[LOGO] STANDISH FUNDS(R)
Standish Group of
Equity Asset Funds
Prospectus
- ----------------------------------------------------
March 31, 1999
Standish Equity Asset Fund
Standish Small Capitalization
Equity Asset Fund
Standish Small Capitalization Equity Fund II
(Service Class Shares)
The Securities and Exchange Commission
has not approved or disapproved these
securities or determined whether this
prospectus is accurate or complete. Any
statement to the contrary is a crime.
<PAGE>
Contents
- --------------------------------------------------------------------------------
Risk/Return Summary................................3
Who may want to invest...........................3
Mutual fund risks................................3
Equity Asset Fund................................4
Small Capitalization Equity Asset Fund...........6
Small Capitalization Equity Fund II..............8
The Funds' Investments and Related Risks..........10
[GRAPHIC OMITTED] The Investment Adviser............................12
About Standish(R) ..............................12
Fund managers...................................13
Advisory services and fees......................13
Investment and Account Information................14
How to purchase shares..........................14
How to exchange shares..........................15
How to redeem shares............................15
Transaction and account policies................16
Valuation of shares.............................16
Dividends and distributions.....................16
Year 2000 issue.................................16
Fund Details......................................17
Taxes...........................................17
Master/feeder structure.........................17
The funds' service providers....................17
Financial Highlights..............................18
For More Information..............................20
Standish Group of Equity Asset Funds 2
<PAGE>
Risk/Return Summary
- --------------------------------------------------------------------------------
Standish was founded in 1933 and currently manages more than $44 billion of
assets for a broad range of clients in the U.S. and abroad.
Standish, Ayer & Wood, Inc. manages Standish Equity Asset Fund, Standish Small
Capitalization Equity Asset Fund and Standish Small Capitalization Equity Fund
II. These funds seek long-term growth of capital.
These funds are available only through account administrators that provide
omnibus accounting services for groups of individuals who beneficially own fund
shares. Omnibus accounts include pension and retirement plans as well as taxable
and tax-deferred investing programs that provide personal or account maintenance
services to groups of individuals.
Descriptions of funds begin on the next page and include more information about
each fund's key investments and strategies, principal risk factors, past
performance and expenses.
Who may want to invest
The may be appropriate for investors:
o Looking to invest over the long term and willing to ride out market swings.
o Who do not need stable income and are willing to tolerate more risk than
fixed income investments.
o Comfortable with the risks of the stock market.
Mutual fund risks
An investment in a fund is not a bank deposit and is not insured or guaranteed
by the Federal Deposit Insurance Corporation or any other government agency.
3 Standish Group of Equity Asset Funds
<PAGE>
Risk/Return Summary
- --------------------------------------------------------------------------------
Equity Asset Fund
Investment objective
Long-term growth of capital.
Key investments and strategies
The fund invests, under normal circumstances, at least 80% of assets in equity
securities of U.S. companies that appear to be undervalued relative to current
earnings growth. The fund may invest without limit in securities of foreign
companies that are listed or traded in the U.S. but not more than 10% of assets
in other foreign securities. The fund may also invest in equity index futures
contracts based primarily upon the S&P 500 Index.
How stocks are selected
The adviser focuses on individual stock selection instead of trying to predict
which industries or sectors will perform best. The adviser selects stocks for
the fund's portfolio by:
o Using a quantitative proprietary model to rank a universe of up to 1500
companies with the most liquid stocks according to these characteristics:
price/earnings ratio; consistency of earnings growth; near term reported
earnings momentum; and actual earnings relative to, and the current trend
in, earnings expectations.
o Using fundamental research and qualitative analysis to select among the
stocks ranked by the model in the top 20%. The adviser looks for companies
with strong competitive positions, high quality management and financial
strength.
The fund invests in stocks that appear to be undervalued (as measured by their
price/earnings ratios) and that may have value and/or growth characteristics.
The fund's stock selection process is designed to produce a diversified
portfolio that, relative to the S&P 500 Index shown below, has a below-average
price/earnings ratio and an above-average earnings growth trend.
Principal risks of investing in the funds
Investors could lose money on their investments in the fund or the fund could
perform less well than other possible investments if any of the following
occurs:
o The stock market goes down.
o An adverse event, such as an unfavorable earnings report, depresses the
value of a particular company's stock.
o The adviser's judgment about the attractiveness, value or potential
appreciation of a particular stock proves to be incorrect.
o Prices of foreign securities go down because of unfavorable government
actions, political, economic or market instability or the absence of
accurate information about foreign companies. A decline in the value of
foreign currencies relative to the U.S dollar will reduce the value of
securities held by the fund and denominated in those currencies.
o During periods of extreme stock market volatility, the fund has difficulty
closing out its position in equity index futures contracts or closing out
the position at a price the fund believes reflects the value of the
securities which make up the underlying index.
The fund may lose money or underperform when the market strongly favors growth
or value stocks over those that combine both characteristics.
Standish Group of Equity Asset Funds 4
<PAGE>
- --------------------------------------------------------------------------------
Total return performance
The bar chart and total return table indicate the risks of investing in the
fund. The bar chart shows changes in the performance from year to year of the
fund and an older feeder fund that invests in the same master portfolio for the
full calendar periods indicated. See "Master/feeder structure" on page 17. The
total return table shows how the fund's and the older feeder fund's average
annual returns for different calendar periods compare to those of a widely
recognized, unmanaged index of U.S. common stock prices. The performance of the
older feeder fund has been reduced to reflect the deduction of the fund's 25
basis point account administration fee. The past performance of the fund and the
older feeder fund does not necessarily indicate how the fund will perform in the
future.
Equity Asset Fund
[The following table was originally a bar chart in the printed materials.]
Calendar Year
Ended
December 31 Percent
----------- -------
1991 33.02
1992 9.25
1993 20.52
1994 -4.02
1995 37.22
1996 26.53
1997 35.94*
1998 7.09*
* The bar chart shows the performance of the older feeder fund through October
7, 1997 and Equity Asset Fund from that date to December 31, 1998.
Quarterly returns
Highest 19.18 in 4th quarter 1998
Lowest -18.73% in 3rd quarter 1998
Average annual total returns for selected
periods ended December 31, 1998
Life Inception
1 Year 5 Year of Funds Date
Equity Asset Fund* 19.45 7.09 18.80 10/8/97
S&P 500 Index 25.07 28.57 24.06 N/A
*Includes performance of the older feeder fund for the period from January 3,
1991 (inception) to October 7, 1997, adjusted to reflect Equity Asset Fund's
0.25% account administration fee.
Fees and expenses of the fund
This table describes the fees and expenses you may pay if you buy and hold
shares of the fund.
Based on fiscal year Equity Asset
ended 9/30/98 Fund
Shareholder fees (fees paid
directly from your investment) None
Annual fund operating expenses(1,2)
(expenses that are deducted
from fund assets)
Management fees 0.50%
Distribution (12b-1) fees None
Other expenses 1.74%
Account administration fee 0.25%
Total annual fund operating
expenses 2.49%
(1)Because Standish has agreed to cap the fund's operating expenses, the fund's
actual expenses were:
Management fees 0.50%
Other expenses 0.08%
Account administration fee 0.25%
Total annual fund
operating expenses 0.83%
These caps may be changed or eliminated.
(2)The table and example reflect the combined expenses of the fund and the
master fund in which it invests all its assets.
Expense example
This example is intended to help you compare the cost of investing in the fund
with the cost of investing in other mutual funds. The example assumes that:
o You invest $10,000 in the fund for the time periods indicated;
o You redeem at the end of each period;
o Your investment has a 5% return each year; and
o The fund's operating expenses have not been capped and remain the same.
Although your actual costs may be higher or lower, under these assumptions your
costs would be:
After After After After
1 year 3 years 5 years 10 years
Equity Asset Fund $252 $776 $1,326 $2,826
5 Standish Group of Equity Asset Funds
<PAGE>
Risk/Return Summary
- --------------------------------------------------------------------------------
Small Capitalization Equity Asset Fund
Investment objective
Long-term growth of capital.
Key investments and strategies
The fund invests, under normal circumstances, at least 80% of assets in stocks
of small capitalization U.S. companies that appear to be undervalued relative to
their ultimate growth potential. The fund focuses on rapidly growing, high
quality companies with total market capitalizations no greater than 75% of the
maximum capitalization of the companies included included in the Russell 2000
Growth Index. The fund looks for companies with products or services that are
leaders in their market niches. The fund may also invest in equity index futures
contracts based primarily upon the Russell 2000 Index.
How stocks are selected
The adviser focuses on individual stock selection instead of trying to predict
which industries or sectors will perform best. The adviser selects stocks for
the fund's portfolio by:
o Using fundamental research to identify and follow companies with attractive
characteristics, such as strong business and competitive positions, solid
cash flows and balance sheets, high quality management and high sustainable
growth.
o Investing in a company when the adviser's research indicates that the
company will experience accelerating revenues and expanding operating
margins, which may lead to rising earnings estimates and favorable earnings
surprises.
The fund's investment strategy may lead it to emphasize certain sectors, such as
technology, health care, business services and communications.
Principal risks of investing in the funds
Investors could lose money on their investments in the fund or the fund could
perform less well than other possible investments if any of the following
occurs:
o The stock market goes down.
o An adverse event, such as an unfavorable earnings report, depresses the
value of a particular company's stock.
o The adviser's judgment about the attractiveness, value or potential
appreciation of a particular stock proves to be incorrect.
o During periods of extreme stock market volatility, the fund has difficulty
closing out its position in equity index futures contracts or closing out
the position at a price the fund believes reflects the value of the
securities which make up the underlying index.
There is a higher risk that the fund will lose money because it invests
primarily in small capitalization stocks. Smaller companies may have limited
product lines, markets and financial resources. They may have shorter operating
histories and more volatile businesses. The prices of small capitalization
stocks, and in particular aggressive growth stocks, tend to be more volatile
than those of other stocks. In addition, it may be harder to sell these stocks,
which can reduce their selling prices.
Negative market sentiment towards, or events affecting issuers in, the
technology, health care, business services and communications sectors may
disproportionately hurt the fund's performance.
Standish Group of Equity Asset Funds 6
<PAGE>
- --------------------------------------------------------------------------------
Total return performance
The bar chart and total return table indicate the risks of investing in the
fund. The bar chart shows changes in the performance from year to year of the
fund and an older feeder fund that invests in the same master portfolio for the
full calendar periods indicated. See "Master/feeder structure" on page 17. The
total return table shows how the fund's and the older feeder fund's average
annual returns for different calendar periods compare to those of a widely
recognized, unmanaged index of U.S. common stock prices. The performance of the
older feeder fund has been reduced to reflect the deduction of the fund's 25
basis point account administration fee. The past performance of the fund and the
older feeder fund does not necessarily indicate how the fund will perform in the
future.
Small Capitalization Equity Asset Fund
[The following table was originally a bar chart in the printed materials.]
Calendar Year
Ended
December 31 Percent
----------- -------
1991 64.27
1992 9.46
1993 27.91
1994 -3.66
1995 29.52
1996 17.07
1997 14.87
1998 0.99*
* The bar chart shows the performance of the older feeder fund through March 31,
1998 and of Small Capitalization Equity Asset Fund from that date to December
31.
Quarterly returns
Highest 28.33 in 4th quarter 1991
Lowest -23.30% in 3rd quarter 1998
Average annual total returns for selected
periods ended December 31, 1998
Life Inception
1 Year 5 Year of Funds Date
Small Cap Equity Asset Fund* 0.99 11.07 18.39% 4/1/98
Russell 2000 Growth Index 1.24 10.22 13.80% N/A
* Includes performance of the older fund for the period from September 1, 1990
(inception) to March 31, 1998, adjusted to reflect Small Cap Equity Asset Fund's
0.25% account administration fee.
Fees and expenses of the fund
This table describes the fees and expenses you may pay if you buy and hold
shares of the fund.
Based on fiscal year Small
ended 9/30/98 Capitalization
Equity Asset Fund
Shareholder fees (fees paid
directly from your investment) None
Annual fund operating expenses(1,2)
(expenses that are deducted
from fund assets)
Management fees 0.60%
Distribution (12b-1) fees None
Other expenses 0.79%
Account administration fee 0.25%
Total annual fund operating
expenses 1.64%
(1)Because Standish has agreed to cap the fund's operating expenses, the fund's
actual expenses were:
Management fees 0.60%
Other expenses 0.12%
Account administration fee 0.00%
Total annual fund operating expenses 0.72%
These caps may be changed or eliminated.
(2)The table and example reflect the combined expenses of the fund and the
master fund in which it invests all its assets.
Expense example
This example is intended to help you compare the cost of investing in the fund
with the cost of investing in other mutual funds. The example assumes that:
o You invest $10,000 in the fund for the time periods indicated;
o You redeem at the end of each period;
o Your investment has a 5% return each year; and
o The fund's operating expenses have not been capped and remain the same.
Although your actual costs may be higher or lower, under these assumptions your
costs would be:
After After After After
1 year 3 years 5 years 10 years
Small Cap Equity Asset Fund $167 $517 $892 $1,944
7 Standish Group of Equity Asset Funds
<PAGE>
Risk/Return Summary
- --------------------------------------------------------------------------------
Small Capitalization Equity Fund II
Investment objective
Long-term growth of capital.
Key investments and strategies
The fund invests, under normal circumstances, at least 80% of assets in equity
securities of small cap U.S. companies. The fund looks for rapidly growing, high
quality companies, especially those involved with value added products or
services. The fund may also invest in equity index futures contracts based
primarily on the Russell 2000 Index.
Market capitalization
The fund focuses on companies with total market capitalizations within the range
of capitalizations of the companies included in the Russell 2000 Growth Index.
How stocks are selected
The adviser engages in individual stock selection instead of trying to predict
which industries or sectors will perform best. The adviser selects stocks for
the fund's portfolio by:
o Using fundamental research to identify and follow companies with attractive
characteristics, such as strong business and competitive positions, solid
cash flows and balance sheets, high quality management and high sustainable
growth.
o Investing in a company when the adviser's research indicates that the
company will experience accelerating revenues and expanding operating
margins, which may lead to rising earnings estimates and favorable earnings
surprises.
The fund's investment strategy may lead it to emphasize certain sectors, such as
technology, health care, business services and communications.
Principal risks of investing in the funds
Investors could lose money on their investments in the fund or the fund could
perform less well than other possible investments if any of the following
occurs:
o The stock market goes down.
o Small cap stocks are out of favor with the market.
o Negative market sentiment towards, or events affecting issuers in, the
technology, health care, business services and communications sectors
disproportionately hurt the fund's performance.
o An adverse event, such as an unfavorable earnings report, depresses the
value of a particular company's stock.
o The adviser's judgment about the attractiveness, value or potential
appreciation of a particular company's stock proves to be incorrect.
o During periods of extreme stock market volatility, the fund has difficulty
closing out its position in equity index futures contracts or closing out
the position at a price the fund believes reflects the value of the
securities which make up the underlying index.
Risks of small cap companies
There is a risk that the fund will lose money because it invests primarily in
small cap stocks. Smaller companies may have limited product lines, markets and
financial resources. They may have shorter operating histories and more volatile
businesses. The prices of small cap stocks, and in particular aggressive growth
stocks, tend to be more volatile than the prices of other stocks. In addition,
it may be harder to sell these stocks, which can reduce their selling prices.
Standish Group of Equity Asset Funds 8
<PAGE>
- --------------------------------------------------------------------------------
Total return performance
The bar chart and total return table indicate the risks of investing in the
fund. The bar chart shows changes in the performance from year to year of the
fund's Institutional Class shares for the full calendar periods indicated. The
total return table shows how average annual returns of Institutional Class
shares for different calendar periods compare to those of a widely recognized
unmanaged index of stock prices. Past performance does not indicate how the fund
will perform in the future.
Small Capitalization Equity Fund II
(Institutional Class)*
[The following table was originally a bar chart in the printed materials.]
Calendar Year
Ended
December 31 Percent
----------- -------
1997 30.82
1998 14.30
Quarterly returns
Highest 27.80 in 2th quarter 1997
Lowest -18.73% in 3rd quarter 1998
*Institutional Class shares are not offered in this prospectus, but Service
Class shares would have had substantially similar performance over all periods
shown. Institutional Class shares and Service Class shares are invested in the
same portfolio of securities and annual returns differ only to the extent that
each class has different expenses.
Average annual total returns for selected
periods ended December 31, 1998
Life of
Institutional Inception
1 Year Class Date
Small Cap Equity Fund II 14.30 22.42 12/23/96
(Institutional Class)
Russell 2000 Growth Index 1.24 7.86 n/a
Fees and expenses of the fund
This table describes the fees and expenses you may pay if you buy and hold
shares of the fund. Expenses are based on estimates for the current fiscal year.
Small
Capitalization
Equity Fund II
(Service Class)
Shareholder fees (fees paid
directly from your investment) None
Annual fund operating expenses(1,2)
(expenses that are deducted
from fund assets)
Management fees 0.60%
Distribution (12b-1) fees None
Other expenses 1.34%
Service fees 0.25%
Total annual fund operating
expenses 2.19%
(1)Because Standish has agreed to cap the fund's operating expenses, the fund's
estimated actual expenses would be:
Management fees 0.55%
Other expenses 0.45%
Service fees 0.25%
Total annual fund
operating expenses 1.25%
These caps may be changed or eliminated.
(2)The table and example reflect the combined expenses of the fund and the
master fund in which it invests all its assets.
Expense example
This example is intended to help you compare the cost of investing in the fund
with the cost of investing in other mutual funds. The example assumes that:
o You invest $10,000 in the fund for the time periods indicated;
o You redeem at the end of each period;
o Your investment has a 5% return each year; and
o The fund's operating expenses have not been capped and remain the same.
Although your actual costs may be higher or lower, under these assumptions your
costs would be:
After After After After
1 year 3 years 5 years 10 years
Small Cap
Equity Fund II
(Service Class) $222 $685 $1,175 $2,524
9 Standish Group of Equity Asset Funds
<PAGE>
The Funds' Investments and Related Risks
- --------------------------------------------------------------------------------
The funds can invest in all types of equity securities.
Equity investments Equity securities include exchange-traded and
over-the-counter (OTC) common and preferred stocks, warrants, rights, equity
index futures contracts, investment grade convertible securities, depository
receipts and shares, trust certificates, limited partnership interests, shares
of other investment companies and real estate investment trusts and equity
participations. Small Capitalization Equity Asset Fund and Small Capitalization
Equity Fund II may invest up to 20% of assets in companies with capitalizations
of more than $700 million and $1.5 million, respectively.
Foreign securities Equity Asset Fund may invest without limit in foreign
securities traded in a U.S. market, but only 10% of assets in foreign securities
traded outside the U.S. Small Capitalization Equity Asset Fund and Small
Capitalization Equity Fund II may invest up to 15% of assets in foreign
securities, including those of emerging market issuers, regardless of where they
are traded.
Foreign securities involve the risks of adverse foreign government actions,
political and economic instability and the lack of adequate and accurate
information. Foreign securities are sometimes less liquid and harder to value
than securities of U.S. issuers. These risks are more severe for securities of
issuers in emerging market countries. In Europe, Economic and Monetary Union
(EMU) and the introduction of a single currency (euro) began in 1999. There are
political and economic risks associated with EMU, which may increase the
volatility of a fund's European investments and present valuation problems.
Defensive investing Each fund may depart from its principal investment
strategies in response to adverse market, economic or political conditions by
taking temporary defensive positions in all types of money market and short-term
debt securities. If a fund takes a temporary defensive position it may be unable
for a time to achieve its investment objective.
Derivative contracts Each fund may, but is not required to, use derivative
contracts for any of the following purposes:
o To hedge against adverse changes--caused by changing interest rates, stock
market prices or currency exchange rates--in the market value of securities
held by or to be bought for a fund.
o As a substitute for purchasing or selling securities.
o To enhance a fund's potential gain in non-hedging situations.
A derivative contract will obligate or entitle a fund to deliver or receive an
asset or a cash payment that is based on the change in value of a designated
security, currency or index. Even a small investment in derivative contracts can
have a big impact on a portfolio's interest rate, stock market and currency
exposure. Therefore, using derivatives can disproportionately increase portfolio
losses and reduce opportunities for gains when interest rates, stock prices or
currency rates are changing. A fund may not fully benefit from or may lose money
on derivatives if changes in their value do not correspond accurately to changes
in the value of the fund's portfolio holdings.
Counterparties to OTC derivative contracts present the same types of credit risk
as issuers of fixed income securities. Derivatives can also make a fund's
portfolio less liquid and harder to value, especially in declining markets.
Standish Group of Equity Asset Funds 10
<PAGE>
- --------------------------------------------------------------------------------
Fixed income securities Equity Asset Fund may invest up to 20% of assets in high
grade fixed income securities. The fund's fixed income securities may be of any
maturity or duration. Small Capitalization Equity Asset Fund and Small
Capitalization Equity Fund II may invest up to 20% of assets in high grade fixed
income securities with remaining maturities of three years or less. Each fund
may invest up to 5% of assets in securities rated, or of comparable quality to
those rated, in the lowest long-term investment grade rating category.
The funds' fixed income securities may have all types of interest rate payment
and reset terms. These securities may be issued by the U.S. government or any of
its agencies, foreign governments or their subdivisions and U.S. and foreign
companies.
Credit quality and risk Securities are investment grade or high grade if:
o They are rated, respectively, in one of the top four or top three long-term
rating categories of a nationally recognized statistical rating
organization.
o They have received a comparable short-term or other rating.
o They are unrated securities that the adviser believes to be of comparable
quality.
The value of a fund's fixed income securities may go down if:
o Interest rates rise, which will make the prices of fixed income securities
go down.
o The issuer of a security owned by the fund has its credit rating downgraded
or defaults on its obligation to pay principal and/or interest.
Impact of high portfolio turnover Each fund may engage in active and frequent
trading to achieve its principal investment strategies. This may lead to the
realization and distribution to shareholders of higher capital gains, which
would increase their tax liability. Frequent trading also increases transaction
costs, which could detract from a fund's performance.
Investment objective Each fund's investment objective may be changed by the
fund's trustees without shareholder approval.
11 Standish Group of Equity Asset Funds
<PAGE>
The Investment Adviser
- --------------------------------------------------------------------------------
Standish offers a broad array of investment services that include management of
domestic and international equity and fixed income portfolios.
About Standish
Standish was established in 1933 and manages more than $44 billion in assets for
institutional and individual investors in the U.S. and abroad. By choice,
Standish has remained a privately held investment management firm over its more
than 65 year history. Ownership is shared by a limited number of employees, who
are the directors of the firm. Standish believes the firm's organizational
structure has helped preserve an entrepreneurial orientation, which is
responsible for its continued commitment to investment performance.
Standish believes that experience is a prerequisite for long-term investment
success. But experience alone is insufficient in a world of complex new
securities and rapidly changing technologies. To keep pace with today's
investment markets, Standish has built a staff which balances enthusiasm and
intellectual curiosity with professional and technical expertise. This
combination of experience and enthusiasm, tradition and innovation has worked
well and serves as a blueprint for future growth at Standish.
Standish relies on a combination of traditional fundamental research, which is
the product of a seasoned staff of specialists, and innovative quantitative
analysis, which uses sophisticated computer-based models to help identify
potentially attractive securities in equity and fixed income markets. In each
market, Standish seeks to discover opportunity by attention to detail and
adherence to a strict set of disciplines. Standish uses fundamental research to
uncover a security sufficiently complex as to have been misvalued by traditional
analysis. Standish uses sophisticated quantitative techniques, which may help
identify persistent market inefficiencies that can be exploited by its portfolio
managers.
Standish strives to balance individual insight with the shared wisdom of the
investment team. By combining technology and an experienced research staff,
Standish has built a powerful internal network of overlapping resources.
Standish Group of Equity Asset Funds 12
<PAGE>
- --------------------------------------------------------------------------------
Fund managers
- --------------------------------------------------------------------------------
Fund Fund managers Positions during past
five years
Equity Asset Fund Ralph S. Tate Vice president and, since
1995, managing director of
Standish
David H. Cameron Vice president and director of
Standish
Small Capitalization Nicholas S. Battelle Vice president and director
Equity Asset Fund of Standish
Small Capitalization Nicholas S. Battelle Vice president and director
Equity Fund II of Standish
Andrew L. Beja Vice president and senior
analyst of Standish since
March 1996. Previously a
vice president and analyst
at Advest, Inc.
- --------------------------------------------------------------------------------
Advisory services and fees
Standish provides each fund with portfolio management and investment research
services, places orders to buy and sell each fund's portfolio securities and
manages each fund's business affairs. For the year ended September 30, 1998,
each fund paid an advisory fee for these services. The adviser agreed to limit
each fund's total annual operating expenses (excluding brokerage commissions,
taxes and extraordinary expenses) and the payment was less than the fund's
contractual advisory fee. These agreements are temporary and may be terminated
or changed at any time.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
Annual Advisory Fee Rates
(as a percentage of the fund's average net assets)
Actual advisory fee paid Contractual advisory fee Current expense limitation
<S> <C> <C> <C>
Equity Asset Fund 0.50% 0.50% 0.96%
Small Capitalization 0.60% 0.60% 0.99%
Equity Asset Fund
Small Capitalization Equity N/A 0.60% 1.25%
Fund II (Service Class)
- ----------------------------------------------------------------------------------------------------------
</TABLE>
Investment Adviser
Standish, Ayer & Wood, Inc.
One Financial Center
Boston, Massachusetts 02111-2662
13 Standish Group of Equity Asset Funds
<PAGE>
Investment and Account Information
- --------------------------------------------------------------------------------
How to purchase shares
Who may purchase fund shares Only account administrators for omnibus accounts
may purchase the funds' shares. Individuals may not purchase shares directly
from the funds.
o If you are an individual investing assets in a retirement plan sponsored by
your employer, contact your employer to find out how to purchase fund
shares.
o If you are an individual investing assets in a self-administered retirement
plan, contact your account administrator to find out how to purchase fund
shares.
Minimum initial investment for each fund is $100,000 per omnibus account. This
minimum does not apply to investments by individual participants in an omnibus
account. Also, this minimum does not apply to omnibus accounts that use Standish
or one its affiliates as their investment adviser.
All orders to purchase shares received and accepted by the distributor or
certain account administrators before the close of regular trading on the New
York Stock Exchange will be executed at that day's share price if payment is
received by the funds' custodian by a specified deadline on the next business
day. Orders accepted after that time will be executed at the next business day's
price. Financial intermediaries acting on a purchaser's behalf are responsible
for transmitting orders to the distributor or its agent by the specified
deadline. All orders must be in good form and accompanied by payment. Each fund
reserves the right to reject purchase orders or to stop offering its shares
without notice to shareholders.
Account administrators should:
o Open an account with the funds by sending to the distributor a completed
original account application.
o Transmit electronically or by telephone to the distributor the name of the
fund, the dollar amount of shares to be purchased and the applicable account
number.
o Wire the purchase price in immediately available funds not later than 3:00
p.m. eastern time on the next business day.
The distributor's address is:
Standish Fund Distributors, L.P.
P.O. Box 1407
Boston, Massachusetts 02205-1407
Tel: 1-800-221-4795
Fax: 617-350-0042
Email: [email protected]
Standish Group of Equity Asset Funds 14
<PAGE>
- --------------------------------------------------------------------------------
How to exchange shares
Account administrators may exchange shares of a fund (except Small
Capitalization Equity Fund II) for shares of any other Standish fund, if the
registration of both accounts is identical. Account administrators may exchange
Service Class shares of Small Capitalization Equity Fund II for Service Class
shares of any other Standish fund, if the registration of both accounts is
identical. Individuals should contact their employers or account administrators
to find out how to exchange fund shares. A fund may refuse any exchange order
and may alter, limit or suspend its exchange privilege on 60 days' notice.
Exchange requests will not be honored until the distributor receives payment for
the exchanged shares (up to 3 business days). An exchange involves a taxable
redemption of shares surrendered in the exchange.
By mail
Account administrators should:
o Send a letter of instruction to the distributor signed by each registered
account owner.
o Provide the name of the current fund, the fund to exchange into, the class
of shares (if applicable) and dollar amount to be exchanged.
o Provide both account numbers.
o Signature guarantees may be required.
By telephone
Account administrators should:
o If the account has telephone privileges, call the distributor.
o Provide the name of current fund, fund to exchange into and dollar amount to
be exchanged.
o Provide both account numbers.
o The distributor may ask for identification and all telephone transactions
may be recorded.
How to redeem shares
All orders to redeem shares received by the distributor or its agent before 4:00
p.m. eastern time will be executed at that day's share price. Orders accepted
after 4:00 p.m. will be executed at the next business day's price. All
redemption orders must be in good form. Each fund has the right to suspend
redemptions of shares and to postpone payment of proceeds for up to seven days,
as permitted by law. Individuals should contact their employers or account
administrators to find out how to redeem fund shares.
By mail
Account administrators should:
o Send a letter of instruction to the distributor signed by each registered
account owner.
o State the name of the fund, the class of shares (if applicable) and number
of shares or dollar amount to be sold.
o Provide the account number.
o Signature guarantees may be required (see page 16).
By telephone
Account administrators should:
o If the account has telephone privileges, call the distributor.
o Proceeds will be mailed by check payable to the shareholder of record to the
address, or wired to the bank as directed, on the account application.
o The distributor may ask for identification and all telephone transactions
may be recorded.
15 Standish Group of Equity Asset Funds
<PAGE>
Investment and Account Information
- --------------------------------------------------------------------------------
Transaction and account policies
Accounts with low balances. If an omnibus account falls below $50,000 as a
result of redemptions (and not because of performance), the distributor may
notify the account administrator that omnibus account participants should
increase the size of the account to $50,000 within 30 days. If the omnibus
account does not increase to $50,000 the distributor may redeem the account at
net asset value and remit the proceeds to the administrator.
In-kind purchases and redemptions. Securities held in an omnibus account may be
used to purchase shares of a fund. The adviser will determine if the securities
are consistent with the fund's objective and policies. If accepted, the
securities will be valued the same way the fund values securities it already
owns. A fund may make payment for redeemed shares wholly or in part by giving
the investor portfolio securities. A redeeming shareholder will pay transaction
costs to dispose of these securities.
Signature guarantees. A signature guarantee may be required for any written
request to sell or exchange shares, or to change account information for
telephone transactions.
The distributor will accept signature guarantees from:
o members of the STAMP program or the Exchange's Medallion Signature Program
o a broker or securities dealer
o a federal savings, cooperative or other type of bank
o a savings and loan or other thrift institution
o a credit union
o a securities exchange or clearing agency
A notary public cannot provide a signature guarantee.
Valuation of shares
Each fund offers its shares at the NAV per share of the fund or class, if more
than one class is offered. Each fund calculates its NAV once daily as of the
close of regular trading on the New York Stock Exchange (generally at 4:00 p.m.,
New York time) on each day the exchange is open. Small Capitalization Equity
Fund II calculates the NAV of each class separately. If the exchange closes
early, the funds accelerate calculation of NAV and transaction deadlines to that
time.
Each fund values the securities in its portfolio on the basis of market
quotations and valuations provided by independent pricing services. If
quotations are not readily available, or the value of a security has been
materially affected by events occurring after the closing of a foreign exchange,
each fund may value its assets by a method that the trustees believe accurately
reflects fair value. A fund that uses fair value to price securities may value
those securities higher or lower than a fund that uses market quotations.
Foreign markets may be open when U.S. markets are closed and the value of
foreign securities owned by a fund may change on days when shareholders cannot
purchase or redeem shares.
Dividends and distributions
Each fund intends to distribute all or substantially all of its net investment
income and realized capital gains, if any, for each taxable year. Small
Capitalization Equity Asset Fund declares and pays dividends, if any, from net
investment income semiannually and distributes capital gains annually. Equity
Asset Fund declares and pays dividends from net investment income quarterly and
distributes capital gains annually. Most of a fund's distributions will be from
capital gains. All dividends and capital gains are reinvested in shares of the
fund that paid them unless the shareholder elects to receive them in cash.
Year 2000 issue
The funds' securities trades, pricing and accounting services and other
operations could be adversely affected if the computer systems of the adviser,
distributor, custodian and transfer agent were unable to recognize dates after
1999. The costs of addressing the Year 2000 issue may also adversely affect the
issues of individual securities held by the funds. The adviser and other service
providers have told the funds that they are taking action to prevent, and do not
expect the funds to suffer from, material year 2000 problems.
Standish Group of Equity Asset Funds 16
<PAGE>
Fund Details
- --------------------------------------------------------------------------------
Taxes
- --------------------------------------------------------------------------------
Transactions Federal Tax Status
(for taxable investors only)
Sales or exchanges of shares. Usually capital gain or loss. Tax
rate depends on how long shares are
held.
Distributions of long-term capital gain. Taxable as long-term capital gain.
Distributions of short term capital gain. Taxable as ordinary income.
Dividends from net investment income. Taxable as ordinary income.
- --------------------------------------------------------------------------------
Every January, the funds provide information to certain account administrators
about the funds' dividends and distributions, which are taxable even if
reinvested, and about the accounts' redemptions during the previous calendar
year. Any account administrator who does not provide the funds with a correct
taxpayer identification number and required certification may be subject to
federal backup withholding tax.
Taxable investors should generally avoid investing in a fund shortly before an
expected dividend or capital gain distribution. Otherwise, an investor may pay
taxes on dividends or distributions that are economically equivalent to a
partial return of the shareholder's investment.
Investors should consult their tax advisers about their own particular tax
situations.
Master/feeder structure
Each fund is a "feeder" fund that invests exclusively in a corresponding
"master" portfolio with identical investment objectives. Except where indicated,
this prospectus uses the term "fund" to mean each feeder fund and its master
portfolio taken together. The master portfolio may accept investments from
multiple feeder funds, which bear the master portfolio's expenses in proportion
to their assets.
Each feeder fund and its master portfolio expect to maintain consistent
investment objectives, but if they do not, the fund will withdraw from the
master portfolio, receiving either cash or securities in exchange for its
interest in the master portfolio. The fund's trustees would then consider
whether the fund should hire its own investment adviser, invest in a different
master portfolio, or take other action.
The funds' service providers
Principal Underwriter
Standish Fund Distributors, L.P.
Custodian, Transfer Agent and Fund Accountant
Investors Bank & Trust Company
Independent Accountants
PricewaterhouseCoopers LLP
Legal Counsel
Hale and Dorr LLP
17 Standish Group of Equity Asset Funds
<PAGE>
Financial Highlights
- --------------------------------------------------------------------------------
The financial highlights tables for Equity Asset Fund and Small Capitalization
Equity Asset Fund are intended to help shareholders understand the funds'
financial performance for the past five years, or less if a fund has a shorter
operating history. Certain information reflects financial results for a single
fund share. Total returns represent the rate that a shareholder would have
earned on an investment in a fund (assuming reinvestment of all dividends and
distributions).
The information was audited by PricewaterhouseCoopers LLP, independent
accountants, whose reports, along with the funds' financial statements, are
included in the funds' annual reports (available upon request). Service Class
shares of Small Capitalization Equity Fund II were first offered to the public
on March 31, 1999 and no financial highlights are available.
Equity Asset Fund
For the period
October 8, 1997(1) to
For the fiscal year ended September 30: September 30, 1998
Net asset value--beginning of period $20.00
------
Income from investment operations
Net investment income*,(3) 0.05
Net realized and unrealized gain (loss) (2.42)
------
Total from investment operations (2.37)
Less distributions declared to shareholders
From net investment income (0.12)
------
Total distributions declared to shareholders (0.12)
------
Net asset value--end of period $17.51
======
Total return (11.66%)
Ratios (to average daily net assets)/Supplemental data
Net assets at end of period (000 omitted) $8,799
Expenses(2) 0.83%(4)
Net investment income(2) 0.46%(4)
-------------------------------
*The adviser voluntarily limited the fund's expenses. Had this action not been
taken, the net investment income per share and the ratios would have been:
Net investment income (loss) per share ($0.14)
Ratios (to average net assets)
Expenses(3) 2.49%(4)
Net investment income (loss)(3) (1.20%)(4)
(1)Commencement of operations.
(2)Calculated based on average shares outstanding.
(3)Includes the fund's share of Standish Equity Portfolio's allocated
expenses for the period from October 8, 1997 to September 30, 1998.
(4)Computed on an annualized basis.
Standish Group of Equity Asset Funds 18
<PAGE>
Financial Highlights
- --------------------------------------------------------------------------------
Small Capitalization Equity Asset Fund
For the period
April 1, 1998(1) to
September 30, 1998(4)
Net asset value--beginning of period $20.00
------
Income from investment operations
Net investment income/(loss)*,(2) (0.05)
Net realized and unrealized gain (loss) (5.76)
------
Total from investment operations (5.81)
------
Less distributions declared to shareholders
Total distributions declared to shareholders --
------
Net asset value--end of period $14.19
======
Total return (29.05%)
Ratios (to average daily net assets)/Supplemental data
Net assets at end of period (000 omitted) $6,723
Expenses*,(2) 0.72%(3)
Net investment income/(loss)(3) (0.53%)(3)
-------------------------------
*The adviser voluntarily limited the fund's expenses. Had this action not been
taken, the net investment income per share and the ratios would have been:
Net investment income (loss) per share ($0.13)(3)
Ratios (to average net assets)
Expenses 1.64%(3)
Net investment income (loss) (1.45%)(3)
(1)Commencement of operations.
(2)Includes the fund's share of the Standish Small Capitalization Equity
Portfolios allocation of expenses for the period from April 1, 1998 to
September 30, 1998.
(3)Computed on an annualized basis.
(4)Calculated based on average shares outstanding.
19 Standish Group of Equity Asset Funds
<PAGE>
For More Information
- --------------------------------------------------------------------------------
Standish, Ayer & Wood, Inc. is an independent investment counseling firm that
has been managing assets for institutional investors and high net worth
individuals, as well as mutual funds, for more than 65 years. Standish offers a
broad array of investment services that includes management of domestic and
international equity and fixed income portfolios.
For investors who want more information about the Standish group of equity asset
funds, the following documents are available free upon request.
Annual/Semiannual Reports
Additional information about the funds' investments is available in the funds'
annual and semiannual reports to shareholders. Each fund's annual report
contains a discussion of the market conditions and investment strategies that
significantly affected the fund's performance during its last fiscal year.
Statement of Additional Information (SAI)
The SAI provides more detailed information about the funds and is incorporated
into this prospectus by reference.
Investors can get free copies of reports and SAIs, request other information and
discuss their questions about the funds by contacting the funds at:
Standish Funds
P.O. Box 1407
Boston, MA 02205-1407
Telephone: 1-800-729-0066
Email:
[email protected]
Internet:
http://www.standishfunds.com
Investors can review the funds' reports and SAIs at the Public Reference Room of
the Securities and Exchange Commission. Investors can get text-only copies:
o For a fee, by writing to or calling the Public Reference Room of the
Commission, Washington, D.C. 20549-6009 Telephone: 1-800-SEC-0330
o Free from the Commission's Internet website at http://www.sec.gov
[LOGO] STANDISH FUNDS(R)
One Financial Center
Boston, MA 02111-2662
(800) SAW-0066
Investment Company Act
file number (811-4813)
99-015
<PAGE>
March 31, 1999
[STANDISH LOGO]
STANDISH, AYER & WOOD INVESTMENT TRUST
One Financial Center
Boston, Massachusetts 02111
(800) 729-0066
STATEMENT OF ADDITIONAL INFORMATION
Standish Group of Equity Asset Funds
Standish Equity Asset Fund
Standish Small Capitalization Equity Asset Fund
Standish Small Cap Equity Fund II Service Class
This combined Statement of Additional Information (SAI) is not a
prospectus. The SAI expands upon and supplements the information contained in
the combined prospectus dated January 28, 1999, as amended and/or supplemented
from time to time, of Standish Equity Asset Fund (Equity Asset Fund), Standish
Small Capitalization Equity Asset Fund (Small Cap Asset Fund) and Standish Small
Cap Equity Fund II (Small Cap II Fund) Service Class, each a separate investment
series of Standish, Ayer & Wood Investment Trust (Trust).
This SAI should be read in conjunction with the funds' prospectus.
Additional information about each fund's investments is available in the funds'
annual and semi-annual reports to shareholders. Investors can get free copies of
reports and the prospectus, request other information and discuss their
questions about the funds by contacting the funds at the phone number above.
Each fund's financial statements which are included in the 1998 annual reports
to shareholders are incorporated by reference into this SAI.
--------------------------------------
Contents
Investment Objectives and Policies............................................ 2
Description of Securities and Related
Risks...................................................................... 3
Investment Techniques and Related
Risks.................................................................... 12
Investment Restrictions...................................................... 19
Calculation of Performance Data.............................................. 22
Management................................................................... 24
Service Plan................................................................. 30
Purchase and Redemption of Shares............................................ 32
Portfolio Transactions....................................................... 32
Determination of Net Asset Value............................................. 33
The Funds and Their Shares................................................... 34
The Portfolio and Its Investors.............................................. 35
Taxation..................................................................... 36
Additional Information....................................................... 40
Experts and Financial Statements............................................. 41
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The prospectus describes the investment objective and policies of each
fund. The following discussion supplements the description of the funds'
investment policies in the prospectus.
Master/Feeder Structure. Equity Asset Fund invests all of its investible
assets in Standish Equity Portfolio (the "Equity Portfolio"). Small Cap Asset
Fund invests all of its investible assets in Standish Small Capitalization
Equity Portfolio (the "Small Cap Portfolio") and Small Cap II Fund invests all
of its investible assets in Standish Small Capitalization Equity Portfolio II
(the "Small Cap II Portfolio"). These funds are sometimes referred to in this
SAI as the feeder funds. Each Portfolio is a series of the Standish, Ayer and
Wood Master Portfolio (the "Portfolio Trust"), an open-end management investment
company. Standish, Ayer and Wood, Inc. ("Standish" or the "adviser") is the
investment adviser to Equity, Small Cap and Small Cap II Portfolios. Each
Portfolio has the same investment objective and restrictions as its
corresponding fund. Because the feeder funds invest all of their investable
assets in their corresponding Portfolios, the description of each fund's
investment policies, techniques, specific investments and related risks that
follows also applies to the corresponding Portfolio.
In addition to these feeder funds, other feeder funds may invest in
these Portfolios, and information about the other feeder funds is available from
Standish. The other feeder funds invest in the Portfolios on the same terms as
the funds and bear a proportionate share of the Portfolios' expenses. The other
feeder funds may sell shares on different terms and under a different pricing
structure than the funds, which may produce different investment results.
There are certain risks associated with an investment in a master-feeder
structure. Large scale redemptions by other feeder funds in a Portfolio may
reduce the diversification of a Portfolio's investments, reduce economies of
scale and increase a Portfolio's operating expenses. If the Portfolio Trust's
Board of Trustees approves a change to the investment objective of a Portfolio
that is not approved by the Trust's Board of Trustees, a fund would be required
to withdraw its investment in the Portfolio and engage the services of an
investment adviser or find a substitute master fund. Withdrawal of a fund's
interest in its Portfolio, which may be required by the Trust's Board of
Trustees without shareholder approval, might cause the fund to incur expenses it
would not otherwise be required to pay.
