[LOGO] STANDISH FUNDS(R)
Standish Group of Global
Prospectus Fixed Income Funds
- -------------------------------------------------------
April 30, 1999
Standish International Fixed Income Fund
(Institutional Class Shares)
Standish International Fixed Income Fund II
Standish Global Fixed Income Fund
Standish Diversified Income 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
International Fixed Income Fund....................4
International Fixed Income Fund II.................6
Global Fixed Income Fund...........................8
Diversified Income Fund...........................10
The Funds' Investments and Related Risks.............12
Additional investment policies....................12
The Investment Adviser...............................14
About SIMCO(R) and Standish(R)....................14
Fund managers.....................................15
[GRAPHIC OMITTED] Advisory services and fees........................15
Investment and Account Information...................16
How to purchase shares............................16
How to exchange shares............................16
How to redeem shares..............................17
Transaction and account policies..................18
Valuation of shares...............................18
Dividends and distributions.......................18
Year 2000 issue...................................18
Fund Details.........................................19
Taxes.............................................19
Master/feeder structure...........................19
The funds' service providers......................19
Financial Highlights.................................20
For More Information.................................24
Standish Group of Global Fixed Income Funds 2
<PAGE>
Risk/Return Summary
- --------------------------------------------------------------------------------
Standish International Management Company, L.P. (SIMCO), an affiliate of
Standish, Ayer & Wood, Inc., manages each fund.
SIMCO believes that discovering pockets of inefficiency is the key to adding
value to fixed income investments. SIMCO focuses on identifying undervalued
sectors and securities and deemphasizes the use of interest rate forecasting.
SIMCO looks for fixed income securities with the most potential for added value,
such as those involving new issuers, the potential for credit upgrades, unique
structural characteristics or innovative features.
SIMCO, together with Standish, 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 Standish global fixed income funds may be appropriate for investors:
o Interested in diversifying their fixed income investment beyond the U.S.
markets.
o Prepared to accept the risks entailed in foreign investing, which include
political instability and currency fluctuation.
o Looking for a hedge against inflation, which erodes the purchasing power
of money.
In addition, for Diversified Income Fund:
o Looking to diversify a fixed income portfolio with a higher yielding
investment.
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 Global Fixed Income 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 and 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 government 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 some securities may
extend 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 Global Fixed Income 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 of the fund from year to
year over the life of the fund. The total return table shows how the fund's
average annual returns for different calendar periods compare to those of two
widely recognized, unmanaged indices of fixed income securities. The fund's past
performance does not necessarily indicate how the fund will perform in the
future.
[The following table was originally a bar chart in the printed materials.]
International Fixed Income Fund
1991 ..........................15.08
1992 .......................... 8.09
1993 ..........................23.78
1994 ..........................-9.22
1995 ..........................18.13
1996 ..........................15.28
1997 ..........................11.86
1998 .......................... 8.73
Calendar Year Ended December 31
Quarterly returns:
Highest: 9.98% in 3rd quarter 1991
Lowest: -5.78% in 1st quarter 1994
Average annual total returns for selected
periods ended December 31, 1998
- --------------------------------------------------------------------------------
Life Inception
1 Year 5 Years of Fund Date
International Fixed Income Fund 8.73 8.50 11.06 1/2/91
- --------------------------------------------------------------------------------
J.P. Morgan Non-U.S. Govt.
Bond Index (Hedged) 12.09 9.45 9.73 N/A
- --------------------------------------------------------------------------------
Lehman Brothers Aggregate 8.67 7.27 8.65 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.
International
Based on fiscal year Fixed Income
ended 12/31/98 Fund
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%
Total annual fund operating
expenses 0.52%
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 $53 $167 $291 $653
5 Standish Group of Global Fixed Income Funds
<PAGE>
Risk/Return Summary
- --------------------------------------------------------------------------------
International Fixed Income Fund II
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 its exposure to foreign currency only to the extent that foreign currency
is hedged in the fund's benchmark, the J.P. Morgan Non-U.S. Government Index.
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 and 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 government 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 some securities may
extend 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 partial 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 Global Fixed Income Funds 6
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
Because the fund has no operating history, no financial highlights are
available.
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. Other expenses are based on estimates for the current fiscal
year.
Shareholder fees (fees paid
directly from your investment) None
Annual fund operating expenses(1)
(expenses that are deducted
from fund assets)
Management fees .40%
Distribution (12b-1) fees None
Other expenses .60%
Total annual fund operating
expenses 1.00%
(1) Because Standish has agreed to cap the fund's operating expenses, actual
expenses were:
Management fees 0.00%
Other expenses 0.55%
Total annual fund
operating expenses 0.55%
These caps may be changed or eliminated.
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 $102 $318 $552 $1,225
7 Standish Group of Global Fixed Income Funds
<PAGE>
Risk Return Summary
- --------------------------------------------------------------------------------
Global 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 U.S.
dollar and non-dollar denominated fixed income securities of 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 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
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 selects 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 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 comparative evaluation of
interest and inflation rate trends, government fiscal and monetary policy
and the credit quality of government 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 some securities may
extend because of slower than expected principal paytments. 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 other 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 Global Fixed Income 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. The total return table shows how the fund's average annual returns for
different calendar periods compare to those of a widely recognized, unmanaged
index of global government fixed income securities. The fund's past performance
does not necessarily indicate how the fund will perform in the future.
[The following table was originally a bar chart in the printed materials.]
1994 ..............................-7.08
1995 ..............................18.13
1996 ..............................13.03
1997 ..............................11.68
1998 .............................. 6.98
Calendar Year Ended December 31
Quarterly returns:
Highest: 5.20% in 2nd quarter 1995
Lowest: -4.80% in 1st quarter 1994
Average annual total returns for selected
periods ended December 31, 1998
- --------------------------------------------------------------------------------
Inception
1 Year 5 Years Date
Global Fixed Income Fund 6.98 8.19 1/3/94
- --------------------------------------------------------------------------------
J.P. Morgan Global Government
Bond Index (hedged) 11.42 8.70 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.
Global
Based on fiscal year Fixed Income
ended 12/31/98 Fund
Shareholder fees (fees paid
directly from your investment) None
Annual fund operating expenses(1)
(expenses that are deducted
from fund assets)
Management fees 0.40%
Distribution (12b-1) fees None
Other expenses 0.16%
Total annual fund operating
expenses 0.56%
- --------------------------------------------------------------------------------
(1) The table and example reflect the combined expenses of the fund and the
corresponding 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
Global Fixed Income Fund $57 $179 $313 $701
9 Standish Group of Global Fixed Income Funds
<PAGE>
Risk/Return Summary
- --------------------------------------------------------------------------------
Diversified Income Fund
Investment objective
To maximize total return, consisting primarily of a high level of income.
Key investments and strategies
The fund invests, under normal circumstances, at least 80% of assets in fixed
income securities issued by U.S. and foreign governments, companies and banks,
as well as tax-exempt securities, preferreds and warrants. The fund emphasizes
multiple market sectors including: U.S., high yield and international and
emerging markets. At least 80% of assets will be dollar denominated or hedged
back to the U.S. dollar. The fund may also invest in interest rate futures
contracts.
Credit quality
The fund invests up to 65% of assets in below investment grade securities,
sometimes referred to as junk bonds, with an emphasis on those below investment
grade securities that appear likely to be upgraded.
Targeted average portfolio credit quality
BB/Ba, but not lower than B
Maturity
The fund 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 sectors and securities, with some
attention to interest rate forecasting. The adviser looks for securities with
the most potential for added value, such as those involving new issuers, unique
structural characteristics or innovative features that may not be well
understood by other investors. The adviser selects securities for the fund's
portfolio by:
o Determining country, sector and maturity weightings based on intermediate
and long-term assessments of the global economic environment and relative
value factors. Portfolio maturity shifts will typically be gradual. Sector
shifts may be rapid.
o Selecting individual securities based on fundamental research emphasizing
creditworthiness, yields to maturity and relative prices of individual
securities.
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 some securities may
extend 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 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. Also, a decline
in the value of foreign currencies relative to the U.S. dollar will reduce
the value of securities 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.
There is a greater risk that the fund will lose money because it invests
primarily in high yield and emerging market bonds. These bonds are considered
speculative because they have a higher risk of issuer default, are subject to
greater price volatility and may be illiquid.
Standish Group of Global Fixed Income Funds 10
<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 from year to
year for the full calendar period indicated. The total return table shows how
the fund's average annual returns for different calendar periods compare to
those of a widely recognized, unmanaged index of dollar denominated fixed income
securities. The fund's past performance does not necessarily indicate how the
fund will perform in the future.
Diversified Income Fund
[The following table was originally a bar chart in the printed materials.]
1998 ....................0.86
Calendar Year Ended December 31,
Quarterly returns:
Highest: 4.48% in 4th quarter 1998
Lowest: -6.60% in 3rd quarter 1998
Average annual total returns for selected periods ended December 31, 1998
- --------------------------------------------------------------------------------
1 Year Life of Fund Inception
Date
Diversified Income Fund .86 4.44 6/2/97
- --------------------------------------------------------------------------------
Lehman Brothers Aggregate Index 8.67 10.41 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.
Based on fiscal year Diversified
ended 12/31/98 Income 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 0.41%
Total annual fund operating
expenses 0.91%
- --------------------------------------------------------------------------------
(1) Because Standish has agreed to cap the fund's operating expenses, actual
expenses were:
Management fees 0.00%
Other expenses 0.00%
Total annual fund
operating expenses 0.00%
These caps may be changed or eliminated.
(2) The table and example reflect the combined expenses of Diversified Income
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
Diversified Income Fund $93 $290 $504 $1,120
11 Standish Group of Global Fixed Income Funds
<PAGE>
The Funds' Investments and Related Risks
- --------------------------------------------------------------------------------
The funds may invest in a wide range of fixed income securities.
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 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 investment policies
International and Global Fixed Income Funds The funds 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 a foreign government is unable or unwilling to repay
principal or interest when due.
Diversified Income Fund There is no limit on the number of countries in which
the fund may invest but the fund will invest in at least 3 different countries,
including the United States. The fund limits its investments in any one
developed foreign country to 15% of assets and in any emerging market country to
7% of assets. At least 80% of assets are denominated in or hedged back to the
U.S. dollar.
The fund may invest up to 10% of assets in common stock.
Standish Group of Global Fixed Income Funds 12
<PAGE>
- --------------------------------------------------------------------------------
Credit quality Securities are investment graded 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.
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 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 Diversified Income Fund's investment objective may be
changed by the fund's trustees without shareholder approval.
13 Standish Group of Global Fixed Income Funds
<PAGE>
The Investment Adviser
- --------------------------------------------------------------------------------
SIMCO and Standish offer a broad array of investment services that include
management of domestic and international equity and fixed income portfolios.
About SIMCO and Standish
SIMCO, a partnership in which Standish holds a 99.98% interest, was established
in 1991 and is the funds' investment adviser. SIMCO 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, SIMCO seeks to discover
opportunity by attention to detail and adherence to a strict set of disciplines.
SIMCO uses fundamental research to uncover a security sufficiently complex as to
have been misvalued by traditional analysis. SIMCO uses sophisticated
quantitative techniques, which may help identify persistent market
inefficiencies that can be exploited by their portfolio managers.
Standish, established in 1933, has remained by choice 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.
SIMCO and Standish strive to balance individual insight with the shared wisdom
of the investment team. By combining technology and an experienced research
staff, SIMCO and Standish have built a powerful internal network of overlapping
resources.
Standish Group of Global Fixed Income Funds 14
<PAGE>
- --------------------------------------------------------------------------------
Fund managers
- --------------------------------------------------------------------------------
Fund Fund managers Positions during past
five years
International Fixed Income Fund Richard S. Wood Executive vice
International Fixed Income II Fund president and
Global Fixed Income Fund director of SIMCO and
vice president and
managing director of
Standish
W. Charles Cook II Vice president of
(Co-manager since SIMCO and vice
1997) president and
director of Standish
- --------------------------------------------------------------------------------
Diversified Income Fund Dolores S. Driscoll Director of SIMCO and
vice president and
managing director of
Standish
- --------------------------------------------------------------------------------
Advisory services and fees
SIMCO provides each fund with portfolio management and investment research
services. The adviser places orders to buy and sell each fund's portfolio
securities and manages each fund's business affairs. For the year ended December
31, 1998, each fund paid an advisory fee for these services. The adviser agreed
to limit certain funds' total annual operating expenses (excluding brokerage
commissions, taxes and extraordinary expenses), and the payments were less than
these funds' contractual advisory fees. 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>
International Fixed Income Fund 0.40% 0.40% 0.80%
International Fixed Income II N/A 0.40% 0.55%
Global Fixed Income Fund 0.40% 0.40% 0.65%
Diversified Income Fund 0.00% 0.50% 0.00%
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
Investment Adviser
Standish International Management Company, L.P.
One Financial Center
Boston, Massachusetts 02111-2662
15 Standish Group of Global Fixed Income Funds
<PAGE>
Investment and Account Information
- --------------------------------------------------------------------------------
How to purchase shares
Minimum initial investment: $100,000
Minimum subsequent investment: $5,000
Minimum investments may be waived by the distributor for investors in omnibus
accounts and clients and employees of Standish and their immediate families.
All orders to purchase shares received in good form by the distributor or its
agent before the close of regular trading on the New York Stock Exchange will be
executed at that day's share price. Orders accepted after that time will be
executed at the next business day's price. All orders must be accompanied by
payment. Each fund reserves the right to reject purchase orders or to stop
offering its shares without notice to shareholders.
Good form means that you have provided the following information with your
request: Name of the fund; account number (if an existing account); dollar
amount or number of shares to be purchased (or exchanged or redeemed); and the
signature of each owner exactly as the account is registered in the case of a
redemption request.
Shares of the funds are not available for sale in every state.
By check
Opening an account
o Send a check to the distributor payable to Standish Funds with the
completed original account application.
Adding to an account
o Send a check to the distributor payable to Standish Funds and a letter of
instruction with the account name and number and effective date of the
request.
By wire
Opening an account
o Send the completed original account application to the distributor.
o Call the distributor to obtain an account number.
o Instruct your bank to wire the purchase amount to Investors Bank & Trust
Company (see below).
Adding to an account
o Call the distributor. Instruct your bank to wire the amount of the
additional investment to Investors Bank & Trust Company (see below).
By fax
Opening an account
o Fax the completed account application to 617-350-0042.
o Mail the original account application to the distributor.
o Follow the instructions for opening an account by wire.
Adding to an account
o Fax a letter of instruction to 617-350-0042 with the account name and
number and effective date of the request.
o Call the distributor. Instruct your bank to wire the amount of the
additional investment to Investors Bank & Trust Company.
Through a financial intermediary
Opening or adding to an account
o Contact your financial intermediary. Financial intermediaries acting on an
investor's behalf are responsible for transmitting orders to the
distributor or its agent by the specified deadline.
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]
Wire instructions:
Investors Bank & Trust Company
Boston, MA
ABA#: 011 001 438
Account #: 79650-4116
Fund name:
Investor account #:
Standish Group of Global Fixed Income Funds 16
<PAGE>
- --------------------------------------------------------------------------------
How to exchange shares
You may exchange shares of a fund for the same class of shares of any other
Standish fund, if the registration of both accounts is identical. 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
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 and dollar
amount to be exchanged.
o Provide both account numbers.
o Signature guarantees may be required (see below).
By telephone
o If the account has telephone privileges, call the distributor.
o Provide the name of the current fund, the 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 before the close of
regular trading on the New York Stock Exchange will be executed at that day's
share price. Orders received after that time 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.
By mail
o Send a letter of instruction to the distributor signed by each registered
account owner.
o State the name of the fund and number of shares or dollar amount to be
sold.
o Provide the account number.
o Signature guarantees may be required (see below).
By telephone
For check or wire
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.
By fax
o Fax the request to the distributor at 617-350-0042.
o Include your name, the name of the fund and the number of shares or dollar
amount to be sold.
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.
Through a financial intermediary
o Contact your financial intermediary. Financial intermediaries acting on an
investor's behalf are responsible for transmitting orders to the
distributor or its agent by the specified deadline.
17 Standish Group of Global Fixed Income Funds
<PAGE>
Investment and Account Information
- --------------------------------------------------------------------------------
Transaction and account policies
Accounts with low balances. If an account falls below $50,000 as a result of
redemptions (and not because of performance), the distributor may ask the
investor to increase the size of the account to $50,000 within 30 days. If the
investor does not increase the account to $50,000 the distributor may redeem the
account at net asset value and remit the proceeds to the investor.
In-kind purchases and redemptions. Securities you own 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 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 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 are unable to recognize dates after
1999. The cost of addressing the Year 2000 issue may adversely affect 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 Global Fixed Income Funds 18
<PAGE>
Fund Details
- --------------------------------------------------------------------------------
Taxes
- --------------------------------------------------------------------------------
Transactions Tax Status
- --------------------------------------------------------------------------------
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 their shareholders about the
funds' dividends and distributions, which are taxable even if reinvested, and
about the shareholders' redemptions during the previous calendar year. Any
shareholder who does not provide the funds with a correct taxpayer
identification number and required certification may be subject to federal
backup withholding tax.
Shareholders should generally avoid investing in a fund shortly before an
expected taxable dividend or capital gain distribution. Otherwise, a shareholder
may pay taxes on dividends or distributions that are economically equivalent to
a partial return of the shareholder's investment.
Shareholders should consult their tax advisers about their own particular tax
situations.
Master/feeder structure
Global Fixed Income Fund and Diversified Income Fund are "feeder" funds that
invest exclusively in 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
19 Standish Group of Global Fixed Income Funds
<PAGE>
Financial Highlights
- --------------------------------------------------------------------------------
The financial highlights tables 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).
International Fixed Income Fund (Institutional Class)
<TABLE>
<CAPTION>
For the fiscal year ended December 31: 1998(1) 1997(1) 1996(1) 1995 1994
<S> <C> <C> <C> <C> <C>
Net asset value--beginning of period $22.81 $23.25 $23.21 $21.30 $24.22
----------- ----------- ----------- ----------- -----------
Income from investment operations
Net investment income $1.38 $1.54 $1.72 $1.96 $1.71
Net realized and unrealized gain (loss) 0.58 $1.16 $1.73 1.84 ($3.93)
----------- ----------- ----------- ----------- -----------
Total from investment operations $1.96 $2.70 $3.45 $3.80 ($2.22)
----------- ----------- ----------- ----------- -----------
Less distributions declared to shareholders
From net investment income ($1.21) ($2.86) ($2.64) ($1.89) ($0.20)
From realized gain (0.34) (0.28) (0.77) -- --
Tax return of capital -- -- -- -- (0.50)
----------- ----------- ----------- ----------- -----------
Total distributions declared to shareholders ($1.55) ($3.14) ($3.41) ($1.89) ($0.70)
----------- ----------- ----------- ----------- -----------
Net asset value--end of period $23.22 $22.81 $23.25 $23.21 $21.30
=========== =========== =========== =========== ===========
Total return(1) 8.73% 11.86% 15.28% 18.13% (9.22%)
Ratios (to average daily net assets)/Supplemental data
Net assets at end of period (000 omitted) $1,352,383 $1,172,695 $840,133 $803,537 $1,069,416
Expenses 0.52% 0.53% 0.53% 0.51% 0.51%
Net investment income 5.92% 6.37% 7.17% 8.09% 7.69%
Portfolio turnover 156% 173% 226% 165% 158%
</TABLE>
----------------------------
(1) Calculated based on average shares outstanding
Standish Group of Global Fixed Income Funds 20
<PAGE>
Global Fixed Income Fund
<TABLE>
<CAPTION>
For the fiscal year ended December 31: 1998(1) 1997(1) 1996(1) 1995 1994(3)
<S> <C> <C> <C> <C> <C>
Net asset value--beginning of period $20.39 $20.09 $19.53 $17.99 $20.00
----------- ----------- ----------- ----------- -----------
Income from investment operations
Net investment income(3) $1.28 $1.34* $1.42 $1.59 $1.29*
Net realized and unrealized gain (loss) $0.12 $0.96 $1.05 $1.60 ($2.70)
----------- ----------- ----------- ----------- -----------
Total from investment operations $1.40 $2.30 $2.47 $3.19 ($1.41)
----------- ----------- ----------- ----------- -----------
Less distributions declared to shareholders
From net investment income ($1.21) ($1.98) ($1.91) (1.65) --
From realized gain (0.30) (0.02) -- -- --
Tax return of capital -- -- -- -- (0.60)
----------- ----------- ----------- ----------- -----------
Total distributions declared to shareholders ($1.51) ($2.00) ($1.91) ($1.65) ($0.60)
----------- ----------- ----------- ----------- -----------
Net asset value--end of period $20.28 $20.39 $20.09 $19.53 $17.99
=========== =========== =========== =========== ===========
Total return 6.98% 11.68% 13.03% 18.13% (7.06%)
Ratios (to average daily net assets)/Supplemental data
Net assets at end of period (000 omitted) $458,526 $255,762 $155,731 $137,889 $135,232
Expenses 0.56% 0.65%* 0.65% 0.62% 0.65%*(2)
Net investment income 6.18% 6.42%* 7.11% 7.69% 7.73%*(2)
Portfolio turnover 162% 176%(3) 184%(4) 163% 140%
</TABLE>
----------------------------
(1) Calculated based on average shares outstanding.
*The adviser voluntarily agreed not to impose a portion of its investment
advisory fee for the years ending December 31, 1997 and December 31, 1994.
Had these actions not been taken, the net investment income per share and the
ratios would have been:
<TABLE>
<S> <C> <C> <C> <C> <C>
Net investment income per share -- $1.33 -- -- $1.27
Ratios (to average daily net assets):
Expenses -- 0.66% -- -- 0.73%(2)
Net investment income -- 6.41% -- -- 7.65%(2)
</TABLE>
(2) Computed on an annualized basis
(3) For the period from January 3, 1994 (commencement of operations) to
December 31, 1994.
(3) For the periods after December 31, 1996, information is for the
Standish Global Fixed Income Portfolio.
(4) Represents the theoretical unaudited portfolio turnover rate of the
fund for the year ended December 31, 1996 had the fund not
contributed its assets to Standish Global Fixed Income Portfolio on
May 3, 1996. The portfolio turnover rate of the fund for the period
from January 1, 1996 to May 2, 1996 was 73%. The portfolio turnover
rate of Standish Global Fixed Income Portfolio for the period from
May 3, 1996 to December 31, 1996 was 111%.
21 Standish Group of Global Fixed Income Funds
<PAGE>
- --------------------------------------------------------------------------------
Diversified Income Fund
<TABLE>
<CAPTION>
Year ended June 2, to
December 31 December 31
1998 1997(1)
<S> <C> <C>
Net asset value--beginning of period $20.51 $20.00
---------- ----------
Income from investment operations
Net investment income2 $1.70 $0.98
Net realized and unrealized gain (loss) (1.52) 0.96
---------- ----------
Total from investment operations $0.18 $1.24
---------- ----------
Less distributions declared to shareholders
From net investment income (1.67) (0.63)
From realized gain on investments -- (0.10)
---------- ----------
Total distributions declared to shareholders ($1.67) (0.73)
---------- ----------
Net asset value--end of period $19.02 $20.51
========== ==========
Total return 0.86% 6.20%
Ratios (to average daily net assets)/Supplemental data
Net assets at end of period (000 omitted) $40,457 $27,398
Expenses(2) 0.00% 0.00%
Net investment income2 8.40% 8.07%(3)
Portfolio turnover 145%(4) 25%(4)
</TABLE>
----------------------------
(1) Calculated based on average shares outstanding
(2) For the period June 2, 1997 (commencement of operations) to December
31, 1997, and the year ended December 31, 1998, the adviser
voluntarily agreed not to impose its advisory fee on the portfolio
and reimbursed the fund and the portfolio for their operating
expenses. Had these actions not been taken, the net investment
income per share and the ratios would have been:
<TABLE>
<S> <C> <C>
Net investment income per share $1.51 $0.74
Ratios (to average net assets)
Expenses(5) 0.91% 1.96%(3)
Net investment income 7.49% 6.11%(3)
</TABLE>
(3) Computed on an annualized basis
(4) Information is for Standish Diversified Income Portfolio.
(5) Includes the fund's share of Standish Diversified Income Portfolio's
allocated expenses for the periods shown.
Standish Group of Global Fixed Income Funds 22
<PAGE>
(this page intentionally left blank)
<PAGE>
Standish International Management Company, L.P. and Standish, Ayer & Wood, Inc.
are independent investment counseling firms that have been managing assets for
institutional investors and high net worth individuals, as well as mutual funds.
SIMCO and Standish offer a broad array of investment services that includes
management of domestic and international equity and fixed income portfolios.
For More Information
- --------------------------------------------------------------------------------
For investors who want more information about the Standish group of global fixed
income 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
800.729.0066
Investment Company Act
file number (811-4813)
98-380 6M 4/99
<PAGE>
[LOGO] STANDISH FUNDS(R)
Standish Group of
Prospectus Fixed Income Funds
- -------------------------------------------------------
April 30, 1999 Standish Fixed Income Fund
Standish Fixed Income Fund II
Standish Diversified Income Fund
Standish Securitized Fund
Standish Controlled Maturity Fund
Standish Short-Term Asset
Reserve 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 Fund..................................4
Fixed Income Fund II ..............................4
Diversified Income Fund............................6
Securitized Fund ..................................6
Controlled Maturity Fund...........................8
Short-Term Asset Reserve Fund......................8
The Funds' Investments and Related Risks.............10
Primary investments...............................10
Additional investments............................10
Additional investment policies....................11
[GRAPHIC OMITTED] The Investment Advisers..............................12
About Standish(R) and SIMCO(R) ...................12
Standish's composite performance..................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.................................24
Standish Group of Fixed Income Funds 2
<PAGE>
Risk/Return Summary
- --------------------------------------------------------------------------------
Standish, Ayer & Wood, Inc. manages all the funds, except Diversified Income
Fund, which is managed by Standish International Management Company, L.P.
