As filed with the Securities and Exchange Commission on March 9, 1999
Registration Nos. 33-8214
811-4813
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 |X|
Pre-Effective Amendment No. |_|
Post-Effective Amendment No. 93 |X|
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 |X|
Amendment No. 97 |X|
(Check appropriate box or boxes.)
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Standish, Ayer & Wood Investment Trust
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(Exact Name of Registrant as Specified in Charter)
One Financial Center, Boston, Massachusetts 02111
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(Address of Principal Executive Offices)
Registrant's Telephone Number, including Area Code: (617) 375-1760
ERNEST V. KLEIN, Esq.
Hale and Dorr
60 State Street
Boston, Massachusetts 02109
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(Name and Address of Agent for Service)
It is proposed that this filing will become effective:
|_| Immediately upon filing pursuant to Rule 485(b)
|_| On [Date] pursuant to Rule 485(b)
|_| 60 days after filing pursuant to Rule 485(a)(1)
|_| On [Date] pursuant to Rule 485(a)(1)
|X| 75 days after filing pursuant to Rule 485(a)(2)
|_| On [Date] pursuant to Rule 485(a)(2)
----------------------
This Post-Effective Amendment has been executed by Standish, Ayer & Wood
Master Portfolio.
<PAGE>
[LOGO] STANDISH FUNDS(R)
Standish Group of Global
Fixed Income Funds
Prospectus
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May xx, 1999
Standish International Fixed Income Fund II
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
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Risk/Return Summary.......................................3
Who may want to invest.................................3
Mutual fund risks......................................3
International Fixed Income Fund II.....................4
The Fund's Investments and Related Risks..................6
The Investment Adviser....................................7
About SIMCO(R) and Standish(R).........................7
Fund managers..........................................7
Advisory services and fees.............................7
[GRAPHIC OMITTED]
Investment and Account Information........................8
How to purchase shares.................................8
How to exchange shares.................................9
How to redeem shares...................................9
Transaction and account policies......................10
Valuation of shares...................................10
Dividends and distributions...........................10
Year 2000 issue.......................................10
Fund Details.............................................11
Taxes.................................................11
The fund's service providers..........................11
For More Information.....................................12
Standish Group of Global Fixed Income Funds 2
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Risk/Return Summary
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Standish International Management Company, L.P. (SIMCO), an affiliate of
Standish, Ayer & Wood, Inc., manages the 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
International Fixed Income Fund II 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.
Mutual fund risks
An investment in the fund is not a bank deposit and is not insured or guaranteed
by the Federal Deposit Insurance Corporation or any other government agency.
A description of the fund begins on the next page and includes more information
about the fund's key investments and strategies, principal risk factors, past
performance and expenses.
3 Standish Group of Global Fixed Income Funds
<PAGE>
Risk/Return Summary
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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 primarily 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.
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 countries, 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 macroeconomic 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.
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
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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
(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%
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
Financial Highlights
The fund has no operating history and no financial highlights are available.
5 Standish Group of Global Fixed Income Funds
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The Fund's Investments and Related Risks
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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, bond index 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 fund 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.
The fund may invest 10% of assets in emerging markets generally and 3% of assets
in any single emerging market. At times, the fund invests substantially in fixed
income securities of foreign governments or their political subdivisions. This
exposes the fund to additional risk if a foreign government is unable or
unwilling to repay principal or interest when due.
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, the fund will treat the security as being rated in the higher
rating category. The fund may choose not to sell securities that are downgraded
below the fund's minimum acceptable credit rating after their purchase. The
fund's credit standards also apply to counterparties to OTC derivative
contracts.
Defensive investing The 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 the fund takes a temporary defensive position, it may be unable
for a time to achieve its investment objective.
Derivative contracts The 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 the fund.
o As a substitute for purchasing or selling securities.
o To shorten or lengthen the effective maturity or duration of the fund's
portfolio.
o To enhance the fund's potential gain in non-hedging situations.
A derivative contract will obligate or entitle the 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 the 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. The 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 the fund's
portfolio less liquid and harder to value, especially in declining markets.
Impact of high portfolio turnover The 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 the fund's performance.
Investment objective The Fund's investment objective may be changed by the
trustees without shareholder approval.
Standish Group of Global Fixed Income Funds 6
<PAGE>
The Investment Adviser
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About SIMCO and Standish
SIMCO, a partnership in which Standish holds a 99.98% interest, was established
in 1991 and is the fund's 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.
SIMCO and Standish offer a broad array of investment services that include
management of domestic and international equity and fixed income portfolios.
Investment Adviser
Standish International Management Company, L.P.
One Financial Center
Boston, Massachusetts 02111-2662
Fund managers
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Fund Managers Positions during past five years
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Richard S. Wood Executive vice president and director of SIMCO and vice
president and managing director of Standish
W. Charles Cook II Vice president of SIMCO and vice president and director
of Standish
Advisory services and fees
SIMCO provides the fund with portfolio management and investment research
services. The adviser places orders to buy and sell the fund's portfolio
securities and manages the fund's business affairs. The fund pays an advisory
fee to SIMCO for these services of x.xx% of the fund's average annual net
assets. For the current fiscal year, SIMCO has agreed to limit the fund's total
annual operating expenses to x.xx% of the fund's average annual net assets. This
agreement is temporary and may be terminated or changed at any time.
7 Standish Group of Global Fixed Income Funds
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Investment and Account Information
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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 accepted 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 in good form and accompanied by
payment. The fund reserves the right to reject purchase orders or to stop
offering its shares without notice to shareholders.
Shares of the fund 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: Wire instructions:
Standish Fund Distributors, L.P. Investors Bank & Trust Company
P.O. Box 1407 Boston, MA
Boston, Massachusetts 02205-1407 ABA#: 011 001 438
Tel: 1-800-221-4795 Account #: 79650-4116
Fax: 617-350-0042 Fund name:
Email: [email protected] Investor account #:
Standish Group of Global Fixed Income Funds 8
<PAGE>
Investment and Account Information
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How to exchange shares
You may exchange shares of the fund for the same class of shares of any other
Standish fund, if the registration of both accounts is identical. The 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 accepted 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 accepted after that time will be executed at the next
business day's price. All redemption orders must be in good form. The 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 prioileges, 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.
9 Standish Group of Global Fixed Income Funds
<PAGE>
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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 the 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. The 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
The fund offers its shares at the NAV per share of the fund. The 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 fund accelerates calculation of NAV and
transaction deadlines to that time.
The 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,
the 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 the fund may change on days when shareholders
cannot purchase or redeem shares.
Dividends and distributions
The fund intends to distribute all or substantially all of its net investment
income and realized capital gains, if any, for each taxable year. The fund
declares and distributes dividends from net investment income quarterly. The
fund declares and distributes net capital gains, if any, annually. All dividends
and capital gains are reinvested in shares of the fund unless the shareholder
elects to receive them in cash. Substantially all of the fund's distributions
will be from net investment income.
Year 2000 issue
The fund's 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 adviser and other service providers have told the fund that they are
taking action to prevent, and do not expect the fund to suffer from, material
year 2000 problems.
Standish Group of Global Fixed Income Funds 10
<PAGE>
Fund Details
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Taxes
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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 Taxable as long-term capital gain.
gain.
Distributions of short-term capital Taxable as ordinary income.
gain.
Dividends from net investment income. Taxable as ordinary income.
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Every January, the fund provides information to its shareholders about the
fund's 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 fund with a correct taxpayer identification
number and required certification may be subject to federal backup withholding
tax. Shareholders should generally avoid investing in the 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.
The fund's 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
11 Standish Group of Global Fixed Income Funds
<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 International Fixed Income Fund
II, the following documents are available free upon request.
Annual/Semiannual Reports
Additional information about the fund's investments will be available in the
fund's annual and semiannual reports to shareholders. The fund's annual report
will contain a discussion of the market conditions and investment strategies
that significantly affected the fund's performance during its first fiscal year.
Statement of Additional Information (SAI)
The SAI provides more detailed information about the fund 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 fund by contacting the fund 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 fund's 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 Investment Company Act
(800) SAW-0066 file number (811-4813)
99-051
<PAGE>
Subject to Completion: dated___________
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY ANY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS STATEMENT OF ADDITIONAL INFORMATION DOES NOT CONSTITUTE A
PROSPECTUS.
STANDISH, AYER & WOOD INVESTMENT TRUST
One Financial Center
Boston, Massachusetts 02111
(800) 729-0066
STATEMENT OF ADDITIONAL INFORMATION
Standish International Fixed Income Fund II
This Statement of Additional Information (SAI) is not a prospectus. The
SAI expands upon and supplements the information contained in the prospectus
dated __________, as amended and/or supplemented from time to time, of Standish
International Fixed Income Fund II, a separate investment series of Standish,
Ayer & Wood Investment Trust (the Trust). The SAI should be read in conjunction
with the fund's prospectus. Investors can get free copies of the prospectus,
request other information and discuss their questions about the fund by
contacting the fund at the phone number above.
---------------------------------------
Contents
Investment Objectives and Policies.......................................... 2
Investment Restrictions..................................................... 24
Calculation of Performance Data............................................. 26
Management.................................................................. 27
Purchase and Redemption of Shares........................................... 31
Portfolio Transactions...................................................... 32
Determination of Net Asset Value............................................ 33
The Fund and Its Shares..................................................... 34
Taxation.................................................................... 34
Additional Information...................................................... 39
Experts and Financial Statements............................................ 40
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The prospectus describes the investment objective and policies of the
fund. The following discussion supplements the description of the fund's
investment policies in the prospectus. Standish International Management
Company, L.P. ("SIMCO" or the "adviser") is the investment adviser to the fund.
Suitability. The fund is not intended to provide an investment program
meeting all of the requirements of an investor. Notwithstanding the fund's
ability to 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 fund.
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).
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 the 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 the 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 the fund is downgraded below the
minimum rating required for the fund, the adviser will determine whether to
retain that security in the fund's portfolio.
Maturity and Duration. The fund generally invests in securities with final
maturities, average lives or interest rate reset frequencies of 15 years or
less. However, the fund may purchase individual securities with effective
maturities that are outside of these ranges. The effective maturity of an
individual portfolio security in which the fund invests is defined as the period
remaining until the earliest date when the fund can recover the principal amount
of such security through mandatory redemption or prepayment by the issuer, the
exercise by the fund of a put option, demand feature or tender option granted by
the issuer or a third party or the payment of the principal on the stated
maturity date. The effective maturity of variable rate securities is calculated
by reference to their coupon reset dates. Thus, the effective maturity of a
security may be substantially shorter than its final stated maturity.
Unscheduled prepayments of principal have the effect of shortening the effective
maturities of securities in general and mortgage-backed securities in
particular. Prepayment rates are influenced by changes in current interest rates
and a variety of economic, geographic, social and other
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factors and cannot be predicted with certainty. In general, securities, such as
mortgage-backed securities, may be subject to greater prepayment rates in a
declining interest rate environment. Conversely, in an increasing interest rate
environment, the rate of prepayment may be expected to decrease. A higher than
anticipated rate of unscheduled principal prepayments on securities purchased at
a premium or a lower than anticipated rate of unscheduled payments on securities
purchased at a discount may result in a lower yield (and total return) to the
fund than was anticipated at the time the securities were purchased. The fund's
reinvestment of unscheduled prepayments may be made at rates higher or lower
than the rate payable on such security, thus affecting the return realized by
the fund.
Duration of an individual portfolio security is a measure of the
security's price sensitivity taking into account expected cash flow and
prepayments under a wide range of interest rate scenarios. In computing the
duration of its portfolio, the fund will have to estimate the duration of
obligations that are subject to prepayment or redemption by the issuer taking
into account the influence of interest rates on prepayments and coupon flows.
The fund may use various techniques to shorten or lengthen the option-adjusted
duration of its portfolio, including the acquisition of debt obligations at a
premium or discount, and the use of mortgage swaps and interest rate swaps,
caps, floors and collars.
Securities. The fund invests primarily in all types of fixed income
securities. In addition, the fund may purchase shares of other investment
companies and real estate investment trusts ("REITs"). The 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 the fund's specific
investment objective and policies and "Description of Securities and Related
Risks" for a more comprehensive list of permissible securities and investments.
International Fixed Income Fund
Additional Investment Information. Under normal market conditions, the
fund invests at least 65% of its total assets in fixed income securities of
foreign governments or their political subdivisions and companies located in
foreign countries.
Country Selection. Under normal market conditions, the fund's assets are
invested in securities of issuers located in at least five countries, not
including the United States. The fund may invest a substantial portion of its
assets in one or more of those five countries. The fund may also invest up to
10% of its total assets in emerging markets generally and may invest up to 3% of
its total assets in any one emerging market.
Credit Quality. The fund invests primarily in investment grade fixed
income securities. The fund may, however, invest up to 10% of its total assets
in securities rated Ba or below by Moody's or BB or below by Standard and
Poor's, Duff or Fitch, or, if not rated, judged by SIMCO to be of equivalent
credit quality. The average dollar-weighted credit quality of the fund's
portfolio is expected to be Aa according to Moody's or AA according to Standard
& Poor's, Duff or FitchIBCA.
Description of Securities and Related Risks
General Risks of Investing
The 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 fund is also
subject to risks associated with direct investments in foreign securities as
described under the "Specific Risks" section.
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Interest Rate Risk. When interest rates decline, the market value of fixed
income securities tends to increase. Conversely, when interest rates increase,
the market value of fixed income securities tends to decline. The volatility of
a security's market value will differ depending upon the security's duration,
the issuer and the type of instrument.
Default Risk/Credit Risk. Investments in fixed income securities are
subject to the risk that the issuer of the security could default on its
obligations causing a fund to sustain losses on such investments. A default
could impact both interest and principal payments.
Call Risk and Extension Risk. Fixed income securities may be subject to
both call risk and extension risk. Call risk exists when the issuer may exercise
its right to pay principal on an obligation earlier than scheduled which would
cause cash flows to be returned earlier than expected. This typically results
when interest rates have declined and a fund will suffer from having to reinvest
in lower yielding securities. Extension risk exists when the issuer may exercise
its right to pay principal on an obligation later than scheduled which would
cause cash flows to be returned later than expected. This typically results when
interest rates have increased and a fund will suffer from the inability to
invest in higher yield securities.
