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. 98 |X|
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 |X|
Amendment No. 102 |X|
(Check appropriate box or boxes.)
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Standish, Ayer & Wood Investment Trust
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(Exact Name of Registrant as Specified in Charter)
One Financial Center, Boston, Massachusetts 02111
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(Address of Principal Executive Offices)
Registrant's Telephone Number, including Area Code: (617) 375-1760
ERNEST V. KLEIN, Esq.
Hale and Dorr
60 State Street
Boston, Massachusetts 02109
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(Name and Address of Agent for Service)
It is proposed that this filing will become effective:
|_| Immediately upon filing pursuant to Rule 485(b)
|_| On [date] pursuant to Rule 485(b)
|_| 60 days after filing pursuant to Rule 485(a)(1)
|_| On [date] pursuant to Rule 485(a)(1)
|_| 75 days after filing pursuant to Rule 485(a)(2)
|X| On June 1, 2000 pursuant to Rule 485(a)(2)
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This Post-Effective Amendment has been executed by Standish, Ayer & Wood Master
Portfolio.
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Draft 3/15/00
[LOGO] STANDISH FUNDS(R)
Standish High Grade Bond Fund
Prospectus
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June 1, 2000
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.
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Contents
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Risk/Return Summary...........................3
Who may want to invest.....................3
Mutual fund risks..........................3
High Grade Bond Fund.......................4
The Fund's Investments and Related Risks......6
Additional investment policies.............6
The Investment Adviser........................8
About Standish(R)..........................8
Fund manager...............................9
Advisory services and fees.................9
[GRAPHIC]
Investment and Account Information...........10
How to purchase shares....................10
How to exchange shares....................11
How to redeem shares......................11
Transaction and account policies..........12
Valuation of shares.......................12
Dividends and distributions...............12
Fund Details.................................13
Taxes.....................................13
The fund's service providers..............13
For More Information.........................16
Standish High Grade Bond Fund 2
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Risk/Return Summary
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Standish, Ayer & Wood, Inc., manages the fund.
Standish believes that discovering pockets of inefficiency is the key to adding
value to fixed income investments. Standish focuses on identifying undervalued
sectors and securities and deemphasizes the use of interest rate forecasting.
Standish looks for fixed income securities with the most potential for added
value, such as those with unique structural characteristics and the potential
for credit upgrade.
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 fund may be appropriate for investors:
o Seeking current income.
o Seeking to build capital gradually through principal appreciation and
compounding interest.
o Looking for higher returns than a government bond fund with comparable
volatility.
o Willing to tolerate fluctuations in bond prices due to interest rate
changes.
Descriptions of the fund begins on the next page and includes more information
about the fund's key investments and strategies, principal risk factors, past
performance and expenses.
Mutual fund risks
An investment in the fund is not a bank deposit and is not insured or guaranteed
by the Federal Deposit Insurance Corporation or any other government agency.
3 Standish High Grade Bond Fund
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Risk/Return Summary
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High Grade Bond Fund
Investment objective
To maximize total return, consistent with preserving principal and liquidity,
primarily through the generation of current income and, to a lesser extent,
capital appreciation.
Key investments and strategies
The fund invests, under normal circumstances, at least 65% of assets in high
grade fixed income securities including, but not limited to, government, agency,
corporate and mortgage and asset-backed issues. The fund may invest in Yankee
bonds, which are U.S. dollar denominated bonds typically issued in the U.S. by
foreign companies and governments, and other dollar denominated securities of
foreign issuers. The fund may also invest in interest rate futures contracts and
options in an attempt to manage portfolio risks and enhance returns.
Credit quality
The fund invests exclusively in investment grade securities with no more than
35% of assets in securities rated BBB/Baa at the time of purchase.
Targeted average portfolio credit quality
In the range of AA/Aa or better.
Maturity
The fund will generally maintain an average dollar-weighted effective portfolio
maturity of 5 to 14 years but may invest in individual securities of any
maturity.
How investments are selected
The adviser focuses on identifying undervalued sectors and securities and
deemphasizes the use of an interest rate forecasting strategy. The adviser
achieves this by selecting securities for the fund's portfolio by:
o Employing quantitative tools to allocate assets to undervalued sectors and
actively trading among them to maximize investment returns.
o Using fundamental and quantitative analysis to identify those securities
with the most potential for capital appreciation, such as those that offer
the best opportunity for credit upgrade.
o Targeting individual issues that provide very good liquidity in most
trading environments.
o Focusing on securities in areas of the yield curve that offer the most
favorable risk/return characteristics.
Principal risks of investing in the fund
Investors could lose money on their investment in the fund or the fund could
perform less well than other possible investments if any of the following
occurs:
o Interest rates rise, which will make the prices of fixed income securities
and the value of the fund's portfolio go down.
o The issuer of a security owned by the fund has its credit rating
downgraded or defaults on its obligation to pay principal and/or interest.
o When interest rates are declining, the issuer of a security exercises its
right to prepay principal earlier than scheduled, forcing the fund to
reinvest in lower yielding securities. This is known as call or prepayment
risk.
o When interest rates are rising, the average life of some securities may
extend because of slower than expected principal payments. This will lock
in a below-market interest rate, increase the security's duration and
reduce the value of the security. This is known as extension risk.
o The adviser's judgment about the attractiveness, relative value or
potential appreciation of a particular country, sector, security or
hedging strategy proves to be incorrect.
o Prices of foreign securities go down because of unfavorable foreign
government actions, political, economic or market instability or the
absence of accurate information about foreign companies. Foreign
securities are sometimes less liquid and harder to value than securities
of U.S. issuers.
o During periods of extreme interest rate volatility the fund has difficulty
closing out its position in interest rate futures contracts or closing out
the position at a price which the adviser believes would be advantageous
to the fund.
Standish High Grade Bond Fund 4
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Fees and expenses of the fund
This table describes the fees and expenses you may pay if you buy and hold
shares of the fund. Other expenses are based on estimates for the current fiscal
year.