(SIMCO), an affiliate of Standish.
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.
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
Fixed Income Fund, Fixed Income Fund II and Securitized Fund 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 Diversified Income Fund:
o Looking to diversify a fixed income portfolio with a higher yielding
investment.
o Prepared to accept the risks of investing in foreign and emerging markets,
which include political instability, currency fluctuations and
illiquidity.
Controlled Maturity Fund and Short-Term Asset Reserve Fund may be appropriate
for investors:
o Seeking limited price fluctuation.
o Seeking current income.
o Looking to diversify a fixed income portfolio with short-term investments.
o In the case of Short-Term Asset Reserve Fund, as an alternative to a money
market fund but without the price stability of a money market fund.
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 Funds
<PAGE>
Risk/Return Summary
- --------------------------------------------------------------------------------
Fixed Income Fund Fixed Income Fund II
Investment Primarily to achieve a To maximize total return,
objective high level of current consistent with preserving
income, consistent with principal and liquidity, while
conserving principal and seeking a relatively high level of
liquidity, and current income.
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 The fund invests, under The fund invests, under normal
and strategies normal circumstances, at circumstances, at least 65% of
least 65% of assets in assets in fixed income securities
fixed income securities of U.S. companies and the U.S.
issued by U.S. and government. The fund may invest in
foreign governments and Yankee bonds, which are U.S.
companies. The fund may dollar denominated bonds typically
invest up to 20% of issued in the U.S. by foreign
assets in non-dollar companies and governments, and
denominated securities of other dollar denominated
foreign and emerging securities of foreign and emerging
market issuers, and no market issuers. The fund may also
more than 10% of assets invest in interest rate futures
in these foreign currency contracts.
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 The fund invests exclusively in
primarily in investment investment grade securities.
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 at
time of purchase.
The adviser attempts to select fixed income securities that
have the potential to be upgraded.
Targeted average AA/Aa AA/Aa
portfolio credit
quality
Maturity Each 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 The adviser focuses on identifying undervalued sectors and
are selected 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. These
characterisitics may also allow for substantial capital
appreciation over time. Many of these securities have higher
yields and offer more current income than US governmental
bonds but at heightened levels of risk. The adviser selects
securities for the funds' portfolios 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 Investors could lose money on their investments in a fund or
of investing in the fund could perform less well than other possible
the funds 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. Because risk is
higher for below investment grade bonds, this risk is
greater for an investment in Fixed Income Fund.
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
some securities may extend 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, 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. 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. Because Fixed Income Fund may invest
in non-dollar denominated foreign securities, these
risks are greater for an investment in Fixed Income
Fund.
o During periods of extreme interest rate volatility, the
fund has difficulty closing out its position in
interest rate futures contracts or closing out its
position at a price which the adviser believes would be
advantageous to the fund.
A decline in the value of foreign currencies relative to the
U.S. dollar will reduce the value of securities held by Fixed
Income Fund and denominated in those currencies.
Standish Group of Fixed Income Funds 4
<PAGE>
- --------------------------------------------------------------------------------
Total return performance
The bar charts and total return table indicate the risks of investing in the
funds. The bar charts show changes in the performance of each fund for the full
calendar periods indicated. The total return table shows how each fund's average
annual returns for different calendar periods compare to those of a widely
recognized, unmanaged index of dollar denominated fixed income securities. Each
fund's past performance does not necessarily indicate how the fund will perform
in the future.
[The following table was originally a bar chart in the printed materials.]
Fixed Income Fund
1989 ..........................13.75
1990 .......................... 9.2
1991 ..........................17.67
1992 .......................... 6.89
1993 ..........................14.62
1994 ..........................-4.88
1995 ..........................18.54
1996 .......................... 5.48
1997 .......................... 9.54
1998 .......................... 5.25
Calendar Year Ended December 31
Quarterly returns:
Highest: 7.57% in 2nd quarter 1989
Lowest: -4.00% in 1st quarter 1994
[The following table was originally a bar chart in the printed materials.]
Fixed Income Fund II
1996 .......................... 3.77
1997 .......................... 8.59
1998 .......................... 4.91
Calendar Year Ended December 31
Quarterly returns:
Highest: 4.38%in 4th quarter 1995
Lowest: -1.90% in 1st quarter 1996
Average annual total returns
for selected periods ended December 31, 1998
- --------------------------------------------------------------------------------
Life Inception
1 Year 5 Years 10 Years of Fund Date
Fixed Income Fund 5.25 6.52 9.40 8.75 3/30/87
- --------------------------------------------------------------------------------
Lehman Brothers Aggregate 8.67 7.27 9.26 8.62 N/A
- --------------------------------------------------------------------------------
Fixed Income Fund II 4.91 -- -- 6.59 7/1/95
- --------------------------------------------------------------------------------
Lehman Brothers Aggregate 8.67 -- -- 8.09 N/A
- --------------------------------------------------------------------------------
Fees and expenses of the funds
This table describes the fees and expenses you may pay if you buy and hold
shares of the funds.
Based on fiscal year Fixed Income Fixed Income
ended 12/31/98 Fund Fund II
Shareholder fees (fees paid
directly from your investment) None None
Annual fund operating expenses(1,2)
(expenses that are deducted
from fund assets)
Management fees 0.31% 0.40%
Distribution (12b-1) fees None None
Other expenses 0.05% 0.22%
Total annual fund operating
expenses 0.36% 0.62%
- --------------------------------------------------------------------------------
(1) Because Standish has agreed to cap Fixed Income Fund II's operating
expenses, that fund's actual expenses were:
Management fees 0.18%
Other expenses 0.22%
Total annual fund
operating expenses 0.40%
These caps may be changed or eliminated.
(2) The table and example reflect the combined expenses of Fixed Income 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 each 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 Fund $37 $116 $202 $456
Fixed Income Fund II $63 $199 $346 $774
5 Standish Group of Fixed Income Funds
<PAGE>
Risk/Return Summary
- --------------------------------------------------------------------------------
Diversified Income Fund Securitized Fund
Investment To maximize total return, To maximize total return,
objective consisting primarily of a consistent with preserving
high level of income. principal and liquidity, through
both capital appreciation and
generation of current income.
Key investments The fund invests, under The fund invests, under normal
and strategies normal circumstances, at circumstances, at least 65% of
least 80% of assets in assets in high quality
fixed income securities mortgage-related and asset-backed
issued by U.S. and securities.The fund is allowed to
foreign governments, invest in foreign governments and
companies and banks, as companies but expects to limit
well as tax-exempt its investments in foreign
securities, preferreds countries to Canada and Europe
and warrants. The fund but is not required to do so. The
emphasizes multiple fund may also invest in interest
market sectors including: rate futures contracts.
U.S., high yield, and
international and
emerging markets. At
least 80% of assets will
be dollar denominated or
hedged back to the U.S.
dollar. The fund may also
invest in interest rate
futures contracts.
Credit quality The fund invests up to The fund invests exclusively in
65% of assets in below investment grade securities,
investment grade primarily U.S. governments, and
securities, sometimes no more than 15% of assets in
referred to as junk securities rated BBB or Baa by a
bonds, with an emphasis rating agency or their unrated
on those below investment equivalents.
grade securities that
have the potential to be
upgraded.
Targeted average BB/Ba, but not lower than AA/Aa or better
portfolio credit B
quality
Maturity/average The fund generally will The fund generally will maintain
life maintain an average an average life of 3 to 15 years
dollar-weighted effective but may invest in individual
portfolio maturity of 5 securities of any maturity.
to 13 years but may
invest in individual
securities of any
maturity.
How investments The adviser focuses on identifying undervalued sectors and
are selected securities, with some attention to interest rate forecasting.
The adviser looks for securities with the most potential for
added value, such as those involving new issuers, unique
structural characteristics or innovative features that may
not be well understood by other investors. These
characterisitics may also allow for substantial capital
appreciation over time. Many of these securities have higher
yields and offer more current income than US governmental
bonds but at heightened levels of risk. The adviser selects
securities for each fund's portfolio by:
o Determining country, o Using both fundamental and
sector and maturity quantitative research to
weightings based on uncover inefficient sectors
intermediate and of the mortgage market and
long-term actively trading securities
assessments of the to take advantage of new
global economic information.
environment and
relative value o Measuring the potential
factors. Portfolio impact of supply/demand
maturity shifts will imbalances, yield curve
typically be shifts, changing prepayment
gradual. Sector patterns and credit quality
shifts may be rapid. to identify individual
securities that present the
o Selecting individual most attractive tradeoffs
securities based on between potential return and
fundamental research risk.
emphasizing
creditworthiness,
yields to maturity
and relative prices
of individual
securities.
Principal risks Investors could lose money on their investments in a fund or
of investing in the fund could perform less well than other possible
the funds 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 some
securities may extend 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
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. Also, a
decline in the value of foreign currencies relative to
the U.S. dollar will reduce the value of securities
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 its position at a
price which the adviser believes would be advantageous
to the fund.
There is a greater risk There is a greater risk that
that Diversified Income Securitized Fund will lose money
Fund will lose money due to prepayment and extension
because it invests risks because the fund invests
primarily in below heavily in mortgage-related
investment grade and securities. Mortgage derivatives
emerging market bonds. in the fund's portfolio may have
These bonds are especially volatile prices
considered speculative because of imbedded leverage or
because they have a unusual interest rate reset
higher risk of issuer terms.
default, are subject to
greater price volatility
and may be illiquid.
Standish Group of Fixed Income Funds 6
<PAGE>
- --------------------------------------------------------------------------------
Total return performance
The bar charts and total return table indicate the risks of investing in the
funds. The bar charts show changes in the performance of each fund for the full
calendar periods indicated. The total return table shows how each fund's average
annual returns for different calendar periods compare to those of two widely
recognized, unmanaged indices of dollar denominated fixed income securities.
Each fund's past performance does not necessarily indicate how the fund will
perform in the future.
[The following table was originally a bar chart in the printed materials.]
Diversified Income Fund
1998 ....................0.86
Calendar Year Ended December 31
Quarterly returns:
Highest: 4.48% in 4th quarter 1998
Lowest: -6.60% in 3rd quarter 1998
[The following table was originally a bar chart in the printed materials.]
Securitized Fund
1990 ..........................11.49
1991 ..........................15.55
1992 .......................... 4.07
1993 ..........................10.01
1994 ..........................-2.13
1995 ..........................16.32
1996 .......................... 4.41
1997 .......................... 9.5
1998 .......................... 7.53
Quarterly returns:
Highest: 5.78% in 4th quarter 1990
Lowest: -2.52% in 1st quarter 1994
Calendar Year Ended December 31
Average annual total returns
for selected periods ended December 31, 1998
- --------------------------------------------------------------------------------
Life of Inception
1 Year 5 Years Fund Date
Diversified Income Fund .86 -- 4.44 6/2/97
- --------------------------------------------------------------------------------
Lehman Brothers Aggregate Index 8.67 -- 10.41 N/A
- --------------------------------------------------------------------------------
Securitized Fund 7.53 6.95 8.53 8/31/89
- --------------------------------------------------------------------------------
Lehman Brothers Mortgage Index 6.97 7.23 8.68 N/A
- --------------------------------------------------------------------------------
Fees and expenses of the funds
This table describes the fees and expenses you may pay if you buy and hold
shares of the funds.
Based on fiscal year Diversified Securitized
ended 12/31/98 Income Fund Fund
Shareholder fees (fees paid
directly from your investment) None None
Annual fund operating expenses(1,2)
(expenses that are deducted
from fund assets)
Management fees 0.50% 0.25%
Distribution (12b-1) fees None None
Other expenses 0.41% 0.31%
Total annual fund operating
expenses 0.91% 0.56%
- --------------------------------------------------------------------------------
(1) Because Standish has agreed to cap the funds' operating expenses, each
fund's actual expenses were:
Management fees 0.00% 0.14%
Other expenses 0.00% 0.31%
Total annual fund
operating expenses 0.00% 0.45%
These caps may be changed or eliminated.
(2) The table and example reflect the combined expenses of Diversified Income
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 each 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
Diversified Income Fund $93 $290 $504 $1,120
Securitized Fund $57 $179 $313 $701
7 Standish Group of Fixed Income Funds
<PAGE>
Risk/Return Summary
- --------------------------------------------------------------------------------
Controlled Maturity Fund Short-Term Asset Reserve Fund
Investment To maximize total return, To achieve a high level of
objective consistent with current income consistent with
preserving principal and preserving principal and
liquidity, while seeking liquidity.
a relatively high level
of current income.
Key investments The fund invests, under The fund invests primarily in
and strategies normal circumstances, at dollar-denominated money market
least 65% of assets in instruments, short-term fixed
fixed income securities income securities and
of U.S. companies and the asset-backed securities of U.S.
U.S. government. The fund and foreign governments, banks
may invest in Yankee and companies. The fund may also
bonds, which are U.S. invest in interest rate futures
dollar denominated bonds contracts.
typically issued in the
U.S. by foreign companies
and governments, and
other dollar denominated
securities of foreign and
emerging market issuers.
The fund may also invest
in interest rate futures
contracts.
Credit quality The fund invests The fund invests exclusively in
exclusively in investment investment grade securities and
grade obligations. The no more than 15% of assets in
adviser attempts to securities rated BBB or Baa (A-2,
select securities that P-2 or Duff-2 for money market
have the potential to be instruments) by a rating agency
upgraded. or their unrated equivalents.
Targeted average AA/Aa AA/Aa
portfolio credit
quality
Maturity The fund generally will The fund generally will maintain
maintain an average an average dollar-weighted
dollar-weighted effective effective portfolio maturity of 6
portfolio maturity of not to 15 months with a maximum
more than 5 years but may average maturity of 18 months. Up
invest in individual to 10 percent of the fund's total
securities of any assets may be invested in
maturity. securities with effective
maturities of 3.25 and 5 years.
How investments The adviser focuses on identifying undervalued sectors and
are selected securities and minimizes the use of an interest rate
forecasting strategy. The adviser looks for securities with
the most potential for added value, such as those involving
the potential for credit upgrades, unique structural
characteristics or innovative features. These
characterisitics may also allow for substantial capital
appreciation over time. Many of these securities have higher
yields and offer more current income than US government bonds
but at heightened levels of risk. The adviser selects
securities for the fund's portfolio by:
o Allocating assets o Using research to locate
among sectors opportunities in
appearing to have less-efficient areas of the
near-term return short-term fixed-income
potential. market.
o Actively trading o Using yield curve analysis
among various to identify securities that
sectors, such as present the most attractive
corporate bonds, tradeoff between the higher
mortgage pass returns and higher risks
through securities, associated with extending
government agencies maturities.
and asset-backed
securities.
o Buying when a yield o Investing in innovative
spread advantage securities that may not be
presents an widely followed by other
opportunity to buy investors.
securities cheaply.
Principal risks Investors could lose money on their investments in a fund or
of investing in the fund could perform less well than other possible
the funds 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.
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 some
securities may extend 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
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. Foreign
securities are sometimes less liquid and harder to value
than securities of U.S. issuers. Because the risks of
foreign investing are more severe for securities of
issuers in emerging market countries, these risks are
greater for an investment in Controlled Maturity Fund.
o During periods of extreme interest rate volatility, the
fund has difficulty closing out its position in interest
rate futures contracts or closing out its position at a
price which the adviser believes would be advantageous
to the fund.
Because Controlled Maturity Fund generally invests in
securities with longer remaining maturities, prepayment and
extension risks are greater for this fund.
Standish Group of Fixed Income Funds 8
<PAGE>
- --------------------------------------------------------------------------------
Total return performance
The bar charts and total return table indicate the risks of investing in the
funds. The bar chart shows changes in the performance of each fund for the full
calendar periods indicated. The total return table shows how each fund's average
annual returns for different calendar periods compare to those of widely
recognized unmanaged indices of Treasury securities. Each fund's past
performance does not necessarily indicate how the fund will perform in the
future.
[The following table was originally a bar chart in the printed materials.]
Controlled Maturity Fund
1996 .........................5.13
1997 .........................6.66
1998 .........................5.58
Calendar Year Ended December 31
Quarterly returns:
Highest: 2.61% in 4th quarter 1995
Lowest: 0.13% in 4th quarter 1998
[The following table was originally a bar chart in the printed materials.]
Short-Term Asset Reserve Fund
1989 .......................... 9.5
1990 ..........................8.98
1991 ..........................9.41
1992 ..........................4.35
1993 ..........................5.09
1994 ..........................2.26
1995 ..........................7.85
1996 ..........................5.62
1997 ..........................5.94
1998 ..........................5.75
Calendar Year Ended December 31
Quarterly returns:
Highest: 3.53% in 2nd quarter 1989
Lowest: 0.06% in 1st quarter 1994
Average annual total returns
for selected periods ended December 31, 1998
- --------------------------------------------------------------------------------
Life of Inception
1 Year 5 Years 10 Years Fund Date
Controlled Maturity Fund 5.58 -- -- 6.18 7/1/95
- --------------------------------------------------------------------------------
Merrill Lynch 1-3 Year
U.S. Treasury Index 7.00 -- -- 6.50 N/A
- --------------------------------------------------------------------------------
Short-Term Asset Reserve Fund 5.75 5.47 6.45 6.45 1/3/89
- --------------------------------------------------------------------------------
Merrill Lynch Treasury Bill Index 5.35 5.28 N/A N/A 6/30/92
- --------------------------------------------------------------------------------
IBC Money Fund
Averages All Taxable Index 5.09 4.86 5.27 7.27 N/A
- --------------------------------------------------------------------------------
Fees and expenses of the funds
This table describes the fees and expenses you may pay if you buy and hold
shares of the funds.
Based on fiscal year Controlled Maturity Short-Term Asset
ended 12/31/98 Fund Reserve Fund
Shareholder fees (fees paid
directly from your investment) None None
Annual fund operating expenses(1,2)
(expenses that are deducted
from fund assets)
Management fees 0.35% 0.25%
Distribution (12b-1) fees None None
Other expenses 0.51% 0.10%
Total annual fund operating
expenses 0.86% 0.35%
- --------------------------------------------------------------------------------
(1) Because Standish has agreed to cap the funds' operating expenses, each
fund's actual expenses were:
Management fees 0.00%
Other expenses 0.30%
Total annual fund
operating expenses 0.30%
These caps may be changed or eliminated.
(2) The table and example reflect the combined expenses of Short-Term Asset
Reserve 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 each 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 constant.
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
Controlled Maturity Fund $88 $274 $477 $1,061
Short-Term Asset
Reserve Fund $36 $113 $197 $443
9 Standish Group of Fixed Income Funds
<PAGE>
The Funds' Investments and Related Risks
- --------------------------------------------------------------------------------
The funds may invest in a wide range of fixed income securities.
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
Diversified Income Fund There is no limit on the number of countries in which
the fund may invest but the fund will invest in at least 3 different countries,
including the United States. The fund limits its investments in any one
developed foreign country to 15% of assets and in any emerging market country to
7% of assets. At least 80% of assets are denominated in or hedged back to the
U.S. dollar.
The fund may invest up to 10% of assets in common stock.
Securitized Fund The fund may invest directly in mortgage loans securing
commercial and residential real estate. This practice exposes the fund to the
risk of delays and difficulties in recovering and reselling the collateral that
secures the loan. The fund may invest up to 10% of assets in securities of
foreign issuers denominated in foreign currencies.
To preserve principal and liquidity, the fund may invest up to 35% of assets in
U.S. Treasury and government agency notes and bonds, certificates of deposit,
money market instruments and repurchase agreements.
Short-Term Asset Reserve Fund The fund may invest in tax-exempt securities and
prime commercial paper of U.S. and foreign companies. The fund may invest up to
10% of assets in preferred stock.
Standish Group of Fixed Income Funds 10
<PAGE>
- --------------------------------------------------------------------------------
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.
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 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 Each fund's (except Fixed Income Fund) investment objective
may be changed by the fund's trustees without shareholder approval.
11 Standish Group of Fixed Income Funds
<PAGE>
The Investment Advisers
- --------------------------------------------------------------------------------
Standish offers a broad array of investment services that include management of
domestic and international equity and fixed income portfolios.
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
investment adviser to all the funds, except Diversified Income Fund. SIMCO, a
partnership in which Standish holds a 99.98% interest, was established in 1991.
SIMCO is the adviser to Diversified Income 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's composite performance
The following tables are made up of (1) all fee paying domestic investment grade
bond portfolios and (2) all fee paying controlled maturity bond portfolios under
Standish's discretionary management. The portfolios have objectives and
strategies substantially similar to Fixed Income Fund II and Controlled Maturity
Fund, respectively.
<TABLE>
<CAPTION>
Standish's Active Domestic Bond Investment Grade Composite Performance Average Annual Cumulative Total Return
Average Annual Total Return For the Periods Ended December 31, 1998 Since Since
The Composite 3 Years 5 years Inception (1/1/90) January 1, 1990
<S> <C> <C> <C> <C>
Size weighted net 6.33% 6.22% 8.44% 107.13%
Size weighted gross 6.98% 6.87% 9.10% 118.77%
Equal weighted net total return 6.14% 6.09% 8.43% 107.28%
Equal weighted gross total return 6.79% 6.74% 9.09% 118.92%
<CAPTION>
The Composite 1990 1991 1992 1993 1994 1995 1996 1997 1998
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Size weighted net total return 9.17% 17.41% 6.04% 12.77% (4.67)% 17.97% 4.14% 8.96% 5.96%
Size weighted gross total return 9.84% 18.12% 6.69% 13.45% (4.07)% 18.67% 4.78% 9.63% 6.61%
Equal weighted net total return 9.29% 17.94% 6.02% 13.79% (4.76)% 17.98% 3.84% 8.88% 5.77%
Equal weighted gross total return 9.95% 18.08% 6.68% 14.02% (4.16)% 18.68% 4.48% 9.54% 6.42%
</TABLE>
<TABLE>
<CAPTION>
Standish's Controlled Maturity Bond Composite Performance Average Annual Cumulative Total Return
Average Annual Total Return For the Periods Ended December 31, 1998 Since Since
The Composite 3 Years 5 years Inception (1/1/85) January 1, 1990
<S> <C> <C> <C> <C>
Size weighted net 5.48% 5.13% N/A 80.46%
Size weighted gross 6.38% 6.03% N/A 94.73%
Equal weighted net total return 5.51% 5.16% 7.79% 83.52%
Equal weighted gross total return 6.40% 6.06% 8.70% 98.02%
<CAPTION>
The Composite 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Size weighted
net total return N/A N/A N/A N/A N/A 8.12% 13.24% 5.91% 8.38% (2.17)% 11.85% 4.38% 6.20% 5.87%
Size weighted
gross total return N/A N/A N/A N/A N/A 9.03% 14.18% 6.81% 9.30% (1.32)% 12.79% 5.27% 7.10% 6.77%
Equal weighted
net total return 15.42% 9.65% 4.04% 6.69% 10.80% 8.16% 13.50% 6.43% 9.19% (2.21)% 11.99% 4.42% 6.26% 5.85%
Equal weighted
gross total return 16.38% 10.57% 4.93% 7.59% 11.74% 9.08% 14.45% 7.34% 10.12% (1.36)% 12.93% 5.31% 7.16% 6.75%
</TABLE>
Performance of the composites is not that of either fund, is not a substitute
for either fund's performance and does not predict a fund's performance results,
which may differ from the composites' results.
Net performance data in each table reflects deduction of the advisory fee and
all other fees and expenses for each fund: .62% for Fixed Income Fund II and
.86% for Controlled Maturity Fund.
Composite performance would be reduced if components held cash positions, had
inflows and outflows of cash and were subject to regulatory requirements to the
same extent as the funds.
Standish Group of Fixed Income Funds 12
<PAGE>
- --------------------------------------------------------------------------------
Fund managers
- --------------------------------------------------------------------------------
Fund Fund managers Positions during past
five years
- --------------------------------------------------------------------------------
Fixed Income Fund Caleb F. Aldrich Vice president and managing
director of Standish
- --------------------------------------------------------------------------------
Fixed Income Caleb F. Aldrich Vice president and managing
Fund II director of Standish
David C. Stuehr Vice president and, since 1995,
director of Standish
- --------------------------------------------------------------------------------
Diversified Income Dolores S. Driscoll Director of SIMCO and vice
Fund president and managing director
of Standish
- --------------------------------------------------------------------------------
Securitized Fund Dolores S. Driscoll Director of SIMCO and vice
president and managing director
of Standish
- --------------------------------------------------------------------------------
Controlled Howard B. Rubin Vice president and director of
Maturity Fund Standish
Barbara J. McKenna Vice president of Standish and,
(Manager since 1998) prior to 1996, portfolio manager
at BayBank
- --------------------------------------------------------------------------------
Short-Term Asset Jennifer Pline Vice president and, since 1998,
Reserve Fund associate director of Standish
Barbara J. McKenna Vice president of Standish and,
(Manager since 1998) prior to 1996, portfolio manager
at BayBank
- --------------------------------------------------------------------------------
Advisory services and fees
SIMCO provides Diversified Income Fund and Standish provides each other 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), and the payments were less than these funds'
contractual advisory fees. These agreements are temporary and may be terminated
or changed at any time.