Specific Risks
The following sections include descriptions of specific risks that are
associated with the fund's purchase of a particular type of security or the
utilization of a specific investment technique.
Corporate Debt Obligations. The 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. The 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
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reduce the value of the portfolio security. In addition, if the exchange rate
for the currency in which the 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 the fund invests primarily in
securities of established issuers based in developed foreign countries, it may
also invest in securities of issuers in emerging markets, including issuers in
Asia (including Russia), Eastern Europe, Latin and South America, the
Mediterranean and Africa. The fund may invest up to 10% of its total assets in
issuers located in emerging markets generally, with a limit of 3% of total
assets invested in issuers located in any one emerging market. These limitations
do not apply to investments denominated or quoted in the euro. The fund 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
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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. The fund is not required
to invest in any emerging market country.
In addition, certain countries may restrict or prohibit investment
opportunities in issuers or industries deemed important to national interests.
The adviser may determine from time to time to invest in the securities of
emerging market countries which may impose restrictions on foreign investment
and repatriation that cannot currently be predicted. Due to restrictions on
direct investment in equity securities in certain emerging market countries,
such as Taiwan, the 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 fund to the extent that it invests 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 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
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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 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.
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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 the
fund's assets quoted in those currencies. Exchange rates are generally affected
by the forces of supply and demand in the international currency markets, the
relative merits of investing in different countries and the intervention or
failure to intervene of U.S. or foreign governments and central banks. Some
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 the 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. The 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. The 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 portfolio.
Sovereign Debt Obligations. The 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 the 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
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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. The 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. The 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. The 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. The fund may invest in Eurodollar Certificates of Deposit
("ECDs"), Eurodollar Time Deposits ("ETDs") and Yankee Certificates of Deposit
("Yankee CDs"). ECDs are U.S. dollar-denominated certificates of deposit issued
by foreign branches of domestic banks; ETDs are U.S. dollar-denominated deposits
in a foreign branch of a U.S. bank or in a foreign bank; and Yankee CDs are U.S.
dollar-denominated certificates of deposit issued by a U.S. branch of a foreign
bank and held in the U.S. These investments involve risks that are different
from investments in securities issued by U.S. issuers, including potential
unfavorable political and economic developments, foreign withholding or other
taxes, seizure of foreign deposits, currency controls, interest limitations or
other governmental restrictions which might affect payment of principal or
interest.
Mortgage-Backed Securities. The 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
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fund's exposure to rising interest rates and prevent a fund from taking
advantage of such higher yields.
GNMA securities are backed by the full faith and credit of the U.S.
Government, which means that the U.S. Government guarantees that the interest
and principal will be paid when due. FNMA securities and FHLMC securities are
not backed by the full faith and credit of the U.S. Government; however, these
enterprises have the ability to obtain financing from the U.S. Treasury.
Multiple class securities include collateralized mortgage obligations
("CMOs") and Real Estate Mortgage Investment Conduit ("REMIC") pass-through or
participation certificates. CMOs provide an investor with a specified interest
in the cash flow from a pool of underlying mortgages or other mortgage-backed
securities. CMOs are issued in multiple classes, each with a specified fixed or
floating interest rate and a final scheduled distribution date. In most cases,
payments of principal are applied to the CMO classes in the order of their
respective stated maturities, so that no principal payments will be made on a
CMO class until all other classes having an earlier stated maturity date are
paid in full. A REMIC is a CMO that qualifies for special tax treatment under
the Internal Revenue Code of 1986, as amended (the "Code"), and invests in
certain mortgages principally secured by interests in real property and other
permitted investments. The fund does 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 the 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. The 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
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securities do not involve any government-related guaranty or insurance. Like
mortgage-backed securities, asset-backed securities are subject to more rapid
prepayment of principal than indicated by their stated maturity which may
greatly increase price and yield volatility. Asset-backed securities generally
do not have the benefit of a security interest in collateral that is comparable
to mortgage assets and there is the possibility that recoveries on repossessed
collateral may not be available to support payments on these securities.
Convertible Securities. The fund may invest in convertible securities
consisting of bonds, notes, debentures and preferred stocks. Convertible debt
securities and preferred stock acquired by the 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. The fund may invest up to
10% of its 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 fund's 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 fund invests, 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
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subsequent to their acquisition will not affect cash income from such securities
but will be reflected in the 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 fund's 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 the fund's net asset value. A less liquid secondary market also
may make it more difficult for the fund to obtain precise valuations of the high
yield securities in its portfolio.
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, the fund may have to replace such security
with a lower yielding security, resulting in a decreased return for investors.
The 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 the 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.
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Warrants. Warrants acquired by the 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. The 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. The 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. The 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 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. The 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. The fund may invest in inverse floating
rate securities. The interest rate on an inverse floater resets in the opposite
direction from the market rate of interest to which the inverse floater is
indexed. An inverse floater may be considered to be leveraged to the extent that
its interest rate varies by a magnitude that exceeds the magnitude of the change
in the index rate of interest. The higher the degree of leverage of an inverse
floater, the greater the volatility of its market value.
Zero Coupon and Deferred Payment Securities. The 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. The fund is required to accrue income
with respect to these securities prior to the receipt of cash payments. Because
the 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.
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Structured or Hybrid Notes. The fund may invest in structured or hybrid
notes. The distinguishing feature of a structured or hybrid note is that the
amount of interest and/or principal payable on the note is based on the
performance of a benchmark asset or market other than fixed income securities or
interest rates. Examples of these benchmarks include stock prices, currency
exchange rates and physical commodity prices. Investing in a structured note
allows the fund to gain exposure to the benchmark 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,
the fund's net asset value. Further, certain structured or hybrid notes may be
illiquid for purposes of the fund's limitations on investments in illiquid
securities. The fund has no limit on investments in structured or hybrid notes.
However, it is expected that not more than 5% of the fund's net assets will be
at risk as a result of such investments.
Investment Techniques and Related Risks
Strategic Transactions. The 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 fund may change over time as new
instruments and strategies are developed or regulatory changes occur.
In the course of pursuing its investment objectives, the fund may purchase
and sell (write) exchange-listed and OTC put and call options on securities,
equity and fixed-income indices and other financial instruments; purchase and
sell financial futures contracts and options thereon; enter into various
interest rate transactions such as swaps, caps, floors or collars; and enter
into various currency transactions such as currency forward contracts,
cross-currency future contracts, currency futures contracts, currency swaps or
options on currencies or currency futures (collectively, all the above are
called "Strategic Transactions"). Strategic Transactions may be used to seek to
protect against possible changes in the market value of securities held in or to
be purchased for the fund's portfolio resulting from general market, interest
rate or currency exchange rate fluctuations, to seek to protect the fund's
unrealized gains in the value of its portfolio securities, to facilitate the
sale of such securities for investment purposes, to 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 the fund will attempt to
limit its net loss exposure resulting from Strategic Transactions entered into
for such purposes. The fund 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, the fund will close out transactions
in order to comply with this limitation. (Transactions such as writing covered
call options are considered to involve hedging for the purposes of this
limitation.) In calculating the fund's net loss exposure from such Strategic
Transactions, an unrealized gain from a particular Strategic Transaction
position would be netted against an unrealized loss from a related Strategic
Transaction position. For example, if the adviser believes that short-term
interest rates as
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indicated in the forward yield curve are too high, the fund may take a short
position in a near-term Eurodollar futures contract and a long position in a
longer-dated Eurodollar futures contract. Under such circumstances, any
unrealized loss in the near-term Eurodollar futures position would be netted
against any unrealized gain in the longer-dated Eurodollar futures position (and
vice versa) for purposes of calculating the fund's net loss exposure.
The ability of the fund to utilize these Strategic Transactions
successfully will depend on the adviser's ability to predict pertinent market
and interest rate movements, which cannot be assured. The fund will comply with
applicable regulatory requirements when implementing these strategies,
techniques and instruments. The fund's activities involving Strategic
Transactions may be limited in order to allow the 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 the fund,
force the purchase or sale, respectively, of portfolio securities at inopportune
times or for prices higher than (in the case of purchases due to the exercise of
put options) or lower than (in the case of sales due to the exercise of call
options) current market values, limit the amount of appreciation the fund can
realize on its investments or cause the fund to hold a security it might
otherwise sell or sell a security it might otherwise hold. The use of currency
transactions can result in the fund incurring losses as a result of a number of
factors including the imposition of exchange controls, suspension of
settlements, or the inability to deliver or receive a specified currency. The
use of options and futures transactions entails certain other risks. In
particular, the variable degree of correlation between price movements of
futures contracts and price movements in the related portfolio position of the
fund creates the possibility that losses on the hedging instrument may be
greater than gains in the value of the fund's position. The writing of options
could significantly increase the fund's portfolio turnover rate and, therefore,
associated brokerage commissions or spreads. In addition, futures and options
markets may not be liquid in all circumstances and certain OTC options may have
no markets. As a result, in certain markets, the fund might not be able to close
out a transaction without incurring substantial losses, if at all. Although the
use of futures and options transactions for hedging should tend to minimize the
risk of loss due to a decline in the value of the hedged position, at the same
time, in certain circumstances, they tend to limit any potential gain which
might result from an increase in value of such position. The loss incurred by
the fund in writing options on futures and entering into futures transactions is
potentially unlimited; however, as described above, the fund will attempt to
limit its net loss exposure resulting from Strategic Transactions entered into
for non-hedging purposes. Futures markets are highly volatile and the use of
futures may increase the volatility of the fund's net asset value. Finally,
entering into futures contracts would create a greater ongoing potential
financial risk than would purchases of options where the exposure is limited to
the cost of the initial premium. Losses resulting from the use of Strategic
Transactions would reduce net asset value and the net result may be less
favorable than if the Strategic Transactions had not been utilized.
General Characteristics of Options. Put options and call options typically
have similar structural characteristics and operational mechanics regardless of
the underlying instrument on which they are purchased or sold. Thus, the
following general discussion relates to each of the particular types of options
discussed in greater detail below. In addition, many Strategic Transactions
involving options require segregation of the fund's assets in special accounts,
as described below under "Use of Segregated Accounts."
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A put option gives the purchaser of the option, in consideration for the
payment of a premium, the right to sell, and the writer the obligation to buy
(if the option is exercised), the underlying security, commodity, index,
currency or other instrument at the exercise price. For instance, the fund's
purchase of a put option on a security might be designed to protect its holdings
in the underlying instrument (or, in some cases, a similar instrument) against a
substantial decline in the market value by giving the fund the right to sell
such instrument at the option exercise price. A call option, in consideration
for the payment of a premium, gives the purchaser of the option the right to
buy, and the seller the obligation to sell (if the option is exercised), the
underlying instrument at the exercise price. The fund may purchase a call option
on a security, futures contract, index, currency or other instrument to seek to
protect the fund against an increase in the price of the underlying instrument
that it intends to purchase in the future by fixing the price at which it may
purchase such instrument. An American style put or call option may be exercised
at any time during the option period while a European style put or call option
may be exercised only upon expiration or during a fixed period prior thereto.
The fund is authorized to purchase and sell exchange listed options and OTC
options. Exchange listed options are issued by a regulated intermediary such as
the Options Clearing Corporation ("OCC"), which guarantees the performance of
the obligations of the parties to such options. The discussion below uses the
OCC as an example, but is also applicable to other financial intermediaries.
With certain exceptions, exchange listed options generally settle by
physical delivery of the underlying security or currency, although in the future
cash settlement may become available. Index options and Eurodollar instruments
are cash settled for the net amount, if any, by which the option is in-the-money
(i.e., where the value of the underlying instrument exceeds, in the case of a
call option, or is less than, in the case of a put option, the exercise price of
the option) at the time the option is exercised. Frequently, rather than taking
or making delivery of the underlying instrument through the process of
exercising the option, listed options are closed by entering into offsetting
purchase or sale transactions that do not result in ownership of the new option.
The fund's ability to close out its position as a purchaser or seller of
an exchange listed put or call option is dependent, in part, upon the liquidity
of the option market. There is no assurance that a liquid option market on an
exchange will exist. In the event that the relevant market for an option on an
exchange ceases to exist, outstanding options on that exchange would generally
continue to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours
during which the underlying financial instruments are traded. To the extent that
the option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct agreement with
the Counterparty. In contrast to exchange listed options, which generally have
standardized terms and performance mechanics, all the terms of an OTC option,
including such terms as method of settlement, term, exercise price, premium,
guarantees and security, are set by negotiation of the parties. The fund will
generally sell (write) OTC options that are subject to a buy-back provision
permitting the fund to require the Counterparty to sell the option back to the
fund at a formula price within seven days. OTC options purchased by a fund, and
portfolio securities "covering" the amount of the fund's obligation pursuant to
an OTC option sold by it (the cost of the sell-back plus the in-the-money
amount, if any) are subject to the fund's restriction on illiquid securities,
unless determined to be liquid in accordance with procedures adopted by the
Board of Trustees. For OTC options written with "primary dealers" pursuant to an
agreement requiring a closing purchase transaction at a formula price, the
amount which is considered to be
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illiquid may be calculated by reference to a formula price. The fund expects
generally to enter into OTC options that have cash settlement provisions,
although it is not required to do so.
Unless the parties provide for it, there is no central clearing or
guaranty function in 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 the fund or fails to make a cash settlement
payment due in accordance with the terms of that option, the fund will lose any
premium it paid for the option as well as any anticipated benefit of the
transaction. Accordingly, the adviser must assess the creditworthiness of each
such Counterparty or any guarantor or credit enhancement of the Counterparty's
credit to determine the likelihood that the terms of the OTC option will be
satisfied. The fund will engage in OTC option transactions only with U.S.
Government securities dealers recognized by the Federal Reserve Bank of New York
as "primary dealers," or broker-dealers, domestic or foreign banks or other
financial institutions which have received, combined with any credit
enhancements, a long-term debt rating of A from Standard & 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 the fund sells (writes) a call option, the premium that it receives may
serve as a partial hedge, to the extent of the option premium, against a
decrease in the value of the underlying securities or instruments in its
portfolio or will increase the fund's income. The sale (writing) of put options
can also provide income.