If a fund is requested to vote on a matter affecting the Portfolio in
which it invests, the fund will call a meeting of its shareholders to vote on
the matter. The fund will then vote on the matter at the meeting of the
Portfolio's investors in the same proportion that the fund's shareholders voted
on the matter. The fund will vote those shares held by its shareholders who did
not vote in the same proportion as those Fund shareholders who did vote on the
matter. A majority of the Trustees who are not "interested persons" (as defined
in the Investment Company Act of 1940, as amended (the "1940 Act")) of the Trust
or the Portfolio Trust, as the case may be, have adopted procedures reasonably
appropriate to deal with potential conflicts of interest arising from the fact
that the same individuals are trustees of the Trust and of the Portfolio Trust.
Suitability. None of the funds is intended to provide an investment
program meeting all of the requirements of an investor. Notwithstanding each
fund's ability to spread risk by holding securities of a number of portfolio
companies, shareholders should be able and prepared to bear the risk of
investment losses which may accompany the investments contemplated by the funds.
-2-
<PAGE>
Equity Asset Fund
Additional Investment Information. Under normal circumstances, at least
80% of Equity Asset Fund's total assets are invested in a diversified portfolio
of equity and equity-related securities. The fund may invest in equity
securities of foreign issuers that are listed on a U.S. securities exchange or
traded in the U.S. OTC market, but will not invest more than 10% of its total
assets in such securities that are not so listed or traded. The fund may also,
to a limited extent, invest in debt securities and preferred stocks that are
convertible into, or exchangeable for, common stocks. Generally, such securities
will be rated, at the time of investment, Aaa, Aa or A by Moody's Investors
Service, Inc. ("Moody's") or AAA, AA or A by Standard & Poor's Ratings Group
("Standard & Poor's"), Duff and Phelps ("Duff") or Fitch IBCA International
("Fitch") or, if unrated, will be determined by the adviser to be of comparable
credit quality. Up to 5% of the fund's total assets invested in convertible debt
securities and preferred stocks may be rated, at the time of investment, Baa by
Moody's or BBB by Standard & Poor's, Duff or Fitch or, if unrated, determined by
the adviser to be of comparable credit quality.
Small Capitalization Equity Asset Fund
Additional Investment Information. Under normal circumstances, at least
80% of Small Cap Asset Fund's total assets are invested in a diversified
portfolio of equity and equity-related securities of companies that, at the time
of purchase of the security, have "total market capitalizations" no greater than
75% of the maximum market capitalization of the companies included in the
Russell 2000 Growth Index, updated monthly. The fund may invest in securities of
larger, more mature companies, provided that such investments do not exceed 20%
of the fund's total assets. The fund may participate in initial public offerings
for previously privately held companies which are expected to have market
capitalizations no greater than 75% of the maximum market capitalization of the
companies included in the Russell 2000 Growth Index, updated monthly, after the
consummation of the offering, and whose securities are expected to be liquid
after the offering. The fund may also invest up to 15% of its total assets in
equity and equity-related securities of foreign issuers, including issuers
located in emerging markets.
Small Cap II Fund
Additional Investment Information. Under normal circumstances, at least
80% of Small Cap II Fund's total assets are invested in equity and
equity-related securities of companies that, at the time of purchase of the
security, have "total market capitalizations" within the range of
capitalizations of the companies included in the Russell 2000 Growth Index,
updated monthly. Small Cap II Fund may invest in securities of larger, more
mature companies, provided that such investments do not exceed 20% of the fund's
total assets. The fund may participate in initial public offerings for
previously privately held companies which are generally expected to have market
capitalizations within the range of market capitalizations of the companies
included in the Russell 2000 Growth Index, updated monthly, after the
consummation of the offering, and whose securities are expected to be liquid
after the offering. The fund may also invest up to 15% of its total assets in
equity and equity-related securities of foreign issuers, including issuers
located in emerging markets.
DESCRIPTION OF SECURITIES AND RELATED RISKS
General Risks of Investing
The funds invest primarily in equity and equity-related securities and
are subject to the risks associated with investments in such securities. Because
investing in equity and equity-related securities is the principal investment
strategy for each of the funds, the risks associated with these investments are
described in the prospectus. The funds are also subject to the risks associated
with
-3-
<PAGE>
direct investments in foreign securities and, to a lesser degree, to the risks
associated with investments in fixed income securities.
Investing in Foreign Securities. Small Cap Asset Fund and Small Cap II
Fund may invest up to 15% of their total assets in foreign securities, including
securities of foreign issuers that trade on a U.S. exchange or in the U.S. OTC
market. Equity Asset Fund may invest without limit in foreign securities which
trade on a U.S. exchange or in the U.S. OTC market, but may not invest more than
10% of its total assets in foreign securities which are not so listed or traded.
Investors should understand that the expense ratios of the funds may be higher
than that of investment companies investing exclusively in domestic securities
because of the cost of maintaining the custody of foreign securities.
Investing in the securities of foreign issuers involves risks that are
not typically associated with investing in U.S. dollar-denominated securities of
domestic issuers. Investments in foreign issuers may be affected by changes in
currency rates, changes in foreign or U.S. laws or restrictions applicable to
such investments and in exchange control regulations (e.g., currency blockage).
A decline in the exchange rate of the currency (i.e., weakening of the currency
against the U.S. dollar) in which a portfolio security is quoted or denominated
relative to the U.S. dollar would reduce the value of the portfolio security.
Commissions on transactions in foreign securities may be higher than those for
similar transactions on domestic stock markets and foreign custodial costs are
higher than domestic custodial costs. In addition, clearance and settlement
procedures may be different in foreign countries and, in certain markets, such
procedures have on occasion been unable to keep pace with the volume of
securities transactions, thus making it difficult to conduct such transactions.
Foreign issuers are not generally subject to uniform accounting,
auditing and financial reporting standards comparable to those applicable to
U.S. issuers. There may be less publicly available information about a foreign
issuer than about a U.S. issuer. In addition, there is generally less government
regulation of foreign markets, companies and securities dealers than in the U.S.
Most foreign securities markets may have substantially less trading volume than
U.S. securities markets and securities of many foreign issuers are less liquid
and more volatile than securities of comparable U.S. issuers. Furthermore, with
respect to certain foreign countries, there is a possibility of nationalization,
expropriation or confiscatory taxation, imposition of withholding or other taxes
on divided or interest payments (or in some cases, capital gains), limitations
on the removal of funds or other assets, political or social instability or
diplomatic developments which could affect investment in those countries.
Currency Risks. The U.S. dollar value of securities denominated in a
foreign currency will vary with changes in currency exchange rates, which can be
volatile. Accordingly, changes in the value of the currency in which a fund's
investments are denominated relative to the U.S. dollar will affect the fund's
net asset value. Exchange rates are generally affected by the forces of supply
and demand in the international currency markets, the relative merits of
investing in different countries and the intervention or failure to intervene of
U.S. or foreign governments and central banks. However, currency exchange rates
may fluctuate based on factors intrinsic to that country's economy. Some
emerging market countries also may have managed currencies, which are not free
floating against the U.S. dollar. In addition, emerging markets are subject to
the risk of restrictions upon the free conversion of their currencies into other
currencies. Any devaluations relative to the U.S. dollar in the currencies in
which a fund's securities are quoted would reduce the fund's net asset value per
share.
Each fund may enter into forward foreign currency exchange contracts and
cross-currency forward contracts with banks or other foreign currency brokers or
dealers to purchase or sell foreign currencies at a future date and may purchase
and sell foreign currency futures contracts and cross-currency futures contracts
to seek to hedge against changes in foreign currency exchange rates,
-4-
<PAGE>
although they have no current intention to engage in such transactions. A
forward foreign currency exchange contract is a negotiated agreement between the
contracting parties to exchange a specified amount of currency at a specified
future time at a specified rate. A cross-currency forward contract is a forward
contract that uses one currency which historically moves in relation to a second
currency to hedge against changes in that second currency. See "Strategic and
Derivative Transactions" within the "Investment Techniques and Related Risks"
section for a further discussion of the risks associated with currency
transactions.
Economic and Monetary Union (EMU). EMU occurred on January 1, 1999, when
11 European countries adopted a single currency - the euro. For participating
countries, EMU means sharing a single currency and single official interest rate
and adhering to agreed upon limits on government borrowing. Budgetary decisions
remain in the hands of each participating country, but are now subject to each
country's commitment to avoid "excessive deficits" and other more specific
budgetary criteria. A European Central Bank is responsible for setting the
official interest rate to maintain price stability within the euro zone.
EMU is driven by the expectation of a number of economic benefits,
including lower transaction costs, reduced exchange risk, greater competition,
and a broadening and deepening of European financial markets. However, there are
a number of significant risks associated with EMU. Monetary and economic union
on this scale has never been attempted before. There is a significant degree of
uncertainty as to whether participating countries will remain committed to EMU
in the face of changing economic conditions. This uncertainty may increase the
volatility of European markets and may adversely affect the prices of securities
of European issuers in the fund's portfolios.
Investing in Securities of Emerging Markets. Although each fund invests
primarily in securities of established issuers based in the U.S. and in other
developed markets, each fund may also invest in securities of issuers in
emerging markets, including issuers in Asia (including Russia), Eastern Europe,
Latin and South America, the Mediterranean and Africa. Each fund may invest up
to 10% of its total assets in issuers located in emerging markets generally and
up to 3% of its total assets in issuers of any one specific emerging market
country. The funds may also invest in currencies of such countries and may
engage in strategic transactions in the markets of such countries.
Investing in the securities of emerging market countries involves
considerations and potential risks not typically associated with investing in
the securities of U.S. issuers whose securities are principally traded in the
United States. These heightened risks include: (i) greater risks of
expropriation, confiscatory taxation, nationalization and less social, political
and economic stability; (ii) the small current size of the markets for
securities of emerging market issuers and the currently low or nonexistent
volume of trading and frequent artificial limits on daily price movements,
resulting in lack of liquidity and in price uncertainty; (iii) certain national
policies which may restrict a fund's investment opportunities, including
limitations on aggregate holdings by foreign investors and restrictions on
investing in issuers or industries deemed sensitive to relevant national
interests; (iv) the absence of developed legal structures governing private or
foreign investment in private property which may adversely affect the fund's
ability to retain ownership of its securities during periods of economic, social
or political turmoil; and (v) high rates of inflation and rapid fluctuations in
interest rates that have had and may continue to have negative effects on the
economies and securities markets of certain emerging market countries.
The economies of emerging market countries may be predominantly based on
only a small number of industries or dependent on revenues from the sale of
particular commodities or on international aid or development assistance. As a
result, these economies may be significantly more vulnerable to changes in local
or global trade conditions, and may suffer from volatile or extreme fluctuations
in currency exchange rates, inflation and deflation rates as well as debt
burdens. Many
-5-
<PAGE>
emerging market countries have experienced and will continue to experience
periods of rapid inflation, resulting in significant market uncertainty and
sharp drops in the U.S. dollar value of the country's assets. The currencies of
emerging market countries may also be devalued as a result of governmental
action in addition to market factors. Recently, the economies of certain
emerging market countries have experienced deflation which has diminished the
demand for goods and services resulting in excess capacity in factories that
were built upon the forecast of continuing strong demand for such goods and
services. All of these risks may adversely affect the funds' investments in
emerging market countries.
Investment and Repatriation Restrictions. Foreign investment in the
securities markets of several emerging market countries is restricted or
controlled to varying degrees. These restrictions may limit a fund's investment
in certain emerging market countries, require governmental approval prior to
investments by foreign persons or limit investment by foreign persons to only a
specified percentage of an issuer's outstanding securities or a specific class
of securities which may have less advantageous terms (including price) than
securities of such company available for purchase by nationals. In certain
countries, the funds may be limited by government regulation or a company's
charter to a maximum percentage of equity ownership in any one company. Such
restrictions may affect the market price, liquidity and rights of securities
that may be purchased by the funds. From time to time, the adviser may determine
that investment and repatriation restrictions in certain emerging market
countries negate the advantages of investing in such countries and no fund is
required to invest in any emerging market country.
In addition, certain countries may restrict or prohibit investment
opportunities in issuers or industries deemed important to national interests.
The adviser may determine from time to time to invest in the securities of
emerging market countries which may impose restrictions on foreign investment
and repatriation that cannot currently be predicted. Due to restrictions on
direct investment in equity securities in certain emerging market countries,
such as Taiwan, the funds may invest only through investment funds in such
emerging market countries.
The repatriation of both investment income and capital from several
emerging market countries is subject to restrictions such as the need for
certain governmental consents. Even where there is no outright restriction on
repatriation of capital, the mechanics of repatriation may affect certain
aspects of the operation of the funds to the extent that they invest in emerging
market countries.
Market Characteristics. All of the securities markets of emerging market
countries have substantially less volume than the New York Stock Exchange.
Equity securities of most emerging market companies are generally less liquid
and subject to greater price volatility than equity securities of U.S. companies
of comparable size. Some of the stock exchanges in the emerging market countries
are in the earliest stages of their development.
Certain of the securities markets of emerging market countries are
marked by high concentrations of market capitalization and trading volume in a
small number of issuers representing a limited number of industries, as well as
a high concentration of ownership of such securities by a limited number of
investors. Even the market for relatively widely traded securities in the
emerging markets may not be able to absorb, without price disruptions, a
significant increase in trading volume or trades of a size customarily
undertaken by institutional investors in the United States. Additionally, market
making and arbitrage activities are generally less extensive in such markets,
which may contribute to increased volatility and reduced liquidity of such
markets. Accordingly, each of these markets may be subject to greater influence
by adverse events generally affecting the market, and by large investors trading
significant blocks of securities, than is usual in the United States. The less
liquid the market, the more difficult it may be for a fund to accurately price
its portfolio securities
-6-
<PAGE>
or to dispose of such securities at the times determined by the adviser to be
appropriate. The risks associated with the liquidity of a market may be
particularly acute in situations in which a fund's operations require cash, such
as the need to meet redemption requests for its shares, to pay dividends and
other distributions and to pay its expenses. To the extent that any emerging
market country experiences rapid increases in its money supply and investment in
equity securities is made for speculative purposes, the equity securities traded
in any such country may trade at price-earnings ratios higher than those of
comparable companies trading on securities markets in the United States. Such
price-earnings ratios may not be sustainable.
Settlement procedures in emerging market countries are less developed
and reliable than those in the United States and in other developed markets, and
a fund may experience settlement delays or other material difficulties. In
addition, significant delays are common in registering transfers of securities,
and a fund may be unable to sell such securities until the registration process
is completed and may experience delays in receipt of dividends and other
entitlements.
Brokerage commissions and other transaction costs on securities
exchanges in emerging market countries are generally higher than in the United
States. There is also less government supervision and regulation of foreign
securities exchanges, brokers and listed companies in emerging market countries
than exists in the United States. Brokers in emerging market countries may not
be as well capitalized as those in the United States, so that they are more
susceptible to financial failure in times of market, political or economic
stress. In addition, existing laws and regulations are often inconsistently
applied. As legal systems in emerging market countries develop, foreign
investors may be adversely affected by new or amended laws and regulations. In
circumstances where adequate laws exist, it may not be possible to obtain swift
and equitable enforcement of the law.
Financial Information and Standards. Issuers in emerging market
countries generally are subject to accounting, auditing and financial standards
and requirements that differ, in some cases significantly, from those applicable
to U.S. issuers. In particular, the assets and profits appearing on the
financial statements of an emerging market company may not reflect its financial
position or results of operations in the same manner as financial statements for
U.S. companies. Substantially less information may be publicly available about
issuers in emerging market countries than is available about issuers in the
United States.
Economic, Political and Social Factors. Many emerging market countries
may be subject to a greater degree of economic, political and social instability
than is the case in the United States and Western European countries. Such
instability may result from, among other things: (i) authoritarian governments
or military involvement in political and economic decision-making, including
changes or attempted changes in government through extra-constitutional means;
(ii) popular unrest associated with demands for improved economic, political and
social conditions; (iii) internal insurgencies; (iv) hostile relations with
neighboring countries; and (v) ethnic, religious and racial disaffection and
conflict. Such economic, political and social instability could significantly
disrupt financial markets of emerging market countries and adversely affect the
value of a fund's assets so invested.
Few emerging market countries have fully democratic governments. Some
governments in the region are authoritarian in nature or are influenced by armed
forces which have been used to control civil unrest. In the past, governments of
certain emerging market countries have been installed or removed as a result of
military coups, while governments in other emerging market countries have
periodically used force to suppress civil dissent. Disparities of wealth, the
pace and success of democratization, and ethnic, religious and racial
disaffection, among other factors, have also led to social unrest, violence
and/or labor unrest in some emerging market countries. Several emerging market
countries have or in the past have had hostile relationships with neighboring
nations or have experienced internal insurrections.
-7-
<PAGE>
The economies of most emerging market countries are heavily dependent
upon international trade and are accordingly affected by protective trade
barriers and the economic conditions of their trading partners, principally, the
United States, Japan, China and the European Union. The enactment by the United
States or other principal trading partners of protectionist trade legislation,
reduction of foreign investment in the local economies and general declines in
the international securities markets could have a significant adverse effect
upon the emerging securities markets. In addition, the economies of some
emerging market countries are vulnerable to weakness in world prices for their
commodity exports.
There may be the possibility of expropriations, confiscatory taxation,
political, economic or social instability or diplomatic developments which would
adversely affect assets of a fund held in emerging market or other foreign
countries. Governments in certain emerging market countries participate to a
significant degree, through ownership interests or regulation, in their
respective economies. Actions by these governments could have a significant
adverse effect on market prices of securities and payment of dividends.
Investing in Fixed Income Securities
The funds may invest a portion of their total assets in fixed income
securities. Fixed income securities include bonds, notes, convertible
securities, Eurodollar instruments, preferred stocks (including convertible
preferred stock) and money market instruments. Fixed income securities are
subject to 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 a fund to sustain losses on such investments. A default
could impact both interest and principal payments. Because the funds invest only
in investment grade fixed income securities, this risk is reduced.
Call Risk and Extension Risk. Fixed income securities may be subject to
both call risk and extension risk. Call risk exists when the issuer may exercise
a right to pay principal on an obligation earlier than scheduled which would
cause cash flows to be returned earlier than expected. This typically results
when interest rates have declined and a fund will suffer from having to reinvest
in lower yielding securities. Extension risk exists when the issuer may exercise
a right to pay principal on an obligation later than scheduled which would cause
cash flows to be returned later than expected. This typically results when
interest rates have increased and a fund will suffer from the inability to
invest in higher yield securities.
Credit Quality. Investment grade securities are those that are rated at
least Baa by Moody's or BBB by Standard & Poor's, Duff or Fitch or, if unrated,
determined by the adviser to be of comparable credit quality. High grade
securities are those that are rated within the top three investment grade
ratings (i.e., Aaa, Aa or A by Moody's or AAA, AA or A by Standard & Poor's,
Duff or Fitch) or, if unrated, determined by the adviser to be of comparable
credit quality. If a security is rated differently by two or more rating
agencies, the adviser uses the highest rating to compute a fund's credit quality
and also to determine the security's rating category. If the rating of a
security held by a fund is downgraded below investment grade, the adviser will
determine whether to retain that security in the fund's portfolio. Securities
rated Baa by Moody's or BBB by Standard & Poor's, Duff or Fitch are generally
considered medium grade obligations and have some speculative characteristics.
Adverse
-8-
<PAGE>
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.
Specific Risks
The following sections include descriptions of specific risks that are
associated with a fund's purchase of a particular type of security or the
utilization of a specific investment technique.
Common Stocks. The funds purchase common stocks. Common stocks are
shares of a corporation or other entity that entitle the holder to a pro rata
share of the profits of the corporation, if any, without preference over any
other shareholder or class of shareholders, including holders of the entity's
preferred stock and other senior equity. Common stock usually carries with it
the right to vote and frequently an exclusive right to do so.
Small Capitalization Stocks. Small Cap Asset Fund and Small Cap II Fund
invest primarily, and Equity Asset Fund may invest to a lesser extent, in
securities of small capitalization companies. Although investments in small
capitalization companies may present greater opportunities for growth, they also
involve greater risks than are customarily associated with investments in
larger, more established companies. The securities of small companies may be
subject to more volatile market movements than securities of larger, more
established companies. Smaller companies may have limited product lines, markets
or financial resources, and they may depend upon a limited or less experienced
management group. The securities of small capitalization companies may be traded
only on the OTC market or on a regional securities exchange and may not be
traded daily or in the volume typical of trading on a national securities
exchange. As a result, the disposition by a fund of securities in order to meet
redemptions or otherwise may require the fund to sell securities at a discount
from market prices, over a longer period of time or during periods when
disposition is not desirable.
Convertible Securities. Each fund may invest in convertible debt and
preferred stock. Convertible debt securities and preferred stock entitle the
holder to acquire the issuer's stock by exchange or purchase for a predetermined
rate. Convertible securities are subject both to the credit and interest rate
risks associated with fixed income securities and to the stock market risk
associated with equity securities.
Warrants. Each fund may purchase warrants. Warrants acquired by a fund
entitle it to buy common stock from the issuer at a specified price and time.
Warrants are subject to the same market risks as stocks, but may be more
volatile in price. A fund's investment in warrants will not entitle it to
receive dividends or exercise voting rights and will become worthless if the
warrants cannot be profitably exercised before the expiration dates.
Depositary Receipts and Depositary Shares. The funds may purchase
depository receipts and depository shares. Depositary receipts and depositary
shares are typically issued by a U.S. or foreign bank or trust company and
evidence ownership of underlying securities of a U.S. or foreign issuer.
Unsponsored programs are organized independently and without the cooperation of
the issuer of the underlying securities. As a result, available information
concerning the issuer may not be as current as for sponsored depositary
instruments and their prices may be more volatile than if they were sponsored by
the issuers of the underlying securities. Examples of such investments include,
but are not limited to, American Depositary Receipts and Shares ("ADRs" and
"ADSs"), Global Depositary Receipts and Shares ("GDRs" and "GDSs") and European
Depositary Receipts and Shares ("EDRs" and "EDSs").
Investments in REITs. Each fund may invest in shares of real estate
investment trusts (REITs), which are pooled investment vehicles that invest in
real estate or real estate loans or interests.
-9-
<PAGE>
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 on amounts distributed to
shareholders under the Internal Revenue Code of 1986, as amended (the "Code").
Corporate Debt Obligations. Each fund may invest in corporate debt
obligations and zero coupon securities issued by financial institutions and
corporations. Corporate debt obligations are subject to the risk of an issuer's
inability to meet principal and interest payments on the obligations and may
also be subject to price volatility due to such factors as market interest
rates, market perception of the creditworthiness of the issuer and general
market liquidity. 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.
U.S. Government Securities. Each fund may invest in U.S. Government
securities. Generally, these securities include U.S. Treasury obligations and
obligations issued or guaranteed by U.S. Government agencies, instrumentalities
or sponsored enterprises which are supported by (a) the full faith and credit of
the U.S. Treasury (such as the Government National Mortgage Association), (b)
the right of the issuer to borrow from the U.S. Treasury (such as securities of
the Student Loan Marketing Association), (c) the discretionary authority of the
U.S. Government to purchase certain obligations of the issuer (such as the
Federal National Mortgage Association and Federal Home Loan Mortgage
Corporation), or (d) only the credit of the agency. No assurance can be given
that the U.S. Government will provide financial support to U.S. Government
agencies, instrumentalities or sponsored enterprises in the future. U.S.
Government securities also include Treasury receipts, zero coupon bonds, U.S.
Treasury inflation indexed 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.
Repurchase Agreements. Each fund may invest up to 10% of its net assets
in repurchase agreements. In a repurchase agreement, a fund buys a security at
one price and simultaneously agrees to sell it back at a higher price. Delays or
losses could result if the other party to the agreement defaults or becomes
insolvent. Repurchase agreements acquired by a fund will always be fully
collateralized as to principal and interest by money market instruments and will
be entered into only with commercial banks, brokers and dealers considered
creditworthy by the adviser.
Short Sales. Each fund may engage in short sales and short sales against
the box. In a short sale, a fund sells a security it does not own in
anticipation of a decline in the market value of the security. In a short sale
against the box, a fund either owns or has the right to obtain at no extra cost
the security sold short. The broker holds the proceeds of the short sale until
the settlement date, at which time the fund delivers the security (or an
identical security) to cover the short position. The fund receives the net
proceeds from the short sale. When a fund enters into a short sale other than
against the box, the fund must first borrow the security to make delivery to the
buyer and must place cash or liquid assets in a segregated account that is
marked to market daily. Short sales other than against the box involve unlimited
exposure to loss. No securities will be sold short if, after giving effect to
any such short sale, the total market value of all securities sold short would
exceed 5% of the value of a fund's net assets.
Restricted and Illiquid Securities. Each fund may invest up to 15% of
its net assets in illiquid securities, although the funds invest in these
securities only on an occasional basis. Illiquid securities are those that are
not readily marketable, repurchase agreements maturing in more than seven days,
time deposits with a notice or demand period of more than seven days, swap
transactions, certain OTC options and certain restricted securities. Based upon
continuing review of the trading markets
-10-
<PAGE>
for a specific restricted security, the security may be determined to be
eligible for resale to qualified institutional buyers pursuant to Rule 144A
under the Securities Act of 1933 and, therefore, to be liquid. Also, certain
illiquid securities may be determined to be liquid if they are found to satisfy
relevant liquidity requirements.
The Board of Trustees has adopted guidelines and delegated to the
adviser the function of determining and monitoring the liquidity of portfolio
securities, including restricted and illiquid securities. The Board of Trustees
however retains oversight and is ultimately responsible for such determinations.
The purchase price and subsequent valuation of illiquid securities normally
reflect a discount, which may be significant, from the market price of
comparable securities for which a liquid market exists.
Investments in Other Investment Companies. Each fund is permitted to
invest up to 10% of its total assets in shares of registered investment
companies and up to 5% of its total assets in any one registered investment
company as long as that investment does not represent more than 3% of the total
voting stock of the acquired investment company. Investments in the securities
of other investment companies may involve duplication of advisory fees and other
expenses. The funds may invest in investment companies that are designed to
replicate the composition and performance of a particular index. For example,
Standard & Poor's Depositary Receipts ("SPDRs") are exchange-traded shares of a
closed-end investment company designed to replicate the price performance and
dividend yield of the Standard & Poor's 500 Composite Stock Price Index.
Investments in index baskets involve the same risks associated with a direct
investment in the types of securities included in the baskets.
Portfolio Turnover and Short-Term Trading. Although it is not the policy
of the funds to purchase or sell securities for trading purposes, the funds
place no restrictions on portfolio turnover and will sell a portfolio security
without regard to the length of time such security has been held if, in the
adviser's view, the security meets the criteria for disposal. A high rate of
portfolio turnover (100% or more) involves correspondingly higher transaction
costs which must be borne directly by a fund and thus indirectly by its
shareholders. It may also result in a fund's realization of larger amounts of
short-term capital gains, distributions from which are taxable to shareholders
as ordinary income. See "Financial Highlights" in the funds' prospectus for each
fund's portfolio turnover rates.
Temporary Defensive Investments. Notwithstanding a fund's investment
objective, each fund may on occasion, for temporary defensive purposes to
preserve capital or to meet redemption requests, hold part or all of its assets
in cash and investment grade money market instruments (i.e., securities with
maturities of less than one year) and short-term debt securities (i.e.,
securities with maturities of one to three years). Each fund may also invest
uncommitted cash and cash needed to maintain liquidity for redemptions in
investment grade money market instruments and short-term debt securities. Each
fund's investments in such securities are limited to 20% of total assets unless
the fund is in a temporary defensive position.
The money market instruments and short-term debt securities in which the
funds may invest consist of obligations issued or guaranteed by the U.S.
Government, its agencies, instrumentalities or authorities; instruments
(including negotiable certificates of deposit, non-negotiable fixed time
deposits and bankers' acceptances) of U.S. banks and foreign banks; repurchase
agreements; and prime commercial paper of U.S. companies and foreign companies.
Money market instruments in which the funds invest will be rated at the
time of purchase P-1 by Moody's or A-1 or Duff-1 by Standard & Poor's, Duff and
Fitch or, if unrated, determined by the adviser to be of comparable quality. At
least 95% of each fund's assets invested in short-term debt securities will be
rated, at the time of investment, Aaa, Aa, or A by Moody's or AAA, AA, or A by
Standard & Poor's or, if not rated, determined to be of comparable credit
quality by the adviser. Up
-11-
<PAGE>
to 5% of each fund's total assets invested in short-term debt securities may be
invested in securities which are rated Baa by Moody's or BBB by Standard &
Poor's or, if not rated, determined to be of comparable credit quality by the
adviser.
INVESTMENT TECHNIQUES AND RELATED RISKS
Strategic and Derivative Transactions. Each fund may, but is not
required to, utilize various investment strategies to seek to hedge market risks
(such as interest rates, currency exchange rates and broad or specific equity or
fixed income market movements) or to enhance potential gain. Such strategies are
generally accepted as part of modern portfolio management and are regularly
utilized by many mutual funds and other institutional investors. Techniques and
instruments used by each fund may change over time as new instruments and
strategies are developed or regulatory changes occur.
In the course of pursuing their investment objectives, each fund may
purchase and sell (write) exchange-listed and OTC put and call options on
securities, equity indices and other financial instruments; purchase and sell
financial futures contracts and options thereon; and enter into currency
transactions such as forward foreign currency exchange contracts, cross-currency
forward contracts, currency futures contracts, currency swaps and options on
currencies or currency futures (collectively, all the above are called
"Strategic Transactions"). Strategic Transactions may be used to seek to protect
against possible changes in the market value of securities held in or to be
purchased for a fund's portfolio resulting from securities markets or currency
exchange rate fluctuations, to seek to protect a fund's unrealized gains in the
value of portfolio securities, to facilitate the sale of such securities for
investment purposes, or to establish a position in the derivatives markets as a
temporary substitute for purchasing or selling particular securities. In
addition to the hedging transactions referred to in the preceding sentence,
Strategic Transactions may also be used to enhance potential gain in
circumstances where hedging is not involved although each fund will attempt to
limit its net loss exposure resulting from Strategic Transactions entered into
for such purposes to not more than 3% of its net assets at any one time and, to
the extent necessary, the funds will close out transactions in order to comply
with this limitation. (Transactions such as writing covered call options are
considered to involve hedging for the purposes of this limitation.) In
calculating a fund's net loss exposure from such Strategic Transactions, an
unrealized gain from a particular Strategic Transaction position would be netted
against an unrealized loss from a related Strategic Transaction position. For
example, if the adviser believes that Equity Asset Fund is underweighted in
cyclical stocks and overweighted in consumer stocks, Equity Asset Fund may buy a
cyclical index call option and sell a cyclical index put option and sell a
consumer index call option and buy a consumer index put option. Under such
circumstances, any unrealized loss in the cyclical position would be netted
against any unrealized gain in the consumer position (and vice versa) for
purposes of calculating the fund's net loss exposure.
The ability of a fund to utilize Strategic Transactions successfully
will depend on the adviser's ability to predict pertinent market and currency
and interest rate movements, which cannot be assured. Each fund will comply with
applicable regulatory requirements when implementing these strategies,
techniques and instruments. The funds' activities involving Strategic
Transactions may be limited in order to enable the funds to satisfy the
requirements of the Code for qualification as a regulated investment company.
Risks of Strategic and Derivative Transactions. Strategic Transactions
have risks associated with them including possible default by the other party to
the transaction, illiquidity and, to the extent the adviser's view as to certain
market movements is incorrect, the risk that the use of such Strategic
Transactions could result in losses greater than if they had not been used. The
risks associated with the funds' transactions in options, futures and other
types of derivative securities including swaps may include some or all of the
following: market risk, leverage and volatility risk, correlation risk, credit
risk and liquidity and valuation risk. The writing of put and call options may
result in losses to the
-12-
<PAGE>
funds, force the purchase or sale, respectively of portfolio securities at
inopportune times or for prices higher than (in the case of purchases due to the
exercise of put options) or lower than (in the case of sales due to the exercise
of call options) current market values, limit the amount of appreciation the
funds can realize on their respective investments or cause the funds to hold a
security they might otherwise sell or sell a security they might otherwise hold.
The use of currency transactions by a fund can result in the fund incurring
losses as a result of a number of factors including the imposition of exchange
controls, suspension of settlements, or the inability to deliver or receive a
specified currency. The use of options and futures transactions entails certain
other risks. In particular, the variable degree of correlation between price
movements of futures contracts and price movements in the related portfolio
position of a fund creates the possibility that losses on the hedging instrument
may be greater than gains in the value of the fund's position. The writing of
options could significantly increase a fund's portfolio turnover rate and,
therefore, associated brokerage commissions or spreads. In addition, futures and
options markets may not be liquid in all circumstances and certain
over-the-counter options may have no markets. As a result, in certain markets,
the funds might not be able to close out a transaction without incurring
substantial losses, if at all. Although the use of futures and options
transactions for hedging should tend to minimize the risk of loss due to a
decline in the value of the hedged position, at the same time, in certain
circumstances, these transactions tend to limit any potential gain which might
result from an increase in value of such position. The loss incurred by a fund
in writing options and entering into futures transactions is potentially
unlimited; however, as described above, each fund will attempt to limit its net
loss exposure resulting from Strategic Transactions entered into for such
purposes to not more than 3% of its net assets at any one time. Futures markets
are highly volatile and the use of futures may increase the volatility of a
fund's net asset value. Finally, entering into futures contracts would create a
greater ongoing potential financial risk than would purchases of options where
the exposure is limited to the cost of the initial premium. Losses resulting
from the use of Strategic Transactions would reduce net asset value and the net
result may be less favorable than if the Strategic Transactions had not been
utilized.
Risks of Strategic and Derivative Transactions Outside the United
States. When conducted outside the United States and especially in emerging
markets, Strategic Transactions may not be regulated as rigorously as in the
United States, may not involve a clearing mechanism and related guarantees, and
are subject to the risk of governmental actions affecting trading in, or the
prices of, foreign securities, currencies and other instruments. The value of
such positions also could be adversely affected by: (i) lesser availability than
in the United States of data on which to make trading decisions, (ii) delays in
a fund's ability to act upon economic events occurring in foreign markets during
non-business hours in the United States, (iii) the imposition of different
exercise and settlement terms and procedures and margin requirements than in the
United States, (iv) lower trading volume and liquidity, and (v) other complex
foreign political, legal and economic factors. At the same time, Strategic
Transactions may offer advantages such as trading in instruments that are not
currently traded in the United States or arbitrage possibilities not available
in the United States.
General Characteristics of Options. Put options and call options
typically have similar structural characteristics and operational mechanics
regardless of the underlying instrument on which they are purchased or sold.
Thus, the following general discussion relates to each of the particular types
of options discussed in greater detail below. In addition, many Strategic
Transactions involving options require segregation of a fund's assets in special
accounts, as described below under "Use of Segregated Accounts."
A put option gives the purchaser of the option, in consideration for the
payment of a premium, the right to sell, and the writer the obligation to buy
(if the option is exercised) the underlying security, commodity, index, or other
instrument at the exercise price. For instance, a fund's purchase of a put
option on a security might be designed to protect its holdings in the underlying
instrument (or, in some cases, a similar instrument) against a substantial
decline in the
-13-
<PAGE>
market value by giving the fund the right to sell such instrument at the option
exercise price. A call option, in consideration for the payment of a premium,
gives the purchaser of the option the right to buy, and the seller the
obligation to sell (if the option is exercised) the underlying instrument at the
exercise price. A fund may purchase a call option on a security, currency,
futures contract, index or other instrument to seek to protect the fund against
an increase in the price of the underlying instrument that it intends to
purchase in the future by fixing the price at which it may purchase such
instrument. An American style put or call option may be exercised at any time
during the option period while a European style put or call option may be
exercised only upon expiration or during a fixed period prior thereto. The funds
are authorized to purchase and sell exchange listed options and over-the-counter
options ("OTC options"). Exchange listed options are issued by a regulated
intermediary such as the Options Clearing Corporation ("OCC"), which guarantees
the performance of the obligations of the parties to such options. The
discussion below uses the OCC as an example, but is also applicable to other
financial intermediaries.
With certain exceptions, exchange listed options generally settle by
physical delivery of the underlying security or currency, although in the future
cash settlement may become available. Index options and Eurodollar instruments
are cash settled for the net amount, if any, by which the option is
"in-the-money" (i.e., where the value of the underlying instrument exceeds, in
the case of a call option, or is less than, in the case of a put option, the
exercise price of the option) at the time the option is exercised. Frequently,
rather than taking or making delivery of the underlying instrument through the
process of exercising the option, listed options are closed by entering into
offsetting purchase or sale transactions that do not result in ownership of the
new option.
A fund's ability to close out its position as a purchaser or seller of
an exchange listed put or call option is dependent, in part, upon the liquidity
of the option market. There is no assurance that a liquid option market on an
exchange will exist. In the event that the relevant market for an option on an
exchange ceases to exist, outstanding options on that exchange would generally
continue to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours
during which the underlying financial instruments are traded. To the extent that
the option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct bilateral
agreement with the Counterparty. In contrast to exchange listed options, which
generally have standardized terms and performance mechanics, all the terms of an
OTC option, including such terms as method of settlement, term, exercise price,
premium, guarantees and security, are set by negotiation of the parties. The
funds will generally sell (write) OTC options (other than OTC currency options)
that are subject to a buy-back provision permitting a fund to require the
Counterparty to sell the option back to the fund at a formula price within seven
days. OTC options purchased by the funds and portfolio securities "covering" the
amount of the funds' obligation pursuant to an OTC option sold by them (the cost
of the sell-back plus the in-the-money amount, if any) are subject to the funds'
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 funds expect generally to
enter into OTC options that have cash settlement provisions, although they are
not required to do so.
Unless the parties provide for it, there is no central clearing or
guaranty function in the OTC option market. As a result, if the Counterparty
fails to make delivery of the security, currency or
-14-
<PAGE>
other instrument underlying an OTC option it has entered into with a fund or
fails to make a cash settlement payment due in accordance with the terms of that
option, the fund will lose any premium it paid for the option as well as any
anticipated benefit of the transaction. Accordingly, the adviser must assess the
creditworthiness of each such Counterparty or any guarantor or credit
enhancement of the Counterparty's credit to determine the likelihood that the
terms of the OTC option will be satisfied. The funds will engage in OTC option
transactions only with U.S. Government securities dealers recognized by the
Federal Reserve Bank of New York as "primary dealers", or broker dealers,
domestic or foreign banks or other financial institutions which have received,
combined with any credit enhancements, a long-term debt rating of A from S&P or
Moody's or an equivalent rating from any other nationally recognized statistical
rating organization ("NRSRO") or which issue debt that is determined to be of
equivalent credit quality by the adviser.
If a fund sells (writes) a call option, the premium that it receives may
serve as a partial hedge, to the extent of the option premium, against a
decrease in the value of the underlying securities or instruments in its
portfolio or will increase the fund's income. The sale (writing) of put options
can also provide income.
Each fund may purchase and sell (write) call options on equity
securities and Eurodollar instruments that are traded on U.S. and foreign
securities exchanges and in the over-the-counter markets, and on securities
indices, currencies and futures contracts. All call options sold by the funds
must be "covered" (i.e., the fund must own the securities or the futures
contract subject to the call) or must meet the asset segregation requirements
described below as long as the call is outstanding. Even though a fund will
receive the option premium to help offset any loss, the fund may incur a loss if
the exercise price is below the market price for the security subject to the
call at the time of exercise. A call option sold by a fund also exposes the fund
during the term of the option to possible loss of opportunity to realize
appreciation in the market price of the underlying security or instrument and
may require the fund to hold a security or instrument which it might otherwise
have sold.
Each fund may purchase and sell (write) put options on equity securities
and Eurodollar instruments (whether or not it holds these securities in its
portfolio), and on securities indices, currencies and futures contracts. A fund
will not sell put options if, as a result, more than 50% of the fund's total
assets would be required to be segregated to cover its potential obligations
under such put options other than those with respect to futures and options
thereon. In selling put options, there is a risk that a fund may be required to
buy the underlying security at a price above the market price.
Options on Securities Indices and Other Financial Indices. Each fund may
also purchase and sell (write) call and put options on securities indices and
other financial indices. Options on securities indices and other financial
indices are similar to options on a security or other instrument except that,
rather than settling by physical delivery of the underlying instrument, they
settle by cash settlement. For example, an option on an index gives the holder
the right to receive, upon exercise of the option, an amount of cash if the
closing level of the index upon which the option is based exceeds, in the case
of a call, or is less than, in the case of a put, the exercise price of the
option (except if, in the case of an OTC option, physical delivery is
specified). This amount of cash is equal to the differential between the closing
price of the index and the exercise price of the option, which also may be
multiplied by a formula value. The seller of the option is obligated, in return
for the premium received, to make delivery of this amount upon exercise of the
option. In addition to the methods described above, the funds may cover call
options on a securities index by owning securities whose price changes are
expected to be similar to those of the underlying index, or by having an
absolute and immediate right to acquire such securities without additional cash
consideration (or for additional cash consideration held in a segregated account
by the custodian) upon conversion or exchange of other securities in their
portfolios.
-15-
<PAGE>
General Characteristics of Futures. Each fund may enter into financial
futures contracts or purchase or sell put and call options on such futures.
Futures are generally bought and sold on the commodities exchanges where they
are listed and involve payment of initial and variation margin as described
below. The sale of futures contracts creates a firm obligation by a fund, as
seller, to deliver to the buyer the specific type of financial instrument called
for in the contract at a specific future time for a specified price (or, with
respect to index futures and Eurodollar instruments, the net cash amount). The
purchase of futures contracts creates a corresponding obligation by a fund, as
purchaser, to purchase a financial instrument at a specific time and price.
Options on futures contracts are similar to options on securities except that an
option on a futures contract gives the purchaser the right in return for the
premium paid to assume a position in a futures contract and obligates the seller
to deliver such position upon exercise of the option.
The funds' use of financial futures and options thereon will in all
cases be consistent with applicable regulatory requirements and in particular
the regulations of the Commodity Futures Trading Commission (the "CTFC")
relating to exclusions from regulation as a commodity pool operator. Those
regulations currently provide that the funds may use commodity futures and
option positions (i) for bona fide hedging purposes without regard to the
percentage of assets committed to margin and option premiums, or (ii) for other
purposes permitted by the CTFC to the extent that the aggregate initial margin
and option premiums required to establish such non-hedging positions (net the
amount the positions were "in the money" at the time of purchase) do not exceed
5% of each fund's respective net asset value, after taking into account
unrealized profits and losses on such positions. Typically, maintaining a
futures contract or selling an option thereon requires a fund to deposit with
its custodian for the benefit of a futures commission merchant (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 funds. If a fund exercises an option on a
futures contract it will be obligated to post initial margin (and potential
subsequent variation margin) for the resulting futures position just as it would
for any position. Futures contracts and options thereon are generally settled by
entering into an offsetting transaction but there can be no assurance that the
position can be offset prior to settlement at an advantageous price, nor that
delivery will occur. The segregation requirements with respect to futures
contracts and options thereon are described below.
Currency Transactions. The funds may engage in currency transactions
with Counterparties to seek to hedge the value of portfolio holdings denominated
in particular currencies against fluctuations in relative value or to enhance
potential gain. Currency transactions include currency contracts, exchange
listed currency futures, exchange listed and OTC options on currencies, and
currency swaps. A forward currency contract involves a privately negotiated
obligation to purchase or sell (with delivery generally required) a specific
currency at a future date, which may be any fixed number of days from the date
of the contract agreed upon by the parties, at a price set at the time of the
contract. A currency swap is an agreement to exchange cash flows based on the
notional (agreed-upon) difference among two or more currencies and operates
similarly to an interest rate swap, which is described below. A fund may enter
into over-the-counter currency transactions with Counterparties which have
received, combined with any credit enhancements, a long term debt rating of A by
S&P or Moody's, respectively, or that have an equivalent rating from a NRSRO or
(except for OTC currency options) whose obligations are determined to be of
equivalent credit quality by the adviser.