Annual Advisory Fee Rates
(as a percentage of the fund's average net assets)
<TABLE>
<CAPTION>
Actual advisory fee paid Contractual advisory fee Current expense limitation
<S> <C> <C> <C>
Fixed Income Fund 0.31% 0.40% 0.38%
Fixed Income Fund II 0.18% 0.40% 0.40%
Diversified Income Fund 0.00% 0.50% 0.00%
Securitized Fund 0.14% 0.25% 0.45%
Controlled Maturity Fund 0.00% 0.35% 0.30%
Short-Term Asset Reserve Fund 0.25% 0.25% 0.36%
</TABLE>
Investment adviser
Standish, Ayer & Wood, Inc.
One Financial Center
Boston, Massachusetts 02111-2662
13 Standish Group of Fixed Income Funds
<PAGE>
Investment and Account Information
- --------------------------------------------------------------------------------
How to purchase shares
Minimum initial investment: $100,000
Minimum subsequent investment: $5,000
Minimum investments may be waived by the distributor for investors in omnibus
accounts and clients and employees of Standish and their immediate families.
All orders to purchase shares received in good form by the distributor or its
agent before the close of regular trading on the New York Stock Exchange will be
executed at that day's share price. Orders accepted after that time will be
executed at the next business day's price. All orders must be accompanied by
payment. Each fund reserves the right to reject purchase orders or to stop
offering its shares without notice to shareholders.
Good form means that you have provided the following information with your
request: Name of the fund; account number (if an existing account); dollar
amount or number of shares to be purchased (or exchanged or redeemed); and the
signature of each owner exactly as the account is registered in the case of a
redemption request.
By check
Opening an account
o Send a check to the distributor payable to Standish Funds with the
completed original account application.
Adding to an account
o Send a check to the distributor payable to Standish Funds and a letter of
instruction with the account name and number and effective date of the
request.
By wire
Opening an account
o Send the completed original account application to the distributor.
o Call the distributor to obtain an account number.
o Instruct your bank to wire the purchase amount to Investors Bank & Trust
Company (see below).
Adding to an account
o Call the distributor. Instruct your bank to wire the amount of the
additional investment to Investors Bank & Trust Company (see below).
By fax
Opening an account
o Fax the completed account application to 617-350-0042.
o Mail the original account application to the distributor.
o Follow the instructions for opening an account by wire.
Adding to an account
o Fax a letter of instruction to 617-350-0042 with the account name and
number and effective date of the request.
o Call the distributor. Instruct your bank to wire the amount of the
additional investment to Investors Bank & Trust Company.
Through a financial intermediary
Opening or adding to an account
o Contact your financial intermediary. Financial intermediaries acting on an
investor's behalf are responsible for transmitting orders to the
distributor or its agent by the specified deadline.
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]
Wire instructions:
Investors Bank & Trust Company
Boston, MA
ABA#: 011 001 438
Account #: 79650-4116
Fund name:
Investor account #:
Standish Group of Fixed Income Funds 14
<PAGE>
- --------------------------------------------------------------------------------
How to exchange shares
You may exchange shares of a fund for the same class of shares of any other
Standish fund, if the registration of both accounts is identical. 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
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 and dollar
amount to be exchanged.
o Provide both account numbers.
o Signature guarantees may be required (see below).
By telephone
o If the account has telephone privileges, call the distributor.
o Provide the name of the current fund, the 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 before the close of
regular trading on the New York Stock Exchange will be executed at that day's
share price. Orders received after that time 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.
By mail
o Send a letter of instruction to the distributor signed by each registered
account owner.
o State the name of the fund and number of shares or dollar amount to be
sold.
o Provide the account number.
o Signature guarantees may be required (see below).
By telephone
For check or wire
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.
By fax
o Fax the request to the distributor at 617-350-0042.
o Include your name, the name of the fund and the number of shares or dollar
amount to be sold.
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.
Through a financial intermediary
o Contact your financial intermediary. Financial intermediaries acting on an
investor's behalf are responsible for transmitting orders to the
distributor or its agent by the specified deadline.
15 Standish Group of Fixed Income Funds
<PAGE>
Investment and Account Information
- --------------------------------------------------------------------------------
Transaction and account policies
Accounts with low balances. If an account falls below $50,000 as a result of
redemptions (and not because of performance), the distributor may ask the
investor to increase the size of the account to $50,000 within 30 days. If the
investor does not increase the account to $50,000 the distributor may redeem the
account at net asset value and remit the proceeds to the investor.
In-kind purchases and redemptions. Securities you own 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. 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. If the exchange closes early, the funds accelerate calculation of NAV
and transaction deadlines to that time.
Each fund values the securities in its port-folio 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 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,
except Short-Term Asset Reserve Fund, declare and distribute dividends from net
investment income quarterly. Short-Term Asset Reserve Fund declares dividends
from net investment income daily and pays them monthly. All 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 cost of addressing the Year 2000 issue may adversely affect the
individual securities held by the fund. 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 Funds 16
<PAGE>
Fund Details
- --------------------------------------------------------------------------------
Taxes
- --------------------------------------------------------------------------------
Transactions Tax Status
- --------------------------------------------------------------------------------
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 their shareholders about the
funds' dividends and distributions, which are taxable even if reinvested, and
about the shareholders' redemptions during the previous calendar year. Any
shareholder who does not provide the funds with a correct taxpayer
identification number and required certification may be subject to federal
backup withholding tax.
Shareholders should generally avoid investing in a fund shortly before an
expected taxable dividend or capital gain distribution. Otherwise, a shareholder
may pay taxes on dividends or distributions that are economically equivalent to
a partial return of the shareholder's investment.
Shareholders should consult their tax advisers about their own particular tax
situations.
Master/feeder structure
Fixed Income Fund, Diversified Income Fund and Short-Term Asset Reserve Fund are
"feeder" funds that invest exclusively in 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 Funds
<PAGE>
Financial Highlights
- --------------------------------------------------------------------------------
The financial highlights tables 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).
Fixed Income Fund
<TABLE>
<CAPTION>
Year Ended December 31,
1998(4) 1997 1996(4) 1995 1994
<S> <C> <C> <C> <C> <C>
Net asset value--beginning of period 20.80 $20.53 $20.92 $18.91 $21.25
--------- --------- --------- --------- ---------
Income from investment operations
Net investment income 1.37 $1.46 $1.46 $1.35 $1.25
Net realized and unrealized gain (loss) (0.30) 0.45 (0.37) 2.08 (2.29)
--------- --------- --------- --------- ---------
Total from investment operations 1.07 $1.91 $1.09 $3.43 ($1.04)
--------- --------- --------- --------- ---------
Less distributions declared to shareholders
From net investment income (1.38) ($1.52) ($1.48) ($1.42) ($1.10)
From net realized gain on investments (0.36) (0.12) -- -- (0.04)
Tax return of capital -- -- -- -- (0.16)
--------- --------- --------- --------- ---------
Total distributions declared to shareholders (1.74) ($1.64) ($1.48) ($1.42) ($1.30)
--------- --------- --------- --------- ---------
Net asset value--end of period 20.13 $20.80 $20.53 $20.92 $18.91
========= ========= ========= ========= =========
Total return 5.25% 9.54% 5.48% 18.54% (4.86%)
Ratios (to average daily net assets)/Supplemental data
Net assets at end of period (000 omitted) $3,392,570 $3,288,318 $2,603,628 $2,267,107 $1,642,933
Expenses(1) 0.36% 0.37% 0.38% 0.38% 0.38%
Net investment income 6.54% 6.76% 7.13% 7.80% 7.25%
Portfolio turnover 148%(3) 89%(3) 118%(2) 132% 122%
</TABLE>
-------------------------------
(1) Includes the fund's share of Standish Fixed Income Portfolio's allocated
expenses for the period from May 3, 1996 to December 31, 1996.
(2) Represents the theoretical unaudited portfolio turnover rate of the fund
for the year ended December 31, 1996 had the fund not contributed its
assets to Standish Fixed Income Portfolio on May 3, 1996. The portfolio
turnover rate of the fund for the period from January 1, 1996 to May 2,
1996 was 49%. The portfolio turnover rate of Standish Fixed Income
Portfolio for the period from May 3, 1996 to December 31, 1996 was 69%.
(3) For periods after December 31, 1996, information is for Standish Fixed
Income Portfolio.
(4) Calculated based on average shares outstanding.
Standish Group of Fixed Income Funds 18
<PAGE>
- --------------------------------------------------------------------------------
Fixed Income Fund II
<TABLE>
<CAPTION>
For the period
July 3, 1995
(commencement
of operations) to
Year Ended December 31, December 31,
1998(2) 1997 1996 1995
<S> <C> <C> <C> <C>
Net asset value--beginning of period $19.17 $18.73 $20.52 $20.00
-------- -------- -------- --------
Income from investment operations
Net investment income* 1.23 $1.11 $1.16 $0.53
Net realized and unrealized gain (loss) (0.30) $0.46 (0.52) 0.64
-------- -------- -------- --------
Total from investment operations 0.93 $1.57 $0.64 $1.17
-------- -------- -------- --------
Less distributions declared to shareholders
From net investment income (1.24) ($1.11) ($1.15) ($0.53)
In excess of net investment income -- -- -- (0.12)
From net realized gains on investments (0.26) (0.02) (1.28) --
-------- -------- -------- --------
Total distributions declared to shareholders (1.50) ($1.13) ($2.43) ($0.65)
-------- -------- -------- --------
Net asset value--end of period $18.60 $19.17 $18.73 $20.52
======== ======== ======== ========
Total return 4.91% 8.59% 3.77% 5.79%
Ratios (to average daily net assets)/Supplemental data
Net assets at end of period (000 omitted) $77,909 $74,580 $35,485 $8,046
Expenses* 0.40% 0.40% 0.40% 0.40%(1)
Net investment income* 6.36% 6.58% 6.57% 6.64%(1)
Portfolio turnover 162% 103% 124% 389%
</TABLE>
*The adviser voluntarily waived its investment fee and reimbursed the fund
for a portion of its operating expenses. Had these actions not been taken,
the net investment income per share ratios would have been:
<TABLE>
<S> <C> <C> <C> <C>
Net investment income per share $1.19 $1.06 $1.04 $0.29
Ratios (to average net assets)
Expenses 0.62% 0.74% 1.06% 1.29%(1)
Net investment income 6.14% 6.24% 5.91% 5.75%(1)
</TABLE>
(1) Computed on an annualized basis
(2) Calculated based on average shares outstanding.
19 Standish Group of Fixed Income Funds
<PAGE>
Financial Highlights
- --------------------------------------------------------------------------------
Diversified Income Fund
<TABLE>
<CAPTION>
For the period June 2, 1997
Year ended (commencement
December 31: of operations)
1998(1) to December 31, 1997(1)
<S> <C> <C>
Net asset value--beginning of period $20.51 $20.00
------- -------
Income from operations
Net investment income* 1.70 $0.98
Net realized and unrealized gain on investments (1.52) 0.26
------- -------
Total from investment operations 0.18 $1.24
------- -------
Less distributions declared to shareholders
From net investment income (1.67) (0.63)
From net realized gain on investments -- (0.10)
------- -------
Total distributions (1.67) (0.73)
------- -------
Net asset value--end of period $19.02 $20.51
======= =======
Total return 0.86% 6.20%
Ratios (to average daily net assets)/Supplemental data
Net assets at end of period (000 omitted) $40,457 $27,398
Expenses*,(2) 0.00% 0.00%(3)
Net investment income* 8.40% 8.07%(3)
Portfolio turnover(4) 145% 25%
</TABLE>
-------------------------------
*For the period June 2, 1997 (commencement of operations) to December 31,
1997, and the year ended December 31 1998, the adviser voluntarily agreed not
to impose its advisory fee on the portfolio and reimbursed the fund and the
portfolio for their operating expenses. Had these actions not been taken, the
net investment income per share and the ratios would have been:
<TABLE>
<S> <C> <C>
Net investment income per share $1.51 $0.74
Ratios (to average net assets)
Expenses(2) 0.91% 1.96%(3)
Net investment income 7.49% 6.11%(3)
</TABLE>
(1) Calculated based on average shares outstanding.
(2) Includes the fund's share of Standish Diversified Income Portfolio's
allocated expenses for the period from June 2, 1997 to December 31, 1997.
(3) Computed on an annualized basis.
(4) The portfolio turnover rate listed is for Standish Diversified Income
Portfolio. Because the fund does not make investments directly in
securities, the fund does not have any portfolio turnover activity.
Standish Group of Fixed Income Funds 20
<PAGE>
- --------------------------------------------------------------------------------
Securitized Fund
<TABLE>
<CAPTION>
Year Ended December 31,
1998(1) 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Net asset value--beginning of period $20.10 $19.70 $20.25 $18.61 $20.24
------- ------- ------- ------- -------
Income from investment operations
Net investment income* $1.31 $1.46 $1.43 $1.32 $1.42
Net realized and unrealized gain (loss) on investments 0.18 0.37 (0.57) 1.66 (1.86)
------- ------- ------- ------- -------
Total from investment operations $1.49 $1.83 $0.86 $2.98 ($0.44)
------- ------- ------- ------- -------
Less distributions declared to shareholders
From net investment income (1.31) ($1.43) ($1.41) ($1.34) ($1.19)
In excess of net investment income (0.02) -- -- -- --
------- ------- ------- ------- -------
Total distributions declared to shareholders (1.33) (1.43) ($1.41) ($1.34) ($1.19)
------- ------- ------- ------- -------
Net asset value--end of period $20.26 $20.10 $19.70 $20.25 $18.61
======= ======= ======= ======= =======
Total return 7.53% 9.50% 4.41% 16.32% ($2.16)%
Ratios (to average daily net assets)/Supplemental data
Net assets at end of period (000 omitted) $40,051 $40,125 $50,617 $55,201 $53,779
Expenses* 0.45% 0.45% 0.45% 0.45% 0.45%
Net investment income* 6.39% 6.47% 6.99% 6.78% 6.79%
Portfolio turnover 123% 100% 212% 225% 138%
</TABLE>
-------------------------------
(1) Calculated based on average shares outstanding.
*The adviser did not impose a portion of its advisory fee. If this voluntary
reduction had not been undertaken, the net investment income per share and
the ratios would have been:
<TABLE>
<S> <C> <C> <C> <C> <C>
Net investment income per share $1.29 $1.43 $1.40 $1.22 $1.41
Ratios (to average net assets)
Expenses 0.56% 0.57% 0.51% 0.51% 0.49%
Net investment income 6.28% 6.35% 6.93% 6.72% 6.76%
</TABLE>
21 Standish Group of Fixed Income Funds
<PAGE>
Financial Highlights
- --------------------------------------------------------------------------------
Controlled Maturity Fund
<TABLE>
<CAPTION>
For the period
July 3, 1995
(commencement)
of operations to
Year Ended December 31, December 31,
1998(2) 1997 1996 1995
<S> <C> <C> <C> <C>
Net asset value--beginning of period $19.95 $19.99 $20.24 $20.00
------- ------- ------- -------
Income from investment operations
Net investment income* $1.25 $1.34 $1.27 $0.57
Net realized and unrealized gain (loss) (0.16) (0.04) (0.27) 0.24
------- ------- ------- -------
Total from investment operations $1.09 $1.30 $1.00 $0.81
------- ------- ------- -------
Less distributions declared to shareholders
From net investment income ($1.17) ($1.34) ($1.24) ($0.57)
From realized gain on investments -- -- (0.01) --
------- ------- ------- -------
Total distributions declared to shareholders ($1.17) ($1.34) ($1.25) ($0.57)
------- ------- ------- -------
Net asset value--end of period $19.87 $19.95 $19.99 $20.24
======= ======= ======= =======
Total return 5.58% 6.66% 5.13% 4.20%
Ratios (to average daily net assets)/Supplemental data
Net assets at end of period (000 omitted) $26,579 $13,916 $12,525 $8,868
Expenses* 0.30% 0.37% 0.40% 0.40%(1)
Net investment income* 6.19% 6.60% 6.60% 6.29%(1)
Portfolio turnover 145% 94% 107% 127%
</TABLE>
-------------------------------
*The adviser voluntarily waived its investment advisory fee and reimbursed
the fund for a portion of its operating expenses. Had these actions not been
taken, the net investment income per share and the ratios would have been:
<TABLE>
<S> <C> <C> <C> <C>
Net investment income per share $1.15 $1.18 $1.11 $0.38
Ratios (to average net assets)
Expenses 0.81% 1.28% 1.25% 2.51%(1)
Net investment income 5.68% 5.69% 5.75% 4.18%(1)
</TABLE>
(1) Computed on an annualized basis.
(2) Calculated based on average shares outstanding.
Standish Group of Fixed Income Funds 22
<PAGE>
- --------------------------------------------------------------------------------
Short-Term Asset Reserve Fund
<TABLE>
<CAPTION>
Year ended December 31,
1998(1) 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Net asset value--beginning of period $19.48 $19.50 $19.55 $19.22 $19.79
-------- -------- -------- -------- --------
Income from investment operations
Net investment income $1.13 $1.15 $1.11 $1.13 $1.01
Net realized and unrealized gain (loss) on investments (0.04) (0.02) (0.04) 0.33 (0.57)
-------- -------- -------- -------- --------
Total from investment operations $1.09 $1.13 $1.07 $1.46 $0.44
-------- -------- -------- -------- --------
Less distributions declared to shareholders
From net investment income ($1.13) ($1.15) ($1.12) ($1.12) ($1.01)
In excess of net investment income -- -- -- (0.01) --
-------- -------- -------- -------- --------
Total distributions declared to shareholders ($1.13) ($1.15) ($1.12) ($1.13) ($1.01)
-------- -------- -------- -------- --------
Net asset value--end of period $19.44 $19.48 $19.50 $19.55 $19.22
======== ======== ======== ======== ========
Total return 5.75% 5.94% 5.62% 7.85% 2.27%
Ratios (to average daily net assets)/Supplemental data
Net assets at end of period (000 omitted) $260,004 $245,757 $194,074 $243,500 $277,017
Expenses 0.35% 0.36% 0.35% 0.33% 0.33%
Net investment income 5.81% 5.89% 5.75% 5.95% 5.24%
Portfolio turnover 113%(2) 119% 156% 208% 154%
</TABLE>
-------------------------------
(1) Computed on average shares outstanding.
(2) For periods after December 31, 1997, information is for Standish
Short-Term Asset Reserve Portfolio.
23 Standish Group of Fixed Income Funds
<PAGE>
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 More Information
- --------------------------------------------------------------------------------
For investors who want more information about the Standish group of fixed income
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
800.729.0066
Investment Company Act
file number (811-4813)
98-318 6M 4/99
<PAGE>
April 30, 1999
[LOGO]
STANDISH, AYER & WOOD INVESTMENT TRUST
One Financial Center
Boston, Massachusetts 02111
(800) 729-0066
STATEMENT OF ADDITIONAL INFORMATION
Standish Group of Global Fixed Income Funds
Standish International Fixed Income Fund
Standish International Fixed Income Fund II
Standish Global Fixed Income Fund
Standish Diversified Income Fund
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 April 30, 1999, as amended and/or supplemented
from time to time, of Standish International Fixed Income Fund Institutional
Class (International Fixed Income Fund), Standish International Fixed Income
Fund II (International Fixed Income Fund II), Standish Global Fixed Income Fund
(Global Fixed Income Fund) and Standish Diversified Income Fund (Diversified
Income Fund), 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...........................................2
Investment Restrictions.....................................................28
Calculation of Performance Data.............................................32
Management..................................................................36
Purchase and Redemption of Shares...........................................43
Portfolio Transactions......................................................44
Determination of Net Asset Value............................................45
The Funds and Their Shares..................................................46
The Portfolios and Their Investors..........................................47
Taxation....................................................................48
Additional Information......................................................53
Experts and Financial Statements............................................53
1
<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. Global Fixed Income Fund invests all of its
investible assets in Standish Global Fixed Income Portfolio ("Global Fixed
Income Portfolio"). Diversified Income Fund invests all of its investible assets
in Standish Diversified Income Portfolio ("Diversified 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 and International Fixed Income Fund II, 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 International Management Company, L.P. ("SIMCO" or the
"Adviser") is the investment adviser to the Portfolios and to International
Fixed Income Fund and International Fixed Income Fund II. 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 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 Fitch IBCA, Inc. ("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, A or P-1 by
Moody's or AAA, AA, A, A-1 or Duff-1 by Standard & Poor's, Duff or Fitch).
2
<PAGE>
Securities rated Baa or P-2 by Moody's or BBB, A-2 or Duff-2 by Standard &
Poor's, Duff or Fitch are generally considered medium grade obligations and have
some speculative characteristics. Adverse changes in economic conditions or
other circumstances are more likely to weaken the medium grade issuer's
capability to pay interest and repay principal than is the case for high grade
securities.
Fixed income securities rated Ba and below by Moody's or BB and below by
Standard & Poor's, Duff or Fitch, 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.
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.
3
<PAGE>
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.
International Fixed Income Fund II
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.
Global Fixed Income 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 or, if not rated, judged by SIMCO to
be of equivalent credit quality but will not invest in securities rated lower
than B. 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.
4
<PAGE>
Diversified Income Fund
Additional Investment Information. Under normal market condition, the
Portfolio invests at least 80% of its net assets in income producing securities.
Income producing securities include all types of fixed income securities as well
as tax-exempt securities and warrants. The Portfolio may also invest up to 10%
of its total assets in common stock and engage in short sales.
Country Selection. Although there is no limit on the number of countries
in which issuers of the Portfolio's investments are located, the Portfolio
intends to invest in no fewer than three different countries, including the
United States. The Portfolio limits its investments in securities of issuers
located in any one developed country (excluding the U.S.) to 15% of its total
assets and limits its investments in securities of issuers located in any one
emerging market country to 7% of its total assets.
Under normal market conditions, at least 80% of the Portfolio's total
assets, adjusted to reflect the Portfolio's net currency exposure after giving
effect to currency transactions and positions, are denominated in or hedged
(including cross-hedged) to the U.S. dollar. It is expected that the Portfolio
will employ currency management techniques to seek to manage its foreign
currency exposure within this limit. These techniques include, but are not
limited to, options, futures, options on futures, forward foreign currency
exchange contracts and currency swaps.
Credit Quality. The Portfolio's portfolio average dollar-weighted credit
quality is expected to be Ba according to Moody's or BB according to Standard &
Poor's, Duff or Fitch, but in no event will be lower than B2 according to
Moody's or B according to Standard & Poor's, Duff or Fitch. Up to 65% of the
Portfolio's total assets may be invested in securities rated, at the time of
investment, below investment grade. Although the Portfolio does not generally
invest in securities that are in default, it may from time to time so invest up
to 10% of its total assets, including in defaulted bank loans. Non-investment
grade securities, commonly referred to as "junk bonds," are considered
speculative by the rating agencies and generally carry a higher degree of risk
(greater price volatility and greater risk of loss of principal and interest)
than higher rated securities.
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
the International Fixed Income Fund and International Fixed Income Fund II 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
5
<PAGE>
returned later than expected. This typically results when interest rates have
increased and a fund will suffer from the inability to invest in higher yield
securities.
Specific Risks
The following sections include descriptions of specific risks that are
associated with a fund's purchase of a particular type of security or the
utilization of a specific investment technique.
Corporate Debt Obligations. Each fund may invest in corporate debt
obligations and zero coupon securities issued by financial institutions and
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, 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.
6
<PAGE>
International Fixed, International Fixed II and Global Fixed Income Funds may
each 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. Diversified Income Fund may invest up to 7% of its total
assets 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. None of the
funds 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.
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
7
<PAGE>
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 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
8
<PAGE>
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. However, under normal market
conditions, at least 80% of Diversified Income Portfolio's total assets,
adjusted to reflect Portfolio/s total assets, adjusted to reflect the
Portfolio's net currency exposure after giving effect to currency transactions
and positions, are denominated in or hedged (including cross-hedged to the U.S.
dollar. 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.
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
9
<PAGE>
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. 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.
10
<PAGE>
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.
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.
11
<PAGE>
Below Investment Grade Fixed Income Securities. Diversified Income Fund,
International Fixed Income Fund, International Fixed Income Fund II and Global
Fixed Income Portfolio may invest up to 65%, 10%, 10%, 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 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.
12
<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
(except International Fixed Income Fund II which had not yet commenced
operations), on an average dollar-weighted basis, calculated at the end of each
month, had the following credit quality characteristics:
International Fixed Income Fund
Investments Percentage
- ----------- ----------
U.S. Governmental securities 2.81%
U.S. Government Agency securities
Corporate Bonds: 1.51
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
0.14
Below B ------
100.00%
======
13
<PAGE>
Global Fixed Income Portfolio
Investments Percentage
- ----------- ----------
U.S. Governmental securities 8.85%
U.S. Government Agency securities
Corporate Bonds: 8.12
Aaa or AAA 38.12
Aa or AA 11.40
A 8.94
Baa or BBB 12.85
Ba or BB 5.04
B 6.37
Below B 0.30
------
100.00%
======
Diversified Income Portfolio
Investments Percentage
- ----------- ----------
U.S. Governmental securities 9.55%
U.S. Government Agency securities
Corporate Bonds: 0.79
Aaa or AAA 3.89
Aa or AA 4.53
A 23.65
Baa or BBB 26.61
Ba or BB 27.37
B 3.61
Below B 0.0
------
100.00%
======
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 2 investment companies that are designed to replicate the composition and
performance of a particular 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
14
<PAGE>
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, International Fixed Income Fund and
International Fixed Income Fund II 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.
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
15
<PAGE>
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 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.
16
<PAGE>
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 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.
17
<PAGE>
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.
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.
