As filed with the Securities and Exchange Commission on November 29, 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. 95 |X|
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 |X|
Amendment No. 99 |X|
(Check appropriate box or boxes.)
---------------
Standish, Ayer & Wood Investment Trust
--------------------------------------------------
(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
-----------------------------------
(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)
|_| 75 days after filing pursuant to Rule 485(a)(2)
|X| On January 28, 2000 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
Prospectus Tax-Sensitive Funds
- -----------------------------------------------------------------
January 28, 2000 Standish Tax-Sensitive
Equity Fund
Standish Small Cap
Tax-Sensitive Equity Fund
Standish Intermediate Tax
Exempt Bond Fund
Standish Massachusetts Intermediate
Tax Exempt Bond Fund
The Securities and Exchange Commission has not approved or disapproved these
securities or determined whether this prospectus is accurate or complete. Any
statement to the contrary is a crime.
<PAGE>
Contents
- --------------------------------------------------------------------------------
Risk/Return Summary................................3
Tax-sensitive investing..........................3
Who may want to invest...........................3
Mutual fund risks................................3
Tax-sensitive equity funds.......................4
Tax exempt bond funds............................6
The Funds' Investments and Related Risks...........8
Tax-sensitive equity funds.......................8
Tax exempt bond funds............................8
All funds........................................9
The Investment Adviser............................10
About Standish(R)...............................10
Fund managers...................................11
Advisory services and fees......................11
[GRAPHIC OMITTED]
Investment and Account Information................12
How to purchase shares..........................12
How to exchange shares..........................13
How to redeem shares............................13
Transaction and account policies................14
Valuation of shares.............................14
Dividends and distributions.....................14
Year 2000 issue.................................14
Fund Details......................................15
Taxes...........................................15
Taxable equivalent yield tables.................15
The funds' service providers....................15
Financial Highlights..............................16
For More Information..............................20
Standish Group of Tax-Sensitive Funds 2
<PAGE>
Risk/Return Summary
- --------------------------------------------------------------------------------
Tax-sensitive investing
Standish, Ayer & Wood, Inc. manages the funds using tax-sensitive strategies
that are designed to reduce the impact of federal and state income tax on the
after tax returns actually achieved by investors in the funds. Standish
Tax-Sensitive Equity Fund and Standish Small Cap Tax-Sensitive Equity Fund
invest primarily in stocks. Standish Intermediate Tax Exempt Bond Fund and
Standish Massachusetts Intermediate Tax Exempt Bond Fund invest in investment
grade, intermediate-term municipal bonds. All of the funds are managed to
minimize the realization and distribution to shareholders of taxable income and
capital gains.
Standish was founded in 1933 and currently manages more than $45 billion of
assets for a broad range of clients in the U.S. and abroad.
- --------------------------------------------------------------------------------
Who may want to invest
The Standish tax-sensitive equity funds may be appropriate for investors:
o In the upper federal income tax brackets.
o Looking to invest over the long term and willing to ride out market
swings.
o Looking to allocate a portion of their assets to stocks.
o Comfortable with the risks of the stock market.
The Standish tax exempt bond funds may be appropriate for investors:
o Seeking a high level of interest income exempt from federal income tax.
o Seeking more price stability than investments in long-term municipal
bonds.
o Looking to diversify into bonds while limiting taxable income.
o Willing to ride out changes in bond market prices due to interest rate
changes.
Descriptions of the funds begin on the next page and include more information
about each fund's key investments and strategies, principal risk factors, past
performance and expenses.
- --------------------------------------------------------------------------------
Mutual fund risks
An investment in a fund is not a bank deposit and is not insured or guaranteed
by the Federal Deposit Insurance Corporation or any other government agency.
3 Standish Group of Tax-Sensitive Funds
<PAGE>
Risk/Return Summary
- --------------------------------------------------------------------------------
----------------------------------------------------
Tax-Sensitive Small Cap Tax-Sensitive
Equity Fund Equity Fund
----------------------------------------------------
Investment objective Maximize after tax total return, consisting of
long-term growth of capital.
Key investments The fund invests, under The fund invests, under
and strategies normal circumstances, at normal circumstances, at
least 80% of assets in least 80% of assets in
equity securities of equity securities of
U.S. companies that small capitalization
appear to be U.S. companies. The fund
undervalued. The fund considers small cap
focuses on medium to companies to have total
large capitalization market capitalizations
companies with within the range of
above-average capital capitalization of the
growth potential. companies included in
the Russell 2000 Growth
Index.
----------------------------------------------------
How stocks are The adviser employs a The adviser employs a
selected "growth at reasonable growth oriented
price" investment style investment style in
in managing the fund's managing the fund's
portfolio. This means portfolio which means
the adviser seeks to the adviser seeks to
identify those companies identify those small cap
with strong growth companies which are
prospects which have experiencing or will
stocks that are trading experience rapid growth.
at prices at or below The adviser focuses on
what the adviser high quality companies,
believes are their especially those with
intrinsic values. The products or services
adviser measures value that are leaders in
according to the stock's their market niches.
price/earnings ratio
relative to its position
in the market.
The adviser focuses on individual stock selection
instead of trying to predict which industries or
sectors will perform best. The adviser selects
stocks for each fund's portfolio by:
o Using a quantitative o Using fundamental
proprietary model to research to identify
identify companies and follow companies
that have strong and with attractive
consistent historic characteristics, such
earnings growth, are as strong business
valued attractively positions, solid cash
by the market and flows and balance
have improving growth sheets, high quality
prospects. management and high
sustainable growth.
o Using fundamental
research and o Investing in a
qualitative analysis company when the
to evaluate the adviser's research
stocks identified by indicates that the
the model. The company will
adviser looks for experience
companies with accelerating revenues
sustainable profit and expanding
growth, proven operating margins,
management teams, which may lead to
attractive businesses rising estimate
and strong financial trends and favorable
characteristics. earnings surprises.
----------------------------------------------------
Tax management The funds use the following strategies, to the
strategies extent consistent with their investment goals, to
reduce the impact of federal and state income taxes
on each fund's aftertax returns.
o Minimizing sales of securities that result in
capital gains.
o If such a sale cannot be avoided, selling first
the highest cost securities to reduce the amount
of capital gain. Also, preferring the sale of
securities producing long-term gains to those
producing short-term gains.
o Selling securities to realize capital losses that
can be offset against realized capital gains.
o Favoring lower dividend stocks and limiting
income-producing investments.
----------------------------------------------------
Principal risks of Investors could lose money on their investments in a
investing in the funds fund or the fund could perform less well than other
possible investments if any of the following occurs.
o The stock market goes down.
o The markets favor growth or value stocks over
stocks which have combined characteristics.
o In a declining market, the value of the fund's
investments in stocks with low dividend yields
goes down more than the value of high yield
stocks.
o The adviser's judgment about the attractiveness,
value or potential appreciation of a particular
company's stocks prove to be incorrect.
----------------------------------------------------
The fund may lose money There is a higher risk
or underperform when that the fund will lose
medium and large money because it invests
capitalization stocks primarily in small
are out of favor with capitalization stocks.
the market. Smaller companies may
have limited product
lines, markets and
financial resources.
They may have shorter
operating histories and
more volatile
businesses. The prices
of small capitalization
stocks, and in
particular aggressive
growth stocks, tend to
be more volatile than
those of other stocks.
In addition, it may be
harder to sell these
stocks, which can reduce
their selling prices.
The fund's investment
strategy may lead it to
emphasize certain
sectors, such as
technology, health care,
business services and
communications. Negative
market sentiment
towards, or events
affecting issuers in,
these sectors may
disproportionately hurt
the fund's performance.
Standish Group of Tax-Sensitive Funds 4
<PAGE>
- --------------------------------------------------------------------------------
Total return The bar charts and total return table indicate the
performance risks of investing in the funds. The bar charts show
changes in the performance of each fund from year to
year over the life of the fund. The total return
table shows how each fund's average annual returns
for different calendar periods compare to those of
two widely recognized, unmanaged indices of common
stock prices. Each fund's past performance does not
necessarily indicate how the fund will perform in
the future.
Quarterly returns:
Tax-Sensitive Equity Fund
Highest: xx.xx% in xx quarter 19xx
Lowest: xx.xx% in xx quarter 19xx
Quarterly returns:
Small Cap Tax-Sensitive
Equity Fund
Highest: xx.xx% in xx quarter 19xx
Lowest: xx.xx% in xx quarter 19xx
Tax-Sensitive Equity Fund
[The following table was represented as a bar chart in the printed material.]
Calendar Year Ended December 31 Percent
1996 30.61
1997 37.87
1998 15.36
1999
Small Cap Tax-Sensitive Equity Fund
[The following table was represented as a bar chart in the printed material.]
Calendar Year Ended December 31 Percent
1996 21.23
1997 23.61
1998 10.65
1999
- --------------------------------------------------------------------------------
Average annual total returns
for selected periods ended December 31, 1999
Inception
1 Year Life of Fund Date
- --------------------------------------------------------------------------------
Tax-Sensitive Equity Fund xx/xx xx/xx 1/2/96
S&P 500 Index xx.xx xx.xx N/A
Small Cap Tax-Sensitive Equity Fund xx.xx xx.xx 1/2/96
Russell 2000 Growth Index xx.xx xx.xx N/A
Expense example
This example is intended to help you compare the cost of investing in each fund
with the cost of investing in other mutual funds. The example assumes that:
o You invest $10,000 in the fund for the time periods indicated;
o You redeem at the end of each period;
o Your investment has a 5% return each year; and
o The fund's operating expenses have not been capped and remain the same.
Although your actual costs may be higher or lower, under these assumptions your
costs would be:
After After After After
1 year 3 years 5 years 10 years
Tax-Sensitive
Equity Fund $87 $271 $471 $1,049
Small Cap Tax-
Sensitive Equity Fund $101 $315 $547 $1,213
Fees and expenses of the funds
This table describes the fees and expenses you may pay if you buy and hold
shares of funds.
Small Cap Tax-
Based on fiscal year Tax-Sensitive Sensitive
ended 9/30/99 Equity Fund Equity Fund
Shareholder fees (fees paid
directly from your investment) None None
Annual fund operating expenses*
(expenses that are deducted
from fund assets)
Management fees 0.50% 0.80%
Distribution (12b-1) fees None None
Other expenses 0.35% 0.19%
Total annual fund operating
expenses 0.85% 0.99%
- --------------------------------------------------------------------------------
*Because Standish has agreed to cap the funds' operating expenses, each fund's
actual expenses were:
Management fees 0.15% 0.59%
Other expenses 0.35% 0.19%
Total annual fund
operating expenses 0.50% 0.78%
These caps may be changed or eliminated.
5 Standish Group of Tax-Sensitive Funds
<PAGE>
Risk/Return Summary
- --------------------------------------------------------------------------------
----------------------------------------------------
Intermediate Tax MA Intermediate Tax
Exempt Bond Fund Exempt Bond Fund
----------------------------------------------------
Investment objective Provide a high level of Provide a high level of
interest income exempt interest income exempt
from federal income tax, from Massachusetts and
while seeking federal income taxes,
preservation of while seeking
shareholders' capital. preservation of
shareholders' capital.
----------------------------------------------------
Key investments The fund invests, under The fund invests, under
and strategies normal circumstances, at normal circumstances, at
least 80% of assets in least 80% of assets in
tax exempt municipal tax exempt municipal
securities issued by securities of
states, territories and Massachusetts issuers
possessions of the and other qualifying
United States, the issuers (such as Puerto
District of Columbia and Rico, the U.S. Virgin
their political Islands and Guam). For
subdivisions, agencies this fund, tax exempt
and instrumentalities. means that the
For this fund, tax securities pay interest
exempt means that the that is excluded from
securities pay interest gross income for federal
that is excluded from income tax purposes and
gross income for federal is exempt from
income tax purposes. Massachusetts personal
income tax.
----------------------------------------------------
Credit quality Exclusively investment grade with an emphasis on
high grade securities.
----------------------------------------------------
Maturity Each fund will generally maintain an average
effective dollar-weighted portfolio maturity of 3 to
10 years but may invest in individual securities of
any maturity.
----------------------------------------------------
How investments The adviser focuses on identifying undervalued
are selected sectors and securities and minimizes the use of
interest rate forecasting. The adviser selects
municipal bonds for each fund's portfolio by:
o Using fundamental credit analysis to estimate the
relative value and attractiveness of various
sectors and securities and to exploit pricing
inefficiencies in the municipal bond market.
o Actively trading among various sectors, such as
insured, general obligation, revenue and housing,
based on their apparent relative values. Each
fund diversifies among these sectors.
o Identifying individual securities with the most
potential for added value, such as those
involving unusual situations, new issues, the
potential for credit upgrades, unique structural
characteristics or innovative features.
----------------------------------------------------
Principal risks of Investors could lose money on their investments in a
investing in the funds 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 municipal
bond prices and the value of the fund's portfolio
go down.
o The issuer of a security in the fund's portfolio
has its credit rating downgraded or defaults on
its obligation to pay principal and/or interest.
o When interest rates are declining, the issuer of
a security exercises its right to prepay
principal earlier than scheduled, forcing the
fund to reinvest in lower yielding securities.
This is known as call or prepayment risk.
o When interest rates are rising, the average life
of some securities may extend because of slower
than expected principal payments. This will lock
in a below-market interest rate, increase the
security's duration and reduce the value of the
security. This is known as extension risk.
o The adviser's judgment about the attractiveness,
relative value or potential appreciation of a
particular sector or security proves to be
incorrect.
o There are adverse changes in federal or
Massachusetts tax law.
----------------------------------------------------
Issuer diversification The fund is diversified The fund is not
and geographic and does not concentrate diversified, which means
concentration in any one geographic that it can invest a
region. higher percentage of its
assets in any one
issuer. Also, the fund
concentrates its
investments in
Massachusetts issuers.
Being non-diversified
and concentrated may
magnify the fund's
losses from adverse
events affecting a
particular issuer or
Massachusetts issuers as
a group.
----------------------------------------------------
Possibility of The fund may realize The fund may realize
taxable income taxable gains on the taxable gains on the
or gains sale of securities. Some sale of securities. Some
of the fund's of the fund's
distributions may be distributions may be
subject to the federal subject to the federal
alternative minimum tax. alternative minimum tax.
In addition,
distributions of the
fund's income and gains
may be subject to state
taxation.
Standish Group of Tax-Sensitive Funds 6
<PAGE>
- --------------------------------------------------------------------------------
Total return The bar charts and total return table indicate the
performance risks of investing in the funds. The bar charts show
changes in the performance of each fund for the full
calendar periods indicated. The total return table
shows how each fund's average annual returns compare
to those of a composite of several widely
recognized, unmanaged indices of municipal bond
prices. Each fund's past performance does not
necessarily indicate how the fund will perform in
the future.
Quarterly returns:
Intermediate Tax Exempt
Bond Fund
Highest: xx.xx% in xx quarter 19xx
Lowest: xx.xx% in xx quarter 19xx
Quarterly returns:
MA Intermediate Tax Exempt
Bond Fund
Highest: xx.xx% in xx quarter 19xx
Lowest: xx.xx% in xx quarter 19xx
Intermediate Tax Exempt Bond Fund
[The following table was represented as a bar chart in the printed material.]
Calendar Year Ended December 31 Percentage
1993 10.78
1994 -2.68
1995 12.65
1996 4.76
1997 8.07
1998 5.41
1999
MA Intermediate Tax Exempt Bond Fund
[The following table was represented as a bar chart in the printed material.]
Calendar Year Ended December 31 Percentage
1993 10.24
1994 -3.84
1995 12.64
1996 4.07
1997 7.39
1998 5.78
1999
- --------------------------------------------------------------------------------
Average annual total returns
for selected periods ended December 31, 1999
1 Year 5 Years Life of Fund Inception
Date
- --------------------------------------------------------------------------------
Intermediate Tax Exempt Fund xx.xx xx.xx xx.xx 11/2/92
MA Intermediate Tax Exempt Fund xx.xx xx.xx xx.xx 11/2/92
Lehman Brothers State GOV Bond
3, 5, 7, 10 Year Index xx.xx xx.xx xx.xx N/A
Expense example
This example is intended to help you compare the cost of investing in each fund
with the cost of investing in other mutual funds. The example assumes that:
o You invest $10,000 in the fund for the time periods indicated;
o You redeem at the end of each period;
o Your investment has a 5% return each year; and
o The fund's operating expenses have not been capped and remain the same.
Although your actual costs may be higher or lower, under these assumptions your
costs would be:
After After After After
1 year 3 years 5 years 10 years
Intermediate Tax
Exempt Fund $64 $202 $351 $786
MA Intermediate Tax
Exempt Fund $66 $208 $362 $310
Fees and expenses of the funds
This table describes the fees and expenses you may pay if you buy and hold
shares of the funds.
Intermediate MA Tax
Based on fiscal year Tax Exempt Exempt
ended 9/30/99 Fund Fund
Shareholder fees (fees paid
directly from your investment) None None
Annual fund operating expenses
(expenses that are deducted
from fund assets)
Management fees 0.40% 0.40%
Distribution (12b-1) fees None None
Other expenses 0.23% 0.25%
Total annual fund operating
expenses 0.63% 0.65%
7 Standish Group of Tax-Sensitive Funds
<PAGE>
The Funds' Investments and Related Risks
- --------------------------------------------------------------------------------
Tax-sensitive equity funds
The tax-sensitive equity funds use tax management strategies only when they are
consistent with the funds' investment goals of maximizing after tax total
return.
Tax management strategies The tax-sensitive equity funds use the tax management
strategies described in the risk/return summary to limit the amount of income
subject to state as well as federal income taxes. However, the tax-sensitive
equity funds do not attempt to address the tax laws of any particular state.
Each fund will follow these strategies only to the extent that they do not
conflict with the fund's investment strategies and other operational needs. For
example, a fund may sell and realize short term gains on a stock if the stock
appears to have peaked or is expected to decline in value, to increase
diversification or to raise cash to pay expenses or meet shareholder redemption
requests. In addition, some of the equity and fixed income securities in the
funds' portfolios will regularly generate taxable income.
Equity investments Equity securities include exchange-traded and
over-the-counter (OTC) common and preferred stocks, warrants, rights, equity
index futures contracts, convertible securities, depositary receipts and shares,
trust certificates, limited partnership interests, shares of other investment
companies and real estate investment trusts and equity participations. Small Cap
Tax-Sensitive Equity Fund may invest up to 20% of assets in companies with total
market capitalization greater than that described on page 4.
Foreign securities Each fund may invest in dollar denominated securities of
foreign issuers. Tax-Sensitive Equity Fund may invest without limit in foreign
securities traded in a U.S. market but may invest only 10% of assets in foreign
securities traded outside the U.S. Small Cap Tax-Sensitive Equity Fund may
invest up to 15% of assets in foreign securities, including those of emerging
market issuers, regardless of where they are traded.
Foreign securities involve the risks of adverse foreign government actions,
political and economic instability and the lack of adequate and accurate
information. Foreign securities are sometimes less liquid and harder to value
than securities of U.S. issuers. These risks are more severe for securities of
issuers in emerging market countries.
In Europe, Economic and Monetary Union (EMU) and the introduction of a single
currency (euro) began in 1999. There are political and economic risks associated
with EMU, which may increase the volatility of a fund's European investments and
present valuation problems.
Tax exempt bond funds
The tax exempt bond funds may invest in a wide range of municipal securities.
Municipal bond investments Each tax exempt bond fund may invest in a wide range
of municipal bonds and notes of any maturity. These may be:
o General obligation bonds issued for various public purposes and supported
by the municipal issuer's credit and taxing power.
o Revenue bonds whose principal and interest is payable only from the
revenues of a particular project or facility. Industrial revenue bonds
depend on the credit standing of a private issuer and may be subject to
the federal alternative minimum tax (AMT).
Municipal bonds may have all types of interest rate payment and reset terms,
including fixed rate, adjustable rate, zero coupon, payment in kind and auction
rate features.
Taxable investments When after tax yields on taxable securities are more
favorable than those on municipal bonds, each fund may invest up to 20% of net
assets in taxable fixed income securities. Taxable securities must be of the
same quality and maturity as the funds' municipal bond investments.
Standish Group of Tax-Sensitive Funds 8
<PAGE>
- --------------------------------------------------------------------------------
All funds
Credit quality Securities are investment grade or high grade if:
o They are rated in one of the top four or top three, respectively,
long-term rating categories of a nationally recognized statistical rating
organization.
o They have received a comparable short-term or other rating or are rated in
one of the top two municipal note rating categories.
o They are unrated securities that the adviser believes to be of comparable
quality.
If a security receives "split" (different) ratings from multiple rating
organizations, a fund will treat the security as being rated in the higher
rating category. A fund may choose not to sell securities that are downgraded
below the fund's minimum acceptable credit rating after their purchase. Each
fund's credit standards also apply to counterparties to OTC derivative
contracts.
All of the funds' investments in fixed income securities are investment grade or
high grade.
Defensive investing Each fund may depart from its principal investment
strategies in response to adverse market, economic or political conditions by
taking temporary defensive positions in all types of short-term debt securities.
Defensive investing may increase a fund's taxable income.
Derivative contracts Each fund may, but is not required to, use derivative
contracts for any of the following purposes:
o To hedge against adverse changes--caused by changing interest rates, stock
market prices or currency exchange rates--in the market value of
securities held by or to be bought for a fund.
o As a substitute for purchasing or selling securities.
o To shorten or lengthen the effective portfolio maturity or duration of the
tax exempt bond funds.
o To enhance a fund's potential gain in non-hedging situations.
A derivative contract will obligate or entitle a fund to deliver or receive an
asset or a cash payment that is based on the change in value of a designated
security, currency or index. Even a small investment in derivative contracts can
have a big impact on a portfolio's interest rate, stock market and currency
exposure. Therefore, using derivatives can disproportionately increase portfolio
losses and reduce opportunities for gains when interest rates, stock prices or
currency rates are changing. A fund may not fully benefit from or may lose money
on derivatives if changes in their value do not correspond accurately to changes
in the value of the fund's portfolio holdings.
Counterparties to OTC derivative contracts present the same types of credit risk
as issuers of fixed income securities. Derivatives can also make a fund's
portfolio less liquid and harder to value, especially in declining markets. In
addition, much of the income and gains generated by derivatives will be taxed as
ordinary income.
Impact of high portfolio turnover Each fund, except Tax-Sensitive Equity Fund,
may engage in active and frequent trading to achieve its principal investment
strategies. This may lead to the realization and distribution to shareholders of
higher capital gains, which would increase their tax liability. Frequent trading
also increases transaction costs, which could detract from a fund's performance.
Investment objective Each tax-sensitive equity fund's investment objective may
be changed by the fund's trustees without shareholder approval.
9 Standish Group of Tax-Sensitive Funds
<PAGE>
The Investment Adviser
- --------------------------------------------------------------------------------
Standish offers a broad array on investment services that include management of
domestic and international equity and fixed income portfolios.
About Standish
Standish was established in 1933 and manages more than $45 billion in assets for
institutional and individual clients in the U.S. and abroad. By choice, Standish
has remained a privately held investment management firm over its more than 65
year history. Ownership is shared by a limited number of employees, who are the
directors of the firm. Standish believes the firm's organizational structure has
helped preserve an entrepreneurial orientation, which is responsible for its
continued commitment to investment performance.
Standish believes that experience is a prerequisite for long-term investment
success. But experience alone is insufficient in a world of complex new
securities and rapidly changing technologies. To keep pace with today's
investment markets, Standish has built a staff which balances enthusiasm and
intellectual curiosity with professional and technical expertise. This
combination of experience and enthusiasm, tradition and innovation has worked
well and serves as a blueprint for future growth at Standish.
Standish relies on a combination of traditional fundamental research, which is
the product of a seasoned staff of specialists, and innovative quantitative
analysis, which uses sophisticated computer-based models to help identify
potentially attractive securities in equity and fixed income markets. In each
market, Standish seeks to discover opportunity by attention to detail and
adherence to a strict set of disciplines. Standish uses fundamental research to
uncover a security sufficiently complex as to have been misvalued by traditional
analysis. Standish uses sophisticated quantitative techniques, which may help
identify persistent market inefficiencies that can be exploited by its portfolio
managers.
Standish strives to balance individual insight with the shared wisdom of the
investment team. By combining technology and an experienced research staff,
Standish has built a powerful internal network of overlapping resources.
Standish Group of Tax-Sensitive Funds 10
<PAGE>
- --------------------------------------------------------------------------------
Fund managers
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Fund Fund managers Positions during past
five years
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Tax-Sensitive Equity Fund Laurence A. Manchester Vice president and director
of Standish
Richard R. Davis Since 1997, associate director of Standish;
previously vice president
Susan B. Coan Since 1998, associate director of Standish;
previously vice president
- -------------------------------------------------------------------------------------------------------------------
Small Cap Tax-Sensitive Equity Fund Nicholas S. Battelle Vice president and director
of Standish
- -------------------------------------------------------------------------------------------------------------------
Intermediate Tax Exempt Bond Fund and Maria D. Furman Since 1996, managing director of Standish;
MA Intermediate Tax Exempt Bond Fund previously vice president
Raymond J. Kubiak Vice president and director of Standish
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
Advisory services and fees
Standish provides each fund with portfolio management and investment research
services, places orders to buy and sell each fund's portfolio securities and
manages each fund's business affairs. For the year ended September 30, 1999,
each fund paid an advisory fee for these services. The adviser agreed to limit
each fund's total annual operating expenses (excluding brokerage commissions,
taxes and extraordinary expenses), and the payment was less than each fund's
contractual advisory fee. These agreements are temporary and may be terminated
or changed at any time.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Annual Advisory Fee Rates
(as a percentage of the fund's average net assets)
Actual advisory fee paid Contractual advisory fee Current expense limitation
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Tax-Sensitive Equity Fund 0.15% 0.50% 0.50%
- -----------------------------------------------------------------------------------------------------------------------------
Small Cap Tax-Sensitive Equity Fund 0.59% 0.60%* 1.00%
- -----------------------------------------------------------------------------------------------------------------------------
Intermediate Tax Exempt Bond Fund 0.40% 0.40% 0.65%
- -----------------------------------------------------------------------------------------------------------------------------
MA Intermediate Tax Exempt Bond Fund 0.40% 0.40% 0.65%
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Effective January 28, 2000, the annual advisory fee rate of the Small
Tax-Sensitive Equity Fund was increased to 0.80% of average daily net assets.
Investment Adviser
Standish, Ayer & Wood, Inc.
One Financial Center
Boston, Massachusetts 02111-2662
11 Standish Group of Tax-Sensitive Funds
<PAGE>
Investment and Account Information
- --------------------------------------------------------------------------------
How to purchase shares
Minimum initial investment: $100,000.
Minimum subsequent investment: $5,000.
Minimum investments may be waived by the distributor for investors in omnibus
accounts and clients and employees of Standish and their immediate families.
All orders to purchase shares received 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 received after that time will be executed at the
next business day's price. All orders must be in good form and accompanied by
payment. Each fund reserves the right to reject purchase orders or to stop
offering its shares without notice to shareholders.
Shares of the funds are not available for sale in every state.
- --------------------------------------------------------------------------------
By check
Opening an account
o Send a check to the distributor payable to Standish Funds with the
completed original account application.
Adding to an account
o Send a check to the distributor payable to Standish Funds and a letter of
instruction with the account name and number and effective date of the
request.
- --------------------------------------------------------------------------------
By wire
Opening an account
o Send the completed original account application to the distributor.
o Call the distributor to obtain an account number.
o Instruct your bank to wire the purchase amount to Investors Bank & Trust
Company (see below).
Adding to an account
o Call the distributor. Instruct your bank to wire the amount of the
additional investment to Investors Bank & Trust Company (see below).
- --------------------------------------------------------------------------------
By fax
Opening an account
o Fax the completed account application to 617-350-0042.
o Mail the original account application to the distributor.
o Follow the instructions for opening an account by wire.
Adding to an account
o Fax a letter of instruction to 617-350-0042 with the account name and
number and effective date of the request.
o Call the distributor. Instruct your bank to wire the amount of the
additional investment to Investors Bank & Trust Company.
- --------------------------------------------------------------------------------
Through a financial intermediary
Opening or adding to an account
o Contact your financial intermediary. Financial intermediaries acting on an
investor's behalf are responsible for transmitting orders to the
distributor or its agent by the specified deadline.
- --------------------------------------------------------------------------------
The distributor's address is:
Standish Fund Distributors, L.P.
P.O. Box 1407
Boston, Massachusetts 02205-1407
Tel: 1-800-221-4795
Fax: 617-350-0042
Email: [email protected]
Wire instructions:
Investors Bank & Trust Company
Boston, MA
ABA#: 011 001 438
Account #: 79650-4116
Fund name:
Investor account #:
Standish Group of Tax-Sensitive Funds 12
<PAGE>
- --------------------------------------------------------------------------------
How to exchange shares
You may exchange shares of a fund for shares of any other Standish fund, if the
registration of both accounts is identical. A fund may refuse any exchange order
and may alter, limit or suspend its exchange privilege on 60 days' notice.
Exchange requests will not be honored until the distributor receives payment for
the exchanged shares (up to 3 business days). An exchange involves a taxable
redemption of shares surrendered in the exchange.
- --------------------------------------------------------------------------------
By mail
o Send a letter of instruction to the distributor signed by each registered
account owner.
o Provide the name of the current fund, the fund to exchange into and dollar
amount to be exchanged.
o Provide both account numbers.
o Signature guarantees may be required.
- --------------------------------------------------------------------------------
By telephone
o If the account has telephone privileges, call the distributor.
o Provide the name of the current fund, the fund to exchange into and dollar
amount to be exchanged.
o Provide both account numbers.
o The distributor may ask for identification and all telephone transactions
may be recorded.
How to redeem shares
All orders to redeem shares received by the distributor or its agent before the
closing of regular trading on the New York Stock Exchange will be executed at
that day's share price. Orders received after that time will be executed at the
next business day's price. All redemption orders must be in good form. Each fund
has the right to suspend redemptions of shares and to postpone payment of
proceeds for up to seven days, as permitted by law.
- --------------------------------------------------------------------------------
By mail
o Send a letter of instruction to the distributor signed by each registered
account owner.
o State the name of the fund and number of shares or dollar amount to be
sold.
o Provide the account number.
o Signature guarantees may be required (see below).
- --------------------------------------------------------------------------------
By telephone
For check or wire
o If the account has telephone privileges, call the distributor.
o Proceeds will be mailed by check payable to the shareholder of record to
the address, or wired to the bank as directed, on the account application.
o The distributor may ask for identification and all telephone transactions
may be recorded.
- --------------------------------------------------------------------------------
By fax
o Fax the request to the distributor at 617-350-0042.
o Include your name, the name of the fund and the number of shares or dollar
amount to be sold.
o Proceeds will be mailed by check payable to the shareholder of record to
the address, or wired to the bank as directed, on the account application.
- --------------------------------------------------------------------------------
Through a financial intermediary
o Contact your financial intermediary. Financial intermediaries acting on an
investor's behalf are responsible for transmitting orders to the
distributor or its agent by the specified deadline.
o Good form means that you have provided adequate instructions and there are
no outstanding claims against your account or transaction limitations on
your account. Also, a signature guarantee may be required with certain
requests.
- --------------------------------------------------------------------------------
Good form
o Good form means that you have provided adequate instructions and there are
no outstanding claims against your account or transactions limitations on
your account. Also, a signature guarantee may be required with certain
requests.
13 Standish Group of Tax-Sensitive Funds
<PAGE>
Investment and Account Information
- --------------------------------------------------------------------------------
Transaction and account policies
Accounts with low balances. If an account falls below $50,000 as a result of
redemptions (and not because of performance), the distributor may ask the
investor to increase the size of the account to $50,000 within 30 days. If the
investor does not increase the account to $50,000 the distributor may redeem the
account at net asset value and remit the proceeds to the investor.
In-kind purchases and redemptions. Securities you own may be used to purchase
shares of a fund. The adviser will determine if the securities are consistent
with the fund's objective and policies. If accepted, the securities will be
valued the same way the fund values securities it already owns. A fund may make
payment for redeemed shares wholly or in part by giving the investor portfolio
securities. A redeeming shareholder will pay transaction costs to dispose of
these securities.
Signature guarantees. A signature guarantee may be required for any written
request to sell or exchange shares, or to change account information for
telephone transactions.
The distributor will accept signature guarantees from:
o members of the STAMP program or the Exchange's Medallion Signature Program
o a broker or securities dealer
o a federal savings, cooperative or other type of bank
o a savings and loan or other thrift institution
o a credit union
o a securities exchange or clearing agency
A notary public cannot provide a signature guarantee.
Valuation of shares
Each fund offers its shares at the NAV per share of the fund. Each fund
calculates its NAV once daily as of the close of regular trading on the New York
Stock Exchange (generally at 4:00 p.m., New York time) on each day the exchange
is open. If the exchange closes early, the funds accelerate calculation of NAV
and transaction deadlines to that time.
Each fund values the securities in its portfolio on the basis of market
quotations and valuations provided by independent pricing services. If
quotations are not readily available, or the value of a security has been
materially affected by events occurring after the closing of a foreign exchange,
each fund may value its assets by a method that the trustees believe accurately
reflects fair value. A fund that uses fair value to price securities may value
those securities higher or lower than a fund that uses market quotations.
Foreign markets may be open on days when U.S. markets are closed and the value
of foreign securities owned by a fund may change on days when shareholders
cannot purchase or redeem shares.
Dividends and distributions
Each fund intends to distribute all or substantially all of its net investment
income and realized capital gains, if any, for each taxable year. The
tax-sensitive equity funds declare and pay dividends from net investment income
semi-annually and distribute capital gains annually. The tax exempt bond funds
declare dividends from net investment income daily and distribute dividends
monthly and capital gains annually. Whether a fund's distributions are
predominantly from capital gains or income will vary from year to year. All
dividends and capital gains are reinvested in shares of the fund that paid them
unless the shareholder elects to receive them in cash.
Year 2000 issue
The funds' securities trades, pricing and accounting services and other
operations could be adversely affected if the computer systems of the adviser,
distributor, custodian and transfer agent were unable to recognize dates after
1999. The adviser and other service providers have told the funds that they have
taken action to prevent, and do not expect the funds to suffer from, material
year 2000 problems.
Standish Group of Tax-Sensitive Funds 14
<PAGE>
Fund Details
- --------------------------------------------------------------------------------
Taxes
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Funds Transactions Tax Status
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
All Sales or exchanges of shares. Usually capital gain or loss. Tax rate
depends on how long shares are held.
- ---------------------------------------------------------------------------------------------------------------------------------
All Distributions of long term capital gain. Taxable as long-term capital gain.
- ---------------------------------------------------------------------------------------------------------------------------------
All Distributions of short term capital gain. Taxable as ordinary income.
- ---------------------------------------------------------------------------------------------------------------------------------
Tax-sensitive equity funds Dividends from net investment income. Taxable as ordinary income.
- ---------------------------------------------------------------------------------------------------------------------------------
Intermediate Tax Exempt Bond Fund Dividends designated as "exempt-interest Exempt from federal income tax, but may be
dividends." subject to AMT and state and local taxes.
- ---------------------------------------------------------------------------------------------------------------------------------
MA Intermediate Tax Exempt Bond Fund Dividends designated as "exempt-interest Exempt from federal income tax and
dividends." normally MA personal income tax, but may
be subject to AMT.
- ---------------------------------------------------------------------------------------------------------------------------------
Both tax exempt bond funds Dividends that are not designated as Taxable as ordinary income.
"exempt-interest dividends."
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Every January, the funds provide information to their shareholders about the
funds' dividends and distributions, which receive the same tax treatment even if
reinvested, and about the shareholders' redemptions during the previous calendar
year. Any shareholder who does not provide the funds with a correct taxpayer
identification number and required certification may be subject to federal
backup withholding tax.
Shareholders should generally avoid investing in a fund shortly before an
expected taxable dividend or capital gain distribution. Otherwise, a shareholder
may pay taxes on dividends or distributions that are economically equivalent to
a partial return of the shareholder's investment.
Shareholders should consult their tax advisers about their own particular tax
situations.
Taxable Equivalent Yield Table (Federal)
Federal Marginal Tax Rate
Taxable equivalent rates based on tax-exempt yield of:
4% 5% 6% 7% 8% 9% 10%
31.0% 5.80% 7.25% 8.70% 10.14% 11.59% 13.04% 14.49%
36.0% 6.25% 7.81% 9.38% 10.94% 12.50% 14.06% 15.63%
39.6% 6.62% 8.28% 9.93% 11.59% 13.25% 14.90% 16.56%
Taxable Equivalent Yield Table (Federal/MA combined)
Combined Federal and MA Marginal Tax Rate*
Taxable equivalent rates based on tax-exempt yield of:
4% 5% 6% 7% 8% 9% 10%
39.28% 6.59% 8.23% 9.88% 11.53% 13.18% 14.82% 16.47%
43.68% 7.10% 8.88% 10.65% 12.43% 14.20% 15.98 17.76%
46.85% 7.53% 9.41% 11.29% 13.17%% 15.05% 16.93% 18.81%
*Assuming (i) a Massachusetts tax rate of 12% and federal tax rates of 31%, 36%
and 39.6%, respectively, and (ii) full deductibility of Massachusetts income
taxes on the investor's federal income tax return.
- --------------------------------------------------------------------------------
The funds' service providers
Principal Underwriter
Standish Fund Distributors, L.P.
Custodian, Transfer Agent and Fund Accountant
Investors Bank & Trust Company
Independent Accountants
PricewaterhouseCoopers LLP
Legal Counsel
Hale and Dorr LLP
15 Standish Group of Tax-Sensitive Funds
<PAGE>
Financial Highlights
- --------------------------------------------------------------------------------
The financial highlights tables are intended to help shareholders understand the
funds' financial performance for the past five years, or less if a fund has a
shorter operating history. Certain information reflects financial results for a
single fund share. Total returns represent the rate that a shareholder would
have earned on an investment in a fund (assuming reinvestment of all dividends
and distributions). The information was audited by PricewaterhouseCoopers LLP,
independent accountants, whose reports, along with the funds' financial
statements, are included in the funds' annual reports (available upon request).
Tax-Sensitive Equity Fund
<TABLE>
<CAPTION>
Fiscal year ended Fiscal year ended Fiscal year ended January 2(2) to
September 30, September 30, September 30, September 30,
1999(1) 1998(1) 1997(1) 1996
<S> <C> <C> <C> <C>
Net asset value--beginning of period $ $35.24 $23.60 $20.00
------ ------ ------ ------
Income from investment operations
Net investment income* 0.29 0.39 0.28
Net realized and unrealized gain (loss) (2.77) 11.58 3.50
------ ------ ------ ------
Total from investment operations (2.48) 11.97 3.78
------ ------ ------ ------
Less distributions declared to shareholders
From net investment income (0.26) (0.33) (0.18)
------ ------ ------ ------
Net asset value--end of period $ 32.50 35.24 23.60
====== ====== ====== ======
Total return (7.13)% 51.19% 18.97%
Ratios (to average daily net assets)/Supplemental data
Net assets at end of period (000 omitted) $ $31,659 $12,819 $2,843
Expenses(3) 0.50% 0.20% 0.00%(3)
Net investment income* 0.78% 1.31% 2.27%(3)
Portfolio turnover 33% 25% 17%
<CAPTION>
-------------------------------
*The adviser voluntarily did not impose some or all of its investment advisory fee and limited the fund's expenses. Had these
actions not been taken, the net investment income per share and the ratios would have been:
<S> <C> <C> <C> <C>
Net investment income per share $ $0.09 $(0.07) $(0.36)
Ratios (to average net assets)
Expenses 1.05% 1.73% 5.15%(3)
Net investment income 0.23% (0.22%) (2.88%)(3)
</TABLE>
(1) Calculated based on average shares outstanding.
(2) Commencement of operations.
(3) Computed on an annualized basis.
Standish Group of Tax-Sensitive Funds 16
<PAGE>
- --------------------------------------------------------------------------------
Small Cap Tax-Sensitive Equity Fund
<TABLE>
<CAPTION>
Fiscal year ended Fiscal year ended Fiscal year ended January 2(2) to
September 30, September 30, September 30, September 30,
1999(1) 1998(1) 1997 1996
<S> <C> <C> <C> <C>
Net asset value--beginning of period $ $32.61 $23.57 $20.00
------ ------ ------ ------
Income from investment operations
Net investment income* (0.15) 0.02 0.04
Net realized and unrealized gain (loss) (6.42) 9.05 3.55
------ ------ ------ ------
Total from investment operations (6.57) 9.07 3.59
------ ------ ------ ------
Less distributions declared to shareholders
From net investment income -- (0.01) (0.03) (0.02)
From net realized gains on investments -- (0.14) -- --
------ ------ ------ ------
Total distributions to shareholders -- (0.15) (0.03) (0.02)
------ ------ ------ ------
Net asset value--end of period $ $25.89 $32.61 $23.57
====== ====== ====== ======
Total return (20.16)% 38.50% 17.95%
Ratios (to average daily net assets)/Supplemental data
Net assets at end of period (000 omitted) $ $66,458 $32,761 $6,896
Expenses* 0.75% 0.21% 0.00%(3)
Net investment income (loss)* (0.51)% 0.08% 0.41%(3)
Portfolio turnover 102% 102% 57%
<CAPTION>
-------------------------------
*The adviser voluntarily did not impose some or all of its investment advisory fee and limited the fund's expenses. Had these
actions not been taken, the net investment income per share and the ratios would have been:
<S> <C> <C> <C> <C>
Net investment income per share $ $(0.22) $(0.16) $(0.28)
Ratios (to average net assets)
Expenses 0.97% 1.24% 3.45%(3)
Net investment income (0.73)% (0.95)% (3.04)%(3)
</TABLE>
(1) Calculated based on average shares outstanding.
(2) Commencement of operations.
(3) Computed on an annualized basis.
17 Standish Group of Tax-Sensitive Funds
<PAGE>
Financial Highlights
- --------------------------------------------------------------------------------
Intermediate Tax Exempt Bond Fund
<TABLE>
<CAPTION>
Fiscal year ended Nine months ended Fiscal year ended
September 30, September 30, December 31,
------------------------------ ----------------- ------------------
1999(3) 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C> <C>
Net asset value--beginning of period $21.78 $21.12 $21.40 $19.91 $21.44
------ ------ ------ ------ ------ ------
Income from investment operations
Net investment income* 0.96 1.01 0.79 0.98 0.95
Net realized and unrealized gain (loss) 0.58 0.74 (0.28) 1.49 (1.51)
------ ------ ------ ------ ------ ------
Total from investment operations 1.54 1.75 0.51 2.47 (0.56)
------ ------ ------ ------ ------ ------
Less distributions declared to shareholders
From net investment income (0.96) (1.01) (0.79) (0.98) (0.95)
From realized gain on investments (0.06) (0.08) -- -- (0.02)
------ ------ ------ ------ ------ ------
Total distributions declared to shareholders (1.02) (1.09) (0.79) (0.98) (0.97)
------ ------ ------ ------ ------ ------
Net asset value--end of period $22.30 $21.78 $21.12 $21.40 $19.91
====== ====== ====== ====== ====== ======
Total return 7.24% 8.27% 2.43% 12.65% (2.68)%
Ratios (to average daily net assets)
/Supplemental data
Net assets at end of period (000 omitted) $78,579 $52,723 $34,843 $32,865 $20,514
Expenses* 0.65% 0.65% 0.65%(2) 0.65% 0.65%
Net investment income 4.37% 4.74% 4.99%(2) 4.75% 4.62%
Portfolio turnover 29% 23%(1) 43%(1) 140% 157%
<CAPTION>
-------------------------------
*The adviser voluntarily did not impose some or all of its investment advisory fee and limited the fund's expenses. Had
these actions not been taken, the net investment income per share and the ratios would have been:
<S> <C> <C> <C> <C> <C> <C>
Net investment income per share $0.95 $0.99 $0.76 $0.95 $0.90
Ratios (to average net assets)
Expenses 0.69% 0.74% 0.82%(2) 0.79% 0.89%
Net investment income 4.33% 4.65% 4.82%(2) 4.61% 4.38%
</TABLE>
(1) Commencing in fiscal 1996, securities which are puttable daily have been
excluded from the portfolio turnover calculations.
(2) Computed on an annualized basis.
(3) Calculated based on average shares outstanding.
