on historical results and is not intended to indicate
future performance.
Dividends and Distributions
Dividends from net investment income for the Fixed Income, Fixed Income II,
Controlled Maturity and Securitized Funds will be declared and distributed
quarterly. Dividends on shares of the Short-Term Asset Reserve Fund will be
declared daily from net investment income and distributed monthly. The Funds'
dividends from short-term and long-term capital gains, if any, after reduction
by capital losses, will be declared and distributed at least annually. In
determining the amounts of its dividends, the Fixed Income Fund will take into
account its share of the income, gain or loss, expense, and any other tax items
of the Fixed Income Portfolio. Dividends from net investment income and capital
gains distributions, if any, are automatically reinvested in additional shares
of the applicable Fund unless the shareholder elects to receive them in cash.
Purchase of Shares
Shares of the Funds may be purchased from Standish Fund Distributors, which
offers the Funds' 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 Standish Fund Distributors and payment for the shares is
received by Investors Bank & Trust Company, the Funds' Custodian. Please see
each Fund's account application or call (800) 221-4795 for instructions on how
to make payment for shares to the Custodian. The Fixed Income, Fixed Income II
and Controlled Maturity Funds require minimum initial investments of $100,000.
Additional investments must be in amounts of at least $5,000. The Short-Term
Asset Reserve and Securitized Funds require minimum initial investments of
$1,000,000. The Short-Term Asset Reserve Fund requires additional investments of
at least $100,000. The Securitized Fund requires additional investments of at
least $50,000. Certificates for Fund shares are generally not issued.
<PAGE>
Shares of the Funds may also be purchased through securities dealers. Orders
for the purchase of Fund shares received by dealers by the close of regular
trading on the New York Stock Exchange ("NYSE") on any business day and
transmitted to Standish Funds Distributor 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 NYSE on that day, if payment for the shares is
also received by the Custodian that day. Otherwise, orders will be effected at
the net asset value per share determined on the next business day. It is the
responsibility of dealers to transmit orders so they will be received by
Standish Fund Distributors before the close of its business day. Shares of a
Fund purchased through dealers may be subject to transaction fees on purchase or
redemption, no part of which will be received by the Funds, Standish Fund
Distributors or Standish.
In the sole discretion of the Trust, each Fund may accept securities instead
of cash for the purchase of shares. The Trust will ask Standish to determine
that any securities acquired by the Funds in this manner are consistent with the
investment objective, policies and restrictions of the applicable Fund. The
securities will be valued in the manner stated below. The purchase of shares of
a 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 a Fund's shares, (ii) to reject purchase orders when in the best
interest of a Fund, (iii) to modify or eliminate the minimum initial or
subsequent investment in Fund shares and (iv) to eliminate duplicate mailings of
Fund material to shareholders who reside at the same address. A Fund's
investment minimums do not apply to accounts for which Standish or any of its
affiliates serves as investment adviser or to employees of Standish or any of
its affiliates or to members of such persons' immediate families. A Fund's
investment minimums apply to the aggregate value invested in omnibus accounts
rather than to the investment of the underlying participants in the omnibus
accounts.
Net Asset Value
Each Fund's net asset value per share is computed each day on which the NYSE
is open as of the close of regular trading on the NYSE (normally 4:00 p.m., New
York City time). The net asset value per share is calculated by determining the
value of all a Fund's assets (the value of its investment in the Fixed Income
Portfolio and other assets, in the case of the Fixed Income Fund), subtracting
all liabilities and dividing the result by the total number of shares
outstanding. Fixed income securities (other than money market instruments) for
which accurate market prices are readily available are valued at their current
market value on the basis of quotations, which may be furnished by a pricing
service or provided by dealers in such securities. Securities not listed on an
exchange or national securities market, certain mortgage-backed and asset-backed
securities and securities for which there were no reported transactions are
valued at the last quoted bid prices. Fixed income securities for which accurate
market prices are not readily available and all other assets are valued at fair
value as determined in good faith by Standish in accordance with procedures
approved by the Trustees, which may include the use of yield equivalents or
matrix pricing. Money market instruments with less than sixty days remaining to
maturity when acquired by a Fund are valued on an amortized cost basis unless
the Trustees determine that amortized cost does not represent fair value. If a
Fund acquires a money market instrument with more than sixty days remaining to
its maturity, it is valued at current market value until the sixtieth day prior
to maturity and will then be valued at amortized cost based upon the value on
such date unless the Trustees determine during such sixty-day period that
amortized cost does not represent fair value.
Exchange of Shares
Shares of the Funds may be exchanged for shares of one or more other funds in
the Standish fund family subject to the terms and restrictions imposed on the
purchase of shares of such funds. Shares of a fund redeemed in an exchange
transaction are valued at the net asset value next determined after the exchange
request is received by Standish Fund Distributors or its agent. Shares of a fund
purchased in an exchange transaction are valued at the net asset value next
determined after the exchange request is received by Standish Fund Distributors
or its agent and payment for the shares is received by the fund into which
shares are to be exchanged. Until receipt of the purchase price by the fund into
which 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 fund family, please call (800) 221-4795. Please
consider the differences in investment objectives and expenses of a fund as
described in its prospectus before making an exchange.
Written Exchanges. Shares of the Funds may be exchanged by written order to
Standish Fund Distributors, P.O. Box 1407, Boston, Massachusetts 02205-1407. 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 described under "Written Redemption" below.
Telephone Exchanges. Shareholders who elect telephone privileges may exchange
shares by calling Standish Fund Distributors at (800) 221-4795. Telephone
privileges are not available to shareholders automatically. Proper
identification will be required for each telephone exchange. Please see
"Telephone Transactions" below for more information regarding telephone
transactions.
<PAGE>
General Exchange Information. All exchanges are subject to the following
exchange restrictions: (i) the fund into which shares are being exchanged must
be lawfully available for sale in your state; (ii) exchanges may be made only
between funds that are registered in the same name, address and, if applicable,
taxpayer identification number; and (iii) unless waived by the Trust, the amount
to be exchanged must satisfy the minimum account size of the fund to be
exchanged into. Exchange requests will not be processed until payment for the
shares of the current Fund has been received by Standish Fund Distributors. The
exchange privilege may be changed or discontinued and may be subject to
additional limitations upon sixty (60) days' notice to shareholders, including
certain restrictions on purchases by market-timer accounts.
Redemption of Shares
Shares of the Funds may be redeemed or repurchased by the methods described
below at the net asset value per share next determined after receipt by Standish
Fund Distributors or its agent of a redemption or repurchase request in proper
form. Redemptions will not be processed until a completed account application
and payment for the shares to be redeemed have been received.
Written Redemption. Shares of each Fund may be redeemed by written order to
Standish Fund Distributors, P.O. Box 1407, Boston, Massachusetts 02205-1407. 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 NYSE's Medallion
Signature Program or by any one of the following institutions, provided that the
institution meets credit standards established by Investors Bank & Trust
Company, the Funds' transfer agent: (i) a bank; (ii) a securities broker or
dealer, including a government or municipal securities broker or dealer, that is
a member of a clearing corporation or has net capital of at least $100,000;
(iii) a credit union having authority to issue signature guarantees; (iv) a
savings and loan association, a building and loan association, a cooperative
bank, or a federal savings bank or association; or (v) a national securities
exchange, a registered securities exchange or a clearing agency. Standish Fund
Distributors reserves the right to waive the requirement that signatures be
guaranteed. 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 Standish Fund Distributors of a written
redemption request in proper form. If shares to be redeemed were recently
purchased by check, the Funds may delay transmittal of redemption proceeds until
such time as they are assured that good funds have been collected for the
purchase of the shares. This may take up to fifteen (15) days in the case of
payments made by check.
Telephone Redemption. Shareholders who elect telephone privileges may redeem
shares by calling Standish Fund Distributors at (800) 221-4795. Telephone
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 telephone 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 telephone redemption.
Repurchase Order. In addition to written redemption of Fund shares, Standish
Fund Distributors may accept telephone orders from brokers or dealers for the
repurchase of Fund shares. Brokers and dealers are obligated to transmit
repurchase orders to Standish Fund Distributors promptly prior to the close of
Standish Fund Distributors' business day (normally 4:00 p.m.). Brokers or
dealers may charge for their services in connection with a repurchase of Fund
shares, but neither the Trust nor Standish Fund Distributors imposes a charge
for share repurchases.
Telephone Transactions. By maintaining an account that is eligible for
telephone exchange and redemption privileges, the shareholder authorizes
Standish, Standish Fund Distributors, the Trust and the Funds' custodian to act
upon instructions of any person to redeem and/or exchange shares from the
shareholder's account. Further, the shareholder acknowledges that, as long as
the Funds employ reasonable procedures to confirm that telephone instructions
are genuine, and follow telephone instructions that they reasonably believe to
be genuine, neither Standish, Standish Fund Distributors, the Trust, the
applicable Fund, the Funds' custodian, nor their respective officers or
employees, will be liable for any loss, expense or cost arising out of any
request for a telephone redemption or exchange, even if such transaction results
from any fraudulent or unauthorized instructions.
Depending upon the circumstances, the Funds intend to employ personal
identification or written confirmation of transaction procedures, and if they do
not, a 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. During these periods, shareholders should
transmit redemption and exchange requests in writing.
* * * *
<PAGE>
The proceeds paid upon redemption or repurchase may be more or less than the
cost of the shares, depending upon the market value of the applicable Fund's or
Portfolio's portfolio investments at the time of redemption or repurchase. The
Funds intend to pay cash for all shares redeemed, but under certain conditions,
the Funds may make payments wholly or partially in securities for this purpose.
Please see the Statement of Additional Information for further information.
Each Fund may redeem, at net asset value, the shares in any account which has
a value of less than $50,000 ($250,000 in the case of the Short-Term Asset
Reserve Fund) 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 to increase the value of the account to an amount equal to
or above the stated minimums.
Management
Trustees. Each Fund is a separate investment series of the Trust, a
Massachusetts business trust. Under the terms of the Agreement and Declaration
of Trust establishing the Trust, the Trustees of the Trust are ultimately
responsible for the management of its business and affairs. The Fixed Income
Portfolio is a separate investment series of the Standish, Ayer & Wood Master
Portfolio ("Portfolio Trust"), a master trust fund organized under the laws of
the State of New York. Under the terms of the Declaration of Trust, the Fixed
Income Portfolio's affairs are managed under the supervision of the Portfolio
Trust's Trustees. See "Management" in the Statement of Additional Information
for more information about the Trustees and officers of the Trust and the
Portfolio Trust.
Investment Adviser. Standish, Ayer & Wood, Inc. ("Standish"), One Financial
Center, Boston, Massachusetts 02111, serves as investment adviser to the Fixed
Income Portfolio and the Funds (except Fixed Income Fund) pursuant to separate
investment advisory agreements. Standish is a Massachusetts corporation
incorporated in 1933 and is a registered investment adviser under the Investment
Advisers Act of 1940. Standish 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, 1997, Standish managed approximately
$31 billion of assets.
The Fixed Income Portfolio's portfolio manager is Caleb F. Aldrich. Mr.
Aldrich has been primarily responsible for the day-to-day management of the
Fixed Income Fund's portfolio since January 1, 1993 and of the Fixed Income
Portfolio's portfolio since the Fixed Income Fund's conversion to the
master-feeder structure on May 3, 1996. During the past five years, Mr. Aldrich
has served as a Director and Vice President of Standish.
The Fixed Income Fund II's portfolio managers are Caleb F. Aldrich and David
C. Stuehr. During the past five years, Mr. Aldrich has served as a Director and
Vice President of Standish. Mr. Stuehr has served as a Director of the Adviser
since January 1995 and, prior thereto, served as a Vice President (since 1992)
and an Assistant Vice President of Standish.
The Short-Term Asset Reserve 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
Standish.
The Controlled Maturity Fund's portfolio manager is Howard B. Rubin. During
the past five years, Mr. Rubin has served as Director and Vice President of
Standish.
The Securitized Fund's portfolio manager is Dolores S. Driscoll, who has 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 has served as a Managing Director of Standish.
Subject to the supervision and direction of the Trustees of the Trust and the
Portfolio Trust, Standish manages the Fixed Income Portfolio, Fixed Income Fund
II, Short-Term Asset Reserve Fund, Controlled Maturity Fund and Securitized Fund
in accordance with their respective investment objectives and policies,
recommends investment decisions, places orders to purchase and sell securities
and permits the Fixed Income Portfolio and the Funds (except Fixed Income Fund)
to use the name "Standish." For these services, each Fund (except Fixed Income
Fund) and the Fixed Income Portfolio pay a monthly fee at a stated annual
percentage rate of such Fund's (or Portfolio's) average daily net asset value:
<TABLE>
<CAPTION>
Actual Rate
Contractual Paid for the
Advisory Fee Year Ended
Net Asset Value Annual Rate December 31, 1996
Fixed Income Portfolio First $250 million 0.40% 0.32%
- ---------------------- ------------------ ----- -----
<S> <C> <C> <C>
Next $250 million 0.35%
Amount over $500 million 0.30%
Fixed Income Fund II All assets 0.40% 0.00%*
Short-Term Asset Reserve Fund All assets 0.25% 0.25%
Controlled Maturity Fund All assets 0.35% 0.00%*
Securitized Fund First $500,000,000 0.25% 0.20%*
Amount over $500,000,000 0.20%
</TABLE>
Standish has voluntarily and temporarily agreed to limit total expenses
(excluding brokerage commissions, taxes and extraordinary expenses) of the Fixed
Income Fund II, Controlled Maturity Fund and Securitized Fund to 0.40%, 0.40%
and 0.45% of the applicable Fund's average daily net assets. Standish may
terminate or revise these agreements at any time although it has no current
intention to do so. If an expense limit is exceeded, the compensation due to
Standish shall be proportionately reduced by the amount of such excess by a
reduction or refund thereof, subject to readjustment during the period during
which such limit is in place.
<PAGE>
Administrator. Standish serves as administrator to the Fixed Income Fund. As
administrator, Standish manages the affairs of the Fund, provides all necessary
office space and services of executive personnel for administering the affairs
of the Fund, and allows the Fund to use the name "Standish." For these services,
Standish currently does not receive any additional compensation. The Trustees of
the Trust may determine in the future to compensate Standish for its
administrative services.
Expenses. The Fixed Income Portfolio and each Fund bears the expenses of its
respective operations other than those incurred by Standish under the investment
advisory agreements or the administration agreement. Each Fund (except Fixed
Income Fund) pays 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 Fixed Income
Fund pays shareholder servicing fees and expenses; expenses of prospectuses,
statements of additional information and shareholder reports which are furnished
to shareholders. The Fixed Income Portfolio pays investment advisory fees,
bookkeeping, share pricing and custodian fees and expenses; expenses of notices
and reports to interest holders; and expenses of the Fixed Income Portfolio's
administrator. The Fixed Income Fund and the Fixed Income Portfolio will pay
legal and auditing fees; registration and reporting fees and expenses; and
Trustees' fees and expenses. Expenses of the Trust which relate to more than one
series are allocated among such series by Standish in an equitable manner.
Standish Fund Distributors bears the distribution expenses attributable to
the offering and sale of Fund shares without subsequent reimbursement.
Each Fund's total annual operating expenses for the fiscal year ended
December 31, 1996 are described above under the caption "Financial Highlights."
Portfolio Transactions. Subject to the supervision of the Trustees of the
Trust and the Portfolio Trust, Standish selects the brokers and dealers that
execute orders to purchase and sell portfolio securities for the Funds and the
Fixed Income Portfolio. Standish will generally seek to obtain the best
available price and most favorable execution with respect to all transactions
for the Fixed Income Portfolio and the Funds. Standish may also consider the
extent to which a broker or dealer provides research to Standish and the number
of Fund shares sold by the broker or dealer in making its selection.
Federal Income Taxes
Each Fund is a separate entity for federal tax purposes and 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, each 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.
Shareholders which are taxable entities or persons will be subject to federal
income tax on dividends and capital gain distributions made by the Funds.
Dividends paid by a 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 reinvested in Fund shares. Only a small portion, if any, of
such dividends may qualify for the corporate dividends received deduction under
the Code. Dividends paid by a 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 reinvested in 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 (including exchanges) and repurchases of shares are taxable
events on which a shareholder may recognize a gain or loss.
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 applicable 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 Funds
and, unless a current IRS Form W-8 or an acceptable substitute is furnished to
the applicable Fund, to backup withholding on certain payments from that Fund.
After the close of each calendar year, the Funds will send a notice to
shareholders that provides information about the federal tax status of
distributions to shareholders for such calendar year.
The Funds and Their Shares
The Trust was organized on August 13, 1986 as a Massachusetts business trust.
In addition to the Funds offered in this Prospectus, the Trust offers other
series to the public. Shareholders of each Fund are entitled to one full or
fractional vote for each share of that Fund. There is no cumulative voting and
shares have no preemption or conversion rights. All series of the Trust vote
together except as provided in the 1940 Act or the Declaration of Trust. The
Trust does not intend to hold annual meetings of shareholders. The Trustees will
call special meetings of shareholders to the extent required by the Trust's
Declaration of Trust or the 1940 Act. The 1940 Act requires the Trustees, under
certain circumstances, to call a meeting to allow shareholders to vote on the
removal of a Trustee and to assist shareholders in communicating with each
other. Certificates for Fund shares are not issued.
<PAGE>
The Portfolio Trust was organized on January 18, 1996 as a New York trust. In
addition to the Fixed Income Portfolio, the Portfolio Trust offers interests in
other series to certain qualified investors. See "Information about the
Master-Feeder Structure" above for additional information about the Portfolio
Trust.
At February 1, 1997, Essex County Gas Company, 7 North Hunt Road, P.O. Box
500, Amesbury, MA 01913, and San Francisco Opera Association, 300 Van Ness
Avenue, San Francisco, CA 94102, each had sole voting and investment power with
respect to more than 25% of the then outstanding shares of the Controlled
Maturity Fund, Exeter Health Resources, Inc., 10 Buzell Avenue, Exeter, NH
03833, had sole voting and investment power with respect to more than 25% of the
then outstanding shares of the Fixed Income Fund II, and 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 Securitized Fund. Accordingly, each such shareholder was deemed to
beneficially own such shares and to control the applicable Fund.
Inquiries concerning the Funds should be made by contacting Standish Fund
Distributors at the address and telephone number listed on the back cover of
this Prospectus.
Custodian, Transfer Agent and Dividend
Disbursing Agent
Investors Bank & Trust Company, John Hancock Tower, 200 Clarendon Street,
Boston, Massachusetts 02116, serves as the Funds' transfer agent, dividend
disbursing agent and as custodian for all cash and securities of the Funds and
the Fixed Income Portfolio. Investors Bank & Trust, Boston and Toronto, Canada,
also provides accounting services to the Funds.
Independent Accountants
Coopers & Lybrand L.L.P., One Post Office Square, Boston, Massachusetts 02109
and Coopers & Lybrand, P.O. Box 219, Grand Cayman, Cayman Islands, BWI, serve as
independent accountants for the Trust and the Portfolio Trust, respectively, and
will audit each Fund's and the Fixed Income Portfolio's financial statements
annually.
Legal Counsel
Hale and Dorr LLP, 60 State Street, Boston, Massachusetts 02109, is legal
counsel to the Trust, the Portfolio Trust and Standish and its affiliates.
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. A 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 Funds 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.
<PAGE>
Standish Group of Fixed Income Funds
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
John Hancock Tower
200 Clarendon Street
Boston, Massachusetts 02116
Independent Accountants
Coopers & Lybrand L.L.P.
One Post Office Square
Boston, Massachusetts 02109
Legal Counsel
Hale and Dorr LLP
60 State Street
Boston, Massachusetts 02109
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.
<PAGE>
May 1, 1997
STANDISH GROUP OF FIXED INCOME FUNDS
STANDISH FIXED INCOME FUND
STANDISH FIXED INCOME FUND II
STANDISH SHORT-TERM ASSET RESERVE FUND
STANDISH CONTROLLED MATURITY FUND
STANDISH SECURITIZED FUND
One Financial Center
Boston, Massachusetts 02111
(800) 729-0066
STATEMENT OF ADDITIONAL INFORMATION
This combined Statement of Additional Information is not a prospectus, but
expands upon and supplements the information contained in the combined
Prospectus dated May 1, 1997, as amended and/or supplemented from time to time
(the "Prospectus"), of the Standish Fixed Income Fund ("Fixed Income Fund"), the
Standish Fixed Income Fund II ("Fixed Income Fund II"), the Standish Short-Term
Asset Reserve Fund ("Short-Term Asset Reserve Fund"), the Standish Controlled
Maturity Fund ("Controlled Maturity Fund") and the Standish Securitized Fund
("Securitized Fund"), each a separate investment series of Standish, Ayer & Wood
Investment Trust (the "Trust"). These five funds are sometimes referred to
herein individually as the "Fund" and collectively as the "Funds". This
Statement of Additional Information should be read in conjunction with the
Prospectus, a copy of which may be obtained without charge by writing or calling
the Trust's principal underwriter, Standish Fund Distributors, L.P. (the
"Principal Underwriter"), at the address and phone number set forth above.
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND IS
AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY IF PRECEDED OR
ACCOMPANIED BY AN EFFECTIVE PROSPECTUS.
CONTENTS
Investment Objectives and Policies.........................2
Investment Restrictions...................................11
Calculation of Performance Data...........................14
Management ...............................................17
Redemption of Shares......................................24
Portfolio Transactions....................................24
Determination of Net Asset Value..........................24
The Funds and Their Shares................................25
The Portfolio and its Investors...........................26
Taxation..................................................26
Additional Information....................................29
Experts and Financial Statements..........................29
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The Prospectus describes the investment objectives and policies of each
Fund. The following discussion supplements the description of the Funds'
investment policies in the Prospectus. Each Fund's investment adviser, except
for the Fixed Income Fund as discussed below, is Standish, Ayer & Wood, Inc.
(the "Adviser").
As described in the Prospectus, the Fixed Income Fund seeks to achieve its
investment objective by investing all its investable assets in the Standish
Fixed Income Portfolio (the "Portfolio"), a series of Standish, Ayer & Wood
Master Portfolio (the "Portfolio Trust"), an open-end management investment
company. The Portfolio has the same investment objective and restrictions as the
Fixed Income Fund.
Standish, Ayer & Wood, Inc. is the adviser to the Portfolio.
The Prospectus describes the investment objective of the Fixed Income Fund
and the Portfolio and summarizes the investment policies they will follow. Since
the investment characteristics of the Fixed Income Fund correspond directly to
those of the Portfolio, the following discusses the various investment
techniques employed by the Portfolio. See the Prospectus for a more complete
description of each Fund's and the Portfolio's investment objective, policies
and restrictions. For the purposes of discussion in this section of this
Statement of Additional Information, the use of the term "Funds" includes
references to the Portfolio unless otherwise voted.
Effective July 1, 1995, the Short-Term Asset Reserve Fund changed its name
from the Consolidated Standish Short-Term Asset Reserve Fund to the Standish
Short-Term Asset Reserve Fund.
Maturity and Duration
The effective maturity of an individual portfolio security in which a 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 a Fund
than was anticipated at the time the securities were purchased. A 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.
<PAGE>
Under normal market conditions, the Fixed Income Fund II 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, a 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. Each 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.
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 by the Portfolio, the Fixed Income Fund II
and the Securitized Fund will be rated Prime-1 by Moody's Investors Service,
Inc. ("Moody's") or A-1 by Standard & Poor's Ratings Group ("S&P") or Duff 1+ by
Duff & Phelps, which are the highest ratings assigned by these rating services
(even if rated lower by one or more of the other agencies), or which, if not
rated or rated lower by one or more of the agencies and not rated by the other
agency or agencies, are judged by the Adviser to be of equivalent quality to the
securities so rated.
A repurchase agreement is an agreement under which a 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 into a repurchase agreement, the Adviser will carefully consider the
creditworthiness of the seller pursuant to procedures reviewed and approved by
the Board of Trustees of the Trust or the Portfolio Trust, as the case may be.
<PAGE>
The use of repurchase agreements involves certain risks. For example, if
the seller defaults on its obligation to repurchase the instruments acquired by
a Fund at a time when their market value has declined, the Fund may incur a
loss. If the seller becomes insolvent or subject to liquidation or
reorganization under bankruptcy or other laws, a court may determine that the
instruments acquired by a Fund are collateral for a loan by the Fund and
therefore are subject to sale by the trustee in bankruptcy. Finally, it is
possible that a Fund may not be able to substantiate its interest in the
instruments it acquires. While the Trustees acknowledge these risks, it is
expected that they can be controlled through careful documentation and
monitoring.
Structured or Hybrid Notes
As more fully described in the Prospectus, each Fund may invest in
structured or hybrid notes. It is expected that not more than 5% of each 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, a Fund's net asset
value. Further, certain structured or hybrid notes may be illiquid for purposes
of the Funds' limitations on investments in illiquid securities.
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 financing.
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 instruments in 1970 for Farmers Home
Administration-FHMA-insured, Federal Housing Administration-FHA-insured and for
Veterans Administration-or VA-guaranteed mortgages ("government mortgages").
<PAGE>
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).
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 FHMA, 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, FHMA-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.
<PAGE>
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.
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,
<PAGE>
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.
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.
<PAGE>
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 or
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.
Strategic Transactions
Each Fund may, but is not required to, utilize various other investment
strategies as described below to seek to hedge various market risks, 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 Funds may change
over time as new instruments and strategies are developed or regulatory changes
occur.
In the course of pursuing its investment objectives, each 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 (the Portfolio and Securitized Fund only) (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 Funds' portfolios resulting from general
market, interest rate or currency exchange rate fluctuations, to protect the
Funds' unrealized gains in the value of their portfolio securities, to
facilitate the sale of such securities for investment purposes, to manage
effective maturity or duration, 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 each Fund will attempt to
limit its net loss exposure resulting from Strategic Transactions entered into
for such purposes. The Portfolio, the Fixed Income Fund II, the Short-Term Asset
Reserve Fund, the Controlled Maturity Fund and the Securitized Fund will attempt
to limit net loss exposure from Strategic Transaction entered into for
<PAGE>
non-hedging purposes to 3%, 1%, 1%, 1% and 3% respectively, of net assets.
(Transactions such as writing covered call options are considered to involve
hedging for the purposes of this limitation.) In calculating each 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, a 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 a 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. Each Fund
will comply with applicable regulatory requirements when implementing these
strategies, techniques and instruments. The Funds' activities involving
Strategic Transactions may be limited by the requirements of Subchapter M of the
Internal Revenue Code of 1986, as amended (the "Code"), for qualification as a
regulated investment company.
Risks of Strategic Transactions
Strategic Transactions have risks associated with them including possible
default by the other party to the transaction, illiquidity and, to the extent
the Adviser's view as to certain market 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 a 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 a Fund can realize on its investments or cause a Fund to
hold a security it might otherwise sell. The use of currency transactions can
result in a 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 Portfolio and the Securitized
Fund only). 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, a Fund might not
be able to close out a transaction without incurring substantial losses, if at
<PAGE>
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 a Fund in writing options on futures and entering into
futures transactions is potentially unlimited; however, as described above, each
Fund will attempt to limit its net loss exposure resulting from Strategic
Transactions entered into for non-hedging purposes. Futures markets are highly
volatile and the use of futures may increase the volatility of a 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 a 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, a Fund's
purchase of a put option on a security might be designed to protect its holdings
in the underlying instrument (or, in some cases, a similar instrument) against a
substantial decline in the market value by giving the Fund the right to sell
such instrument at the option exercise price. A call option, in consideration
for the payment of a premium, gives the purchaser of the option the right to
buy, and the seller the obligation to sell (if the option is exercised), the
underlying instrument at the exercise price. A Fund may purchase a call option
on a security, 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.
Each 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
<PAGE>
are cash settled for the net amount, if any, by which the option is in-the-money
(i.e., where the value of the underlying instrument exceeds, in the case of a
call option, or is less than, in the case of a put option, the exercise price of
the option) at the time the option is exercised. Frequently, rather than taking
or making delivery of the underlying instrument through the process of
exercising the option, listed options are closed by entering into offsetting
purchase or sale transactions that do not result in ownership of the new option.