The fund may purchase and sell (write) call options on securities
including U.S. Treasury and agency securities, mortgage-backed securities, 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 the
fund must be covered (i.e., the fund must own the securities or the futures
contract subject to the call) or must meet the asset segregation requirements
described below as long as the call is outstanding. In addition, the fund may
cover a written call option or put option by entering into an offsetting forward
contract and/or by purchasing an offsetting option or any other option which, by
virtue of its exercise price or otherwise, reduces the fund's net exposure on
its written option position. Even though the fund will receive the option
premium to help offset any loss, the fund may incur a loss if the exercise price
is below the market price for the security subject to the call at the time of
exercise. A call sold by the fund also exposes the fund during the term of the
option to possible loss of opportunity to realize appreciation in the market
price of the underlying security or instrument and may require the fund to hold
a security or instrument which it might otherwise have sold.
The 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. The fund will not sell put options if, as a
result, more than 50% of its assets would be required to be segregated to cover
its potential obligations under such put options other than those with respect
to futures and options thereon. In selling put options, there is a risk that the
fund may be required to buy the underlying security at a price above the market
price.
Options on Securities Indices and Other Financial Indices. The fund may
also purchase and sell (write) call and put options on securities indices and
other financial indices. Options on securities indices and other financial
indices are similar to options on a security or other instrument except that,
rather than settling by physical delivery of the underlying instrument, they
settle by cash settlement. For example, an option on an index gives the holder
the right to receive, upon exercise of the option,
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an amount of cash if the closing level of the index upon which the option is
based exceeds, in the case of a call, or is less than, in the case of a put, the
exercise price of the option (except if, in the case of an OTC option, physical
delivery is specified). This amount of cash is equal to the differential between
the closing price of the index and the exercise price of the option, which also
may be multiplied by a formula value. The seller of the option is obligated, in
return for the premium received, to make delivery of this amount upon exercise
of the option. In addition to the methods described above, the fund may cover
call options on a securities index by owning securities whose price changes are
expected to be similar to those of the underlying index, or by having an
absolute and immediate right to acquire such securities without additional cash
consideration (or for additional cash consideration held in a segregated account
by its custodian) upon conversion or exchange of other securities in its
portfolio.
General Characteristics of Futures. The fund may enter into financial
futures contracts or purchase or sell put and call options on such futures.
Futures are generally bought and sold on the commodities exchanges where they
are listed and involve payment of initial and variation margin as described
below. All futures contracts entered into by the fund are traded on U.S.
exchanges or boards of trade that are licensed and regulated by the Commodity
Futures Trading Commission ("CFTC") or on certain foreign exchanges.
The sale of futures contracts creates a firm obligation by the fund, as
seller, to deliver to the buyer the specific type of financial instrument called
for in the contract at a specific future time for a specified price (or, with
respect to index futures and Eurodollar instruments, the net cash amount). The
purchase of futures contracts creates a corresponding obligation by the fund, as
purchaser, to purchase a financial instrument at a 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.
The fund's use of financial futures and options thereon will in all cases
be consistent with applicable regulatory requirements and in particular the
regulations of the CFTC relating to exclusions from regulation as a commodity
pool operator. Those regulations currently provide that 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 the fund exercises an option on a
futures contract it will be obligated to post initial margin (and potential
subsequent variation margin) for the resulting futures position just as it would
for any position. Futures contracts and options thereon are generally settled by
entering into an offsetting transaction but there can be no assurance that the
position can be offset prior to settlement at an advantageous price, nor that
delivery will occur. The segregation requirements with respect to futures
contracts and options thereon are described below.
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Currency Transactions. The fund may engage in currency transactions with
Counterparties to seek to hedge the value of portfolio holdings denominated in
particular currencies against fluctuations in relative value or to enhance
potential gain. Currency transactions include currency contracts, exchange
listed currency futures, exchange listed and OTC options on currencies, and
currency swaps. A forward currency contract involves a privately negotiated
obligation to purchase or sell (with delivery generally required) a specific
currency at a future date, which may be any fixed number of days from the date
of the contract agreed upon by the parties, at a price set at the time of the
contract. A currency swap is an agreement to exchange cash flows based on the
notional (agreed upon) difference among two or more currencies and operates
similarly to an interest rate swap, which is described below. The 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.
The 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 the fund, which will generally arise in connection with the
purchase or sale of its portfolio securities or the receipt of income therefrom.
Position hedging is entering into a currency transaction with respect to
portfolio security positions denominated or generally quoted in that currency.
The fund will not enter into a transaction to hedge currency exposure to
an extent greater, after netting all transactions intended wholly or partially
to offset other transactions, than the aggregate market value (at the time of
entering into the transaction) of the securities held in its portfolio that are
denominated or generally quoted in or currently convertible into such currency,
other than with respect to non-hedging transactions or proxy hedging as
described below.
The fund may also cross-hedge currencies by entering into transactions to
purchase or sell one or more currencies that are expected to decline in value in
relation to other currencies to which the fund has or in which the fund expects
to have portfolio exposure. For example, the fund may hold a 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, the 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 the fund's portfolio securities are
or are expected to be denominated, and to buy U.S. dollars. The amount of the
contract would not exceed the value of the portfolio securities denominated in
linked currencies. For example, if the adviser considers that the Korean won is
linked to the Japanese yen, and the fund's 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 the fund if the currency being hedged fluctuates in value to a degree
or in a direction that is not anticipated. Further, there is the risk that the
perceived linkage between various currencies may not be present or may not be
present
19
<PAGE>
during the particular time that the fund is engaging in proxy hedging. If the
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 the 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. The fund may enter into multiple transactions,
including multiple options transactions, multiple futures transactions, multiple
currency transactions including forward currency contracts and multiple interest
rate transactions, structured notes and any combination of futures, options,
currency and interest rate transactions ("component transactions"), instead of a
single Strategic Transaction, as part of a single or combined strategy when, in
the opinion of the adviser, it is in the best interests of the fund to do so. A
combined transaction will usually contain elements of risk that are present in
each of its component transactions. Although combined transactions are normally
entered into based on the adviser's judgment that the combined strategies will
reduce risk or otherwise more effectively achieve the desired portfolio
management goal, it is possible that the combination will instead increase such
risks or hinder achievement of the portfolio management objective.
Swaps, Caps, Floors and Collars. Among the Strategic Transactions into
which the fund may enter are interest rate, currency and index swaps and the
purchase or sale of related caps, floors and collars. The fund expects to enter
into these transactions primarily for hedging purposes, including, but not
limited to, preserving a return or spread on a particular investment or portion
of the fund's portfolio, protecting against currency fluctuations, as a duration
management technique or protecting against an increase in the price of
securities the fund anticipates purchasing at a later date. Swaps, caps, floors
and collars may also be used to enhance potential gain in circumstances where
hedging is not involved although, as described above, the fund will attempt to
limit its net loss exposure resulting from swaps, caps, floors and collars and
other Strategic Transactions entered into for such purposes. The 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.
The fund will not sell interest rate caps or floors where it does not own
securities or other instruments providing the income stream the fund may be
obligated to pay. Interest rate swaps involve the exchange by the fund with
another party of their respective commitments to pay or receive interest (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
20
<PAGE>
specified index falls below a predetermined interest rate or amount. A collar is
a combination of a cap and a floor that preserves a certain rate of return
within a predetermined range of interest rates or values.
The fund will usually enter into swaps on a net basis (i.e., the two
payment streams are netted out in a cash settlement on the payment date or dates
specified in the instrument) with the fund receiving or paying, as the case may
be, only the net amount of the two payments. The fund will not enter into any
swap, cap, floor or collar transaction unless, at the time of entering into such
transaction, the unsecured long-term debt of the Counterparty, combined with any
credit enhancements, is rated at least A by Standard & 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 the fund's policy regarding illiquid
securities, unless it is determined, based upon continuing review of the trading
markets for the specific security, that such security is liquid. The Board of
Trustees of the Trust has adopted guidelines and delegated to the adviser the
daily function of determining and monitoring the liquidity of swaps, caps,
floors and collars. The Board of Trustees, however, retains oversight focusing
on factors such as valuation, liquidity and availability of information and is
ultimately responsible for such determinations. The Staff of the SEC currently
takes the position that swaps, caps, floors and collars are illiquid, and are
subject to the fund's limitation on investing in illiquid securities.
Risks of Strategic Transactions Outside the United States. The fund may
use strategic transactions to seek to hedge against currency exchange rate
risks. When conducted outside the United States, Strategic Transactions may not
be regulated as rigorously as in the United States, may not involve a clearing
mechanism and related guarantees, and are subject to the risk of governmental
actions affecting trading in, or the prices of, foreign securities, currencies
and other instruments. The value of such positions also could be adversely
affected by: (i) lesser availability than in the United States of data on which
to make trading decisions, (ii) delays in the fund's ability to act upon
economic events occurring in foreign markets during non-business hours in the
United States, (iii) the imposition of different exercise and settlement terms
and procedures and margin requirements than in the United States, (iv) lower
trading volume and liquidity, and (v) other complex foreign political, legal and
economic factors. At the same time, Strategic Transactions may offer advantages
such as trading in instruments that are not currently traded in the United
States or arbitrage possibilities not available in the United States.
Use of Segregated Accounts. The fund will hold securities or other
instruments whose values are expected to offset its obligations under the
Strategic Transactions. The fund will cover Strategic Transactions as required
by interpretive positions of the SEC. The fund will not enter into Strategic
Transactions that expose the fund to an obligation to another party unless it
owns either (i) an offsetting position in securities or other options, futures
contracts or other instruments or (ii) cash, receivables or liquid securities
with a value sufficient to cover its potential obligations. The 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
21
<PAGE>
while the Strategic Transaction is outstanding, unless they are replaced with
similar assets. As a result, there is a possibility that segregation of a large
percentage of the fund's assets could impede portfolio management or the fund's
ability to meet redemption requests or other current obligations.
"When-Issued", "Delayed Delivery" and "Forward Commitment" Securities. The
fund may invest up to 25% of its net assets in securities purchased on a
when-issued or delayed delivery basis. Delivery and payment for securities
purchased on a when-issued or delayed delivery basis will normally take place 15
to 45 days after the date of the transaction. The payment obligation and
interest rate on the securities are fixed at the time that the fund enters into
the commitment, but interest will not accrue to the fund until delivery of and
payment for the securities. Although the fund will only make commitments to
purchase "when-issued" and "delayed delivery" securities with the intention of
actually acquiring the securities, the fund may sell the securities before the
settlement date if deemed advisable by the adviser.
Unless the fund has entered into an offsetting agreement to sell the
securities purchased on a when-issued or forward commitment basis, 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 the fund. Changes in market value may be based upon the public's
perception of the creditworthiness of the issuer or changes in the level of
interest rates. Generally, the value of "when-issued", "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. The fund may invest up to 25% of its net assets in
repurchase agreements. A repurchase agreement is an agreement under which a fund
acquires money market instruments (generally U.S. Government securities) from a
commercial bank, broker or dealer, subject to resale to the seller at an
agreed-upon price and date (normally the next business day). The resale price
reflects an agreed-upon interest rate effective for the period the instruments
are held by the fund and is unrelated to the interest rate on the instruments.
The instruments acquired by the fund (including accrued interest) must have an
aggregate market value in excess of the resale price and will be held by the
fund's custodian bank until they are repurchased. 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.
The use of repurchase agreements involves certain risks. For example, if
the seller defaults on its obligation to repurchase the instruments acquired by
the fund at a time when their market value has declined, the fund may incur a
loss. If the seller becomes insolvent or subject to liquidation or
reorganization under bankruptcy or other laws, a court may determine that the
instruments acquired by the fund are collateral for a loan by the fund and
therefore are subject to sale by the trustee in bankruptcy. Finally, it is
possible that the fund may not be able to substantiate its interest in the
instruments it acquires. While the Trustees acknowledge these risks, it is
expected that they can be controlled through careful documentation and
monitoring.
Forward Roll Transactions. To seek to enhance current income, the fund may
invest up to 10% of its net assets in forward roll transactions involving
mortgage-backed securities. In a forward roll transaction, the fund sells a
mortgage-backed security to a financial institution, such as a bank or
broker-dealer, and simultaneously agrees to repurchase a similar security from
the institution at a later
22
<PAGE>
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 the
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
the 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 the fund, the net asset value of the fund would
fall faster than would otherwise be the case.
Short Sales. The fund may engage in short sales and short sales against
the box. In a short sale, the 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, the 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 the 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 the
fund's net assets.
Restricted and Illiquid Securities. The 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 Board of Trustees has adopted guidelines and delegated to the advisers
the function of determining and monitoring the liquidity of portfolio
securities, including restricted and illiquid securities. The Board of Trustees,
however, retains oversight and is ultimately responsible for such
determinations. The purchase price and subsequent valuation of illiquid
securities normally reflect a discount, which may be significant, from the
market price of comparable securities for which a liquid market exists.
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.
23
<PAGE>
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.
The fund may invest in commercial paper rated P-1 by Moody's or A-1 by
Standard & Poors or Duff-1 by Duff, which are the highest ratings assigned by
these rating services (even if rated lower by one or more of the other
agencies), or, if not rated or rated lower by one or more of the agencies and
not rated by the other agency or agencies, judged by the adviser to be of
equivalent quality to the securities so rated. In determining whether securities
are of equivalent quality, the adviser may take into account, but will not rely
entirely on, ratings assigned by foreign rating agencies.
Temporary Defensive Investments. The fund may maintain cash balances and
purchase money market instruments for cash management and liquidity purposes.
The fund may adopt a temporary defensive position during adverse market
conditions by investing without limit in high quality money market instruments,
including short-term U.S. Government securities, negotiable certificates of
deposit, non-negotiable fixed time deposits, bankers' acceptances, commercial
paper, floating-rate notes and repurchase agreements.
Portfolio Turnover. It is not the policy of the fund to purchase or sell
securities for trading purposes. However, the fund places no restrictions on
portfolio turnover and it may sell any portfolio security without regard to the
period of time it has been held. The fund may therefore generally change its
portfolio investments at any time in accordance with the adviser's appraisal of
factors affecting any particular issuer or market, or the economy in general. A
rate of turnover of 100% would occur if the value of the lesser of purchases and
sales of portfolio securities for a particular year equaled the average monthly
value of portfolio securities owned during the year (excluding short-term
securities). A high rate of portfolio turnover (100% or more) involves a
correspondingly greater amount of brokerage commissions and other costs which
must be borne directly by the fund and thus indirectly by its shareholders. It
may also result in the realization of larger amounts of net short-term capital
gains, distributions of which are taxable to the fund's shareholders as ordinary
income.