Standish Group of Tax-Sensitive Funds 18
<PAGE>
- --------------------------------------------------------------------------------
MA Intermediate Tax Exempt Bond Fund
<TABLE>
<CAPTION>
Fiscal year ended Nine months ended Fiscal year ended
September 30, September 30, December 31,
------------------------------ ----------------- ------------------
1999(2) 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C> <C>
Net asset value--beginning of period $21.18 $20.63 $21.02 $19.55 $21.31
------ ------ ------ ------ ------ ------
Income from investment operations
Net investment income* 0.94 0.97 0.74 0.94 0.94
Net realized and unrealized gain (loss) 0.60 0.55 (0.39) 1.47 (1.75)
------ ------ ------ ------ ------ ------
Total from investment operations 1.54 1.52 0.35 2.41 (0.81)
------ ------ ------ ------ ------
Less distributions declared to shareholders
From net investment income (0.94) (0.97) (0.74) (0.94) (0.94)
From realized gain on investments -- -- -- -- (0.01)
------ ------ ------ ------ ------ ------
Total distributions declared to shareholders (0.94) (0.97) (0.74) ($0.94) ((0.95)
------ ------ ------ ------ ------ ------
Net asset value--end of period $21.78 $21.18 $20.63 $21.02 $19.55
====== ====== ====== ====== ====== ======
Total return 7.45% 7.55% 1.70% 12.64% (3.84)%
Ratios (to average daily net assets)
/Supplemental data
Net assets at end of period (000 omitted) $53,600 $38,401 $32,136 $32,565 $27,776
Expenses* 0.65% 0.65% 0.65%(1) 0.65% 0.65%
Net investment income* 4.40 4.67% 4.78%(1) 4.71% 4.67%
Portfolio turnover 19% 25% 35% 77% 84%
<CAPTION>
-------------------------------
*The adviser voluntarily did not impose some or all of its investment advisory fee and limited the fund's expenses. Had
these actions not been taken, the net investment income per share and the ratios would have been:
<S> <C> <C> <C> <C> <C> <C>
Net investment income per share $0.92 $0.95 $0.72 $0.95 $0.91
Ratios (to average net assets)
Expenses 0.77% 0.75% 0.73%(1) 0.72% 0.78%
Net investment income 4.28% 4.57% 4.70%(1) 4.64% 4.54%
</TABLE>
(1) Computed on an annualized basis.
(2) Calculated based on average shares outstanding.
19 Standish Group of Tax-Sensitive Funds
<PAGE>
Standish, Ayer & Wood, Inc. is an independent investment counseling firm that
has been managing assets for institutional investors and high net worth
individuals, as well as mutual funds, for more than 65 years. Standish offers a
broad array of investment services that includes management of domestic and
international equity and fixed income portfolios.
For More Information
- --------------------------------------------------------------------------------
For investors who want more information about the Standish group of
tax-sensitive funds, the following documents are available free upon request.
Annual/Semiannual Reports
Additional information about the funds' investments is available in the funds'
annual and semiannual reports to shareholders. Each fund's annual report
contains a discussion of the market conditions and investment strategies that
significantly affected the fund's performance during its last fiscal year.
Statement of Additional Information (SAI)
The SAI provides more detailed information about the funds and is incorporated
into this prospectus by reference.
Investors can get free copies of reports and SAIs, request other information and
discuss their questions about the funds by contacting the funds at:
Standish Funds
P.O. Box 1407
Boston, MA 02205-1407
Telephone: 1-800-SAW-0066
Email:
[email protected]
Internet:
http://www.standishfunds.com
Investors can review the funds' reports and SAIs at the Public Reference Room of
the Securities and Exchange Commission. Investors can get text-only copies:
o For a fee, by writing to or calling the Public Reference Room of the
Commission, Washington, D.C. 20549-6009 Telephone: 1-800-SEC-0330
o Free from the Commission's Internet website at http://www.sec.gov
[LOGO] STANDISH FUNDS(R)
One Financial Center
Boston, MA 02111-2662
800.729.0066
Investment Company Act
file number (811-4813)
99-314
<PAGE>
January 28, 2000
[STANDISH LOGO]
STANDISH, AYER & WOOD INVESTMENT TRUST
One Financial Center
Boston, Massachusetts 02111
(800) 729-0066
STATEMENT OF ADDITIONAL INFORMATION
Standish Tax-Sensitive Equity Fund
Standish Small Cap Tax-Sensitive Equity Fund
Standish Intermediate Tax Exempt Bond Fund
Standish Massachusetts Intermediate Tax Exempt Bond Fund
This combined Statement of Additional Information (SAI) is not a
prospectus. The SAI expands upon and supplements the information contained in
the combined prospectus dated January 28, 2000, as amended and/or supplemented
from time to time, of Standish Tax-Sensitive Equity Fund (Equity Fund) and
Standish Small Cap Tax-Sensitive Equity Fund (Small Cap Fund), Standish
Intermediate Tax Exempt Bond Fund (Intermediate Tax Exempt Fund) and Standish
Massachusetts Intermediate Tax Exempt Bond Fund (Massachusetts Tax Exempt Fund),
each a separate investment series of Standish, Ayer & Wood Investment Trust (the
"Trust"). The Equity Fund and the Small Cap Fund are referred to herein as the
"tax-sensitive funds" and the Intermediate Tax Exempt Fund and the Massachusetts
Tax Exempt Fund are referred to herein as the "tax exempt funds."
This SAI should be read in conjunction with the funds' prospectus.
Additional information about each fund's investments is available in the funds'
annual and semi-annual reports to shareholders. Investors can get free copies of
reports and the prospectus, request other information and discuss their
questions about the funds by contacting the funds at the phone number above.
Each fund's financial statements which are included in the 1999 annual reports
to shareholders are incorporated by reference into this SAI.
Contents
--------------------------------------
Investment Objectives and Policies.............................................2
Investment Restrictions.......................................................22
Calculation of Performance Data...............................................26
Management....................................................................32
Purchase and Redemption of Shares.............................................38
Portfolio Transactions........................................................39
Determination of Net Asset Value..............................................40
Federal and Massachusetts Income Taxes........................................41
The Funds and Their Shares....................................................47
Additional Information........................................................48
Experts and Financial Statements..............................................49
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The prospectus describes the investment objective and policies of each
fund. The following discussion supplements the description of the funds'
investment policies in the prospectus. Each fund's investment adviser is
Standish, Ayer & Wood, Inc. ("Standish" or the "adviser").
Suitability. None of the funds is intended to provide an investment
program meeting all of the requirements of an investor. Notwithstanding each
fund's ability to spread risk by holding securities of a number of portfolio
companies, shareholders should be able and prepared to bear the risk of
investment losses which may accompany the investments contemplated by the funds.
Because the tax-sensitive funds are managed to seek the highest long-term
total return after considering the impact of federal and state income taxes paid
by shareholders on the funds' distributions and the tax exempt funds seek to
provide a high level of interest income exempt from federal and, in the case of
the Massachusetts Tax Exempt Fund, Massachusetts income taxes, the funds may not
be suitable investments for non-taxable investors or persons investing through
tax deferred vehicles (e.g., individual retirement accounts (IRAs) or other
qualified pension and retirement plans).
Credit Quality. Investment grade securities are those that are rated at
least Baa by Moody's Investors Service, Inc. ("Moody's") or BBB by Standard &
Poor's Ratings Group ("Standard & Poor's"), Duff and Phelps ("Duff") or Fitch
IBCA International ("Fitch") or, if unrated, determined by Standish to be of
comparable credit quality. High grade securities are those that are rated within
the top three investment grade ratings (i.e., Aaa, Aa or A by Moody's or AAA, AA
or A by Standard & Poor's, Duff or Fitch) or, if unrated, determined by Standish
to be of comparable credit quality. The tax exempt funds also may invest in
municipal notes rated at least MIG-1 or MIG-2 by Moody's or at least SP-1 or
SP-2 by Standard & Poor's or, if unrated, determined by Standish to be of
comparable credit quality. If a security is rated differently by two or more
rating agencies, Standish uses the highest rating to compute a fund's credit
quality and also to determine the security's rating category. If the rating of a
security held by a fund is downgraded below investment grade, Standish will
determine whether to retain that security in the fund's portfolio. Securities
rated Baa by Moody's or BBB by Standard & Poor's, Duff or Fitch are generally
considered medium grade obligations and have some speculative characteristics.
Adverse 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.
Portfolio Maturity and Duration (tax exempt funds). Under normal market
conditions, the tax exempt funds will maintain a dollar-weighted average
portfolio maturity of between three and ten years. This means that the
dollar-weighted average duration of the tax exempt funds' portfolio investments
will be less than the duration of a U.S. Treasury obligation with a remaining
stated maturity of three to ten years. A mutual fund with an average portfolio
maturity longer than that of the tax exempt funds will tend to have a higher
yield, but will generally exhibit greater share price volatility. Conversely, a
mutual fund with a short-term maturity will generally have a lower yield, but
will generally offer more price stability.
The effective maturity of an individual portfolio security in which the
tax exempt funds invest is defined as the period remaining until the earliest
date when a 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. Prepayment
rates are influenced by changes in current interest rates and a variety of
economic, geographic, social and other factors and cannot be predicted with
certainty. In general, securities 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
-2-
<PAGE>
lower than anticipated rate of unscheduled payments on securities purchased at a
discount may result in a lower yield (and total return) to a tax exempt fund
than was anticipated at the time the securities were purchased. A fund's
reinvestment of unscheduled prepayments may be made at rates higher or lower
than the rate payable on such security, thus affecting the return realized by
the fund.
Duration represents the weighted average maturity of expected cash flows
(i.e., interest and principal payments) on one or more debt obligations,
discounted to their present values. The duration of an obligation is always less
than or equal to its stated maturity and is related to the degree of the
volatility in the market value of the obligation. 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, each tax exempt fund will
have to estimate the duration of debt obligations that are subject to prepayment
or redemption by the issuer, based on projected cash flows from such
obligations. Subject to the requirement that, under normal market conditions,
each tax exempt fund's dollar-weighted average portfolio maturity will not
exceed ten years, the funds may invest in individual debt obligations of any
maturity, including obligations with a remaining stated maturity of less than
three or more than ten years. The tax exempt funds may each use various
techniques to shorten or lengthen the option-adjusted duration of its portfolio,
including without limitation the acquisition of debt obligations at a premium or
discount, the use of futures contracts and the use of interest rate swaps, caps,
floors and collars.
The Tax-Sensitive Equity Fund
Additional Investment Information. Under normal circumstances, at least
80% of the Equity Fund's total assets are invested in a diversified portfolio of
equity and equity-related securities. The fund may also, to a limited extent,
invest in debt securities and preferred stocks that are convertible into, or
exchangeable for, common stocks. Generally, such securities will be rated, at
the time of investment, Aaa, Aa or A by Moody's or AAA, AA or A by Standard &
Poor's, Duff or Fitch or, if unrated, will be determined by the adviser to be of
comparable credit quality. Up to 5% of the fund's total assets invested in
convertible debt securities and preferred stocks may be rated, at the time of
investment, Baa by Moody's or BBB by Standard & Poor's, Duff or Fitch or, if
unrated, determined by the adviser to be of comparable credit quality. The fund
may also invest in equity securities of foreign issuers that are listed on a
U.S. securities exchange or traded in the U.S. OTC market, but will not invest
more than 10% of its total assets in such securities that are not so listed or
traded. The fund currently intends to limit its investments in foreign
securities to those that are denominated or quoted in U.S. dollars.
When practicable and prudent, the Equity Fund intends to hold appreciated
portfolio securities for more than one year, and for more than 18 months (or
such other holding period as may be required under federal income tax law to
benefit from the lowest applicable tax rate) where appropriate in light of
investment considerations, in order to reduce the realization and, therefore,
the distribution to shareholders of short-term capital gains which are taxable
to them as ordinary income and to seek to maximize the portion of its
distributions of long-term capital gains qualified for the most favorable tax
rate.
The Small Cap Tax-Sensitive Equity Fund
Additional Investment Information. Under normal circumstances, at least
80% of Small Cap Fund's total assets are invested in equity and equity-related
securities of companies that, at the time of purchase of the security, have
"total market capitalizations" within the range of capitalizations of the
companies included in the Russell 2000 Growth Index, updated monthly. Small Cap
Fund may invest in securities of larger, more mature companies, provided that
such investments do not exceed 20% of the fund's total assets. The fund may
participate in initial public offerings for previously privately held companies
which are generally expected to have market capitalizations within the range of
market capitalizations of the companies included in the Russell 2000 Growth
Index, updated monthly, after the consummation of the offering, and whose
securities are expected to be liquid after the offering. The fund
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may also invest up to 15% of its total assets in equity securities of foreign
issuers, including issuers located in emerging markets.
Because of the nature of the securities of small capitalization companies
in which the Small Cap Fund will primarily invest (including those issued in
initial public offerings), the Small Cap Fund does not place any restrictions on
portfolio turnover and may, from time to time, have a high portfolio turnover
rate. This policy may have the effect of causing the Small Cap Fund to realize
and, therefore, distribute short-term capital gains which are taxable to
shareholders as ordinary income.
The Intermediate Tax Exempt Bond Fund
Additional Investment Information. Under normal market conditions,
substantially all and at least 80% of the Intermediate Tax Exempt Fund's net
assets are invested in a diversified portfolio of municipal securities which are
obligations issued by or on behalf of states, territories and possessions
(including Puerto Rico, the U.S. Virgin Islands and Guam) of the United States,
and the District of Columbia and their political subdivisions, agencies,
authorities and instrumentalities, the interest on which is, in the opinion of
bond counsel to the issuer, excluded from gross income for federal income tax
purposes. Also under normal market conditions, at least 65% of the fund's net
assets are invested in municipal bonds. These two investment policies of the
fund are fundamental and may not be changed without shareholder approval.
Although as a matter of fundamental policy it is authorized to do so, the
Intermediate Tax Exempt Fund does not expect to invest more than 25% of its
total assets in any one of the following sectors of the municipal securities
market: hospitals, ports, airports, colleges and universities, turnpikes and
toll roads, housing bonds, lease rental bonds, industrial revenue bonds or
pollution control bonds. For the purposes of this limitation, securities whose
credit is enhanced by bond insurance, letters of credit or other means are not
considered to belong to a particular sector.
Under normal market conditions, the fund may invest up to 20% of its net
assets in taxable, fixed income securities (i.e., when there is a yield
disparity between taxable and municipal securities on an after-tax basis which
is favorable for taxable investments). The fund's taxable investments will
generally be of comparable credit quality and maturity to the municipal
securities in which the fund invests and will be limited primarily to
obligations issued or guaranteed by the U.S. Government, its agencies,
instrumentalities or authorities; investment grade corporate debt securities;
prime commercial paper; certain certificates of deposit of domestic banks; and
repurchase agreements, secured by U.S. Government securities, with maturities
not in excess of seven days. To the extent that income dividends include income
from taxable sources, a portion of a shareholder's dividend income will be
taxable. See "Federal and Massachusetts Income Taxes" in this SAI.
The Massachusetts Intermediate Tax Exempt Bond Fund
Additional Investment Information. Under normal market conditions,
substantially all and at least 80% of the Massachusetts Tax Exempt Fund's net
assets are invested in a non-diversified portfolio of municipal securities of
issuers located in Massachusetts and other qualifying issuers (including Puerto
Rico, the U.S. Virgin Islands and Guam), the interest on which is, in the
opinion of bond counsel to the issuer, excluded from gross income for federal
income tax purposes and is exempt from Massachusetts personal income tax
("Massachusetts Municipal Securities"). Also under normal market conditions, at
least 65% of the fund's net assets are invested in municipal bonds. These two
investment policies of the fund are fundamental and may not be changed without
shareholder approval. Although as a matter of fundamental policy it is
authorized to do so, the Massachusetts Tax Exempt Fund does not expect to invest
more than 25% of its total assets in any one of the following sectors of the
municipal securities market: hospitals, ports, airports, colleges and
universities, turnpikes and toll roads, housing bonds, lease rental bonds,
industrial revenue bonds or pollution control bonds. For the purposes of this
limitation, securities whose credit is enhanced by bond insurance, letters of
credit or other means are not considered to belong to a particular sector.
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Under normal market conditions, the Fund may invest up to 20% of its net
assets in taxable, fixed income securities and municipal securities that are not
Massachusetts Municipal Securities (i.e., when there is a yield disparity
between other instruments and Massachusetts Municipal Securities on an after-tax
basis which is favorable for taxable investments). These other investments will
generally be of comparable credit quality and maturity to the Massachusetts
Municipal Securities in which the Fund invests and will be limited primarily to
obligations issued or guaranteed by the U.S. Government, its agencies,
instrumentalities or authorities; investment grade corporate debt securities;
municipal securities other than Massachusetts Municipal Securities; prime
commercial paper; certain certificates of deposit of domestic banks; and
repurchase agreements, secured by U.S. Government securities, with maturities
not in excess of seven days. To the extent that income dividends include income
from taxable sources, a portion of a shareholder's dividend income will be
subject to federal and/or Massachusetts tax. See "Federal and Massachusetts
Income Taxes" in this SAI.
DESCRIPTION OF SECURITIES AND RELATED RISKS
General Risks of Investing in the Tax-Sensitive Funds
The prospectus discusses the principal risks of investing in each fund.
The following discussion provides additional information on the risks associated
with an investment in a fund. The tax-sensitive funds invest primarily in equity
and equity-related securities and are subject to the risks associated with
investments in such securities. The tax-sensitive funds are also subject to the
risks associated with direct investments in foreign securities.
Investing in Foreign Securities. Although the Equity Fund intends to
invest primarily in equity securities of U.S. issuers, the Equity Fund may
invest (without limitation) in equity securities of issuers located in any
foreign country, which securities are listed on a U.S. exchange or traded in the
U.S. over-the-counter market. The Equity Fund will not invest more than 10% of
its total assets in foreign equity securities that are not so listed or traded.
The Small Cap Fund may invest up to 15% of its total assets in equity securities
of issuers located in any foreign country. The tax-sensitive funds currently
intend to limit their investments in foreign securities to those that are quoted
or denominated in U.S. dollars. Investors should understand that the expense
ratios of the tax-sensitive funds may be higher than that of investment
companies investing exclusively in domestic securities because of the cost of
maintaining the custody of foreign securities.
Investing in the securities of foreign issuers involves risks that are not
typically associated with investing in U.S. dollar-denominated securities of
domestic issuers. Investments in foreign issuers may be affected by changes in
currency rates, changes in foreign or U.S. laws or restrictions applicable to
such investments and in exchange control regulations (e.g., currency blockage).
A decline in the exchange rate of the currency (i.e., weakening of the currency
against the U.S. dollar) in which a portfolio security is quoted or denominated
relative to the U.S. dollar would reduce the value of the portfolio security.
Commissions on transactions in foreign securities may be higher than those for
similar transactions on domestic stock markets and foreign custodial costs are
higher than domestic custodial costs. In addition, clearance and settlement
procedures may be different in foreign countries and, in certain markets, such
procedures have on occasion been unable to keep pace with the volume of
securities transactions, thus making it difficult to conduct such transactions.
Foreign issuers are not generally subject to uniform accounting, auditing
and financial reporting standards comparable to those applicable to U.S.
issuers. There may be less publicly available information about a foreign issuer
than about a U.S. issuer. In addition, there is generally less government
regulation of foreign markets, companies and securities dealers than in the U.S.
Most foreign securities markets may have substantially less trading volume than
U.S. securities markets and securities of many foreign issuers are less liquid
and more volatile than securities of comparable U.S. issuers. Furthermore, with
respect to certain foreign countries, there is a possibility of nationalization,
expropriation or confiscatory taxation,
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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
investment in those countries.
Currency Risks. The U.S. dollar value of securities denominated in a
foreign currency will vary with changes in currency exchange rates, which can be
volatile. Accordingly, changes in the value of the currency in which a
tax-sensitive fund's investments are denominated relative to the U.S. dollar
will affect the fund's net asset value. Exchange rates are generally affected by
the forces of supply and demand in the international currency markets, the
relative merits of investing in different countries and the intervention or
failure to intervene of U.S. or foreign governments and central banks. However,
currency exchange rates may fluctuate based on factors intrinsic to that
country's economy. Some emerging market countries also may have managed
currencies, which are not free floating against the U.S. dollar. In addition,
emerging markets are subject to the risk of restrictions upon the free
conversion of their currencies into other currencies. Any devaluations relative
to the U.S. dollar in the currencies in which a tax-sensitive fund's securities
are quoted would reduce the fund's net asset value per share. Because the
tax-sensitive funds currently intend to limit their investments in foreign
securities to those that are quoted or denominated in U.S. dollars, the funds
are only subject to currency risks indirectly through the foreign companies in
which they invest.
Emerging Markets. The tax-sensitive funds may also invest up to 10% of
their total assets in issuers located in emerging markets generally and up to 3%
of their total assets in issuers of any one specific emerging market country.
The tax-sensitive funds may also invest in currencies of such countries and may
engage in strategic transactions in the markets of such countries. Investing in
the securities of emerging market countries involves considerations and
potential risks not typically associated with investing in the securities of
U.S. issuers whose securities are principally traded in the United States. These
risks may be related to (i) restrictions on foreign investment and repatriation
of capital; (ii) differences in size, liquidity and volatility of, and the
degree and manner of regulation of, the securities markets of the emerging
market countries compared to the U.S. securities markets; (iii) economic,
political and social factors; and (iv) foreign exchange matters such as
fluctuations in exchange rates between the U.S. dollar and the currencies in
which a fund's portfolio securities are quoted or denominated, exchange control
regulations and costs associated with currency exchange. A fund's purchase and
sale of portfolio securities in certain emerging market countries may be
constrained by limitations as to daily changes in the prices of listed
securities, periodic trading or settlement volume and/or limitations on
aggregate holdings of foreign investors. In certain cases, such limitations may
be computed based upon the aggregate trading by or holdings of the funds, the
adviser and its affiliates and their respective clients and other service
providers. The funds may not be able to sell securities in circumstances where
price, trading or settlement volume limitations have been reached. These
limitations may have a negative impact on each fund's performance and may
adversely affect the liquidity of each fund's investments to the extent that it
invests in emerging market countries.
Investment and Repatriation Restrictions. Foreign investment in the
securities markets of several emerging market countries is restricted or
controlled to varying degrees. These restrictions may limit a fund's investment
in certain emerging market countries, require governmental approval prior to
investments by foreign persons or limit investment by foreign persons to only a
specified percentage of an issuer's outstanding securities or a specific class
of securities which may have less advantageous terms (including price) than
securities of such company available for purchase by nationals. In certain
countries, the funds may be limited by government regulation or a company's
charter to a maximum percentage of equity ownership in any one company. Such
restrictions may affect the market price, liquidity and rights of securities
that may be purchased by the funds. From time to time, the adviser may determine
that investment and repatriation restrictions in certain emerging market
countries negate the advantages of investing in such countries and no fund is
required to invest in any emerging market country.
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In addition, certain countries may restrict or prohibit investment
opportunities in issuers or industries deemed important to national interests.
The adviser may determine from time to time to invest in the securities of
emerging market countries which may impose restrictions on foreign investment
and repatriation that cannot currently be predicted. Due to restrictions on
direct investment in equity securities in certain emerging market countries,
such as Taiwan, the funds may invest only through investment funds in such
emerging market countries.
The repatriation of both investment income and capital from several
emerging market countries is subject to restrictions such as the need for
certain governmental consents. Even where there is no outright restriction on
repatriation of capital, the mechanics of repatriation may affect certain
aspects of the operation of the funds to the extent that they invest in emerging
market countries.
Market Characteristics. All of the securities markets of emerging market
countries have substantially less volume than the New York Stock Exchange.
Equity securities of most emerging market companies are generally less liquid
and subject to greater price volatility than equity securities of U.S. companies
of comparable size. Some of the stock exchanges in the emerging market countries
are in the earliest stages of their development.
Certain of the securities markets of emerging market countries are marked
by high concentrations of market capitalization and trading volume in a small
number of issuers representing a limited number of industries, as well as a high
concentration of ownership of such securities by a limited number of investors.
Even the market for relatively widely traded securities in the emerging markets
may not be able to absorb, without price disruptions, a significant increase in
trading volume or trades of a size customarily undertaken by institutional
investors in the United States. Additionally, market making and arbitrage
activities are generally less extensive in such markets, which may contribute to
increased volatility and reduced liquidity of such markets. Accordingly, each of
these markets may be subject to greater influence by adverse events generally
affecting the market, and by large investors trading significant blocks of
securities, than is usual in the United States. The less liquid the market, the
more difficult it may be for a fund to accurately price its portfolio securities
or to dispose of such securities at the times determined by the adviser to be
appropriate. The risks associated with the liquidity of a market may be
particularly acute in situations in which a fund's operations require cash, such
as the need to meet redemption requests for its shares, to pay dividends and
other distributions and to pay its expenses. To the extent that any emerging
market country experiences rapid increases in its money supply and investment in
equity securities is made for speculative purposes, the equity securities traded
in any such country may trade at price-earnings ratios higher than those of
comparable companies trading on securities markets in the United States. Such
price-earnings ratios may not be sustainable.
Settlement procedures in emerging market countries are less developed and
reliable than those in the United States and in other developed markets, and a
fund may experience settlement delays or other material difficulties. In
addition, significant delays are common in registering transfers of securities,
and a fund may be unable to sell such securities until the registration process
is completed and may experience delays in receipt of dividends and other
entitlements.
Brokerage commissions and other transactions costs on securities exchanges
in emerging market countries are generally higher than in the United States.
There is also less government supervision and regulation of foreign securities
exchanges, brokers and listed companies in emerging market countries than exists
in the United States. Brokers in emerging market countries may not be as well
capitalized as those in the United States, so that they are more susceptible to
financial failure in times of market, political or economic stress. In addition,
existing laws and regulations are often inconsistently applied. As legal systems
in emerging market countries develop, foreign investors may be adversely
affected by new or amended laws and regulations. In circumstances where adequate
laws exist, it may not be possible to obtain swift and equitable enforcement of
the law.
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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 affect on market prices of securities and payment of dividends.
General Risks of Investing in the Tax Exempt Funds
The tax exempt funds invest primarily in municipal securities and are
subject to risks associated with investments in such securities. These risks,
which also apply to fixed income securities generally, include interest rate
risk, default risk, and call and extension risk. The Massachusetts Tax Exempt
Fund is also subject to the specific risks associated with investments in
Massachusetts Municipal Securities. See Appendix A.
Interest Rate Risk. When interest rates decline, the market value of
municipal securities tends to increase. Conversely, when interest rates
increase, the market value of municipal 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.
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Default Risk/Credit Risk. Investments in municipal securities are subject
to the risk that the issuer of the security could default on its obligations
causing a tax exempt fund to sustain losses on such investments. A default could
impact both interest and principal payments.
Call Risk and Extension Risk. Municipal securities may be subject to both
call risk and extension risk. Call risk exists when the issuer may exercise a
right to pay principal on an obligation earlier than scheduled which would cause
cash flows to be returned earlier than expected. This typically results when
interest rates have declined and a tax exempt fund will suffer from having to
reinvest in lower yielding securities. Extension risk exists when the issuer may
exercise a right to pay principal on an obligation later than scheduled which
would cause cash flows to be returned later than expected. This typically
results when interest rates have increased and a tax exempt fund will suffer
from the inability to invest in higher yield securities.
Specific Risks Associated with the Funds' Investments
The following sections include descriptions of specific risks that are
associated with a fund's purchase of a particular type of security or the
utilization of a specific investment technique.
Common Stocks. The tax-sensitive funds purchase common stocks. Common
stocks are shares of a corporation or other entity that entitle the holder to a
pro rata share of the profits of the corporation, if any, without preference
over any other shareholder or class of shareholders, including holders of the
entity's preferred stock and other senior equity. Common stock usually carries
with it the right to vote and frequently an exclusive right to do so.
Small Capitalization Stocks. The Small Cap Fund invests primarily, and the
Equity Fund may invest to a lesser extent, in securities of small capitalization
companies. Although investments in small capitalization companies may present
greater opportunities for growth, they also involve greater risks than are
customarily associated with investments in larger, more established companies.
The securities of small companies may be subject to more volatile market
movements than securities of larger, more established companies. Smaller
companies may have limited product lines, markets or financial resources, and
they may depend upon a limited or less experienced management group. The
securities of small capitalization companies may be traded only on the OTC
market or on a regional securities exchange and may not be traded daily or in
the volume typical of trading on a national securities exchange. As a result,
the disposition by a tax-sensitive fund of securities in order to meet
redemptions or otherwise may require the fund to sell securities at a discount
from market prices, over a longer period of time or during periods when
disposition is not desirable.
Convertible Securities. Each tax-sensitive fund may invest in convertible
debt and preferred stock. Convertible debt securities and preferred stock
entitle the holder to acquire the issuer's stock by exchange or purchase for a
predetermined rate. Convertible securities are subject both to the credit and
interest rate risks associated with fixed income securities and to the stock
market risk associated with equity securities.
Warrants. Each tax-sensitive fund may purchase warrants. Warrants acquired
by a fund entitle it to buy common stock from the issuer at a specified price
and time. Warrants are subject to the same market risks as stocks, but may be
more volatile in price. A fund's investment in warrants will not entitle it to
receive dividends or exercise voting rights and will become worthless if the
warrants cannot be profitably exercised before the expiration dates.
Depositary Receipts and Depositary Shares. The tax-sensitive funds may
purchase depository receipts and depository shares. Depositary receipts and
depositary shares are typically issued by a U.S. or foreign bank or trust
company and evidence ownership of underlying securities of a U.S. or foreign
issuer. Unsponsored programs are organized independently and without the
cooperation of the issuer of the underlying securities. As a result, available
information concerning the issuer may not be as current as for sponsored
depositary instruments and their prices may be more volatile than if they were
sponsored by the issuers of the underlying securities. Examples of such
investments include, but are not limited to, American
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Depositary Receipts and Shares ("ADRs" and "ADSs"), Global Depositary Receipts
and Shares ("GDRs" and "GDSs") and European Depositary Receipts and Shares
("EDRs" and "EDSs").
Investments in REITs. Each tax-sensitive fund may invest in shares of real
estate investment trusts (REITs), which are pooled investment vehicles that
invest in real estate or real estate loans or interests. 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 of income and gains that are distributed to their
shareholders under the Internal Revenue Code of 1986, as amended (the "Code").
Corporate Debt Obligations. Each fund may invest in corporate debt
obligations and zero coupon securities issued by financial institutions and
corporations. Corporate debt obligations are subject to the risk of an issuer's
inability to meet principal and interest payments on the obligations and may
also be subject to price volatility due to such factors as market interest
rates, market perception of the creditworthiness of the issuer and general
market liquidity. Zero coupon securities are securities sold at a discount to
par value and on which interest payments are not made during the life of the
security.
U.S. Government Securities. Each fund may invest in U.S. Government
securities. Generally, these securities include U.S. Treasury obligations and
obligations issued or guaranteed by U.S. Government agencies, instrumentalities
or sponsored enterprises which are supported by (a) the full faith and credit of
the U.S. Treasury (such as the Government National Mortgage Association), (b)
the right of the issuer to borrow from the U.S. Treasury (such as securities of
the Student Loan Marketing Association), (c) the discretionary authority of the
U.S. Government to purchase certain obligations of the issuer (such as the
Federal National Mortgage Association and Federal Home Loan Mortgage
Corporation), or (d) only the credit of the agency. No assurance can be given
that the U.S. Government will provide financial support to U.S. Government
agencies, instrumentalities or sponsored enterprises in the future. U.S.
Government securities also include Treasury receipts, zero coupon bonds, U.S.
Treasury inflation-indexed bonds, deferred interest securities and other
stripped U.S. Government securities, where the interest and principal components
of stripped U.S. Government securities are traded independently.
Municipal Securities. The tax exempt funds may invest in all kinds of
municipal securities, including without limitation municipal notes, municipal
bonds, private activity bonds and variable rate demand instruments. Municipal
securities are issued to obtain funds for various public purposes, including the
construction of a variety of public facilities such as bridges, highways,
housing, hospitals, mass transportation, schools, streets and water and sewer
works. Other public purposes for which municipal securities may be issued
include the refunding of outstanding obligations, obtaining funds for general
operating expenses and the obtaining of funds to loan to other public
institutions and facilities. In addition, certain types of industrial revenue
bonds are, or have been under prior tax law, issued by or on behalf of public
authorities to obtain funds to provide privately operated housing facilities,
sports facilities, convention or trade show facilities, airport, mass transit,
port or parking facilities, air or water pollution control facilities and
certain local facilities for water supply, gas, electricity, or sewage or solid
waste disposal.
Because the tax exempt funds invest in investment grade municipal
securities, the income earned on shares of the funds will tend to be less than
it might be on a portfolio emphasizing lower quality securities. Municipal
obligations are subject to the provisions of bankruptcy, insolvency and other
laws affecting the rights and remedies of creditors, such as the Federal
Bankruptcy Code, and laws which may be enacted by Congress or state legislatures
extending the time for payment of principal or interest, or both, or imposing
other constraints upon enforcement of such obligations or upon municipalities to
levy taxes. There is also the possibility that as a result of litigation or
other conditions the power or ability of any one or more issuers to pay when due
principal of and interest on its or their municipal obligations may be
materially affected. Although the tax exempt funds' quality standards are
designed to minimize the credit risk of investing in the funds, that risk cannot
be entirely eliminated.
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Municipal Notes. The tax exempt funds may invest in municipal notes.
Municipal notes are generally issued to satisfy short-term capital needs and
generally have maturities of one year or less. Municipal notes include: tax
anticipation notes; revenue anticipation notes; bond anticipation notes; and
construction loan notes.
Tax anticipation notes are sold to finance working capital needs of
municipalities. They are generally payable from specific tax revenues expected
to be received at a future date. Revenue anticipation notes are issued in
expectation of receipt of other types of revenue such as Federal revenues
available under the Federal Revenue Sharing Program. Tax anticipation notes and
revenue anticipation notes are generally issued in anticipation of various
seasonal revenues such as income, sales, use, and business taxes. Bond
anticipation notes are sold to provide interim financing. These notes are
generally issued in anticipation of long-term financing in the market. In most
cases, these monies provide for the repayment of the notes. Construction loan
notes are sold to provide construction financing. After the projects are
successfully completed and accepted, many projects receive permanent financing
through the Federal Housing Administration under the Federal National Mortgage
Association ("Fannie Mae") or the Government National Mortgage Association
("Ginnie Mae"). There are, of course, a number of other types of notes in which
the funds may invest which are issued for different purposes and secured
differently from those described above.
Municipal Bonds. The tax exempt funds may invest in municipal bonds.
Municipal bonds, which meet longer term capital needs and generally have
maturities of more than one year when issued, have two principal
classifications: "General Obligation" Bonds and "Revenue" Bonds.
Issuers of General Obligation Bonds include states, counties, cities,
towns and regional districts. The proceeds of these obligations are used to fund
a wide range of public projects including the construction or improvement of
schools, highways and roads, water and sewer systems and a variety of other
public purposes. The basic security of General Obligation Bonds is the issuer's
pledge of its full faith, credit and taxing power for the payment of principal
and interest. The taxes that can be levied for the payment of debt service may
be limited or unlimited as to rate or amount or special assessments.
The principal security for a Revenue Bond is generally the net revenues
derived from a particular facility or group of facilities or, in some cases,
from the proceeds of a special excise or other specific revenue source. Revenue
Bonds have been issued to fund a wide variety of capital projects including:
electric, gas, water and sewer systems; highways, bridges and tunnels; port and
airport facilities; colleges and universities; and hospitals. Although the
principal security behind these bonds varies widely, many provide additional
security in the form of a debt service reserve fund whose monies may also be
used to make principal and interest payments on the issuer's obligations.
Housing finance authorities have a wide range of security including partially or
fully insured, rent subsidized and/or collateralized mortgages, and/or the net
revenues from housing or other public projects. In addition to a debt service
reserve fund, some authorities provide further security in the form of a state's
ability (without obligation) to make up deficiencies in the debt service reserve
fund. Lease rental revenue bonds issued by a state or local authority for
capital projects are secured by annual lease rental payments from the state or
locality to the authority sufficient to cover debt service on the authority's
obligations.
Industrial Development and Pollution Control Bonds (which are types of
private activity bonds), although nominally issued by municipal authorities, are
generally not secured by the taxing power of the municipality but are secured by
the revenues of the authority derived from payments by the industrial user.
Under federal tax legislation, certain types of Industrial Development Bonds and
Pollution Control Bonds may no longer be issued on a tax-exempt basis, although
previously-issued bonds of these types and certain refundings of such bonds are
not affected.
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Other Municipal Securities. There is a variety of hybrid and special types
of municipal securities as well as numerous differences in the types of security
for municipal securities both within and between the two principal
classifications above. The tax exempt funds may purchase other types of
municipal securities as long as the investment complies with the policies set
forth in the funds' prospectus and SAI.
Variable Rate Demand Instruments. The tax exempt funds may purchase
variable rate demand instruments that are tax-exempt municipal obligations
providing for a periodic adjustment in the interest rate paid on the instrument
according to changes in interest rates generally. These instruments also permit
the funds to demand payment of the unpaid principal balance plus accrued
interest upon a specified number of days' notice to the issuer or its agent. The
demand feature may be backed by a bank letter of credit or guarantee issued with
respect to such instrument. A bank that issues a repurchase commitment may
receive a fee from the funds for this arrangement. The issuer of a variable rate
demand instrument may have a corresponding right to prepay in its discretion the
outstanding principal of the instrument plus accrued interest upon notice
comparable to that required for the holder to demand payment.
The variable rate demand instruments that the tax exempt funds may
purchase are payable on demand on not more than seven calendar days' notice. The
terms of the instruments provide that interest rates are adjustable at intervals
ranging from daily to up to six months, and the adjustments are based upon the
current interest rate environment as provided in the respective instruments. The
adviser may determine that an unrated variable rate demand instrument meets the
funds' quality criteria by reason of being backed by a letter of credit or
guarantee issued by a bank that meets the quality criteria of the funds. Thus,
either the credit of the issuer of the municipal obligation or the guarantor
bank or both will meet the quality standards of the funds.
The interest rate of the underlying variable rate demand instruments may
change with changes in interest rates generally, but the variable rate nature of
these instruments should decrease changes in value due to interest rate
fluctuations. Accordingly, as interest rates decrease or increase, the potential
for capital gain and the risk of capital loss on the disposition of portfolio
securities are less than would be the case with a comparable portfolio of fixed
income securities. Because the adjustment of interest rates on the variable rate
demand instruments is made in relation to movements of the applicable rate
adjustment index, the variable rate demand instruments are not comparable to
long-term fixed interest rate securities. Accordingly, interest rates on the
variable rate demand instruments may be higher or lower than current market
rates for fixed rate obligations of comparable quality with similar final
maturities.
The maturity of the variable rate demand instruments held by a tax exempt
fund will ordinarily be deemed to be the longer of (1) the notice period
required before the fund is entitled to receive payment of the principal amount
of the instrument or (2) the period remaining until the instrument's next
interest rate adjustment.
Illiquid Municipal Securities. The tax exempt funds limit investments in
securities which are not readily marketable to less than 15% of net assets.
Although an entire issue of municipal securities may be purchased by one or a
small number of institutional investors such as the tax exempt funds, municipal
securities may nonetheless be readily marketable. The adviser determines whether
a municipal security is readily marketable based on whether it may be sold in a
reasonable time consistent with the customs of the municipal markets (usually
seven days) at a price (or interest rate) which accurately reflects its value.
The adviser believes that the quality standards applicable to the funds'
investments enhance marketability. In addition, stand-by commitments and demand
obligations also enhance marketability.
"When-Issued," "Delayed Delivery" and "Forward Commitment" Securities. The
tax exempt funds may commit up to 40% of their net assets to purchase securities
on a "when-issued" and "delayed delivery" basis. Delivery and payment for the
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 the funds
enter into such commitments, but interest will not accrue to the funds until
delivery of and payment for the securities. Although the funds will only make
commitments
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to purchase "when-issued" and "delayed delivery" securities with the intention
of actually acquiring the securities, the funds may sell the securities before
the settlement date if deemed advisable by the adviser.
Unless the funds have entered into an offsetting agreement to sell the
securities purchased on a when issued or delayed delivery basis, cash or liquid
obligations with a market value at least equal to the amount of the funds'
commitment will be segregated with the funds' custodian bank. If the market
value of these securities declines, additional cash or securities will be
segregated daily so that the aggregate market value of the segregated securities
equals the amount of the funds' commitment.
Securities purchased on a "when-issued" and "delayed delivery" basis may
have a market value on delivery which is less than the amount paid by a tax
exempt fund. Changes in market value may be based upon the public's perception
of the creditworthiness of the issuer or changes in the level of interest rates.
Generally, the value of "when-issued" securities will fluctuate inversely to
changes in interest rates, i.e., they will appreciate in value when interest
rates fall and will depreciate in value when interest rates rise. The funds may
sell portfolio securities on a delayed delivery basis. The market value of the
securities when they are delivered may be more than the amount to be received by
the funds.
Repurchase Agreements. Each fund may invest up to 15% of its net assets in
repurchase agreements. In a repurchase agreement, a fund buys a security at one
price and simultaneously agrees to sell it back at a higher price. Delays or
losses could result if the other party to the agreement defaults or becomes
insolvent. Repurchase agreements acquired by a fund will always be fully
collateralized as to principal and interest by money market instruments and will
be entered into only with commercial banks, brokers and dealers considered
creditworthy by the adviser.
Short Sales. Each tax-sensitive fund may engage in short sales and short
sales against the box. In a short sale, a fund sells a security it does not own
in anticipation of a decline in the market value of the security. In a short
sale against the box, a fund either owns or has the right to obtain at no extra
cost the security sold short. The broker holds the proceeds of the short sale
until the settlement date, at which time the fund delivers the security (or an
identical security) to cover the short position. The fund receives the net
proceeds from the short sale. When a fund enters into a short sale other than
against the box, the fund must first borrow the security to make delivery to the
buyer and must place cash or liquid assets in a segregated account that is
marked to market daily. Short sales other than against the box involve unlimited
exposure to loss. No securities will be sold short if, after giving effect to
any such short sale, the total market value of all securities sold short would
exceed 5% of the value of a fund's net assets.
Restricted and Illiquid Securities. Each fund may invest up to 15% of its
net assets in illiquid securities; however, the tax-sensitive funds invest in
these securities only on an occasional basis. Illiquid securities are those that
are not readily marketable, repurchase agreements maturing in more than seven
days, time deposits with a notice or demand period of more than seven days, swap
transactions, certain OTC options and certain restricted securities. Based upon
continuing review of the trading markets for a specific restricted security, the
security may be determined to be eligible for resale to qualified institutional
buyers pursuant to Rule 144A under the Securities Act of 1933 and, therefore, to
be liquid. Also, certain illiquid securities may be determined to be liquid if
they are found to satisfy relevant liquidity requirements.
The Board of Trustees has adopted guidelines and delegated to the adviser
the function of determining and monitoring the liquidity of portfolio
securities, including restricted and illiquid securities. The Board of Trustees
however retains oversight and is ultimately responsible for such determinations.
The purchase price and subsequent valuation of illiquid securities normally
reflect a discount, which may be significant, from the market price of
comparable securities for which a liquid market exists.
Investments in Other Investment Companies. Each fund is permitted to
invest up to 10% of its total assets in shares of registered investment
companies and up to 5% of its total assets in any one registered investment
company as long as that investment does not represent more than 3% of the total
voting stock of the acquired investment company. Investments in the securities
of other investment companies may involve duplication of advisory fees and other
expenses. The funds may invest in investment companies that are
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designed to replicate the composition and performance of a particular index. For
example, Standard & Poor's Depositary Receipts ("SPDRs") are exchange-traded
shares of a closed-end investment company designed to replicate the price
performance and dividend yield of the Standard & Poor's 500 Composite Stock
Price Index. Investments in index baskets involve the same risks associated with
a direct investment in the types of securities included in the baskets.
Each tax-sensitive fund is authorized to invest all of its assets in the
securities of a single open-end registered investment company (a "pooled fund")
having substantially identical investment objectives, policies and restrictions
as such fund, notwithstanding any other investment restriction or policy. This
structure is commonly referred to as the "master-feeder" structure. If
authorized by the Trustees, a tax-sensitive fund would seek to achieve its
investment objective by investing in a pooled fund which would invest in a
portfolio of securities that complies with the fund's investment objective,
policies and restrictions. The Trustees currently do not intend to authorize
investing in a pooled fund in connection with a master/feeder structure.
Stand-By Commitments. To facilitate liquidity, the tax exempt funds may
enter into "stand-by commitments" permitting them to resell municipal securities
to the original seller at a specified price. Stand-by commitments generally
involve no additional cost to the funds, but may, however, reduce the yields
available on securities subject to stand-by commitments.
Third Party Put. The tax exempt funds may purchase long-term fixed rate
bonds which have been coupled with an option granted by a third party financial
institution allowing the funds at specified intervals to tender or put their
bonds to the institution and receive the face value thereof. These third party
puts are available in several different forms, may be represented by custodial
receipts or trust certificates and may be combined with other features. The
financial institution granting the put option does not provide credit
enhancement, and typically, if there is a default on or significant downgrading
of the bond, or a loss of its tax-exempt status, the put option will terminate
automatically and the risk to the funds will be that of holding a long-term
bond. These third party puts will not be considered to shorten a fund's
maturity.
