STANDISH SHORT-TERM ASSET RESERVE FUND
PROSPECTUS
January 2, 1998
The Standish Short-Term Asset Reserve Fund (the "Fund") is one fund in the
Standish, Ayer & Wood family of funds. The Fund is organized as a separate
diversified investment series of Standish, Ayer & Wood Investment Trust
("Trust"), an open end investment company. The Fund invests solely in the
Standish Short-Term Asset Reserve Portfolio (the "Portfolio"), a series of
Standish, Ayer & Wood Master Portfolio ("Portfolio Trust"), an open end
investment company. Standish, Ayer & Wood, Inc. ("Standish"), Boston,
Massachusetts, is the investment adviser to the Portfolio.
Investors may purchase shares in the Fund without charge from Standish Fund
Distributors, L.P. An application may be obtained by calling (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 the Fund's portfolio
by selecting undervalued investments, rather than by varying the average
maturity of the 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-three 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 Fund 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 January 2,
1998, 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 Fund are not deposits or obligations of, or guaranteed or endorsed
by, any bank or other insured depository institution, and are not insured by the
Federal Deposit Insurance Corporation, the Federal Reserve Board or any other
government agency. An investment in shares of the Fund involves investment
risks, including possible loss of principal.
<PAGE>
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 Fund 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 Fund may not
legally be sold. Contact Standish Fund Distributors to determine whether the
Fund is available for sale in your state.
TABLE OF CONTENTS
Expense Information.........................................................3
Financial Highlights........................................................5
Investment Objective and Policies...........................................6
Description of Securities and Related Risks.................................7
Investment Techniques and Related Risks....................................11
Information about the Master-Feeder Structure..............................16
Calculation of Performance Data............................................17
Dividends and Distributions................................................17
Purchase of Shares.........................................................17
Net Asset Value............................................................18
Exchange of Shares.........................................................19
Redemption of Shares.......................................................20
Management.................................................................22
Federal Income Tax.........................................................23
The Fund and Its Shares....................................................24
Custodian, Transfer Agent and Dividend Disbursing Agent....................25
Independent Accountants....................................................25
Legal Counsel..............................................................25
Tax Certification Instructions.............................................25
<PAGE>
EXPENSE INFORMATION
Total operating expenses are based on expenses incurred by the Fund for the
fiscal year ended December 31, 1996 and include expenses of the Fund and
estimated expenses of the Portfolio, adjusted for current expenses and expense
limitations. The Trust's Trustees believe that the 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.
Shareholder Transaction Expenses
Maximum Sales Load Imposed on Purchases None
Maximum Sales Load Imposed on Reinvested Dividends None
Deferred Sales Load None
Redemption Fees None
Annual Operating Expenses (as a percentage of average net assets)
Management Fees (after expense limitation)(1) 0.21%*
12b-1 Fees None
Other Expenses+ 0.14%
----
Total Operating Expenses (after expense limitation) 0.35%*
====
- ----------
(1)As of the close of business on January 1, 1998, the Fund transferred
its investable assets to the Portfolio in exchange for an interest in the
Portfolio. Prior to such date, the Trust, on behalf of the Fund, retained
Standish as its investment adviser.
*Standish has voluntarily agreed to limit the master-feeder aggregate
annual operating expenses of the Fund and the Portfolio (excluding brokerage
commissions, taxes and extraordinary expenses) to the Fund's ratio of expenses
to average net assets in effect immediately prior to the Fund's conversion to
the master-feeder structure. The expense ratio considered to be in effect
immediately prior to the conversion for this purpose will be calculated using
the actual expenses incurred by the Fund during the three months immediately
prior to conversion and annualizing this amount. In the absence of this
agreement, Management Fees and Total Operating Expenses (as a percentage of
average net assets) of the Fund and the Portfolio are estimated to be 0.25% and
0.39%. Standish may terminate or revise this agreement at any time although it
has no current intention 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 the Fund's annual return is 5% and that its
total operating expenses are exactly as described. For every $1,000 invested, an
investor would
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have paid the following expenses if an account were closed after the number of
years indicated:
Short-Term
Asset Reserve
Fund
----
After 1 Year..................................................... $ 4
After 3 Years.................................................... $11
After 5 Years.................................................... $20
After 10 Years................................................... $40
The purpose of the table is to assist investors in understanding the
various costs and expenses that an investor in the 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 the Fund's expenses.
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights for the periods ended December 31 after 1992 have
been audited by Coopers & Lybrand L.L.P., independent accountants, whose
reports, together with the Financial Statements of the Fund, are incorporated
into the Statement of Additional Information. Financial highlights for prior
periods were audited by other independent accountants. The Fund's annual report,
which contains additional information about the Fund's performance, may be
obtained from Standish Fund Distributors without charge. The financial
highlights for the period ended June 30, 1997 are unaudited.
<TABLE>
<CAPTION>
Short-Term Asset Reserve Fund Year Ended December 31,
Six Months
Ended
June 30,
1997
(Unaudited) 1996 1995 1994 1993 1992*
<S> <C> <C> <C> <C> <C> <C>
Net asset value - beginning of period $19.50 $19.55 $19.22 $19.79 $19.96 $20.46
-------- -------- -------- -------- -------- --------
Income from investment operations
Net investment income $0.56 $1.11 $1.13 $1.01 $1.31 $1.35
Net realized and unrealized gain
(loss) on investments (0.02) (0.04) 0.33 (0.57) (0.17) (0.48)
-------- -------- -------- -------- -------- --------
Total from investment operations $0.54 $1.07 $1.46 $0.44 $1.14 $0.87
Less distributions declared
to shareholders
From net investment income ($0.56) ($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 ($0.56) ($1.12) ($1.13) ($1.01) ($1.31) ($1.37)
-------- -------- -------- -------- -------- --------
Net asset value - end of period $19.48 $19.50 $19.55 $19.22 $19.79 $19.96
======== ======== ======== ======== ======== ========
Total return1 2.80% 5.62% 7.85% 2.27% 5.08% 4.33%
Ratios (to average daily net assets)/
Supplemental Data
Net assets at end of period $245,600 $194,074 $243,500 $277,017 $275,080 $289,969
(000 omitted)
Expenses 0.37% 0.35% 0.33% 0.33% 0.33% 0.37%
Net investment income 5.79% 5.75% 5.95% 5.24% 5.82% 6.60%
Portfolio turnover 79.00% 156.00% 208.00% 154.00% 182.00% 167.00%
<CAPTION>
Short-Term Asset Reserve Fund Year Ended December 31,
1991* 1990* 1989*@
<S> <C> <C> <C>
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%
</TABLE>
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):
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992 1991 1990 1989
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
</TABLE>
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
Investment Strategy for the Standish Short-Term Asset Reserve Fund
The Fund's investment objective and policies are set forth below. Because
the Fund invests all of its investible assets in the Portfolio, the investment
objective and characteristics of the Fund correspond directly to those of the
Portfolio. 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
objective and policies of the Portfolio. Because of the uncertainty inherent in
all investments, no assurance can be given that the Portfolio will achieve its
investment objective.
Investment Objective. The Portfolio's investment objective is to achieve a
high level of current income consistent with preserving principal and liquidity.
Securities. The Portfolio invests in a broad range of investment grade
money market instruments and short-term fixed-income securities. The Portfolio
may invest in all types of income producing securities, including bonds, notes
(including structured or hybrid notes), mortgage-backed securities, asset-backed
securities, shares of real estate investment trusts ("REITs"), convertible
securities, Eurodollar and Yankee Dollar instruments, preferred stocks
(including convertible preferred stock), and other money market instruments
(such as negotiable certificates of deposit, non-negotiable fixed time deposits,
bankers' acceptances and prime commercial paper). These income producing
securities may be issued by the U.S. Government, its agencies, authorities,
instrumentalities or sponsored enterprises, U.S. and foreign banks, U.S. and
(solely with respect to prime commercial paper) foreign corporations. The
Portfolio limits its investments in each of tax-exempt securities and in
preferred stocks to 10% of its total assets.
The Portfolio may purchase securities that pay income on a fixed,
variable, floating, inverse floating, contingent, in-kind or deferred basis. The
Portfolio may enter into repurchase agreements, reverse 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 and engage in short sales.
Credit Quality. The Portfolio invests primarily in high grade securities.
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 Investors Service, Inc.
("Moody's") or AAA, AA, A, A-1 or Duff-1 by Standard and Poor's Rating Group
("Standard & Poor's"), Duff & Phelps, Inc. ("Duff") or Fitch Investors Service,
Inc. ("Fitch") or, if unrated, determined by Standish to be of comparable credit
quality. The Portfolio 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 &
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
<PAGE>
Portfolio is expected to be at least at Aa according to Moody's or AA according
to Standard & Poor's, Duff or Fitch.
Securities rated in the lowest category of investment grade (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. If a security is rated differently
by two or more rating agencies, Standish uses the highest rating to compute the
Portfolio's credit quality and also to determine its rating category. If a
security held by the Portfolio is downgraded, Standish will determine whether to
retain that security in the Portfolio's portfolio.
Maturity. All securities held by the Portfolio 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 Portfolio'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 Portfolio 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 Portfolio's average dollar-weighted effective portfolio maturity
will not exceed 18 months.
DESCRIPTION OF SECURITIES
AND RELATED RISKS
General Risks
Investment in the Fund involves certain risks. The Portfolio invests
primarily in high grade 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.
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 the Portfolio 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 the Portfolio 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
<PAGE>
would cause cash flows to be returned later than expected. This typically
results when interest rates have increased and the Portfolio will suffer from
the inability to invest in higher yield securities.
Securities and Specific Risks
The following sections include descriptions of specific risks that are
associated with the Portfolio's purchase of a particular type of security or the
utilization of a specific investment technique.
Corporate Debt Obligations. The Portfolio 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. The Portfolio 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").
Mortgage-Backed Securities. The Portfolio 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 the Portfolio's ability to reinvest the
returns of principal at comparable yields. Conversely, in a
<PAGE>
rising interest rate environment, a declining prepayment rate will extend the
average life of many mortgage-backed securities, increase the Portfolio's
exposure to rising interest rates and prevent the Portfolio 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 Portfolio does not intend to purchase residual interests in
REMICs.
Asset-Backed Securities. The Portfolio 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 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. The Portfolio may invest in convertible securities
consisting of bonds, notes, debentures and preferred stocks. The Portfolio
limits its investments in preferred stock to no more than 10% of its total
assets. Convertible debt securities and preferred stock acquired by the
Portfolio entitle the Portfolio to exchange
<PAGE>
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.
Inverse Floating Rate Securities. The Portfolio may invest only in inverse
floating rate securities 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. The Portfolio 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. The Portfolio is required to accrue
income with respect to these securities prior to the receipt of cash payments.
Because the Fund will distribute its share of 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 Portfolio 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. The Portfolio 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 Portfolio 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 Portfolio may
forego all or part of the interest and principal that would be payable on a
comparable conventional note. An investment in structured or hybrid notes
involves risks similar to those associated with a direct investment in the
benchmark asset.
Eurodollar and Yankee Dollar Investments. The Portfolio 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
<PAGE>
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 Portfolio 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. The Portfolio is managed without regard to
potential tax consequences. If Standish believes that tax-exempt securities will
provide competitive returns, the Portfolio may invest up to 10% of its total
assets in tax-exempt securities. The Fund's distributions of its share of
interest earned from these investments will be taxable.
Real Estate Investment Trusts. REITs are pooled investment vehicles that
invest in real estate or real estate loans or interests. Investing in REITs
involves risks similar to those associated with investing in equity securities
of small capitalization companies. REITs are dependent upon management skills,
are not diversified, and are subject to risks of project financing, default by
borrowers, self-liquidation, and the possibility of failing to qualify for the
exemption from taxation under the Code.
INVESTMENT TECHNIQUES AND
RELATED RISKS
Strategic Transactions. The Portfolio may, but is not required to, utilize
various investment strategies to seek to hedge market risks (such as interest
rate 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 Portfolio may
change over time as new instruments and strategies are developed or regulatory
changes occur.
In the course of pursuing its investment objective, the Portfolio may
purchase and sell (write) exchange-listed and over-the-counter put and call
options on securities, 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 index, total return and other swap transactions (collectively, all the
above are called "Strategic Transactions"). Strategic Transactions may be used
to seek to protect against possible changes in the market value of securities
held in or to be purchased for the Portfolio's portfolio resulting from
<PAGE>
securities markets or interest rate fluctuations, to seek to protect the
Portfolio'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 the Portfolio's portfolio, or to establish a
position in the derivatives markets as a temporary substitute for purchasing or
selling particular securities. In addition to the hedging transactions referred
to in the preceding sentence, Strategic Transactions may also be used to enhance
potential gain in circumstances where hedging is not involved.
The ability of the Portfolio to utilize Strategic Transactions
successfully will depend on Standish's ability to predict pertinent market and
interest rate movements, which cannot be assured. The Portfolio will comply with
applicable regulatory requirements when implementing these strategies,
techniques and instruments. The Portfolio's activities involving Strategic
Transactions may be limited 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 or interest rate movements is incorrect,
the risk that the use of such Strategic Transactions could result in losses
greater than if they had not been used. The writing of put and call options may
result in losses to the Portfolio, force the purchase or sale, respectively, of
portfolio securities at inopportune times or for prices higher than (in the case
of purchases due to the exercise of put options) or lower than (in the case of
sales due to the exercise of call options) current market values, limit the
amount of appreciation the Portfolio can realize on its investments or cause the
Portfolioto 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 the Portfolio'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 the Portfolio creates the
possibility that losses on the hedging instrument may be greater than gains in
the value of the Portfolio's position. The writing of options could
significantly increase the Portfolio's portfolio turnover rate and associated
brokerage commissions or spreads. In addition, futures and options markets may
not be liquid in all circumstances and certain over-the-counter options may have
no markets. As a result, in certain markets, the Portfolio might not be able to
close out a transaction without incurring substantial losses. 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, they can
limit any potential gain which might result from an increase in value of such
position. The loss incurred by the Portfolio in writing options and entering
into futures transactions is potentially unlimited.
<PAGE>
The Portfolio will attempt to limit its net loss exposure resulting from
Strategic Transactions entered into for non-hedging purposes to no more than 1%
of net assets. In calculating the Portfolio's net loss exposure from such
Strategic Transactions, an unrealized gain from a particular Strategic
Transaction position would be netted against an unrealized loss from a related
position. See the Statement of Additional Information for further information
regarding the Portfolio's use of Strategic Transactions.
When-Issued and Delayed Delivery Securities. The Portfolio may invest up
to 10% of its net assets in when-issued or delayed delivery basis securities.
Although the Portfolio will generally purchase securities on a when-issued or
delayed delivery basis with the intention of actually acquiring the securities,
the Portfolio 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 the Portfolio enters into the commitment, but no
income will accrue to the Portfolio until they are delivered and paid for.
Unless the Portfolio has entered into an offsetting agreement to sell the
securities, cash or liquid assets equal to the amount of the Portfolio's
commitment must be segregated to secure the Portfolio'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
Portfolio.
Repurchase Agreements. The Portfolio may invest up to 25% of its net
assets in repurchase agreements. In a repurchase agreement, the Portfolio 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 the Portfolio
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.
Reverse Repurchase Agreements. The Portfolio may enter into reverse
repurchase agreements with respect to 15% of its net assets. In a reverse
repurchase agreement the Portfolio sells securities and agrees to repurchase
them at a mutually agreed upon date and price. At the time the Portfolio enters
into a reverse repurchase agreement, it will establish a segregated account
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 Portfolio under
the Investment Company Act of 1940 ("1940 Act"). ThePortfolio intends to enter
into reverse repurchase agreements to provide cash to satisfy redemption
requests and to avoid liquidating securities during unfavorable market
conditions.
<PAGE>
Forward Roll Transactions. To seek to enhance current income, the
Portfolio may invest up to 10% of its net assets in forward roll transactions
involving mortgage-backed securities. In a forward roll transaction, the
Portfolio sells a mortgage-backed security to a financial institution, such as a
bank or broker-dealer, and simultaneously agrees to repurchase a similar
security from the institution at a later date at an agreed-upon price. The
mortgage-backed securities that are repurchased will bear the same interest rate
as those sold, but generally will be collateralized by different pools of
mortgages with different prepayment histories than those sold. During the period
between the sale and repurchase, the Portfolio will not be entitled to receive
interest and principal payments on the securities sold. Proceeds of the sale
will be invested in short-term instruments, such as repurchase agreements or
other short-term securities, and the income from these investments, together
with any additional fee income received on the sale and the amount gained by
repurchasing the securities in the future at a lower price, will generate income
and gain for the Portfolio which is intended to exceed the yield on the
securities sold. Forward roll transactions involve the risk that the market
value of the securities sold by the Portfolio may decline below the repurchase
price of those securities. At the time that the Portfolio enters into aforward
roll transaction, it will place cash or liquid assets in a segregated account
that is marked to market daily having a value at least 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) to increase the net asset value of the Portfolio's shares faster
than would otherwise be the case. On the other hand, if the additional monies
received are invested in ways that do not fully recover the costs of such
transactions to the Portfolio, the net asset value of the Portfolio would fall
faster than would otherwise be the case.
Restricted and Illiquid Securities. The Portfolio may invest up to 10% of
its net assets in illiquid investments. 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, swaps 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 Portfolio Trust's Board of Trustees has adopted guidelines and
delegated to Standish 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
<PAGE>
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 the Portfolio and thus indirectly by the Fund's shareholders. It may also
result in the Portfolio's realization of larger amounts of short-term capital
gains, distributions from which are taxable to shareholders as ordinary income.
See "Financial Highlights" for the Fund's portfolio turnover rates.
Short-Term Trading. The Portfolio 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.
Temporary Defensive Investments. The Portfolio may adopt a temporary
defensive position during adverse market conditions by investing without limit
in high quality money market instruments, including short-term U.S. Government
securities, negotiable certificates of deposit, non-negotiable fixed time
deposits, bankers' acceptances, commercial paper, floating- rate notes,
repurchase agreements and commercial paper rated A-2 by Moody's or P-2 or Duff-2
by Standard & Poor's, Duff or Fitch.
Investment Restrictions. The investment objective and investment policies
set forth in this Prospectus of the Fund and the Portfolio are not fundamental
and may be changed by the Board of Trustees without the approval of shareholders
except that the Fund's 15% limit on reverse repurchase agreements is
fundamental. The Fund and the Portfolio have adopted fundamental policies which
may not be changed without the approval of the Fund's shareholders. See
"Investment Restrictions" in the Statement of Additional Information. If any
percentage restriction is adhered to at the time of investment, a subsequent
increase or decrease in the percentage resulting from a change in the value of
the Portfolio's assets will not constitute a violation of the restriction. If
there is a change in the Fund's investment objective, shareholders should
consider whether the Fund remains an appropriate investment in light of their
then current financial situation.
INFORMATION ABOUT THE
MASTER-FEEDER STRUCTURE
The Fund seeks to achieve its investment objective by investing all of its
investable assets in the Portfolio, which has an identical investment objective.