18
<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. All futures contracts entered into by a fund are traded on U.S. exchanges
or boards of trade that are licensed and regulated by the Commodity Futures
Trading Commission ("CFTC") or on certain foreign exchanges.
The sale of futures contracts creates a firm obligation by a fund, as
seller, to deliver to the buyer the specific type of financial instrument called
for in the contract at a specific future time for a specified price (or, with
respect to index futures and Eurodollar instruments, the net cash amount). The
purchase of futures contracts creates a corresponding obligation by a fund, as
purchaser to purchase a financial instrument at a specific time and price.
Options on futures contracts are similar to options on securities except that an
option on a futures contract gives the purchaser the right in return for the
premium paid to assume a position in a futures contract and obligates the seller
to deliver such position, if the option is exercised.
A fund's use of financial futures and options thereon will in all cases be
consistent with applicable regulatory requirements and in particular the
regulations of the CFTC relating to exclusions from regulation as a commodity
pool operator. Those regulations currently provide that a fund may use commodity
futures and option positions (i) for bona fide hedging purposes without regard
to the percentage of assets committed to margin and option premiums, or (ii) for
other purposes permitted by the CFTC to the extent that the aggregate initial
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
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.
19
<PAGE>
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.
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.
20
<PAGE>
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 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.
21
<PAGE>
Use of Segregated Accounts. Each fund will hold securities or other
instruments whose values are expected to offset its obligations under the
Strategic Transactions. Each fund will cover Strategic Transactions as required
by interpretive positions of the 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.
Global Fixed Income Portfolio, International Fixed Income Fund and International
Fixed Income Fund II may each invest up to 25% of its net assets in securities
purchased on a when-issued or delayed delivery basis. The Diversified Income
Portfolio places no limit on investments in when-issued or delayed delivery
securities. 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 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. Global Fixed Income Portfolio, International Fixed
Income Fund and International Fixed Income Fund II may each invest up to 25% of
its net assets in repurchase agreements. The Diversified Income Portfolio places
no limit on investments 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
22
<PAGE>
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, International Fixed Income Fund and International Fixed Income
Fund II may each invest up to 5%, 10% and 10%, respectively, of its net assets
in forward roll transactions involving mortgage-backed securities. The
Diversified Income Portfolio places no limit on investments in forward roll
transactions. In a forward roll transaction, a fund sells a mortgage-backed
security to a financial institution, such as a bank or broker-dealer, and
simultaneously agrees to repurchase a similar security from the institution at a
later date at an agreed-upon price. The mortgage-backed securities that are
repurchased will bear the same interest rate as those sold, but generally will
be collateralized by different pools of mortgages with different prepayment
histories than those sold. During the period between the sale and repurchase,
the fund will not be entitled to receive interest and principal payments on the
securities sold. Proceeds of the sale will be invested in short-term
instruments, such as repurchase agreements or other short-term securities, and
the income from these investments, together with any additional fee income
received on the sale and the amount gained by repurchasing the securities in the
future at a lower price, will generate income and gain for the fund which is
intended to exceed the yield on the securities sold. Forward roll transactions
involve the risk that the market value of the securities sold by the fund may
decline below the repurchase price of those securities. At the time that a fund
enters into a forward roll transaction, it will place cash or liquid assets in a
segregated account that is marked to market daily having a value equal to the
repurchase price (including accrued interest).
Leverage. The use of forward roll transactions and reverse repurchase
agreements involves leverage. Leverage allows any investment gains made with the
additional monies received (in excess of the costs of the forward roll
transaction or reverse repurchase agreement) to increase the net asset value of
a fund 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
23
<PAGE>
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.
International Fixed Income Fund, International Fixed Income Fund II and
Global Fixed Income Portfolio may each 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. Diversified Income
Portfolio may invest in commercial paper rated P-1 or P-2 by Moody's, A-1 or A-2
by S&P, Duff-1 or Duff-2 by Duff, or in commercial paper that is unrated. 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, International Fixed Income Fund II 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 Diversified
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.
24
<PAGE>
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.
Standish International Fixed Income Fund and Standish International Fixed
Income Fund II.
As a matter of fundamental policy, each of the International Fixed Income
Fund and International Fixed Income Fund II 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. Each Fund may not:
a. Invest in the securities of an issuer for the purpose of exercising
control or management, but it may do so where it is deemed advisable to
protect or enhance the value of an existing investment.
b. Purchase securities of any other investment company except to the extent
permitted by the 1940 Act.
c. Invest more than 15% of its net assets in securities which are illiquid.
25
<PAGE>
d. Purchase additional securities if the fund's borrowings exceed 5% of its
net assets.
Standish Global Fixed Income 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.
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).
26
<PAGE>
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).
Diversified Income Fund and Diversified Income Portfolio
As a matter of fundamental policy, Diversified Income Portfolio
(Diversified Income Fund) may not:
1. Issue senior securities. For purposes of this restriction, borrowing money
in accordance with paragraph 2 below, making loans in accordance with
paragraph 6 below, the issuance of shares of beneficial interest in
multiple classes or series, the deferral of trustees' fees, the purchase
or sale of options, futures contracts, forward commitments and repurchase
agreements entered into in accordance with the Portfolio's (fund's)
investment policies or within the meaning of paragraph 5 below, are not
deemed to be senior securities.
2. Borrow money, except 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.
3. Underwrite the securities of other issuers, except to the extent that, in
connection with the disposition of portfolio securities, the Portfolio
(fund) may be deemed to be an underwriter under the Securities Act of
1933.
4. Purchase or sell real estate except that the Portfolio (fund) may (i)
acquire or lease office space for its own use, (ii) invest in securities
of issuers that invest in real estate or interests therein, (iii) invest
in securities that are secured by real estate or interests therein, (iv)
purchase and sell mortgage-related securities and (v) hold and sell real
estate acquired by the Portfolio (fund) as a result of the ownership of
securities.
5. Purchase or sell commodities or commodity contracts, except the Portfolio
(fund) may purchase and sell options on securities, securities indices and
currency, futures contracts on securities, securities indices and currency
and options on such futures, forward foreign currency exchange contracts,
forward commitments, securities index put or call warrants and repurchase
agreements entered into in accordance with the Portfolio's (fund's)
investment policies.
6. Make loans, except that the Portfolio (fund) (1) may lend portfolio
securities in accordance with the Portfolio's (fund's) investment policies
up to 33 1/3% of the Portfolio's (fund's) total assets taken at market
value, (2) enter into repurchase agreements, and (3) purchase all or a
portion of an issue of debt securities, bank loan participation interests,
bank certificates of deposit, bankers' acceptances, debentures or other
securities, whether or not the purchase is made upon the original issuance
of the securities.
7. With respect to 75% of its total assets, purchase securities of an issuer
(other than the U.S. Government, its agencies, instrumentalities or
authorities or repurchase agreements collateralized by U.S. Government
securities and other investment companies), if: (a) such purchase would
cause more than 5% of the Portfolio's (fund's) total assets taken at
market value to be invested in the securities of such issuer; or (b) such
purchase would at the time result in more than 10% of the outstanding
voting securities of such issuer being held by the Portfolio (fund).
8. Invest more than 25% of its total assets in the securities of one or more
issuers conducting their principal business activities in the same
industry (excluding the U.S. Government or its agencies or
27
<PAGE>
instrumentalities). For the purposes of this restriction, state and
municipal governments and their agencies, authorities and
instrumentalities are not deemed to be industries; telephone companies are
considered to be a separate industry from water, gas or electric
utilities; personal credit finance companies and business credit finance
companies are deemed to be separate industries; and wholly-owned finance
companies are considered to be in the industry of their parents if their
activities are primarily related to financing the activities of their
parents. This restriction does not apply to investments in municipal
securities which have been pre-refunded by the use of obligations of the
U.S. Government or any of its agencies or instrumentalities.
The following restrictions are not fundamental policies and may be changed
by the Trustees of the Portfolio Trust (Trust) without investor approval in
accordance with applicable laws, regulations or regulatory policy. The Portfolio
(fund) may not:
a. Purchase securities on margin (except that the Portfolio (fund) may obtain
such short-term credits as may be necessary for the clearance of purchases
and sales of securities).
b. Invest in the securities of an issuer for the purpose of exercising
control or management, but it may do so where it is deemed advisable to
protect or enhance the value of an existing investment.
c. Purchase the securities of any other investment company except to the
extent permitted by the 1940 Act.
d. Invest more than 15% of its net assets in securities which are illiquid.
e. Purchase additional securities if the Portfolio's (fund's) borrowings
exceed 5% of its net assets.
******
Notwithstanding any fundamental or non-fundamental policy Global Fixed
Income Fund and Diversified Income 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.
28
<PAGE>
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)/CD + 1)^6 - 1]
Where:
A=interest earned during the period; B=net expenses accrued for the
period; C=the average daily number of shares outstanding during the period that
were entitled to receive dividends; D=the maximum offering price per share (net
asset value) on the last day of the period.
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:
Average Annual Total Return
Life of
Fund 1-Year 5-Year 10-Year Fund Yield
- ---- ------ ------ ------- ---- -----
Global Fixed Income Fund(1) 6.98% 8.19% N/A 8.19% 5.65%
International Fixed
Income Fund(2) 8.73% 8.50% N/A 11.06% 4.40%
International Fixed
Income Fund II(3) N/A N/A N/A N/A N/A
Diversified Income Fund(4) 0.86%(4) N/A N/A 4.44% 9.98%
- ---------------------------
(1) Global Fixed Income Fund commenced operations on January 3, 1994.
(2) International Fixed Income Fund commenced operations on January 2, 1991.
(3) International Fixed Income Fund II commenced operations on April 30, 1999.
(4) Diversified Income Fund commenced operation on June 2, 1997.
These performance quotations should not be considered as representative of
any fund's performance for any specified period in the future.
29
<PAGE>
In addition to average annual return quotations, the funds may quote
quarterly and annual performance on a net (with management and administration
fees deducted) and gross basis as follows:
International Fixed Income Fund
Quarter/Year Net Gross
- --------------------------------------------
1Q91 (2.90)% (2.75)%
2Q91 (1.76) (1.48)
3Q91 9.99 10.18
4Q91 9.69 9.84
1991 15.07 15.95
1Q92 (2.43) 2.26
2Q92 9.45 9.59
3Q92 4.30 4.44
4Q92 (2.97) (2.82)
1992 8.07 8.71
1Q93 6.18 6.31
3Q93 5.26 5.40
4Q93 5.06 5.18
1993 23.77 24.38
1Q94 (5.78) (5.66)
2Q94 (4.48) (4.35)
3Q94 (0.95) (0.82)
4Q94 1.84 1.97
1994 (9.22) (8.74)
1Q95 2.59 2.72
2Q95 4.71 4.84
3Q95 4.01 4.16
4Q95 5.74 5.88
1995 18.13 18.75
1Q96 0.73 0.86
2Q96 3.49 3.63
3Q96 5.36 5.49
4Q96 4.95 5.07
30
<PAGE>
1996 15.28 15.85
1Q97 1.46 1.59
2Q97 3.74 3.89
3Q97 3.78 3.91
4Q97 2.40 2.53
1997 11.86 12.44
1Q98 2.55 2.67
2Q98 1.74 1.87
3Q98 2.99 3.11
4Q98 1.19 1.33
1998 8.73 9.28
Global Fixed Income Fund
Quarter/Year Net Gross
- --------------------------------------------
1Q94 (4.80)% (4.64)%
2Q94 (3.56) (3.40)
3Q94 (0.77) (0.05)
4Q94 1.44 1.60
1994 (7.06) (6.46)
1Q95 2.94 3.10
2Q95 5.21 5.36
3Q95 3.80 3.95
4Q95 5.09 5.26
1995 18.13 18.84
1Q96 0.05 0.21
2Q96 2.59 2.75
3Q96 4.97 5.14
4Q96 4.91 5.08
1996 13.03 13.76
1Q97 0.99 1.14
2Q97 3.99 4.14
31
<PAGE>
3Q97 3.79 3.94
4Q97 2.46 2.65
1997 11.68 12.38
1Q98 2.21 2.36
2Q98 1.78 1.91
3Q98 2.34 2.48
4Q98 0.49 0.62
1998 6.98 7.57
Diversified Income Fund
Quarter/Year Net Gross
- --------------------------------------------
3Q97 6.05% 6.05%
4Q97 0.14 0.14
1997 6.20 6.20
1Q98 3.76 3.76
2Q98 (0.38) (0.38)
3Q98 (6.60) (6.60)
4Q98 4.48 4.48
1998 0.86 0.86
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
International Fixed Income Fund and International Fixed Income Fund II may each
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 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. Diversified Income Fund and Diversified
Income Portfolio may also compare their performance to the Lehman Brothers
Aggregate 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.
32
<PAGE>
MANAGEMENT
Trustees and Officers of the Trust and Portfolio Trust
The Trustees and executive officers of the Trust are listed below. The
Trustees of the Portfolio Trust are identical to the Trustees of the Trust. The
officers of the Portfolio Trust are Messrs. Clayson, Ladd, Wood, Hollis, and
Martins, and Mdmes. Banfield, Herrmann, Pester, Kneeland, Lillo and
Rafferty-Maple, 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.
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 Mertens House, Inc.
So. Woodstock, VT 05071
*Edward H. Ladd, 1/3/38 Trustee Chairman of the Board and
c/o Standish, Ayer & Wood, Inc. Managing Director, Standish, Ayer & Wood,
One Financial Center 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
</TABLE>
33
<PAGE>
<TABLE>
<S> <C> <C>
Anne P. Herrmann, 1/26/56 Vice President and Secretary Assistant Vice President and
C/o Standish, Ayer & Wood, Inc. Senior Fund Administration Manager,
One Financial Center Standish, Ayer & Wood, Inc.
Boston, MA 02111
Paul G. Martins, 3/10/56 Vice President and Treasurer Vice President of Finance, Standish, Ayer
C/o Standish, Ayer & Wood, Inc. & Wood, Inc. since October 1996; formerly
One Financial Center Senior Vice President, Treasurer and Chief
Boston, MA 02111 Financial Officer of Liberty Financial
Bank Group
Beverly E. Banfield, 7/6/56 Vice President Vice President, Associate Director and
C/o Standish, Ayer & Wood, Inc. Compliance Officer, Standish, Ayer & Wood,
One Financial Center Inc.
Boston, MA 02111
Denise B. Kneeland, 8/19/51 Vice President Vice President and Manager, Mutual Fund
C/o Standish, Ayer & Wood, Inc. 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 Vice President Assistant Compliance Manager and
C/o Standish, Ayer & Wood, Inc. Compliance Officer, Standish, Ayer & Wood,
One Financial Center Inc. since 1998; formerly Compliance
Boston, MA 02111 Officer, State Street Global Advisors
Rosalind J. Lillo, 2/6/38 Vice President Broker/Dealer Administrator
C/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc. since October
One Financial Center 1995; formerly Compliance Administrator,
Boston, MA 02111 New England Securities Corp.
Deborah Rafferty-Maple, 1/4/69 Vice President Financial Planner and Registered
C/o Standish, Ayer & Wood, Inc. Investment Networks Marketing Manager,
One Financial Center Standish, Ayer & Wood
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:
34
<PAGE>
Aggregate Compensation from the Funds
<TABLE>
<CAPTION>
Name of Trustee Fixed Global Fixed Inter- Inter- Pension or Total Compensation from
Income Income Asset national national Retirement Funds and Portfolio &
Asset Fund** Fixed Fixed Benefits Accrued Other Funds in Complex*
Fund** Income Income as Part of Funds'
Fund Fund II Expenses
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
D. Barr Clayson $0 $0 $0 $0 $0 $0
Samuel C. Fleming $0 $0 $8,923 $1,050 $0 $57,375
Benjamin M. $0 $0 $8,923 $1,050 $0 $57,375
Friedman
John H. Hewitt $0 $0 $9,701 $1,075 $0 $62,375
Edward H. Ladd $0 $0 $0 $0 $0 $0
Caleb Loring, III $0 $0 $8,923 $1,050 $0 $57,375
Richard S. Wood $0 $0 $0 $0 $0 $0
</TABLE>
* As of the date of this SAI there were 23 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 February 5, 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:
Global Fixed Income Fund
Percentage of
Name and Address Outstanding Shares
- ---------------- ------------------
Brown University 17.5%
164 Angell Street
Investment Office - Box C
Providence, RI 02912
MAC & Co. a/c CLSF 14.9%
P.O. Box 3198
Pittsburgh, PA 15230
Amsouth Bank TTEE 9.4%
For Infirm Health Systems, Inc.
P.O. Box 11426
Birmingham, AL 35202
MAC & Co. a/c LNFF 7.9%
P.O. Box 3198
Pittsburgh, PA 15230
Childrens Medical Center Corp. 6.4%
1295 Boylston Street
Suite 300
Boston, MA 02215
35
<PAGE>
International Fixed Income Fund
Percentage of
Name and Address Outstanding Shares
- ---------------- ------------------
Bell Atlantic Master Trust 10.7%
Boston & Co.
P.O. Box 3198
Pittsburgh, PA 15230
Northern Trust as TTE for 7.8%
Lucent Technologies Master
Pension Plan
P.O. Box 92956
Chicago, IL 60675
Diversified Income Fund
Percentage of
Name and Address Outstanding Shares
- ---------------- ------------------
Porter & Co. Allendale Insurance Co. 6.5%*
Allendale Park
P.O. Box 7500
Johnston, RI 02919
Wellesley College 19.5%
Wellesley, MA 02181
Davis Family Foundation 7.5%
c/o Investors Bank & Trust Co.
P.O. Box 1537
Boston, MA 02205
*Because the shareholder beneficially owned more than 25% of the then
outstanding shares of the indicated Fund, the shareholder was considered to
control such fund. As a controlling person, the shareholder may be able to
determine whether a proposal submitted to the shareholders of such fund will be
approved or disapproved.
Investment adviser.
SIMCO serves as investment adviser to the Global Fixed Income Portfolio,
Diversified Income Portfolio and the International Fixed Income Fund and
International Fixed Income Fund II pursuant to written investment advisory
agreements. Prior to the close of business on May 3, 1996, SIMCO managed
directly the assets of the Global Fixed Income Fund pursuant to an investment
advisory agreement. This agreement was terminated by the Global Fixed Income
Fund on such date subsequent to the approval by the Global Fixed Income Fund's
shareholders on March 29, 1996 to implement certain changes in the Global Fixed
Income Fund's investment restrictions which enable the Global Fixed Income Fund
to invest all of its investable assets in the Portfolio. SIMCO is a Delaware
limited partnership which was organized in 1991 and is registered under the
Investment Advisers Act of 1940. The general partner of SIMCO is Standish, One
Financial Center, Boston, MA 02111, which holds a 99.98% partnership interest.
The limited partners, who each hold a 0.01% interest in SIMCO, are: Walter M.
Cabot, Sr., 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 a 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.
36
<PAGE>
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.
Subject to the supervision and direction of the Trustees of the Trust and
Portfolio Trust, the adviser recommends investment decisions and, places orders
to purchase and sell securities for the Portfolios and the International Fixed
Income Fund and International Fixed Income Fund II. 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
Fund percentage of average daily net assets)
Global Fixed Income Portfolio 0.40%
International Fixed Income Fund 0.40%
International Fixed Income Fund II 0.40%
Diversified Income Fund 0.50%
During the last three fiscal years ended December 31, the funds and the
Portfolios paid advisory fees in the following amounts:
Fund 1996 1997 1998
- ------------------------------------------------------------------------------
Global Fixed Income Fund(1) $198,747(2) N/A N/A
Global Fixed Income Portfolio $ 412,216(2) $ 802,027 $1,514.971
Diversified Income Fund(1) N/A N/A N/A
Diversified Income Portfolio N/A $0(3) $0(3)
International Fixed Income Fund $3,234,397 $4,012,641 $5,359,632
International Fixed Income Fund II N/A N/A N/A
(1) The funds do not directly pay advisory fees. Each fund bears its pro rata
allocation of its corresponding Portfolio's expenses, including advisory
fees.
(2) The Global Fixed Income Portfolio commenced operations on May 3, 1996.
(3) The Diversified Income Portfolio commenced operations on June 2, 1997. The
adviser voluntarily agreed not to impose its advisory fee for the period
June 2, 1997 to December 31, 1997 and for the fiscal year ended December
31, 1998 in the amounts of $45,742 and $214,014, respectively.
Pursuant to the investment advisory agreements, the International Fixed
Income Fund, International Fixed Income Fund II 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, International Fixed Income Fund II 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
37
<PAGE>
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,
International Fixed Income Fund II 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, International Fixed Income Fund II 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, International Fixed Income Fund II 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 International Fixed Income Fund II and their 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 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 of 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
38
<PAGE>
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.
PURCHASE AND REDEMPTION OF SHARES
Additional information on purchase and redemption of shares is included in
the prospectus.
In addition to Standish Fund Distributors and other agents of the Trust,
each fund has authorized one or more brokers and dealers to accept on its behalf
orders for the purchase and redemption of fund shares. Under certain conditions,
such authorized brokers and dealers may designate other intermediaries to accept
orders for the purchase and redemption of fund shares. In accordance with a
position taken by the staff of the SEC, such purchase and redemption orders are
considered to have been received by a fund when accepted by the authorized
broker or dealer or, if applicable, the authorized broker's or dealer's
designee. Also in accordance with the position taken by the staff of the SEC,
such purchase and redemption orders will receive the appropriate fund's net
asset value per share next computed after the purchase or redemption order is
accepted by the authorized broker or dealer or, if applicable, the authorized
broker's or dealer's designee.
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 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
39
<PAGE>
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., New York City 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 Global Fixed Income
Fund and Diversified Income 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 Global Fixed Income Fund and Diversified Income 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 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
40
<PAGE>
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: Institutional
Class and Service Class. Shares of the Service Class are offered through another
prospectus and SAI. Each share of International Fixed Income Fund II, Global
Fixed Income Fund and Diversified 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 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, Global Fixed
Income Fund and Diversified Income fund invest all of their investible assets in
other open-end investment companies.
41
<PAGE>
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.
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
42
<PAGE>
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 Diversified
Income Fund and Global Fixed Income Fund invest their assets in Diversified
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. Diversified for purposes of applying
the requirements of the Code regarding qualification as a RIC, Income Fund and
Global Fixed Fund each will be deemed (i) to own its proportionate share of each
of the assets of the corresponding Portfolio and (ii) to be entitled to the
gross income of the corresponding Portfolio attributable to such share.
Each fund will be subject to a 4% non-deductible federal excise tax on
certain amounts not distributed (and not treated as having been distributed) on
a timely basis in accordance with annual minimum distribution requirements. Each
fund intends under normal circumstances to seek to avoid liability for such tax
by satisfying such distribution requirements. Certain distributions made in
order to satisfy the Code's distribution requirements may be declared by the
funds during October, November or December 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.
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.
43
<PAGE>
Limitations imposed by the Code on regulated investment companies like the
funds may restrict the International Fixed Income Fund, the International Fixed
Income Fund II 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, the International Fixed Income Fund II or a
Portfolio may cause the International Fixed Income Fund, International Fixed
Income Fund II or a 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 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.
44
<PAGE>
International Fixed Income Fund, International Fixed Income Fund II and,
taking into account its share of the investments of the corresponding Portfolio,
Global Fixed Income Fund and Diversified 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.
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.
45
<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.
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.
46
<PAGE>
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 PricewaterhouseCoopers L.L.P., independent
accountants, and are incorporated by reference into this SAI. The Portfolios'
financial statements contained in Diversified Income Fund's and Global Fixed
Income Fund's 1998 Annual Reports have also been audited by
PricewaterhouseCoopers, L.L.P.
The financial statements for the year ended December 31, 1998 are
incorporated by reference from the 1998 Annual Reports, which have previously
been sent to shareholders and were filed with the SEC on or about February 26,
1999, 1940 Act File No. 811-04813.
47
<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.
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.
48
<PAGE>
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
- 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
49
<PAGE>
- 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 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+.
50
<PAGE>
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, 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.
51
<PAGE>
[LOGO] STANDISH FUNDS(R)
One Financial Center
Boston, MA 02111-2662
(800) 729-0066
www.standishfunds.com
<PAGE>
April 30, 1999
[LOGO]
STANDISH, AYER & WOOD INVESTMENT TRUST
One Financial Center
Boston, Massachusetts 02111
(800) 729-0066
STATEMENT OF ADDITIONAL INFORMATION
Standish Group Of Fixed Income Funds
Standish Fixed Income Fund
Standish Diversified Income Fund
Standish Fixed Income Fund II
Standish Short-Term Asset Reserve Fund
Standish Controlled Maturity Fund
Standish Securitized Fund
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 April 30, 1999, as amended and/or supplemented
from time to time, of Standish Fixed Income Fund (Fixed Income Fund), Standish
Diversified Income Fund (Diversified Income Fund), Standish Fixed Income Fund II
(Fixed Income Fund II), Standish Short-Term Asset Reserve Fund (Short-Term Asset
Reserve Fund), Standish Controlled Maturity Fund (Controlled Maturity Fund) and
Standish Securitized Fund (Securitized Fund), 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...........................................2
Investment Restrictions.....................................................33
Calculation of Performance Data.............................................42
Management..................................................................46
Purchase and Redemption of Shares...........................................54
Portfolio Transactions......................................................54
Determination of Net Asset Value............................................55
The Funds and Their Shares..................................................56
The Portfolios and Their Investors..........................................58
Taxation....................................................................58
Additional Information......................................................63
Experts and Financial Statements............................................64
1
<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 Fund invests all of its investible
assets in Standish Fixed Income Portfolio ("Fixed Income Portfolio").