Portfolio Diversification and Concentration. The fund is non-diversified
which means that it may, with respect to up to 50% of its total assets, invest
more than 5% of its total assets in the securities of a single issuer. Investing
a significant amount of the 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 fund will not concentrate (invest 25% or
more of its total assets) in the securities of issuers in any one industry. The
fund's policies concerning diversification and concentration are fundamental and
may not be changed without shareholder approval.
INVESTMENT RESTRICTIONS
The fund has adopted the following fundamental policies. The fund'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, which
phrase as used herein means the lesser of (i) 67% or more of the voting
securities of the fund present at a meeting, if the holders of more than 50% of
the outstanding voting
24
<PAGE>
securities of the fund are present or represented by proxy, or (ii) more than
50% of the outstanding voting securities of the fund.
Standish International Fixed Income Fund II.
As a matter of fundamental policy, the International Fixed Income Fund may
not:
1. Invest, with respect to at least 50% of its total assets, more than 5% in
the securities of any one issuer (other than the U.S. Government, its
agencies or instrumentalities) or acquire more than 10% of the outstanding
voting securities of any issuer.
2. Issue senior securities, borrow money or securities or pledge or mortgage
its assets, except that the fund may (a) borrow money from banks as a
temporary measure for extraordinary or emergency purposes (but not for
investment purposes) in an amount up to 15% of the current value of its
total assets, (b) enter into forward roll transactions, and (c) pledge its
assets to an extent not greater than 15% of the current value of its total
assets.
3. Lend portfolio securities, except that the fund may lend its portfolio
securities with a value up to 20% of its total assets (with a 10% limit
for any borrower) and may enter into repurchase agreements with respect to
25% of the value of its net assets.
4. Invest more than 25% of the current value of its total assets in any
single industry, provided that this restriction shall not apply to debt
securities issued or guaranteed by the United States government or its
agencies or instrumentalities.
5. Underwrite the securities of other issuers, except to the extent that, in
connection with the disposition of portfolio securities, the fund may be
deemed to be an underwriter under the Securities Act of 1933.
6. Purchase real estate or real estate mortgage loans, although the fund may
purchase marketable securities of companies which deal in real estate,
real estate mortgage loans or interests therein.
7. Purchase securities on margin (except that the fund may obtain such
short-term credits as may be necessary for the clearance of purchases and
sales of securities).
8. Purchase or sell commodities or commodity contracts except that the fund
may purchase and sell financial futures contracts and options on financial
futures contracts and engage in foreign currency exchange transactions.
The following restrictions are not fundamental policies and may be changed
by the Trustees without shareholder approval, in accordance with applicable
laws, regulations or regulatory policy. The fund may not:
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.
******
If any percentage restriction described above is adhered to at the time of
investment, a subsequent increase or decrease in the percentage resulting from a
change in the value of the fund's assets will not constitute a violation of the
restriction.
CALCULATION OF PERFORMANCE DATA
As indicated in the Prospectus, the fund may, from time to time, advertise
certain total return and yield information. The average annual total return of
the fund for a period is computed by subtracting the net asset value per share
at the beginning of the period from the net asset value per share at the end of
the period (after adjusting for the reinvestment of any income dividends and
capital gain distributions), and dividing the result by the net asset value per
share at the beginning of the period. In particular, the fund's average annual
total return ("T") is computed by using the redeemable value at the end of a
specified period of time ("ERV") of a hypothetical initial investment of $1,000
("P") over a period of time ("n") according to the formula P(1+T)n=ERV.
The fund's yield is computed by dividing the net investment income per
share earned during a base period of 30 days, or one month, by the maximum
offering price per share on the last day of the period. For the purpose of
determining net investment income, the calculation includes, among expenses of
the fund, all recurring fees that are charged to all shareholder accounts and
any non-recurring charges for the period stated. In particular, yield is
determined according to the following formula:
Yield = 2[((A - B)/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 fund may also quote non-standardized yield, such as yield-to-maturity
("YTM"). YTM represents the rate of return an investor will receive if a
long-term, interest bearing investment, such as a bond, is held to its maturity
date. YTM does not take into account purchase price, redemption value, time to
maturity, coupon yield and the time between interest payments.
With respect to the treatment of discount and premium on mortgage or other
receivables-backed obligations which are expected to be subject to monthly
payments of principal and interest ("pay downs"), the fund accounts for gain or
loss attributable to actual monthly pay downs as an increase or decrease to
interest income during the period.
In addition, the fund may elect (i) to amortize the discount or premium
remaining on a security, based on the cost of the security, to the weighted
average maturity date, if such information is available, or to the remaining
term of the security, if the weighted average maturity date is not available, or
(ii) not to amortize the discount or premium remaining on a security.
26
<PAGE>
Any performance quotations should not be considered as representative of
the fund's performance for any specified period in the future. The fund's
performance may be compared in sales literature 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
the fund may compare its performance to the J. P. Morgan Non-U.S. Government
Bond Index, which is generally considered to be representative of unmanaged
government bonds in foreign markets, and the Lehman Brothers Aggregate Index as
described above.
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
The Trustees and executive officers of the Trust are listed below. All
executive officers of the 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;
P.O. Box 307 Trustee, 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 &
One Financial Center Wood, Inc.;
Boston, MA 02111 Director of Standish International
Management Company, L.P.
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
Name, Address and Date of Birth Position Held With Trust Principal Occupation During Past 5
Years
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Caleb Loring III, 11/14/43 Trustee Trustee, Essex Street Associates
c/o Essex Street Associates (family investment trust office);
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;
One Financial Center formerly Senior Vice President, Treasurer
Boston, MA 02111 and Chief 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 &
One Financial Center Wood, Inc.
Boston, MA 02111
Denise B. Kneeland, 8/19/51 Vice President Vice President and Manager, Mutual
c/o Standish, Ayer & Wood, Inc. Fund Operations,
One Financial Center Standish, Ayer & Wood, Inc.
Boston, MA 02111 since December 1995; formerly Vice
President, Scudder, Stevens and Clark
Tami M. Pester, 10/29/67 Vice President Assistant Compliance Manager and
c/o Standish, Ayer & Wood, Inc. Compliance Officer, Standish, Ayer &
One Financial Center Wood, Inc. since 1998; Compliance
Boston, MA 02111 Officer, State Street Global Advisors
Rosalind J. Lillo, 2/6/38 Vice President Broker/Dealer Administrator
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc. since
One Financial Center October 1995; formerly Compliance
Boston, MA 02111 Administrator, New England Securities
Corp.
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
Name, Address and Date of Birth Position Held With Trust Principal Occupation During Past 5
Years
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deborah Rafferty-Maple, 1/4/69 Vice President Financial Planner and Registered
c/o Standish, Ayer & Wood, Inc. Investment Networks Marketing
One Financial Center Manager, Standish, Ayer & Wood
Boston, MA 02111
Gigi K. Szekely, 5/8/67 Vice President Manager, Mutual Funds, Marketing
c/o Standish, Ayer & Wood, Inc. Communications,
One Financial Center Standish, Ayer & Wood, Inc.
Boston, MA 02111
</TABLE>
* Indicates that Trustee is an interested person of the Trust for purposes of
the 1940 Act.
Compensation of Trustees and Officers.
The Trust does not pay compensation to the Trustees of the Trust that are
affiliated with Standish or to the Trust's officers. None of the Trustees or
officers have engaged in any financial transactions (other than the purchase or
redemption of the fund's shares) with the Trust or the adviser 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 estimates the compensation which will be paid to the
Trust's Trustees for the fund's initial fiscal year ending December 31, 1999.
Aggregate Compensation from the Fund
<TABLE>
<CAPTION>
Pension or
Retirement
International Benefits Accrued Total Compensation
Fixed Income as Part of Fund's from Fund & Other
Name of Trustee Fund II* Expenses Funds in Complex*
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
D. Barr Clayson $0 $0 $0
Samuel C. Fleming $1,050 $0 $57,375
Benjamin M. Friedman $1,050 $0 $57,375
John H. Hewitt $1,075 $0 $62,375
Edward H. Ladd $0 $0 $0
Caleb Loring, III $1,050 $0 $57,375
Richard S. Wood $0 $0 $0
</TABLE>
*Estimated. The fund is newly organized and has not paid any trustees' fees.
** 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.
Investment adviser.
SIMCO serves as investment adviser to the fund pursuant to written
investment advisory agreement. 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
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<PAGE>
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.
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, the
adviser recommends investment decisions and places orders to purchase and sell
securities for the fund. In addition to those services, the adviser provides the
fund with office space for managing its affairs, with the services of required
executive personnel, and with certain clerical services and facilities. Under
the investment advisory agreement, the adviser is paid a fee equal to 0.40% of
the fund's average daily net assets. The advisory fees are payable monthly.
Pursuant to the investment advisory agreement, the fund bears expenses of
its operations other than those incurred by the adviser pursuant to the
investment advisory agreement. Among other expenses, the fund will pay share
pricing and shareholder servicing fees and expenses; custodian fees and
expenses; legal and auditing fees and expenses; expenses of prospectuses,
statements of additional information and shareholder reports; registration and
reporting fees and expenses; and Trustees' fees and expenses.
Unless terminated as provided below, the investment advisory agreement
continues 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
by the "vote of a majority of the outstanding voting securities" of the fund,
and, in either event (ii) by vote of a majority of the Trustees of the Trust who
are not parties to the investment advisory agreement or "interested persons" (as
defined in the Investment Company Act of 1940) of any such party, cast in person
at a meeting called for the purpose of voting on such approval. The investment
advisory agreement may be terminated at any time without the payment of any
penalty by vote of the Trustees of the Trust or by the "vote of a majority of
the outstanding voting securities" of the fund 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 fund, the adviser, the Principal Underwriter and the Trust have each
adopted extensive restrictions on personal securities trading by personnel of
the adviser and its affiliates. These restrictions include: pre-clearance of all
personal securities transactions and a prohibition of purchasing initial public
offerings of securities. These restrictions are a continuation of the basic
principle that the interests of the fund and its shareholders come before those
of the adviser and its employees.
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<PAGE>
Administrator.
Investors Bank & Trust Company ("IBT"), 200 Clarendon Street, Boston
Massachusetts 02116, serves as the administrator to the fund pursuant to a
written administration agreement with the Trust on its behalf. As administrator,
IBT manages the affairs of the fund and provides all necessary office space and
services of executive personnel for administering the affairs of the fund. The
administration agreement can be terminated by either party on not more than
sixty days' written notice.
Distributor of the Fund.
Standish Fund Distributors, L.P. (the "Principal Underwriter"), an
affiliate of the adviser, serves as the Trust's exclusive principal underwriter
and holds itself available to receive purchase orders for the fund's shares. In
that capacity, the Principal Underwriter has been granted the right, as agent of
the Trust, to solicit and accept orders for the purchase of the fund's shares in
accordance with the terms of the Underwriting Agreement between the Trust and
the Principal Underwriter. Pursuant to the Underwriting Agreement, the Principal
Underwriter has agreed to use its best efforts to obtain orders for the
continuous offering of the fund's shares. The Principal Underwriter receives no
commissions or other compensation for its services, and has not received any
such amounts in any prior year. The Underwriting Agreement shall continue in
effect with respect to the fund until two years after its execution and for
successive periods of one year thereafter only if it is approved at least
annually thereafter (i) by a vote of the holders of a majority of the fund's
outstanding shares or by the Trustees of the Trust or (ii) by a vote of a
majority of the Trustees of the Trust who are not "interested persons" (as
defined by the 1940 Act) of the parties to the Underwriting Agreement, cast in
person at a meeting called for the purpose of voting on such approval. The
Underwriting Agreement will terminate automatically if assigned by either party
thereto and is terminable at any time without penalty by a vote of a majority of
the Trustees of the Trust, a vote of a majority of the Trustees who are not
"interested persons" of the Trust, or by a vote of the holders of a majority of
the fund's outstanding shares, in any case without payment of any penalty on not
more than 60 days' written notice to the other party. The offices of the
Principal Underwriter are located at One Financial Center, 26th Floor, Boston,
Massachusetts 02111.
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,
the fund has authorized one or more brokers and dealers to accept on its behalf
orders for the purchase and redemption of fund shares. Under certain conditions,
such authorized brokers and dealers may designate other intermediaries to accept
orders for the purchase and redemption of fund shares. In accordance with a
position taken by the staff of the SEC, such purchase and redemption orders are
considered to have been received by the fund when accepted by the authorized
broker or dealer or, if applicable, the authorized broker's or dealer's
designee. Also in accordance with the position taken by the staff of the SEC,
such purchase and redemption orders will receive the fund's net asset value per
share next computed after the purchase or redemption order is accepted by the
authorized broker or dealer or, if applicable, the authorized broker's or
dealer's designee.
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<PAGE>
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 the
fund of securities owned by it or determination by the fund of the value of its
net assets is not reasonably practicable; or (iii) for such other periods as the
SEC may permit for the protection of shareholders of the fund.
The Trust intends to pay redemption proceeds in cash for all fund shares
redeemed but, under certain conditions, the Trust may make payment wholly or
partly in 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 the 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 the fund's portfolio transactions
and will do so in a manner deemed fair and reasonable to the fund and not
according to any formula. The primary consideration in all portfolio
transactions will be prompt execution of orders in an efficient manner at the
most favorable price. In selecting broker-dealers and in negotiating
commissions, the adviser will consider the firm's reliability, the quality of
its execution services on a continuing basis and its financial condition. When
more than one firm is believed to meet these criteria, preference may be given
to firms which also sell shares of the fund. In addition, if the adviser
determines in good faith that the amount of commissions charged by a broker is
reasonable in relation to the value of the brokerage and research services
provided by such broker, the fund may pay commissions to such broker in an
amount greater than the amount another firm may charge. Research services may
include (i) furnishing advice as to the value of securities, the advisability of
investing in, purchasing or selling securities, and the availability of
securities or purchasers or sellers of securities, (ii) furnishing 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 fund effects its securities transactions may be used by the adviser in
servicing other accounts; not all of these services may be used by the adviser
in connection with the fund generating the soft dollar credits. The investment
advisory fee paid by the fund 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
fund and another advisory account. In some cases, this procedure could have an
adverse effect on the price or the amount of securities
32
<PAGE>
available to the fund. In making such allocations, the main factors considered
by the adviser will be the respective investment objectives, the relative size
of portfolio holdings of the same or comparable securities, the availability of
cash for investment, the size of investment commitments generally held, and
opinions of the persons responsible for recommending the investment.