The Fund is a feeder fund and the Portfolio is the master fund in what is
referred to as the master-feeder structure.
In addition to the Fund, other feeder funds may invest in the Portfolio,
and information about these other feeder funds is available from Standish Fund
Distributors. The other feeder funds invest in the Portfolio on the same terms
as the Fund and bear a proportionate share of the 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
<PAGE>
structure. Large scale redemptions by other feeder funds in the Portfolio may
reduce the diversification of the Portfolio's investments, reduce economies of
scale and increase the Portfolio's operating expenses. If the Portfolio Trust's
Board of Trustees approves a change to the investment objective of the Portfolio
that is not approved by the Trust's Board of Trustees, the 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 the Fund's
interest in the 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 Portfolio, the
Fund will call a meeting of the Fund's shareholders to vote on the matter. The
Fund will vote on any 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 the shares held by Fund shareholders who do not vote in the same proportion
as the shares of Fund shareholders who do vote.
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 the Portfolio Trust.
CALCULATION OF PERFORMANCE DATA
From time to time the 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. The 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 the Fund is computed by dividing the net investment income
per share earned during the period stated in the advertisement by the maximum
offering price per share on the last day of the period (using the average number
of shares entitled to receive dividends). For the purpose of determining net
investment income, the calculation includes among expenses of the Fund all
recurring fees that are charged to all shareholder accounts and any nonrecurring
charges for the period stated.
From time to time, the Fund may compare its performance 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, the Fund's performance may be
compared to alternative investment or savings vehicles
<PAGE>
or to indices or indicators of economic activity.
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.
DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income for the Fund will be declared daily
and distributed monthly. The Fund's dividends from short-term and long-term
capital gains, if any, after reduction by capital losses, will be declared and
distributed at least annually. In determining the amounts of its dividends, the
Fund will take into account its share of the income, gain or loss, expense, and
any other tax items of the Portfolio. Dividends from net investment income and
capital gains distributions, if any, are automatically reinvested in additional
shares of the Fund unless the shareholder elects to receive them in cash.
PURCHASE OF SHARES
Shares of the Fund may be purchased from Standish Fund Distributors, which
offers the Fund's shares to the public on a continuous basis. Shares are sold at
the net asset value per share next computed after the purchase order is received
in good order by Standish Fund Distributors and payment for the shares is
received by Investors Bank & Trust Company, the Fund's Custodian. Please see the
Fund's account application or call (800) 221-4795 for instructions on how to
make payment for shares to the Custodian. The Fund requires minimum initial
investments of $1,000,000. Additional investments must be in amounts of at least
$100,000. Certificates for Fund shares are generally not issued.
Shares of the Fund may also be purchased through brokers and dealers.
Orders for the purchase of Fund shares received by brokers and 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 brokers and dealers to transmit orders so they will be
received by Standish Fund Distributors before the close of its business day.
Shares of the Fund purchased through brokers and dealers may be subject to
transaction fees on purchase or redemption, no part of which will be received by
the Fund, Standish Fund Distributors or Standish.
In the sole discretion of the Trust, the 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 Fund in this manner are consistent
with the investment objective, policies and restrictions of the Portfolio. The
securities will be valued in the manner stated below. Purchasing shares of the
Fund for securities instead of cash may cause an investor who contributed them
to realize a taxable gain or loss with respect to the securities transferred to
the Fund.
<PAGE>
The Trust reserves the right in its sole discretion (i) to suspend the
offering of the Fund's shares, (ii) to reject purchase orders when in the best
interest of the Fund, (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. The 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. The Fund's
investment minimums apply to the aggregate value invested in omnibus accounts
rather than to the investment of the underlying participants in the omnibus
accounts.
NET ASSET VALUE
The 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 the Fund's investment in the Portfolio and other assets,
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 the Portfolio are valued on an
amortized cost basis unless the Trustees determine that amortized cost does not
represent fair value. If the Portfolio acquires a money market instrument with
more than sixty days remaining to its maturity, it is valued at current market
value until the sixtieth day prior to maturity and will then be valued at
amortized cost based upon the value on such date unless the Trustees determine
during such sixty-day period that amortized cost does not represent fair value.
EXCHANGE OF SHARES
Shares of the Fund 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
<PAGE>
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 Fund 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 theminimum 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 Fund 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 the 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 Fund's transfer agent: (i) a bank; (ii) a securities broker
<PAGE>
or dealer, including a government or municipal securitiesbroker 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 Fund may delay transmittal of redemption proceeds until
such time as it is 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., 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 Fund's custodian to act
upon instructions of any person to redeem and/or exchange shares from the
shareholder's account. Further, the shareholder acknowledges that, as long as
the Fund employs reasonable procedures
<PAGE>
to confirm that telephone instructions are genuine, and follows telephone
instructions that it reasonably believes to be genuine, neither Standish,
Standish Fund Distributors, the Trust, the Fund, the Fund's custodian, nor their
respective officers or employees, will be liable for any loss, expense or cost
arising out of any request for a telephone redemption or exchange, even if such
transaction results from any fraudulent or unauthorized instructions.
Depending upon the circumstances, the Fund intends to employ personal
identification or written confirmation of transaction procedures, and if it does
not, the Fund may be liable for any losses due to unauthorized or fraudulent
instructions. All telephone transaction requests will be recorded.
Shareholders may experience delays in exercising telephone transaction
privileges during periods of abnormal market activity. 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 Portfolio's
portfolio investments at the time of redemption or repurchase. The Fund intends
to pay cash for all shares redeemed, but under certain conditions, the Fund may
make payments wholly or partially in securities for this purpose. Please see the
Statement of Additional Information for further information.
The Fund may redeem, at net asset value, the shares in any account which
has a value of less than $250,000 as a result of redemptions or transfers.
Before doing so, the Fund will notify the shareholder that the value of the
shares in the account is less than the specified minimum and will allow the
shareholder 30 days to make an additional investment to increase the value of
the account to an amount equal to or above the stated minimum.
MANAGEMENT
Trustees. The 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. Standish, One Financial Center, Boston, Massachusetts
02111, serves as investment adviser to the Portfolio pursuant to an investment
advisory agreement and manages the Portfolio's investments and affairs subject
to the supervision of the Trustees of the Portfolio Trust. Standish is a
Massachusetts corporation incorporated in 1933 and is a registered investment
adviser under the Investment Advisers
<PAGE>
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 September 30, 1997, Standish managed
approximately $37 billion of assets.
The Portfolio has two portfolio managers -- Ms. Jennifer Pline and Ms.
Barbara J. McKenna. Ms. Pline was a portfolio manager of the Fund's portfolio
since 1991 and has been a portfolio manager of the Portfolio's portfolio since
the Fund's conversion to the master-feeder structure on January 1, 1998. During
the past five years, Ms. Pline has served as a Vice President of Standish. Ms.
McKenna has been a portfolio manager of the Portfolio's portfolio since January
1998. Ms. McKenna has served as a Vice President of Standish since 1996.
Subject to the supervision and direction of the Trustees of the Portfolio
Trust, Standish manages the Portfolio in accordance with its investment
objective and policies, recommends investment decisions, places orders to
purchase and sell securities and permits the Portfolio to use the name
"Standish." For these services, the Portfolio pays a monthly fee at a stated
annual percentage rate of the Portfolio's average daily net asset value:
Contractual Advisory
Fee Annual Rate
---------------
Short-Term Asset Reserve
Portfolio 0.25%
Administrator. Standish serves as administrator to the 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 Portfolio and the Fund each bears the expenses of its
respective operations other than those incurred by Standish under the investment
advisory agreement or by Standish under the administration agreement. The
Portfolio pays investment advisory fees; bookkeeping, share pricing and
custodian fees and expenses; and expenses of notices and reports to interest
holders. The 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 Fund and the Portfolio
pay legal and auditing fees; registration and reporting 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.
See the footnotes to the Expense Information table for a description of
Standish's voluntary expense limitation for the Fund. The Fund's total annual
operating expenses for the fiscal year ended December 31, 1996 are described
<PAGE>
above under the caption "Financial Highlights."
Portfolio Transactions. Subject to the supervision of the Trustees of the
Portfolio Trust, Standish selects the brokers and dealers that execute orders to
purchase and sell portfolio securities for the Portfolio. Standish will
generally seek to obtain the best available price and most favorable execution
with respect to all transactions for the Portfolio and may 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
The Fund is a separate entity for federal tax purposes and intends to
qualify for each taxable year for taxation as a "regulated investment company"
under the Code. If it qualifies as a regulated investment company, the Fund will
not be subject to federal income tax on income (including capital gains)
distributed to shareholders in the form of dividends or capital gain
distributions in accordance with certain timing requirements of the Code.
Shareholders which are taxable entities or persons will be subject to
federal income tax on dividends and capital gain distributions made by the Fund.
Dividends paid by the Fund from net investment income, certain net foreign
currency gains, and any excess of net short-term capital gain over net long-term
capital loss will be taxable to shareholders as ordinary income, whether
received in cash or reinvested in Fund shares. Only a small portion, if any, of
these dividends may qualify for the corporate dividends received deduction under
the Code. Dividends paid by the Fund from net capital gain (the excess of net
long-term capital gain over net short-term capital loss), called "capital gain
distributions," will be taxable to shareholders as 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 may be
taxable at different maximum rates, lower than the maximum rate applicable to
ordinary income, and the applicable rates may depend on the holding periods for
the assets with respect to which the gains were recognized. 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 for taxable shareholders.
Individuals and certain other classes of shareholders may be subject to
31% backup withholding of federal income tax on dividends, capital gain
distributions, and the proceeds of redemptions or repurchases of shares, if they
fail to furnish the Fund with their correct taxpayer identification numberand
certain certifications or if they are otherwise subject to backup withholding.
Individuals, corporations and other shareholders that are not U.S. persons under
the Code are subject to different tax rules and may be subject to nonresident
alien withholding at the rate of 30% (or a lower rate provided by an applicable
tax treaty) on amounts treated as ordinary dividends from the Fund and, unless a
current IRS Form W-8 or an acceptable substitute is furnished to the Fund, to
backup withholding on certain payments from that Fund.
<PAGE>
After the close of each calendar year, the Fund will send a notice to
shareholders that provides information about the federal tax status of
distributions to shareholders for such calendar year.
THE FUND AND ITS SHARES
The Trust was organized on August 13, 1986 as a Massachusetts business
trust. In addition to the Fund offered in this Prospectus, the Trust offers
other series to the public. Shareholders of the Fund are entitled to one full or
fractional vote for each Fund share or fraction thereof. 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 ameeting 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 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.
Inquiries concerning the Fund 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, 200 Clarendon Street, Boston,
Massachusetts 02116, serves as the Fund's transfer agent, dividend disbursing
agent and as custodian for all cash and securities of the Fund and the
Portfolio. Investors Bank & Trust Company also provides accounting services to
the Fund.
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P., One Post Office Square, Boston, Massachusetts
02109 serves as independent accountants for the Trust and the Portfolio Trust
and will audit the Fund's 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 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
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subject to backup withholding. The Fund will not impose backup withholding as a
result of your failure to make any certification, except the certifications in
the Application that directly relate to your TIN and backup withholding status.
Amounts withheld and forwarded to the IRS can be credited as a payment of tax
when completing your Federal income tax return.
For most individual taxpayers, the TIN is the social security number.
Special rules apply for certain accounts. For example, for an account
established under the Uniform Gift to Minors Act, the TIN of the minor should be
furnished. If you do not have a TIN, you may apply for one using forms available
at local offices of the Social Security Administration or the IRS, and you
should write "Applied For" in the space for a TIN on the Application.
Recipients exempt from backup withholding, including corporations and
certain other entities, should provide their TIN and underline "exempt" in
section 2(a) of the TIN section of the Application to avoid possible erroneous
withholding. Non-resident aliens and foreign entities may be subject to
withholding of up to 30% on certain distributions received from the Fund and
must provide certain certifications on IRS Form W-8 to avoid backup withholding
with respect to other payments. For further information, see Code Sections 1441,
1442 and 3406 and/or consult your tax adviser.
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STANDISH SHORT-TERM ASSET RESERVE FUND
Investment Adviser
Standish, Ayer & Wood, Inc.
P.O. Box 1407
One Financial Center
Boston, Massachusetts 02111
Principal Underwriter Independent Accountants
Standish Fund Distributors, L.P. Coopers & Lybrand L.L.P.
P.O. Box 1407 One Post Office Square
One Financial Center Boston, Massachusetts 02109
Boston, MA 02111
Custodian Legal Counsel
Investors Bank & Trust Company Hale and Dorr LLP
200 Clarendon Street 60 State Street
Boston, Massachusetts 02116 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.
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January 2, 1998
STANDISH SHORT-TERM ASSET RESERVE FUND
P.O. Box 1407
One Financial Center
Boston, Massachusetts 02111
(800) 729-0066
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information is not a prospectus, but expands
upon and supplements the information contained in the Prospectus dated January
2, 1998, as amended and/or supplemented from time to time (the "Prospectus"), of
the Standish Short-Term Asset Reserve Fund (the "Fund"), a separate investment
series of Standish, Ayer & Wood Investment Trust (the "Trust"). This Statement
of Additional Information should be read in conjunction with the 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 17
Calculation of Performance Data 20
Management 23
Purchase and Redemption of Shares 34
Portfolio Transactions 34
Determination of Net Asset Value 35
The Fund and Its Shares 37
The Portfolio and its Investors 38
Taxation 39
Additional Information 43
Experts and Financial Statements 43
INVESTMENT OBJECTIVE AND POLICIES
The Prospectus describes the investment objective and policies of the Fund.
The following discussion supplements the description of the Fund's investment
objective and policies in the Prospectus.
As described in the Prospectus, the Fund seeks to achieve its investment
objective by investing all its investable assets in the Standish Short-Term
Asset Reserve Portfolio (the "Portfolio"), a series of Standish, Ayer & Wood
Master Portfolio (the "Portfolio Trust"), an open-end management investment
company. The Portfolio has the same investment objective and restrictions as the
Fund. Standish, Ayer & Wood, Inc. ("Standish" or the "Adviser") is the adviser
to the Portfolio.
Since the investment characteristics of the 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
the Fund's and the Portfolio's investment objective, policies and restrictions.
Effective July 1, 1995, the 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 the Portfolio invests is defined as the period remaining until
the earliest date when the Portfolio can recover the principal amount of such
security through mandatory
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redemption or prepayment by the issuer, the exercise by the Portfolio of a put
option, demand feature or tender option granted by the issuer or a third party
or the payment of the principal on the stated maturity date. The effective
maturity of variable rate securities is calculated by reference to their coupon
reset dates. Thus, the effective maturity of a security may be substantially
shorter than its final stated maturity. Unscheduled prepayments of principal
have the effect of shortening the effective maturities of securities in general
and mortgage-backed securities in particular. Prepayment rates are influenced by
changes in current interest rates and a variety of economic, geographic, social
and other factors and cannot be predicted with certainty. In general,
securities, such as mortgage-backed securities, may be subject to greater
prepayment rates in a declining interest rate environment. Conversely, in an
increasing interest rate environment, the rate of prepayment may be expected to
decrease. A higher than anticipated rate of unscheduled principal prepayments on
securities purchased at a premium or a lower than anticipated rate of
unscheduled payments on securities purchased at a discount may result in a lower
yield (and total return) to the Portfolio than was anticipated at the time the
securities were purchased. The Portfolio'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 Portfolio.
Duration of an individual portfolio security is a measure of the security's
price sensitivity taking into account expected cash flow and prepayments under a
wide range of interest rate scenarios. In computing the duration of its
portfolio, the Portfolio will have to estimate the duration of obligations that
are subject to prepayment or redemption by the issuer taking into account the
influences of interest rates on prepayments and coupon flows. The Portfolio 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, 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.
A repurchase agreement is an agreement under which the Portfolio acquires
money market instruments (generally U.S. Government securities) from a
commercial bank, broker or dealer, subject to resale to the seller at an
agreed-upon price and date (normally the next business day). The resale price
reflects an agreed-upon interest rate effective for the period the instruments
are held by the Portfolio and is unrelated to the interest rate on the
instruments. The instruments acquired by the Portfolio (including accrued
interest) must have an aggregate market value in excess of the resale price and
will be held by the custodian bank for the Portfolio until they are repurchased.
The Trustees will monitor the standards that the Adviser will use in reviewing
the creditworthiness of any party to a repurchase agreement with the Portfolio.
The use of repurchase agreements involves certain risks. For example, if the
seller defaults on its obligation to repurchase the instruments acquired by the
Portfolio at a time when their market value has declined, the Portfolio may
incur a loss. If the seller becomes insolvent or subject to liquidation or
reorganization under bankruptcy or other laws, a court may determine that the
instruments acquired by the Portfolio are collateral for a loan by the Portfolio
and therefore are subject to sale by the trustee in bankruptcy. Finally, it is
possible that the Portfolio may not be able to substantiate its interest in the
instruments it acquires. While the Trustees acknowledge these risks, it is
expected that they can be controlled through careful documentation and
monitoring.
Structured or Hybrid Notes. As more fully described in the Prospectus, the
Portfolio may invest in structured or hybrid notes. It is expected that not more
than 5% of the Portfolio's net assets will be at risk as a result of such
investments. In addition to the risks associated with a direct investment in the
benchmark asset, investments in structured and hybrid notes involve the risk
that the issuer or counterparty to the obligation will fail to perform its
contractual obligations. Certain structured or hybrid notes may also be
leveraged to the extent that the magnitude of any change in the interest rate or
principal payable on the benchmark asset is a multiple of the change in the
reference price. Leverage enhances the price volatility of the security and,
therefore, the Portfolio's net asset value. Further, certain structured or
hybrid notes may be illiquid for purposes of the Portfolio's 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
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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").
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.
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.
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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-trough
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 a classes A, B, C and Z. Each tranche is identified by its coupon and
maturity. The first three classes are usually current interest-bearing bonds
paying interest on a quarterly or semi-annual basis, while the fourth, Class Z,
is an accrual bond. Amortized principal payments and prepayments from the
underlying mortgage collateral redeem principal of the CMO sequentially;
payments from the mortgages first redeem principal on the Class A bonds. When
principal of the Class A bonds has been redeemed, the payments then redeem
principal on the Class B bonds. This pattern of using principal payments to
redeem each bond sequentially continues until the Class C bonds have been
retired. At this point, Class Z bonds begin paying interest and amortized
principal on their accrued value.
The final tranche of a CMO is usually a deferred interest bond, commonly
referred to as the Z bond. This bond accrues interest at its coupon rate but
does not pay this interest until all previous tranches have been fully retired.
While earlier classes remain outstanding, interest accrued on the Z bond is
compounded and added to the outstanding principal. The deferred interest period
ends when all previous tranches are retired, at which point the Z bond pays
periodic interest and principal until it matures. The Adviser would purchase a Z
bond for the Portfolio 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 purchase. Pool size may vary, but the minimum is
usually $20 million for public offerings and $10 million for private placements.