A Fund's ability to close out its position as a purchaser or seller of an
exchange listed put or call option is dependent, in part, upon the liquidity of
the option market. There is no assurance that a liquid option market on an
exchange will exist. In the event that the relevant market for an option on an
exchange ceases to exist, outstanding options on that exchange would generally
continue to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours
during which the underlying financial instruments are traded. To the extent that
the option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct 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. A 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. OTC options purchased by a Fund, and
portfolio securities "covering" the amount of a 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 subject to each Fund's restriction on illiquid securities, unless
determined to be liquid in accordance with procedures adopted by the Boards of
Trustees. For OTC 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. The Funds expect generally to enter into OTC options that have
cash settlement provisions, although they are not required to do so.
Unless the parties provide for it, there is no central clearing or guaranty
function in an OTC option. As a result, if the Counterparty fails to make
delivery of the security, currency or other instrument underlying an OTC option
it has entered into with a Fund or fails to make a cash settlement payment due
in accordance with the terms of that option, the Fund will lose any premium it
paid for the option as well as any anticipated benefit of the transaction.
Accordingly, the Adviser must assess the creditworthiness of each such
Counterparty or any guarantor or credit enhancement of the Counterparty's credit
to determine the likelihood that the terms of the OTC option will be satisfied.
A Fund will engage in OTC option transactions only with U.S. Government
<PAGE>
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 the debt of which is determined to be of equivalent credit quality
by the Adviser.
If a Fund sells (writes) a call option, the premium that it receives may
serve as a partial hedge, to the extent of the option premium, against a
decrease in the value of the underlying securities or instruments in its
portfolio or will increase the Fund's income. The sale (writing) of put options
can also provide income.
The Funds, except for the Short-Term Asset Reserve Fund, may purchase and
sell (write) call options on securities including U.S. Treasury and agency
securities, mortgage-backed securities, 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, currencies (Portfolio and
Securitized only) and futures contracts. The Short-Term Asset Reserve Fund may
purchase and sell 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 over-the-counter markets, and on securities indices
and futures contracts. All calls sold by a 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, each 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 a Fund also
exposes the Fund during the term of the option to possible loss of opportunity
to realize appreciation in the market price of the underlying security or
instrument and may require the Fund to hold a security or instrument which it
might otherwise have sold.
A Fund may purchase and sell (write) put options on securities including
U.S. Treasury and agency securities, mortgage backed securities, asset backed
securities, foreign sovereign debt (Portfolio and Securitized only), 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
Short-Term Asset Reserve Fund may purchase and sell 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
<PAGE>
securities indices and futures contracts. A Fund will not sell put options if,
as a result, more than 50% of the Fund's assets would be required to be
segregated to cover its potential obligations under such put options other than
those with respect to futures and options thereon. In selling put options, there
is a risk that a Fund may be required to buy the underlying security at a price
above the market price.
Options on Securities Indices and Other Financial Indices
Each Fund may also purchase and sell (write) call and put options on
securities indices and other financial indices. Options on securities indices
and other financial indices are similar to options on a security or other
instrument except that, rather than settling by physical delivery of the
underlying instrument, they settle by cash settlement. For example, an option on
an index gives the holder the right to receive, upon exercise of the option, an
amount of cash if the closing level of the index upon which the option is based
exceeds, in the case of a call, or is less than, in the case of a put, the
exercise price of the option (except if, in the case of an OTC option, physical
delivery is specified). This amount of cash is equal to the differential between
the closing price of the index and the exercise price of the option, which also
may be multiplied by a formula value. The seller of the option is obligated, in
return for the premium received, to make delivery of this amount upon exercise
of the option. In addition to the methods described above, each 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
Each Fund may enter into financial futures contracts or purchase or sell
put and call options on such futures. Futures are generally bought and sold on
the commodities exchanges where they are listed and involve payment of initial
and variation margin as described below. All futures contracts entered into by a
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 a Fund, as
seller, to deliver to the buyer the specific type of financial instrument called
for in the contract at a specific future time for a specified price (or, with
respect to index futures and Eurodollar instruments, the net cash amount). The
purchase of futures contracts creates a corresponding obligation by a Fund, as
purchaser to purchase a financial instrument at a specific time and price.
Options on futures contracts are similar to options on securities except that an
option on a futures contract gives the purchaser the right in return for the
premium paid to assume a position in a futures contract and obligates the seller
to deliver such position, if the option is exercised.
A 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 a 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
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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 a 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, or directly
with the 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 a Fund exercises an option on a
futures contract it will be obligated to post initial margin (and potential
subsequent variation margin) for the resulting futures position just as it would
for any position. Futures contracts and options thereon are generally settled by
entering into an offsetting transaction but there can be no assurance that the
position can be offset prior to settlement at an advantageous price, nor that
delivery will occur. The segregation requirements with respect to futures
contracts and options thereon are described below.
Currency Transactions
The Portfolio and the Securitized Fund may engage in currency transactions
with Counterparties to seek to hedge the value of portfolio holdings denominated
in particular currencies against fluctuations in relative value or to enhance
potential gain. Currency transactions include currency contracts, exchange
listed currency futures, exchange listed and OTC options on currencies, and
currency swaps. A forward currency contract involves a privately negotiated
obligation to purchase or sell (with delivery generally required) a specific
currency at a future date, which may be any fixed number of days from the date
of the contract agreed upon by the parties, at a price set at the time of the
contract. A currency swap is an agreement to exchange cash flows based on the
notional (agreed upon) difference among two or more currencies and operates
similarly to an interest rate swap, which is described below. The Portfolio and
the Securitized 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) are
determined to be equivalent credit quality by the Adviser.
The Portfolio's and the Securitized Fund's transactions 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
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or liabilities of the Portfolio or a Fund, which will generally arise in
connection with the purchase or sale of its portfolio securities or the receipt
of income therefrom. Position hedging is entering into a currency transaction
with respect to portfolio security positions denominated or generally quoted in
that currency.
The Portfolio and the Securitized 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 Portfolio and the Securitized 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
Portfolio or Securitized Fund has or in which the Portfolio or Securitized Fund
expects to have portfolio exposure. For example, the Portfolio may hold a French
government bond and the Adviser may believe that French francs will deteriorate
against German marks. The Portfolio would sell French francs to reduce its
exposure to that currency and buy German marks. This strategy would be a hedge
against a decline in the value of French francs, although it would expose the
Portfolio to declines in the value of the German mark relative to the U.S.
dollar.
To seek to reduce the effect of currency fluctuations on the value of
existing or anticipated holdings of portfolio securities, the Portfolio and
Securitized Fund may also engage in proxy hedging. Proxy hedging is often used
when the currency to which a Fund's portfolio is exposed is difficult to hedge
or to hedge against the U.S. dollar. Proxy hedging entails entering into a
forward contract to sell a currency whose changes in value are generally
considered to be linked to a currency or currencies in which certain of a Fund's
portfolio securities are or are expected to be denominated, and to buy U.S.
dollars. The amount of the contract would not exceed the value of the portfolio
securities denominated in linked currencies. For example, if the Adviser
considers that the Austrian schilling is linked to the German deutschemark (the
"D-mark"), and a portfolio contains securities denominated in schillings and the
Adviser believes that the value of schillings will decline against the U.S.
dollar, the Adviser may enter into a contract to sell D-marks and buy dollars.
Proxy hedging involves some of the same risks and considerations as other
transactions with similar instruments. Currency transactions can result in
losses to the Portfolio and Securitized 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
Portfolio and Securitized Fund is engaging in proxy hedging. If the Portfolio or
Securitized Fund enters into a currency hedging transaction, it 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
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issuing governments and influences economic planning and policy, purchases and
sales of currency and related instruments can be negatively affected by
government exchange controls, blockages, and manipulations or exchange
restrictions imposed by governments. These can result in losses to the Portfolio
and the Securitized Fund if they are unable to deliver or receive currency or
funds in settlement of obligations and could also cause hedges they have 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
Each Fund may enter into multiple transactions, including multiple options
transactions, multiple futures transactions, multiple currency transactions
(including forward currency contracts - the Portfolio and Securitized Fund only)
and multiple interest rate transactions, structured notes and any combination of
futures, options, currency (the Portfolio and Securitized Fund only) 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 Funds 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 Funds may enter are
interest rate, currency (the Portfolio and Securitized Fund only) and index
swaps and the purchase or sale of related caps, floors and collars. The Funds
expect to enter into these transactions primarily for hedging purposes,
including, but not limited to, preserving a return or spread on a particular
investment or portion of a Fund's portfolio, protecting against currency
fluctuations (the Portfolio and Securitized Fund only), as a duration management
technique or protecting against an increase in the price of securities a 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, each 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. The Portfolio, the Fixed Income
Fund II, the Short-Term Asset Reserve Fund, the Controlled Maturity Fund and the
Securitized Fund will attempt to limit net loss exposure from Strategic
Transaction entered into for non-hedging purposes to not more than 3%, 1%, 1%,
1% and 3% respectively, of net assets. A Fund will not sell interest rate caps
or floors where it does not own securities or other instruments providing the
income stream the Fund may be obligated to pay. Interest rate swaps involve the
exchange by the Fund with another party of their respective commitments to pay
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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.
Each 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 a Fund receiving or paying, as the case may
be, only the net amount of the two payments. A 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 a 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 Boards of Trustees of the Portfolio Trust and the
Trust have adopted guidelines and delegated to the Adviser the daily function of
determining and monitoring the liquidity of swaps, caps, floors and collars. The
Boards of Trustees, however, retain 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
each Fund's limitation on investing in illiquid securities.
Eurodollar Contracts
Each Fund may make investments in Eurodollar contracts. Eurodollar
contracts are U.S. dollar-denominated futures contracts or options thereon which
are linked to the London Interbank Offered Rate ("LlBOR"), although foreign
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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. A Fund might use
Eurodollar futures contracts and options thereon to hedge against changes in
LIBOR, to which many interest rate swaps and fixed income instruments are
linked.
Risks of Strategic Transactions Outside the United States
The Portfolio and the Securitized Fund may use strategic transactions to
seek to hedge against currency exchange rate risks. When conducted outside the
United States, Strategic Transactions may not be regulated as rigorously as in
the United States, may not involve a clearing mechanism and related guarantees,
and are subject to the risk of governmental actions affecting trading in, or the
prices of, foreign securities, currencies and other instruments. The value of
such positions also could be adversely affected by: (i) lesser availability than
in the United States of data on which to make trading decisions, (ii) delays in
the Portfolio's or Securitized 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
Each Fund will hold securities or other instruments whose values are
expected to offset its obligations under the Strategic Transactions. Each Fund
will cover Strategic Transactions as required by interpretive positions of the
SEC. A Fund will not enter into Strategic Transactions that expose the Fund to
an obligation to another party unless it owns either (i) an offsetting position
in securities or other options, futures contracts or other instruments or (ii)
cash, receivables or liquid securities with a value sufficient to cover its
potential obligations. A Fund may have to comply with any applicable regulatory
requirements for Strategic Transactions, and if required, will set aside cash
and other assets in a segregated account with its custodian bank in the amount
prescribed. In that case, the Funds' custodian would maintain the value of such
segregated account equal to the prescribed amount by adding or removing
additional cash or other assets to account for fluctuations in the value of the
account 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 a
Fund's assets could impede portfolio management or the Fund's ability to meet
redemption requests or other current obligations.
"When-Issued", "Delayed Delivery Securities" and "Forward Commitment" Securities
The Portfolio, the Fixed Income II and Controlled Maturity Funds may invest
up to 15% of their net assets in securities purchased on a when-issued or
delayed delivery basis. The Short-Term Asset Reserve Fund may commit up to 10%
of its net assets to purchase such securities. The Securitized Fund may invest
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up to 25% of its net assets in securities purchased on a when-issued basis,
forward rolls and forward commitments. Delivery and payment for securities
purchased on a when-issued or delayed delivery basis 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 that a Fund enters into
the commitment, but interest will not accrue to the Fund until delivery of and
payment for the securities. Although a Fund will only make commitments to
purchase "when-issued" and "delayed delivery" securities with the intention of
actually acquiring the securities, each Fund may sell the securities before the
settlement date if deemed advisable by the Adviser. The Short-Term Asset Reserve
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 a Fund has entered into an offsetting agreement to sell the
securities purchased on a when-issued or forward commitment basis, cash or
liquid obligations with a market value at least equal to the amount of the
Fund's commitment will be segregated with the Fund's custodian bank. If the
market value of these securities declines, additional cash or securities will be
segregated daily so that the aggregate market value of the segregated securities
equals the amount of the Fund's commitment.
Securities purchased on a "when-issued", "delayed delivery" or "forward
commitment" basis may have a market value on delivery which is less than the
amount paid by a 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", "delayed delivery" 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.
Portfolio Turnover
It is not the policy of any of the Funds to purchase or sell securities for
trading purposes. However, each 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 enable the Fund to maintain
its status as a regulated investment company under the Code. A 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 a Fund and thus
indirectly by its shareholders. It may also result in the realization of larger
amounts of net short-term capital gains, distributions of which are taxable to
shareholders as ordinary income and may, under certain circumstances, make it
more difficult for the Funds to qualify as regulated investment companies under
the Code.
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INVESTMENT RESTRICTIONS
The Funds and the Portfolio have adopted the following fundamental
policies. Each of the Fund's and the Portfolio's fundamental policies cannot be
changed unless the change is approved by the "vote of the outstanding voting
securities" of a Fund or the Portfolio, as the case may be, which phrase as used
herein means the lesser of (i) 67% or more of the voting securities of the Fund
or the Portfolio present at a meeting, if the holders of more than 50% of the
outstanding voting securities of the Fund or the Portfolio are present or
represented by proxy, or (ii) more than 50% of the outstanding voting securities
of the Fund or the Portfolio.
Standish Fixed Income Fund and Portfolio
As a matter of fundamental policy, the Portfolio (Fixed Income 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 Portfolio (Fixed Income 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 Fixed Income 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 Portfolio (i) may lend portfolio
securities in accordance with the Portfolio's investment policies up to 33
1/3% of the Portfolio's total assets taken at market value, (ii) enter
into repurchase agreements, and (iii) purchase all or a portion of an
issue of debt securities, bank loan participation interests, bank
certificates of deposit, bankers' acceptances, debentures or other
securities, whether or not the purchase is made upon the original issuance
of the securities, and except that the Fixed Income Fund may enter into
repurchase agreements with respect to 5% of the value of its net assets.
4. Invest more than 25% of the current value of its total assets in any
single industry, provided that this restriction shall not apply to U.S.
Government securities, including mortgage pass-through securities (GNMAs).
5. Underwrite the securities of other issuers, except to the extent that, in
connection with the disposition of portfolio securities, the Portfolio
(Fund) may be deemed to be an underwriter under the Securities Act of
1933.
6. Purchase real estate or real estate mortgage loans, although the Portfolio
(Fund) may purchase marketable securities of companies which deal in real
estate, real estate mortgage loans or interests therein.
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7. Purchase securities on margin (except that the Portfolio (Fund) may obtain
such short-term credits as may be necessary for the clearance of purchases
and sales of securities).
8. Purchase or sell commodities or commodity contracts except that the
Portfolio (Fund) may purchase and sell financial futures contracts and
options on financial futures contracts and engage in foreign currency
exchange transactions.
The following restrictions are not fundamental policies and may be changed
by the Trustees of the Portfolio Trust (Trust) without investor approval in
accordance with applicable laws, regulations or regulatory policy. The Portfolio
(Fund) may not:
A. Invest in the securities of an issuer for the purpose of exercising control
or management, but it may do so where it is deemed advisable to protect or
enhance the value of an existing investment.
B. Purchase securities of any other investment company except to the extent
permitted by the 1940 Act.
C. Invest more than 15% of its net assets in illiquid securities.
D. Invest more than 5% of its net assets in repurchase agreements (this
restriction is fundamental with respect to the Fixed Income Fund, but not
the Portfolio).
E. Purchase additional securities if the Portfolio's bank borrowings exceed 5%
of its net assets. (This policy is fundamental with respect to the Fund but
not the Portfolio.)
Notwithstanding any fundamental or non-fundamental policy, the Fixed Income
Fund may invest all of its assets (other than assets which are not "investment
securities" (as defined in the 1940 Act) or are excepted by the SEC) in an
open-end management investment company with substantially the same investment
objective as the Fixed Income Fund.
Standish Fixed Income Fund II
As a matter of fundamental policy, 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.
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4. Underwrite the securities of other issuers, except to the extent that, in
connection with the disposition of portfolio securities, the Fund may be
deemed to be an underwriter under the Securities Act of 1933.
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.
<PAGE>
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. Invest in the securities of an issuer for the purpose of exercising control
or management, but it may do so where it is deemed advisable to protect or
enhance the value of an existing investment.
B. Purchase securities of any other investment company except to the extent
permitted by the 1940 Act.
C. Purchase securities on margin, except any short-term credits which may be
necessary for the clearance of transactions and the initial or maintenance
margin in connection with options and futures contracts and related
options.
D. Invest more than 15% of its net assets in securities which are illiquid.
E. Purchase additional securities if the Fund's borrowings exceed 5% of its
net assets.
Short-Term Asset Reserve Fund
As a matter of fundamental policy, 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.
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.
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 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.
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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 that the Fund
may engage in financial futures contracts and related options
transactions.
8. 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. Invest in the securities of an issuer for the purpose of exercising control
or management, but it may do so where it is deemed advisable to protect or
enhance the value of an existing investment.
B. Invest more than 15% of its net assets in securities which are illiquid.
Controlled Maturity Fund
As a matter of fundamental policy, 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.
<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.
See the discussion following the Fixed Income Fund II's fundamental
investment restrictions for additional information on industry concentration.
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. Invest in the securities of an issuer for the purpose of exercising control
or management, but it may do so where it is deemed advisable to protect or
enhance the value of an existing investment.
B. Purchase securities of any other investment company except to the extent
permitted by the 1940 Act.
C. Purchase securities on margin, except any short-term credits which may be
necessary for the clearance of transactions and the initial or maintenance
margin in connection with options and futures contracts and related
options.
D. Invest more than 15% of its net assets in securities which are illiquid.
E. Purchase additional securities if the Fund's borrowings exceed 5% of its
net assets.
<PAGE>
Securitized Fund
As a matter of fundamental policy, 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.
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. Invest in the securities of an issuer for the purpose of exercising control
or management, but it may do so where it is deemed advisable to protect or
enhance the value of an existing investment.
<PAGE>
B. Invest more than 15% of its net assets in securities which are illiquid.
If any percentage restriction described above is adhered to at the time of
investment, a subsequent increase or decrease in the percentage resulting from a
change in the value of the Portfolio's or a Fund's assets will not constitute a
violation of the restriction.
CALCULATION OF PERFORMANCE DATA
As indicated in the Prospectus, each Fund may, from time to time, advertise
certain total return and yield information. The average annual total return of a
Fund for a period is computed by subtracting the net asset value per share at
the beginning of the period from the net asset value per share at the end of the
period (after adjusting for the reinvestment of any income dividends and capital
gain distributions), and dividing the result by the net asset value per share at
the beginning of the period. In particular, the Funds' average annual total
return ("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 Funds' yield is computed by dividing the net investment income per
share earned during a base period of 30 days, or one month, 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 Funds, all recurring fees that are charged to all shareholder accounts and
any non-recurring charges for the period stated. In particular, yield is
determined according to the following formula:
Yield = 2[(A - B + 1)6 - 1]
CD
Where:
a=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.
The Funds 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.
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 Funds account for gain or
loss attributable to actual monthly pay downs as an increase or decrease to
interest income during the period. In addition, each 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.
<PAGE>
The Funds' average annual total return for the one-, five- and ten-year (or
life-of-the-Fund, if shorter) periods ended December 31, 1996 and average
annualized yield for the 30-day period ended December 31, 1996 were as follows:
Average Annual Total Return
Fund 1-Year 5-Year 10-Year Yield
- ---- ------ ------ ------- -----
Fixed Income Fund 5.48% 7.82% 9.04%1 7.10%
Fixed Income Fund II 3.77% 6.41%2 N/A 6.46%
Controlled Maturity
Fund 5.13% 6.26%2 N/A 6.24%
Securitized Fund 4.41% 6.36% 8.54%3 7.07%
Short-Term Asset
Reserve Fund 5.62% 5.02% 6.60%4 5.91%
- ---------------------------
1 Fixed Income Fund commenced operations on March 27, 1987.
2 Fixed Income Fund II and Controlled Maturity Fund commenced operations on
July 3, 1995.
3 Securitized Fund commenced operations on August 31, 1989.
4 Short-Term Asset Reserve Fund commenced operations on January 3, 1989.
These performance quotations should not be considered as representative of
any Fund's performance for any specified period in the future.
In addition to average annual return quotations, the Funds may quote
quarterly and annual performance on a net (with management and administration
fees deducted) and gross basis as follows:
Fixed Income Fund
Quarter/Year Net Gross
- --------------------------------------------------------------------------------
2Q87 (1.14)% (0.95)%
3Q87 (2.16) (2.04)
4Q87 4.15 4.30
1987 0.74 1.20
1Q88 4.36 4.52
2Q88 1.18 1.29
3Q88 1.98 2.11
4Q88 0.78 0.91
1988 8.53 9.09
1Q89 1.23 1.37
2Q89 7.57 7.70
3Q89 1.13 1.26
4Q89 3.30 3.42
1989 13.76 14.33
1Q90 (0.50) (0.38)
2Q90 3.69 3.84
3Q90 0.89 1.00
4Q90 4.95 5.06
1990 9.23 9.77
1Q91 3.16 3.28
2Q91 1.71 1.84
<PAGE>
Quarter/Year Net Gross
- --------------------------------------------------------------------------------
3Q91 6.19 6.29
4Q91 5.58 5.68
1991 17.65 18.15
1Q92 (0.95) (0.84)
2Q92 4.95 5.4
3Q92 3.43 3.53
4Q92 (0.58) (0.47)
1992 6.88 7.33
1Q93 5.88 5.98
2Q93 3.42 3.52
3Q93 3.42 3.52
4Q93 1.23 1.33
1993 14.64 15.08
1Q94 (3.99) (3.90)
2Q94 (1.88) (1.78)
3Q94 0.67 0.77
4Q94 0.32 0.42
1994 (4.86) (4.48)
1Q95 4.39 4.48
2Q95 5.91 6.01
3Q95 2.46 2.56
4Q95 4.64 4.73
1995 18.54 18.9
1Q96 (1.58) (1.49)
2Q96 0.84 0.93
3Q96 2.58 2.67
4Q96 3.60 3.70
1996 5.48 5.86
Fixed Income Fund II
Quarter/Year Net Gross
- --------------------------------------------------------------------------------
3Q95 1.35 1.44
4Q95 4.38 4.48
1995 5.79 5.97
1Q96 (1.90) (1.81)
2Q96 0.39 0.48
3Q96 2.18 2.28
4Q96 3.12 3.21
1996 3.77 4.15
Short-Term Asset Reserve Fund
Quarter/Year Net Gross
- --------------------------------------------------------------------------------
1Q89 1.58% 1.70%
2Q89 3.52 3.64
3Q89 1.71 1.82
4Q89 2.38 2.51
1989 9.50 10.01
<PAGE>
Quarter/Year Net Gross
- --------------------------------------------------------------------------------
1Q90 1.34 1.45
2Q90 2.56 2.69
3Q90 2.17 2.27
4Q90 2.62 2.73
1990 8.97 9.45
1Q91 2.10 2.20
2Q91 1.97 2.07
3Q91 2.62 2.71
4Q91 2.39 2.47
1991 9.41 9.79
1Q92 0.84 0.91
2Q91 2.08 2.17
3Q92 1.18 1.28
4Q92 0.17 0.27
1992 4.33 4.70
1Q93 1.90 1.98
2Q93 1.10 1.19
3Q93 1.20 1.28
4Q93 0.78 0.86
1993 5.08 5.41
1Q94 0.06 0.14
2Q91 0.06 0.14
3Q94 1.31 1.39
4Q94 0.83 0.91
1994 2.27 2.60
1Q95 2.08 2.16
2Q95 2.14 2.22
3Q95 1.55 1.62
4Q95 1.89 1.97
1995 7.85 8.20
1Q96 1.08 1.17
2Q96 1.31 1.40
3Q96 1.51 1.60
4Q96 1.60 1.69
1996 5.62 5.99
Controlled Maturity Fund
Quarter/Year Net Gross
- --------------------------------------------------------------------------------
3Q95 1.55% 1.64%
4Q95 2.61 2.70
1995 4.20 4.38
1Q96 0.25 0.35
2Q96 1.05 1.14
3Q96 1.71 1.80
4Q96 2.03 2.12
1996 5.13 5.51
Securitized Funds
Quarter/Year Net Gross
- --------------------------------------------------------------------------------
3Q89 0.00% (0.04)%
4Q89 4.01 4.17
1989 4.01 4.21
1Q90 0.45 0.57
2Q90 3.58 3.69
3Q90 1.29 1.40
4Q90 5.79 5.91
1990 11.49 11.99
1Q91 2.89 3.00
2Q91 1.84 1.95
3Q91 5.16 5.27
4Q91 4.90 5.03
1991 15.57 16.10
1Q92 (1.58) (1.47)
2Q92 4.38 4.49
3Q92 1.80 1.91
4Q92 (.49) (.38)
1992 4.07 4.52
1Q93 4.37 4.48
2Q93 2.56 2.67
3Q93 2.38 2.49
4Q93 0.38 0.49
1993 10.02 10.48
1Q94 (2.53) (2.42)
2Q94 (0.83) (0.72)
3Q94 0.89 1.00
4Q94 0.338) 0.447)
1994 (2.16) (1.72)
1Q95 4.78 4.89
2Q95 5.31 5.43
3Q95 2.16 2.27
4Q95 3.19 3.32
1995 16.32 16.85
1Q96 (1.23) (1.11)
2Q96 0.51 0.62
3Q96 2.09 2.22
4Q96 3.03 3.14
1996 4.41 4.91
These performance quotations should not be considered as representative of
a Fund's performance for any specified period in the future. Each Fund's
performance may be compared in sales literature to the performance of other
mutual funds having similar objectives or to standardized indices or other
measures of investment performance. In particular, the Portfolio, Fixed Income
<PAGE>
Fund and Fixed Income Fund II Fund may compare their 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. The Short-Term Asset Reserve 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 Short-Term Asset Reserve Fund's portfolio is longer than
that of a money market fund and, unlike a money market fund, the net asset value
of the Short-Term Asset Reserve Fund's shares may fluctuate. The Controlled
Maturity 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. The Securitized Fund may compare its
performance to the Lehman Brothers Aggregate Index, the Salomon Mortgage Index
and the Shearson Mortgage Index. The Salomon and Shearson Indices are considered
to be representative of the performance of fixed rate securitized mortgage pools
of GNMA, FNMA and FHLNC securities. 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 a Fund's past
performance to that of other mutual funds and investment products. Of course,
past performance is not a guarantee of future results.
MANAGEMENT
Trustees and Officers of the Trust and Portfolio Trust
The Trustees and executive officers of the Trust are listed below. The
Trustees of the Portfolio Trust are identical to the Trustees of the Trust. The
officers of the Portfolio Trust are Messrs. Clayson, Ladd, Wood, Hollis and
Martin, and Ms. Banfield, Chase, Herrmann and Kneeland, who hold the same office
with the Portfolio Trust as with the Trust. All executive officers of the Trust
and the Portfolio Trust are affiliates of Standish, Ayer & Wood, Inc., the
Portfolio and 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 and
c/o Standish, Ayer & Wood, Inc. Managing Director, Standish, Ayer &
One Financial Center 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.O. Box 5600 Director, Holyoke Mutual Insurance Company
Beverly Farms, MA 01915
<PAGE>
Name, Address and Date of Birth Position Held Principal Occupation
With Trust During Past 5 Years
- ---------------------------------------------------------------------------------------------------------------
*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 and Treasurer Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Anne P. Herrmann, 1/26/56 Vice President and Secretary Mutual Fund Administrator,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Paul G. Martins, 3/10/56 Vice President Vice President, Standish, Ayer & Wood, Inc.
c/o Standish, Ayer & Wood, Inc. since October 1996; formerly Senior Vice President,
One Financial Center Treasurer and Chief Financial Officer
Boston, MA 02111 of Liberty Financial Bank Group (1993-95);
prior to 1993, Corporate Controller,
The Berkeley Financial Group
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 02111
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
Boston, MA 02111 Compliance Officer,
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
Remi Browne, 10/15/53 Vice President Vice President, Standish, Ayer & Wood, Inc
c/o Standish, Ayer & Wood, Inc. Vice President and Chief Investment Officer
One Financial Center of Standish International Management
Boston, MA 02111 Company, L.P., prior to
August 1996, Managing Director
Ark Asset Management Company
Walter M. Cabot, 1/16/33 Vice President Senior Adviser 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 Adviser and Director of
Standish International Management Company, L.P.