High Grade
Bond Fund
Shareholder fees (fees paid
directly from your investment) None
Annual fund operating expenses(1)
(expenses that are deducted
from fund assets)
Management fees 0.40%
Distribution (12b-1) fees None
Other expenses 0.26%
Total annual fund operating
expenses 0.66%
(1)Because Standish has agreed to cap the fund's operating expenses, actual
expenses are estimated to be:
Management fees 0.14%
Other expenses 0.26%
Total annual fund
operating expenses 0.40%
This cap may be changed or eliminated.
Expense example
This example is intended to help you compare the cost of investing in the fund
with the cost of investing in other mutual funds. The example assumes that:
o You invest $10,000 in the fund for the time periods indicated;
o You redeem at the end of each period;
o Your investment has a 5% return each year; and
o The fund's operating expenses have not been capped and remain the same.
Although your actual costs may be higher or lower, under these assumptions your
costs would be:
After After After After
1 year 3 years 5 years 10 years
High Grade
Bond Fund $67 $211 $368 $822
5 Standish High Grade Bond Fund
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The Fund's Investments and Related Risks
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The fund may invest in a wide range of fixed income securities.
Additional Information About the Fund's Principal Investments
Fixed income investments Fixed income investments include bonds, notes,
mortgage-related securities, asset-backed securities, eurodollar and Yankee
dollar instruments and money market instruments. These fixed income securities
may be issued by U.S. and foreign corporations or entities; U.S. and foreign
banks; U.S. and foreign governments, their agencies, authorities,
instrumentalities; sponsored enterprises or political subdivisions; and state
and municipal governments. These securities may have all types of interest rate
payment and reset terms, including fixed rate, adjustable rate, zero coupon,
contingent, deferred, payment in kind and auction rate features.
Asset-backed securities represent participations in, or are secured by and
payable from, assets such as installment sales or loan contracts, leases, credit
card receivables and other categories of receivables.
Mortgage-related securities may be issued by private companies or by agencies of
the U.S. government. Mortgage-related securities represent direct or indirect
participations in, or are collateralized by and payable from, mortgage loans
secured by real property. Mortgage-related and asset-backed securities are
especially sensitive to prepayment and extension risk.
The fund may use mortgage dollar rolls to finance the purchase of additional
investments. Dollar rolls expose the fund to the risk that the return on
additional investments is lower than the financing cost of the fund's dollar
roll obligations.
Additional information About the Fund's Other Investment Strategies
Credit quality Securities are high grade or investment grade if rated in one of
the three or four highest long-term rating categories, respectively, of a
nationally recognized statistical rating organization, have received a
comparable short-term or other rating or are unrated securities that the adviser
believes are of comparable quality.
If a security receives "split" (different) ratings from multiple rating
organizations, the fund will treat the security as being rated in the lower
rating category. The fund's credit standards also apply to counterparties to OTC
derivative contracts.
Defensive investing The fund may depart from its principal investment strategies
in response to adverse market, economic or political conditions by taking
temporary defensive positions in all types of money market and short term debt
securities. If the fund takes a temporary defensive position, it may be unable
for a time to achieve its investment objective.
Derivative contracts The fund may, but is not required to, use derivative
contracts for any of the following purposes:
o To hedge against adverse changes in the market value of securities held by
or to be bought for the fund which are caused by changing interest rates.
o As a substitute for purchasing or selling securities.
o To shorten or lengthen the effective maturity or duration of the fund's
portfolio.
o To enhance the fund's potential gain in non-hedging situations.
Standish High Grade Bond Fund 6
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A derivative contract will obligate or entitle the fund to deliver or receive an
asset or a cash payment that is based on the change in value of a designated
security or index. Even a small investment in derivative contracts can have a
big impact on a portfolio's interest rate exposure. Therefore, using derivatives
can disproportionately increase portfolio losses and reduce opportunities for
gains when interest rates are changing. The fund may not fully benefit from or
may lose money on derivatives if changes in their value do not correspond
accurately to changes in the value of the fund's portfolio holdings.
Counterparties to OTC derivative contracts present the same types of credit risk
as issuers of fixed income securities. OTC derivatives can also make the fund's
portfolio less liquid and harder to value, especially in volatile markets.
Impact of high portfolio turnover The fund may engage in active and frequent
trading to achieve its principal investment strategies. This may lead to the
realization and distribution to shareholders of higher capital gains, which
would increase their tax liability. Frequent trading also increases transaction
costs, which could detract from a fund's performance.
Investment objective The fund's investment objective may be changed by the
fund's trustees without shareholder approval.
7 Standish High Grade Bond Fund
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The Investment Adviser
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Standish offers a broad array of investment services that include management of
domestic and international equity and fixed income portfolios.
About Standish
Standish, established in 1933, has remained by choice a privately held
investment management firm over its more than 65 year history. Ownership is
shared by a limited number of employees, who are the directors of the firm.
Standish believes the firm's organizational structure has helped preserve an
entrepreneurial orientation, which reinforces its commitment to investment
performance.
Standish believes that experience is a prerequisite for long-term investment
success. But experience alone is insufficient in a world of complex new
securities and rapidly changing technologies. To keep pace with today's
investment markets, Standish has built a staff which balances enthusiasm and
intellectual curiosity with professional and technical expertise. This
combination of experience and enthusiasm, tradition and innovation has worked
well and serves as a blueprint for future growth at Standish.
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 utilizing detailed analysis
and thorough adherence to a strict set of disciplines. Standish uses fundamental
research to identify a security sufficiently complex as to have been misvalued
by more traditional analysis. Standish uses sophisticated quantitative
techniques, which may help identify market misvaluations that can be exploited
by their 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 complementary resources.
Standish High Grade Bond Fund 8
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Fund managers
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Fund Fund managers Positions during past
five years
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High Grade Bond Fund Catherine A. Powers Vice president and, since 2000,
director of Standish
Mark P. Seidner Vice president and, since 2000,
associate director of Standish
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Advisory services and fees
Standish provides the fund with portfolio management and investment research
services. The adviser places orders to buy and sell the fund's portfolio
securities and manages the fund's business affairs. The adviser agreed to limit
the fund's total annual operating expenses (excluding brokerage commissions,
taxes and extraordinary expenses).This agreement is temporary and may be
terminated or changed at any time.