Privately-issued mortgage-related obligations do not carry government or
quasi-government guarantees. Rather, mortgage pool insurance generally is used
to insure against credit losses that may occur in the mortgage pool. Pool
insurance protects against credit losses to the extent of the coverage in force.
Each mortgage, regardless of original loan-to-value ratio, is insured to 100% of
principal, interest and other expenses, to a total aggregate loss limit stated
on the policy. The aggregate loss limit of the policy generally is 5% to 7% of
the original aggregate principal of the mortgages included in the pool.
In addition to the insurance coverage to protect against defaults on the
underlying mortgages, mortgage-backed securities can be protected against the
nonperformance or poor performance of servicers. Performance bonding of
obligations such as those of the servicers under the origination, servicing or
other contractual agreement will protect the value of the pool of insured
mortgages and enhance the marketability.
The rating received by a mortgage security will be a major factor in its
marketability. For public issues, a rating is always required, but it may be
optional for private placements depending on the demands of the marketplace and
investors.
Before rating an issue, a rating agency such as Standard & Poor's Rating
Group ("Standard & Poor's) or Moody's Investors Service, Inc. ("Moody's) will
consider several factors, including: the creditworthiness of the issuer; the
issuer's track record as an originator and servicer; the type, term and
characteristics of the mortgages, as well as loan-to-value ratio and loan
amounts; the insurer and the level of mortgage insurance and hazard insurance
provided. Where an equity reserve account or letter of credit is offered, the
rating agency will also examine the adequacy of the reserve and the strength of
the issuer of the letter of credit.
Strategic Transactions. The Portfolio 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 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
Portfolio may change over time as new instruments and strategies are developed
or regulatory changes occur.
In the course of pursuing its investment objective, the Portfolio may
purchase and sell (write) exchange-listed and over-the-counter put and call
options on securities, indices and other financial instruments; purchase and
sell financial futures contracts and options thereon; and enter into various
interest rate transactions such as swaps, caps, floors or collars (collectively,
all the above are called "Strategic Transactions"). Strategic Transactions may
be used to seek to protect against possible changes in the market value
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of securities held in or to be purchased for the Portfolio's portfolio resulting
from securities market or interest rate fluctuations, to protect the Portfolio's
unrealized gains in the value of its portfolio securities, to facilitate the
sale of such securities for investment purposes, to manage the effective
maturity or duration of the Portfolio's portfolio, or to establish a position in
the derivatives markets as a temporary substitute for purchasing or selling
particular securities. In addition to the hedging transactions referred to in
the preceding sentence, Strategic Transactions may also be used to seek to
enhance potential gain in circumstances where hedging is not involved although
the Portfolio will attempt to limit its net loss exposure resulting from
Strategic Transactions entered into for such purposes to not more than 1% of its
net assets at any one time and, to the extent necessary, the Portfolio will
close out transactions in order to comply with this limitation. (Transactions
such as writing covered call options are considered to involve hedging for the
purposes of this limitation.) In calculating the Portfolio's net loss exposure
from such Strategic Transactions, an unrealized gain from a particular Strategic
Transaction position would be netted against an unrealized loss from a related
Strategic Transaction position. For example, if the Adviser believes that
short-term interest rates as indicated in the forward yield curve are too high,
the Portfolio 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 near-term
Eurodollar futures position (and vice versa) for purposes of calculating the
Portfolio's net loss exposure. The ability of the Portfolio to utilize these
Strategic Transactions successfully will depend on the Adviser's ability to
predict pertinent market and interest rate movements, which cannot be assured.
The Portfolio will comply with applicable regulatory requirements when
implementing these strategies, techniques and instruments. The Portfolio's
activities involving Strategic Transactions may be limited by the requirements
of Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"),
for qualification as a regulated investment company.
Risks of Strategic Transactions. The use of Strategic Transactions has
associated risks including possible default by the other party to the
transaction, illiquidity and, to the extent the Adviser's view as to certain
market 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. Writing put and call options may result in losses to the Portfolio, force
the purchase or sale, respectively, of portfolio securities at inopportune times
or for prices higher than (in the case of purchases due to the exercise of put
options) or lower than (in the case of sales due to the exercise of call
options) current market values, limit the amount of appreciation the Portfolio
can realize on its investments or cause the Portfolio to hold a security it
might otherwise sell. The use of options and futures transactions entails
certain other risks. In particular, the variable degree of correlation between
price movements of futures contracts and price movements in the related
portfolio position of the Portfolio creates the possibility that losses on the
hedging instrument may be greater than gains in the value of the Portfolio's
position. Writing options could significantly increase the Portfolio's portfolio
turnover rate and, therefore, associated brokerage commissions or spreads. In
addition, futures and options markets may not be liquid in all circumstances and
certain over-the-counter options may have no markets. As a result, in certain
markets, the Portfolio might not be able to close out a transaction without
incurring substantial losses, if at all. Although the use of futures and options
transactions for hedging should tend to minimize the risk of loss due to a
decline in the value of the hedged position, at the same time, in certain
circumstances, they tend to limit any potential gain which might result from an
increase in value of such position. The loss incurred by the Portfolio in
writing options and entering into futures transactions is potentially unlimited;
however, as described above, the Portfolio will attempt to limit its net loss
exposure resulting from Strategic Transactions entered into for non-hedging
purposes to not more than 1% of its net assets at any one time. Futures markets
are highly volatile and the use of futures may increase the volatility of the
Portfolio's net asset value. Finally, entering into futures contracts would
create a greater ongoing potential financial risk than would purchases of
options where the exposure is limited to the cost of the initial premium. Losses
resulting from the use of Strategic Transactions would reduce net asset value
and the net result may be less favorable than if the Strategic Transactions had
not been utilized.
General Characteristics of Options. Put options and call options typically
have similar structural characteristics and operational mechanics regardless of
the underlying instrument on which they are purchased or sold. Thus, the
following general discussion relates to each of the particular types of options
discussed in greater detail below. In addition, many Strategic Transactions
involving options require segregation of the Portfolio's assets in special
accounts, as described below under "Use of Segregated Accounts."
A put option gives the purchaser of the option, in consideration for the
payment of a premium, the right to sell, and the writer the obligation to buy
(if the option is exercised), the underlying security, commodity, index or other
instrument at the exercise price. For instance, the Portfolio's purchase of a
put option on a security might be designed to protect its holdings in the
underlying instrument (or, in some cases, a similar instrument) against a
substantial decline in the market value by giving the Portfolio the right to
sell such instrument at the option exercise price. A call option, in
consideration for the payment of a premium, gives the purchaser of the option
the right to buy, and the seller the obligation to sell (if the option is
exercised), the underlying instrument at the exercise price. The Portfolio may
purchase a call option on a security, futures contract, index or other
instrument to seek to protect the Portfolio against an increase in the price of
the underlying instrument that it intends to purchase in the future by fixing
the price at which it may purchase such instrument. An American style put or
call option may be exercised at any time during the option period while a
European style put or call option may be exercised only upon expiration or
during a fixed period prior thereto. The Portfolio is authorized to purchase and
sell exchange listed options and over-the-counter options ("OTC options").
Exchange listed options are issued by a regulated intermediary such as the
Options Clearing Corporation ("OCC"), which guarantees the performance of the
obligations of the parties to such options. The discussion below uses the OCC as
an example, but is also applicable to other financial intermediaries.
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With certain exceptions, exchange listed options generally settle by physical
delivery of the underlying security, although in the future cash settlement may
become available. Index options and Eurodollar instruments are cash settled for
the net amount, if any, by which the option is "in-the-money" (i.e., where the
value of the underlying instrument exceeds, in the case of a call option, or is
less than, in the case of a put option, the exercise price of the option) at the
time the option is exercised. Frequently, rather than taking or making delivery
of the underlying instrument through the process of exercising the option,
listed options are closed by entering into offsetting purchase or sale
transactions that do not result in ownership of the new option.
The Portfolio's ability to close out its position as a purchaser or seller of
an exchange listed put or call option is dependent, in part, upon the liquidity
of the option market. There is no assurance that a liquid option market on an
exchange will exist. In the event that the relevant market for an option on an
exchange ceases to exist, outstanding options on that exchange would generally
continue to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours
during which the underlying financial instruments are traded. To the extent that
the option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counter-parties") through direct agreement with
the Counterparty. In contrast to exchange listed options, which generally have
standardized terms and performance mechanics, all the terms of an OTC option,
including such terms as method of settlement, term, exercise price, premium,
guarantees and security, are set by negotiation of the parties. The Portfolio
will generally sell (write) OTC options that are subject to a buy-back provision
permitting the Portfolio to require the Counterparty to sell the option back to
the Portfolio at a formula price within seven days. OTC options purchased by the
Portfolio, and portfolio securities "covering" the amount of the Portfolio's
obligation pursuant to an OTC option sold by it (the cost of the sell-back plus
the in-the-money amount, if any) are subject to the Portfolio's restriction on
illiquid securities, unless determined to be liquid in accordance with
procedures adopted by the Board 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 Portfolio expects
generally to enter into OTC options that have cash settlement provisions,
although it is not required to do so.
Unless the parties provide for it, there is no central clearing or guaranty
function in the OTC option market. As a result, if the Counterparty fails to
make delivery of the security, currency or other instrument underlying an OTC
option it has entered into with the Portfolio or fails to make a cash settlement
payment due in accordance with the terms of that option, the Portfolio will lose
any premium it paid for the option as well as any anticipated benefit of the
transaction. Accordingly, the Adviser must assess the creditworthiness of each
such Counterparty or any guarantor or credit enhancement of the Counterparty's
credit to determine the likelihood that the terms of the OTC option will be
satisfied. The Portfolio will engage in OTC option transactions only with U.S.
Government securities dealers recognized by the Federal Reserve Bank of New York
as "primary dealers," or broker-dealers, domestic or foreign banks or other
financial institutions which have received, combined with any credit
enhancements, a long-term debt rating of A from S&P or Moody's or an equivalent
rating from any other nationally recognized statistical rating organization
("NRSRO") or which issue debt that is determined to be of equivalent credit
quality by the Adviser.
If the Portfolio sells (writes) a call option, the premium that it receives
may serve as a partial hedge, to the extent of the option premium, against a
decrease in the value of the underlying securities or instruments in its
portfolio or will increase the Portfolio's income. The sale (writing) of put
options can also provide income.
The Portfolio may purchase and sell (write) put and call options on
securities, including U.S. Treasury and agency securities and Eurodollar
instruments that are traded on U.S. and foreign securities exchanges and in the
OTC markets and on securities indices and futures contracts.
All calls sold by the Portfolio must be "covered" (i.e., the Portfolio must
own the securities or the futures contract subject to the call) or must meet the
asset segregation requirements described below as long as the call is
outstanding. In addition, the Portfolio 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 Portfolio's net exposure on its written option position.
Even though the Portfolio will receive the option premium to help offset any
loss, the Portfolio may incur a loss if the exercise price is below the market
price for the security subject to the call at the time of exercise. A call sold
by the Portfolio also exposes the Portfolio during the term of the option to
possible loss of opportunity to realize appreciation in the market price of the
underlying security or instrument and may require the Portfolio to hold a
security or instrument which it might otherwise have sold.
The Portfolio will not sell put options if, as a result, more than 50% of the
Portfolio's assets would be required to be segregated to cover its potential
obligations under such put options other than those with respect to futures and
options thereon. In selling put options, there is a risk that the Portfolio may
be required to buy the underlying security at a price above the market price.
Options on Securities Indices and Other Financial Indices. The Portfolio may
also purchase and sell (write) call and put options on securities indices and
other financial indices. Options on securities indices and other financial
indices are similar to options on a security or other instrument except that,
rather than settling by physical delivery of the underlying instrument, they
settle by cash settlement. For example, an option on an index gives the holder
the right to receive, upon exercise of the option, an amount of cash if the
closing level of the index upon which the option is based exceeds, in the case
of a call, or is less than, in the case of a put, the
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<PAGE>
exercise price of the option (except if, in the case of an OTC option, physical
delivery is specified). This amount of cash is equal to the differential between
the closing price of the index and the exercise price of the option, which also
may be multiplied by a formula value. The seller of the option is obligated, in
return for the premium received, to make delivery of this amount upon exercise
of the option. In addition to the methods described above, the Portfolio may
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) upon conversion or exchange of other securities in its
portfolio.
General Characteristics of Futures. The Portfolio may enter into financial
futures contracts or purchase or sell put and call options on such futures.
Futures are generally bought and sold on the commodities exchanges where they
are listed and involve payment of initial and variation margin as described
below. All futures contracts entered into by the Portfolio are traded on U.S.
exchanges or boards of trade that are licensed and regulated by the Commodity
Futures Trading Commission ("CFTC") or on certain foreign exchanges. The sale of
futures contracts creates a firm obligation by the Portfolio, as seller, to
deliver to the buyer the specific type of financial instrument called for in the
contract at a specific future time for a specified price (or, with respect to
index futures and Eurodollar instruments, the net cash amount). The purchase of
futures contracts creates a corresponding obligation by the Portfolio, as
purchaser, to purchase a financial instrument at a specific time and price.
Options on futures contracts are similar to options on securities except that an
option on a futures contract gives the purchaser the right in return for the
premium paid to assume a position in a futures contract and obligates the seller
to deliver such position upon exercise of the option.
The Portfolio's use of financial futures and options thereon will in all
cases be consistent with applicable regulatory requirements and in particular
the regulations of the CFTC relating to exclusions from regulation as a
commodity pool operator. Those regulations currently provide that the Portfolio
may use commodity futures and option positions (i) for bona fide hedging
purposes without regard to the percentage of assets committed to margin and
option premiums, or (ii) for other purposes permitted by the CFTC to the extent
that the aggregate initial margin and option premiums required to establish such
non-hedging positions (net of the amount that the positions were "in the money"
at the time of purchase) do not exceed 5% of the net asset value of the
Portfolio's portfolio, after taking into account unrealized profits and losses
on such positions. Typically, maintaining a futures contract or selling an
option thereon requires the Portfolio to deposit, with its custodian for the
benefit of a futures commission merchant, 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 Portfolio. If the Portfolio exercises an option on a futures
contract it will be obligated to post initial margin (and potential subsequent
variation margin) for the resulting futures position just as it would for any
position. Futures contracts and options thereon are generally settled by
entering into an offsetting transaction but there can be no assurance that the
position can be offset prior to settlement at an advantageous price, nor that
delivery will occur. The segregation requirements with respect to futures
contracts and options thereon are described below.
Combined Transactions. The Portfolio may enter into multiple transactions,
including multiple options transactions, multiple futures transactions and
multiple interest rate transactions, structured notes and any combination of
futures, options and interest rate transactions ("component transactions")
instead of a single Strategic Transaction, as part of a single or combined
strategy when, in the opinion of the Adviser, it is in the best interests of the
Portfolio to do so. A combined transaction will usually contain elements of risk
that are present in each of its component transactions. Although combined
transactions are normally entered into based on the Adviser's judgment that the
combined strategies will reduce risk or otherwise more effectively achieve the
desired portfolio management goal, it is possible that the combination will
instead increase such risks or hinder achievement of the portfolio management
objective.
Swaps, Caps, Floors and Collars. Among the Strategic Transactions into which
the Portfolio may enter are interest rate, index and total return swaps and the
purchase or sale of related caps, floors and collars. The Portfolio expects to
enter into these transactions primarily for hedging purposes, including, but not
limited to, preserving a return or spread on a particular investment or portion
of its portfolio, as a duration management technique or protecting against an
increase in the price of securities the Portfolio anticipates purchasing at a
later date. Swaps, caps, floors and collars may also be used to enhance
potential gain in circumstances where hedging is not involved although, as
described above, the Portfolio will attempt to limit its net loss exposure
resulting from swaps, caps, floors and collars and other Strategic Transactions
entered into for such purposes to not more than 1% of its net assets at any one
time. The Portfolio will not sell interest rate caps, floors or collars where it
does not own securities or other instruments providing the income stream the
Portfolio may be obligated to pay. Interest rate swaps involve the exchange by
the Portfolio with another party of their respective commitments to pay or
receive interest, e.g., an exchange of floating rate payments for fixed rate
payments with respect to a notional amount of principal. An index swap is an
agreement to swap cash flows on a notional amount based on changes in the values
of the reference indices. The purchase of a cap entitles the purchaser to
receive payments on a notional principal amount from the party selling such cap
to the extent that a specified index exceeds a predetermined interest rate or
amount. The purchase of a floor entitles the purchaser to receive payments on a
notional principal amount from the party selling such floor to the extent that a
specified index falls below a predetermined interest rate or amount. A collar is
a combination of a cap and a floor that preserves a certain rate of return
within a predetermined range of interest rates or values.
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<PAGE>
The Portfolio will usually enter into swaps on a net basis, i.e., the two
payment streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with the Portfolio receiving or paying, as the case
may be, only the net amount of the two payments. The Portfolio will not enter
into any swap, cap, floor or collar transaction unless, at the time of entering
into such transaction, the unsecured long-term debt of the Counterparty,
combined with any credit enhancements, is rated at least A by S&P or Moody's or
has an equivalent rating from an NRSRO or the Counterparty issues debt that is
determined to be of equivalent credit quality by the Adviser. If there is a
default by the Counterparty, the Portfolio may have contractual remedies
pursuant to the agreements related to the transaction. The swap market has grown
substantially in recent years with a large number of banks and investment
banking firms acting both as principals and as agents utilizing standardized
swap documentation. As a result, the swap market has become relatively liquid.
Caps, floors and collars are more recent innovations for which standardized
documentation has not yet been fully developed. Swaps, caps, floors and collars
are considered illiquid for purposes of the Portfolio's policy regarding
illiquid securities, unless it is determined, based upon continuing review of
the trading markets for the specific security, that such security is liquid. The
Trustees have adopted guidelines and delegated to the Adviser the daily function
of determining and monitoring the liquidity of swaps, caps, floors and collars.
The 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 the Portfolio's
limitation on investing in illiquid securities.
Eurodollar Contracts. The Portfolio may make investments in Eurodollar
contracts. Eurodollar contracts are U.S. dollar-denominated futures contracts or
options thereon which are linked to the London Interbank Offered Rate ("LIBOR"),
although foreign currency-denominated instruments are available from time to
time. Eurodollar futures contracts enable purchasers to obtain a fixed rate for
the lending of funds and sellers to obtain a fixed rate for borrowings. The
Portfolio might use Eurodollar futures contracts and options thereon to hedge
against changes in LIBOR, to which many interest rate swaps and fixed income
instruments are linked.
Use of Segregated Accounts. The Portfolio will hold securities or other
instruments whose values are expected to offset its obligations under the
Strategic Transactions. The Portfolio will cover Strategic Transactions as
required by interpretive positions of the staff of the SEC. The Portfolio will
not enter into Strategic Transactions that expose the Portfolio to an obligation
to another party unless it owns either (i) an offsetting position in securities
or other options, futures contracts or other instruments or (ii) cash,
receivables or liquid securities with a value sufficient to cover its potential
obligations. The Portfolio may have to comply with any applicable regulatory
requirements for Strategic Transactions, and if required, will set aside cash
and other assets in a segregated account in the amount prescribed. In that case,
the value of such segregated account would be maintained in amount at least
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
Portfolio's obligations on the underlying Strategic Transactions. Assets held in
a segregated account would not be sold while the Strategic Transaction is
outstanding, unless they are replaced with similar assets. As a result, there is
a possibility that segregation of a large percentage of the Portfolio's assets
could impede portfolio management or the Portfolio's ability to meet redemption
requests or other current obligations.