The funds' transactions in forward currency contracts and other currency
transactions such as futures, options, options on futures and swaps will
generally be limited to hedging involving either
-16-
<PAGE>
specific transactions or portfolio positions. See "Strategic and Derivative
Transactions." Transaction hedging is entering into a currency transaction with
respect to specific assets or liabilities of a fund, which will generally arise
in connection with the purchase or sale of its portfolio securities or the
receipt of income therefrom. Position hedging is entering into a currency
transaction with respect to portfolio security positions denominated or
generally quoted in that currency.
A fund will not enter into a transaction to hedge currency exposure to
an extent greater, after netting all transactions intended wholly or partially
to offset other transactions, than the aggregate market value (at the time of
entering into the transaction) of the securities held in its portfolio that are
denominated or generally quoted in or currently convertible into such currency,
other than with respect to proxy hedging as described below.
Each fund may also cross-hedge currencies by entering into transactions
to purchase or sell one or more currencies that are expected to decline in value
in relation to other currencies to which the fund has or in which the fund
expects to have portfolio exposure. For example, a fund may hold a South Korean
security and the adviser may believe that the Korean won will deteriorate
against the Japanese yen. The fund would sell Korean won to reduce its exposure
to that currency and buy Japanese yen. This strategy would be a hedge against a
decline in the value of Korean won, although it would expose the fund to
declines in the value of the Japanese yen relative to the U.S. dollar.
To seek to reduce the effect of currency fluctuations on the value of
existing or anticipated holdings of portfolio securities, the funds may also
engage in proxy hedging. Proxy hedging is often used when the currency to which
the fund's portfolio is exposed is difficult to hedge or to hedge against the
dollar. Proxy hedging entails entering into a forward contract to sell a
currency whose changes in value are generally considered to be linked to a
currency or currencies in which certain of a fund's portfolio securities are or
are expected to be denominated, and to buy U.S. dollars. The amount of the
contract would not exceed the value of the fund's securities denominated in
linked currencies. For example, if the adviser considers that the British pound
is linked to the euro, a fund holds securities denominated in pounds and the
adviser believes that the value of pounds will decline against the U.S. dollar,
the adviser may enter into a contract to sell euros and buy dollars. Proxy
hedging involves some of the same risks and considerations as other transactions
with similar instruments. Currency transactions can result in losses to the
funds if the currency being hedged fluctuates in value to a degree or in a
direction that is not anticipated. Further, there is the risk that the perceived
linkage between various currencies may not be present or may not be present
during the particular time that the funds are engaging in proxy hedging. If a
fund enters into a currency hedging transaction, the fund will comply with the
asset segregation requirements described below.
Risks of Currency Transactions. Currency transactions are subject to
risks different from those of other portfolio transactions. Because currency
control is of great importance to the issuing governments and influences
economic planning and policy, purchases and sales of currency and related
instruments can be negatively affected by government exchange controls,
blockages, and manipulations or exchange restrictions imposed by governments.
These can result in losses to a fund if it is unable to deliver or receive
currency or funds in settlement of obligations and could also cause hedges it
has entered into to be rendered useless, resulting in full currency exposure as
well as incurring transaction costs. Buyers and sellers of currency futures are
subject to the same risks that apply to the use of futures generally. Further,
settlement of a currency futures contract for the purchase of most currencies
must occur at a bank based in the issuing nation. Trading options on currency
futures is relatively new, and the ability to establish and close out positions
on such options is subject to the maintenance of a liquid market which may not
always be available. Currency exchange rates may fluctuate based on factors
extrinsic to that country's economy.
-17-
<PAGE>
Swaps, Caps, Floors, Spreads and Collars. Among the Strategic
Transactions into which each of the funds may enter are interest rate, currency
rate and index swaps and the purchase or sale of related caps, floors, spreads
and collars. Interest rate swaps involve the exchange by a fund with another
party of their respective commitments to pay or receive interest, e.g., an
exchange of floating rate payments for fixed rate payments with respect to a
notional amount of principal. A fund will not sell interest rate caps or floors
where it does not own securities or other instruments providing the income
stream the fund may be obligated to pay. A currency swap is an agreement to
exchange cash flows on a notional amount of two or more currencies based on the
relative value differential among them. An index swap is an agreement to swap
cash flows on a notional amount based on changes in the values of the reference
indices. The purchase of a cap entitles the purchaser to receive payments on a
notional principal amount from the party selling such cap to the extent that a
specified index exceeds a predetermined interest rate or amount. The purchase of
a floor entitles the purchaser to receive payments on a notional principal
amount from the party selling such floor to the extent that a specified index
falls below a predetermined interest rate or amount. A collar or a spread is a
combination of a cap and a floor that preserves a certain rate of return within
a predetermined range of interest rates or values.
The funds will usually enter into swaps on a net basis, i.e., the two
payment streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with a fund receiving or paying, as the case may
be, only the net amount of the two payments. The funds will not enter into any
swap, cap, floor, spread or collar transaction unless, at the time of entering
into such transaction, the unsecured long-term debt of the Counterparty,
combined with any credit enhancements, is rated at least A by S&P or Moody's or
has an equivalent rating from an NRSRO or the Counterparty issues debt that is
determined to be of equivalent credit quality by the adviser. If there is a
default by the Counterparty, a fund may have contractual remedies pursuant to
the agreements related to the transaction. The swap market has grown
substantially in recent years with a large number of banks and investment
banking firms acting both as principals and as agents utilizing standardized
swap documentation. As a result, the swap market has become relatively liquid.
Caps, floors, spreads and collars are more recent innovations for which
standardized documentation has not yet been fully developed. Swaps, caps,
floors, spreads and collars are considered illiquid for purposes of each fund's
policy regarding illiquid securities, unless it is determined, based upon
continuing review of the trading markets for the specific security, that such
security is liquid. The Board of Trustees has adopted guidelines and delegated
to the adviser the daily function of determining and monitoring the liquidity of
swaps, caps, floors, spreads and collars. The Board of Trustees, however,
retains oversight focusing on factors such as valuation, liquidity and
availability of information and is ultimately responsible for such
determinations. The staff of the SEC currently takes the position that swaps,
caps, floors, spreads and collars are illiquid, and are subject to each fund's
limitation on investing in illiquid securities.
Combined Transactions. Each fund may enter into multiple transactions,
including multiple options transactions, multiple futures transactions, multiple
swap transactions, and multiple interest rate transactions, structured notes and
any combination of futures, options, swaps, currency, multiple currency
transactions (including forward currency contracts) and interest rate
transactions ("component" transactions), instead of a single Strategic
Transaction, as part of a single or combined strategy when, in the opinion of
the adviser it is in the best interests of the fund to do so. A combined
transaction will usually contain elements of risk that are present in each of
its component transactions. Although combined transactions are normally entered
into based on the adviser's judgment that the combined strategies will reduce
risk or otherwise more effectively achieve the desired portfolio management
goal, it is possible that the combination will instead increase such risks or
hinder achievement of the portfolio management objective.
-18-
<PAGE>
Use of Segregated Accounts. Each fund will hold securities or other
instruments whose values are expected to offset its obligations under the
Strategic Transactions. A fund will not enter into Strategic Transactions that
expose the fund to an obligation to another party unless it owns either (i) an
offsetting position in securities or other options, futures contracts or other
instruments or (ii) cash, receivables or liquid securities with a value
sufficient to cover its potential obligations. A fund may have to comply with
any applicable regulatory requirements for Strategic Transactions, and if
required, will set aside cash and other liquid assets on the fund's records or
in a segregated account in the amount prescribed. If the market value of these
securities declines or the fund's obligations on the underlying Strategic
Transaction increases, additional cash or liquid securities will be segregated
daily so that the aggregate market value of the segregated securities is at
least equal to the amount of the fund's obligations on the underlying Strategic
Transactions. Segregated assets would not be sold while the Strategic
Transaction is outstanding, unless they are replaced with similar assets. As a
result, there is a possibility that segregation of a large percentage of a
fund's assets could impede portfolio management or the fund's ability to meet
redemption requests or other current obligations.
Eurodollar Contracts. Each fund may make investments in Eurodollar
contracts. Eurodollar contracts are U.S. dollar-denominated futures contracts or
options thereon which are linked to the London Interbank Offered Rate ("LIBOR"),
although foreign currency-denominated instruments are available from time to
time. Eurodollar futures contracts enable purchasers to obtain a fixed rate for
the lending of funds and sellers to obtain a fixed rate for borrowings. A fund
might use Eurodollar futures contracts and options thereon to hedge against
changes in LIBOR, to which many interest rate swaps and fixed income instruments
are linked.
Short-Term Trading. Each fund will sell a portfolio security without
regard to the length of time that security has been held if, in the adviser's
view, the security meets the criteria for disposal.
Portfolio Diversification and Concentration. Each fund is diversified,
which generally means that, with respect to 75% of its total assets (i) no more
than 5% of the fund's total assets may be invested in the securities of a single
issuer and (ii) each fund will purchase no more than 10% of the outstanding
voting securities of a single issuer. The funds will not concentrate (invest 25%
or more of their total assets) in the securities of issuers in any one industry.
The funds' policies concerning diversification and concentration are fundamental
and may not be changed without shareholder approval.
INVESTMENT RESTRICTIONS
The funds and the Portfolios have adopted the following fundamental
policies. Each fund's and Portfolio's fundamental policies cannot be changed
unless the change is approved by a "vote of a majority of the outstanding voting
securities" of the fund or the Portfolio, as the case may be, which phrase as
used herein means the lesser of (i) 67% or more of the voting securities of the
fund or the Portfolio present at a meeting, if the holders of more than 50% of
the outstanding voting securities of the fund or the Portfolio are present or
represented by proxy, or (ii) more than 50% of the outstanding voting securities
of the fund or the Portfolio. A fund's non-fundamental policies may be changed
by the Board of Trustees, without shareholder approval, in accordance with
applicable laws, regulations or regulatory policy.
Equity Asset Fund and Equity Asset Portfolio and Small Cap Fund and
Small Cap Portfolio.
As a matter of fundamental policy, each Portfolio (fund) may not:
1. Invest more than 25% of the current value of its total assets in any
single industry, provided that this restriction shall not apply to U.S.
Government securities.
-19-
<PAGE>
2. Underwrite the securities of other issuers, except to the extent that,
in connection with the disposition of portfolio securities, a Portfolio
(fund) may be deemed be an underwriter under the Securities Act of 1933.
3. Purchase real estate or real estate mortgage loans.
4. Purchase securities on margin (except that each Portfolio (fund) may
obtain such short-term credits as may be necessary for the clearance of
purchases and sales of securities).
5. Purchase or sell commodities or commodity contracts except that each
Portfolio (fund) may purchase and sell financial futures contracts and
engage in options on financial futures contracts and foreign currency
exchange transactions.
6. With respect to at least 75% of its total assets, invest more than 5% in
the securities of any one issuer (other than the U.S. Government, its
agencies or instrumentalities) or acquire more than 10% of the
outstanding voting securities of any issuer.
7. Issue senior securities, borrow money, enter into reverse repurchase
agreements or pledge or mortgage its assets, except that each Portfolio
(fund) may (a) borrow from banks in an amount up to 15% of the current
value of its total assets as a temporary measure for extraordinary or
emergency purposes (but not investment purposes) and (b) pledge its
assets to an extent not greater than 15% of the current value of its
total assets to secure such borrowings.
8. Make loans of portfolio securities, except that each Portfolio (fund)
may enter into repurchase agreements.
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.
Each Portfolio (fund) may not:
a. Invest in the securities of an issuer for the purpose of exercising
control or management, but it may do so where it is deemed advisable to
protect or enhance the value of an existing investment.
b. Purchase the securities of any other investment company except to the
extent permitted by the 1940 Act.
c. Invest more than 15% of its net assets in securities which are illiquid.
d. Purchase additional securities if the Portfolio's borrowings exceed 5%
of its net assets.
Small Cap II Fund and Small Cap II Portfolio. As a matter of fundamental
policy, Small Cap II Portfolio (Small Cap II Fund) may not:
1. Invest more than 25% of the current value of its total assets in any
single industry, provided that this restriction shall not apply to U.S.
Government securities or mortgage-backed securities issued or guaranteed
as to principal or interest by the U.S. Government, its agencies or
instrumentalities.
2. Issue senior securities. For purposes of this restriction, borrowing
money in accordance with paragraph 3 below, making loans in accordance
with paragraph 8 below, the issuance of shares of beneficial interest in
multiple classes or series, the deferral of trustees' fees, the
-20-
<PAGE>
purchase or sale of options, futures contracts, forward commitments and
repurchase agreements entered into in accordance with the Portfolio's
(fund's) investment policies or within the meaning of paragraph 6 below,
are not deemed to be senior securities.
3. Borrow money, except in amounts not to exceed 33 1/3% of the value of
the Portfolio's (fund's) total assets (including the amount borrowed)
taken at market value (i) from banks for temporary or short-term
purposes or for the clearance of transactions, (ii) in connection with
the redemption of portfolio shares or to finance failed settlements of
portfolio trades without immediately liquidating portfolio securities or
other assets, (iii) in order to fulfill commitments or plans to purchase
additional securities pending the anticipated sale of other portfolio
securities or assets and (iv) the Portfolio (fund) may enter into
reverse repurchase agreements and forward roll transactions. For
purposes of this investment restriction, investments in short sales,
futures contracts, options on futures contracts, securities or indices
and forward commitments shall not constitute borrowing.
4. Underwrite the securities of other issuers, except to the extent that,
in connection with the disposition of portfolio securities, the
Portfolio (fund) may be deemed to be an underwriter under the Securities
Act of 1933.
5. Purchase or sell real estate except that the Portfolio (fund) may (i)
acquire or lease office space for its own use, (ii) invest in securities
of issuers that invest in real estate or interests therein, (iii) invest
in securities that are secured by real estate or interests therein, (iv)
purchase and sell mortgage-related securities and (v) hold and sell real
estate acquired by the Portfolio (fund) as a result of the ownership of
securities.
6. Purchase securities on margin (except that the Portfolio (fund) may
obtain such short-term credits as may be necessary for the clearance of
purchases and sales of securities).
7. Purchase or sell commodities or commodity contracts, except the
Portfolio (fund) may purchase and sell options on securities, securities
indices and currency, futures contracts on securities, securities
indices and currency and options on such futures, forward foreign
currency exchange contracts, forward commitments, securities index put
or call warrants and repurchase agreements entered into in accordance
with the Portfolio's (fund's) investment policies.
8. Make loans, except that the Portfolio (fund) (1) may lend portfolio
securities in accordance with the Portfolio's (fund's) investment
policies up to 33 1/3% of the Portfolio's (fund's) total assets taken at
market value, (2) enter into repurchase agreements, and (3) purchase all
or a portion of an issue of debt securities, bank loan participation
interests, bank certificates of deposit, bankers' acceptances,
debentures or other securities, whether or not the purchase is made upon
the original issuance of the securities.
9. With respect to 75% of its total assets, purchase securities of an
issuer (other than the U.S. Government, its agencies, instrumentalities
or authorities or repurchase agreements collateralized by U.S.
Government securities and other investment companies), if: (a) such
purchase would cause more than 5% of the Portfolio's (fund's) total
assets taken at market value to be invested in the securities of such
issuer; or (b) such purchase would at the time result in more than 10%
of the outstanding voting securities of such issuer being held by the
Portfolio (fund).
-21-
<PAGE>
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.
Each Portfolio (fund) may not:
a. Invest in the securities of an issuer for the purpose of exercising
control or management, but it may do so where it is deemed advisable to
protect or enhance the value of an existing investment.
b. Purchase the securities of any other investment company except to the
extent permitted by the 1940 Act.
c. Invest more than 15% of its net assets in securities which are illiquid.
d. Purchase additional securities if the fund's borrowings exceed 5% of its
net assets.
* * * * * * * * * * * * * * * *
Notwithstanding any other fundamental or non-fundamental investment
restriction or policy, the funds may each invest all of their assets in the
securities of a single open-end registered investment company with substantially
the same fundamental investment objectives, restrictions and policies as the
fund.
If any percentage restriction described above is adhered to at the time
of investment, a subsequent increase or decrease in the percentage resulting
from a change in the value of a fund's assets will not constitute a violation of
the restriction.
For purposes of each fund's fundamental investment restriction regarding
industry concentration, the adviser generally classifies issuers by industry in
accordance with classifications set forth in the Director of Companies Filing
annual Reports with the Securities and Exchange Commission. In the absence of
such classification or if the adviser determines in good faith based on its own
information that the economic characteristics affecting a particular issuer make
it more appropriately considered to be engaged in a different industry, the
adviser may classify an issuer according to its own sources. For instance,
personal credit finance companies and business credit finance companies are
deemed to be separate industries and wholly-owned finance companies are
considered to be in the industry of their parents if their activities are
primarily related to financing the activities of their parents.
CALCULATION OF PERFORMANCE DATA
Each fund may, from time to time, advertise certain total return
information. The average annual total return of a fund for a period is computed
by subtracting the net asset value per share at the beginning of the period from
the net asset value per share at the end of the period (after adjusting for the
reinvestment of any income dividends and capital gain distributions), and
dividing the result by the net asset value per share at the beginning of the
period. In particular, the average annual total return of a fund ("T") is
computed by using the redeemable value at the end of a specified period of time
("ERV") of a hypothetical initial investment of $1,000 ("P") over a period of
time ("n") according to the formula P(1+T)^n=ERV.
-22-
<PAGE>
The funds' average annual total return for the one-, five-, and ten-year
(or life of fund, if shorter) periods ended September 30, 1998 were as follows:
<TABLE>
<CAPTION>
Average Annual Total Return
------------------------------------------------
Life-of-
Fund Fund 1-Year 5-Year 10-Year
- -------------------------------------- ---- ------ ------ -------
<S> <C> <C> <C> <C>
Equity Asset Fund(1) 17.45%(2,3) (11.66%)(2) 15.22%(2) N/A
Small Capitalization Equity Asset Fund 15.70%(2,4) (27.69%)(2) 7.67%(2) N/A
Small Cap II Fund(2) 10.29%(4,5) (17.84)%(2) N/A N/A
</TABLE>
- -------------------
(1) The Equity Asset Fund commenced operations on October 8, 1997.
(2) Because the Equity Asset Fund commenced operations on October 8, 1997,
the Small Cap Asset Fund commenced operations on April 1, 1998 and the
Small Cap II Fund Service Class has not yet commenced operations, the
average annual total return quotations for the one, five, ten year and
life-of-fund periods include the performance record of their
corresponding non-asset funds (or Institutional Class in the case of the
Small Cap II Fund), adjusted to reflect the imposition of service fees
at the rate of 0.25% of average daily net assets. The adjustment is made
by reducing the corresponding Equity Fund's, Small Capitalization Equity
Fund's and Small Capp II Fund Institutional Class' performance record
for rolling one month periods by .020833% (the fraction of the .25%
service fee paid monthly) and then aggregating those performance results
for the appropriate one, five, ten or life of fund period.
(3) Equity Fund commenced operations on June 2, 1991.
(4) Small Capitalization Equity Fund commenced operations on September 1,
1990.
(5) Small Cap II Fund Institutional Class commenced operations on December
23, 1996.
These performance quotations should not be considered as representative
of any fund's performance for any specified period in the future. In addition to
average annual return quotations, the funds may quote quarterly and annual
performance on a net (with management and administration fees deducted) and
gross basis as follows:
Equity Asset Fund
Quarter/Year Net Gross
- ----------------- ------- ----------
4Q97 (1.69) (1.69)
1997 (1.69) (1.69)
1Q98 12.72 12.72
2Q98 (1.91) (1.86)
3Q98 (18.73) (18.52)
Small Cap Asset Fund
Quarter/Year Net Gross
- ----------------- ------- ----------
2Q98 (7.50) (7.44)
3Q98 (23.30) (23.09)
4Q98 25.65 25.93
These performance quotations should not be considered as representative
of a fund's performance for any specified period in the future. Each fund's
performance may be compared in sales literature to
-23-
<PAGE>
the performance of other mutual funds having similar objectives or to
standardized indices or other measures of investment performance. In particular,
Equity Asset Fund may compare its performance to the S&P 500 Index, which is
generally considered to be representative of the performance of unmanaged common
stocks that are publicly traded in the United States securities markets. The
Small Cap Asset Fund and Small Cap II Fund may compare their performances to the
Russell 2000 Index, which is generally considered to be representative of
unmanaged small capitalization stocks in the United States markets, the Russell
2000 Growth Index, which is generally considered to be representative of those
Russell 2000 companies with higher price-to-book ratios and forecasted growth,
and the S&P 500 Index. Comparative performance may also be expressed by
reference to a ranking prepared by a mutual fund monitoring service or by one or
more newspapers, newsletters or financial periodicals. Performance comparisons
may be useful to investors who wish to compare a fund's past performance to that
of other mutual funds and investment products. Of course, past performance is
not a guarantee of future results.
MANAGEMENT
Trustees and Officers
The Board of Trustees has established the investment objective and
policies which govern each fund's and each Portfolio's operation. The Board has
appointed officers of the Trust who conduct the day-to-day business of each
fund. The Board, however, remains responsible for ensuring that each fund is
operating consistently accordingly to its objective and policies and the
requirements of the federal securities laws. 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. All executive officers of the Trust and the
Portfolio Trust are affiliates of Standish, Ayer & Wood, Inc.
<TABLE>
<CAPTION>
Position Held Principal Occupation
Name, Address and Date of Birth with Trust During Past 5 Years
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
*D. Barr Clayson, 7/29/35 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.;
Director, CareGroup Inc.
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 Trustee, Cornell University;
Director, CareGroup Inc.
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;
Trustee, Mertens House, Inc.
</TABLE>
-24-
<PAGE>
<TABLE>
<CAPTION>
Position Held Principal Occupation
Name, Address and Date of Birth with Trust During Past 5 Years
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
*Edward H. Ladd, 1/3/38 Trustee Chairman of the Board and
c/o Standish, Ayer & Wood, Inc. Managing Director, Standish, Ayer &
One Financial Center Wood, Inc.; Director,
Boston, MA 02111 Standish International
Management Company, L.P.
Caleb Loring III, 11/14/43 Trustee Trustee, Essex Street Associates
c/o Essex Street Associates (family investment trust office);
400 Essex Street Director, Holyoke Mutual Insurance Company;
Beverly, MA 01915 Director, Carter Family Corporation;
Board Member, Gordon-Conwell Theological
Seminary; Chairman of the Advisory Board,
Salvation Army; Chairman, Vision New England
*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 Senior Fund Administration Manager,
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, Standish, Ayer &
c/o Standish, Ayer & Wood, Inc. Treasurer Wood, Inc. since October 1996; formerly Senior
One Financial Center Vice President, Treasurer and Chief Financial
Boston, MA 02111 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, Associate Director
c/o Standish, Ayer & Wood, Inc. and Compliance Officer,
One Financial Center Standish, Ayer & Wood, Inc.
Boston, MA 02111
Denise B. Kneeland, 8/19/51 Vice President Vice President and Manager,
c/o Standish, Ayer & Wood, Inc. Mutual Funds Operations,
One Financial Center Standish, Ayer & Wood, Inc.
Boston, MA 02111 since December 1995; formerly
Vice President, Scudder, Stevens and Clark
Rosalind J. Lillo, 2/6/38 Assistant Vice President Broker/Dealer Administrator,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center since October 1995; formerly
Boston, MA 02111 Compliance Administrator,
New England Securities Corp.
</TABLE>
-25-
<PAGE>
<TABLE>
<CAPTION>
Position Held Principal Occupation
Name, Address and Date of Birth with Trust During Past 5 Years
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Gigi K. Szekely, 5/8/67 Assistant Vice President Manager, Mutual Funds Client
c/o Standish, Ayer & Wood, Inc. Communications,
One Financial Center Standish, Ayer & Wood, Inc.
Boston, MA 02111
Tami M. Pester, 10/29/67
c/o Standish, Ayer & Wood, Inc. Assistant Compliance Manager and Compliance
One Financial Center Officer, Standish, Ayer & Wood, Inc. since 1998;
Boston, MA 02111 Assistant Vice President Compliance Officer, State Street Global Advisors
</TABLE>
- ----------------
* Indicates that Trustee is an interested person of the Trust for purposes
of the 1940 Act.
Compensation of Trustees and Officers
Neither the Trust nor the Portfolio Trust pays compensation to the
Trustees of the Trust or the Portfolio Trust that are affiliated with Standish
or to the Trust's and Portfolio Trust's officers. None of the Trustees or
officers have engaged in any financial transactions (other than the purchase or
redemption of the Funds' shares) with the Trust, the Portfolio Trust or the
adviser during the fiscal year ended September 30, 1998, 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.
The following table sets forth all compensation paid to the Trust's
Trustees as of the funds' fiscal years ended September 30, 1998:
<TABLE>
<CAPTION>
Aggregate Compensation
from the Funds
Pension or Total Compensation
Small Cap Retirement Benefits from Funds and
Equity Asset Asset Small Cap Accrued as Part of Other Funds in
Name of Trustee Fund** Fund** II Fund** Fund's Expenses Complex*
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
D. Barr Clayson 0 0 0 $0 $0
Samuel C. Fleming $894 $152 $1,777 0 $57,375
Benjamin M. Friedman $894 $152 $1,777 0 $57,375
John H. Hewitt $901 $160 $1,785 0 $62,375
Edward H. Ladd 0 0 0 0 $0
Caleb Loring, III $894 $152 $1,777 0 $57,375
Richard S. Wood 0 0 0 0 $0
</TABLE>
- -------------
* As of the date of this Statement of Additional Information, there were
25 mutual funds in the fund complex.
** The fund bears its pro rata allocation of trustee's fees paid by its
corresponding portfolio to the trustees of the Portfolio Trust.
Certain Shareholders
At January 19, 1999 the Trustees and officers of the Trust as a group
beneficially owned (i.e., had voting and/or investment power) less than 1% of
the then outstanding shares of each fund. Also at that date, no person
beneficially owned 5% or more of the then outstanding shares of any fund except:
-26-
<PAGE>
Percentage of
Outstanding
Name and Address Shares
Equity Asset Fund
Prudential Trust FBO MTA 99.3%*
30 Scranton Office Park
Scranton, PA 18507
Small Cap Equity Asset Fund
Norwest Bank MN TR FBO 100%
Brown Printing
510 Marquette Ave.
Minneapolis, MN 55443
Small Cap II Fund
The Shipley Family 10.5%(i)
Foundation, Inc.
Nutter, McClennen & Fish
One International Place
Boston, MA 02110
Stephen Phillips Memorial 9.9%(i)
Charitable Trust Scholarship
Foundation
P.O. Box 242
Salem, MA 01970
East Orange General Hospital 6.6%(i)
300 Central Avenue
East Orange, NJ 07019
Portland Museum of Art 6.2%
Pooled Endowment Funds
7 Congress Square
Portland, ME 04101
Hewitt Foundation, Inc. 6.0%(i)
230 Coram Avenue
Shelton, CT 06484
South Shore Bank TTEE 5.6%(i)
FBO North Hill Living Care Village
of Massachusetts
1400 Hancock Street
Quincy, MA 02169
- -------------
* Because the shareholder beneficially owned more than 25% of the
outstanding shares of the indicated fund, the shareholder was
considered to control the fund. As a controlling person, the
shareholder may be able to determine whether a proposal submitted
to the shareholders of such fund will be approved or disapproved.
(i) Institutional Class
Investment Advisers
Standish serves as the adviser to the Equity Portfolio, Small Cap
Portfolio and the Small Cap II Portfolio pursuant to written investment advisory
agreements. Standish is a Massachusetts corporation organized in 1933 and is
registered under the Investment Advisers Act of 1940.
The following, constituting all of the Directors and all of the
shareholders of Standish, are Standish controlling persons: Caleb F. Aldrich,
Nicholas S. Battelle, 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
-27-
<PAGE>
A. Manchester, George W. Noyes, Arthur H. Parker, Howard B. Rubin, Austin C.
Smith, Thomas P. Sorbo, David C. Stuehr, Ralph S. Tate, Michael W. Thompson and
Richard S. Wood. Subject to the supervision and direction of the Trustees of the
Trust and the Portfolio Trust, the adviser recommends investment decisions,
places orders to purchase and sell securities and permits the Portfolios and the
funds to use the name "Standish." Under the investment advisory agreements, the
adviser is paid a fee for its services based upon a percentage of the applicable
Portfolio's average daily net asset value computed as set forth below. The
advisory fees are payable monthly.
Contractual Advisory
Fee Rate
--------
(as a percentage of average
Fund daily net assets)
- ----
Equity Portfolio 0.50%
Small Cap Portfolio 0.60%
Small Cap II Portfolio 0.60%
During the last fiscal year ended September 30, 1998, the funds and the
Portfolios paid advisory fees in the following amounts:
Fund 1996 1997 1998
---- ---- ---- ----
Equity Asset Fund(1) N/A N/A N/A
Equity Portfolio $345,301(2) $493,202 $1,017,136
Small Cap Asset Fund (1) N/A N/A N/A
Small Cap Portfolio $920,742(2) $1,051,872 $1,363,260
Small Cap II Fund (1,3) N/A N/A N/A
Small Cap II Portfolio 0(3) 0(3) $0(3)
- ------------------------
(1) The funds do not pay directly advisory fees. Each fund bears its pro
rata allocation of its corresponding Portfolio's expenses, including
advisory fees.
(2) The Equity Portfolio and Small Cap Portfolio commenced operations on May
3, 1996.
(3) The Small Cap II Fund commenced operations on December 23, 1996. The
adviser voluntarily agreed not to impose its advisory fee for the period
through December 31, 1996 and for the fiscal years ended September 30,
1997 and 1998 in the amoutns of $62, $10,209 and $61,698, respectively.
The adviser has voluntarily and temporarily agreed to limit total
expenses (excluding brokerage commissions, taxes and extraordinary expenses) of
Equity Asset Fund, Small Cap Asset Fund and Small Cap II Fund Service Class to
the total operating expenses of the corresponding non-asset fund or, in the case
of the Small Cap II Fund, the Institutional Class, plus 0.25%, which represents
the Service Plan fee. In connection with this voluntary agreement, the adviser
will limit only those expenses borne by the Equity Asset Fund or Small Cap Asset
Fund and not those borne by the Equity Portfolio or Small Cap Portfolio. Based
on the relative size of the Equity Asset Fund and Small Cap Asset Fund to the
size of their corresponding non-asset funds, the adviser may not be able to
implement the limitation to the extent it would require the limitation of
expenses borne by the
-28-
<PAGE>
respective Portfolios. Standish may revise or discontinue these agreements at
any time although it has no current intention to do so. If an expense limitation
is exceeded, the compensation due to the adviser shall be proportionately
reduced by the amount of such excess by reduction or refund thereof, subject to
readjustment during the period during which such limit is in place.
Pursuant to the investment advisory agreements, each Portfolio bears
expenses of its operations other than those incurred by the adviser pursuant to
the investment advisory agreement. Among other expenses, the funds and the
Portfolios will pay share pricing and shareholder servicing fees and expenses;
custodian fees and expenses; legal and auditing fees and expenses; expenses of
prospectuses, statements of additional information and shareholder reports;
registration and reporting fees and expenses; and Trustees' fees and expenses.
Unless terminated as provided below, the investment advisory agreements
continue in full force and effect from year to year but only so long as each
such continuance is approved annually (i) by the Trustees of the Portfolio Trust
or by the "vote of a majority of the outstanding voting securities" of the
applicable 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. Each 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
applicable Portfolio or by the adviser, on sixty days' written notice to the
other parties. The investment advisory agreements terminate in the event of
their assignment as defined in the 1940 Act.
In an attempt to avoid any potential conflict with portfolio
transactions for the Portfolios, the adviser, the Principal Underwriter, the
Trust and the Portfolio Trust have each adopted extensive restrictions on
personal securities trading by personnel of the adviser and its affiliates.
These restrictions include: pre-clearance of all personal securities
transactions and a prohibition of purchasing initial public offerings of
securities. These restrictions are a continuation of the basic principle that
the interests of the Portfolios and their investors come before those of the
adviser and its employees.
Administrator
Investors Bank & Trust Company ("IBT"), 200 Clarendon Street, Boston
Massachusetts 02116, serves as the administrator to the Portfolios and Standish
serves as the administrator to the feeder funds pursuant to written
administration agreements with the Trust on behalf of these funds. As
administrators, IBT and Standish manage the affairs of their respective
Portfolios or funds, provide all necessary office space and services of
executive personnel for administering the affairs of the funds, and, in the case
of Standish, allows the feeder funds to use the name "Standish." For these
services, IBT currently receives a fee from the feeder funds based on a
percentage of the feeder fund's net assets according to the following formula:
0.0105% of net assets up to the first $1 billion, 0.0034% of net assets for the
next $500 million and 0.0017 of net assets in excess of $1.5 billion. IBT also
receives an aggregate fee of $12,625 per month from all of the Portfolios in the
Portfolio Trust and all of the non-feeder funds in the Trust. This fee is
allocated among each Portfolio and non-feeder fund based upon the relative asset
sizes of the Portfolios and non-feeder funds. Standish currently does not
receive any additional compensation for its services as administrator. The
Trustees of the Trust may, however, determine in the future to compensate
Standish for its administrative services. Each of the administration agreements
can be terminated by either party on not more than sixty days' written notice.
-29-
<PAGE>
administration agreements can be terminated by either party on not more than
sixty days' written notice.
Distributor of the Trust
Standish Fund Distributors, L.P., an affiliate of the adviser, serves as
the Trust's exclusive principal underwriter and makes itself available to
receive purchase orders for the funds' shares. In that capacity, Standish Fund
Distributors has been granted the right, as agent of the Trust, to solicit and
accept orders for the purchase of the funds' shares in accordance with the terms
of the Underwriting Agreement between the Trust and Standish Fund Distributors.
Pursuant to the Underwriting Agreement, Standish Fund Distributors has agreed to
use its best efforts to obtain orders for the continuous offering of the funds'
shares. Standish Fund Distributors receives no commissions or other compensation
for its services, and has not received any such amounts in any prior year. The
Underwriting Agreement shall continue in effect with respect to each fund until
two years after its execution and for successive periods of one year thereafter
only if it is approved at least annually thereafter (i) by a vote of the holders
of a majority of the fund's outstanding shares or by the Trustees of the Trust
or (ii) by a vote of a majority of the Trustees of the Trust who are not
"interested persons" (as defined by the 1940 Act) of the parties to the
Underwriting Agreement, cast in person at a meeting called for the purpose of
voting on such approval. The Underwriting Agreement will terminate automatically
if assigned by either party thereto and is terminable with respect to a fund at
any time without penalty by a vote of a majority of the Trustees of the Trust, a
vote of a majority of the Trustees who are not "interested persons" of the
Trust, or by a vote of the holders of a majority of the applicable 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 Standish Fund
Distributors are located at One Financial Center, 26th Floor, Boston,
Massachusetts 02111.
SERVICE PLAN
The Trust, with respect to Equity Asset Fund, Small Cap Asset Fund and
Small Cap II Fund Service Class, has adopted a service plan (the "Service
Plan"). Each Service Plan provides that a fund may compensate entities ("Account
Administrators") that provide omnibus accounting services for groups of
individuals who beneficially own fund shares ("Omnibus Accounts") for providing
certain personal, account administration and/or shareholder liaison services to
participants in the Omnibus Accounts. Pursuant to the Service Plan, the funds
may enter into agreements with Account Administrators which purchase shares of
the funds ("Service Agreements"). Under such Service Agreements or otherwise,
Account Administrators may perform some or all of the following services: (a)
establishing and maintaining Omnibus Accounts with the funds; (b) establishing
and maintaining subaccounts and subaccount balances for Omnibus Accounts and
their participants ("Participants"); (c) processing orders by Omnibus Accounts
and Participants to purchase, redeem and exchange fund shares promptly and in
accordance with the effective prospectus relating to such shares; (d)
transmitting to each fund (or its agent) on each Business Day (as defined below)
a net subscription or net redemption order reflecting subscription, redemption
and exchange orders received by it with respect to the Omnibus Accounts; (e)
receiving and transmitting funds representing the purchase price or redemption
proceeds relating to such orders; (f) mailing fund prospectuses, statements of
additional information, periodic reports, transaction confirmations and
subaccount information to Omnibus Accounts and Participants; (g) answering
Omnibus Account and Participant inquiries about the funds, subaccount balances,
distribution options and such other administrative services for the Omnibus
Account and the Participants as provided for in the service agreements between
the Account Administrator and the Omnibus Account; and (h) providing such
statistical and other information as may be reasonably requested by the funds or
necessary for the funds to comply with applicable federal or state laws.
-30-
<PAGE>
As compensation for such services, the funds may pay each Account
Administrator a service fee in an amount of up to 0.25% (on an annualized basis)
of the fund's average daily net assets attributable to fund shares that are
attributable to or held in the name of such Account Administrator. Account
Administrators may from time to time be required to meet certain other criteria
in order to receive service fees.
In accordance with the terms of the Service Plan, Standish provides to
the Trust for review by the Trustees a quarterly written report of the amounts
expended under the Service Plan and the purpose for which such expenditures were
made. In the Trustees' quarterly review of the Service Plan, they will consider
the continued appropriateness and the level of compensation that the Service
Plan provides.
Conflict of interest restrictions (including the Employee Retirement
Income Security Act of 1974 ("ERISA")) may apply to an Account Administrator's
receipt of compensation paid by the funds in connection with the investment of
fiduciary assets in fund shares. Account Administrators that are subject to the
jurisdiction of the SEC, the Department of Labor or state securities
commissions, are urged to consult legal advisers before investing fiduciary
assets in fund shares and receiving service fees.
The Trust believes that fiduciaries of ERISA plans may properly receive
fees under the Service Plan if the plan fiduciary otherwise properly discharges
its fiduciary duties, including (if applicable) those under ERISA. Under ERISA,
a plan fiduciary, such as a trustee or investment manager, must meet the
fiduciary responsibility standards set forth in part 4 of Title I of ERISA.
These standards are designed to help ensure that the fiduciary's decisions are
made in the best interests of the plan and are not colored by self-interest.
Section 403(c)(1) of ERISA provides, in part, that the assets of a plan
shall be held for the exclusive purpose of providing benefits to the plan's
participants and their beneficiaries and defraying reasonable expenses of
administering the plan. Section 404(a)(1) sets forth a similar requirement on
how a plan fiduciary must discharge his or her duties with respect to the plan,
and provides further that such fiduciary must act prudently and solely in the
interest of the participants and beneficiaries. These basic provisions are
supplemented by the per se prohibitions of certain classes of transactions set
forth in Section 406 of ERISA.
Section 406(a)(1)(D) of ERISA prohibits a fiduciary of an ERISA plan
from causing that plan to engage in a transaction if he knows or should know
that the transaction would constitute a direct or indirect transfer to, or use
by or for the benefit of, a party in interest, of any assets of that plan.
Section 3(14) includes, within the definition of "party in interest" with
respect to a plan, any fiduciary with respect to that plan. Thus, Section
406(a)(1)(D) would not only prohibit a fiduciary from causing the plan to engage
in a transaction which would benefit a third person who is a party in interest,
but it also would prohibit the fiduciary from similarly benefiting himself. In
addition, Section 406(b)(1) specifically prohibits a fiduciary with respect to a
plan from dealing with the assets of that plan in his own interest or for his
own account. Section 406(b)(3) supplements these provisions by prohibiting a
plan fiduciary from receiving any consideration for his own personal account
from any party dealing with the plan in connection with a transaction involving
the assets of the plan.
In accordance with the foregoing, however, a fiduciary of an ERISA plan
may properly receive service fees under the Service Plan if the fees are used
for the exclusive purpose of providing benefits to the plan's participants and
their beneficiaries or for defraying reasonable expenses of administering the
plan for which the plan would otherwise be liable. See, e.g., Department of
Labor ERISA Technical Release No. 86-1 (stating a violation of ERISA would not
occur where a broker-dealer rebates commission dollars to a plan fiduciary who,
in turn, reduces its fees for which the plan is
-31-
<PAGE>
otherwise responsible for paying). Thus, the fiduciary duty issues involved in a
plan fiduciary's receipt of the service fee must be assessed on a case-by-case
basis by the relevant plan fiduciary.
PURCHASE AND REDEMPTION OF SHARES
Additional information on purchase and redemption of shares is included
in the prospectus.
The Trust may suspend the right to redeem fund shares or postpone the
date of payment upon redemption for more than seven days (i) for any period
during which the New York Stock Exchange is closed (other than customary weekend
or holiday closings) or trading on the exchange is restricted; (ii) for any
period during which an emergency exists as a result of which disposal by a fund
of securities owned by it or determination by a fund of the value of its net
assets is not reasonably practicable; or (iii) for such other periods as the SEC
may permit for the protection of shareholders of the funds.
The Trust intends to pay redemption proceeds in cash for all fund shares
redeemed but, under certain conditions, the Trust may make payment wholly or
partly in fund portfolio securities. Portfolio securities paid upon redemption
of fund shares will be valued at their then current market value. The Trust has
elected to be governed by the provisions of Rule 18f-1 under the 1940 Act which
limits each fund's obligation to make cash redemption payments to any
shareholder during any 90- day period to the lesser of $250,000 or 1% of the
fund's net asset value at the beginning of such period. An investor may incur
brokerage costs in converting portfolio securities received upon redemption to
cash.
PORTFOLIO TRANSACTIONS
The adviser is responsible for placing each Portfolio's portfolio
transactions and will do so in a manner deemed fair and reasonable to the
Portfolios and not according to any formula. The primary consideration in all
portfolio transactions will be prompt execution of orders in an efficient manner
at the most favorable price. In selecting broker-dealers and in negotiating
commissions, the adviser will consider the firm's reliability, the quality of
its execution services on a continuing basis and its financial condition. When
more than one firm is believed to meet these criteria, preference may be given
to firms which also sell shares of the funds. In addition, if the adviser
determines in good faith that the amount of commissions charged by a broker is
reasonable in relation to the value of the brokerage and research services
provided by such broker, the Portfolios may pay commissions to such broker in an
amount greater than the amount another firm may charge. Research services may
include (i) furnishing advice as to the value of securities, the advisability of
investing in, purchasing or selling securities, and the availability of
securities or purchasers or sellers of securities, (ii) furnishing seminars,
information, analyses and reports concerning issuers, industries, securities,
trading markets and methods, legislative developments, changes in accounting
practices, economic factors and trends, portfolio strategy, access to research
analysts, corporate management personnel, industry experts and economists,
comparative performance evaluation and technical measurement services and
quotation services, and products and other services (such as third party
publications, reports and analysis, and computer and electronic access,
equipment, software, information and accessories that deliver, process or
otherwise utilize information, including the research described above) that
assist the adviser in carrying out its responsibilities and (iii) effecting
securities transactions and performing functions incidental thereto (such as
clearance and settlement). Research services furnished by firms through which
the Portfolios effect their securities transactions may be used by the adviser
in servicing other accounts; not all of these services may be used by the
adviser in connection with the Portfolio generating the soft dollar credits. The
investment advisory fee paid by the Portfolios under the investment advisory
agreements will not be reduced as a result of the adviser's receipt of research
services.