Portfolio Turnover and Short-Term Trading. It is not the policy of any
fund to purchase or sell securities for trading purposes, and the Equity Fund
generally intends to have low annual portfolio turnover rates in order to reduce
the realization and distribution to shareholders of capital gains. The Small Cap
Fund and the tax exempt funds place no restrictions on portfolio turnover.
Notwithstanding the foregoing, each fund will sell a portfolio security without
regard to the length of time such security has been held if, in the adviser's
view, the security meets the criteria for disposal. A high rate of portfolio
turnover (100% or more) involves correspondingly higher transaction costs which
must be borne directly by a fund and thus indirectly by its shareholders. It may
also result in a fund's realization of larger amounts of short-term capital
gains, distributions from which are taxable to shareholders as ordinary income.
See "Financial Highlights" in the funds' prospectus for each fund's portfolio
turnover rates.
Temporary Defensive Investments. Notwithstanding a fund's investment
objective, each fund may on occasion, for temporary defensive purposes to
preserve capital or to meet redemption requests, hold part or all of its assets
in cash and investment grade money market instruments (i.e., securities with
maturities of less than one year) and short-term debt securities (i.e.,
securities with maturities of one to three years). Each fund may also invest
uncommitted cash and cash needed to maintain liquidity for redemptions in
investment grade money market instruments and short-term debt securities.
Investments in such securities will be limited to 20% of a fund's total assets
unless the fund is in a temporary defensive position.
The money market instruments and short-term debt securities in which the
funds may invest consist of obligations issued or guaranteed by the U.S.
Government, its agencies, instrumentalities or authorities; instruments
(including negotiable certificates of deposit, non-negotiable fixed time
deposits and bankers' acceptances) of U.S. banks and foreign banks (the
tax-sensitive funds only); repurchase
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agreements; and prime commercial paper of U.S. companies and foreign companies
(the tax-sensitive funds only).
The funds' investments in money market securities will be rated, at the
time of investment, P-1 by Moody's or A-1 by Standard & Poor's. At least 95% of
each tax-sensitive fund's assets invested in short-term debt securities will be
rated, at the time of investment, Aaa, Aa, or A by Moody's or AAA, AA, or A by
Standard & Poor's or, if not rated, determined to be of comparable credit
quality by the adviser. Up to 5% of each tax-sensitive fund's total assets
invested in short-term debt securities may be invested in securities which are
rated Baa by Moody's or BBB by Standard & Poor's or, if not rated, determined to
be of comparable credit quality by the adviser. The tax exempt funds'
investments in taxable securities, such as money market and short-term debt
securities, will generally be of comparable credit quality and maturity to the
municipal securities in which the tax exempt funds invest. To the extent that
income dividends distributed by the tax exempt funds include income from taxable
sources, a portion of a shareholder's dividend income will be taxable.
Investments in commercial paper by Intermediate Tax Exempt Fund and
Massachusetts Tax Exempt Fund will be rated Prime-1 by Moody's or A-1 by
Standard & Poor's 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 which, if not rated or rated lower by one or more of the agencies
and not rated by the other agency or agencies, are judged by the adviser to be
of equivalent quality to the securities so rated. 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.
INVESTMENT TECHNIQUES AND RELATED RISKS
Strategic and Derivative Transactions. Each fund may, but is not required
to, utilize various investment strategies to seek to hedge market risks (such as
interest rates, currency exchange rates and broad or specific equity or fixed
income market movements), to manage the effective maturity or duration of fixed
income securities (tax exempt funds only) or to enhance potential gain. Such
strategies are generally accepted as part of modern portfolio management and are
regularly utilized by many mutual funds and other institutional investors.
Techniques and instruments used by each fund may change over time as new
instruments and strategies are developed or regulatory changes occur.
In the course of pursuing their investment objectives, each fund may
purchase and sell (write) exchange-listed and OTC put and call options on
securities, equity indices (tax-sensitive funds only), fixed income indices (tax
exempt funds only), and other financial instruments; purchase and sell financial
futures contracts and options thereon; enter into various interest rate
transactions such as caps, swaps, floors and collars (tax exempt funds only);
and, to the extent a tax-sensitive fund invests in foreign securities, enter
into currency transactions such as forward foreign currency exchange contracts,
cross-currency forward contracts, currency futures contracts, currency swaps and
options on currencies or currency futures (collectively, all the above are
called "Strategic Transactions"). Strategic Transactions may be used to seek to
protect against possible changes in the market value of securities held in or to
be purchased for a fund's portfolio resulting from securities markets or
currency exchange rate fluctuations, to seek to protect a fund's unrealized
gains in the value of portfolio securities, to facilitate the sale of such
securities for investment purposes, to seek to manage the effective maturity or
duration of the tax exempt funds' portfolios or to establish a position in the
derivatives markets as a temporary substitute for purchasing or selling
particular securities. In addition to the hedging transactions referred to in
the preceding sentence, Strategic Transactions may also be used to enhance
potential gain in circumstances where hedging is not involved although each fund
will attempt to limit its net loss exposure resulting from Strategic
Transactions entered into for such purposes to not more than 3% of its net
assets at any one time and, to the extent necessary, the funds will close out
transactions in order to comply with this limitation. (Transactions such as
writing covered call options are considered to involve hedging for the purposes
of
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this limitation.) In calculating a fund's net loss exposure from such Strategic
Transactions, an unrealized gain from a particular Strategic Transaction
position would be netted against an unrealized loss from a related Strategic
Transaction position. For example, if the adviser believes that the Equity Fund
is underweighted in cyclical stocks and overweighted in consumer stocks, the
Equity Fund may buy a cyclical index call option and sell a cyclical index put
option and sell a consumer index call option and buy a consumer index put
option. Under such circumstances, any unrealized loss in the cyclical position
would be netted against any unrealized gain in the consumer position (and vice
versa) for purposes of calculating the fund's net loss exposure.
The ability of a fund to utilize Strategic Transactions successfully will
depend on the adviser's ability to predict pertinent market and currency and
interest rate movements, which cannot be assured. Each fund will comply with
applicable regulatory requirements when implementing these strategies,
techniques and instruments. The funds' activities involving Strategic
Transactions may be limited in order to enable the funds to satisfy the
requirements of the Internal Revenue Code of 1986, as amended (the "Code"), for
qualification as a regulated investment company and by the funds' tax-related
objectives due to the fact that Strategic Transactions may produce taxable
income or short-term capital gain in many cases and the applicable tax rules may
make it more difficult to control the timing of gains or losses.
Risks of Strategic and Derivative Transactions. Strategic Transactions
have risks associated with them including possible default by the other party to
the transaction, illiquidity and, to the extent the adviser's view as to certain
market movements is incorrect, the risk that the use of such Strategic
Transactions could result in losses greater than if they had not been used. The
risks associated with the funds' transactions in options, futures and other
types of derivative securities including swaps may include some or all of the
following: market risk, leverage and volatility risk, correlation risk, credit
risk and liquidity and valuation risk. The writing of put and call options may
result in losses to the funds, force the purchase or sale, respectively of
portfolio securities at inopportune times or for prices higher than (in the case
of purchases due to the exercise of put options) or lower than (in the case of
sales due to the exercise of call options) current market values, limit the
amount of appreciation the funds can realize on their respective investments or
cause the funds to hold a security they might otherwise sell or sell a security
they might otherwise hold. The use of currency transactions by a tax-sensitive
fund can result in the fund incurring losses as a result of a number of factors
including the imposition of exchange controls, suspension of settlements, or the
inability to deliver or receive a specified currency. The use of options and
futures transactions entails certain other risks. In particular, the variable
degree of correlation between price movements of futures contracts and price
movements in the related portfolio position of a fund creates the possibility
that losses on the hedging instrument may be greater than gains in the value of
the fund's position. The writing of options could significantly increase a
fund's portfolio turnover rate and, therefore, associated brokerage commissions
or spreads. In addition, futures and options markets may not be liquid in all
circumstances and certain over-the-counter options may have no markets. As a
result, in certain markets, the funds might not be able to close out a
transaction without incurring substantial losses, if at all. Although the use of
futures and options transactions for hedging should tend to minimize the risk of
loss due to a decline in the value of the hedged position, at the same time, in
certain circumstances, these transactions tend to limit any potential gain which
might result from an increase in value of such position. The loss incurred by a
fund in writing options and entering into futures transactions is potentially
unlimited; however, as described above, each fund will attempt to limit its net
loss exposure resulting from Strategic Transactions entered into for such
purposes to not more than 3% of its net assets at any one time. Futures markets
are highly volatile and the use of futures may increase the volatility of a
fund's net asset value. Finally, entering into futures contracts would create a
greater ongoing potential financial risk than would purchases of options where
the exposure is limited to the cost of the initial premium. Losses resulting
from the use of Strategic Transactions would reduce net asset value and the net
result may be less favorable than if the Strategic Transactions had not been
utilized.
Risks of Strategic and Derivative Transactions Outside the United States.
When conducted outside the United States and especially in emerging markets,
Strategic Transactions may not be regulated as
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rigorously as in the United States, may not involve a clearing mechanism and
related guarantees, and are subject to the risk of governmental actions
affecting trading in, or the prices of, foreign securities, currencies and other
instruments. The value of such positions also could be adversely affected by:
(i) lesser availability than in the United States of data on which to make
trading decisions, (ii) delays in a fund's ability to act upon economic events
occurring in foreign markets during non-business hours in the United States,
(iii) the imposition of different exercise and settlement terms and procedures
and margin requirements than in the United States, (iv) lower trading volume and
liquidity, and (v) other complex foreign political, legal and economic factors.
At the same time, Strategic Transactions may offer advantages such as trading in
instruments that are not currently traded in the United States or arbitrage
possibilities not available in the United States.
General Characteristics of Options. Put options and call options typically
have similar structural characteristics and operational mechanics regardless of
the underlying instrument on which they are purchased or sold. Thus, the
following general discussion relates to each of the particular types of options
discussed in greater detail below. In addition, many Strategic Transactions
involving options require segregation of a fund's assets in special accounts, as
described below under "Use of Segregated Accounts."
A put option gives the purchaser of the option, in consideration for the
payment of a premium, the right to sell, and the writer the obligation to buy
(if the option is exercised) the underlying security, commodity, index, or other
instrument at the exercise price. For instance, a fund's purchase of a put
option on a security might be designed to protect its holdings in the underlying
instrument (or, in some cases, a similar instrument) against a substantial
decline in the market value by giving the fund the right to sell such instrument
at the option exercise price. A call option, in consideration for the payment of
a premium, gives the purchaser of the option the right to buy, and the seller
the obligation to sell (if the option is exercised) the underlying instrument at
the exercise price. A fund may purchase a call option on a security, currency
(tax-sensitive funds), futures contract, index or other instrument to seek to
protect the fund against an increase in the price of the underlying instrument
that it intends to purchase in the future by fixing the price at which it may
purchase such instrument. An American style put or call option may be exercised
at any time during the option period while a European style put or call option
may be exercised only upon expiration or during a fixed period prior thereto.
The funds are authorized to purchase and sell exchange listed options and
over-the-counter options ("OTC options"). Exchange listed options are issued by
a regulated intermediary such as the Options Clearing Corporation ("OCC"), which
guarantees the performance of the obligations of the parties to such options.
The discussion below uses the OCC as an example, but is also applicable to other
financial intermediaries.
With certain exceptions, exchange listed options generally settle by
physical delivery of the underlying security or currency, although in the future
cash settlement may become available. Index options and Eurodollar instruments
are cash settled for the net amount, if any, by which the option is
"in-the-money" (i.e., where the value of the underlying instrument exceeds, in
the case of a call option, or is less than, in the case of a put option, the
exercise price of the option) at the time the option is exercised. Frequently,
rather than taking or making delivery of the underlying instrument through the
process of exercising the option, listed options are closed by entering into
offsetting purchase or sale transactions that do not result in ownership of the
new option.
A fund's ability to close out its position as a purchaser or seller of an
exchange listed put or call option is dependent, in part, upon the liquidity of
the option market. There is no assurance that a liquid option market on an
exchange will exist. In the event that the relevant market for an option on an
exchange ceases to exist, outstanding options on that exchange would generally
continue to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours
during which the underlying financial instruments are traded. To the extent that
the option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
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OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct bilateral
agreement with the Counterparty. In contrast to exchange listed options, which
generally have standardized terms and performance mechanics, all the terms of an
OTC option, including such terms as method of settlement, term, exercise price,
premium, guarantees and security, are set by negotiation of the parties. The
funds will generally sell (write) OTC options (other than OTC currency options)
that are subject to a buy-back provision permitting a fund to require the
Counterparty to sell the option back to the fund at a formula price within seven
days. OTC options purchased by the funds and portfolio securities "covering" the
amount of the funds' obligation pursuant to an OTC option sold by them (the cost
of the sell-back plus the in-the-money amount, if any) are subject to the funds'
restriction on illiquid securities, unless determined to be liquid in accordance
with procedures adopted by the Board of Trustees. For OTC options written with
"primary dealers" pursuant to an agreement requiring a closing purchase
transaction at a formula price, the amount which is considered to be illiquid
may be calculated by reference to a formula price. The funds expect generally to
enter into OTC options that have cash settlement provisions, although they are
not required to do so.
Unless the parties provide for it, there is no central clearing or
guaranty function in the OTC option market. As a result, if the Counterparty
fails to make delivery of the security, currency (tax-sensitive funds) or other
instrument underlying an OTC option it has entered into with a fund or fails to
make a cash settlement payment due in accordance with the terms of that option,
the fund will lose any premium it paid for the option as well as any anticipated
benefit of the transaction. Accordingly, the adviser must assess the
creditworthiness of each such Counterparty or any guarantor or credit
enhancement of the Counterparty's credit to determine the likelihood that the
terms of the OTC option will be satisfied. The funds will engage in OTC option
transactions only with U.S. Government securities dealers recognized by the
Federal Reserve Bank of New York as "primary dealers", or broker dealers,
domestic or foreign banks or other financial institutions which have received,
combined with any credit enhancements, a long-term debt rating of A from S&P or
Moody's or an equivalent rating from any other nationally recognized statistical
rating organization ("NRSRO") or which issue debt that is determined to be of
equivalent credit quality by the adviser.
If a fund sells (writes) a call option, the premium that it receives may
serve as a partial hedge, to the extent of the option premium, against a
decrease in the value of the underlying securities or instruments in its
portfolio or will increase the fund's income. The sale (writing) of put options
can also provide income.
Each fund may purchase and sell (write) call options on equity
(tax-sensitive funds) and debt (tax exempt funds) securities including U.S.
Treasury and agency securities, municipal notes and bonds (tax exempt funds) and
Eurodollar instruments that are traded on U.S. and foreign securities exchanges
and in the over-the-counter markets, and on securities indices, currencies
(tax-sensitive funds) and futures contracts. All call options sold by the funds
must be "covered" (i.e., the fund must own the securities or the futures
contract subject to the call) or must meet the asset segregation requirements
described below as long as the call is outstanding. Even though a fund will
receive the option premium to help offset any loss, the fund may incur a loss if
the exercise price is below the market price for the security subject to the
call at the time of exercise. A call option sold by a fund also exposes the fund
during the term of the option to possible loss of opportunity to realize
appreciation in the market price of the underlying security or instrument and
may require the fund to hold a security or instrument which it might otherwise
have sold.
Each fund may purchase and sell (write) put options on equity
(tax-sensitive funds) and debt (tax exempt funds) securities including U.S.
Treasury and agency securities, municipal notes and bonds (tax exempt funds) and
Eurodollar instruments (whether or not it holds the above securities in its
portfolio), and on securities indices, currencies (tax-sensitive funds) and
futures contracts. A fund will not sell put options if, as a result, more than
50% of the fund's total assets would be required to be segregated to cover its
potential obligations under such put options other than those with respect to
futures and options thereon. In selling put options, there is a risk that a fund
may be required to buy the underlying security at a price above the market
price.
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Options on Securities Indices and Other Financial Indices. Each fund may
also purchase and sell (write) call and put options on securities indices and
other financial indices. Options on securities indices and other financial
indices are similar to options on a security or other instrument except that,
rather than settling by physical delivery of the underlying instrument, they
settle by cash settlement. For example, an option on an index gives the holder
the right to receive, upon exercise of the option, an amount of cash if the
closing level of the index upon which the option is based exceeds, in the case
of a call, or is less than, in the case of a put, the exercise price of the
option (except if, in the case of an OTC option, physical delivery is
specified). This amount of cash is equal to the differential between the closing
price of the index and the exercise price of the option, which also may be
multiplied by a formula value. The seller of the option is obligated, in return
for the premium received, to make delivery of this amount upon exercise of the
option. In addition to the methods described above, the funds may cover call
options on a securities index by owning securities whose price changes are
expected to be similar to those of the underlying index, or by having an
absolute and immediate right to acquire such securities without additional cash
consideration (or for additional cash consideration held in a segregated account
by the custodian) upon conversion or exchange of other securities in their
portfolios.
General Characteristics of Futures. Each fund may enter into financial
futures contracts or purchase or sell put and call options on such futures.
Futures are generally bought and sold on the commodities exchanges where they
are listed and involve payment of initial and variation margin as described
below. The sale of futures contracts creates a firm obligation by a fund, as
seller, to deliver to the buyer the specific type of financial instrument called
for in the contract at a specific future time for a specified price (or, with
respect to index futures and Eurodollar instruments, the net cash amount). The
purchase of futures contracts creates a corresponding obligation by a fund, as
purchaser, to purchase a financial instrument at a specific time and price.
Options on futures contracts are similar to options on securities except that an
option on a futures contract gives the purchaser the right in return for the
premium paid to assume a position in a futures contract and obligates the seller
to deliver such position upon exercise of the option.
The funds' use of financial futures and options thereon will in all cases
be consistent with applicable regulatory requirements and in particular the
regulations of the Commodity Futures Trading Commission (the "CTFC") relating to
exclusions from regulation as a commodity pool operator. Those regulations
currently provide that the funds may use commodity futures and option positions
(i) for bona fide hedging purposes without regard to the percentage of assets
committed to margin and option premiums, or (ii) for other purposes permitted by
the CTFC to the extent that the aggregate initial margin and option premiums
required to establish such non-hedging positions (net the amount the positions
were "in the money" at the time of purchase) do not exceed 5% of each fund's
respective net asset value, after taking into account unrealized profits and
losses on such positions. Typically, maintaining a futures contract or selling
an option thereon requires a fund to deposit with its custodian for the benefit
of a futures commission merchant (or directly with the Futures Commission
merchant), as security for its obligations an amount of cash or other specified
assets (initial margin) which initially is typically 1% to 10% of the face
amount of the contract (but may be higher in some circumstances). Additional
cash or assets (variation margin) may be required to be deposited directly with
the futures commission merchant thereafter on a daily basis as the value of the
contract fluctuates. The purchase of an option on financial futures involves
payment of a premium for the option without any further obligation on the part
of the funds. If a fund exercises an option on a futures contract it will be
obligated to post initial margin (and potential subsequent variation margin) for
the resulting futures position just as it would for any position. Futures
contracts and options thereon are generally settled by entering into an
offsetting transaction but there can be no assurance that the position can be
offset prior to settlement at an advantageous price, nor that delivery will
occur. The segregation requirements with respect to futures contracts and
options thereon are described below.
Combined Transactions. Each fund may enter into multiple transactions,
including multiple options transactions, multiple futures transactions, and
multiple interest rate transactions, structured notes and any combination of
futures, options, currency (tax-sensitive funds), multiple currency transactions
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(including forward currency contracts) (tax-sensitive funds) 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.
Currency Transactions. The tax-sensitive funds may engage in currency
transactions with Counterparties to seek to hedge the value of portfolio
holdings denominated in particular currencies against fluctuations in relative
value or to enhance potential gain. Currency transactions include currency
contracts, exchange listed currency futures, exchange listed and OTC options on
currencies, and currency swaps. A forward currency contract involves a privately
negotiated obligation to purchase or sell (with delivery generally required) a
specific currency at a future date, which may be any fixed number of days from
the date of the contract agreed upon by the parties, at a price set at the time
of the contract. A currency swap is an agreement to exchange cash flows based on
the notional (agreed-upon) difference among two or more currencies and operates
similarly to an interest rate swap, which is described below. A fund may enter
into over-the-counter currency transactions with Counterparties which have
received, combined with any credit enhancements, a long term debt rating of A by
S&P or Moody's, respectively, or that have an equivalent rating from a NRSRO or
(except for OTC currency options) whose obligations are determined to be of
equivalent credit quality by the adviser.
The tax-sensitive funds' transactions in forward currency contracts and
other currency transactions such as futures, options, options on futures and
swaps will generally be limited to hedging involving either specific
transactions or portfolio positions. See "Strategic and Derivative
Transactions." Transaction hedging is entering into a currency transaction with
respect to specific assets or liabilities of a fund, which will generally arise
in connection with the purchase or sale of its portfolio securities or the
receipt of income therefrom. Position hedging is entering into a currency
transaction with respect to portfolio security positions denominated or
generally quoted in that currency.
A fund will not enter into a transaction to hedge currency exposure to an
extent greater, after netting all transactions intended wholly or partially to
offset other transactions, than the aggregate market value (at the time of
entering into the transaction) of the securities held in its portfolio that are
denominated or generally quoted in or currently convertible into such currency,
other than with respect to proxy hedging as described below.
Each tax-sensitive fund may also cross-hedge currencies by entering into
transactions to purchase or sell one or more currencies that are expected to
decline in value in relation to other currencies to which the fund has or in
which the fund expects to have portfolio exposure. For example, a fund may hold
a French security and the adviser may believe that French francs will
deteriorate against German marks. The fund would sell French francs to reduce
its exposure to that currency and buy German marks. This strategy would be a
hedge against a decline in the value of French francs, although it would expose
the fund to declines in the value of the German mark relative to the U.S.
dollar.
To seek to reduce the effect of currency fluctuations on the value of
existing or anticipated holdings of portfolio securities, the tax-sensitive
funds may also engage in proxy hedging. Proxy hedging is often used when the
currency to which the fund's portfolio is exposed is difficult to hedge or to
hedge against the dollar. Proxy hedging entails entering into a forward contract
to sell a currency whose changes in value are generally considered to be linked
to a currency or currencies in which certain of a fund's portfolio securities
are or are expected to be denominated, and to buy U.S. dollars. The amount of
the contract would not exceed the value of the fund's securities denominated in
linked currencies. For example, if the adviser considers that the Austrian
schilling is linked to the German deutsche mark, a fund holds securities
denominated in schillings and the adviser believes that the value of schillings
will decline against the U.S.
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dollar, the adviser may enter into a contract to sell deutsche marks and buy
dollars. Proxy hedging involves some of the same risks and considerations as
other transactions with similar instruments. Currency transactions can result in
losses to the funds if the currency being hedged fluctuates in value to a degree
or in a direction that is not anticipated. Further, there is the risk that the
perceived linkage between various currencies may not be present or may not be
present during the particular time that the funds are engaging in proxy hedging.
If a fund enters into a currency hedging transaction, the fund will comply with
the asset segregation requirements described below.
Swaps, Caps, Floors, Spreads and Collars. Among the Strategic Transactions
into which each of the funds may enter are interest rate, currency rate
(tax-sensitive funds only) and index swaps and the purchase or sale of related
caps, floors, spreads and collars. Interest rate swaps involve the exchange by a
fund with another party of their respective commitments to pay or receive
interest, e.g., an exchange of floating rate payments for fixed rate payments
with respect to a notional amount of principal. A fund will not sell interest
rate caps or floors where it does not own securities or other instruments
providing the income stream the fund may be obligated to pay. A currency swap is
an agreement to exchange cash flows on a notional amount of two or more
currencies based on the relative value differential among them. An index swap is
an agreement to swap cash flows on a notional amount based on changes in the
values of the reference indices. The purchase of a cap entitles the purchaser to
receive payments on a notional principal amount from the party selling such cap
to the extent that a specified index exceeds a predetermined interest rate or
amount. The purchase of a floor entitles the purchaser to receive payments on a
notional principal amount from the party selling such floor to the extent that a
specified index falls below a predetermined interest rate or amount. A collar or
a spread is a combination of a cap and a floor that preserves a certain rate of
return within a predetermined range of interest rates or values.
The funds will usually enter into swaps on a net basis, i.e., the two
payment streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with a fund receiving or paying, as the case may
be, only the net amount of the two payments. The funds will not enter into any
swap, cap, floor, spread or collar transaction unless, at the time of entering
into such transaction, the unsecured long-term debt of the Counterparty,
combined with any credit enhancements, is rated at least A by S&P or Moody's or
has an equivalent rating from an NRSRO or the Counterparty issues debt that is
determined to be of equivalent credit quality by the adviser. If there is a
default by the Counterparty, a fund may have contractual remedies pursuant to
the agreements related to the transaction. The swap market has grown
substantially in recent years with a large number of banks and investment
banking firms acting both as principals and as agents utilizing standardized
swap documentation. As a result, the swap market has become relatively liquid.
Caps, floors, spreads and collars are more recent innovations for which
standardized documentation has not yet been fully developed. Swaps, caps,
floors, spreads and collars are considered illiquid for purposes of each fund's
policy regarding illiquid securities, unless it is determined, based upon
continuing review of the trading markets for the specific security, that such
security is liquid. The Board of Trustees has adopted guidelines and delegated
to the adviser the daily function of determining and monitoring the liquidity of
swaps, caps, floors, spreads and collars. The Board of Trustees, however,
retains oversight focusing on factors such as valuation, liquidity and
availability of information and is ultimately responsible for such
determinations. The staff of the SEC currently takes the position that swaps,
caps, floors, spreads and collars are illiquid, and are subject to each fund's
limitation on investing in illiquid securities.
Eurodollar Contracts. Each fund may make investments in Eurodollar
contracts. Eurodollar contracts are U.S. dollar-denominated futures contracts or
options thereon which are linked to the London Interbank Offered Rate ("LIBOR"),
although foreign currency-denominated instruments are available from time to
time. Eurodollar futures contracts enable purchasers to obtain a fixed rate for
the lending of funds and sellers to obtain a fixed rate for borrowings. A fund
might use Eurodollar futures contracts and options thereon to hedge against
changes in LIBOR, to which many interest rate swaps and fixed income instruments
are linked.
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Use of Segregated Accounts. Each fund will hold securities or other
instruments whose values are expected to offset its obligations under the
Strategic Transactions. A fund will not enter into Strategic Transactions that
expose the fund to an obligation to another party unless it owns either (i) an
offsetting position in securities or other options, futures contracts or other
instruments or (ii) cash, receivables or liquid securities with a value
sufficient to cover its potential obligations. The funds may have to comply with
any applicable regulatory requirements designed to make sure that mutual funds
do not use leverage in Strategic Transactions, and if required, will set aside
cash and other assets in a segregated account with the custodian bank (or marked
on the funds' records as segregated) in the amount prescribed. In that case, the
funds' custodian would maintain the value of such segregated account equal to
the prescribed amount by adding or removing additional cash or other assets to
account for fluctuations in the value of the account and the applicable fund's
obligations on the related Strategic Transactions. Assets held in a segregated
account would not be sold while the Strategic Transaction is outstanding, unless
they are replaced with similar assets. As a result, there is a possibility that
segregation of a large percentage of a fund's assets could impede portfolio
management or a fund's ability to meet redemption requests or other current
obligations.
Portfolio Diversification and Concentration. The Massachusetts Tax Exempt
Fund is non-diversified which generally means that, with respect to 50% of the
fund's total assets, it may invest more than 5% of its total assets in the
securities of a single issuer. Each of the other funds is diversified, which
generally means that, with respect to 75% of its total assets (i) no more than
5% of the fund's total assets may be invested in the securities of a single
issuer and (ii) each fund will purchase no more than 10% of the outstanding
voting securities of a single issuer. Because of the relatively small number of
issuers of Massachusetts Municipal Securities, the Massachusetts Tax Exempt Fund
is likely to invest a greater percentage of its assets in the securities of a
single issuer than is an investment company which invests in a broad range of
municipal securities, such as the Intermediate Tax Exempt Fund. Therefore, the
Massachusetts Tax Exempt Fund would be more susceptible than a diversified fund
to any single adverse economic or political occurrence or development affecting
Massachusetts issuers. The Massachusetts Tax Exempt Fund will also be subject to
an increased risk of loss if the issuer is unable to make interest or principal
payments or if the market value of such securities declines. It is also possible
that there will not be sufficient availability of suitable Massachusetts
Municipal Securities for the fund to achieve its objective of providing income
exempt from Massachusetts taxes.
The tax-sensitive funds will not concentrate (invest 25% or more of their
total assets) in the securities of issuers in any one industry. Although they
are authorized to do so, the tax exempt funds do not expect to concentrate
(invest 25% or more of their total assets) in any one of the following sectors
of the municipal securities market: hospitals, ports, airports, colleges and
universities, turnpikes and toll roads, housing bonds, lease rental bonds,
industrial revenue bonds or pollution control bonds. For the purposes of this
limitation, securities whose credit is enhanced by bond insurance, letters of
credit or other means are not considered to belong to a particular sector.
Investing a significant amount of a tax exempt fund's assets in the securities
of issuers in any one industry will cause the fund's net asset value to be more
sensitive to events affecting that industry. The funds' policies concerning
diversification and concentration are fundamental and may not be changed without
shareholder approval.
INVESTMENT RESTRICTIONS
Each fund has adopted certain fundamental and non-fundamental policies in
addition to those described under "Investment Objectives and Policies" in the
Prospectus. A fund's fundamental policies cannot be changed unless the change is
approved by the lesser of (i) 67% or more of the voting securities present at a
meeting, if the holders of more than 50% of the outstanding voting securities of
that fund are present or represented by proxy, or (ii) more than 50% of the
outstanding voting securities of that fund. A fund's non-fundamental policies
may be changed by the Board of Trustees, without shareholder approval, in
accordance with applicable laws, regulations or regulatory policy.
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Standish Intermediate Tax Exempt Bond Fund. As a matter of fundamental
policy, the Intermediate Tax Exempt Fund may not:
1. Issue senior securities, borrow money or pledge or mortgage its assets,
except that the fund may borrow from banks as a temporary measure for
extraordinary or emergency purposes (but not investment purposes) in an
amount up to 15% of the current value of its total assets, and pledge its
assets to an extent not greater than 15% of the current value of its total
assets to secure such borrowings; however, the fund may not make any
additional investments while its outstanding borrowings exceed 5% of the
current value of its total assets.
2. 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.
3. 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 and may purchase, hold and
sell real estate acquired as a result of ownership of securities or other
instruments.
4. 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).
5. Purchase or sell commodities or commodity contracts except that the fund
may purchase and sell financial futures contracts and options on financial
futures contracts.
6. Lend portfolio securities, except that the fund may enter into repurchase
agreements which are terminable within 7 days.
7. Invest, with respect to at least 75% of its total assets, more than 5% in
the securities of any one issuer (other than the U.S. Government, its
agencies or instrumentalities) or acquire more than 10% of the outstanding
voting securities of any issuer.
8. Invest more than an aggregate of 15% of the net assets of the fund in
securities subject to legal or contractual restrictions on resale or for
which there are no readily available market quotations or in other
illiquid securities.
Standish Massachusetts Intermediate Tax Exempt Bond Fund. As a matter of
fundamental policy, the Massachusetts Tax Exempt Fund may not:
1. Issue senior securities, borrow money or pledge or mortgage its assets,
except that the fund may borrow from banks as a temporary measure for
extraordinary or emergency purposes (but not investment purposes) in an
amount up to 15% of the current value of its total assets, and pledge its
assets to an extent not greater than 15% of the current value of its total
assets to secure such borrowings; however, the fund may not make any
additional investments while its outstanding borrowings exceed 5% of the
current value of its total assets.
2. 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.
3. 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 and may purchase, hold and
sell real estate acquired as a result of ownership of securities or other
instruments.
4. 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).
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5. Purchase or sell commodities or commodity contracts except that the fund
may purchase and sell financial futures contracts and options on financial
futures contracts.
6. Lend portfolio securities, except that the fund may enter into repurchase
agreements which are terminable within seven days.
7. 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 25% of the outstanding
voting securities of any issuer (in determining the issuer of a tax-exempt
security, identification of the issuer will be based upon a determination
of the source of assets and revenues committed to meeting interest and
principal payments of each security).
8. Invest more than an aggregate of 15% of the net assets of the fund in
securities subject to legal or contractual restrictions on resale or for
which there are no readily available market quotations or in other
illiquid securities.
Standish Tax-Sensitive Equity Fund and Standish Small Cap Tax-Sensitive
Equity Fund. As a matter of fundamental policy, each of the Standish Small Cap
Tax-Sensitive Equity Fund and Standish Tax-Sensitive Equity Fund may not:
1. Invest more than 25% of the current value of its total assets in any
single industry, provided that this restriction shall not apply to U.S.
Government securities or mortgage-backed securities issued or guaranteed
as to principal or interest by the U.S. Government, its agencies or
instrumentalities; provided, however, that the fund may invest all or part
of its investable assets in an open-end registered investment company with
substantially the same investment objective, policies and restrictions as
the fund.
2. Issue senior securities. For purposes of this restriction, borrowing money
in accordance with paragraph 3 below, making loans in accordance with
paragraph 8 below, the issuance of shares of beneficial interest in
multiple classes or series, the deferral of trustees' fees, the purchase
or sale of options, futures contracts, forward commitments and repurchase
agreements entered into in accordance with the fund's investment policies
or within the meaning of paragraph 6 below, are not deemed to be senior
securities.
3. Borrow money, except in amounts not to exceed 33 1/3% of the value of the
fund's total assets (including the amount borrowed) taken at market value
(i) from banks for temporary or short-term purposes or for the clearance
of transactions, (ii) in connection with the redemption of fund shares or
to finance failed settlements of portfolio trades without immediately
liquidating portfolio securities or other assets; (iii) in order to
fulfill commitments or plans to purchase additional securities pending the
anticipated sale of other portfolio securities or assets and (iv) the fund
may enter into reverse repurchase agreements and forward roll
transactions. For purposes of this investment restriction, investments in
short sales, futures contracts, options on futures contracts, securities
or indices and forward commitments shall not constitute borrowing.
4. Underwrite the securities of other issuers, except to the extent that, in
connection with the disposition of portfolio securities, the fund may be
deemed to be an underwriter under the Securities Act of 1933; provided,
however, that the fund may invest all or part of its investable assets in
an open-end registered investment company with substantially the same
investment objective, policies and restrictions as the fund.
5. Purchase or sell real estate except that the fund may (i) acquire or lease
office space for its own use, (ii) invest in securities of issuers that
invest in real estate or interests therein, (iii) invest in securities
that are secured by real estate or interests therein, (iv) purchase and
sell mortgage-related securities and (v) hold and sell real estate
acquired by the fund as a result of the ownership of securities.
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6. Purchase securities on margin (except that the fund may obtain such
short-term credits as may be necessary for the clearance of purchases and
sales of securities).
7. Purchase or sell commodities or commodity contracts, except the fund may
purchase and sell options on securities, securities indices and currency,
futures contracts on securities, securities indices and currency and
options on such futures, forward foreign currency exchange contracts,
forward commitments, securities index put or call warrants and repurchase
agreements entered into in accordance with the fund's investment policies.
8. Make loans, except that the fund (1) may lend portfolio securities in
accordance with the fund's investment policies up to 33 1/3% of the fund's
total assets taken at market value, (2) enter into repurchase agreements,
and (3) purchase all or a portion of an issue of debt securities, bank
loan participation interests, bank certificates of deposit, bankers'
acceptances, debentures or other securities, whether or not the purchase
is made upon the original issuance of the securities.
9. With respect to 75% of its total assets, purchase securities of an issuer
(other than the U.S. Government, its agencies, instrumentalities or
authorities or repurchase agreements collateralized by U.S. Government
securities and other investment companies), if:
a. such purchase would cause more than 5% of the fund's total assets
taken at market value to be invested in the securities of such
issuer; or
b. such purchase would at the time result in more than 10% of the
outstanding voting securities of such issuer being held by the fund;
provided, however, that the fund may invest all or part of its
investable assets in an open-end registered investment company with
substantially the same investment objective, policies and
restrictions as the fund.
For purposes of the fundamental investment restriction (1) regarding
industry concentration, the adviser generally classifies issuers by industry in
accordance with classifications set forth in the Directory of Companies Filing
Annual Reports With The Securities and Exchange Commission. In the absence of
such classification or if the adviser determines in good faith based on its own
information that the economic characteristics affecting a particular issuer make
it more appropriately considered to be engaged in a different industry, the
adviser may classify an issuer according to its own sources. For instance,
personal credit finance companies and business credit finance companies are
deemed to be separate industries and wholly-owned finance companies are
considered to be in the industry of their parents if their activities are
primarily related to financing the activities of their parents.
As a matter of non-fundamental policy, each fund may not:
(a) Invest in the securities of an issuer for the purpose of exercising
control or management, but it may do so where it is deemed advisable to
protect or enhance the value of an existing investment.
(b) Purchase securities of any other investment company except as permitted by
the 1940 Act.
(c) Invest more than 15% of its net assets in securities which are illiquid
(this policy is fundamental with respect to the tax exempt funds).
(d) Purchase additional securities if the fund's borrowings exceed 5% of its
net assets (this policy is fundamental with respect to the tax exempt
funds).
As a matter of non-fundamental policy, the tax exempt funds may not own
more than 10% of the outstanding voting securities of any one issuer. Because
municipal securities are not voting securities, there is no limit on the
percentage of a single issuer's municipal bonds which the tax exempt funds may
own so long as, as to 75% of the total assets of the Intermediate Tax Exempt
Bond Fund and as to 50% of the total
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assets of the Massachusetts Tax Exempt Fund, they do not invest more than 5% of
their total assets in the securities of the issuer. Consequently, the tax exempt
funds may invest in a greater percentage of the outstanding securities of a
single issuer than would an investment company which invests in voting
securities.
Although they are allowed to do so as a matter of fundamental policy, the
tax exempt funds do not expect to invest in securities (other than securities of
the U.S. Government, its agencies or instrumentalities and municipal securities)
if more than 25% of the current value of their total assets would be invested in
a single industry. Although governmental issuers of municipal securities are not
considered part of any "industry," municipal securities backed only by the
assets and revenues of nongovernmental users may, for this purpose, be deemed to
be issued by such nongovernmental users (e.g., industrial development bonds) and
constitute an "industry." Thus, the tax exempt funds do not expect that more
than 25% of their assets will be invested in obligations deemed to be issued by
nongovernmental users in any one industry (e.g., industrial development bonds
for health care facilities) and in taxable obligations of issuers in the same
industry. However, it is possible that the tax exempt funds may invest more than
25% of their assets in a broader sector of the market for municipal securities.
Determining the issuer of a tax-exempt security will be based upon the
source of assets and revenues committed to meeting interest and principal
payments of each security. A security guaranteed or otherwise backed by full
faith and credit of a governmental entity would generally be considered to
represent a separate security issued by such guaranteeing entity and by the
primary obligor. However, a guarantee of a security shall not be deemed to be a
security issued by the guarantor if the value of all securities guaranteed by
the guarantor and owned by the tax exempt funds is less than 10% of the value of
the total assets of the funds. Securities backed only by the assets and revenues
of nongovernmental users will be deemed to be issued by such nongovernmental
users.
The tax-sensitive funds have no current intention of lending portfolio
securities or entering into reverse repurchase agreements or forward roll
transactions. None of the funds have any current intention to borrow money for
other than temporary of emergency purposes.
Notwithstanding any other fundamental or non-fundamental investment
restriction or policy, the tax-sensitive funds may each invest all of its assets
in the securities of a single open-end registered investment company with
substantially the same fundamental investment objectives, restrictions and
policies as the fund.
If any percentage restriction described above is adhered to at the time of
investment, a subsequent increase or decrease in the percentage resulting from a
change in the value of a fund's assets will not constitute a violation of the
restriction.
CALCULATION OF PERFORMANCE DATA
Each fund may, from time to time, advertise certain total return
information and the tax exempt funds may also advertise certain yield and tax
equivalent yield information. The average annual total return of a fund for a
period is computed by subtracting the net asset value per share at the beginning
of the period from the net asset value per share at the end of the period (after
adjusting for the reinvestment of any income dividends and capital gain
distributions), and dividing the result by the net asset value per share at the
beginning of the period. In particular, the average annual total return of a
fund ("T") is computed by using the redeemable value at the end of a specified
period of time ("ERV") of a hypothetical initial investment of $1,000 ("P") over
a period of time ("n") according to the formula P(1+T)^n=ERV.
The yield of the tax exempt funds is computed by dividing the net
investment income per share earned during a base period of 30 days, or one
month, by the maximum offering price per share on the last day of the period.
For the purpose of determining net investment income, the calculation includes,
among expenses of the funds, all recurring fees that are charged to all
shareholder accounts and any non-recurring charges for the period stated. In
particular, yield is determined according to the following formula:
-26-
<PAGE>
Yield = 2[((A - B)/CD + 1)^6 - 1]
Where: A = dividends and interest earned during the period; B = net
expenses accrued for the period; C = average daily number of shares outstanding
during the period that were entitled to receive dividends; D = the maximum
offering price (net asset value) per share on the last day of the period.
Tax equivalent yield is the net annualized taxable yield needed to produce
a specified tax exempt yield at a given tax rate based on a specified 30-day (or
one month) period, assuming semi-annual compounding of income. The taxable
equivalent yield for the tax exempt funds is based upon each fund's current
tax-exempt yield and an investor's marginal tax rate. The formula is:
Portfolio's Tax-Free Yield = Taxable Equivalent Yield
--------------------------
100% - Marginal Tax Rate
The funds' average annual total return for the one-year, five-year and
since inception periods ended September 30, 1999, and the tax exempt funds'
average annualized yield and tax-equivalent yield for the 30-day period ended
September 30, 1999 were as follows:
<TABLE>
<CAPTION>
Average Annual Total Return*
----------------------------
Tax-
Since Equivalent
Fund 1-Year 5-Year 10-Year Inception Yield Yield
---- ------ ------ ------- --------- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Tax-Sensitive Equity Fund 14.46% n/a(1) n/a(1) 18.87% n/a n/a
Small Cap Tax-Sensitive 57.03% n/a(1) n/a(1) 21.07% n/a n/a
Fund
Intermediate Tax Exempt (0.33)% 5.68% n/a(1) 5.83% 4.49% 7.43%(2)
Fund
Massachusetts Tax Exempt (0.18)% 5.49% n/a(1) 5.34% 4.32% 8.13%(2)
Fund
</TABLE>
- -------------------
*The Advisor voluntarily capped each fund's expenses for various periods since
inception. Had the Advisor not taken these actions, each fund's performance
would be lower.
(1)The tax-sensitive funds commenced operations on January 2, 1996 and the tax
exempt funds commenced operations on November 2, 1992.
(2)Intermediate Tax Exempt Fund's tax-equivalent yield assumes a federal income
tax rate of 39.6% and Massachusetts Tax Exempt Fund's tax-equivalent yield
assumes a combined federal and Massachusetts tax rate of 46.85%.
The tax exempt funds may also quote non-standardized yield, such as
yield-to-maturity ("YTM"). YTM represents the rate of return an investor will
receive if a long-term, interest bearing investment, such as a bond, is held to
its maturity date. YTM does not take into account purchase price, redemption
value, time to maturity, coupon yield, and the time between interest payments.
The tax-sensitive funds may also quote total return giving effect to the
payment of taxes. Tax equivalent yield demonstrates the yield from a taxable
investment necessary to produce an after-tax yield
-27-
<PAGE>
equivalent to that of a fund which invests primarily in tax-exempt obligations.
It is computed by dividing the tax-exempt portion of a tax exempt fund's yield
(calculated as indicated above) by one, minus a stated income tax rate and
adding the product to the taxable portion (if any) of the fund's yield.
In addition to average annual return and yield and tax equivalent yield
(tax exempt funds' quotations, each fund may quote quarterly and annual
performance on a net (with management fees and other operating expenses
deducted) and gross basis. The funds' net and gross performance is as follows:
Intermediate Tax Exempt Fund
Quarter/Year Net Gross
-----------------------------------------------------------------
1992 2.79% 2.95%
1Q93 3.46 3.62
2Q93 2.63 2.79
3Q93 2.94 3.10
4Q93 1.35 1.51
1993 10.78 11.47
1Q94 -3.95 -3.79
2Q94 1.67 1.83
3Q94 0.98 1.15
4Q94 -1.29 -1.13
1994 -2.68 -2.02
1Q95 4.61 4.77
2Q95 1.95 2.12
3Q95 2.76 2.95
4Q95 2.77 2.94
1995 12.65 13.3
1Q96 -0.42 -0.27
2Q96 0.91 1.05
3Q96 1.93 2.08
4Q96 2.28 2.46
1996 4.76 5.41
1Q97 (0.01) 0.16
2Q97 2.97 3.13
3Q97 2.82 2.99
4Q97 2.09 2.27
1997 8.07 8.80
1Q98 0.94 1.10
2Q98 1.28 1.45
-28-
<PAGE>
3Q98 2.75 2.92
4Q98 0.34 0.50
1998 5.41 6.09
1Q99 0.68 0.83
2Q99 (1.72) (1.57)
3Q99 0.38 0.53
1999(1) (0.67) (0.23)
- --------
(1)Information is presented for the first 9 months of the calendar year.