"When-Issued" and "Delayed Delivery" Securities. The Portfolio may invest up
to 10% of its net assets in securities purchased 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 the Portfolio enters into the commitment, but
interest will not accrue to the Portfolio until delivery of and payment for the
securities. Although the Portfolio will only make commitments to purchase
"when-issued" and "delayed delivery" securities with the intention of actually
acquiring the securities, the Portfolio may sell the securities before the
settlement date if deemed advisable by the Adviser. The Portfolio may also, with
respect to up to 25% of its net assets, enter into contracts to purchase
securities for a fixed price at a future date beyond customary settlement time.
Unless the Portfolio 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 Portfolio's
commitment will be segregated. If the market value of these securities declines,
additional cash or securities will be segregated daily so that the aggregate
market value of the segregated securities equals the amount of the Portfolio's
commitment.
Securities purchased on a "when-issued" and "delayed delivery" basis may have
a market value on delivery which is less than the amount paid by the Portfolio.
Changes in market value may be based upon the public's perception of the
creditworthiness of the issuer or changes in the level of interest rates.
Generally, the value of "when-issued", "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 decline in
value when interest rates rise.
Portfolio Turnover. It is not the policy of the Portfolio to purchase or sell
securities for trading purposes. However, the Portfolio does not place any
restrictions on portfolio turnover and may sell any portfolio security without
regard to the period of time it has been held. The Portfolio may therefore
generally change its portfolio investments at any time in accordance with the
Adviser's appraisal of factors affecting any particular issuer or market, or
relevant economic conditions. 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)
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involves a correspondingly greater amount of brokerage commissions and other
costs which must be borne directly by the Portfolio and thus indirectly by its
interestholders. It may also result in the realization of larger amounts of net
short-term capital gains, distributions of which by an interestholder in the
Portfolio are taxable as ordinary income.
INVESTMENT RESTRICTIONS
The Fund 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 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 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.
As a matter of fundamental policy, the Portfolio (Fund) may not:
1. Issue senior securities. For purposes of this restriction, borrowing money
in accordance with paragraph 2 below, making loans in accordance with paragraph
6 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 5 below, are not deemed to be senior securities.
2. Borrow money, except (i) 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 from banks or through reverse repurchase agreements or forward roll
transactions, (ii) up to an additional 5% of its total assets for temporary
purposes, (iii) in connection with short-term credits as may be necessary for
the clearance of purchases and sales of portfolio securities and (iv) the
Portfolio (Fund) may purchase securities on margin to the extent permitted by
applicable law. For purposes of this investment restriction, investments in
short sales, roll transactions, futures contracts, options on futures contracts,
securities or indices and forward commitments, entered into in accordance with
the Portfolio's (Fund's) investment policies, shall not constitute borrowing.
3. 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.
4. 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.
5. 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.
6. 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.
7. 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).
8. Invest more than 25% of its total assets in the securities of one or more
issuers conducting their principal business activities in the same industry
(excluding the U.S. Government or its agencies or instrumentalities).
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. 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).
b. 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.
c. Purchase the securities of any other investment company except to the
extent permitted by the 1940 Act.
d. Invest more than 15% of its net assets in securities which are illiquid.
e. Purchase additional securities if the Portfolio's (Fund's) borrowings
exceed 5% of its net assets. Notwithstanding any fundamental or non-fundamental
policy, the Fund may invest all of its assets (other than assets which are not
"investment securities"
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(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.
For the purposes of fundamental restriction 8, state and municipal
governments and their agencies, authorities and instrumentalities are not deemed
to be industries; telephone companies are considered to be a separate industry
from water, gas or electric utilities; 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. Fundamental restriction 8 does not apply to investments in
municipal securities which have been pre-refunded by the use of obligations of
the U.S. Government or any of its agencies or instrumentalities. For purposes of
fundamental restriction 8, the industry classification of an asset-backed
security is determined by its underlying assets. For example, certificates for
automobile receivables and certificates for amortizing revolving debts
constitute two different industries.
If any percentage restriction described above is adhered to at the time of
investment, a subsequent increase or decrease in the percentage resulting from a
change in the value of the Portfolio's (Fund's) assets will not constitute a
violation of the restriction.
CALCULATION OF PERFORMANCE DATA
As indicated in the Prospectus, the Fund may, from time to time, advertise
certain total return and yield information. The average annual total return of
the Fund for a period is computed by subtracting the net asset value per share
at the beginning of the period from the net asset value per share at the end of
the period (after adjusting for the reinvestment of any income dividends and
capital gain distributions), and dividing the result by the net asset value per
share at the beginning of the period. In particular, the Fund's 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 Fund's 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 Fund, all
recurring fees that are charged to all shareholder accounts and any
non-recurring charges for the period stated. In particular, yield is determined
according to the following formula:
Yield = 2[(A - B + 1)^6 - 1]
CD
Where:
A=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 Fund may also quote non-standardized yield, such as yield-to-maturity
("YTM"). YTM represents the rate of return an investor will receive if a
long-term, interest bearing investment, such as a bond, is held to its maturity
date. YTM does not take into account purchase price, redemption value, time to
maturity, coupon yield and the time between interest payments.
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 Portfolio accounts for
gain or loss attributable to actual monthly pay downs as an increase or decrease
to interest income during the period. In addition, the Portfolio may elect (i)
to amortize the discount or premium remaining on a security, based on the cost
of the security, to the weighted average maturity date, if such information is
available, or to the remaining term of the security, if the weighted average
maturity date is not available, or (ii) not to amortize the discount or premium
remaining on a security.
The Fund's average annual total return for the one-, five- and ten-year (or
life-of-the-Fund, if shorter) periods ended on June 30, 1997 were as follows:
Average Annual Total Return
1-Year 5-Year Since
Inception(1)
Short-Term Asset Reserve Fund 6.02% 4.99% 6.55%
----------
(1) Short-Term Asset Reserve Fund commenced operations on January 3, 1989.
The Fund's yield for the 30 days ended June 30, 1997 was 5.91%. These
performance quotations should not be considered as representative of the Fund's
performance for any specified period in the future.
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In addition to average annual return quotations, the Fund may quote quarterly
and annual performance on a net (with management and administration fees
deducted) and gross basis as follows:
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 10.0
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
2Q92 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
2Q94 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
These performance quotations should not be considered as representative of
the Fund's performance for any specified period in
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<PAGE>
the future. The Fund's performance may be compared in sales literature to the
performance of other mutual funds having similar objectives or to standardized
indices or other measures of investment performance. In particular, the Fund may
compare its performance to The IBC/Donoghue Money Market Average/All Taxable
Index, which is generally considered to be representative of the performance of
domestic, taxable money market funds, and the One Year Treasury Bills. However,
the average maturity of the Fund's portfolio is longer than that of a money
market fund and, unlike a money market fund, the net asset value of the Fund's
shares may fluctuate.
Comparative performance may also be expressed by reference to a ranking
prepared by a mutual fund monitoring service or by one or more newspapers,
newsletters or financial periodicals. Performance comparisons may be useful to
investors who wish to compare the Fund's past performance to that of other
mutual funds and investment products. Of course, past performance is not a
guarantee of future results.
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,
Martins, Hanlon and Stuehr and Ms. Banfield, Herrmann, Kneeland, Broccoli and
Walcott-Abramson 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 Portfolios' investment adviser
and the Fund's administrator.
<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
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.; Director of
Boston, MA 02111 Standish International
Management Company, L.P.
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
Name, Address and Date of Birth Position Held Principal Occupation
with Trust During Past 5 Years
<S> <C> <C>
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 and
c/o Standish, Ayer & Wood, Inc. Managing Director,
One Financial Center Standish, Ayer & Wood, Inc.;
Boston, MA 02111 Executive Vice President and Director,
Standish International Management Company, L.P.
James E. Hollis III, 11/21/48 Executive Vice President Vice President and Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
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 and Vice President of Finance,
c/o Standish, Ayer & Wood, Inc. Treasurer Standish, Ayer & Wood, Inc.
One Financial Center since October 1996; formerly
Boston, MA 02111 Senior Vice President, Treasurer
and Chief Financial Officer of
Liberty Financial Bank Group
(1993-95); prior to 1993,
Corporate Controller, The
Berkeley Financial Group
Beverly E. Banfield, 7/6/56 Vice President Vice President and Compliance
c/o Standish, Ayer & Wood, Inc. Officer, Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Lavinia B. Chase, 6/4/46 Vice President Vice President, Associate Director
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
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
</TABLE>
38
<PAGE>
<TABLE>
<CAPTION>
Name, Address and Date of Birth Position Held Principal Occupation
with Trust During Past 5 Years
<S> <C> <C>
Sarah Walcott Abramson, 12/9/65 Vice President Compliance Administrator,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center since October 1993
Boston, MA 02111
Kathleen M. Broccoli, 4/13/65 Vice President Manager, Portfolio Accounting,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Thomas J. Hanlon, 9/25/60 Vice President Manager, Trade Settlement
c/o Standish, Ayer & Wood, Inc. and Pricing,
One Financial Center Standish, Ayer & Wood, Inc.
Boston, MA 02111
Rosalind J. Lillo, 2/6/38 Vice President 'Broker/Dealer Administrator,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center since October 1995;
Boston, MA 02111 Compliance Administrator,
New England Securities Corp.
Gigi K. Szekely,5/8/67 Vice President Manager, Client
c/o Standish, Ayer & Wood, Inc. Communications,
One Financial Center Standish, Ayer & Wood, Inc.
Boston, MA 02111
</TABLE>
- ----------
*Indicates that the Trustee is an interested person of the Trust and the
Portfolio Trust for purposes of the 1940 Act as a result of his relationship
with Standish and its affiliates.
Compensation of Trustees and Officers.
Neither the Trust nor the Portfolio Trust compensates 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 Fund's shares) with the Trust or the Portfolio Trust during the year ended
December 31, 1996, except that certain Trustees and officers who are directors
and shareholders of Standish may, from time to time, purchase additional shares
of common stock of Standish.
<TABLE>
<CAPTION>
Pension or Retirement Total Compensation
Aggregate Compensation Benefits Accrued as from the Fund and
Name of Trustee from the Fund* Part of Fund's Expenses Other Funds in Complex**
<S> <C> <C> <C>
D. Barr Clayson $0 $0 $0
Samuel C. Fleming $2,772 $0 $49,250
Benjamin M. Friedman $2,561 $0 $45,500
John H. Hewitt $2,561 $0 $45,500
Edward H. Ladd $0 $0 $0
Caleb Loring, III $2,561 $0 $45,500
Richard S. Wood $0 $0 $0
</TABLE>
39
<PAGE>
- ----------
*The Fund bears its pro rata allocation of Trustees' fees paid by the
Portfolio to the Trustees of the Portfolio Trust. As a recently created entity,
the Portfolio did not pay any fees to its Trustees for the year ended December
31, 1996.
**As of the date of this Statement of Additional Information there were 22
funds in the fund complex. Total Compensation is presented for the year ended
December 31, 1996.
Certain Shareholders. At September 30, 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 the
Fund. At September 30, 1997, the 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 the Fund except:
Percentage of
Name and Address Outstanding Shares
The Nature Conservancy
1815 N. Lynn Street
Arlington, VA 22209 14%
The Metropolitan Museum of Art
1000 Fifth Avenue
New York, NY 10028 10%
University of Rochester
Administration Bldg. 263
Rochester, NY 14627 9%
St. Joseph's Healthcare 7%
Investment Adviser. Standish serves as the Adviser to the Portfolio pursuant
to a written investment advisory agreement. Prior to the close of business on
January 2, 1998, Standish managed directly the assets of the Fund pursuant to an
investment advisory agreement. This agreement was terminated by the Fund on such
date subsequent to the approval by the Fund's shareholders on December 17, 1997
to implement certain changes in the Fund's investment restrictions which enable
the Fund to invest all of its investable assets in the Portfolio. 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 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, W. Charles Cook, Joseph M. Corrado, 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,
Michael W. Thompson and Richard S. Wood.
Certain services provided by Standish under the advisory agreement are
described in the Prospectus. These services are provided without reimbursement
by the Portfolio for any costs incurred. Under the investment advisory
agreement, Standish is paid a fee based upon a percentage of the
Portfolio's average daily net asset value. The contractual advisory fee rate
is 0.25% of the Portfolio's average daily net assets. The advisory fee is
payable monthly.
During the last three fiscal years ended December 31, the Fund and the
Portfolio paid advisory fees in the following amounts:
Fund 1994 1995 1996
Short-Term Asset Reserve Fund* $730,191 $705,129** $643,488
Short-Term Asset Reserve Portfolio*** N/A N/A N/A
- ----------
*The Fund was converted to the master/feeder fund structure on January 2,
1998 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.
**Prior to July 1, 1995, Standish and Consolidated Investment Corporation
("Consolidated") served as the 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.
***The Portfolio commenced operation on January 2, 1998.
40
<PAGE>
Pursuant to the investment advisory agreement, the Portfolio bears expenses
of its operations other than those incurred by Standish. Among other expenses,
the Portfolio pays 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.
Standish has voluntarily agreed to limit the master-feeder aggregate annual
operating expenses of the Fund and the Portfolio (excluding brokerage
commissions, taxes and extraordinary expenses) to the Fund's ratio of expenses
to average net assets in effect immediately prior to the Fund's conversion to
the master-feeder structure. The expense ratio considered to be in effect
immediately prior to the conversion for this purpose was calculated using the
actual expenses incurred by the Fund during the three months immediately prior
to conversion and annualizing this amount. Standish may terminate or revise this
agreement at any time although it has no current intention to do so.
Unless terminated as provided below, the investment advisory agreement
continues in full force and effect until December 31, 1999 and from year to year
thereafter, but only for so long as each such continuance is approved annually
(i) by the Trustees of the Portfolio Trust or by the "vote of a majority of the
outstanding voting securities" of the Portfolio and, in either event (ii) by
vote of a majority of the Trustees of the Portfolio Trust who are not parties to
the investment advisory agreement or "interested persons" (as defined in the
1940 Act) of any such party, cast in person at a meeting called for the purpose
of voting on such approval. The investment advisory agreement may be terminated
at any time without the payment of any penalty by vote of the Trustees of the
Portfolio Trust or by the "vote of a majority of the outstanding voting
securities" of the Portfolio or by Standish, on sixty days' written notice to
the other party. The investment advisory agreement terminates in the event of
its assignment as defined in the 1940 Act.
In an attempt to avoid any potential conflict with portfolio transactions for
the Fund and the Portfolio, Standish, the Principal Underwriter, the Trust and
the Portfolio Trust have each adopted extensive restrictions on personal
securities trading by personnel of the Adviser and its affiliates. These
restrictions include: pre-clearance of all personal securities transactions and
a prohibition of purchasing initial public offerings of securities. These
restrictions are a continuation of the basic principle that the interests of the
Fund and its shareholders, and the Portfolio and its investors, come before
those of the Adviser and its employees.
Administrator of the Fund. Standish serves as the administrator to the Fund
(the "Fund Administrator") pursuant to a written administration agreement with
the Trust on behalf of the Fund. Certain services provided by the Fund
Administrator under the administration agreement are described in the
Prospectus. For these services, the Fund Administrator currently does not
receive any additional compensation. The Trustees of the Trust may, however,
determine in the future to compensate the Fund Administrator for its
administrative services. The Fund's administration agreement can be terminated
by either party on not more than sixty days' written notice.
Distributor of the Fund. Standish Fund Distributors, L.P. (the "Principal
Underwriter"), an affiliate of Standish, serves as the Trust's exclusive
principal underwriter and holds itself available to receive purchase orders for
the Fund's shares. In that capacity, the Principal Underwriter has been granted
the right, as agent of the Trust, to solicit and accept orders for the purchase
of the Fund's shares in accordance with the terms of the Underwriting Agreement
between the Trust and the Principal Underwriter. Pursuant to the Underwriting
Agreement, the Principal Underwriter has agreed to use its best efforts to
obtain orders for the continuous offering of the Fund's shares. The Principal
Underwriter receives no commissions or other compensation for its services, and
has not received any such amounts in any prior year. The Underwriting Agreement
shall continue in effect with respect to the Fund until two years after its
execution and for successive periods of one year thereafter only if it is
approved at least annually thereafter (i) by a vote of the holders of a majority
of the Fund's outstanding shares or by the Trustees of the Trust or (ii) by a
vote of a majority of the Trustees of the Trust who are not "interested persons"
(as defined by the 1940 Act) of the parties to the Underwriting Agreement, cast
in person at a meeting called for the purpose of voting on such approval. The
Underwriting Agreement will terminate automatically if assigned by either party
thereto and is terminable at any time without penalty by a vote of a majority of
the Trustees of the Trust, a vote of a majority of the Trustees who are not
"interested persons" of the Trust, or, with respect to the 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.
PURCHASE AND REDEMPTION OF SHARES
Detailed information on the purchase and redemption of shares is included in
the Prospectus.
In addition to Standish Fund Distributors and other agents of the Trust, the
Fund has authorized one or more brokers and dealers to accept on its behalf
orders for the purchase and redemption of Fund shares. Under certain conditions,
such authorized brokers and dealers may designate other intermediaries to accept
orders for the purchase and redemption of Fund shares. In accordance with a
position taken by the staff of the Securities and Exchange Commission, such
purchase and redemption orders are considered to have been received by the Fund
when accepted by the authorized broker or dealer or, if applicable, the
authorized broker's or dealer's designee. Also in accordance with the position
taken by the staff of the Securities and Exchange Commission, such purchase and
redemption orders will receive the Fund's net asset value per share next
computed after the purchase or redemption order is accepted by the authorized
broker or dealer or, if applicable, the authorized broker's or dealer's
designee.
41
<PAGE>
The Trust may suspend the right to redeem Fund shares or postpone the date of
payment upon redemption for more than seven days (i) for any period during which
the New York Stock Exchange is closed (other than customary weekend or holiday
closings) or trading on the exchange is restricted; (ii) for any period during
which an emergency exists as a result of which disposal by the Fund of
securities owned by it or determination by the Fund of the value of its net
assets is not reasonably practicable; or (iii) for such other periods as the SEC
may permit for the protection of shareholders of the Fund.
The 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 the
Fund's obligation to make cash redemption payments to any shareholder during any
90-day period to the lesser of $250,000 or 1% of the Fund's net asset value at
the beginning of such period. An investor may incur brokerage costs in
converting portfolio securities received upon redemption to cash. The Portfolio
has advised the Trust that the Portfolio will not redeem in-kind except in
circumstances in which the Fund is permitted to redeem in-kind or except in the
event the Fund completely withdraws its interest from the Portfolio.