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Annual Advisory Fee Rates
(as a percentage of the fund's average net assets)
Contractual advisory fee Current expense limitation
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High Grade Bond Fund 0.40% 0.40%
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Investment Adviser
Standish, Ayer & Wood, Inc.
One Financial Center
Boston, Massachusetts 02111-2662
9 Standish High Grade Bond Fund
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Investment and Account Information
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How to purchase shares
Minimum initial investment: $100,000
Minimum subsequent investment: $5,000
Minimum investments may be waived by the distributor for investors in omnibus
accounts and clients and employees of Standish and their immediate families.
All orders to purchase shares 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 recieved after that time will be executed at the
next business day's price. All orders must be in good form and accompanied by
payment. The fund reserves the right to reject purchase orders or to stop
offering its shares without notice to shareholders.
Good form means that you have provided the following information with your
request: Name of the fund; account number (if an existing account); dollar
amount or number of shares to be purchased (or exchanged or redeemed); and the
signature of each owner exactly as the account is registered in the case of a
redemption request.
Shares of the fund are not available for sale in every state.
By check
Opening an account
o Send a check to the distributor payable to Standish Funds with the
completed original account application.
Adding to an account
o Send a check to the distributor payable to Standish Funds and a letter of
instruction with the account name and number and effective date of the
request.
By wire
Opening an account
o Send the completed original account application to the distributor.
o Call the distributor to obtain an account number.
o Instruct your bank to wire the purchase amount to Investors Bank & Trust
Company (see below).
Adding to an account
o Call the distributor. Instruct your bank to wire the amount of the
additional investment to Investors Bank & Trust Company (see below).
By fax
Opening an account
o Fax the completed account application to 617-350-0042.
o Mail the original account application to the distributor.
o Follow the instructions for opening an account by wire.
Adding to an account
o Fax a letter of instruction to 617-350-0042 with the account name and
number and effective date of the request.
o Call the distributor. Instruct your bank to wire the amount of the
additional investment to Investors Bank & Trust Company.
Through a financial intermediary
Opening or adding to an account
o Contact your financial intermediary. Financial intermediaries acting on an
investor's behalf are responsible for transmitting orders to the
distributor or its agent by the specified deadline.
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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 High Grade Bond Fund 10
<PAGE>
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How to exchange shares
You may exchange shares of the fund for the same class of shares of any other
Standish fund, if the registration of both accounts is identical. The fund may
refuse any exchange order and may alter, limit or suspend its exchange privilege
on 60 days' notice. Exchange requests will not be honored until the distributor
receives payment for the exchanged shares (up to 3 business days). An exchange
involves a taxable redemption of shares surrendered in the exchange.
By mail
o Send a letter of instruction to the distributor signed by each registered
account owner.
o Provide the name of the current fund, the fund to exchange into and dollar
amount to be exchanged.
o Provide both account numbers.
o Signature guarantees may be required (see below).
By telephone
o If the account has telephone privileges, call the distributor.
o Provide the name of the current fund, the fund to exchange into and dollar
amount to be exchanged.
o Provide both account numbers.
o The distributor may ask for identification and all telephone transactions
may be recorded.
How to redeem shares
All orders to redeem shares received by the distributor before the close of
regular trading on the New York Stock Exchange will be executed at that day's
share price. Orders received after that time will be executed at the next
business day's price. All redemption orders must be in good form. The fund has
the right to suspend redemptions of shares and to postpone payment of proceeds
for up to seven days, as permitted by law.
By mail
o Send a letter of instruction to the distributor signed by each registered
account owner.
o State the name of the fund and number of shares or dollar amount to be
sold.
o Provide the account number.
o Signature guarantees may be required (see below).
By telephone
For check or wire
o If the account has telephone 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.
11 Standish High Grade Bond Fund
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Investment and Account Information
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Transaction and account policies
Accounts with low balances. If an account falls below $50,000 as a result of
redemptions (and not because of performance), the distributor may ask the
investor to increase the size of the account to $50,000 within 30 days. If the
investor does not increase the account to $50,000 the distributor may redeem the
account at net asset value and remit the proceeds to the investor.
In-kind purchases and redemptions. Securities you own may be used to purchase
shares of the fund. The adviser will determine if the securities are consistent
with the fund's objective and policies. If accepted, the securities will be
valued the same way the fund values securities it already owns. The fund may
make payment for redeemed shares wholly or in part by giving the investor
portfolio securities. A redeeming shareholder will pay transaction costs to
dispose of these securities.
Signature guarantees. A signature guarantee may be required for any written
request to sell or exchange shares, or to change account information for
telephone transactions.
The distributor will accept signature guarantees from:
o members of the STAMP program or the Exchange's Medallion Signature Program
o a broker or securities dealer
o a federal savings, cooperative or other type of bank
o a savings and loan or other thrift institution
o a credit union
o a securities exchange or clearing agency
A notary public cannot provide a signature guarantee.
Household delivery of fund documents
With your consent, Standish may send a single prospectus and shareholder report
to your residence for you and any other member of your household who has an
account with the fund. If you wish to revoke your consent to this practice, you
may do so by contacting Standish, either orally or in writing at the telephone
number or address for the fund listed on the back cover of this prospectus.
Standish will begin mailing prospectuses and shareholder reports to you within
30 days after receiving your revocation.
Valuation of shares
The fund offers its shares at the NAV per share of the fund. The fund calculates
its NAV once daily as of the close of regular trading on the New York Stock
Exchange (generally at 4:00 p.m., New York time) on each day the exchange is
open. If the exchange closes early, the fund accelerates calculation of NAV and
transaction deadlines to that time.
The fund values the securities in its portfolio on the basis of market
quotations and valuations provided by independent pricing services. If
quotations are not readily available, or the value of a security has been
materially affected by events occurring after the closing of a foreign exchange,
the fund may value its assets by a method that the trustees believe accurately
reflects fair value. A fund that uses fair value to price securities may value
those securities higher or lower than another fund that uses market quotations.
Foreign markets may be open on days when U.S. markets are closed and the value
of foreign securities owned by the fund may change on days when shareholders
cannot purchase or redeem shares.