DETERMINATION OF NET ASSET VALUE
The fund's net asset value is calculated each day on which the 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 the 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 the fund less all liabilities by the number of fund shares
outstanding, and adjusting to the nearest cent per share. Expenses and fees of
the fund are accrued daily and taken into account for the purpose of determining
net asset value.
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 the fund are valued on an amortized cost basis. If the fund
acquires a money market instrument with more than sixty days remaining to its
maturity, it is valued at current market value until the sixtieth day prior to
maturity and will then be valued at amortized cost based upon the value on such
date unless the Trustees determine during such sixty-day period that amortized
cost does not represent fair value.
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 the 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 fund's 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.
33
<PAGE>
THE FUND AND ITS SHARES
The 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. Shares
of the fund represent interests in the fund in proportion to each share's net
asset value. Shareholders are not entitled to any preemptive, conversion or
subscription rights. All shares, when issued, will be fully paid and
non-assessable by the Trust. Upon any liquidation of the fund, shareholders of
the 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 the
fund. The Trustees have established other series of the Trust. Pursuant to the
Declaration, the Board may establish and issue multiple classes of shares for
each series of the Trust. Pursuant to the Declaration of Trust and subject to
shareholder approval (if then required by applicable law), the Trustees may
authorize the fund to invest all of its investable assets in a single open-end
investment company that has substantially the same investment objectives,
policies and restrictions as the fund.
All fund shares have equal rights with regard to voting, and shareholders
of the fund have the right to vote as a separate class with respect to matters
as to which their interests are not identical to those of shareholders of other
classes of the Trust, including the approval of an investment advisory contract
and any change of investment policy requiring the approval of shareholders.
Under Massachusetts law, shareholders of the Trust could, under certain
circumstances, be held liable for the obligations of the Trust. However, the
Agreement and Declaration of Trust disclaims shareholder liability for acts or
obligations of the Trust and requires that notice of this disclaimer be given in
each agreement, obligation or instrument entered into or executed by the Trust
or a Trustee. The Declaration also provides for indemnification from the assets
of the Trust for all losses and expenses of any Trust shareholder held liable
for the obligations of the Trust. Thus, the risk of a shareholder incurring a
financial loss on account of his or its liability as a shareholder of the Trust
is limited to circumstances in which the Trust would be unable to meet its
obligations. The possibility that these circumstances would occur is remote.
Upon payment of any liability incurred by the Trust, the shareholder paying the
liability will be entitled to reimbursement from the general assets of the
Trust. The Declaration also provides that no series of the Trust is liable for
the obligations of any other series. The Trustees intend to conduct the
operations of the Trust to avoid, to the extent possible, ultimate liability of
shareholders for liabilities of the Trust.
TAXATION
Each series of the Trust, including the fund, is treated as a separate
entity for accounting and tax purposes. The fund intends to qualify and elect to
be treated as a "regulated investment company" ("RIC") under Subchapter M of the
Code. As such and by complying with the applicable provisions of the Code
regarding the sources of its income,
34
<PAGE>
the timing of its distributions, and the diversification of its assets, the fund
will not be subject to Federal income tax on its investment company taxable
income (i.e., all taxable income, after reduction by deductible expenses, other
than its "net capital gain," which is the excess, if any, of its net long-term
capital gain over its net short-term capital loss) and net capital gain which
are distributed to shareholders in accordance with the timing and other
requirements of the Code.
The fund will be subject to a 4% non-deductible federal excise tax on
certain amounts not distributed (and not treated as having been distributed) on
a timely basis in accordance with annual minimum distribution requirements. The
fund intends under normal circumstances to seek to avoid liability for such tax
by satisfying such distribution requirements. Certain distributions made in
order to satisfy the Code's distribution requirements may be declared by the
fund during October, November or December 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.
The fund is not subject to Massachusetts corporate excise or franchise
taxes. Provided that the fund qualifies as a regulated investment company under
the applicable provisions of federal law incorporated in Massachusetts law, it
will also not be required to pay any Massachusetts income tax.
The fund will not distribute net capital gains realized in any year to the
extent that a capital loss is carried forward from prior years against such
gain. For federal income tax purposes, the fund is permitted to carry forward a
net capital loss in any year to offset its own net capital gains, if any, during
the eight years following the year of the loss. To the extent subsequent net
capital gains are offset by such losses, they would not result in federal income
tax liability to the fund.
If the fund invests in zero coupon securities, certain increasing rate or
deferred interest securities or, in general, other securities with original
issue discount (or with market discount if the fund elects to include market
discount in income currently), the fund must accrue income on such investments
prior to the receipt of the corresponding cash payments. However, the fund must
distribute, at least annually, all or substantially all of its net income to
shareholders to qualify as a regulated investment company under the Code and
avoid federal income and excise taxes. Therefore, the fund may have to dispose
of its portfolio securities under disadvantageous circumstances to generate
cash, or may have to leverage itself by borrowing the cash, to allow
satisfaction of the distribution requirements.
Limitations imposed by the Code on regulated investment companies like the
fund may restrict the fund's ability to enter into futures, options or currency
forward transactions.
Certain options, futures or currency forward transactions undertaken by
the fund may cause the fund to recognize gains or losses from marking to market
even though the fund's positions have not been sold or terminated and affect the
character as long-term or short-term (or, in the case of certain options,
futures or forward contracts relating to foreign currency, as ordinary income or
loss) and timing of some capital gains and losses realized by the fund.
Additionally, the fund may be required to recognize gain if an option, future,
forward contract, short sale, swap or other Strategic Transaction that is not
subject to the mark to market rules is treated as a "constructive sale" of an
"appreciated financial position" held by the fund 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 the fund to satisfy the
35
<PAGE>
distribution requirements referred to above even though no corresponding cash
amounts may concurrently be received, possibly requiring the disposition of
portfolio securities or borrowing to obtain the necessary cash. Also, certain
losses on transactions involving options, futures or forward contracts and/or
offsetting or successor positions may be deferred rather than being taken into
account currently in calculating the fund's taxable income or gain. Certain of
the applicable tax rules may be modified if the fund is eligible and chooses to
make one or more of certain tax elections that may be available. These
transactions may therefore affect the amount, timing and character of the fund's
distributions to shareholders. The fund will take into account the special tax
rules 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 the fund will account for these
instruments in a manner that is intended to allow the fund to continue to
qualify as a regulated investment company. Due to possible unfavorable
consequences under present tax law, the fund does not currently intend to
acquire "residual" interests in real estate mortgage investment conduits
("REMICs"), although the fund may acquire "regular" interests in REMICs.
Foreign exchange gains and losses realized by the fund in connection with
certain transactions involving foreign currency-denominated debt securities,
certain foreign currency futures and options, foreign currency forward
contracts, foreign currencies, or payables or receivables denominated in a
foreign currency are subject to Section 988 of the Code, which generally causes
such gains and losses to be treated as ordinary income and losses and may affect
the amount, timing and character of fund distributions to shareholders. In some
cases, elections may be available that would alter this treatment. Any such
transactions that are not directly related to the 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
the 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 the fund to obtain cash corresponding to its earnings from such
countries, which may cause the fund to have difficulty obtaining cash necessary
to satisfy tax distribution requirements.
The fund may be subject to withholding and other taxes imposed by foreign
countries with respect to its investments in foreign securities. Tax conventions
between certain countries and the U.S. may reduce or eliminate such taxes in
some cases. Investors in the 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 fund's total assets at the close of
any taxable year were to consist of stock or securities of foreign corporations
and the fund were to file an election with the Internal Revenue Service.
The fund may meet the 50% threshold referred to in the previous paragraph
for a year and, if it 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 even
though not actually received by them and (ii) treat such respective pro rata
portions as foreign taxes paid by them.
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<PAGE>
If the 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, although such shareholders will be
required to include their share of such taxes in gross income. Shareholders who
claim a foreign tax credit for such foreign taxes may be required to treat a
portion of dividends received from the fund as a separate category of income for
purposes of computing the limitations on the foreign tax credit. Tax exempt
shareholders will ordinarily not benefit from this election. Each year (if any)
that the 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 and (ii) the portion of fund dividends which
represents income from each foreign country.
If the 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"), the fund could be
subject to Federal income tax and additional interest charges on "excess
distributions" received from such companies or gain from the sale of stock in
such companies, even if all income or gain actually realized is timely
distributed to its shareholders. The fund would not be able to pass through to
its shareholders any credit or deduction for such a tax. Certain elections may,
if available, ameliorate these adverse tax consequences, but any such election
would require the fund to recognize taxable income or gain (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 may limit and/or manage stock holdings, if any, in
passive foreign investment companies to minimize the fund's tax liability or
maximize its return from these investments.
Investment in debt obligations by the fund that are at risk of or in
default presents special tax issues for the fund. Tax rules are not entirely
clear about issues such as when the fund may cease to accrue interest, original
issue discount, or market discount, when and to what extent deductions may be
taken for bad debts or worthless securities, how payments received on
obligations in default should be allocated between principal and income, and
whether exchanges of debt obligations in a workout context are taxable. These
and other issues will be addressed by the fund in the event that it holds such
obligations, in order to reduce the risk of the fund, distributing insufficient
income to preserve its status as a RIC or becoming subject to Federal income or
excise tax.
Distributions from the 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.
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<PAGE>
The fund's distributions to its corporate shareholders would potentially
qualify in their hands for the corporate dividends received deduction, subject
to certain holding period requirements and limitations on debt financing under
the Code, only to the extent the fund earned dividend income from stock
investments in U.S. domestic corporations. The fund is permitted to acquire
stocks of U.S. domestic corporations, and it is therefore possible that a small
portion of the 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. Consequently,
subsequent distributions by the 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 the fund in a
transaction that is treated as a sale for tax purposes, a shareholder may
realize a taxable gain or loss, depending upon the difference between the
redemption proceeds and the shareholder's tax basis in his shares. Such gain or
loss will generally be treated as capital gain or loss if the shares are capital
assets in the shareholder's hands. Any loss realized on a redemption 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, the fund's distributions are derived from interest on (or, in the case
of intangible property taxes, the value of its assets is attributable to)
investments in certain U.S. Government obligations, provided in some states that
certain thresholds for holdings of such obligations and/or reporting
requirements are satisfied. Shareholders should consult their tax advisers
regarding the applicable requirements in their particular states, as well as the
Federal, and any other state
38
<PAGE>
or local, tax consequences of ownership of shares of, and receipt of
distributions from, the 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 fund 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. The fund
will not impose backup withholding as a result of your failure to make any
certification, except the certifications in the Application that directly relate
to your TIN and backup withholding status. Amounts withheld and forwarded to the
IRS can be credited as a payment of tax when completing your federal income tax
return.
For most individual taxpayers, the TIN is the social security number.
Special rules apply for certain accounts. For example, for an account
established under the Uniform Gift to Minors Act, the TIN of the minor should be
furnished. If you do not have a TIN, you may apply for one using forms available
at local offices of the Social Security Administration or the IRS, and you
should write "Applied For" in the space for a TIN on the Application.
Recipients exempt from backup withholding, including corporations and
certain other entities, should provide their TIN and underline "exempt" in
section 2(a) of the TIN section of the Application to avoid possible erroneous
withholding. Non-resident aliens and foreign entities 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 the fund is effectively connected will be subject to U.S.
Federal income tax treatment that is different from that described above. These
investors may be subject to nonresident alien withholding tax at the rate of 30%
(or a lower rate under an applicable tax treaty) on amounts treated as ordinary
dividends from the fund and, unless an effective IRS Form W-8, 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
The fund's financial statements for the fiscal year ending December 31,
1999 will be audited by PricewaterhouseCoopers L.L.P., independent accountants.
39
<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.
40
<PAGE>
BBB - Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB - Debt rated BB is regarded, on balance, as predominantly speculative
with respect to capacity to pay interest and repay principal in accordance with
the terms of the obligation. While such debt will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or major
risk exposures to adverse conditions.
B - Debt rated B has a greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The B rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
BB or BB- rating.
STANDARD & POOR'S
CHARACTERISTICS OF SOVEREIGN DEBT
OF FOREIGN COUNTRIES
AAA - Stable, predictable governments with demonstrated track record of
responding flexibly to changing economic and political circumstances
Key players in the global trade and financial system:
- Prosperous and resilient economies, high per capita incomes
- Low fiscal deficits and government debt, low inflation
- Low external debt.
AA - Stable, predictable governments with demonstrated track record of
responding to changing economic and political circumstances
- tightly integrated into global trade and financial system
- Differ from AAAs only to a small degree because:
- Economies are smaller, less prosperous and generally more vulnerable
to adverse external influences (e.g., protection and terms of trade
shocks)
- More variable fiscal deficits, government debt and inflation
- Moderate to high external debt.
A - Politics evolving toward more open, predictable forms of governance in
environment of rapid economic and social change
- Established trend of integration into global trade and financial
system
- Economies are smaller, less prosperous and generally more vulnerable
to adverse external influences (e.g., protection and terms of trade
shocks), but
- Usually rapid growth in output and per capita incomes
- Manageable through variable fiscal deficits, government debt and
inflation
- Usually low but variable debt
- Integration into global trade and financial system growing but
untested
- Low to moderate income developing economies but variable performance
and quite vulnerable to adverse external influences
41
<PAGE>
- Variable to high fiscal deficits, government debt and inflation
- Very high and variable debt, often graduates of Brady plan but track
record not well established.
BBB - Political factors a source of significant uncertainty, either
because system is in transition or due to external threats, or both, often in
environment of rapid economic and social change
- Integration into global trade and financial system growing but
untested
- Economies less prosperous and often more vulnerable to adverse
external influences
- Variable to high fiscal deficits, government debt and inflation
- High and variable external debt.