PORTFOLIO TRANSACTIONS
Standish is responsible for placing the Portfolio's portfolio transactions
and will do so in a manner deemed fair and reasonable to the Portfolio and not
according to any formula. The primary consideration in all portfolio
transactions will be prompt execution of orders in an efficient manner at the
most favorable price. In selecting broker-dealers and in negotiating
commissions, Standish will consider the firm's reliability, the quality of its
execution services on a continuing basis and its financial condition. When more
than one firm is believed to meet these criteria, preference may be given to
firms which also sell shares of the Fund. In addition, if Standish 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 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 Portfolio effects its securities transactions may be used by Standish in
servicing other accounts; not all of these services may be used by Standish in
connection with the Portfolio. The investment advisory fee paid by the Portfolio
under the investment advisory agreement will not be reduced as a result of
Standish's receipt of research services.
Standish also places portfolio transactions for other advisory accounts.
Standish will seek to allocate portfolio transactions equitably whenever
concurrent decisions are made to purchase or sell securities for the Portfolio
and another advisory account. In some cases, this procedure could have an
adverse effect on the price or the amount of securities available to the
Portfolio. In making such allocations, the main factors considered by Standish
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 Portfolio's securities transactions will be effected on a
principal basis involving a "spread" or "dealer mark-up," the Portfolio does not
expect to pay any brokerage commissions.
DETERMINATION OF NET ASSET VALUE
The Fund's net asset value is calculated each day on which the New York Stock
Exchange is open (a "Business Day"). Currently, the New York Stock Exchange is
not open on weekends, New Year's Day, Martin Luther King Day, Presidents' Day,
Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day. The net asset value of the Fund's shares is determined as of the
close of regular trading on the New York Stock Exchange (normally 4:00 p.m., New
York City time) and is computed by dividing the value of all securities and
other assets of the Fund (substantially all of which will be represented by the
Fund's 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 the Fund are accrued daily and taken into account for the purpose of
determining net asset value.
The value of the Portfolio's net assets (i.e., the value of its securities
and other assets less its liabilities, including expenses payable or accrued) is
determined at the same time and on the same days as the net asset value per
share of the Fund is determined. Each investor in the Portfolio, including the
Fund, may add to or reduce its investment in the Portfolio on each Business Day.
As of 4:00 p.m. (Eastern time) on each Business Day, the value of each
investor's interest in the Portfolio will be determined by multiplying the net
asset value of the Portfolio by the percentage representing that investor's
share of the aggregate beneficial interests in the Portfolio. Any additions or
reductions which are to be effected on that day will then be effected. The
investor's percentage of the aggregate beneficial interests in the Portfolio
will then be recomputed as the percentage equal to the fraction (i) the
numerator of which is the value of such investor's investment in the Portfolio
as of 4:00 p.m. on such day plus or minus, as the case may be, the amount of net
additions to or reductions in the investor's investment in the Portfolio
effected on such day, and (ii) the denominator
42
<PAGE>
of which is the aggregate net asset value of the Portfolio as of 4:00 p.m. on
such day plus or minus, as the case may be, the amount of the net additions to
or reductions in the aggregate investments in the Portfolio by all investors in
the Portfolio. The percentage so determined will then be applied to determine
the value of the investor's interest in the Portfolio as of 4:00 p.m. on the
following Business Day.
Portfolio securities 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 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 the Portfolio are valued on an amortized cost basis. If the
Portfolio acquires a money market instrument with more than sixty days remaining
to its maturity, it is valued at current market value until the sixtieth day
prior to maturity and will then be valued at amortized cost based upon the value
on such date unless the Trustees determine during such sixty-day period that
amortized cost does not represent fair value.
The Board of Trustees of the Trust has approved determining the current
market value of securities with one year or less remaining to maturity on a
spread basis which will be employed in conjunction with the periodic use of
market quotations. Under the spread process, the Adviser determines in good
faith the current market value of these portfolio securities by comparing their
quality, maturity and liquidity characteristics to those of United States
Treasury bills.
THE FUND AND ITS SHARES
The Fund is an investment series of the Trust, an unincorporated business
trust organized under the laws of The Commonwealth of Massachusetts pursuant to
an Agreement and Declaration of Trust dated August 13, 1986. Under the Agreement
and Declaration of Trust, the Trustees of the Trust have authority to issue an
unlimited number of shares of beneficial interest, par value $.01 per share, of
the Fund. Each share of the 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 the Fund,
shareholders are entitled to share pro rata in the net assets available for
distribution.
Pursuant to the Declaration, the Trustees may create additional funds by
establishing additional series of shares in the Trust. The establishment of
additional series would not affect the interests of current shareholders in the
Fund. 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 Fund. Pursuant to the Declaration of Trust and subject to
shareholder approval (if then required by applicable law), the Trustees may
authorize the Fund to invest all of its investable assets in a single open-end
investment company that has substantially the same investment objectives,
policies and restrictions as the Fund. As of the date of this Statement of
Additional Information, the Fund invests all of its investible assets in the
Portfolio.
All Fund shares have equal rights with regard to voting, and shareholders of
the Fund have the right to vote as a separate class with respect to matters as
to which their interests are not identical to those of shareholders of other
classes of the Trust, including the approval of an investment advisory contract
and any change of investment policy requiring the approval of shareholders.
Under Massachusetts law, shareholders of the Trust could, under certain
circumstances, be held liable for the obligations of the Trust. However, the
Agreement and Declaration of Trust disclaims shareholder liability for acts or
obligations of the Trust and requires that notice of this disclaimer be given in
each agreement, obligation or instrument entered into or executed by the Trust
or a Trustee. The Declaration also provides for indemnification from the assets
of the Trust for all losses and expenses of any Trust shareholder held liable
for the obligations of the Trust. Thus, the risk of a shareholder incurring a
financial loss on account of 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 Fund, is
requested to vote on a fundamental policy of or matters pertaining to the
Portfolio, the Trust will hold a meeting of the Fund's shareholders and will
cast its vote proportionately as instructed by the Fund's shareholders. Fund
shareholders who do not vote will not affect the Trust's votes at the Portfolio
meeting. The percentage of the Trust's votes representing Fund shareholders not
voting will be voted by the Trustees of the Trust in the same proportion as the
Fund shareholders who do, in fact, vote. Subject to applicable statutory and
regulatory requirements, the Fund would not request a vote of its shareholders
with respect to (a) any proposal relating to the Portfolio, which proposal, if
made with respect to the Fund, would not require the vote of the shareholders of
the Fund, or (b) any proposal with respect to the Portfolio that is identical in
all material respects to a proposal that has previously been approved by
shareholders of the Fund. Any proposal submitted to holders in the Portfolio,
and that is not required to be voted on by shareholders of the Fund, would
nonetheless be
43
<PAGE>
voted on by the Trustees of the Trust.
THE PORTFOLIO AND ITS INVESTORS
The Portfolio is a series of Standish, Ayer & Wood Master Portfolio, which,
like the Trust, is an open-end management investment company registered 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 Trust normally will not hold meetings of holders of such interests
except as required under the 1940 Act. The Portfolio Trust 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 Trust 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 Trust may be removed upon a
majority vote of the interests held by holders in the Portfolio Trust qualified
to vote in the election. The 1940 Act requires the Portfolio Trust to assist its
holders in calling such a meeting. Upon liquidation of the Portfolio, holders in
the Portfolio would be entitled to share pro rata in the net assets of the
Portfolio available for distribution to holders. Each holder in the Portfolio is
entitled to a vote in proportion to its percentage interest in the Portfolio.
TAXATION
Each series of the Trust, including the Fund, is treated as a separate entity
for accounting and tax purposes. The Fund has elected to be treated and to
qualify as a "regulated investment company" ("RIC") under Subchapter M of the
Code, and intends to continue to so qualify in the future. As such and by
complying with the applicable provisions of the Code regarding the sources of
its income, the timing of its distributions, and the diversification of its
assets, the Fund will not be subject to Federal income tax on its investment
company taxable income (i.e., all 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 and
other 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 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 Fund invests its assets in the
Portfolio, the Portfolio normally must satisfy the applicable source of income
and diversification requirements in order for the Fund to satisfy them. The
Portfolio will allocate at least annually among its investors, including the
Fund, each investor's distributive share of the Portfolio's net investment
income, net realized capital gains, and any other items of income, gain, loss,
deduction or credit. The Portfolio will make allocations to the Fund in 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 Fund to satisfy the tax distribution requirements that apply to the
Fund and that must be satisfied in order to avoid Federal income and/or excise
tax on the Fund. For purposes of applying the requirements of the Code regarding
qualification as a RIC, the Fund will be deemed (i) to own its proportionate
share of each of the assets of the Portfolio and (ii) to be entitled to the
gross income of the Portfolio attributable to such share.
The Fund will be subject to a 4% non-deductible federal excise tax on certain
amounts not distributed (and not treated as having been distributed) on a timely
basis in accordance with annual minimum distribution requirements. The Fund
intends under normal circumstances to 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 Fund
during October, November or December of the year but paid during the following
January. Such distributions will be taxable to taxable shareholders as if
received on December 31 of the year the distributions are declared, rather than
the year in which the distributions are received.
The Fund is not subject to Massachusetts corporate excise or franchise taxes.
Provided that the Fund qualifies as a regulated investment company under the
Code, it will also not be required to pay any Massachusetts income tax.
The Fund will not distribute net capital gains realized in any year to the
extent that a capital loss is carried forward from prior years against such
gain. For federal income tax purposes, the Fund is permitted to carry forward a
net capital loss in any year to offset its own net capital gains, if any, during
the eight years following the year of the loss. To the extent subsequent net
capital gains are offset by such losses, they would not result in federal income
tax liability to the Fund and, as noted above, would not be distributed as such
to shareholders. As of December 31, 1996, the Fund had $3,071,161, $1,512,610,
$5,263,400, $568,968 and $277,757 of capital loss carry forwards, which expire
on December 31, 2000, December 31, 2001, December 31, 2002, December 31, 2003
and December 31, 2004, respectively.
If the Portfolio invests in zero coupon securities, certain increasing rate
or deferred interest securities or, in general, other securities with original
issue discount (or with market discount if the Fund elects to include market
discount in income currently), the Portfolio must accrue income on such
investments prior to the receipt of the corresponding cash payments. However,
the Fund must distribute, at least annually, all or substantially all of its net
income, including its distributive share of such income accrued by
44
<PAGE>
the Portfolio, to shareholders to qualify as a regulated investment company
under the Code and avoid federal income and excise taxes. Therefore, the
Portfolio may have to dispose of its portfolio securities under disadvantageous
circumstances to generate cash, or may have to leverage itself by borrowing the
cash, to enable the Fund to satisfy the distribution requirements.
Limitations imposed by the Code on regulated investment companies like the
Fund may restrict the Portfolio's ability to enter into futures, options or
currency forward transactions.
Certain options or futures transactions undertaken by the Portfolio may cause
the Fund to recognize gains or losses from marking to market even though the
Portfolio's positions have not been sold or terminated and affect the character
as long-term or short-term and timing of some capital gains and losses realized
by the Portfolio and allocable to the Fund. Additionally, the Portfolio (and the
Fund) may be required to recognize gain if an option, future, forward contract,
short sale, swap or other strategic transaction that is not subject to the mark
to market rules is treated as a "constructive sale" of an "appreciated financial
position" held by the Portfolio under Section 1259 of the Code. Any net mark to
market gains and/or gains from constructive sales 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 Fund's taxable
income or gain. Certain of the applicable tax rules may be modified if the
Portfolio is eligible and chooses to make one or more of certain tax elections
that may be available. These transactions may affect the amount, timing and
character of the Fund's distributions to shareholders. The Fund will take into
account the special tax rules applicable to options, futures, forward contracts
and constructive sales in order to minimize any potential adverse tax
consequences.
The Federal income tax rules applicable to dollar rolls, certain structured
securities, interest rate swaps, caps, floors and collars, and possibly other
investments or transactions are unclear in certain respects, and the Portfolio
will account for these instruments in a manner that is intended to allow the
Fund and other similar investors to qualify as RICs. Due to possible unfavorable
con-sequences under present tax law, the Portfolio does not currently intend to
acquire "residual" interests in real estate mortgage investment conduit
("REMICs"), although it may acquire "regular" interests in REMICs.
Distributions from the Fund's current or accumulated earnings and profits
("E&P"), as computed for Federal income tax purposes, will be taxable as
described in the Fund's Prospectus whether taken in shares or in cash.
Distributions, if any, in excess of E&P will constitute a return of capital,
which will first reduce an investor's tax basis in Fund shares and thereafter
(after such basis is reduced to zero) will generally give rise to capital gains.
Shareholders electing to receive distributions in the form of additional shares
will have a cost basis for federal income tax purposes in each share so received
equal to the amount of cash they would have received had they elected to receive
the distributions in cash, divided by the number of shares received. As a result
of the enactment of the Taxpayer Relief Act of 1997 (the "1997 TRA") on August
5, 1997, gain recognized after May 6, 1997 from the sale of a capital asset is
taxable to individual (non corporate) investors at different maximum federal
income tax rates, depending generally upon the tax holding period for the asset,
the federal income tax bracket of the taxpayer, and the dates the asset was
acquired and/or sold. The Treasury Department is expected to issue regulations
to apply this legislation (as modified by any "technical corrections" that may
be enacted) to distributions by a RIC, including the Fund, from its realized net
capital gain. It is anticipated that RICs will be able to pass through to their
shareholders the benefits of the capital gains tax rates contained in the 1997
TRA. Shareholders should consult their own tax advisers on the correct
application of these new rules in their particular circumstances.
The Fund's distributions to its corporate shareholders would potentially
qualify in their hands for the corporate dividends received deduction, subject
to certain holding period requirements and limitations on debt financing under
the Code, only to the extent the Fund was allocated dividend income of the
Portfolio from stock investments in U.S. domestic corporations. It is
anticipated that, due to the nature of the Fund's investments, no portion of the
Fund's 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 realized or unrealized
appreciation in the Fund's share of the Portfolio's portfolio. Consequently,
subsequent distributions by the Fund on such shares from such appreciation may
be taxable to such investor even if the net asset value of the investor's shares
is, as a result of the distributions, reduced below the investor's cost for such
shares, and the distributions economically represent a return of a portion of
the purchase price.
Upon a redemption or other disposition of shares of the Fund in a transaction
that is treated as a sale for tax purposes, 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. Any loss realized on a redemption may be disallowed to the
extent the shares disposed of are replaced with other shares of the Fund within
a period of 61 days beginning 30 days before and ending 30 days after the shares
are disposed of, such as pursuant to automatic dividend reinvestments. In such a
case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss. Any loss realized upon the redemption of shares with a tax
holding period of six months or less will be treated as a long-term capital loss
to the extent of any amounts treated as distributions of long-term capital gain
with respect to such shares. Shareholders should consult their own tax advisers
regarding their particular circumstances to determine whether a disposition of
Fund shares is properly treated as a sale for tax purposes, as is assumed in the
foregoing discussion. Also, future Treasury Department
45
<PAGE>
regulations issued to implement the 1997 TRA may contain rules for determining
different tax rates applicable to sales of Fund shares held for more than one
year, more than 18 months, and (for certain sales after the year 2000 or the
year 2005) more than five years. These regulations may also modify some of the
provisions described above.
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 Portfolio may be subject to withholding and other taxes imposed by
foreign countries with respect to any investments in foreign securities, and the
Fund does not expect to pass its share of such taxes or any related deductions
or credits through to its shareholders. Foreign exchange gains and losses may be
recognized by the Portfolio in connection with hybrid or structured securities
or Strategic Transactions in which its return is dependent upon changes in the
value of a foreign currency. Such gains or losses may be subject in particular
cases to Section 988 of the Code, which generally would cause them to be treated
as ordinary income and losses and could affect the amount, timing and character
of the Fund's distributions to its shareholders.
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, the 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
effect, if any, of the 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, the Fund in their
particular circumstances.
Non-U.S. investors not engaged in a U.S. trade or business with which their
investment in the Fund is effectively connected will be subject to U.S. Federal
income tax treatment that is different from that described above. These
investors may be subject to nonresident alien withholding tax at the rate of 30%
(or a lower rate under an applicable tax treaty) on amounts treated as ordinary
dividends from the Fund and, unless an effective IRS Form W-8 or authorized
substitute is on file, to 31% backup withholding on certain other payments from
the Fund. Non-U.S. investors should consult their tax adviser regarding such
treatment and the application of foreign taxes to an investment in the Fund.
ADDITIONAL INFORMATION
The 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, the Fund's financial statements
contained in the 1996 Annual Report of the Fund 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 the Fund for the periods from commencement of operations through December 31,
1992 were audited by Deloitte & Touche, LLP, independent auditors. Financial
statements for the period ended June 30, 1997 are unaudited. The Fund's and the
Portfolio's financial statements for the current fiscal year will be audited by
Coopers & Lybrand, L.L.P., independent accountants.
46
<PAGE>
Standish, Ayer & Wood Investment Trust
Standish Short-Term Asset Reserve Fund Series
Financial Statements for the Year Ended
December 31, 1996
<PAGE>
January 27, 1997
Dear Standish, Ayer & Wood Investment Trust Shareholder:
I am writing to provide you with a review of development at Standish, Ayer &
Wood as they relate to the activities of the Investment Trust. The financial
markets in 1996 provided another very fine year for our clients. Investment
returns were quite favorable. U.S. stocks had another excellent year on top of a
sensational 1995, and U.S. bonds generally earned the coupon, a somewhat
surprising development given the very high bond returns of the previous year.
Selected international stocks and hedged international bonds also recorded very
high returns, the latter benefitting from protection against currency loss as
the dollar appreciated. In addition to the positive market returns, we are
delighted to report that in virtually all of the asset classes in which we
operate, the Standish management efforts added value compared to the relevant
benchmarks.
During this period in which our clients fared exceptionally well, Standish also
had a successful year. Our assets under management grew modestly to $30 billion
as new business offset some account losses. We attribute a slightly higher
attrition of accounts to a wave of corporate mergers and pension fund
restructuring, changes in asset allocation, and higher turnover in public funds
where political considerations are sometimes paramount. Substantial increases in
assets occurred in small capitalization U.S. equities where asset growth has met
our self-imposed limits, management for high net worth individuals through our
private client group, and mutual funds where aggregate assets under management
now total $4.2 billion. One of the distinctive features of Standish is the
longevity of many of our client relationships. We continue to work with three
insurance company clients which retained Standish in 1934, 1940, and 1955,
respectively. And it was with great pleasure that in 1996 we celebrated our
twenty-fifth year of service to American Telephone.
We have also grown significantly as an enterprise. At the end of the year, our
organization had 213 members (versus 198 at the end of 1995). We are
particularly proud that 50 of the staff members are Chartered Financial Analysts
(CFAs) or the equivalent. Our investment team has had only minimal turnover. At
midyear, Dave Murray, a Director and Treasurer, elected to take early retirement
after twenty-two years of distinguished service. With that exception, the
directorship remains unchanged, with 22 of us continuing as owners of the
business.