Diversified Income Fund invests all of its investible assets in Standish
Diversified Income Portfolio ("Diversified Income Portfolio"). Short-Term Asset
Reserve Fund invests all of its investible assets in Standish Short-Term Asset
Reserve Portfolio ("Short-Term Asset Reserve Portfolio"). These three 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.
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.
Adviser. Standish, Ayer and Wood, Inc. ("Standish") is the investment
adviser to Fixed Income Portfolio and Short-Term Asset Reserve Portfolio and to
Fixed Income Fund II, Controlled Maturity Fund and Securitized Fund. Standish
International Management Company, L.P. ("SIMCO") is the investment adviser to
Diversified Income Portfolio. 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 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 Fitch IBCA, Inc. ("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, A or P-1 by
Moody's or AAA, AA, A, A-1 or Duff-1 by Standard & Poor's, Duff or Fitch).
2
<PAGE>
Securities rated Baa or P-2 by Moody's or BBB, A-2 or Duff-2 by Standard &
Poor's, Duff or Fitch are generally considered medium grade obligations and have
some speculative characteristics. Adverse changes in economic conditions or
other circumstances are more likely to weaken the medium grade issuer's
capability to pay interest and repay principal than is the case for high grade
securities.
Fixed income securities rated Ba and below by Moody's or BB and below by
Standard & Poor's, Duff or Fitch, 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
(10 years for Controlled Maturity Fund) 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.
Under normal market conditions, Fixed Income Fund II will maintain an
option-adjusted duration in the range of plus or minus 15% of the duration of
the Lehman Government/Corporate Index. Duration of an individual portfolio
security is a measure of the security's price sensitivity taking into account
expected cash flow and prepayments under a wide range of interest rate
scenarios. In computing the duration of its portfolio, a fund will have to
estimate the duration of obligations that are subject to prepayment or
redemption by the issuer taking into account the influence of interest rates on
prepayments and coupon flows. Each fund may use various techniques to shorten or
lengthen the option-adjusted duration of its portfolio, including the
acquisition of debt obligations at a premium or discount, and the use of
mortgage swaps and interest rate swaps, caps, floors and collars.
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.
3
<PAGE>
Fixed Income 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 or Fitch, or, if unrated, determined by Standish to be of
comparable credit quality. The average dollar-weighted credit quality of the
Portfolio's portfolio is expected to be Aa according to Moody's or AA according
to Standard & Poor's, Duff or Fitch.
Maturity. Under normal market conditions, the Portfolio's average
dollar-weighted effective portfolio maturity will vary from five to thirteen
years.
Diversified Income Fund
Additional Investment Information. Under normal market conditions, the
Portfolio invests at least 80% of its net assets in income producing securities.
Income producing securities include all types of fixed income securities as well
as tax-exempt securities and warrants. The Portfolio may also invest up to 10%
of its total assets in common stock and engage in short sales.
Country Selection. Although there is no limit on the number of countries
in which issuers of the Portfolio's investments are located, the Portfolio
intends to invest in no fewer than three different countries, including the
United States. The Portfolio limits its investments in securities of issuers
located in any one developed country (excluding the U.S.) to 15% of its total
assets and limits its investments in securities of issuers located in any one
emerging market country to 7% of its total assets.
Under normal market conditions, at least 80% of the Portfolio's total
assets, adjusted to reflect the Portfolio's net currency exposure after giving
effect to currency transactions and positions, are denominated in or hedged
(including cross-hedged) to the U.S. dollar. It is expected that the Portfolio
will employ currency management techniques to seek to manage its foreign
currency exposure within this limit. These techniques include, but are not
limited to, options, futures, options on futures, forward foreign currency
exchange contracts and currency swaps.
Credit Quality. The Portfolio's portfolio average dollar-weighted credit
quality is expected to be Ba according to Moody's or BB according to Standard &
Poor's, Duff or Fitch, but in no event will be lower than B2 according to
Moody's or B according to Standard & Poor's, Duff or Fitch. Up to 65% of the
Portfolio's total assets may be invested in securities rated, at the time of
investment, below investment grade. Although the Portfolio does not generally
invest in securities that are in default, it may from time to time so invest up
to 10% of its total assets, including in defaulted bank loans. Non-investment
grade securities, commonly referred to as "junk bonds", are considered
speculative by the rating agencies and generally carry a higher degree of risk
(greater price volatility and greater risk of loss of principal and interest)
than higher rated securities.
Maturity. Under normal market conditions, the Portfolio's average
dollar-weighted effective portfolio maturity will vary from five to thirteen
years.
Fixed Income Fund II
Additional Investment Information. Under normal market conditions,
substantially all and at least 65% of the fund's total assets are invested in
investment grade fixed income securities.
4
<PAGE>
Credit Quality. The fund invests exclusively in investment grade fixed
income securities. The average dollar-weighted credit quality of the fund's
portfolio is expected to be Aa according to Moody's or AA according to Standard
& Poor's, Duff or Fitch.
Maturity. Under normal market conditions, the fund's average
dollar-weighted effective portfolio maturity will vary from five to thirteen
years.
Short-Term Asset Reserve Fund
Additional Investment Information. The Portfolio invests in a broad range
of investment grade money market instruments and short-term fixed income
securities. The Portfolio may also invest in tax-exempt securities and prime
commercial paper of U.S. and foreign companies, and may enter into reverse
repurchase agreements. The Portfolio limits its investments in preferred stock
to 10% of its total assets. Effective July 1, 1995, Short-Term Asset Reserve
Fund changed its name from Consolidated Standish Short-Term Asset Reserve Fund
to Standish Short-Term Asset Reserve Fund.
Credit Quality. The Portfolio invests primarily in high grade securities,
cash and cash equivalents. The Portfolio may also invest up to 15% of its total
assets in medium grade obligations rated Baa or P-2 by Moody's or BBB, A-2 or
Duff-2 by Standard & Poor's, Duff or Fitch, or, if unrated, determined by
Standish to be of comparable credit quality. The average dollar-weighted credit
quality of the Portfolio's portfolio is expected to be at least Aa according to
Moody's or AA according to Standard & Poor's, Duff or Fitch.
Maturity. All securities held by the Portfolio will have an effective or
remaining maturity of 3.25 years or less from the date of settlement, except
that up to 10% of the Portfolio's total assets may be represented by securities
with effective maturities or redemption dates, put dates or coupon dates of
between 3.25 and five years. The maturity limitation does not apply to U.S.
Treasury notes or bonds with maturities of longer than 3.25 years, which may be
purchased by the Portfolio in conjunction with the sale of note or bond futures
contracts or with certain equivalent options positions which are designed to
hedge the notes or bonds in such a way as to create a synthetic short-term
instrument. The Portfolio's average dollar-weighted effective portfolio maturity
will not exceed 18 months.
Controlled Maturity Fund
Additional Investment Information. Under normal market conditions,
substantially all and at least 65% of the fund's total assets are invested in
investment grade fixed income securities.
Credit Quality. The fund invests exclusively in investment grade fixed
income securities. The average dollar-weighted credit quality of the fund's
portfolio is expected to be Aa according to Moody's or AA according to Standard
& Poor's, Duff or Fitch.
Maturity. Under normal market conditions, the fund's average
dollar-weighted effective portfolio maturity will not exceed five years. The
fund generally invests in securities with final maturities, average lives or
interest rate frequencies of 10 years or less.
Securitized Fund
Additional Investment Information. Under normal market conditions, at
least 65% of the fund's total assets are invested in mortgage-related and
asset-backed securities. Mortgage-related securities include directly placed
mortgages, mortgage-backed securities, collateralized mortgage obligations and
other pass-through securities, and mortgage derivatives. Asset-backed securities
represent participations in, or are secured by and payable from, assets such as
motor vehicle installment sales contracts, installment loan contracts, leases of
various types of real and personal property, receivables from revolving credit
(credit card) agreements and other categories of receivables. In order to
preserve principal and liquidity, up to 35% of the fund's total assets may,
under normal market conditions, be invested in U.S. Treasury and government
agency notes and bonds, certificates of deposit,
5
<PAGE>
money market instruments and repurchase agreements. The fund seeks capital
appreciation when market factors such as declining interest rates indicate that
capital appreciation may be available without significant risk to principal.
Up to 10% of the fund's total assets may be invested in mortgage-related
and other securities of foreign governments or companies denominated in
currencies other than the U.S. dollar. The fund may enter into forward foreign
currency exchange contracts and cross currency forward contracts to seek to
hedge against changes in foreign currency exchange rates. See "Strategic
Transactions" below.
Credit Quality. The fund invests primarily in high grade mortgage-related
and asset-backed securities. The fund may, however, invest up to 15% of its
total assets in securities rated Baa by Moody's or BBB by Standard & Poor's,
Duff or Fitch, or, if unrated, determined by Standish to be of comparable credit
quality. The average dollar-weighted credit quality of the fund's portfolio is
expected to be Aa according to Moody's or AA according to Standard & Poor's,
Duff or Fitch.
Maturity. The fund's average dollar-weighted effective portfolio maturity
will vary depending upon the maturity of its investments. Mortgage-related
securities, when they are issued, have stated maturities of up to 40 years,
depending on the length of the mortgages underlying the securities. In practice,
scheduled and unscheduled early prepayments of principal and interest on the
underlying mortgages will make the effective maturity of the securities shorter.
A security based on a pool of 40 year mortgages may have an average life as
short as two years. The relationship between mortgage repayments and interest
rates may give some high-yielding mortgage-related securities less potential for
return and value than conventional bonds with comparable maturities. The fund
expects that the average life of securities held by it will be from three to
fifteen years.
Description of Securities and Related Risks
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. Fixed Income
Portfolio, Diversified Income Portfolio and Securitized Fund are also subject to
risks associated with direct investments in foreign securities as described
under the "Specific Risks" section.
Interest Rate Risk. When interest rates decline, the market value of fixed
income securities tends to increase. Conversely, when interest rates increase,
the market value of fixed income securities tends to decline. The volatility of
a security's market value will differ depending upon the security's duration,
the issuer and the type of instrument.
Default Risk/Credit Risk. Investments in fixed income securities are
subject to the risk that the issuer of the security could default on its
obligations causing a fund to sustain losses on such investments. A default
could impact both interest and principal payments.
Call Risk and Extension Risk. Fixed income securities may be subject to
both call risk and extension risk. Call risk exists when the issuer may exercise
its right to pay principal on an obligation earlier than scheduled which would
cause cash flows to be returned earlier than expected. This typically results
when interest rates have declined and a fund will suffer from having to reinvest
in lower yielding securities. Extension risk exists when the issuer may exercise
its right to pay principal on an obligation later than scheduled which would
cause cash flows to be returned later than expected. This typically results when
interest rates have increased and a fund will suffer from the inability to
invest in higher yield securities.
6
<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").
Mortgage-Backed Securities. Each fund may invest in privately issued
mortgage-backed securities and mortgage-backed securities issued or guaranteed
by the U.S. Government or any of its agencies, instrumentalities or sponsored
enterprises, including, but not limited to, GNMA, FNMA or FHLMC. Mortgage-backed
securities represent direct or indirect participations in, or are collateralized
by and payable from, mortgage loans secured by real property. Mortgagors can
generally prepay interest or principal on their mortgages whenever they choose.
Therefore, mortgage-backed securities are often subject to more rapid repayment
than their stated maturity date would indicate as a result of principal
prepayments on the underlying loans. This can result in significantly greater
price and yield volatility than is the case with traditional fixed income
securities. During periods of declining interest rates, prepayments can be
expected to accelerate, and thus impair a fund's ability to reinvest the returns
of principal at comparable yields. Conversely, in a rising interest rate
environment, a declining prepayment rate will extend the average life of many
mortgage-backed securities, increase a fund's exposure to rising interest rates
and prevent a fund from taking advantage of such higher yields.
GNMA securities are backed by the full faith and credit of the U.S.
Government, which means that the U.S. Government guarantees that the interest
and principal will be paid when due. FNMA securities and FHLMC securities are
not backed by the full faith and credit of the U.S. Government; however, these
enterprises have the ability to obtain financing from the U.S. Treasury. See the
SAI for additional descriptions of GNMA, FNMA and FHLMC certificates.
Multiple class securities include collateralized mortgage obligations
("CMOs") and Real Estate Mortgage Investment Conduit ("REMIC") pass-through or
participation certificates. CMOs provide an investor with a specified interest
in the cash flow from a pool of underlying mortgages or other mortgage-backed
securities. CMOs are issued in multiple classes, each with a specified fixed or
floating interest rate and a final scheduled distribution date. In most cases,
payments of principal are applied to the CMO classes in the order of their
respective stated maturities, so that no principal payments will be made on a
CMO class until all other classes having an earlier stated maturity date are
paid in full. A REMIC is a CMO that qualifies for special tax treatment under
the Internal Revenue Code of 1986, as amended (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.
7
<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. Short-Term Asset Reserve Portfolio does
not invest in SMBS.
Direct Investment in Mortgage Loans. Securitized Fund may invest directly
in mortgage loans securing commercial and residential real estate. When the fund
invests directly in mortgage loans, the fund, rather than a financial
intermediary, becomes the mortgagee with respect to such mortgage loans. Direct
investments in mortgage loans are available from lending institutions which
group together a number of mortgages for resale (usually from 10 to 50
mortgages) and which act as servicing agents for the purchaser with respect to,
among other things, the receipt of principal and interest payments. The seller
generally does not provide any insurance covering the payment of interest on or
repayment of principal of the mortgages, but such insurance may be purchased by
the mortgagor. Investing directly in mortgage loans may involve certain risks
and characteristics not applicable to investments in other securities. Such
risks include delays and difficulties in recovering and reselling the collateral
securing the mortgage loan during foreclosure proceedings, limitations pursuant
to Federal bankruptcy and state insolvency laws and other state laws enforcing a
personal judgment against a borrower following foreclosure to make up any
deficiency not realized on sale of the collateral, and the application of
Federal and state laws limiting interest rates that may be charged by the lender
and the lender's ability to accelerate the maturity of the mortgage loan.
Unlike mortgage-backed securities which generally represent an interest in
a pool of mortgages, direct investment in a mortgage loan involves pre-payment
and credit risk of an individual issuer and real property, and, consequently,
requires different investment and credit analysis by the Adviser. Direct
investments in mortgage loans are illiquid and subject to Securitized Fund's
policy of not investing more than 15% of its net assets in illiquid investments.
Life of Mortgage-Related Obligations. The average life of mortgage-related
obligations is likely to be substantially less than the stated maturities of the
mortgages in the mortgage pools underlying such securities. Prepayments or
refinancing of principal by mortgagors and mortgage foreclosures will usually
result in the return of the greater part of principal invested long before the
maturity of the mortgages in the pool.
As prepayment rates of individual mortgage pools will vary widely, it is
not possible to predict accurately the average life of a particular issue of
mortgage-related obligations. However, with respect to GNMA Certificates,
statistics published by the FHA are normally used as an indicator of the
expected average life of an issue. The actual life of a particular issue of GNMA
Certificates, however, will depend on the coupon rate of the financing.
GNMA Certificates. The Government National Mortgage Association ("GNMA")
was established in 1968 when the Federal National Mortgage Association ("FNMA")
was separated into two organizations, GNMA and FNMA. GNMA is a wholly-owned
government corporation within the Department of Housing and Urban Development.
GNMA developed the first mortgage-backed pass-through instruments in 1970 for
Farmers Home Administration-FHMA-insured, Federal Housing
Administration-FHA-insured and for Veterans Administration-or VA-guaranteed
mortgages ("government mortgages").
GNMA purchases government mortgages and occasionally conventional
mortgages to support the housing market. GNMA is known primarily, however, for
its role as guarantor of pass-through securities collateralized by government
mortgages. Under the GNMA securities guarantee program, government mortgages
that are pooled must be less than one year old by the date GNMA issues its
commitment. Loans in a single pool must be of the
8
<PAGE>
same type in terms of interest rate and maturity. The minimum size of a pool is
$1 million for single-family mortgages and $500,000 for manufactured housing and
project loans.
Under the GNMA II program, loans with different interest rates can be
included in a single pool and mortgages originated by more than one lender can
be assembled in a pool. In addition, loans made by a single lender can be
packaged in a custom pool (a pool containing loans with specific characteristics
or requirements).
GNMA Guarantee. The National Housing Act authorizes GNMA to guarantee the
timely payment of principal of and interest on securities backed by a pool of
mortgages insured by FHA or FHMA, or guaranteed by VA. The GNMA guarantee is
backed by the full faith and credit of the United States. GNMA is also empowered
to borrow without limitation from the U.S. Treasury if necessary to make any
payments required under its guarantee.
Yield Characteristics of GNMA Certificates. The coupon rate of interest on
GNMA Certificates is lower than the interest rate paid on the VA-guaranteed,
FHMA-insured or FHA-insured mortgages underlying the Certificates, but only by
the amount of the fees paid to GNMA and the issuer. For the most common type of
mortgage pool, containing single-family dwelling mortgages, GNMA receives an
annual fee of 0.06% of the outstanding principal for providing its guarantee,
and the issuer is paid an annual fee of 0.44% for assembling the mortgage pool
and for passing through monthly payments of interest and principal to GNMA
Certificate holders.
The coupon rate by itself, however, does not indicate the yield which will
be earned on the GNMA Certificates for several reasons. First, GNMA Certificates
may be issued at a premium or discount, rather than at par, and, after issuance,
GNMA Certificates may trade in the secondary market at a premium or discount.
Second, interest is paid monthly, rather than semi-annually as with traditional
bonds. Monthly compounding has the effect of raising the effective yield earned
on GNMA Certificates. Finally, the actual yield of each GNMA Certificate is
influenced by the prepayment experience of the mortgage pool underlying the GNMA
Certificate. If mortgagors prepay their mortgages, the principal returned to
GNMA Certificate holders may be reinvested at higher or lower rates.
Market for GNMA Certificates. Since the inception of the GNMA
mortgage-backed securities program in 1970, the amount of GNMA Certificates
outstanding has grown rapidly. The size of the market and the active
participation in the secondary market by securities dealers and many types of
investors make the GNMA Certificates a highly liquid instrument. Prices of GNMA
Certificates are readily available from securities dealers and depend on, among
other things, the level of market rates, the GNMA Certificate's coupon rate and
the prepayment experience of the pools of mortgages backing each GNMA
Certificate.
FHLMC Participation Certificates. The Federal Home Loan Mortgage
Corporation ("FHLMC") was created by the Emergency Home Finance Act of 1970. It
is a private corporation, initially capitalized by the Federal Home Loan Bank
System, charged with supporting the mortgage lending activities of savings and
loan associations by providing an active secondary market for conventional
mortgages. To finance its mortgage purchases, FHLMC issues FHLMC Participation
Certificates and Collateralized Mortgage Obligations ("CMOs").
Participation Certificates represent an undivided interest in a pool of
mortgage loans. FHLMC purchases whole loans or participations on 30-year and
15-year fixed-rate mortgages, adjustable-rate mortgages ("ARMs") and home
improvement loans. Under certain programs, it will also purchase FHA and VA
mortgages.
Loans pooled for FHLMC must have a minimum coupon rate equal to the
Participation Certificate rate specified at delivery, plus a required spread for
the corporation and a minimum servicing fee, generally 0.375% (37.5 basis
points). The maximum coupon rate on loans is 2% (200 basis points) in excess of
the minimum eligible coupon rate for Participation Certificates. FHLMC requires
a minimum commitment of $1 million in mortgages but imposes no maximum amount.
Negotiated deals require a minimum commitment of $10 million. FHLMC guarantees
timely payment of the interest and the ultimate payment of principal of its
Participation Certificates. This guarantee is backed by reserves set aside to
protect against losses due to default. The FHLMC CMO is divided into varying
maturities with prepayment set specifically for holders of the shorter term
securities. The CMO is designed to respond to investor concerns about early
repayment of mortgages.
9
<PAGE>
FHLMC's CMOs are general obligations, and FHLMC will be required to use
its general funds to make principal and interest payments on CMOs if payments
generated by the underlying pool of mortgages are insufficient to pay principal
and interest on the CMO.
A CMO is a cash-flow bond in which mortgage payments from underlying
mortgage pools pay principal and interest to CMO bondholders. The CMO is
structured to address two major shortcomings associated with traditional
pass-through securities: payment frequency and prepayment risk. Traditional
pass-through securities pay interest and amortized principal on a monthly basis
whereas CMOs normally pay principal and interest semi-annually. In addition,
mortgage-backed securities carry the risk that individual mortgagors in the
mortgage pool may exercise their prepayment privileges, leading to irregular
cash flow and uncertain average lives, durations and yields.
A typical CMO structure contains four tranches, which are generally
referred to as classes A, B, C and Z. Each tranche is identified by its coupon
and maturity. The first three classes are usually current interest-bearing bonds
paying interest on a quarterly or semi-annual basis, while the fourth, Class Z,
is an accrual bond. Amortized principal payments and prepayments from the
underlying mortgage collateral redeem principal of the CMO sequentially;
payments from the mortgages first redeem principal on the Class A bonds. When
principal of the Class A bonds has been redeemed, the payments then redeem
principal on the Class B bonds. This pattern of using principal payments to
redeem each bond sequentially continues until the Class C bonds have been
retired. At this point, Class Z bonds begin paying interest and amortized
principal on their accrued value.
The final tranche of a CMO is usually a deferred interest bond, commonly
referred to as the Z bond. This bond accrues interest at its coupon rate but
does not pay this interest until all previous tranches have been fully retired.
While earlier classes remain outstanding, interest accrued on the Z bond is
compounded and added to the outstanding principal. The deferred interest period
ends when all previous tranches are retired, at which point the Z bond pays
periodic interest and principal until it matures. The adviser would purchase a Z
bond for the fund if it expected interest rates to decline.
FNMA Securities. FNMA was created by the National Housing Act of 1938. In
1968, the agency was separated into two organizations, GNMA to support a
secondary market for government mortgages and FNMA to act as a private
corporation supporting the housing market.
FNMA pools may contain fixed-rate conventional loans on one-to-four-family
properties. Seasoned FHA and VA loans, as well as conventional growing equity
mortgages, are eligible for separate pools. FNMA will consider other types of
loans for securities pooling on a negotiated basis. A single pool may include
mortgages with different loan-to-value ratios and interest rates, though rates
may not vary beyond two percentage points.
Privately-Issued Mortgage Loan Pools. Savings associations, commercial
banks and investment bankers issue pass-through securities secured by a pool
of mortgages.
Generally, only conventional mortgages on single-family properties are
included in private issues, though seasoned loans and variable rate mortgages
are sometimes included. Private placements allow purchasers to negotiate terms
of transactions. Maximum amounts for individual loans may exceed the loan limit
set for government agency purchases. Pool size may vary, but the minimum is
usually $20 million for public offerings and $10 million for private placements.
Privately-issued mortgage-related obligations do not carry government or
quasi-government guarantees. Rather, mortgage pool insurance generally is used
to insure against credit losses that may occur in the mortgage pool. Pool
insurance protects against credit losses to the extent of the coverage in force.
Each mortgage, regardless of original loan-to-value ratio, is insured to 100% of
principal, interest and other expenses, to a total aggregate loss limit stated
on the policy. The aggregate loss limit of the policy generally is 5% to 7% of
the original aggregate principal of the mortgages included in the pool.
10
<PAGE>
In addition to the insurance coverage to protect against defaults on the
underlying mortgages, mortgage-backed securities can be protected against the
nonperformance or poor performance of servicers. Performance bonding of
obligations such as those of the servicers under the origination, servicing or
other contractual agreement will protect the value of the pool of insured
mortgages and enhance the marketability.
The rating received by a mortgage security will be a major factor in its
marketability. For public issues, a rating is always required, but it may be
optional for private placements depending on the demands of the marketplace and
investors. Before rating an issue, a rating agency such as Standard & Poor's or
Moody's will consider several factors, including: the creditworthiness of the
issuer; the issuer's track record as an originator and servicer; the type, term
and characteristics of the mortgages, as well as loan-to-value ratio and loan
amounts; the insurer and the level of mortgage insurance and hazard insurance
provided. Where an equity reserve account or letter of credit is offered, the
rating agency will also examine the adequacy of the reserve and the strength of
the issuer of the letter of credit.
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, other than Securitized Fund, may invest
in convertible securities consisting of bonds, notes, debentures and preferred
stocks. Short-Term Asset Reserve Portfolio's investments in preferred stock are
limited to no more than 10% of its total assets. Convertible debt securities and
preferred stock acquired by a fund entitle the fund to exchange such instruments
for common stock of the issuer at a predetermined rate. Convertible securities
are subject both to the credit and interest rate risks associated with debt
obligations and to the stock market risk associated with equity securities.
Below Investment Grade Fixed Income Securities. Fixed Income Portfolio and
Diversified Income Portfolio may invest up to 15% and 65%, 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 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
11
<PAGE>
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 Portfolios' 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 Portfolios 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. Diversified Income Portfolio may be required to
liquidate other portfolio securities in order to enable certain of its interest
holders to satisfy their annual distribution obligations in respect of accrued
interest income on securities which are subsequently written off, even though
Diversified Income Portfolio has not received any cash payments of such
interest.
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 Portfolios' 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 Portfolio's net asset value. A less liquid secondary market
also may make it more difficult for either Portfolio to obtain precise
valuations of the high yield securities in its portfolio.
Proposed 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 Portfolio may have to replace such security
with a lower yielding security, resulting in a decreased return for investors.