-32-
<PAGE>
The adviser also places portfolio transactions for other advisory
accounts. The adviser will seek to allocate portfolio transactions equitably
whenever concurrent decisions are made to purchase or sell securities for a
Portfolio and another advisory account. In some cases, this procedure could have
an adverse effect on the price or the amount of securities available to a
Portfolio. In making such allocations, the main factors considered by the
adviser will be the respective investment objectives, the relative size of
portfolio holdings of the same or comparable securities, the availability of
cash for investment, the size of investment commitments generally held, and
opinions of the persons responsible for recommending the investment.
BROKERAGE COMMISSIONS
Aggregate Brokerage Commissions
Paid by the Fund for Portfolio Transactions
-------------------------------------------
Fund/Portfolio 1996 1997 1998
-------------- ---- ---- ----
Equity Asset Fund(1) N/A N/A N/A
Equity Portfolio(2,3) $148,871 $294,686 $555,507
Small Cap Asset Fund(1) N/A N/A N/A
Small Cap Portfolio(2,3) $255,346 $247,090 $346,603
Small Cap II Fund(1) N/A N/A N/A
Small Cap II Portfolio(3,4) $3,480 $12,384 $20,950
- ------------------
(1) The fund is a feeder fund in the master-feeder structure and does not
directly pay brokerage commissions but bears its pro rata share of
brokerage commissions paid by its corresponding Portfolio.
(2) The Portfolio commenced operations on May 3, 1996.
(3) At September 30, 1998, none of the Portfolios held any securities of its
regular brokers or dealer.
(4) The Portflio commmenced operations on Decemer 23, 1996.
DETERMINATION OF NET ASSET VALUE
Each fund's net asset value is calculated each day on which the NYSE is
open (a "Business Day"). Currently, the NYSE is not open on weekends, New Year's
Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day. The net asset
value of each fund's shares is determined as of the close of regular trading on
the NYSE (normally 4:00 p.m., Eastern time). If the NYSE closes early, the
calculation of net asset value will be accelerated to the actual closing time.
Net Asset Value is computed by dividing the value of all securities and other
assets of a fund (substantially all of which will be represented by the fund's
interest in its corresponding Portfolio) less all liabilities by the applicable
number of fund shares outstanding, and adjusting to the nearest cent per share.
Expenses and fees of each fund are accrued daily and taken into account for the
purpose of determining net asset value.
The value of a Portfolio's net assets (i.e., the value of its securities
and other assets less its liabilities, including expenses payable or accrued) is
determined at the same time and on the same days as the net asset value per
share of the fund is determined. Each investor in a Portfolio may add to or
reduce its investment in the Portfolio on each Business Day. As of the close of
regular trading on the NYSE on each Business Day, the value of each investor's
interest in a Portfolio will be
-33-
<PAGE>
determined by multiplying the net asset value of the Portfolio by the percentage
representing that investor's share of the aggregate beneficial interests in the
Portfolio. Any additions or reductions which are to be effected on that day will
then be effected. The investor's percentage of the aggregate beneficial
interests in a Portfolio will then be recomputed as the percentage equal to the
fraction (i) the numerator of which is the value of such investor's investment
in the Portfolio as of the close of regular trading on the NYSE on such day plus
or minus, as the case may be, the amount of net additions to or reductions in
the investor's investment in the Portfolio effected on such day, and (ii) the
denominator of which is the aggregate net asset value of the Portfolio as of the
close of regular trading on the NYSE on such day plus or minus, as the case may
be, the amount of the net additions to or reductions in the aggregate
investments in the Portfolio by all investors in the Portfolio. The percentage
so determined will then be applied to determine the value of the investor's
interest in a Portfolio as of the close of regular trading on the NYSE on the
following Business Day.
Portfolio securities are valued at the last sale prices on the exchange
or national securities market on which they are primarily traded. Securities not
listed on an exchange or national securities market, or securities for which
there were no reported transactions, are valued at the last quoted bid price.
Securities for which quotations are not readily available and all other assets
are valued at fair value as determined in good faith at the direction of the
Trustees.
Money market instruments with less than sixty days remaining to maturity
when acquired by a fund or Portfolio are valued on an amortized cost basis. If a
fund acquires a money market instrument with more than sixty days remaining to
its maturity, it is valued at current market value until the sixtieth day prior
to maturity and will then be valued at amortized cost based upon the value on
such date unless the Trustees of the Trust or the Portfolio Trust determine
during such sixty-day period that amortized cost does not represent fair value.
Generally, trading in securities on foreign exchanges is substantially
completed each day at various times prior to the close of regular trading on the
NYSE. If a security's primary exchange is outside the U.S., the value of such
security used in computing the net asset value of a Fund's shares is determined
as of such times. Foreign currency exchange rates are also generally determined
prior to the close of regular trading on the NYSE. Occasionally, events which
affect the values of such securities and such exchange rates may occur between
the times at which they are determined and the close of regular trading on the
NYSE and will therefore not be reflected in the computation of the Funds' net
asset value. If events materially affecting the value of such securities occur
during such period, then these securities may be valued at their fair value as
determined in good faith by the Trustees of the Trust or the Portfolio Trust.
THE FUNDS AND THEIR SHARES
Each fund is a diversified investment series of the Trust, an open-end
management investment company organized as an unincorporated business trust
under the laws of The Commonwealth of Massachusetts pursuant to an Agreement and
Declaration of Trust dated August 13, 1986. Under the Agreement and Declaration
of Trust, the Trustees of the Trust have authority to issue an unlimited number
of shares of beneficial interest, par value $.01 per share, of each fund. Small
Cap II Fund offers two classes of shares: Service Class and Institutional Class.
Shares of the Institutional Class are offered through another prospectus and
SAI. Each share of Equity Asset Fund and Small Cap Asset Fund represents an
equal proportionate interest in the respective fund with each other share and is
entitled to such dividends and distributions as are declared by the Trustees.
Shares of each class of Small Cap II Fund represent interests in the fund in
proportion to each share's net asset value. The per share net asset value of
each class of shares is calculated separately and may differ as a result of the
service fee applicable to Service Class shares and the allocation of certain
class-specific expenses which apply to only one of the classes. 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
-34-
<PAGE>
any liquidation of a fund, shareholders of that fund are entitled to share pro
rata in the net assets available for distribution.
Pursuant to the Declaration, the Trustees may create additional funds by
establishing additional series of shares in the Trust. The establishment of
additional series would not affect the interests of current shareholders in any
Fund. The Trustees have established other series of the Trust. Pursuant to the
Declaration, the Board may establish and issue multiple classes of shares for
each series of the Trust. Pursuant to the Declaration of Trust and subject to
shareholder approval (if then required by applicable law), the Trustees may
authorize each fund to invest all of its investable assets in a single open-end
investment company that has substantially the same investment objectives,
policies and restrictions as the fund. As of the date of this SAI, the funds
invest all of their investible assets in other open-end investment companies
(i.e., the corresponding Portfolio).
All fund shares have equal rights with regard to voting, and
shareholders of a fund have the right to vote as a separate class with respect
to matters as to which their interests are not identical to those of
shareholders of other classes of the Trust, including the approval of an
investment advisory contract and any change of investment policy requiring the
approval of shareholders.
Under Massachusetts law, shareholders of the Trust could, under certain
circumstances, be held liable for the obligations of the Trust. However, the
Agreement and Declaration of Trust disclaims shareholder liability for acts or
obligations of the Trust and requires that notice of this disclaimer be given in
each agreement, obligation or instrument entered into or executed by the Trust
or a Trustee. The Declaration also provides for indemnification from the assets
of the Trust for all losses and expenses of any Trust shareholder held liable
for the obligations of the Trust. Thus, the risk of a shareholder incurring a
financial loss on account of his or its liability as a shareholder of the Trust
is limited to circumstances in which the Trust would be unable to meet its
obligations. The possibility that these circumstances would occur is remote.
Upon payment of any liability incurred by the Trust, the shareholder paying the
liability will be entitled to reimbursement from the general assets of the
Trust. The Declaration also provides that no series of the Trust is liable for
the obligations of any other series. The Trustees intend to conduct the
operations of the Trust to avoid, to the extent possible, ultimate liability of
shareholders for liabilities of the Trust.
Except as described below, whenever the Trust is requested to vote on a
fundamental policy of or matters pertaining to a Portfolio, the Trust will hold
a meeting of the associated fund's shareholders and will cast its vote
proportionately as instructed by the fund's shareholders. Fund shareholders who
do not vote will not affect the Trust's votes at the Portfolio meeting. The
percentage of the Trust's votes representing fund shareholders not voting will
be voted by the Trustees of the Trust in the same proportion as the fund
shareholders who do, in fact, vote. Subject to applicable statutory and
regulatory requirements, a fund would not request a vote of its shareholders
with respect to (a) any proposal relating to the Portfolio, which proposal, if
made with respect to the fund, would not require the vote of the shareholders of
the fund, or (b) any proposal with respect to the Portfolio that is identical in
all material respects to a proposal that has previously been approved by
shareholders of the fund. Any proposal submitted to holders in a Portfolio, and
that is not required to be voted on by shareholders of the fund, would
nonetheless be voted on by the Trustees of the Trust.
THE PORTFOLIO AND ITS INVESTORS
Each Portfolio is a series of Standish, Ayer & Wood Master Portfolio,
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.
-35-
<PAGE>
Interests in a Portfolio have no preemptive or conversion rights, and
are fully paid and non-assessable, except as set forth in the Prospectus. A
Portfolio normally will not hold meetings of holders of such interests except as
required under the 1940 Act. A Portfolio would be required to hold a meeting of
holders in the event that at any time less than a majority of its Trustees
holding office had been elected by holders. The Trustees of a Portfolio continue
to hold office until their successors are elected and have qualified. Holders
holding a specified percentage of interests in a Portfolio may call a meeting of
holders in the Portfolio for the purpose of removing any Trustee. A Trustee of
the Portfolio may be removed upon a majority vote of the interests held by
holders in the Portfolio qualified to vote in the election. The 1940 Act
requires a Portfolio to assist its holders in calling such a meeting. Upon
liquidation of a Portfolio, holders in a Portfolio would be entitled to share
pro rata in the net assets of a Portfolio available for distribution to holders.
Each holder in the Portfolio is entitled to a vote in proportion to its
percentage interest in the Portfolio.
TAXATION
Each series of the Trust, including each fund, is treated as a separate
entity for accounting and tax purposes. Each fund has qualified and elected or
intends to elect to be treated as a "regulated investment company" ("RIC") under
Subchapter M of the Code, and intends to continue to so qualify in the future.
As such and by complying with the applicable provisions of the Code regarding
the sources of its income, the timing of its distributions, and the
diversification of its assets, each fund will not be subject to Federal income
tax on its investment company taxable income (i.e., all taxable income, after
reduction by deductible expenses, other than its "net capital gain," which is
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.
Each Portfolio is treated as a partnership for federal income tax
purposes. As such, a Portfolio is not subject to federal income taxation.
Instead, the corresponding fund must take into account, in computing its federal
income tax liability (if any), its share of the Portfolio's income, gains,
losses, deductions, credits and tax preference items, without regard to whether
it has received any cash distributions from the Portfolio. Because the funds
invest their assets in a corresponding Portfolio, each Portfolio normally must
satisfy the applicable source of income and diversification requirements in
order for the corresponding fund to satisfy them. Each Portfolio will allocate
at least annually among its investors, including the corresponding fund, each
investor's distributive share of that Portfolio's net investment income, net
realized capital gains, and any other items of income, gain, loss, deduction or
credit. Each Portfolio will make allocations to the corresponding fund in a
manner intended to comply with the Code and applicable regulations and will make
moneys available for withdrawal at appropriate times and in sufficient amounts
to enable the corresponding fund to satisfy the tax distribution requirements
that apply to it and that must be satisfied in order for the fund to avoid
Federal income and/or excise tax. For purposes of applying the requirements of
the Code regarding qualification as a RIC, each fund will be deemed (i) to own
its proportionate share of each of the assets of the corresponding Portfolio and
(ii) to be entitled to the gross income of the corresponding Portfolio
attributable to such share.
Each fund will be subject to a 4% non-deductible federal excise tax on
certain amounts not distributed (and not treated as having been distributed) on
a timely basis in accordance with annual minimum distribution requirements. Each
fund intends under normal circumstances to seek to avoid liability for such tax
by satisfying such distribution requirements. Certain distributions made in
order to satisfy the Code's distribution requirements may be declared by the
funds during October, November or December but paid during the following
January. Such distributions will be treated by shareholders under the Code as if
received on December 31 of the year the distributions are declared, rather than
the year in which the distributions are received.
-36-
<PAGE>
Each fund is not subject to Massachusetts corporate excise or franchise
taxes. Provided that the funds qualify as regulated investment companies under
the applicable provisions of federal law incorporated in Massachusetts law, they
will also not be required to pay any Massachusetts income tax.
Each fund will not distribute net capital gains realized in any year to
the extent that a capital loss is carried forward from prior years against such
gain. For federal income tax purposes, a fund is permitted to carry forward a
net capital loss in any year to offset its own net capital gains, if any, during
the eight years following the year of the loss. To the extent subsequent net
capital gains are offset by such losses, they would not result in federal income
tax liability to the fund and, as noted above, would not be distributed as such
to shareholders. As of the end of its most recent taxable year, the Equity Asset
Fund has $2,007 of capital loss carryforwards which expire on September 30, 2006
available to offset future net capital gains.
Limitations imposed by the Code on regulated investment companies like
the funds may restrict a Portfolio's ability to enter into futures, options or
currency forward transactions.
Certain options, futures or currency forward transactions undertaken by
a Portfolio may cause the Portfolio 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 (or, in the case of certain
options, futures or forward contracts relating to foreign currency, as ordinary
income or loss) and timing of some capital gains and losses realized by a
Portfolio and allocable to the corresponding fund. Additionally, a Portfolio 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 Portfolio's
and therefore the funds' taxable income or gain. Certain of the applicable tax
rules may be modified if a Fund or Portfolio is eligible and chooses to make one
or more of certain tax elections that may be available. These transactions may
therefore affect the amount, timing and character of a fund's distributions to
shareholders. Each Portfolio and 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.
If a 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 an election is made 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, a fund must distribute, at least annually, all or substantially all of
its net income, including its distributive share of such income accrued by the
corresponding Portfolio, to shareholders to qualify as a regulated investment
company under the Code and avoid federal income and excise taxes. Therefore, a
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 allow satisfaction of the distribution requirements.
The Federal income tax rules applicable to certain structured or hybrid
securities, dollar rolls, currency swaps or interest rate swaps, caps, floors
and collars are unclear in certain respects, and a Portfolio will account for
these instruments in a manner that is intended to allow the funds to continue to
qualify as regulated investment companies.
-37-
<PAGE>
In some countries, restrictions on repatriation may make it difficult or
impossible for a Portfolio to obtain cash corresponding to its earnings from
such countries which may cause a fund to have difficulty obtaining cash
necessary to satisfy tax distribution requirements.
Foreign exchange gains and losses realized by a Portfolio in connection
with certain transactions, if any, involving foreign currency-denominated debt
securities, certain foreign currency futures and options, foreign currency
forward contracts, foreign currencies, or payables or receivables denominated in
a foreign currency are subject to Section 988 of the Code, which generally
causes such gains and losses to be treated as ordinary income and losses and may
affect the amount, timing and character of fund distributions to shareholders.
In some cases, elections may be available that would alter this treatment. Any
such transactions that are not directly related to the Portfolios' investment in
stock or securities, possibly including speculative currency positions or
currency derivatives not used for hedging purposes, could under future Treasury
regulations produce income not among the types of "qualifying income" from which
each fund must derive at least 90% of its gross income for its taxable year.
Each Portfolio may be subject to withholding and other taxes imposed by
foreign countries with respect to investments in foreign securities. Tax
conventions between certain countries and the U.S. may reduce or eliminate such
taxes in some cases. Investors in a fund would be entitled to claim U.S. foreign
tax credits or deductions with respect to such taxes, subject to certain holding
period requirements and other provisions and limitations contained in the Code,
only if more than 50% of the value of the applicable fund's total assets (taking
into account the fund's allocable share of the Portfolio's assets) at the close
of any taxable year were to consist of stock or securities of foreign
corporations and the fund were to file an election with the Internal Revenue
Service. Because the investments of the Portfolios are such that each fund
expects that it generally will not meet this 50% requirement, shareholders of
each fund generally will not directly take into account the foreign taxes, if
any, paid by the corresponding Portfolio and will not be entitled to any related
tax deductions or credits. Such taxes will reduce the amounts the funds would
otherwise have available to distribute.
If a Portfolio acquires stock (including, under proposed regulations, an
option to acquire stock such as is inherent in a convertible bond) in certain
foreign corporations that receive at least 75% of their annual gross income from
passive sources (such as interest, dividends, certain rents and royalties, or
capital gains) or hold at least 50% of their assets in investments producing
such passive income ("passive foreign investment companies"), the relevant fund
could be subject to Federal income tax and additional interest charges on
"excess distributions" actually or constructively received from such companies
or gain from the actual or deemed sale of stock in such companies, even if all
income or gain actually realized is timely distributed to its shareholders. They
would not be able to pass through to their shareholders any credit or deduction
for such a tax. Certain elections may, if available, ameliorate these adverse
tax consequences, but any such election would require them to recognize taxable
income or gain (subject to tax distribution requirements) without the concurrent
receipt of cash. These investments could also result in the treatment of
associated capital gains as ordinary income. The Portfolios may limit and/or
manage stock holdings, if any, in passive foreign investment companies to
minimize each fund's tax liability or maximize its return from these
investments.
Distributions from a fund's current or accumulated earnings and profits
("E&P"), as computed for Federal income tax purposes, will be treated under the
Code as ordinary income (if they are from the fund's investment company taxable
income) or long-term capital gain (if they are from the fund's net capital gain
and are designated by the fund as "capital gain dividends") 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
-38-
<PAGE>
to the amount of cash they would have received had they elected to receive the
distributions in cash, divided by the number of shares received.
For purposes of the dividends received reduction available to
corporations, dividends received by a Portfolio and allocable to its
corresponding fund, if any, from U.S. domestic corporations in respect of the
stock of such corporations held by the Portfolio, for U.S. Federal income tax
purposes, for at least a minimum holding period, generally 46 days, extending
before and after each dividend and distributed and designated by the fund may be
treated as qualifying dividends. The Portfolios' dividend income, if any,
probably will generally qualify for this deduction. Corporate shareholders must
meet the minimum holding period requirements referred to above with respect to
their shares of the applicable fund in order to qualify for the deduction and,
if they borrow to acquire or otherwise incur debt attributable to such shares,
may be denied a portion of the dividends received deduction. The entire
qualifying dividend, including the otherwise deductible amount, will be included
in determining the excess (if any) of a corporate shareholder's adjusted current
earnings over its alternative minimum taxable income, which may increase its
alternative minimum tax liability.
Additionally, any corporate shareholder should consult its tax adviser
regarding the possibility that its basis in its shares may be reduced, for
Federal income tax purposes, by reason of "extraordinary dividends" received
with respect to the shares, and, to the extent such basis would be reduced below
zero, current recognition of income would be required.
At the time of an investor's purchase of fund shares, a portion of the
purchase price may be attributable to undistributed net investment income and/or
realized or unrealized appreciation in the fund's share of a Portfolio's
portfolio. Consequently, subsequent distributions by a fund on such shares from
such income and/or appreciation may be taxable to such investor even if the net
asset value of the investor's shares is, as a result of the 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 a 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 same fund within a period of 61 days beginning 30 days before and ending
30 days after the shares are disposed of, such as pursuant to automatic dividend
reinvestments. In such a case, the basis of the shares acquired will be adjusted
to reflect the disallowed loss. Any loss realized upon the redemption of shares
with a tax holding period of six months or less will be treated as a long-term
capital loss to the extent of any amounts treated as distributions of long-term
capital gain with respect to such shares. 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.
Different tax treatment, including penalties on certain excess
contributions and deferrals, certain pre-retirement and post-retirement
distributions and certain prohibited transactions, is accorded to accounts
maintained as qualified retirement plans. Shareholders should consult their tax
advisers for more information.
The foregoing discussion relates solely to U.S. Federal income tax law
as applicable to U.S. persons (i.e., U.S. citizens or residents and U.S.
domestic corporations, partnerships, trusts or estates) subject to tax under
such law. The discussion does not address special tax rules applicable to
certain classes of investors, such as tax-exempt entities, insurance companies,
and financial institutions. Dividends, capital gain distributions, and ownership
of or gains realized on the redemption (including an exchange) of fund shares
may also be subject to state and local taxes. A state income (and possibly
-39-
<PAGE>
local income and/or intangible property) tax exemption is generally available to
the extent, if any, a fund's distributions are derived from interest on (or, in
the case of intangible property taxes, the value of its assets is attributable
to) investments in certain U.S. Government obligations, provided in some states
that certain thresholds for holdings of such obligations and/or reporting
requirements are satisfied. Shareholders should consult their tax advisers
regarding the applicable requirements in their particular states, including the
effect, if any, of a feeder fund's indirect ownership (through the Portfolio) of
any such obligations, as well as the federal, and any other state or local, tax
consequences of ownership of shares of, and receipt of distributions from, a
fund in their particular circumstances.
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 funds with their correct taxpayer identification number and
certain certifications or if they are otherwise subject to backup withholding.
Federal law requires that taxable distributions and proceeds of
redemptions and exchanges be reported to the IRS and that 31% be withheld if you
fail to provide your correct Taxpayer Identification Number ("TIN") and the
TIN-related certifications contained in the Account Purchase Application
("Application") or you are otherwise subject to backup withholding. A fund will
not impose backup withholding as a result of your failure to make any
certification, except the certifications in the Application that directly relate
to your TIN and backup withholding status. Amounts withheld and forwarded to the
IRS can be credited as a payment of tax when completing your federal income tax
return.
For most individual taxpayers, the TIN is the social security number.
Special rules apply for certain accounts. For example, for an account
established under the Uniform Gift to Minors Act, the TIN of the minor should be
furnished. If you do not have a TIN, you may apply for one using forms available
at local offices of the Social Security Administration or the IRS, and you
should write "Applied For" in the space for a TIN on the Application.
Recipients exempt from backup withholding, including corporations and
certain other entities, should provide their TIN and underline "exempt" in
section 2(a) of the TIN section of the Application to avoid possible erroneous
withholding. Non-resident aliens and foreign entities must provide certain
certifications on IRS Form W-8. For further information, see Code Sections 1441,
1442 and 3406 and/or consult your tax adviser.
Non-U.S. investors not engaged in a U.S. trade or business with which
their investment in a fund is effectively connected will be subject to U.S.
Federal income tax treatment that is different from that described above. These
investors may be subject to nonresident alien withholding tax at the rate of 30%
(or a lower rate under an applicable tax treaty) on amounts treated as ordinary
dividends from the fund and, unless an effective IRS Form W-8 or authorized
substitute is on file, to 31% backup withholding on certain other payments from
the fund. Non-U.S. investors should consult their tax advisers regarding such
treatment and the application of foreign taxes to an investment in the funds.
ADDITIONAL INFORMATION
The funds' prospectus and this SAI omit certain information contained in
the Trust's registration statement filed with the SEC, which may be obtained
from the SEC's principal office at 450 Fifth Street, N.W., Washington, D.C.
20549, upon payment of the fee prescribed by the rules and regulations
promulgated by the SEC.
-40-
<PAGE>
EXPERTS AND FINANCIAL STATEMENTS
Each fund's and Portfolio's financial statements contained in the 1998
Annual Reports of the funds and the Portfolios have been audited by
PricewaterhouseCoopers L.L.P., independent accountants, and are incorporated by
reference into this SAI.
-41-
<PAGE>
[LOGO] STANDISH FUNDS(R)
Standish Group of
Fixed Income Asset Funds
Prospectus
- ------------------------------------------------------
March 31, 1999
Standish Fixed Income Asset Fund
Standish International Fixed Income Fund
(Service Class Shares)
Standish Global Fixed Income Asset Fund
The Securities and Exchange Commission
has not approved or disapproved these
securities or determined whether this
prospectus is accurate or complete. Any
statement to the contrary is a crime.
<PAGE>
Contents
- --------------------------------------------------------------------------------
Risk/Return Summary.............................3
Who may want to invest........................3
Mutual fund risks.............................3
Fixed Income Asset Fund.......................4
Standish International Fixed Income Fund......6
Global Fixed Income Asset Fund................8
The Funds' Investments and Related Risks.......10
Additional investments.......................10
Additional investment policies...............10
The Investment Advisers........................12
About Standish(R) and SIMCO(R) ..............12
Fund managers................................13
Advisory services and fees...................13
[GRAPHIC OMITTED] Investment and Account Information.............14
How to purchase shares......................14
How to exchange shares......................15
How to redeem shares........................15
Transaction and account policies............16
Valuation of shares.........................16
Dividends and distributions.................16
Year 2000 Issue.............................16
Fund Details...................................17
Taxes.......................................17
Master/feeder structure.....................17
The funds' service providers................17
Financial Highlights...........................18
For More Information...........................20
Standish Group of Fixed Income Asset Funds 2
<PAGE>
Risk/Return Summary
- --------------------------------------------------------------------------------
Standish, Ayer & Wood, Inc. manages Fixed Income Asset Fund and Standish
International Management Company, L.P. (SIMCO), an affiliate of Standish,
manages International Fixed Income Fund and Global Fixed Income Asset Fund.
Standish believes that discovering pockets of inefficiency is the key to adding
value to fixed income investments. Standish focuses on identifying undervalued
sectors and securities and deemphasizes the use of interest rate forecasting.
Standish looks for fixed income securities with the most potential for added
value, such as those involving unusual situations, new issuers, the potential
for credit upgrades, unique structural characteristics or innovative features.
These funds are only available through account administrators that provide
omnibus services for groups of individuals who beneficially own fund shares.
Omnibus accounts include pension and retirement plans as well as taxable and
tax-deferred investing programs that provide personal or account maintenance
services to groups of individuals.
Standish was founded in 1933 and currently manages more than $44 billion of
assets for a broad range of clients in the U.S. and abroad.
Who may want to invest
The funds may be appropriate for investors:
o Willing to ride out changes in bond prices due to interest rate changes.
o Seeking current income.
o Seeking to build capital gradually through appreciation and compounding
interest.
In addition, for International Fixed Income Fund and Global Fixed Income Asset
Fund:
o Prepared to accept the risks of investing in foreign and emerging markets,
which include political instability, currency fluctuations and illiquidity.
Descriptions of the funds begin on the next page and include more information
about each fund's key investments and strategies, principal risk factors, past
performance and expenses.
Mutual fund risks
An investment in a fund is not a bank deposit and is not insured or guaranteed
by the Federal Deposit Insurance Corporation or any other government agency.
3 Standish Group of Fixed Income Asset Funds
<PAGE>
Risk/Return Summary
- --------------------------------------------------------------------------------
Fixed Income Asset Fund
Investment objective
Primarily to achieve a high level of current income, consistent with conserving
principal and liquidity and secondarily to seek capital appreciation when
changes in interest rates and economic conditions indicate that capital
appreciation may be available without significant risk to principal.
Key investments and strategies
The fund invests, under normal circumstances, at least 65% of assets in fixed
income securities issued by U.S. and foreign governments and companies. The fund
may invest up to 20% of assets in non-dollar denominated securities of foreign
and emerging market issuers, and no more than 10% of assets in these foreign
currency denominated securities that have not been hedged back to the U.S.
dollar. The fund may also invest in interest rate futures contracts.
Credit quality
The fund invests primarily in investment grade securities, but may invest up to
15% of assets in below investment grade securities, sometimes referred to as
junk bonds. The fund will not invest in securities rated lower than B. The
adviser attempts to select fixed income securities that have the potential to be
upgraded.
Targeted average portfolio credit quality
AA/Aa
Maturity
The fund generally will maintain an average dollar-weighted effective portfolio
maturity of 5 to 13 years but may invest in individual securities of any
maturity.
How investments are selected
The adviser focuses on identifying undervalued government bond markets,
currencies, sectors and securities as well as on countries with favorable
relative investment environments and deemphasizes the use of an interest rate
forecasting strategy. The adviser looks for fixed income securities with the
most potential for added value, such as those involving the potential for credit
upgrades, unique structural characteristics or innovative features. The adviser
selects securities for the fund's portfolio by:
o Allocating assets among sectors appearing to have near-term return
potential.
o Actively trading among various sectors, such as corporate, mortgage pass
through, government agency and asset-backed securities.
o Buying when a yield spread advantage presents an opportunity to buy
securities cheaply.
Principal risks of investing in the fund
Investors could lose money on their investments in the fund or the fund could
perform less well than other possible investments if any of the following
occurs:
o Interest rates rise, which will make the prices of fixed income securities
and the value of the fund's portfolio go down.
o The issuer of a security owned by the fund has its credit rating downgraded
or defaults on its obligation to pay principal and/or interest. This risk is
higher for below investment grade bonds.
o When interest rates are declining, the issuer of a security exercises its
right to prepay principal earlier than scheduled, forcing the fund to
reinvest in lower yielding securities. This is known as call or prepayment
risk.
o When interest rates are rising, the average life of securities backed by
debt obligations is extended because of slower than expected principal
payments. This will lock in a below-market interest rate, increase the
security's duration and reduce the value of the security. This is known as
extension risk.
o The adviser's judgment about the attractiveness, relative value or potential
appreciation of a particular country, currency, sector, security or hedging
strategy proves to be incorrect.
o Prices of foreign securities go down because of unfavorable foreign
government actions, political, economic or market instability or the absence
of accurate information about foreign companies. A decline in the value of
foreign currencies relative to the U.S. dollar will reduce the value of
securities held by the fund and denominated in those currencies. Foreign
securities are sometimes less liquid and harder to value than securities of
U.S. issuers. These risks are more severe for securities of issuers in
emerging market countries.
o During periods of extreme interest rate volatility the fund has difficulty
closing out its position in interest rate futures contracts or closing out
the position at a price which the adviser believes would be advantageous to
the fund.
Standish Group of Fixed Income Asset Funds 4
<PAGE>
- --------------------------------------------------------------------------------
Total return performance
The bar chart and total return table indicate the risks of investing in the
fund. The bar chart shows changes in the performance from year to year of the
fund and an older feeder fund that invests in the same master portfolio. See
"Master/feeder structure" on page 17. The total return table shows how the
fund's and the older feeder fund's average annual returns for different calendar
periods compare to those of a widely recognized, unmanaged index of fixed income
securities. The performance of the older feeder fund has been reduced to reflect
the deduction of the fund's 25 basis point account administration fee. The past
performance of the fund and the older feeder fund does not necessarily indicate
how the fund will perform in the future.
Fixed Income Asset Fund
[The following table was originally a bar chart in the printed materials.]
Calendar Year
Ended
December 31 Percent
----------- -------
1989 13.47
1990 8.93
1991 17.38
1992 6.62
1993 14.34
1994 -5.12
1995 18.25
1996 5.21
1997 9.27
1998 4.33*
Quarterly returns:
Fixed Income Asset Fund
Highest: 7.51% in 2nd quarter 1989
Lowest: -4.06% in 1st quarter 1994
*The bar chart shows the performance of the older feeder fund through May 31,
1998 and of Fixed Income Asset Fund from that date to December 31, 1998.
Average annual total returns
for selected periods ended December 31, 1998
Life Inception
1 Year 5 Year 10 Year of Funds Date
Fixed Income Asset Fund* 4.33 6.12 9.06 8.43 6/1/98
Lehman Brothers Aggregate 8.67 7.27 9.26 8.62 N/A
*Includes performance of the older feeder fund for the period from March 27,
1987 (inception) to May 31, 1998, adjusted to reflect Fixed Income Asset Fund's
0.25% account administration fee.
Fees and expenses of the fund
This table describes the fees and expenses you may pay if you buy and hold
shares of the fund.
Based on fiscal year Fixed Income
ended 12/31/98 Asset Fund
(unaudited)
Shareholder fees (fees paid
directly from your investment) None
Annual fund operating expenses(1,2)
(expenses that are deducted
from fund assets)
Management fees 0.31%
Distribution (12b-1) fees None
Other expenses 3.06%
Account administration fee 0.25%
Total annual fund operating
expenses 3.62%
(1)Because Standish has agreed to cap the fund's operating expenses, the fund's
actual expenses were:
Management fees 0.31%
Other expenses 0.03%
Account administration fee 0.25%
Total annual fund
operating expenses 0.59%
These caps may be changed or eliminated.
(2)The table and example reflect the combined expenses of the fund and the
master fund in which it invests all its assets.
Expense Example
This example is intended to help you compare the cost of investing in the fund
with the cost of investing in other mutual funds. The example assumes that:
o You invest $10,000 in the fund for the time periods indicated;
o You redeem at the end of each period;
o Your investment has a 5% return each year; and
o The fund's operating expenses have not been capped and remain the same.
Although your actual costs may be higher or lower, under these assumptions your
costs would be:
After After After After
1 year 3 years 5 years 10 years
Fixed Income Asset Fund $365 $1,109 $1,873 $3,880
5 Standish Group of Fixed Income Asset Funds
<PAGE>
Risk/Return Summary
- --------------------------------------------------------------------------------
International Fixed Income Fund
Investment objective
To maximize total return while realizing a market level of income consistent
with preserving principal and liquidity.
Key investments and strategies
The fund invests, under normal circumstances, at least 65% of assets in
non-dollar denominated fixed income securities of foreign governments and
companies located in various countries, including emerging markets. The fund
always invests in at least 5 countries other than the U.S. At times, the fund
may invest a substantial part of its assets in any one country. The fund will
hedge most, but not necessarily all, of its foreign currency exposure to protect
the U.S. dollar value of the fund's assets. The fund may also invest in interest
rate futures contracts.
Credit quality
The fund invests primarily in investment grade securities, but may invest up to
10% of assets in below investment grade securities, sometimes referred to as
junk bonds. The fund will not invest in securities rated lower than B. The
adviser selects fixed income securities that have the potential to be upgraded.
Targeted average portfolio credit quality
AA/Aa
Maturity
The fund is not subject to any maturity restrictions.
How investments are selected
The adviser focuses on identifying undervalued government bond markets,
currencies, sectors and securities and deemphasizes the use of an interest rate
forecasting strategy. The adviser looks for fixed income securities with the
most potential for added value, such as those involving the potential for credit
upgrades, unique structural characteristics or innovative features. The adviser
selects securities for the fund's portfolio by:
o Using fundamental economic research at the country and industry, as opposed
to company, level as well as quantitative analysis to allocate assets among
countries and currencies based on a comparative evaluation of interest and
inflation rate trends, government fiscal and monetary policies and the
credit quality of governmental debt.
o Focusing on sectors and individual securities that appear to be relatively
undervalued and actively trading among sectors.
Principal risks of investing in the fund
Investors could lose money on their investment in the fund or the fund could
perform less well than other possible investments if any of the following
occurs:
o Interest rates rise, which will make the prices of fixed income securities
and the value of the fund's portfolio go down.
o The issuer of a security owned by the fund has its credit rating downgraded
or defaults on its obligation to pay principal and/or interest. This risk is
higher for below investment grade bonds.
o When interest rates are declining, the issuer of a security exercises its
right to prepay principal earlier than scheduled, forcing the fund to
reinvest in lower yielding securities. This is known as call or prepayment
risk.
o When interest rates are rising, the average life of securities backed by
debt obligations is extended because of slower than expected principal
payments. This will lock in a below-market interest rate, increase the
security's duration and reduce the value of the security. This is known as
extension risk.
o The adviser's judgment about the attractiveness, relative value or potential
appreciation of a particular country, currency, sector, security or hedging
strategy proves to be incorrect.
o Prices of foreign securities go down because of unfavorable foreign
government actions, political, economic or market instability or the absence
of accurate information about foreign companies. A decline in the value of
foreign currencies relative to the U.S. dollar will reduce the value of
securities held by the fund and denominated in those currencies. Foreign
securities are sometimes less liquid and harder to value than securities of
U.S. issuers. These risks are more severe for securities of issuers in
emerging market countries.
o During periods of extreme interest rate volatility the fund has difficulty
closing out its position in interest rate futures contracts or closing out
the position at a price which the adviser believes would be advantageous to
the fund.
The fund is non-diversified. This means that the fund may invest more of its
assets in the securities of a single issuer than diversified funds. To the
extent the fund invests more if its assets in a single issuer, the fund's share
price may be adversely affected by events affecting that issuer.
Standish Group of Fixed Income Asset Funds 6
<PAGE>
- --------------------------------------------------------------------------------
Total return performance
The bar chart and total return table indicate the risks of investing in the
fund. The bar chart shows changes in the performance of the fund's Institutional
Class shares from year to year over the life of that class for the full calendar
periods indicated. The total return table shows how average annual returns of
Institutional Class shares for different calendar periods compare to those of
two widely recognized, unmanaged indices of fixed income securities. Past
performance does not indicate how the fund will perform in the future.
International Fixed Income Fund
(Institutional Class)*
[The following table was originally a bar chart in the printed materials.]
Calendar Year
Ended
December 31 Percent
----------- -------
1991 15.07
1992 8.07
1993 23.97
1994 -9.22
1995 18.13
1996 15.28
1997 11.86
1998 8.73
Quarterly returns:
Equity Fund
Highest: 9.98% in 3rd quarter 1998
Lowest: -5.78% in 1st quarter 1994
*Institutional Class shares are not offered in this prospectus, but Service
Class shares would have had substantially similar performance over all periods
shown. Institutional Class shares and Service Class shares are invested in the
same portfolio of securities and annual returns differ only to the extent that
each class has different expenses.
Average annual total returns for selected
periods ended December 31, 1998
Life of
1 Year 5 Years Institutional Class
International Fixed Income Fund 8.73 8.50 11.06
(Institutional Class)
J.P. Morgan Non-U.S. Govt.
Bond Index (Hedged) 12.09 9.45 9.73
Lehman Brothers Aggregate 8.67 7.27 8.65
Fees and expenses of the fund
This table describes the fees and expenses you may pay if you buy and hold
shares of the fund. Expenses are based on estimates for the current fiscal year.
International
Fixed Income
Fund
(Service Class)
Shareholder fees (fees paid
directly from your investment) None
Annual fund operating expenses
(expenses that are deducted
from fund assets)
Management fees 0.40%
Distribution (12b-1) fees None
Other expenses 0.12%
Service fee 0.25%
Total annual fund operating
expenses 0.77%
Expense example
This example is intended to help you compare the cost of investing in the fund
with the cost of investing in other mutual funds. The example assumes that:
o You invest $10,000 in the fund for the time periods indicated;
o You redeem at the end of each period;
o Your investment has a 5% return each year; and
o The fund's operating expenses have not been capped and remain the same.
Although your actual costs may be higher or lower, under these assumptions your
costs would be:
After After After After
1 year 3 years 5 years 10 years
International
Fixed Income Fund
(Service Class) $79 $246 $428 $954
7 Standish Group of Fixed Income Asset Funds
<PAGE>
Risk/Return Summary
- --------------------------------------------------------------------------------
Global Fixed Income Asset Fund
Investment objective
To maximize total return while realizing a market level of income consistent
with preserving principal and liquidity.
Key investments and strategies
The fund invests primarily in non-dollar denominated fixed income securities of
foreign governments and companies located in various countries, including
emerging markets. The fund generally invests in 8 or more countries, but always
invests in at least 3 countries, one of which may be the U.S. At times, the fund
may invest a substantial part of its assets in a single country. The fund will
hedge most, but not necessarily all, of its foreign currency exposure to protect
the U.S. dollar value of the fund's assets. The fund may also invest in interest
rate futures contracts based upon fixed income securities.
Credit quality
The fund invests, under normal circumstances, at least 65% of assets in
investment grade securities, but may invest up to 15% of assets in below
investment grade securities, sometimes referred to as junk bonds. The fund will
not invest in securities rated lower than B. The adviser attempts to select
fixed income securities that have the potential to be upgraded.
Targeted average portfolio credit quality
In the range of A to AA/Aa
Maturity
The fund is not subject to any maturity restrictions.
How investments are selected
The adviser focuses on identifying undervalued government bond markets,
currencies, sectors and securities as well as on countries with favorable
relative investment environments and deemphasizes the use of an interest rate
forecasting strategy. The adviser looks for fixed income securities with the
most potential for added value, such as those involving the potential for credit
upgrades, unique structural characteristics or innovative features. The adviser
selects securities for the fund's portfolio by:
o Using fundamental economic research and quantitative analysis to allocate
assets among countries and currencies based on a detailed evaluation of
interest rate and inflation trends, government fiscal and monetary policy
and the credit quality of governmental debt.
o Exploring sectors and individual securities that appear to be relatively
undervalued and actively trading among sectors.
Principal risks of investing in the funds
Investors could lose money on their investments in the fund or the fund could
perform less well than other possible investments if any of the following
occurs:
o Interest rates rise, which will make the prices of fixed income securities
and the value of the fund's portfolio go down.
o The issuer of a security owned by the fund has its credit rating downgraded
or defaults on its obligation to pay principal and/or interest. This risk is
higher for below investment grade bonds.
o When interest rates are declining, the issuer of a security exercises its
right to prepay principal earlier than scheduled, forcing the fund to
reinvest in lower yielding securities. This is known as call or prepayment
risk.
o When interest rates are rising, the average life of securities backed by
debt obligations is extended because of slower than expected principal
payments. This will lock in a below-market interest rate, increase the
security's duration and reduce the value of the security. This is known as
extension risk.
o The adviser's judgment about the attractiveness, relative value or potential
appreciation of a particular country, currency, sector, security or hedging
strategy proves to be incorrect.
o Prices of foreign securities go down because of unfavorable foreign
government actions, political, economic or market instability or the absence
of accurate information about foreign companies. A decline in the value of
foreign currencies relative to the U.S. dollar will reduce the value of
securities held by the fund and denominated in those currencies. Foreign
securities are sometimes less liquid and harder to value than securities of
U.S. issuers. These risks are more severe for securities of issuers in
emerging market countries.
o During periods of extreme interest rate volatility the fund has difficulty
closing out its position in interest rate futures contracts or closing out
the position at a price which the adviser believes would be advantageous to
the fund.
The fund is non-diversified. This means that the fund may invest more of its
assets in the securities of a single issuer than diversified funds. To the
extent the fund invests more of its assets in a single issuer, the fund's share
price may be adversely affected by events affecting that issuer.
Standish Group of Fixed Income Asset Funds 8
<PAGE>
- --------------------------------------------------------------------------------
Total return performance
The bar chart and total return table indicate the risks of investing in the
fund. As of the date of this prospectus, the fund had not begun investment
operations. The bar chart shows changes in the performance from year to year of
an older feeder fund that invests in the same master portfolio. See
"Master/feeder structure" on page 17. The total return table shows how the older
feeder fund's average annual returns for different calendar periods compare to
those of a widely recognized, unmanaged index of fixed income securities. The
performance of the older feeder fund has been reduced to reflect the deduction
of the fund's 25 basis point account administration fee. The older feeder fund's
past performance does not necessarily indicate how the fund will perform in the
future.
Global Fixed Income Asset Fund
[The following table was originally a bar chart in the printed materials.]
Calendar Year
Ended
December 31 Percent
----------- -------
1994 -7.31
1995 17.84
1996 12.75
1997 11.41
1998 6.71
Quarterly returns:
Global Fixed Income Asset Fund
Highest: 5.14% in 2nd quarter 1995
Lowest: -4.86 in 1st quarter 1994
Average annual total returns
for selected periods ended December 31, 1998
Life Inception
1 Year of Funds Date
Global Fixed Income Asset Fund 6.71 7.92 1/3/94*
J.P. Morgan Global Government Bond Index 11.42 8.70 N/A
*Inception date of older feeder fund.