<PAGE>
Name, Address and Date of Birth Position Held Principal Occupation
With Trust During Past 5 Years
- ---------------------------------------------------------------------------------------------------------------
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 and Associate Director,
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 and Director
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 and Associate Director,
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
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, Standish International
Boston, MA 02111 Management Company, L.P.
Mark A. Flaherty, 4/24/59 Vice President Vice President and Director,
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.
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
<PAGE>
Name, Address and Date of Birth Position Held Principal Occupation
With Trust During Past 5 Years
- ---------------------------------------------------------------------------------------------------------------
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,
One Financial Center Investment Sales,
Boston, MA 02111 Cigna Corporation (1993) and
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
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.
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
David C. Stuehr, 3/1/58 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Ralph S. Tate, 4/2/47 Vice President Vice President and Managing Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc. since
One Financial Center April, 1990; formerly Vice
Boston, MA 02111 President, Aetna Life & Casualty
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
<PAGE>
Name, Address and Date of Birth Position Held Principal Occupation
With Trust During Past 5 Years
- ---------------------------------------------------------------------------------------------------------------
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.
</TABLE>
Compensation of Trustees and Officers. Neither the Trust nor the Portfolio
Trust pays compensation to the Trustees of the Trust or the Portfolio Trust that
are affiliated with Standish or to the Trust's and Portfolio Trust's officers.
None of the Trustees or officers have engaged in any financial transactions
(other than the purchase or redemption of the Funds' shares) with the
Trust, the Portfolio Trust or the Adviser during the year ended December
31, 1996.
The following table sets forth all compensation paid to the Trust's and the
Portfolio Trust's Trustees as of the Funds' fiscal years ended December 31,
1996:
<TABLE>
<CAPTION>
Aggregate Compensation from the Funds
Pension or
Retirement Total
Short-Term Benefits Compensation
Fixed Fixed Controlled Asset Accued as from Funds and
Income Income Securitized Maturity Resource Part of Funds' Portfolio & Other
Name of Trustee Fund** Fund II Fund Fund Fund Expenses Funds in Complex**
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
D. Barr Clayson $0 $0 $0 $0 $0 $0 $0
Samuel C. Fleming $21,002 $247 $629 $126 $2,772 $0 $49,250
Benjamin M. Friedman $19,403 $228 $579 $117 $2,561 $0 $45,500
John H. Hewitt $19,403 $228 $579 $117 $2,561 $0 $45,500
Edward H. Ladd $0 $0 $0 $0 $0 $0 $0
Caleb Loring, III $19,403 $228 $579 $117 $2,561 $0 $45,500
Richard S. Wood $0 $0 $0 $0 $0 $0 $0
</TABLE>
* As of the date of this Statement of Additional Information there were 20 funds
in the fund complex. Total compensation is presented for the calendar year ended
December 31, 1996. ** The Fixed Income Fund bears its pro rata allocation of
Trustees' fees paid by the Portfolio to the Trustees of the Portfolio Trust.
Certain Shareholders
At February 1, 1997, Trustees and officers of the Trust and the Portfolio
Trust as a group beneficially owned (i.e., had voting and/or investment power)
less than 1% of the then outstanding shares of each Fund. At February 1, 1997,
the Fixed Income Fund beneficially owned approximately 100% of the then
outstanding interests of the Portfolio and therefore controlled the Portfolio.
Also at that date, no person beneficially owned 5% or more of the then
outstanding shares of any Fund except:
Fixed Income Fund II
Percentage of
Name and Address Outstanding Shares
- --------------------------------------------------------------------------------
Exeter Health Resources, Inc. 71%*
10 Buzell Avenue
Exeter, NH 03833
Miss Porter's School 11%
60 Main Street
Farmington, CT 06032
Houston General Insurance Empl. 10%
P.O. Box 2932
Fort Worth, TX 76113
Mentor Trust Co. 8%
TTEE FBO
Life Technologies, Inc.
Two Logan Square,
6th Floor
Philadelphia, PA 19103
<PAGE>
Short-Term Asset Reserve Fund
Percentage of
Name and Address Outstanding Shares
- --------------------------------------------------------------------------------
Virginia Portfolio 17%
84 State Street, Suite 900
Boston, MA 02109
University of Rochester 11%
Administration Bldg. 263
Rochester, NY 14627
Wellesley College 11%
106 Central Street
Wellesley, MA 02181
The Nature Conservancy 8%
1815 N. Lynn Street
Arlington, VA 22209
Shands Teaching Hospital & Clinics, Inc. 6%
Bankers Trust Trustee
P.O. Box 100336
Gainesville, FL 32610
Blue Cross Blue Shield 5%
of Vermont
P.O. Box 186
Montpelier, VT 05602
New England Deaconess Hospital 5%
185 Pilgrim Road
Boston, MA 02215
The Controlled Maturity Fund
Percentage of
Name and Address Outstanding Shares
- --------------------------------------------------------------------------------
Essex County Gas and Company 32%*
7 North Hunt Road
Amesbury, MA 01913
San Francisco Opera Association 28%*
301 Van Ness Avenue
San Francisco, CA 94102
Saturn & Co. FBO Cumming Foundation 8%
P.O. Box 1537
Boston, MA 02205
Saturn & Co. Ian M. Cumming IRA 6%
P.O. Box 1537
Boston, MA 02205
Hebrew College Campaign Fund Hebrew College 5%
43 Hawes Street
Brookline, MA 02146
Saturn & Co. FBO David Edward Cumming Trust 5%
P.O. Box 1537
Boston, MA 02205
Securitized Fund
Percentage of
Name and Address Outstanding Shares
- --------------------------------------------------------------------------------
Allendale Mutual Insurance Company 73%*
Allendale Park
P.O. Box 7500
Johnston, RI 02919
<PAGE>
Potter & Co. 8%
Bank of Boston
150 Royall Way
Canton, MA
Colonial Williamsburg Pension 7%
The Colonial Williamsburg Foundation
P.O. Box C
Williamsburg, VA 23187
*Because the shareholder beneficially owned more than 25% of the then
outstanding shares of the indicated Fund, the shareholder was considered to
control such Fund. As a controlling person, the shareholder may be able to
determine whether a proposal submitted to the shareholders of such Fund will be
approved or disapproved.
Investment Adviser.
Standish serves as the Adviser to the Portfolio and the Funds (other than
Fixed Income Fund) pursuant to written investment advisory agreements. Prior to
the close of business on May 3, 1996, Standish managed directly the assets of
the Fixed Income Fund pursuant to an investment advisory agreement. This
agreement was terminated by the Fixed Income Fund on such date subsequent to the
approval by the Fixed Income Fund's shareholders on March 29, 1996 to implement
certain changes in the Fixed Income Fund's investment restrictions which enable
the Fixed Income Fund to invest all of its investable assets in the Portfolio.
The Adviser is a Massachusetts corporation organized in 1933 and is registered
under the Investment Advisers Act of 1940.
The following, constituting all of the Directors and all of the
shareholders of the Adviser, are the Adviser's controlling persons: Caleb F.
Aldrich, Nicholas S. Battelle, Walter M. Cabot, Sr., David H. Cameron, Karen K.
Chandor, D. Barr Clayson, Richard C. Doll, Dolores S. Driscoll, Mark A.
Flaherty, Maria D. Furman, James E. Hollis III, Raymond J. Kubiak, Edward H.
Ladd, Laurence A. Manchester, George W. Noyes, Arthur H. Parker, Howard B.
Rubin, Austin C. Smith, David C. Stuehr, Ralph S. Tate, and Richard S. Wood.
Certain services provided by the Adviser under the advisory agreements are
described in the Prospectus. These services are provided without reimbursement
by the Portfolio or the Funds for any costs incurred. In addition to those
services, the Adviser provides the Funds (but not the Portfolio) with office
space for managing their affairs, with the services of required executive
personnel, and with certain clerical services and facilities. Under the
investment advisory agreements, the Adviser is paid a fee based upon a
percentage of the applicable Fund's or Portfolio's average daily net asset value
computed as set forth below. The advisory fees are payable monthly.
Contractual Advisory Fee Rate
(as a percentage of
Fund average daily net assets)
Fixed Income Portfolio 0.40% of the first $250 million
0.35% of the next $250 million
0.30% of over $500 million
Fixed Income Fund II 0.40%
Controlled Maturity Fund 0.35%
Securitized Fund 0.25%
Short-Term Asset Reserve Fund 0.25%
<PAGE>
During the last three fiscal years ended December 31, the Funds and the
Portfolio paid advisory fees in the following amounts:
Fund 1994 1995 1996
- --------------------------------------------------------------------------------
Fixed Income Fund 4,750,132 6,321,967 2,493,7431
Fixed Income Portfolio N/A N/A 5,121,7562
Fixed Income Fund II N/A 03 03
Controlled Maturity Fund N/A 04 04
Securitized Fund 149,2535 107,8925 102,9815
Short-Term Asset
Reserve Fund 730,1916 705,1296 643,488
- ------------------------
1 Fixed Income Fund was converted to the master/feeder fund structure on May 3,
1996 and does not pay directly advisory fees after that date. The Fund bears
its pro rata allocation of the Portfolio's expenses, including advisory fees.
2 The Portfolio commenced operations on May 3, 1996.
3 The Fixed Income Fund II commenced operations on July 3, 1995. The Adviser
voluntarily agreed not to impose its advisory fee for the period July 3, 1995
through December 31, 1995 and for the fiscal year ended December 31, 1996,
which would otherwise have been $42,628 and $61,291, respectively.
4 The Controlled Maturity Fund commenced operations on July 3, 1995. The Adviser
voluntarily agreed not to impose its advisory fee for the period July 3, 1995
through December 31, 1995 and for the fiscal year ended December 31, 1996,
which would otherwise have been $11,617 and $35,907, respectively.
5 For the fiscal years ended December 31, 1994, 1995 and 1996, the Adviser
voluntarily agreed not to impose its fee in the amount of $24,168, $31,998 and
$29,535.
6 Prior to July 1, 1995, Standish and Consolidated Investment Corporation
("Consolidated") served as the Short-Term Asset Reserve Fund's co-investment
advisers and each received 50% of the advisory fees paid by the Fund. For the
period January 1, 1995 through June 30, 1995, Standish and Consolidated
received fees in the aggregate of $345,111. For the period July 1, 1995
through December 31, 1995, Standish received fees of $360,018.
Pursuant to the investment advisory agreements, each Fund (other than Fixed
Income Fund) and the Portfolio bears expenses of its operations other than those
incurred by the Adviser pursuant to the investment advisory agreement. Among
other expenses, the Funds and the Portfolio 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.
Unless terminated as provided below, the investment advisory agreements
continue in full force and effect from year to year but only so long as each
such continuance is approved annually (i) by either the Trustees of the Trust or
the Portfolio Trust (as applicable) or by the "vote of a majority of the
outstanding voting securities" of the Portfolio or the applicable Fund, and, in
either event (ii) by vote of a majority of the Trustees of the Trust or the
Portfolio Trust (as applicable) who are not parties to the investment advisory
<PAGE>
agreement or "interested persons" (as defined in the 1940 Act) of any such
party, cast in person at a meeting called for the purpose of voting on such
approval. Each investment advisory agreement may be terminated at any time
without the payment of any penalty by vote of the Trustees of the Trust or the
Portfolio Trust or by the "vote of a majority of the outstanding voting
securities" of the applicable Fund or the Portfolio or by the Adviser, on sixty
days' written notice to the other parties. The investment advisory agreements
terminate in the event of their assignment as defined in the 1940 Act.
In an attempt to avoid any potential conflict with portfolio transactions
for the Funds and the Portfolio, the Adviser, the Principal Underwriter, the
Trust and the Portfolio Trust have each adopted extensive restrictions on
personal securities trading by personnel of the Adviser and its affiliates.
These restrictions include: pre-clearance of all personal securities
transactions and a prohibition of purchasing initial public offerings of
securities. These restrictions are a continuation of the basic principle that
the interests of the Funds and their shareholders, and the Portfolio and its
investors, come before those of the Adviser and its employees.
Administrator of the Fund.
Standish also serves as the administrator to the Fixed Income Fund (the
"Fund Administrator") pursuant to a written administration agreement with the
Trust on behalf of the Fund. Certain services provided by the Fund Administrator
under the administration agreement are described in the Prospectus. For these
services, the Fund Administrator currently does not receive any additional
compensation. The Trustees of the Trust may, however, determine in the future to
compensate the Fund Administrator for its administrative services. The Fixed
Income Fund's administration agreement can be terminated by either party on not
more than sixty days' written notice.
Administrator of the Portfolio.
IBT Trust Company (Cayman) Ltd., P.O. Box 501, Grand Cayman, Cayman
Islands, BWI, serves as the administrator to the Portfolio (the "Portfolio
Administrator") pursuant to a written administration agreement with the
Portfolio Trust on behalf of the Portfolio. The Portfolio Administrator provides
the Portfolio Trust with office space for managing its affairs, and with certain
clerical services and facilities. For its services to the Portfolio Trust, the
Portfolio Administrator currently receives a fee from the Portfolio in the
amount of $7,500 annually. The Portfolio's administration agreement can be
terminated by either party on not more than sixty days' written notice.
Distributor of the Funds.
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 each 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 each Fund's shares
in accordance with the terms of the Underwriting Agreement between the Trust and
<PAGE>
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 each 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 each 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, with respect to a Fund, by a vote of the
holders of a majority of the Fund's outstanding shares, in any case without
payment of any penalty on not more than 60 days' written notice to the other
party. The offices of the Principal Underwriter are located at One Financial
Center, 26th Floor, Boston, Massachusetts 02111.
REDEMPTION OF SHARES
Detailed information on redemption of shares is included in the Prospectus.
The Trust may suspend the right to redeem Fund shares or postpone the date of
payment upon redemption for more than seven days (i) for any period during which
the New York Stock Exchange is closed (other than customary weekend or holiday
closings) or trading on the exchange is restricted; (ii) for any period during
which an emergency exists as a result of which disposal by a Fund of securities
owned by it or determination by a Fund of the value of its net assets is not
reasonably practicable; or (iii) for such other periods as the SEC may permit
for the protection of shareholders of a Fund.
The Trust intends to pay redemption proceeds in cash for all Fund shares
redeemed but, under certain conditions, the Trust may make payment wholly or
partly in portfolio securities, in conformity with a rule of the SEC. Portfolio
securities paid upon redemption of Fund shares will be valued at their then
current market value. The Trust, on behalf of each of its series, has elected to
be governed by the provisions of Rule 18f-1 under the 1940 Act which limits each
Fund's obligation to make cash redemption payments to any shareholder during any
90-day period to the lesser of $250,000 or 1% of the Fund's net asset value at
the beginning of such period. An investor may incur brokerage costs in
converting portfolio securities received upon redemption to cash. The Portfolio
has advised the Trust that the Portfolio will not redeem in-kind except in
circumstances in which the Fixed Income Fund is permitted to redeem in-kind or
except in the event the Fixed Income Fund completely withdraws its interest from
the Portfolio.
<PAGE>
PORTFOLIO TRANSACTIONS
The Adviser is responsible for placing each Fund's and the Portfolio's
portfolio transactions and will do so in a manner deemed fair and reasonable to
the Funds and the Portfolio and not according to any formula. The primary
consideration in all portfolio transactions will be prompt execution of orders
in an efficient manner at the most favorable price. In selecting broker-dealers
and in negotiating commissions, the Adviser will consider the firm's
reliability, the quality of its execution services on a continuing basis and its
financial condition. When more than one firm is believed to meet these criteria,
preference may be given to firms which also sell shares of the Funds. 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 Funds and the Portfolio 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 Funds and the Portfolio effect their
securities transactions may be used by the Adviser in servicing other accounts;
not all of these services may be used by the Adviser in connection with the Fund
or the Portfolio generating the soft dollar credits. The investment advisory fee
paid by the Funds and the Portfolio under the investment advisory agreements
will not be reduced as a result of the Adviser's receipt of research services.
The Adviser also places portfolio transactions for other advisory accounts.
The Adviser will seek to allocate portfolio transactions equitably whenever
concurrent decisions are made to purchase or sell securities for a Fund or the
Portfolio and another advisory account. In some cases, this procedure could have
an adverse effect on the price or the amount of securities available to a Fund
or the Portfolio. In making such allocations, the main factors considered by the
Adviser will be the respective investment objectives, the relative size of
portfolio holdings of the same or comparable securities, the availability of
cash for investment, the size of investment commitments generally held, and
opinions of the persons responsible for recommending the investment.
Because most of the Funds' and the Portfolio's securities transactions are
effected on a principal basis involving a "spread" or "dealer mark-up," the
Funds and the Portfolio have not paid any brokerage commissions during the past
three years.
DETERMINATION OF NET ASSET VALUE
Each Fund's net asset value is calculated each day on which the New York
Stock Exchange is open (a "Business Day"). Currently, the New York Stock
Exchange is not open on weekends, New Year's Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
The net asset value of each Fund's shares is determined as of the close of
regular trading on the New York Stock Exchange (normally 4:00 p.m., New York
City time) and is computed by dividing the value of all securities and other
<PAGE>
assets of a Fund (substantially all of which, in the case of the Fixed Income
Fund, will be represented by the Fixed Income Fund's interest in the Portfolio)
less all liabilities by the number of Fund shares outstanding, and adjusting to
the nearest cent per share. Expenses and fees of each Fund are accrued daily and
taken into account for the purpose of determining net asset value.
The value of the Portfolio's net assets (i.e., the value of its securities
and other assets less its liabilities, including expenses payable or accrued) is
determined at the same time and on the same days as the net asset value per
share of the Fixed Income Fund is determined. Each investor in the Portfolio,
including the Fixed Income Fund, may add to or reduce its investment in the
Portfolio on each Business Day. As of 4:00 p.m. (Eastern time) on each Business
Day, the value of each investor's interest in the Portfolio will be determined
by multiplying the net asset value of the Portfolio by the percentage
representing that investor's share of the aggregate beneficial interests in the
Portfolio. Any additions or reductions which are to be effected on that day will
then be effected. The investor's percentage of the aggregate beneficial
interests in the Portfolio will then be recomputed as the percentage equal to
the fraction (i) the numerator of which is the value of such investor's
investment in the Portfolio as of 4:00 p.m. on such day plus or minus, as the
case may be, the amount of net additions to or reductions in the investor's
investment in the Portfolio effected on such day, and (ii) the denominator of
which is the aggregate net asset value of the Portfolio as of 4:00 p.m. on such
day plus or minus, as the case may be, the amount of the net additions to or
reductions in the aggregate investments in the Portfolio by all investors in the
Portfolio. The percentage so determined will then be applied to determine the
value of the investor's interest in the Portfolio as of 4:00 p.m. on the
following Business Day.
With respect to each Fund (other than Short-Term Asset Reserve Fund) and
the Portfolio, portfolio securities that are fixed income securities (other than
money market instruments) for which accurate market prices are readily available
are valued at their current market value on the basis of quotations, which may
be furnished by a pricing service or provided by dealers in such securities.
Fixed income securities for which accurate market prices are not readily
available and other assets are valued at fair value as determined in good faith
by the Adviser in accordance with procedures approved by the Trustees, which may
include the use of yield equivalents or matrix pricing.
Money market instruments with less than sixty days remaining to maturity
when acquired by a Fund or the Portfolio are valued on an amortized cost basis.
If a Fund or the Portfolio acquires a money market instrument with more than
sixty days remaining to its maturity, it is valued at current market value until
the sixtieth day prior to maturity and will then be valued at amortized cost
based upon the value on such date unless the Trustees determine during such
sixty-day period that amortized cost does not represent fair value.
The Board of Trustees of the Trust has approved with respect to Short-Term
Asset Reserve Fund determining the current market value of securities with one
year or less remaining to maturity on a spread basis which will be employed in
<PAGE>
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.
THE FUNDS AND THEIR SHARES
Each Fund is an investment series of the Trust, an unincorporated business
trust organized under the laws of The Commonwealth of Massachusetts pursuant to
an Agreement and Declaration of Trust dated August 13, 1986. Under the Agreement
and Declaration of Trust, the Trustees of the Trust have authority to issue an
unlimited number of shares of beneficial interest, par value $.01 per share, of
each Fund. Each share of a Fund represents an equal proportionate interest in
the Fund with each other share and is entitled to such dividends and
distributions as are declared by the Trustees. 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 a Fund,
shareholders of that Fund 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 any
Fund. The Trustees have established other series of the Trust. 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 Funds. Pursuant to the Declaration of Trust and subject to
shareholder approval (if then required by applicable law), the Trustees may
authorize each 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, only the Fixed Income Fund invests all of its investible
assets in another open-end investment company.
All Fund shares have equal rights with regard to voting, and shareholders
of a Fund have the right to vote as a separate class with respect to matters as
to which their interests are not identical to those of shareholders of other
classes of the Trust, including the approval of an investment advisory contract
and any change of investment policy requiring the approval of shareholders.
Under Massachusetts law, shareholders of the Trust could, under certain
circumstances, be held liable for the obligations of the Trust. However, the
Agreement and Declaration of Trust disclaims shareholder liability for acts or
obligations of the Trust and requires that notice of this disclaimer be given in
each agreement, obligation or instrument entered into or executed by the Trust
or a Trustee. The Declaration also provides for indemnification from the assets
of the Trust for all losses and expenses of any Trust shareholder held liable
for the obligations of the Trust. Thus, the risk of a shareholder incurring a
financial loss on account of his or its liability as a shareholder of the Trust
is limited to circumstances in which the Trust would be unable to meet its
<PAGE>
obligations. The possibility that these circumstances would occur is remote.
Upon payment of any liability incurred by the Trust, the shareholder paying the
liability will be entitled to reimbursement from the general assets of the
Trust. The Declaration also provides that no series of the Trust is liable for
the obligations of any other series. The Trustees intend to conduct the
operations of the Trust to avoid, to the extent possible, ultimate liability of
shareholders for liabilities of the Trust.
Except as described below, whenever the Trust, on behalf of the Fixed
Income Fund, is requested to vote on a fundamental policy of or matters
pertaining to the Portfolio, the Trust will hold a meeting of the Fixed Income
Fund's shareholders and will cast its vote proportionately as instructed by the
Fixed Income Fund's shareholders. Fixed Income Fund shareholders who do not vote
will not affect the Trust's votes at the Portfolio meeting. The percentage of
the Trust's votes representing Fixed Income Fund shareholders not voting will be
voted by the Trustees of the Trust in the same proportion as the Fixed Income
Fund shareholders who do, in fact, vote. Subject to applicable statutory and
regulatory requirements, the Fixed Income Fund would not request a vote of its
shareholders with respect to (a) any proposal relating to the Portfolio, which
proposal, if made with respect to the Fixed Income Fund, would not require the
vote of the shareholders of the Fund, or (b) any proposal with respect to the
Portfolio that is identical in all material respects to a proposal that has
previously been approved by shareholders of the Fixed Income Fund. Any proposal
submitted to holders in the Portfolio, and that is not required to be voted on
by shareholders of the Fixed Income Fund, would nonetheless be voted on by the
Trustees of the Trust.
THE PORTFOLIO AND ITS INVESTORS
The Portfolio is a series of Standish, Ayer & Wood Master Portfolio, a
newly formed trust and, like the Fixed Income Fund, is an open-end management
investment company under the Investment Company Act of 1940, as amended. The
Portfolio Trust was organized as a master trust fund under the laws of the State
of New York on January 18, 1996.
Interests in the Portfolio have no preemptive or conversion rights, and are
fully paid and non-assessable, except as set forth in the Prospectus. The
Portfolio normally will not hold meetings of holders of such interests except as
required under the 1940 Act. The Portfolio would be required to hold a meeting
of holders in the event that at any time less than a majority of its Trustees
holding office had been elected by holders. The Trustees of the Portfolio
continue to hold office until their successors are elected and have qualified.
Holders holding a specified percentage of interests in the Portfolio may call a
meeting of holders in the Portfolio for the purpose of removing any Trustee. A
Trustee of the Portfolio may be removed upon a majority vote of the interests
held by holders in the Portfolio qualified to vote in the election. The 1940 Act
requires the Portfolio to assist its holders in calling such a meeting. Upon
liquidation of the Portfolio, holders in the Portfolio would be entitled to
share pro rata in the net assets of the Portfolio available for distribution to
holders. Each holder in the Portfolio is entitled to a vote in proportion to its
percentage interest in the Portfolio.
<PAGE>
TAXATION
Each series of the Trust, including each Fund, is treated as a separate
entity for accounting and tax purposes. Each Fund has qualified and elected to
be treated as a "regulated investment company" ("RIC") under Subchapter M of the
Code, and intends to continue to so qualify in the future. As such and by
complying with the applicable provisions of the Code regarding the sources of
its income, the timing of its distributions, and the diversification of its
assets, each 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 in accordance with the timing
requirements of the Code.
The Portfolio is treated as a partnership for federal income tax purposes.
As such, the Portfolio is not subject to federal income taxation. Instead, the
Fixed Income Fund must take into account, in computing its federal income tax
liability (if any), its share of the Portfolio's income, gains, losses,
deductions, credits and tax preference items, without regard to whether it has
received any cash distributions from the Portfolio. Because the Fixed Income
Fund invests its assets in the Portfolio, the Portfolio normally must satisfy
the applicable source of income and diversification requirements in order for
the Fund to satisfy them. The Portfolio will allocate at least annually among
its investors, including the Fixed Income Fund, each investor's distributive
share of the Portfolio's net investment income, net realized capital gains, and
any other items of income, gain, loss, deduction or credit. The Portfolio will
make allocations to the Fixed Income Fund in a manner intended to comply with
the Code and applicable regulations and will make moneys available for
withdrawal at appropriate times and in sufficient amounts to enable the Fixed
Income Fund to satisfy the tax distribution requirements that apply to the Fixed
Income Fund and that must be satisfied in order to avoid Federal income and/or
excise tax on the Fixed Income Fund. For purposes of applying the requirements
of the Code regarding qualification as a RIC, the Fixed Income Fund will be
deemed (i) to own its proportionate share of each of the assets of the Portfolio
and (ii) to be entitled to the gross income of the Portfolio attributable to
such share.
Each 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. Each
Fund intends under normal circumstances to seek to avoid liability for such tax
by satisfying such distribution requirements. Certain distributions made in
order to satisfy the Code's distribution requirements may be declared by the
Funds during October, November or December of the year but paid during the
following January. Such distributions will be taxable to taxable shareholders as
if received on December 31 of the year the distributions are declared, rather
than the year in which the distributions are received.
Each Fund is not subject to Massachusetts corporate excise or franchise
taxes. Provided that the Funds qualify as regulated investment companies under
the Code, they will also not be required to pay any Massachusetts income tax.
<PAGE>
Each 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, a 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 Short-Term Asset Reserve Fund has $3,071,161, $1,512,610,
$5,263,400, $568,968 and $277,757 of capital loss carryforwards, which expire on
December 31, 2000, December 31, 2001, December 31, 2002, December 31, 2003, and
December 31, 2004, respectively, available to offset future net capital gains.
The Controlled Maturity Fund has $10,860 of capital loss carryforwards which
expire on December 31, 2004, and the Securitized Fund has $1,745,441 and
$234,501 of capital loss carryforwards which expire on December 31, 2002 and
December 31, 2004, respectively, available to offset future net capital gains.
If a Fund or the Portfolio invests in zero coupon securities, certain
increasing rate or deferred interest securities or, in general, other securities
with original issue discount (or with market discount if a Fund elects to
include market discount in income currently), the Fund or the Portfolio must
accrue income on such investments prior to the receipt of the corresponding cash
payments. However, a Fund must distribute, at least annually, all or
substantially all of its net income, including its distributive share of such
income accrued by the Portfolio, in the case of the Fixed Income Fund, to
shareholders to qualify as a regulated investment company under the Internal
Revenue Code and avoid federal income and excise taxes. Therefore, a Fund or the
Portfolio may have to dispose of its portfolio securities under disadvantageous
circumstances to generate cash, or may have to leverage itself by borrowing the
cash, to enable the Funds to satisfy the distribution requirements.
Limitations imposed by the Codes on regulated investment companies like the
Funds may restrict a Fund's or the Portfolio's ability to enter into futures,
options or currency forward transactions. Only the Portfolio and Securitized
Fund may engage in currency forward transactions.