In addition, if Diversified Income Portfolio experiences unexpected net
redemptions of its shares, it may be forced to sell its higher rated securities,
resulting in a decline in the overall credit quality of Diversified Income
Portfolio's portfolio and increasing the exposure of Diversified Income
Portfolio to the risks of high yield securities. Diversified Income Portfolio
and Fixed Income Portfolio may also incur additional expenses to the extent that
either 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
12
<PAGE>
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
Portfolio'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, Fixed Income Portfolio's and
Diversified Income Portfolio'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 22.3%
U.S. Government Agency securities 15.8%
Corporate Bonds:
Aaa or AAA 13.7%
Aa or AA 6.0%
A 8.0%
Baa or BBB 20.4%
Ba or BB 8.8%
B 4.4%
Below B 0.6%
-----
100%
=====
Diversified Income Portfolio
Investments Percentage
----------- ----------
U.S. Governmental securities 9.50%
U.S. Government Agency securities .80%
Corporate Bonds:
Aaa or AAA 0.0%
Aa or AA 3.9%
A 4.5%
Baa or BBB 23.5%
13
<PAGE>
Ba or BB 26.5%
B 27.7%
Below B 3.6%
-----
100%
=====
Foreign Securities. Diversified Income Portfolio may invest a significant
portion of its assets, and Fixed Income Portfolio and Securitized Fund may
invest to a limited degree, in securities of foreign governments and companies.
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, political or social instability or
diplomatic developments which could affect investments in those countries.
Investing in Emerging Markets. Although Fixed Income Portfolio and
Diversified Income Portfolio invest 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. Fixed
Income Portfolio 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. Although Diversified Income
Portfolio places no limit on the amount of its assets that may be invested in
emerging markets in the aggregate, Diversified Income Portfolio may only invest
up to 7% of its total assets in issuers located in any one emerging market.
These limitations do not apply to investments denominated or quoted in the euro.
These Portfolios 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 Portfolio'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
14
<PAGE>
structures governing private or foreign investment in private property which may
adversely affect a Portfolio'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 Portfolio'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 Portfolio 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 Portfolio. 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 Portfolio 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 Portfolio 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 Portfolios 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
("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 Portfolio may be
15
<PAGE>
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 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 Portfolio'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 Portfolio 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
16
<PAGE>
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. However, under
normal market conditions, at least 80% of Diversified Income Portfolio's total
assets, adjusted to reflect the Portfolio's net currency exposure after giving
effect to currency transactions and positions, are denominated in or hedged
(including cross-hedged) to the U.S. dollar. 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 Portfolio's securities are denominated
may have a detrimental impact on the Portfolio's net asset value except to the
extent such foreign currency exposure is subject to hedging transactions. Fixed
Income Portfolio and Diversified Income Portfolio 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 Portfolio'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.
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. Fixed Income Portfolio, Diversified Income
Portfolio and Securitized Fund may invest in sovereign debt obligations, which
involve special risks that are not present in corporate debt obligations. The
foreign issuer of the sovereign debt or the foreign governmental authorities
that control the repayment of the debt may be unable or unwilling to repay
principal or interest when due, and a fund may have limited recourse in the
event of a default. During periods of economic uncertainty, the market prices of
sovereign debt, and the fund's net asset value, to the extent it invests in such
securities, may be more volatile than prices of debt obligations of U.S.
issuers. In the past, certain foreign countries have encountered difficulties in
servicing their debt obligations, withheld payments of principal and interest
and declared moratoria on the payment of principal and interest on their
sovereign debt.
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.
17
<PAGE>
Brady Bonds. Fixed Income Portfolio and Diversified Income Portfolio 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. Fixed Income and Diversified Income
Portfolios 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. 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. Short-Term Asset Reserve Portfolio may invest in Eurodollar
Certificates of Deposit ("ECDs"), Eurodollar Time Deposits ("ETDs") and Yankee
Certificates of Deposit ("Yankee CDs"). ECDs are U.S. dollar-denominated
certificates of deposit issued by foreign branches of domestic banks; ETDs are
U.S. dollar-denominated deposits in a foreign branch of a U.S. bank or in a
foreign bank; and Yankee CDs are U.S. dollar-denominated certificates of deposit
issued by a U.S. branch of a foreign bank and held in the U.S. These investments
involve risks that are different from investments in securities issued by U.S.
issuers, including potential unfavorable political and economic developments,
foreign withholding or other taxes, seizure of foreign deposits, currency
controls, interest limitations or other governmental restrictions which might
affect payment of principal or interest.
Warrants. Warrants acquired by Diversified Income Portfolio 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.
Diversified Income Portfolio'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. Diversified Income Portfolio may invest up to 10% of its
total assets in 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 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
18
<PAGE>
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. It is expected that not more than 5% of each fund's net assets,
except for Diversified Income Portfolio, will be at risk as a result of such
investments. Diversified Income Portfolio places no limit on investments in
structured or hybrid notes.
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, Diversified Income
Portfolio and Short-Term Asset Reserve Portfolio may invest up to 10% of their
total assets in tax-exempt securities. Fixed Income II and Controlled Maturity
Funds may invest up to 5% of their net assets in tax-exempt securities. A fund's
distributions of interest earned from these investments will be taxable.
Securitized Fund does not generally invest in tax-exempt securities.
19
<PAGE>
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 (Fixed Income Portfolio, Diversified
Income Portfolio and Securitized Fund only) (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. Fixed Income Portfolio, Diversified Income Portfolio, Fixed
Income Fund II, Short-Term Asset Reserve Portfolio, Controlled Maturity Fund and
Securitized Fund will attempt to limit net loss exposure from Strategic
Transaction entered into for non-hedging purposes to 3%, 3%, 1%, 1%, 1% and 3%
respectively, 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 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 (Fixed
Income Portfolio, Diversified Income Portfolio and Securitized Fund only). The
use of options and futures transactions entails certain
20
<PAGE>
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 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
21
<PAGE>
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 S&P or Moody's or an equivalent
rating from any other nationally recognized statistical rating organization
("NRSRO") or the debt of which is determined to be of equivalent credit quality
by the adviser.
If a fund sells (writes) a call option, the premium that it receives may
serve as a partial hedge, to the extent of the option premium, against a
decrease in the value of the underlying securities or instruments in its
portfolio or will increase the fund's income. The sale (writing) of put options
can also provide income.
The funds, except for Short-Term Asset Reserve Portfolio, 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 (Fixed Income Portfolio, Diversified Income Portfolio and
Securitized Fund only) 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 (Fixed Income Portfolio, Diversified Income Portfolio and Securitized
Fund only) and futures contracts. Short-Term Asset Reserve Portfolio may
purchase and sell call options on securities, including U.S. Treasury and agency
securities and Eurodollar instruments that are traded on U.S. and foreign
securities exchanges and in OTC markets, and on securities indices and futures
contracts. All calls sold by a fund must be covered (i.e., the fund must own the
securities or the futures contract subject to the call) or must meet the asset
segregation requirements described below as long as the call is outstanding. In
addition, each fund may cover a written call option or put option by entering
into an offsetting forward contract and/or by purchasing an offsetting option or
any other option which, by virtue of its exercise price or otherwise, reduces
the fund's net exposure on its written option position. Even though the fund
will receive the option premium to help offset any loss, the fund may incur a
loss if the exercise price is below the market price for the security subject to
the call at the time of exercise. A call sold by a fund also exposes the fund
during the term of the option to possible loss of opportunity to realize
appreciation in the market price of the underlying security or instrument and
may require the fund to hold a security or instrument which it might otherwise
have sold.
A fund may purchase and sell (write) put options on securities including
U.S. Treasury and agency securities, mortgage backed securities, asset backed
securities, foreign sovereign debt (Fixed Income Portfolio,
22
<PAGE>
Diversified Income Portfolio and Securitized Fund only), corporate debt
securities, equity securities (including convertible securities) and Eurodollar
instruments (whether or not it holds the above securities in its portfolio), and
on securities indices, currencies and futures contracts. Short-Term Asset
Reserve Portfolio may purchase and sell put options on securities including U.S.
Treasury and agency securities and Eurodollar instruments (whether or not it
holds the above securities in its portfolio), and on securities indices and
futures contracts. A fund will not sell put options if, as a result, more than
50% of the fund's assets would be required to be segregated to cover its
potential obligations under such put options other than those with respect to
futures and options thereon. In selling put options, there is a risk that a fund
may be required to buy the underlying security at a price above the market
price.
Options on Securities Indices and Other Financial Indices. Each fund may
also purchase and sell (write) call and put options on securities indices and
other financial indices. Options on securities indices and other financial
indices are similar to options on a security or other instrument except that,
rather than settling by physical delivery of the underlying instrument, they
settle by cash settlement. For example, an option on an index gives the holder
the right to receive, upon exercise of the option, an amount of cash if the
closing level of the index upon which the option is based exceeds, in the case
of a call, or is less than, in the case of a put, the exercise price of the
option (except if, in the case of an OTC option, physical delivery is
specified). This amount of cash is equal to the differential between the closing
price of the index and the exercise price of the option, which also may be
multiplied by a formula value. The seller of the option is obligated, in return
for the premium received, to make delivery of this amount upon exercise of the
option. In addition to the methods described above, each fund may cover call
options on a securities index by owning securities whose price changes are
expected to be similar to those of the underlying index, or by having an
absolute and immediate right to acquire such securities without additional cash
consideration (or for additional cash consideration held in a segregated account
by its custodian) upon conversion or exchange of other securities in its
portfolio.
General Characteristics of Futures. Each fund may enter into financial
futures contracts or purchase or sell put and call options on such futures.
Futures are generally bought and sold on the commodities exchanges where they
are listed and involve payment of initial and variation margin as described
below. All futures contracts entered into by a fund are traded on U.S. exchanges
or boards of trade that are licensed and regulated by the Commodity Futures
Trading Commission ("CFTC") or on certain foreign exchanges.
The sale of futures contracts creates a firm obligation by a fund, as
seller, to deliver to the buyer the specific type of financial instrument called
for in the contract at a specific future time for a specified price (or, with
respect to index futures and Eurodollar instruments, the net cash amount). The
purchase of futures contracts creates a corresponding obligation by a fund, as
purchaser to purchase a financial instrument at a specific time and price.
Options on futures contracts are similar to options on securities except that an
option on a futures contract gives the purchaser the right in return for the
premium paid to assume a position in a futures contract and obligates the seller
to deliver such position, if the option is exercised.
A fund's use of financial futures and options thereon will in all cases be
consistent with applicable regulatory requirements and in particular the
regulations of the CFTC relating to exclusions from regulation as a commodity
pool operator. Those regulations currently provide that a fund may use commodity
futures and option positions (i) for bona fide hedging purposes without regard
to the percentage of assets committed to margin and option premiums, or (ii) for
other purposes permitted by the CFTC to the extent that the aggregate initial
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
23
<PAGE>
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. Fixed Income Portfolio, Diversified Income
Portfolio and Securitized Fund may engage in currency transactions with
Counterparties to seek to hedge the value of portfolio holdings denominated in
particular currencies against fluctuations in relative value or to enhance
potential gain. Currency transactions include currency contracts, exchange
listed currency futures, exchange listed and OTC options on currencies, and
currency swaps. A forward currency contract involves a privately negotiated
obligation to purchase or sell (with delivery generally required) a specific
currency at a future date, which may be any fixed number of days from the date
of the contract agreed upon by the parties, at a price set at the time of the
contract. A currency swap is an agreement to exchange cash flows based on the
notional (agreed upon) difference among two or more currencies and operates
similarly to an interest rate swap, which is described below. Fixed Income
Portfolio, Diversified Income Portfolio and Securitized 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 S&P or Moody's,
respectively, or that have an equivalent rating from a NRSRO or (except for OTC
currency options) are determined to be of equivalent credit quality by the
adviser.
Fixed Income Portfolio, Diversified Income Portfolio and Securitized
Fund's transactions in forward currency contracts and other currency
transactions such as futures, options, options on futures and swaps will
generally be limited to hedging involving either specific transactions or
portfolio positions. See "Strategic Transactions." Transaction hedging is
entering into a currency transaction with respect to specific assets or
liabilities of a Portfolio or a fund, which will generally arise in connection
with the purchase or sale of its portfolio securities or the receipt of income
therefrom. Position hedging is entering into a currency transaction with respect
to portfolio security positions denominated or generally quoted in that
currency.
Each of Fixed Income Portfolio, Diversified Income Portfolio and
Securitized Fund will not enter into a transaction to hedge currency exposure to
an extent greater, after netting all transactions intended wholly or partially
to offset other transactions, than the aggregate market value (at the time of
entering into the transaction) of the securities held in its portfolio that are
denominated or generally quoted in or currently convertible into such currency,
other than with respect to non-hedging transactions or proxy hedging as
described below.
Fixed Income Portfolio, Diversified Income Portfolio and Securitized Fund
may also cross-hedge currencies by entering into transactions to purchase or
sell one or more currencies that are expected to decline in value in relation to
other currencies to which Fixed Income Portfolio, Diversified Income Portfolio
or Securitized Fund has or in which the Portfolio or Securitized Fund expects to
have portfolio exposure. For example, a Portfolio may hold a South Korean
government bond and the adviser may believe that the Korean won will deteriorate
against the Japanese yen. The Portfolio 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
Portfolio 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, Fixed Income
Portfolio, Diversified Income Portfolio and Securitized Fund may also engage in
proxy hedging. Proxy hedging is often used when the currency to which a fund's
portfolio is exposed is difficult to hedge or to hedge against the U.S. dollar.
Proxy hedging entails entering into a forward contract to sell a currency whose
changes in value are generally considered to be linked to a currency or
currencies in which certain of a fund's portfolio securities are or are expected
to be denominated, and to buy U.S. dollars. The amount of the contract would not
exceed the value of the portfolio securities denominated in linked currencies.
For example, if the adviser considers that the 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 Fixed Income
Portfolio, Diversified Income Portfolio or Securitized Fund if the currency
being hedged fluctuates in value to a degree or in a direction that is not
anticipated. Further, there is the risk that the perceived linkage between
various currencies may
24
<PAGE>
not be present or may not be present during the particular time that Fixed
Income Portfolio, Diversified Income Portfolio or Securitized Fund is engaging
in proxy hedging. If Fixed Income Portfolio, Diversified Income Portfolio or
Securitized Fund enters into a currency hedging transaction, it will comply with
the asset segregation requirements described below.
Risks of Currency Transactions. Currency transactions are subject to risks
different from those of other portfolio transactions. Because currency control
is of great importance to the 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 Fixed Income Portfolio, Diversified Income Portfolio and
Securitized Fund if they are unable to deliver or receive currency or funds in
settlement of obligations and could also cause hedges they have entered into to
be rendered useless, resulting in full currency exposure as well as incurring
transaction costs. Buyers and sellers of currency futures are subject to the
same risks that apply to the use of futures generally. Further, settlement of a
currency futures contract for the purchase of most currencies must occur at a
bank based in the issuing nation. Trading options on currency futures is
relatively new, and the ability to establish and close out positions on such
options is subject to the maintenance of a liquid market which may not always be
available. Currency exchange rates may fluctuate based on factors extrinsic to
that country's economy.
Combined Transactions. Each fund may enter into multiple transactions,
including multiple options transactions, multiple futures transactions, multiple
currency transactions including forward currency contracts (Fixed Income
Portfolio, Diversified Income Portfolio and Securitized Fund only) and multiple
interest rate transactions, structured notes and any combination of futures,
options, currency (Fixed Income Portfolio, Diversified Income Portfolio and
Securitized Fund only) and interest rate transactions ("component
transactions"), instead of a single Strategic Transaction, as part of a single
or combined strategy when, in the opinion of the adviser, it is in the best
interests of the funds to do so. A combined transaction will usually contain
elements of risk that are present in each of its component transactions.
Although combined transactions are normally entered into based on the adviser's
judgment that the combined strategies will reduce risk or otherwise more
effectively achieve the desired portfolio management goal, it is possible that
the combination will instead increase such risks or hinder achievement of the
portfolio management objective.
Swaps, Caps, Floors and Collars. Among the Strategic Transactions into
which the funds may enter are interest rate, currency (Fixed Income Portfolio,
Diversified Income Portfolio and Securitized Fund only) and index swaps and the
purchase or sale of related caps, floors and collars. The funds expect to enter
into these transactions primarily for hedging purposes, including, but not
limited to, preserving a return or spread on a particular investment or portion
of a fund's portfolio, protecting against currency fluctuations (the Fixed
Income Portfolio, Diversified Income Portfolio and Securitized Fund only), as a
duration management technique or protecting against an increase in the price of
securities a fund anticipates purchasing at a later date. Swaps, caps, floors
and collars may also be used to enhance potential gain in circumstances where
hedging is not involved although, as described above, each fund will attempt to
limit its net loss exposure resulting from swaps, caps, floors and collars and
other Strategic Transactions entered into for such purposes. Fixed Income
Portfolio, Diversified Income Portfolio, Fixed Income Fund II, Short-Term Asset
Reserve Portfolio, Controlled Maturity Fund and Securitized Fund will attempt to
limit net loss exposure from Strategic Transactions entered into for non-hedging
purposes to not more than 3%, 3%, 1%, 1%, 1% and 3% respectively, of net assets.
A fund will not sell interest rate caps or floors where it does not own
securities or other instruments providing the income stream the fund may be
obligated to pay. Interest rate swaps involve the exchange by the fund with
another party of their respective commitments to pay 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
25
<PAGE>
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 S&P or Moody's or has an equivalent
rating from an NRSRO or the Counterparty issues debt that is determined to be of
equivalent credit quality by the adviser. If there is a default by the
Counterparty, the fund may have contractual remedies pursuant to the agreements
related to the transaction. The swap market has grown substantially in recent
years with a large number of banks and investment banking firms acting both as
principals and as agents utilizing standardized swap documentation. As a result,
the swap market has become relatively liquid. Caps, floors and collars are more
recent innovations for which standardized documentation has not yet been fully
developed. Swaps, caps, floors and collars are considered illiquid for purposes
of a fund's policy regarding illiquid securities, unless it is determined, based
upon continuing review of the trading markets for the specific security, that
such security is liquid. The Boards of Trustees of the Portfolio Trust and the
Trust have adopted guidelines and delegated to the adviser the daily function of
determining and monitoring the liquidity of swaps, caps, floors and collars. The
Boards of Trustees, however, retain oversight focusing on factors such as
valuation, liquidity and availability of information and 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. Fixed Income
Portfolio, Diversified Income Portfolio and Securitized Fund may use strategic
transactions to seek to hedge against currency exchange rate risks. When
conducted outside the United States, Strategic Transactions may not be regulated
as rigorously as in the United States, may not involve a clearing mechanism and
related guarantees, and are subject to the risk of governmental actions
affecting trading in, or the prices of, foreign securities, currencies and other
instruments. The value of such positions also could be adversely affected by:
(i) lesser availability than in the United States of data on which to make
trading decisions, (ii) delays in Fixed Income Portfolio, Diversified Income
Portfolio and Securitized Fund's ability to act upon economic events occurring
in foreign markets during non-business hours in the United States, (iii) the
imposition of different exercise and settlement terms and procedures and margin
requirements than in the United States, (iv) lower trading volume and liquidity,
and (v) other complex foreign political, legal and economic factors. At the same
time, Strategic Transactions may offer advantages such as trading in instruments
that are not currently traded in the United States or arbitrage possibilities
not available in the United States.
Use of Segregated Accounts. Each fund will hold securities or other
instruments whose values are expected to offset its obligations under the
Strategic Transactions. Each fund will cover Strategic Transactions as required
by interpretive positions of the SEC. A fund will not enter into Strategic
Transactions that expose the fund to an obligation to another party unless it
owns either (i) an offsetting position in securities or other options, futures
contracts or other instruments or (ii) cash, receivables or liquid securities
with a value sufficient to cover its potential obligations. A fund may have to
comply with any applicable regulatory requirements for Strategic Transactions,
and if required, will set aside cash and other 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, Fixed Income II and Controlled Maturity Fund may invest
up to 15% of their net assets in securities purchased on a when-issued or
delayed delivery basis. Short-Term Asset Reserve Portfolio may commit up to 10%
of its net assets to purchase such securities. Securitized Fund may invest up to
25% of its net assets in securities purchased on a
26
<PAGE>
when-issued basis, forward rolls and forward commitments. Diversified Income
Portfolio places no limit on investments in when-issued and delayed delivery
securities. 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. Short-Term Asset Reserve Fund may also, with respect to up to 25% of
its net assets, enter into contracts to purchase securities for a fixed price at
a future date beyond customary settlement time.
Unless a fund has entered into an offsetting agreement to sell the
securities purchased on a when-issued or forward commitment basis, the fund will
segregate, on its records or with its 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, Fixed Income Fund II,
Short-Term Asset Reserve Portfolio, Controlled Maturity Fund and Securitized
Fund may invest up to 5%, 15%, 25%, 25% and 15%, respectively, of net assets in
repurchase agreements. Diversified Income Portfolio places no limit on
investments 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.
Reverse Repurchase Agreements. Short-Term Asset Reserve Portfolio may
enter into reverse repurchase agreements with respect to 15% of its total
assets. In a reverse repurchase agreement the Portfolio sells securities and
agrees to repurchase them at a mutually agreed upon date and price. At the time
the Portfolio enters into a reverse repurchase agreement, it will establish a
segregated account containing cash or liquid assets having a value not less than
the repurchase price (including accrued interest) that is marked to market
daily. Reverse repurchase agreements involve the risks that the market value of
the securities which the Portfolio is obligated to repurchase may decline below
the repurchase price or that the counterparty may default on its obligation to
resell the securities. The staff of the Securities and Exchange Commission
("SEC") considers reverse repurchase agreements to be borrowings by the
Portfolio under the Investment Company Act of 1940 ("1940 Act"). The Portfolio
intends to
27
<PAGE>
enter into reverse repurchase agreements to provide cash to satisfy redemption
requests and avoid liquidating securities during unfavorable market conditions.
Forward Roll Transactions. To seek to enhance current income, Fixed Income
Portfolio, Fixed Income Fund II, Short-Term Asset Reserve Portfolio and
Controlled Maturity Fund may each invest up to 10% of its net assets in forward
roll transactions involving mortgage- backed securities. Securitized Fund may
invest up to 25% of its net assets, collectively, in forward roll transaction,
when-issued securities and forward commitments. Diversified Income Portfolio
places no limit on investments in forward roll transactions. In a forward roll
transaction, a fund sells a mortgage-backed security to a financial institution,
such as a bank or broker-dealer, and simultaneously agrees to repurchase a
similar security from the institution at a later date at an agreed-upon price.
The mortgage-backed securities that are repurchased will bear the same interest
rate as those sold, but generally will be collateralized by different pools of
mortgages with different prepayment histories than those sold. During the period
between the sale and repurchase, the fund will not be entitled to receive
interest and principal payments on the securities sold. Proceeds of the sale
will be invested in short-term instruments, such as repurchase agreements or
other short-term securities, and the income from these investments, together
with any additional fee income received on the sale and the amount gained by
repurchasing the securities in the future at a lower price, will generate income
and gain for the fund which is intended to exceed the yield on the securities
sold. Forward roll transactions involve the risk that the market value of the
securities sold by the fund may decline below the repurchase price of those
securities. At the time that a fund enters into a forward roll transaction, it
will place cash or liquid assets in a segregated account that is marked to
market daily having a value equal to the repurchase price (including accrued
interest).
Leverage. The use of forward roll transactions and reverse repurchase
agreements involves leverage. Leverage allows any investment gains made with the
additional monies received (in excess of the costs of the forward roll
transaction or reverse repurchase agreement) to increase the net asset value of
a fund 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. Fixed Income Portfolio, Diversified Income Portfolio and
Securitized Fund may engage in short sales and short sales against the box. In a
short sale, a fund sells a security it does not own in anticipation of a decline
in the market value of that security. In a short sale against the box, a fund
either owns or has the right to obtain at no extra cost the security sold short.
The broker holds the proceeds of the short sale until the settlement date, at
which time the fund delivers the security (or an identical security) to cover
the short position. The fund receives the net proceeds from the short sale. When
a fund enters into a short sale other than against the box, the fund must first
borrow the security to make delivery to the buyer and must 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 net assets for Fixed Income Portfolio
and Securitized Fund and 10% of the value of total assets for Diversified Income
Portfolio.
Restricted and Illiquid Securities. Each fund may invest up to 15% of its
net assets in illiquid securities, except Short-Term Asset Reserve Portfolio,
which is limited to 10% of its net assets. Illiquid securities are those that
are not readily marketable, repurchase agreements maturing in more than seven
days, time deposits with a notice or demand period of more than seven days,
certain SMBS, swap transactions, certain 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 daily function of determining and monitoring the liquidity of
portfolio securities, including restricted and illiquid securities. The Boards
of Trustees, however, retain oversight and are ultimately responsible for such
determinations. The purchase
28
<PAGE>
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 (except Fixed Income Fund II and
Controlled Maturity Fund) 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.
Diversified Income Portfolio may invest in commercial paper rated "P-1" or
"P-2" by Moody's, "A-1" or "A-2" by S&P, Duff-1 or Duff-2 by Duff & Phelps
("Duff"), or in commercial paper that is unrated. Short-Term Asset Reserve
Portfolio may also invest in commercial paper rated A-2 by Moody's or P-2 or
Duff-2 by Standard & Poor's, Duff or Fitch. Investments in commercial paper by
Fixed Income Portfolio, Fixed Income Fund II and Securitized Fund will be rated
P-1 by Moody's or A-1 by S&P 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.
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. 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 (except for Fixed Income II and
Controlled Maturity Funds) and concentration are fundamental and may not be
changed without shareholder approval.
29
<PAGE>
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.