Fees and expenses of the fund
This table describes the fees and expenses you may pay if you buy and hold
shares of the fund. Expenses are estimated for the current fiscal year.
Global
Fixed Income
Asset Fund
(unaudited)
Shareholder fees (fees paid
directly from your investment) None
Annual fund operating expenses(1,2)
(expenses that are deducted
from fund assets)
Management fees 0.40%
Distribution (12b-1) fees None
Other expenses 0.16%
Account administration fee 0.25%
Total annual fund operating
expenses 0.81%
Expense example
This example is intended to help you compare the cost of investing in the fund
with the cost of investing in other mutual funds. The example assumes that:
o You invest $10,000 in the fund for the time periods indicated;
o You redeem at the end of each period;
o Your investment has a 5% return each year; and
o The fund's operating expenses have not been capped and remain the same.
Although your actual costs may be higher or lower, under these assumptions your
costs would be:
After After After After
1 year 3 years 5 years 10 years
Global Fixed Income Asset Fund $83 $259 $450 $1,002
9 Standish Group of Fixed Income Asset Funds
<PAGE>
The Funds' Investments and Related Risks
- --------------------------------------------------------------------------------
Primary investments
Fixed income investments Fixed income investments include bonds, notes
(including structured notes), mortgage-related securities, asset-backed
securities, convertible securities, eurodollar and Yankee dollar instruments,
preferred stocks, interest rate futures contracts and money market instruments.
Fixed income securities may be issued by U.S. and foreign corporations or
entities; U.S. and foreign banks; the U.S. government, its agencies,
authorities, instrumentalities or sponsored enterprises; state and municipal
governments; and foreign governments and their political subdivisions. These
securities may have all types of interest rate payment and reset terms,
including fixed rate, adjustable rate, zero coupon, contingent, deferred,
payment in kind and auction rate features.
Asset-backed securities represent participations in, or are secured by and
payable from, assets such as installment sales or loan contracts, leases, credit
card receivables and other categories of receivables.
Mortgage-related securities may be issued by private companies or by agencies of
the U.S. government. Mortgage-related securities represent direct or indirect
participations in, or are collateralized by and payable from, mortgage loans
secured by real property. Mortgage-related and asset-backed securities are
especially sensitive to prepayment and extension risk.
For mortgage derivatives and structured securities that have imbedded leverage
features, small changes in interest or prepayment rates may cause large and
sudden price movements. Mortgage derivatives can also become illiquid and hard
to value in declining markets.
The funds may use mortgage dollar rolls to finance the purchase of additional
investments. Dollar rolls expose a fund to the risk that it will lose money if
the additional investments do not produce enough income to cover the fund's
dollar roll obligations.
Additional investments
International Fixed Income Fund and Global Fixed Income Asset Fund Each fund may
invest 10% of assets in emerging markets generally and 3% of assets in any
single emerging market. At times the funds invest substantially in fixed income
securities of foreign governments or their political subdivisions. This exposes
the funds to additional risk if the foreign government is unable or unwilling to
repay principal or interest when due.
In Europe, Economic and Monetary Union (EMU) and the introduction of a single
currency (euro) began in 1999. There are political and economic risks associated
with EMU, which may increase the volatility of a fund's European investments and
present valuation problems.
Additional investment policies
Credit quality Securities are investment grade if they are rated in one of the
four highest long-term rating categories of a nationally recognized statistical
rating organization, have received a comparable short-term or other rating or
are unrated securities that the adviser believes are of comparable quality.
If a security receives "split" (different) ratings from multiple rating
organizations, a fund will treat the security as being rated in the higher
rating category. A fund may choose not to sell securities that are downgraded
below the fund's minimum acceptable credit rating after their purchase. Each
fund's credit standards also apply to counterparties to OTC derivative
contracts.
The funds may invest in a wide range of fixed income securities.
Standish Group of Fixed Income Asset Funds 10
<PAGE>
- --------------------------------------------------------------------------------
Defensive investing Each fund may depart from its principal investment
strategies in response to adverse market, economic or political conditions by
taking temporary defensive positions in all types of short term debt securities.
If a fund takes a temporary defensive position, it may be unable for a time to
achieve its investment objective.
Derivative contracts Each fund may, but is not required to, use derivative
contracts for any of the following purposes:
o To hedge against adverse changes--caused by changing interest rates or
currency exchange rates--in the market value of securities held by or to be
bought for a fund.
o As a substitute for purchasing or selling securities.
o To shorten or lengthen the effective maturity or duration of a fund's
portfolio.
o To enhance a fund's potential gain in non-hedging situations.
A derivative contract will obligate or entitle a fund to deliver or receive an
asset or a cash payment that is based on the change in value of a designated
security, currency or index. Even a small investment in derivative contracts can
have a big impact on a portfolio's interest rate and currency exposure.
Therefore, using derivatives can disproportionately increase portfolio losses
and reduce opportunities for gains when interest rates or currency rates are
changing. A fund may not fully benefit from or may lose money on derivatives if
changes in their value do not correspond accurately to changes in the value of
the fund's portfolio holdings.
Counterparties to OTC derivative contracts present the same types of credit risk
as issuers of fixed income securities. Derivatives can also make a fund's
portfolio less liquid and harder to value, especially in declining markets.
Impact of high portfolio turnover Each fund may engage in active and frequent
trading to achieve its principal investment strategies. This may lead to the
realization and distribution to shareholders of higher capital gains, which
would increase their tax liability. Frequent trading also increases transaction
costs, which could detract from a fund's performance.
Investment objective Fixed Income Asset and Global Fixed Income Asset Funds'
investment objective may be changed by the funds' trustees without shareholder
approval.
11 Standish Group of Fixed Income Asset Funds
<PAGE>
The Investment Advisers
- --------------------------------------------------------------------------------
About Standish and SIMCO
Standish was established in 1933 and manages more than $44 billion in assets for
institutional and individual investors in the U.S. and abroad. Standish is the
adviser to Fixed Income Asset Fund. SIMCO, a partnership in which Standish holds
a 99.98% interest, was established in 1991. SIMCO is the adviser to
International Fixed Income Fund and Global Fixed Income Asset Fund.
By choice, Standish has remained a privately held investment management firm
over its more than 65 year history. Ownership is shared by a limited number of
employees, who are the directors of the firm. Standish believes the firm's
organizational structure has helped preserve an entrepreneurial orientation,
which reinforces its commitment to investment performance.
Standish believes that experience is a prerequisite for long-term investment
success. But experience alone is insufficient in a world of complex new
securities and rapidly changing technologies. To keep pace with today's
investment markets, Standish has built a staff which balances enthusiasm and
intellectual curiosity with professional and technical expertise. This
combination of experience and enthusiasm, tradition and innovation has worked
well and serves as a blueprint for future growth at Standish.
Standish and SIMCO rely on a combination of traditional fundamental research,
which is the product of a seasoned staff of specialists, and innovative
quantitative analysis, which uses sophisticated computer-based models to help
identify potentially attractive securities in equity and fixed income markets.
In each market, Standish and SIMCO seek to discover opportunity by attention to
detail and adherence to a strict set of disciplines. Standish and SIMCO use
fundamental research to uncover a security sufficiently complex as to have been
misvalued by traditional analysis. Standish and SIMCO use sophisticated
quantitative techniques, which may help identify persistent market
inefficiencies that can be exploited by their portfolio managers.
Standish and SIMCO strive to balance individual insight with the shared wisdom
of the investment team. By combining technology and an experienced research
staff, Standish has built a powerful internal network of overlapping resources.
Standish offers a broad array of investment services that include management of
domestic and international equity and fixed income portfolios.
Standish Group of Fixed Income Asset Funds 12
<PAGE>
- --------------------------------------------------------------------------------
Fund managers
- --------------------------------------------------------------------------------
Fund Fund managers Positions during past five years
Fixed Income Caleb F. Aldrich Vice president and managing
Asset Fund director of Standish
International Fixed Richard S. Wood Executive vice president and
Income Fund director of SIMCO and vice
Global Fixed president and managing director
Income Asset Fund of Standish
W. Charles Cook II Vice president of SIMCO and
(Co-manager since 1997) vice president and, since 1997,
director of Standish
- --------------------------------------------------------------------------------
Advisory services and fees
SIMCO provides International Fixed Income Fund and Global Fixed Income Asset
Fund and Standish provides Fixed Income Asset Fund with portfolio management and
investment research services. Each adviser places orders to buy and sell each
fund's portfolio securities and Standish manages each fund's business affairs.
For the year ended December 31, 1998, each fund paid an advisory fee for these
services. The advisers agreed to limit certain funds' total annual operating
expenses (excluding brokerage commissions, taxes and extraordinary expenses).
These agreements are temporary and may be terminated or changed at any time.
<TABLE>
<CAPTION>
Annual Advisory Fee Rates
(as a percentage of the fund's average net assets)
Actual advisory fee paid Contractual advisory fee Current expense limitation
<S> <C> <C> <C>
Fixed Income Asset Fund 0.31% 0.40% 0.61%
International Fixed Income Fund
(Service Class) N/A 0.40% 0.80%
Global Fixed Income
Asset Fund N/A 0.40% 0.81%
</TABLE>
Standish, Ayer & Wood, Inc.
One Financial Center
Boston, Massachusetts 02111-2662
Standish International Management Company, L.P.
One Financial Center
Boston, Massachusetts 02111-2662
13 Standish Group of Fixed Income Asset Funds
<PAGE>
Investment and Account Information
- --------------------------------------------------------------------------------
How to purchase shares
Who may purchase fund shares Only account administrators for omnibus accounts
may purchase the funds' shares. Individuals may not purchase shares directly
from the funds.
o If you are an individual investing assets in a retirement plan sponsored by
your employer, contact your employer to find out how to purchase fund
shares.
o If you are an individual investing assets in a self-administered retirement
plan, contact your account administrator to find out how to purchase fund
shares.
Minimum initial investment for each fund is $100,000 per omnibus account. This
minimum does not apply to investments by individual participants in an omnibus
account. Also, this minimum does not apply to omnibus accounts that use Standish
or one its affiliates as their investment adviser.
All orders to purchase shares received and accepted by the distributor or
certain account administrators before the close of regular trading on the New
York Stock Exchange will be executed at that day's share price if payment is
received by the funds' custodian by a specified time on the next business day.
Orders accepted after that time will be executed at the next business day's
price. Financial intermediaries acting on a purchaser's behalf are responsible
for transmitting orders to the distributor or its agent by the specified
deadline. All orders must be in good form and accompanied by payment. Each fund
reserves the right to reject purchase orders or to stop offering its shares
without notice to shareholders.
Account administrators should:
o Open an account with the funds by sending to the distributor a completed
original account application.
o Transmit electronically or by telephone to the distributor the name of the
fund, the dollar amount of shares to be purchased and the applicable account
number.
o Wire the purchase price in immediately available funds not later than a
specified time on the next business day.
The distributor's address is:
Standish Fund Distributors, L.P.
P.O. Box 1407
Boston, Massachusetts 02205-1407
Tel: 1-800-221-4795
Fax: 617-350-0042
Email: [email protected]
Standish Group of Fixed Income Asset Funds 14
<PAGE>
- --------------------------------------------------------------------------------
How to exchange shares
Account administrators may exchange shares of a fund (except International Fixed
Income Fund) for shares of any other Standish fund, if the registration of both
accounts is identical. Account administrators may exchange Service Class shares
of International Fixed Income Fund for Service Class shares of any other
Standish fund, if the registration of both accounts is identical. Individuals
should contact their employers or account administrators to find out how to
exchange fund shares. A fund may refuse any exchange order and may alter, limit
or suspend its exchange privilege on 60 days' notice. Exchange requests will not
be honored until the distributor receives payment for the exchanged shares (up
to 3 business days). An exchange involves a taxable redemption of shares
surrendered in the exchange.
By mail
Account administrators should:
o Send a letter of instruction to the distributor signed by each registered
account owner.
o Provide the name of the current fund, the fund to exchange into, the class
of shares (if applicable) and dollar amount to be exchanged.
o Provide both account numbers.
o Signature guarantees may be required.
By telephone
Account administrators should:
o If the account has telephone privileges, call the distributor.
o Provide the name of the current fund, the fund to exchange into, the class
of shares (if applicable) and dollar amount to be exchanged.
o Provide both account numbers.
o The distributor may ask for identification and all telephone transactions
may be recorded.
How to redeem shares
All orders to redeem shares received by the distributor or its agent before 4:00
p.m. eastern time will be executed at that day's share price. Orders accepted
after 4:00 p.m. will be executed at the next business day's price. All
redemption orders must be in good form. Each fund has the right to suspend
redemptions of shares and to postpone payment of proceeds for up to seven days,
as permitted by law. Individuals should contact their employers or account
administrators to find out how to redeem fund shares.
By mail
Account administrators should:
o Send a letter of instruction to the distributor signed by each registered
account owner.
o State the name of the fund the class of shares (if applicable) and number of
shares or dollar amount to be sold.
o Provide the account number.
o Signature guarantees may be required (see page 16).
By telephone
Account administrators should:
o If the account has telephone privileges, call the distributor.
o Proceeds will be mailed by check payable to the shareholder of record to the
address, or wired to the bank as directed, on the account application.
o The distributor may ask for identification and all telephone transactions
may be recorded.
15 Standish Group of Fixed Income Asset Funds
<PAGE>
Investment and Account Information
- --------------------------------------------------------------------------------
Transaction and account policies
Accounts with low balances. If an omnibus account falls below $50,000 as a
result of redemptions (and not because of performance), the distributor may
notify the account administrator that omnibus account participants should
increase the size of the account to $50,000 within 30 days. If the omnibus
account does not increase to $50,000 the distributor may redeem the account at
net asset value and remit the proceeds to the administrator.
In-kind purchases and redemptions. Securities held in an omnibus account may be
used to purchase shares of a fund. The adviser will determine if the securities
are consistent with the fund's objective and policies. If accepted, the
securities will be valued the same way the fund values securities it already
owns. A fund may make payment for redeemed shares wholly or in part by giving
the investor portfolio securities. A redeeming shareholder will pay transaction
costs to dispose of these securities.
Signature guarantees. A signature guarantee may be required for any written
request to sell or exchange shares, or to change account information for
telephone transactions.
The distributor will accept signature guarantees from:
o members of the STAMP program or the Exchange's Medallion Signature Program
o a broker or securities dealer
o a federal savings, cooperative or other type of bank
o a savings and loan or other thrift institution
o a credit union
o a securities exchange or clearing agency
A notary public cannot provide a signature guarantee.
Valuation of shares
Each fund offers its shares at the NAV per share of the fund or class, if more
than one class is offered. Each fund calculates its NAV once daily as of the
close of regular trading on the New York Stock Exchange (generally at 4:00 p.m.,
New York time) on each day the exchange is open. International Fixed Income Fund
calculates the NAV of each class of shares separately. If the exchange closes
early, the funds accelerate calculation of NAV and transaction deadlines to that
time.
Each fund values the securities in its portfolio on the basis of market
quotations and valuations provided by independent pricing services. If
quotations are not readily available, or the value of a security has been
materially affected by events occurring after the closing of a foreign exchange,
each fund may value its assets by a method that the trustees believe accurately
reflects fair value. A fund that uses fair value to price securities may value
those securities higher or lower than another fund that uses market quotations.
Foreign markets may be open on days when the U.S. markets are closed and the
value of foreign securities owned by a fund may change on days when shareholders
cannot purchase or redeem shares.
Dividends and distributions
Each fund intends to distribute all or substantially all of its net investment
income and realized capital gains, if any, for each taxable year. The funds
declare and distribute dividends from net investment income quarterly. The funds
declare and distribute net capital gains, if any, annually. All dividends and
capital gains are reinvested in shares of the fund that paid them unless the
shareholder elects to receive them in cash. Substantially all of a fund's
distributions will be from net investment income.
Year 2000 issue
The funds' securities trades, pricing and accounting services and other
operations could be adversely affected if the computer systems of the adviser,
distributor, custodian and transfer agent were unable to recognize dates after
1999. The costs of addressing the Year 2000 issue may also adversely effect the
issues of individual securities held by the funds.The adviser and other service
providers have told the funds that they are taking action to prevent, and do not
expect the funds to suffer from, material year 2000 problems.
Standish Group of Fixed Income Asset Funds 16
<PAGE>
Fund Details
- --------------------------------------------------------------------------------
Taxes
- --------------------------------------------------------------------------------
Federal Tax Status
Transactions (for taxable investors only)
Sales or exchanges of shares. Usually capital gain or loss. Tax
rate depends on how long shares are
held.
Distributions of long term capital gain. Taxable as long-term capital gain.
Distributions of short term capital gain. Taxable as ordinary income.
Dividends from net investment income. Taxable as ordinary income.
- --------------------------------------------------------------------------------
Every January, the funds provide information to certain account administrators
about the funds' dividends and distributions, which are taxable even if
reinvested, and about the accounts' redemptions during the previous calendar
year. Any account administrator who does not provide the funds with a correct
taxpayer identification number and required certification may be subject to
federal backup withholding tax.
Taxable investors should generally avoid investing in a fund shortly before an
expected dividend or capital gain distribution. Otherwise, an investor may pay
taxes on dividends or distributions that are economically equivalent to a
partial return of the shareholder's investment.
Investors should consult their tax advisers about their own particular tax
situations.
Master/feeder structure
Fixed Income Asset and Global Fixed Income Asset Funds are "feeder" funds that
invest exclusively in a corresponding "master" portfolios with identical
investment objectives. Except where indicated, this prospectus uses the term
"fund" to mean each feeder fund and its master portfolio taken together. The
master portfolio may accept investments from multiple feeder funds, which bear
the master portfolio's expenses in proportion to their assets.
Each feeder fund and its master portfolio expect to maintain consistent
investment objectives, but if they do not, the fund will withdraw from the
master portfolio, receiving either cash or securities in exchange for its
interest in the master portfolio. The fund's trustees would then consider
whether the fund should hire its own investment adviser, invest in a different
master portfolio, or take other action.
The funds' service providers
Principal Underwriter
Standish Fund Distributors, L.P.
Custodian, Transfer Agent and Fund Accountant
Investors Bank & Trust Company
Independent Accountants
PricewaterhouseCoopers LLP
Legal Counsel
Hale and Dorr LLP
17 Standish Group of Fixed Income Asset Funds
<PAGE>
Financial Highlights
- --------------------------------------------------------------------------------
The financial highlights tables for Fixed Income Asset Fund are intended to help
shareholders understand the fund's financial performance for the past five
years, or less if the fund has a shorter operating history. Certain information
reflects financial results for a single fund share. Total returns represent the
rate that a shareholder would have earned on an investment in a fund (assuming
reinvestment of all dividends and distributions). The information was audited by
PricewaterhouseCoopers LLP, independent accountants, whose reports, along with
the funds' financial statements, are included in the funds' annual reports
(available upon request). Global Fixed Income Asset Fund has not commenced
operations as of March 31, 1999 and no financial highlights are available.
Service Class shares of International Fixed Income Fund were first offered to
the public on March 31, 1999 and no financial highlights are available.
Fixed Income Asset Fund
For the period June 1, 1998 (commencement of operations) 1998
to December 31:(1) (unaudited)
Net asset value--beginning of period $20.00
------
Income from investment operations
Net investment income(1) $0.75
Net realized and unrealized gain (loss) (0.49)
------
Total from investment operations ($0.26)
Less distributions declared to shareholders
From net investment income --
In excess of net investment income --
From net realized gain on investments --
Tax return of capital --
Total distributions declared to shareholders --
Net asset value--end of period $20.26
======
Total return(2) 1.30%
Ratios (to average daily net assets)/Supplemental data
Net assets at end of period (000 omitted) $14
Expenses(3) 0.59%
Net investment income(3) 6.30%
Portfolio turnover
-----------------------------------
1 Calculated based on average shares outstanding.
2 The Fund's performance benchmark is the Lehman Brothers Aggregate Index. See
"Calculations of Performance Data" for a description of the index. The
average annual total return of this index for each year since the Fund's
inception was as follows (this total return information is not audited).
3 Computed on an annualized basis.
1998
Total Return:
Lehman Brothers Aggregate Index 8.67%
Standish Group of Fixed Income Asset Funds 18
<PAGE>
- --------------------------------------------------------------------------------
19 Standish Group of Fixed Income Asset Funds
<PAGE>
For More Information
- --------------------------------------------------------------------------------
Standish, Ayer & Wood, Inc. is an independent investment counseling firm that
has been managing assets for institutional investors and high net worth
individuals, as well as mutual funds, for more than 65 years. Standish offers a
broad array of investment services that includes management of domestic and
international equity and fixed income portfolios.
For investors who want more information about the Standish group of fixed income
asset funds, the following documents are available free upon request.
Annual/Semiannual Reports
Additional information about the funds' investments is available in the funds'
annual and semiannual reports to shareholders. Each fund's annual report
contains a discussion of the market conditions and investment strategies that
significantly affected the fund's performance during its last fiscal year.
Statement of Additional Information (SAI)
The SAI provides more detailed information about the funds and is incorporated
into this prospectus by reference.
Investors can get free copies of reports and SAIs, request other information and
discuss their questions about the funds by contacting the funds at:
Standish Funds
P.O. Box 1407
Boston, MA 02205-1407
Telephone: 1-800-SAW-0066
Email:
[email protected]
Internet:
http://www.standishfunds.com
Investors can review the funds' reports and SAIs at the Public Reference Room of
the Securities and Exchange Commission. Investors can get text-only copies:
o For a fee, by writing to or calling the Public Reference Room of the
Commission, Washington, D.C. 20549-6009 Telephone: 1-800-SEC-0330
o Free from the Commission's Internet website at http://www.sec.gov
[LOGO] STANDISH FUNDS(R)
One Financial Center
Boston, MA 02111-2662
(800) SAW-0066
Investment Company Act
file number (811-4813)
99-014
Standish Group of Fixed Income Asset Funds 20
<PAGE>
March 31, 1999
[STANDISH LOGO]
STANDISH, AYER & WOOD INVESTMENT TRUST
One Financial Center
Boston, Massachusetts 02111
(800) 729-0066
STATEMENT OF ADDITIONAL INFORMATION
Standish Group of Fixed Income Asset Funds
Standish Fixed Income Asset Fund
Standish Global Fixed Income Asset Fund
Standish International Fixed Income Fund Service Class
This combined Statement of Additional Information (SAI) is not a
prospectus. The SAI expands upon and supplements the information contained in
the combined prospectus dated January 29, 1999, as amended and/or supplemented
from time to time, of Standish Fixed Income Asset Fund (Fixed Income Asset
Fund), Standish Global Fixed Income Asset Fund (Global Fixed Income Asset Fund)
and Standish International Fixed Income Fund (International Fixed Income Fund)
Service Class, each a separate investment series of Standish, Ayer & Wood
Investment Trust (the Trust).
The SAI should be read in conjunction with the funds' prospectus.
Additional information about each fund's investments is available in the funds'
annual and semi-annual reports to shareholders. Investors can get free copies of
reports and the prospectus, request other information and discuss their
questions about the funds by contacting the funds at the phone number above.
Each fund's financial statements which are included in the 1998 annual reports
to shareholders are incorporated by reference into this SAI.
-----------------------------------------------
Contents
Investment Objectives and Policies.............................................3
Investment Restrictions.......................................................28
Calculation of Performance Data...............................................32
Management....................................................................34
Purchase and Redemption of Shares.............................................41
Portfolio Transactions........................................................41
Determination of Net Asset Value..............................................42
The Funds and Their Shares....................................................43
The Portfolios and Their Investors............................................45
Taxation......................................................................45
Additional Information........................................................50
Experts and Financial Statements..............................................50
<PAGE>
INVESTMENT OBJECTIVES
AND POLICIES
The prospectus describes the investment objective and policies of each
fund. The following discussion supplements the description of the funds'
investment policies in the prospectus.
Master/Feeder Structure. Fixed Income Asset Fund invests all of its
investible assets in Standish Fixed Income Portfolio ("Fixed Income Portfolio").
Global Fixed Income Asset Fund invests all of its investible assets in Standish
Global Fixed Income Portfolio ("Global Fixed Income Portfolio"). These two funds
are sometimes referred to in this SAI as the feeder funds. Each Portfolio is a
series of Standish, Ayer and Wood Master Portfolio ("Portfolio Trust"), an
open-end management investment company. Each Portfolio, together with
International Fixed Income Fund, are sometimes referred to collectively under
this "Investment Objectives and Policies" section as the "funds".
In addition to these feeder funds, other feeder funds may invest in these
Portfolios, and information about the other feeder funds is available from
Standish, Ayer and Wood, Inc. ("Standish"). The other feeder funds invest in the
Portfolios on the same terms as the funds and bear a proportionate share of the
Portfolios' expenses. The other feeder funds may sell shares on different terms
and under a different pricing structure than the funds, which may produce
different investment results.
There are certain risks associated with an investment in a master-feeder
structure. Large scale redemptions by other feeder funds in a Portfolio may
reduce the diversification of a Portfolio's investments, reduce economies of
scale and increase a Portfolio's operating expenses. If the Portfolio Trust's
Board of Trustees approves a change to the investment objective of a Portfolio
that is not approved by the Trust's Board of Trustees, a fund would be required
to withdraw its investment in the Portfolio and engage the services of an
investment adviser or find a substitute master fund. Withdrawal of a fund's
interest in its Portfolio, which may be required by the Trust's Board of
Trustees without shareholder approval, might cause the fund to incur expenses it
would not otherwise be required to pay.
If a fund is requested to vote on a matter affecting the Portfolio in
which it invests, the fund will call a meeting of its shareholders to vote on
the matter. The fund will then vote on the matter at the meeting of the
Portfolio's investors in the same proportion that the fund's shareholders voted
on the matter. The fund will vote those shares held by its shareholders who did
not vote in the same proportion as those fund shareholders who did vote on the
matter. A majority of the Trustees who are not "interested persons" (as defined
in the Investment Company Act of 1940, as amended (the "1940 Act")) of the Trust
or the Portfolio Trust, as the case may be, have adopted procedures reasonably
appropriate to deal with potential conflicts of interest arising from the fact
that the same individuals are trustees of the Trust and of the Portfolio Trust.
Adviser. Standish is the investment adviser to Fixed Income Portfolio.
Standish International Management Company, L.P. ("SIMCO") is the investment
adviser to Global Fixed Income Portfolio and to International Fixed Income Fund.
Both Standish and SIMCO are sometimes referred to collectively in this SAI as
the "adviser." Each Portfolio has the same investment objective and restrictions
as its corresponding fund. Because the feeder funds invest all of their
investable assets in their corresponding Portfolios, the description of each
fund's investment policies, techniques, specific investments and related risks
that follows also applies to the corresponding Portfolio.
Suitability. None of the funds is intended to provide an investment
program meeting all of the requirements of an investor. Notwithstanding each
fund's ability to spread risk by holding
2
<PAGE>
securities of a number of portfolio companies, shareholders should be able and
prepared to bear the risk of investment losses which may accompany the
investments contemplated by the funds.
Credit Quality. Investment grade securities are those that are rated at
Baa or higher by Moody's Investors Service, Inc. ("Moody's") or BBB or higher by
Standard & Poor's Ratings Group ("Standard & Poors"), Duff & Phelps, Inc.
("Duff") or FitchIBCA, Inc.("FitchIBCA") or, if unrated, determined by the
adviser to be of comparable credit quality. High grade securities are those that
are rated within the top three investment grade ratings (i.e., Aaa, Aa, A or P-1
by Moody's or AAA, AA, A, A-1 or Duff-1 by Standard & Poor's, Duff or Fitch).
Securities rated Baa or P-2 by Moody's or BBB, A-2 or Duff-2 by Standard &
Poor's, Duff, Fitch or IBCA are generally considered medium grade obligations
and have some speculative characteristics. Adverse changes in economic
conditions or other circumstances are more likely to weaken the medium grade
issuer's capability to pay interest and repay principal than is the case for
high grade securities.
Fixed income securities rated Ba and below by Moody's or BB and below by
Standard & Poor's, Duff, Fitch or IBCA, or, if unrated, determined by the
adviser to be of comparable credit quality are considered below investment grade
obligations. Below investment grade securities, commonly referred to as "junk
bonds," carry a higher degree of risk than medium grade securities and are
considered speculative by the rating agencies. To the extent a fund invests in
medium grade or non-investment grade fixed income securities, the adviser
attempts to select those fixed income securities that have the potential for
upgrade.
If a security is rated differently by two or more rating agencies, the
adviser uses the highest rating to compute a fund's credit quality and also to
determine the security's rating category. In the case of unrated sovereign and
subnational debt of foreign countries, the adviser may take into account, but
will not rely entirely on, the ratings assigned to the issuers of such
securities. If the rating of a security held by a fund is downgraded below the
minimum rating required for the particular fund, the adviser will determine
whether to retain that security in the fund's portfolio.
Maturity and Duration. Each fund generally invests in securities with
final maturities, average lives or interest rate reset frequencies of 15 years
or less. However, each fund may purchase individual securities with effective
maturities that are outside of these ranges. The effective maturity of an
individual portfolio security in which a fund invests is defined as the period
remaining until the earliest date when the fund can recover the principal amount
of such security through mandatory redemption or prepayment by the issuer, the
exercise by the fund of a put option, demand feature or tender option granted by
the issuer or a third party or the payment of the principal on the stated
maturity date. The effective maturity of variable rate securities is calculated
by reference to their coupon reset dates. Thus, the effective maturity of a
security may be substantially shorter than its final stated maturity.
Unscheduled prepayments of principal have the effect of shortening the effective
maturities of securities in general and mortgage-backed securities in
particular. Prepayment rates are influenced by changes in current interest rates
and a variety of economic, geographic, social and other factors and cannot be
predicted with certainty. In general, securities, such as mortgage-backed
securities, may be subject to greater prepayment rates in a declining interest
rate environment. Conversely, in an increasing interest rate environment, the
rate of prepayment may be expected to decrease. A higher than anticipated rate
of unscheduled principal prepayments on securities purchased at a premium or a
lower than anticipated rate of unscheduled payments on securities purchased at a
discount may result in a lower yield (and total return) to a fund than was
anticipated at the time the securities were purchased. A fund's reinvestment of
unscheduled prepayments may be made at rates higher or lower than the rate
payable on such security, thus affecting the return realized by the fund.
3
<PAGE>
Duration of an individual portfolio security is a measure of the
security's price sensitivity taking into account expected cash flow and
prepayments under a wide range of interest rate scenarios. In computing the
duration of its portfolio, a fund will have to estimate the duration of
obligations that are subject to prepayment or redemption by the issuer taking
into account the influence of interest rates on prepayments and coupon flows.
Each fund may use various techniques to shorten or lengthen the option-adjusted
duration of its portfolio, including the acquisition of debt obligations at a
premium or discount, and the use of mortgage swaps and interest rate swaps,
caps, floors and collars.
Securities. The funds invest primarily in all types of fixed income
securities. In addition, each fund may purchase shares of other investment
companies and real estate investment trusts ("REITs"). Each fund may also enter
into repurchase agreements and forward dollar roll transactions, may purchase
zero coupon and deferred payment securities and may buy securities on a
when-issued or delayed delivery basis. Please refer to each fund's specific
investment objective and policies and "Description of Securities and Related
Risks" for a more comprehensive list of permissible securities and investments.
Fixed Income Asset Fund
Additional Investment Information. Under normal market conditions,
substantially all, and at least 65%, of the Portfolio's total assets are
invested in investment grade fixed income securities. The Portfolio may invest
up to 20% of its total assets in fixed income securities of foreign companies
and foreign governments and their political subdivisions, including securities
of issuers located in emerging markets. No more than 10% of the Portfolio's
total assets will be invested in foreign securities not subject to currency
hedging transactions back into U.S. dollars. The Portfolio may also engage in
short sales.
Credit Quality. The Portfolio invests primarily in investment grade fixed
income securities. The Portfolio may, however, invest up to 15% of its total
assets in securities rated Ba or below by Moody's or BB or below by Standard &
Poor's, Duff, Fitch or IBCA, or, if unrated, determined by Standish to be of
comparable credit quality. The average dollar-weighted credit quality of the
Portfolio's portfolio is expected to be Aa according to Moody's or AA according
to Standard & Poor's, Duff or FitchIBCA.
Maturity. Under normal market conditions, the Portfolio's average
dollar-weighted effective portfolio maturity will vary from five to thirteen
years.
Global Fixed Income Asset Fund
Additional Investment Information. Under normal market conditions, the
Portfolio invests at least 65% of its total assets in fixed income securities of
foreign governments or their political subdivisions and companies located in
countries around the world, including the United States. The portfolio may also
lend portfolio securities and engage in short sales.
Country Selection. Under normal market conditions, the Portfolio's assets
are invested in securities of issuers located in at least three different
countries, one of which may be in the United States. The Portfolio intends,
however, to invest in no fewer then eight foreign countries. The Portfolio may
invest a substantial portion of its assets in one or more of those eight
countries. The Portfolio may also invest up to 10% of its total assets in
emerging markets generally and may invest up to 3% of its total assets in any
one emerging market.
Credit Quality. The Portfolio invests primarily in investment grade fixed
income securities. The Portfolio may, however, invest up to 15% of its total
assets in below investment grade securities
4
<PAGE>
or, if not rated, judged by SIMCO to be of equivalent credit quality. The
average dollar-weighted credit quality of the Portfolio's portfolio is expected
to be in a range of Aa to A according to Moody's or AA to A according to
Standard & Poor's, Duff, FitchIBCA.
International Fixed Income Fund
Additional Investment Information. Under normal market conditions, the
Fund invests at least 65% of its total assets in fixed income securities of
foreign governments or their political subdivisions and companies located in
foreign countries.
Country Selection. Under normal market conditions, the Fund's assets are
invested in securities of issuers located in at least five countries, not
including the United States. The Fund may invest a substantial portion of its
assets in one or more of those five countries. The Fund may also invest up to
10% of its total assets in emerging markets generally and may invest up to 3% of
its total assets in any one emerging market.
Credit Quality. The Fund invests primarily in investment grade fixed
income securities. The Fund may, however, invest up to 10% of its total assets
in securities rated Ba or below by Moody's or BB or below by Standard and
Poor's, Duff or Fitch, or, if not rated, judged by SIMCO to be of equivalent
credit quality. The average dollar-weighted credit quality of the Fund's
portfolio is expected to be Aa according to Moody's or AA according to Standard
& Poor's, Duff or FitchIBCA.
Description of Securities and Related Risks
General Risks of Investing
Each fund invests primarily in fixed income securities and is subject to
risks associated with investments in such securities. These risks include
interest rate risk, default risk and call and extension risk. The Portfolios and
International Fixed Income Fund are also subject to risks associated with direct
investments in foreign securities as described under the "Specific Risks"
section.
Interest Rate Risk. When interest rates decline, the market value of fixed
income securities tends to increase. Conversely, when interest rates increase,
the market value of fixed income securities tends to decline. The volatility of
a security's market value will differ depending upon the security's duration,
the issuer and the type of instrument.
Default Risk/Credit Risk. Investments in fixed income securities are
subject to the risk that the issuer of the security could default on its
obligations causing a fund to sustain losses on such investments. A default
could impact both interest and principal payments.
Call Risk and Extension Risk. Fixed income securities may be subject to
both call risk and extension risk. Call risk exists when the issuer may exercise
its right to pay principal on an obligation earlier than scheduled which would
cause cash flows to be returned earlier than expected. This typically results
when interest rates have declined and a fund will suffer from having to reinvest
in lower yielding securities. Extension risk exists when the issuer may exercise
its right to pay principal on an obligation later than scheduled which would
cause cash flows to be returned later than expected. This typically results when
interest rates have increased and a fund will suffer from the inability to
invest in higher yield securities.
5
<PAGE>
Specific Risks
The following sections include descriptions of specific risks that are
associated with a fund's purchase of a particular type of security or the
utilization of a specific investment technique.
Corporate Debt Obligations. Each fund may invest in corporate debt
obligations and zero coupon securities issued by financial institutions and
companies, including obligations of industrial, utility, banking and other
financial issuers. Corporate debt obligations are subject to the risk of an
issuer's inability to meet principal and interest payments on the obligations
and may also be subject to price volatility due to such factors as market
interest rates, market perception of the creditworthiness of the issuer and
general market liquidity.
U.S. Government Securities. Each fund may invest in U.S. Government
securities. Generally, these securities include U.S. Treasury obligations and
obligations issued or guaranteed by U.S. Government agencies, instrumentalities
or sponsored enterprises which are supported by (a) the full faith and credit of
the U.S. Treasury (such as the Government National Mortgage Association
("GNMA")), (b) the right of the issuer to borrow from the U.S. Treasury (such as
securities of the Student Loan Marketing Association ("SLMA")), (c) the
discretionary authority of the U.S. Government to purchase certain obligations
of the issuer (such as the Federal National Mortgage Association ("FNMA") and
Federal Home Loan Mortgage Corporation ("FHLMC")), or (d) only the credit of the
agency. No assurance can be given that the U.S. Government will provide
financial support to U.S. Government agencies, instrumentalities or sponsored
enterprises in the future. U.S. Government securities also include Treasury
receipts, zero coupon bonds, U.S. Treasury inflation-indexed 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").
Foreign Securities. Investing in the securities of foreign issuers
involves risks that are not typically associated with investing in U.S.
dollar-denominated securities of domestic issuers. Investments in foreign
issuers may be affected by changes in currency rates, changes in foreign or U.S.
laws or restrictions applicable to such investments and in exchange control
regulations (i.e., currency blockage). A decline in the exchange rate of the
currency (i.e., weakening of the currency against the U.S. dollar) in which a
portfolio security is quoted or denominated relative to the U.S. dollar would
reduce the value of the portfolio security. In addition, if the exchange rate
for the currency in which a fund receives interest payments declines against the
U.S. dollar before such income is distributed as dividends to shareholders, the
fund may have to sell portfolio securities to obtain sufficient cash to enable
the fund to pay such dividends. Commissions on transactions in foreign
securities may be higher than those for similar transactions on domestic stock
markets and foreign custodial costs are higher than domestic custodial costs. In
addition, clearance and settlement procedures may be different in foreign
countries and, in certain markets, such procedures have on occasion been unable
to keep pace with the volume of securities transactions, thus making it
difficult to conduct such transactions.
Foreign issuers are not generally subject to uniform accounting, auditing
and financial reporting standards comparable to those applicable to U.S.
issuers. There may be less publicly available information about a foreign issuer
than about a U.S. issuer. In addition, there is generally less government
regulation of foreign markets, companies and securities dealers than in the U.S.
Most foreign securities markets may have substantially less trading volume than
U.S. securities markets and securities of many foreign issuers are less liquid
and more volatile than securities of comparable U.S. issuers. Furthermore, with
respect to certain foreign countries, there is a possibility of nationalization,
expropriation or confiscatory taxation, imposition of withholding or other taxes
on dividend or interest payments (or, in some cases, capital gains), limitations
on the removal of funds or other assets,
6
<PAGE>
political or social instability or diplomatic developments which could affect
investments in those countries.
Investing in Emerging Markets. Although each fund invests primarily in
securities of established issuers based in developed foreign countries, each may
also invest in securities of issuers in emerging markets, including issuers in
Asia (including Russia), Eastern Europe, Latin and South America, the
Mediterranean and Africa. Each fund may invest up to 10% of its total assets in
issuers located in emerging markets generally, with a limit of 3% of total
assets invested in issuers located in any one emerging market. These limitations
do not apply to investments denominated or quoted in the euro. These funds may
also invest in currencies of such countries and may engage in strategic
transactions in the markets of such countries. Investing in securities of
issuers in emerging markets involves exposure to significantly higher risk than
investing in foreign countries with developed markets and may be considered
speculative. These heightened risks include: (i) greater risks of expropriation,
confiscatory taxation, nationalization and less social, political and economic
stability; (ii) the small current size of the markets for securities of emerging
market issuers and the currently low or nonexistent volume of trading and
frequent limits on daily price movements, resulting in lack of liquidity and in
price uncertainty; (iii) certain national policies which may restrict a fund's
investment opportunities, including limitations on aggregate holdings by foreign
investors and restrictions on investing in issuers or industries deemed
sensitive to relevant national interests; (iv) the absence of developed legal
structures governing private or foreign investment in private property which may
adversely affect a fund's ability to retain ownership of its securities during
periods of economic, social or political turmoil; and (v) high rates of
inflation and rapid fluctuations in interest rates that have had and may
continue to have negative effects on the economies and securities markets of
certain emerging market countries.
Investment and Repatriation Restrictions. Foreign investment in the
securities markets of several emerging market countries is restricted or
controlled to varying degrees. These restrictions may limit a fund's investment
in certain emerging market countries, require governmental approval prior to
investments by foreign persons or limit investment by foreign persons to only a
specified percentage of an issuer's outstanding securities or a specific class
of securities which may have less advantageous terms (including price) than
securities of such company available for purchase by nationals. In certain
countries, a fund may be limited by government regulation or a company's charter
to a maximum percentage of equity ownership in any one company. Such
restrictions may affect the market price, liquidity and rights of securities
that may be purchased by the fund. From time to time, the adviser may determine
that investment and repatriation restrictions in certain emerging market
countries negate the advantages of investing in such countries. Neither fund is
required to invest in any emerging market country.
In addition, certain countries may restrict or prohibit investment
opportunities in issuers or industries deemed important to national interests.
The adviser may determine from time to time to invest in the securities of
emerging market countries which may impose restrictions on foreign investment
and repatriation that cannot currently be predicted. Due to restrictions on
direct investment in equity securities in certain emerging market countries,
such as Taiwan, a fund may invest only through investment funds in such emerging
market countries.
The repatriation of both investment income and capital from several
emerging market countries is subject to restrictions such as the need for
certain governmental consents. Even where there is no outright restriction on
repatriation of capital, the mechanics of repatriation may affect certain
aspects of the operation of the funds to the extent that they invest in emerging
market countries.
7
<PAGE>
Market Characteristics. All of the securities markets of emerging market
countries have substantially less volume than the New York Stock Exchange
("NYSE"). Equity securities of most emerging market companies are generally less
liquid and subject to greater price volatility than equity securities of U.S.
companies of comparable size. Some of the stock exchanges in the emerging market
countries are in the earliest stages of their development.
Certain of the securities markets of emerging market countries are marked
by high concentrations of market capitalization and trading volume in a small
number of issuers representing a limited number of industries, as well as a high
concentration of ownership of such securities by a limited number of investors.
Even the market for relatively widely traded securities in the emerging markets
may not be able to absorb, without price disruptions, a significant increase in
trading volume or trades of a size customarily undertaken by institutional
investors in the United States. Additionally, market making and arbitrage
activities are generally less extensive in such markets, which may contribute to
increased volatility and reduced liquidity of such markets. Accordingly, each of
these markets may be subject to greater influence by adverse events generally
affecting the market, and by large investors trading significant blocks of
securities, than is usual in the United States. The less liquid the market, the
more difficult it may be for a fund to accurately price its portfolio securities
or to dispose of such securities at the times determined by the adviser to be
appropriate. The risks associated with the liquidity of a market may be
particularly acute in situations in which a fund's operations require cash, such
as the need to meet redemption requests for its shares, to pay dividends and
other distributions and to pay its expenses. To the extent that any emerging
market country experiences rapid increases in its money supply and investment in
equity securities is made for speculative purposes, the equity securities traded
in any such country may trade at price-earnings ratios higher than those of
comparable companies trading on securities markets in the United States. Such
price-earnings ratios may not be sustainable.