Certain options, futures or currency forward transactions undertaken by a
Fund or the Portfolio may cause the Fund to recognize gains or losses from
marking to market even though the Fund's or the Portfolio's positions have not
been sold or terminated and affect the character as long-term or short-term (or,
in the case of certain options, futures or forward contracts relating to foreign
currency, as ordinary income or loss) and timing of some capital gains and
losses realized by a Fund or realized by the Portfolio and allocable to the
Fixed Income Fund. Any net mark to market gains may also have to be distributed
by a Fund to satisfy the distribution requirements referred to above even though
<PAGE>
no corresponding cash amounts may concurrently be received, possibly requiring
the disposition of portfolio securities or borrowing to obtain the necessary
cash. Also, certain losses on transactions involving options, futures or forward
contracts and/or offsetting or successor positions may be deferred rather than
being taken into account currently in calculating the Funds' taxable income or
gain. Certain of the applicable tax rules may be modified if a Fund or the
Portfolio is eligible and chooses to make one or more of certain tax elections
that may be available. These transactions may affect the amount, timing and
character of a Fund's distributions to shareholders. Each Fund will take into
account the special tax rules applicable to options, futures or forward
contracts in order to minimize any potential adverse tax consequences.
The Federal income tax rules applicable to dollar rolls, currency swaps,
and interest rate swaps, caps, floors and collars are unclear in certain
respects, and a Fund or the Portfolio may be required to account for these
instruments under tax rules in a manner that, under certain circumstances, may
limit its transactions in these instruments. Due to possible unfavorable
consequences under present tax law, each Fund and the Portfolio do not currently
intend to acquire "residual" interests in real estate mortgage investment
conduits ("REMICs"), although the Funds or the Portfolio may acquire "regular"
interests in REMICs.
Foreign exchange gains and losses realized by the Portfolio and the
Securitized Fund in connection with certain transactions, if any, 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 Fund
distributions to shareholders. In some cases, elections may be available that
would alter this treatment. Any such transactions that are not directly related
to the Portfolio's or the Securitized 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 (or share of such gain in the case of the Fixed Income Fund plus any
such gain the Fund may realize from other sources) is limited under the Code to
less than 30% of each Fund's gross income for its taxable year, and could under
future Treasury regulations produce income not among the types of "qualifying
income" from which each Fund must derive at least 90% of its gross income for
its taxable year.
The Portfolio or the Securitized 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 in some cases. Investors in the Fixed Income Fund
or the Securitized Fund would be entitled to claim U.S. foreign tax credits with
respect to such taxes, subject to certain provisions and limitations contained
in the Code, only if more than 50% of the value of the applicable Fund's total
assets (in the case of the Fixed Income Fund, taking into account its allocable
share of the Portfolio's assets) at the close of any taxable year were to
consist of stock or securities of foreign corporations and the Fund were to file
an election with the Internal Revenue Service. Because the investments of the
Portfolio and the Securitized Fund are such that each Fund expects that it will
not meet this 50% requirement, shareholders of each Fund generally will not
directly take into account the foreign taxes, if any, paid by the Portfolio and
allocable to the Fixed Income Fund or paid by the Securitized Fund, and will not
be entitled to any related tax deductions or credits. Such taxes will reduce the
amounts each Fund would otherwise have available to distribute.
<PAGE>
If the Portfolio or the Securitized Fund acquires stock in certain foreign
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 Fixed Income Fund or the
Securitized Fund could be subject to Federal income tax and additional interest
charges on "excess distributions" actually or constructively received from such
companies or gain from the actual or deemed sale of stock in such companies,
even if all income or gain actually realized is timely distributed to its
shareholders. They would not be able to pass through to their shareholders any
credit or deduction for such a tax. Certain elections may, if available,
ameliorate these adverse tax consequences, but any such election would require
them to recognize taxable income or gain without the concurrent receipt of cash.
The Portfolio and the Securitized Fund may limit and/or manage stock holdings,
if any, in passive foreign investment companies to minimize each Fund's tax
liability or maximize its return from these investments.
Investment in debt obligations by the Portfolio that are at risk of or in
default presents special tax issues for the Fixed Income Fund. Tax rules are not
entirely clear about issues such as when the Portfolio may cease to accrue
interest, original issue discount, or market discount, when and to what extent
deductions may be taken for bad debts or worthless securities, how payments
received on obligations in default should be allocated between principal and
income, and whether exchanges of debt obligations in a workout context are
taxable. These and other issues will be addressed by the Portfolio, in the event
that it holds such obligations, in order to reduce the risk of the Fixed Income
Fund, or any other RIC investing in the Portfolio, distributing insufficient
income to preserve its status as a RIC or becoming subject to Federal income or
excise tax.
Distributions from a Fund's current or accumulated earnings and profits
("E&P"), as computed for Federal income tax purposes, will be taxable as
described in the Funds' Prospectus whether taken in shares or in cash.
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.
A 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 a Fund earned dividend income (or, in the case of
the Fixed Income Fund, was allocated dividend income of the Portfolio) from
stock investments in U.S. domestic corporations. The Funds and the Portfolio are
permitted to acquire preferred stocks, and it is therefore possible that a
portion of a Fund's distributions, from the dividends attributable 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.
<PAGE>
At the time of an investor's purchase of Fund shares, a portion of the
purchase price may be attributable to undistributed net investment income and/or
realized or unrealized appreciation in the Fund's portfolio (or share of the
Portfolio's portfolio in the case of the Fixed Income Fund). Consequently,
subsequent distributions by a Fund on such shares 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 economically represent a
return of a portion of the purchase price.
Upon a redemption (including a repurchase) of shares of a 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 generally 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,
subject to the rules described below. Any loss realized on a redemption may be
disallowed to the extent the shares disposed of are replaced with other shares
of the same 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.
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. A state income (and possibly local income
and/or intangible property) tax exemption is generally available to the extent,
if any, a Fund's distributions are derived from interest on (or, in the case of
intangible property taxes, the value of its assets is attributable to)
investments in certain U.S. Government obligations, provided in some states that
certain thresholds for holdings of such obligations and/or reporting
requirements are satisfied. Shareholders should consult their tax advisers
regarding the applicable requirements in their particular states, including the
<PAGE>
effect, if any, of the Fixed Income Fund's indirect ownership (through the
Portfolio) of any such obligations, as well as the Federal, and any other state
or local, tax consequences of ownership of shares of, and receipt of
distributions from, a 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 Prospectus and this Statement of Additional Information omit certain
information contained in the registration statement filed with the SEC, which
may be obtained from the SEC's principal office at 450 Fifth Street, N.W.,
Washington, D.C. 20549, upon payment of the fee prescribed by the rules and
regulations promulgated by the Commission.
EXPERTS AND FINANCIAL STATEMENTS
Except as noted in the next sentence, each Fund's financial statements
contained in the 1996 Annual Reports of the Funds have been audited by Coopers &
Lybrand L.L.P., independent accountants, and are incorporated by reference into
and attached to this Statement of Additional Information. Financial highlights
of Fixed Income Fund, Securitized Fund and Short-Term Asset Reserve Fund for
periods from commencement of operations through December 31, 1992 were audited
by Deloitte & Touche, LLP, independent auditors. The Portfolio's financial
statements contained in the Fixed Income Fund's 1996 Annual Report have been
audited by Coopers & Lybrand, an affiliate of Coopers & Lybrand L.L.P.
APPENDIX
MOODY'S RATINGS DEFINITIONS FOR CORPORATE BONDS AND SOVEREIGN, SUBNATIONAL
AND SOVEREIGN RELATED ISSUES
Aaa - Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa - Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long term risks appear somewhat larger than in Aaa securities.
<PAGE>
A - Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa - Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba - Bonds which are rated Ba are judged to have speculative elements.
Their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
STANDARD & POOR'S RATINGS DEFINITIONS
AAA - Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA- Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A - Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB - Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB - Debt rated BB is regarded, on balance, as predominantly speculative
with respect to capacity to pay interest and repay principal in accordance with
the terms of the obligation. While such debt will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or major
risk exposures to adverse conditions.
STANDARD & POOR'S CHARACTERISTICS OF SOVEREIGN DEBT OF
FOREIGN COUNTRIES
AAA- Stable, predictable governments with demonstrated track record of
responding flexibly to changing economic and political circumstances
Key players in the global trade and financial system: - Prosperous and
resilient economies, high per capita incomes - Low fiscal deficits and
government debt, low inflation - Low external debt
AA- Stable, predictable governments with demonstrated track record of
responding to changing economic and political circumstances
- Tightly integrated into global trade and financial system - Differ from
AAAs only to a small degree because:
- Economies are smaller, less prosperous and generally more vulnerable to
adverse external influences (e.g., protection and terms of trade shocks)
<PAGE>
- More variable fiscal deficits, government debt and inflation
- Moderate to high external debt
A- Politics evolving toward more open, predictable forms of governance in
environment of rapid economic and social change
- Established trend of integration into global trade and financial system
- Economies are smaller, less prosperous and generally more vulnerable to
adverse external influences (e.g., protection and terms of trade shocks),
but
- Usually rapid growth in output and per capita incomes
- Manageable through variable fiscal deficits, government debt and
inflation - Usually low but variable debt - Integration into global trade
and financial system growing but untested
- Low to moderate income developing economies but variable performance and
quite vulnerable to adverse
external influences
- Variable to high fiscal deficits, government debt and inflation
- Very high and variable debt, often graduates of Brady plan but track
record not well established BBB- Political factors a source of significant
uncertainty, either because system is in transition or due to external
threats, or both, often in environment of rapid economic and
social change - Integration into global trade and financial system growing
but untested - Economies less prosperous and often more vulnerable to
adverse external influences - Variable to high fiscal deficits, government
debt and inflation - High and variable external debt BB- Political factors
a source of major uncertainty, either because system is in transition or
due to external threats, or both, often in environment of rapid
economic and social change
- Integration into global trade and financial system growing but
untested
- Low to moderate income developing economies, but variable performance and
quite vulnerable to adverse external influences
- Variable to high fiscal deficits, government debt and inflation
- Very high and variable debt, often graduates of Brady Plan but track
record not well established BB- Political factors a source of major
uncertainty, either because system is in transition or due to
external threats, or both, often in environment of rapid economic and social
change
In the case of sovereign, subnational and sovereign related issuers, the
Portfolio uses the foreign currency or domestic (local) currency rating
depending upon how a security in the portfolio is denominated. In the case where
the Portfolio holds a security denominated in a domestic (local) currency and
one of the rating services does not provide a domestic (local) currency rating
for the issuer, the Portfolio will use the foreign currency rating for the
issuer; in the case where the Portfolio holds a security denominated in a
foreign currency and one of the rating services does not provide a foreign
currency rating for the issuer, the Portfolio will treat the security as being
unrated.
<PAGE>
DESCRIPTION OF DUFF & PHELPS RATINGS FOR CORPORATE BONDS AND FOR SOVEREIGN,
SUBNATIONAL AND SOVEREIGN RELATED ISSUERS
AAA - Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA - High credit quality. Protection factors are strong. Risk is modest but
may vary slightly from time to time because of economic conditions.
A - Protection factors are average but adequate. However, risk factors are
more variable and greater in periods of economic stress.
BBB - Below average protection factors but still considered sufficient for
prudent investment. Considerable variability in risk during economic cycles.
BB - Below investment grade but deemed likely to meet obligations when due.
Present or prospective financial protection factors fluctuate according to
industry conditions or company fortunes. Overall quality may move up or down
frequently within this category.
FITCH INVESTORS SERVICE, INC. LONG-TERM DEBT RATING DEFINITIONS
AAA - Bonds 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 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. Because bonds rated in
the AAA and AA categories are not significantly vulnerable to foreseeable future
developments, short-term debt of these issuers is generally rated F-1+.
A - Bonds 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 considered to be investment grade and of 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 impact 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.
BB - Bonds are considered speculative. The obligor's ability to pay
interest and repay principal may be affected over time by adverse economic
changes. However, business and financial alternatives can be identified which
could assist the obligor in satisfying its debt service requirements.
<PAGE>
IBAC LONG TERM RATINGS FOR CORPORATE BONDS AND FOR SOVEREIGN, SUBNATIONAL
AND SOVEREIGN RELATED ISSUES
AAA - Obligations for which there is the lowest expectation of investment
risk. Capacity for timely repayment of principal and interest is substantial,
such that adverse changes in business, economic or financial conditions are
unlikely to increase investment risk substantially.
AA - Obligations for which there is a very low expectation of investment
risk. Capacity for timely repayment of principal and interest is substantial.
Adverse changes in business, economic or financial conditions may increase
investment risk, albeit not very significantly.
A - Obligations for which there is currently 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.
<PAGE>
The Standish Group of
Global Fixed Income Funds
Standish International Fixed Income Fund
Standish Global Fixed Income Fund
Prospectus
..........................
<PAGE>
Standish Group of Global Fixed Income Funds
....................................................................
The Standish International Fixed Income Fund and the Standish Global Fixed
Income Fund are each organized as a separate non-diversified investment series
of Standish, Ayer & Wood Investment Trust, an open end investment company. The
Global Fixed Income Fund invests solely in the Standish Global Fixed Income
Portfolio, an open end investment company. Standish International Management
Company, L.P. ("SIMCO"), Boston, Massachusetts is the investment adviser to the
Portfolio and the International Fixed Income Fund.
Prospective investors can obtain more information about the Funds, including
an application and Investor Guide, by calling Standish Fund Distributors, L.P.
at (800) 729-0066.
The primary investment management and research focus of SIMCO is at the
security and industry/sector level. SIMCO seeks to add value to each Fund's
portfolio by selecting undervalued investments, rather than by varying the
average maturity of a Fund's portfolio to reflect interest rate forecasts. SIMCO
utilizes fundamental credit and sector valuation techniques to evaluate what it
considers to be less efficient markets and sectors of the fixed income
marketplace in an attempt to select securities with the potential for the
highest return. SIMCO emphasizes intermediate term economic fundamentals
relating to foreign countries and emerging markets, rather than focusing on
day-to-day fluctuations in a particular currency or in the fixed income markets.
SIMCO serves as the international research and investment arm of Standish, Ayer
& Wood, Inc. ("Standish") for both debt and equity securities in all countries
outside of the United States. Standish has been providing investment counseling
to mutual funds, other institutional investors and high net worth individuals
for more than sixty years. Standish offers a broad array of investment services
that includes U.S., international and global management of fixed income and
equity securities for mutual funds and separate accounts. Privately held by
twenty-one employee/directors and headquartered in Boston, Massachusetts, the
firm employs over eighty investment professionals with a total staff of more
than two hundred.
This Prospectus sets forth concisely the information about the Funds that a
prospective investor should know before investing and should be retained for
future reference. Additional information has been filed with the Securities and
Exchange Commission in a Statement of Additional Information dated May 1, 1997,
as amended or supplemented from time to time. The Statement of Additional
Information is incorporated by reference into this Prospectus and is available
without charge upon request from (800) 729-0066.
Shares of the Funds are not deposits or obligations of, or guaranteed or
endorsed by, any bank or other insured depository institution, and are not
insured by the Federal Deposit Insurance Corporation, the Federal Reserve Board
or any other government agency. An investment in shares of the Funds involves
investment risks, including possible loss of principal.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Shares of the Funds are not available for sale in every state. This
Prospectus is not intended to be an offer to sell shares, nor may an offer to
purchase shares be accepted from investors, in those states where shares of the
Funds may not legally be sold. Contact Standish Fund Distributors to determine
whether the Funds are available for sale in your state.
<PAGE>
Table of Contents
Fund Comparison Highlights ................................................3
Expense Information ..........................................................4
Financial Highlights .........................................................5
Investment Objectives and Policies ...........................................7
The International Fixed Income Fund .......................................7
The Global Fixed Income Fund ..............................................8
Description of Securities and Related Risks ..................................8
General Risks .............................................................8
Specific Risks ............................................................9
Investment Techniques and Related Risks .....................................11
Information about the Master-Feeder Structure ...............................14
Calculation of Performance Data .............................................14
Dividends and Distributions .................................................15
Purchase of Shares ..........................................................15
Net Asset Value .............................................................15
Exchange of Shares ..........................................................16
Redemption of Shares ........................................................16
Management ..................................................................17
Federal Income Taxes ........................................................18
The Funds and Their Shares ..................................................19
Custodian, Transfer Agent and Dividend Disbursing Agent .....................19
Independent Accountants .....................................................19
Legal Counsel ...............................................................19
Tax Certification Instructions ..............................................19
<PAGE>
Fund Comparison Highlights
The following table highlights information contained in this Prospectus and is
qualified in its entirety by the more detailed information contained within. For
a complete description of each Fund's distinct investment objective and
policies, see "Investment Objectives and Policies," "Description of Securities
and Related Risks" and "Investment Techniques and Related Risks." There can be
no assurance that a Fund's investment objective will be achieved.
<TABLE>
<CAPTION>
International Fixed Income Fund Global Fixed Income Fund
------------------------------- ------------------------
<S> <C> <C>
Investment Objective Maximize total return while realizing a market level of Maximize total return while realizing a
income consistent with preserving principal and market level of income consistent with
liquidity preserving principal and liquidity
Foreign Securities Selected Under normal market conditions, 65% or more of total Under normal market conditions, 65% or
assets in fixed income securities of issuers located in more of total assets in fixed income
at least three countries, excluding the U.S. securities of issuers located in at least
three countries, including the U.S.
U.S. Securities Selected Generally will not consider fixed income securities of Generally will consider fixed income
U.S. issuers in its investment strategy securities of U.S. issuers in its
investment strategy
Intended Diversification No fewer than five different countries No fewer than three different countries
Currency Strategy Will hedge currencies to seek to protect the U.S. Will hedge currencies to seek to protect
dollar value of the Fund's assets the U.S. dollar value of the Fund's assets
Below Investment Grade Yes, up to 5% of total assets in securities rated Ba by Yes, up to 15% of total assets in
Moody's or BB by Standard and Poor's, Duff, Fitch or securities rated Ba by Moody's or BB by
IBCA Standard and Poor's, Duff, Fitch or IBCA
Average Portfolio Quality Aa/AA In range of AA/Aa to A/A
Benchmark J.P. Morgan Non-U.S. Government Bond Index J.P. Morgan Global Government Bond
(Hedged) and Lehman Brothers Aggregate Bond Index Index (Hedged)
</TABLE>
<PAGE>
Expense Information
Total operating expenses are based on expenses for each Fund's fiscal year ended
December 31, 1996. Total operating expenses for the Global Fixed Income Fund
include expenses of the Fund and the Standish Global Fixed Income Portfolio
("Portfolio"). The Trust's Trustees believe that the Global Fixed Income Fund's
total operating expenses are approximately equal to or less than what would be
the case if the Fund did not invest all of its investable assets in the
Portfolio.
<TABLE>
<CAPTION>
Shareholder Transaction Expenses
<S> <C> <C>
Maximum Sales Load Imposed on Purchases None None
Maximum Sales Load Imposed on Reinvested Dividends None None
Deferred Sales Load None None
Redemption Fees None None
Annual Operating Expenses
(as a percentage of average net assets)
Management Fees 0.40% 0.40%
12b-1 Fees None None
Other Expenses+ 0.13% 0.25%
------------------- -------------------
Total Operating Expenses 0.53% 0.65%
=================== ===================
</TABLE>
+ Other expenses include custodian and transfer agent fees, registration
costs, payments for insurance, and audit and legal services
Example
Hypothetically assume that each Fund's annual return is 5% and that its total
operating expenses are exactly as described. for every $1,000 invested, an
investor would have paid the followihg expenses if an account were closed after
the number of years indicated:
After 1 Year $6 $7
After 3 Years 17 21
After 5 Years 30 36
After 10 Years 67 81
The purpose of the table is to assist investors in understanding the
various costs and expenses that an investor in each Fund will bear directly or
indirectly. The example is included solely for illustrative purposes and should
not be considered a representation of future performance or expenses. Actual
expenses may be more or less than those shown. See "Management" for additional
information about each Fund's expenses.
<PAGE>
<TABLE>
<CAPTION>
Financial Highlights
The financial highlights for periods after 1992 have been audited by Coopers &
Lybrand L.L.P., independent accountants, whose reports, together with the
Financial Statements of the Funds, are incorporated into the Statement of
Additional Information. Financial highlights for prior periods were audited by
other independent accountants. The Funds' annual reports, which contain
additional information about Fund performance, may be obtained from Standish
Fund Distributors without charge.
1996 1 1995 1994 1993 1992*
Net asset value - beginning of period $23.21 $21.30 $24.22 $21.20 $22.05
-------------- -------------- ---------------- ---------------- -------------
Income from investment operations
<S> <C> <C> <C> <C> <C>
Net investment income $1.72 $1.96 $1.71 $2.03 $2.01
Net realized and unrealized gain
(loss) on Investments 1.73 1.84 (3.93) 2.90 (0.25)
-------------- -------------- ---------------- ---------------- -------------
Total from investment operations $3.45 $3.80 ($2.22) $4.93 $1.76
-------------- -------------- ---------------- ---------------- -------------
Less distributions declared
to shareholders
From net investment income ($2.64) ($1.89) ($0.20) ($1.53) ($2.03)
From realized gain (0.77) -- -- (0.26) (0.54)
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 ($3.41) ($1.89) ($0.70) ($1.91) ($2.61)
-------------- -------------- ---------------- ---------------- -------------
Net asset value - end of period $23.25 $23.21 $21.30 $24.22 $21.20
============== ============== ================ ================ =============
Total return2 15.28% 18.13% (9.22%) 23.77% 8.07%
Ratios (to average daily net assets)/
Supplemental Data
Net assets at end of period (000 omitted) $840,133 $803,537 $1,069,416 $1,131,201 $384,660
Expenses 0.53% 0.51% 0.51% 0.51% 0.59%
Net investment income 7.17% 8.09% 7.69% 7.53% 8.37%
Portfolio turnover 226.00% 165.00% 158.00% 98.00% 175.00%
</TABLE>
<PAGE>
International Fixed Income Fund Year Ended December 31,
1991*+
Net asset value - beginning of period $20.00
-------------
Income from investment operations
Net investment income $1.55
Net realized and unrealized gain
(loss) on Investments 1.44
-------------
Total from investment operations $2.99
-------------
Less distributions declared
to shareholders
From net investment income ($0.04)
From realized gain (0.90)
In excess of net realized gain --
In excess of net investment income --
Tax return of capital --
-------------
Total distributions declared to shareholders ($0.94)
-------------
Net asset value - end of period $22.05
=============
Total return2 15.11%t
Ratios (to average daily net assets)/
Supplemental Data
Net assets at end of period (000 omitted) $72,697
Expenses 0.80%t
Net investment income 8.00%t
Portfolio turnover 319.00%
t Computed on an annualized basis.
* Audited by other auditors.
+ For the period from January 2, 1991 (start of business) to December 31, 1991.
1 Computed based on average shares outstanding.
2 The Fund's performance benchmarks are the J.P. Morgan Non-U.S. Government
Bond Index (Hedged) and the Lehman Brothers Aggregate Bond Index. See
"Calculation of Performance Data" for a description of these indices. The
average annual total return of these indices for each year since the Fund's
inception was as follows (this total return information is not audited):
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992 1991
Total Return
<S> <C> <C> <C> <C> <C> <C>
J.P. Morgan Non-U.S. Government Bond Index (Hedged) 12.60% 18.23% (5.07%) 13.90% 5.97% 10.90%
Lehman Brothers Aggregate Bond Index 3.61% 18.47% 2.92% 9.75% 7.40% 16.00%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Global Fixed Income Fund Year Ended December 31,
1996(3) 1995 1994+
Net asset value - beginning of period $19.53 $17.99 $20.00
-------------- ---------------- --------------
Income from investment operations
<S> <C> <C> <C>
Net investment income $1.42 $1.59 $1.29
Net realized and unrealized gain (loss) 1.05 1.60 (2.70)
-------------- ---------------- --------------
Total from investment operations $2.47 $3.19 ($1.41)
Less distributions declared to shareholders
Tax return of capital -- -- ($0.60)
From net investments income (1.91) (1.65) --
-------------- ---------------- --------------
Total distributions declared to shareholders ($1.91) ($1.65) ($0.60)
-------------- ---------------- --------------
Net asset value - end of period $20.09 $19.53 $17.99
============== ================ ==============
Total return4 13.03% 18.13% (7.06)%
Ratios (to average daily net assets)/Supplemental Data
Net assets at end of period (000 omitted) $155,731 $137,899 $135,232
Expenses1 0.65% 0.62% 0.65%t*
Net investment income 7.11% 7.69% 7.73%t*
Portfolio turnover2 73.00% 163.00% 140.00%
</TABLE>
* The Adviser voluntarily agreed not to impose a portion of its investment
advisory fee for the year ended December 31, 1994. Had these actions not
been taken, the net investment income per share and the ratios would have
been:
Net investment income per share $1.27 Ratios (to average daily net
assets):
Expenses 0.73%t
Net investment income 7.65%t
t Computed on an annualized basis.
+ For the period from January 3, 1994 (start of business) to December 31,
1994.
1 Includes the Fund's share of Standish Global Fixed Income Portfolio's
allocated expenses for the period from May 3, 1996 to December 31, 1996.
2 Portfolio turnover represents the rate of portfolio activity for the period
while the Fund was making investments directly in securities. The portfolio
turnover rate for the period since the Fund trasferred substantially all of
its investable assets to the Portfolio is 111% as shown in the Standish
Global Fixed Income Portfolio's financial statements included in the
Statement of Additional Information.
3 Computed based on average shares outstanding.
4 The Fund's performance benchmark is the J.P. Morgan Global Index (Hedged).
See "Calculation of Performance Data" for a description of this index. The
average annual total return of this index for each year since the Fund's
inception was as follows (the total return information was not audited):
1996 1995 1994
Total Return
J.P. Morgan Global Government Bond Index (Hedged) 8.60% 17.89% (4.05)%
<PAGE>
Investment Objectives and Policies
....................................................................
Investment Strategy
Each Fund is an actively managed non-diversified portfolio consisting
primarily of fixed income securities denominated in foreign currencies and the
U.S. dollar. Each Fund is managed to maximize total return while realizing a
market level of income consistent with preserving principal and liquidity. In
pursuing each Fund's investment strategy, SIMCO seeks to add value to each
Fund's portfolio by selecting undervalued investments, rather than by varying
the average maturity of a Fund's portfolio to reflect interest rate forecasts.
SIMCO utilizes fundamental credit and sector valuation techniques to evaluate
what it considers to be less efficient markets and sectors of the fixed income
marketplace in an attempt to select securities with the potential for the
highest return. SIMCO emphasizes intermediate term economic fundamentals
relating to foreign countries and emerging markets, rather than focusing on
day-to-day fluctuations in a particular currency or in the fixed income markets.
Securities. The Funds may invest in all types of fixed income securities
including bonds, notes (including structured or hybrid notes), mortgage-backed
securities, asset-backed securities, convertible securities, Eurodollar and
Yankee Dollar instruments, preferred stocks (including convertible preferred
stock), listed and unlisted warrants and money market instruments. These fixed
income securities may be issued by foreign and U.S. corporations or entities,
foreign governments and their political subdivisions, the U.S. government, its
agencies, authorities, instrumentalities or sponsored enterprises and
supranational entities. 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.
Each Fund purchases securities that pay interest on a fixed, variable,
floating, inverse floating, contingent, in-kind or deferred basis. Each Fund may
enter into repurchase agreements and forward dollar roll transactions, may
purchase zero coupon and deferred payment securities, may buy securities on a
when-issued or delayed delivery basis, may engage in short sales and may lend
portfolio securities. Each Fund may enter into various forward foreign currency
exchange transactions and foreign currency futures transactions and utilize
over-the-counter ("OTC") options to seek to manage the Fund's foreign currency
exposure.
Please refer to each Fund's specific investment objective and policies and
the "Description of Securities" section for a more comprehensive list of
permissible securities and investments.
Credit Quality. Each Fund invests primarily in investment grade fixed income
securities, i.e., securities rated at the time of purchase at least Baa by
Moody's Investors Service, Inc. or BBB by Standard & Poor's Ratings Group, Duff
& Phelps, Inc., Fitch Investors Service, Inc. or IBCA, Ltd., or, if unrated,
determined by SIMCO to be of comparable credit quality. If a security is rated
differently by two or more rating agencies, SIMCO uses the highest rating to
compute a Fund's credit quality and also to determine its rating category. In
determining whether unrated securities are of equivalent credit quality, SIMCO
may take into account, but will not rely entirely on, ratings assigned by
foreign rating agencies. If the rating of a security held by a Fund is
downgraded below the minimum rating required for the particular Fund, SIMCO will
determine whether to retain that security in a Fund's portfolio.