Standish Fixed Income Fund and Portfolio
As a matter of fundamental policy, Fixed Income Portfolio (Fixed Income
Fund) may not:
1. Invest, with respect to at least 75% of its total assets, more than 5% in
the securities of any one issuer (other than the U.S. Government, its
agencies or instrumentalities) or acquire more than 10% of the outstanding
voting securities of any issuer.
2. Issue senior securities, borrow money or securities or pledge or mortgage
its assets, except that the Portfolio (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:
30
<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 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.)
Notwithstanding any fundamental or non-fundamental policy, the fund may
invest all of its assets (other than assets which are not "investment
securities" (as defined in the 1940 Act) or are excepted by the SEC) in an open
end management investment company with substantially the same investment
objective as the fund.
Diversified Income Fund and Portfolio
As a matter of fundamental policy, Diversified Income Portfolio
(Diversified Income Fund) may not:
1. Issue senior securities. For purposes of this restriction, borrowing money
in accordance with paragraph 2 below, making loans in accordance with
paragraph 6 below, the issuance of shares of beneficial interest in
multiple classes or series, the deferral of trustees' fees, the purchase
or sale of options, futures contracts, forward commitments and repurchase
agreements entered into in accordance with the Portfolio's (fund's)
investment policies or within the meaning of paragraph 5 below, are not
deemed to be senior securities.
2. Borrow money, except 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.
3. Underwrite the securities of other issuers, except to the extent that, in
connection with the disposition of portfolio securities, the Portfolio
(fund) may be deemed to be an underwriter under the Securities Act of
1933.
4. Purchase or sell real estate except that the Portfolio (fund) may (i)
acquire or lease office space for its own use, (ii) invest in securities
of issuers that invest in real estate or interests therein, (iii) invest
in securities that are secured by real estate or interests therein, (iv)
purchase and sell mortgage-related securities and (v) hold and sell real
estate acquired by the Portfolio (fund) as a result of the ownership of
securities.
5. Purchase or sell commodities or commodity contracts, except the Portfolio
(fund) may purchase and sell options on securities, securities indices and
currency, futures contracts on securities, securities indices and currency
and options on such futures, forward foreign currency exchange contracts,
forward commitments, securities index put or call warrants and repurchase
agreements entered into in accordance with the Portfolio's (fund's)
investment policies.
6. Make loans, except that the Portfolio (fund) (1) may lend portfolio
securities in accordance with the Portfolio's (fund's) investment policies
up to 33 1/3% of the Portfolio's (fund's) total assets taken at market
value, (2) enter into repurchase agreements, and (3) purchase all or a
portion of an issue of debt
31
<PAGE>
securities, bank loan participation interests, bank certificates of
deposit, bankers' acceptances, debentures or other securities, whether or
not the purchase is made upon the original issuance of the securities.
7. With respect to 75% of its total assets, purchase securities of an issuer
(other than the U.S. Government, its agencies, instrumentalities or
authorities or repurchase agreements collateralized by U.S. Government
securities and other investment companies), if: (a) such purchase would
cause more than 5% of the Portfolio's (fund's) total assets taken at
market value to be invested in the securities of such issuer; or (b) such
purchase would at the time result in more than 10% of the outstanding
voting securities of such issuer being held by the Portfolio (fund).
8. Invest more than 25% of its total assets in the securities of one or more
issuers conducting their principal business activities in the same
industry (excluding the U.S. Government or its agencies or
instrumentalities). For the purposes of this restriction, state and
municipal governments and their agencies, authorities and
instrumentalities are not deemed to be industries; telephone companies are
considered to be a separate industry from water, gas or electric
utilities; personal credit finance companies and business credit finance
companies are deemed to be separate industries; and wholly-owned finance
companies are considered to be in the industry of their parents if their
activities are primarily related to financing the activities of their
parents. This restriction does not apply to investments in municipal
securities which have been pre-refunded by the use of obligations of the
U.S. Government or any of its agencies or instrumentalities.
The following restrictions are not fundamental policies and may be changed
by the Trustees of the Portfolio Trust (Trust) without investor approval in
accordance with applicable laws, regulations or regulatory policy. The Portfolio
(fund) may not:
a. Purchase securities on margin (except that the Portfolio (fund) may obtain
such short-term credits as may be necessary for the clearance of purchases
and sales of securities).
b. Invest in the securities of an issuer for the purpose of exercising
control or management, but it may do so where it is deemed advisable to
protect or enhance the value of an existing investment.
c. Purchase the securities of any other investment company except to the
extent permitted by the 1940 Act.
d. Invest more than 15% of its net assets in securities which are illiquid.
e. Purchase additional securities if the Portfolio's (fund's) borrowings
exceed 5% of its net assets.
Notwithstanding any fundamental or non-fundamental policy, the fund may
invest all of its assets (other than assets which are not "investment
securities" (as defined in the 1940 Act) or are excepted by the SEC) in an open
end investment company with substantially the same investment objective as the
fund.
Standish Fixed Income Fund II
As a matter of fundamental policy, Fixed Income Fund II may not:
1. Invest more than 25% of the current value of its total assets in any
single industry, provided that this restriction shall not apply to U.S.
Government securities or mortgage-backed securities issued or guaranteed
as to principal or interest by the U.S. Government, its agencies or
instrumentalities.
2. Issue senior securities, except as permitted by paragraphs 3, 7 and 8
below. For purposes of this restriction, the issuance of shares of
beneficial interest in multiple classes or series, the deferral of
trustees' fees, the purchase or sale of options, futures contracts,
forward commitments and repurchase agreements entered into in accordance
with the fund's investment policies or within the meaning of paragraph 7
below, are not deemed to be senior securities.
32
<PAGE>
3. Borrow money, except (i) from banks for temporary or short-term purposes
or for the clearance of transactions in amounts not to exceed 33 1/3% of
the value of the fund's total assets (including the amount borrowed) taken
at market value, (ii) in connection with the redemption of fund shares or
to finance failed settlements of portfolio trades without immediately
liquidating portfolio securities or other assets; (iii) in order to
fulfill commitments or plans to purchase additional securities pending the
anticipated sale of other portfolio securities or assets and (iv) the fund
may enter into reverse repurchase agreements and forward roll
transactions. For purposes of this investment restriction, investments in
short sales, futures contracts, options on futures contracts, securities
or indices and forward commitments shall not constitute borrowing.
4. Underwrite the securities of other issuers, except to the extent that, in
connection with the disposition of portfolio securities, the fund may be
deemed to be an underwriter under the Securities Act of 1933.
5. Purchase or sell real estate except that the fund may (i) acquire or lease
office space for its own use, (ii) invest in securities of issuers that
invest in real estate or interests therein, (iii) invest in securities
that are secured by real estate or interests therein, (iv) purchase and
sell mortgage-related securities and (v) hold and sell real estate
acquired by the fund as a result of the ownership of securities.
6. Purchase securities on margin (except that the fund may obtain such
short-term credits as may be necessary for the clearance of purchases and
sales of securities).
7. Purchase or sell commodities or commodity contracts, except the fund may
purchase and sell options on securities, securities indices and currency,
futures contracts on securities, securities indices and currency and
options on such futures, forward foreign currency exchange contracts,
forward commitments, securities index put or call warrants and repurchase
agreements entered into in accordance with the fund's investment policies.
8. Make loans, except that the fund (1) may lend portfolio securities in
accordance with the fund's investment policies up to 33 1/3% of the fund's
total assets taken at market value, (2) enter into repurchase agreements,
and (3) purchase all or a portion of an issue of debt securities, bank
loan participation interests, bank certificates of deposit, bankers'
acceptances, debentures or other securities, whether or not the purchase
is made upon the original issuance of the securities.
For purposes of the fundamental investment restriction (1) regarding
industry concentration, the adviser generally classifies issuers by industry in
accordance with classifications set forth in the Directory of Companies Filing
Annual Reports With The Securities and Exchange Commission. In the absence of
such classification or if the adviser determines in good faith based on its own
information that the economic characteristics affecting a particular issuer make
it more appropriately considered to be engaged in a different industry, the
adviser may classify an issuer according to its own sources. For instance,
personal credit finance companies and business credit finance companies are
deemed to be separate industries and wholly-owned finance companies are
considered to be in the industry of their parents if their activities are
primarily related to financing the activities of their parents.
The following restrictions are not fundamental policies and may be changed
by the Trustees without shareholder approval, in accordance with applicable
laws, regulations or regulatory policy. The fund may not:
A. 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.
33
<PAGE>
Short-Term Asset Reserve Fund and Portfolio
As a matter of fundamental policy, Short-Term Asset Reserve Portfolio
(Short-Term Asset Reserve Fund) may not:
1. Issue senior securities. For purposes of this restriction, borrowing money
in accordance with paragraph 2 below, making loans in accordance with
paragraph 6 below, the issuance of shares of beneficial interest in
multiple classes or series, the deferral of trustees' fees, the purchase
or sale of options, futures contracts, forward commitments and repurchase
agreements entered into in accordance with the Portfolio's (fund's)
investment policies or within the meaning of paragraph 5 below, are not
deemed to be senior securities.
2. Borrow money, except (i) in amounts not to exceed 33 1/3% of the value of
the Portfolio's (fund's) total assets (including the amount borrowed)
taken at market value from banks or through reverse repurchase agreements
or forward roll transactions, (ii) up to an additional 5% of its total
assets for temporary purposes, (iii) in connection with short-term credits
as may be necessary for the clearance of purchases and sales of portfolio
securities and (iv) the Portfolio (fund) may purchase securities on margin
to the extent permitted by applicable law. For purposes of this investment
restriction, investments in short sales, roll transactions, futures
contracts, options on futures contracts, securities or indices and forward
commitments, entered into in accordance with the Portfolio's (fund's)
investment policies, shall not constitute borrowing.
3. Underwrite the securities of other issuers, except to the extent that, in
connection with the disposition of portfolio securities, the Portfolio
(fund) may be deemed to be an underwriter under the Securities Act of
1933.
4. Purchase or sell real estate except that the Portfolio (fund) may (i)
acquire or lease office space for its own use, (ii) invest in securities
of issuers that invest in real estate or interests therein, (iii) invest
in securities that are secured by real estate or interests therein, (iv)
purchase and sell mortgage-related securities and (v) hold and sell real
estate acquired by the Portfolio (fund) as a result of the ownership of
securities.
5. Purchase or sell commodities or commodity contracts, except the Portfolio
(fund) may purchase and sell options on securities, securities indices and
currency, futures contracts on securities, securities indices and currency
and options on such futures, forward foreign currency exchange contracts,
forward commitments, securities index put or call warrants and repurchase
agreements entered into in accordance with the Portfolio's (fund's)
investment policies.
6. Make loans, except that the Portfolio (fund) (1) may lend portfolio
securities in accordance with the Portfolio's (fund's) investment policies
up to 33 1/3% of the Portfolio's (fund's) total assets taken at market
value, (2) enter into repurchase agreements, and (3) purchase all or a
portion of an issue of debt securities, bank loan participation interests,
bank certificates of deposit, banker's acceptances, debentures or other
securities, whether or not the purchase is made upon the original issuance
of the securities.
7. With respect to 75% of its total assets, purchase securities of an issuer
(other than the U.S. Government, its agencies, instrumentalities or
authorities or repurchase agreements collateralized by U.S. Government
securities and other investment companies), if: (a) such purchase would
cause more than 5% of the Portfolio's (fund's) total assets taken at
market value to be invested in the securities of such issuer; or (b) such
purchase would at the time result in more than 10% of the outstanding
voting securities of such issuer being held by the Portfolio (fund).
8. Invest more than 25% of its total assets in the securities of one or more
issuers conducting their principal business activities in the same
industry (excluding the U.S. Government or its agencies or
instrumentalities).
34
<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. Purchase securities on margin (except that the Portfolio (fund) may obtain
such short-term credits as may be necessary for the clearance of purchases
and sales of securities).
b. Invest in the securities of an issuer for the purpose of exercising
control or management, but it may do so where it is deemed advisable to
protect or enhance the value of an existing investment.
c. Purchase the securities of any other investment company except to the
extent permitted by the 1940 Act.
d. Invest more than 15% of its net assets in securities which are illiquid.
e. Purchase additional securities if the Portfolio's (fund's) borrowings
exceed 5% of its net assets. Notwithstanding any fundamental or
non-fundamental policy, the fund may invest all of its assets (other than
assets which are not"investment securities" (as defined in the 1940 Act)
or are excepted by the SEC) in an open-end investment company with
substantially the same investment objective as the fund.
For the purposes of fundamental restriction 8, state and municipal
governments and their agencies, authorities and instrumentalities are not deemed
to be industries; telephone companies are considered to be a separate industry
from water, gas or electric utilities; personal credit finance companies and
business credit finance companies are deemed to be separate industries; and
wholly-owned finance companies are considered to be in the industry of their
parents if their activities are primarily related to financing the activities of
their parents. Fundamental restriction 8 does not apply to investments in
municipal securities which have been pre-refunded by the use of obligations of
the U.S. Government or any of its agencies or instrumentalities. For purposes of
fundamental restriction 8, the industry classification of an asset-backed
security is determined by its underlying assets. For example, certificates for
automobile receivables and certificates for amortizing revolving debts
constitute two different industries.
Controlled Maturity Fund
As a matter of fundamental policy, Controlled Maturity Fund may not:
1. Invest more than 25% of the current value of its total assets in any
single industry, provided that this restriction shall not apply to U.S.
Government securities or mortgage-backed securities issued or guaranteed
as to principal or interest by the U.S. Government, its agencies or
instrumentalities.
2. Issue senior securities, except as permitted by paragraphs 3, 7 and 8
below. For purposes of this restriction, the issuance of shares of
beneficial interest in multiple classes or series, the deferral of
trustees' fees, the purchase or sale of options, futures contracts,
forward commitments and repurchase agreements entered into in accordance
with the fund's investment policies or within the meaning of paragraph 6
below, are not deemed to be senior securities.
3. Borrow money, except (i) from banks for temporary or short-term purposes
or for the clearance of transactions in amounts not to exceed 33 1/3% of
the value of the fund's total assets (including the amount borrowed) taken
at market value, (ii) in connection with the redemption of fund shares or
to finance failed settlements of portfolio trades without immediately
liquidating portfolio securities or other assets; (iii) in order to
fulfill commitments or plans to purchase additional securities pending the
anticipated sale of other portfolio securities or assets and (iv) the fund
may enter into reverse repurchase agreements and forward roll
transactions. For purposes of this investment restriction, investments in
short sales, futures contracts, options on futures contracts, securities
or indices and forward commitments shall not constitute borrowing.
4. Underwrite the securities of other issuers, except to the extent that, in
connection with the disposition of portfolio securities, the fund may be
deemed to be an underwriter under the Securities Act of 1933.
35
<PAGE>
5. Purchase or sell real estate except that the fund may (i) acquire or lease
office space for its own use, (ii) invest in securities of issuers that
invest in real estate or interests therein, (iii) invest in securities
that are secured by real estate or interests therein, (iv) purchase and
sell mortgage-related securities and (v) hold and sell real estate
acquired by the fund as a result of the ownership of securities.
6. Purchase securities on margin (except that the fund may obtain such
short-term credits as may be necessary for the clearance of purchases and
sales of securities).
7. Purchase or sell commodities or commodity contracts, except the fund may
purchase and sell options on securities, securities indices and currency,
futures contracts on securities, securities indices and currency and
options on such futures, forward foreign currency exchange contracts,
forward commitments, securities index put or call warrants and repurchase
agreements entered into in accordance with the fund's investment policies.
8. Make loans, except that the fund (1) may lend portfolio securities in
accordance with the fund's investment policies up to 33 1/3% of the fund's
total assets taken at market value, (2) enter into repurchase agreements,
and (3) purchase all or a portion of an issue of debt securities, bank
loan participation interests, bank certificates of deposit, bankers'
acceptances, debentures or other securities, whether or not the purchase
is made upon the original issuance of the securities.
See the discussion following Fixed Income Fund II's fundamental investment
restrictions for additional information on industry concentration.
The following restrictions are not fundamental policies and may be changed
by the Trustees without shareholder approval, in accordance with applicable
laws, regulations or regulatory policy. The fund may not:
A. Invest in the securities of an issuer for the purpose of exercising
control or management, but it may do so where it is deemed advisable to
protect or enhance the value of an existing investment.
B. Purchase securities of any other investment company except to the extent
permitted by the 1940 Act.
C. 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.
Securitized Fund
As a matter of fundamental policy, Securitized Fund may not:
1. Invest, with respect to at least 75% of its total assets, more than 5% in
the securities of any one issuer (other than the U.S. Government, its
agencies or instrumentalities) or acquire more than 10% of the outstanding
voting securities of any issuer.
2. Issue senior securities, borrow money or securities or pledge or mortgage
its assets, except that the fund may (a) borrow money from banks as a
temporary measure for extraordinary or emergency purposes (but not for
investment purposes) in an amount up to 15% of the current value of its
total assets, (b) enter into forward roll transactions and (c) pledge its
assets to an extent not greater than 15% of the current value of its total
assets to secure such borrowings; however, the fund may not make any
additional investments while its outstanding bank borrowings exceed 5% of
the current value of its total assets.
3. Lend portfolio securities, except that the fund may enter into repurchase
agreements with respect to 15% of the value of its net assets.
36
<PAGE>
4. Invest more than 25% of the current value of its total assets in any
single industry except the real estate industry.
5. Underwrite the securities of other issuers, except to the extent that in
connection with the disposition of portfolio securities the fund may be
deemed to be an underwriter under the Securities Act of 1933.
6. Purchase securities on margin (except that the fund may obtain such
short-term credits as may be necessary for the clearance of purchases and
sales of securities).
7. Purchase or sell commodities, commodity contracts, or real estate, except
that the fund may purchase and sell obligations which are secured by real
estate or by mortgages on real estate, securities of issuers which invest
or deal in real estate, or have a call on real estate or are convertible
into real estate, and the fund may purchase and sell financial futures
contracts and options on financial futures contracts and engage in foreign
currency exchange transactions.
8. Purchase the securities of other investment companies, except that the
fund may make such a purchase (a) in the open market involving no
commission or profit to a sponsor or dealer (other than the customary
broker's commission), provided that immediately thereafter (i) not more
than 10% of the fund's total assets would be invested in such securities,
(ii) not more than 5% of the fund's total assets would be invested in the
securities of any one investment company and (iii) not more than 3% of the
voting stock of any one investment company would be owned by the fund, or
(b) as part of a merger, consolidation, or acquisition of assets.
The following restrictions are not fundamental policies and may be changed
by the Trustees without shareholder approval, in accordance with applicable
laws, regulations or regulatory policy. The fund may not:
A. Invest in the securities of an issuer for the purpose of exercising
control or management, but it may do so where it is deemed advisable to
protect or enhance the value of an existing investment.
B. Invest more than 15% of its net assets in securities which are illiquid.
If any percentage restriction described above is adhered to at the time of
investment, a subsequent increase or decrease in the percentage resulting from a
change in the value of the Portfolio's or a fund's assets will not constitute a
violation of the restriction.
CALCULATION OF PERFORMANCE DATA
As indicated in the Prospectus, each fund may, from time to time,
advertise certain total return and yield information. The average annual total
return of a fund for a period is computed by subtracting the net asset value per
share at the beginning of the period from the net asset value per share at the
end of the period (after adjusting for the reinvestment of any income dividends
and capital gain distributions), and dividing the result by the net asset value
per share at the beginning of the period. In particular, the funds' average
annual total return ("T") is computed by using the redeemable value at the end
of a specified period of time ("ERV") of a hypothetical initial investment of
$1,000 ("P") over a period of time ("n") according to the formula P(1+T)n=ERV.
The funds' yield is computed by dividing the net investment income per
share earned during a base period of 30 days, or one month, by the maximum
offering price per share on the last day of the period. For the purpose of
determining net investment income, the calculation includes, among expenses of
the funds, all recurring fees that are charged to all shareholder accounts and
any non-recurring charges for the period stated. In particular, yield is
determined according to the following formula:
Yield = 2[((A - B)/CD + 1)^6 - 1]
Where:
37
<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:
Average Annual Total Return
Fund 1-Year 5-Year 10-Year Yield
- ---- ------ ------ ------- -----
Fixed Income Fund 5.25% 6.52% 9.40% 7.14%
Diversified Income Fund 0.86% N/A(1) N/A 9.98%
Fixed Income Fund II 4.91% N/A(2) N/A 6.65%
Controlled Maturity Fund 5.58% N/A(2) N/A 6.15%
Securitized Fund 7.53% 6.95% N/A(3) 6.25%
Short-Term Asset Reserve Fund 5.75% 5.47% 6.45%(4) 5.12%
- ---------------------------
(1) Diversified Income Fund commenced operations on June 2, 1997.
(2) Fixed Income Fund II and Controlled Maturity Fund commenced operations
on July 3, 1995.
(3) Securitized Fund commenced operations on September 30, 1989.
(4) Short-Term Asset Reserve Fund commenced operations on January 3, 1989.
These performance quotations should not be considered as representative of
any fund's performance for any specified period in the future.
In addition to average annual return quotations, the funds may quote
quarterly and annual performance on a net (with management and administration
fees deducted) and gross basis as follows:
38
<PAGE>
Fixed Income Fund
Quarter/Year Net Gross
- ------------------------------------------------------------------------------
1988 8.53 9.09
1Q89 1.23 1.37
2Q89 7.57 7.70
3Q89 1.13 1.26
4Q89 3.30 3.42
1989 13.76 14.33
1Q90 (0.50) (0.38)
2Q90 3.69 3.84
3Q90 0.89 1.00
4Q90 4.95 5.06
1990 9.23 9.77
1Q91 3.16 3.28
2Q91 1.71 1.84
3Q91 6.19 6.29
4Q91 5.58 5.68
1991 17.65 18.15
1Q92 (0.95) (0.84)
2Q92 4.95 5.4
3Q92 3.43 3.53
4Q92 (0.58) (0.47)
1992 6.88 7.33
1Q93 5.88 5.98
2Q93 3.42 3.52
3Q93 3.42 3.52
4Q93 1.23 1.33
1993 14.64 15.08
1Q94 (3.99) (3.90)
2Q94 (1.88) (1.78)
3Q94 0.67 0.77
4Q94 0.32 0.42
1994 (4.86) (4.48)
1Q95 4.39 4.48
2Q95 5.91 6.01
3Q95 2.46 2.56
4Q95 4.64 4.73
1995 18.54 18.9
1Q96 (1.58) (1.49)
2Q96 0.84 0.93
3Q96 2.58 2.67
4Q96 3.60 3.70
1996 5.48 5.86
1Q97 (0.16) (0.07)
2Q97 3.76 3.85
3Q97 3.44 3.53
4Q97 2.23 2.33
1997 9.54 9.95
1Q98 1.68 1.78
2Q98 2.10 2.19
3Q98 1.54 1.63
4Q98 (0.15) (0.06)
1998 5.25 5.63
Diversified Income Fund
Quarter/Year Net Gross
- ------------------------------------------------------------------------------
3Q97 6.05 6.05
4Q97 0.14 0.14
1997 6.20 6.20
1Q98 3.76 3.76
2Q98 (0.38) (0.38)
3Q98 (6.60) (6.60)
4Q98 4.48 4.48
1998 0.86 0.86
Fixed Income Fund II
Quarter/Year Net Gross
- ------------------------------------------------------------------------------
3Q95 1.35 1.44
4Q95 4.38 4.48
1995 5.79 5.97
1Q96 (1.90) (1.81)
2Q96 0.39 0.48
3Q96 2.18 2.28
4Q96 3.12 3.21
1996 3.77 4.15
1Q97 (0.49) (0.40)
2Q97 3.65 3.74
3Q97 3.30 3.39
4Q97 1.92 2.01
1997 8.59 8.97
1Q98 1.72 1.81
2Q98 1.82 1.92
3Q98 1.87 1.96
4Q98 (0.57) (0.48)
1998 4.91 5.28
Short-Term Asset Reserve Fund
Quarter/Year Net Gross
- ------------------------------------------------------------------------------
1Q89 1.58% 1.70%
2Q89 3.52 3.64
3Q89 1.71 1.82
4Q89 2.38 2.51
1989 9.50 10.01
1Q90 1.34 1.45
2Q90 2.56 2.69
3Q90 2.17 2.27
4Q90 2.62 2.73
1990 8.97 9.45
1Q91 2.10 2.20
2Q91 1.97 2.07
3Q91 2.62 2.71
4Q91 2.39 2.47
1991 9.41 9.79
1Q92 0.84 0.91
2Q91 2.08 2.17
3Q92 1.18 1.28
4Q92 0.17 0.27
39
<PAGE>
1992 4.33 4.70
1Q93 1.90 1.98
2Q93 1.10 1.19
3Q93 1.20 1.28
4Q93 0.78 0.86
1993 5.08 5.41
1Q94 0.06 0.14
2Q91 0.06 0.14
3Q94 1.31 1.39
4Q94 0.83 0.91
1994 2.27 2.60
1Q95 2.08 2.16
2Q95 2.14 2.22
3Q95 1.55 1.62
4Q95 1.89 1.97
1995 7.85 8.20
1Q96 1.08 1.17
2Q96 1.31 1.40
3Q96 1.51 1.60
4Q96 1.60 1.69
1996 5.62 5.99
1Q97 0.98 1.07
2Q97 1.80 1.89
3Q97 1.69 1.78
4Q97 1.33 1.45
1997 5.94 6.34
1Q98 1.53 1.62
2Q98 1.39 1.49
3Q98 1.81 1.90
4Q98 0.90 0.98
1998 5.75 6.12
Controlled Maturity Fund
Quarter/Year Net Gross
- ------------------------------------------------------------------------------
3Q95 1.55% 1.64%
4Q95 2.61 2.70
1995 4.20 4.38
1Q96 0.25 0.35
2Q96 1.05 1.14
3Q96 1.71 1.80
4Q96 2.03 2.12
1996 5.13 5.51
1Q97 0.65 0.74
2Q97 2.22 2.31
3Q97 2.10 2.20
4Q97 1.53 1.61
1997 6.66 7.03
1Q98 1.41 1.49
2Q98 1.66 1.73
3Q98 2.30 2.38
4Q98 0.13 0.20
1998 5.58 5.90
Securitized Funds
Quarter/Year Net Gross
- ------------------------------------------------------------------------------
3Q89 0.00% (0.04)%
4Q89 4.01 4.17
1989 4.01 4.21
1Q90 0.45 0.57
2Q90 3.58 3.69
3Q90 1.29 1.40
4Q90 5.79 5.91
1990 11.49 11.99
1Q91 2.89 3.00
2Q91 1.84 1.95
3Q91 5.16 5.27
4Q91 4.90 5.03
1991 15.57 16.10
1Q92 (1.58) (1.47)
2Q92 4.38 4.49
3Q92 1.80 1.91
4Q92 (.49) (.38)
1992 4.07 4.52
1Q93 4.37 4.48
2Q93 2.56 2.67
3Q93 2.38 2.49
4Q93 0.38 0.49
1993 10.02 10.48
1Q94 (2.53) (2.42)
2Q94 (0.83) (0.72)
3Q94 0.89 1.00
4Q94 0.338) 0.447)
1994 (2.16) (1.72)
1Q95 4.78 4.89
2Q95 5.31 5.43
3Q95 2.16 2.27
4Q95 3.19 3.32
1995 16.32 16.85
1Q96 (1.23) (1.11)
2Q96 0.51 0.62
3Q96 2.09 2.22
4Q96 3.03 3.14
1996 4.41 4.91
1Q97 (0.57) (0.46)
2Q97 3.72 3.85
3Q97 3.48 3.61
4Q97 2.60 2.72
1997 9.50 10.01
1Q98 1.49 1.60
2Q98 2.53 2.65
3Q98 3.88 4.00
4Q98 (0.52) (0.40)
1998 7.53 8.03
40
<PAGE>
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 Portfolio, Fixed Income Fund and Fixed Income Fund II 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. Diversified
Income Portfolio and Diversified Income Fund may also compare their performance
to the Lehman Brothers Aggregate Index. Short-Term Asset Reserve Portfolio and
Short-Term Asset Reserve Fund may compare their performance to The IBC/Donoghue
Money Market Average/All Taxable Index, which is generally considered to be
representative of the performance of domestic, taxable money market funds.