BB - Political factors a source of major uncertainty, either because
system is in transition or due to external threats, or both, often in
environment of rapid economic and social change
- Integration into global trade and financial system growing but
untested
- Low to moderate income developing economies, but variable
performance and quite vulnerable to adverse external influences
- Variable to high fiscal deficits, government debt and inflation
- Very high and variable debt, often graduates of Brady Plan but track
record not well established
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.
42
<PAGE>
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+.
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.
43
<PAGE>
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.
44
<PAGE>
PART C
OTHER INFORMATION
Item 24. Exhibits
(a) Agreement and Declaration of Trust dated August 13, 1986***
(a1) Certificate of Designation of Standish Fixed Income Fund***
(a2) Certificate of Designation of Standish International Fund***
(a3) Certificate of Designation of Standish Securitized Fund***
(a4) Certificate of Designation of Standish Short-Term Asset Reserve
Fund***
(a5) Certificate of Designation of Standish Marathon Fund***
(a6) Certificate of Amendment dated November 21, 1989***
(a7) Certificate of Amendment dated November 29, 1989***
(a8) Certificate of Amendment dated April 24, 1990***
(a9) Certificate of Designation of Standish Equity Fund***
(a10) Certificate of Designation of Standish International Fixed Income
Fund***
(a11) Certificate of Designation of Standish Intermediate Tax Exempt Bond
Fund***
(a12) Certificate of Designation of Standish Massachusetts Intermediate
Tax Exempt Bond Fund***
(a13) Certificate of Designation of Standish Global Fixed Income Fund***
(a14) Certificate of Designation of Standish Controlled Maturity Fund and
Standish Fixed Income Fund II***
(a15) Certificate of Designation of Standish Tax-Sensitive Small Cap
Equity Fund and Standish Tax-Sensitive Equity Fund***
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<PAGE>
(a16) Form of Certificate of Designation of Standish Equity Asset Fund,
Standish Small Capitalization Equity Asset Fund, Standish Fixed
Income Asset Fund and Standish Global Fixed Income Asset Fund***
(a17) Form of Certificate of Designation of Standish Small Capitalization
Equity Fund II***
(a18) Certificate of Designation of Standish Small Capitalization Equity
Asset Fund II, Standish Diversified Income Fund, Standish
Diversified Income Asset Fund*
(a19) Form of Certificate of Designation of Institutional Shares and
Service Shares of Standish Small Capitalization Equity Fund II and
Standish International Fixed Income Fund****
(a20) Form of Certificate of Designation of Standish International Fixed
Income Fund II*****
(a21) Amendment to the Agreement and Declaration of Trust dated March 4,
1999*****
(b) Bylaws of the Registrant***
(c) Not applicable
(d1) Form of Investment Advisory Agreement between Registrant and
Standish, Ayer & Wood, Inc. relating to Standish International
Fund***
(d2) Investment Advisory Agreement between the Registrant and Standish,
Ayer & Wood, Inc. relating to Standish Securitized Fund***
(d3) Investment Advisory Agreement between the Registrant and Standish,
Ayer & Wood, Inc. relating to Standish International Fixed Income
Fund***
(d4) Assignment of Investment Advisory Agreement between the Registrant
and Standish, Ayer & Wood, Inc. relating to Standish International
Fixed Income Fund***
(d5) Form of Investment Advisory Agreement between the Registrant and
Standish, Ayer & Wood, Inc. relating to Standish Intermediate Tax
Exempt Bond Fund***
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<PAGE>
(d6) Investment Advisory Agreement between the Registrant and Standish,
Ayer & Wood, Inc. relating to Standish Massachusetts Intermediate
Tax Exempt Bond Fund***
(d7) Investment Advisory Agreement between the Registrant and Standish,
Ayer & Wood, Inc. relating to Standish Controlled Maturity Fund***
(d8) Investment Advisory Agreement between the Registrant and Standish,
Ayer & Wood, Inc. relating to Standish Fixed Income Fund II***
(d9) Investment Advisory Agreement between the Registrant and Standish,
Ayer & Wood, Inc. relating to Standish Small Cap Tax-Sensitive
Equity Fund***
(d10) Investment Advisory Agreement between the Registrant and Standish,
Ayer & Wood, Inc. relating to Standish Tax-Sensitive Equity Fund***
(d11) Form of Assignment of Investment Advisory Agreement***
(d12) Form of Investment Advisory Agreement between the Registrant and
Standish, Ayer & Wood, Inc. relating to Standish International Fixed
Income Fund II*****
(e1) Underwriting Agreement between the Registrant and Standish Fund
Distributors, L.P.***
(f) Not applicable
(g1) Master Custody Agreement between the Registrant and Investors Bank
& Trust Company***
(g2) Custody Agreement between Registrant with respect to Standish
International Equity Fund and Morgan Stanley Company***
(g3) Master Custody Agreement between the Registrant and Morgan Stanley
Trust Company***
(h1) Transfer Agency and Service Agreement between the Registrant and
Investors Bank & Trust Company***
(h2) Most recently dated/filed revised Exhibit A to Transfer Agency and
Service Agreement between the Registrant and Investors Bank & Trust
Company*****
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<PAGE>
(h3) Master Administration Agreement between the Registrant and Investors
Bank & Trust Company***
(h4) Form of Administrative Services Agreement between Standish, Ayer &
Wood, Inc. and the Registrant***
(h5) Most recently dated/filed revised Exhibit A to Administrative
Services Agreement between Standish, Ayer & Wood, Inc. and the
Registrant***
(h6) Form of Service Plan relating to Standish Small Capitalization
Equity Fund II and Standish International Fixed Income Fund****
(i) Opinion and Consent of Counsel for the Registrant**
(j) Not applicable
(k) Not applicable
(l) Not applicable
(m) Not applicable
(n) Not applicable
(o) Multiple Class Plan pursuant to Rule 18f-3 relating to Standish
Small Capitalization Equity Fund II and Standish International Fixed
Income Fund****
(p1) Power of Attorney for Registrant (Richard S. Wood)^
(p2) Power of Attorney for Registrant (Samuel C. Fleming)^
(p3) Power of Attorney for Registrant (Benjamin M. Friedman)^
(p4) Power of Attorney for Registrant (John H. Hewitt)^
(p5) Power of Attorney for Registrant (Edward H. Ladd)^
(p6) Power of Attorney for Registrant (Caleb Loring III)^
(p7) Power of Attorney for Registrant (D. Barr Clayson)^
(p8) Power of Attorney for Registrant (Paul G. Martins)**
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<PAGE>
(p9) Power of Attorney for Portfolio Trust (Richard S. Wood)^
(p10) Power of Attorney for Portfolio Trust (Samuel C. Fleming, Benjamin
M. Friedman, John H. Hewitt, Edward H. Ladd, Caleb Loring III,
Richard S. Wood and D. Barr Clayson)+
(p11) Power of Attorney for Portfolio Trust (Paul G. Martins)**
- --------------------
^ Filed as an exhibit to Registration Statement No. 33-8214 and
incorporated herein by reference thereto.
+ Filed electronically as an exhibit to Registration Statement No.
811-07603 and incorporated herein by reference thereto.
* Filed electronically as an exhibit to Registration Statement No.
33-8214 (Post-Effective Amendment No. 81) and incorporated herein by
reference thereto.
** Filed electronically as an exhibit to Registration Statement No.
33-8214 (Post-Effective Amendment No. 82) and incorporated herein by
reference thereto.
*** Filed electronically as an exhibit to Registration Statement No.
33-8214 (Post-Effective Amendment No. 88) and incorporated by
reference thereto.
**** Filed electronically as an exhibit to Registration Statement No.
33-8214 (Post-Effective Amendment No. 91) and incorporated by
reference thereto.
***** Filed herewith.
Item 24. Persons Controlled by or under Common Control with Registrant
No person is directly or indirectly controlled by or under common control
with the Registrant.
Item 25. Indemnification
Under the Registrant's Agreement and Declaration of Trust, any past or
present Trustee or officer of the Registrant is indemnified to the fullest
extent permitted by law against liability and all expenses reasonably incurred
by him in connection with any action, suit or proceeding to which he may be a
party or is otherwise involved by reason of his being or having been a Trustee
or officer of the Registrant. The Agreement and Declaration of Trust of the
Registrant does not authorize indemnification where it is determined, in the
manner specified in the Declaration, that such Trustee or officer has not acted
in good faith in the reasonable belief that his actions were in the best
interest of the Registrant. Moreover, the
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<PAGE>
Declaration does not authorize indemnification where such Trustee or officer is
liable to the Registrant or its shareholders by reason of willful misfeasance,
bad faith, gross negligence or reckless disregard of his or her duties.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to Trustees, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that, in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a Trustee, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by any such Trustee, officer or controlling person
against the Registrant in connection with the securities being registered, and
the Commission is still of the same opinion, the Registrant will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification is against public policy as expressed in the Act and will be
governed by the final adjudication of such issue.
Item 26. Business and Other Connections of Investment Advisers
The business and other connections of the officers and Directors of
Standish, Ayer & Wood, Inc. ("Standish, Ayer & Wood"), the investment adviser to
certain series of the Registrant, are listed on the Form ADV of Standish, Ayer &
Wood as currently on file with the Commission (File No. 801-584), the text of
which is hereby incorporated by reference.
The business and other connections of the officers and partners of
Standish International Management Company, L.P. ("SIMCO"), the investment
adviser to certain other series of the Registrant, are listed on the Form ADV of
SIMCO as currently on file with the Commission (File No. 801-639338), the text
of which is hereby incorporated by reference.
The following sections of each such Form ADV are incorporated herein by
reference:
(a) Items 1 and 2 of Part 2;
(b) Section IV, Business Background, of each Schedule D.
C-6
<PAGE>
Item 27. Principal Underwriter
(a) Standish Fund Distributors, L.P. serves as the principal
underwriter of each of the following series of the Registrant:
Standish Fixed Income Fund
Standish Securitized Fund
Standish Short-Term Asset Reserve Fund
Standish International Fixed Income Fund
Standish International Fixed Income Fund II
Standish Global Fixed Income Fund
Standish Equity Fund
Standish Small Capitalization Equity Fund
Standish Massachusetts Intermediate Tax Exempt Bond Fund
Standish Intermediate Tax Exempt Bond Fund
Standish International Equity Fund
Standish Controlled Maturity Fund
Standish Fixed Income Fund II
Standish Small Cap Tax-Sensitive Equity Fund
Standish Tax-Sensitive Equity Fund
Standish Equity Asset Fund
Standish Small Capitalization Equity Asset Fund
Standish Fixed Income Asset Fund
Standish Global Fixed Income Asset Fund
Standish Small Capitalization Equity Fund II
Standish Diversified Income Fund
Standish Diversified Income Asset Fund
(b) Directors and Officers of Standish Fund Distributors, L.P.:
Positions and Offices Positions and Offices
Name with Underwriter with Registrant
- ---- --------------------- ---------------------
James E. Hollis, III Chief Executive Officer Vice President
Beverly E. Banfield Chief Operating Officer Vice President
The General Partner of Standish Fund Distributors, L.P. is Standish, Ayer
& Wood, Inc.
(c) Not applicable.
Item 28. Location of Accounts and Records
The Registrant maintains the records required by Section 31(a) of the
Investment Company Act of 1940 and Rules 31a-1 to 31a-3 inclusive thereunder at
its principal office, located at One Financial Center, Boston, Massachusetts
02111. Certain records, including records relating to the Registrant's
shareholders and the physical possession of its securities, may be maintained
pursuant to Rule 31a-3 at the main offices of the Registrant's transfer and
dividend disbursing agent and custodian.
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Item 29. Management Services
Not applicable
Item 30. Undertakings
Not applicable.
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<PAGE>
STANDISH, AYER & WOOD INVESTMENT TRUST
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this
Post-Effective Amendment to its Registration Statement pursuant to Rule 485(a)
under the Securities Act of 1933 to be signed on its behalf by the undersigned,
thereunto duly authorized, on the 4th day of March, 1999.
STANDISH, AYER & WOOD
INVESTMENT TRUST
/s/ Paul G. Martins
---------------------------------
Paul G. Martins, Treasurer
The term "Standish, Ayer & Wood Investment Trust" means and refers to the
Trustees from time to time serving under the Agreement and Declaration of Trust
of the Registrant dated August 13, 1986, a copy of which is on file with the
Secretary of State of The Commonwealth of Massachusetts. The obligations of the
Registrant hereunder are not binding personally upon any of the Trustees,
shareholders, nominees, officers, agents or employees of the Registrant, but
bind only the trust property of the Registrant, as provided in the Agreement and
Declaration of Trust of the Registrant. The execution of this Registration
Statement has been authorized by the Trustees of the Registrant and this
Registration Statement has been signed by an authorized officer of the
Registrant, acting as such, and neither such authorization by such Trustees nor
such execution by such officer shall be deemed to have been made by any of them,
but shall bind only the trust property of the Registrant as provided in its
Declaration of Trust.
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to the Registration Statement has been signed below by
the following persons in the capacities and on the date indicated.
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<PAGE>
Signature Title Date
Richard S. Wood* Trustee and President March 4, 1999
- -------------------------- (principal executive officer)
Richard S. Wood
/s/ Paul G. Martins Treasurer (principal March 4, 1999
- -------------------------- financial and accounting
Paul G. Martins officer)
D. Barr Clayson* Trustee March 4, 1999
- --------------------------
D. Barr Clayson
Samuel C. Fleming* Trustee March 4, 1999
- --------------------------
Samuel C. Fleming
Benjamin M. Friedman* Trustee March 4, 1999
- --------------------------
Benjamin M. Friedman
John H. Hewitt* Trustee March 4, 1999
- --------------------------
John H. Hewitt
Edward H. Ladd* Trustee March 4, 1999
- --------------------------
Edward H. Ladd
Caleb Loring III* Trustee March 4, 1999
- --------------------------
Caleb Loring III
*By: /s/ Paul G. Martins
--------------------------
Paul G. Martins
Attorney-In-Fact
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<PAGE>
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, Standish, Ayer & Wood Master Portfolio has duly
caused this Post-Effective Amendment to the Registration Statement of Standish,
Ayer & Wood Investment Trust to be signed on its behalf by the undersigned,
thereunto duly authorized, on the 4th day of March, 1999.