Securities rated within the top three investment grade ratings (i.e., Aaa,
Aa, A or P-1 by Moody's or AAA, AA, A, A-1 or Duff-1 by Standard & Poor's, Duff,
Fitch or IBCA) are generally regarded as high grade obligations. Securities
rated Baa or P-2 by Moody's or BBB, A-2 or Duff-2 by Standard & Poor's, Duff,
Fitch or IBCA are generally considered medium grade obligations and have some
speculative characteristics. Adverse changes in economic conditions or other
circumstances are more likely to weaken the medium grade issuer's capability to
pay interest and repay principal than is the case for high grade securities. The
Funds may also invest, to a limited degree, in below investment grade fixed
income securities rated Ba by Moody's or BB by Standard & Poor's, Duff, Fitch or
IBCA, or, if unrated, determined by SIMCO to be of comparable credit quality.
Below investment grade securities, commonly referred to as "junk bonds," carry a
higher degree of risk than investment grade securities and are considered
speculative by the rating agencies. SIMCO attempts to select for the Funds those
medium grade and non-investment grade fixed income securities that have the
potential for upgrade.
Each Fund's specific investment objective and policies are set forth below
and will assist the investor in differentiating each Fund's unique
characteristics. Because of the uncertainty inherent in all investments, no
assurance can be given that a Fund will achieve its investment objective. See
"Description of Securities and Related Risks" and "Investment Techniques and
Related Risks" below for additional information.
The International Fixed Income Fund
Investment Objective. The Fund's investment objective is to maximize total
return while realizing a market level of income consistent with preserving
principal and liquidity.
Securities. Under normal market conditions, the Fund invests at least 65% of
its total assets in fixed income securities of foreign governments or their
political subdivisions and companies located in foreign countries.
Country Selection. Under normal market conditions, the Fund's assets are
invested in securities of issuers located in at least five countries, not
including the United States. The Fund intends to invest in no fewer than five
foreign countries. The Fund may invest a substantial portion of its assets in
one or more of those five countries. The Fund may also invest up to 10% of its
total assets in emerging markets generally and may invest up to 3% of its total
assets in any one emerging market.
<PAGE>
Credit Quality. The Fund invests primarily in investment grade fixed income
securities. If a non-investment grade fixed income security presents special
opportunities to the Fund, the Fund may invest up to 5% of its total assets in
securities rated Ba by Moody's or BB by Standard and Poor's, Duff, Fitch or
IBCA, or, if not rated, judged by SIMCO to be of equivalent credit quality. The
average dollar weighted credit quality of the Fund is expected to be Aa
according to Moody's or AA according to Standard & Poor's, Duff, Fitch or IBCA.
The Global Fixed Income Fund
The investment objective and characteristics of the Global Fixed Income Fund
correspond directly to those of the Standish Global Fixed Income Portfolio
("Portfolio") in which the Fund invests all of its investable assets. This
structure, where one fund invests all of its investable assets in another
investment company, is described under the caption "Information About the
Master-Feeder Structure" below. The following discusses the investment
objectives and policies of the Portfolio.
Investment Objective. The Portfolio's investment objective is to maximize
total return while realizing a market level of income consistent with preserving
principal and liquidity.
Securities. Under normal market conditions, the Portfolio invests at least
65% of its total assets in fixed income securities of foreign governments or
their political subdivisions and companies located in countries around the
world, including the United States.
Country Selection. Under normal market conditions, the Portfolio's assets are
invested in securities of issuers located in at least three different countries,
one of which may be the United States. The Portfolio intends, however, to invest
in no fewer than eight foreign countries. The Portfolio may invest a substantial
portion of its assets in one or more of those eight countries. The Portfolio may
also invest up to 10% of its total assets in emerging markets generally and may
invest up to 3% of its total assets in any one emerging market.
Credit Quality. The Portfolio generally invests in investment grade fixed
income securities. If a non-investment grade fixed income security presents
special opportunities for the Portfolio, the Portfolio may invest up to 15% of
its total assets in securities rated Ba by Moody's or BB by Standard and Poor's,
Duff, Fitch or IBCA or, if not rated, judged by SIMCO to be of equivalent credit
quality. The average dollar weighted credit quality of the Portfolio is expected
to be in a range of Aa to A according to Moody's or AA to A according to
Standard & Poor's, Duff, Fitch or IBCA.
Description of Securities and Related Risks
For purposes of the discussion in this section and the "Investment Techniques
and Related Risks" section of this Prospectus, the use of the term "Funds"
includes the Portfolio, unless otherwise noted.
General Risks
Investments in the Funds involve certain risks. Each Fund invests primarily
in the fixed income securities described above and is subject to risks
associated with investments in such securities. These risks include interest
rate risk, default risk and call and extension risk. The Funds are also subject
to risks associated with direct investments in foreign securities and below
investment grade fixed income securities.
Interest Rate Risk. When interest rates decline, the market value of fixed
income securities tends to increase. Conversely, when interest rates increase,
the market value of fixed income securities tends to decline. The volatility of
a security's market value will differ depending upon the security's duration,
the issuer and the type of instrument.
Default Risk/Credit Risk. Investments in fixed income securities are subject
to the risk that the issuer of the security could default on its obligations
causing a Fund to sustain losses on such investments. A default could impact
both interest and principal payments.
Call Risk and Extension Risk. Fixed income securities may be subject to both
call risk and extension risk. Call risk exists when the issuer may exercise a
right to pay principal on an obligation earlier than scheduled which would cause
cash flows to be returned earlier than expected. This typically results when
interest rates have declined and a Fund will suffer from having to reinvest in
lower yielding securities. Extension risk exists when the issuer may exercise a
right to pay principal on an obligation later than scheduled which would cause
cash flows to be returned later than expected. This typically results when
interest rates have increased and a Fund will suffer from the inability to
invest in higher yield securities.
Investing in Foreign Securities. Investing in the securities of foreign
issuers involves risks that are not typically associated with investing in U.S.
dollar-denominated securities of domestic issuers. Investments in foreign
issuers may be affected by changes in currency rates, changes in foreign or U.S.
laws or restrictions applicable to such investments and in exchange control
regulations (i.e., currency blockage). A decline in the exchange rate of the
currency (i.e., weakening of the currency against the U.S. dollar) in which a
portfolio security is quoted or denominated relative to the U.S. dollar would
reduce the value of the portfolio security. Commissions may be higher and
spreads may be greater on transactions in foreign securities than those for
similar transactions in domestic markets. In addition, clearance and settlement
procedures may be different in foreign countries and, in certain markets, such
procedures have on occasion been unable to keep pace with the volume of
securities transactions, thus making it difficult to conduct such transactions.
Foreign issuers are not generally subject to uniform accounting, auditing and
financial reporting standards comparable to those applicable to U.S. issuers.
There may be less publicly available information about a foreign issuer than
about a U.S. issuer. In addition, there is generally less government regulation
of foreign markets, companies and securities dealers than in the U.S. Most
foreign securities markets may have substantially less trading volume than U.S.
securities markets and securities of many foreign issuers are less liquid and
more volatile than securities of comparable U.S. issuers. Furthermore, with
<PAGE>
respect to certain foreign countries, there is a possibility of nationalization,
expropriation or confiscatory taxation, imposition of withholding or other taxes
on dividend or interest payments (or, in some cases, capital gains), limitations
on the removal of funds or other assets, political or social instability or
diplomatic developments which could affect investments in those countries.
Investing in Emerging Markets. Although each Fund invests primarily in
securities of established issuers based in developed foreign countries, it may
also invest in securities of issuers in emerging markets, including issuers in
Asia, Eastern Europe, Latin and South America, the Mediterranean, Russia and
Africa. The Funds may also invest in currencies of such countries and may engage
in strategic transactions in the markets of such countries. Investments in
securities of issuers in emerging markets may involve a high degree of risk and
many may be considered speculative. These investments carry all of the risks of
investing in securities of foreign issuers to a heightened degree. These
heightened risks include (i) greater risks of expropriation, confiscatory
taxation, nationalization, and less social, political and economic stability;
(ii) the small current size of the markets for securities of emerging market
issuers and the currently low or nonexistent volume of trading combined with
frequent artificial limits on daily price movements, resulting in lack of
liquidity and in price uncertainty; (iii) certain national policies which may
restrict a Fund's investment opportunities including limitations on aggregate
holdings by foreign investors and restrictions on investing in issuers or
industries deemed sensitive to relevant national interests; and (iv) the absence
of developed legal structures governing private or foreign investment and
private property.
Currency Risks. The U.S. dollar value of foreign securities denominated in a
foreign currency will vary with changes in currency exchange rates, which can be
volatile. Accordingly, changes in the value of these currencies against the U.S.
dollar will result in corresponding changes in the U.S. dollar value of a Fund's
assets quoted in those currencies. Exchange rates are generally affected by the
forces of supply and demand in the international currency markets, the relative
merits of investing in different countries and the intervention or failure to
intervene of U.S. or foreign governments and central banks. Some countries in
emerging markets also may have managed currencies, which do not float freely
against the U.S. dollar and may restrict the free conversion of their currencies
into other currencies. Any devaluations in the currencies in which a Fund's
securities are denominated may have a detrimental impact on the Fund's net asset
value. Each Fund utilizes various investment strategies to seek to minimize the
currency risks described above. These strategies include the use of currency
transactions such as currency forward and futures contracts, cross currency
forward and futures contracts, currency swaps and options and cross currency
options on currencies or currency futures.
Specific Risks
The following sections include descriptions of specific risks that are
associated with a Fund's purchase of a particular type of security or the
utilization of a specific investment technique.
Sovereign Debt Obligations. Investment in sovereign debt obligations involves
special risks not present in corporate debt obligations. The issuer of the
sovereign debt or the governmental authorities that control the repayment of the
debt may be unable or unwilling to repay principal or interest when due, and a
Fund may have limited recourse in the event of a default. During periods of
economic uncertainty, the market prices of sovereign debt, and a Fund's net
asset value, may be more volatile than prices of U.S. debt obligations. In the
past, certain emerging markets have encountered difficulties in servicing their
debt obligations, withheld payments of principal and interest and declared
moratoria on the payment of principal and interest on their sovereign debts.
A sovereign debtor's willingness or ability to repay principal and pay
interest in a timely manner may be affected by, among other factors, its cash
flow situation, the extent of its foreign currency reserves, the availability of
sufficient foreign exchange, the relative size of the debt service burden, the
sovereign debtor's policy toward principal international lenders and local
political constraints. Sovereign debtors may also be dependent on expected
disbursements from foreign governments, multilateral agencies and other entities
to reduce principal and interest arrearages on their debt. The failure of a
sovereign debtor to implement economic reforms, achieve specified levels of
economic performance or repay principal or interest when due may result in the
cancellation of third-party commitments to lend funds to the sovereign debtor,
which may further impair such debtor's ability or willingness to service its
debts.
Corporate Debt Obligations. Each Fund may invest in corporate debt
obligations and zero coupon securities issued by financial institutions and
corporations. 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.
Brady Bonds. Brady Bonds are securities created through the exchange of
existing commercial bank loans to public and private entities in certain
emerging markets for new bonds in connection with debt restructurings. In light
of the history of defaults of countries issuing Brady Bonds on their commercial
bank loans, investments in Brady Bonds may be viewed as speculative. Brady Bonds
may be fully or partially collateralized or uncollateralized, are issued in
various currencies (but primarily in U.S. dollars) and are actively traded in
over-the-counter secondary markets. Incomplete collateralization of interest or
principal payment obligations results in increased credit risk. U.S.
dollar-denominated collateralized Brady Bonds, which may be fixed-rate bonds or
floating-rate bonds, are generally collateralized by U.S. Treasury zero coupon
bonds having the same maturity as the Brady bonds.
Obligations of Supranational Entities. Each Fund may invest in obligations of
supranational entities designated or supported by governmental entities to
promote economic reconstruction or development and of international banking
institutions and related government agencies. Examples include the International
<PAGE>
Bank for Reconstruction and Development (the "World Bank"), the Asian
Development Bank and the Inter-American Development Bank. Each supranational
entity's lending activities are limited to a percentage of its total capital
(including "callable capital" contributed by its governmental members at the
entity's call), reserves and net income. There is no assurance that
participating governments will be able or willing to honor their commitments to
make capital contributions to a supranational entity.
U.S. Government Securities. Each Fund may invest in U.S. Government
securities. Generally, these securities include U.S. Treasury obligations and
obligations issued or guaranteed by U.S. Government agencies, instrumentalities
or sponsored enterprises which are supported by (a) the full faith and credit of
the U.S. Treasury (such as the Government National Mortgage Association), (b)
the right of the issuer to borrow from the U.S. Treasury (such as securities of
the Student Loan Marketing Association), (c) the discretionary authority of the
U.S. Government to purchase certain obligations of the issuer (such as the
Federal National Mortgage Association and Federal Home Loan Mortgage
Corporation), or (d) only the credit of the agency. No assurance can be given
that the U.S. Government will provide financial support to U.S. Government
agencies, instrumentalities or sponsored enterprises in the future. U.S.
Government securities also include Treasury receipts, zero coupon bonds,
deferred interest securities and other stripped U.S. Government securities,
where the interest and principal components of stripped U.S. Government
securities are traded independently ("STRIPS").
Below Investment Grade Securities. The Global Fixed Income Portfolio and the
International Fixed Income Fund may invest up to 15% and 5%, respectively, of
their total assets in securities rated below investment grade. Fixed income
securities rated below investment grade generally offer a higher yield, but may
be subject to a higher risk of default in interest or principal payments than
higher rated securities. The market prices of below investment grade securities
are generally less sensitive to interest rate changes than higher rated
securities, but are generally more sensitive to adverse economic or political
changes or, in the case of corporate issuers, to individual company
developments. Below investment grade securities also may have less liquid
markets than higher rated securities, and their liquidity, as well as their
value, may be more severely affected by adverse economic conditions. Adverse
publicity and investor perceptions of the market, as well as newly enacted or
proposed legislation, may also have a negative impact on the market for below
investment grade securities. See the Statement of Additional Information for a
detailed description of the ratings assigned to fixed income securities by
Moody's, Standard & Poor's, Duff, Fitch and IBCA.
For the fiscal year ended December 31, 1996, the Global Fixed Income
Portfolio's and the International Equity Fund's investments, on a dollar
weighted basis, calculated at the end of each month, had the following credit
quality characteristics:
Global Fixed Income
Portfolio's Investments Percentage
U.S. Government Securities 6.5%
U.S. Government Agency Securities 5.1%
Corporate Bonds:
Aaa or AAA 31.5%
Aa or AA 16.8%
A 11.8%
Baa or BBB 16.6%
Ba or BB 11.7%
-----
100.0%
International Fixed Income Fund's
Investments Percentage
U.S. Government Securities 0.0%
U.S. Government Agency
Securities 9.3%
Corporate Bonds:
Aaa or AAA 47.7%
Aa or AA 22.5%
A 7.4%
Baa or BBB 9.3%
Ba or BB 3.8%
----
100.0%
Mortgage-Backed Securities. Each Fund may invest in privately issued
mortgage-backed securities and mortgage-backed securities issued or guaranteed
by foreign entities or the U.S. Government or any of its agencies,
instrumentalities or sponsored enterprises. Mortgage-backed securities represent
direct or indirect participations in, or are collateralized by and payable from,
mortgage loans secured by real property. Mortgagors can generally prepay
interest or principal on their mortgages whenever they choose. Therefore,
mortgage-backed securities are often subject to more rapid repayment than their
stated maturity date would indicate as a result of principal prepayments on the
underlying loans. This can result in significantly greater price and yield
volatility than is the case with traditional fixed income securities. During
periods of declining interest rates, prepayments can be expected to accelerate,
and thus impair a Fund's ability to reinvest the returns of principal at
comparable yields. Conversely, in a rising interest rate environment, a
declining prepayment rate will extend the average life of many mortgage-backed
securities, increase a Fund's exposure to rising interest rates and prevent a
Fund from taking advantage of such higher yields.
Asset-Backed Securities. Each Fund may invest in asset-backed securities
issued by foreign or U.S. entities. The principal and interest payments on
asset-backed securities are collateralized by pools of assets such as auto
loans, credit card receivables, leases, installment contracts and personal
property. Such asset pools are securitized through the use of special purpose
trusts or corporations. 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; however, privately issued obligations collateralized by a
portfolio of privately issued asset-backed securities do not involve any
government-related guaranty or insurance. Like mortgage-backed securities,
<PAGE>
asset-backed securities are subject to more rapid prepayment of principal than
indicated by their stated maturity which may greatly increase price and yield
volatility. 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 recoveries on repossessed collateral may not be
available to support payments on these securities.
Convertible Securities. Each Fund may invest in convertible securities
consisting of bonds, notes, debentures and preferred stocks. Convertible debt
securities and preferred stock acquired by a Fund entitle the Fund to exchange
such instruments for common stock of the issuer at a predetermined rate.
Convertible securities are subject both to the credit and interest rate risks
associated with debt obligations and to the stock market risk associated with
equity securities.
Zero Coupon and Deferred Payment Securities. Each Fund may invest in zero
coupon and deferred payment securities. Zero coupon securities are securities
sold at a discount to par value and on which interest payments are not made
during the life of the security. Upon maturity, the holder is entitled to
receive the par value of the security. A Fund is required to accrue income with
respect to these securities prior to the receipt of cash payments. Because a
Fund will distribute this accrued income to shareholders, to the extent that
shareholders elect to receive dividends in cash rather than reinvesting such
dividends in additional shares, the Fund will have fewer assets with which to
purchase income producing securities. Deferred payment securities are securities
that remain zero coupon securities until a predetermined date, at which time the
stated coupon rate becomes effective and interest becomes payable at regular
intervals. Zero coupon and deferred payment securities may be subject to greater
fluctuation in value and may have less liquidity in the event of adverse market
conditions than comparably rated securities paying cash interest at regular
interest payment periods.
Eurodollar and Yankee Dollar Investments. Each Fund may invest in Eurodollar
and Yankee Dollar instruments. Eurodollar instruments are bonds of foreign
corporate and government issuers that pay interest and principal in U.S. dollars
held in banks outside the United States, primarily in Europe. Yankee Dollar
instruments are U.S. dollar denominated bonds typically issued in the U.S. by
foreign governments and their agencies and foreign banks and corporations. The
Funds may invest in Eurodollar Certificates of Deposit ("ECDs"), Eurodollar Time
Deposits ("ETDs") and Yankee Certificates of Deposit ("Yankee CDs"). 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. These investments involve risks that are different from investments in
securities issued by U.S. issuers, including potential unfavorable political and
economic developments, foreign withholding or other taxes, seizure of foreign
deposits, currency controls, interest limitations or other governmental
restrictions which might affect payment of principal or interest.
Structured or Hybrid Notes. Each 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 a Fund to gain exposure to the benchmark market while fixing the maximum
loss that it may experience in the event that the market does not perform as
expected. Depending on the terms of the note, a 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.
Warrants. Warrants acquired by a Fund entitle it to buy common stock from the
issuer at a specified price and time. Warrants are subject to the same market
risks as stocks, but may be more volatile in price. A Fund's investment in
warrants will not entitle it to receive dividends or exercise voting rights and
will become worthless if the warrants cannot be profitably exercised before
their expiration dates.
Inverse Floating Rate Securities. Each 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.
Investment Techniques and Related Risks
Strategic Transactions. Each Fund may, but is not required to, utilize
various investment strategies to seek to hedge market risks (such as interest
rates, currency exchange 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 each
Fund may change over time as new instruments and strategies are developed or
regulatory changes occur.
In the course of pursuing its investment objective, each 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; and, enter into currency
transactions such as forward foreign currency exchange contracts, currency
<PAGE>
futures contracts, currency swaps and 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 a Fund's portfolio
resulting from securities markets, currency exchange rate or interest rate
fluctuations, to seek to protect a Fund's unrealized gains in the value of
portfolio securities, to facilitate the sale of such securities for investment
purposes, to seek to manage the effective maturity or duration of a 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.
The ability of a Fund to utilize Strategic Transactions successfully will
depend on SIMCO's ability to predict pertinent market and interest rate
movements, which cannot be assured. Each Fund will comply with applicable
regulatory requirements when implementing these strategies, techniques and
instruments. The Funds' activities involving Strategic Transactions may be
limited by the requirements of 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
SIMCO's view as to certain market, interest rate or currency 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 a 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 a Fund can realize on its investments
or cause a Fund to hold a security it might otherwise sell.
The use of options and futures transactions entails certain other risks.
Futures markets are highly volatile and the use of futures may increase the
volatility of a Fund's net asset value. In particular, the variable degree of
correlation between price movements of futures contracts and price movements in
the related portfolio position of a Fund creates the possibility that losses on
the hedging instrument may be greater than gains in the value of the Fund's
position. The writing of options could significantly increase a Fund's portfolio
turnover rate and 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, a
Fund might not be able to close out a transaction without incurring substantial
losses. Losses resulting from the use of Strategic Transactions could reduce net
asset value and the net result may be less favorable than if the Strategic
Transactions had not been utilized. Although the use of futures and options
transactions for hedging and managing effective maturity and duration should
tend to minimize the risk of loss due to a decline in the value of the position,
at the same time, such transactions can limit any potential gain which might
result from an increase in value of such position. The loss incurred by a Fund
in writing options on futures and entering into futures transactions is
potentially unlimited.
The use of currency transactions can result in a 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.
Each Fund will attempt to limit its net loss exposure resulting from
Strategic Transactions entered into for non-hedging purposes to no more than 3%
of net assets. In calculating each 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 position. See
the Statement of Additional Information for further information regarding the
use of Strategic Transactions.
When-Issued and Delayed Delivery Securities. Each Fund may invest up to 25%
of its total assets in when-issued and delayed delivery securities. Although a
Fund will generally purchase securities on a when-issued or delayed delivery
basis with the intention of actually acquiring the securities, the Funds may
dispose of these securities prior to settlement, if SIMCO deems it appropriate
to do so. The payment obligation and interest rate on these securities is fixed
at the time a Fund enters into the commitment, but no income will accrue to the
Fund until they are delivered and paid for. Unless a Fund has entered into an
offsetting agreement to sell the securities, cash or liquid assets equal to the
amount of the Fund's commitment must be segregated and maintained with the
Fund's custodian to secure the Fund's obligation and 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.
Portfolio Diversification and Concentration. Each Fund is non-diversified
which means that it may invest more than 5% of its total assets in the
securities of a single issuer. Investing a significant amount of a Fund's assets
in the securities of a small number of foreign issuers will cause the Fund's net
asset value to be more sensitive to events affecting those issuers. The Funds
will not concentrate (invest 25% or more of their total assets) in the
securities of issuers in any one industry. For purposes of this limitation, the
staff of the Securities and Exchange Commission (the "SEC") considers (a) all
supranational organizations as a group to be a single industry and (b) each
foreign government and its political subdivisions to be a single industry.
Repurchase Agreements. Each Fund may invest up to 25% of net assets in
repurchase agreements. In a repurchase agreement, a Fund buys a security at one
price and simultaneously agrees to sell it back at a higher price. Delays or
losses could result if the other party to the agreement defaults or becomes
insolvent. Repurchase agreements acquired by a Fund will always be fully
collateralized as to principal and interest by U. S. Government Securities and
money market instruments and will be entered into only with commercial banks,
brokers and dealers considered creditworthy by SIMCO.
<PAGE>
Forward Roll Transactions. To seek to enhance current income, the Global
Fixed Income Portfolio may invest up to 5% of its total assets and the
International Fixed Income Fund may invest up to 10% of its total assets in
forward roll transactions involving mortgage-backed securities. In a forward
roll transaction, a 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 that a Fund enters into a forward roll
transaction, it will place cash or liquid assets in a segregated account that is
marked to market daily having a value equal to the repurchase price (including
accrued interest).
Leverage. 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 a 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 a Fund, the net asset value of the Fund would
fall faster than would otherwise be the case.
Short Sales. Each Fund may engage in short sales and short sales against the
box. In a short sale, a Fund sells a security it does not own in anticipation of
a decline in the market value of that security. In a short sale against the box,
a Fund either owns or has the right to obtain at no extra cost the security sold
short. The broker holds the proceeds of the short sale until the settlement
date, at which time the Fund delivers the security (or an identical security) to
cover the short position. The Fund receives the net proceeds from the short
sale. When a Fund enters into a short sale other than against the box, the Fund
must first borrow the security to make delivery to the buyer and must place cash
or liquid assets in a segregated account with the Fund's custodian that is
marked to market daily. Short sales other than against the box involve unlimited
exposure to loss. 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 a Fund's net assets.
Securities Loans. To seek to realize additional income, each Fund may lend a
portion of the securities in its portfolio to broker-dealers and financial
institutions, who are seeking securities to consummate transactions they are
obligated to perform under contract. The market value of securities loaned by
each 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 a Fund, borrowers will deposit collateral equal to at
least 100% of the market value of the borrowed securities, which will be marked
to market daily. As is the case with any extension of credit, lending portfolio
securities involves certain risks in the event a borrower should fail
financially, including delays or inability to recover the loaned securities or
foreclose against the collateral. SIMCO, under the supervision of the Boards of
Trustees, monitors the creditworthiness of the parties to whom the Funds make
securities loans.
Restricted and Illiquid Securities. Each Fund may invest up to 15% of its net
assets in illiquid securities. Illiquid securities are those that are not
readily marketable, repurchase agreements maturing in more than seven days, time
deposits with a notice or demand period of more than seven days, certain
over-the-counter options and certain restricted securities. Based upon
continuing review of the trading markets for a specific restricted security, the
security may be determined to be eligible for resale to qualified institutional
buyers pursuant to Rule 144A under the Securities Act of 1933 and, therefore, be
liquid. Also, certain illiquid securities may be determined to be liquid if they
are found to satisfy certain relevant liquidity requirements.
The Board of Trustees has adopted guidelines and delegated to SIMCO the daily
function of determining and monitoring the liquidity of portfolio securities,
including restricted and illiquid securities. The Board of Trustees, however,
retains oversight and is ultimately responsible for such determinations. The
purchase price and subsequent valuation of 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. A high rate of portfolio turnover (100% or more) involves
correspondingly higher transaction costs which must be borne directly by a Fund
and thus indirectly by its shareholders. It may also result in a 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. See "Financial Highlights" for each Fund's
portfolio turnover rates.
Short-Term Trading. Each Fund will sell a portfolio security without regard
to the length of time such security has been held if, in SIMCO's view, the
security meets the criteria for disposal.
Temporary Defensive Investments. Each Fund may maintain cash balances and
purchase money market instruments for cash management and liquidity purposes.
Each Fund may adopt a temporary defensive position during adverse market
conditions by investing without limit in U.S. and non-U.S. dollar denominated
<PAGE>
high quality money market instruments, including short-term U.S. Government
securities, negotiable certificates of deposit, non-negotiable fixed time
deposits, bankers' acceptances, commercial paper, floating-rate notes and
repurchase agreements.
Investment Restrictions. The investment objective of the Global Fixed Income
Portfolio is not fundamental and may be changed by the Board of Trustees of the
Portfolio Trust without the approval of shareholders. The investment objective
of the Global Fixed Income Fund and the International Fixed Income Fund is a
fundamental policy which may not be changed without a vote of the respective
Funds' shareholders. The Global Fixed Income Portfolio's and the Funds'
investment policies set forth in this Prospectus are non-fundamental and may be
changed without shareholder approval except that the Portfolio's and the Funds'
20% limit on securities loans (10% limit for any single borrower) and the
International Fixed Income Fund's 25% limit on repurchase agreements are
fundamental. The Global Fixed Income Fund and the Global Fixed Income Portfolio
have adopted other fundamental policies which may not be changed without the
approval of the Funds' shareholders. See "Investment Restrictions" in the
Statement of Additional Information. If any percentage restriction 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 respective Fund's or Portfolio's
assets will not constitute a violation of the restriction. If there is a change
in a Fund's investment objective, shareholders should consider whether the Fund
remains an appropriate investment in light of their current financial situation.
Information About the Master-Feeder Structure
The Global Fixed Income Fund seeks to achieve its investment objective by
investing all of its investable assets in the Global Fixed Income Portfolio,
which has an identical investment objective. The Global Fixed Income Fund is a
feeder fund and the Global Fixed Income Portfolio is the master fund in a
so-called master-feeder structure. The International Fixed Income Fund purchases
securities directly and maintains its own individual portfolio.