Massachusetts Tax Exempt Fund
Quarter/Year Net Gross
-----------------------------------------------------------------
1992 2.27% 2.43%
1Q93 2.88 3.04
2Q93 2.72 2.88
3Q93 2.74 2.90
4Q93 1.55 1.71
1993 10.24 10.95
1Q94 (4.20) (4.04)
2Q94 1.02 1.18
3Q94 0.50 0.67
4Q94 (1.12) (0.96)
1994 (3.84) (3.20)
1Q95 4.86 5.02
2Q95 2.01 2.18
3Q95 2.69 2.87
4Q95 2.54 2.70
1995 12.64 13.38
1Q96 (0.63) (0.47)
2Q96 0.77 0.92
3Q96 1.56 1.72
4Q96 2.32 2.50
1996 4.07 4.72
1Q97 (0.20) (0.03)
2Q97 2.76 2.92
-29-
<PAGE>
3Q97 2.50 2.67
4Q97 2.18 2.36
1997 7.39 8.12
1Q98 1.06 1.23
2Q98 1.24 1.40
3Q98 2.78 2.96
4Q98 0.59 0.76
1998 5.78 6.49
1Q99 0.62 0.79
2Q99 (1.76) (1.60)
3Q99 0.39 0.55
1999(1) (0.77) (0.28)
- --------
(1)Information is presented for the first 9 months of the calendar year.
Tax-Sensitive Equity Fund
Quarter/Year Net Gross
-----------------------------------------------------------------
1Q96 6.60% 6.60%
2Q96 3.42 3.42
3Q96 7.91 7.91
4Q96 9.78 9.78
1996 30.61 30.61
1Q97 2.88 2.88
2Q97 17.34 17.34
3Q97 14.08 14.21
4Q97 0.11 0.23
1997 37.87 38.20
1Q98 15.56 15.69
2Q98 (1.72) (1.60)
3Q98 (18.32) (18.22)
4Q98 24.36 24.50
1998 15.36 15.91
1Q99 (7.10) (6.98)
2Q99 9.73 9.86
3Q99 (9.71) (9.60)
-30-
<PAGE>
1999(1) (7.96) (7.62)
- -------
(1)Information is presented for the first 9 months of the calendar year.
Small Cap Tax-Sensitive Equity Fund
Quarter/Year Net Gross
-----------------------------------------------------------------
1Q96 7.55% 7.55%
2Q96 12.27 12.27
3Q96 -2.32 -2.32
4Q96 2.78 2.78
1996 21.23 21.23
1Q97 (10.45) (10.45)
2Q97 24.41 24.41
3Q97 20.96 20.96
4Q97 (8.27) (8.10)
1997 23.61 23.98
1Q98 12.30 12.49
2Q98 (2.69) (2.52)
3Q98 (20.36) (20.20)
4Q98 27.14 27.35
1998 10.65 11.45
1Q99 12.63 12.84
2Q99 10.76 10.95
3Q99 (1.00) (0.82)
1999(1) 23.50 24.17
- --------
(1)Information is presented for the first 9 months of the calendar year.
These performance quotations should not be considered as representative of
any fund's performance for any specified period in the future. Each fund's
advisory fee was not imposed, in whole or in part, and the adviser limited other
expenses of certain funds in varying amounts during various periods since each
fund's inception. In the absence of such arrangements, the performance of each
fund would have been lower.
Each fund's performance may be compared in sales literature to the
performance of other mutual funds having similar objectives or to standardized
indices or other measures of investment performance. In particular, the tax
exempt funds may each compare their respective performance to various indices
(or particular components thereof), which are generally considered to be
representative of the performance of all municipal securities such as the Lehman
Muni 3-5-7-10 Index and the Lehman Intermediate Muni Index.
-31-
<PAGE>
The tax-sensitive funds may each compare their respective performance to the S&P
500 Index, which is generally considered to be representative of the performance
of unmanaged common stocks that are publicly traded in the United States
securities markets. In addition, the Small Cap Fund may compare its performance
to the Russell 2000 Growth Index. The Russell 2000 Index is generally considered
to be representative of unmanaged small capitalization stocks in the United
States markets and the Russell 2000 Growth Index is generally considered to be
representative of those Russell 2000 companies with higher price-to-book ratios
and higher forecasted growth values. Comparative performance may also be
expressed by reference to a ranking prepared by a mutual fund monitoring service
or by one or more newspapers, newsletters or financial periodicals. Performance
comparisons may be useful to investors who wish to compare a fund's past
performance to that of other mutual funds and investment products. Of course,
past performance is not a guarantee of future results.
MANAGEMENT
Trustees and Officers
The Board of Trustees has established the investment objective and
policies which govern each fund's operation. The Board has appointed officers of
the Trust who conduct the day-to-day business of each fund. The Board, however,
remains responsible for ensuring that each fund is operating consistently
accordingly to its objective and policies and the requirements of the federal
securities laws. The Trustees and executive officers of the Trust are listed
below. All executive officers of the Trust are affiliates of Standish, Ayer &
Wood, Inc., the fund's investment adviser.
<TABLE>
<CAPTION>
Position Held Principal Occupation
Name, Address and Date of Birth with Trust During Past 5 Years
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
*D. Barr Clayson, 7/29/35 Trustee and Vice President Managing Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.;
One Financial Center Chairman and Director,
Boston, MA 02111 Standish International
Management Company, LLC
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 2333 Trustee, Mertens House, Inc.
New London, NH 03257
*Edward H. Ladd, 1/3/38 Trustee and Vice President Chairman of the Board and
c/o Standish, Ayer & Wood, Inc. Managing Director, Standish, Ayer &
One Financial Center Wood, Inc.; Director,
Boston, MA 02111 Standish International
Management Company, LLC
</TABLE>
-32-
<PAGE>
<TABLE>
<CAPTION>
Position Held Principal Occupation
Name, Address and Date of Birth with Trust During Past 5 Years
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Caleb Loring III, 11/14/43 Trustee Trustee, Essex Street Associates
c/o Essex Street Associates (family investment trust office);
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 Trustee and President 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, LLC
James E. Hollis III, 11/21/48 Executive Vice President Director, Standish, Ayer & Wood, Inc.
c/o Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Anne P. Herrmann, 1/26/56 Vice President and Secretary Assistant Vice President and
c/o Standish, Ayer & Wood, Inc. Senior Fund Administration Manager
One Financial Center Standish, Ayer & Wood, Inc.
Boston, MA 02111
Paul G. Martins, 3/10/56 Vice President and Treasurer Vice President of Finance, Standish, Ayer &
c/o Standish, Ayer & Wood, Inc. Wood, Inc. since October 1996; formerly Senior
One Financial Center Vice President, Treasurer and Chief Financial
Boston, MA 02111 Officer of Liberty Financial Bank Group
Beverly E. Banfield, 7/6/56 Vice President Associate Director and Compliance Officer,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Denise B. Kneeland, 8/19/51 Vice President Vice President and Manager,
c/o Standish, Ayer & Wood, Inc. Mutual Funds Operations,
One Financial Center Standish, Ayer & Wood, Inc.
Boston, MA 02111
Rosalind J. Lillo, 2/6/38 Vice President Broker/Dealer Administrator,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center since October 1995; formerly
Boston, MA 02111 Compliance Administrator,
New England Securities Corp.
</TABLE>
-33-
<PAGE>
<TABLE>
<CAPTION>
Position Held Principal Occupation
Name, Address and Date of Birth with Trust During Past 5 Years
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Tami M. Pester, 10/29/67 Vice President Assistant Vice President, Assistant
c/o Standish, Ayer & Wood, Inc. Compliance Manager and Compliance Officer,
One Financial Center Standish, Ayer & Wood, Inc. since 1998;
Boston, MA 02111 Compliance Officer, State Street Global
Advisors.
Deborah Rafferty-Maple, 1/4/69 Vice President Assistant Vice President, Financial Planner
c/o Standish, Ayer & Wood, Inc. and Registered Investment Networks
One Financial Center Marketing Manager
Boston, MA 02111 Standish, Ayer & Wood, Inc.
Lisa Kane Vice President Client Service Representative,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Steven M. Anderson Vice President Mutual Funds Controller,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
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 funds pay no compensation to the Trust's Trustees affiliated with the
adviser or to the Trust's officers. None of the Trust's Trustees or officers has
engaged in any financial transactions (other than the purchase or redemption of
a fund's shares) with the Trust or the adviser during the funds' fiscal years
ended September 30, 1999 except that certain Trustees and officers who are
directors and shareholders of the adviser may, from time to time, purchase
additional shares of common stock of the adviser.
The following table sets forth all compensation paid to the Trust's
Trustees as of the funds' fiscal years ended September 30, 1999:
<TABLE>
<CAPTION>
Pension or
Aggregate Compensation from the Funds Retirement Total
------------------------------------- Benefits Compensation
Accrued as from Funds
Small Intermediate Massachusetts Part of and
Equity Cap Tax Exempt Tax Exempt Fund's Other Funds in
Name of Trustee Fund Fund Fund Fund Expenses Complex*
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
D. Barr Clayson $0 $0 $0 $0 $0 $0
Samuel C. Fleming 1,079 2,457 1,675 1,619 0 57,000
Benjamin M. Friedman 1,079 2,457 1,675 1,619 0 57,000
John H. Hewitt 1,109 2,538 1,738 1,662 0 62,000
Edward H. Ladd 0 0 0 0 0 0
Caleb Loring, III 1,079 2,457 1,675 1,619 0 57,000
Richard S. Wood 0 0 0 0 0 0
</TABLE>
-34-
<PAGE>
- -------------
* As of the date of this Statement of Additional Information, there were 24
mutual funds in the fund complex.
Certain Shareholders
At November 15, 1999 the Trustees and officers of the Trust as a group
beneficially owned (i.e., had voting and/or investment power) less than 1% of
the then outstanding shares of each fund. Also at that date, no person
beneficially owned 5% or more of the then outstanding shares of any fund except:
[SAW: Please update for each Fund]
Intermediate Tax Exempt Fund
Percentage of
Name and Address Outstanding Shares
---------------------------------------------------------------------
Bingham Dana & Gould 15%
Trust Department
150 Federal Street
Boston, MA 02110
Root Capital Partners, L.P., Ltd. 9%
P.O. Box 2860
Daytona Beach, FL 32120
Charles Schwab & Co., Inc. 9%
Special Custody Acct. For
Exclusive Benefit of Customers
101 Montgomery Street
San Francisco, CA 94104
Massachusetts Tax Exempt Fund:
Percentage of
Name and Address Outstanding Shares
---------------------------------------------------------------------
Bingham Dana & Gould 24%
Trust Department
150 Federal Street
Boston, MA 02110
Hyde Investment Corp. 8%
Bob & Co.
c/o BankBoston
PO Box 1809
Boston, MA 02105
-35-
<PAGE>
Tax-Sensitive Equity Fund:
Percentage of
Name and Address Outstanding Shares
---------------------------------------------------------------------
Charles Schwab & Co., Inc 15%
Special Custody Acct. For
Exclusive Benefit of Customers
101 Montgomery Street
San Francisco, CA 94104
Small Cap Tax-Sensitive Fund
Percentage of
Name and Address Outstanding Shares
---------------------------------------------------------------------
Charles Schwab & Co., Inc. 17%
Special Custody Acct. For
Exclusive Benefit of Customers
101 Montgomery Street
San Francisco, CA 94104
Bingham Dana & Gould 13%
Trust Department
150 Federal Street
Boston, MA 02110
Investment Adviser
Standish, Ayer & Wood, Inc. serves as investment adviser to each fund
pursuant to separate written investment advisory agreements with the Trust. The
adviser is a Massachusetts corporation organized in 1933 and is registered under
the Investment Advisers Act of 1940.
The following, constituting all of the Directors and all of the
shareholders of the adviser, are the adviser's controlling persons: Caleb F.
Aldrich, Nicholas S. Battelle, David H. Cameron, Karen K. Chandor, Lavinia B.
Chase, D. Barr Clayson, W. Charles Cook, Joseph M. Corrado, Richard C. Doll,
Dolores S. Driscoll, Maria D. Furman, James E. Hollis III, Raymond J. Kubiak,
Edward H. Ladd, Laurence A. Manchester, George W. Noyes, Arthur H. Parker,
Catherine A. Powers, Howard B. Rubin, Austin C. Smith, Thomas P. Sorbo, David C.
Stuehr, Ralph S. Tate, Michael W. Thompson and Richard S. Wood.
Certain services provided by the adviser under the investment advisory
agreements are described in the Prospectus. In addition to those services, the
adviser provides each fund with office space for managing its affairs, with the
services of required executive personnel, and with certain clerical services and
facilities. These services are provided by the adviser without reimbursement by
the funds for any costs incurred. Under each investment advisory agreement, the
adviser is paid a fee based upon a percentage of each fund's average daily net
asset value computed set forth below. This fee is paid monthly.
-36-
<PAGE>
Contractual Advisory
Fund Fee Annual Rate
- ---- ---------------
Tax-Sensitive Equity 0.50%
Small Cap Tax-Sensitive 0.80%*
Intermediate Tax Exempt 0.40%
Massachusetts Tax Exempt 0.40%
- ----------------
*Prior to January 28, 2000, the Small Cap Tax Sensitive Equity Fund paid the
advisor a fee equal on an annual basis to 0.60% of the fund's average daily net
assets.
During the last three fiscal years ended September 30, the funds paid
advisory fees in the following amounts:
Fund 1997 1998 1999
- ---- ---- ---- ----
Tax-Sensitive Equity $0(1) $0(2) $59,596(3)
Small Cap Tax-Sensitive $0(1) $182,060(2) $659,419(3)
Intermediate Tax Exempt $132,842(1) $236,745(2) $332,383
Massachusetts Tax Exempt $104,855(1) $128,194(2) $232,763
- ------------------
(1) For the fiscal year ended September 30, 1997, the adviser voluntarily agreed
not to impose any of its fees for the Equity and Small Cap Funds which otherwise
would have been $32,635 and $100,630, respectively, and voluntarily agreed not
to impose a portion of its fees for the Intermediate Tax Exempt and
Massachusetts Tax Exempt Funds in the amount of $40,552 and $33,848,
respectively.
(2) For the fiscal year ended September 30, 1998, the adviser voluntarily agreed
not to impose any of its fees for the Equity Fund which otherwise would have
been $128,459, and voluntarily agreed not to impose a portion of its fees for
the Small Cap, Intermediate Tax Exempt and Massachusetts Tax Exempt Funds in the
amount of $109,263, $27,935, and $51,114, respectively.
(3) For the fiscal year ended September 30, 1999, the adviser voluntarily agreed
not to impose a portion of its fees for the Equity and Small Cap Funds in the
amounts of $191,380 and $13,604, respectively.
The adviser has voluntarily and temporarily agreed to limit total expenses
(excluding brokerage commissions, taxes and extraordinary expenses) of the
Equity Fund, the Small Cap Fund, the Intermediate Tax Exempt Fund and the
Massachusetts Tax Exempt Fund to 0.50%, 1.00%, 0.65% and 0.65%, respectively, of
the applicable fund's average daily net assets. Standish may revise or
discontinue these agreements at any time although it has no current intention to
do so. If an expense limitation is exceeded, the compensation due to the adviser
shall be proportionately reduced by the amount of such excess by reduction or
refund thereof, subject to readjustment during the period during which such
limit is in place.
Pursuant to the investment advisory agreements, each fund bears the
expenses of its operations other than those incurred by the adviser pursuant to
the investment advisory agreements. Among other expenses, each fund will pay
share pricing and shareholder servicing fees and expenses; custodian fees
-37-
<PAGE>
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.
The initial term of the Small Cap Tax Sensitive Equity Fund's investment
advisory agreements ends on January 28, 2002. Each other fund's investment
advisory agreement is outside of its initial term. Unless terminated as provided
below, each fund's investment advisory agreement continues in full force and
effect for successive periods of one year after its initial term, but only as
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 applicable 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 1940
Act) of any such party, cast in person at a meeting called for the purpose of
voting on such approval. Each investment advisory agreement may be terminated at
any time without the payment of any penalty by vote of the Trustees of the Trust
or by vote of a majority of the outstanding voting securities (as defined in the
1940 Act) of the applicable 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 funds, the adviser, Standish Fund Distributors and the Trust have
adopted extensive restrictions on personal securities trading by personnel of
the adviser and its affiliates. These restrictions include: pre-clearance of all
personal securities transactions and a prohibition of purchasing initial public
offerings of securities. These restrictions are a continuation of the basic
principle that the interests of the funds and their shareholders come before
those of the adviser, its affiliates and their employees.
Distributor of the Trust
Standish Fund Distributors, L.P., an affiliate of the adviser, serves as
the Trust's exclusive principal underwriter and holds itself available to
receive purchase orders for the funds' shares. In that capacity, Standish Fund
Distributors has been granted the right, as agent of the Trust, to solicit and
accept orders for the purchase of the funds' shares in accordance with the terms
of the Underwriting Agreement between the Trust and Standish Fund Distributors.
Pursuant to the Underwriting Agreement, Standish Fund Distributors has agreed to
use its best efforts to obtain orders for the continuous offering of the funds'
shares. Standish Fund Distributors receives no commissions or other compensation
for its services, and has not received any such amounts in any prior year. The
Underwriting Agreement shall continue in effect with respect to each fund until
two years after its execution and for successive periods of one year thereafter
only if it is approved at least annually thereafter (i) by a vote of the holders
of a majority of the fund's outstanding shares or by the Trustees of the Trust
or (ii) by a vote of a majority of the Trustees of the Trust who are not
"interested persons" (as defined by the 1940 Act) of the parties to the
Underwriting Agreement, cast in person at a meeting called for the purpose of
voting on such approval. The Underwriting Agreement will terminate automatically
if assigned by either party thereto and is terminable with respect to a fund at
any time without penalty by a vote of a majority of the Trustees of the Trust, a
vote of a majority of the Trustees who are not "interested persons" of the
Trust, or by a vote of the holders of a majority of the applicable fund's
outstanding shares, in any case without payment of any penalty on not more than
60 days' written notice to the other party. The offices of Standish Fund
Distributors are located at One Financial Center, 26th Floor, Boston,
Massachusetts 02111.
PURCHASE AND REDEMPTION OF SHARES
Detailed information on purchase and redemption of shares is included in
the prospectus.
In addition to Standish Fund Distributors and other agents of the Trust,
each fund has authorized one or more brokers and dealers to accept on its behalf
orders for the purchase and redemption of fund
-38-
<PAGE>
shares. Under certain conditions, such authorized brokers and dealers may
designate other intermediaries to accept orders for the purchase and redemption
of fund shares. In accordance with a position taken by the staff of the
Securities and Exchange Commission, such purchase and redemption orders are
considered to have been received by a fund when accepted by the authorized
broker or dealer or, if applicable, the authorized broker's or dealer's
designee. Also in accordance with the position taken by the staff of the
Securities and Exchange Commission, such purchase and redemption orders will
receive the appropriate fund's net asset value per share next computed after the
purchase or redemption order is accepted by the authorized broker or dealer or,
if applicable, the authorized broker's or dealer's designee.
The Trust may suspend the right to redeem fund shares or postpone the date
of payment upon redemption for more than seven days (i) for any period during
which the New York Stock Exchange is closed (other than customary weekend or
holiday closings) or trading on the exchange is restricted; (ii) for any period
during which an emergency exists as a result of which disposal by a fund of
securities owned by it or determination by a fund of the value of its net assets
is not reasonably practicable; or (iii) for such other periods as the SEC may
permit for the protection of shareholders of the funds.
The Trust intends to pay redemption proceeds in cash for all fund shares
redeemed but, under certain conditions, the Trust may make payment wholly or
partly in fund portfolio securities. Portfolio securities paid upon redemption
of fund shares will be valued at their then current market value. The Trust has
elected to be governed by the provisions of Rule 18f-1 under the 1940 Act which
limits the fund's obligation to make cash redemption payments to any shareholder
during any 90-day period to the lesser of $250,000 or 1% of the fund's net asset
value at the beginning of such period. An investor may incur brokerage costs in
converting portfolio securities received upon redemption to cash.
PORTFOLIO TRANSACTIONS
The adviser is responsible for placing each fund's portfolio transactions
and will do so in a manner deemed fair and reasonable to the funds and not
according to any formula. The primary consideration in all portfolio
transactions will be prompt execution of orders in an efficient manner at the
most favorable price. In selecting broker-dealers and in negotiating
commissions, the adviser will consider the firm's reliability, the quality of
its execution services on a continuing basis and its financial condition. When
more than one firm is believed to meet these criteria, preference may be given
to firms which also sell shares of the respective 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, a 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 funds effect their securities transactions may be used by the adviser in
servicing other accounts; not all of these services may be used by the adviser
in connection with the funds. The investment advisory fees paid by the funds
under the 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
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securities for a fund and another advisory account. In some cases, this
procedure could have an adverse effect on the price or the amount of securities
available to the funds. In making such allocations, the main factors considered
by the adviser will be the respective investment objectives, the relative size
of portfolio holdings of the same or comparable securities, the availability of
cash for investment, the size of investment commitments generally held, and
opinions of the persons responsible for recommending the investment. To the
extent permitted by law, securities to be sold or purchased for a fund may be
aggregated with those to be sold or purchased for other investment clients of
the adviser and the adviser's personnel in order to obtain best execution.
Aggregate Brokerage Commissions
Paid by the Fund on Portfolio
Transactions for the Years ended September 30,
----------------------------------------------
Fund 1997 1998 1999
---- ---- ---- ----
Tax-Sensitive Equity $10,193 $50,450 $56,729
Fund
Small Cap Tax- $32,992 $82,362 $224,818
Sensitive Fund
MA Tax Exempt Fund 0 $291 $398
At September 30, 1999, no fund held any securities of their regular
brokers or dealers. The tax exempt funds generally execute portfolio
transactions on a "net" basis without the payment of brokerage commissions but
which include a mark-up or "spread" by the securities broker-dealer.
DETERMINATION OF NET ASSET VALUE
Each fund's net asset value is calculated each business day on which the
New York Stock Exchange is open. Currently the New York Stock Exchange 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. The net asset value of a fund's shares is determined as of the close
of regular trading on the New York Stock Exchange (normally 4:00 p.m., New York
time) and is computed by dividing the value of all securities and other assets
of the fund less all liabilities by the number of shares outstanding, and
adjusting to the nearest cent per share. Expenses and fees, including the
investment advisory fee, are accrued daily and taken into account for the
purpose of determining net asset value.
Equity and other taxable securities are valued at the last sales prices,
on the exchange or national securities market on which they are primarily
traded. Equity and other taxable securities not listed on an exchange or
national securities market, or securities for which there are no reported
transactions, are valued at the last quoted bid prices. Municipal securities are
valued by the adviser or by an independent pricing service approved by the
Trustees, which uses information with respect to transactions in bonds,
quotations from bond dealers, market transactions in comparable securities and
various relationships between securities in determining value. The tax exempt
funds believe that reliable market quotations for municipal securities are
generally not readily available for purposes of valuing their portfolio
securities. As a result, it is likely that most valuations of municipal
securities made by the adviser or provided by such pricing service will be based
upon fair value determined on the basis of the factors listed above (which may
also include use of yield equivalents or matrix pricing). Securities for which
quotations are not readily available and all other assets will be valued at fair
value as determined in good faith by the adviser in accordance with procedures
approved by the Trustees. Money market instruments with less than sixty days
remaining to maturity when acquired by a fund are valued on an amortized cost
basis unless the
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Trustees determine that amortized cost does not represent fair value. If a fund
acquires a money market instrument with more than sixty days remaining to its
maturity, it is valued at current market value until the sixtieth day prior to
maturity and will then be valued at amortized cost based upon its 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
New York Stock Exchange. If a security's primary exchange is outside the U.S.,
the value of such security used in computing the net asset value of a
tax-sensitive fund's shares is determined as of such times. Foreign currency
exchange rates are also generally determined prior to the close of regular
trading on the New York Stock Exchange. Occasionally, events which affect the
values of such securities and such exchange rates may occur between the times at
which they are determined and the close of regular trading on the New York Stock
Exchange and will therefore not be reflected in the computation of the
tax-sensitive funds' net asset values. 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.
FEDERAL AND MASSACHUSETTS INCOME TAXES
Federal Income Taxation
Each series of the Trust, including each fund, is treated as a separate
entity for accounting and tax purposes. Each fund presently qualifies and
intends to continue to qualify as a "regulated investment company" under
Subchapter M of the Code. As such and by complying with the applicable
provisions of the Code regarding the sources of its income, the timing of its
distributions, and the diversification of its assets, a 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), net tax-exempt interest (if any) and net
capital gain which are distributed to shareholders in accordance with the timing
and other requirements of the Code.
Each fund will be subject to a 4% non-deductible federal excise tax on
certain taxable amounts not distributed (and not treated as having been
distributed) on a timely basis in accordance with annual minimum distribution
requirements. The funds intend under normal circumstances to seek to avoid
liability for such tax by satisfying such distribution requirements. Certain
distributions made in order to satisfy the Code's distribution requirements may
be declared by the funds during October, November or December of the year but
paid during the following January. Such distributions will be treated by
shareholders as if received on December 31 of the year the distributions are
declared, rather than the year in which the distributions are received.
The funds 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, each 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 funds and, as noted above, would not be distributed as such
to shareholders. As of the end of its most recent taxable year, the Equity Fund
has $1,162, $95,353 and $1,003,879 of capital loss carryforwards which expire on
September 30, 2004, 2005 and 2007, respectively, available to offset future net
capital gains and the Massachusetts Tax Exempt Fund has $104,125 of capital loss
carryforwards which expire on September 30, 2003 available to offset future net
capital gains.
Limitations imposed by the Code on regulated investment companies like the
funds may restrict a fund's ability to enter into futures, options and currency
forward transactions.
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Certain options, futures and forward foreign currency transactions
(tax-sensitive funds only) undertaken by a fund may cause the fund to recognize
gains or losses from marking to market even though its positions have not been
sold or terminated and affect the character as long-term or short-term (or, in
the case of certain currency forwards, options and futures (tax-sensitive funds
only), as ordinary income or loss) and timing of some capital gains and losses
realized by a fund. Additionally, a 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 to satisfy the distribution
requirements referred to above even though no corresponding cash amounts may
concurrently be received, possibly requiring the disposition of portfolio
securities or borrowing to obtain the necessary cash. Also, certain losses of a
fund on its transactions involving options, futures or forward contracts and/or
offsetting or successor portfolio 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 a 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 a
fund's distributions to shareholders. The funds will take into account the
special tax rules applicable to options, futures, forward contracts and
constructive sales in order to minimize any potential adverse tax consequences.
The federal income tax rules applicable to dollar rolls, certain
structured or hybrid securities, interest rate swaps or currency swaps
(tax-sensitive funds only), and interest rate caps, floors and collars are
unclear in certain respects, and the funds will account for these instruments in
a manner that is intended to allow them to continue to qualify as regulated
investment companies.
If either tax-sensitive 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
received by the fund is timely distributed to its shareholders. The
tax-sensitive funds would not be able to pass through to their shareholders any
credit or deduction for such a tax. An election may generally be available that
would ameliorate these adverse tax consequences, but any such election could
require the electing 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 tax-sensitive funds may limit and/or manage their stock
holdings in passive foreign investment companies to minimize their tax liability
or maximize their return from these investments.
Foreign exchange gains and losses realized by the tax-sensitive funds in
connection with certain transactions involving foreign currency-denominated debt
securities, if any, 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 distributions to
shareholders. Any such transactions that are not directly related to a fund's
investment in stock or securities, possibly including speculative currency
positions or currency derivatives not used for hedging purposes, could under
future Treasury regulations produce income not among the types of "qualifying
income" from which each fund must derive at least 90% of its gross income for
each taxable year.
The tax-sensitive funds may be subject to withholding and other taxes
imposed by foreign countries with respect to their investments in foreign
securities. Tax conventions between certain countries and the U.S. may reduce or
eliminate such taxes in some cases. Investors would be entitled to claim U.S.
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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 Equity Fund's or Small Cap
Fund's respective total assets at the close of any taxable year were to consist
of stock or securities of foreign corporations and the applicable fund were to
file an election with the Internal Revenue Service. Because the tax-sensitive
funds generally do not expect to meet this 50% requirement, investors generally
will not directly take into account the foreign taxes, if any, paid by the
tax-sensitive funds, and will generally not be entitled to any related tax
deductions or credits. Such taxes will reduce the amounts the tax-sensitive
funds would otherwise have available to distribute.
Distributions from a fund's current or accumulated earnings and profits
("E&P"), as computed for Federal income tax purposes, will be treated under the
Code as ordinary income (if they are from the fund's investment company taxable
income), capital gain (if they are from the fund's net capital gain and are
designated as "capital gain dividends"), or tax-exempt interest (if they are
from a tax-exempt fund's net tax-exempt interest and are designated as
"exempt-interest dividends"), whether taken in shares or in cash. Amounts that
are not allowable as a deduction in computing taxable income, including expenses
associated with earning tax-exempt interest income, do not reduce current E&P
for this purpose. Distributions, if any, in excess of E&P will constitute a
return of capital, which will first reduce an investor's tax basis in fund
shares and thereafter (after such basis is reduced to zero) will generally give
rise to capital gains. Shareholders electing to receive distributions in the
form of additional shares will have a cost basis for federal income tax purposes
in each share so received equal to the amount of cash they would have received
had they elected to receive the distributions in cash, divided by the number of
shares received. As a result of the enactment of the Taxpayer Relief Act of 1997
(the "1997 TRA") on August 5, 1997, gain from the sale of a capital asset is
taxable to individual (noncorporate) investors at different maximum federal
income tax rates, depending generally upon the tax holding period for the asset,
the federal income tax bracket of the taxpayer, and the dates the asset was
acquired and/or sold. Each fund intends to pass through to its shareholders the
benefits of the capital gains tax rates enacted in the 1997 TRA. Each fund will
provide appropriate information to its shareholders about the tax rate(s)
applicable to its distributions from its long-term capital gains. Shareholders
should consult their own tax advisers on the correct application of these new
rules in their particular circumstances.
For purposes of the dividends received deduction available to
corporations, dividends, if any, received by the tax-sensitive funds from U.S.
domestic corporations in respect of the stock of such corporations held by the
tax-sensitive funds, for U.S. Federal income tax purposes, for at least a
minimum holding period, generally 46 days, extending before and after each
dividend, and distributed and designated by the tax-sensitive funds may be
treated as qualifying dividends. Distributions by the tax exempt funds will not
qualify for the dividends received deduction. Corporate shareholders must meet
the minimum holding period requirement referred to above with respect to their
shares of the tax-sensitive funds in order to qualify for the deduction and, if
they borrow to acquire or otherwise incur debt attributable to such shares, may
be denied a portion of the dividends received deduction. The entire qualifying
dividend, including the otherwise deductible amount, will be included in
determining the excess (if any) of a corporate shareholder's adjusted current
earnings over its alternative minimum taxable income, which may increase its
alternative minimum tax liability. Additionally, any corporate shareholder
should consult its tax adviser regarding the possibility that its basis in its
shares may be reduced, for Federal income tax purposes, by reason of
"extraordinary dividends" received with respect to the shares and, to the extent
such basis would be reduced below zero, current recognition of income would be
required.
Taxable distributions by the tax exempt funds include distributions
attributable to income or gains from the tax exempt funds' taxable investments
or transactions, including (i) gains from the sale of portfolio securities or
the right to when-issued securities prior to issuance or from options or futures
transactions and (ii) income attributable to repurchase agreements, securities
lending, recognized market discount, interest rate swaps, caps, floors or
collars, and a portion of the discount from certain stripped tax-exempt
obligations or their coupons.
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Distributions by a tax exempt fund of tax-exempt interest
("exempt-interest dividends") timely designated as such by the fund will be
treated as tax-exempt interest under the Code, provided that the fund qualifies
as a regulated investment company and at least 50% of the value of its assets at
the end of each quarter of its taxable year is invested in obligations the
interest on which is excluded from gross income under Section 103(a) of the
Code. Shareholders are required to report their receipt of tax-exempt interest,
including such distributions, on their federal income tax returns. The portion
of a tax exempt fund's distributions designated as exempt-interest dividends may
differ from the actual percentage that its tax-exempt income comprises of its
total income during the period of any particular shareholder's investment. The
tax exempt funds will report to shareholders the amount designated as
exempt-interest dividends for each year.
Interest income from certain types of tax-exempt obligations that are
private activity bonds in which the tax exempt funds may invest is treated as an
item of tax preference for purposes of the federal alternative minimum tax. To
the extent that a tax exempt fund invests in these types of tax-exempt
obligations, shareholders will be required to treat as an item of tax preference
for federal alternative minimum tax purposes (both individual and corporate)
that part of the fund's exempt-interest dividends which is derived from interest
on these tax-exempt obligations. All exempt-interest dividends, whether or not
attributable to private activity bonds, may also increase the alternative
minimum tax liability, if any, of corporate shareholders of the tax exempt
funds.
Shareholders receiving social security benefits and certain railroad
retirement benefits may be subject to federal income tax on a portion of such
benefits as a result of receiving investment income, including tax-exempt income
(such as exempt-interest dividends) and other dividends paid by the tax exempt
funds. Shares of the tax exempt funds may not be an appropriate investment for
persons who are "substantial users" of facilities financed by industrial
development or private activity bonds, or persons related to "substantial
users." Consult your tax adviser if you think this may apply to you.
If a tax exempt fund invests in zero coupon securities, certain increasing
rate or deferred interest securities or, in general, other securities with
original issue discount, 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 taxable and
tax-exempt income, including such accrued income, to shareholders to qualify as
a regulated investment company under the Code and avoid federal income and
excise taxes. Therefore, a tax exempt 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 satisfy distribution requirements. The
tax-sensitive funds would be subject to the same tax rules but do not expect to
acquire such investments.
The tax exempt funds purchase tax-exempt obligations which are generally
accompanied by an opinion of bond counsel to the effect that interest on such
securities is not included in gross income for federal income tax purposes and,
with respect to the obligations of Massachusetts issuers acquired by the
Massachusetts Tax Exempt Fund, Massachusetts state income taxes. It is not
economically feasible to, and the tax exempt funds therefore do not, make any
independent inquiry into whether such securities are in fact tax-exempt. Bond
counsels' opinions will generally be based in part upon covenants by the issuers
and related parties regarding continuing compliance with federal tax
requirements. Tax laws enacted principally during the 1980s not only had the
effect of limiting the purposes for which tax-exempt bonds could be issued and
reducing the supply of such bonds, but also increased the number and complexity
of requirements that must be satisfied on a continuing basis in order for bonds
to be and remain tax-exempt. If the issuer of a bond or a user of a
bond-financed facility fails to comply with such requirements at any time,
interest on the bond could become taxable, retroactive to the date the
obligation was issued. In that event, a portion of the tax exempt fund's or
Massachusetts Tax Exempt Fund's distributions attributable to interest the fund
received on such bond for the current year and for prior years could be
characterized or recharacterized as taxable income.
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The tax exempt funds may purchase municipal obligations together with the
right to resell the securities to the seller at an agreed upon price or yield
within a specified period prior to the maturity date of the securities. Such a
right to resell is commonly known as a "put" and is also referred to as a
"standby commitment." The tax exempt funds may pay for a standby commitment
either separately, in cash, or in the form of a higher price for the securities
which are acquired subject to the standby commitment, thus increasing the cost
of securities and reducing the yield otherwise available. Additionally, the tax
exempt funds may purchase beneficial interests in municipal obligations held by
trusts, custodial arrangements or partnerships and/or combined with third-party
puts or other types of features such as interest rate swaps; those investments
may require the tax exempt funds to pay "tender fees" or other fees for the
various features provided.
The Internal Revenue Service (the "IRS") has issued a revenue ruling to
the effect that, under specified circumstances, a registered investment company
will be the owner of tax-exempt municipal obligations acquired subject to a put
option. The IRS has also issued private letter rulings to certain taxpayers
(which do not serve as precedent for other taxpayers) to the effect that
tax-exempt interest received by a regulated investment company with respect to
such obligations will be tax-exempt in the hands of the company and may be
distributed to its shareholders as exempt-interest dividends. The IRS has
subsequently announced that it will not ordinarily issue advance ruling letters
as to the identity of a true owner of property in cases involving the sale of
securities or participation interests therein if the purchaser has the right to
cause the security, or the participation interest therein, to be purchased by
either the seller or a third party. Each tax exempt fund intends to take the
position that it is the owner of any municipal obligations acquired subject to a
standby commitment or other third party put and that tax-exempt interest earned
with respect to such municipal obligations will be tax-exempt in its hands.
There is no assurance that the IRS will agree with such position in any
particular case. Additionally, the federal income tax treatment of certain other
aspects of these investments, including the treatment of tender fees paid by the
tax exempt funds, in relation to various regulated investment company tax
provisions is unclear. However the adviser intends to manage each tax exempt
fund's portfolio in a manner designed to minimize any adverse impact from the
tax rules applicable to these investments.
Interest on indebtedness incurred by a shareholder to purchase or carry
shares of a tax exempt fund will not be deductible for federal income tax
purposes to the extent it is deemed related to exempt-interest dividends paid by
the fund. Pursuant to published guidelines, the IRS may deem indebtedness to
have been incurred for the purpose of purchasing or carrying shares of the tax
exempt funds even though the borrowed funds may not be directly traceable to the
purchase of shares.
At the time of an investor's purchase of fund shares, a portion of the
purchase price may be attributable to undistributed net investment income
(except in the case of the tax exempt funds) and/or realized or unrealized
appreciation in a 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.
The funds may consider the use of equalization accounting for any taxable
year if it would further the goal of reducing taxable distributions to
shareholders for such year. Under equalization accounting, a fund's earnings and
profits are allocated in part to redemption proceeds paid by the fund; although
a redeeming shareholder's tax treatment would not be affected by such an
allocation, in certain circumstances the amounts of realized net income and/or
net capital gains the fund is required to distribute may be reduced through the
use of equalization accounting. Hence, if a fund determines that it will use
equalization accounting for a particular year, the amount, timing and character
of its distributions for that year may be affected. The funds would consider
using equalization accounting for a particular year only if they determine that
such use is consistent with their tax objectives and would produce a benefit for
such year that outweighs any additional tax or accounting complexities or costs.
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Upon a redemption or other disposition of shares of the funds 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 be treated as capital gain or loss if the shares are capital assets in
the shareholder's hands. Any loss realized on a redemption may be disallowed to
the extent the shares disposed of are replaced with other shares of the same
fund within a period of 61 days beginning 30 days before and ending 30 days
after the shares are disposed of, such as pursuant to automatic dividend
reinvestments. In such a case, the basis of the shares acquired will be adjusted
to reflect the disallowed loss. Any loss realized upon the redemption of shares
with a tax holding period of six months or less will, with respect to the tax
exempt funds, be disallowed to the extent of all exempt-interest dividends paid
with respect to such shares and, with respect to any fund, the allowable loss on
such a redemption will be treated as a long-term capital loss to the extent of
any amounts treated as distributions of long-term capital gain with respect to
such shares. Shareholders should consult their own tax advisers regarding their
particular circumstances to determine whether a disposition of fund shares is
properly treated as a sale for tax purposes, as is assumed in the foregoing
discussion. Also, future Treasury Department regulations, announcements or other
guidance issued to implement the 1997 TRA may contain rules for determining
different tax rates applicable to sales of fund shares held for more than one
year, more than 18 months, and (for certain sales after the year 2000 or the
year 2005) more than five years. These regulations may also modify some of the
provisions described above.
A state income (and possibly local income and/or intangible property) tax
exemption is generally available to the extent, if any, that a fund's
distributions are derived from interest on (or, in the case of intangible
property taxes, the value of its assets is attributable to) certain U.S.
Government obligations and/or tax-exempt municipal obligations issued by or on
behalf of the particular state in which the shareholder is subject to tax or a
political subdivision thereof, provided in some states that certain thresholds
for holdings of such obligations and/or reporting requirements are satisfied.
Individuals and certain other classes of shareholders may be subject to
31% backup withholding of federal income tax on dividends (other than
exempt-interest dividends), capital gain distributions, and the proceeds of
redemptions or repurchases of shares, if they fail to furnish the funds with
their correct taxpayer identification number and certain certifications or if
they are otherwise subject to backup withholding.
Federal law requires that taxable distributions and proceeds of
redemptions and exchanges be reported to the IRS and that 31% be withheld if you
fail to provide your correct Taxpayer Identification Number ("TIN") and the
TIN-related certifications contained in the Account Purchase Application
("Application") or you are otherwise subject to backup withholding. A fund will
not impose backup withholding as a result of your failure to make any
certification, except the certifications in the Application that directly relate
to your TIN and backup withholding status. Amounts withheld and forwarded to the
IRS can be credited as a payment of tax when completing your federal income tax
return.
For most individual taxpayers, the TIN is the social security number.
Special rules apply for certain accounts. For example, for an account
established under the Uniform Gift to Minors Act, the TIN of the minor should be
furnished. If you do not have a TIN, you may apply for one using forms available
at local offices of the Social Security Administration or the IRS, and you
should write "Applied For" in the space for a TIN on the Application.
Recipients exempt from backup withholding, including corporations and
certain other entities, should provide their TIN and underline "exempt" in
section 2(a) of the TIN section of the Application to avoid possible erroneous
withholding.
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
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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. Shareholders should consult their
own tax advisers as to the Federal, state or local tax consequences of ownership
of shares of, and receipt of distributions from, the funds in their particular
circumstances.
Non-U.S. investors not engaged in a U.S. trade or business with which
their investment in the funds 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 funds and, unless an effective IRS Form W-8, Form W-8BEN, or
other authorized form is on file, to 31% backup withholding on certain
distributions from the funds. Non-U.S. investors should consult their tax
advisers regarding such treatment and the application of foreign taxes to an
investment in the funds.
Massachusetts Income Taxation of Distributions from the Massachusetts Tax Exempt
Fund
To the extent that the Massachusetts Tax Exempt Fund's exempt-interest
dividends are derived from interest on Massachusetts Municipal Securities and
are properly designated as such, these distributions will also be exempt from
Massachusetts personal income tax. For Massachusetts personal income tax
purposes, dividends from the fund's taxable net investment income (if any),
federally tax-exempt income from obligations not described in the preceding
sentence, and net short-term capital gains, if any, will generally be taxable as
ordinary income, whether received in cash or additional shares. However, any
dividends that are properly designated as attributable to interest the fund
receives on direct U.S. Government obligations will not be subject to
Massachusetts personal income tax.
For Massachusetts personal income tax purposes, long-term capital gains
are generally taxed at a maximum rate of 5%, with the applicable tax rate
decreasing in a prescribed manner as the tax holding period of the capital asset
increases. The applicable statutory provision does not address the determination
of the tax rates applicable to a mutual fund's capital gain distributions. The
Massachusetts Department of Revenue (the "DOR") has proposed regulations
pursuant to which capital gain distributions would be taxed at the maximum 5%
rate unless a mutual fund reports to the DOR and the shareholder within a
prescribed time period the portions of the distributions attributable to gains
in each separate holding period category, in which case each such portion would
be taxed at the rate applicable to the appropriate holding period category. The
Massachusetts Tax Exempt Fund intends to provide information regarding its
distributions in accordance with applicable laws.
A portion of such a capital gain distribution will be exempt from
Massachusetts personal income tax if it is properly designated as attributable
to gains realized on the sale of certain tax-exempt bonds issued pursuant to
Massachusetts statutes that specifically exempt such gains from Massachusetts
taxation. These bonds are relatively few in number. Dividends from net
investment income (including exempt-interest dividends) and from net long-term
and short-term capital gains will be subject to, and shares of the fund will be
included in the net worth of intangible property corporations for purposes of,
the Massachusetts corporation excise tax if received by a corporation subject to
such tax.
Each fund is not subject to Massachusetts corporate excise or franchise
taxes. Provided that each fund qualifies as a regulated investment company, it
will also not be required to pay any Massachusetts income tax.