Settlement procedures in emerging market countries are less developed and
reliable than those in the United States and in other developed markets, and a
fund may experience settlement delays or other material difficulties. In
addition, significant delays are common in registering transfers of securities,
and a fund may be unable to sell such securities until the registration process
is completed and may experience delays in receipt of dividends and other
entitlements.
Brokerage commissions and other transactions costs on securities exchanges
in emerging market countries are generally higher than in the United States.
There is also less government supervision and regulation of foreign securities
exchanges, brokers and listed companies in emerging market countries than exists
in the United States. Brokers in emerging market countries may not be as well
capitalized as those in the United States, so that they are more susceptible to
financial failure in times of market, political or economic stress. In addition,
existing laws and regulations are often inconsistently applied. As legal systems
in emerging market countries develop, foreign investors may be adversely
affected by new or amended laws and regulations. In circumstances where adequate
laws exist, it may not be possible to obtain swift and equitable enforcement of
the law.
Financial Information and Standards. Issuers in emerging market countries
generally are subject to accounting, auditing and financial standards and
requirements that differ, in some cases significantly, from those applicable to
U.S. issuers. In particular, the assets and profits appearing on the financial
statements of an emerging market company may not reflect its financial position
or results of operations in the same manner as financial statements for U.S.
companies. Substantially less information may be publicly available about
issuers in emerging market countries than is available about issuers in the
United States.
Economic, Political and Social Factors. Many emerging market countries may
be subject to a greater degree of economic, political and social instability
than is the case in the United States and
8
<PAGE>
Western European countries. Such instability may result from, among other
things: (i) authoritarian governments or military involvement in political and
economic decision-making, including changes or attempted changes in government
through extra-constitutional means; (ii) popular unrest associated with demands
for improved economic, political and social conditions; (iii) internal
insurgencies; (iv) hostile relations with neighboring countries; and (v) ethnic,
religious and racial disaffection and conflict. Such economic, political and
social instability could significantly disrupt financial markets of emerging
market countries and adversely affect the value of a fund's assets so invested.
Few emerging market countries have fully democratic governments. Some
governments in the region are authoritarian in nature or are influenced by armed
forces which have been used to control civil unrest. During the course of the
last 25 years, governments of certain emerging market countries have been
installed or removed as a result of military coups, while governments in other
emerging market countries have periodically used force to suppress civil
dissent. Disparities of wealth, the pace and success of democratization, and
ethnic, religious and racial disaffection, among other factors, have also led to
social unrest, violence and/or labor unrest in some emerging market countries.
Several emerging market countries have or in the past have had hostile
relationships with neighboring nations or have experienced internal
insurrections.
The economies of most emerging market countries are heavily dependent upon
international trade and are accordingly affected by protective trade barriers
and the economic conditions of their trading partners, principally, the United
States, Japan, China and the European Union. The enactment by the United States
or other principal trading partners of protectionist trade legislation,
reduction of foreign investment in the local economies and general declines in
the international securities markets could have a significant adverse effect
upon the emerging securities markets. In addition, the economies of some
emerging market countries are vulnerable to weakness in world prices for their
commodity exports.
There may be the possibility of expropriations, confiscatory taxation,
political, economic or social instability or diplomatic developments which would
adversely affect assets of a fund held in emerging market or other foreign
countries. Governments in certain emerging market countries participate to a
significant degree, through ownership interests or regulation, in their
respective economies. Actions by these governments could have a significant
adverse effect on market prices of securities and payment of dividends.
Currency Risks. The U.S. dollar value of foreign securities denominated in
a foreign currency will vary with changes in currency exchange rates, which can
be volatile. Accordingly, changes in the value of these currencies against the
U.S. dollar will result in corresponding changes in the U.S. dollar value of a
fund's assets quoted in those currencies. No more than 10% of Fixed Income
Portfolio's total assets will be invested in foreign securities not subject to
hedging transactions back into U.S. dollars. Exchange rates are generally
affected by the forces of supply and demand in the international currency
markets, the relative merits of investing in different countries and the
intervention or failure to intervene of U.S. or foreign governments and central
banks. Some emerging market countries also may have managed currencies, which
are not free floating against the U.S. dollar. In addition, emerging markets may
restrict the free conversion of their currencies into other currencies. Any
devaluations in the currencies in which a fund's securities are denominated may
have a detrimental impact on the fund's net asset value except to the extent
such foreign currency exposure is subject to hedging transactions. Each fund may
utilize various investment strategies to seek to minimize the currency risks
described above. These strategies include the use of currency transactions such
as currency forward and futures contracts, cross currency forward and futures
contracts, currency swaps and currency options. Each fund's use of currency
transactions may expose it to risks independent of its securities positions. See
"Strategic Transactions" within the "Investment Techniques and Related Risks"
section for a discussion of the risks associated with such strategies.
9
<PAGE>
Economic and Monetary Union (EMU). EMU occurred on January 1, 1999, when
11 European countries adopted a single currency - the euro. For participating
countries, EMU means sharing a single currency and single official interest rate
and adhering to agreed upon limits on government borrowing. Budgetary decisions
remain in the hands of each participating country, but are now subject to each
country's commitment to avoid "excessive deficits" and other more specific
budgetary criteria. A European Central Bank is responsible for setting the
official interest rate to maintain price stability within the euro zone.
EMU is driven by the expectation of a number of economic benefits,
including lower transaction costs, reduced exchange risk, greater competition,
and a broadening and deepening of European financial markets. However, there are
a number of significant risks associated with EMU. Monetary and economic union
on this scale has never been attempted before. There is a significant degree of
uncertainty as to whether participating countries will remain committed to EMU
in the face of changing economic conditions. This uncertainty may increase the
volatility of European markets and may adversely affect the prices of securities
of European issuers in the fund's portfolios.
Sovereign Debt Obligations. Each fund may invest in sovereign debt
obligations, which involve special risks that are not present in corporate debt
obligations. The foreign issuer of the sovereign debt or the foreign
governmental authorities that control the repayment of the debt may be unable or
unwilling to repay principal or interest when due, and a fund may have limited
recourse in the event of a default. During periods of economic uncertainty, the
market prices of sovereign debt, and the fund's net asset value, to the extent
it invests in such securities, may be more volatile than prices of debt
obligations of U.S. issuers. In the past, certain foreign countries have
encountered difficulties in servicing their debt obligations, withheld payments
of principal and interest and declared moratoria on the payment of principal and
interest on their sovereign debt.
A sovereign debtor's willingness or ability to repay principal and pay
interest in a timely manner may be affected by, among other factors, its cash
flow situation, the extent of its foreign currency reserves, the availability of
sufficient foreign exchange, the relative size of the debt service burden, the
sovereign debtor's policy toward principal international lenders and local
political constraints. Sovereign debtors may also be dependent on expected
disbursements from foreign governments, multilateral agencies and other entities
to reduce principal and interest arrearages on their debt. The failure of a
sovereign debtor to implement economic reforms, achieve specified levels of
economic performance or repay principal or interest when due may result in the
cancellation of third party commitments to lend funds to the sovereign debtor,
which may further impair such debtor's ability or willingness to service its
debts.
Brady Bonds. Each fund may invest in Brady Bonds. Brady Bonds are
securities created through the exchange of existing commercial bank loans to
public and private entities in certain emerging markets for new bonds in
connection with debt restructurings. In light of the history of defaults of
countries issuing Brady Bonds on their commercial bank loans, investments in
Brady Bonds may be viewed as speculative. Brady Bonds may be fully or partially
collateralized or uncollateralized, are issued in various currencies (but
primarily in U.S. dollars) and are actively traded in OTC secondary markets.
Incomplete collateralization of interest or principal payment obligations
results in increased credit risk. U.S. dollar-denominated collateralized Brady
Bonds, which may be fixed-rate bonds or floating-rate bonds, are generally
collateralized by U.S. Treasury zero coupon bonds having the same maturity as
the Brady Bonds.
Obligations of Supranational Entities. Each fund may invest in obligations
of supranational entities designated or supported by governmental entities to
promote economic reconstruction or development and of international banking
institutions and related government agencies. Examples include the International
Bank for Reconstruction and Development (the "World Bank"), the European Coal
and Steel Community, the Asian Development Bank and the Inter-American
Development Bank.
10
<PAGE>
Each supranational entity's lending activities are limited to a percentage of
its total capital (including "callable capital" contributed by its governmental
members at the entity's call), reserves and net income. There is no assurance
that participating governments will be able or willing to honor their
commitments to make capital contributions to a supranational entity.
Eurodollar and Yankee Dollar Investments. Each fund may invest in
Eurodollar and Yankee Dollar instruments. Eurodollar instruments are bonds of
foreign corporate and government issuers that pay interest and principal in U.S.
dollars generally held in banks outside the United States, primarily in Europe.
Yankee Dollar instruments are U.S. dollar denominated bonds typically issued in
the U.S. by foreign governments and their agencies and foreign banks and
corporations. Each of the funds may invest in Eurodollar Certificates of Deposit
("ECDs"), Eurodollar Time Deposits ("ETDs") and Yankee Certificates of Deposit
("Yankee CDs"). ECDs are U.S. dollar-denominated certificates of deposit issued
by foreign branches of domestic banks; ETDs are U.S. dollar-denominated deposits
in a foreign branch of a U.S. bank or in a foreign bank; and Yankee CDs are U.S.
dollar-denominated certificates of deposit issued by a U.S. branch of a foreign
bank and held in the U.S. These investments involve risks that are different
from investments in securities issued by U.S. issuers, including potential
unfavorable political and economic developments, foreign withholding or other
taxes, seizure of foreign deposits, currency controls, interest limitations or
other governmental restrictions which might affect payment of principal or
interest.
Mortgage-Backed Securities. Each fund may invest in privately issued
mortgage-backed securities and mortgage-backed securities issued or guaranteed
by the U.S. Government or any of its agencies, instrumentalities or sponsored
enterprises, including, but not limited to, GNMA, FNMA or FHLMC. Mortgage-backed
securities represent direct or indirect participations in, or are collateralized
by and payable from, mortgage loans secured by real property. Mortgagors can
generally prepay interest or principal on their mortgages whenever they choose.
Therefore, mortgage-backed securities are often subject to more rapid repayment
than their stated maturity date would indicate as a result of principal
prepayments on the underlying loans. This can result in significantly greater
price and yield volatility than is the case with traditional fixed income
securities. During periods of declining interest rates, prepayments can be
expected to accelerate, and thus impair a fund's ability to reinvest the returns
of principal at comparable yields. Conversely, in a rising interest rate
environment, a declining prepayment rate will extend the average life of many
mortgage-backed securities, increase a fund's exposure to rising interest rates
and prevent a fund from taking advantage of such higher yields.
GNMA securities are backed by the full faith and credit of the U.S.
Government, which means that the U.S. Government guarantees that the interest
and principal will be paid when due. FNMA securities and FHLMC securities are
not backed by the full faith and credit of the U.S. Government; however, these
enterprises have the ability to obtain financing from the U.S. Treasury.
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 (the "Code"), and invests in
certain mortgages principally secured by interests in real property and other
permitted investments. The funds do not intend to purchase residual interests in
REMICs.
11
<PAGE>
Stripped mortgage-backed securities ("SMBS") are derivative multiple class
mortgage-backed securities. SMBS are usually structured with two different
classes; one that receives 100% of the interest payments and the other that
receives 100% of the principal payments from a pool of mortgage loans. If the
underlying mortgage loans experience prepayments of principal at a rate
different from what was anticipated, a fund may fail to recoup fully its initial
investment in these securities. Although the markets for SMBS and CMOs are
increasingly liquid, certain SMBS and CMOs may not be readily marketable and
will be considered illiquid for purposes of each fund's limitation on
investments in illiquid securities. The market value of the class consisting
entirely of principal payments generally is unusually volatile in response to
changes in interest rates. The yields on a class of SMBS that receives all or
most of the interest from mortgage loans are generally higher than prevailing
market yields on other mortgage-backed securities because their cash flow
patterns are more volatile and there is a greater risk that the initial
investment will not be fully recouped.
Life of Mortgage-Related Obligations. The average life of mortgage-related
obligations is likely to be substantially less than the stated maturities of the
mortgages in the mortgage pools underlying such securities. Prepayments or
refinancing of principal by mortgagors and mortgage foreclosures will usually
result in the return of the greater part of principal invested long before the
maturity of the mortgages in the pool.
As prepayment rates of individual mortgage pools will vary widely, it is
not possible to predict accurately the average life of a particular issue of
mortgage-related obligations. However, with respect to GNMA Certificates,
statistics published by the FHA are normally used as an indicator of the
expected average life of an issue. The actual life of a particular issue of GNMA
Certificates, however, will depend on the coupon rate of the financing.
Asset-Backed Securities. Each fund may invest in asset-backed securities.
The principal and interest payments on asset-backed securities are
collateralized by pools of assets such as auto loans, credit card receivables,
leases, installment contracts and personal property. Such asset pools are
securitized through the use of special purpose trusts or corporations. Payments
or distributions of principal and interest on asset-backed securities may be
guaranteed up to certain amounts and for a certain time period by a letter of
credit or a pool insurance policy issued by a financial institution; however,
privately issued obligations collateralized by a portfolio of privately issued
asset-backed securities do not involve any government-related guaranty or
insurance. Like mortgage-backed securities, asset-backed securities are subject
to more rapid prepayment of principal than indicated by their stated maturity
which may greatly increase price and yield volatility. Asset-backed securities
generally do not have the benefit of a security interest in collateral that is
comparable to mortgage assets and there is the possibility that recoveries on
repossessed collateral may not be available to support payments on these
securities.
Convertible Securities. Each fund may invest in convertible securities
consisting of bonds, notes, debentures and preferred stocks. Convertible debt
securities and preferred stock acquired by a fund entitle the fund to exchange
such instruments for common stock of the issuer at a predetermined rate.
Convertible securities are subject both to the credit and interest rate risks
associated with debt obligations and to the stock market risk associated with
equity securities.
Below Investment Grade Fixed Income Securities. International Fixed Income
Fund, Fixed Income Portfolio and Global Fixed Income Portfolio may invest up to
10%, 15% and 15%, respectively, of their total assets in non-investment grade
securities. Non-investment grade fixed income securities are considered
predominantly speculative by traditional investment standards. In some cases,
these securities may be highly speculative and have poor prospects for reaching
investment grade standing. Non-investment grade fixed income securities and
unrated securities of comparable credit quality are subject to the increased
risk of an issuer's inability to meet principal and interest obligations. These
12
<PAGE>
securities, also referred to as high yield securities or "junk bonds", may be
subject to greater price volatility due to such factors as specific corporate
developments, interest rate sensitivity, negative perceptions of the high yield
markets generally and less secondary market liquidity.
The amount of high yield, fixed income securities proliferated in the
1980s and early 1990s as a result of increased merger and acquisition and
leveraged buyout activity. Such securities are also issued by less-established
corporations desiring to expand. Risks associated with acquiring the securities
of such issuers generally are greater than is the case with higher rated
securities because such issuers are often less creditworthy companies or are
highly leveraged and generally less able than more established or less leveraged
entities to make scheduled payments of principal and interest.
The market values of high yield, fixed income securities tend to reflect
individual corporate developments to a greater extent than do those of higher
rated securities, which react primarily to fluctuations in the general level of
interest rates. Issuers of such high yield securities may not be able to make
use of more traditional methods of financing and their ability to service debt
obligations may be more adversely affected than issuers of higher rated
securities by economic downturns, specific corporate developments or the
issuers' inability to meet specific projected business forecasts. These
non-investment grade securities also tend to be more sensitive to economic
conditions than higher-rated securities. Negative publicity about the high yield
bond market and investor perceptions regarding lower rated securities, whether
or not based on the funds' fundamental analysis, may depress the prices for such
securities.
Since investors generally perceive that there are greater risks associated
with non-investment grade securities of the type in which the funds invest, the
yields and prices of such securities may tend to fluctuate more than those for
higher rated securities. In the lower quality segments of the fixed-income
securities market, changes in perceptions of issuers' creditworthiness tend to
occur more frequently and in a more pronounced manner than do changes in higher
quality segments of the fixed-income securities market, resulting in greater
yield and price volatility.
Another factor which causes fluctuations in the prices of fixed-income
securities is the supply and demand for similarly rated securities. In addition,
the prices of fixed-income securities fluctuate in response to the general level
of interest rates. Fluctuations in the prices of portfolio securities subsequent
to their acquisition will not affect cash income from such securities but will
be reflected in a fund's net asset value.
The risk of loss from default for the holders of high yield, fixed-income
securities is significantly greater than is the case for holders of other debt
securities because such high yield, fixed-income securities are generally
unsecured and are often subordinated to the rights of other creditors of the
issuers of such securities.
The secondary market for high yield, fixed-income securities is dominated
by institutional investors, including mutual fund portfolios, insurance
companies and other financial institutions. Accordingly, the secondary market
for such securities is not as liquid as and is more volatile than the secondary
market for higher-rated securities. In addition, the trading volume for high
yield, fixed-income securities is generally lower than that of higher rated
securities and the secondary market for high yield, fixed-income securities
could contract under adverse market or economic conditions independent of any
specific adverse changes in the condition of a particular issuer. These factors
may have an adverse effect on the funds' ability to dispose of particular
portfolio investments. Prices realized upon the sale of such lower rated or
unrated securities, under these circumstances, may be less than the prices used
in calculating a fund's net asset value. A less liquid secondary market also may
make it more difficult for a fund to obtain precise valuations of the high yield
securities in its portfolio.
13
<PAGE>
Federal legislation could adversely affect the secondary market for high
yield securities and the financial condition of issuers of these securities. The
form of any proposed legislation and the probability of such legislation being
enacted is uncertain.
Non-investment grade or high yield, fixed-income securities also present
risks based on payment expectations. High yield, fixed-income securities
frequently contain "call" or buy-back features which permit the issuer to call
or repurchase the security from its holder. If an issuer exercises such a "call
option" and redeems the security, a fund may have to replace such security with
a lower yielding security, resulting in a decreased return for investors. A fund
may also incur additional expenses to the extent that it is required to seek
recovery upon a default in the payment of principal or interest on a portfolio
security.
Credit ratings issued by credit rating agencies are designed to evaluate
the safety of principal and interest payments of rated securities. They do not,
however, evaluate the market value risk of non-investment grade securities and,
therefore, may not fully reflect the true risks of an investment. In addition,
credit rating agencies may or may not make timely changes in a rating to reflect
changes in the economy or in the conditions of the issuer that affect the market
value of the security. Consequently, credit ratings are used only as a
preliminary indicator of investment quality. Investments in non-investment grade
and comparable unrated obligations will be more dependent on the adviser's
credit analysis than would be the case with investments in investment-grade debt
obligations. The adviser employs its own credit research and analysis, which
includes a study of existing debt, capital structure, ability to service debt
and to pay dividends, the issuer's sensitivity to economic conditions, its
operating history and the current trend of earnings. The adviser continually
monitors the investments in each fund's portfolio and evaluates whether to
dispose of or to retain non-investment grade and comparable unrated securities
whose credit ratings or credit quality may have changed.
For the fiscal year ended December 31, 1998, each fund's investments, on
an average dollar-weighted basis, calculated at the end of each month, had the
following credit quality characteristics:
Fixed Income Portfolio
Investments Percentage
----------- ----------
U.S. Governmental
securities 22.2
U.S. Government Agency
securities 15.82
Corporate Bonds:
Aaa or AAA 13.7
Aa or AA 5.95
A 8.02
Baa or BBB 20.69
Ba or BB 8.84
B 4.39
Below B .37
------
100%
======
14
<PAGE>
Global Fixed Income Portfolio
Investments Percentage
----------- ----------
U.S. Governmental
securities 8.85
U.S. Government Agency
securities 8.12
Corporate Bonds:
Aaa or AAA 38.12
Aa or AA 11.4
A 8.94
Baa or BBB 12.85
Ba or BB 5.04
B 6.37
Below B .30
------
100%
======
International Fixed Income Fund
Investments Percentage
----------- ----------
U.S. Governmental
securities 2.81
U.S. Government Agency
securities 1.51
Corporate Bonds:
Aaa or AAA 52.22
Aa or AA 19.23
A 8.30
Baa or BBB 7.61
Ba or BB 4.00
B 4.17
Below B .14
------
100%
======
Warrants. Warrants acquired by a fund entitle it to buy common stock from
the issuer at a specified price and time. Warrants are subject to the same
market risks as stocks, but may be more volatile in price. A fund's investment
in warrants will not entitle it to receive dividends or exercise voting rights
and will become worthless if the warrants cannot be profitably exercised before
their expiration dates.
Common Stocks. Common stocks are shares of a corporation or other entity
that entitle the holder to a pro rata share of the profits of the corporation,
if any, without preference over any other shareholder or class of shareholders,
including holders of the entity's preferred stock and other senior equity.
Common stock usually carries with it the right to vote and frequently an
exclusive right to do so.
Investments in Other Investment Companies. Each fund is permitted to
invest up to 10% of its total assets in shares of investment companies and up to
5% of its total assets in any one investment company as long as that investment
does not represent more than 3% of the total voting stock of the acquired
investment company. Investments in the securities of other investment companies
may involve duplication of advisory fees and other expenses. A fund may invest
in investment companies that are designed to replicate the composition and
performance of a particular
15
<PAGE>
index. For example, World Equity Benchmark Series ("WEBS") are exchange traded
shares of open-end investment companies designed to replicate the composition
and performance of publicly traded issuers in particular countries. Investments
in index baskets involve the same risks associated with a direct investment in
the types of securities included in the baskets.
Real Estate Investment Trusts. Each fund may invest in REITs. 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 on distributed
amounts under the Code.
Inverse Floating Rate Securities. Each fund may invest in inverse floating
rate securities. The interest rate on an inverse floater resets in the opposite
direction from the market rate of interest to which the inverse floater is
indexed. An inverse floater may be considered to be leveraged to the extent that
its interest rate varies by a magnitude that exceeds the magnitude of the change
in the index rate of interest. The higher the degree of leverage of an inverse
floater, the greater the volatility of its market value.
Zero Coupon and Deferred Payment Securities. Each fund may invest in zero
coupon and deferred payment securities. Zero coupon securities are securities
sold at a discount to par value and on which interest payments are not made
during the life of the security. Upon maturity, the holder is entitled to
receive the par value of the security. A fund is required to accrue income with
respect to these securities prior to the receipt of cash payments. Because a
fund will distribute this accrued income to shareholders, to the extent that
shareholders elect to receive dividends in cash rather than reinvesting such
dividends in additional shares, the fund will have fewer assets with which to
purchase income producing securities. Deferred payment securities are securities
that remain zero coupon securities until a predetermined date, at which time the
stated coupon rate becomes effective and interest becomes payable at regular
intervals. Zero coupon and deferred payment securities may be subject to greater
fluctuation in value and may have less liquidity in the event of adverse market
conditions than comparably rated securities paying cash interest at regular
interest payment periods.
Structured or Hybrid Notes. Each fund may invest in structured or hybrid
notes. The distinguishing feature of a structured or hybrid note is that the
amount of interest and/or principal payable on the note is based on the
performance of a benchmark asset or market other than fixed income securities or
interest rates. Examples of these benchmarks include stock prices, currency
exchange rates and physical commodity prices. Investing in a structured note
allows the fund to gain exposure to the benchmark asset while fixing the maximum
loss that it may experience in the event that the security does not perform as
expected. Depending on the terms of the note, the fund may forego all or part of
the interest and principal that would be payable on a comparable conventional
note; the fund's loss cannot exceed this foregone interest and/or principal. In
addition to the risks associated with a direct investment in the benchmark
asset, investments in structured and hybrid notes involve the risk that the
issuer or counterparty to the obligation will fail to perform its contractual
obligations. Certain structured or hybrid notes may also be leveraged to the
extent that the magnitude of any change in the interest rate or principal
payable on the benchmark asset is a multiple of the change in the reference
price. Leverage enhances the price volatility of the security and, therefore, a
fund's net asset value. Further, certain structured or hybrid notes may be
illiquid for purposes of the funds' limitations on investments in illiquid
securities. Global Fixed Income Portfolio and International Fixed Income Fund
have no limit on investments in structured or hybrid notes. However, it is
expected that not more than 5% of each fund's net assets will be at risk as a
result of such investments.
16
<PAGE>
Tax-Exempt Securities. Each fund is managed without regard to potential
tax consequences. If the adviser believes that tax-exempt securities will
provide competitive returns, Fixed Income Portfolio may invest up to 10% of its
total assets in tax-exempt securities. The fund's distributions of interest
earned from these investments will be taxable.
Investment Techniques and Related Risks
Strategic Transactions. Each fund may, but is not required to, utilize
various other investment strategies as described below to seek to hedge various
market risks (such as interest rates, currency exchange rates, and broad or
specific fixed income market movements), to manage the effective maturity or
duration of fixed-income securities, or to seek to enhance potential gain. Such
strategies are generally accepted as part of modern portfolio management and are
regularly utilized by many mutual funds and other institutional investors.
Techniques and instruments used by the funds may change over time as new
instruments and strategies are developed or regulatory changes occur.
In the course of pursuing its investment objectives, each fund may
purchase and sell (write) exchange-listed and OTC put and call options on
securities, equity and fixed-income indices and other financial instruments;
purchase and sell financial futures contracts and options thereon; enter into
various interest rate transactions such as swaps, caps, floors or collars; and
enter into various currency transactions such as currency forward contracts,
cross-currency future contracts, currency futures contracts, currency swaps or
options on currencies or currency futures (collectively, all the above are
called "Strategic Transactions"). Strategic Transactions may be used to seek to
protect against possible changes in the market value of securities held in or to
be purchased for the funds' portfolios resulting from general market, interest
rate or currency exchange rate fluctuations, to seek to protect the funds'
unrealized gains in the value of their portfolio securities, to facilitate the
sale of such securities for investment purposes, to seek to manage effective
maturity or duration, or to establish a position in the derivatives markets as a
temporary substitute for purchasing or selling particular securities. In
addition to the hedging transactions referred to in the preceding sentence,
Strategic Transactions may also be used to enhance potential gain in
circumstances where hedging is not involved although each fund will attempt to
limit its net loss exposure resulting from Strategic Transactions entered into
for such purposes. The funds will attempt to limit net loss exposure from
Strategic Transaction entered into for non-hedging purposes to 3% of net assets
at any one time. To the extent necessary, each fund will close out transactions
in order to comply with this limitation. (Transactions such as writing covered
call options are considered to involve hedging for the purposes of this
limitation.) In calculating each fund's net loss exposure from such Strategic
Transactions, an unrealized gain from a particular Strategic Transaction
position would be netted against an unrealized loss from a related Strategic
Transaction position. For example, if the adviser believes that short-term
interest rates as indicated in the forward yield curve are too high, a fund may
take a short position in a near-term Eurodollar futures contract and a long
position in a longer-dated Eurodollar futures contract. Under such
circumstances, any unrealized loss in the near-term Eurodollar futures position
would be netted against any unrealized gain in the longer-dated Eurodollar
futures position (and vice versa) for purposes of calculating the fund's net
loss exposure.
The ability of a fund to utilize these Strategic Transactions successfully
will depend on the adviser's ability to predict pertinent market and interest
rate movements, which cannot be assured. Each fund will comply with applicable
regulatory requirements when implementing these strategies, techniques and
instruments. The funds' activities involving Strategic Transactions may be
limited in order to allow the applicable fund to satisfy the requirements of
Subchapter M of the Code for qualification as a regulated investment company.
Risks of Strategic Transactions. Strategic Transactions have risks
associated with them including possible default by the other party to the
transaction, illiquidity and, to the extent the
17
<PAGE>
adviser's view as to certain market or interest rate movements is incorrect, the
risk that the use of such Strategic Transactions could result in losses greater
than if they had not been used. The writing of put and call options may result
in losses to a fund, force the purchase or sale, respectively, of portfolio
securities at inopportune times or for prices higher than (in the case of
purchases due to the exercise of put options) or lower than (in the case of
sales due to the exercise of call options) current market values, limit the
amount of appreciation a fund can realize on its investments or cause a fund to
hold a security it might otherwise sell or sell a security it might otherwise
hold. The use of currency transactions can result in a fund incurring losses as
a result of a number of factors including the imposition of exchange controls,
suspension of settlements, or the inability to deliver or receive a specified
currency. The use of options and futures transactions entails certain other
risks. In particular, the variable degree of correlation between price movements
of futures contracts and price movements in the related portfolio position of
the fund creates the possibility that losses on the hedging instrument may be
greater than gains in the value of the fund's position. The writing of options
could significantly increase the fund's portfolio turnover rate and, therefore,
associated brokerage commissions or spreads. In addition, futures and options
markets may not be liquid in all circumstances and certain OTC options may have
no markets. As a result, in certain markets, a fund might not be able to close
out a transaction without incurring substantial losses, if at all. Although the
use of futures and options transactions for hedging should tend to minimize the
risk of loss due to a decline in the value of the hedged position, at the same
time, in certain circumstances, they tend to limit any potential gain which
might result from an increase in value of such position. The loss incurred by a
fund in writing options on futures and entering into futures transactions is
potentially unlimited; however, as described above, each fund will attempt to
limit its net loss exposure resulting from Strategic Transactions entered into
for non-hedging purposes. Futures markets are highly volatile and the use of
futures may increase the volatility of a fund's net asset value. Finally,
entering into futures contracts would create a greater ongoing potential
financial risk than would purchases of options where the exposure is limited to
the cost of the initial premium. Losses resulting from the use of Strategic
Transactions would reduce net asset value and the net result may be less
favorable than if the Strategic Transactions had not been utilized.
General Characteristics of Options. Put options and call options typically
have similar structural characteristics and operational mechanics regardless of
the underlying instrument on which they are purchased or sold. Thus, the
following general discussion relates to each of the particular types of options
discussed in greater detail below. In addition, many Strategic Transactions
involving options require segregation of a fund's assets in special accounts, as
described below under "Use of Segregated Accounts."
A put option gives the purchaser of the option, in consideration for the
payment of a premium, the right to sell, and the writer the obligation to buy
(if the option is exercised), the underlying security, commodity, index,
currency or other instrument at the exercise price. For instance, a fund's
purchase of a put option on a security might be designed to protect its holdings
in the underlying instrument (or, in some cases, a similar instrument) against a
substantial decline in the market value by giving the fund the right to sell
such instrument at the option exercise price. A call option, in consideration
for the payment of a premium, gives the purchaser of the option the right to
buy, and the seller the obligation to sell (if the option is exercised), the
underlying instrument at the exercise price. A fund may purchase a call option
on a security, futures contract, index, currency or other instrument to seek to
protect the fund against an increase in the price of the underlying instrument
that it intends to purchase in the future by fixing the price at which it may
purchase such instrument. An American style put or call option may be exercised
at any time during the option period while a European style put or call option
may be exercised only upon expiration or during a fixed period prior thereto.
Each fund is authorized to purchase and sell exchange listed options and 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
18
<PAGE>
such options. The discussion below uses the OCC as an example, but is also
applicable to other financial intermediaries.
With certain exceptions, exchange listed options generally settle by
physical delivery of the underlying security or currency, although in the future
cash settlement may become available. Index options and Eurodollar instruments
are cash settled for the net amount, if any, by which the option is in-the-money
(i.e., where the value of the underlying instrument exceeds, in the case of a
call option, or is less than, in the case of a put option, the exercise price of
the option) at the time the option is exercised. Frequently, rather than taking
or making delivery of the underlying instrument through the process of
exercising the option, listed options are closed by entering into offsetting
purchase or sale transactions that do not result in ownership of the new option.
A fund's ability to close out its position as a purchaser or seller of an
exchange listed put or call option is dependent, in part, upon the liquidity of
the option market. There is no assurance that a liquid option market on an
exchange will exist. In the event that the relevant market for an option on an
exchange ceases to exist, outstanding options on that exchange would generally
continue to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours
during which the underlying financial instruments are traded. To the extent that
the option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct agreement with
the Counterparty. In contrast to exchange listed options, which generally have
standardized terms and performance mechanics, all the terms of an OTC option,
including such terms as method of settlement, term, exercise price, premium,
guarantees and security, are set by negotiation of the parties. A fund will
generally sell (write) OTC options that are subject to a buy-back provision
permitting the fund to require the Counterparty to sell the option back to the
fund at a formula price within seven days. OTC options purchased by a fund, and
portfolio securities "covering" the amount of a fund's obligation pursuant to an
OTC option sold by it (the cost of the sell-back plus the in-the-money amount,
if any) are subject to each fund's restriction on illiquid securities, unless
determined to be liquid in accordance with procedures adopted by the Boards of
Trustees. For OTC options written with "primary dealers" pursuant to an
agreement requiring a closing purchase transaction at a formula price, the
amount which is considered to be illiquid may be calculated by reference to a
formula price. The funds expect generally to enter into OTC options that have
cash settlement provisions, although they are not required to do so.
Unless the parties provide for it, there is no central clearing or
guaranty function in an OTC option. As a result, if the Counterparty fails to
make delivery of the security, currency or other instrument underlying an OTC
option it has entered into with a fund or fails to make a cash settlement
payment due in accordance with the terms of that option, the fund will lose any
premium it paid for the option as well as any anticipated benefit of the
transaction. Accordingly, the adviser must assess the creditworthiness of each
such Counterparty or any guarantor or credit enhancement of the Counterparty's
credit to determine the likelihood that the terms of the OTC option will be
satisfied. A fund will engage in OTC option transactions only with U.S.
Government securities dealers recognized by the Federal Reserve Bank of New York
as "primary dealers," or broker-dealers, domestic or foreign banks or other
financial institutions which have received, combined with any credit
enhancements, a long-term debt rating of A from Standard & Poors or Moody's or
an equivalent rating from any other nationally recognized statistical rating
organization ("NRSRO") or the debt of which is determined to be of equivalent
credit quality by the adviser.
19
<PAGE>
If a fund sells (writes) a call option, the premium that it receives may
serve as a partial hedge, to the extent of the option premium, against a
decrease in the value of the underlying securities or instruments in its
portfolio or will increase the fund's income. The sale (writing) of put options
can also provide income.
Each fund may purchase and sell (write) call options on securities
including U.S. Treasury and agency securities, mortgage-backed securities, asset
backed securities, foreign sovereign debt, corporate debt securities, equity
securities (including convertible securities) and Eurodollar instruments that
are traded on U.S. and foreign securities exchanges and in the OTC markets, and
on securities indices, currencies and futures contracts. All calls sold by a
fund must be covered (i.e., the fund must own the securities or the futures
contract subject to the call) or must meet the asset segregation requirements
described below as long as the call is outstanding. In addition, each fund may
cover a written call option or put option by entering into an offsetting forward
contract and/or by purchasing an offsetting option or any other option which, by
virtue of its exercise price or otherwise, reduces the fund's net exposure on
its written option position. Even though the fund will receive the option
premium to help offset any loss, the fund may incur a loss if the exercise price
is below the market price for the security subject to the call at the time of
exercise. A call sold by a fund also exposes the fund during the term of the
option to possible loss of opportunity to realize appreciation in the market
price of the underlying security or instrument and may require the fund to hold
a security or instrument which it might otherwise have sold.
A fund may purchase and sell (write) put options on securities including
U.S. Treasury and agency securities, mortgage backed securities, asset backed
securities, foreign sovereign debt, corporate debt securities, equity securities
(including convertible securities) and Eurodollar instruments (whether or not it
holds the above securities in its portfolio), and on securities indices,
currencies and futures contracts. A fund will not sell put options if, as a
result, more than 50% of the fund's assets would be required to be segregated to
cover its potential obligations under such put options other than those with
respect to futures and options thereon. In selling put options, there is a risk
that a fund may be required to buy the underlying security at a price above the
market price.
Options on Securities Indices and Other Financial Indices. Each fund may
also purchase and sell (write) call and put options on securities indices and
other financial indices. Options on securities indices and other financial
indices are similar to options on a security or other instrument except that,
rather than settling by physical delivery of the underlying instrument, they
settle by cash settlement. For example, an option on an index gives the holder
the right to receive, upon exercise of the option, an amount of cash if the
closing level of the index upon which the option is based exceeds, in the case
of a call, or is less than, in the case of a put, the exercise price of the
option (except if, in the case of an OTC option, physical delivery is
specified). This amount of cash is equal to the differential between the closing
price of the index and the exercise price of the option, which also may be
multiplied by a formula value. The seller of the option is obligated, in return
for the premium received, to make delivery of this amount upon exercise of the
option. In addition to the methods described above, each fund may cover call
options on a securities index by owning securities whose price changes are
expected to be similar to those of the underlying index, or by having an
absolute and immediate right to acquire such securities without additional cash
consideration (or for additional cash consideration held in a segregated account
by its custodian) upon conversion or exchange of other securities in its
portfolio.
General Characteristics of Futures. Each fund may enter into financial
futures contracts or purchase or sell put and call options on such futures.
Futures are generally bought and sold on the commodities exchanges where they
are listed and involve payment of initial and variation margin as described
below. All futures contracts entered into by a fund are traded on U.S. exchanges
or boards
20
<PAGE>
of trade that are licensed and regulated by the Commodity Futures Trading
Commission ("CFTC") or on certain foreign exchanges.
The sale of futures contracts creates a firm obligation by a fund, as
seller, to deliver to the buyer the specific type of financial instrument called
for in the contract at a specific future time for a specified price (or, with
respect to index futures and Eurodollar instruments, the net cash amount). The
purchase of futures contracts creates a corresponding obligation by a fund, as
purchaser to purchase a financial instrument at a specific time and price.
Options on futures contracts are similar to options on securities except that an
option on a futures contract gives the purchaser the right in return for the
premium paid to assume a position in a futures contract and obligates the seller
to deliver such position, if the option is exercised.
A fund's use of financial futures and options thereon will in all cases be
consistent with applicable regulatory requirements and in particular the
regulations of the CFTC relating to exclusions from regulation as a commodity
pool operator. Those regulations currently provide that a fund may use commodity
futures and option positions (i) for bona fide hedging purposes without regard
to the percentage of assets committed to margin and option premiums, or (ii) for
other purposes permitted by the CFTC to the extent that the aggregate initial
margin and option premiums required to establish such non-hedging positions (net
of the amount that the positions were "in the money" at the time of purchase) do
not exceed 5% of the net asset value of a fund's portfolio, after taking into
account unrealized profits and losses on such positions. Typically, maintaining
a futures contract or selling an option thereon requires the fund to deposit,
with its custodian for the benefit of a futures commission merchant, or directly
with the futures commission merchant, as security for its obligations an amount
of cash or other specified assets (initial margin) which initially is typically
1% to 10% of the face amount of the contract (but may be higher in some
circumstances). Additional cash or assets (variation margin) may be required to
be deposited directly with the futures commission merchant thereafter on a daily
basis as the value of the contract fluctuates. The purchase of an option on
financial futures involves payment of a premium for the option without any
further obligation on the part of the fund. If a fund exercises an option on a
futures contract it will be obligated to post initial margin (and potential
subsequent variation margin) for the resulting futures position just as it would
for any position. Futures contracts and options thereon are generally settled by
entering into an offsetting transaction but there can be no assurance that the
position can be offset prior to settlement at an advantageous price, nor that
delivery will occur. The segregation requirements with respect to futures
contracts and options thereon are described below.
Currency Transactions. Each fund may engage in currency transactions with
Counterparties to seek to hedge the value of portfolio holdings denominated in
particular currencies against fluctuations in relative value or to enhance
potential gain. Currency transactions include currency contracts, exchange
listed currency futures, exchange listed and OTC options on currencies, and
currency swaps. A forward currency contract involves a privately negotiated
obligation to purchase or sell (with delivery generally required) a specific
currency at a future date, which may be any fixed number of days from the date
of the contract agreed upon by the parties, at a price set at the time of the
contract. A currency swap is an agreement to exchange cash flows based on the
notional (agreed upon) difference among two or more currencies and operates
similarly to an interest rate swap, which is described below. A fund may enter
into OTC currency transactions with Counterparties which have received, combined
with any credit enhancements, a long term debt rating of A by Standard & Poors
or Moody's, respectively, or that have an equivalent rating from a NRSRO or
(except for OTC currency options) are determined to be of equivalent credit
quality by the adviser.
Each fund's transactions in forward currency contracts and other currency
transactions such as futures, options, options on futures and swaps will
generally be limited to hedging involving either specific transactions or
portfolio positions. See "Strategic Transactions." Transaction hedging is
21
<PAGE>
entering into a currency transaction with respect to specific assets or
liabilities of a fund, which will generally arise in connection with the
purchase or sale of its portfolio securities or the receipt of income therefrom.
Position hedging is entering into a currency transaction with respect to
portfolio security positions denominated or generally quoted in that currency.
The funds will not enter into a transaction to hedge currency exposure to
an extent greater, after netting all transactions intended wholly or partially
to offset other transactions, than the aggregate market value (at the time of
entering into the transaction) of the securities held in its portfolio that are
denominated or generally quoted in or currently convertible into such currency,
other than with respect to non-hedging transactions or proxy hedging as
described below.
Each fund may also cross-hedge currencies by entering into transactions to
purchase or sell one or more currencies that are expected to decline in value in
relation to other currencies to which the Fund has or in which the fund expects
to have portfolio exposure. For example, a fund may hold a South Korean
government bond and the adviser may believe that the Korean won will deteriorate
against the Japanese yen. The fund would sell Korean won to reduce its exposure
to that currency and buy Japanese yen. This strategy would be a hedge against a
decline in the value of Korean won, although it would expose the fund to
declines in the value of the Japanese yen relative to the U.S. dollar.
To seek to reduce the effect of currency fluctuations on the value of
existing or anticipated holdings of portfolio securities, each fund may also
engage in proxy hedging. Proxy hedging is often used when the currency to which
a fund's portfolio is exposed is difficult to hedge or to hedge against the U.S.
dollar. Proxy hedging entails entering into a forward contract to sell a
currency whose changes in value are generally considered to be linked to a
currency or currencies in which certain of a fund's portfolio securities are or
are expected to be denominated, and to buy U.S. dollars. The amount of the
contract would not exceed the value of the portfolio securities denominated in
linked currencies. For example, if the adviser considers that the Korean won is
linked to the Japanese yen, and a portfolio contains securities denominated in
won and the adviser believes that the value of won will decline against the U.S.
dollar, the adviser may enter into a contract to sell yen and buy dollars. Proxy
hedging involves some of the same risks and considerations as other transactions
with similar instruments. Currency transactions can result in losses to a fund
if the currency being hedged fluctuates in value to a degree or in a direction
that is not anticipated. Further, there is the risk that the perceived linkage
between various currencies may not be present or may not be present during the
particular time that a fund is engaging in proxy hedging. If a fund enters into
a currency hedging transaction, it will comply with the asset segregation
requirements described below.
Risks of Currency Transactions. Currency transactions are subject to risks
different from those of other portfolio transactions. Because currency control
is of great importance to the issuing governments and influences economic
planning and policy, purchases and sales of currency and related instruments can
be negatively affected by government exchange controls, blockages, and
manipulations or exchange restrictions imposed by governments. These can result
in losses to a fund if they are unable to deliver or receive currency or funds
in settlement of obligations and could also cause hedges they have entered into
to be rendered useless, resulting in full currency exposure as well as incurring
transaction costs. Buyers and sellers of currency futures are subject to the
same risks that apply to the use of futures generally. Further, settlement of a
currency futures contract for the purchase of most currencies must occur at a
bank based in the issuing nation. Trading options on currency futures is
relatively new, and the ability to establish and close out positions on such
options is subject to the maintenance of a liquid market which may not always be
available. Currency exchange rates may fluctuate based on factors extrinsic to
that country's economy.