However, the average maturity of Short-Term Asset Reserve Portfolio is longer
than that of a money market fund 's portfolio and, unlike a money market fund,
the net asset value of Short-Term Asset Reserve Fund's shares may fluctuate.
Controlled Maturity Fund may compare its performance to the Merrill Lynch 1-3
Year U.S. Treasury Index, the Merrill Lynch 1-5 Year U.S. Treasury Index and the
Merrill Lynch 1 Year Treasury Bill Index. Securitized Fund may compare its
performance to the Lehman Brothers Aggregate Index and the Lehman Brothers
Mortgage Index. The Lehman Brothers Mortgage Index is considered to be
representative of the performance of fixed rate securitized mortgage pools of
GNMA, FNMA and FHLNC securities. Comparative performance may also be expressed
by reference to a ranking prepared by a mutual fund monitoring service or by one
or more newspapers, newsletters or financial periodicals. Performance
comparisons may be useful to investors who wish to compare a fund's past
performance to that of other mutual funds and investment products. Of course,
past performance is not a guarantee of future results.
MANAGEMENT
Trustees and Officers of the Trust and Portfolio Trust
The Trustees and executive officers of the Trust are listed below. The
Trustees of the Portfolio Trust are identical to the Trustees of the Trust. The
officers of the Portfolio Trust are Messrs. Clayson, Ladd, Wood, Hollis and
Martins, and Mdmes. Banfield, Herrmann, Kneeland, Pester, Lillo, and
Rafferty-Maple, 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.
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
</TABLE>
41
<PAGE>
<TABLE>
<S> <C> <C>
John H. Hewitt, 4/11/35 Trustee Trustee, The Peabody Foundation; Trustee,
P.O. Box 307 Mertens House, Inc.
So. Woodstock, VT 05071
*Edward H. Ladd, 1/3/38 Trustee Chairman of the Board and
c/o Standish, Ayer & Wood, Inc. Managing Director, Standish, Ayer & Wood,
One Financial Center 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 Secretary Assistant Vice President and
c/o Standish, Ayer & Wood, Inc. Senior Fund Administration Manager,
One Financial Center Standish, Ayer & Wood, Inc.
Boston, MA 02111
Paul G. Martins, 3/10/56 Vice President and Treasurer Vice President of Finance, Standish, Ayer
c/o Standish, Ayer & Wood, Inc. & Wood, Inc. since October 1996; formerly
One Financial Center Senior Vice President, Treasurer and Chief
Boston, MA 02111 Financial Officer of Liberty Financial
Bank Group
Beverly E. Banfield, 7/6/56 Vice President Vice President, Associate Director and
c/o Standish, Ayer & Wood, Inc. Compliance Officer, Standish, Ayer & Wood,
One Financial Center Inc.
Boston, MA 02111
Denise B. Kneeland, 8/19/51 Vice President Vice President and Manager, Mutual Fund
c/o Standish, Ayer & Wood, Inc. 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 Vice President Assistant Compliance Manager and
c/o Standish, Ayer & Wood, Inc. Compliance Officer, Standish, Ayer & Wood,
One Financial Center Inc. since 1998; Compliance Officer, State
Boston, MA 02111 Street Global Advisors
</TABLE>
42
<PAGE>
<TABLE>
<S> <C> <C>
Rosalind J. Lillo, 2/6/38 Vice President Broker/Dealer Administrator
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc. since October
One Financial Center 1995; formerly Compliance Administrator,
Boston, MA 02111 New England Securities Corp.
Deborah Rafferty-Maple, 1/4/69 Vice President Financial Planner and Registered
c/o Standish, Ayer & Wood, Inc. Investment Networks Marketing Manager,
One Financial Center Standish, Ayer & Wood
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.
43
<PAGE>
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:
Aggregate Compensation from the Funds
<TABLE>
<CAPTION>
Name of Trustee Fixed Diversified Fixed Securitized Controlled Short-Term Pension or Total
Income Income Income Fund Maturity Asset Retirement Compensation
Fund** Fund** Fund II Fund Reserve Benefits from Funds
Fund** Accrued as Part and Portfolio &
of Funds' Other Funds in
Expenses Complex*
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
D. Barr Clayson $0 $ 0 $0 $0 $0 $0 $0 $0
Samuel C. Fleming $16,611 $1,937 $1,700 $1,115 $1,045 $3,769 $0 $57,375
Benjamin M. $16,611 $1,937 $1,700 $1,115 $1,045 $3,769 $0 $57,375
Friedman
John H. Hewitt $18,058 $2,106 $1,848 $1,212 $1,136 $4,098 $0 $62,375
Edward H. Ladd $0 $0 $0 $0 $0 $0 $0 $0
Caleb Loring, III $16,611 $1,937 $1,700 $1,115 $1,045 $3,769 $0 $57,375
Richard S. Wood $0 $ 0 $0 $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 April 1, 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:
Diversified Income Fund
Percentage of
Name and Address Outstanding Shares
Allendale Mutual Insurance
Company 56.5%*
Allendale Park
P.O. Box 7500
Johnston, RI 02919
Wellesley College 19.5%
Wellesley, MA 02181
Davis Family Foundation 7.5%
c/o Investors Bank and Trust Co.
P.O. Box 1537
Boston, MA 02205
Potter & Co./Allendale Ins. Co. 5.7%
1301 Atwood Avenue
P.O. Box 7500
Johnston, RI 02919
Fixed Income Fund II
Percentage of
Name and Address Outstanding Shares
Exeter Health Resources, Inc. 54.8%*
10 Buzell Avenue
Exeter, NH 03833
44
<PAGE>
Miss Porter's School 10.7%
60 Main Street
Farmington, CT 06032
1952 Trust/MRW 8.8%
First Union National Bank
TTEE FBO Miriam Weber
Charlotte, NC 28288
Milton Hospital Funded 7.5%
Depreciation Acct
92 Highland Street
Milton, MA 02186
1952 Trust/SCR 5.9%
John D. Rockefeller Trust
First Union National Bank
1525 West WT Harris Boulevard
Charlotte, NC 28288
Short-Term Asset Reserve Fund
Percentage of
Name and Address Outstanding Shares
The Nature Conservancy 20.6%
Endowment Fund
1815 N. Lynn Street
Arlington, VA 22209
Virginia Portfolio 11.0%
c/o Peregrin Financial
84 State Street, Suite 900
Boston, MA 02109
Northern Trust Company 13.8%
as Custodian
FBO BayCare Health System
P.O. Box 92956
Chicago, IL 60675
Shands Teaching 5.3%
Hospital & Clinic
Bankers Trust Trustee
P.O. Box 100336
Gainesville, FL 32610
The Controlled Maturity Fund
Percentage of
Name and Address Outstanding Shares
National Financial Service 34.4%
FBO Customers
One World Financial Center
200 Liberty Street, 5th Floor
New York, NY 10281
Essex County Gas and Company 18.6%
7 North Hunt Road
Amesbury, MA 01913
San Francisco Opera Association 17.6%
301 Van Ness Avenue
San Francisco, CA 94102
Connecticut American Inc. 15.8%
c/o Anthem Blue Cross &
Blue Shield CT
370 Bassett Road
North Haven, CT 06473
Securitized Fund
Percentage of
Name and Address Outstanding Shares
Allendale Mutual Insurance
Company 73.7%*
Allendale Park
P.O. Box 7500
Johnston, RI 02919
Colonial Williamsburg Pension 12.4%
The Colonial Williamsburg Foundation
P.O. Box C
Williamsburg, VA 23187
Potter & Co./Allendale Ins. Co. 7.9%
Bank of Boston
150 Royall Way
Canton, MA
45
<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.
Investment adviser.
Standish serves as the adviser to Fixed Income Portfolio, Fixed Income
Fund II, Short-Term Asset Reserve Portfolio, Securitized Fund and Controlled
Maturity Fund 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 Diversified Income Portfolio
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 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
Fund percentage of average daily net assets)
Fixed Income Portfolio 0.40% of the first $250 million
0.35% of the next $250 million
0.30% over $500 million
Diversified Income Portfolio 0.50%
Fixed Income Fund II 0.40%
Controlled Maturity Fund 0.35%
Securitized Fund 0.25% of the first $500 million
0.20% over $500 million
Short-Term Asset Reserve Portfolio 0.25%
During the last three fiscal years ended December 31, the funds and the
Portfolios paid advisory fees in the following amounts:
46
<PAGE>
Fund 1996 1997 1998
- ---- ---- ---- ----
Fixed Income Fund $2,493,743(1) N/A N/A
Fixed Income Portfolio 5,121,756(1) $9,043,263 $10,702,756
Diversified Income Portfolio N/A 0(2) 0(2)
Fixed Income Fund II 0(3) 200,481(3) 305,342(3)
Controlled Maturity Fund 0(3) 0(4) 0(4)
Securitized Fund 102,961(5) 118,095(5) 100,997(5)
Short-Term Asset Reserve Fund 643,488 582,254 N/A(6)
Short-Term Asset Reserve Portfolio N/A(6) N/A(6) 709,540
(1) Fixed Income Fund was converted to the master/feeder fund structure on May
3, 1996 and does not pay directly advisory fees after that date. The fund
bears its pro rata allocation of the Portfolio's expenses, including
advisory fees. Fixed Income Portfolio commenced operations on May 3, 1996.
(2) Diversified Income Portfolio commenced operations on June 2, 1997. The
adviser voluntarily agreed not to impose its advisory fee the period June
2, 1997 to December 31, 1997 and for the fiscal year ended December 31,
1998 in the amounts of $45,742 and $214,014, respectively.
(3) The adviser voluntarily agreed not to impose all or a portion of its
advisory fee for the fiscal years ended December 31, 1996, 1997 and 1998
in the amounts of $61,291, $172,825 and $165,457, respectively.
(4) The adviser voluntarily agreed not to impose its advisory fee for the
fiscal years ended December 31, 1996, 1997 and 1998, which would otherwise
have been $35,907, $43,478 and $74,568, respectively.
(5) For the fiscal years ended December 31, 1996, 1997 and 1998, the adviser
voluntarily agreed not to impose a portion of its fee in the amount of
$29,535, $55,412 and $45,491, respectively.
(6) Short-Term Asset Reserve Fund was converted to the master/feeder structure
on January 2, 1998, and does not pay directly advisory fees after that
date. The fund bears its pro rata portion of the Portfolio's expenses,
including advisory fees. The Short-Term Asset Reserve Portfolio commenced
operation on January 2, 1998.
Pursuant to the investment advisory agreements, each 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
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 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 applicable fund or 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 applicable fund or the Portfolio or by the adviser, on sixty
days' written notice to the other parties. The investment advisory agreements
terminate in the event of their assignment as defined in the 1940 Act.
In an attempt to avoid any potential conflict with portfolio transactions
for the funds and the 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
47
<PAGE>
all personal securities transactions and a prohibition of purchasing initial
public offerings of securities. These restrictions are a continuation of the
basic principle that the interests of the funds and their shareholders, and the
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 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 of 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.
PURCHASE AND REDEMPTION OF SHARES
Detailed information on redemption of shares is included in the
Prospectus. In addition to Standish Fund Distributors and other agents of the
Trust, each fund has authorized one or more brokers and dealers to accept on its
behalf orders for the purchase and redemption of fund shares. Under certain
conditions, such authorized brokers and dealers may designate other
intermediaries to accept orders for the purchase and redemption of fund shares.
In accordance with a position taken by the staff of the SEC, such purchase and
redemption orders are considered to have been received by a fund when accepted
by the authorized broker or dealer or, if applicable, the authorized broker's or
dealer's designee. Also in accordance with the position taken by the staff of
the SEC, such purchase and redemption orders will receive the appropriate fund's
net asset value per share next computed after the purchase or redemption order
is accepted by the authorized broker or dealer or, if applicable, the authorized
broker's or dealer's designee.
48
<PAGE>
The Trust may suspend the right to redeem fund shares or postpone the date
of payment upon redemption for more than seven days (i) for any period during
which the NYSE is closed (other than customary weekend or holiday closings) or
trading on the exchange is restricted; (ii) for any period during which an
emergency exists as a result of which disposal by a fund of securities owned by
it or determination by a fund of the value of its net assets is not reasonably
practicable; or (iii) for such other periods as the SEC may permit for the
protection of shareholders of a fund.
The Trust intends to pay redemption proceeds in cash for all fund shares
redeemed but, under certain conditions, the Trust may make payment wholly or
partly in portfolio securities, in conformity with a rule of the SEC. Portfolio
securities paid upon redemption of fund shares will be valued at their then
current market value. The Trust, on behalf of each of its series, has elected to
be governed by the provisions of Rule 18f-1 under the 1940 Act which limits each
fund's obligation to make cash redemption payments to any shareholder during any
90-day period to the lesser of $250,000 or 1% of the fund's net asset value at
the beginning of such period. An investor may incur brokerage costs in
converting portfolio securities received upon redemption to cash. Each Portfolio
has advised the Trust that the Portfolio will not redeem in-kind except in
circumstances in which the applicable fund is permitted to redeem in-kind or
except in the event the applicable fund completely withdraws its interest from
the Portfolio.
PORTFOLIO TRANSACTIONS
The adviser is responsible for placing each fund's and each Portfolio's
portfolio transactions and will do so in a manner deemed fair and reasonable to
the funds and the Portfolios and not according to any formula. The primary
consideration in all portfolio transactions will be prompt execution of orders
in an efficient manner at the most favorable price. In selecting broker-dealers
and in negotiating commissions, the adviser will consider the firm's
reliability, the quality of its execution services on a continuing basis and its
financial condition. When more than one firm is believed to meet these criteria,
preference may be given to firms which also sell shares of the funds. In
addition, if the adviser determines in good faith that the amount of commissions
charged by a broker is reasonable in relation to the value of the brokerage and
research services provided by such broker, the funds and the Portfolios may pay
commissions to such broker in an amount greater than the amount another firm may
charge. Research services may include (i) furnishing advice as to the value of
securities, the advisability of investing in, purchasing or selling securities,
and the availability of securities or purchasers or sellers of securities, (ii)
furnishing 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 and the Portfolios effect their securities transactions
may be used by the adviser in servicing other accounts; not all of these
services may be used by the adviser in connection with the funds or the
Portfolios generating the soft dollar credits. The investment advisory fee paid
by the funds and the Portfolios under the investment advisory agreements will
not be reduced as a result of the adviser's receipt of research services.
The adviser also places portfolio transactions for other advisory
accounts. The adviser will seek to allocate portfolio transactions equitably
whenever concurrent decisions are made to purchase or sell securities for a fund
or a Portfolio and another advisory account. In some cases, this procedure could
have an adverse effect on the price or the amount of securities available to a
fund or a Portfolio. In making such allocations, the main factors considered by
the adviser will be the respective investment objectives, the relative size of
portfolio holdings of the same or comparable securities, the availability of
cash for investment, the size of investment commitments generally held, and
opinions of the persons responsible for recommending the investment.
49
<PAGE>
Because most of the funds' and the Portfolio's securities transactions are
effected on a principal basis involving a "spread" or "dealer mark-up," the
funds and the Portfolios 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., New York City 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 Fund,
Diversified Income Fund and Short-Term Asset Reserve 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 Fund, Diversified Income Fund and Short-Term Asset Reserve
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 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 or a Portfolio are valued on an amortized cost basis. If
a fund or Portfolio acquires a money market instrument with more than sixty days
remaining to its maturity, it is valued at current market value until the
sixtieth day prior to maturity and will then be valued at amortized cost based
upon the value on such date unless the Trustees determine during such sixty-day
period that amortized cost does not represent fair value.
Generally, trading in securities on foreign 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
50
<PAGE>
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.
With respect to Short-Term Asset Reserve Portfolio, the Board of Trustees
of the Trust has approved determining the current market value of securities
with one year or less remaining to maturity on a spread basis which will be
employed in conjunction with the periodic use of market quotations. Under the
spread process, the adviser determines in good faith the current market value of
these portfolio securities by comparing their quality, maturity and liquidity
characteristics to those of United States Treasury bills.
THE 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. Each
share of a fund represents an equal proportionate interest in the fund with each
other share and is entitled to such dividends and distributions as are declared
by the Trustees. Shareholders are not entitled to any preemptive, conversion or
subscription rights. All shares, when issued, will be fully paid and
non-assessable by the Trust. Upon any liquidation of a fund, shareholders of
that fund are entitled to share pro rata in the net assets available for
distribution.
Pursuant to the Declaration, the Trustees may create additional funds by
establishing additional series of shares in the Trust. The establishment of
additional series would not affect the interests of current shareholders in any
fund. The Trustees have established other series of the Trust. Pursuant to the
Declaration, the Board may establish and issue multiple classes of shares for
each series of the Trust. As of the date of this SAI, the Trustees do not have
any plan to establish multiple classes of shares for the funds. Pursuant to the
Declaration of Trust and subject to shareholder approval (if then required by
applicable law), the Trustees may authorize each fund to invest all of its
investable assets in a single open-end investment company that has substantially
the same investment objectives, policies and restrictions as the fund. As of the
date of this SAI, Fixed Income Fund, Diversified Income Fund and Short-Term
Asset Reserve 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.
51
<PAGE>
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.
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
Fund, Diversified Income Fund and Short-Term Asset Reserve Fund invest their
assets in Fixed Income Portfolio, Diversified Income Portfolio and Short-Term
Asset Reserve 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
52
<PAGE>
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 Fund, Diversified Income
Fund and Short-Term Asset Reserve Fund each will be deemed (i) to own its
proportionate share of each of the assets of the corresponding Portfolio and
(ii) to be entitled to the gross income of the corresponding Portfolio
attributable to such share.
Each fund will be subject to a 4% non-deductible federal excise tax on
certain amounts not distributed (and not treated as having been distributed) on
a timely basis in accordance with annual minimum distribution requirements. Each
fund intends under normal circumstances to seek to avoid liability for such tax
by satisfying such distribution requirements. Certain distributions made in
order to satisfy the Code's distribution requirements may be declared by the
funds during October, November or December 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. Short-Term Asset Reserve Fund has accumulated capital
loss carryforwards in the amounts of $3,071,161, $1,512,610, $5,263,400,
$568,968, $277,757, $381,998, and $80,787 which expire on December 31 of 2000,
2001, 2002, 2003, 2004, 2005 and 2006, respectively. Controlled Maturity Fund
has accumulated capital loss carryforwards in the amounts of $5,003 and $88,743
which expire on December 31 of 2004 and 2005, respectively. Securitized Fund has
accumulated capital loss carryforwards in the amounts of $803,341 and $234,501
which expire on December 31 of 2002 and 2004, respectively. Diversified Income
Fund has accumulated capital loss carryforwards in the amount of $1,365,591
which expires on December 31, 2006.
If a fund or 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 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 a fund's or a Portfolio's ability to enter into futures,
options or currency forward transactions. Only Fixed Income Portfolio,
Diversified Income Portfolio and Securitized Fund may engage in currency forward
transactions.
Certain options, futures or currency forward transactions undertaken by a
fund or Portfolio may cause the fund or Portfolio to recognize gains or losses
from marking to market even though the fund's or Portfolio's positions have not
been sold or terminated and affect the character as long-term or short-term (or,
in the case of certain options, futures or forward contracts relating to foreign
currency, as ordinary income or loss) and timing of some capital gains and
losses realized by 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
53
<PAGE>
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 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 or the Portfolios may acquire
"regular" interests in REMICs.
Foreign exchange gains and losses realized by Fixed Income Portfolio,
Diversified Income Portfolio and Securitized Fund in connection with certain
transactions, if any, involving foreign currency-denominated debt securities,
certain foreign currency futures and options, foreign currency forward
contracts, foreign currencies, or payables or receivables denominated in a
foreign currency are subject to Section 988 of the Code, which generally causes
such gains and losses to be treated as ordinary income and losses and may affect
the amount, timing and character of fund distributions to shareholders. In some
cases, elections may be available that would alter this treatment. Any such
transactions that are not directly related to Fixed Income Portfolio,
Diversified Income Portfolio or Securitized Fund'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.
Fixed Income Portfolio, Diversified Income Portfolio or Securitized Fund
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 Fixed Income Fund, Diversified Income Fund or Securitized 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 (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 and
Securitized Fund are such that each fund expects that it will not meet this 50%
requirement, shareholders of each fund generally will not directly take into
account the foreign taxes, if any, paid by Fixed Income Portfolio and allocable
to Fixed Income Fund or paid by Securitized Fund, and will not be entitled to
any related tax deductions or credits. Such taxes will reduce the amounts each
fund would otherwise have available to distribute.
Taking into account its share of the investments of Diversified Income
Portfolio, Diversified Income Fund may meet the 50% threshold referred to in the
previous paragraph for a year and, if it does, 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 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.
54
<PAGE>
If Diversified Income 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 Diversified Income 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 Diversified Income
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 Diversified Income 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
Portfolio and (ii) the portion of fund dividends which represents income from
each foreign country.
If Fixed Income Portfolio, Diversified Income Portfolio or Securitized
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"), Fixed Income, Securitized and
Diversified Income Funds 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.
Fixed Income Portfolio, Diversified Income Portfolio and Securitized Fund may
limit and/or manage stock holdings, if any, in passive foreign investment
companies to minimize each fund's tax liability or maximize its return from
these investments.
Investment in debt obligations by Fixed Income Portfolio and Diversified
Income 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 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 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.
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 preferred stocks of U.S. domestic
corporations, and it is therefore possible that a portion of a fund's
distributions, from the dividends attributable to such preferred
55
<PAGE>
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.
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
56
<PAGE>
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.
Non-U.S. investors not engaged in a U.S. trade or business with which
their investment in a fund is effectively connected will be subject to U.S.
Federal income tax treatment that is different from that described above. These
investors may be subject to nonresident alien withholding tax at the rate of 30%
(or a lower rate under an applicable tax treaty) on amounts treated as ordinary
dividends from the fund and, unless an effective IRS Form W-8 or authorized
substitute is on file, to 31% backup withholding on certain other payments from
the fund. Non-U.S. investors should consult their tax advisers regarding such
treatment and the application of foreign taxes to an investment in the fund.
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 PricewaterhouseCoopers L.L.P., independent
accountants, and are incorporated by reference into this SAI. The Portfolios'
financial statements contained in Fixed Income Fund's, Diversified Income Fund's
and Short-Term Asset Reserve Fund's 1998 Annual Report have also been audited by
PricewaterhouseCoopers L.L.P.
The financial statements for the year ended December 31, 1998 are
incorporated by reference from the 1998 Annual Reports, which were previously
sent to shareholders and were filed with the SEC on or about February 26, 1999,
1940 Act File No. 811-04813.
57
<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.
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.
58
<PAGE>
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
- 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
59
<PAGE>
- 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 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+.
60
<PAGE>
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 IBAC 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, 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.
61
<PAGE>
[LOGO] Standish Funds(R)
One Financial Center
Boston, MA 02111-2662
(800) 729-0066
www.standishfunds.com