Dividends and distributions
The fund intends to distribute all or substantially all of its net investment
income and realized capital gains, if any, for each taxable year. The fund
declares and distributes dividends from net investment income quarterly. The
fund declares and distributes net capital gains, if any, annually. All dividends
and capital gains are reinvested in shares of the fund unless the shareholder
elects to receive them in cash. Substantially all of the fund's distributions
will be from net investment income.
Standish High Grade Bond Fund 12
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Fund Details
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Taxes
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Transactions Tax Status
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Sales or exchanges of shares. Usually capital gain or loss.
Tax rate depends on how long
shares are held.
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Distributions of long-term capital gain. Taxable as long-term capital
gain.
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Distributions of short-term capital gain. Taxable as ordinary income.
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Dividends from net investment income. Taxable as ordinary income.
Every January, the fund provides information to their shareholders about the
fund's dividends and distributions, which are taxable even if reinvested, and
about the shareholders' redemptions during the previous calendar year. Any
shareholder who does not provide the funds with a correct taxpayer
identification number and required certification may be subject to federal
backup withholding tax.
Shareholders should generally avoid investing in the fund shortly before an
expected taxable dividend or capital gain distribution. Otherwise, a shareholder
may pay taxes on dividends or distributions that are economically equivalent to
a partial return of the shareholder's investment.
Shareholders should consult their tax advisers about their own particular tax
situations.
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The fund's service providers
Principal Underwriter
Standish Fund Distributors, L.P.
Custodian, Transfer Agent and Fund Accountant
Investors Bank & Trust Company
Independent Accountants
PricewaterhouseCoopers LLP
Legal Counsel
Hale and Dorr LLP
13 Standish High Grade Bond Fund
<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. Standish offers a broad array of
investment services that includes management of domestic and international
equity and fixed income portfolios.
For More Information
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For investors who want more information about the Standish High Grade Bond Fund,
the following documents are available free upon request.
Statement of Additional Information (SAI)
The SAI provides more detailed information about the fund and is incorporated
into this prospectus by reference.
Investors can get free copies of the SAI, request other information and discuss
their questions about the fund by contacting the fund at:
Standish Funds
P.O. Box 1407
Boston, MA 02205-1407
Telephone: 1-800-729-0066
Email:
[email protected]
Internet:
http://www.standishonline.com
Investors can review the fund's SAI at the Public Reference Room of the
Securities and Exchange Commission. Investors can get text-only copies:
o For a fee, by writing the Public Reference Room of the Commission,
Washington, D.C. 20549-6009 Telephone: 1-202-942-8090
o For a fee, by sending an email or electronic request to the Public
Reference Room of the Commissioner at [email protected]
[LOGO] STANDISH FUNDS(R)
One Financial Center
Boston, MA 02111-2662
800.729.0066
Investment Company Act
file number (811-4813)
00-079 3/00
<PAGE>
June 1, 2000
[STANDISH LOGO]
STANDISH, AYER & WOOD INVESTMENT TRUST
One Financial Center
Boston, Massachusetts 02111
(800) 729-0066
STATEMENT OF ADDITIONAL INFORMATION
Standish High Grade Bond Fund
This Statement of Additional Information (SAI) is not a prospectus. The
SAI expands upon and supplements the information contained in the prospectus
dated June 1, 2000, as amended and/or supplemented from time to time, of
Standish High Grade Bond Fund (High Grade Bond Fund), a separate investment
series of Standish, Ayer & Wood Investment Trust (the Trust). The SAI should be
read in conjunction with the fund's prospectus.
---------------------------------
Contents
INVESTMENT OBJECTIVE AND POLICIES............................................2
INVESTMENT RESTRICTIONS.....................................................18
CALCULATION OF PERFORMANCE DATA.............................................20
MANAGEMENT..................................................................21
PURCHASE AND REDEMPTION OF SHARES...........................................25
PORTFOLIO TRANSACTIONS......................................................26
DETERMINATION OF NET ASSET VALUE............................................27
THE FUND AND ITS SHARES.....................................................28
TAXATION....................................................................28
ADDITIONAL INFORMATION......................................................32
EXPERTS AND FINANCIAL STATEMENTS............................................32
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The prospectus describes the investment objective and policies of the
fund. The following discussion supplements the description of the fund's
investment policies in the prospectus.
Adviser. Standish, Ayer & Wood, Inc. ("Standish" or the "Adviser") is the
investment adviser to the fund.
Suitability. The fund is not intended to provide an investment program
meeting all of the requirements of an investor. Notwithstanding the fund's
ability to spread risk by holding securities of a number of portfolio companies,
shareholders should be able and prepared to bear the risk of investment losses
which may accompany the investments contemplated by the funds.
Credit Quality. Investment grade securities are those that are rated Baa
or higher by Moody's Investors Service, Inc. ("Moody's") or BBB or higher by
Standard & Poor's Ratings Group ("Standard & Poors"), Duff and Phelps ("Duff")
or Fitch IBCA International ("Fitch") or, if unrated, determined by the adviser
to be of comparable credit quality. High grade securities are those that are
rated within the top three investment grade ratings (i.e., Aaa, Aa, A or P-1 by
Moody's or AAA, AA, A, A-1 or Duff-1 by Standard & Poor's, Duff or Fitch).
Securities rated Baa or P-2 by Moody's or BBB, A-2 or Duff-2 by Standard &
Poor's, Duff or Fitch are generally considered medium grade obligations and have
some speculative characteristics. Adverse changes in economic conditions or
other circumstances are more likely to weaken the medium grade issuer's
capability to pay interest and repay principal than is the case for high grade
securities.
If a security is rated differently by two or more rating agencies, the
Adviser uses the lowest rating to compute the fund's credit quality and also to
determine the security's rating category. If the rating of a security held by
the fund is downgraded below Baa by Moody's or BBB by Standard & Poors, Duff or
Fitch, the Adviser will determine whether to retain that security in the fund's
portfolio.