In addition to the Global Fixed Income Fund, other feeder funds may invest in
the Global Fixed Income Portfolio, and information about these other feeder
funds is available from Standish Fund Distributors. The other feeder funds
invest in the Global Fixed Income Portfolio on the same terms as the Fund and
bear a proportionate share of the Global Fixed Income Portfolio's expenses. The
other feeder funds may sell shares on different terms and under a different
pricing structure than the Fund, which may produce different investment results.
There are certain risks associated with an investment in a master-feeder
structure. Large scale redemptions by other feeder funds in the Global Fixed
Income Portfolio may reduce the diversification of the Global Fixed Income
Portfolio's investments, reduce economies of scale and increase the Global Fixed
Income Portfolio's operating expenses. If the Portfolio Trust's Board of
Trustees approves a change to the investment objective of the Global Fixed
Income Portfolio that is not approved by the Trust's Board of Trustees, the
Global Fixed Income Fund would be required to withdraw its investment in the
Global Fixed Income Portfolio and engage the services of an investment adviser
or find a substitute master fund. Withdrawal of the Fund's interest in the
Portfolio might cause the Fund to incur expenses it would not otherwise be
required to pay.
If the Global Fixed Income Fund is requested to vote on a matter affecting
the Global Fixed Income Portfolio, the Fund will call a meeting of its
shareholders to vote on the matter. The Fund will then vote on the matter at the
meeting of the Portfolio's investors in the same proportion that the Fund's
shareholders voted on the matter. The Fund will vote those shares held by its
shareholders who did not vote in the same proportion as those Fund shareholders
who did vote on the matter.
A majority of the Trustees who are not "interested persons" (as defined in
the Investment Company Act of 1940) of the Trust or the Portfolio Trust, as the
case may be, have adopted procedures reasonably appropriate to deal with
potential conflicts of interest arising from the fact that the same individuals
are trustees of the Trust and of the Portfolio Trust.
Calculation of Performance Data
From time to time each Fund may advertise its yield and average annual total
return information. Average annual total return is determined by computing the
average annual percentage change in the value of $1,000 invested at the maximum
public offering price for specified periods ending with the most recent calendar
quarter, assuming reinvestment of all dividends and distributions at net asset
value. The total return calculation assumes a complete redemption of the
investment at the end of the relevant period. Each Fund may also from time to
time advertise total return on a cumulative, average, year-by-year or other
basis for various specified periods by means of quotations, charts, graphs or
schedules.
The "yield" of a 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, a Fund may compare its performance in publications 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, a Fund's performance may be compared to
alternative investment or savings vehicles or to indices or indicators of
economic activity.
J.P. Morgan Non-U.S. Government Bond Index (Hedged). This index is generally
considered to be representative of unmanaged government bonds in foreign
markets.
Lehman Brothers Aggregate Index. This index is composed of securities from
the Lehman Brothers Government/Corporate Bond Index, the Mortgage Backed
<PAGE>
Securities Index and the Yankee Bond Index, and is generally considered to be
representative of all unmanaged, domestic, dollar denominated, fixed rate
investment grade bonds.
J.P. Morgan Global Index. This index is generally considered to be
representative of the performance of fixed rate, domestic government bonds from
eleven countries.
Dividends and Distributions
Dividends from net investment income for the Funds will be declared and
distributed quarterly. The Funds' dividends from short-term and long-term
capital gains, if any, after reduction by capital losses, will be declared and
distributed at least annually. In determining the amounts of its dividends, the
Global Fixed Income Fund will take into account its share of the income, gain or
loss, expense, and any other tax items of the Global Fixed Income Portfolio.
Dividends from net investment income and capital gains distributions, if any,
are automatically reinvested in additional shares of the applicable Fund unless
the shareholder elects to receive them in cash.
Purchase of Shares
Shares of the Funds may be purchased from Standish Fund Distributors, which
offers the Funds' 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 Standish Fund Distributors and payment for the shares is
received by Investors Bank & Trust Company, the Funds' Custodian. Please see
each Fund's account application or call (800) 221-4795 for instructions on how
to make payment for shares to the Custodian. The Funds require minimum initial
investments of $100,000. Additional investments must be in amounts of at least
$5,000. Certificates for Fund shares are generally not issued.
Shares of the Funds may also be purchased through securities dealers. Orders
for the purchase of Fund shares received by dealers by the close of regular
trading on the New York Stock Exchange ("NYSE") on any business day and
transmitted to Standish Funds Distributor 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 NYSE on that day, if payment for the shares is
also received by the Custodian that day. Otherwise, orders will be effected at
the net asset value per share determined on the next business day. It is the
responsibility of dealers to transmit orders so they will be received by
Standish Fund Distributors before the close of its business day. Shares of a
Fund purchased through dealers may be subject to transaction fees on purchase or
redemption, no part of which will be received by the Funds, Standish Fund
Distributors or Standish.
In the sole discretion of the Trust, each Fund may accept securities instead
of cash for the purchase of shares. The Trust will ask the Adviser to determine
that any securities acquired by the Funds in this manner are consistent with the
investment objective, policies and restrictions of the applicable Fund. The
securities will be valued in the manner stated below. The purchase of shares of
a Fund by 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 a Fund's shares, (ii) to reject purchase orders when in the best
interest of a Fund, (iii) to modify or eliminate the minimum initial or
subsequent investment in Fund shares and (iv) to eliminate duplicate mailings of
Fund material to shareholders who reside at the same address. A 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. A Fund's
investment minimums apply to the aggregate value invested in omnibus accounts
rather than to the investment of the underlying participants in the omnibus
accounts.
Net Asset Value
Each Fund's net asset value per share is computed each day on which the NYSE
is open as of the close of regular trading on the NYSE (normally 4:00 p.m., New
York City time). The net asset value per share is calculated by determining the
value of all a Fund's assets (the value of its investment in the Portfolio and
other assets, in the case of the Global Fixed Income Fund), subtracting all
liabilities and dividing the result by the total number of shares outstanding.
Fixed income securities (other than money market instruments) for which accurate
market prices are readily available are valued at their current market value on
the basis of quotations, which may be furnished by a pricing service or provided
by dealers in such securities. Securities not listed on an exchange or national
securities market, certain mortgage-backed and asset-backed securities and
securities for which there were no reported transactions are valued at the last
quoted bid prices. Fixed income securities for which accurate market prices are
not readily available and all other assets are valued at fair value as
determined in good faith by SIMCO in accordance with procedures approved by the
Trustees, which may include the use of yield equivalents or matrix pricing.
Money market instruments with less than sixty days remaining to maturity when
acquired by a Fund are valued on an amortized cost basis unless the Trustees
determine that amortized cost does not represent fair value. If a Fund acquires
a money market instrument with more than sixty days remaining to its maturity,
it is valued at current market value until the sixtieth day prior to maturity
and will then be valued at amortized cost based upon the value on such date
unless the Trustees determine during such sixty-day period that amortized cost
does not represent fair value.
Portfolio securities traded on more than one U.S. national securities
exchange or on a U.S. exchange and a foreign securities exchange are valued at
the last sale price, from the exchange representing the principal market for
such securities, on the business day when such value is determined. The value of
all assets and liabilities expressed in foreign currencies is converted into
U.S. dollar values at currency exchange rates determined by Investors Bank &
Trust Company, the Funds' transfer agent, to be representative of fair rates of
exchange at times prior to the close of trading on the NYSE. If such rates are
not available, the rate of exchange will be determined in good faith under
<PAGE>
procedures established by the Trustees. Trading in securities on European and
Asian securities exchanges and over-the-counter markets is normally completed
well before the close of business on the NYSE and may not take place on all
business days that the NYSE is open and may take place on days when the NYSE is
closed. Events affecting the values of portfolio securities that occur between
the time their prices are determined and the close of regular trading on the
NYSE will not be reflected in the Funds' calculation of net asset values unless
SIMCO determines that the particular event would materially affect net asset
value, in which case an adjustment will be made.
Exchange of Shares
Shares of the Funds may be exchanged for shares of one or more other funds in
the Standish fund family subject to the terms and restrictions imposed on the
purchase of shares of such funds. Shares of a fund redeemed in an exchange
transaction are valued at the net asset value next determined after the exchange
request is received by Standish Fund Distributors or its agent. Shares of a fund
purchased in an exchange transaction are valued at the net asset value next
determined after the exchange request is received by Standish Fund Distributors
or its agent and payment for the shares is received by the fund into which
shares are to be exchanged. Until receipt of the purchase price by the fund into
which 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 fund family, please call (800) 221-4795. Please
consider the differences in investment objectives and expenses of a fund as
described in its prospectus before making an exchange.
Written Exchanges. Shares of the Funds may be exchanged by written order to
Standish Fund Distributors, P.O. Box 1407, Boston, Massachusetts 02205-1407. 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 described under "Written Redemption" below.
Telephone Exchanges. Shareholders who elect telephone privileges may exchange
shares by calling Standish Fund Distributors at (800) 221-4795. Telephone
privileges are not available to shareholders automatically. Proper
identification will be required for each telephone exchange. Please see
"Telephone Transactions" below for more information regarding telephone
transactions.
General Exchange Information. All exchanges are subject to the following
exchange restrictions: (i) the fund into which shares are being exchanged must
be lawfully available for sale in your state; (ii) exchanges may be made only
between funds that are registered in the same name, address and, if applicable,
taxpayer identification number; and (iii) unless waived by the Trust, the amount
to be exchanged must satisfy the minimum account size of the fund to be
exchanged into. Exchange requests will not be processed until payment for the
shares of the current Fund has been received by Standish Fund Distributors. The
exchange privilege may be changed or discontinued and may be subject to
additional limitations upon sixty (60) days' notice to shareholders, including
certain restrictions on purchases by market-timer accounts.
Redemption of Shares
Shares of the Funds may be redeemed or repurchased by the methods described
below at the net asset value per share next determined after receipt by Standish
Fund Distributors or its agent of a redemption or repurchase request in proper
form.
Written Redemption. Shares of each Fund may be redeemed by written order to
Standish Fund Distributors, P.O. Box 1407, Boston, Massachusetts 02205-1407. 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 NYSE's Medallion
Signature Program or by any one of the following institutions, provided that the
institution meets credit standards established by Investors Bank & Trust
Company, the Funds' transfer agent: (i) a bank; (ii) a securities broker or
dealer, including a government or municipal securities broker or dealer, that is
a member of a clearing corporation or has net capital of at least $100,000;
(iii) a credit union having authority to issue signature guarantees; (iv) a
savings and loan association, a building and loan association, a cooperative
bank, or a federal savings bank or association; or (v) a national securities
exchange, a registered securities exchange or a clearing agency. Standish Fund
Distributors reserves the right to waive the requirement that signatures be
guaranteed. 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 Standish Fund Distributors of a written
redemption request in proper form. If shares to be redeemed were recently
purchased by check, the Funds may delay transmittal of redemption proceeds until
such time as they are assured that good funds have been collected for the
purchase of the shares. This may take up to fifteen (15) days in the case of
payments made by check.
Telephone Redemption. Shareholders who elect telephone privileges may redeem
shares by calling Standish Fund Distributors at (800) 221-4795. Telephone
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
<PAGE>
normally be paid promptly after receipt of telephone 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 telephone redemption.
Repurchase Order. In addition to written redemption of Fund shares, Standish
Fund Distributors may accept telephone orders from brokers or dealers for the
repurchase of Fund shares. Brokers and dealers are obligated to transmit
repurchase orders to Standish Fund Distributors promptly prior to the close of
Standish Fund Distributors' business day (normally 4:00 p.m., New York City
time). Brokers or dealers may charge for their services in connection with a
repurchase of Fund shares, but neither the Trust nor Standish Fund Distributors
imposes a charge for share repurchases.
Telephone Transactions. By maintaining an account that is eligible for
telephone exchange and redemption privileges, the shareholder authorizes
Standish, Standish Fund Distributors, the Trust and the Funds' custodian to act
upon instructions of any person to redeem and/or exchange shares from the
shareholder's account. Further, the shareholder acknowledges that, as long as
the Funds employ reasonable procedures to confirm that telephone instructions
are genuine, and follow telephone instructions that they reasonably believe to
be genuine, neither SIMCO, Standish Fund Distributors, the Trust, the applicable
Fund, the Funds' custodian, nor their respective officers or employees, will be
liable for any loss, expense or cost arising out of any request for a telephone
redemption or exchange, even if such transaction results from any fraudulent or
unauthorized instructions.
Depending upon the circumstances, the Funds intend to employ personal
identification or written confirmation of transaction procedures, and if they do
not, a 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. During these periods, shareholders should
transmit redemption and exchange requests in writing.
* * *
The proceeds paid upon redemption or repurchase may be more or less than the
cost of the shares, depending upon the market value of the applicable Fund's or
Portfolio's portfolio investments at the time of redemption or repurchase. The
Funds intend to pay cash for all shares redeemed, but under certain conditions,
the Funds may make payments wholly or partially in securities for this purpose.
Please see the Statement of Additional Information for further information.
Each 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 to increase the value of the account to an
amount equal to or above the stated minimum.
Management
Trustees. Each Fund is a separate investment series of Standish, Ayer & Wood
Trust, a Massachusetts business trust. Under the terms of the Agreement and
Declaration of Trust establishing the Trust, the Trustees of the Trust are
ultimately responsible for the management of its business and affairs. The
Portfolio is a separate investment series of the Standish, Ayer & Wood Master
Portfolio, a master trust fund organized under the laws of the State of New
York. Under the terms of the Declaration of Trust, the Portfolio's affairs are
managed under the supervision of the Portfolio Trust's Trustees. See
"Management" in the Statement of Additional Information for more information
about the Trustees and officers of the Trust and the Portfolio Trust.
Investment Adviser. SIMCO, One Financial Center, Boston, Massachusetts 02111,
serves as investment adviser to the Global Fixed Income Portfolio and the
International Fixed Income Fund pursuant to separate investment advisory
agreements and manages the Global Fixed Income Portfolio's and the International
Fixed Income Fund's investments and affairs subject to the supervision of the
Trustees of the Portfolio Trust. SIMCO is a Delaware limited partnership
organized in 1991 and is a registered investment adviser under the Investment
Advisers Act of 1940. The general partner of the Adviser is Standish which holds
a 99.98% partnership interest. The limited partners, who each hold a 0.01%
interest in SIMCO, are Walter M. Cabot, Sr., a Director of and Senior Adviser to
SIMCO and Standish, and D. Barr Clayson, Chairman and Vice President of the
Board of SIMCO and Managing Director and Vice President of Standish. Ralph S.
Tate, Managing Director of Standish, is President and a Director of SIMCO.
Richard S. Wood, Vice President and a Managing Director of Standish and the
President of the Trust, is the Executive Vice President of SIMCO. Standish and
SIMCO 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, 1997, Standish managed approximately $31 billion of
assets.
The Global Fixed Income Portfolio's and the International Fixed Income Fund's
portfolio manager is Richard S. Wood. Mr. Wood has been primarily responsible
for the day-to-day management of the Funds' portfolios since their inception and
of the Portfolio's portfolio since the Global Fixed Income Fund's conversion to
the master-feeder structure on May 3, 1996. During the past five years, Mr. Wood
has served as a Vice President and a Managing Director (since 1995) of Standish,
President of the Trust and Executive Vice President of SIMCO.
<PAGE>
Subject to the supervision and direction of the Trustees of the Trust and the
Portfolio Trust, SIMCO manages the Global Fixed Income Portfolio and
International Fixed Income Fund in accordance with their respective investment
objectives and policies, recommends investment decisions, places orders to
purchase and sell securities and permits the Global Fixed Income Portfolio and
the International Fixed Income Fund to use the name "Standish." For these
services, the Global Fixed Income Portfolio and the International Fixed Income
Fund pay a monthly fee at a stated annual percentage rate of such Fund's
(Portfolio's) average daily net asset value:
Contractual Actual Rate Paid
Advisory Fee for the Year Ended
Annual Rate December 31, 1996
------------ -----------------
International
Fixed Income Fund 0.40% 0.40%
Global Fixed
Income Portfolio 0.40% 0.40%
Administrator. Standish serves as administrator to the Global Fixed Income
Fund. As administrator, Standish manages the affairs of the Global Fixed Income
Fund, provides all necessary office space and services of executive personnel
for administering the affairs of the Global Fixed Income Fund, and allows the
Global Fixed Income Fund to use the name "Standish." For these services,
Standish currently does not receive any additional compensation. The Trustees of
the Trust may determine in the future to compensate Standish for its
administrative services.
Expenses. The Global Fixed Income Portfolio and each Fund bears the expenses
of its respective operations other than those incurred by SIMCO under the
investment advisory agreements or by Standish under the administration
agreement. The Global Fixed Income Portfolio pays investment advisory fees;
bookkeeping, share pricing and custodian fees and expenses; expenses or notices
and reports to interest holders; and expense of the Portfolio's administrator.
The Global Fixed Income Fund pays shareholder servicing fees and expenses,
expenses of printing prospectuses, statements of additional information and
shareholder reports which are furnished to existing shareholders. The Global
Fixed Income Fund and the Global Fixed Income Portfolio pay legal and auditing
fees; registration and reporting fees and expenses. The International Fixed
Income Fund, since it does not invest in a corresponding Portfolio, bears all of
the expenses listed above for both the Global Fixed Income Portfolio and the
Global Fixed Income Fund. Expenses of the Trust which relate to more than one
series are allocated among such series by Standish in an equitable manner.
Standish Fund Distributors bears the distribution expenses attributable to
the offering and sale of Fund shares without subsequent reimbursement. Each
Fund's total annual operating expenses for the fiscal year ended December 31,
1996 are described above under the caption "Financial Highlights."
Portfolio Transactions. Subject to the supervision of the Trustees of the
Trust and the Portfolio Trust, SIMCO selects the brokers and dealers that
execute orders to purchase and sell portfolio securities for the International
Fixed Income Fund and the Global Fixed Income Portfolio. SIMCO will generally
seek to obtain the best available price and most favorable execution with
respect to all transactions for the Global Fixed Income Portfolio and the
International Fixed Income Fund. SIMCO may also consider the extent to which a
broker or dealer provides research to SIMCO and the number of Fund shares sold
by the broker or dealer in making its selection.
Federal Income Taxes
Each Fund is a separate entity for federal tax purposes and 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, each 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.
Shareholders which are taxable entities or persons will be subject to federal
income tax on dividends and capital gain distributions made by the Funds.
Dividends paid by a 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 reinvested in Fund shares. These dividends generally will
not qualify for the corporate dividends received deduction under the Code.
Dividends paid by a 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 reinvested in 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 (including exchanges) and repurchases of shares are taxable
events on which a shareholder may recognize a gain or loss.
The International Fixed Income Fund and the Global Fixed Income Portfolio may
be subject to foreign taxes with respect to income or gains from certain foreign
investments, which will reduce the yield or return from such investments. The
Funds may qualify to elect to pass certain qualifying foreign taxes through
shareholders. If this election is made, shareholders would include their shares
of qualified foreign taxes in their gross incomes (in addition to any actual
dividends and distributions) and might be entitled to a corresponding federal
income tax credit or deduction. Shareholders will receive appropriate
information if either Fund makes this election for any year.
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
<PAGE>
fail to furnish the applicable 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 Funds
and, unless a current IRS Form W-8 or an acceptable substitute is furnished to
the applicable Fund, to backup withholding on certain payments from that Fund.
After the close of each calendar year, the Funds will send a notice to
shareholders that provides information about the federal tax status of
distributions to shareholders for such calendar year.
The Funds and Their Shares
The Trust was organized on August 13, 1986 as a Massachusetts business trust.
In addition to the Funds offered in this Prospectus, the Trust offers other
series to the public. Shareholders of each Fund are entitled to one full or
fractional vote for each share or fraction thereof of that Fund. There is no
cumulative voting and shares have no preemption or conversion rights. All series
of the Trust vote together except as provided in the 1940 Act or the Declaration
of Trust. The Trust does not intend to hold annual meetings of shareholders. The
Trustees will call special meetings of shareholders to the extent required by
the Trust's Declaration of Trust or the 1940 Act. The 1940 Act requires the
Trustees, under certain circumstances, to call a meeting to allow shareholders
to vote on the removal of a Trustee and to assist shareholders in communicating
with each other.
The Portfolio Trust was organized on January 18, 1996 as a New York trust. In
addition to the Global Fixed Income Portfolio, the Portfolio Trust offers
interests in other series to certain qualified investors. See "Information about
the Master-Feeder Structure" above for additional information about the
Portfolio Trust.
At February 1, 1997, Brown University, 164 Angell Street, Investment Office -
Box C, Providence, RI, 02912, had sole voting and investment power with respect
to more than 25% of the then outstanding share of the Global Fixed Income Fund.
Accordingly, this shareholder was deemed to beneficially own those shares and to
control the Global Fixed Income Fund.
Inquiries concerning the Funds should be made by contacting Standish Fund
Distributors at the address and telephone number listed on the back cover of
this Prospectus.
Custodian, Transfer Agent and Dividend
Disbursing Agent
Investors Bank & Trust Company, John Hancock Tower, 200 Clarendon Street,
Boston, Massachusetts 02116, serves as the Funds' transfer agent, dividend
disbursing agent and as custodian for all cash and securities of the Funds and
the Portfolio. Investors Bank & Trust, Boston and Toronto, Canada, also provides
accounting services to the Funds.
Independent Accountants
Coopers & Lybrand L.L.P., One Post Office Square, Boston, Massachusetts 02109
and Coopers & Lybrand, P.O. Box 219, Grand Cayman, Cayman Islands, BWI, serve as
independent accountants for the Trust and the Portfolio Trust, respectively, and
will audit the Funds' and the Portfolio's financial statements annually.
Legal Counsel
Hale and Dorr LLP, 60 State Street, Boston, Massachusetts 02109, is legal
counsel to the Trust, the Portfolio Trust and SIMCO and its affiliates.
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. A 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 Funds 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.
<PAGE>
Standish Group of Global Fixed Income Funds
....................................................................
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
John Hancock Tower
200 Clarendon Street
Boston, Massachusetts 02116
Independent Accountants
Coopers & Lybrand L.L.P.
One Post Office Square
Boston, Massachusetts 02109
Coopers &Lybrand
P.O. Box 219
Grand Cayman Island, BWI
(Global Fixed Income Portfolio Only)
Legal Counsel
Hale and Dorr LLP
60 State Street
Boston, Massachusetts 02109
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.
<PAGE>
May 1, 1997
STANDISH INTERNATIONAL FIXED INCOME FUND
STANDISH GLOBAL FIXED INCOME FUND
One Financial Center
Boston, Massachusetts 02111
(800) 729-0066
STATEMENT OF ADDITIONAL INFORMATION
This combined Statement of Additional Information is not a prospectus, but
expands upon and supplements the information contained in the combined
Prospectus dated May 1, 1997, as amended and/or supplemented from time to time
(the "Prospectus"), of the Standish International Fixed Income Fund
("International Fixed Income Fund") and the Standish Global Fixed Income Fund
("Global Fixed Income Fund"), each 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, a copy of which
may be obtained without charge by writing or calling the Trust's principal
underwriter, Standish Fund Distributors, L.P. (the "Principal Underwriter"), at
the address and phone number set forth above.
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND IS
AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY IF PRECEDED OR
ACCOMPANIED BY AN EFFECTIVE PROSPECTUS.
CONTENTS
Investment Objective and Policies..........................2
Investment Restrictions....................................8
Calculation of Performance Data............................9
Management ...............................................11
Redemption of Shares......................................17
Portfolio Transactions....................................17
Determination of Net Asset Value..........................18
The Funds and Their Shares................................18
The Portfolio and Its Investors...........................19
Taxation..................................................19
Additional Information....................................22
Experts and Financial Statements..........................22
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The Prospectus describes the investment objective and policies of each
Fund. The following discussion supplements the description of the Funds'
investment policies in the Prospectus.
As described in the Prospectus, the Global Fixed Income Fund seeks to
achieve its investment objective by investing all its investable assets in the
Standish Global Fixed Income Portfolio (the "Portfolio"), a series of Standish,
Ayer & Wood Master Portfolio (the "Portfolio Trust"), an open-end management
investment company. The Portfolio has the same investment objective and
restrictions as the Global Fixed Income Fund. Standish International Management
Company, L.P. ("SIMCO" or the "Adviser") is the adviser to the Portfolio and the
International Fixed Income Fund.
The Prospectus describes the investment objective of the Global Fixed
Income Fund and the Portfolio and summarizes the investment policies they will
follow. Since the investment characteristics of the Global Fixed Income Fund
correspond directly to those of the Portfolio, the following discusses the
various investment techniques employed by the Portfolio. See the Prospectus for
a more complete description of each Fund's and the Portfolio's investment
objective, policies and restrictions. For the purposes of the discussion in this
section of this Statement of Additional Information, the use of the term "Fund"
or "Funds" includes references to the Portfolio and the International Fixed
Income Fund unless otherwise noted.
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 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 "P-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 ("Duff"), 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 SIMCO to be of
equivalent quality to the securities so rated. In determining whether securities
are of equivalent quality, SIMCO may take into account, but will not rely
entirely on, ratings assigned by foreign rating agencies.
A repurchase agreement is an agreement under which a Fund acquires money
market instruments (generally U.S. Government securities) 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
<PAGE>
the Fund and is unrelated to the interest rate on the instruments. The
instruments acquired by each 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 SIMCO will use in reviewing the creditworthiness of
any party to a repurchase agreement with the Funds.
The use of repurchase agreements involves certain risks. For example, if
the seller defaults on its obligation to repurchase the instruments acquired by
a Fund at a time when their market value has declined, the Fund may incur a
loss. If the seller becomes insolvent or subject to liquidation or
reorganization under bankruptcy or other laws, a court may determine that the
instruments acquired by a Fund are collateral for a loan by the Fund and
therefore are subject to sale by the trustee in bankruptcy. Finally, it is
possible that a Fund may not be able to substantiate its interest in the
instruments it acquires. While the Trustees acknowledge these risks, it is
expected that they can be controlled through careful documentation and
monitoring.
Strategic Transactions
Each Fund may, but is not required to, utilize various other investment
strategies as described below to seek to hedge various market risks (such as
interest rates, currency exchange 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
Funds may change over time as new instruments and strategies are developed or
regulatory changes occur.
In the course of pursuing its investment objective, each 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 a
Fund's portfolio resulting from securities market, interest rate or currency
exchange rate fluctuations, to protect a Fund's unrealized gains in the value of
its portfolio securities, to facilitate the sale of such securities for
investment purposes, to manage the effective maturity or duration of a 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 each Fund will attempt to limit its net loss
exposure resulting from Strategic Transactions entered into for such purposes to
<PAGE>
not more than 3% of its net assets at any one time and, to the extent necessary,
each 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 each 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 SIMCO
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 a Fund to utilize these
Strategic Transactions successfully will depend on SIMCO's ability to predict
pertinent market and interest rate movements, which cannot be assured. Each Fund
will comply with applicable regulatory requirements when implementing these
strategies, techniques and instruments. The Funds' activities involving
Strategic Transactions may be limited by the requirements of Subchapter M of the
Internal Revenue Code of 1986, as amended (the "Code"), for qualification as
regulated investment companies.
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
SIMCO'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 a 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 a Fund can realize on its investments or cause a Fund to
hold a security it might otherwise sell. The use of currency transactions can
result in a 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 a Fund creates the possibility that losses on
the hedging instrument may be greater than gains in the value of the Fund's
position. The writing of options could significantly increase a Fund's portfolio
turnover rate and, therefore, associated brokerage commissions or spreads. In
addition, futures and options markets may not be liquid in all circumstances and
certain over-the-counter options may have no markets. As a result, in certain
markets, a 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
<PAGE>
circumstances, they tend to limit any potential gain which might result from an
increase in value of such position. The loss incurred by a Fund in writing
options on futures and entering into futures transactions is potentially
unlimited; however, as described above, each Fund will attempt to limit its net
loss exposure resulting from Strategic Transactions entered into for non-hedging
purposes to not more than 3% of its net assets at any one time. Futures markets
are highly volatile and the use of futures may increase the volatility of a
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 each 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, a Fund's
purchase of a put option on a security might be designed to protect its holdings
in the underlying instrument (or, in some cases, a similar instrument) against a
substantial decline in the market value by giving the Fund the right to sell
such instrument at the option exercise price. A call option, in consideration
for the payment of a premium, gives the purchaser of the option the right to
buy, and the seller the obligation to sell (if the option is exercised), the
underlying instrument at the exercise price. Each 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. Each 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
<PAGE>
the case of a call option, or is less than, in the case of a put option, the
exercise price of the option) at the time the option is exercised. Frequently,
rather than taking or making delivery of the underlying instrument through the
process of exercising the option, listed options are closed by entering into
offsetting purchase or sale transactions that do not result in ownership of the
new option.