THE FUNDS AND THEIR SHARES
Each fund is an investment series of Standish, Ayer & Wood Investment
Trust, an unincorporated business trust organized under the laws of The
Commonwealth of Massachusetts pursuant to an
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Agreement and Declaration of Trust dated August 13, 1986, as amended from time
to time (the "Declaration"). Under the Declaration, the Trustees have authority
to issue an unlimited number of shares of beneficial interest, par value $.01
per share, of the funds. Each share of a fund represents an equal proportionate
interest in the fund with each other share and is entitled to such dividends and
distributions as are declared by the Trustees. Shareholders are not entitled to
any preemptive, conversion or subscription rights. All shares, when issued, will
be fully paid and non-assessable by the Trust. Upon any liquidation of a fund,
shareholders 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. Pursuant to the Declaration, the Board may establish and issue multiple
classes of shares for each series of the Trust. As of the date of this Statement
of Additional Information, the Trustees do not have any plan to establish
multiple classes of shares for the funds.
All fund shares have equal rights with regard to voting, and shareholders
of a fund have the right to vote as a separate class with respect to matters as
to which their interests are not identical to those of shareholders of other
classes of the Trust, including the approval of an investment advisory contract
and any change of investment policy requiring the approval of shareholders.
Pursuant to the Declaration of Trust and subject to shareholder approval
(if then required), the Trustees may authorize each fund to invest all or part
of its investable assets in a single open-end investment company that has
substantially the same investment objectives, policies and restrictions as the
fund. As of the date of this Statement of Additional Information, the Board does
not have any plan to authorize any fund to so invest its assets.
Under Massachusetts law, shareholders of the Trust could, under certain
circumstances, be held liable for the obligations of the Trust. However, the
Declaration 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 her liability as a shareholder of the Trust is limited to
circumstances in which both inadequate insurance existed and 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.
ADDITIONAL INFORMATION
The funds' prospectus and this SAI omit certain information contained in
the Trust's registration statement filed with the SEC, which may be obtained
from the SEC's principal office at 450 Fifth Street, N.W., Washington, D.C.
20549, upon payment of the fee prescribed by the rules and regulations
promulgated by the SEC.
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EXPERTS AND FINANCIAL STATEMENTS
Each fund's financial statements contained in the 1999 annual reports of
the funds have been audited by PricewaterhouseCoopers, L.P., independent
accountants. PricewaterhouseCoopers, L.P., independent accountants, will audit
each fund's financial statements for the current fiscal year ending September
30, 2000.
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APPENDIX A
Special Considerations Relating to Massachusetts Municipal Securities.
The Massachusetts Tax Exempt Fund is non-diversified and invests primarily
in securities issued by The Commonwealth of Massachusetts (the "Commonwealth"),
its political subdivisions, including cities and towns, and its public
authorities. Therefore, the financial condition of the Commonwealth, its public
authorities and local governments could affect the market values and
marketability of, and therefore the net asset value per share and the interest
income of, the Massachusetts Tax Exempt Fund, or result in the default of
existing obligations, including obligations which may be held by the fund. The
following section provides only a brief summary of the complex factors affecting
the financial condition of Massachusetts, and is based on information obtained
from the Commonwealth, as publicly available on the date of this SAI. The
information contained in such publicly available documents has not been
independently verified. It should be noted that the creditworthiness of
obligations issued by local issuers may be unrelated to the creditworthiness of
the Commonwealth, and that there is no obligation on the part of the
Commonwealth to make payment on such local obligations in the event of default
in the absence of a specific guarantee or pledge provided by the Commonwealth.
Economic Factors Summary. Annual budgeted revenues increased by
approximately 7.1% in fiscal 1993. Annual budgeted revenues increased from
fiscal 1993 to fiscal 1994 by approximately 5.7%, by approximately 5.4% in
fiscal 1995, and by approximately 5.7% in fiscal 1996, by approximately 4.9% in
fiscal 1997 and by approximately 8.9% in fiscal 1998. Annual budgeted
expenditures increased by approximately 9.5% in fiscal 1993, increased by
approximately 5.6% in fiscal 1994, increased by approximately 4.7% in fiscal
1995, increased by approximately 4.0% in fiscal 1996, increased by approximately
6.3% in fiscal 1997 and increased by approximately 5.8% in fiscal 1998. Fiscal
1993 ended with positive fund balances of $549.4 million, including $309.5
million in the Stabilization Fund. Fiscal 1994 ended with fund balances of
$589.3 million, including $382.9 million in the Stabilization Fund. Fiscal 1995
ended with fund balances of $726 million, including $425.4 million in the
Stabilization Fund. Fiscal 1996 ended with fund balances of approximately
$1.152.5 million, including $543.3 million in the Stabilization Fund. Fiscal
1997 ended with fund balances of approximately $1.394 million, including $799.3
million in the Stabilization Fund. Fiscal 1998 ended with fund balances of
approximately $2.192 million, including $1.159 million in the Stabilization
Fund.
1994 Fiscal Year. The budgeted operating funds of the Commonwealth ended
fiscal 1994 with a surplus of revenues and other sources over expenditures and
other uses of $26.8 million and aggregate ending fund balances in the budgeted
operating funds of the Commonwealth of approximately $589.3 million. Budgeted
revenues and other sources for fiscal 1994 totaled approximately $15.550
billion, including tax revenues of $10.607 billion, $87 million below the
Department of Revenue's fiscal 1994 tax revenue estimate of $10.694 billion.
Total revenues and other sources increased by approximately 5.7% from fiscal
1993 to fiscal 1994 while tax revenues increased by 6.8% for the same period.
Commonwealth budgeted expenditures and other uses in fiscal 1994 totaled $15.523
billion, which is $826.5 million or approximately 5.6% higher than fiscal 1993
budgeted expenditures and other uses.
1995 Fiscal Year. Fiscal 1995 tax revenue collections were approximately
$11.163 billion, approximately $12 million above the Department of Revenue's
revised fiscal year 1995 tax revenue estimate of $11.151 billion, approximately
$556 million, or 5.2%, above fiscal 1994 tax revenues of $10.607 billion.
Budgeted revenues and other sources, including non-tax revenues, collected in
fiscal 1995 were approximately $16.387 billion, approximately $837 million, or
5.4%, above fiscal 1994 budgeted revenues of $15.550 billion. Budgeted
expenditures and other uses of funds in fiscal 1995 were approximately $16.251
billion, approximately $728 million , or 4.7%, above fiscal 1994 budgeted
expenditures and uses of $15.523 billion. The Commonwealth ended fiscal 1995
with an operating gain of $137 million and an ending fund balance of $726
million.
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1996 Fiscal Year. Budgeted operating funds of the Commonwealth ended
fiscal 1996 with a surplus of revenues and other sources over expenditures and
other uses of $446.4 million, resulting in aggregate ending fund balances in the
budgeted operating funds of the Commonwealth of approximately $1.172 billion.
Budgeted revenues and other sources for fiscal 1996 totaled approximately
$17.328 billion, including tax revenues of approximately $12.049 billion.
Budgeted revenues and other sources increased by approximately 5.7% from fiscal
1995 to fiscal 1996, while tax revenues increased by approximately 7.9% for the
same period. Income tax withholding payments increased by approximately 8.0%
from fiscal 1995, and total income tax collections by approximately 12.3%. (The
Department of Revenue believes that the strong tax revenue growth in fiscal 1996
was due partly to one-time factors that may not recur in fiscal 1997. These
include the rise in the stock and bond markets in calendar 1995, which may have
created unusually large capital gains and thus increases in personal income tax
payments in fiscal 1996. These factors have been incorporated into the
Department's forecast for fiscal 1997 tax revenues.) Budgeted expenditures and
other uses in fiscal 1996 totaled approximately $16.881 billion, an increase of
approximately $630.6 million, or 3.9%, over fiscal 1995.
The fiscal 1996 year-end transfer to the Stabilization Fund amounted to
approximately $177.4 million, bringing the Stabilization Fund balance to
approximately $625.0 million, which exceeded the amount that can remain in the
Stabilization Fund by law, $543.3 million. Under state finance law, year-end
surplus amounts (as defined in the law) in excess of the amount that can remain
in the Stabilization Fund are transferred to the Tax Reduction Fund, to be
applied, subject to legislative appropriation, to the reduction of personal
income taxes. The balance in the Tax Reduction Fund, as reflected in the 1996
Comptroller's Audited Financial Report, is approximately $231.7 million.
Legislation approved by the Governor on July 30, 1996 appropriated $150 million
from the Tax Reduction Fund for personal income tax reductions in fiscal 1997,
to be implemented by a temporary increase in the amount of the personal
exemption allowable for the 1996 taxable year. On January 23, 1997, the Governor
filed legislation to appropriate the remaining balance of approximately $85
million (including interest earnings) in the Tax Reduction Fund for an
additional temporary personal exemption increase during the 1997 taxable year.
1997 Fiscal Year. On October 31, 1997, the Comptroller released the
Commonwealth's statutory basis financial report for fiscal 1997. The report
indicates that fiscal 1997 tax collections totaled approximately $12.864
billion, an increase of approximately $815 million, or 6.8%, over fiscal 1996
and approximately $357 million higher than the most recent official estimates
released by the Secretary of Administration and Finance on May 20, 1997. Total
fiscal 1997 budgeted revenues amounted to approximately $18.170 billion. Total
fiscal 1997 budgeted expenditures were approximately $17.949 billion.
On August 29, 1997, Governor Cellucci signed the final fiscal 1997
supplemental appropriation bill. The legislation provided for approximately
$195.0 million in additional fiscal 1997 appropriations, of which $63.7 million
were carried forward into fiscal 1998, and continued $44.6 million in prior
appropriations. The legislation also provided for several one-time transfers of
funds to be charged to fiscal 1997. The legislation established a Capital
Investment Trust Fund to be administered by the Secretary of Administration and
Finance and provided for the transfer of $229.8 million to such fund to finance
certain specified expenditures for equipment purchases, deferred maintenance and
repairs, technology upgrades and capital purchases and improvements. The
spending authorization will expire at the end of fiscal 1999, and any unexpended
balances in the fund will be transferred at that time to the Commonwealth
Stabilization Fund. The legislation directed the transfer of $100 million to the
Stabilization Fund (in addition to the transfer required by the general
provisions of the state finance law) and the transfer of $128 million to a
Caseload Increase Mitigation Fund which had been established in the fiscal 1998
budget. Moneys in the Caseload Increase Mitigation Fund are available to fund
expenditures under programs administered by the Department of Transitional
Assistance in the event caseloads increase beyond the level contemplated by
regular budgetary appropriations or the average level of the prior fiscal year,
or to accommodate changes in federal funding of such programs. The amount
transferred from fiscal 1997 revenues reflects the unanticipated federal revenue
increase received by the Commonwealth attributable to
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federal welfare reform legislation. The legislation also provided for the
transfer of $20.2 million to the Massachusetts Water Pollution Abatement Trust
for state capitalization grants for the state revolving fund programs under the
federal Clean Water Act and Safe Drinking Water Act.
1998 Fiscal Year. On October 30, 1998, the Comptroller released the
Commonwealth's statutory basis financial report for fiscal 1998. The report
indicates that fiscal 1998 tax collections totaled approximately $14.026
billion, an increase of approximately $1.16 billion or 9% over fiscal 1997.
Total fiscal 1998 budgeted revenues amounted to approximately $19.8 billion. The
1998 ending fiscal balance of $2.192 billion is composed of $286.3 million
reserved for continuing appropriations debt service, $1.159 billion reserved in
the Stablization Fund, $367.6 million reserved for tax reductions, and $378.5
billion as undesignated surplus available for appropriation in fiscal 1999.
State finance law was amended during fiscal 1998 to increase the maximum balance
that may accumulate in the Stablization Fund to an amount not to exceed 7.5% of
budgeted revenues and other sources. State finance law then directs that any
amount in excess of the cap be transferred to the Tax Reduction Fund. For fiscal
1998, this "ceiling" was $1.484 billion, so the actual balance in the
Stablization Fund of $1.160 billion was under the cap.
1999 Fiscal Year. The budget for fiscal 1999 was enacted by the
Legislature on June 30, 1998 and approved by Governor Cellucci on June 30, 1998.
The budget is based on total budgeted revenues of approximately $19.514 billion,
or a decrease in budgeted revenues from fiscal 1998 of approximately 1.4%.
Fiscal year 1999 is projected to end with a cash balance of $957.9 million.
Cash Flow. Fiscal 1999 is projected to end with a cash balance of $957.9
million without regard to any fiscal 1998 activity that may occur after June 30,
1998. The cash flow statement notes that general obligation bonds were issued
for capital projects in September, 1998 in the amount of $500 million.
Approximately $250.0 million of these proceeds are for fiscal year 1998
expenditures. Anticipated to be issued for the remainder of the fiscal year are
bonds for $250.0 million in December 1998, March 1999 and June 1999. Neither the
issuance of transit notes nor commercial paper for operating purposes is
forecast.
Pursuant to legislation enacted in August 1995 and March 1997, the
Massachusetts Turnpike Authority (MTA) and the Massachusetts Port Authority
(MassPort) (MTA and MassPort collectively, the "authorities") are obligated to
make payments to the Commonwealth of no less than $700.0 million and $200.0
million, respectively, for use in meeting transportation related obligations.
The Commonwealth is expected to receive $597.0 million from the authorities in
December 1998. In addition, the Executive Office for Administration and Finance
anticipates the need for the Commonwealth to issue bond anticipation notes
(BANs) during fiscal year 1999 in anticipation of payments from the MTA and
MassPort totaling approximately $306.0 million. The terms of contractual
agreements between the Commonwealth and the authorities regarding the timing of
these future payments have been agreed upon and are contained in the memorandum
of understanding. If such payments are not ultimately received in amounts
sufficient to pay these BANs, the Commonwealth has authority to issue bonds for
that purpose. Additionally, legislation enacted in May 1997 authorizes the
Commonwealth to issue grant anticipation notes (GANs) to finance a portion of
the cash requirements of the Central Artery/Tunnell project, consistent with the
current "Central Artery/Tunnell Finance Plan" prepared by the Massachusetts
Highway Department and the joint feasibility study released December 5, 1996.
The current project financing plan anticipates the issuance of approximately
$315.0 million of GANs during fiscal year 1999 in anticipation of future federal
highway grants.
Revenues. In order to fund its programs and services, the Commonwealth
collects a variety of taxes and receives revenues from other non-tax sources,
including the federal government and various fees, fines, court revenues,
assessments, reimbursements, interest earnings and transfers from its
non-budgeted funds. In fiscal 1998, approximately 71% of the Commonwealth's
annual revenues were derived from state taxes. In addition, the federal
government provided approximately 17% of annual revenues, with the remaining 12%
coming from departmental revenues and transfers from non-budgeted funds.
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The major components of state taxes are the income tax, which accounts for
59% of total projected tax revenues in fiscal 1998, the sales and use tax, which
accounted for 21%, and the business corporation tax, which accounted for
approximately 7%. Other tax and excise sources account for the remaining 13% of
total fiscal 1996 tax revenues.
Income Tax. The Commonwealth assesses personal income taxes at flat rates,
according to classes of income, after specified deductions and exemptions. A
rate of 5.95% is applied to income from employment, professions, trades,
businesses, partnerships, rents, royalties, taxable pensions and annuities and
interest from Massachusetts banks; and a rate of 12% is applied to other
interest (although interest on obligations of the United States and of the
Commonwealth and its political subdivisions is exempt), dividends; and a rate
ranging from 12% on capital gains from the sale of assets held for one year and
less to 0% on capital gains from the sale of certain assets held more than six
years. State income tax revenues increased 8.3% from fiscal 1997 to fiscal 1998.
Limitations on Tax Revenues. In Massachusetts efforts to limit and reduce
levels of taxation have been underway for several years. Limits were established
on state tax revenues by legislation enacted on October 25, 1986 and by an
initiative petition approved by the voters on November 4, 1986. The two measures
are inconsistent in several respects.
Chapter 62F, which was added to the General Laws by initiative petition in
November 1986, establishes a state tax revenue growth limit for each fiscal year
equal to the average positive rate of growth in total wages and salaries in the
Commonwealth, as reported by the federal government, during the three calendar
years immediately preceding the end of such fiscal year. Chapter 62F also
requires that allowable state tax revenues be reduced by the aggregate amount
received by local governmental units from any newly authorized or increased
local option taxes or excises. Any excess in state tax revenue collections for a
given fiscal year over the prescribed limit, as determined by the State Auditor,
is to be applied as a credit against the then current personal income tax
liability of all taxpayers in the Commonwealth in proportion to the personal
income tax liability of all taxpayers in the Commonwealth for the immediately
preceding tax year. Unlike Chapter 29, as described below, the initiative
petition did not exclude principal and interest payments on Commonwealth debt
obligations from the scope of its tax limit. However, the preamble contained in
Chapter 62F provides that "although not specifically required by anything
contained in this chapter, it is assumed that from allowable state tax revenues
as defined herein the Commonwealth will give priority attention to the funding
of state financial assistance to local governmental units, obligations under the
state governmental pension systems, and payment of principal and interest on
debt and other obligations of the Commonwealth."
The legislation enacted in October 1986, which added Chapter 29B to the
General Laws, also establishes an allowable state revenue growth factor by
reference to total wages and salaries in the Commonwealth. However, rather than
utilizing a three-year average wage and salary growth rate, as used by Chapter
62F, Chapter 29B utilizes an allowable state revenue growth factor equal to
one-third of the positive percentage gain in Massachusetts wages and salaries,
as reported by the federal government, during the three calendar years
immediately preceding the end of a given fiscal year. Additionally, unlike
Chapter 62F, Chapter 29B allows for an increase in maximum state tax revenue to
fund an increase in local aid and excludes from its definition of state tax
revenues (i) income derived from local option taxes and excises, and (ii)
revenues needed to fund debt service costs.
Commonwealth Programs and Services. Fiscal 1994 budgeted expenditures were
$15.533 billion, an increase of 5.7% from fiscal 1993. Fiscal 1995 budgeted
expenditures were $16.259 billion, an increase of 4.7% from fiscal 1994. Fiscal
1996 budgeted expenditures were $16.896 billion, an increase of 4.0% from fiscal
1995. Fiscal 1997 budgeted expenditures were $17.949 billion, an increase of 6%
from fiscal 1996. Fiscal 1998 budgeted expenditures were $19.002 billion, an
increase of 6% over fiscal 1997 levels.
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Local Aid. In November 1980, voters in the Commonwealth approved a
statewide tax limitation initiative petition, commonly known as Proposition 2
1/2, to constrain levels of property taxation and to limit the charges and fees
imposed on cities and towns by certain governmental entities, including county
governments. Proposition 2 1/2, is not a provision of the state constitution and
accordingly is subject to amendment or repeal by the Legislature. Proposition 2
1/2, as amended to date, limits the property taxes that may be levied by any
city or town in any fiscal year to the lesser of (i) 2.5% of the full and fair
cash valuation of the real estate and personal property therein, and (ii) 2.5%
over the previous year's levy limit plus any growth in the tax base from certain
new construction and parcel subdivisions. Proposition 2 1/2 also limits any
increase in the charges and fees assessed by certain governmental entities,
including county governments, on cities and towns to the sum of (1) 2.5% of the
total charges and fees imposed in the preceding fiscal year, and (ii) any
increase in charges for services customarily provided locally or services
obtained by the city or town at its option. The law contains certain override
provisions and, in addition, permits debt service on specific bonds and notes
and expenditures for identified capital project to be excluded from the limits
by a majority vote at a general or special election. At the time Proposition 2
1/2 was enacted, many cities and towns had property tax levels in excess of the
limit and were therefore required to roll back property taxes with a concurrent
loss of revenues. Between fiscal 1981 and fiscal 1996, the aggregate property
tax levy grew from $3.347 billion to $5.924 billion, representing an increase of
approximately 77%. By contrast according to federal Bureau of Labor Statistics,
the consumer price index for all urban consumers in Boston grew during the same
period by approximately 92%.
Commonwealth Financial Support for Local Governments. During the 1980's,
the Commonwealth increased payments to its cities, towns and regional school
districts ("Local Aid") to mitigate the impact of Proposition 2 1/2 on local
programs and services. In fiscal 1997, approximately 20% of the Commonwealth's
budget was allocated to Local Aid. Local Aid payments to cities, towns and
regional school districts take the form of both direct and indirect assistance.
Direct Local Aid increased to 2.547 billion in fiscal 1993, and to $2.727
billion in fiscal 1994. Fiscal 1995 expenditures for direct Local Aid were 2.976
billion, which was an increase of approximately 9.1% above the fiscal 1994
level. Fiscal 1996 expenditures for direct Local Aid were $3.246 billion, which
was an increase of approximately 9.1% above the fiscal 1995 level. Fiscal 1997
expenditures for direct Local Aid were $3.558 billion, an increase of
approximately 9.0% above fiscal 1996. Fiscal 1998 expenditures for direct Local
Aid were $3.949 million, an increase of approximately 10% above fiscal 1997.
Debt Service. The growth of capital expenditures during the 1980's
accounts for the significant rise in annual debt service expenditures since
fiscal 1989. Debt service payments on general obligation bonds and notes in
fiscal 1992 were $898.3 million, representing a 47% decrease from fiscal 1991,
which resulted from a $261.0 million one-time reduction achieved through the
issuance of refunding bonds in September and October 1991. Debt service
expenditures for fiscal 1993, fiscal 1994, fiscal 1995, fiscal, fiscal 1997 and
fiscal 1998 were $1.14 billion, $1.155 billion, $1.230 billion and $1.183
billion, $1.276 billion and $1.213 billion respectively. The amounts noted
represent debt service payments on Commonwealth debt (including the Fiscal
Recovery Bonds and the Special Obligation Bonds) but do not include debt service
on notes issued to finance certain Medicaid related liabilities, which were paid
in full from non-budgeted funds, other debt service contract assistance payments
and grants to municipalities under the school building assistance program to
defray a portion of the debt service costs on local school bonds.
In January 1990, legislation was enacted to impose a limit on debt service
in Commonwealth budgets beginning in fiscal 1991. The law, as amended, which is
codified as Section 60B of Chapter 29 of the General Laws, provides that no more
than 10% of the total appropriations in any fiscal year may be expended for
payment of interest and principal on general obligation debt (excluding the
Fiscal Recovery Bonds) of the Commonwealth. This law may be amended or repealed
by the Legislature or may be superseded in the General Appropriation Act for any
year.
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At June 30, 1998, the aggregate outstanding debt for which the
Commonwealth is obligated to provide contract assistance support totaled
approximate$3.485 billion long-term and $400 million short-term. In addition,
the Commonwealth guarantees the debt of certain local governments and public
higher education building authorities. The guaranteed long-term debt outstanding
at June 30, 1998 was approximately $234 million.
At June 30, 1998, the Commonwealth had commitments of approximately $3.2
billion for various construction projects. The majority relate to construction
funding for a major infrastructure project known as the Central Artery/Tunnel
Project. The Central Artery/Tunnel Project continues to anticipate federal
participation and payments from the Massachusetts Turnpike Authority and the
Massachusetts Port Authority.
Obligations of Puerto Rico. Massachusetts Municipal Securities also
include obligations of the governments of Puerto Rico, the Virgin Islands and
Guam to the extent that interest on these obligations is exempt from
Massachusetts state personal income tax. The Massachusetts Tax Exempt Fund will
not invest more than 10% of its net assets in the obligations of each of the
Virgin Islands and Guam, but may invest without limitation in the obligations of
Puerto Rico. Accordingly, the Massachusetts Tax Exempt Fund may be adversely
affected by local political and economic conditions and developments within
Puerto Rico affecting the issuers of such obligations. The economy of Puerto
Rico is dominated by the manufacturing and service sectors. Although the economy
of Puerto Rico expanded significantly from 1984 thorough 1989, the rate of this
expansion slowed in 1990 and remains weak. Although the Puerto Rico unemployment
rate has declined substantially since 1985, the seasonally adjusted rate of
unemployment for February 1995 was approximately 12.3%.
Ratings. Standard & Poor's currently rates the Commonwealth's general
obligation debt and related guaranteed bonds as "AA-." Moody's currently rates
the Commonwealth's general obligation debt as "Aaa." Fitch IBCA International
currently rates the Commonwealth's general obligation debt as "AA-." No
assurance can be given that the rating agencies will not further adjust their
ratings or their outlooks. A ratings change would probably affect the value of
the Commonwealth's general obligations as well as those of other entities which
rely on the Commonwealth for partial or full funding.
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[LOGO] STANDISH FUNDS (R)
Standish Group of
Prospectus Equity Asset Funds
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January 28, 2000 Standish Equity Asset Fund
Standish Small Cap Growth Fund
(Service Class Shares)
The Securities and Exchange Commission has not approved or disapproved these
securities or determined whether this prospectus is accurate or complete. Any
statement to the contrary is a crime.
<PAGE>
Contents
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Risk/Return Summary................................3
Who may want to invest...........................3
Mutual fund risks................................3
Equity Asset Fund................................4
Small Cap Growth Fund............................6
The Funds' Investments and Related Risks...........8
The Investment Adviser............................10
About Standish(R) ..............................10
Fund managers...................................11
Advisory services and fees......................11
[GRAPHIC OMITTED]
Investment and Account Information................12
How to purchase shares..........................12
How to exchange shares..........................13
How to redeem shares............................13
Transaction and account policies................14
Valuation of shares.............................14
Dividends and distributions.....................14
Year 2000 issue.................................14
Fund Details......................................15
Taxes...........................................15
Master/feeder structure.........................15
The funds' service providers....................15
Financial Highlights..............................16
For More Information..............................18
Standish Group of Equity Asset Funds 2
<PAGE>
Risk/Return Summary
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Standish, Ayer & Wood, Inc. manages Standish Equity Asset Fund and Standish
Small Cap Growth Fund. These funds seek long-term growth of capital.
These funds are available only through account administrators that provide
omnibus accounting services for groups of individuals who beneficially own fund
shares. Omnibus accounts include pension and retirement plans as well as taxable
and tax-deferred investing programs that provide personal or account maintenance
services to groups of individuals.
Standish was founded in 1933 and currently manages more than $45 billion of
assets for a broad range of clients in the U.S. and abroad.
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Who may want to invest
The funds may be appropriate for investors:
o Looking to invest over the long term and willing to ride out market
swings.
o Who do not need stable income and are willing to tolerate more risk than
fixed income investments.
o Comfortable with the risks of the stock market.
Descriptions of funds begin on the next page and include more information about
each fund's key investments and strategies, principal risk factors, past
performance and expenses.
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Mutual fund risks
An investment in a fund is not a bank deposit and is not insured or guaranteed
by the Federal Deposit Insurance Corporation or any other government agency.
3 Standish Group of Equity Asset Funds
<PAGE>
Risk/Return Summary
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Equity Asset Fund
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Investment objective
Long-term growth of capital.
Key investments and strategies
The fund invests, under normal circumstances, at least 80% of assets in equity
securities of U.S. companies that appear to be undervalued relative to current
earnings growth. The fund may invest without limit in securities of foreign
companies that are listed or traded in the U.S. but not more than 10% of assets
in other foreign securities. The fund may also invest in equity index futures
contracts based primarily upon the S&P 500 Index.
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How stocks are selected
The adviser employs a value based investment style in managing the fund's
portfolio which means the adviser seeks to identify those companies with stocks
trading at prices below what the adviser believes are their intrinsic values.
The adviser measures value by looking at the stock's price/earnings ratio
relative to its position in the market. The adviser uses the following stock
selection process:
o The adviser uses a quantitative proprietary model to rank a universe of up
to 1500 companies with the most liquid stocks according to these
characteristics: price/earnings ratio; consistency of earnings growth;
near term reported earnings momentum; and actual earnings relative to, and
current trend in, earnings expectations.
o The adviser uses fundamental research and qualitative analysis to select
among the stocks ranked as attractive by the model. The adviser looks for
companies with strong competitive positions, high quality management and
financial strength.
The adviser focuses on individual stock selection instead of trying to predict
which industries or sectors will perform best. The adviser's stock selection
process is designed to produce a diversified portfolio that, relative to the S&P
500 Index, has a below-average price/earnings ratio and an above-average
earnings growth trend.
- --------------------------------------------------------------------------------
Principal risks of investing in the funds
Investors could lose money on their investments in the fund or the fund could
perform less well than other possible investments if any of the following
occurs:
o The stock market goes down.
o An adverse event, such as an unfavorable earnings report, depresses the
value of a particular company's stock.
o The adviser's judgment about the attractiveness, value or potential
appreciation of a particular stock proves to be incorrect.
o Prices of foreign securities go down because of unfavorable government
actions, political, economic or market instability or the absence of
accurate information about foreign companies. A decline in the value of
foreign currencies relative to the U.S. dollar will reduce the value of
securities held by the fund and denominated in those currencies.
o During periods of extreme stock market volatility, the fund has difficulty
closing out its position in equity index futures contracts or closing out
the position at a price the fund believes reflects the value of the
securities which make up the underlying index.
The fund may lose money or underperform when the market strongly favors growth
or value stocks over those that combine both characteristics, or when medium and
large capitalization company stocks fall out of favor with the market.
Standish Group of Equity Asset Funds 4
<PAGE>
- --------------------------------------------------------------------------------
Total return performance
The bar chart and total return table indicate the risks of investing in the
fund. The bar chart shows changes in the performance from year to year of the
fund and an older feeder fund that invests in the same master portfolio for the
full calendar periods indicated. See "Master/feeder structure" on page 17. The
total return table shows how the fund's and the older feeder fund's average
annual returns for different calendar periods compare to those of a widely
recognized, unmanaged index of U.S. common stock prices. The performance of the
older feeder fund has been reduced to reflect the deduction of the fund's 25
basis point account administration fee. The past performance of the fund and the
older feeder fund does not necessarily indicate how the fund will perform in the
future.
Equity Asset Fund
[The following table was represented as a bar chart in the printed material.]
Calendar Year Ended December 31 Percent
1991 33.02
1992 9.25
1993 20.52
1994 -4.02
1995 37.22
1996 26.53
1997 35.94*
1998 7.09*
1999
* The bar chart shows the performance of the older feeder fund through October
7, 1997 and Equity Asset Fund from that date to December 31, 1999.
Quarterly returns
Highest xx.xx in xth quarter 199x
Lowest xx.xx in xrd quarter 199x
Average annual total returns for selected
periods ended December 31, 1999
Life Inception
1 Year 5 Year of Funds Date
- --------------------------------------------------------------------------------
Equity Asset Fund* xx.xx xx.xx xx xx
S&P 500 Index xx.xx xx.xx xx xx
* Includes performance of the older feeder fund for the period from January 3,
1991 (inception) to October 7, 1997, adjusted to reflect Equity Asset Fund's
0.25% account administration fee.
Fees and expenses of the fund
This table describes the fees and expenses you may pay if you buy and hold
shares of the fund.
Based on fiscal year Equity Asset
ended 9/30/99 Fund
Shareholder fees (fees paid
directly from your investment) None
Annual fund operating expenses(1,2)
(expenses that are deducted
from fund assets)
Management fees 0.50%
Distribution (12b-1) fees None
Other expenses 0.19%
Account administration fee 0.25%
Total annual fund operating
expenses 0.94%
- --------------------------------------------------------------------------------
(1) Because Standish has agreed to cap the fund's operating expenses, the fund's
actual expenses were:
Management fees 0.50%
Other expenses 0.16%
Account administration fee 0.25%
Total annual fund
operating expenses 0.91%
These caps may be changed or eliminated.
(2) The table and example reflect the combined expenses of the fund and the
master fund in which it invests all its assets.
Expense example
This example is intended to help you compare the cost of investing in the fund
with the cost of investing in other mutual funds. The example assumes that:
o You invest $10,000 in the fund for the time periods indicated;
o You redeem at the end of each period;
o Your investment has a 5% return each year; and
o The fund's operating expenses have not been capped and remain the same.
Although your actual costs may be higher or lower, under these assumptions your
costs would be:
After After After After
1 year 3 years 5 years 10 years
Equity Asset Fund $96 $300 $520 $1,155
5 Standish Group of Equity Asset Funds
<PAGE>
Risk/Return Summary
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Small Cap Growth Fund (Service Class)
(formerly Small Cap Equity Fund II)
- --------------------------------------------------------------------------------
Investment objective
Long-term growth of capital.
- --------------------------------------------------------------------------------
Key investments and strategies
The fund invests, under normal circumstances, at least 80% of assets in equity
securities of small cap U.S. companies. The fund considers small cap companies
to have total market capitalizations within the range of capitalizations of the
companies included in the Russell 2000 Growth Index. The fund may also invest in
equity index futures contracts based primarily on the Russell 2000 Index.
- --------------------------------------------------------------------------------
How stocks are selected
The adviser employs a growth investment style in managing the fund's portfolio
which means the adviser seeks to identify those small cap companies which are
experiencing or will experience rapid earnings or revenue growth. The adviser
selects these stocks by:
o Using fundamental research to identify and follow companies with
attractive characteristics, such as strong business and competitive
positions, solid cash flows and balance sheets, high quality management
and high sustainable growth.
o Investing in a company when the adviser's research indicates that the
company will experience accelerating revenues and expanding operating
margins, which may lead to rising earnings estimates and favorable
earnings surprises.
The adviser focuses on individual stock selection instead of trying to predict
which industries or sectors will perform best. The fund's investment strategy
may lead it to emphasize certain sectors, such as technology, health care,
business services and communications.
- --------------------------------------------------------------------------------
Principal risks of investing in the funds
Investors could lose money on their investments in the fund or the fund could
perform less well than other possible investments if any of the following
occurs:
o The stock market goes down.
o Small cap stocks are out of favor with the market.
o The markets strongly favor stocks with value characteristics over growth
stocks.
o Negative market sentiment towards, or events affecting issuers in, the
technology, health care, business services and communications sectors
disproportionately hurt the fund's performance.
o An adverse event, such as an unfavorable earnings report, depresses the
value of a particular company's stock.
o The adviser's judgment about the attractiveness, value or potential
appreciation of a particular company's stock proves to be incorrect.
o During periods of extreme stock market volatility, the fund has difficulty
closing out its position in equity index futures contracts or closing out
the position at a price the fund believes reflects the value of the
securities which make up the underlying index.
- --------------------------------------------------------------------------------
Risks of small cap companies
There is a risk that the fund will lose money because it invests primarily in
small cap stocks. Smaller companies may have limited product lines, markets and
financial resources. They may have shorter operating histories and more volatile
businesses. The prices of small cap stocks, and in particular aggressive growth
stocks, tend to be more volatile than the prices of other stocks. In addition,
it may be harder to sell these stocks, which can reduce their selling prices.
Standish Group of Equity Asset Funds 6
<PAGE>
- --------------------------------------------------------------------------------
Total return performance
The bar chart and total return table indicate the risks of investing in the
fund. The bar chart shows changes in the performance from year to year of the
fund's Institutional Class shares for the full calendar periods indicated. The
total return table shows how average annual returns of Institutional Class
shares for different calendar periods compare to those of a widely recognized
unmanaged index of stock prices. Past performance does not indicate how the fund
will perform in the future.
Small Capitalization Equity Fund II
(Institutional Class)*
[The following table was represented as a bar chart in the printed material.]
Calendar Year Ended December 31 Percentage
1997 30.82
1998 14.30
1999
Quarterly returns
Highest xx.xx in xth quarter 199x
Lowest xx.xx% in xrd quarter 199x
*Institutional Class shares are not offered in this prospectus, but Service
Class shares would have had substantially similar performance over all periods
shown. Institutional Class shares and Service Class shares are invested in the
same portfolio of securities and annual returns differ only to the extent that
each class has different expenses.
Average annual total returns for selected
periods ended December 31, 1999
Life of
Institutional Inception
1 Year Class Date
- --------------------------------------------------------------------------------
Small Cap Growth Fund xx.xx xx.xx 12/23/96
(Institutional Class)
Russell 2000 Growth Index xx.xx xx.xx n/a
Fees and expenses of the fund
This table describes the fees and expenses you may pay if you buy and hold
shares of the fund. Expenses are based on estimates for the current fiscal year.
Small
Cap Growth
Fund
(Service Class)
Shareholder fees (fees paid
directly from your investment) None
Annual fund operating expenses(1,2)
(expenses that are deducted
from fund assets)
Management fees 0.80%
Distribution (12b-1) fees None
Other expenses 0.58%
Service fees 0.25%
Total annual fund operating
expenses 1.63%
- --------------------------------------------------------------------------------
(1) Because Standish has agreed to cap the fund's operating expenses, the fund's
estimated actual expenses would be:
Management fees 0.80%
Other expenses 0.20%
Service fees 0.25%
Total annual fund
operating expenses 1.25%
These caps may be changed or eliminated.
(2) The table and example reflect the combined expenses of the fund and the
master fund in which it invests all its assets.
Expense example
This example is intended to help you compare the cost of investing in the fund
with the cost of investing in other mutual funds. The example assumes that:
o You invest $10,000 in the fund for the time periods indicated;
o You redeem at the end of each period;
o Your investment has a 5% return each year; and
o The fund's operating expenses have not been capped and remain the same.
Although your actual costs may be higher or lower, under these assumptions your
costs would be:
After After After After
1 year 3 years 5 years 10 years
Small Cap
Equity Fund II
(Service Class) $166 $514 $887 $1933
7 Standish Group of Equity Asset Funds
<PAGE>
The Funds' Investments and Related Risks
- --------------------------------------------------------------------------------
The funds can invest in all types of equity securities.
Equity investments Equity securities include exchange-traded and
over-the-counter (OTC) common and preferred stocks, warrants, rights, equity
index futures contracts, convertible securities, depository receipts and shares,
trust certificates, limited partnership interests, shares of other investment
companies and real estate investment trusts and equity participations. Small Cap
Growth Fund may invest up to 20% of assets in companies with capitalizations of
more than $1.5 million.
Foreign securities Equity Asset Fund may invest without limit in foreign
securities traded in a U.S. market, but only 10% of assets in foreign securities
traded outside the U.S. Small Cap Growth Fund may invest up to 15% of assets in
foreign securities, including those of emerging market issuers, regardless of
where they are traded.
Foreign securities involve the risks of adverse foreign government actions,
political and economic instability and the lack of adequate and accurate
information. Foreign securities are sometimes less liquid and harder to value
than securities of U.S. issuers. These risks are more severe for securities of
issuers in emerging market countries. In Europe, Economic and Monetary Union
(EMU) and the introduction of a single currency (euro) began in 1999. There are
political and economic risks associated with EMU, which may increase the
volatility of a fund's European investments and present valuation problems.
Defensive investing Each fund may depart from its principal investment
strategies in response to adverse market, economic or political conditions by
taking temporary defensive positions in all types of money market and short-term
debt securities. If a fund takes a temporary defensive position it may be unable
for a time to achieve its investment objective.
Derivative contracts Each fund may, but is not required to, use derivative
contracts for any of the following purposes:
o To hedge against adverse changes--caused by changing interest rates, stock
market prices or currency exchange rates--in the market value of
securities held by or to be bought for a fund.
o As a substitute for purchasing or selling securities.
o To enhance a fund's potential gain in non-hedging situations.
A derivative contract will obligate or entitle a fund to deliver or receive an
asset or a cash payment that is based on the change in value of a designated
security, currency or index. Even a small investment in derivative contracts can
have a big impact on a portfolio's interest rate, stock market and currency
exposure. Therefore, using derivatives can disproportionately increase portfolio
losses and reduce opportunities for gains when interest rates, stock prices or
currency rates are changing. A fund may not fully benefit from or may lose money
on derivatives if changes in their value do not correspond accurately to changes
in the value of the fund's portfolio holdings.
Counterparties to OTC derivative contracts present the same types of credit risk
as issuers of fixed income securities. Derivatives can also make a fund's
portfolio less liquid and harder to value, especially in declining markets.
Standish Group of Equity Asset Funds 8
<PAGE>
- --------------------------------------------------------------------------------
Fixed income securities Equity Asset Fund may invest up to 20% of assets in high
grade fixed income securities. The fund's fixed income securities may be of any
maturity or duration. Small Cap Growth Fund may invest up to 20% of assets in
high grade fixed income securities with remaining maturities of three years or
less. Each fund may invest up to 5% of assets in securities rated, or of
comparable quality to those rated, in the lowest long-term investment grade
rating category.
The funds' fixed income securities may have all types of interest rate payment
and reset terms. These securities may be issued by the U.S. government or any of
its agencies, foreign governments or their subdivisions and U.S. and foreign
companies.
Credit quality and risk Securities are investment grade or high grade if:
o They are rated, respectively, in one of the top four or top three
long-term rating categories of a nationally recognized statistical rating
organization.
o They have received a comparable short-term or other rating.
o They are unrated securities that the adviser believes to be of comparable
quality.
The value of a fund's fixed income securities may go down if:
o Interest rates rise, which will make the prices of fixed income securities
go down.
o The issuer of a security owned by the fund has its credit rating
downgraded or defaults on its obligation to pay principal and/or interest.
Impact of high portfolio turnover Each fund may engage in active and frequent
trading to achieve its principal investment strategies. This may lead to the
realization and distribution to shareholders of higher capital gains, which
would increase their tax liability. Frequent trading also increases transaction
costs, which could detract from a fund's performance.
Investment objective Each fund's investment objective may be changed by the
fund's trustees without shareholder approval.
9 Standish Group of Equity Asset Funds
<PAGE>
The Investment Adviser
- --------------------------------------------------------------------------------
Standish offers a broad array of investment services that include management of
domestic and international equity and fixed income portfolios.
About Standish
Standish was established in 1933 and manages more than $45 billion in assets for
institutional and individual investors in the U.S. and abroad. By choice,
Standish has remained a privately held investment management firm over its more
than 65 year history. Ownership is shared by a limited number of employees, who
are the directors of the firm. Standish believes the firm's organizational
structure has helped preserve an entrepreneurial orientation, which is
responsible for its continued commitment to investment performance.
Standish believes that experience is a prerequisite for long-term investment
success. But experience alone is insufficient in a world of complex new
securities and rapidly changing technologies. To keep pace with today's
investment markets, Standish has built a staff which balances enthusiasm and
intellectual curiosity with professional and technical expertise. This
combination of experience and enthusiasm, tradition and innovation has worked
well and serves as a blueprint for future growth at Standish.
Standish relies on a combination of traditional fundamental research, which is
the product of a seasoned staff of specialists, and innovative quantitative
analysis, which uses sophisticated computer-based models to help identify
potentially attractive securities in equity and fixed income markets. In each
market, Standish seeks to discover opportunity by attention to detail and
adherence to a strict set of disciplines. Standish uses fundamental research to
uncover a security sufficiently complex as to have been misvalued by traditional
analysis. Standish uses sophisticated quantitative techniques, which may help
identify persistent market inefficiencies that can be exploited by its portfolio
managers.
Standish strives to balance individual insight with the shared wisdom of the
investment team. By combining technology and an experienced research staff,
Standish has built a powerful internal network of overlapping resources.
Standish Group of Equity Asset Funds 10
<PAGE>
- --------------------------------------------------------------------------------
Fund managers
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
Positions during past
Fund Fund managers five years
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Equity Asset Fund Ralph S. Tate Since 1995, managing director of Standish;
previously vice president
David H. Cameron Director of Standish
- -------------------------------------------------------------------------------------------------
Small Cap Growth Fund Nicholas S. Battelle Vice president and director
of Standish
Andrew L. Beja Associate director and senior analyst of
Standish since March 1996. Previously a vice
president and analyst at Advest, Inc.
- -------------------------------------------------------------------------------------------------
</TABLE>
Advisory services and fees
Standish provides each fund with portfolio management and investment research
services, places orders to buy and sell each fund's portfolio securities and
manages each fund's business affairs. For the year ended September 30, 1999,
each fund paid an advisory fee for these services. The adviser agreed to limit
each fund's total annual operating expenses (excluding brokerage commissions,
taxes and extraordinary expenses) and the payment was less than the fund's
contractual advisory fee. These agreements are temporary and may be terminated
or changed at any time.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Annual Advisory Fee Rates
(as a percentage of the fund's average net assets)
Actual advisory fee paid Contractual advisory fee Current expense limitation
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Equity Asset Fund 0.50% 0.50% 0.96%
- ------------------------------------------------------------------------------------------------------------------------
Small Cap Growth Fund (Service Class) N/A 0.60%* 1.25%
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Effective January 28, 2000, the annual advisory fee rate of the Small Cap
Growth Fund was increased to 0.80% of average daily net assets.
Investment Adviser
Standish, Ayer & Wood, Inc.
One Financial Center
Boston, Massachusetts 02111-2662
11 Standish Group of Equity Asset Funds
<PAGE>
Investment and Account Information
- --------------------------------------------------------------------------------
How to purchase shares
Who may purchase fund shares Only account administrators for omnibus accounts
may purchase the funds' shares. Individuals may not purchase shares directly
from the funds.
o If you are an individual investing assets in a retirement plan sponsored
by your employer, contact your employer to find out how to purchase fund
shares.
o If you are an individual investing assets in a self-administered
retirement plan, contact your account administrator to find out how to
purchase fund shares.