Maturity and Duration. The fund will generally maintain an average
dollar-weighted effective portfolio maturity of 5 to 14 years. However, the fund
may purchase individual securities with effective maturities that are outside of
this range. The effective maturity of an individual portfolio security in which
the fund invests is defined as the period remaining until the earliest date when
the fund can recover the principal amount of such security through mandatory
redemption or prepayment by the issuer, the exercise by the fund of a put
option, demand feature or tender option granted by the issuer or a third party
or the payment of the principal on the stated maturity date. The effective
maturity of variable rate securities is calculated by reference to their coupon
reset dates. Thus, the effective maturity of a security may be substantially
shorter than its final stated maturity. Prepayment rates are influenced by
changes in current interest rates and a variety of economic, geographic, social
and other factors and cannot be predicted with certainty. In general,
securities, such as mortgage-backed securities, may be subject to greater
prepayment rates in a declining interest rate environment. Conversely, in an
increasing interest rate environment, the rate of prepayment may be expected to
decrease. A higher than anticipated rate of unscheduled principal prepayments on
securities purchased at a premium or a lower than anticipated rate of
unscheduled payments on securities purchased at a discount may result in a lower
yield (and total return) to the fund than was anticipated at the time the
securities were purchased. The fund's reinvestment of unscheduled prepayments
may be made at rates higher or lower than the rate payable on such security,
thus affecting the return realized by the fund.
Duration of an individual portfolio security is a measure of the
security's price sensitivity taking into account expected cash flow and
prepayments under a wide range of interest rate scenarios. In
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computing the duration of its portfolio, the fund will have to estimate the
duration of obligations that are subject to prepayment or redemption by the
issuer taking into account the influence of interest rates on prepayments and
coupon flows. The fund may use various techniques to shorten or lengthen the
option-adjusted duration of its portfolio, including the acquisition of debt
obligations at a premium or discount, and the use of mortgage swaps and interest
rate swaps, caps, floors and collars.
Securities. The fund invests primarily in all types of fixed income
securities. The fund may also enter into repurchase agreements and forward
dollar roll transactions, may purchase zero coupon and deferred payment
securities and may buy securities on a when-issued or delayed delivery basis.
Please refer to the fund's specific investment objective and policies and
"Description of Securities and Related Risks" for a more comprehensive list of
permissible securities and investments.
Description of Securities and Related Risks
General Risks of Investing
The prospectus discusses the principal risk of investing in the fund. The
following discussion provides additional information on the risks associated
with an investment in the fund. The fund invests primarily in fixed income
securities and is subject to risks associated with investments in such
securities. These risks include interest rate risk, default risk and call and
extension risk.
Interest Rate Risk. When interest rates decline, the market value of fixed
income securities tends to increase. Conversely, when interest rates increase,
the market value of fixed income securities tends to decline. The volatility of
a security's market value will differ depending upon the security's duration,
the issuer and the type of instrument.
Default Risk/Credit Risk. Investments in fixed income securities are
subject to the risk that the issuer of the security could default on its
obligations causing the fund to sustain losses on such investments. A default
could impact both interest and principal payments.
Call Risk and Extension Risk. Fixed income securities may be subject to
both call risk and extension risk. Call risk exists when the issuer may exercise
its right to pay principal on an obligation earlier than scheduled which would
cause cash flows to be returned earlier than expected. This typically results
when interest rates have declined and the fund will suffer from having to
reinvest in lower yielding securities. Extension risk exists when the issuer may
exercise its right to pay principal on an obligation later than scheduled which
would cause cash flows to be returned later than expected. This typically
results when interest rates have increased and the fund will suffer from the
inability to invest in higher yield securities.
Specific Risks
The following sections include descriptions of specific risks that are
associated with the fund's purchase of a particular type of security or the
utilization of a specific investment technique.
U.S. Government Securities. The fund may invest in U.S. Government
securities. Generally, these securities include U.S. Treasury obligations and
obligations issued or guaranteed by U.S. Government agencies, instrumentalities
or sponsored enterprises which are supported by (a) the full faith and credit of
the U.S. Treasury (such as the Government National Mortgage Association
("GNMA")), (b) the right of the issuer to borrow from the U.S. Treasury (such as
securities of the Student Loan Marketing Association ("SLMA")), (c) the
discretionary authority of the U.S. Government to purchase certain obligations
of the issuer (such as the Federal National Mortgage Association ("FNMA") and
Federal
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Home Loan Mortgage Corporation ("FHLMC")), or (d) only the credit of the agency.
No assurance can be given that the U.S. Government will provide financial
support to U.S. Government agencies, instrumentalities or sponsored enterprises
in the future. U.S. Government securities also include Treasury receipts, zero
coupon bonds, U.S. Treasury inflation-indexed bonds, deferred interest
securities and other stripped U.S. Government securities, where the interest and
principal components of stripped U.S. Government securities are traded
independently ("STRIPs").
Corporate Debt Obligations. The fund may invest in corporate debt
obligations and zero coupon securities issued by financial institutions and
companies, including obligations of industrial, utility, banking and other
financial issuers. Corporate debt obligations are subject to the risk of an
issuer's inability to meet principal and interest payments on the obligations
and may also be subject to price volatility due to such factors as market
interest rates, market perception of the creditworthiness of the issuer and
general market liquidity.
Mortgage-Backed Securities. The fund may invest in privately issued
mortgage-backed securities and mortgage-backed securities issued or guaranteed
by the U.S. Government or any of its agencies, instrumentalities or sponsored
enterprises, including, but not limited to, GNMA, FNMA or FHLMC. Mortgage-backed
securities represent direct or indirect participations in, or are collateralized
by and payable from, mortgage loans secured by real property. Mortgagors can
generally prepay interest or principal on their mortgages whenever they choose.
Therefore, mortgage-backed securities are often subject to more rapid repayment
than their stated maturity date would indicate as a result of principal
prepayments on the underlying loans. This can result in significantly greater
price and yield volatility than is the case with traditional fixed income
securities. During periods of declining interest rates, prepayments can be
expected to accelerate, and thus impair the fund's ability to reinvest the
returns of principal at comparable yields. Conversely, in a rising interest rate
environment, a declining prepayment rate will extend the average life of many
mortgage-backed securities, increase the fund's exposure to rising interest
rates and prevent the fund from taking advantage of such higher yields.