22
<PAGE>
Combined Transactions. Each fund may enter into multiple transactions,
including multiple options transactions, multiple futures transactions, multiple
currency transactions including forward currency contracts and multiple interest
rate transactions, structured notes and any combination of futures, options,
currency and interest rate transactions ("component transactions"), instead of a
single Strategic Transaction, as part of a single or combined strategy when, in
the opinion of the adviser, it is in the best interests of the funds to do so. A
combined transaction will usually contain elements of risk that are present in
each of its component transactions. Although combined transactions are normally
entered into based on the adviser's judgment that the combined strategies will
reduce risk or otherwise more effectively achieve the desired portfolio
management goal, it is possible that the combination will instead increase such
risks or hinder achievement of the portfolio management objective.
Swaps, Caps, Floors and Collars. Among the Strategic Transactions into
which the funds may enter are interest rate, currency and index swaps and the
purchase or sale of related caps, floors and collars. The funds expect to enter
into these transactions primarily for hedging purposes, including, but not
limited to, preserving a return or spread on a particular investment or portion
of a fund's portfolio, protecting against currency fluctuations, as a duration
management technique or protecting against an increase in the price of
securities a fund anticipates purchasing at a later date. Swaps, caps, floors
and collars may also be used to enhance potential gain in circumstances where
hedging is not involved although, as described above, each fund will attempt to
limit its net loss exposure resulting from swaps, caps, floors and collars and
other Strategic Transactions entered into for such purposes. Each fund will
attempt to limit net loss exposure from Strategic Transactions entered into for
non-hedging purposes to not more than 3% of net assets.
A fund will not sell interest rate caps or floors where it does not own
securities or other instruments providing the income stream the fund may be
obligated to pay. Interest rate swaps involve the exchange by the fund with
another party of their respective commitments to pay or receive interest (i.e.,
an exchange of floating rate payments for fixed rate payments with respect to a
notional amount of principal). A currency swap is an agreement to exchange cash
flows on a notional amount of two or more currencies based on the relative value
differential among them and an index swap is an agreement to swap cash flows on
a notional amount based on changes in the values of the reference indices. The
purchase of a cap entitles the purchaser to receive payments on a notional
principal amount from the party selling such cap to the extent that a specified
index exceeds a predetermined interest rate or amount. The purchase of a floor
entitles the purchaser to receive payments on a notional principal amount from
the party selling such floor to the extent that a specified index falls below a
predetermined interest rate or amount. A collar is a combination of a cap and a
floor that preserves a certain rate of return within a predetermined range of
interest rates or values.
Each fund will usually enter into swaps on a net basis (i.e., the two
payment streams are netted out in a cash settlement on the payment date or dates
specified in the instrument) with the fund receiving or paying, as the case may
be, only the net amount of the two payments. A fund will not enter into any
swap, cap, floor or collar transaction unless, at the time of entering into such
transaction, the unsecured long-term debt of the Counterparty, combined with any
credit enhancements, is rated at least A by Standard & Poors or Moody's or has
an equivalent rating from an NRSRO or the Counterparty issues debt that is
determined to be of equivalent credit quality by the adviser. If there is a
default by the Counterparty, the fund may have contractual remedies pursuant to
the agreements related to the transaction. The swap market has grown
substantially in recent years with a large number of banks and investment
banking firms acting both as principals and as agents utilizing standardized
swap documentation. As a result, the swap market has become relatively liquid.
Caps, floors and collars are more recent innovations for which standardized
documentation has not yet been fully developed. Swaps, caps, floors and collars
are considered illiquid for purposes
23
<PAGE>
of a fund's policy regarding illiquid securities, unless it is determined, based
upon continuing review of the trading markets for the specific security, that
such security is liquid. The Boards of Trustees of the Portfolio Trust and the
Trust have adopted guidelines and delegated to the adviser the daily function of
determining and monitoring the liquidity of swaps, caps, floors and collars. The
Boards of Trustees, however, retain oversight focusing on factors such as
valuation, liquidity and availability of information and are ultimately
responsible for such determinations. The Staff of the SEC currently takes the
position that swaps, caps, floors and collars are illiquid, and are subject to
each fund's limitation on investing in illiquid securities.
Risks of Strategic Transactions Outside the United States. The funds may
use strategic transactions to seek to hedge against currency exchange rate
risks. When conducted outside the United States, Strategic Transactions may not
be regulated as rigorously as in the United States, may not involve a clearing
mechanism and related guarantees, and are subject to the risk of governmental
actions affecting trading in, or the prices of, foreign securities, currencies
and other instruments. The value of such positions also could be adversely
affected by: (i) lesser availability than in the United States of data on which
to make trading decisions, (ii) delays in a fund's ability to act upon economic
events occurring in foreign markets during non-business hours in the United
States, (iii) the imposition of different exercise and settlement terms and
procedures and margin requirements than in the United States, (iv) lower trading
volume and liquidity, and (v) other complex foreign political, legal and
economic factors. At the same time, Strategic Transactions may offer advantages
such as trading in instruments that are not currently traded in the United
States or arbitrage possibilities not available in the United States.
Use of Segregated Accounts. Each fund will hold securities or other
instruments whose values are expected to offset its obligations under the
Strategic Transactions. Each fund will cover Strategic Transactions as required
by interpretive positions of the SEC. A fund will not enter into Strategic
Transactions that expose the fund to an obligation to another party unless it
owns either (i) an offsetting position in securities or other options, futures
contracts or other instruments or (ii) cash, receivables or liquid securities
with a value sufficient to cover its potential obligations. A fund may have to
comply with any applicable regulatory requirements for Strategic Transactions,
and if required, will set aside cash and other liquid assets on the fund's
records or in a segregated account in the amount prescribed. If the market value
of these securities declines or the fund's obligation on the underlying
Strategic Transaction increases, additional cash or liquid securities will be
segregated daily so that the aggregate market value of the segregated securities
is at least equal to the amount of the fund's obligations on the underlying
Strategic Transactions. Segregated assets would not be sold while the Strategic
Transaction is outstanding, unless they are replaced with similar assets. As a
result, there is a possibility that segregation of a large percentage of a
fund's assets could impede portfolio management or the fund's ability to meet
redemption requests or other current obligations.
"When-Issued", "Delayed Delivery" and "Forward Commitment" Securities.
Fixed Income Portfolio, Global Fixed Income Portfolio and International Fixed
Income Fund may invest up to 15%, 25% and 25%, respectively, of their 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 a fund
enters into the commitment, but interest will not accrue to the fund until
delivery of and payment for the securities. Although a fund will only make
commitments to purchase "when-issued" and "delayed delivery" securities with the
intention of actually acquiring the securities, each fund may sell the
securities before the settlement date if deemed advisable by the adviser.
Unless a fund has entered into an offsetting agreement to sell the
securities purchased on a when-issued or forward commitment basis, the fund will
segregate, on its records or with its
24
<PAGE>
custodian, cash or liquid obligations with a market value at least equal to the
amount of the fund's commitment. 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 is at least equal to the
amount of the fund's commitment.
Securities purchased on a "when-issued", "delayed delivery" or "forward
commitment" basis may have a market value on delivery which is less than the
amount paid by a fund. Changes in market value may be based upon the public's
perception of the creditworthiness of the issuer or changes in the level of
interest rates. Generally, the value of "when-issued", "delayed delivery" and
"forward commitment" securities will fluctuate inversely to changes in interest
rates, i.e., they will appreciate in value when interest rates fall and will
depreciate in value when interest rates rise.
Repurchase Agreements. Fixed Income Portfolio, Global Fixed Income
Portfolio and International Fixed Income Fund may each invest up to 5%, 25% and
25%, respectively, of its net assets in repurchase agreements.
A repurchase agreement is an agreement under which a fund acquires money
market instruments (generally U.S. Government securities) from a commercial
bank, broker or dealer, subject to resale to the seller at an agreed-upon price
and date (normally the next business day). The resale price reflects an
agreed-upon interest rate effective for the period the instruments are held by
the fund and is unrelated to the interest rate on the instruments. The
instruments acquired by a fund (including accrued interest) must have an
aggregate market value in excess of the resale price and will be held by the
fund's custodian bank until they are repurchased. In evaluating whether to enter
into a repurchase agreement, the adviser will carefully consider the
creditworthiness of the seller pursuant to procedures reviewed and approved by
the Board of Trustees of the Trust or the Portfolio Trust, as the case may be.
The use of repurchase agreements involves certain risks. For example, if
the seller defaults on its obligation to repurchase the instruments acquired by
a fund at a time when their market value has declined, the fund may incur a
loss. If the seller becomes insolvent or subject to liquidation or
reorganization under bankruptcy or other laws, a court may determine that the
instruments acquired by a fund are collateral for a loan by the fund and
therefore are subject to sale by the trustee in bankruptcy. Finally, it is
possible that a fund may not be able to substantiate its interest in the
instruments it acquires. While the Trustees acknowledge these risks, it is
expected that they can be controlled through careful documentation and
monitoring.
Forward Roll Transactions. To seek to enhance current income, Global Fixed
Income Portfolio, Fixed Income Portfolio and International Fixed Income Fund may
each invest up to 5%, 10%, and 10%, respectively, of its net assets in forward
roll transactions involving mortgage- backed securities. In a forward roll
transaction, a fund sells a mortgage-backed security to a financial institution,
such as a bank or broker-dealer, and simultaneously agrees to repurchase a
similar security from the institution at a later date at an agreed-upon price.
The mortgage-backed securities that are repurchased will bear the same interest
rate as those sold, but generally will be collateralized by different pools of
mortgages with different prepayment histories than those sold. During the period
between the sale and repurchase, the fund will not be entitled to receive
interest and principal payments on the securities sold. Proceeds of the sale
will be invested in short-term instruments, such as repurchase agreements or
other short-term securities, and the income from these investments, together
with any additional fee income received on the sale and the amount gained by
repurchasing the securities in the future at a lower price, will generate income
and gain for the fund which is intended to exceed the yield on the securities
sold. Forward roll transactions involve the risk that the market value of the
securities sold by the fund may decline below the repurchase price of those
securities. At the time that a fund enters into a forward roll transaction, it
will place cash or liquid
25
<PAGE>
assets in a segregated account that is marked to market daily having a value
equal to the repurchase price (including accrued interest).
Leverage. The use of forward roll transactions and reverse repurchase
agreements involves leverage. Leverage allows any investment gains made with the
additional monies received (in excess of the costs of the forward roll
transaction or reverse repurchase agreement) to increase the net asset value of
a fund faster than would otherwise be the case. On the other hand, if the
additional monies received are invested in ways that do not fully recover the
costs of such transactions to a fund, the net asset value of the fund would fall
faster than would otherwise be the case.
Short Sales. Each fund may engage in short sales and short sales against
the box. In a short sale, a fund sells a security it does not own in
anticipation of a decline in the market value of that security. In a short sale
against the box, a fund either owns or has the right to obtain at no extra cost
the security sold short. The broker holds the proceeds of the short sale until
the settlement date, at which time the fund delivers the security (or an
identical security) to cover the short position. The fund receives the net
proceeds from the short sale. When a fund enters into a short sale other than
against the box, the fund must first borrow the security to make delivery to the
buyer and must segregate cash or liquid assets on its records or in a segregated
account with the fund's custodian that is marked to market daily. Short sales
other than against the box involve unlimited exposure to loss. No securities
will be sold short if, after giving effect to any such short sale, the total
market value of all securities sold short would exceed 5% of the value of each
funds net assets.
Restricted and Illiquid Securities. Each fund may invest up to 15% of its
net assets in illiquid securities. Illiquid securities are those that are not
readily marketable, repurchase agreements maturing in more than seven days, time
deposits with a notice or demand period of more than seven days, certain SMBS,
swap transactions, certain OTC options and certain restricted securities. Based
upon continuing review of the trading markets for a specific restricted
security, the security may be determined to be eligible for resale to qualified
institutional buyers pursuant to Rule 144A under the Securities Act of 1933 and,
therefore, to be liquid. Also, certain illiquid securities may be determined to
be liquid if they are found to satisfy relevant liquidity requirements.
The Boards of Trustees have adopted guidelines and delegated to the
advisers the function of determining and monitoring the liquidity of portfolio
securities, including restricted and illiquid securities. The Boards of
Trustees, however, retain oversight and are ultimately responsible for such
determinations. The purchase price and subsequent valuation of illiquid
securities normally reflect a discount, which may be significant, from the
market price of comparable securities for which a liquid market exists.
Money Market Instruments and Repurchase Agreements. Money market
instruments include short-term U.S. and foreign Government securities,
commercial paper (promissory notes issued by corporations to finance their
short-term credit needs), negotiable certificates of deposit, non-negotiable
fixed time deposits, bankers' acceptances and repurchase agreements.
U.S. Government securities include securities which are direct obligations
of the U.S. Government backed by the full faith and credit of the United States
and securities issued by agencies and instrumentalities of the U.S. Government
which may be guaranteed by the U.S. Treasury or supported by the issuer's right
to borrow from the U.S. Treasury or may be backed by the credit of the federal
agency or instrumentality itself. Agencies and instrumentalities of the U.S.
Government include, but are not limited to, Federal Land Banks, the Federal Farm
Credit Bank, the Central Bank for Cooperatives, Federal Intermediate Credit
Banks, Federal Home Loan Banks and the Federal National Mortgage Association.
26
<PAGE>
Each of the funds may invest in commercial paper rated P-1 by Moody's or
A-1 by Standard & Poors or Duff-1 by Duff, which are the highest ratings
assigned by these rating services (even if rated lower by one or more of the
other agencies), or, if not rated or rated lower by one or more of the agencies
and not rated by the other agency or agencies, judged by the adviser to be of
equivalent quality to the securities so rated. In determining whether securities
are of equivalent quality, the adviser may take into account, but will not rely
entirely on, ratings assigned by foreign rating agencies.
Temporary Defensive Investments. Each fund may maintain cash balances and
purchase money market instruments for cash management and liquidity purposes.
Each fund may adopt a temporary defensive position during adverse market
conditions by investing without limit in high quality money market instruments,
including short-term U.S. Government securities, negotiable certificates of
deposit, non-negotiable fixed time deposits, bankers' acceptances, commercial
paper, floating-rate notes and repurchase agreements.
Portfolio Turnover. It is not the policy of any of the funds to purchase
or sell securities for trading purposes. However, each fund places no
restrictions on portfolio turnover and it may sell any portfolio security
without regard to the period of time it has been held. A fund may therefore
generally change its portfolio investments at any time in accordance with the
adviser's appraisal of factors affecting any particular issuer or market, or the
economy in general. A rate of turnover of 100% would occur if the value of the
lesser of purchases and sales of portfolio securities for a particular year
equaled the average monthly value of portfolio securities owned during the year
(excluding short-term securities). A high rate of portfolio turnover (100% or
more) involves a correspondingly greater amount of brokerage commissions and
other costs which must be borne directly by a fund and thus indirectly by its
shareholders. It may also result in the realization of larger amounts of net
short-term capital gains, distributions of which are taxable to a fund's
shareholders as ordinary income.
Portfolio Diversification and Concentration. International Fixed Income
Fund and Global Fixed Income Portfolio are non-diversified which means that they
may, with respect to up to 50% of their total assets, invest more than 5% of
their total assets in the securities of a single issuer. Investing a significant
amount of a fund's assets in the securities of a small number of foreign issuers
will cause the fund's net asset value to be more sensitive to events affecting
those issuers. The Fixed Income Portfolio is diversified which means that, with
respect to 75% of its total assets (i) no more than 5% of its total assets may
be invested in the securities of a single issuer and (ii) it will purchase no
more than 10% of the outstanding voting securities of a single issuer. None of
the funds will concentrate (invest 25% or more of their total assets) in the
securities of issuers in any one industry. The funds' policies concerning
diversification and concentration are fundamental and may not be changed without
shareholder approval.
INVESTMENT RESTRICTIONS
The funds and the Portfolios have adopted the following fundamental
policies. Each fund's and Portfolio's fundamental policies cannot be changed
unless the change is approved by the "vote of a majority of the outstanding
voting securities" of the fund or the Portfolio, as the case may be, which
phrase as used herein means the lesser of (i) 67% or more of the voting
securities of the fund or the Portfolio present at a meeting, if the holders of
more than 50% of the outstanding voting securities of the fund or the Portfolio
are present or represented by proxy, or (ii) more than 50% of the outstanding
voting securities of the fund or the Portfolio.
27
<PAGE>
Standish Fixed Income Asset Fund and Standish Fixed Income Portfolio
As a matter of fundamental policy, the Portfolio (Fund) may not:
1. Invest, with respect to at least 75% of its total assets, more than 5% in
the securities of any one issuer (other than the U.S. Government, its
agencies or instrumentalities) or acquire more than 10% of the outstanding
voting securities of any issuer.
2. Issue senior securities, borrow money or securities or pledge or mortgage
its assets, except that the Portfolio (fund) may (a) borrow money from
banks as a temporary measure for extraordinary or emergency purposes (but
not for investment purposes) in an amount up to 15% of the current value
of its total assets, (b) enter into forward roll transactions, and (c)
pledge its assets to an extent not greater than 15% of the current value
of its total assets to secure such borrowings; however, the fund may not
make any additional investments while its outstanding bank borrowings
exceed 5% of the current value of its total assets.
3. Lend portfolio securities except that the Portfolio (i) may lend portfolio
securities in accordance with the Portfolio's investment policies up to 33
1/3% of the Portfolio's total assets taken at market value, (ii) enter
into repurchase agreements, and (iii) purchase all or a portion of an
issue of debt securities, bank loan participation interests, bank
certificates of deposit, bankers' acceptances, debentures or other
securities, whether or not the purchase is made upon the original issuance
of the securities, and except that the fund may enter into repurchase
agreements with respect to 5% of the value of its net assets.
4. Invest more than 25% of the current value of its total assets in any
single industry, provided that this restriction shall not apply to U.S.
Government securities, including mortgage pass-through securities (GNMAs).
5. Underwrite the securities of other issuers, except to the extent that, in
connection with the disposition of portfolio securities, the Portfolio
(fund) may be deemed to be an underwriter under the Securities Act of
1933.
6. Purchase real estate or real estate mortgage loans, although the Portfolio
(fund) may purchase marketable securities of companies which deal in real
estate, real estate mortgage loans or interests therein.
7. Purchase securities on margin (except that the Portfolio (fund) may obtain
such short-term credits as may be necessary for the clearance of purchases
and sales of securities).
8. Purchase or sell commodities or commodity contracts except that the
Portfolio (fund) may purchase and sell financial futures contracts and
options on financial futures contracts and engage in foreign currency
exchange transactions.
The following restrictions are not fundamental policies and may be changed
by the Trustees of the Portfolio Trust (Trust) without investor approval in
accordance with applicable laws, regulations or regulatory policy. The Portfolio
(Fund) may not:
a. Invest in the securities of an issuer for the purpose of exercising
control or management, but it may do so where it is deemed advisable to
protect or enhance the value of an existing investment.
28
<PAGE>
b. Purchase securities of any other investment company except to the extent
permitted by the 1940 Act.
c. Invest more than 15% of its net assets in illiquid securities.
d. Invest more than 5% of its net assets in repurchase agreements (this
restriction is fundamental with respect to the fund, but not the
Portfolio).
e. Purchase additional securities if the Portfolio's bank borrowings exceed
5% of its net assets. (This policy is fundamental with respect to the fund
but not the Portfolio.)
Standish International Fixed Income Fund.
As a matter of fundamental policy, the International Fixed Income Fund may
not:
1. Invest, with respect to at least 50% of its total assets, more than 5% in
the securities of any one issuer (other than the U.S. Government, its
agencies or instrumentalities) or acquire more than 10% of the outstanding
voting securities of any issuer.
2. Issue senior securities, borrow money or securities or pledge or mortgage
its assets, except that the fund may (a) borrow money from banks as a
temporary measure for extraordinary or emergency purposes (but not for
investment purposes) in an amount up to 15% of the current value of its
total assets, (b) enter into forward roll transactions, and (c) pledge its
assets to an extent not greater than 15% of the current value of its total
assets.
3. Lend portfolio securities, except that the fund may lend its portfolio
securities with a value up to 20% of its total assets (with a 10% limit
for any borrower) and may enter into repurchase agreements with respect to
25% of the value of its net assets.
4. Invest more than 25% of the current value of its total assets in any
single industry, provided that this restriction shall not apply to debt
securities issued or guaranteed by the United States government or its
agencies or instrumentalities.
5. Underwrite the securities of other issuers, except to the extent that, in
connection with the disposition of portfolio securities, the fund may be
deemed to be an underwriter under the Securities Act of 1933.
6. Purchase real estate or real estate mortgage loans, although the fund may
purchase marketable securities of companies which deal in real estate,
real estate mortgage loans or interests therein.
7. Purchase securities on margin (except that the Fund may obtain such
short-term credits as may be necessary for the clearance of purchases and
sales of securities).
8. Purchase or sell commodities or commodity contracts except that the fund
may purchase and sell financial futures contracts and options on financial
futures contracts and engage in foreign currency exchange transactions.
The following restrictions are not fundamental policies and may be changed
by the Trustees without shareholder approval, in accordance with applicable
laws, regulations or regulatory policy. The Fund may not:
29
<PAGE>
a. Invest in the securities of an issuer for the purpose of exercising
control or management, but it may do so where it is deemed advisable to
protect or enhance the value of an existing investment.
b. Purchase securities of any other investment company except to the extent
permitted by the 1940 Act.
c. Invest more than 15% of its net assets in securities which are illiquid.
d. Purchase additional securities if the fund's borrowings exceed 5% of its
net assets.
Standish Global Fixed Income Asset Fund and Standish Global Fixed Income
Portfolio.
As a matter of fundamental policy, the Portfolio (fund) may not:
1. Invest more than 25% of the current value of its total assets in any
single industry, provided that this restriction shall not apply to debt
securities issued or guaranteed by the United States government or its
agencies or instrumentalities.
2. Underwrite the securities of other issuers, except to the extent that, in
connection with the disposition of portfolio securities, the Portfolio
(fund) may be deemed to be an underwriter under the Securities Act of
1933.
3. Purchase real estate or real estate mortgage loans, although the Portfolio
(fund) may purchase marketable securities of companies which deal in real
estate, real estate mortgage loans or interests therein.
4. Purchase securities on margin (except that the Portfolio (fund) may obtain
such short-term credits as may be necessary for the clearance of purchases
and sales of securities).
5. Purchase or sell commodities or commodity contracts except that the
Portfolio (fund) may purchase and sell financial futures contracts and
options on financial futures contracts and engage in foreign currency
exchange transactions.
6. With respect to at least 50% of its total assets, invest more than 5% in
the securities of any one issuer (other than the U.S. Government, its
agencies or instrumentalities) or acquire more than 10% of the outstanding
voting securities of any issuer.
7. Issue senior securities, borrow money, enter into reverse repurchase
agreements or pledge or mortgage its assets, except that the Portfolio
(fund) may (a) borrow from banks as a temporary measure for extraordinary
or emergency purposes (but not investment purposes) in an amount up to 15%
of the current value of its total assets to secure such borrowings, (b)
enter into forward roll transactions, and (c) pledge its assets to an
extent not greater than 15% of the current value of its total assets to
secure such borrowings; however, the fund may not make any additional
investments while its outstanding borrowings exceed 5% of the current
value of its total assets.
8. Lend portfolio securities, except that the Portfolio (fund) may lend its
portfolio securities with a value up to 20% of its total assets (with a
10% limit for any borrower), except that the Portfolio may enter into
repurchase agreements and except that the fund may enter into repurchase
agreements with respect to 25% of the value of its net assets.
30
<PAGE>
The following restrictions are not fundamental policies and may be changed
by the Trustees of the Portfolio Trust (Trust) without investor approval, in
accordance with applicable laws, regulations or regulatory policy. The Portfolio
(Fund) may not:
a. Invest in the securities of an issuer for the purpose of exercising
control or management but it may do so where it is deemed advisable to
protect or enhance the value of an existing investment.
b. Purchase the securities of any other investment company except to the
extent permitted by the 1940 Act.
c. Invest more than 25% of its net assets in repurchase agreements (this
restriction is fundamental with respect to the Fund but not the
Portfolio).
d. Purchase additional securities if the Portfolio's borrowings exceed 5% of
its net assets (this restriction is fundamental with respect to the fund
but not the Portfolio).
******
Notwithstanding any fundamental or non-fundamental policy, Fixed Income
Asset Fund and Global Fixed Income Asset Fund may invest all of their assets
(other than assets which are not "investment securities" (as defined in the 1940
Act) or are excepted by the SEC) in an open end management investment company
with substantially the same investment objective as the respective fund.
If any percentage restriction described above is adhered to at the time of
investment, a subsequent increase or decrease in the percentage resulting from a
change in the value of the Portfolio's or a fund's assets will not constitute a
violation of the restriction.
CALCULATION OF PERFORMANCE DATA
As indicated in the Prospectus, each fund may, from time to time,
advertise certain total return and yield information. The average annual total
return of a fund for a period is computed by subtracting the net asset value per
share at the beginning of the period from the net asset value per share at the
end of the period (after adjusting for the reinvestment of any income dividends
and capital gain distributions), and dividing the result by the net asset value
per share at the beginning of the period. In particular, the funds' average
annual total return ("T") is computed by using the redeemable value at the end
of a specified period of time ("ERV") of a hypothetical initial investment of
$1,000 ("P") over a period of time ("n") according to the formula P(1+T)^n=ERV.
The funds' yield is computed by dividing the net investment income per
share earned during a base period of 30 days, or one month, by the maximum
offering price per share on the last day of the period. For the purpose of
determining net investment income, the calculation includes, among expenses of
the funds, all recurring fees that are charged to all shareholder accounts and
any non-recurring charges for the period stated. In particular, yield is
determined according to the following formula:
Yield = 2[(A - B + 1)^6 - 1]
-----
CD
Where:
31
<PAGE>
A=interest earned during the period; B=net expenses accrued for the
period; C=the average daily number of shares outstanding during the period that
were entitled to receive dividends; D=the maximum offering price per share (net
asset value) on the last day of the period.
The funds may also quote non-standardized yield, such as yield-to-maturity
("YTM"). YTM represents the rate of return an investor will receive if a
long-term, interest bearing investment, such as a bond, is held to its maturity
date. YTM does not take into account purchase price, redemption value, time to
maturity, coupon yield and the time between interest payments.
With respect to the treatment of discount and premium on mortgage or other
receivables-backed obligations which are expected to be subject to monthly
payments of principal and interest ("pay downs"), the funds account for gain or
loss attributable to actual monthly pay downs as an increase or decrease to
interest income during the period.
In addition, each fund may elect (i) to amortize the discount or premium
remaining on a security, based on the cost of the security, to the weighted
average maturity date, if such information is available, or to the remaining
term of the security, if the weighted average maturity date is not available, or
(ii) not to amortize the discount or premium remaining on a security.
The funds' average annual total return for the one-, five- and ten-year
(or life-of-fund, if shorter) periods ended December 31, 1998 and average
annualized yield for the 30-day period ended December 31, 1998 were as follows:
<TABLE>
<CAPTION>
Average Annual Total Return
Fund 1-Year 5-Year 10-Year Life of Fund Yield
- ---- ------ ------ ------- ------------ -----
<S> <C> <C> <C> <C> <C>
Fixed Income Asset Fund(1) 4.33%(4) 6.12%(4) 9.06%(4) 8.43% 7.14%
Global Fixed Income Asset Fund(2) 6.71%(4) 7.92%(4) N/A 7.92%(4) 5.65%
International Fixed Income Fund(3) 8.46%(4) 8.23%(4) N/A 10.29%(4) 4.40%
</TABLE>
- ---------------------------
(1) Fixed Income Asset Fund commenced operations on June 1, 1998.
(2) Global Fixed Asset Income Fund has not yet commenced operations.
(3) International Fixed Income Fund Service Class has not yet commenced
operations.
(4) Because the Global Fixed Income Asset Fund and International Fixed Income
Fund have not yet commenced operations, and Fixed Income Asset Fund has
not been in operation for a full year, the average annual total return
quotations for the one, five, ten year and life-of-fund (for Global Fixed
Income Asset Fund and International Fixed Income Fund Service Class only)
periods include the performance record of their corresponding non-asset
funds (or Institutional Class in the case of International Fixed Income
Fund) adjusted to reflect the imposition of service fees at the rate of
0.25% of average daily net assets. The adjustment is made by reducing the
corresponding Fixed Income Fund's, Global Fixed Income Fund's or
International Fixed Income Fund Service Class's performance record for
rolling one month periods by .020833% (the fraction of the .25% service
fee paid monthly) and then aggregating those performance results for the
appropriate one, five, ten or life of fund period.
These performance quotations should not be considered as representative of
any fund's performance for any specified period in the future.
In addition to average annual return quotations, the funds may quote
quarterly and annual performance on a net (with management and administration
fees deducted) and gross basis as follows:
32
<PAGE>
Fixed Income Asset Fund
Quarter/Year Net Gross
- --------------------------------------------------------
3Q98 1.69 1.84
4Q98 (1.07) (0.93)
1998
These performance quotations should not be considered as representative of
a fund's performance for any specified period in the future. Each fund's
performance may be compared in sales literature and advertisements to the
performance of other mutual funds and separately managed discretionary accounts
(including private investment companies) having similar objectives or to
standardized indices or other measures of investment performance. In particular,
Fixed Income Asset Fund and Fixed Income Portfolio may compare their performance
to the Lehman Government/Corporate Index, which is generally considered to be
representative of the performance of all domestic, dollar denominated, fixed
rate, investment grade bonds, and the Lehman Brothers Aggregate Index which is
composed of securities from the Lehman Brothers Government/Corporate Bond Index,
Mortgage Backed Securities Index and Yankee Bond Index, and is generally
considered to be representative of all unmanaged, domestic, dollar denominated,
fixed rate investment grade bonds. International Fixed Income Fund may compare
its performance to the J. P. Morgan Non-U.S. Government Bond Index, which is
generally considered to be representative of unmanaged government bonds in
foreign markets, and the Lehman Brothers Aggregate Index as described above. The
Global Fixed Income Asset Fund and the Global Fixed Income Portfolio may compare
their performance to the J. P. Morgan Global Index, which is generally
considered to be representative of the performance of fixed rate, domestic
government bonds from eleven countries.
Comparative performance may also be expressed by reference to a ranking prepared
by a mutual fund monitoring service or by one or more newspapers, newsletters or
financial periodicals. Performance comparisons may be useful to investors who
wish to compare a fund's past performance to that of other mutual funds and
investment products. Of course, past performance is not a guarantee of future
results.
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, Hanlon,
Stuer and Martin, and Mdmes. Banfield, Herrmann, Broccoli, Walcott-Abramson and
Kneeland, who hold the same office with the Portfolio Trust as with the Trust.
All executive officers of the Trust and the Portfolio Trust are affiliates of
Standish, Ayer & Wood, Inc.
<TABLE>
<CAPTION>
Name, Address and Date of Birth Position Held With Trust Principal Occupation During Past 5
Years
- ----------------------------------- -------------------------- ------------------------------------
<S> <C> <C>
*D. Barr Clayson, 7/29/35 Trustee Vice President and Managing Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.;
One Financial Center Chairman and Director, Standish
Boston, MA 02111 International Management Company,
L.P.; Director, CareGroup Inc.
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
Name, Address and Date of Birth Position Held With Trust Principal Occupation During Past 5
Years
- ----------------------------------- -------------------------- ------------------------------------
<S> <C> <C>
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 Trustee, Cornell University; Director,
CareGroup Inc.
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;
P.O. Box 307 Trustee, Visiting Nurse Alliance of
So. Woodstock, VT 05071 Vermont
and New Hampshire; Trustee, Mertens
House, Inc.
*Edward H. Ladd, 1/3/38 Trustee Chairman of the Board and
c/o Standish, Ayer & Wood, Inc. Managing Director, Standish, Ayer &
One Financial Center Wood, Inc.;
Boston, MA 02111 Director of Standish International
Management Company, L.P.
Caleb Loring III, 11/14/43 Trustee Trustee, Essex Street Associates
c/o Essex Street Associates (family investment trust office);
400 Essex Street Director, Holyoke Mutual Insurance
Beverly, MA 01915 Company; Director, Carter Family
Corporation; Board Member, Gordon-
Conwell Theological Seminary; Chairman
of the Advisory Board, Salvation Army;
Chairman, Vision New England
*Richard S. Wood, 5/21/54 President and Trustee Vice President and Managing Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.;
One Financial Center Executive Vice President and Director,
Boston, MA 02111 Standish International Management
Company, L.P.
James E. Hollis III, 11/21/48 Executive Vice President Vice President and Director, Standish,
c/o Standish, Ayer & Wood, Inc. Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Anne P. Herrmann, 1/26/56 Vice President and Senior Fund Administration Manager,
c/o Standish, Ayer & Wood, Inc. Secretary Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Paul G. Martins, 3/10/56 Vice President and Vice President of Finance, Standish, Ayer
c/o Standish, Ayer & Wood, Inc. Treasurer & Wood, Inc. since October 1996;
One Financial Center formerly Senior Vice President, Treasurer
Boston, MA 02111 and Chief Financial Officer of Liberty
Financial Bank Group
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
Name, Address and Date of Birth Position Held With Trust Principal Occupation During Past 5
Years
- ----------------------------------- -------------------------- ------------------------------------
<S> <C> <C>
Beverly E. Banfield, 7/6/56 Vice President Vice President, Associate Director and
c/o Standish, Ayer & Wood, Inc. Compliance Officer, Standish, Ayer &
One Financial Center Wood, Inc.
Boston, MA 02111
Denise B. Kneeland, 8/19/51 Vice President Vice President and Manager, Mutual
c/o Standish, Ayer & Wood, Inc. Fund Operations,
One Financial Center Standish, Ayer & Wood, Inc.
Boston, MA 02111 since December 1995; formerly Vice
President, Scudder, Stevens and Clark
Tami M. Pester, 10/29/67 Assistant Vice President Assistant Compliance Manager and
c/o Standish, Ayer & Wood, Inc. Compliance Officer, Standish, Ayer &
One Financial Center Wood, Inc. since 1998; Compliance
Boston, MA 02111 Officer, State Street Global Advisors
Rosalind J. Lillo, 2/6/38 Assistant Vice President Broker/Dealer Administrator
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc. since
One Financial Center October 1995; formerly Compliance
Boston, MA 02111 Administrator, New England Securities
Corp.
Gigi K. Szekely, 5/8/67 Assistant Vice President Manager, Mutual Funds Client
c/o Standish, Ayer & Wood, Inc. Communications,
One Financial Center Standish, Ayer & Wood, Inc.
Boston, MA 02111
</TABLE>
* Indicates that Trustee is an interested person of the Trust for purposes of
the 1940 Act.
Compensation of Trustees and Officers.
Neither the Trust nor the Portfolio Trust pays compensation to the
Trustees of the Trust or the Portfolio Trust that are affiliated with Standish
or to the Trust's and Portfolio Trust's officers. None of the Trustees or
officers have engaged in any financial transactions (other than the purchase or
redemption of the funds' shares) with the Trust, the Portfolio Trust or the
advisers during the year ended December 31, 1998, 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.
The following table sets forth all compensation paid to the Trust's and
the Portfolio Trust's Trustees as of the funds' fiscal years ended December 31,
1998:
35
<PAGE>
Aggregate Compensation from the Funds
<TABLE>
<CAPTION>
Pension or
Fixed Retirement Total Compensation
Income Global Fixed International Benefits Accrued from Funds and
Asset Income Asset Fixed Income as Part of Funds' Portfolio & Other Funds
Name of Trustee Fund** Fund** Fund Expenses in Complex*
- -------------------- --------- ------------- ---------------- ----------------- -----------------------
<S> <C> <C> <C> <C> <C>
D. Barr Clayson $0 $0 $0 $0 $0
Samuel C. Fleming $0 $0 $8,923 $0 $57,375
Benjamin M. Friedman $0 $0 $8,923 $0 $57,375
John H. Hewitt $0 $0 $9.701 $0 $62,375
Edward H. Ladd $0 $0 $0 $0 $0
Caleb Loring, III $0 $0 $8,923 $0 $57,375
Richard S. Wood $0 $0 $0 $0 $0
</TABLE>
* As of the date of this SAI there were 22 funds in the fund complex. Total
compensation is presented for the calendar year ended December 31, 1998.
** The fund bears its pro rata allocation of Trustees' fees paid by its
corresponding Portfolio to the Trustees of the Portfolio Trust.
Certain Shareholders
At January 15, 1999, Trustees and officers of the Trust and the Portfolio
Trust as a group beneficially owned (i.e., had voting and/or investment power)
less than 1% of the then outstanding shares of each fund. Also at that date, no
person owned beneficially or of record 5% or more of the then outstanding shares
of any fund except:
Fixed Income Asset Fund
Percentage of
Outstanding
Name and Address Shares
- ------------------------------------------------------
LaSalle 100%
LaSalle National Bank Trustee
FBO Various Plans
135 LaSalle Street
Chicago, IL 60603
International Fixed Income Fund
Percentage of
Outstanding
Name and Address Shares
- ------------------------------------------------------
Bost & Co. 10.6%(i)
P. O. Box 3198
Pittsburgh, PA 15230
Northern Trust as TTE for 7.7%(i)
Lucent Technologies Master
Pension Plan
P. O. Box 92956
Chicago, IL 60675
36
<PAGE>
*Because the shareholder beneficially owned more than 25% of the then
outstanding shares of the indicated Fund, the shareholder was considered to
control such fund. As a controlling person, the shareholder may be able to
determine whether a proposal submitted to the shareholders of such fund will be
approved or disapproved.
(i)Institutional Class
Investment adviser.
Standish serves as the adviser to Fixed Income Portfolio pursuant to
written investment advisory agreements. Standish is a Massachusetts corporation
organized in 1933 and is registered under the Investment advisers Act of 1940.
The following, constituting all of the Directors and all of the
shareholders of Standish, are Standish controlling persons: Caleb F. Aldrich,
Nicholas S. Battelle, 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, Thomas P. Sorbo, David C. Stuehr, Ralph S. Tate, Michael
W. Thompson and Richard S. Wood.
SIMCO serves as investment adviser to Global Fixed Income Portfolio and
International Fixed Income Fund pursuant to an investment advisory agreement.
SIMCO is a Delaware limited partnership which was organized in 1991 and is a
registered investment adviser under the Investment Advisers Act of 1940. The
general partner of SIMCO is Standish, which holds a 99.98% partnership interest.
The limited partners who each hold a 0.01% interest in SIMCO, are: Walter M.
Cabot, Sr., Senior Adviser to SIMCO and Standish, and D. Barr Clayson, Chairman
of the Board and Vice President of SIMCO, a Managing Director and Vice President
of Standish and a Trustee and Vice President of the Trust and Portfolio Trust.
Ralph S. Tate, Managing Director of Standish, is President and a Director of
SIMCO. Richard S. Wood, Vice President and Managing Director of Standish and the
President and a Trustee of the Trust and Portfolio Trust, is the Executive Vice
President and a Director of SIMCO.
Subject to the supervision and direction of the Trustees of the Trust and
Portfolio Trust, the adviser recommends investment decisions, places orders to
purchase and sell securities and permits the Portfolios and International Fixed
Income II, Controlled Maturity and Securitized Funds to use the name "Standish".
In addition to those services, the adviser provides the funds (but not the
Portfolios) with office space for managing their affairs, with the services of
required executive personnel, and with certain clerical services and facilities.
Under the investment advisory agreements, the adviser is paid a fee based upon a
percentage of the applicable fund's or Portfolio's average daily net asset value
computed as set forth below. The advisory fees are payable monthly.
Contractual Advisory Fee Rate (as a percentage of
Fund average daily net assets)
- --------------------------------------------------------------------------------
Fixed Income Portfolio 0.40% of the first $250 million
0.35% of the next $250 million
0.30% of over $500 million
Global Fixed Income Portfolio 0.40%
International Fixed Income 0.40%
Fund
37
<PAGE>
During the last three fiscal years ended December 31, the funds and the
Portfolios paid advisory fees in the following amounts:
<TABLE>
<CAPTION>
Fund 1996 1997 1998
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fixed Income Asset Fund(1) N/A N/A N/A
Fixed Income Portfolio 5,121,756(2) $9,043,263(2) 10,702,756
Global Fixed Income Asset Fund(1) N/A N/A N/A
Global Fixed Income Portfolio $412,216 1,514.971
International Fixed Income Fund 3,234,397 4,012,641 5,359,632
</TABLE>
(1) The funds do not pay directly advisory fees. Each fund bears its pro rata
allocation of its corresponding Portfolio's expenses, including advisory
fees.
(2) The Fixed Income Portfolio commenced operations on May 3, 1996..
(3) The Global Fixed Income Portfolio commenced operations on May 3, 1996. .
Pursuant to the investment advisory agreements, the International Fixed
Income Fund and each Portfolio bears expenses of its operations other than those
incurred by the adviser pursuant to the investment advisory agreement. Among
other expenses, the International Fixed Income Fund and the Portfolios will pay
share pricing and shareholder servicing fees and expenses; custodian fees and
expenses; legal and auditing fees and expenses; expenses of prospectuses,
statements of additional information and shareholder reports; registration and
reporting fees and expenses; and Trustees' fees and expenses.
Unless terminated as provided below, the investment advisory agreements
continue in full force and effect from year to year but only so long as each
such continuance is approved annually (i) by either the Trustees of the Trust or
the Portfolio Trust (as applicable) or by the "vote of a majority of the
outstanding voting securities" of the International Fixed Income Fund or the
applicable Portfolio, and, in either event (ii) by vote of a majority of the
Trustees of the Trust or the Portfolio Trust (as applicable) who are not parties
to the investment advisory agreement or "interested persons" (as defined in the
1940 Act) of any such party, cast in person at a meeting called for the purpose
of voting on such approval. Each investment advisory agreement may be terminated
at any time without the payment of any penalty by vote of the Trustees of the
Trust or the Portfolio Trust or by the "vote of a majority of the outstanding
voting securities" of the International Fixed Income Fund or the applicable
Portfolio or by the adviser, on sixty days' written notice to the other parties.
The investment advisory agreements terminate in the event of their assignment as
defined in the 1940 Act.
In an attempt to avoid any potential conflict with portfolio transactions
for the International Fixed Income Fund and the Portfolios, the advisers, the
Principal Underwriter, the Trust and the Portfolio Trust have each adopted
extensive restrictions on personal securities trading by personnel of the
adviser and its affiliates. These restrictions include: pre-clearance of all
personal securities transactions and a prohibition of purchasing initial public
offerings of securities. These restrictions are a continuation of the basic
principle that the interests of the International Fixed Income Fund and its
shareholders, and the Portfolios and their investors, come before those of the
adviser and its employees.