Minimum initial investment for each fund is $100,000 per omnibus account. This
minimum does not apply to investments by individual participants in an omnibus
account. Also, this minimum does not apply to omnibus accounts that use Standish
or one its affiliates as their investment adviser.
All orders to purchase shares received by the distributor or certain account
administrators before the close of regular trading on the New York Stock
Exchange will be executed at that day's share price if payment is received by
the funds' custodian by a specified deadline on the next business day. Orders
received after that time will be executed at the next business day's price.
Financial intermediaries acting on a purchaser's behalf are responsible for
transmitting orders to the distributor or its agent by the specified deadline.
All orders must be in good form and accompanied by payment. Each fund reserves
the right to reject purchase orders or to stop offering its shares without
notice to shareholders.
- --------------------------------------------------------------------------------
Account administrators should:
o Open an account with the funds by sending to the distributor a completed
original account application.
o Transmit electronically or by telephone to the distributor the name of the
fund, the dollar amount of shares to be purchased and the applicable
account number.
o Wire the purchase price in immediately available funds not later than 3:00
p.m. eastern time on the next business day.
- --------------------------------------------------------------------------------
The distributor's address is:
Standish Fund Distributors, L.P.
P.O. Box 1407
Boston, Massachusetts 02205-1407
Tel: 1.800.221.4795
Fax: 617.350.0042
Email: [email protected]
Standish Group of Equity Asset Funds 12
<PAGE>
- --------------------------------------------------------------------------------
How to exchange shares
Account administrators may exchange shares of Equity Asset Fund for shares of
any other Standish fund, if the registration of both accounts is identical.
Account administrators may exchange Service Class shares of Small Cap Growth
Fund for Service Class shares of any other Standish fund, if the registration of
both accounts is identical. Individuals should contact their employers or
account administrators to find out how to exchange fund shares. A fund may
refuse any exchange order and may alter, limit or suspend its exchange privilege
on 60 days' notice. Exchange requests will not be honored until the distributor
receives payment for the exchanged shares (up to 3 business days). An exchange
involves a taxable redemption of shares surrendered in the exchange.
- --------------------------------------------------------------------------------
By mail
Account administrators should:
o Send a letter of instruction to the distributor signed by each registered
account owner.
o Provide the name of the current fund, the fund to exchange into, the class
of shares (if applicable) and dollar amount to be exchanged.
o Provide both account numbers.
o Signature guarantees may be required.
- --------------------------------------------------------------------------------
By telephone
Account administrators should:
o If the account has telephone privileges, call the distributor.
o Provide the name of current fund, fund to exchange into and dollar amount
to be exchanged.
o Provide both account numbers.
o The distributor may ask for identification and all telephone transactions
may be recorded.
How to redeem shares
All orders to redeem shares received by the distributor or its agent before the
close of regular trading on the New York Stock Exchange will be executed at that
day's share price. Orders received after that time will be executed at the next
business day's price. All redemption orders must be in good form. Each fund has
the right to suspend redemptions of shares and to postpone payment of proceeds
for up to seven days, as permitted by law. Individuals should contact their
employers or account administrators to find out how to redeem fund shares.
- --------------------------------------------------------------------------------
By mail
Account administrators should:
o Send a letter of instruction to the distributor signed by each registered
account owner.
o State the name of the fund, the class of shares (if applicable) and number
of shares or dollar amount to be sold.
o Provide the account number.
o Signature guarantees may be required (see page 16).
- --------------------------------------------------------------------------------
By telephone
Account administrators should:
o If the account has telephone privileges, call the distributor.
o Proceeds will be mailed by check payable to the shareholder of record to
the address, or wired to the bank as directed, on the account application.
o The distributor may ask for identification and all telephone transactions
may be recorded.
- --------------------------------------------------------------------------------
Good form
o Good form means that you have provided adequate instructions and there are
no outstanding claims against your account or transaction limitations on
your account. Also, a signature guarantee may be required with certain
requests.
13 Standish Group of Equity Asset Funds
<PAGE>
Investment and Account Information
- --------------------------------------------------------------------------------
Transaction and account policies
Accounts with low balances. If an omnibus account falls below $50,000 as a
result of redemptions (and not because of performance), the distributor may
notify the account administrator that omnibus account participants should
increase the size of the account to $50,000 within 30 days. If the omnibus
account does not increase to $50,000 the distributor may redeem the account at
net asset value and remit the proceeds to the administrator.
In-kind purchases and redemptions. Securities held in an omnibus account may be
used to purchase shares of a fund. The adviser will determine if the securities
are consistent with the fund's objective and policies. If accepted, the
securities will be valued the same way the fund values securities it already
owns. A fund may make payment for redeemed shares wholly or in part by giving
the investor portfolio securities. A redeeming shareholder will pay transaction
costs to dispose of these securities.
Signature guarantees. A signature guarantee may be required for any written
request to sell or exchange shares, or to change account information for
telephone transactions.
The distributor will accept signature guarantees from:
o members of the STAMP program or the Exchange's Medallion Signature Program
o a broker or securities dealer
o a federal savings, cooperative or other type of bank
o a savings and loan or other thrift institution
o a credit union
o a securities exchange or clearing agency
A notary public cannot provide a signature guarantee.
Valuation of shares
Each fund offers its shares at the NAV per share of the fund or class, if more
than one class is offered. Each fund calculates its NAV once daily as of the
close of regular trading on the New York Stock Exchange (generally at 4:00 p.m.,
New York time) on each day the exchange is open. Small Cap Growth Fund
calculates the NAV of each class separately. If the exchange closes early, the
funds accelerate calculation of NAV and transaction deadlines to that time.
Each fund values the securities in its portfolio on the basis of market
quotations and valuations provided by independent pricing services. If
quotations are not readily available, or the value of a security has been
materially affected by events occurring after the closing of a foreign exchange,
each fund may value its assets by a method that the trustees believe accurately
reflects fair value. A fund that uses fair value to price securities may value
those securities higher or lower than a fund that uses market quotations.
Foreign markets may be open when U.S. markets are closed and the value of
foreign securities owned by a fund may change on days when shareholders cannot
purchase or redeem shares.
Dividends and distributions
Each fund intends to distribute all or substantially all of its net investment
income and realized capital gains, if any, for each taxable year. The funds
declare and pay dividends, if any, from net investment income semiannually and
distributes capital gains annually. Most of a fund's distributions will be from
capital gains. All dividends and capital gains are reinvested in shares of the
fund that paid them unless the shareholder elects to receive them in cash.
Year 2000 issue
The funds' securities trades, pricing and accounting services and other
operations could be adversely affected if the computer systems of the adviser,
distributor, custodian and transfer agent were unable to recognize dates after
1999. The costs of addressing the Year 2000 issue may also adversely affect the
issues of individual securities held by the funds. The adviser and other service
providers have told the funds that they have taken action to prevent, and do not
expect the funds to suffer from, material year 2000 problems.
Standish Group of Equity Asset Funds 14
<PAGE>
Fund Details
Taxes
- --------------------------------------------------------------------------------
Federal Tax Status (for
Transactions taxable investors only)
- --------------------------------------------------------------------------------
Sales or exchanges of shares. Usually capital gain or loss. Tax
rate depends on how long shares are
held.
- --------------------------------------------------------------------------------
Distributions of long-term capital 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.
- --------------------------------------------------------------------------------
Every January, the funds provide information to certain account administrators
about the funds' dividends and distributions, which are taxable even if
reinvested, and about the accounts' redemptions during the previous calendar
year. Any account administrator who does not provide the funds with a correct
taxpayer identification number and required certification may be subject to
federal backup withholding tax.
Taxable investors should generally avoid investing in a fund shortly before an
expected dividend or capital gain distribution. Otherwise, an investor may pay
taxes on dividends or distributions that are economically equivalent to a
partial return of the shareholder's investment.
Investors should consult their tax advisers about their own particular tax
situations.
- --------------------------------------------------------------------------------
Master/feeder structure
Each fund is a "feeder" fund that invests exclusively in a corresponding
"master" portfolio with identical investment objectives. Except where indicated,
this prospectus uses the term "fund" to mean feeder fund and its master
portfolio taken together. The master portfolio may accept investments from
multiple feeder funds, which bear the master portfolio's expenses in proportion
to their assets.
The feeder fund and its master portfolio expect to maintain consistent
investment objectives, but if they do not, the fund will withdraw from the
master portfolio, receiving either cash or securities in exchange for its
interest in the master portfolio. The fund's trustees would then consider
whether the fund should hire its own investment adviser, invest in a different
master portfolio, or take other action.
The funds' service providers
- --------------------------------------------------------------------------------
Principal Underwriter
Standish Fund Distributors, L.P.
Custodian, Transfer Agent and Fund Accountant
Investors Bank & Trust Company
Independent Accountants
PricewaterhouseCoopers LLP
Legal Counsel
Hale and Dorr LLP
15 Standish Group of Equity Asset Funds
<PAGE>
Financial Highlights
- --------------------------------------------------------------------------------
The financial highlights tables for Equity Asset Fund and Small Cap Growth Fund
are intended to help shareholders understand the funds' financial performance
for the past five years, or less if a fund has a shorter operating history.
Certain information reflects financial results for a single fund share. Total
returns represent the rate that a shareholder would have earned on an investment
in a fund (assuming reinvestment of all dividends and distributions). The
information was audited by PricewaterhouseCoopers LLP, independent accountants,
whose reports, along with the funds' financial statements, are included in the
funds' annual reports (available upon request).
Equity Asset Fund
<TABLE>
<CAPTION>
For the period
Fiscal year ended October 8, 1997(1) to
For the fiscal year ended September 30: september 30, 1999 September 30, 1998
<S> <C> <C>
Net asset value--beginning of period $20.00
------
Income from investment operations
Net investment income(*,3) 0.05
Net realized and unrealized gain (loss) (2.42)
------
Total from investment operations (2.37)
Less distributions declared to shareholders
From net investment income (0.12)
------
Total distributions declared to shareholders (0.12)
------
Net asset value--end of period $17.51
======
Total return (11.66%)
Ratios (to average daily net assets)/Supplemental data
Net assets at end of period (000 omitted) $8,799
Expenses(2) 0.83%(4)
Net investment income(2) 0.46%(4)
<CAPTION>
-------------------------------
*The adviser voluntarily limited the fund's expenses. Had this action not been taken, the net investment
income per share and the ratios would have been:
<S> <C> <C>
Net investment income (loss) per share ($0.14)
Ratios (to average net assets)
Expenses(3) 2.49%(4)
Net investment income (loss)(3) (1.20%)(4)
</TABLE>
(1) Commencement of operations.
(2) Calculated based on average shares outstanding.
(3) Includes the fund's share of Standish Equity Portfolio's allocated expenses
for the period from October 8, 1997 to September 30, 1998.
(4) Computed on an annualized basis.
Standish Group of Equity Asset Funds 16
<PAGE>
Financial Highlights
- --------------------------------------------------------------------------------
Small Capitalization Growth Fund
17 Standish Group of Equity Asset Funds
<PAGE>
Standish, Ayer & Wood, Inc. is an independent investment counseling firm that
has been managing assets for institutional investors and high net worth
individuals, as well as mutual funds, for more than 65 years. Standish offers a
broad array of investment services that includes management of domestic and
international equity and fixed income portfolios.
For More Information
- --------------------------------------------------------------------------------
For investors who want more information about the Standish group of equity asset
funds, the following documents are available free upon request.
Annual/Semiannual Reports
Additional information about the funds' investments is available in the funds'
annual and semiannual reports to shareholders. Each fund's annual report
contains a discussion of the market conditions and investment strategies that
significantly affected the fund's performance during its last fiscal year.
Statement of Additional Information (SAI)
The SAI provides more detailed information about the funds and is incorporated
into this prospectus by reference.
Investors can get free copies of reports and SAIs, request other information and
discuss their questions about the funds by contacting the funds at:
Standish Funds
P.O. Box 1407
Boston, MA 02205-1407
Telephone: 1.800.729.0066
Email:
[email protected]
Internet:
http://www.standishfunds.com
Investors can review the funds' reports and SAIs at the Public Reference Room of
the Securities and Exchange Commission. Investors can get text-only copies:
o For a fee, by writing to or calling the Public Reference Room of the
Commission, Washington, D.C. 20549-6009 Telephone: 1.800.SEC.0330
o Free from the Commission's Internet website at http://www.sec.gov
[LOGO] STANDISH FUNDS(R)
One Financial Center
Boston, MA 02111-2662
800.729.0066
Investment Company Act
file number (811-4813)
99-315
<PAGE>
January 28, 2000
[STANDISH LOGO]
STANDISH, AYER & WOOD INVESTMENT TRUST
One Financial Center
Boston, Massachusetts 02111
(800) 729-0066
STATEMENT OF ADDITIONAL INFORMATION
Standish Equity Asset Fund
Standish Small Cap Growth Fund (Service Class)
(formerly Standish Small Capitalization Equity Fund II)
This combined Statement of Additional Information (SAI) is not a
prospectus. The SAI expands upon and supplements the information contained in
the combined prospectus dated January 28, 2000, as amended and/or supplemented
from time to time, of Standish Equity Asset Fund (Equity Asset Fund) and
Standish Small Cap Growth Fund (Small Cap Growth Fund) Service Class, each a
separate investment series of Standish, Ayer & Wood Investment Trust (Trust).
This SAI should be read in conjunction with the funds' prospectus.
Additional information about each fund's investments is available in the funds'
annual and semi-annual reports to shareholders. Investors can get free copies of
reports and the prospectus, request other information and discuss their
questions about the funds by contacting the funds at the phone number above.
Each fund's financial statements which are included in the 1999 annual reports
to shareholders are incorporated by reference into this SAI.
--------------------------------------
Contents
Investment Objectives and Policies........................................... 2
Description of Securities and Related Risks.................................. 3
Investment Techniques and Related Risks...................................... 11
Investment Restrictions...................................................... 18
Calculation of Performance Data.............................................. 21
Management................................................................... 23
Service Plan................................................................. 29
Purchase and Redemption of Shares............................................ 30
Portfolio Transactions....................................................... 31
Determination of Net Asset Value............................................. 32
The Funds and Their Shares................................................... 33
The Portfolio and Its Investors.............................................. 34
Taxation..................................................................... 34
Additional Information....................................................... 39
Experts and Financial Statements............................................. 39
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The prospectus describes the investment objective and policies of each
fund. The following discussion supplements the description of the funds'
investment policies in the prospectus.
Master/Feeder Structure. Equity Asset Fund invests all of its investible
assets in Standish Equity Portfolio (the "Equity Portfolio") and Small Cap
Growth Fund invests all of its investible assets in Standish Small Growth
Portfolio (the "Small Cap Growth Portfolio"). These funds are sometimes referred
to in this SAI as the feeder funds. Each Portfolio is a series of the Standish,
Ayer and Wood Master Portfolio (the "Portfolio Trust"), an open-end management
investment company. Standish, Ayer and Wood, Inc. ("Standish" or the "adviser")
is the investment adviser to Equity and Small Cap Growth Portfolios. Each
Portfolio has the same investment objective and restrictions as its
corresponding fund. Because the feeder funds invest all of their investable
assets in their corresponding Portfolios, the description of each fund's
investment policies, techniques, specific investments and related risks that
follows also applies to the corresponding Portfolio.
In addition to these feeder funds, other feeder funds may invest in these
Portfolios, and information about the other feeder funds is available from
Standish. The other feeder funds invest in the Portfolios on the same terms as
the funds and bear a proportionate share of the Portfolios' expenses. The other
feeder funds may sell shares on different terms and under a different pricing
structure than the funds, which may produce different investment results.
There are certain risks associated with an investment in a master-feeder
structure. Large scale redemptions by other feeder funds in a Portfolio may
reduce the diversification of a Portfolio's investments, reduce economies of
scale and increase a Portfolio's operating expenses. If the Portfolio Trust's
Board of Trustees approves a change to the investment objective of a Portfolio
that is not approved by the Trust's Board of Trustees, a fund would be required
to withdraw its investment in the Portfolio and engage the services of an
investment adviser or find a substitute master fund. Withdrawal of a fund's
interest in its Portfolio, which may be required by the Trust's Board of
Trustees without shareholder approval, might cause the fund to incur expenses it
would not otherwise be required to pay.
If a fund is requested to vote on a matter affecting the Portfolio in
which it invests, the fund will call a meeting of its shareholders to vote on
the matter. The fund will then vote on the matter at the meeting of the
Portfolio's investors in the same proportion that the fund's shareholders voted
on the matter. The fund will vote those shares held by its shareholders who did
not vote in the same proportion as those Fund shareholders who did vote on the
matter. A majority of the Trustees who are not "interested persons" (as defined
in the Investment Company Act of 1940, as amended (the "1940 Act")) of the Trust
or the Portfolio Trust, as the case may be, have adopted procedures reasonably
appropriate to deal with potential conflicts of interest arising from the fact
that the same individuals are trustees of the Trust and of the Portfolio Trust.
Suitability. None of the funds is intended to provide an investment
program meeting all of the requirements of an investor. Notwithstanding each
fund's ability to spread risk by holding securities of a number of portfolio
companies, shareholders should be able and prepared to bear the risk of
investment losses which may accompany the investments contemplated by the funds.
Equity Asset Fund
Additional Investment Information. Under normal circumstances, at least
80% of Equity Asset Fund's total assets are invested in a diversified portfolio
of equity and equity-related securities. The fund may invest in equity
securities of foreign issuers that are listed on a U.S. securities exchange or
traded in the U.S. OTC market, but will not invest more than 10% of its total
assets in such securities that are not so listed or traded. The fund may also,
to a limited extent, invest in debt securities and preferred stocks that are
-2-
<PAGE>
convertible into, or exchangeable for, common stocks. Generally, such securities
will be rated, at the time of investment, Aaa, Aa or A by Moody's Investors
Service, Inc. ("Moody's") or AAA, AA or A by Standard & Poor's Ratings Group
("Standard & Poor's"), Duff and Phelps ("Duff") or Fitch IBCA International
("Fitch") or, if unrated, will be determined by the adviser to be of comparable
credit quality. Up to 5% of the fund's total assets invested in convertible debt
securities and preferred stocks may be rated, at the time of investment, Baa by
Moody's or BBB by Standard & Poor's, Duff or Fitch or, if unrated, determined by
the adviser to be of comparable credit quality.
Small Cap Growth Fund
Additional Investment Information. On January 28, 2000, the fund and
corresponding Portfolio changed their names from Standish Small Capitalization
Equity Fund II and Standish Small Capitalization Equity Portfolio II to Standish
Small Cap Growth Fund and Standish Small Cap Growth Portfolio, respectively. The
trustees approved these name changes so that the fund's and Portfolio's names
are more reflective of the manner in which Standish manages the Portfolio.
Under normal circumstances, at least 80% of Small Cap Growth Fund's total
assets are invested in equity and equity-related securities of companies that,
at the time of purchase of the security, have "total market capitalizations"
within the range of capitalizations of the companies included in the Russell
2000 Growth Index, updated monthly. Small Cap Growt Fund may invest in
securities of larger, more mature companies, provided that such investments do
not exceed 20% of the fund's total assets. The fund may participate in initial
public offerings for previously privately held companies which are generally
expected to have market capitalizations within the range of market
capitalizations of the companies included in the Russell 2000 Growth Index,
updated monthly, after the consummation of the offering, and whose securities
are expected to be liquid after the offering. The fund may also invest up to 15%
of its total assets in equity and equity-related securities of foreign issuers,
including issuers located in emerging markets.
DESCRIPTION OF SECURITIES AND RELATED RISKS
General Risks of Investing
The funds invest primarily in equity and equity-related securities and are
subject to the risks associated with investments in such securities. Because
investing in equity and equity-related securities is the principal investment
strategy for each of the funds, the risks associated with these investments are
described in the prospectus. The funds are also subject to the risks associated
with direct investments in foreign securities and, to a lesser degree, to the
risks associated with investments in fixed income securities.
Investing in Foreign Securities. Small Cap Growth Fund may invest up to
15% of its total assets in foreign securities, including securities of foreign
issuers that trade on a U.S. exchange or in the U.S. OTC market. Equity Asset
Fund may invest without limit in foreign securities which trade on a U.S.
exchange or in the U.S. OTC market, but may not invest more than 10% of its
total assets in foreign securities which are not so listed or traded. Investors
should understand that the expense ratios of the funds may be higher than that
of investment companies investing exclusively in domestic securities because of
the cost of maintaining the custody of foreign securities.
Investing in the securities of foreign issuers involves risks that are not
typically associated with investing in U.S. dollar-denominated securities of
domestic issuers. Investments in foreign issuers may be affected by changes in
currency rates, changes in foreign or U.S. laws or restrictions applicable to
such investments and in exchange control regulations (e.g., currency blockage).
A decline in the exchange rate of the currency (i.e., weakening of the currency
against the U.S. dollar) in which a portfolio security is quoted or denominated
relative to the U.S. dollar would reduce the value of the portfolio security.
Commissions on transactions in foreign securities may be higher than those for
similar transactions on domestic stock markets and foreign custodial costs are
higher than domestic custodial costs. In addition, clearance and settlement
procedures may be different in foreign countries and, in certain markets, such
procedures have on occasion been unable to keep pace with the volume of
securities transactions, thus making it difficult to conduct such transactions.
-3-
<PAGE>
Foreign issuers are not generally subject to uniform accounting, auditing
and financial reporting standards comparable to those applicable to U.S.
issuers. There may be less publicly available information about a foreign issuer
than about a U.S. issuer. In addition, there is generally less government
regulation of foreign markets, companies and securities dealers than in the U.S.
Most foreign securities markets may have substantially less trading volume than
U.S. securities markets and securities of many foreign issuers are less liquid
and more volatile than securities of comparable U.S. issuers. Furthermore, with
respect to certain foreign countries, there is a possibility of nationalization,
expropriation or confiscatory taxation, imposition of withholding or other taxes
on divided or interest payments (or in some cases, capital gains), limitations
on the removal of funds or other assets, political or social instability or
diplomatic developments which could affect investment in those countries.
Currency Risks. The U.S. dollar value of securities denominated in a
foreign currency will vary with changes in currency exchange rates, which can be
volatile. Accordingly, changes in the value of the currency in which a fund's
investments are denominated relative to the U.S. dollar will affect the fund's
net asset value. Exchange rates are generally affected by the forces of supply
and demand in the international currency markets, the relative merits of
investing in different countries and the intervention or failure to intervene of
U.S. or foreign governments and central banks. However, currency exchange rates
may fluctuate based on factors intrinsic to that country's economy. Some
emerging market countries also may have managed currencies, which are not free
floating against the U.S. dollar. In addition, emerging markets are subject to
the risk of restrictions upon the free conversion of their currencies into other
currencies. Any devaluations relative to the U.S. dollar in the currencies in
which a fund's securities are quoted would reduce the fund's net asset value per
share.
Each fund may enter into forward foreign currency exchange contracts and
cross-currency forward contracts with banks or other foreign currency brokers or
dealers to purchase or sell foreign currencies at a future date and may purchase
and sell foreign currency futures contracts and cross-currency futures contracts
to seek to hedge against changes in foreign currency exchange rates, although
they have no current intention to engage in such transactions. A forward foreign
currency exchange contract is a negotiated agreement between the contracting
parties to exchange a specified amount of currency at a specified future time at
a specified rate. A cross-currency forward contract is a forward contract that
uses one currency which historically moves in relation to a second currency to
hedge against changes in that second currency. See "Strategic and Derivative
Transactions" within the "Investment Techniques and Related Risks" section for a
further discussion of the risks associated with currency transactions.
Economic and Monetary Union (EMU). EMU occurred on January 1, 1999, when
11 European countries adopted a single currency - the euro. For participating
countries, EMU means sharing a single currency and single official interest rate
and adhering to agreed upon limits on government borrowing. Budgetary decisions
remain in the hands of each participating country, but are now subject to each
country's commitment to avoid "excessive deficits" and other more specific
budgetary criteria. A European Central Bank is responsible for setting the
official interest rate to maintain price stability within the euro zone.
EMU is driven by the expectation of a number of economic benefits,
including lower transaction costs, reduced exchange risk, greater competition,
and a broadening and deepening of European financial markets. However, there are
a number of significant risks associated with EMU. Monetary and economic union
on this scale has never been attempted before. There is a significant degree of
uncertainty as to whether participating countries will remain committed to EMU
in the face of changing economic conditions. This uncertainty may increase the
volatility of European markets and may adversely affect the prices of securities
of European issuers in the fund's portfolios.
-4-
<PAGE>
Investing in Securities of Emerging Markets. Although each fund invests
primarily in securities of established issuers based in the U.S. and in other
developed markets, each fund may also invest in securities of issuers in
emerging markets, including issuers in Asia (including Russia), Eastern Europe,
Latin and South America, the Mediterranean and Africa. Each fund may invest up
to 10% of its total assets in issuers located in emerging markets generally and
up to 3% of its total assets in issuers of any one specific emerging market
country. The funds may also invest in currencies of such countries and may
engage in strategic transactions in the markets of such countries.
Investing in the securities of emerging market countries involves
considerations and potential risks not typically associated with investing in
the securities of U.S. issuers whose securities are principally traded in the
United States. These heightened risks include: (i) greater risks of
expropriation, confiscatory taxation, nationalization and less social, political
and economic stability; (ii) the small current size of the markets for
securities of emerging market issuers and the currently low or nonexistent
volume of trading and frequent artificial limits on daily price movements,
resulting in lack of liquidity and in price uncertainty; (iii) certain national
policies which may restrict a fund's investment opportunities, including
limitations on aggregate holdings by foreign investors and restrictions on
investing in issuers or industries deemed sensitive to relevant national
interests; (iv) the absence of developed legal structures governing private or
foreign investment in private property which may adversely affect the fund's
ability to retain ownership of its securities during periods of economic, social
or political turmoil; and (v) high rates of inflation and rapid fluctuations in
interest rates that have had and may continue to have negative effects on the
economies and securities markets of certain emerging market countries.
The economies of emerging market countries may be predominantly based on
only a small number of industries or dependent on revenues from the sale of
particular commodities or on international aid or development assistance. As a
result, these economies may be significantly more vulnerable to changes in local
or global trade conditions, and may suffer from volatile or extreme fluctuations
in currency exchange rates, inflation and deflation rates as well as debt
burdens. Many emerging market countries have experienced and will continue to
experience periods of rapid inflation, resulting in significant market
uncertainty and sharp drops in the U.S. dollar value of the country's assets.
The currencies of emerging market countries may also be devalued as a result of
governmental action in addition to market factors. Recently, the economies of
certain emerging market countries have experienced deflation which has
diminished the demand for goods and services resulting in excess capacity in
factories that were built upon the forecast of continuing strong demand for such
goods and services. All of these risks may adversely affect the funds'
investments in emerging market countries.
Investment and Repatriation Restrictions. Foreign investment in the
securities markets of several emerging market countries is restricted or
controlled to varying degrees. These restrictions may limit a fund's investment
in certain emerging market countries, require governmental approval prior to
investments by foreign persons or limit investment by foreign persons to only a
specified percentage of an issuer's outstanding securities or a specific class
of securities which may have less advantageous terms (including price) than
securities of such company available for purchase by nationals. In certain
countries, the funds may be limited by government regulation or a company's
charter to a maximum percentage of equity ownership in any one company. Such
restrictions may affect the market price, liquidity and rights of securities
that may be purchased by the funds. From time to time, the adviser may determine
that investment and repatriation restrictions in certain emerging market
countries negate the advantages of investing in such countries and no fund is
required to invest in any emerging market country.
In addition, certain countries may restrict or prohibit investment
opportunities in issuers or industries deemed important to national interests.
The adviser may determine from time to time to invest in the securities of
emerging market countries which may impose restrictions on foreign investment
and repatriation that cannot currently be predicted. Due to restrictions on
direct investment in equity securities
-5-
<PAGE>
in certain emerging market countries, such as Taiwan, the funds may invest only
through investment funds in such emerging market countries.
The repatriation of both investment income and capital from several
emerging market countries is subject to restrictions such as the need for
certain governmental consents. Even where there is no outright restriction on
repatriation of capital, the mechanics of repatriation may affect certain
aspects of the operation of the funds to the extent that they invest in emerging
market countries.
Market Characteristics. All of the securities markets of emerging market
countries have substantially less volume than the New York Stock Exchange.
Equity securities of most emerging market companies are generally less liquid
and subject to greater price volatility than equity securities of U.S. companies
of comparable size. Some of the stock exchanges in the emerging market countries
are in the earliest stages of their development.
Certain of the securities markets of emerging market countries are marked
by high concentrations of market capitalization and trading volume in a small
number of issuers representing a limited number of industries, as well as a high
concentration of ownership of such securities by a limited number of investors.
Even the market for relatively widely traded securities in the emerging markets
may not be able to absorb, without price disruptions, a significant increase in
trading volume or trades of a size customarily undertaken by institutional
investors in the United States. Additionally, market making and arbitrage
activities are generally less extensive in such markets, which may contribute to
increased volatility and reduced liquidity of such markets. Accordingly, each of
these markets may be subject to greater influence by adverse events generally
affecting the market, and by large investors trading significant blocks of
securities, than is usual in the United States. The less liquid the market, the
more difficult it may be for a fund to accurately price its portfolio securities
or to dispose of such securities at the times determined by the adviser to be
appropriate. The risks associated with the liquidity of a market may be
particularly acute in situations in which a fund's operations require cash, such
as the need to meet redemption requests for its shares, to pay dividends and
other distributions and to pay its expenses. To the extent that any emerging
market country experiences rapid increases in its money supply and investment in
equity securities is made for speculative purposes, the equity securities traded
in any such country may trade at price-earnings ratios higher than those of
comparable companies trading on securities markets in the United States. Such
price-earnings ratios may not be sustainable.
Settlement procedures in emerging market countries are less developed and
reliable than those in the United States and in other developed markets, and a
fund may experience settlement delays or other material difficulties. In
addition, significant delays are common in registering transfers of securities,
and a fund may be unable to sell such securities until the registration process
is completed and may experience delays in receipt of dividends and other
entitlements.
Brokerage commissions and other transaction costs on securities exchanges
in emerging market countries are generally higher than in the United States.
There is also less government supervision and regulation of foreign securities
exchanges, brokers and listed companies in emerging market countries than exists
in the United States. Brokers in emerging market countries may not be as well
capitalized as those in the United States, so that they are more susceptible to
financial failure in times of market, political or economic stress. In addition,
existing laws and regulations are often inconsistently applied. As legal systems
in emerging market countries develop, foreign investors may be adversely
affected by new or amended laws and regulations. In circumstances where adequate
laws exist, it may not be possible to obtain swift and equitable enforcement of
the law.
Financial Information and Standards. Issuers in emerging market countries
generally are subject to accounting, auditing and financial standards and
requirements that differ, in some cases significantly,
-6-
<PAGE>
from those applicable to U.S. issuers. In particular, the assets and profits
appearing on the financial statements of an emerging market company may not
reflect its financial position or results of operations in the same manner as
financial statements for U.S. companies. Substantially less information may be
publicly available about issuers in emerging market countries than is available
about issuers in the United States.
Economic, Political and Social Factors. Many emerging market countries may
be subject to a greater degree of economic, political and social instability
than is the case in the United States and Western European countries. Such
instability may result from, among other things: (i) authoritarian governments
or military involvement in political and economic decision-making, including
changes or attempted changes in government through extra-constitutional means;
(ii) popular unrest associated with demands for improved economic, political and
social conditions; (iii) internal insurgencies; (iv) hostile relations with
neighboring countries; and (v) ethnic, religious and racial disaffection and
conflict. Such economic, political and social instability could significantly
disrupt financial markets of emerging market countries and adversely affect the
value of a fund's assets so invested.
Few emerging market countries have fully democratic governments. Some
governments in the region are authoritarian in nature or are influenced by armed
forces which have been used to control civil unrest. In the past, governments of
certain emerging market countries have been installed or removed as a result of
military coups, while governments in other emerging market countries have
periodically used force to suppress civil dissent. Disparities of wealth, the
pace and success of democratization, and ethnic, religious and racial
disaffection, among other factors, have also led to social unrest, violence
and/or labor unrest in some emerging market countries. Several emerging market
countries have or in the past have had hostile relationships with neighboring
nations or have experienced internal insurrections.
The economies of most emerging market countries are heavily dependent upon
international trade and are accordingly affected by protective trade barriers
and the economic conditions of their trading partners, principally, the United
States, Japan, China and the European Union. The enactment by the United States
or other principal trading partners of protectionist trade legislation,
reduction of foreign investment in the local economies and general declines in
the international securities markets could have a significant adverse effect
upon the emerging securities markets. In addition, the economies of some
emerging market countries are vulnerable to weakness in world prices for their
commodity exports.
There may be the possibility of expropriations, confiscatory taxation,
political, economic or social instability or diplomatic developments which would
adversely affect assets of a fund held in emerging market or other foreign
countries. Governments in certain emerging market countries participate to a
significant degree, through ownership interests or regulation, in their
respective economies. Actions by these governments could have a significant
adverse effect on market prices of securities and payment of dividends.
Investing in Fixed Income Securities
The funds may invest a portion of their total assets in fixed income
securities. Fixed income securities include bonds, notes, convertible
securities, Eurodollar instruments, preferred stocks (including convertible
preferred stock) and money market instruments. Fixed income securities are
subject to interest rate risk, default risk and call and extension risk.
Interest Rate Risk. When interest rates decline, the market value of fixed
income securities tends to increase. Conversely, when interest rates increase,
the market value of fixed income securities tends to decline. The volatility of
a security's market value will differ depending upon the security's duration,
the issuer and the type of instrument.
-7-
<PAGE>
Default Risk/Credit Risk. Investments in fixed income securities are
subject to the risk that the issuer of the security could default on its
obligations causing a fund to sustain losses on such investments. A default
could impact both interest and principal payments. Because the funds invest only
in investment grade fixed income securities, this risk is reduced.
Call Risk and Extension Risk. Fixed income securities may be subject to
both call risk and extension risk. Call risk exists when the issuer may exercise
a right to pay principal on an obligation earlier than scheduled which would
cause cash flows to be returned earlier than expected. This typically results
when interest rates have declined and a fund will suffer from having to reinvest
in lower yielding securities. Extension risk exists when the issuer may exercise
a right to pay principal on an obligation later than scheduled which would cause
cash flows to be returned later than expected. This typically results when
interest rates have increased and a fund will suffer from the inability to
invest in higher yield securities.
Credit Quality. Investment grade securities are those that are rated at
least Baa by Moody's or BBB by Standard & Poor's, Duff or Fitch or, if unrated,
determined by the adviser to be of comparable credit quality. High grade
securities are those that are rated within the top three investment grade
ratings (i.e., Aaa, Aa or A by Moody's or AAA, AA or A by Standard & Poor's,
Duff or Fitch) or, if unrated, determined by the adviser to be of comparable
credit quality. If a security is rated differently by two or more rating
agencies, the adviser uses the highest rating to compute a fund's credit quality
and also to determine the security's rating category. If the rating of a
security held by a fund is downgraded below investment grade, the adviser will
determine whether to retain that security in the fund's portfolio. Securities
rated Baa by Moody's or BBB by Standard & Poor's, Duff or Fitch are generally
considered medium grade obligations and have some speculative characteristics.
Adverse changes in economic conditions or other circumstances are more likely to
weaken the medium grade issuer's capability to pay interest and repay principal
than is the case for high grade securities.
Specific Risks
The following sections include descriptions of specific risks that are
associated with a fund's purchase of a particular type of security or the
utilization of a specific investment technique.
Common Stocks. The funds purchase common stocks. Common stocks are shares
of a corporation or other entity that entitle the holder to a pro rata share of
the profits of the corporation, if any, without preference over any other
shareholder or class of shareholders, including holders of the entity's
preferred stock and other senior equity. Common stock usually carries with it
the right to vote and frequently an exclusive right to do so.
Small Capitalization Stocks. Small Cap Growth Fund invests primarily, and
Equity Asset Fund may invest to a lesser extent, in securities of small
capitalization companies. Although investments in small capitalization companies
may present greater opportunities for growth, they also involve greater risks
than are customarily associated with investments in larger, more established
companies. The securities of small companies may be subject to more volatile
market movements than securities of larger, more established companies. Smaller
companies may have limited product lines, markets or financial resources, and
they may depend upon a limited or less experienced management group. The
securities of small capitalization companies may be traded only on the OTC
market or on a regional securities exchange and may not be traded daily or in
the volume typical of trading on a national securities exchange. As a result,
the disposition by a fund of securities in order to meet redemptions or
otherwise may require the fund to sell securities at a discount from market
prices, over a longer period of time or during periods when disposition is not
desirable.
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<PAGE>
Convertible Securities. Each fund may invest in convertible debt and
preferred stock. Convertible debt securities and preferred stock entitle the
holder to acquire the issuer's stock by exchange or purchase for a predetermined
rate. Convertible securities are subject both to the credit and interest rate
risks associated with fixed income securities and to the stock market risk
associated with equity securities.
Warrants. Each fund may purchase warrants. Warrants acquired by a fund
entitle it to buy common stock from the issuer at a specified price and time.
Warrants are subject to the same market risks as stocks, but may be more
volatile in price. A fund's investment in warrants will not entitle it to
receive dividends or exercise voting rights and will become worthless if the
warrants cannot be profitably exercised before the expiration dates.
Depositary Receipts and Depositary Shares. The funds may purchase
depository receipts and depository shares. Depositary receipts and depositary
shares are typically issued by a U.S. or foreign bank or trust company and
evidence ownership of underlying securities of a U.S. or foreign issuer.
Unsponsored programs are organized independently and without the cooperation of
the issuer of the underlying securities. As a result, available information
concerning the issuer may not be as current as for sponsored depositary
instruments and their prices may be more volatile than if they were sponsored by
the issuers of the underlying securities. Examples of such investments include,
but are not limited to, American Depositary Receipts and Shares ("ADRs" and
"ADSs"), Global Depositary Receipts and Shares ("GDRs" and "GDSs") and European
Depositary Receipts and Shares ("EDRs" and "EDSs").
Investments in REITs. Each fund may invest in shares of real estate
investment trusts (REITs), which are pooled investment vehicles that invest in
real estate or real estate loans or interests. Investing in REITs involves risks
similar to those associated with investing in equity securities of small
capitalization companies. REITs are dependent upon management skills, are not
diversified, and are subject to risks of project financing, default by
borrowers, self-liquidation, and the possibility of failing to qualify for the
exemption from taxation on amounts distributed to shareholders under the
Internal Revenue Code of 1986, as amended (the "Code").
Corporate Debt Obligations. Each fund may invest in corporate debt
obligations and zero coupon securities issued by financial institutions and
corporations. Corporate debt obligations are subject to the risk of an issuer's
inability to meet principal and interest payments on the obligations and may
also be subject to price volatility due to such factors as market interest
rates, market perception of the creditworthiness of the issuer and general
market liquidity. Zero coupon securities are securities sold at a discount to
par value and on which interest payments are not made during the life of the
security.
U.S. Government Securities. Each fund may invest in U.S. Government
securities. Generally, these securities include U.S. Treasury obligations and
obligations issued or guaranteed by U.S. Government agencies, instrumentalities
or sponsored enterprises which are supported by (a) the full faith and credit of
the U.S. Treasury (such as the Government National Mortgage Association), (b)
the right of the issuer to borrow from the U.S. Treasury (such as securities of
the Student Loan Marketing Association), (c) the discretionary authority of the
U.S. Government to purchase certain obligations of the issuer (such as the
Federal National Mortgage Association and Federal Home Loan Mortgage
Corporation), or (d) only the credit of the agency. No assurance can be given
that the U.S. Government will provide financial support to U.S. Government
agencies, instrumentalities or sponsored enterprises in the future. U.S.
Government securities also include Treasury receipts, zero coupon bonds, U.S.
Treasury inflation indexed bonds, deferred interest securities and other
stripped U.S. Government securities, where the interest and principal components
of stripped U.S. Government securities are traded independently.
Repurchase Agreements. Each fund may invest up to 10% of its net assets in
repurchase agreements. In a repurchase agreement, a fund buys a security at one
price and simultaneously agrees to
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sell it back at a higher price. Delays or losses could result if the other party
to the agreement defaults or becomes insolvent. Repurchase agreements acquired
by a fund will always be fully collateralized as to principal and interest by
money market instruments and will be entered into only with commercial banks,
brokers and dealers considered creditworthy by the adviser.
Short Sales. Each fund may engage in short sales and short sales against
the box. In a short sale, a fund sells a security it does not own in
anticipation of a decline in the market value of the security. In a short sale
against the box, a fund either owns or has the right to obtain at no extra cost
the security sold short. The broker holds the proceeds of the short sale until
the settlement date, at which time the fund delivers the security (or an
identical security) to cover the short position. The fund receives the net
proceeds from the short sale. When a fund enters into a short sale other than
against the box, the fund must first borrow the security to make delivery to the
buyer and must place cash or liquid assets in a segregated account that is
marked to market daily. Short sales other than against the box involve unlimited
exposure to loss. No securities will be sold short if, after giving effect to
any such short sale, the total market value of all securities sold short would
exceed 5% of the value of a fund's net assets.
Restricted and Illiquid Securities. Each fund may invest up to 15% of its
net assets in illiquid securities, although the funds invest in these securities
only on an occasional basis. Illiquid securities are those that are not readily
marketable, repurchase agreements maturing in more than seven days, time
deposits with a notice or demand period of more than seven days, swap
transactions, certain OTC options and certain restricted securities. Based upon
continuing review of the trading markets for a specific restricted security, the
security may be determined to be eligible for resale to qualified institutional
buyers pursuant to Rule 144A under the Securities Act of 1933 and, therefore, to
be liquid. Also, certain illiquid securities may be determined to be liquid if
they are found to satisfy relevant liquidity requirements.
The Board of Trustees has adopted guidelines and delegated to the adviser
the function of determining and monitoring the liquidity of portfolio
securities, including restricted and illiquid securities. The Board of Trustees
however retains oversight and is ultimately responsible for such determinations.
The purchase price and subsequent valuation of illiquid securities normally
reflect a discount, which may be significant, from the market price of
comparable securities for which a liquid market exists.
Investments in Other Investment Companies. Each fund is permitted to
invest up to 10% of its total assets in shares of registered investment
companies and up to 5% of its total assets in any one registered investment
company as long as that investment does not represent more than 3% of the total
voting stock of the acquired investment company. Investments in the securities
of other investment companies may involve duplication of advisory fees and other
expenses. The funds may invest in investment companies that are designed to
replicate the composition and performance of a particular index. For example,
Standard & Poor's Depositary Receipts ("SPDRs") are exchange-traded shares of a
closed-end investment company designed to replicate the price performance and
dividend yield of the Standard & Poor's 500 Composite Stock Price Index.
Investments in index baskets involve the same risks associated with a direct
investment in the types of securities included in the baskets.
Portfolio Turnover and Short-Term Trading. Although it is not the policy
of the funds to purchase or sell securities for trading purposes, the funds
place no restrictions on portfolio turnover and will sell a portfolio security
without regard to the length of time such security has been held if, in the
adviser's view, the security meets the criteria for disposal. A high rate of
portfolio turnover (100% or more) involves correspondingly higher transaction
costs which must be borne directly by a fund and thus indirectly by its
shareholders. It may also result in a fund's realization of larger amounts of
short-term capital gains, distributions from which are taxable to shareholders
as ordinary income. See "Financial Highlights" in the funds' prospectus for each
fund's portfolio turnover rates.
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Temporary Defensive Investments. Notwithstanding a fund's investment
objective, each fund may on occasion, for temporary defensive purposes to
preserve capital or to meet redemption requests, hold part or all of its assets
in cash and investment grade money market instruments (i.e., securities with
maturities of less than one year) and short-term debt securities (i.e.,
securities with maturities of one to three years). Each fund may also invest
uncommitted cash and cash needed to maintain liquidity for redemptions in
investment grade money market instruments and short-term debt securities. Each
fund's investments in such securities are limited to 20% of total assets unless
the fund is in a temporary defensive position.
The money market instruments and short-term debt securities in which the
funds may invest consist of obligations issued or guaranteed by the U.S.
Government, its agencies, instrumentalities or authorities; instruments
(including negotiable certificates of deposit, non-negotiable fixed time
deposits and bankers' acceptances) of U.S. banks and foreign banks; repurchase
agreements; and prime commercial paper of U.S. companies and foreign companies.
Money market instruments in which the funds invest will be rated at the
time of purchase P-1 by Moody's or A-1 or Duff-1 by Standard & Poor's, Duff and
Fitch or, if unrated, determined by the adviser to be of comparable quality. At
least 95% of each fund's assets invested in short-term debt securities will be
rated, at the time of investment, Aaa, Aa, or A by Moody's or AAA, AA, or A by
Standard & Poor's or, if not rated, determined to be of comparable credit
quality by the adviser. Up to 5% of each fund's total assets invested in
short-term debt securities may be invested in securities which are rated Baa by
Moody's or BBB by Standard & Poor's or, if not rated, determined to be of
comparable credit quality by the adviser.