GNMA securities are backed by the full faith and credit of the U.S.
Government, which means that the U.S. Government guarantees that the interest
and principal will be paid when due. FNMA securities and FHLMC securities are
not backed by the full faith and credit of the U.S. Government; however, these
enterprises have the ability to obtain financing from the U.S. Treasury.
Multiple class securities include collateralized mortgage obligations
("CMOs") and Real Estate Mortgage Investment Conduit ("REMIC") pass-through or
participation certificates. CMOs provide an investor with a specified interest
in the cash flow from a pool of underlying mortgages or other mortgage-backed
securities. CMOs are issued in multiple classes, each with a specified fixed or
floating interest rate and a final scheduled distribution date. In most cases,
payments of principal are applied to the CMO classes in the order of their
respective stated maturities, so that no principal payments will be made on a
CMO class until all other classes having an earlier stated maturity date are
paid in full. A REMIC is a CMO that qualifies for special tax treatment under
the Internal Revenue Code of 1986, as amended (the "Code"), and invests in
certain mortgages principally secured by interests in real property and other
permitted investments. The fund does not intend to purchase residual interests
in REMICs.
Stripped mortgage-backed securities ("SMBS") are derivative multiple class
mortgage-backed securities. SMBS are usually structured with two different
classes; one that receives 100% of the interest payments and the other that
receives 100% of the principal payments from a pool of mortgage loans. If the
underlying mortgage loans experience prepayments of principal at a rate
different from what was anticipated, the fund may fail to recoup fully its
initial investment in these securities. Although the markets for SMBS and CMOs
are increasingly liquid, certain SMBS and CMOs may not be readily marketable and
will be considered illiquid for purposes of the fund's limitation on investments
in illiquid
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securities. The market value of the class consisting entirely of principal
payments generally is unusually volatile in response to changes in interest
rates. The yields on a class of SMBS that receives all or most of the interest
from mortgage loans are generally higher than prevailing market yields on other
mortgage-backed securities because their cash flow patterns are more volatile
and there is a greater risk that the initial investment will not be fully
recouped.
Life of Mortgage-Related Obligations. The average life of mortgage-related
obligations is likely to be substantially less than the stated maturities of the
mortgages in the mortgage pools underlying such securities. Prepayments or
refinancing of principal by mortgagors and mortgage foreclosures will usually
result in the return of the greater part of principal invested long before the
maturity of the mortgages in the pool.
As prepayment rates of individual mortgage pools will vary widely, it is
not possible to predict accurately the average life of a particular issue of
mortgage-related obligations. However, with respect to GNMA Certificates,
statistics published by the FHA are normally used as an indicator of the
expected average life of an issue. The actual life of a particular issue of GNMA
Certificates, however, will depend on the coupon rate of the financing.
Asset-Backed Securities. The fund may invest in asset-backed securities.
The principal and interest payments on asset-backed securities are
collateralized by pools of assets such as auto loans, credit card receivables,
leases, installment contracts and personal property. Such asset pools are
securitized through the use of special purpose trusts or corporations. Payments
or distributions of principal and interest on asset-backed securities may be
guaranteed up to certain amounts and for a certain time period by a letter of
credit or a pool insurance policy issued by a financial institution; however,
privately issued obligations collateralized by a portfolio of privately issued
asset-backed securities do not involve any government-related guaranty or
insurance. Like mortgage-backed securities, asset-backed securities are subject
to more rapid prepayment of principal than indicated by their stated maturity
which may greatly increase price and yield volatility. Asset-backed securities
generally do not have the benefit of a security interest in collateral that is
comparable to mortgage assets and there is the possibility that recoveries on
repossessed collateral may not be available to support payments on these
securities.
Eurodollar and Yankee Dollar Investments. The fund may invest in
Eurodollar and Yankee Dollar instruments. Eurodollar instruments are bonds of
foreign corporate and government issuers that pay interest and principal in U.S.
dollars generally held in banks outside the United States, primarily in Europe.
Yankee Dollar instruments are U.S. dollar denominated bonds typically issued in
the U.S. by foreign governments and their agencies and foreign banks and
corporations. The fund may invest in Eurodollar Certificates of Deposit
("ECDs"), Eurodollar Time Deposits ("ETDs") and Yankee Certificates of Deposit
("Yankee CDs"). ECDs are U.S. dollar-denominated certificates of deposit issued
by foreign branches of domestic banks; ETDs are U.S. dollar-denominated deposits
in a foreign branch of a U.S. bank or in a foreign bank; and Yankee CDs are U.S.
dollar-denominated certificates of deposit issued by a U.S. branch of a foreign
bank and held in the U.S. These investments involve risks that are different
from investments in securities issued by U.S. issuers, including potential
unfavorable political and economic developments, foreign withholding or other
taxes, seizure of foreign deposits, currency controls, interest limitations or
other governmental restrictions which might affect payment of principal or
interest.
Foreign Securities. The fund may invest in foreign securities that are
denominated in U.S. dollars. 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. 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.
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issuer. In addition, there is generally less government regulation of foreign
markets, companies and securities dealers than in the U.S. Most foreign
securities markets may have substantially less trading volume than U.S.
securities markets and securities of many foreign issuers are less liquid and
more volatile than securities of comparable U.S. issuers. Furthermore, with
respect to certain foreign countries, there is a possibility of nationalization,
expropriation or confiscatory taxation, imposition of withholding or other taxes
on dividend or interest payments (or, in some cases, capital gains), limitations
on the removal of funds or other assets, political or social instability or
diplomatic developments which could affect investments in those countries.
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.
Investing in Emerging Markets. The fund may invest in foreign securities
of issuers in emerging markets, including issuers in Asia (including Russia),
Eastern Europe, Latin and South America, the Mediterranean and Africa. Investing
in the securities of issuers of emerging market countries involves heightened
risks relative to investments in foreign securities of issuers located in
developed countries. 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
and other developed foreign 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 the issuer derives
some or all of its revenues, 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 fund, the adviser and its affiliates and their respective
clients and other service providers. The fund 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 the fund's performance
and may adversely affect the liquidity of each funds investment to the extent
that it invest certain emerging market countries.