In our letter a year ago, we mentioned our dissatisfaction with our efforts in
managing international equity portfolios. We are particularly pleased to report
that not only has performance improved, but we have brought aboard Remi Browne
as the leader of our effort. Remi, who was elected Vice President of Standish
and SIMCO in September, has had long experience in adding value to international
equity portfolios at State Street Bank in Boston, and more recently at Ark Asset
Management in New York.
During 1996, we introduced a number of new products. After extensive research,
we began a quantitatively based program to manage international small
capitalization equities. The results have been exceedingly favorable to date. As
our existing Standish International Equity Fund was altered to include stock
selection, we have begun a new investment discipline designed to focus on
country selection. Due to the increasing appetite of investors for absolute
returns, we have introduced a duration neutral bond strategy with the objective
of delivering relatively high returns with very limited volatility by using
derivatives to mitigate interest rate risk. Finally, we had concluded some time
ago that in our style of U.S. small capitalization equities -- particularly
given the focus on "micro caps" -- there is a finite amount we could manage
effectively without risking liquidity or high transaction costs. Accordingly,
having grown close to our asset target, we have closed the Small Cap Fund and
have introduced the Standish Small Capitalization Equity Fund II with the same
management style applied to companies with a median market capitalization of
$500 million.
Fulfilling your objectives as our client must be our first priority. To that
end, we are honing our research and the implementation of what we believe are
solid, durable investment philosophies.
<PAGE>
We are also making efforts to diversify our organization from a dependence on
bond management. Our activities are both internal -- designing new products and
marketing programs - and external -- looking to acquisitions, strategic
partnership relationships, and the acquisition of minority interests. Among
other initiatives designed to diversify our product and client base, we have
begun a partnership relationship as well as an equity interest in Cypress
Investments, Inc., an effort designed to acquire and manage bank-sponsored
mutual funds on a private label basis.
We are confident that we have the people, resources, investment technology, and
organizational stability to succeed. While both the investment world and
Standish are changing at an accelerating pace, the successful business
principles we have applied for many decades are still intact. Most importantly,
we believe that we are in partnership with our clients to meet their financial
needs. We are dedicated to working hard to fulfill your expectations in the
years ahead, and we are confident we can achieve your and our objectives.
Sincerely yours,
Edward H. Ladd
Chairman
Standish, Ayer & Wood, Inc.
<PAGE>
Management Discussion
The year 1996 was reasonably positive for investors in short duration assets.
For the full year ended December 31, 1996, the STAR Fund returned 5.62%,
outperforming the IBC Donoghue Money Market Average at 4.90%, a margin of 72
basis points (bp). We experienced quite a volatile market environment and are
pleased that we were able to turn in positive performance for the year.
As we have noted throughout the year, 1996 was a very choppy market environment.
It was almost as if investors did a complete turnaround on January 1, 1996 after
a very strong market environment during 1995. The first half of 1996 was
characterized by concern that the economy was reaching record low levels of
unemployment, and that inflation was bound to heat up, causing the Federal
Reserve to tighten monetary policy. In the first six months of the year, rates
rose by 60-100 bp, depending on the maturity. As the year continued, the
economic news continued to be good on all fronts, resulting in a very strong
fourth quarter during which rates fell by about 30 bp across the board. Despite
this strong fourth quarter rally, we still ended the full year with a rate
increase of 35-70 bp in the short end of the curve. The yield curve also
steepened significantly during the year; as we opened 1996, there was a yield
pickup of only 20 bp from 3 months to 3 years; at December 31 the yield pickup
was 83 bp. The market environment was generally quite good for the types of
spread products that we employ during the year. Corporate bonds experienced
spread tightening for the year to historically narrow levels, and Asset Backed
Securities (ABS) tightened as well, despite a year of record high issuance.
Our performance attribution models show us that the STAR Fund performance was
positively impacted by our holdings in non- Treasury sectors, which averaged
75-80% of the portfolio throughout the year. As previously mentioned, corporate
securities either narrowed or maintained their spread (depending on the
particular name), allowing the additional yield to accrue to the bottom line of
the fund. The asset backed sector which comprised about 20-25% of our portfolio
for much of the year was a particular standout, as spreads tightened
significantly. We continue to believe that this is the single most attractive
sector in the short term markets as we enter 1997.
Our duration decisions were generally neutral to positive for the year. Although
we suffered during the first half as interest rates rose, we maintained our
duration, believing that the rate rise was unwarranted. We were rewarded for our
fortitude, especially during the fourth quarter, when the market rallied
strongly. Our general strategy is to avoid making major changes in duration over
the short term but to adopt a longer term outlook and to make modest changes as
conditions warrant.
During the fourth quarter of 1996, we began to employ a new type of options
strategy on the portfolio in conjunction with our desire to add value
opportunistically through the use of options. Because market participants had
turned complacent at year end, the volatility in the markets had decreased
substantially. Thus, it was possible to buy call options at a relatively low
price that would allow us to maintain our current portfolio duration and
participate in any substantial market rallies, while keeping our downside risk
at the same level. We expect that these strategies will continue to play an
important role for us during 1997.
Looking back on 1996 performance, we are pleased that we were able to turn in
attractive returns in such a volatile market environment, and we continue to
have a very positive outlook for an extended duration short term portfolio. We
would like to thank our shareholders for their support during the year, and we
would like to assure you that we are working our hardest to turn in competitive
performance during the next year.
Jennifer A. Pline
<PAGE>
Standish, Ayer & Wood Investment Trust
Standish Short-Term Asset Reserve Fund Series
Comparison of Change in Value of $1,000,000 Investment in Standish
Short-Term Asset Reserve Fund and IBC Donoghue Average
The following is a description of the graphical chart omitted from electronic
format:
This line chart shows the cumulative performance of the Standish Short-Term
Asset Reserve Fund compared with the IBC Donoghue Average for the period January
3, 1989 to December 31, 1996, based upon a $1,000,000 investment. Also included
are the average annual total returns for one year, five year, and since
inception.
<PAGE>
Standish, Ayer & Wood Investment Trust
Standish Short-Term Asset Reserve Fund
Portfolio of Investments
December 31, 1996
<TABLE>
<CAPTION>
Expected
Maturity Par Value
Security Rate (Unaudited) Maturity Value (Note 1A)
- --------------------------------------------------------- ------- ----------- -------------- ----------------- -----------
BONDS and NOTES - 99.0%
- ---------------------------------------------------------
Asset Backed - 30.0%
- ---------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Advanta Home Equity Trust Loan 1993-4 A1 5.50% 04/15/00 3/25/2010 $ 736,116 700,920
Aircraft Lease Portfolio Trust 1994-1 A2 7.15% 12/31/97 9/15/2004 3,633,940 3,672,550
AT&T Capital Equipment 1996-1A2 5.95% 01/10/98 7/15/2000 3,030,000 3,034,734
Beneficial California Incorporated Home Equity 1994-1 B (a) 6.35% 02/28/97 3/29/2044 1,873,699 1,882,468
Capital Home Equity 1990-1B (a) 6.75% 02/28/97 12/31/1997 1,212,513 1,214,782
Capital Home Equity 1992-1 (a) 6.30% 02/20/97 12/25/2012 371,562 371,968
Case Equipment Trust Loan 1995-BA2 5.95% 02/28/97 9/15/2000 565,421 565,981
Charter Financial Corp 1994-1A 7.40% 02/28/98 10/25/2001 1,549,075 1,571,585
Contimortgage Hel Trust 6.86% 09/30/97 7/15/2010 2,175,000 2,177,719
Contimortgage Home Equtiy 1994-4A 7.96% 12/30/97 9/15/2009 4,421,533 4,482,330
Continental Mortgage Home Equity 1996-4 A2 6.23% 02/05/98 10/15/2011 2,850,000 2,845,547
Equacredit Home Equity 1993-4 5.73% 06/15/99 12/15/2008 2,062,559 2,013,573
Equacredit Home Equity 1994-1A 5.80% 08/30/99 3/15/2009 665,668 649,546
Equicon Home Equity 1995-2 A1 6.45% 08/30/97 7/18/2010 1,301,702 1,300,482
Equicon Home Equity 1995-4 A1 6.15% 04/15/97 7/15/2004 2,333,362 2,332,632
Greentree Financial Corp. 1996-9 A1 5.96% 10/06/97 1/15/2028 4,170,408 4,169,073
Greentree Financial Corp. 6.10% 12/15/97 4/15/2018 1,711,346 1,706,520
Greentree Financial Corp. 1993-3 5.20% 04/15/97 10/15/2018 4,709,548 4,683,033
Greentree Financial Corp. 1995-DA1 6.05% 04/15/97 9/15/2025 1,871,802 1,874,104
Home Equity Loan 1992-2 A1 (a) 6.22% 02/20/97 10/20/2007 420,930 422,243
Home Equity Loan Trust 1992-2A 6.65% 02/15/99 11/20/2012 629,917 629,327
Merrill Lynch Asset Backed 1992-B A2 8.05% 05/15/97 4/15/2012 1,550,139 1,554,975
Merrill Lynch Home Equity 1991-2A2 (a) 5.91% 02/15/97 4/15/2006 170,326 170,379
Merrill Lynch Home Equity 1993-1B (a) 6.69% 02/15/97 2/15/2003 1,450,693 1,456,583
Old Stone Credit Corp. Home Equity Trust 1992-4 Cl A 6.55% 01/25/99 11/25/2007 606,369 604,758
Olympic Auto Receivables Trust 1995-D A2 5.80% 02/15/97 10/15/1998 917,242 917,242
Onyx Acceptance Trust 1996-1 A 5.40% 09/15/98 5/15/2001 3,028,477 3,001,977
Security Pacific Home Equity Cl 1991-1 Cl A 7.85% 03/01/97 5/15/1998 103,371 103,726
Security Pacific Home Equity Cl 1991-2 A 8.10% 03/31/97 6/15/2020 573,025 574,097
Security Pacific Home Equity Cl 1991-2 B 8.15% 12/15/97 6/15/2020 2,600,598 2,638,185
The Money Store Home Equity 1994-A A1 4.88% 07/30/97 3/15/2008 2,186,225 2,169,145
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Expected
Maturity Par Value
Security Rate (Unaudited) Maturity Value (Note 1A)
- --------------------------------------------------------- ------- ----------- -------------- ----------------- -----------
<S> <C> <C> <C> <C> <C>
Asset Backed - (continued)
- ---------------------------------------------------------
The Money Store Home Equity 1994-C A1 6.78% 02/28/97 9/15/2007 $ 127,153 127,312
The Money Store Home Equity 1995-B A2 6.50% 02/28/97 10/15/2006 718,598 717,251
TransAmerica Leasing 1995-1 A 6.40% 10/15/97 9/15/2001 1,119,810 1,124,972
UCFC Home Equity Loan Trust 1994 D1 A2 8.38% 06/10/97 3/10/2007 585,418 586,881
UCFC Home Equity Loan Trust 1995 B1 A1 6.75% 01/10/97 10/10/2004 197,392 197,392
----------
TOTAL Asset Backed 58,245,992
----------
Corporate - 46.8%
- ---------------------------------------------------------
Basic Industry - 0.8%
- ---------------------------------------------------------
Georgia Pacific Corp. 9.85% 6/15/1997 1,475,000 1,498,984
----------
Consumer Cyclical - 7.1%
- ---------------------------------------------------------
Chrysler Financial Corp. 8.06% 1/27/1997 600,000 600,822
Chrysler Financial Corp. 5.02% 1/27/1997 2,000,000 1,999,280
Chrysler Financial Corp. 7.89% 2/10/1997 3,300,000 3,306,204
Dayton Hudson Corp. 9.55% 4/15/1997 800,000 808,352
Dayton Hudson Corp. 9.77% 6/15/1997 2,200,000 2,237,510
Ford Motor Credit Corp. (a) 5.81% 11/09/1998 2,800,000 2,799,076
Sears Roebuck Co 9.25% 4/15/1998 2,000,000 2,077,060
----------
13,828,304
----------
Financial - 32.9%
- ---------------------------------------------------------
Bank of Boston (a) 5.55% 8/28/1998 3,000,000 2,995,230
Bear Stearns Co (a) 6.10% 1/14/1999 2,800,000 2,786,000
Capital One Bank Co. 8.63% 1/15/1997 5,500,000 5,503,080
Centura Bank 6.00% 4/07/1997 5,125,000 5,125,000
Citicorp (a) 5.76% 1/30/1998 4,100,000 4,095,900
Comdisco Inc Notes 6.29% 10/22/1998 425,000 425,631
Dean Witter Discover (a) 5.51% 3/10/1999 2,800,000 2,753,940
Discover Credit 7.81% 3/18/1997 2,400,000 2,409,912
Discover Credit 7.76% 5/13/1997 2,000,000 2,013,380
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Expected
Maturity Par Value
Security Rate (Unaudited) Maturity Value (Note 1A)
- --------------------------------------------------------- ------- ----------- -------------- ----------------- -----------
<S> <C> <C> <C> <C> <C>
Financial - (continued)
- ---------------------------------------------------------
Discover Credit 7.82% 5/13/1997 $ 1,000,000 1,006,890
First Interstate 12.75% 5/01/1997 1,660,000 1,695,607
First USA Bank 8.10% 2/21/1997 2,350,000 2,356,392
Fleet Mortgage Group Inc. 6.13% 8/15/1997 1,000,000 1,000,590
Goldman Sachs Inc. 144A (a) 5.93% 1/26/1999 3,000,000 3,012,000
Great Western Bank 9.50% 7/01/1997 3,800,000 3,866,614
Heller Financial 7.75% 5/15/1997 3,350,000 3,371,373
International Lease Finance 5.50% 4/01/1997 5,400,000 5,395,194
Merrill Lynch Cmt (a) 5.77% 4/07/1997 6,150,000 6,147,909
Morgan Stanley 5.65% 6/15/1997 650,000 649,578
Norwest Corp. 9.25% 5/01/1997 1,140,000 1,152,175
Salomon Brothers Inc. 5.47% 8/29/1997 2,000,000 1,994,800
Wells Fargo & Co. (a) 5.98% 6/25/1997 4,000,000 4,006,320
----------
63,763,515
----------
Health Care - 1.5%
- ---------------------------------------------------------
Health & Rehab Property (a) 6.28% 7/13/1999 2,900,000 2,863,605
----------
Real Estate - 4.5%
- ---------------------------------------------------------
Equity Residential Property Operating LP (a) 6.25% 12/22/1997 5,800,000 5,794,076
Taubman Realty (a) 6.00% 11/03/1997 3,025,000 3,017,407
----------
8,811,483
----------
TOTAL Corporate 90,765,891
----------
U.S. Government Agency - 5.2%
- ---------------------------------------------------------
Pass Thru Securities
- ---------------------------------------------------------
FHLMC (a) 7.82% 05/01/98 2/01/2023 380,413 388,794
FHLMC 7.00% 02/16/97 8/01/1999 2,437,975 2,461,593
FHLMC 8.00% 05/01/97 2/01/2000 - 7/01/20 3,797,216 3,885,621
Resolution Trust Corp. 1992 Cl B 7.15% 06/30/97 12/25/2020 2,054,182 2,054,182
Resolution Trust Corp. 1992-12 A-A2 7.50% 12/15/97 08/25/2023 553,538 555,614
Resolution Trust Corp. 1992-7 A3 (a) 7.36% 06/30/97 3/25/2022 757,057 756,584
----------
TOTAL U.S. Government Agency 10,102,388
----------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Par Value
Security Rate Maturity Value (Note 1A)
- --------------------------------------------------------- ---------- ------------------ ---------------- ----------
<S> <C> <C> <C> <C> <C>
U.S. Treasury Obligations - 17.0%
- ---------------------------------------------------------
Treasury Notes - 17.0%
- ---------------------------------------------------------
U.S. Treasury Note 5.88% 8/15/1998 $ 7,800,000 7,803,666
U.S. Treasury Note 5.88% 10/31/1998 1,375,000 1,374,780
U.S. Treasury Note 5.63% 11/30/1998 16,695,000 16,619,372
U.S. Treasury Note 5.13% 11/30/1998 7,000,000 6,907,040
U.S. Treasury Note 5.38% 5/31/1998 325,000 323,323
----------
TOTAL U.S. Treasury Obligations 33,028,181
----------
TOTAL BONDS and NOTES (Cost $192,381,683) 192,142,452
----------
<CAPTION>
Principal
Amount of
Contracts
--------------
<S> <C> <C>
Purchased Options - 0.0%
- ---------------------------------------------------------
- ---------------------------------------------------------
Deliver/Receive, Excercise Price, Expiration
- ---------------------------------------------------------
UST Call, 5.75% 12/23/98, Str 100.09375, 3/24/97 (Premiums Paid $10,563) 52,000 8,125
----------
<CAPTION>
Par
Value
--------------
<S> <C> <C>
Repurchase Agreements - 0.0%
- ---------------------------------------------------------
Prudential-Bache Repurchase Agreement, dated 12/31/96,
5.72% due 1/2/97, to pay $40,697 (Collateralized by
FNMA FNARM with a rate of 6.084% and a maturity date of
12/01/35 with a market value of $41,497. (Cost $40,864) $ 40,864 40,864
----------
TOTAL INVESTMENTS (Cost $192,433,110) - 99.0% 192,191,441
Other Assets less Liabilities - 1.0% 1,882,164
----------
NET ASSETS - 100.0% $194,073,605
==========
</TABLE>
(a) Variable Rate Security
* This security is restricted, but eligible for resale under 144A
FHLMC - Federal Home Loan Mortgage Corporation
UST - U.S. Treasury
FNARM - FNMA Adjustable Rate Mortgage
UCFC - United Co.'s Financial Corp.