INVESTMENT TECHNIQUES AND RELATED RISKS
Strategic and Derivative Transactions. Each fund may, but is not required
to, utilize various investment strategies to seek to hedge market risks (such as
interest rates, currency exchange rates and broad or specific equity or fixed
income market movements) or to enhance potential gain. Such strategies are
generally accepted as part of modern portfolio management and are regularly
utilized by many mutual funds and other institutional investors. Techniques and
instruments used by each fund may change over time as new instruments and
strategies are developed or regulatory changes occur.
In the course of pursuing their investment objectives, each fund may
purchase and sell (write) exchange-listed and OTC put and call options on
securities, equity indices and other financial instruments; purchase and sell
financial futures contracts and options thereon; and enter into currency
transactions such as forward foreign currency exchange contracts, cross-currency
forward contracts, currency futures contracts, currency swaps and options on
currencies or currency futures (collectively, all the above are called
"Strategic Transactions"). Strategic Transactions may be used to seek to protect
against possible changes in the market value of securities held in or to be
purchased for a fund's portfolio resulting from securities markets or currency
exchange rate fluctuations, to seek to protect a fund's unrealized gains in the
value of portfolio securities, to facilitate the sale of such securities for
investment purposes, or to establish a position in the derivatives markets as a
temporary substitute for purchasing or selling particular securities. In
addition to the hedging transactions referred to in the preceding sentence,
Strategic Transactions may also be used to enhance potential gain in
circumstances where hedging is not involved although each fund will attempt to
limit its net loss exposure resulting from Strategic Transactions entered into
for such purposes to not more than 3% of its net assets at any one time and, to
the extent necessary, the funds will close out transactions in order to comply
with this limitation. (Transactions such as writing covered call options are
considered to involve hedging for the purposes of this limitation.) In
calculating a fund's net loss exposure from such Strategic Transactions, an
unrealized gain from a particular Strategic Transaction position would be netted
against an unrealized loss from a related Strategic Transaction position. For
example, if the adviser believes that Equity Asset Fund is underweighted in
cyclical stocks and overweighted in consumer stocks, Equity Asset Fund may buy a
cyclical index call option and sell a
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cyclical index put option and sell a consumer index call option and buy a
consumer index put option. Under such circumstances, any unrealized loss in the
cyclical position would be netted against any unrealized gain in the consumer
position (and vice versa) for purposes of calculating the fund's net loss
exposure.
The ability of a fund to utilize Strategic Transactions successfully will
depend on the adviser's ability to predict pertinent market and currency and
interest rate movements, which cannot be assured. Each fund will comply with
applicable regulatory requirements when implementing these strategies,
techniques and instruments. The funds' activities involving Strategic
Transactions may be limited in order to enable the funds to satisfy the
requirements of the Code for qualification as a regulated investment company.
Risks of Strategic and Derivative Transactions. Strategic Transactions
have risks associated with them including possible default by the other party to
the transaction, illiquidity and, to the extent the adviser's view as to certain
market movements is incorrect, the risk that the use of such Strategic
Transactions could result in losses greater than if they had not been used. The
risks associated with the funds' transactions in options, futures and other
types of derivative securities including swaps may include some or all of the
following: market risk, leverage and volatility risk, correlation risk, credit
risk and liquidity and valuation risk. The writing of put and call options may
result in losses to the funds, force the purchase or sale, respectively of
portfolio securities at inopportune times or for prices higher than (in the case
of purchases due to the exercise of put options) or lower than (in the case of
sales due to the exercise of call options) current market values, limit the
amount of appreciation the funds can realize on their respective investments or
cause the funds to hold a security they might otherwise sell or sell a security
they might otherwise hold. The use of currency transactions by a fund can result
in the fund incurring losses as a result of a number of factors including the
imposition of exchange controls, suspension of settlements, or the inability to
deliver or receive a specified currency. The use of options and futures
transactions entails certain other risks. In particular, the variable degree of
correlation between price movements of futures contracts and price movements in
the related portfolio position of a fund creates the possibility that losses on
the hedging instrument may be greater than gains in the value of the fund's
position. The writing of options could significantly increase a fund's portfolio
turnover rate and, therefore, associated brokerage commissions or spreads. In
addition, futures and options markets may not be liquid in all circumstances and
certain over-the-counter options may have no markets. As a result, in certain
markets, the funds might not be able to close out a transaction without
incurring substantial losses, if at all. Although the use of futures and options
transactions for hedging should tend to minimize the risk of loss due to a
decline in the value of the hedged position, at the same time, in certain
circumstances, these transactions tend to limit any potential gain which might
result from an increase in value of such position. The loss incurred by a fund
in writing options and entering into futures transactions is potentially
unlimited; however, as described above, each fund will attempt to limit its net
loss exposure resulting from Strategic Transactions entered into for such
purposes to not more than 3% of its net assets at any one time. Futures markets
are highly volatile and the use of futures may increase the volatility of a
fund's net asset value. Finally, entering into futures contracts would create a
greater ongoing potential financial risk than would purchases of options where
the exposure is limited to the cost of the initial premium. Losses resulting
from the use of Strategic Transactions would reduce net asset value and the net
result may be less favorable than if the Strategic Transactions had not been
utilized.
Risks of Strategic and Derivative Transactions Outside the United States.
When conducted outside the United States and especially in emerging markets,
Strategic Transactions may not be regulated as rigorously as in the United
States, may not involve a clearing mechanism and related guarantees, and are
subject to the risk of governmental actions affecting trading in, or the prices
of, foreign securities, currencies and other instruments. The value of such
positions also could be adversely affected by: (i) lesser availability than in
the United States of data on which to make trading decisions, (ii) delays in a
fund's
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ability to act upon economic events occurring in foreign markets during
non-business hours in the United States, (iii) the imposition of different
exercise and settlement terms and procedures and margin requirements than in the
United States, (iv) lower trading volume and liquidity, and (v) other complex
foreign political, legal and economic factors. At the same time, Strategic
Transactions may offer advantages such as trading in instruments that are not
currently traded in the United States or arbitrage possibilities not available
in the United States.
General Characteristics of Options. Put options and call options typically
have similar structural characteristics and operational mechanics regardless of
the underlying instrument on which they are purchased or sold. Thus, the
following general discussion relates to each of the particular types of options
discussed in greater detail below. In addition, many Strategic Transactions
involving options require segregation of a fund's assets in special accounts, as
described below under "Use of Segregated Accounts."
A put option gives the purchaser of the option, in consideration for the
payment of a premium, the right to sell, and the writer the obligation to buy
(if the option is exercised) the underlying security, commodity, index, or other
instrument at the exercise price. For instance, a fund's purchase of a put
option on a security might be designed to protect its holdings in the underlying
instrument (or, in some cases, a similar instrument) against a substantial
decline in the market value by giving the fund the right to sell such instrument
at the option exercise price. A call option, in consideration for the payment of
a premium, gives the purchaser of the option the right to buy, and the seller
the obligation to sell (if the option is exercised) the underlying instrument at
the exercise price. A fund may purchase a call option on a security, currency,
futures contract, index or other instrument to seek to protect the fund against
an increase in the price of the underlying instrument that it intends to
purchase in the future by fixing the price at which it may purchase such
instrument. An American style put or call option may be exercised at any time
during the option period while a European style put or call option may be
exercised only upon expiration or during a fixed period prior thereto. The funds
are authorized to purchase and sell exchange listed options and over-the-counter
options ("OTC options"). Exchange listed options are issued by a regulated
intermediary such as the Options Clearing Corporation ("OCC"), which guarantees
the performance of the obligations of the parties to such options. The
discussion below uses the OCC as an example, but is also applicable to other
financial intermediaries.
With certain exceptions, exchange listed options generally settle by
physical delivery of the underlying security or currency, although in the future
cash settlement may become available. Index options and Eurodollar instruments
are cash settled for the net amount, if any, by which the option is
"in-the-money" (i.e., where the value of the underlying instrument exceeds, in
the case of a call option, or is less than, in the case of a put option, the
exercise price of the option) at the time the option is exercised. Frequently,
rather than taking or making delivery of the underlying instrument through the
process of exercising the option, listed options are closed by entering into
offsetting purchase or sale transactions that do not result in ownership of the
new option.
A fund's ability to close out its position as a purchaser or seller of an
exchange listed put or call option is dependent, in part, upon the liquidity of
the option market. There is no assurance that a liquid option market on an
exchange will exist. In the event that the relevant market for an option on an
exchange ceases to exist, outstanding options on that exchange would generally
continue to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours
during which the underlying financial instruments are traded. To the extent that
the option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
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OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct bilateral
agreement with the Counterparty. In contrast to exchange listed options, which
generally have standardized terms and performance mechanics, all the terms of an
OTC option, including such terms as method of settlement, term, exercise price,
premium, guarantees and security, are set by negotiation of the parties. The
funds will generally sell (write) OTC options (other than OTC currency options)
that are subject to a buy-back provision permitting a fund to require the
Counterparty to sell the option back to the fund at a formula price within seven
days. OTC options purchased by the funds and portfolio securities "covering" the
amount of the funds' obligation pursuant to an OTC option sold by them (the cost
of the sell-back plus the in-the-money amount, if any) are subject to the funds'
restriction on illiquid securities, unless determined to be liquid in accordance
with procedures adopted by the Board of Trustees. For OTC options written with
"primary dealers" pursuant to an agreement requiring a closing purchase
transaction at a formula price, the amount which is considered to be illiquid
may be calculated by reference to a formula price. The funds expect generally to
enter into OTC options that have cash settlement provisions, although they are
not required to do so.
Unless the parties provide for it, there is no central clearing or
guaranty function in the OTC option market. As a result, if the Counterparty
fails to make delivery of the security, currency or other instrument underlying
an OTC option it has entered into with a fund or fails to make a cash settlement
payment due in accordance with the terms of that option, the fund will lose any
premium it paid for the option as well as any anticipated benefit of the
transaction. Accordingly, the adviser must assess the creditworthiness of each
such Counterparty or any guarantor or credit enhancement of the Counterparty's
credit to determine the likelihood that the terms of the OTC option will be
satisfied. The funds will engage in OTC option transactions only with U.S.
Government securities dealers recognized by the Federal Reserve Bank of New York
as "primary dealers", or broker dealers, domestic or foreign banks or other
financial institutions which have received, combined with any credit
enhancements, a long-term debt rating of A from S&P or Moody's or an equivalent
rating from any other nationally recognized statistical rating organization
("NRSRO") or which issue debt that is determined to be of equivalent credit
quality by the adviser.
If a fund sells (writes) a call option, the premium that it receives may
serve as a partial hedge, to the extent of the option premium, against a
decrease in the value of the underlying securities or instruments in its
portfolio or will increase the fund's income. The sale (writing) of put options
can also provide income.
Each fund may purchase and sell (write) call options on equity securities
and Eurodollar instruments that are traded on U.S. and foreign securities
exchanges and in the over-the-counter markets, and on securities indices,
currencies and futures contracts. All call options sold by the funds must be
"covered" (i.e., the fund must own the securities or the futures contract
subject to the call) or must meet the asset segregation requirements described
below as long as the call is outstanding. Even though a fund will receive the
option premium to help offset any loss, the fund may incur a loss if the
exercise price is below the market price for the security subject to the call at
the time of exercise. A call option sold by a fund also exposes the fund during
the term of the option to possible loss of opportunity to realize appreciation
in the market price of the underlying security or instrument and may require the
fund to hold a security or instrument which it might otherwise have sold.
Each fund may purchase and sell (write) put options on equity securities
and Eurodollar instruments (whether or not it holds these securities in its
portfolio), and on securities indices, currencies and futures contracts. A fund
will not sell put options if, as a result, more than 50% of the fund's total
assets would be required to be segregated to cover its potential obligations
under such put options other than those with respect to futures and options
thereon. In selling put options, there is a risk that a fund may be required to
buy the underlying security at a price above the market price.
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Options on Securities Indices and Other Financial Indices. Each fund may
also purchase and sell (write) call and put options on securities indices and
other financial indices. Options on securities indices and other financial
indices are similar to options on a security or other instrument except that,
rather than settling by physical delivery of the underlying instrument, they
settle by cash settlement. For example, an option on an index gives the holder
the right to receive, upon exercise of the option, an amount of cash if the
closing level of the index upon which the option is based exceeds, in the case
of a call, or is less than, in the case of a put, the exercise price of the
option (except if, in the case of an OTC option, physical delivery is
specified). This amount of cash is equal to the differential between the closing
price of the index and the exercise price of the option, which also may be
multiplied by a formula value. The seller of the option is obligated, in return
for the premium received, to make delivery of this amount upon exercise of the
option. In addition to the methods described above, the funds may cover call
options on a securities index by owning securities whose price changes are
expected to be similar to those of the underlying index, or by having an
absolute and immediate right to acquire such securities without additional cash
consideration (or for additional cash consideration held in a segregated account
by the custodian) upon conversion or exchange of other securities in their
portfolios.
General Characteristics of Futures. Each fund may enter into financial
futures contracts or purchase or sell put and call options on such futures.
Futures are generally bought and sold on the commodities exchanges where they
are listed and involve payment of initial and variation margin as described
below. The sale of futures contracts creates a firm obligation by a fund, as
seller, to deliver to the buyer the specific type of financial instrument called
for in the contract at a specific future time for a specified price (or, with
respect to index futures and Eurodollar instruments, the net cash amount). The
purchase of futures contracts creates a corresponding obligation by a fund, as
purchaser, to purchase a financial instrument at a specific time and price.
Options on futures contracts are similar to options on securities except that an
option on a futures contract gives the purchaser the right in return for the
premium paid to assume a position in a futures contract and obligates the seller
to deliver such position upon exercise of the option.
The funds' use of financial futures and options thereon will in all cases
be consistent with applicable regulatory requirements and in particular the
regulations of the Commodity Futures Trading Commission (the "CTFC") relating to
exclusions from regulation as a commodity pool operator. Those regulations
currently provide that the funds may use commodity futures and option positions
(i) for bona fide hedging purposes without regard to the percentage of assets
committed to margin and option premiums, or (ii) for other purposes permitted by
the CTFC to the extent that the aggregate initial margin and option premiums
required to establish such non-hedging positions (net the amount the positions
were "in the money" at the time of purchase) do not exceed 5% of each fund's
respective net asset value, after taking into account unrealized profits and
losses on such positions. Typically, maintaining a futures contract or selling
an option thereon requires a fund to deposit with its custodian for the benefit
of a futures commission merchant (or directly with the Futures Commission
merchant), as security for its obligations an amount of cash or other specified
assets (initial margin) which initially is typically 1% to 10% of the face
amount of the contract (but may be higher in some circumstances). Additional
cash or assets (variation margin) may be required to be deposited directly with
the futures commission merchant thereafter on a daily basis as the value of the
contract fluctuates. The purchase of an option on financial futures involves
payment of a premium for the option without any further obligation on the part
of the funds. If a fund exercises an option on a futures contract it will be
obligated to post initial margin (and potential subsequent variation margin) for
the resulting futures position just as it would for any position. Futures
contracts and options thereon are generally settled by entering into an
offsetting transaction but there can be no assurance that the position can be
offset prior to settlement at an advantageous price, nor that delivery will
occur. The segregation requirements with respect to futures contracts and
options thereon are described below.
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Currency Transactions. The funds may engage in currency transactions with
Counterparties to seek to hedge the value of portfolio holdings denominated in
particular currencies against fluctuations in relative value or to enhance
potential gain. Currency transactions include currency contracts, exchange
listed currency futures, exchange listed and OTC options on currencies, and
currency swaps. A forward currency contract involves a privately negotiated
obligation to purchase or sell (with delivery generally required) a specific
currency at a future date, which may be any fixed number of days from the date
of the contract agreed upon by the parties, at a price set at the time of the
contract. A currency swap is an agreement to exchange cash flows based on the
notional (agreed-upon) difference among two or more currencies and operates
similarly to an interest rate swap, which is described below. A fund may enter
into over-the-counter currency transactions with Counterparties which have
received, combined with any credit enhancements, a long term debt rating of A by
S&P or Moody's, respectively, or that have an equivalent rating from a NRSRO or
(except for OTC currency options) whose obligations are determined to be of
equivalent credit quality by the adviser.
The funds' transactions in forward currency contracts and other currency
transactions such as futures, options, options on futures and swaps will
generally be limited to hedging involving either specific transactions or
portfolio positions. See "Strategic and Derivative Transactions." Transaction
hedging is entering into a currency transaction with respect to specific assets
or liabilities of a fund, which will generally arise in connection with the
purchase or sale of its portfolio securities or the receipt of income therefrom.
Position hedging is entering into a currency transaction with respect to
portfolio security positions denominated or generally quoted in that currency.
A fund will not enter into a transaction to hedge currency exposure to an
extent greater, after netting all transactions intended wholly or partially to
offset other transactions, than the aggregate market value (at the time of
entering into the transaction) of the securities held in its portfolio that are
denominated or generally quoted in or currently convertible into such currency,
other than with respect to proxy hedging as described below.
Each fund may also cross-hedge currencies by entering into transactions to
purchase or sell one or more currencies that are expected to decline in value in
relation to other currencies to which the fund has or in which the fund expects
to have portfolio exposure. For example, a fund may hold a South Korean security
and the adviser may believe that the Korean won will deteriorate against the
Japanese yen. The fund would sell Korean won to reduce its exposure to that
currency and buy Japanese yen. This strategy would be a hedge against a decline
in the value of Korean won, although it would expose the fund to declines in the
value of the Japanese yen relative to the U.S. dollar.
To seek to reduce the effect of currency fluctuations on the value of
existing or anticipated holdings of portfolio securities, the funds may also
engage in proxy hedging. Proxy hedging is often used when the currency to which
the fund's portfolio is exposed is difficult to hedge or to hedge against the
dollar. Proxy hedging entails entering into a forward contract to sell a
currency whose changes in value are generally considered to be linked to a
currency or currencies in which certain of a fund's portfolio securities are or
are expected to be denominated, and to buy U.S. dollars. The amount of the
contract would not exceed the value of the fund's securities denominated in
linked currencies. For example, if the adviser considers that the British pound
is linked to the euro, a fund holds securities denominated in pounds and the
adviser believes that the value of pounds will decline against the U.S. dollar,
the adviser may enter into a contract to sell euros and buy dollars. Proxy
hedging involves some of the same risks and considerations as other transactions
with similar instruments. Currency transactions can result in losses to the
funds if the currency being hedged fluctuates in value to a degree or in a
direction that is not anticipated. Further, there is the risk that the perceived
linkage between various currencies may not be present or may not be present
during the particular time that the funds are engaging in proxy hedging. If a
fund enters into a currency hedging transaction, the fund will comply with the
asset segregation requirements described below.
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Risks of Currency Transactions. Currency transactions are subject to risks
different from those of other portfolio transactions. Because currency control
is of great importance to the issuing governments and influences economic
planning and policy, purchases and sales of currency and related instruments can
be negatively affected by government exchange controls, blockages, and
manipulations or exchange restrictions imposed by governments. These can result
in losses to a fund if it is unable to deliver or receive currency or funds in
settlement of obligations and could also cause hedges it has entered into to be
rendered useless, resulting in full currency exposure as well as incurring
transaction costs. Buyers and sellers of currency futures are subject to the
same risks that apply to the use of futures generally. Further, settlement of a
currency futures contract for the purchase of most currencies must occur at a
bank based in the issuing nation. Trading options on currency futures is
relatively new, and the ability to establish and close out positions on such
options is subject to the maintenance of a liquid market which may not always be
available. Currency exchange rates may fluctuate based on factors extrinsic to
that country's economy.
Swaps, Caps, Floors, Spreads and Collars. Among the Strategic Transactions
into which each of the funds may enter are interest rate, currency rate and
index swaps and the purchase or sale of related caps, floors, spreads and
collars. Interest rate swaps involve the exchange by a fund with another party
of their respective commitments to pay or receive interest, e.g., an exchange of
floating rate payments for fixed rate payments with respect to a notional amount
of principal. A fund will not sell interest rate caps or floors where it does
not own securities or other instruments providing the income stream the fund may
be obligated to pay. A currency swap is an agreement to exchange cash flows on a
notional amount of two or more currencies based on the relative value
differential among them. An index swap is an agreement to swap cash flows on a
notional amount based on changes in the values of the reference indices. The
purchase of a cap entitles the purchaser to receive payments on a notional
principal amount from the party selling such cap to the extent that a specified
index exceeds a predetermined interest rate or amount. The purchase of a floor
entitles the purchaser to receive payments on a notional principal amount from
the party selling such floor to the extent that a specified index falls below a
predetermined interest rate or amount. A collar or a spread is a combination of
a cap and a floor that preserves a certain rate of return within a predetermined
range of interest rates or values.
The funds will usually enter into swaps on a net basis, i.e., the two
payment streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with a fund receiving or paying, as the case may
be, only the net amount of the two payments. The funds will not enter into any
swap, cap, floor, spread or collar transaction unless, at the time of entering
into such transaction, the unsecured long-term debt of the Counterparty,
combined with any credit enhancements, is rated at least A by S&P or Moody's or
has an equivalent rating from an NRSRO or the Counterparty issues debt that is
determined to be of equivalent credit quality by the adviser. If there is a
default by the Counterparty, a fund may have contractual remedies pursuant to
the agreements related to the transaction. The swap market has grown
substantially in recent years with a large number of banks and investment
banking firms acting both as principals and as agents utilizing standardized
swap documentation. As a result, the swap market has become relatively liquid.
Caps, floors, spreads and collars are more recent innovations for which
standardized documentation has not yet been fully developed. Swaps, caps,
floors, spreads and collars are considered illiquid for purposes of each fund's
policy regarding illiquid securities, unless it is determined, based upon
continuing review of the trading markets for the specific security, that such
security is liquid. The Board of Trustees has adopted guidelines and delegated
to the adviser the daily function of determining and monitoring the liquidity of
swaps, caps, floors, spreads and collars. The Board of Trustees, however,
retains oversight focusing on factors such as valuation, liquidity and
availability of information and is ultimately responsible for such
determinations. The staff of the SEC currently takes the position that swaps,
caps, floors, spreads and collars are illiquid, and are subject to each fund's
limitation on investing in illiquid securities.
-17-
<PAGE>
Combined Transactions. Each fund may enter into multiple transactions,
including multiple options transactions, multiple futures transactions, multiple
swap transactions, and multiple interest rate transactions, structured notes and
any combination of futures, options, swaps, currency, multiple currency
transactions (including forward currency contracts) and interest rate
transactions ("component" transactions), instead of a single Strategic
Transaction, as part of a single or combined strategy when, in the opinion of
the adviser it is in the best interests of the fund to do so. A combined
transaction will usually contain elements of risk that are present in each of
its component transactions. Although combined transactions are normally entered
into based on the adviser's judgment that the combined strategies will reduce
risk or otherwise more effectively achieve the desired portfolio management
goal, it is possible that the combination will instead increase such risks or
hinder achievement of the portfolio management objective.
Use of Segregated Accounts. Each fund will hold securities or other
instruments whose values are expected to offset its obligations under the
Strategic Transactions. A fund will not enter into Strategic Transactions that
expose the fund to an obligation to another party unless it owns either (i) an
offsetting position in securities or other options, futures contracts or other
instruments or (ii) cash, receivables or liquid securities with a value
sufficient to cover its potential obligations. A fund may have to comply with
any applicable regulatory requirements for Strategic Transactions, and if
required, will set aside cash and other liquid assets on the fund's records or
in a segregated account in the amount prescribed. If the market value of these
securities declines or the fund's obligations on the underlying Strategic
Transaction increases, additional cash or liquid securities will be segregated
daily so that the aggregate market value of the segregated securities is at
least equal to the amount of the fund's obligations on the underlying Strategic
Transactions. Segregated assets would not be sold while the Strategic
Transaction is outstanding, unless they are replaced with similar assets. As a
result, there is a possibility that segregation of a large percentage of a
fund's assets could impede portfolio management or the fund's ability to meet
redemption requests or other current obligations.
Eurodollar Contracts. Each fund may make investments in Eurodollar
contracts. Eurodollar contracts are U.S. dollar-denominated futures contracts or
options thereon which are linked to the London Interbank Offered Rate ("LIBOR"),
although foreign currency-denominated instruments are available from time to
time. Eurodollar futures contracts enable purchasers to obtain a fixed rate for
the lending of funds and sellers to obtain a fixed rate for borrowings. A fund
might use Eurodollar futures contracts and options thereon to hedge against
changes in LIBOR, to which many interest rate swaps and fixed income instruments
are linked.
Short-Term Trading. Each fund will sell a portfolio security without
regard to the length of time that security has been held if, in the adviser's
view, the security meets the criteria for disposal.
Portfolio Diversification and Concentration. Each fund is diversified,
which generally means that, with respect to 75% of its total assets (i) no more
than 5% of the fund's total assets may be invested in the securities of a single
issuer and (ii) each fund will purchase no more than 10% of the outstanding
voting securities of a single issuer. The funds will not concentrate (invest 25%
or more of their total assets) in the securities of issuers in any one industry.
The funds' policies concerning diversification and concentration are fundamental
and may not be changed without shareholder approval.
INVESTMENT RESTRICTIONS
The funds and the Portfolios have adopted the following fundamental
policies. Each fund's and Portfolio's fundamental policies cannot be changed
unless the change is approved by a "vote of a majority of the outstanding voting
securities" of the fund or the Portfolio, as the case may be, which phrase as
used herein means the lesser of (i) 67% or more of the voting securities of the
fund or the Portfolio present at a
-18-
<PAGE>
meeting, if the holders of more than 50% of the outstanding voting securities of
the fund or the Portfolio are present or represented by proxy, or (ii) more than
50% of the outstanding voting securities of the fund or the Portfolio. A fund's
non-fundamental policies may be changed by the Board of Trustees, without
shareholder approval, in accordance with applicable laws, regulations or
regulatory policy.
Equity Asset Fund and Equity Portfolio.
As a matter of fundamental policy, each Portfolio (fund) may not:
1. Invest more than 25% of the current value of its total assets in any
single industry, provided that this restriction shall not apply to U.S.
Government securities.
2. Underwrite the securities of other issuers, except to the extent that, in
connection with the disposition of portfolio securities, a Portfolio
(fund) may be deemed be an underwriter under the Securities Act of 1933.
3. Purchase real estate or real estate mortgage loans.
4. Purchase securities on margin (except that each Portfolio (fund) may
obtain such short-term credits as may be necessary for the clearance of
purchases and sales of securities).
5. Purchase or sell commodities or commodity contracts except that each
Portfolio (fund) may purchase and sell financial futures contracts and
engage in options on financial futures contracts and foreign currency
exchange transactions.
6. With respect to at least 75% of its total assets, invest more than 5% in
the securities of any one issuer (other than the U.S. Government, its
agencies or instrumentalities) or acquire more than 10% of the outstanding
voting securities of any issuer.
7. Issue senior securities, borrow money, enter into reverse repurchase
agreements or pledge or mortgage its assets, except that each Portfolio
(fund) may (a) borrow from banks in an amount up to 15% of the current
value of its total assets as a temporary measure for extraordinary or
emergency purposes (but not investment purposes) and (b) pledge its assets
to an extent not greater than 15% of the current value of its total assets
to secure such borrowings.
8. Make loans of portfolio securities, except that each Portfolio (fund) may
enter into repurchase agreements.
The following restrictions are not fundamental policies and may be changed
by the Trustees of the Portfolio Trust (Trust) without investor approval, in
accordance with applicable laws, regulations or regulatory policy. Each
Portfolio (fund) may not:
a. Invest in the securities of an issuer for the purpose of exercising
control or management, but it may do so where it is deemed advisable to
protect or enhance the value of an existing investment.
b. Purchase the securities of any other investment company except to the
extent permitted by the 1940 Act.
c. Invest more than 15% of its net assets in securities which are illiquid.
d. Purchase additional securities if the Portfolio's borrowings exceed 5% of
its net assets.
-19-
<PAGE>
Small Cap Growth Fund and Small Cap Growth Portfolio. As a matter of
fundamental policy, Small Cap Growth Fund (Small Cap Growth Portfolio) may not:
1. Invest more than 25% of the current value of its total assets in any
single industry, provided that this restriction shall not apply to U.S.
Government securities or mortgage-backed securities issued or guaranteed
as to principal or interest by the U.S. Government, its agencies or
instrumentalities.
2. Issue senior securities. For purposes of this restriction, borrowing money
in accordance with paragraph 3 below, making loans in accordance with
paragraph 8 below, the issuance of shares of beneficial interest in
multiple classes or series, the deferral of trustees' fees, the purchase
or sale of options, futures contracts, forward commitments and repurchase
agreements entered into in accordance with the Portfolio's (fund's)
investment policies or within the meaning of paragraph 6 below, are not
deemed to be senior securities.
3. Borrow money, except in amounts not to exceed 33 1/3% of the value of the
Portfolio's (fund's) total assets (including the amount borrowed) taken at
market value (i) from banks for temporary or short-term purposes or for
the clearance of transactions, (ii) in connection with the redemption of
portfolio shares or to finance failed settlements of portfolio trades
without immediately liquidating portfolio securities or other assets,
(iii) in order to fulfill commitments or plans to purchase additional
securities pending the anticipated sale of other portfolio securities or
assets and (iv) the Portfolio (fund) may enter into reverse repurchase
agreements and forward roll transactions. For purposes of this investment
restriction, investments in short sales, futures contracts, options on
futures contracts, securities or indices and forward commitments shall not
constitute borrowing.
4. Underwrite the securities of other issuers, except to the extent that, in
connection with the disposition of portfolio securities, the Portfolio
(fund) may be deemed to be an underwriter under the Securities Act of
1933.
5. Purchase or sell real estate except that the Portfolio (fund) may (i)
acquire or lease office space for its own use, (ii) invest in securities
of issuers that invest in real estate or interests therein, (iii) invest
in securities that are secured by real estate or interests therein, (iv)
purchase and sell mortgage-related securities and (v) hold and sell real
estate acquired by the Portfolio (fund) as a result of the ownership of
securities.
6. Purchase securities on margin (except that the Portfolio (fund) may obtain
such short-term credits as may be necessary for the clearance of purchases
and sales of securities).
7. Purchase or sell commodities or commodity contracts, except the Portfolio
(fund) may purchase and sell options on securities, securities indices and
currency, futures contracts on securities, securities indices and currency
and options on such futures, forward foreign currency exchange contracts,
forward commitments, securities index put or call warrants and repurchase
agreements entered into in accordance with the Portfolio's (fund's)
investment policies.
8. Make loans, except that the Portfolio (fund) (1) may lend portfolio
securities in accordance with the Portfolio's (fund's) investment policies
up to 33 1/3% of the Portfolio's (fund's) total assets taken at market
value, (2) enter into repurchase agreements, and (3) purchase all or a
portion of an issue of debt securities, bank loan participation interests,
bank certificates of deposit, bankers' acceptances, debentures or other
securities, whether or not the purchase is made upon the original issuance
of the securities.
-20-
<PAGE>
9. With respect to 75% of its total assets, purchase securities of an issuer
(other than the U.S. Government, its agencies, instrumentalities or
authorities or repurchase agreements collateralized by U.S. Government
securities and other investment companies), if: (a) such purchase would
cause more than 5% of the Portfolio's (fund's) total assets taken at
market value to be invested in the securities of such issuer; or (b) such
purchase would at the time result in more than 10% of the outstanding
voting securities of such issuer being held by the Portfolio (fund).
The following restrictions are not fundamental policies and may be changed
by the Trustees of the Trust without investor approval, in accordance with
applicable laws, regulations or regulatory policy. The Portfolio (fund) may not:
a. Invest in the securities of an issuer for the purpose of exercising
control or management, but it may do so where it is deemed advisable to
protect or enhance the value of an existing investment.
b. Purchase the securities of any other investment company except to the
extent permitted by the 1940 Act.
c. Invest more than 15% of its net assets in securities which are illiquid.
d. Purchase additional securities if the fund's borrowings exceed 5% of its
net assets.
* * * * * * * * * * * * * * * *
Notwithstanding any other fundamental or non-fundamental investment
restriction or policy, the funds may each invest all of their assets in the
securities of a single open-end registered investment company with substantially
the same fundamental investment objectives, restrictions and policies as the
fund.
If any percentage restriction described above is adhered to at the time of
investment, a subsequent increase or decrease in the percentage resulting from a
change in the value of a fund's assets will not constitute a violation of the
restriction.
For purposes of each fund's fundamental investment restriction regarding
industry concentration, the adviser generally classifies issuers by industry in
accordance with classifications set forth in the Director of Companies Filing
annual Reports with the Securities and Exchange Commission. In the absence of
such classification or if the adviser determines in good faith based on its own
information that the economic characteristics affecting a particular issuer make
it more appropriately considered to be engaged in a different industry, the
adviser may classify an issuer according to its own sources. For instance,
personal credit finance companies and business credit finance companies are
deemed to be separate industries and wholly-owned finance companies are
considered to be in the industry of their parents if their activities are
primarily related to financing the activities of their parents.
CALCULATION OF PERFORMANCE DATA
Each fund may, from time to time, advertise certain total return
information. The average annual total return of a fund for a period is computed
by subtracting the net asset value per share at the beginning of the period from
the net asset value per share at the end of the period (after adjusting for the
reinvestment of any income dividends and capital gain distributions), and
dividing the result by the net asset value per share at the beginning of the
period. In particular, the average annual total return of a fund ("T") is
computed by using the redeemable value at the end of a specified period of time
("ERV") of a hypothetical initial investment of $1,000 ("P") over a period of
time ("n") according to the formula P(1+T)n=ERV.
-21-
<PAGE>
The funds' average annual total return for the one-, five-, and ten-year
(or life of fund, if shorter) periods ended September 30, 1999 were as follows:
Average Annual Total Return
-------------------------------------------------
Life-of-
Fund Fund 1-Year 5-Year 10-Year
- -------------------------- --------- --------- --------- -------
Equity Asset Fund(1) 16.82%(2) 12.04%(2) 17.94%(2) N/A
Small Cap Growth Fund(1,3) 28.74%(3) 71.73%(3) N/A N/A
- -------------------
(1) Because the Equity Asset Fund commenced operations on October 8, 1997 and
the Small Cap Growth Fund Service Class commenced operations on March 31,
1999, the average annual total return quotations for the one, five, ten
year and life-of-fund periods include the performance record of their
corresponding non-asset fund or Institutional Class (in the case of the
Small Cap Growth Fund), adjusted to reflect the imposition of service fees
at the rate of 0.25% of average daily net assets. The adjustment is made
by reducing the corresponding Equity Fund's and Small Cap Growth Fund
Institutional Class' performance record for rolling one month periods by
.020833% (the fraction of the .25% service fee paid monthly) and then
aggregating those performance results for the appropriate one, five, ten
or life of fund period.
(2) Equity Fund commenced operations on June 2, 1991.
(3) Small Cap Growth Fund Institutional Class commenced operations on December
23, 1996. The adviser voluntarily capped the fund's expenses for various
periods since inception. Had the adviser not taken these actions, the
fund's performance could be lower.
These performance quotations should not be considered as representative of
any fund's performance for any specified period in the future. In addition to
average annual return quotations, the funds may quote quarterly and annual
performance on a net (with management and administration fees deducted) and
gross basis as follows:
Equity Asset Fund
Quarter/Year Net Gross
- ------------ ------- -------
4Q97 (1.69) (1.69)
1997 (1.69) (1.69)
1Q98 12.72 12.72
2Q98 (1.91) (1.86)
3Q98 (18.73) (18.52)
4Q98 19.18 19.44
1998 7.09 7.65
1Q99 (7.01) (6.79)
2Q99 7.97 8.20
3Q99 (6.36) (6.14)
-22-
<PAGE>
These performance quotations should not be considered as representative of
a fund's performance for any specified period in the future. Each fund's
performance may be compared in sales literature to the performance of other
mutual funds having similar objectives or to standardized indices or other
measures of investment performance. In particular, Equity Asset Fund may compare
its performance to the S&P 500 Index, which is generally considered to be
representative of the performance of unmanaged common stocks that are publicly
traded in the United States securities markets. The Small Cap Growth Fund may
compare its performance to the Russell 2000 Growth Index, which is generally
considered to be representative of those Russell 2000 companies with higher
price-to-book ratios and forecasted growth. The Russell 2000 Index is generally
considered to be representative of unmanaged small capitalization stocks in the
United States markets. Comparative performance may also be expressed by
reference to a ranking prepared by a mutual fund monitoring service or by one or
more newspapers, newsletters or financial periodicals. Performance comparisons
may be useful to investors who wish to compare a fund's past performance to that
of other mutual funds and investment products. Of course, past performance is
not a guarantee of future results.
MANAGEMENT
Trustees and Officers
The Board of Trustees has established the investment objective and
policies which govern each fund's and each Portfolio's operation. The Board has
appointed officers of the Trust who conduct the day-to-day business of each
fund. The Board, however, remains responsible for ensuring that each fund is
operating consistently accordingly to its objective and policies and the
requirements of the federal securities laws. The Trustees and executive officers
of the Trust are listed below. The Trustees of the Portfolio Trust are identical
to the Trustees of the Trust. All executive officers of the Trust and the
Portfolio Trust are affiliates of Standish, Ayer & Wood, Inc.
<TABLE>
<CAPTION>
Position Held Principal Occupation
Name, Address and Date of Birth with Trust During Past 5 Years
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
*D. Barr Clayson, 7/29/35 Trustee and Vice President Managing Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.;
One Financial Center Chairman and Director,
Boston, MA 02111 Standish International
Management Company, LLC
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 2333 Trustee, Mertens House, Inc.
New London, NH 03257
</TABLE>
-23-
<PAGE>
<TABLE>
<CAPTION>
Position Held Principal Occupation
Name, Address and Date of Birth with Trust During Past 5 Years
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
*Edward H. Ladd, 1/3/38 Trustee and Vice President Chairman of the Board and
c/o Standish, Ayer & Wood, Inc. Managing Director, Standish, Ayer &
One Financial Center Wood, Inc.; Director,
Boston, MA 02111 Standish International
Management Company, LLC
Caleb Loring III, 11/14/43 Trustee Trustee, Essex Street Associates
c/o Essex Street Associates (family investment trust office);
400 Essex Street Director, Holyoke Mutual Insurance Company;
Beverly, MA 01915 Director, Carter Family Corporation;
Board Member, Gordon-Conwell Theological
Seminary; Chairman of the Advisory Board,
Salvation Army; Chairman, Vision New England
*Richard S. Wood, 5/21/54 Trustee and President 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,
LLC
James E. Hollis III, 11/21/48 Executive Vice President Director, Standish, Ayer & Wood, Inc.
c/o Standish, 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 & Wood,
c/o Standish, Ayer & Wood, Inc. Inc. since October 1996; formerly Senior Vice
One Financial Center President, Treasurer and Chief Financial Officer of
Boston, MA 02111 Liberty Financial Bank Group
Beverly E. Banfield, 7/6/56 Vice President Associate Director
c/o Standish, Ayer & Wood, Inc. and Compliance Officer,
One Financial Center Standish, Ayer & Wood, Inc.
Boston, MA 02111
Denise B. Kneeland, 8/19/51 Vice President Vice President and Manager,
c/o Standish, Ayer & Wood, Inc. Mutual Funds Operations,
One Financial Center Standish, Ayer & Wood, Inc.
Boston, MA 02111 since December 1995; formerly
Vice President, Scudder, Stevens and Clark
Rosalind J. Lillo, 2/6/38 Vice President Broker/Dealer Administrator,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center since October 1995; formerly
Boston, MA 02111 Compliance Administrator,
New England Securities Corp.
</TABLE>
-24-
<PAGE>
<TABLE>
<CAPTION>
Position Held Principal Occupation
Name, Address and Date of Birth with Trust During Past 5 Years
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Tami M. Pester, 10/29/67 Vice President Assistant Vice President, Assistant Compliance
c/o Standish, Ayer & Wood, Inc. Manager and Compliance Officer, Standish, Ayer
One Financial Center & Wood, Inc. since 1998; Compliance Officer, State
Boston, MA 02111 Street Global Advisors
Deborah Rafferty-Maple, 1/4/69 Vice President Assistant Vice President, Financial Planner and
c/o Standish Ayer & Wood, Inc. Registered Investment Networks Marketing
One Financial Center Manager, Standish, Ayer & Wood, Inc.
Boston, MA 02111
Lisa Kane Vice President Client Service Representative,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Steven M. Anderson Vice President Mutual Funds Controller,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
</TABLE>
- ----------------
* Indicates that Trustee is an interested person of the Trust for purposes
of the 1940 Act.
Compensation of Trustees and Officers
Neither the Trust nor the Portfolio Trust pays compensation to the
Trustees of the Trust or the Portfolio Trust that are affiliated with Standish
or to the Trust's and Portfolio Trust's officers. None of the Trustees or
officers have engaged in any financial transactions (other than the purchase or
redemption of the Funds' shares) with the Trust, the Portfolio Trust or the
adviser during the fiscal year ended September 30, 1999, except that certain
Trustees and officers who are directors and shareholders of Standish, may from
time to time, purchase additional shares of common stock of Standish.
The following table sets forth all compensation paid to the Trust's
Trustees as of the funds' fiscal years ended September 30, 1999:
<TABLE>
<CAPTION>
Aggregate Compensation from
the Funds
---------------------------- Pension or Retirement
Small Cap Benefits Accrued as Total Compensation
Equity Asset Growth Part of Fund's from Funds and Other
Name of Trustee Fund** Fund** Expenses Funds in Complex*
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
D. Barr Clayson 0 0 $0 $0
Samuel C. Fleming $2,060 $0 0 $57,000
Benjamin M. Friedman $2,060 $0 0 $57,000
John H. Hewitt $2,121 $0 0 $62,000
Edward H. Ladd 0 0 0 $0
Caleb Loring, III $2,060 $0 0 $57,000
Richard S. Wood 0 0 0 $0
</TABLE>
- -------------
* As of the date of this Statement of Additional Information, there were 24
mutual funds in the fund complex.
* The fund bears its pro rata allocation of trustee's fees paid by its
corresponding portfolio to the trustees of the Portfolio Trust.
-25-
<PAGE>
Certain Shareholders
At November 15, 1999 the Trustees and officers of the Trust as a group
beneficially owned (i.e., had voting and/or investment power) less than 1% of
the then outstanding shares of each fund. Also at that date, no person
beneficially owned 5% or more of the then outstanding shares of any fund except:
<TABLE>
<CAPTION>
Percentage of Percentage of
Outstanding Outstanding
Name and Address Shares Name and Address Shares
<S> <C> <C> <C>
Equity Asset Fund
Prudential Trust FBO MTA 99%*
30 Scranton Office Park
Scranton, PA 18507
Small Cap Growth Fund
Kenyon College Balanced Fund Charles Schwab & Co., Inc. -
Kenyon College 18%(i) Special Account FBO Customers 12%(i)
Walton House 101 Montgomery Street
Gambier, OH 43022 Attn: Mutual Funds
San Francisco, CA 94104
Wentworth Institute of Technology 10%(i) Stephen Phillips Memorial 6%(i)
c/o State Street Bank & Trust Charitable Trust Scholarship
P.O. Box 1992 Foundation
Boston, MA 02105 P.O. Box 242
Salem, MA 01970
</TABLE>
- -----------
* Because the shareholder beneficially owned more than 25% of the
outstanding shares of the indicated fund, the shareholder was
considered to control the fund. As a controlling person, the
shareholder may be able to determine whether a proposal submitted to
the shareholders of such fund will be approved or disapproved.
(i) Institutional Class
Investment Advisers
Standish serves as the adviser to the Equity Portfolio and the Small Cap
Growth Portfolio pursuant to written investment advisory agreements. Standish is
a Massachusetts corporation organized in 1933 and is registered under the
Investment Advisers Act of 1940.
The following, constituting all of the Directors and all of the
shareholders of Standish, are Standish controlling persons: Caleb F. Aldrich,
Nicholas S. Battelle, David H. Cameron, Karen K. Chandor, Lavinia B. Chase, D.
Barr Clayson, W. Charles Cook, Joseph M. Corrado, Richard C. Doll, Dolores S.
Driscoll, Maria D. Furman, James E. Hollis III, Raymond J. Kubiak, Edward H.
Ladd, Laurence A. Manchester, George W. Noyes, Arthur H. Parker, Catherine A.
Powers, Howard B. Rubin, Austin C. Smith, Thomas P. Sorbo, David C. Stuehr,
Ralph S. Tate, Michael W. Thompson and Richard S. Wood.