Investment and Repatriation Restrictions. Foreign investment in the
securities markets of several emerging market countries is restricted or
controlled to varying degrees. These restrictions may limit the 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 fund may be limited by government regulation or a
company's charter to a maximum percentage of equity ownership in any one
company. Such restrictions may affect the market price, liquidity and rights of
securities that may be purchased by the fund. From time to time, the adviser may
determine that investment and repatriation restrictions in certain emerging
market countries negate the advantages of investing in such countries and the
fund is not required to invest in any emerging market country.
In addition, certain countries may restrict or prohibit investment
opportunities in issuers or industries deemed important to national interests.
The adviser may determine from time to time to invest in the securities of
emerging market countries which may impose restrictions on foreign investment
and repatriation that cannot currently be predicted.
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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 the 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.
Settlement procedures in emerging market countries are less developed and
reliable than those in the United States and in other developed markets, and the
fund may experience settlement delays or other material difficulties. In
addition, significant delays are common in registering transfers of securities,
and the fund may be unable to sell such securities until the registration
process is completed and may experience delays in receipt of dividends and other
entitlements.
Brokerage commissions and other transactions costs on securities exchanges
in emerging market countries are generally higher than in the United States.
There is also less government supervision and regulation of foreign securities
exchanges, brokers and listed companies in emerging market countries than exists
in the United States. Brokers in emerging market countries may not be as well
capitalized as those in the United States, so that they are more susceptible to
financial failure in times of market, political or economic stress. In addition,
existing laws and regulations are often inconsistently applied. As legal systems
in emerging market countries develop, foreign investors may be adversely
affected by new or amended laws and regulations. In circumstances where adequate
laws exist, it may not be possible to obtain swift and equitable enforcement of
the law.
Financial Information and Standards. Issuers in emerging market countries
generally are subject to accounting, auditing and financial standards and
requirements that differ, in some cases significantly, from those applicable to
U.S. issuers. In particular, the assets and profits appearing on the financial
statements of an emerging market company may not reflect its financial position
or results of operations in the same manner as financial statements for U.S.
companies. Substantially less information may be publicly available about
issuers in emerging market countries than is available about issuers in the
United States.
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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.
Warrants. Warrants acquired by the fund entitle it to buy common stock
from the issuer at a specified price and time. Warrants are subject to the same
market risks as stocks, but may be more volatile in price. The fund's investment
in warrants will not entitle it to receive dividends or exercise voting rights
and will become worthless if the warrants cannot be profitably exercised before
the expiration dates.
Investments in Other Investment Companies. The fund is permitted to invest
up to 10% of its total assets in shares of investment companies and up to 5% of
its total assets in any one investment company as long as that investment does
not represent more than 3% of the total voting stock of the acquired investment
company. Investments in the securities of other investment companies may involve
duplication of advisory fees and other expenses. The fund may invest in
investment companies that are designed to replicate the composition and
performance of a particular index. For example, World Equity Benchmark Series
("WEBS") are exchange traded shares of open-end investment companies designed to
replicate the composition and performance of publicly traded issuers in
particular countries. Investments in index baskets involve the same risks
associated with a direct investment in the types of securities included in the
baskets.
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Real Estate Investment Trusts. The fund may invest in REITs. REITs are
pooled investment vehicles that invest in real estate or real estate loans or
interests. Investing in REITs involves risks similar to those associated with
investing in equity securities of small capitalization companies. REITs are
dependent upon management skills, are not diversified, and are subject to risks
of project financing, default by borrowers, self-liquidation, and the
possibility of failing to qualify for the exemption from taxation on distributed
amounts under the Code.
Inverse Floating Rate Securities. The fund may invest in inverse floating
rate securities. The interest rate on an inverse floater resets in the opposite
direction from the market rate of interest to which the inverse floater is
indexed. An inverse floater may be considered to be leveraged to the extent that
its interest rate varies by a magnitude that exceeds the magnitude of the change
in the index rate of interest. The higher the degree of leverage of an inverse
floater, the greater the volatility of its market value.
Zero Coupon and Deferred Payment Securities. The fund may invest in zero
coupon and deferred payment securities. Zero coupon securities are securities
sold at a discount to par value and on which interest payments are not made
during the life of the security. Upon maturity, the holder is entitled to
receive the par value of the security. The fund is required to accrue income
with respect to these securities prior to the receipt of cash payments. Because
the fund will distribute this accrued income to shareholders, to the extent that
shareholders elect to receive dividends in cash rather than reinvesting such
dividends in additional shares, the fund will have fewer assets with which to
purchase income producing securities. Deferred payment securities are securities
that remain zero coupon securities until a predetermined date, at which time the
stated coupon rate becomes effective and interest becomes payable at regular
intervals. Zero coupon and deferred payment securities may be subject to greater
fluctuation in value and may have less liquidity in the event of adverse market
conditions than comparably rated securities paying cash interest at regular
interest payment periods.
Structured or Hybrid Notes. The fund may invest in structured or hybrid
notes. The distinguishing feature of a structured or hybrid note is that the
amount of interest and/or principal payable on the note is based on the
performance of a benchmark asset or market other than fixed income securities or
interest rates. Examples of these benchmarks include stock prices, currency
exchange rates and physical commodity prices. Investing in a structured note
allows the fund to gain exposure to the benchmark asset while fixing the maximum
loss that it may experience in the event that the security does not perform as
expected. Depending on the terms of the note, the fund may forego all or part of
the interest and principal that would be payable on a comparable conventional
note; the fund's loss cannot exceed this foregone interest and/or principal. In
addition to the risks associated with a direct investment in the benchmark
asset, investments in structured and hybrid notes involve the risk that the
issuer or counterparty to the obligation will fail to perform its contractual
obligations. Certain structured or hybrid notes may also be leveraged to the
extent that the magnitude of any change in the interest rate or principal
payable on the benchmark asset is a multiple of the change in the reference
price. Leverage enhances the price volatility of the security and, therefore,
the fund's net asset value. Further, certain structured or hybrid notes may be
illiquid for purposes of the funds' limitations on investments in illiquid
securities. The fund has no limit on investments in structured or hybrid notes.