STANDISH, AYER & WOOD
MASTER PORTFOLIO
/s/ Paul G. Martins
---------------------------------
Paul G. Martins, Treasurer
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to the Registration Statement of Standish, Ayer & Wood
Investment Trust has been signed by the following persons in their capacities
with Standish, Ayer & Wood Master Portfolio and on the date indicated.
Signature Title Date
Richard S. Wood* Trustee and President March 4, 1999
- --------------------- (principal executive
Richard S. Wood officer)
Paul G. Martins* Treasurer (principal March 4, 1999
- --------------------- financial and accounting
Paul G. Martins officer)
D. Barr Clayson* Trustee March 4, 1999
- ---------------------
D. Barr Clayson
Samuel C. Fleming* Trustee March 4, 1999
- ---------------------
Samuel C. Fleming
Benjamin M. Friedman* Trustee March 4, 1999
- ---------------------
Benjamin M. Friedman
C-11
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John H. Hewitt* Trustee March 4, 1999
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John H. Hewitt
Edward H. Ladd* Trustee March 4, 1999
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Edward H. Ladd
Caleb Loring III* Trustee March 4, 1999
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Caleb Loring III
*By: /s/ James E. Hollis III
--------------------------
James E. Hollis, III
Attorney-In-Fact
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EXHIBIT INDEX
Exhibit
(a20) Form of Certificate of Designation of Standish International Fixed
Income Fund II
(a21) Amendment to the Agreement and Declaration of Trust dated March 4,
1999
(d12) Form of Investment Advisory Agreement between the Registrant and
Standish, Ayer & Wood, Inc. relating to Standish International Fixed
Income Fund II
STANDISH, AYER & WOOD INVESTMENT TRUST
One Financial Center
Boston, Massachusetts 02111
Certificate of Designation
The undersigned, being a Vice President of Standish, Ayer & Wood
Investment Trust (the "Trust"), a trust with transferable shares of the type
commonly called a Massachusetts business trust, DOES HEREBY CERTIFY that,
pursuant to the authority conferred upon the Trustees of the Trust by Section
6.1(b) and Section 9.3 of the Agreement and Declaration of Trust, dated August
13, 1986, as amended (as so amended, the "Declaration of Trust"), and by the
affirmative vote of a Majority of the Trustees at a meeting duly called and held
on February 28 and March 1, 1999 the Declaration of Trust is amended as set
forth in this Certificate of Designation.
A. There is hereby established and designated one additional Series of the
Trust: "Standish International Fixed Income Fund II." Such series is referred to
herein as the "Fund."
B. The beneficial interest in the Fund shall be divided into Shares having
a nominal or par value of one cent ($.01) per Share, of which an unlimited
number may be issued, which Shares shall represent interests only in the Fund.
The Shares of the Fund shall have the following rights and preferences:
1. Assets Belonging to the Fund. Any portion of the Trust Property
allocated to the Fund, and all consideration received by the Trust for the
issue or sale of Shares of the Fund, together with all assets in which
such consideration is invested or reinvested, all interest, dividends,
income, earnings profits and gains therefrom, and proceeds thereof,
including any proceeds derived from the sale, exchange or liquidation of
such assets, and any funds or payments derived from any reinvestment of
such proceeds in whatever form the same may be, shall be held by the
Trustees in trust for the benefit of the holders of Shares of the Fund and
shall irrevocably belong to the Fund for all purposes, and shall be so
recorded upon the books of account of the Trust, and the Shareholders of
any other Fund who are not Shareholders of the Fund shall not have, and
shall be conclusively deemed to have waived, any claims to the assets of
the Fund. Such consideration, assets, interest, dividends, income,
earnings, profits, gains and proceeds, together with any General Items
allocated to the Fund as provided in the following sentence, are herein
referred to collectively as "Fund-Assets" of the Fund, and as assets
"belonging to" the Fund. In the event that there are any assets, income,
earnings, profits and proceeds thereof, funds, or payments which are not
readily identifiable as belonging to any particular Fund (collectively
"General Items"), the Trustees shall allocate such General Items to and
among any one or more of the Funds established and designated from time to
time in such
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manner and on such basis as they, in their sole discretion, deem fair and
equitable; and any General Items so allocated to the Fund shall belong to
and be part of the Fund Assets of the Fund. Each such allocation by the
Trustees shall be conclusive and binding upon the Shareholders of all the
Funds for all purposes.
2. Liabilities of the Fund. The assets belonging to the Fund shall
be charged with the liabilities in respect of the Fund and all expenses,
costs, charges and reserves attributable to the Fund, and any general
liabilities, expenses, costs, charges or reserves of the Trust which are
not readily identifiable as pertaining to any particular Fund shall be
allocated and charged by the Trustees to and among any one or more of the
Funds established and designated from time to time in such manner and on
such basis as the Trustees in their sole discretion deem fair and
equitable. The indebtedness, expenses, costs, charges and reserves
allocated and so charged to the Fund are herein referred to as
"liabilities of" the Fund. Each allocation of liabilities, expenses,
costs, charges and reserves by the Trustees shall be conclusive and
binding upon the Shareholders of all the Funds or all purposes. Any
creditor of the Fund may look only to the assets of the Fund to satisfy
such creditor's debt.
3. Dividends. Dividends and distributions on Shares of the Fund may
be paid with such frequency as the Trustees may determine, which may be
daily or otherwise pursuant to a standing resolution or resolutions
adopted only once or with such frequency as the Trustees may determine, to
the Shareholders of the Fund, from such of the income, accrued or
realized, and capital gains, realized or unrealized, and out of the assets
belonging to the Fund, as the Trustees may determine, after providing for
actual and accrued liabilities of the Fund. All dividends and
distributions on Shares of the Fund shall be distributed pro rata to the
Shareholders of the Fund in proportion to the number of such Shares held
by such holders at the date and time of record established for the payment
of such dividends or distributions, except that in connection with any
dividend or distribution program or procedure the Trustees may determine
that no dividend or distribution shall be payable on Shares as to which
the Shareholder's purchase order and/or payment have not been receive by
the time or times established by the Trustees under such program or
procedure, or that dividends or distributions shall be payable on Shares
which have been tendered by the holder thereof for redemption or
repurchase, but the redemption or repurchase proceeds of which have not
yet been paid to such Shareholder. Such dividends and distributions may be
made in cash or Shares of the Fund or a combination thereof as determined
by the Trustees, or pursuant to any program that the Trustees may have in
effect at the time for the election by each Shareholder of the mode of the
making of such dividend or distribution to that Shareholder. Any such
dividend or
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distribution paid in Shares will be paid at the net asset value thereof as
determined in accordance with subsection (8) hereof.
4. Liquidation. In the event of the liquidation or dissolution of
the Trust or the liquidation of the Fund, the Shareholders of the Fund
shall be entitled to receive, when and as declared by the Trustees, the
excess of the Fund Assets over the liabilities of the Fund. The assets so
distributable to the Shareholders of the Fund shall be distributed among
such Shareholders in proportion to the number of Shares of the Fund held
by them and recorded on the books of the Trust. The Fund or class thereof
may be terminated by either (i) the affirmative vote of the holders of not
less than two-thirds of the Shares outstanding and entitled to vote at any
meeting or action of Shareholders of the Fund or class thereof; provided,
however, that if such termination is recommended by the Trustees, a
Majority Shareholder Vote shall be sufficient to authorize such
liquidation, or (ii) notice to Shareholders of the Fund or class by means
of an instrument in writing signed by a majority of the Trustees, stating
that a majority of the Trustees has determined that the continuation of
the Fund or class thereof is not in the best interest of the Shareholders
of the Fund or class as a result of factors or events adversely affecting
the ability of the Fund or class to conduct its business in an
economically viable manner. Such factors and events may include (but are
not limited to) the inability of the Fund or class to maintain its assets
at an appropriate size, changes in laws or regulations governing the Fund
or class or affecting assets of the type in which the Fund invests or
economic developments or trends having a significant adverse impact on the
business or operation of the Fund or class.
5. Voting. The Shareholders shall have the voting rights set forth
in or determined under Article 7 of the Declaration of Trust.
6. Redemption by Shareholder. Each holder of Shares of the Fund
shall have the right at such times as may be permitted by the Trust to
require the Trust to redeem all or any part of his Shares of the Fund at a
redemption price equal to the net asset value per Share of the Fund next
determined in accordance with subsection (8) hereof after the Shares are
properly tendered for redemption; provided, that the Trustees may from
time to time, in their discretion, determine and impose a fee for such
redemption. Payment of the redemption price shall be in cash; provided,
however, that if the Trustees determine, which determination shall be
conclusive, that conditions exist which make payment wholly in cash unwise
or undesirable, the Trust may make payment wholly or partly in Securities
or other assets belonging to the Fund at the value of such Securities or
assets used in such determination of net asset value. Notwithstanding the
foregoing, the Trust may postpone payment of the redemption price and may
suspend the right of the holders of Shares of the Fund to require the
Trust to redeem Shares of the Fund during any period or
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at any time when and to the extent permissible under the Investment
Company Act of 1940, as amended (the "1940 Act").
7. Redemption at the Option of the Trust. Each Share of the Fund
shall be subject to redemption at the option of the Trust at the
redemption price which would be applicable if such Share were then being
redeemed by the Shareholder pursuant to subsection (6) hereof: (i) at any
time, if the Trustees determine in their sole discretion that failure to
so redeem may have materially adverse consequences to the holders of the
Shares of the Trust or of any Fund, or (ii) upon such other conditions
with respect to maintenance of Shareholder accounts of a minimum amount as
may from time to time be determined by the Trustees and set forth in the
then current Prospectus of the Fund. Upon such redemption the holders of
the Shares so redeemed shall have no further right with respect thereto
other than to receive payment of such redemption price.
8. Net Asset Value. The net asset value per Share of the Fund at any
time shall be the quotient obtained by dividing the value of the net
assets of the Fund at such time (being the current value of the assets
belonging to the Fund, less its then existing liabilities) by the total
number of Shares of the Fund then outstanding, all determined in
accordance with the methods and procedures, including without limitation
those with respect to rounding, established by the Trustees from time to
time. The Trustees may determine to maintain the net asset value per Share
of the Fund at a designated constant dollar amount and in connection
therewith may adopt procedures not inconsistent with the 1940 Act for the
continuing declaration of income attributable to the Fund as dividends
payable in additional Shares of the Fund at the designated constant dollar
amount and for the handling of any losses attributable to the Fund. Such
procedures may provide that in the event of any loss each Shareholder
shall be deemed to have contributed to the shares of beneficial interest
account of the Fund his pro rata portion of the total number of Shares
required to be cancelled in order to permit the net asset value per Share
of the Fund to be maintained, after reflecting such loss, at the
designated constant dollar amount. Each Shareholder of the Fund shall be
deemed to have expressly agreed, by his investment in the Fund, to make
the contribution referred to in the preceding sentence in the event of any
such loss.
9. Transfer. All Shares of the Fund shall be transferable, but
transfers of Shares of the Fund will be recorded on the Share transfer
records of the Trust applicable to the Fund only at such times as
Shareholders shall have the right to require the Trust to redeem Shares of
the Fund and at such other times as may be permitted by the Trustees.
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<PAGE>
10. Equality. All Shares of the Fund shall represent an equal
proportionate interest in the assets belonging to the Fund (subject to the
liabilities of the Fund), and each Share of the Fund shall be equal to
each other Share thereof; but the provisions of this sentence shall not
restrict any distinctions permissible under subsection (3) hereof that may
exist with respect to dividends and distributions on Shares of the Fund.
The Trustees may from time to time divide or combine the Shares of the
Fund into a greater or lesser number of Shares of the Fund without thereby
changing the proportionate beneficial interest in the assets belonging to
the Fund or in any way affecting the rights of the holders of Shares of
any other Fund.
11. Rights of Fractional Shares. Any fractional Share of any Series
shall carry proportionately all the rights and obligations of a whole
Share of that Series, including rights and obligation with respect to
voting, receipt of dividends and distributions, redemption of Shares, and
liquidation of the Trust or of the Fund.
12. Conversion Rights. Subject to compliance with the requirements
of the 1940 Act, the Trustees shall have the authority to provide that
holders of Shares of the Fund shall have the right to convert said Shares
into Shares of one or more other Funds in accordance with such
requirements and procedures as the Trustees may establish.
13. Master/Feeder. Notwithstanding any other provisions herein or in
the Declaration of Trust as applicable to the Fund, the Trustees shall
have full power in their discretion, without any requirement of approval
by shareholders of the Fund, to invest part or all of the Fund Assets, or
to dispose of parts or all of the Fund Assets and invest the proceeds of
such disposition, in securities issued by one or more other investment
companies registered under the 1940 Act. Any such other investment company
may (but need not) be a trust (formed under the laws of the Commonwealth
of Massachusetts any other state or jurisdiction) which is classified as a
partnership for Federal income tax purposes.
14. Multiple Class. Notwithstanding any other provisions herein or
in the Declaration of Trust as applicable to the Fund, the Trustees shall
have full power and authority in their discretion, without any requirement
of approval by shareholders of the Fund, to establish and designate, and
to change, in any manner Shares of any classes with such preferences,
terms of conversion, voting powers, rights and privileges as the Trustees
may determine (but the Trustees may not change Shares which have
previously been issued by the Fund and are currently outstanding in a
manner materially adverse to the Shareholders of such Shares without a
Majority Shareholder Vote of such Shareholders); to divide or combine the
Shares of any classes into a greater or
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lesser number; to classify or reclassify any unissued Shares of any class
into one or more classes of Shares; and to abolish any one or more classes
of Shares. The assets belonging to the Fund shall be charged with the
liabilities of the Fund and all expenses, costs, charges and reserves
attributable to the Fund, except that liabilities and expenses allocated
solely to a particular class shall be borne by that class. All dividends
and other distributions on Shares of the Fund shall be distributed pro
rata to the Shareholders of the Fund in proportion to the number of Shares
of the Fund they held on the record date established for such payment,
except that such dividends and distributions shall appropriately reflect
expenses allocated to a particular class of the Fund. The net asset value
per Share of any class shall be determined in the same manner that net
asset value per Share of any Fund is determined in accordance with
subparagraph (h) of Section 6.2 of the Declaration of Trust. If the Shares
of the Fund are divided into separate classes, each matter required or
permitted to be voted upon at a meeting or by written consent of
Shareholders shall be submitted to a separate vote of the outstanding
shares of each class; provided that (a) when required by the Declaration
of Trust or by the 1940 Act, Shares shall be voted in the aggregate and
not by an individual class, and (b) when the Trustees have determined that
the matter affects the interests of more than one class, then the
Shareholders of all such classes shall be entitled to vote thereon. Each
Shareholder of any class shall be entitled to the same voting powers and
rights as are the Shareholders of any Series, including the requirements
for quorum and shareholder action, as are set forth in the Declaration of
Trust. In addition to the powers set forth in Section 5.2 of the
Declaration of Trust, the Trustees shall also have the power and authority
to enter into any one or more contracts with any one or more Contracting
Party to provide for the performance and assumption of some or all of the
services, duties and responsibilities set forth in subparagraphs (a)
through (g) of Section 5.2 of the Declaration of Trust to, for or on
behalf of any class, as the Trustees may deem appropriate. To the extent
necessary to accommodate the creation of multiple classes of Shares, any
other provision of the Declaration of Trust which refers specifically to a
Fund or Series shall also refer to a class, as context requires.