<PAGE>
Standish, Ayer & Wood Investment Trust
Standish Short - Term Asset Reserve Fund
Statement of Assets and Liabilitites
December 31, l996
<TABLE>
<S> <C> <C>
Assets
Investments, at value (Note 1A) (identified cost, $192,433,110) $192,191,441
Receivable for investments sold 156,050
Interest receivable 2,135,074
------------
Total assets 194,482,565
Liabilities
Distribution payable $380,297
Accrued trustee fees (Note 3) 2,022
Accrued expenses and other liabilities 26,641
----------------
Total liabilities 408,960
------------
Net Assets $194,073,605
============
Net Assets consist of
Paid - in capital $205,255,771
Distributions in excess of net investment income (131,817)
Accumulated undistributed net realized gain (loss) (10,808,680)
Net unrealized appreciation (depreciation) (241,669)
------------
Total Net Assets $194,073,605
============
Shares of beneficial interest outstanding 9,953,704
============
Net asset value, offering price, and redemption price per share $19.50
============
(Net assets/Shares outstanding)
</TABLE>
The accompanying notes are an integral part of the financial statements
<PAGE>
Standish, Ayer & Wood Investment Trust
Standish Short - Term Asset Reserve Fund
Statement of Operations
Year Ended December 31, l996
<TABLE>
<S> <C> <C>
Income
Interest income $15,608,502
Expenses
Investment advisory fee (Note 3) $643,488
Accounting, custody and transfer agent fees 143,850
Legal fees 34,803
Audit services 22,092
Insurance expense 9,902
Trustees fees (Note 3) 9,630
Registration costs 9,326
Miscellaneous 11,829
---------------
Total expenses 884,920
------------
Net investment income 14,723,582
------------
Realized and unrealized gain (loss)
Net realized gain (loss)
Investment securities (407,753)
Written option transactions 28,818
---------------
Net realized gain (loss) (378,935)
Change in net unrealized appreciation (depreciation)
Investment securities (494,693)
Written options (547)
---------------
Change in net unrealized appreciation (depreciation) (495,240)
------------
Net realized and unrealized gain (loss) (874,175)
------------
Net increase (decrease) in net assets from operations $13,849,407
============
</TABLE>
The accompanying notes are an integral part of the financial statements
<PAGE>
Standish, Ayer & Wood Investment Trust
Standish Short - Term Asset Reserve Fund
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, December 31,
1996 1995
------------------ -----------------
<S> <C> <C>
Increase (decrease) in Net Assets
From operations:
Net investment income $14,723,582 $16,422,079
Net realized gain (loss) (378,935) 91,489
Change in net unrealized appreciation (depreciation) (495,240) 4,729,922
------------------ -----------------
Net increase (decrease) in net assets from operations 13,849,407 21,243,490
------------------ -----------------
Distributions to shareholders
From net investment income (14,723,192) (16,408,848)
In excess of net investment income ----- (72,090)
------------------ -----------------
Total distributions to shareholders (14,723,192) (16,480,938)
------------------ -----------------
Fund share (principal) transactions (Note 4)
Net proceeds from sale of shares 190,145,017 224,454,605
Net asset value of shares issued to shareholders in
payment of distributions declared 10,684,739 11,942,616
Cost of shares redeemed. (249,381,886) (274,677,022)
------------------ -----------------
Increase (decrease) in net assets from Fund share transactions (48,552,130) (38,279,801)
------------------ -----------------
Net increase (decrease) in net assets (49,425,915) (33,517,249)
Net Assets
At beginning of period 243,499,520 277,016,769
------------------ -----------------
At end of period (including distributions in excess of net
investment income of $131,817 and $ 72,090 at
December 31, 1996 and 1995, respectively) $194,073,605 $243,499,520
================== =================
</TABLE>
The accompanying notes are an integral part of the financial statements
<PAGE>
Standish, Ayer & Wood Investment Trust
Standish Short-Term Asset Reserve Fund
Financial Highlights
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------------------
1996 1995 1994 1993 1992 *
------------ ------------ ------------ ------------- -----------
<S> <C> <C> <C> <C> <C>
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) (0.04) 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 gains 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 return 5.62% 7.85% 2.27% 5.08% 4.33%
Net assets at end of period (000's omitted) $194,074 $243,500 $277,017 $275,080 $289,969
Ratios (to average daily net assets)/Supplemental Data:
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% 208% 154% 182% 167%
</TABLE>
* Audited by other auditors.
The accompanying notes are an integral part of the financial statements
<PAGE>
Notes to Financial Statements
(1) .....Significant Accounting Policies:
Standish, Ayer & Wood Investment Trust (the "Trust") is organized as a
Massachusetts business trust and is registered under the Investment
Company Act of 1940, as amended, as an open-end, management investment
company. Standish Short-Term Asset Reserve Fund (the "Fund") is a
separate diversified investment series of the Trust. The following is a
summary of significant accounting policies consistently followed by the
Fund in the preparation of its financial statements. The preparation of
financial statements in accordance with generally accepted accounting
principles requires management to make estimates and assumptions that
affect the reported amounts and disclosures in the financial
statements. Actual results could differ from those estimates.
A. .Investment security valuations--
Securities for which quotations are readily available are valued at the
last sale price, or if no sale, at the closing bid price in the
principal market in which such securities are primarily traded.
Securities (including restricted securities) for which quotations are
not readily available are valued primarily at their fair value as
determined in good faith under consistently applied procedures under
the general supervision of the Board of Trustees. Short-term
instruments with less than sixty-one days remaining to maturity when
acquired by the Fund are valued on an amortized cost basis. If the Fund
acquires a short-term instrument with more than sixty days remaining to
its maturity, it is valued at current market value until the sixtieth
day prior to maturity and will then be valued at amortized cost based
upon the value on such date unless the trustees determine during such
sixty-day period that amortized cost does not represent fair value.
B. .Repurchase agreements--
It is the policy of the Fund to require the custodian bank to take
possession, to have legally segregated in the Federal Reserve Book
Entry System, or to have segregated within the custodian bank's vault,
all securities held as collateral in support of repurchase agreement
investments. Additionally, procedures have been established by the Fund
to monitor on a daily basis, the market value of the repurchase
agreement's underlying investments to ensure the existence of a proper
level of collateral.
C. .Securities transactions and income--
Securities transactions are recorded as of the trade date. Realized
gains and losses from securities sold are recorded on the identified
cost basis. Interest income is determined on the basis of interest
accrued, adjusted for accretion of discount or amortization of premiums
debt securities when required for federal income tax purposes.
D. .Federal taxes--
As a qualified regulated investment company under Subchapter M of the
Internal Revenue Code, the Fund is not subject to income taxes to the
extent that it distributes all of its taxable income for its fiscal
year. At December 31, 1996, the Fund, for federal income tax purposes,
had capital loss carryovers which will reduce the Fund's taxable income
arising from future net realized gain on investments, if any, to the
extent permitted by the Internal Revenue Code and thus will reduce the
amount of distributions to shareholders which would otherwise be
necessary to relieve the Fund of any liability for federal income tax.
Such capital loss carryovers are $3,071,161, $1,512,610, $5,263,400
$568,968 and $277,757 which expire on December 31, 2000, December 31,
2001, December 31, 2002, December 31, 2003, and December 31, 2004
respectively. The Fund elected to defer to its fiscal year ending
December 31, 1997, $113,973 of losses recognized during the period
November 1, 1996 to December 31, 1996.
(2) ....Distributions to Shareholders:
Dividends on shares of the Fund are declared daily from net investment
income and distributed monthly. Net capital gains, if any, are
distributed annually. Dividends from net investment income and
distributions from capital gains, if any, are reinvested in additional
shares of the Fund unless the shareholder elects to receive them in
cash. Distributions to shareholders are recorded on the ex-dividend
date. Income and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally
accepted accounting principles. These differences are primarily due to
differing treatment of asset backed securities. Permanent book and tax
basis differences relating to shareholder distributions will result in
reclassifications between paid-in capital, undistributed net investment
and accumulated net realized gain (loss).
<PAGE>
(3) ....Investment Advisory Fee:
The investment advisory fee is paid to Standish, Ayer & Wood, Inc.
(SA&W) for overall investment advisory and administrative services, and
general office facilities, monthly at the annual rate of 0.25% of the
Fund's average daily net assets. The advisory agreement provides that
if the total Fund operating expenses (excluding brokerage, taxes and
extraodinary expenses) of the Fund in any fiscal year exceed 0.50% of
the Fund's average daily net assets, the compensation due to SA&W shall
be reduced by the amount of the excess. The Fund pays no compensation
directly to its trustees who are affiliated with SA&W or to its
officers, all of whom receive remuneration for their services to the
Fund from SA&W. Certain of the trustees and officers of the Trust are
directors or officers of SA&W.
(4) ....Purchases and Sales of Investments:
Purchases and sales of investments, other than short-term obligations
were as follows:
Purchases Sales
U.S. Government securities $316,467,507 $286,457,375
================== ==================
Non-U.S. Government securities $83,425,120 $102,574,333
================== ==================
(5) ....Shares of Beneficial Interest:
The Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest having a
par value of one cent per share. Transactions in Fund shares were as
follows:
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995
------------------ ------------------
<S> <C> <C>
Shares sold 9,748,426 11,547,118
Shares issued to shareholders in payment of distributions declared 548,316 614,434
Shares redeemed (12,798,043) (14,122,510)
------------------ -----------------
Net decrease (2,501,301) (1,960,958)
================== =================
</TABLE>
(6) ....Federal Income Tax Basis of Investment Securities:
The cost and unrealized appreciation (depreciation) in value of the
investment securities owned at December 31, 1996, as computed on a
federal income tax basis, are as follows:
<TABLE>
<S> <C>
Aggregate Cost $192,436,358
Gross unrealized appreciation $191,489
Gross unrealized depreciation (436,406)
------------------
Net unrealized depreciation ($244,917)
==================
</TABLE>
<PAGE>
(7) ....Financial Instruments
In general, the following instruments are used for hedging purposes as
described below. However, these instruments may also be used to enhance
potential gain in circumstances where hedging is not involved. The
nature, risks and objectives of these investments are set forth more
fully in the Fund's Prospectus and Statement of Additional Information.
The Fund trades the following financial instruments with off-balance
sheet risk:
.........Options--
Call and put options give the holder the right to purchase or sell,
respectively, a security or currency at a specified price on or before
a certain date. The Fund uses options to seek to hedge against risks of
market exposure and changes in securities prices as well as to seek to
enhance returns. Options, both held and written by the Fund, are
reflected in the accompanying Statement of Assets and Liabilities at
market value. Premiums received from writing options which expire are
treated as realized gains. Premiums received from writing options which
are exercised or are closed are added to or offset against the proceeds
or amount paid on the transaction to determine the realized gain or
loss. If a put option written by the Fund is exercised, the premium
reduces the cost basis of the securities purchased by the Fund. The
Fund, as writer of an option, has no control over whether the
underlying securities may be sold (call) or purchased (put) and as a
result bears the market risk of an unfavorable change in the price of
the security underlying the written option. The Fund has no open
written option contracts at December 31, 1996. A summary of written
option transactions for the year ended December 31, 1996 is as follows:
Written Call Option Transactions
Number
of Contracts Premiums
-------------- ----------------
Outstanding, beginning of period 7,000 $4,922
Options written 91,915 94,599
Options exercised (5,000) (3,321)
Options expired (73,415) (78,095)
Options closed (20,500) (18,105)
-------------- ----------------
Outstanding, end of period 0 $0
============== ================
<PAGE>
Report of Independent Accountants
To the Trustees of Standish, Ayer & Wood Investment Trust and the Shareholders
of Standish Short-Term Asset Reserve Fund: We have audited the accompanying
statement of assets and liabilities of Standish, Ayer & Wood Investment Trust:
Standish Short-Term Asset Reserve Fund (the "Fund"), including the portfolio of
investments, as of December 31, 1996, and the related statement of operations
for the year then ended, changes in net assets for each of the two years in the
period then ended and financial highlights for each of the four years in the
period then ended. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits. The financial highlights for the year ended December 31, 1992, presented
herein, were audited by other auditors, whose report, dated February 12, 1993,
expressed an unqualified opinion on such financial highlights. We conducted our
audits in accordance with generally accepted auditing standards. Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements and financial highlights are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. Our procedures included
confirmation of securities owned as of December 31, 1996 by correspondence with
the custodian and brokers. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion. In our opinion, the financial
statements and financial highlights referred to above present fairly, in all
material respects, the financial position of Standish, Ayer & Wood Investment
Trust: Standish Short-Term Asset Reserve Fund as of December 31, 1996, the
results of its operations for the year then ended, the changes in its net assets
for each of the two years in the period then ended, and financial highlights for
each of the four years in the period then ended, in conformity with generally
accepted accounting principles.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
February 20, 1997
<PAGE>
This Report is submitted for the general information of shareholders and is not
authorized for distribution to prospective investors unless proceeded or
accompanied by an effective prospectus. Nothing herein is to be construed to be
an offer of sale or solicitation or an offer to buy shares of the Fund. Such
offer is made only by the Fund's prospectus, which includes details as to the
offering and other material information.
<PAGE>
Standish, Ayer & Wood Investment Trust
Standish Short-Term Asset Reserve Fund
Statement of Assets and Liabilities
June 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Assets
Investments at value (Note 1A) (identified cost, $237,913,603) $ 237,818,052
Cash 134,913
Receivable for investments sold 2,151,859
Receivable for Fund shares sold 4,035,454
Interest and dividends receivable 2,103,908
-------------
Total assets 246,244,186
Liabilities
Payable for Fund shares redeemed 297,500
Distribution payable 297,796
Payable to Investment Adviser (Note 2) 123
Accrued accounting, custody and transfer agent fees 36,617
Accrued expenses and other liabilities 12,094
---------
Total liabilities 644,130
-------------
Net Assets $ 245,600,056
=============
Net Assets consist of
Paid-in capital $ 256,988,623
Distributions in excess of net investment income (131,833)
Accumulated net realized loss (11,161,183)
Net unrealized depreciation (95,551)
-------------
Total Net Assets $ 245,600,056
=============
Shares of beneficial interest outstanding 12,609,611
=============
Net asset value, offering price and redemption price per share
(Net assets/Shares outstanding) $ 19.48
=============
</TABLE>
The accompanying notes are an integral part of the financial statements.
2
<PAGE>
Standish, Ayer & Wood Investment Trust
Standish Short-Term Asset Reserve Fund
Statement of Operations
Six Months Ended June 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Investment Income
Interest income 6,746,089
----------------
Total investment income 6,746,089
Expenses
Investment advisory fee (Note 2) 273,655
Accounting, custody and transfer agent fees 69,169
Legal and audit services 27,259
Insurance expense 10,737
Administration fee 4,540
Registration costs 4,180
Trustees fees (Note 2) 3,291
Miscellaneous 9,998
----------------
Total expenses 402,829
----------------
Net investment income 6,343,260
----------------
Realized and Unrealized Gain (loss) on Investments
Net realized gain (loss)
Investment security transactions (352,503)
----------------
Net realized loss (352,503)
Change in unrealized appreciation (depreciation)
Investment securities 146,118
----------------
Net change in unrealized appreciation (depreciation) 146,118
----------------
Net realized and unrealized loss (206,385)
----------------
Net increase in net assets from operations $ 6,136,875
================
</TABLE>
The accompanying notes are an integral part of the financial statements.
3
<PAGE>
Standish, Ayer & Wood Investment Trust
Standish Short-Term Asset Reserve Fund
Statements of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, 1997 December 31,
(Unaudited) 1996
------------------ --------------
<S> <C> <C>
Increase (decrease) in net assets
From operations
Net investment income $ 6,343,260 $ 14,723,582
Net realized loss (352,503) (378,935)
Change in unrealized appreciation (depreciation) 146,118 (495,240)
------------- -------------
Net increase in net assets from operations 6,136,875 13,849,407
------------- -------------
Distributions to Shareholders
From net investment income (6,343,276) (14,723,192)
------------- -------------
Total distributions to shareholders (6,343,276) (14,723,192)
------------- -------------
Fund Share (principal) Transactions (Note 4)
Net proceeds from sale of shares 139,213,573 190,145,017
Net asset value of shares issued to shareholders in payment of distributions declared 4,275,523 10,684,739
Cost of shares redeemed (91,756,244) (249,381,886)
------------- -------------
Net increase (decrease) in net assets from Fund share transactions 51,732,852 (48,552,130)
------------- -------------
Net increase (decrease) in net assets 51,526,451 (49,425,915)
Net Assets
At beginning of period 194,073,605 243,499,520
------------- -------------
At end of period (including distributions in excess of net investment income of
$131,833 and $131,817, respectively) $ 245,600,056 $ 194,073,605
============= =============
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
<PAGE>
Standish, Ayer & Wood Investment Trust
Standish Short-Term Asset Reserve Fund
Financial Highlights
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
Six Months Ended December 31,
June 30, 1997 -----------------------------------------------------------------
(Unaudited) 1996 1995 1994 1993 1992/1/
------------- -------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 19.50 $ 19.55 $ 19.22 $ 19.79 $ 19.96 $ 20.46
------------- -------- -------- -------- -------- ---------
Income from investment operations
Net investment income 0.56 1.11 1.13 1.01 1.31 1.35
Net realized and unrealized gain
(loss) on investments (0.02) (0.04) 0.33 (0.57) (0.17) (0.48)
--------- -------- -------- -------- -------- --------
Total from investment operations 0.54 1.07 1.46 0.44 1.14 0.87
--------- -------- -------- -------- -------- --------
Less distributions to shareholders
From net investment income (0.56) (1.12) (1.12) (1.01) (1.31) (1.35)
In excess of net investment income -- -- (0.01) -- -- --
From net realized gains on
investments -- -- -- -- -- (0.02)
--------- -------- -------- -------- -------- --------
Total distributions to
shareholders (0.56) (1.12) (1.13) (1.01) (1.31) (1.37)
--------- -------- -------- -------- -------- --------
Net asset value, end of period $ 19.48 $ 19.50 $ 19.55 $ 19.22 $ 19.79 $ 19.96
======== ======== ======== ======== ======== ========
Total return 2.80% 5.62% 7.85% 2.27% 5.08% 4.33%
<CAPTION>
Ratios (to average daily net assets)/Supplemental Data
<S> <C> <C> <C> <C> <C> <C>
Expenses 0.37%+ 0.35% 0.33% 0.33% 0.33% 0.37%
Net investment income 5.79%+ 5.75% 5.95% 5.24% 5.82% 6.60%
Portfolio Turnover 79% 156% 208% 154% 182% 167%
Net assets, end of period (000's
omitted) $245,600 $194,074 $243,500 $277,017 $275,080 $289,969
</TABLE>
+ Computed on an annualized basis.
/1/ Audited by other auditors.
The accompanying notes are an integral part of the financial statements.