A Fund's ability to close out its position as a purchaser or seller of an
exchange listed put or call option is dependent, in part, upon the liquidity of
the option market. There is no assurance that a liquid option market on an
exchange will exist. In the event that the relevant market for an option on an
exchange ceases to exist, outstanding options on that exchange would generally
continue to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours
during which the underlying financial instruments are traded. To the extent that
the option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct 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. Each 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. OTC
options purchased by a Fund, and portfolio securities "covering" the amount of a
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 subject to each Fund's
restriction on illiquid securities, unless determined to be liquid in accordance
with procedures adopted by the Boards of Trustees. For OTC 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. Each 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 a Fund or fails to make a cash settlement
payment due in accordance with the terms of that option, the Fund will lose any
premium it paid for the option as well as any anticipated benefit of the
transaction. Accordingly, SIMCO must assess the creditworthiness of each such
Counterparty or any guarantor or credit enhancement of the Counterparty's credit
<PAGE>
to determine the likelihood that the terms of the OTC option will be satisfied.
Each 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.
If a Fund sells (writes) a call option, thepremium that it receives may
serve as a partial hedge, to the extent of the option premium, against a
decrease in the value of the underlying securities or instruments in its
portfolio or will increase the Fund's income. The sale (writing) of put options
can also provide income.
Each Fund may purchase and sell (write) call options on 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, currencies and futures contracts. All calls sold by a 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, each 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,
but virtue of its exercise price or otherwise, reduces the Fund's net exposure
on its written option position. Even though a Fund will receive the option
premium to help offset any loss, the Fund may incur a loss if the exercise price
is below the market price for the security subject to the call at the time of
exercise. A call sold by a Fund also exposes the Fund during the term of the
option to possible loss of opportunity to realize appreciation in the market
price of the underlying security or instrument and may require the Fund to hold
a security or instrument which it might otherwise have sold.
Each Fund may purchase and sell (write) put options on securities including
U.S. Treasury and agency securities, mortgage-backed and asset-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. A Fund will not sell put options if, as a
result, more than 50% of the Fund's assets would be required to be segregated to
cover its potential obligations under such put options other than those with
respect to futures and options thereon. In selling put options, there is a risk
that a Fund may be required to buy the underlying security at a price above the
market price.
Options on Securities Indices and Other Financial Indices
Each Fund may also purchase and sell (write) call and put options on
securities indices and other financial indices. Options on securities indices
and other financial indices are similar to options on a security or other
instrument except that, rather than settling by physical delivery of the
<PAGE>
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, each 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
Each Fund may enter into financial futures contracts or purchase or sell
put and call options on such futures. Futures are generally bought and sold on
the commodities exchanges where they are listed and involve payment of initial
and variation margin as described below. All future contracts entered into by a
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 a
Fund, as seller, to deliver to the buyer the specific type of financial
instrument called for in the contract at a specific future time for a specified
price (or, with respect to index futures and Eurodollar instruments, the net
cash amount). The purchase of futures contracts creates a corresponding
obligation by a Fund, as purchaser, to purchase a financial instrument at a
specific time and price. Options on futures contracts are similar to options on
securities except that an option on a futures contract gives the purchaser the
right in return for the premium paid to assume a position in a futures contract
and obligates the seller to deliver such position upon exercise of the option.
Each 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 a 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 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 a Fund to deposit, with
<PAGE>
its custodian for the benefit of a futures commission merchant, or directly with
the 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 a Fund exercises an option on a
futures contract it will be obligated to post initial margin (and potential
subsequent variation margin) for the resulting futures position just as it would
for any position. Futures contracts and options thereon are generally settled by
entering into an offsetting transaction but there can be no assurance that the
position can be offset prior to settlement at an advantageous price, nor that
delivery will occur. The segregation requirements with respect to futures
contracts and options thereon are described below.
Currency Transactions
Each Fund may engage in currency transactions with Counterparties to seek
to hedge the value of portfolio holdings denominated in particular currencies
against fluctuations in relative value or to enhance potential gain. Currency
transactions include currency contracts, exchange listed currency futures,
exchange listed and OTC options on currencies, and currency swaps. A forward
currency contract involves a privately negotiated obligation to purchase or sell
(with delivery generally required) a specific currency at a future date, which
may be any fixed number of days from the date of the contract agreed upon by the
parties, at a price set at the time of the contract. A currency swap is an
agreement to exchange cash flows based on the notional (agreed-upon) difference
among two or more currencies and operates similarly to an interest rate swap,
which is described below. A Fund may enter into over-the-counter currency
transactions with Counterparties which have received, combined with any credit
enhancements, a long term debt rating of A by S&P or Moody's, respectively, or
that have an equivalent rating from a NRSRO or (except for OTC currency options)
whose obligations are determined to be of equivalent credit quality by SIMCO.
Each Fund's transactions in forward currency contracts and other currency
transactions such as futures, options, options on futures and swaps will
generally be limited to hedging involving either specific transactions or
portfolio positions. See, "Strategic Transactions." Transaction hedging is
entering into a currency transaction with respect to specific assets or
liabilities of a 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.
Each 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.
<PAGE>
Each 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, a Fund may hold a French government
bond and SIMCO 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 seek to reduce the effect of currency fluctuations on the value of
existing or anticipated holdings of portfolio securities, each Fund may also
engage in proxy hedging. Proxy hedging is often used when the currency to which
a Fund's portfolio is exposed is difficult to hedge or to hedge against the U.S.
dollar. Proxy hedging entails entering into a forward contract to sell a
currency whose changes in value are generally considered to be linked to a
currency or currencies in which certain of a Fund's portfolio securities are or
are expected to be denominated, and to buy U.S. dollars. The amount of the
contract would not exceed the value of the Fund's securities denominated in
linked currencies. For example, if SIMCO considers that the Austrian schilling
is linked to the German deutschemark (the "D-mark"), and a portfolio contains
securities denominated in schillings and SIMCO believes that the value of
schillings will decline against the U.S. dollar, SIMCO 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 a 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 a Fund
is engaging in proxy hedging. If a 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 a Fund if it
is unable to deliver or receive currency or funds in settlement of obligations
and could also cause hedges it has entered into to be rendered useless,
resulting in full currency exposure as well as incurring transaction costs.
Buyers and sellers of currency futures are subject to the same risks that apply
to the use of futures generally. Further, settlement of a currency futures
contract for the purchase of most currencies must occur at a bank based in the
issuing nation. Trading options on currency futures is relatively new, and the
ability to establish and close out positions on such options is subject to the
maintenance of a liquid market which may not always be available. Currency
exchange rates may fluctuate based on factors extrinsic to that country's
economy.
<PAGE>
Combined Transactions
Each 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
SIMCO, it is in the best interests of the Funds 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
SIMCO'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 each Fund may enter are
interest rate, currency and index swaps and the purchase or sale of related
caps, floors and collars. Each 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 a 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, each 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. Each 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.
<PAGE>
Each 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. Each 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 SIMCO. If there is a default by the Counterparty, a
Fund may have contractual remedies pursuant to the agreements related to the
transaction. The swap market has grown substantially in recent years with a
large number of banks and investment banking firms acting both as principals and
as agents utilizing standardized swap documentation. As a result, the swap
market has become relatively liquid. Caps, floors 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 each Fund's policy regarding illiquid securities, unless it is determined,
based upon continuing review of the trading markets for the specific security,
that such security is liquid. The Boards of Trustees of the Trust and the
Portfolio Trust have adopted guidelines and delegated to SIMCO the daily
function of determining and monitoring the liquidity of swaps, caps, floors and
collars. The Boards of Trustees, however, retain oversight focusing on factors
such as valuation, liquidity and availability of information and they are
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 each Fund's limitation on investing in illiquid securities.
Eurodollar Contracts
Each Fund may make investments in Eurodollar contracts. Eurodollar
contracts are U.S. dollar-denominated futures contracts or options thereon which
are linked to the London Interbank Offered Rate ("LIBOR"), although foreign
currency-denominated instruments are available from time to time. Eurodollar
futures contracts enable purchasers to obtain a fixed rate for the lending of
funds and sellers to obtain a fixed rate for borrowings. A Fund might use
Eurodollar futures contracts and options thereon to hedge against changes in
LIBOR, to which many interest rate swaps and fixed income instruments are
linked.
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 a Fund's ability to act upon economic
events occurring in foreign markets during non-business hours in the United
States, (iii) the imposition of different exercise and settlement terms and
procedures and margin requirements than in the United States, (iv) lower trading
volume and liquidity, and (v) other complex foreign political, legal and
economic factors. At the same time, Strategic Transactions may offer advantages
such as trading in instruments that are not currently traded in the United
States or arbitrage possibilities not available in the United States.
<PAGE>
Use of Segregated Accounts
Each Fund will hold securities or other instruments whose values are
expected to offset its obligations under the Strategic Transactions. Each Fund
will cover Strategic Transactions as required by interpretive positions of the
staff of the SEC. A Fund will not enter into Strategic Transactions that expose
a 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 securities with a value sufficient to cover
its potential obligations. Each Fund may have to comply with any applicable
regulatory requirements for Strategic Transactions, and if required, will set
aside cash and other assets in a segregated account with its custodian bank in
the amount prescribed. In that case, each 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 a 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
Each Fund may commit up to 25% of its net assets to purchase securities on
a "when-issued" or "delayed delivery" basis. Delivery and payment for securities
purchased on a when-issued or delayed delivery basis 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 that a Fund enters into
the commitment, but interest will not accrue to the Fund until delivery of and
payment for the securities. Although each Fund will only make commitments to
purchase "when-issued" and "delayed delivery" securities with the intention of
actually acquiring the securities, a Fund may sell the securities before the
settlement date if deemed advisable by SIMCO. Unless a Fund has entered into an
offsetting agreement to sell the securities purchased on a "when-issued" or
"forward commitment" basis, cash or liquid 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 a 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.
<PAGE>
Portfolio Turnover
It is not the policy of either Fund to purchase or sell securities for
trading purposes. However, neither Fund places any restrictions on portfolio
turnover and each 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. Each Fund may therefore generally
change its portfolio investments at any time in accordance with SIMCO's
appraisal of factors affecting any particular issuer or market, or relevant
economic conditions.
INVESTMENT RESTRICTIONS
The Funds and the Portfolio have adopted the following fundamental
policies. Each of the Fund's and Portfolio's fundamental policies cannot be
changed unless the change is approved by a "vote of the outstanding voting
securities" of a Fund or the Portfolio, as the case may be, which phrase as used
herein means the lesser of (i) 67% or more of the voting securities of the Fund
or Portfolio present at a meeting, if the holders of more than 50% of the
outstanding voting securities of the Fund or Portfolio are present or
represented by proxy, or (ii) more than 50% of the outstanding voting securities
of the Fund or Portfolio.
International Fixed Income Fund.
As a matter of fundamental policy, the International Fixed Income 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.
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.
<PAGE>
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. Invest in the securities of an issuer for the purpose of exercising control
or management, but it may do so where it is deemed advisable to protect or
enhance the value of an existing investment.
b. Purchase securities of any other investment company except to the extent
permitted by the 1940 Act.
c. Invest more than 15% of its net assets in securities which are illiquid.
d. Purchase additional securities if the Fund's borrowings exceed 5% of its
net assets.
Global Fixed Income Fund and Global Fixed Income Portfolio.
As a matter of fundamental policy, the Global Fixed Income Portfolio
(Global Fixed Income Fund) may not:
1. Invest more than 25% of the current value of its total assets in any single
industry, provided that this restriction shall not apply to debt securities
issued or guaranteed by the United States government or its agencies or
instrumentalities.
2. Underwrite the securities of other issuers, except to the extent that, in
connection with the disposition of portfolio securities, the Portfolio
(Fund) may be deemed to be an underwriter under the Securities Act of
1933.
3. Purchase real estate or real estate mortgage loans, although the Portfolio
(Fund) may purchase marketable securities of companies which deal in real
estate, real estate mortgage loans or interests therein.
4. Purchase securities on margin (except that the Portfolio (Fund) may obtain
such short-term credits as may be necessary for the clearance of purchases
and sales of securities).
5. Purchase or sell commodities or commodity contracts except that the
Portfolio (Fund) may purchase and sell financial futures contracts and
options on financial futures contracts and engage in foreign currency
exchange transactions.
6. With respect to at least 50% of its total assets, invest more than 5% in
the securities of any one issuer (other than the U.S. Government, its
agencies or instrumentalities) or acquire more than 10% of the outstanding
voting securities of any issuer.
<PAGE>
7. Issue senior securities, borrow money, enter into reverse repurchase
agreements or pledge or mortgage its assets, except that the Portfolio
(Fund) may (a) borrow from banks as a temporary measure for extraordinary
or emergency purposes (but not investment purposes) in an amount up to 15%
of the current value of its total assets to secure such borrowings, (b)
enter into forward roll transactions, and (c) pledge its assets to an
extent not greater than 15% of the current value of its total assets to
secure such borrowings; however, the Fund may not make any additional
investments while its outstanding borrowings exceed 5% of the current
value of its total assets.
8. Lend portfolio securities, except that the Portfolio (Fund) may lend its
portfolio securities with a value up to 20% of its total assets (with a
10% limit for any borrower), except that the Portfolio may enter into
repurchase agreements and except that the Fund may enter into repurchase
agreements with respect to 25% of the value of its net assets.
The following restrictions are not fundamental policies and may be changed
by the Trustees of the Portfolio Trust (Trust) without investor approval, in
accordance with applicable laws, regulations or regulatory policy. The Portfolio
(Fund) may not:
a. Invest in the securities of an issuer for the purpose of exercising control
or management but it may do so where it is deemed advisable to protect or
enhance the value of an existing investment.
b. Purchase the securities of any other investment company except to the
extent permitted by the 1940 Act.
c. Invest more than 25% of its net assets in repurchase agreements (this
restriction is fundamental with respect to the Fund but not the Portfolio).
d. Purchase additional securities if the Portfolio's borrowings exceed 5% of
its net assets (this restriction is fundamental with respect to the Fund
but not the Portfolio).
Notwithstanding any fundamental or non-fundamental policy, the Global Fixed
Income Fund may invest all of its assets (other than assets which are not
"investment securities" (as defined in the 1940 Act) or are excepted by the SEC)
in an open-end management investment company with substantially the same
investment objective as the Global Fixed Income Fund.
------------------
Purchases of securities of other investment companies permitted under the
restrictions above could cause the Funds 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 Funds' assets will
not constitute a violation of the restriction.
<PAGE>
CALCULATION OF PERFORMANCE DATA
As indicated in the Prospectus, each Fund may, from time to time, advertise
certain total return and yield information. The average annual total return of a
Fund for a period is computed by subtracting the net asset value per share at
the beginning of the period from the net asset value per share at the end of the
period (after adjusting for the reinvestment of any income dividends and capital
gain distributions), and dividing the result by the net asset value per share at
the beginning of the period. In particular, the Funds' average annual total
return ("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 Funds' yield is computed by dividing the net investment income per
share earned during a base period of 30 days, or one month, 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 Funds, all recurring fees that are charged to all shareholder accounts and
any non-recurring charges for the period stated. In particular, yield is
determined according to the following formula:
Yield = 2[(A - B + 1)6 - 1]
CD
Where:
a=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 (net asset value)
per share on the last day of the period.
The Funds 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.
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 Funds account for gain or
loss attributable to actual monthly pay downs as an increase or decrease to
interest income during the period. In addition, each 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.
<PAGE>
The Funds' average annual total return for the one-, five- and ten-year (or
life-of-the-Fund, if shorter) periods ended December 31, 1996 and average
annualized yield for the 30-day period ended December 31, 1996 were as follows:
Average Annual Total Return
Fund 1-Year 5-Year 10-Year Yield
- ---- ------ ------ ------- -----
International Fixed
Income Fund 15.28% 10.59% 11.32%1 5.74%
Global Fixed
Income Fund 13.03% 7.46%2 N/A 6.86%
- ---------------------------
1 International Fixed Income Fund commenced operations on January 2, 1991.
2 Global Fixed Income Fund commenced operations on January 3, 1994.
These performance quotations should not be considered as representative of
any Fund's performance for any specified period in the future.
In addition to average annual return quotations, the Funds may quote
quarterly and annual performance on a net (with management and administration
fees deducted) and gross basis as follows:
International Fixed Income Fund
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
<PAGE>
Quarter/Year Net Gross
- --------------------------------------------------------------------------------
1995 18.13 18.75
1Q96 0.73 0.86
2Q96 3.49 3.63
3Q96 5.36 5.49
4Q96 4.95 5.07
1996 15.28 15.85
Global Fixed Income Fund
Quarter/Year Net Gross
- --------------------------------------------------------------------------------
1Q94 (4.80)% (4.64)%
2Q94 (3.56) (3.40)
3Q94 (0.77) (0.05)
4Q94 1.44 1.60
1994 (7.06) (6.46)
1Q95 2.94 3.10
2Q95 5.21 5.36
3Q95 3.80 3.95
4Q95 5.09 5.26
1995 18.13 18.84
1Q96 0.05 0.21
2Q96 2.59 2.75
3Q96 4.97 5.14
4Q96 4.91 5.08
1996 13.03 13.76
These performance quotations should not be considered as representative of
a Fund's performance for any specified period in the future. Each Fund's
performance may be compared in sales literature to the performance of other
mutual funds having similar objectives or to standardized indices or other
measures of investment performance. In particular, the International Fixed
Income 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 Bond Index, and is
generally considered to be representative of all unmanaged, domestic, dollar
denominated, fixed rate investment grade bonds. The Global Fixed Income Fund may
compare its performance to the J.P. Morgan Global Index, which is generally
considered to be representative of the performance of fixed rate, domestic
government bonds from eleven countries.
Comparative performance may also be expressed by reference to a ranking
prepared by a mutual fund monitoring service or by one or more newspapers,
newsletters or financial periodicals. Performance comparisons may be useful to
investors who wish to compare a Fund's past performance to that of other mutual
funds and investment products. Of course, past performance is not a guarantee of
future results.
<PAGE>
MANAGEMENT
Trustees and Officers of the Trust and Portfolio Trust
The Trustees and executive officers of the Trust are listed below. The
Trustees of the Portfolio Trust are identical to the Trustees of the Trust. The
officers of the Portfolio Trust are Messrs. Clayson, Ladd, Wood, Hollis and
Martin, and Ms. Banfield, Chase, Herrmann and Kneeland, who hold the same office
with the Portfolio Trust as with the Trust. All executive officers of the Trust
and the Portfolio Trust are affiliates of Standish, Ayer & Wood, Inc., the
Portfolio and 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 and
c/o Standish, Ayer & Wood, Inc. Managing Director, Standish, Ayer &
One Financial Center 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.O. 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 and Treasurer Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
<PAGE>
Name, Address and Date of Birth Position Held Principal Occupation
With Trust During Past 5 Years
- ---------------------------------------------------------------------------------------------------------------
Anne P. Herrmann, 1/26/56 Vice President and Secretary Mutual Fund Administrator,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Paul G. Martins, 3/10/56 Vice President Vice President, Standish, Ayer & Wood, Inc.
c/o Standish, Ayer & Wood, Inc. since October 1996; formerly Senior Vice President,
One Financial Center Treasurer and Chief Financial Officer
Boston, MA 02111 of Liberty Financial Bank Group (1993-95);
prior to 1993, Corporate Controller,
The Berkeley Financial Group
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 02111
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
Boston, MA 02111 Compliance Officer,
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
Remi Browne, 10/15/53 Vice President Vice President, Standish, Ayer & Wood, Inc
c/o Standish, Ayer & Wood, Inc. Vice President and Chief Investment Officer
One Financial Center of Standish International Management
Boston, MA 02111 Company, L.P., prior to
August 1996, Managing Director
Ark Asset Management Company
Walter M. Cabot, 1/16/33 Vice President Senior Adviser 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 Adviser 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 and Associate Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
<PAGE>
Name, Address and Date of Birth Position Held Principal Occupation
With Trust During Past 5 Years
- ---------------------------------------------------------------------------------------------------------------
Susan B. Coan, 5/1/52 Vice President Vice President and Director
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 and Associate Director,
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
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, Standish International
Boston, MA 02111 Management Company, L.P.
Mark A. Flaherty, 4/24/59 Vice President Vice President and Director,
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.
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,
One Financial Center Investment Sales,
Boston, MA 02111 Cigna Corporation (1993) and
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
<PAGE>
Name, Address and Date of Birth Position Held Principal Occupation
With Trust During Past 5 Years
- ---------------------------------------------------------------------------------------------------------------
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
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.
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
David C. Stuehr, 3/1/58 Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Ralph S. Tate, 4/2/47 Vice President Vice President and Managing Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc. since
One Financial Center April, 1990; formerly Vice
Boston, MA 02111 President, Aetna Life & Casualty
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.
</TABLE>
<PAGE>
Compensation of Trustees and Officers
Neither the Trust nor the Portfolio Trust pays compensation to the Trustees
of the Trust or the Portfolio Trust that are affiliated with Standish, Ayer &
Wood, Inc. ("Standish") as administrator of the Global Fixed Income Fund, SIMCO
or to the Trust's and Portfolio Trust's officers. None of the Trustees or
officers have engaged in any financial transactions (other than the purchase or
redemption of the Funds' shares) with the Trust, the Portfolio Trust or the
Adviser during the year ended December 31, 1996.
The following table sets forth all compensation paid to the Trust's and the
Portfolio Trust's Trustees as of the Funds' fiscal years ended December 31,
1996:
<TABLE>
<CAPTION>
Aggregate Compensation from the Funds
Pension or
International Global Retirement
Fixed Fixed Benefits Accrued Total Compensation from
Income Income as Part of Funds' Funds and Portfolio and
Name of Trustee Fund Fund** Expenses Other Funds in Complex*
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
D. Barr Clayson $0 $0 $0 $0
Samuel C. Fleming $9,658 $1,292 $0 $49,250
Benjamin M. Friedman $8,922 $1,194 $0 $45,500
John H. Hewitt $8,922 $1,194 $0 $45,500
Edward H. Ladd $0 $0 $0 $0
Caleb Loring, III $8,922 $1,194 $0 $45,500
Richard S. Wood $0 $0 $0 $0
- -------------------
* As of the date of this Statement of Additional Information there were 20
funds in the fund complex. Total compensation is presented for the calendar
year ended December 31, 1996.
** The Global Fixed Income Fund bears its pro rata allocation of Trustees' fees
paid by the Portfolio to the Trustees of the
Portfolio Trust.
</TABLE>
<PAGE>
Certain Shareholders
At February 1, 1997, Trustees and officers of the Trust and the Portfolio
Trust as a group beneficially owned (i.e., had voting and/or investment power)
less than 1% of the then outstanding shares of each Fund. At February 1, 1997,
the Global Fixed Income Fund beneficially owned approximately 100% of the then
outstanding interests of the Portfolio and therefore controlled the Portfolio.
Also at that date, no person beneficially owned 5% or more of the then
outstanding shares of any Fund except:
International Fixed Income Fund
Percentage of
Name and Address Outstanding Shares
- --------------------------------------------------------------------------------
MAC & Co. 14%
P.O. Box 3198
Pittsburg, PA 15230
Maryland State Retirement & Pension System 7%
Room 701
301 West Preston Street
Baltimore, MD
Boston & Co. 6%
Mellon Bank
P.O. Box 3198
Pittsburg, PA 15230
Global Fixed Income Fund
Percentage of
Name and Address Outstanding Shares
- --------------------------------------------------------------------------------
Brown University 25%*
164 Angell Street
Investment Office - Box C
Providence, RI 02912
Childrens Medical Center Corp. 16%
1295 Boylston Street
Suite 300
Boston, MA 02215
Lafayette College 13%
234 Markle Hall
Easton, PA 18042-1779
Wenner-Gren Foundation 9%
220 Fifth Avenue
New York, NY 10001
Trustees of Boston College 8%
St. Thomas More Hall
Room 310
Chestnut Hill, MA 02167
Sisters of Mercy Health System 5%
2039 N. Geyer Road
St. Louis, MO 63131
*Because the shareholder beneficially owned more than 25% of the then
outstanding shares of the indicated Fund, the shareholder was considered to
control such Fund. As a controlling person, the shareholder may be able to
determine whether a proposal submitted to the shareholders of such Fund will be
approved or disapproved.
<PAGE>
Investment Adviser
SIMCO serves as the Adviser to the Global Fixed Income Portfolio and the
International Fixed Income Fund pursuant to written investment advisory
agreements. Prior to the close of business on May 3, 1996, SIMCO managed
directly the assets of the Global Fixed Income Fund pursuant to an investment
advisory agreement. This agreement was terminated by the Global Fixed Income
Fund on such date subsequent to the approval by the Global Fixed Income Fund's
shareholders on March 29, 1996 to implement certain changes in the Global Fixed
Income Fund's investment restrictions which enable the Global Fixed Income Fund
to invest all of its investable assets in the Portfolio. SIMCO is a Delaware
limited partnership organized in 1991 and is registered under the Investment
Advisers Act of 1940. The General Partner of the Adviser is Standish, One
Financial Center, Boston, MA 02111, which holds a 99.98% partnership interest.
The Limited Partners, who each hold a 0.01% interest in SIMCO, are Walter M.
Cabot, Sr., a Director of and a Senior Adviser to Standish, and D. Barr Clayson,
Chairman of the Board of SIMCO and a Managing Director of Standish. Ralph S.
Tate, a Managing Director of Standish, is President and a Director of SIMCO.
Richard S. Wood, a Managing Director and Vice President of Standish and the
President of the Trust, is the Executive Vice President of SIMCO.
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, George W. Noyes, Arthur H. Parker, Howard B. Rubin, Austin C. Smith,
David C. Stuehr, Ralph S. Tate, and Richard S. Wood.
Certain services provided by SIMCO under the advisory agreements are
described in the Prospectus. These services are provided without reimbursement
by the Portfolio or the International Fixed Income Fund for any costs incurred.
In addition to those services, SIMCO provides the International Fixed Income
Fund (but not the Portfolio) with office space for managing their affairs, with
the services of required executive personnel, and with certain clerical services
and facilities. Under the investment advisory agreements, SIMCO is paid a fee
based upon a percentage of the International Fixed Income Fund's or the
Portfolio's average daily net asset value computed as set forth below. The
advisory fees are payable monthly.
Contractual Advisory Fee Rate
(as a percentage of
Fund average daily net assets)
- ---- -------------------------
Global Fixed
Income Portfolio 0.40%
International Fixed
Income Fund 0.40%
<PAGE>
During the last three fiscal years ended December 31, the Funds and the
Portfolio paid advisory fees in the following amounts:
Fund 1994 1995 1996
- ---- ---- ---- ----
Global Fixed
Income Fund 407,392 535,630 198,7471
Global Fixed
Income Portfolio N/A2 N/A2 412,2162
International Fixed
Income Fund 4,402,708 3,916,500 3,234,397
- ------------------------
1 Global Fixed Income Fund was converted to the master/feeder fund structure on
May 3, 1996 and does not pay directly advisory fees after that date. The Fund
bears its pro rata allocation of the Portfolio's expenses, including advisory
fees.
2 The Portfolio commenced operations on May 3, 1996.
Pursuant to the investment advisory agreements each of the International
Fixed Income Fund and the Portfolio bears expenses of its operations other than
those incurred by SIMCO pursuant to the investment advisory agreement. Among
other expenses, the International Fixed Income Fund and the Portfolio 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.
Unless terminated as provided below, the investment advisory agreements
continue in full force and effect from year to year but only so long as each
such continuance is approved annually (i) by either the Trustees of the Trust or
the Portfolio Trust (as applicable) or by the "vote of a majority of the
outstanding voting securities" of the Portfolio or the Fund, and, in either
event (ii) by vote of a majority of the Trustees of the Trust or the Portfolio
Trust (as applicable) who are not parties to the investment advisory agreement
or "interested persons" (as defined in the 1940 Act) of any such party, cast in
person at a meeting called for the purpose of voting on such approval. Each
investment advisory agreement may be terminated at any time without the payment
of any penalty by vote of the Trustees of the Trust or the Portfolio Trust or by
the "vote of a majority of the outstanding voting securities" of the Fund or the
Portfolio or by SIMCO, on sixty days' written notice to the other parties. The
investment advisory agreements terminate in the event of their assignment as
defined in the 1940 Act.