Administrator
Investors Bank & Trust Company ("IBT"), 200 Clarendon Street, Boston
Massachusetts 02116, serves as the administrator to the Portfolios and Standish
serves as the administrator to the feeder
38
<PAGE>
funds pursuant to written administration agreements with the Trust on behalf of
these funds. As administrators, IBT and Standish manage the affairs of their
respective Portfolios or funds, provide all necessary office space and services
of executive personnel for administering the affairs of the funds, and, in the
case of Standish, allows the feeder funds to use the name "Standish." For these
services, IBT currently receives a fee from the funds based on a percentage of
the fund's net assets according to the following formula: 0.0105% of net assets
up to the first $1 billion, 0.0034% of net assets for the next $500 million and
0.0017 of net assets in excess of $1.5 billion. IBT also receives an aggregate
fee of $12,625 per month from all of the Portfolios in the Portfolio Trust and
all of the non-feeder funds in the Trust. This fee is allocated among each
Portfolio and non-feeder fund based upon the relative asset sizes of the
Portfolios and non-feeder funds. IBT receives an aggregate fee of $2,500 per
month from all the feeder funds in the Trust. This fee is allocated among each
feeder fund based upon the relative asset sizes. Standish currently does not
receive any additional compensation for its services as administrator. The
Trustees of the Trust may, however, determine in the future to compensate
Standish for its administrative services. Each of the administration agreements
can be terminated by either party on not more than sixty days' written notice.
Distributor of the Funds.
Standish Fund Distributors, L.P. (the "Principal Underwriter"), an
affiliate of the adviser, serves as the Trust's exclusive principal underwriter
and holds itself available to receive purchase orders for each fund's shares. In
that capacity, the Principal Underwriter has been granted the right, as agent of
the Trust, to solicit and accept orders for the purchase of each fund's shares
in accordance with the terms of the Underwriting Agreement between the Trust and
the Principal Underwriter. Pursuant to the Underwriting Agreement, the Principal
Underwriter has agreed to use its best efforts to obtain orders for the
continuous offering of each fund's shares. The Principal Underwriter receives no
commissions or other compensation for its services, and has not received any
such amounts in any prior year. The Underwriting Agreement shall continue in
effect with respect to each fund until two years after its execution and for
successive periods of one year thereafter only if it is approved at least
annually thereafter (i) by a vote of the holders of a majority of the fund's
outstanding shares or by the Trustees of the Trust or (ii) by a vote of a
majority of the Trustees of the Trust who are not "interested persons" (as
defined by the 1940 Act) of the parties to the Underwriting Agreement, cast in
person at a meeting called for the purpose of voting on such approval. The
Underwriting Agreement will terminate automatically if assigned by either party
thereto and is terminable at any time without penalty by a vote of a majority of
the Trustees of the Trust, a vote of a majority of the Trustees who are not
"interested persons" of the Trust, or, with respect to a fund, by a vote of the
holders of a majority of the fund's outstanding shares, in any case without
payment of any penalty on not more than 60 days' written notice to the other
party. The offices of the Principal Underwriter are located at One Financial
Center, 26th Floor, Boston, Massachusetts 02111.
SERVICE PLAN
The Trust, with respect to Fixed Income Asset Fund, Global Fixed Income
Asset Fund and International Fixed Income Fund Service Class, has adopted a
service plan (the "Service Plan"). Each Service Plan provides that a fund may
compensate entities ("Account Administrators") that provide omnibus accounting
services for groups of individuals who beneficially own fund shares ("Omnibus
Accounts") for providing certain personal, account administration and/or
shareholder liaison services to participants in the Omnibus Accounts. Pursuant
to the Service Plan, the funds may enter into agreements with Account
Administrators which purchase shares of the funds ("Service Agreements"). Under
such Service Agreements or otherwise, Account Administrators may perform some or
all of the
39
<PAGE>
following services: (a) establishing and maintaining Omnibus Accounts with the
funds; (b) establishing and maintaining subaccounts and subaccount balances for
Omnibus Accounts and their participants ("Participants"); (c) processing orders
by Omnibus Accounts and Participants to purchase, redeem and exchange fund
shares promptly and in accordance with the effective prospectus relating to such
shares; (d) transmitting to each fund (or its agent) on each Business Day (as
defined below) a net subscription or net redemption order reflecting
subscription, redemption and exchange orders received by it with respect to the
Omnibus Accounts; (e) receiving and transmitting funds representing the purchase
price or redemption proceeds relating to such orders; (f) mailing fund
prospectuses, statements of additional information, periodic reports,
transaction confirmations and subaccount information to Omnibus Accounts and
Participants; (g) answering Omnibus Account and Participant inquiries about the
funds, subaccount balances, distribution options and such other administrative
services for the Omnibus Account and the Participants as provided for in the
service agreements between the Account Administrator and the Omnibus Account;
and (h) providing such statistical and other information as may be reasonably
requested by the funds or necessary for the funds to comply with applicable
federal or state laws.
As compensation for such services, the funds may pay each Account
Administrator a service fee in an amount of up to 0.25% (on an annualized basis)
of the fund's average daily net assets attributable to fund shares that are
attributable to or held in the name of such Account Administrator. Account
Administrators may from time to time be required to meet certain other criteria
in order to receive service fees.
In accordance with the terms of the Service Plan, Standish provides to the
Trust for review by the Trustees a quarterly written report of the amounts
expended under the Service Plan and the purpose for which such expenditures were
made. In the Trustees' quarterly review of the Service Plan, they will consider
the continued appropriateness and the level of compensation that the Service
Plan provides.
Conflict of interest restrictions (including the Employee Retirement
Income Security Act of 1974 ("ERISA")) may apply to an Account Administrator's
receipt of compensation paid by the funds in connection with the investment of
fiduciary assets in fund shares. Account Administrators that are subject to the
jurisdiction of the SEC, the Department of Labor or state securities
commissions, are urged to consult legal advisers before investing fiduciary
assets in fund shares and receiving service fees.
The Trust believes that fiduciaries of ERISA plans may properly receive
fees under the Service Plan if the plan fiduciary otherwise properly discharges
its fiduciary duties, including (if applicable) those under ERISA. Under ERISA,
a plan fiduciary, such as a trustee or investment manager, must meet the
fiduciary responsibility standards set forth in part 4 of title 1 of ERISA.
These standards are designed to help ensure that the fiduciary's decisions are
made in the best interests of the plan and are not colored by self-interest.
Section 403(c)(1) of ERISA provides, in part, that the assets of a plan
shall be held for the exclusive purpose of providing benefits to the plan's
participants and their beneficiaries and defraying reasonable expenses of
administering the plan. Section 404(a)(1) sets forth a similar requirement on
how a plan fiduciary must act prudently and solely in the interest of the
participants and beneficiaries. These basic provisions are supplemented by the
per se prohibitions of certain classes of transactions set forth in Section 406
of ERISA.
Section 406(a)(1)(D) of ERISA prohibits a fiduciary of an ERISA plan from
causing that plan to engage in a transaction if he knows or should know that the
transaction would constitute a direct or indirect transfer to, or use by or for
the benefit of, a party in interest, of any assets of the plan. Section
40
<PAGE>
3(14) includes, within the definition of "party in interest" with respect to a
plan, any fiduciary with respect to that plan. Thus, Section 406(a)(1)(D) would
not only prohibit a fiduciary from causing the plan to engage in a transaction
which would benefit a third person who is a party in interest, but it also would
prohibit the fiduciary from similarly benefiting himself. In addition, Section
406(b)(1) specifically prohibits a fiduciary with respect to a plan from dealing
with the assets of that plan in his own interest or for his own account. Section
406(b)(3) supplements these provisions by prohibiting a plan fiduciary from
receiving any consideration for his own personal account from any party dealing
with the plan in connection with a transaction involving the assets of the plan.
In accordance with the foregoing, however, a fiduciary of an ERISA plan
may properly receive service fees under the Service Plan if the fees are used
for the exclusive purpose of providing benefits to the plan's participants and
their beneficiaries or for defraying reasonable expenses of administering the
plan for which the plan would otherwise be liable. See, e.g., Department of
Labor ERISA Technical Release No. 86-1 (stating a violation of ERISA would not
occur where a broker-dealer rebates commission dollars to a plan fiduciary who,
in turn, reduces its fees for which the plan is otherwise responsible for
paying). Thus, the fiduciary duty issues involved in a plan fiduciary's receipt
of the service fee must be assessed on a case-by-case basis by the relevant plan
fiduciary.
PURCHASE AND REDEMPTION OF SHARES
Additional information on purchase and redemption of shares is included in
the prospectus.
The Trust must suspend the right to redeem fund shares or postpone the
date of payment upon redemption for more than seven days (i) for any period
during which the New York Stock Exchange is closed (other than customary weekend
or holiday closings) or trading on the exchange is restricted; (ii) for any
period during which an emergency exists as a result of which disposal by a fund
of securities owned by it or determination by a fund of the value of its net
assets is not reasonably practicable; or (iii) for such other periods as the SEC
may permit for the protection of shareholders of the funds.
The Trust intends to pay redemption proceeds in cash for all fund shares
redeemed but, under certain conditions, the Trust may make payment wholly or
partly in fund portfolio securities. Portfolio securities distributed upon
redemption of fund shares will be valued at their then current market value. The
Trust has elected to be governed by the provisions of Rule 18f-1 under the 1940
Act which limits each fund's obligation to make cash redemption payments to any
shareholder during any 90-day period to the lesser of $250,000 of 1% of the
fund's net asset value at the beginning of such period. An investor may incur
brokerage costs in converting portfolio securities received upon redemption to
cash.
PORTFOLIO TRANSACTIONS
The adviser is responsible for placing each fund's portfolio transactions
and will do so in a manner deemed fair and reasonable to the funds and not
according to any formula. The primary consideration in all portfolio
transactions will be prompt execution of orders in an efficient manner at the
most favorable price. In selecting broker-dealers and in negotiating
commissions, the adviser will consider the firm's reliability, the quality of
its execution services on a continuing basis and its financial condition. When
more than one firm is believed to meet these criteria, preference may be given
to firms which also sell shares of the funds. In addition, if the adviser
determines in good faith that the amount of commissions charged by a broker is
reasonable in relation to the value of the brokerage and research services
provided by such broker, the funds 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
41
<PAGE>
securities, and the availability of securities or purchasers or sellers of
securities, (ii) furnishing seminars, information, analyses and reports
concerning issuers, industries, securities, trading markets and methods,
legislative developments, changes in accounting practices, economic factors and
trends, portfolio strategy, access to research analysts, corporate management
personnel, industry experts and economists, comparative performance evaluation
and technical measurement services and quotation services, and products and
other services (such as third party publications, reports and analysis, and
computer and electronic access, equipment, software, information and accessories
that deliver, process or otherwise utilize information, including the research
described above) that assist the adviser in carrying out its responsibilities
and (iii) effecting securities transactions and performing functions incidental
thereto (such as clearance and settlement). Research services furnished by firms
through which the funds effect their securities transactions may be used by the
adviser in servicing other accounts; not all of these services may be used by
the adviser in connection with the funds generating the soft dollar credits. The
investment advisory fee paid by the funds under the investment advisory
agreements will not be reduced as a result of the adviser's receipt of research
services.
The adviser also places portfolio transactions for other advisory
accounts. The adviser will seek to allocate portfolio transactions equitably
whenever concurrent decisions are made to purchase or sell securities for the
funds and another advisory account. In some cases, this procedure could have an
adverse effect on the price or the amount of securities available to the funds.
In making such allocations, the main factors considered by the adviser will be
the respective investment objectives, the relative size of portfolio holdings of
the same or comparable securities, the availability of cash for investment, the
size of investment commitments generally held, and opinions of the persons
responsible for recommending the investment.
Because most of the fund's securities transactions are effected on a
principal basis involving a "spread" or "dealer mark-up," the funds have not
paid any brokerage commissions during the past three years.
DETERMINATION OF NET ASSET VALUE
Each fund's net asset value is calculated each day on which the NYSE is
open (a "Business Day"). Currently, the NYSE is not open on weekends, New Year's
Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day. The net asset
value of each fund's shares is determined as of the close of regular trading on
the NYSE (normally 4:00 p.m., Eastern time). If the NYSE closes early, the
calculation of net asset value will be accelerated to the actual closing time.
Net asset value is computed by dividing the value of all securities and other
assets of a fund (substantially all of which, in the case of Fixed Income Asset
Fund and Global Fixed Income Asset Fund, will be represented by the fund's
interest in its corresponding Portfolio) less all liabilities by the number of
fund shares outstanding, and adjusting to the nearest cent per share. Expenses
and fees of each fund are accrued daily and taken into account for the purpose
of determining net asset value.
The value of a Portfolio's net assets (i.e., the value of its securities
and other assets less its liabilities, including expenses payable or accrued) is
determined at the same time and on the same days as the net asset value per
share of Fixed Income Asset Fund and Global Fixed Income Asset Fund is
determined. Each investor in a Portfolio may add to or reduce its investment in
the Portfolio on each Business Day. As of the close of regular trading on the
NYSE on each Business Day, the value of each investor's interest in a Portfolio
will be determined by multiplying the net asset value of the Portfolio by the
percentage representing that investor's share of the aggregate beneficial
interests in a Portfolio. Any additions or reductions which are to be effected
on that day will then be effected. The investor's percentage of the aggregate
beneficial interests in a Portfolio will then be recomputed as the percentage
equal to the fraction (i) the numerator of which is the value of such investor's
investment
42
<PAGE>
in the Portfolio as of the close of regular trading on the NYSE on such day plus
or minus, as the case may be, the amount of net additions to or reductions in
the investor's investment in the Portfolio effected on such day, and (ii) the
denominator of which is the aggregate net asset value of the Portfolio as of the
close of regular trading on the NYSE 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 the close of regular trading on the NYSE on the
following Business Day.
Portfolio securities are valued at the last sales prices on the exchange
or national securities market on which they are primarily traded. Securities not
listed on an exchange or national securities market, or securities for which
there were no reported transactions, are valued at the last quoted bid price.
Securities for which quotations are not readily available and all other assets
are valued at fair value as determined in good faith at the direction of the
Trustees.
Portfolio securities that are fixed income securities (other than money
market instruments) for which accurate market prices are readily available are
valued at their current market value on the basis of quotations, which may be
furnished by a pricing service or provided by dealers in such securities. Fixed
income securities for which accurate market prices are not readily available and
other assets are valued at fair value as determined in good faith by the adviser
in accordance with procedures approved by the Trustees, which may include the
use of yield equivalents or matrix pricing.
Money market instruments with less than sixty days remaining to maturity
when acquired by a fund are valued on an amortized cost basis. If the fund
acquires a money market instrument with more than sixty days remaining to its
maturity, it is valued at current market value until the sixtieth day prior to
maturity and will then be valued at amortized cost based upon the value on such
date unless the Trustees determine during such sixty-day period that amortized
cost does not represent fair value.
Generally, trading in securities on foreign exchanges is substantially
completed each day at various times prior to the close of regular trading on the
NYSE. If a security's primary exchange is outside the U.S., the value of such
security used in computing the net value of a fund's shares is determined as of
such times. Foreign currency exchange rates are also generally determined prior
to the close of regular trading on the NYSE. Occasionally, events which affect
the values of such securities and such exchange rates may occur between the
times at which they are determined and the close of regular trading on the NYSE
and will therefore not be reflected in the computation of the funds' net asset
value. If events materially affecting the value of such securities occur during
such period, then these securities may be valued at their fair value as
determined in good faith by the Trustees of the Trust or the Portfolio Trust.
THE FUNDS AND THEIR SHARES
Each fund is a diversified investment series of the Trust, an open-end
management investment company organized as an unincorporated business trust
under the laws of The Commonwealth of Massachusetts pursuant to an Agreement and
Declaration of Trust dated August 13, 1986. Under the Agreement and Declaration
of Trust, the Trustees of the Trust have authority to issue an unlimited number
of shares of beneficial interest, par value $.01 per share, of each fund.
International Fixed Income Fund offers two classes of Shares: Service Class and
Institutional Class. Shares of the Institutional Class are offered through
another prospectus and SAI. Each share of Fixed Income Fund and Global Fixed
Income Fund represents an equal proportionate interest in the respective fund
with each other share and is entitled to such dividends and distributions as are
declared by the Trustees. Shares of International Fixed Income Fund represent
interests in the fund in proportion to each share's
43
<PAGE>
net asset value. The per share net asset value of each class of shares is
calculated separately and may differ as a result of the service fee applicable
to Service Class shares and the allocation of certain class specific expenses
which apply to only one of the classes or which differ between the classes.
Shareholders are not entitled to any preemptive, conversion or subscription
rights. All shares, when issued, will be fully paid and non-assessable by the
Trust. Upon any liquidation of a fund, shareholders of that fund are entitled to
share pro rata in the net assets available for distribution.
Pursuant to the Declaration, the Trustees may create additional funds by
establishing additional series of shares in the Trust. The establishment of
additional series would not affect the interests of current shareholders in any
fund. The Trustees have established other series of the Trust. Pursuant to the
Declaration, the Board may establish and issue multiple classes of shares for
each series of the Trust. Pursuant to the Declaration of Trust and subject to
shareholder approval (if then required by applicable law), the Trustees may
authorize each fund to invest all of its investable assets in a single open-end
investment company that has substantially the same investment objectives,
policies and restrictions as the fund. As of the date of this SAI, Fixed Income
Asset Fund and Global Fixed Income Asset Fund invest all of their investible
assets in other open-end investment companies.
All fund shares have equal rights with regard to voting, and shareholders
of a fund have the right to vote as a separate class with respect to matters as
to which their interests are not identical to those of shareholders of other
classes of the Trust, including the approval of an investment advisory contract
and any change of investment policy requiring the approval of shareholders.
Under Massachusetts law, shareholders of the Trust could, under certain
circumstances, be held liable for the obligations of the Trust. However, the
Agreement and Declaration of Trust disclaims shareholder liability for acts or
obligations of the Trust and requires that notice of this disclaimer be given in
each agreement, obligation or instrument entered into or executed by the Trust
or a Trustee. The Declaration also provides for indemnification from the assets
of the Trust for all losses and expenses of any Trust shareholder held liable
for the obligations of the Trust. Thus, the risk of a shareholder incurring a
financial loss on account of his or its liability as a shareholder of the Trust
is limited to circumstances in which the Trust would be unable to meet its
obligations. The possibility that these circumstances would occur is remote.
Upon payment of any liability incurred by the Trust, the shareholder paying the
liability will be entitled to reimbursement from the general assets of the
Trust. The Declaration also provides that no series of the Trust is liable for
the obligations of any other series. The Trustees intend to conduct the
operations of the Trust to avoid, to the extent possible, ultimate liability of
shareholders for liabilities of the Trust.
Except as described below, whenever the Trust is requested to vote on a
fundamental policy of or matters pertaining to a Portfolio, the Trust will hold
a meeting of the associated fund's shareholders and will cast its vote
proportionately as instructed by the fund's shareholders. Fund shareholders who
do not vote will not affect the Trust's votes at the Portfolio meeting. The
percentage of the Trust's votes representing fund shareholders not voting will
be voted by the Trustees of the Trust in the same proportion as the fund
shareholders who do, in fact, vote. Subject to applicable statutory and
regulatory requirements, a fund would not request a vote of its shareholders
with respect to (a) any proposal relating to the Portfolio, which proposal, if
made with respect to the fund, would not require the vote of the shareholders of
the fund, or (b) any proposal with respect to the Portfolio that is identical in
all material respects to a proposal that has previously been approved by
shareholders of the fund. Any proposal submitted to holders in a Portfolio, and
that is not required to be voted on by shareholders of the associated fund,
would nonetheless be voted on by the Trustees of the Trust.
44
<PAGE>
THE PORTFOLIOS AND THEIR INVESTORS
Each Portfolio is a series of Standish, Ayer & Wood Master Portfolio, a
trust 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 a Portfolio have no preemptive or conversion rights, and are
fully paid and non-assessable, except as set forth in the Prospectus. A
Portfolio normally will not hold meetings of holders of such interests except as
required under the 1940 Act. A Portfolio would be required to hold a meeting of
holders in the event that at any time less than a majority of its Trustees
holding office had been elected by holders. The Trustees of the Portfolios
continue to hold office until their successors are elected and have qualified.
Holders holding a specified percentage of interests in a Portfolio may call a
meeting of holders in the Portfolio for the purpose of removing any Trustee. A
Trustee of the Portfolio may be removed upon a majority vote of the interests
held by holders in the Portfolio qualified to vote in the election. The 1940 Act
requires a Portfolio to assist its holders in calling such a meeting. Upon
liquidation of a Portfolio, holders in the Portfolio would be entitled to share
pro rata in the net assets of the Portfolio available for distribution to
holders. Each holder in the Portfolio is entitled to a vote in proportion to its
percentage interest in the Portfolio.
TAXATION
Each series of the Trust, including each fund, is treated as a separate
entity for accounting and tax purposes. Each fund has qualified and elected or
intends to elect to be treated as a "regulated investment company" ("RIC") under
Subchapter M of the Code, and intends to continue to so qualify in the future.
As such and by complying with the applicable provisions of the Code regarding
the sources of its income, the timing of its distributions, and the
diversification of its assets, each fund will not be subject to Federal income
tax on its investment company taxable income (i.e., all taxable income, after
reduction by deductible expenses, other than its "net capital gain," which is
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.
Each Portfolio is treated as a partnership for federal income tax
purposes. As such, a Portfolio is not subject to federal income taxation.
Instead, the corresponding fund must take into account, in computing its federal
income tax liability (if any), its share of the Portfolio's income, gains,
losses, deductions, credits and tax preference items, without regard to whether
it has received any cash distributions from the Portfolio. Because Fixed Income
Asset Fund and Global Fixed Income Asset Fund invest their assets in Fixed
Income Portfolio and Global Fixed Income Portfolio, respectively, each Portfolio
normally must satisfy the applicable source of income and diversification
requirements in order for the corresponding fund to satisfy them. Each Portfolio
will allocate at least annually among its investors, including the corresponding
fund, each investor's distributive share of that Portfolio's net investment
income, net realized capital gains, and any other items of income, gain, loss,
deduction or credit. Each Portfolio will make allocations to the corresponding
fund in a manner intended to comply with the Code and applicable regulations and
will make moneys available for withdrawal at appropriate times and in sufficient
amounts to enable the corresponding fund to satisfy the tax distribution
requirements that apply to it and that must be satisfied in order for the fund
to avoid Federal income and/or excise tax. For purposes of applying the
requirements of the Code regarding qualification as a RIC, Fixed Income Asset
Fund and Global Fixed Asset Fund each will be deemed (i) to own its
proportionate share of each of the assets of the corresponding Portfolio and
(ii) to be entitled to the gross income of the corresponding Portfolio
attributable to such share.
45
<PAGE>
Each fund will be subject to a 4% non-deductible federal excise tax on
certain amounts not distributed (and not treated as having been distributed) on
a timely basis in accordance with annual minimum distribution requirements. Each
fund intends under normal circumstances to seek to avoid liability for such tax
by satisfying such distribution requirements. Certain distributions made in
order to satisfy the Code's distribution requirements may be declared by the
funds during October, November or December but paid during the following
January. Such distributions will be treated by shareholders under the Code as if
received on December 31 of the year the distributions are declared, rather than
the year in which the distributions are received.
Each fund is not subject to Massachusetts corporate excise or franchise
taxes. Provided that the funds qualify as regulated investment companies under
the applicable provisions of federal law incorporated in Massachusetts law, they
will also not be required to pay any Massachusetts income tax.
Each fund will not distribute net capital gains realized in any year to
the extent that a capital loss is carried forward from prior years against such
gain. For federal income tax purposes, a fund is permitted to carry forward a
net capital loss in any year to offset its own net capital gains, if any, during
the eight years following the year of the loss. To the extent subsequent net
capital gains are offset by such losses, they would not result in federal income
tax liability to the fund. [SAW: Any net operating loss carryforwards as of
12/31/98.]
If a fund or portfolio invests in zero coupon securities, certain
increasing rate or deferred interest securities or, in general, other securities
with original issue discount (or with market discount if a fund elects to
include market discount in income currently), the fund or the Portfolio must
accrue income on such investments prior to the receipt of the corresponding cash
payments. However, a fund must distribute, at least annually, all or
substantially all of its net income, including its distributive share of such
income accrued by the corresponding Portfolio, to shareholders to qualify as a
regulated investment company under the Code and avoid federal income and excise
taxes. Therefore, a fund or 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 allow satisfaction of the distribution
requirements.
Limitations imposed by the Code on regulated investment companies like the
funds may restrict the International Fixed Income Fund or a Portfolio's ability
to enter into futures, options or currency forward transactions.
Certain options, futures or currency forward transactions undertaken by
the International Fixed Income Fund or a Portfolio may cause the International
Fixed Income Fund or Portfolio to recognize gains or losses from marking to
market even though the fund's or Portfolio's positions have not been sold or
terminated and affect the character as long-term or short-term (or, in the case
of certain options, futures or forward contracts relating to foreign currency,
as ordinary income or loss) and timing of some capital gains and losses realized
by a fund or realized by a Portfolio and allocable to the corresponding fund.
Additionally, a fund or Portfolio 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 fund or
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 funds' taxable income or
gain. Certain of the applicable tax rules may be modified if a
46
<PAGE>
fund or a Portfolio is eligible and chooses to make one or more of certain tax
elections that may be available. These transactions may therefore affect the
amount, timing and character of a fund's distributions to shareholders. Each
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 certain structured or hybrid
securities, dollar rolls, currency swaps, and interest rate swaps, caps, floors
and collars are unclear in certain respects, and a fund or Portfolio will
account for these instruments in a manner that is intended to allow the funds to
continue to qualify as regulated investment companies. Due to possible
unfavorable consequences under present tax law, each fund and Portfolio does not
currently intend to acquire "residual" interests in real estate mortgage
investment conduits ("REMICs"), although the funds may acquire "regular"
interests in REMICs.
Foreign exchange gains and losses realized by a fund or Portfolio in
connection with certain transactions, if any, involving foreign
currency-denominated debt securities, certain foreign currency futures and
options, foreign currency forward contracts, foreign currencies, or payables or
receivables denominated in a foreign currency are subject to Section 988 of the
Code, which generally causes such gains and losses to be treated as ordinary
income and losses and may affect the amount, timing and character of fund
distributions to shareholders. In some cases, elections may be available that
would alter this treatment. Any such transactions that are not directly related
to a fund's or Portfolio's investment in stock or securities, possibly including
speculative currency positions or currency derivatives not used for hedging
purposes, could under future Treasury regulations produce income not among the
types of "qualifying income" from which each fund must derive at least 90% of
its gross income for its taxable year.
In some countries, restrictions on repatriation may make it difficult or
impossible for a fund or Portfolio to obtain cash corresponding to its earnings
from such countries, which may cause a fund to have difficulty obtaining cash
necessary to satisfy tax distribution requirements.
The funds or Portfolio may be subject to withholding and other taxes
imposed by foreign countries with respect to their investments in foreign
securities. Tax conventions between certain countries and the U.S. may reduce or
eliminate such taxes in some cases. Investors in the funds would be entitled to
claim U.S. foreign tax credits or deductions with respect to such taxes, subject
to certain holding period requirements and other provisions and limitations
contained in the Code, only if more than 50% of the value of the applicable
fund's total assets (in the case of a fund that invests in a Portfolio, taking
into account its allocable share of the Portfolio's assets) at the close of any
taxable year were to consist of stock or securities of foreign corporations and
the fund were to file an election with the Internal Revenue Service. Because the
investments of Fixed Income Portfolio are such that Fixed Income Fund expects
that it will not meet this 50% requirement, shareholders of Fixed Income Fund
generally will not directly take into account the foreign taxes, if any, paid by
Fixed Income Portfolio and will not be entitled to any related tax deductions or
credits. Such taxes will reduce the amounts Fixed Income Fund would otherwise
have available to distribute.
International Fixed Income Fund and, taking into account its share of the
investments of the corresponding Portfolio, Global Fixed Income Fund may meet
the 50% threshold referred to in the previous paragraph for a year and, if one
does, it may file an election with the Internal Revenue Service pursuant to
which shareholders of the fund will be required to (i) include in ordinary gross
income (in addition to taxable dividends actually received) their pro rata
shares of qualified foreign taxes paid by the fund or paid by the Portfolio and
allocated to the fund even though not actually received by them and (ii) treat
such respective pro rata portions as foreign taxes paid by them.
47
<PAGE>
If a fund makes this election, shareholders may then deduct such pro rata
portions of qualified foreign taxes in computing their taxable incomes, or,
alternatively, use them as foreign tax credits, subject to applicable holding
period requirements and other limitations, against their U.S. federal income
taxes. Shareholders who do not itemize deductions for federal income tax
purposes will not, however, be able to deduct their pro rata portion of
qualified foreign taxes paid by the fund or Portfolio, although such
shareholders will be required to include their share of such taxes in gross
income. Shareholders who claim a foreign tax credit for such foreign taxes may
be required to treat a portion of dividends received from the applicable fund as
a separate category of income for purposes of computing the limitations on the
foreign tax credit. Tax exempt shareholders will ordinarily not benefit from
this election. Each year (if any) that a fund files the election described
above, its shareholders will be notified of the amount of (i) each shareholder's
pro rata share of qualified foreign taxes paid by the fund or the Portfolio and
(ii) the portion of fund dividends which represents income from each foreign
country.
If a Portfolio or fund acquires stock (including, under proposed
regulations, an option to acquire stock such as is inherent in a convertible
bond) in certain foreign corporations that receive at least 75% of their annual
gross income from passive sources (such as interest, dividends, certain rents
and royalties, or capital gains) or hold at least 50% of their assets in
investments producing such passive income ("passive foreign investment
companies"), a fund could be subject to Federal income tax and additional
interest charges on "excess distributions" actually or constructively received
from such companies or gain from the actual or deemed sale of stock in such
companies, even if all income or gain actually realized is timely distributed to
its shareholders. They would not be able to pass through to their shareholders
any credit or deduction for such a tax. Certain elections may, if available,
ameliorate these adverse tax consequences, but any such election would require
them to recognize taxable income or gain (subject to tax distribution
requirements) without the concurrent receipt of cash. These investments could
also result in the treatment of associated capital gains as ordinary income. The
fund and the Portfolios may limit and/or manage stock holdings, if any, in
passive foreign investment companies to minimize each fund's tax liability or
maximize its return from these investments.
Investment in debt obligations by the fund or a Portfolio that are at risk
of or in default presents special tax issues for the applicable fund. Tax rules
are not entirely clear about issues such as when the fund or Portfolio may cease
to accrue interest, original issue discount, or market discount, when and to
what extent deductions may be taken for bad debts or worthless securities, how
payments received on obligations in default should be allocated between
principal and income, and whether exchanges of debt obligations in a workout
context are taxable. These and other issues will be addressed by a fund or
Portfolio, in the event that it holds such obligations, in order to reduce the
risk of the corresponding fund, or any other RIC investing in the Portfolio,
distributing insufficient income to preserve its status as a RIC or becoming
subject to Federal income or excise tax.
Distributions from a fund's current or accumulated earnings and profits
("E&P"), as computed for Federal income tax purposes, will be treated under the
Code as ordinary income (if they are from the fund's investment company taxable
income) or long-term capital gain (if they are from the fund's net capital gain
and are designated by the fund as "capital gain dividends") 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.
48
<PAGE>
A fund's distributions to its corporate shareholders would potentially
qualify in their hands for the corporate dividends received deduction, subject
to certain holding period requirements and limitations on debt financing under
the Code, only to the extent a fund earned dividend income (or, in the case of a
Standish Feeder Fund, was allocated dividend income of the applicable Portfolio)
from stock investments in U.S. domestic corporations. The funds and the
Portfolios are permitted to acquire stocks of U.S. domestic corporations, and it
is therefore possible that a small portion of a fund's distributions, from the
dividends attributable to such stocks, may qualify for the dividends received
deduction. Such qualifying portion, if any, may affect a corporate shareholder's
liability for alternative minimum tax and/or result in basis reductions and
other consequences in certain circumstances.
At the time of an investor's purchase of fund shares, a portion of the
purchase price may be attributable to undistributed net investment income and/or
realized or unrealized appreciation in the fund's portfolio (or share of the
Portfolio's portfolio in the case of Standish Feeder Funds). Consequently,
subsequent distributions by a fund on such shares from such income and/or
appreciation may be taxable to such investor even if the net asset value of the
investor's shares is, as a result of the distributions, reduced below the
investor's cost for such shares, and the distributions economically represent a
return of a portion of the purchase price.
Upon a redemption or other disposition of shares of a 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 or other
disposition may be disallowed to the extent the shares disposed of are replaced
with other shares of the same fund within a period of 61 days beginning 30 days
before and ending 30 days after the shares are disposed of, such as pursuant to
automatic dividend reinvestments. In such a case, the basis of the shares
acquired will be adjusted to reflect the disallowed loss. Any loss realized upon
the redemption of shares with a tax holding period of six months or less will be
treated as a long-term capital loss to the extent of any amounts treated as
distributions of long-term capital gain with respect to such shares.
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.
Different tax treatment, including penalties on certain excess
contributions and deferrals, certain pre-retirement and post-retirement
distributions and certain prohibited transactions, is accorded to accounts
maintained as qualified retirement plans. Shareholders should consult their tax
adviser for more information.
The foregoing discussion relates solely to U.S. Federal income tax law as
applicable to U.S. persons (i.e., U.S. citizens or residents and U.S. domestic
corporations, partnerships, trusts or estates) subject to tax under such law.
The discussion does not address special tax rules applicable to certain classes
of investors, such as tax-exempt entities, insurance companies, and financial
institutions. Dividends, capital gain distributions, and ownership of or gains
realized on the redemption (including an exchange) of fund shares may also be
subject to state and local taxes. A state income (and possibly local income
and/or intangible property) tax exemption is generally available to the extent,
if any, a fund's distributions are derived from interest on (or, in the case of
intangible property taxes, the value of its assets is attributable to)
investments in certain U.S. Government obligations, provided in some states that
certain thresholds for holdings of such obligations and/or reporting
requirements are satisfied. Shareholders should consult their tax advisers
regarding the applicable requirements in their particular states, including the
effect, if any, of any Standish Feeder Fund's indirect ownership (through the
corresponding Portfolio) of any such obligations, as well as the Federal, and
any other state or local, tax consequences of ownership of shares of, and
receipt of distributions from, a fund in their particular circumstances.
49
<PAGE>
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 funds with their correct taxpayer identification number and
certain certifications or if they are otherwise subject to backup withholding.
Federal law requires that taxable distributions and proceeds of
redemptions and exchanges be reported to the IRS and that 31% be withheld if you
fail to provide your correct Taxpayer Identification Number ("TIN") and the
TIN-related certifications contained in the Account Purchase Application
("Application") or you are otherwise subject to backup withholding. A fund will
not impose backup withholding as a result of your failure to make any
certification, except the certifications in the Application that directly relate
to your TIN and backup withholding status. Amounts withheld and forwarded to the
IRS can be credited as a payment of tax when completing your federal income tax
return.
For most individual taxpayers, the TIN is the social security number.
Special rules apply for certain accounts. For example, for an account
established under the Uniform Gift to Minors Act, the TIN of the minor should be
furnished. If you do not have a TIN, you may apply for one using forms available
at local offices of the Social Security Administration or the IRS, and you
should write "Applied For" in the space for a TIN on the Application.
Recipients exempt from backup withholding, including corporations and
certain other entities, should provide their TIN and underline "exempt" in
section 2(a) of the TIN section of the Application to avoid possible erroneous
withholding. Non-resident aliens and foreign entities must provide certain
certifications on IRS Form W-8, W-8BEN or other withholding certificate.
Non-U.S. investors not engaged in a U.S. trade or business with which
their investment in a fund is effectively connected will be subject to U.S.
Federal income tax treatment that is different from that described above. These
investors may be subject to nonresident alien withholding tax at the rate of 30%
(or a lower rate under an applicable tax treaty) on amounts treated as ordinary
dividends from the fund and, unless an effective IRS Form W-8, W-8BEN or other
withholding certificate is on file, to 31% backup withholding on certain other
payments from the fund. Non-U.S. investors should consult their tax advisers
regarding such treatment and the application of foreign taxes to an investment
in the fund.
ADDITIONAL INFORMATION
The Prospectus and this SAI 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
or by accessing the SEC's Web site at http://www.sec.gov.
EXPERTS AND FINANCIAL STATEMENTS
Each fund's financial statements contained in the 1998 Annual Reports of
the funds have been audited by Coopers & Lybrand L.L.P., independent
accountants, and are incorporated by reference into this SAI. The Portfolios'
financial statements contained in Fixed Income Asset Fund's and Global Fixed
Income Asset Fund's 1998 Annual Report have been audited by
PricewaterhouseCoopers, P.O. Box 219, Grand Cayman, Grand Cayman Islands, BWI,
an affiliate of PricewaterhouseCoopers L.L.P.
50
<PAGE>
APPENDIX
MOODY'S RATINGS DEFINITIONS FOR
CORPORATE BONDS AND SOVEREIGN,
SUBNATIONAL AND SOVEREIGN
RELATED ISSUES
Aaa - Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa - Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long term risks appear somewhat larger than in Aaa securities.
A - Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa - Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba - Bonds which are rated Ba are judged to have speculative elements.
Their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B - Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
STANDARD & POOR'S RATINGS
DEFINITIONS
AAA - Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA- Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A - Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
51
<PAGE>
BBB - Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB - Debt rated BB is regarded, on balance, as predominantly speculative
with respect to capacity to pay interest and repay principal in accordance with
the terms of the obligation. While such debt will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or major
risk exposures to adverse conditions.
B - Debt rated B has a greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The B rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
BB or BB- rating.
STANDARD & POOR'S
CHARACTERISTICS OF SOVEREIGN DEBT
OF FOREIGN COUNTRIES
AAA - Stable, predictable governments with demonstrated track record of
responding flexibly to changing economic and political circumstances
Key players in the global trade and financial system:
- Prosperous and resilient economies, high per capita incomes
- Low fiscal deficits and government debt, low inflation
- Low external debt.
AA - Stable, predictable governments with demonstrated track record of
responding to changing economic and political circumstances
- tightly integrated into global trade and financial system
- Differ from AAAs only to a small degree because:
- Economies are smaller, less prosperous and generally more vulnerable
to adverse external influences (e.g., protection and terms of trade
shocks)
- More variable fiscal deficits, government debt and inflation
- Moderate to high external debt.
A - Politics evolving toward more open, predictable forms of governance in
environment of rapid economic and social change
- Established trend of integration into global trade and financial
system
- Economies are smaller, less prosperous and generally more vulnerable
to adverse external influences (e.g., protection and terms of trade
shocks), but
- Usually rapid growth in output and per capita incomes
- Manageable through variable fiscal deficits, government debt and
inflation
- Usually low but variable debt
- Integration into global trade and financial system growing but
untested
- Low to moderate income developing economies but variable performance
and quite vulnerable to adverse external influences
- Variable to high fiscal deficits, government debt and inflation
52
<PAGE>
- Very high and variable debt, often graduates of Brady plan but track
record not well established.
BBB - Political factors a source of significant uncertainty, either
because system is in transition or due to external threats, or both, often in
environment of rapid economic and social change
- Integration into global trade and financial system growing but
untested
- Economies less prosperous and often more vulnerable to adverse
external influences
- Variable to high fiscal deficits, government debt and inflation
- High and variable external debt.
BB - Political factors a source of major uncertainty, either because
system is in transition or due to external threats, or both, often in
environment of rapid economic and social change
- Integration into global trade and financial system growing but
untested
- Low to moderate income developing economies, but variable
performance and quite vulnerable to adverse external influences
- Variable to high fiscal deficits, government debt and inflation
- Very high and variable debt, often graduates of Brady Plan but track
record not well established
In the case of sovereign, subnational and sovereign related issuers, a
fund uses the foreign currency or domestic (local) currency rating depending
upon how a security in the portfolio is denominated. In the case where a fund
holds a security denominated in a domestic (local) currency and one of the
rating services does not provide a domestic (local) currency rating for the
issuer, the fund will use the foreign currency rating for the issuer; in the
case where a fund holds a security denominated in a foreign currency and one of
the rating services does not provide a foreign currency rating for the issuer,
the fund will treat the security as being unrated.
DESCRIPTION OF DUFF & PHELPS
RATINGS FOR CORPORATE BONDS AND
FOR SOVEREIGN, SUBNATIONAL AND
SOVEREIGN RELATED ISSUERS
AAA - Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA - High credit quality. Protection factors are strong. Risk is modest
but may vary slightly from time to time because of economic conditions.
A - Protection factors are average but adequate. However, risk factors are
more variable and greater in periods of economic stress.
BBB - Below average protection factors but still considered sufficient for
prudent investment. Considerable variability in risk during economic cycles.
BB - Below investment grade but deemed likely to meet obligations when
due. Present or prospective financial protection factors fluctuate according to
industry conditions or company fortunes. Overall quality may move up or down
frequently within this category.
B - Below investment grade and possessing risk that obligations will not
be met when due. Financial protection factors will fluctuate widely according to
economic cycles, industry conditions
53
<PAGE>
and/or company fortunes. Potential exists for frequent changes in the rating
within this category or into a higher or lower rating guide.
FITCH IBCA INTERNATIONAL
LONG-TERM CREDIT RATING
DEFINITIONS
AAA - Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and
repay principal, which is unlikely to be affected by reasonably foreseeable
events.
AA - Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is very
strong, although not quite as strong as bonds rated AAA. Because bonds rated in
the AAA and AA categories are not significantly vulnerable to foreseeable future
developments, short-term debt of these issuers is generally rated F-1+.
A - Bonds considered to be investment grade and of high credit quality.
The obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB - Bonds considered to be investment grade and of good credit quality.
The obligor's ability to pay interest and repay principal is considered to be
adequate. Adverse changes in economic conditions and circumstances, however, are
more likely to have adverse impact on these bonds, and therefore impair timely
payment. The likelihood that the ratings of these bonds will fall below
investment grade is higher than for bonds with higher ratings.
BB - Bonds are considered speculative. The obligor's ability to pay
interest and repay principal may be affected over time by adverse economic
changes. However, business and financial alternatives can be identified which
could assist the obligor in satisfying its debt service requirements.
B - Bonds are considered highly speculative. The obligor's ability to pay
interest and repay principal are currently being met, but a limited margin
safety remains. However, capacity for continued payment is contingent upon a
sustained, favorable business and economic environment.
FITCH IBCA LONG-TERM RATINGS FOR
NATIONAL ISSUES
AAA - Obligations for which there is the lowest expectation of investment
risk. Capacity for timely repayment of principal and interest is substantial,
such that adverse changes in business, economic or financial conditions are
unlikely to increase investment risk substantially.
AA - Obligations for which there is a very low expectation of investment
risk. Capacity for timely repayment of principal and interest is substantial.
Adverse changes in business, economic or financial conditions may increase
investment risk, albeit not very significantly.
A - Obligations for which there is currently a low expectation of
investment risk. Capacity for timely repayment of principal and interest is
strong, although adverse changes in business, economic or financial conditions
may lead to increased investment risk.
BBB - Obligations for which there is currently a low expectation of
investment risk. Capacity for timely repayment of principal and interest is
adequate, although adverse changes in business,
54
<PAGE>
economic or financial conditions are more likely to lead to increased investment
risk than for obligations in other categories.
BB - Obligations for which capacity for timely repayment of principal and
interest is uncertain relative to other obligors in the same country. Within the
context of the country, these obligations are speculative to some degree and
capacity for timely repayment remains susceptible over time to adverse changes
in business, financial or economic conditions.
B - Obligations for which capacity for timely repayment of principal and
interest is uncertain relative to other obligors in the same country. Timely
repayment of principal and interest is not sufficiently protected against
adverse changes in business, economic or financial conditions and these
obligations are more speculative than those in higher rated categories.
55