5
<PAGE>
Standish, Ayer & Wood Investment Trust
Standish Short-Term Asset Reserve Fund
Schedule of Investments - June 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Expected
Maturity Par Value
Security Rate (Unaudited) Maturity Value (Note 1A)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BONDS AND NOTES -- 89.6%
Asset Backed -- 29.4%
ACC Automobile Receivables Trust 6.700% 02/17/1999 12/17/2003 $ 6,461,317 $ 6,473,432
Advanta Home Equity Trust Loan 1993-4 A1 5.500% 04/15/2000 03/25/2010 647,874 614,873
Aircraft Lease Portfolio Trust 1994-1 A2 7.150% 12/31/1997 09/15/2004 5,562,960 5,602,944
AT&T Capital Equipment 1996-1A2 5.950% 01/10/1998 07/15/1998 3,030,000 3,037,575
Auto Finance Group 97 A 6.350% 12/01/1998 05/31/2002 5,000,000 4,998,438
Beneficial CA, Inc. Home Equity 1994-1 B/(a)/ 6.100% 07/28/1997 03/29/2044 1,867,680 1,876,421
Capital Home Equity 1990-1B/(a)/ 6.438% 07/30/1997 12/31/1997 1,002,432 1,005,870
Capital Home Equity 1992-1/(a)/ 5.988% 07/20/1997 12/25/2012 198,314 198,437
Charter Financial Corp 1994-1A 7.400% 02/28/1998 10/25/2001 1,113,670 1,124,458
Choice Credit Card Trust 1992-2B 7.200% 03/15/1998 03/15/1998 4,000,000 4,030,000
Contimortgage Home Equity 1994-5 A2 9.070% 07/30/1997 10/15/2009 544,993 550,443
Contimortgage Home Equity 1996-1 A2 5.580% 02/01/1998 01/15/2011 3,999,970 3,981,220
Contimortgage Home Equity 1997-2 A2 6.400% 05/01/1998 01/15/2012 3,000,000 2,994,844
Contimortgage Home Equtiy 1994-4A 7.960% 12/30/1997 09/15/2009 2,945,314 2,972,006
Continental Mortgage Home Equity 1996-4 A2 6.230% 02/05/1998 10/15/2011 2,850,000 2,850,445
Equacredit Home Equity 1993-4 5.725% 06/15/1999 12/15/2008 1,745,407 1,693,590
Equacredit Home Equity 1994-1A 5.800% 08/30/1999 03/15/2009 578,725 561,092
Equicon Home Equity 1995-2 A1 6.450% 08/30/1997 07/18/2010 578,424 577,610
Equicon Home Equity 1995-4 A1 6.150% 07/15/1997 07/15/2004 439,948 439,948
Greentree Financial Corp. 6.100% 12/15/1997 04/15/2018 1,221,614 1,217,411
Greentree Financial Corp. 1993-3 5.200% 07/15/1997 10/15/2018 496,396 494,376
Greentree Financial Corp. 1995-DA1 6.050% 07/15/1997 09/15/2025 83,869 83,869
Home Equity Loan 1992-2 A1/(a)/ 5.810% 07/20/1997 10/20/2007 381,194 382,266
Home Equity Loan Trust 1992-2A 6.650% 02/15/1999 11/20/2012 526,283 522,007
IMC Home Equity Loan 1997-2 A2 6.700% 06/25/1999 11/20/2011 1,750,000 1,752,461
Merrill Lynch Home Equity 1993-1B/(a)/ 6.438% 07/15/1997 02/15/2003 1,379,442 1,385,897
OSCC Home Equity Trust 1992-4 Cl A 6.550% 01/25/1999 11/25/2007 497,584 494,474
Option One CTS ARM Trust 96-1 A2 5.735% 07/25/1997 04/25/2026 2,524,983 2,528,928
Resolution Trust Corp. 1992-7 A3/(a)/ 7.350% 07/31/1997 03/25/2022 701,054 698,425
Security Pacific Home Equity Cl 1991-2 B 8.150% 12/15/1997 06/15/2020 2,389,213 2,414,225
Standard Credit Card 1994-3 B 7.000% 04/07/1999 04/07/2001 2,000,000 2,015,620
The Money Store Home Equity 1994-A A1 4.875% 07/30/1997 03/15/2008 1,226,325 1,220,002
Transamerica Leasing 1995-1 A 6.400% 10/15/1997 09/15/2001 741,791 745,036
World Omni Auto Lease 6.300% 03/15/1998 06/25/2002 6,817,225 6,834,268
World Omni Auto Lease 6.850% 09/15/1999 11/15/2002 3,748,043 3,739,844
-----------------
Total Asset Backed (Cost $72,250,747) 72,112,755
-----------------
<CAPTION>
Collateralized Mortgage Obligations -- 1.5%
<S> <C> <C> <C> <C> <C>
FHLB 6.455% 07/18/1997 05/20/1999 $ 2,500,000 $ 2,500,000
FHLB 6.455% 07/8/1997 07/08/1998 1,000,000 1,000,940
Merrill Lynch Mortgage Investors 1992-B A2 8.050% 07/15/1997 04/15/2012 291,599 291,415
-----------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
6
<PAGE>
Standish, Ayer & Wood Investment Trust
Standish Short-Term Asset Reserve Fund
Schedule of Investments - June 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Expected
Maturity Par Value
Security Rate (Unaudited) Maturity Value (Note 1A)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Collateralized Mortgage Obligations (continued)
Total Collateralized Mortgage Obligations
(Cost $3,801,985) 3,792,355
--------------
Corporate -- 42.5%
Financial -- 34.5%
American General Finance Corp. 7.250% 03/01/1998 $ 5,000,000 $ 5,035,750
BankBoston(a) 5.550% 08/28/1998 3,000,000 3,006,270
Banponce Corp. 6.270% 03/04/1999 5,000,000 4,995,600
Bear Stearns Co. 7.625% 09/15/1999 1,000,000 1,023,850
Bear Stearns Co.(a) 6.450% 01/14/1999 2,800,000 2,786,000
Beneficial Corp. 8.170% 11/09/1999 3,950,000 4,091,055
Dean Witter Discover(a) 5.510% 03/10/1999 2,800,000 2,753,940
First USA Bank 6.125% 10/30/1997 1,250,000 1,249,850
Fleet Mortgage Group, Inc. 6.125% 08/15/1997 1,000,000 1,000,380
Fleet Mortgage Group, Inc. 7.180% 12/24/1997 1,575,000 1,582,875
Ford Motor Credit Corp.(a) 5.810% 11/09/1998 2,800,000 2,810,220
General Electric Capital 5.360% 01/20/1998 4,000,000 3,987,760
GMAC 0.000% 10/24/1997 4,400,000 4,321,680
Goldman Sachs Group L.P. 144A(a) 6.100% 04/15/1998 2,000,000 1,992,860
Goldman Sachs, Inc. 144A(a) 5.931% 01/26/1999 3,000,000 3,015,000
Great Western Bank 9.500% 07/01/1997 3,800,000 3,800,000
Health & Rehab Property(a) 6.283% 07/13/1999 2,900,000 2,900,290
Huntington Bank 6.150% 01/07/1999 1,550,000 1,547,551
Key Bank Corp. 6.050% 04/06/1998 5,000,000 5,005,000
Lehman Brothers 8.375% 02/15/1999 3,100,000 3,189,187
Lehman Brothers 6.780% 05/06/1999 4,000,000 4,021,400
MBNA Corp. 5.886% 05/05/1999 3,000,000 3,012,600
Merrill Lynch & Co. 0.000% 07/28/1997 1,500,000 1,493,550
Morgan Stanley 9.250% 03/01/1998 5,250,000 5,358,098
MTN-MBNA American Bank 7.120% 04/12/1999 2,700,000 2,733,696
Salomon, Inc. 9.375% 04/15/1998 5,000,000 5,122,800
Sigma Fin Asset Backed C.P. 0.000% 10/15/1997 2,500,000 2,456,000
USF&G Corp. 7.000% 05/15/1998 525,000 528,885
-------------
84,822,147
-------------
Growth Cyclical -- 2.1%
Ford Motor Credit F Float(a) 6.125% 02/22/1999 $ 3,000,000 $ 3,014,820
Sears Roebuck Co. 9.250% 04/15/1998 2,000,000 2,048,320
-------------
5,063,140
-------------
Real Estate -- 5.7%
Equity Residential Property Operating L.P., REIT(a) 6.250% 12/22/1997 $ 3,800,000 $ 3,811,210
Taubman Realty, REIT(a) 5.973% 11/03/1997 3,775,000 3,777,492
Wellsford Residential Property, REIT 5.793% 11/24/1999 6,500,000 6,507,800
</TABLE>
The accompanying notes are an integral part of the finacial statements.
7
<PAGE>
Standish, Ayer & Wood Investment Trust
Standish Short-Term Asset Reserve Fund
Schedule of Investments - June 30, 1997 (unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Expected
Maturity Par Value
Security Rate (Unaudited) Maturity Value (Note 1A)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Real Estate (continued)
---------------
14,096,502
---------------
Technology -- 0.2%
Comdisco, Inc. 6.290% 10/22/1998 $ 425,000 $ 425,731
---------------
Total Corporate (Cost $104,337,035) 104,407,520
---------------
Government/Other -- 2.4%
Australia -- 2.4%
St. George Build So Sf97 6.563% " 07/14/2000 $ 4,000,000 $ 4,058,720
St. Georges Bank 6.875% 04/01/1999 1,800,000 1,808,406
Total Government/Other (Cost $5,831,485) 5,867,126
---------------
U.S. Government Agency -- 8.0%
Pass Thru Securities -- 8.0%
American Express Centuri Bank 5.788% 07/12/1999 07/12/1999 $ 2,500,000 $ 2,508,400
FHLD 0.000% 09/26/1997 6,295,000 6,210,143
FHLMC 8.000% 04/23/1999 02/01/2000-
07/01/2000 2,865,809 2,917,752
FHLMC 7.000% 01/23/1999 08/01/1999 2,141,677 2,151,716
FHLMC 8.000% 03/23/1999 05/01/2000 403,718 411,036
FHLMC/(a)/ 7.816% 05/01/1998 02/01/2023 378,348 394,072
FHLMC Gold 5Yr 5.500% 01/23/1998 10/01/1998 990,768 986,210
FNMA 0.000% 10/07/1997 1,850,000 1,822,306
Resolution Trust Corp. 1992 Cl B 7.150% 07/31/1997 12/25/2020 1,740,096 1,742,815
Resolution Trust Corp. 1992-12 A-A2 7.500% 12/15/1997 08/25/2023 456,955 458,669
---------------
19,603,119
---------------
Total U.S. Government Agency (Cost $19,644,553) 19,603,119
---------------
U.S. Treasury Obligations -- 5.8%
Treasury Notes -- 5.8%
U.S. Treasury Note 5.750% 12/31/1998 $13,650,000 $ 13,609,460
U.S. Treasury Note 6.125% 03/31/1998 750,000 752,340
---------------
14,361,800
---------------
Total U.S. Treasury Obligations (Cost $14,374,396) 14,361,800
---------------
TOTAL BONDS AND NOTES (COST $220,240,201) 220,144,675
---------------
SHORT-TERM INVESTMENTS -- 7.2%
Commercial Paper -- 7.2%
General Electric Credit 5.340% 07/07/1997 $ 2,400,000 $ 2,397,840
Allstate 6.060% 07/01/1997 2,500,000 2,499,579
Anheuser Busch 6.100% 07/01/1997 1,900,000 1,899,678
</TABLE>
The accompanying notes are an integral part of the financial statements.
8
<PAGE>
Standish, Ayer & Wood Investment Trust
Standish Short-Term Asset Reserve Fund
Schedule of Investments - June 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par Value
Security Rate Maturity Value (Note 1A)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Ciesco L.P. 5.530% 07/01/1997 $ 4,000,000 $ 3,996,313
McKesson 6.375% 07/01/1997 4,600,000 4,599,185
Xerox Credit Corp. 5.570% 07/07/1997 2,300,000 2,280,782
-------------
TOTAL SHORT-TERM INVESTMENTS (COST $17,673,402) 17,673,377
-------------
TOTAL INVESTMENTS -- 96.8% (COST $237,913,603) $237,818,052
Other Assets, Less Liabilities -- 3.2% 7,782,004
=============
NET ASSETS -- 100% $245,600,056
</TABLE>
FHLB - Federal Home Loan Bank
FHLD - Federal Home Loan Discount
FHLMC - Federal Home Loan Mortgage Corporation
FNMA - Federal National Mortgage Association
GMAC - General Motors Acceptance Corporation
OSCC - Old Stone Credit Corporation
/(a)/Variable Rate Security
The accompanying notes are an integral part of the financial statements.
9
<PAGE>
Standish, Ayer & Wood Investment Trust
Standish Short-Term Asset Reserve Fund
Notes to Financial Statements (Unaudited)
- --------------------------------------------------------------------------------
(1) Significant Accounting Policies:
Standish, Ayer & Wood Investment Trust (the "Trust") is organized as a
Massachusetts business trust and is registered under the Investment Company
Act of 1940, as amended, as an open-end, management investment company.
Standish Short-Term Asset Reserve Fund (the "Fund") is a separate
diversified investment series of the Trust.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts and disclosures in the financial
statements. Actual results could differ from those estimates.
A. Investment security valuations--
Securities for which quotations are readily available are valued at the
last sale price, or if no sale, at the closing bid price in the principal
market in which such securities are primarily traded. Securities (including
restricted securities) for which quotations are not readily available are
valued primarily at their fair value as determined in good faith under
consistently applied procedures under the general supervision of the Board
of Trustees.
Short-term instruments with less than sixty-one days remaining to maturity
when acquired by the Fund are valued on an amortized cost basis. If the
Fund acquires a short-term instrument with more than sixty days remaining
to its maturity, it is valued at current market value until the sixtieth
day prior to maturity and will then be valued at amortized cost based upon
the value on such date unless the trustees determine during such sixty-day
period that amortized cost does not represent fair value.
B. Repurchase agreements--
It is the policy of the Fund to require the custodian bank to take
possession, to have legally segregated in the Federal Reserve Book Entry
System, or to have segregated within the custodian bank's vault, all
securities held as collateral in support of repurchase agreement
investments. Additionally, procedures have been established by the Fund to
monitor on a daily basis, the market value of the repurchase agreement's
underlying investments to ensure the existence of a proper level of
collateral.
C. Securities transactions and income--
Securities transactions are recorded as of the trade date. Realized gains
and losses from securities sold are recorded on the identified cost basis.
Interest income is determined on the basis of interest accrued, adjusted
for accretion of discount or amortization of premiums debt securities when
required for federal income tax purposes.
D. Federal taxes--
As a qualified regulated investment company under Subchapter M of the
Internal Revenue Code, the Fund is not subject to income taxes to the
extent that it distributes all of its taxable income for its fiscal year.
At December 31, 1996, the Fund, for federal income tax purposes, had
capital loss carryovers which will reduce the Fund's taxable income arising
from future net realized gain on investments, if any, to the extent
permitted by the Internal Revenue Code and thus will reduce the amount of
distributions to shareholders which would otherwise be necessary to relieve
the Fund of any liability for federal income tax. Such capital loss
carryovers are $3,071,161, $1,512,610, $5,263,400, $568,968 and $277,757
which expire on December 31, 2000, December 31, 2001, December 31, 2002,
December 31, 2003, and December 31, 2004 respectively. The Fund elected to
defer to its fiscal year ending December 31, 1997, $113,973 of losses
recognized during the period November 1, 1996 to December 31, 1996.
10
<PAGE>
Standish, Ayer & Wood Investment Trust
Standish Short-Term Asset Reserve Fund
Notes to Financial Statements (Unaudited)
- --------------------------------------------------------------------------------
(2) Distributions to Shareholders:
Dividends on shares of the Fund are declared daily from net investment
income and distributed monthly. Net capital gains, if any, are distributed
annually. Dividends from net investment income and distributions from
capital gains, if any, are reinvested in additional shares of the Fund
unless the shareholder elects to receive them in cash. Distributions to
shareholders are recorded on the ex-dividend date. Income and capital gain
distributions are determined in accordance with income tax regulations
which may differ from generally accepted accounting principles. These
differences are primarily due to differing treatment of asset backed
securities. Permanent book and tax basis differences relating to
shareholder distributions will result in reclassifications between paid-in
capital, undistributed net investment and accumulated net realized gain
(loss).
(3) Investment Advisory Fee:
The investment advisory fee is paid to Standish, Ayer & Wood, Inc. ("SA&W")
for overall investment advisory and administrative services, and general
office facilities, monthly at the annual rate of 0.25% of the Fund's
average daily net assets. The advisory agreement provides that if the total
operating expenses (excluding brokerage, taxes and extraordinary expenses)
of the Fund in any fiscal year exceed 0.50% of the Fund's average daily net
assets, the compensation due to SA&W shall be reduced by the amount of the
excess. The Trust pays no compensation directly to its trustees who are
affiliated with SA&W or to its officers, all of whom receive remuneration
for their services to the Trust from SA&W. Certain of the trustees and
officers of the Trust are directors or officers of SA&W.
(4) Purchases and Sales of Investments:
Purchases and sales of investments, other than short-term obligations were
as follows:
<TABLE>
<CAPTION>
Purchases Sales
----------- -------
<S> <C> <C>
U.S. Government Securities.......................... $ 77,812,762 $83,743,436
============ ===========
Investments (non-U.S. government securities)........ $137,968,543 $33,413,156
============ ===========
</TABLE>
(5) Shares of Beneficial Interest:
The Declaration of Trust permits the Trustees to issue an unlimited number
of full and fractional shares of beneficial interest having a par value of
one cent per share. Transactions in Fund shares were as follows:
<TABLE>
<CAPTION>
Six Months Ended
June 30, 1997 Year ended
(Unaudited) December 31, 1996
------------------ ------------------
<S> <C> <C>
Shares sold............................................................ 7,151,460 9,748,426
Shares issued to shareholders in payment of distributions declared..... 219,732 548,316
Shares redeemed........................................................ (4,715,285) (12,798,043)
--------------- ----------------
Net increase/(decrease)................................................ 2,655,907 (2,501,301)
=============== ================
</TABLE>
11
<PAGE>
Standish, Ayer 7 Wood Investment Trust
Standish Short-Term Asset Reserve Fund
Notes to Financial Statements (Unaudited)
- --------------------------------------------------------------------------------
(6) Federal Income Tax Basis of Investment Securities:
The cost and unrealized appreciation (depreciation) in value of the
investment securities owned at June 30, 1997, as computed on a federal
income tax basis, were as follows:
Aggregate Cost........................................ $237,913,603
============
Gross unrealized appreciation......................... $ 351,034
Gross unrealized depreciation......................... (446,585)
Net unrealized appreciation (depreciation)............ ------------
$ (95,551)
============
(7) Financial Instruments
In general, the following instruments are used for hedging purposes as
described below. However, these instruments may also be used to enhance
potential gain in circumstances where hedging is not involved. The nature,
risks and objectives of these investments are set forth more fully in the
Fund's Prospectus and Statement of Additional Information.
The Fund trades the following financial instruments with off-balance sheet
risk:
Options--
Call and put options give the holder the right to purchase or sell,
respectively, a security or currency at a specified price on or before a
certain date. The Fund may use options to seek to hedge against risks of
market exposure and changes in security prices, as well as to seek to
enhance returns. Writing puts and buying calls tend to increase the Fund's
exposure to the underlying instrument. Buying puts and writing calls tend
to decrease the Fund's exposure to the underlying instrument, or hedge
other Fund investments. Options, both held and written by the Fund, are
reflected in the accompanying Statement of Assets and Liabilities at market
value. The underlying face amount at value of any open purchased option is
shown in the Schedule of Investments. This amount reflects each contract's
exposure to the underlying instrument at period end. Losses may arise from
changes in the value of the underlying instruments, if there is an illiquid
secondary market, or if the counterparties do not perform under the
contracts' terms.
Premiums received from writing options which expire are treated as realized
gains. Premiums received from writing options which are exercised or are
closed are added to or offset against the proceeds or amount paid on the
transaction to determine the realized gain or loss. Realized gains and
losses on purchased options are included in realized gains and losses on
investment securities, except purchased options on foreign currency which
are included in realized gains and losses on foreign currency transactions.
If a put option purchased by the Fund is exercised, the premium reduces the
cost basis of the securities purchased by the Fund. The Fund, as writer of
an option, has no control over whether the underlying securities may be
sold (call) or purchased (put) and as a result bears the market risk of an
unfavorable change in the price of the security underlying the written
option. There were no outstanding written option contracts at June 30,
1997.
12