15. Amendment, etc. Subject to the provisions and limitations of
Section 9.3 of the Declaration of Trust and applicable law, this
Certificate of Designation may be amended by an instrument signed in
writing by a Majority of the Trustees (or by an officer of the Trust
pursuant to the Vote of a Majority of the Trustees), provided that, if any
amendment adversely affects the rights of the Shareholders of the Fund,
such amendment may be adopted by an instrument signed in writing by a
Majority of the Trustees (or by an officer of the Trust pursuant to the
vote of a Majority of the Trustees) when authorized to do so by the vote
in accordance with Section 7.1 of the
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Declaration of Trust of the holders of a majority of all the Shares of the
Fund outstanding and entitled to vote, without regard to the other Series.
16. Incorporation of Defined Terms. All capitalized terms which are
not defined herein shall have the same meanings as are assigned to those
terms in the Declaration of Trust filed with the Secretary of State of The
Commonwealth of Massachusetts.
The Trustees further direct that, upon the execution of this Certificate
of Designation, the Trust take all necessary action to file a copy of this
Certificate of Designation with the Secretary of State of The Commonwealth of
Massachusetts and at any other place required by law or by the Declaration of
Trust.
IN WITNESS WHEREOF, the undersigned has set her hand and seal this ___ day
of ______________, 1999.
By:
------------------------------
Its: Vice President
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<PAGE>
ACKNOWLEDGMENT
M A S S A C H U S E T T S
SUFFOLK, SS.: ______________, 1999
Then personally appeared the above-named Vice President of Standish, Ayer
& Wood Investment Trust and acknowledged the foregoing instrument to be her free
act and deed.
Before me,
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Notary Public
My commission expires:________
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STANDISH, AYER & WOOD INVESTMENT TRUST
Amendment to Declaration of Trust
This AMENDMENT to the DECLARATION OF TRUST (the "Amendment") of Standish,
Ayer & Wood Investment Trust (the "Trust") is made on March 4, 1999 by the
Trustees of the Trust;
WHEREAS, it is desired that the Trust be permitted to divide the Shares of
any Series of the Trust into separate Classes of Shares;
WHEREAS, this Amendment complies with the provisions of Section 9.3 of the
Declaration of Trust governing amendments to the Declaration;
NOW, THEREFORE, the DECLARATION OF TRUST shall be further amended as
follows to provide the Trustees with the authority to establish separate Classes
of Shares of each Series of the Trust:
Section 1. Definitions. The capitalized terms contained in this Amendment shall
have the same meanings as set forth in the Declaration of Trust, except as
provided below:
(a) "Class" means the class of Shares of a Series established pursuant to
Section 2 below.
(b) "Shares" shall mean the transferable units into which the beneficial
interest in the Trust and each Series or Class is divided from time to
time (including whole Shares and fractions of Shares). All references
herein to "Shares" which are not accompanied by a reference to any
particular Series, Fund of Class shall be deemed to apply to outstanding
Shares without regard to Series.
Section 2. Powers of the Trustees. In addition to the powers set forth in
Article III of the Declaration of Trust, the Trustees shall have the power to:
(a) Establish separate and distinct Classes of Shares of any Series of the
Trust, all in accordance with the provisions of Section 3 below.
(b) To allocate assets, liabilities and expenses of a Fund to a particular
Class or to apportion the same between or among two or more Classes,
provided that any liabilities or expenses incurred by a particular Class
shall be payable solely out of the assets belonging to that Class as
provided for in Section 4 below.
1
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Section 3. Establishment of Classes. The beneficial interest in the Trust may be
divided into transferable Shares of one or more separate and distinct Classes
established by the Trustees. The number of Shares of each Class is unlimited and
each Share shall have a nominal or par value of one cent ($.01) per Share. The
Trustees shall have full power and authority, in additional to the authority set
forth in Article VI of the Declaration of Trust, to establish and to change in
any manner Shares of any Classes with such preferences, terms of conversion,
voting powers, rights and privileges as the Trustees may determine (but the
Trustees may not change Shares which have previously been issued by the Trust
and are currently outstanding in a manner materially adverse to the Shareholders
of such Shares); to divide or combine the Shares of any Classes into a greater
or lesser number; to classify or reclassify any unissued Shares of any Classes
into one or more Classes of Shares; and to abolish any one or more Classes of
Shares.
Section 4. Liabilities of Funds. The assets belonging to a Fund shall be charged
with the liabilities of that Fund and all expenses, costs, charges and reserves
attributable to that Fund, except that liabilities and expenses allocated solely
to a particular Class shall be borne by that Class.
Section 5. Dividends. All dividends and other distributions on Shares of a
particular Fund shall be distributed pro rata to the Shareholders of that Fund
in proportion to the number of Shares of that Fund they held on the record date
established for such payment, except that such dividends and distributions shall
appropriately reflect expenses allocated to a particular Class of such Series.
Section 6. Net Asset Value. The net asset value per Share of any Class shall be
determined in the same manner that net asset value per Share of any Fund is
determined in accordance with subparagraph (h) of Section 6.2 of the Declaration
of Trust.
Section 7. Voting Powers. If the Shares of a Fund are divided into separate
Classes, each matter required or permitted to be voted upon at a meeting or by
written consent of Shareholders shall be submitted to a separate vote of the
outstanding shares of each Class; provided that (a) when required by the
Declaration of Trust or by the 1940 Act, Shares shall be voted in the aggregate
and not by an individual Class, and (b) when the Trustees have determined that
the matter affects the interests of more than one Class, then the Shareholders
of all such Classes shall be entitled to vote thereon. Each holder of Shares of
any Class shall be entitled to the same voting powers and rights as are the
holders of Shares of any Series, including the requirements for quorum and
shareholder action, as are set forth in the Declaration of Trust.
Section 8. Certain Contracts. In addition to the powers set forth in Section 5.2
of the Declaration of Trust, the Trustees shall also have the power and
authority to enter
2
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into any one or more contracts with any one or more Contracting Party to provide
for the performance and assumption of some or all of the services, duties and
responsibilities set forth in subparagraphs (a) through (g) of Section 5.2 of
the Declaration of Trust to, for or on behalf of any Class, as the Trustees may
deem appropriate.
Section 9. Miscellaneous. To the extent necessary to accommodate the creation of
multiple Classes of Shares, any other provision of the Declaration of Trust
which refers specifically to a Fund or Series shall also refer to a Class, as
context requires.
IN WITNESS WHEREOF, the undersigned have executed this instrument this 4th
day of March, 1999.
/s/ D. Barr Clayson /s/ Caleb Loring III
- ------------------- --------------------
D. Barr Clayson Caleb Loring III
/s/ Samuel C. Fleming /s/ Edward H. Ladd
- --------------------- ------------------
Samuel C. Fleming Edward H. Ladd
/s/ Benjamin M. Friedman /s/ John H. Hewitt
- ------------------------ ------------------
Benjamin M. Friedman John H. Hewitt
3
INVESTMENT ADVISORY AGREEMENT
AGREEMENT made as of this ___ day of _______, 1999, between Standish, Ayer
& Wood Investment Trust, an unincorporated business trust organized under the
laws of The Commonwealth of Massachusetts (the "Trust"), and Standish
International Management Company, L.P., a Massachusetts limited partnership (the
"Adviser".)
WITNESSETH:
WHEREAS, the Trust is engaged in business as an open-end management
investment company and is so registered under the Investment Company Act of
1940, as amended (the "1940 Act"); and
WHEREAS, the assets held by the Trustees of the Trust may be divided into
separate funds, each with its own separate investment portfolio, investment
objectives, policies and purposes; and
WHEREAS, the Adviser is engaged in the business of rendering investment
advisory and management services, and is registered as an investment adviser
under the Investment Advisers Act of 1940, as amended; and
WHEREAS, the Trust desires to retain the Adviser to furnish investment
advisory services to Standish International Fixed Income Fund (Unhedged) (the
"Fund"), a separate fund of the Trust, and the Adviser is willing to furnish
such services;
NOW, THEREFORE, it is hereby agreed between the parties hereto as follows:
1. Appointment of the Adviser. The Trust hereby appoints the Adviser to
act as investment adviser of the Fund for the period and on the terms herein set
forth. The Adviser accepts such appointment and agrees to render the services
herein set forth, for the compensation herein provided. The Adviser shall for
all purposes herein be deemed an independent contractor and shall, unless
expressly otherwise provided, have no authority to act for or represent the Fund
in any way nor shall otherwise be deemed an agent of the Fund.
2. Duties of the Adviser.
(a) The Adviser, at its expense, will furnish continuously an investment
program for the Fund, will determine, subject to the overall supervision and
review of the Trustees of the Trust, what investments shall be purchased, held,
sold or exchanged by the Fund and what portion, if any, of the assets of the
Fund will be held uninvested, and shall, on behalf of the Trust, make changes in
the investments of the Fund. Subject always to the supervision of the Trustees
of the Trust and to the
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provisions of the Trust's Agreement and Declaration of Trust and Bylaws and of
the 1940 Act, the Adviser will also manage, supervise and conduct the other
affairs and business of the Fund and matters incidental thereto. The Adviser,
and any affiliates thereof, shall be free to render similar services to other
investment companies and other clients and to engage in other activities, so
long as the services rendered hereunder are not impaired.
(b) The Adviser shall provide, without cost to the Trust, all necessary
office space and the services of executive personnel for administering the
affairs of the Fund.
(c) The Fund shall bear the expenses of its operations, including legal
and auditing services, taxes and governmental fees, certain insurance premiums,
costs of shareholder notices and reports, typesetting and printing of
prospectuses and statements of additional information for regulatory purposes
and for distribution to shareholders, bookkeeping and share pricing expenses,
fees and disbursements of the Trust's custodian, transfer and dividend
disbursing agent or registrar, or interest and other like expenses properly
payable by the Trust.
3. Compensation of the Adviser.
(a) As full compensation for the services and facilities furnished by the
Adviser under this Agreement, the Trust agrees to pay to the Adviser a fee at
the annual rate of 0.40% of the Fund's average daily net asset value. Such fees
shall be accrued when computed and payable monthly. For purposes of calculating
such fees, the Fund's average daily net asset value shall be determined by
taking the average of all determinations of net asset value made in the manner
provided in the Fund's current prospectus and statement of additional
information.
(b) The compensation payable to the Adviser hereunder for any period less
than a full month during which this Agreement is in effect shall be prorated
according to the proportion which such period bears to a full month.
4. Limitation of Liability of the Adviser. The Adviser shall not be liable
for any error of judgment or mistake of law or for any loss suffered by the Fund
in connection with any investment policy or the purchase, sale or retention of
any securities on the recommendation of the Adviser; provided, however, that
nothing herein contained shall be construed to protect the Adviser against any
liability to the Fund by reason of willful misfeasance, bad faith or gross
negligence in the performance of its duties, or by reason of reckless disregard
of its obligations and duties under this Agreement.
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<PAGE>
5. Term and Termination.
(a) This Agreement shall become effective on the date hereof. Unless
terminated as herein provided, this Agreement shall remain in full force and
effect for two years from the date hereof and shall continue in full force and
effect for successive periods of one year thereafter, but only so long as each
such continuance is approved annually (i) by either the Trustees of the Trust or
by vote of a majority of the outstanding voting securities (as defined in the
1940 Act) of the Fund, and, in either event, (ii) by vote of a majority of the
Trustees of the Trust who are not parties to this 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.
(b) This Agreement may be terminated at any time without the payment of
any penalty by vote of the Trustees of the Trust or by vote of a majority of the
outstanding voting securities (as defined in the 1940 Act) of the Fund or by the
Adviser, on sixty days' written notice to the other parties.
(c) This Agreement shall automatically and immediately terminate in the
event of its assignment as defined in the 1940 Act.
6. Limitation of Liability. The term "Standish, Ayer & Wood Investment
Trust" means and refers to the Trustees from time to time serving under the
Agreement and Declaration of Trust of the Trust dated August 13, 1986, as the
same may subsequently thereto have been, or subsequently hereto be, amended. It
is expressly agreed that the obligations of the Trust hereunder shall not be
binding upon any of the Trustees, shareholders, nominees, officers, agents or
employees of the Trust, personally, but shall bind only the trust property of
the Trust as provided in the Agreement and Declaration of Trust of the Trust.
The execution and delivery of this Agreement have been authorized by the
Trustees of the Trust and this Agreement has been signed by an authorized
officer of the Trust, acting as such, and neither such authorization by such
Trustees nor such execution and delivery by such officer shall be deemed to have
been made by any of them, but shall bind only the trust property of the Trust as
provided in the Agreement and Declaration of Trust.
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IN WITNESS WHEREOF the parties hereto have caused this Agreement to be
duly executed as of the date first written above.
STANDISH, AYER & WOOD INVESTMENT TRUST
Attest:
By:
- --------------------- -----------------------------------
Its:
----------------------------------
STANDISH INTERNATIONAL MANAGEMENT
COMPANY, L.P.
Attest: By: Standish, Ayer & Wood, Inc.
Its: General Partner
By:
- --------------------- -----------------------------------
Its:
----------------------------------
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