In an attempt to avoid any potential conflict with portfolio transactions
for the Funds and the Portfolio, SIMCO, the Principal Underwriter, the Trust and
the Portfolio Trust have each adopted extensive restrictions on personal
securities trading by personnel of the Adviser and its affiliates. These
restrictions include: pre-clearance of all personal securities transactions and
a prohibition of purchasing initial public offerings of securities. These
restrictions are a continuation of the basic principle that the interests of the
Funds and their shareholders, and the Portfolio and its investors, come before
those of the Adviser and its employees.
<PAGE>
Administrator of the Global Fixed Income Fund
Standish also serves as the administrator to the Global Fixed Income Fund
(the "Fund Administrator") pursuant to a written administration agreement with
the Trust on behalf of the Global Fixed Income Fund. Certain services provided
by the Fund Administrator under the administration agreement are described in
the Prospectus. For these services, the Fund Administrator currently does not
receive any additional compensation. The Trustees of the Trust may, however,
determine in the future to compensate the Fund Administrator for its
administrative services. The Global Fixed Income Fund's administration agreement
can be terminated by either party on not more than sixty days' written notice.
Administrator of the Global Fixed Income Portfolio
IBT Trust Company (Cayman) Ltd., P.O. Box 501, Grand Cayman, Cayman
Islands, BWI, serves as the administrator to the Portfolio (the "Portfolio
Administrator") pursuant to a written administration agreement with the
Portfolio Trust on behalf of the Portfolio. The Portfolio Administrator provides
the Portfolio Trust with office space for managing its affairs, and with certain
clerical services and facilities. For its services to the Portfolio Trust, the
Portfolio Administrator currently receives a fee from the Portfolio in the
amount of $7,500 annually. The Portfolio's administration agreement can be
terminated by either party on not more than sixty days' written notice.
Distributor of the Funds
Standish Fund Distributors, L.P. (the "Principal Underwriter"), an
affiliate of Standish, serves as the Trust's exclusive principal underwriter and
holds itself available to receive purchase orders for each 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 each 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 each 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 each 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, with respect to a Fund, 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.
<PAGE>
REDEMPTION OF SHARES
Detailed information on redemption of shares is included in the Prospectus.
The Trust may suspend the right to redeem Fund shares or postpone the date of
payment upon redemption for more than seven days (i) for any period during which
the New York Stock Exchange is closed (other than customary weekend or holiday
closings) or trading on the exchange is restricted; (ii) for any period during
which an emergency exists as a result of which disposal by a Fund of securities
owned by it or determination by a Fund of the value of its net assets is not
reasonably practicable; or (iii) for such other periods as the SEC may permit
for the protection of shareholders of a Fund.
The Trust intends to pay redemption proceeds in cash for all Fund shares
redeemed but, under certain conditions, the Trust may make payment wholly or
partly in portfolio securities, in conformity with a rule of the SEC. Portfolio
securities paid upon redemption of Fund shares will be valued at their then
current market value. The Trust, on behalf of each of its series, has elected to
be governed by the provisions of Rule 18f-1 under the 1940 Act which limits each
Fund's obligation to make cash redemption payments to any shareholder during any
90-day period to the lesser of $250,000 or 1% of the Fund's net asset value at
the beginning of such period. An investor may incur brokerage costs in
converting portfolio securities received upon redemption to cash. The Portfolio
has advised the Trust that the Portfolio will not redeem in-kind except in
circumstances in which the Global Fixed Income Fund is permitted to redeem
in-kind or except in the event the Global Fixed Income Fund completely withdraws
its interest from the Portfolio.
PORTFOLIO TRANSACTIONS
The Adviser is responsible for placing the International Fixed Income
Fund's and the Portfolio's portfolio transactions and will do so in a manner
deemed fair and reasonable to the Fund and the Portfolio and not according to
any formula. The primary consideration in all portfolio transactions will be
prompt execution of orders in an efficient manner at the most favorable price.
In selecting broker-dealers and in negotiating commissions, SIMCO 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
Funds. In addition, if SIMCO 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 International Fixed
Income Fund and the Portfolio 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 and the Portfolio effect their securities transactions may be used by
SIMCO in servicing other accounts; not all of these services may be used by the
Adviser in connection with the Fund or the Portfolio generating the soft dollar
credits. The investment advisory fee paid by the Fund and the Portfolio under
the investment advisory agreements will not be reduced as a result of SIMCO's
receipt of research services.
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SIMCO also places portfolio transactions for other advisory accounts. SIMCO
will seek to allocate portfolio transactions equitably whenever concurrent
decisions are made to purchase or sell securities for the Fund or the Portfolio
and another advisory account. In some cases, this procedure could have an
adverse effect on the price or the amount of securities available to the
International Fixed Income Fund or the Portfolio. In making such allocations,
the main factors considered by SIMCO will be the respective investment
objectives, the relative size of portfolio holdings of the same or comparable
securities, the availability of cash for investment, the size of investment
commitments generally held, and opinions of the persons responsible for
recommending the investment.
Because most of the International Fixed Income Fund's and the Portfolio's
securities transactions are effected on a principal basis involving a "spread"
or "dealer mark-up," the Fund and the Portfolio have not paid any brokerage
commissions during the past three years.
DETERMINATION OF NET ASSET VALUE
Each Fund's net asset value is calculated each day on which the New York
Stock Exchange is open (a "Business Day"). Currently, the New York Stock
Exchange is not open on weekends, New Year's Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
The net asset value of each Fund's shares is determined as of the close of
regular trading on the New York Stock Exchange (normally 4:00 p.m., New York
City time) and is computed by dividing the value of all securities and other
assets of a Fund (substantially all of which, in the case of the Global Fixed
Income Fund, will be represented by the Global Fixed Income Fund's interest in
the Portfolio) less all liabilities by the number of Fund shares outstanding,
and adjusting to the nearest cent per share. Expenses and fees of each Fund are
accrued daily and taken into account for the purpose of determining net asset
value.
The value of the Portfolio's net assets (i.e., the value of its securities
and other assets less its liabilities, including expenses payable or accrued) is
determined at the same time and on the same days as the net asset value per
share of the Global Fixed Income Fund is determined. Each investor in the
Portfolio, including the Global Fixed Income Fund, may add to or reduce its
investment in the Portfolio on each Business Day. As of 4:00 p.m. (Eastern time)
on each Business Day, the value of each investor's interest in the Portfolio
will be determined by multiplying the net asset value of the Portfolio by the
percentage representing that investor's share of the aggregate beneficial
interests in the Portfolio. Any additions or reductions which are to be effected
on that day will then be effected. The investor's percentage of the aggregate
beneficial interests in the Portfolio will then be recomputed as the percentage
equal to the fraction (i) the numerator of which is the value of such investor's
investment in the Portfolio as of 4:00 p.m. on such day plus or minus, as the
case may be, the amount of net additions to or reductions in the investor's
investment in the Portfolio effected on such day, and (ii) the denominator of
which is the aggregate net asset value of the Portfolio as of 4:00 p.m. on such
day plus or minus, as the case may be, the amount of the net additions to or
reductions in the aggregate investments in the Portfolio by all investors in the
Portfolio. The percentage so determined will then be applied to determine the
value of the investor's interest in the Portfolio as of 4:00 p.m. on the
following Business Day.
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Portfolio securities that are fixed income securities (other than money
market instruments) for which accurate market prices are readily available are
valued at their current market value on the basis of quotations, which may be
furnished by a pricing service or provided by dealers in such securities. Fixed
income securities for which accurate market prices are not readily available and
other assets are valued at fair value as determined in good faith by the Adviser
in accordance with procedures approved by the Trustees, which may include the
use of yield equivalents or matrix pricing.
Money market instruments with less than sixty days remaining to maturity
when acquired by the International Fixed Income Fund or the Portfolio are valued
on an amortized cost basis. If the Fund or the Portfolio acquires a money market
instrument with more than sixty days remaining to its maturity, it is valued at
current market value until the sixtieth day prior to maturity and will then be
valued at amortized cost based upon the value on such date unless the Trustees
determine during such sixty-day period that amortized cost does not represent
fair value.
Generally, trading in securities on foreign securities exchanges is
substantially completed each day at various times prior to the close of regular
trading on the New York Stock Exchange. The values of foreign securities (whose
principal trading markets are such foreign exchanges) used in computing the net
asset value of the International Fixed Income Fund's and the Portfolio'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 Funds' or the Portfolio'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 FUNDS AND THEIR SHARES
Each Fund is an investment series of the Trust, an unincorporated business
trust organized under the laws of The Commonwealth of Massachusetts pursuant to
an Agreement and Declaration of Trust dated August 13, 1986. Under the Agreement
and Declaration of Trust, the Trustees of the Trust have authority to issue an
unlimited number of shares of beneficial interest, par value $.01 per share, of
each Fund. Each share of a Fund represents an equal proportionate interest in
the Fund with each other share and is entitled to such dividends and
distributions as are declared by the Trustees. 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 a Fund,
shareholders of that Fund are entitled to share pro rata in the net assets
available for distribution.
<PAGE>
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 any
Fund. The Trustees have established other series of the Trust. 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 Funds. Pursuant to the Declaration of Trust and subject to
shareholder approval (if then required by applicable law), the Trustees may
authorize each 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 Global Fixed Income Fund invests all of its
investible assets in another open-end investment company.
All Fund shares have equal rights with regard to voting, and shareholders
of a Fund have the right to vote as a separate class with respect to matters as
to which their interests are not identical to those of shareholders of other
classes of the Trust, including the approval of an investment advisory contract
and any change of investment policy requiring the approval of shareholders.
Under Massachusetts law, shareholders of the Trust could, under certain
circumstances, be held liable for the obligations of the Trust. However, the
Agreement and Declaration of Trust disclaims shareholder liability for acts or
obligations of the Trust and requires that notice of this disclaimer be given in
each agreement, obligation or instrument entered into or executed by the Trust
or a Trustee. The Declaration also provides for indemnification from the assets
of the Trust for all losses and expenses of any Trust shareholder held liable
for the obligations of the Trust. Thus, the risk of a shareholder incurring a
financial loss on account of his or its liability as a shareholder of the Trust
is limited to circumstances in which the Trust would be unable to meet its
obligations. The possibility that these circumstances would occur is remote.
Upon payment of any liability incurred by the Trust, the shareholder paying the
liability will be entitled to reimbursement from the general assets of the
Trust. The Declaration also provides that no series of the Trust is liable for
the obligations of any other series. The Trustees intend to conduct the
operations of the Trust to avoid, to the extent possible, ultimate liability of
shareholders for liabilities of the Trust.
Except as described below, whenever the Trust, on behalf of the Global
Fixed Income Fund, is requested to vote on a fundamental policy of or matters
pertaining to the Portfolio, the Trust will hold a meeting of the Global Fixed
Income Fund's shareholders and will cast its vote proportionately as instructed
by the Global Fixed Income Fund's shareholders. Global Fixed Income Fund
shareholders who do not vote will not affect the Trust's votes at the Portfolio
meeting. The percentage of the Trust's votes representing Global Fixed Income
Fund shareholders not voting will be voted by the Trustees of the Trust in the
same proportion as the Global Fixed Income Fund shareholders who do, in fact,
<PAGE>
vote. Subject to applicable statutory and regulatory requirements, the Global
Fixed Income Fund would not request a vote of its shareholders with respect to
(a) any proposal relating to the Portfolio, which proposal, if made with respect
to the Global Fixed Income Fund, would not require the vote of the shareholders
of the Fund, or (b) any proposal with respect to the Portfolio that is identical
in all material respects to a proposal that has previously been approved by
shareholders of the Global Fixed Income Fund. Any proposal submitted to holders
in the Portfolio, and that is not required to be voted on by shareholders of the
Global Fixed Income Fund, would nonetheless be voted on by the Trustees of the
Trust.
THE PORTFOLIO AND ITS INVESTORS
The Portfolio is a series of Standish, Ayer & Wood Master Portfolio, a
newly formed trust and, like the Global Fixed Income Fund, is an open-end
management investment company under the Investment Company Act of 1940, as
amended. The Portfolio Trust was organized as a master trust fund under the laws
of the State of New York on January 18, 1996.
Interests in the Portfolio have no preemptive or conversion rights, and are
fully paid and non-assessable, except as set forth in the Prospectus. The
Portfolio normally will not hold meetings of holders of such interests except as
required under the 1940 Act. The Portfolio would be required to hold a meeting
of holders in the event that at any time less than a majority of its Trustees
holding office had been elected by holders. The Trustees of the Portfolio
continue to hold office until their successors are elected and have qualified.
Holders holding a specified percentage of interests in the Portfolio may call a
meeting of holders in the Portfolio for the purpose of removing any Trustee. A
Trustee of the Portfolio may be removed upon a majority vote of the interests
held by holders in the Portfolio qualified to vote in the election. The 1940 Act
requires the Portfolio to assist its holders in calling such a meeting. Upon
liquidation of the Portfolio, holders in the Portfolio would be entitled to
share pro rata in the net assets of the Portfolio available for distribution to
holders. Each holder in the Portfolio is entitled to a vote in proportion to its
percentage interest in the Portfolio.
TAXATION
Each series of the Trust, including each Fund, is treated as a separate
entity for accounting and tax purposes. Each Fund has qualified and elected to
be treated as a "regulated investment company" ("RIC") under Subchapter M of the
Code, and intends to continue to so qualify in the future. As such and by
complying with the applicable provisions of the Code regarding the sources of
its income, the timing of its distributions, and the diversification of its
assets, each 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 in accordance with the timing
requirements of the Code.
The Portfolio is treated as a partnership for federal income tax purposes.
As such, the Portfolio is not subject to federal income taxation. Instead, the
Global Fixed Income Fund must take into account, in computing its federal income
tax liability (if any), its share of the Portfolio's income, gains, losses,
<PAGE>
deductions, credits and tax preference items, without regard to whether it has
received any cash distributions from the Portfolio. Because the Global Fixed
Income Fund invests its assets in the Portfolio, the Portfolio normally must
satisfy the applicable source of income and diversification requirements in
order for the Fund to satisfy them. The Portfolio will allocate at least
annually among its investors, including the Global Fixed Income Fund, each
investor's distributive share of the Portfolio's net investment income, net
realized capital gains, and any other items of income, gain, loss, deduction or
credit. The Portfolio will make allocations to the Global Fixed Income Fund in a
manner intended to comply with the Code and applicable regulations and will make
moneys available for withdrawal at appropriate times and in sufficient amounts
to enable the Global Fixed Income Fund to satisfy the tax distribution
requirements that apply to the Global Fixed Income Fund and that must be
satisfied in order to avoid Federal income and/or excise tax on the Global Fixed
Income Fund. For purposes of applying the requirements of the Code regarding
qualification as a RIC, the Global Fixed Income Fund will be deemed (i) to own
its proportionate share of each of the assets of the Portfolio and (ii) to be
entitled to the gross income of the Portfolio attributable to such share.
Each 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. Each
Fund intends under normal circumstances to seek to avoid liability for such tax
by satisfying such distribution requirements. Certain distributions made in
order to satisfy the Code's distribution requirements may be declared by the
Funds during October, November or December of the year but paid during the
following January. Such distributions will be taxable to taxable shareholders as
if received on December 31 of the year the distributions are declared, rather
than the year in which the distributions are received.
Each Fund is not subject to Massachusetts corporate excise or franchise
taxes. Provided that the Funds qualify as regulated investment companies under
the Code, they will also not be required to pay any Massachusetts income tax.
Each 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, a 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 Global Fixed Income Fund has $402,973 of capital loss
carryforwards, which expire on December 31, 2002, available to offset future net
capital gains.
If a Fund or the Portfolio invests in zero coupon securities, certain
increasing rate or deferred interest securities or, in general, other securities
with original issue discount (or with market discount if a Fund elects to
include market discount in income currently), the Fund or the Portfolio must
accrue income on such investments prior to the receipt of the corresponding cash
payments. However, a Fund must distribute, at least annually, all or
<PAGE>
substantially all of its net income, including its distributive share of such
income accrued by the Portfolio, in the case of the Global Fixed Income Fund, to
shareholders to qualify as a regulated investment company under the Internal
Revenue Code and avoid federal income and excise taxes. Therefore, a Fund or the
Portfolio may have to dispose of its portfolio securities under disadvantageous
circumstances to generate cash, or may have to leverage itself by borrowing the
cash, to enable the Fund to satisfy the distribution requirements.
Limitations imposed by the Code on regulated investment companies like the
Funds may restrict a Fund's or the Portfolio's ability to enter into futures,
options or currency forward transactions.
Certain options, futures or currency forward transactions undertaken by a
Fund or the Portfolio may cause a Fund to recognize gains or losses from marking
to market even though the Fund's or the Portfolio's positions have not been sold
or terminated and affect the character as long-term or short-term (or, in the
case of certain options, futures or forward contracts relating to foreign
currency, as ordinary income or loss) and timing of some capital gains and
losses realized by a Fund or realized by the Portfolio and allocable to the
Global Fixed Income Fund. Any net mark to market gains may also have to be
distributed by a Fund 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 losses on transactions involving options, futures
or forward contracts and/or offsetting or successor positions may be deferred
rather than being taken into account currently in calculating the Funds' taxable
income or gain. Certain of the applicable tax rules may be modified if a Fund or
the Portfolio is eligible and chooses to make one or more of certain tax
elections that may be available. These transactions may affect the amount,
timing and character of the Funds' distributions to shareholders. Each Fund will
take into account the special tax rules applicable to options, futures or
forward contracts in order to minimize any potential adverse tax consequences.
The Federal income tax rules applicable to dollar rolls, currency swaps,
and interest rate swaps, caps, floors and collars are unclear in certain
respects, and a Fund or the Portfolio may be required to account for these
instruments under tax rules in a manner that, under certain circumstances, may
limit its transactions in these instruments. Due to possible unfavorable
consequences under present tax law, each Fund and the Portfolio do not currently
intend to acquire "residual" interests in real estate mortgage investment
conduits ("REMICs"), although the Funds may acquire "regular" interests in
REMICs.
Foreign exchange gains and losses realized by the Portfolio and the
International Fixed Income Fund in connection with certain transactions, if any,
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
Fund distributions to shareholders. In some cases, elections may be available
that would alter this treatment. Any such transactions that are not directly
related to the Portfolio's or the International Fixed Income Fund's investment
<PAGE>
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 (or share of such gain in the case of the
Global Fixed Income Fund plus any such gain the Fund may realize from other
sources) is limited under the Code to less than 30% of each Fund's gross income
for its taxable year, and could under future Treasury regulations produce income
not among the types of "qualifying income" from which each Fund must derive at
least 90% of its gross income for its taxable year.
The Portfolio or the International Fixed Income 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 in some cases. Investors in a Fund
would be entitled to claim U.S. foreign tax credits with respect to such taxes,
subject to certain provisions and limitations contained in the Code, only if
more than 50% of the value of that Fund's total assets (in the case of the
Global Fixed Income Fund, taking into account its allocable share of the
Portfolio's 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. For any taxable year, either Fund may meet the 50%
threshold referred to in the previous paragraph and may therefore file an
election with the Internal Revenue Service pursuant to which shareholders of the
applicable Fund will be required to (i) include in ordinary gross income (in
additional 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 a 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 applicable
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
applicable 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 (if any) that a Fund files the
election described above, its shareholders will be notified of the amount of (i)
each shareholder's pro rata share of foreign income taxes paid by the Fund and
(ii) the portion of Fund dividends which represents income from each foreign
country.
If the Portfolio or the International Fixed Income Fund acquires stock in
certain foreign 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"), either Fund could be
<PAGE>
subject to Federal income tax and additional interest charges on "excess
distributions" actually or constructively received from such companies or gain
from the actual or deemed sale of stock in such companies, even if all income or
gain actually realized is timely distributed to its shareholders. They would not
be able to pass through to their shareholders any credit or deduction for such a
tax. Certain elections may, if available, ameliorate these adverse tax
consequences, but any such election would require them to recognize taxable
income or gain without the concurrent receipt of cash. The Portfolio and the
International Fixed Income Fund may limit and/or manage stock holdings, if any,
in passive foreign investment companies to minimize each Fund's tax liability or
maximize its return from these investments.
Investment in debt obligations by the International Fixed Income Fund or
the Portfolio that are at risk of or in default presents special tax issues for
that Fund or the Global Fixed Income Fund, respectively. Tax rules are not
entirely clear about issues such as when the International Fixed Income Fund or
the Portfolio may cease to accrue interest, original issue discount, or market
discount, when and to what extent deductions may be taken for bad debts or
worthless securities, how payments received on obligations in default should be
allocated between principal and income, and whether exchanges of debt
obligations in a workout context are taxable. These and other issues will be
addressed by the International Fixed Income Fund or the Portfolio, in the event
that either holds such obligations, in order to reduce the risk of that Fund or
the Global Fixed Income Fund, or any other RIC investing in the Portfolio,
distributing insufficient income to preserve its status as a RIC or becoming
subject to Federal income or excise tax.
Distributions from a Fund's current or accumulated earnings and profits
("E&P"), as computed for Federal income tax purposes, will be taxable as
described in the Funds' Prospectus whether taken in shares or in cash.
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.
A 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 a Fund earned dividend income (or, in the case of
the Global Fixed Income Fund, was allocated dividend income of the Portfolio)
from stock investments in U.S. domestic corporations. It is anticipated that,
due to the nature of the Funds' investments, no portion of the Funds'
distributions will generally qualify for the dividends received deduction.
At the time of an investor's purchase of Fund shares, a portion of the
purchase price may be attributable to undistributed net investment income and/or
realized or unrealized appreciation in the Fund's portfolio (or share of the
Portfolio's portfolio in the case of the Global Fixed Income Fund).
Consequently, subsequent distributions by a Fund on such shares from such income
<PAGE>
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 economically represent a
return of a portion of the purchase price.
Upon a redemption (including a repurchase) of shares of a 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 generally 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,
subject to the rules described below. Any loss realized on a redemption may be
disallowed to the extent the shares disposed of are replaced with other shares
of the same 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.
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. A state income (and possibly local income
and/or intangible property) tax exemption is generally available to the extent,
if any, a Fund's distributions are derived from interest on (or, in the case of
<PAGE>
intangible property taxes, the value of its assets is attributable to)
investments in certain U.S. Government obligations, provided in some states that
certain thresholds for holdings of such obligations and/or reporting
requirements are satisfied. Shareholders should consult their tax advisers
regarding the applicable requirements in their particular states, including the
effect, if any, of the Global Fixed Income Fund's indirect ownership (through
the Portfolio) of any such obligations, the Federal, and any other state or
local, tax consequences of ownership of shares of, and receipt of distributions
from, a Fund 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 applicable 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 Funds.
ADDITIONAL INFORMATION
The Prospectus and this Statement of Additional Information omit certain
information contained in the registration statement filed with the SEC, which
may be obtained from the SEC's principal office at 450 Fifth Street, N.W.,
Washington, D.C. 20549, upon payment of the fee prescribed by the rules and
regulations promulgated by the Commission.
EXPERTS AND FINANCIAL STATEMENTS
Except as noted in the next sentence, each Fund's financial statements
contained in the 1996 Annual Reports of the Funds have been audited by Coopers &
Lybrand L.L.P., independent accountants, and are incorporated by reference into
and attached to this Statement of Additional Information. Financial highlights
of International Fixed Income Fund for periods from commencement of operations
through December 31, 1992 were audited by Deloitte & Touche, LLP, independent
auditors. The Portfolio's financial statements contained in the Global Fixed
Income Fund's 1996 Annual Report have been audited by Coopers & Lybrand, an
affiliate of Coopers & Lybrand L.L.P.
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APPENDIX
MOODY'S RATINGS DEFINITIONS FOR CORPORATE BONDS AND SOVEREIGN, SUBNATIONAL
AND SOVEREIGN RELATED ISSUES
Aaa - Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa - Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long term risks appear somewhat larger than in Aaa securities.
A - Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa - Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba - Bonds which are rated Ba are judged to have speculative elements.
Their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
STANDARD & POOR'S RATINGS DEFINITIONS
AAA - Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA- Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A - Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB - Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
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BB - Debt rated BB is regarded, on balance, as predominantly speculative
with respect to capacity to pay interest and repay principal in accordance with
the terms of the obligation. While such debt will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or major
risk exposures to adverse conditions.
STANDARD & POOR'S CHARACTERISTICS OF SOVEREIGN DEBT OF
FOREIGN COUNTRIES AAA- Stable, predictable governments with demonstrated
track record of responding flexibly to changing
economic and political circumstances
Key players in the global trade and financial system: - Prosperous and
resilient economies, high per capita incomes - Low fiscal deficits and
government debt, low inflation - Low external debt
AA- Stable, predictable governments with demonstrated track record of
responding to changing economic and political circumstances
- Tightly integrated into global trade and financial system - Differ from
AAAs only to a small degree because:
- Economies are smaller, less prosperous and generally more vulnerable to
adverse external influences (e.g., protection and terms of trade shocks)
- More variable fiscal deficits, government debt and inflation
- Moderate to high external debt
A- Politics evolving toward more open, predictable forms of governance in
environment of rapid economic and social change
- Established trend of integration into global trade and financial system
- Economies are smaller, less prosperous and generally more vulnerable to
adverse external influences (e.g., protection and terms of trade shocks),
but
- Usually rapid growth in output and per capita incomes
- Manageable through variable fiscal deficits, government debt and
inflation - Usually low but variable debt - Integration into global trade
and financial system growing but untested
- Low to moderate income developing economies but variable performance and
quite vulnerable to adverse external influences
- Variable to high fiscal deficits, government debt and inflation
- Very high and variable debt, often graduates of Brady plan but track
record not well established BBB- Political factors a source of significant
uncertainty, either because system is in transition or due
to external threats, or both, often in environment of rapid economic and
social change - Integration into global trade and financial system growing
but untested - Economies less prosperous and often more vulnerable to
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adverse external influences - Variable to high fiscal deficits, government
debt and inflation - High and variable external debt BB- Political factors
a source of major uncertainty, either because system is in transition or
due to
external threats, or both, often in environment of rapid economic and social
change - Integration into global trade and financial system growing but
untested
- Low to moderate income developing economies, but variable performance and
quite vulnerable to adverse external influences
- Variable to high fiscal deficits, government debt and inflation
- Very high and variable debt, often graduates of Brady Plan but track
record not well established BB- Political factors a source of major
uncertainty, either because system is in transition or due to
external threats, or both, often in environment of rapid economic and social
change
In the case of sovereign, subnational and sovereign related issuers, the
Portfolio uses the foreign currency or domestic (local) currency rating
depending upon how a security in the portfolio is denominated. In the case where
the Portfolio holds a security denominated in a domestic (local) currency and
one of the rating services does not provide a domestic (local) currency rating
for the issuer, the Portfolio will use the foreign currency rating for the
issuer; in the case where the Portfolio holds a security denominated in a
foreign currency and one of the rating services does not provide a foreign
currency rating for the issuer, the Portfolio will treat the security as being
unrated.
DESCRIPTION OF DUFF & PHELPS RATINGS FOR CORPORATE BONDS AND FOR SOVEREIGN,
SUBNATIONAL AND SOVEREIGN RELATED ISSUERS
AAA - Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA - High credit quality. Protection factors are strong. Risk is modest but
may vary slightly from time to time because of economic conditions.
A - Protection factors are average but adequate. However, risk factors are
more variable and greater in periods of economic stress.
BBB - Below average protection factors but still considered sufficient for
prudent investment. Considerable variability in risk during economic cycles.
BB - Below investment grade but deemed likely to meet obligations when due.
Present or prospective financial protection factors fluctuate according to
industry conditions or company fortunes. Overall quality may move up or down
frequently within this category.
FITCH INVESTORS SERVICE, INC. LONG-TERM DEBT RATING DEFINITIONS
AAA - Bonds 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.
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AA - Bonds 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. Because bonds rated in
the AAA and AA categories are not significantly vulnerable to foreseeable future
developments, short-term debt of these issuers is generally rated F-1+.
A - Bonds 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 considered to be investment grade and of 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 impact 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.
BB - Bonds are considered speculative. The obligor's ability to pay
interest and repay principal may be affected over time by adverse economic
changes. However, business and financial alternatives can be identified which
could assist the obligor in satisfying its debt service requirements.
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 currently 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.