-26-
<PAGE>
Subject to the supervision and direction of the Trustees of the Trust and
the Portfolio Trust, the adviser recommends investment decisions, places orders
to purchase and sell securities and permits the Portfolios and the funds to use
the name "Standish." Under the investment advisory agreements, the adviser is
paid a fee for its services based upon a percentage of the applicable
Portfolio's average daily net asset value computed as set forth below. The
advisory fees are payable monthly.
Contractual Advisory
Fee Rate
--------
Fund (as a percentage of average daily
- ---- net assets)
Equity Portfolio 0.50%
Small Cap Growth Portfolio 0.80%*
- -----------------------
* Prior to January 28, 2000, the Small Cap Growth Fund paid the adviser a
fee equal on an annual basis to 0.60% of the fund's average daily net
assets.
During the last fiscal year ended September 30, 1999, the funds and the
Portfolios paid advisory fees in the following amounts:
Fund 1997 1998 1999
---- ---- ---- ----
Equity Asset Fund(1) N/A N/A N/A
Equity Portfolio(2) $493,202 $1,017,136 $1,360,746
Small Cap Growth Fund(1,3) N/A N/A N/A
Small Cap Growth Portfolio 0(3) 0(3) $173,628(3)
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(1) The funds do not pay directly advisory fees. Each fund bears its pro rata
allocation of its corresponding Portfolio's expenses, including advisory
fees.
(2) The Equity Portfolio commenced operations on May 3, 1996.
(3) The Small Cap Growth Fund commenced operations on December 23, 1996. The
adviser voluntarily agreed not to impose its advisory fee for the fiscal
years ended September 30, 1997 and 1998 in the amounts of $10,209 and
$61,698, respectively.
The adviser has voluntarily and temporarily agreed to limit total expenses
(excluding brokerage commissions, taxes and extraordinary expenses) of Equity
Asset Fund and Small Cap Growth Fund Service Class to the total operating
expenses of the corresponding non-asset fund or, in the case of the Small Cap
Growth Fund, the Institutional Class, plus 0.25%, which represents the Service
Plan fee. In connection with this voluntary agreement, the adviser will limit
only those expenses borne by the Equity Asset Fund and not those borne by the
Equity Portfolio. Based on the relative size of the Equity Asset Fund to the
size of its corresponding non-asset funds, the adviser may not be able to
implement the limitation to the extent it would require the limitation of
expenses borne by the respective Portfolios. Standish may revise or discontinue
these agreements at any time although it has no current intention to do so. If
an expense limitation is exceeded, the compensation due to the adviser shall be
proportionately reduced by the amount of such excess by reduction or refund
thereof, subject to readjustment during the period during which such limit is in
place.
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Pursuant to the investment advisory agreements, each Portfolio bears
expenses of its operations other than those incurred by the adviser pursuant to
the investment advisory agreement. Among other expenses, the funds and the
Portfolios will pay share pricing and shareholder servicing fees and expenses;
custodian fees and expenses; legal and auditing fees and expenses; expenses of
prospectuses, statements of additional information and shareholder reports;
registration and reporting fees and expenses; and Trustees' fees and expenses.
The initial term of the Small Cap Growth Fund's investment advisory
agreement ends on January 28, 2002. The Equity Asset Fund's investment advisory
agreement is outside of this initial term. Unless terminated as provided below,
the investment advisory agreements continue in full force and effect from year
to year after their initial terms but only so long as each such continuance is
approved annually (i) by the Trustees of the Portfolio Trust or by the "vote of
a majority of the outstanding voting securities" of the applicable Portfolio,
and, in either event (ii) by vote of a majority of the Trustees of the Portfolio
Trust who are not parties to the investment advisory agreement or "interested
persons" (as defined in the 1940 Act) of any such party, cast in person at a
meeting called for the purpose of voting on such approval. Each investment
advisory agreement may be terminated at any time without the payment of any
penalty by vote of the Trustees of the Portfolio Trust or by the "vote of a
majority of the outstanding voting securities" of the applicable Portfolio or by
the adviser, on sixty days' written notice to the other parties. The investment
advisory agreements terminate in the event of their assignment as defined in the
1940 Act.
In an attempt to avoid any potential conflict with portfolio transactions
for the Portfolios, the adviser, the Principal Underwriter, the Trust and the
Portfolio Trust have each adopted extensive restrictions on personal securities
trading by personnel of the adviser and its affiliates. These restrictions
include: pre-clearance of all personal securities transactions and a prohibition
of purchasing initial public offerings of securities. These restrictions are a
continuation of the basic principle that the interests of the Portfolios and
their investors come before those of the adviser and its employees.
Administrator
Investors Bank & Trust Company ("IBT"), 200 Clarendon Street, Boston
Massachusetts 02116, serves as the administrator to the Portfolios and Standish
serves as the administrator to the feeder funds pursuant to written
administration agreements with the Trust on behalf of these funds. As
administrators, IBT and Standish manage the affairs of their respective
Portfolios or funds, provide all necessary office space and services of
executive personnel for administering the affairs of the funds, and, in the case
of Standish, allows the feeder funds to use the name "Standish." For these
services, IBT currently receives a fee from the feeder funds based on a
percentage of the feeder fund's net assets according to the following formula:
0.0105% of net assets up to the first $1 billion, 0.0034% of net assets for the
next $500 million and 0.0017 of net assets in excess of $1.5 billion. IBT also
receives an aggregate fee of $12,625 per month from all of the Portfolios in the
Portfolio Trust and all of the non-feeder funds in the Trust. This fee is
allocated among each Portfolio and non-feeder fund based upon the relative asset
sizes of the Portfolios and non-feeder funds. Standish currently does not
receive any additional compensation for its services as administrator. The
Trustees of the Trust may, however, determine in the future to compensate
Standish for its administrative services. Each of the administration agreements
can be terminated by either party on not more than sixty days' written notice.
Distributor of the Trust
Standish Fund Distributors, L.P., an affiliate of the adviser, serves as
the Trust's exclusive principal underwriter and makes itself available to
receive purchase orders for the funds' shares. In that capacity, Standish Fund
Distributors has been granted the right, as agent of the Trust, to solicit and
accept orders for the purchase of the funds' shares in accordance with the terms
of the Underwriting Agreement between the Trust and Standish Fund Distributors.
Pursuant to the Underwriting Agreement, Standish Fund Distributors has agreed to
use its best efforts to obtain orders for the continuous offering of the funds'
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shares. Standish Fund Distributors receives no commissions or other compensation
for its services, and has not received any such amounts in any prior year. The
Underwriting Agreement shall continue in effect with respect to each fund until
two years after its execution and for successive periods of one year thereafter
only if it is approved at least annually thereafter (i) by a vote of the holders
of a majority of the fund's outstanding shares or by the Trustees of the Trust
or (ii) by a vote of a majority of the Trustees of the Trust who are not
"interested persons" (as defined by the 1940 Act) of the parties to the
Underwriting Agreement, cast in person at a meeting called for the purpose of
voting on such approval. The Underwriting Agreement will terminate automatically
if assigned by either party thereto and is terminable with respect to a fund at
any time without penalty by a vote of a majority of the Trustees of the Trust, a
vote of a majority of the Trustees who are not "interested persons" of the
Trust, or by a vote of the holders of a majority of the applicable fund's
outstanding shares, in any case without payment of any penalty on not more than
60 days' written notice to the other party. The offices of Standish Fund
Distributors are located at One Financial Center, 26th Floor, Boston,
Massachusetts 02111.
SERVICE PLAN
The Trust, with respect to Equity Asset Fund and Small Cap Growth Fund
Service Class, has adopted a service plan (the "Service Plan"). Each Service
Plan provides that a fund may compensate entities ("Account Administrators")
that provide omnibus accounting services for groups of individuals who
beneficially own fund shares ("Omnibus Accounts") for providing certain
personal, account administration and/or shareholder liaison services to
participants in the Omnibus Accounts. Pursuant to the Service Plan, the funds
may enter into agreements with Account Administrators which purchase shares of
the funds ("Service Agreements"). Under such Service Agreements or otherwise,
Account Administrators may perform some or all of the following services: (a)
establishing and maintaining Omnibus Accounts with the funds; (b) establishing
and maintaining subaccounts and subaccount balances for Omnibus Accounts and
their participants ("Participants"); (c) processing orders by Omnibus Accounts
and Participants to purchase, redeem and exchange fund shares promptly and in
accordance with the effective prospectus relating to such shares; (d)
transmitting to each fund (or its agent) on each Business Day (as defined below)
a net subscription or net redemption order reflecting subscription, redemption
and exchange orders received by it with respect to the Omnibus Accounts; (e)
receiving and transmitting funds representing the purchase price or redemption
proceeds relating to such orders; (f) mailing fund prospectuses, statements of
additional information, periodic reports, transaction confirmations and
subaccount information to Omnibus Accounts and Participants; (g) answering
Omnibus Account and Participant inquiries about the funds, subaccount balances,
distribution options and such other administrative services for the Omnibus
Account and the Participants as provided for in the service agreements between
the Account Administrator and the Omnibus Account; and (h) providing such
statistical and other information as may be reasonably requested by the funds or
necessary for the funds to comply with applicable federal or state laws.
As compensation for such services, the funds may pay each Account
Administrator a service fee in an amount of up to 0.25% (on an annualized basis)
of the fund's average daily net assets attributable to fund shares that are
attributable to or held in the name of such Account Administrator. Account
Administrators may from time to time be required to meet certain other criteria
in order to receive service fees.
In accordance with the terms of the Service Plan, Standish provides to the
Trust for review by the Trustees a quarterly written report of the amounts
expended under the Service Plan and the purpose for which such expenditures were
made. In the Trustees' quarterly review of the Service Plan, they will consider
the continued appropriateness and the level of compensation that the Service
Plan provides.
Conflict of interest restrictions (including the Employee Retirement
Income Security Act of 1974 ("ERISA")) may apply to an Account Administrator's
receipt of compensation paid by the funds in connection with the investment of
fiduciary assets in fund shares. Account Administrators that are subject
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to the jurisdiction of the SEC, the Department of Labor or state securities
commissions, are urged to consult legal advisers before investing fiduciary
assets in fund shares and receiving service fees.
The Trust believes that fiduciaries of ERISA plans may properly receive
fees under the Service Plan if the plan fiduciary otherwise properly discharges
its fiduciary duties, including (if applicable) those under ERISA. Under ERISA,
a plan fiduciary, such as a trustee or investment manager, must meet the
fiduciary responsibility standards set forth in part 4 of Title I of ERISA.
These standards are designed to help ensure that the fiduciary's decisions are
made in the best interests of the plan and are not colored by self-interest.
Section 403(c)(1) of ERISA provides, in part, that the assets of a plan
shall be held for the exclusive purpose of providing benefits to the plan's
participants and their beneficiaries and defraying reasonable expenses of
administering the plan. Section 404(a)(1) sets forth a similar requirement on
how a plan fiduciary must discharge his or her duties with respect to the plan,
and provides further that such fiduciary must act prudently and solely in the
interest of the participants and beneficiaries. These basic provisions are
supplemented by the per se prohibitions of certain classes of transactions set
forth in Section 406 of ERISA.
Section 406(a)(1)(D) of ERISA prohibits a fiduciary of an ERISA plan from
causing that plan to engage in a transaction if he knows or should know that the
transaction would constitute a direct or indirect transfer to, or use by or for
the benefit of, a party in interest, of any assets of that plan. Section 3(14)
includes, within the definition of "party in interest" with respect to a plan,
any fiduciary with respect to that plan. Thus, Section 406(a)(1)(D) would not
only prohibit a fiduciary from causing the plan to engage in a transaction which
would benefit a third person who is a party in interest, but it also would
prohibit the fiduciary from similarly benefiting himself. In addition, Section
406(b)(1) specifically prohibits a fiduciary with respect to a plan from dealing
with the assets of that plan in his own interest or for his own account. Section
406(b)(3) supplements these provisions by prohibiting a plan fiduciary from
receiving any consideration for his own personal account from any party dealing
with the plan in connection with a transaction involving the assets of the plan.
In accordance with the foregoing, however, a fiduciary of an ERISA plan
may properly receive service fees under the Service Plan if the fees are used
for the exclusive purpose of providing benefits to the plan's participants and
their beneficiaries or for defraying reasonable expenses of administering the
plan for which the plan would otherwise be liable. See, e.g., Department of
Labor ERISA Technical Release No. 86-1 (stating a violation of ERISA would not
occur where a broker-dealer rebates commission dollars to a plan fiduciary who,
in turn, reduces its fees for which the plan is otherwise responsible for
paying). Thus, the fiduciary duty issues involved in a plan fiduciary's receipt
of the service fee must be assessed on a case-by-case basis by the relevant plan
fiduciary.
PURCHASE AND REDEMPTION OF SHARES
Additional information on purchase and redemption of shares is included in
the prospectus.
The Trust may suspend the right to redeem fund shares or postpone the date
of payment upon redemption for more than seven days (i) for any period during
which the New York Stock Exchange is closed (other than customary weekend or
holiday closings) or trading on the exchange is restricted; (ii) for any period
during which an emergency exists as a result of which disposal by a fund of
securities owned by it or determination by a fund of the value of its net assets
is not reasonably practicable; or (iii) for such other periods as the SEC may
permit for the protection of shareholders of the funds.
The Trust intends to pay redemption proceeds in cash for all fund shares
redeemed but, under certain conditions, the Trust may make payment wholly or
partly in fund portfolio securities. Portfolio securities paid upon redemption
of fund shares will be valued at their then current market value. The Trust
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has elected to be governed by the provisions of Rule 18f-1 under the 1940 Act
which limits each fund's obligation to make cash redemption payments to any
shareholder during any 90-day period to the lesser of $250,000 or 1% of the
fund's net asset value at the beginning of such period. An investor may incur
brokerage costs in converting portfolio securities received upon redemption to
cash.
PORTFOLIO TRANSACTIONS
The adviser is responsible for placing each Portfolio's portfolio
transactions and will do so in a manner deemed fair and reasonable to the
Portfolios and not according to any formula. The primary consideration in all
portfolio transactions will be prompt execution of orders in an efficient manner
at the most favorable price. In selecting broker-dealers and in negotiating
commissions, the adviser will consider the firm's reliability, the quality of
its execution services on a continuing basis and its financial condition. When
more than one firm is believed to meet these criteria, preference may be given
to firms which also sell shares of the funds. In addition, if the adviser
determines in good faith that the amount of commissions charged by a broker is
reasonable in relation to the value of the brokerage and research services
provided by such broker, the Portfolios may pay commissions to such broker in an
amount greater than the amount another firm may charge. Research services may
include (i) furnishing advice as to the value of securities, the advisability of
investing in, purchasing or selling securities, and the availability of
securities or purchasers or sellers of securities, (ii) furnishing seminars,
information, analyses and reports concerning issuers, industries, securities,
trading markets and methods, legislative developments, changes in accounting
practices, economic factors and trends, portfolio strategy, access to research
analysts, corporate management personnel, industry experts and economists,
comparative performance evaluation and technical measurement services and
quotation services, and products and other services (such as third party
publications, reports and analysis, and computer and electronic access,
equipment, software, information and accessories that deliver, process or
otherwise utilize information, including the research described above) that
assist the adviser in carrying out its responsibilities and (iii) effecting
securities transactions and performing functions incidental thereto (such as
clearance and settlement). Research services furnished by firms through which
the Portfolios effect their securities transactions may be used by the adviser
in servicing other accounts; not all of these services may be used by the
adviser in connection with the Portfolio generating the soft dollar credits. The
investment advisory fee paid by the Portfolios under the investment advisory
agreements will not be reduced as a result of the adviser's receipt of research
services.
The adviser also places portfolio transactions for other advisory
accounts. The adviser will seek to allocate portfolio transactions equitably
whenever concurrent decisions are made to purchase or sell securities for a
Portfolio and another advisory account. In some cases, this procedure could have
an adverse effect on the price or the amount of securities available to a
Portfolio. In making such allocations, the main factors considered by the
adviser will be the respective investment objectives, the relative size of
portfolio holdings of the same or comparable securities, the availability of
cash for investment, the size of investment commitments generally held, and
opinions of the persons responsible for recommending the investment.
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BROKERAGE COMMISSIONS
Aggregate Brokerage Commissions
Paid by the Fund for Portfolio Transactions
-------------------------------------------
Fund/Portfolio 1997 1998 1999
-------------- ---- ---- ----
Equity Asset Fund(1) N/A N/A N/A
Equity Portfolio(2,3) $294,686 $555,507 $464,684
Small Cap Growth Fund(1) N/A N/A N/A
Small Cap Growth Portfolio(3,4) $12,384 $20,950 $66,805
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(1) The fund is a feeder fund in the master-feeder structure and does not
directly pay brokerage commissions but bears its pro rata share of
brokerage commissions paid by its corresponding Portfolio.
(2) The Portfolio commenced operations on May 3, 1996.
(3) [SAW: Please confirm.] At September 30, 1999, none of the Portfolios held
any securities of its regular brokers or dealer.
(4) The Portflio commmenced operations on Decemer 23, 1996.
DETERMINATION OF NET ASSET VALUE
Each fund's net asset value is calculated each day on which the NYSE is
open (a "Business Day"). Currently, the NYSE is not open on weekends, New Year's
Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day. The net asset
value of each fund's shares is determined as of the close of regular trading on
the NYSE (normally 4:00 p.m., New York City time). If the NYSE closes early, the
calculation of net asset value will be accelerated to the actual closing time.
Net Asset Value is computed by dividing the value of all securities and other
assets of a fund (substantially all of which will be represented by the fund's
interest in its corresponding Portfolio) less all liabilities by the applicable
number of fund shares outstanding, and adjusting to the nearest cent per share.
Expenses and fees of each fund are accrued daily and taken into account for the
purpose of determining net asset value.
The value of a Portfolio's net assets (i.e., the value of its securities
and other assets less its liabilities, including expenses payable or accrued) is
determined at the same time and on the same days as the net asset value per
share of the fund is determined. Each investor in a Portfolio may add to or
reduce its investment in the Portfolio on each Business Day. As of the close of
regular trading on the NYSE on each Business Day, the value of each investor's
interest in a Portfolio will be determined by multiplying the net asset value of
the Portfolio by the percentage representing that investor's share of the
aggregate beneficial interests in the Portfolio. Any additions or reductions
which are to be effected on that day will then be effected. The investor's
percentage of the aggregate beneficial interests in a Portfolio will then be
recomputed as the percentage equal to the fraction (i) the numerator of which is
the value of such investor's investment in the Portfolio as of the close of
regular trading on the NYSE on such day plus or minus, as the case may be, the
amount of net additions to or reductions in the investor's investment in the
Portfolio effected on such day, and (ii) the denominator of which is the
aggregate net asset value of the Portfolio as of the close of regular trading on
the NYSE on such day plus or minus, as the case may be, the amount of the net
additions to or reductions in the aggregate investments in the Portfolio by all
investors in the Portfolio. The percentage so determined will then be applied to
determine the value of the investor's interest in a Portfolio as of the close of
regular trading on the NYSE on the following Business Day.
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Portfolio securities are valued at the last sale prices on the exchange or
national securities market on which they are primarily traded. Securities not
listed on an exchange or national securities market, or securities for which
there were no reported transactions, are valued at the last quoted bid price.
Securities for which quotations are not readily available and all other assets
are valued at fair value as determined in good faith at the direction of the
Trustees.
Money market instruments with less than sixty days remaining to maturity
when acquired by a fund or Portfolio are valued on an amortized cost basis. If a
fund acquires a money market instrument with more than sixty days remaining to
its maturity, it is valued at current market value until the sixtieth day prior
to maturity and will then be valued at amortized cost based upon the value on
such date unless the Trustees of the Trust or the Portfolio Trust determine
during such sixty-day period that amortized cost does not represent fair value.
Generally, trading in securities on foreign exchanges is substantially
completed each day at various times prior to the close of regular trading on the
NYSE. If a security's primary exchange is outside the U.S., the value of such
security used in computing the net asset value of a Fund's shares is determined
as of such times. Foreign currency exchange rates are also generally determined
prior to the close of regular trading on the NYSE. Occasionally, events which
affect the values of such securities and such exchange rates may occur between
the times at which they are determined and the close of regular trading on the
NYSE and will therefore not be reflected in the computation of the Funds' net
asset value. If events materially affecting the value of such securities occur
during such period, then these securities may be valued at their fair value as
determined in good faith by the Trustees of the Trust or the Portfolio Trust.
THE FUNDS AND THEIR SHARES
Each fund is a diversified investment series of the Trust, an open-end
management investment company organized as an unincorporated business trust
under the laws of The Commonwealth of Massachusetts pursuant to an Agreement and
Declaration of Trust dated August 13, 1986. Under the Agreement and Declaration
of Trust, the Trustees of the Trust have authority to issue an unlimited number
of shares of beneficial interest, par value $.01 per share, of each fund. Small
Cap Growth Fund offers two classes of shares: Service Class and Institutional
Class. Shares of the Institutional Class are offered through another prospectus
and SAI. Each share of Equity Asset Fund represents an equal proportionate
interest in the fund with each other share and is entitled to such dividends and
distributions as are declared by the Trustees. Shares of each class of Small Cap
Growth Fund represent interests in the fund in proportion to each share's net
asset value. The per share net asset value of each class of shares is calculated
separately and may differ as a result of the service fee applicable to Service
Class shares and the allocation of certain class-specific expenses which apply
to only one of the classes. Shareholders are not entitled to any preemptive,
conversion or subscription rights. All shares, when issued, will be fully paid
and non-assessable by the Trust. Upon any liquidation of a fund, shareholders of
that fund are entitled to share pro rata in the net assets available for
distribution.
Pursuant to the Declaration, the Trustees may create additional funds by
establishing additional series of shares in the Trust. The establishment of
additional series would not affect the interests of current shareholders in any
Fund. The Trustees have established other series of the Trust. Pursuant to the
Declaration, the Board may establish and issue multiple classes of shares for
each series of the Trust. Pursuant to the Declaration of Trust and subject to
shareholder approval (if then required by applicable law), the Trustees may
authorize each fund to invest all of its investable assets in a single open-end
investment company that has substantially the same investment objectives,
policies and restrictions as the fund. As of the date of this SAI, the funds
invest all of their investible assets in other open-end investment companies
(i.e., the corresponding Portfolio).
All fund shares have equal rights with regard to voting, and shareholders
of a fund have the right to vote as a separate class with respect to matters as
to which their interests are not identical to those of
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shareholders of other classes of the Trust, including the approval of an
investment advisory contract and any change of investment policy requiring the
approval of shareholders.
Under Massachusetts law, shareholders of the Trust could, under certain
circumstances, be held liable for the obligations of the Trust. However, the
Agreement and Declaration of Trust disclaims shareholder liability for acts or
obligations of the Trust and requires that notice of this disclaimer be given in
each agreement, obligation or instrument entered into or executed by the Trust
or a Trustee. The Declaration also provides for indemnification from the assets
of the Trust for all losses and expenses of any Trust shareholder held liable
for the obligations of the Trust. Thus, the risk of a shareholder incurring a
financial loss on account of his or its liability as a shareholder of the Trust
is limited to circumstances in which the Trust would be unable to meet its
obligations. The possibility that these circumstances would occur is remote.
Upon payment of any liability incurred by the Trust, the shareholder paying the
liability will be entitled to reimbursement from the general assets of the
Trust. The Declaration also provides that no series of the Trust is liable for
the obligations of any other series. The Trustees intend to conduct the
operations of the Trust to avoid, to the extent possible, ultimate liability of
shareholders for liabilities of the Trust.
Except as described below, whenever the Trust is requested to vote on a
fundamental policy of or matters pertaining to a Portfolio, the Trust will hold
a meeting of the associated fund's shareholders and will cast its vote
proportionately as instructed by the fund's shareholders. Fund shareholders who
do not vote will not affect the Trust's votes at the Portfolio meeting. The
percentage of the Trust's votes representing fund shareholders not voting will
be voted by the Trustees of the Trust in the same proportion as the fund
shareholders who do, in fact, vote. Subject to applicable statutory and
regulatory requirements, a fund would not request a vote of its shareholders
with respect to (a) any proposal relating to the Portfolio, which proposal, if
made with respect to the fund, would not require the vote of the shareholders of
the fund, or (b) any proposal with respect to the Portfolio that is identical in
all material respects to a proposal that has previously been approved by
shareholders of the fund. Any proposal submitted to holders in a Portfolio, and
that is not required to be voted on by shareholders of the fund, would
nonetheless be voted on by the Trustees of the Trust.
THE PORTFOLIO AND ITS INVESTORS
Each Portfolio is a series of Standish, Ayer & Wood Master Portfolio,
which, like the Trust, is an open-end management investment company registered
under the Investment Company Act of 1940, as amended. The Portfolio Trust was
organized as a master trust fund under the laws of the State of New York on
January 18, 1996.
Interests in a Portfolio have no preemptive or conversion rights, and are
fully paid and non-assessable, except as set forth in the Prospectus. A
Portfolio normally will not hold meetings of holders of such interests except as
required under the 1940 Act. A Portfolio would be required to hold a meeting of
holders in the event that at any time less than a majority of its Trustees
holding office had been elected by holders. The Trustees of a Portfolio continue
to hold office until their successors are elected and have qualified. Holders
holding a specified percentage of interests in a Portfolio may call a meeting of
holders in the Portfolio for the purpose of removing any Trustee. A Trustee of
the Portfolio may be removed upon a majority vote of the interests held by
holders in the Portfolio qualified to vote in the election. The 1940 Act
requires a Portfolio to assist its holders in calling such a meeting. Upon
liquidation of a Portfolio, holders in a Portfolio would be entitled to share
pro rata in the net assets of a Portfolio available for distribution to holders.
Each holder in the Portfolio is entitled to a vote in proportion to its
percentage interest in the Portfolio.
TAXATION
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Each series of the Trust, including each fund, is treated as a separate
entity for accounting and tax purposes. Each fund has qualified and elected or
intends to elect to be treated as a "regulated investment company" ("RIC") under
Subchapter M of the Code, and intends to continue to so qualify in the future.
As such and by complying with the applicable provisions of the Code regarding
the sources of its income, the timing of its distributions, and the
diversification of its assets, each fund will not be subject to Federal income
tax on its investment company taxable income (i.e., all taxable income, after
reduction by deductible expenses, other than its "net capital gain," which is
the excess, if any, of its net long-term capital gain over its net short-term
capital loss) and net capital gain which are distributed to shareholders in
accordance with the timing and other requirements of the Code.
Each Portfolio is treated as a partnership for federal income tax
purposes. As such, a Portfolio is not subject to federal income taxation.
Instead, the corresponding fund must take into account, in computing its federal
income tax liability (if any), its share of the Portfolio's income, gains,
losses, deductions, credits and tax preference items, without regard to whether
it has received any cash distributions from the Portfolio. Because the funds
invest their assets in a corresponding Portfolio, each Portfolio normally must
satisfy the applicable source of income and diversification requirements in
order for the corresponding fund to satisfy them. Each Portfolio will allocate
at least annually among its investors, including the corresponding fund, each
investor's distributive share of that Portfolio's net investment income, net
realized capital gains, and any other items of income, gain, loss, deduction or
credit. Each Portfolio will make allocations to the corresponding fund in a
manner intended to comply with the Code and applicable regulations and will make
moneys available for withdrawal at appropriate times and in sufficient amounts
to enable the corresponding fund to satisfy the tax distribution requirements
that apply to it and that must be satisfied in order for the fund to avoid
Federal income and/or excise tax. For purposes of applying the requirements of
the Code regarding qualification as a RIC, each fund will be deemed (i) to own
its proportionate share of each of the assets of the corresponding Portfolio and
(ii) to be entitled to the gross income of the corresponding Portfolio
attributable to such share.
Each fund will be subject to a 4% non-deductible federal excise tax on
certain amounts not distributed (and not treated as having been distributed) on
a timely basis in accordance with annual minimum distribution requirements. Each
fund intends under normal circumstances to seek to avoid liability for such tax
by satisfying such distribution requirements. Certain distributions made in
order to satisfy the Code's distribution requirements may be declared by the
funds during October, November or December but paid during the following
January. Such distributions will be treated by shareholders under the Code as if
received on December 31 of the year the distributions are declared, rather than
the year in which the distributions are received.
Each fund is not subject to Massachusetts corporate excise or franchise
taxes. Provided that the funds qualify as regulated investment companies, they
will also not be required to pay any Massachusetts income tax.
Each fund will not distribute net capital gains realized in any year to
the extent that a capital loss is carried forward from prior years against such
gain. For federal income tax purposes, a fund is permitted to carry forward a
net capital loss in any year to offset its own net capital gains, if any, during
the eight years following the year of the loss. To the extent subsequent net
capital gains are offset by such losses, they would not result in federal income
tax liability to the fund and, as noted above, would not be distributed as such
to shareholders.
Limitations imposed by the Code on regulated investment companies like the
funds may restrict a Portfolio's ability to enter into futures, options or
currency forward transactions.
Certain options, futures or currency forward transactions undertaken by a
Portfolio may cause the Portfolio to recognize gains or losses from marking to
market even though the Portfolio's positions have not been sold or terminated
and affect the character as long-term or short-term (or, in the case of certain
options,
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<PAGE>
futures or forward contracts relating to foreign currency, as ordinary income or
loss) and timing of some capital gains and losses realized by a Portfolio and
allocable to the corresponding fund. Additionally, a Portfolio may be required
to recognize gain if an option, future, forward contract, short sale, swap or
other strategic transaction that is not subject to the mark to market rules is
treated as a "constructive sale" of an "appreciated financial position" held by
the Portfolio under Section 1259 of the Code. Any net mark to market gains
and/or gains from constructive sales may also have to be distributed by a fund
to satisfy the distribution requirements referred to above even though no
corresponding cash amounts may concurrently be received, possibly requiring the
disposition of portfolio securities or borrowing to obtain the necessary cash.
Also, certain losses on transactions involving options, futures or forward
contracts and/or offsetting or successor positions may be deferred rather than
being taken into account currently in calculating the Portfolio's and therefore
the funds' taxable income or gain. Certain of the applicable tax rules may be
modified if a Fund or Portfolio is eligible and chooses to make one or more of
certain tax elections that may be available. These transactions may therefore
affect the amount, timing and character of a fund's distributions to
shareholders. Each Portfolio and fund will take into account the special tax
rules applicable to options, futures, forward contracts and constructive sales
in order to minimize any potential adverse tax consequences.
If a Portfolio invests in zero coupon securities, certain increasing rate
or deferred interest securities or, in general, other securities with original
issue discount (or with market discount if an election is made to include market
discount in income currently), the Portfolio must accrue income on such
investments prior to the receipt of the corresponding cash payments. However, a
fund must distribute, at least annually, all or substantially all of its net
income, including its distributive share of such income accrued by the
corresponding Portfolio, to shareholders to qualify as a regulated investment
company under the Code and avoid federal income and excise taxes. Therefore, a
Portfolio may have to dispose of its portfolio securities under disadvantageous
circumstances to generate cash, or may have to leverage itself by borrowing the
cash, to allow satisfaction of the distribution requirements.
The Federal income tax rules applicable to certain structured or hybrid
securities, dollar rolls, currency swaps or interest rate swaps, caps, floors
and collars are unclear in certain respects, and a Portfolio will account for
these instruments in a manner that is intended to allow the funds to continue to
qualify as regulated investment companies.
In some countries, restrictions on repatriation may make it difficult or
impossible for a Portfolio to obtain cash corresponding to its earnings from
such countries which may cause a fund to have difficulty obtaining cash
necessary to satisfy tax distribution requirements.
Foreign exchange gains and losses realized by a Portfolio in connection
with certain transactions, if any, involving foreign currency-denominated debt
securities, certain foreign currency futures and options, foreign currency
forward contracts, foreign currencies, or payables or receivables denominated in
a foreign currency are subject to Section 988 of the Code, which generally
causes such gains and losses to be treated as ordinary income and losses and may
affect the amount, timing and character of fund distributions to shareholders.
In some cases, elections may be available that would alter this treatment. Any
such transactions that are not directly related to the Portfolios' investment in
stock or securities, possibly including speculative currency positions or
currency derivatives not used for hedging purposes, could under future Treasury
regulations produce income not among the types of "qualifying income" from which
each fund must derive at least 90% of its gross income for its taxable year.
Each Portfolio may be subject to withholding and other taxes imposed by
foreign countries with respect to investments in foreign securities. Tax
conventions between certain countries and the U.S. may reduce or eliminate such
taxes in some cases. Investors in a fund would be entitled to claim U.S. foreign
tax credits or deductions with respect to such taxes, subject to certain holding
period requirements and other provisions and limitations contained in the Code,
only if more than 50% of the value of the applicable fund's total assets (taking
into account the fund's allocable share of the Portfolio's assets) at the close
of any
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<PAGE>
taxable year were to consist of stock or securities of foreign corporations and
the fund were to file an election with the Internal Revenue Service. Because the
investments of the Portfolios are such that each fund expects that it generally
will not meet this 50% requirement, shareholders of each fund generally will not
directly take into account the foreign taxes, if any, paid by the corresponding
Portfolio and will not be entitled to any related tax deductions or credits.
Such taxes will reduce the amounts the funds would otherwise have available to
distribute.
If a Portfolio acquires stock (including, under proposed regulations, an
option to acquire stock such as is inherent in a convertible bond) in certain
foreign corporations that receive at least 75% of their annual gross income from
passive sources (such as interest, dividends, certain rents and royalties, or
capital gains) or hold at least 50% of their assets in investments producing
such passive income ("passive foreign investment companies"), the relevant fund
could be subject to Federal income tax and additional interest charges on
"excess distributions" actually or constructively received from such companies
or gain from the actual or deemed sale of stock in such companies, even if all
income or gain actually realized is timely distributed to its shareholders. They
would not be able to pass through to their shareholders any credit or deduction
for such a tax. Certain elections may, if available, ameliorate these adverse
tax consequences, but any such election would require them to recognize taxable
income or gain (subject to tax distribution requirements) without the concurrent
receipt of cash. These investments could also result in the treatment of
associated capital gains as ordinary income. The Portfolios may limit and/or
manage stock holdings, if any, in passive foreign investment companies to
minimize each fund's tax liability or maximize its return from these
investments.
Distributions from a fund's current or accumulated earnings and profits
("E&P"), as computed for Federal income tax purposes, will be treated under the
Code as ordinary income (if they are from the fund's investment company taxable
income) or long-term capital gain (if they are from the fund's net capital gain
and are designated by the fund as "capital gain dividends") whether taken in
shares or in cash. Distributions, if any, in excess of E&P will constitute a
return of capital, which will first reduce an investor's tax basis in fund
shares and thereafter (after such basis is reduced to zero) will generally give
rise to capital gains. Shareholders electing to receive distributions in the
form of additional shares will have a cost basis for federal income tax purposes
in each share so received equal to the amount of cash they would have received
had they elected to receive the distributions in cash, divided by the number of
shares received.
For purposes of the dividends received reduction available to
corporations, dividends received by a Portfolio and allocable to its
corresponding fund, if any, from U.S. domestic corporations in respect of the
stock of such corporations held by the Portfolio, for U.S. Federal income tax
purposes, for at least a minimum holding period, generally 46 days, extending
before and after each dividend and distributed and designated by the fund may be
treated as qualifying dividends. The Portfolios' dividend income, if any,
probably will generally qualify for this deduction. Corporate shareholders must
meet the minimum holding period requirements referred to above with respect to
their shares of the applicable fund in order to qualify for the deduction and,
if they borrow to acquire or otherwise incur debt attributable to such shares,
may be denied a portion of the dividends received deduction. The entire
qualifying dividend, including the otherwise deductible amount, will be included
in determining the excess (if any) of a corporate shareholder's adjusted current
earnings over its alternative minimum taxable income, which may increase its
alternative minimum tax liability.
Additionally, any corporate shareholder should consult its tax adviser
regarding the possibility that its basis in its shares may be reduced, for
Federal income tax purposes, by reason of "extraordinary dividends" received
with respect to the shares, and, to the extent such basis would be reduced below
zero, current recognition of income would be required.
At the time of an investor's purchase of fund shares, a portion of the
purchase price may be attributable to undistributed net investment income and/or
realized or unrealized appreciation in the fund's share of a Portfolio's
portfolio. Consequently, subsequent distributions by a fund on such shares
-37-
<PAGE>
from such income and/or appreciation may be taxable to such investor even if the
net asset value of the investor's shares is, as a result of the distributions,
reduced below the investor's cost for such shares, and the distributions
economically represent a return of a portion of the purchase price.
Upon a redemption or other disposition of shares of a fund in a
transaction that is treated as a sale for tax purposes, a shareholder may
realize a taxable gain or loss, depending upon the difference between the
redemption proceeds and the shareholder's tax basis in his shares. Such gain or
loss will generally be treated as capital gain or loss if the shares are capital
assets in the shareholder's hands. Any loss realized on a redemption may be
disallowed to the extent the shares disposed of are replaced with other shares
of the same fund within a period of 61 days beginning 30 days before and ending
30 days after the shares are disposed of, such as pursuant to automatic dividend
reinvestments. In such a case, the basis of the shares acquired will be adjusted
to reflect the disallowed loss. Any loss realized upon the redemption of shares
with a tax holding period of six months or less will be treated as a long-term
capital loss to the extent of any amounts treated as distributions of long-term
capital gain with respect to such shares. Shareholders should consult their own
tax advisers regarding their particular circumstances to determine whether a
disposition of fund shares is properly treated as a sale for tax purposes, as is
assumed in the foregoing discussion.
Different tax treatment, including penalties on certain excess
contributions and deferrals, certain pre-retirement and post-retirement
distributions and certain prohibited transactions, is accorded to accounts
maintained as qualified retirement plans. Shareholders should consult their tax
advisers for more information.
The foregoing discussion relates solely to U.S. Federal income tax law as
applicable to U.S. persons (i.e., U.S. citizens or residents and U.S. domestic
corporations, partnerships, trusts or estates) subject to tax under such law.
The discussion does not address special tax rules applicable to certain classes
of investors, such as tax-exempt entities, insurance companies, and financial
institutions. Dividends, capital gain distributions, and ownership of or gains
realized on the redemption (including an exchange) of fund shares may also be
subject to state and local taxes. A state income (and possibly local income
and/or intangible property) tax exemption is generally available to the extent,
if any, a fund's distributions are derived from interest on (or, in the case of
intangible property taxes, the value of its assets is attributable to)
investments in certain U.S. Government obligations, provided in some states that
certain thresholds for holdings of such obligations and/or reporting
requirements are satisfied. Shareholders should consult their tax advisers
regarding the applicable requirements in their particular states, including the
effect, if any, of a feeder fund's indirect ownership (through the Portfolio) of
any such obligations, as well as the federal, and any other state or local, tax
consequences of ownership of shares of, and receipt of distributions from, a
fund in their particular circumstances.
Individuals and certain other classes of shareholders may be subject to
31% backup withholding of federal income tax on dividends, capital gain
distributions, and the proceeds of redemptions or repurchases of shares, if they
fail to furnish the funds with their correct taxpayer identification number and
certain certifications or if they are otherwise subject to backup withholding.
Federal law requires that taxable distributions and proceeds of
redemptions and exchanges be reported to the IRS and that 31% be withheld if you
fail to provide your correct Taxpayer Identification Number ("TIN") and the
TIN-related certifications contained in the Account Purchase Application
("Application") or you are otherwise subject to backup withholding. A fund will
not impose backup withholding as a result of your failure to make any
certification, except the certifications in the Application that directly relate
to your TIN and backup withholding status. Amounts withheld and forwarded to the
IRS can be credited as a payment of tax when completing your federal income tax
return.
For most individual taxpayers, the TIN is the social security number.
Special rules apply for certain accounts. For example, for an account
established under the Uniform Gift to Minors Act, the TIN of the minor should be
furnished. If you do not have a TIN, you may apply for one using forms available
at
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<PAGE>
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-U.S. investors not engaged in a U.S. trade or business with which
their investment in a fund is effectively connected will be subject to U.S.
Federal income tax treatment that is different from that described above. These
investors may be subject to nonresident alien withholding tax at the rate of 30%
(or a lower rate under an applicable tax treaty) on amounts treated as ordinary
dividends from the fund and, unless an effective IRS Form W-8, Form W-8BEN, or
other authorized form is on file, to 31% backup withholding on certain
distributions from the fund. Non-U.S. investors should consult their tax
advisers regarding such treatment and the application of foreign taxes to an
investment in the funds.
ADDITIONAL INFORMATION
The funds' prospectus and this SAI omit certain information contained in
the Trust's registration statement filed with the SEC, which may be obtained
from the SEC's principal office at 450 Fifth Street, N.W., Washington, D.C.
20549, upon payment of the fee prescribed by the rules and regulations
promulgated by the SEC.
EXPERTS AND FINANCIAL STATEMENTS
Each fund's and Portfolio's financial statements contained in the 1999
Annual Reports of the funds and the Portfolios have been audited by
PricewaterhouseCoopers L.L.P., independent accountants.
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<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***
C-1
<PAGE>
(a15) Certificate of Designation of Standish Tax-Sensitive Small Cap
Equity Fund and Standish Tax-Sensitive Equity Fund***
(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) Certificate of Designation of Standish Small Cap Value Fund and
Standish International Small Cap Fund******
(a22) 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***
C-2
<PAGE>
(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***
(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) Form of Investment Advisory Agreement between the Registrant and
Standish, Ayer & Wood, Inc. relating to Standish Small Cap
Tax-Sensitive Equity Fund***
(d10) Form of 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*****
(d13) Investment Advisory Agreement between the Registrant and Standish,
Ayer & Wood, Inc. relating to Standish Small Cap Value Fund******
(d14) Investment Advisory Agreement between the Registrant and Standish,
Ayer & Wood, Inc. relating to Standish International Small Cap
Fund******
(e1) Underwriting Agreement between the Registrant and Standish Fund
Distributors, L.P.***
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<PAGE>
(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*****
(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) Consent of Independent Public Accountants for the Registrant#
(k) Not applicable
(l) Not applicable
(m) Not applicable
(n) Not applicable
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<PAGE>
(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)**
(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.
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<PAGE>
*** 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 electronically as an exhibit to Registration Statement No.
33-8214 (Post-Effective Amendment No. 93) and incorporated by
reference thereto.
****** Filed electronically as an exhibit to Registration Statement No.
33-8214 (Post-Effective Amendment No. 94) 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 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
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<PAGE>
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.
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
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<PAGE>
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
Standish Small Cap Value Fund
Standish International Small Cap 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 29th day of November, 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 November 29, 1999
- ------------------------ (principal executive officer)
Richard S. Wood
/s/ Paul G. Martins Treasurer (principal November 29, 1999
- ------------------------ financial and accounting
Paul G. Martins officer)
D. Barr Clayson* Trustee November 29, 1999
- ------------------------
D. Barr Clayson
Samuel C. Fleming* Trustee November 29, 1999
- ------------------------
Samuel C. Fleming
Benjamin M. Friedman* Trustee November 29, 1999
- ------------------------
Benjamin M. Friedman
John H. Hewitt* Trustee November 29, 1999
- ------------------------
John H. Hewitt
Edward H. Ladd* Trustee November 29, 1999
- ------------------------
Edward H. Ladd
Caleb Loring III* Trustee November 29, 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 29th day of November, 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 November 29, 1999
- ---------------------- (principal executive
Richard S. Wood officer)
Paul G. Martins* Treasurer (principal November 29, 1999
- ---------------------- financial and accounting
Paul G. Martins officer)
D. Barr Clayson* Trustee November 29, 1999
- ----------------------
D. Barr Clayson
Samuel C. Fleming* Trustee November 29, 1999
- ----------------------
Samuel C. Fleming
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<PAGE>
Benjamin M. Friedman* Trustee November 29, 1999
- ----------------------
Benjamin M. Friedman
John H. Hewitt* Trustee November 29, 1999
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John H. Hewitt
Edward H. Ladd* Trustee November 29, 1999
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Edward H. Ladd
Caleb Loring III* Trustee November 29, 1999
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Caleb Loring III
*By: /s/ James E. Hollis III
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James E. Hollis, III
Attorney-In-Fact
C-13
<PAGE>
EXHIBIT INDEX
Exhibit
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(j) Consent of Independent Public Accountants for the Registrant#
Consent of Independent Accountants
To the Trustees of Standish, Ayer & Wood Investment Trust:
We hereby consent to the reference to our Firm under the captions "Independent
Accountants" and "Financial Highlights" in Post-Effective Amendment No. 95 to
the Registration Statement on Form N-1A (1933 Act File Number 33-8214) of
Standish, Ayer & Wood Investment Trust: Standish Equity Asset Fund, Standish
Small Capitalization Equity Fund II, Standish Intermediate Tax Exempt Bond Fund,
Massachusetts Intermediate Tax Exempt Bond Fund, Standish Tax-Sensitive Equity
Fund and Standish Small Cap Tax-Sensitive Equity Fund.
PricewaterhouseCoopers LLP
Boston, Massachusetts
November 29, 1999