However, it is expected that not more than 5% of the fund's net assets will be
at risk as a result of such investments.
Tax-Exempt Securities. The fund is managed without regard to potential tax
consequences. If the adviser believes that tax-exempt securities will provide
competitive returns, The fund may invest up to 10% of its total assets in
tax-exempt securities. The fund's distributions of interest earned from these
investments will be taxable.
Investment Techniques and Related Risks
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Strategic Transactions. The fund may, but is not required to, utilize
various investment strategies to seek to hedge market risks (such as interest
rates and broad or specific fixed income market movements), to manage the
effective maturity or duration of fixed-equity, or to seek to enhance potential
gain. Such strategies are generally accepted as part of modern portfolio
management and are regularly utilized by many mutual funds and other
institutional investors. Techniques and instruments used by the fund may change
over time as new instruments and strategies are developed or regulatory changes
occur.
In the course of pursuing their investment objectives, the fund may
purchase and sell (write) exchange-listed and OTC put and call options on
securities, equity and fixed-income indices and other financial instruments;
purchase and sell financial futures contracts and options thereon; and enter
into various interest rate transactions such as swaps, caps, floors or collars
(collectively, all the above are called "Strategic Transactions"). Strategic
Transactions may be used to seek to protect against possible changes in the
market value of securities held in or to be purchased for the fund's portfolio
resulting from securities markets or currency exchange rate fluctuations, to
seek to protect the fund's unrealized gains in the value of their portfolio
securities, to facilitate the sale of such securities for investment purposes,
to seek to manage effective maturity or duration, or to establish a position in
the derivatives markets as a temporary substitute for purchasing or selling
particular securities. In addition to the hedging transactions referred to in
the preceding sentence, Strategic Transactions may also be used to enhance
potential gain in circumstances where hedging is not involved although the fund
will attempt to limit its net loss exposure resulting from Strategic
Transactions entered into for such purposes to not more than 3% of net assets at
any one time 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 the fund's net loss exposure from such Strategic Transactions, an
unrealized gain from a particular Strategic Transaction position would be netted
against an unrealized loss from a related Strategic Transaction position. For
example, if the adviser believes that short-term interest rates as indicated in
the forward yield curve are too high, the fund may take a short position in a
near-term Eurodollar futures contract and a long position in a longer-dated
Eurodollar futures contract. Under such circumstances, any unrealized loss in
the near-term Eurodollar futures position would be netted against any unrealized
gain in the longer-dated Eurodollar futures position (and vice versa) for
purposes of calculating the fund's net loss exposure.
The ability of the fund to utilize Strategic Transactions successfully
will depend on the adviser's ability to predict pertinent market and interest
rate movements, which cannot be assured. The fund will comply with applicable
regulatory requirements when implementing these strategies, techniques and
instruments. The funds' activities involving Strategic Transactions may be
limited in order to enable the funds to satisfy the requirements of Subchapter M
of the Code for qualification as a regulated investment company.
Risks of Strategic Transactions. Strategic Transactions have risks
associated with them including possible default by the other party to the
transaction, illiquidity and, to the extent the adviser's view as to certain
market or interest rate movements is incorrect, the risk that the use of such
Strategic Transactions could result in losses greater than if they had not been
used. The writing of put and call options may result in losses to the fund,
force the purchase or sale, respectively, of portfolio securities at inopportune
times or for prices higher than (in the case of purchases due to the exercise of
put options) or lower than (in the case of sales due to the exercise of call
options) current market values, limit the amount of appreciation the fund can
realize on its investments or cause the fund to hold a security it might
otherwise sell or sell a security it might otherwise hold. The use of options
and futures transactions entails certain other risks. In particular, the
variable degree of correlation between price movements of futures contracts and
price movements in the related portfolio position of the fund creates the
possibility that losses on the hedging instrument may be greater than gains in
the value of the fund's position. The writing of options could significantly
increase the fund's portfolio turnover rate and, therefore, associated
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brokerage commissions or spreads. In addition, futures and options markets may
not be liquid in all circumstances and certain OTC options may have no markets.
As a result, in certain markets, the fund might not be able to close out a
transaction without incurring substantial losses, if at all. Although the use of
futures and options transactions for hedging should tend to minimize the risk of
loss due to a decline in the value of the hedged position, at the same time, in
certain circumstances, they tend to limit any potential gain which might result
from an increase in value of such position. The loss incurred by the fund in
writing options on futures and entering into futures transactions is potentially
unlimited; however, as described above, the fund will attempt to limit its net
loss exposure resulting from Strategic Transactions entered into for non-hedging
purposes. Futures markets are highly volatile and the use of futures may
increase the volatility of the fund's net asset value. Finally, entering into
futures contracts would create a greater ongoing potential financial risk than
would purchases of options where the exposure is limited to the cost of the
initial premium. Losses resulting from the use of Strategic Transactions would
reduce net asset value and the net result may be less favorable than if the
Strategic Transactions had not been utilized.
General Characteristics of Options. Put options and call options typically
have similar structural characteristics and operational mechanics regardless of
the underlying instrument on which they are purchased or sold. Thus, the
following general discussion relates to each of the particular types of options
discussed in greater detail below. In addition, many Strategic Transactions
involving options require segregation of the fund's assets in special accounts,
as described below under "Use of Segregated Accounts."
A put option gives the purchaser of the option, in consideration for the
payment of a premium, the right to sell, and the writer the obligation to buy
(if the option is exercised), the underlying security, commodity, index,
currency or other instrument at the exercise price. For instance, the fund's
purchase of a put option on a security might be designed to protect its holdings
in the underlying instrument (or, in some cases, a similar instrument) against a
substantial decline in the market value by giving the fund the right to sell
such instrument at the option exercise price. A call option, in consideration
for the payment of a premium, gives the purchaser of the option the right to
buy, and the seller the obligation to sell (if the option is exercised), the
underlying instrument at the exercise price. The fund may purchase a call option
on a security, futures contract, index, currency or other instrument to seek to
protect the fund against an increase in the price of the underlying instrument
that it intends to purchase in the future by fixing the price at which it may
purchase such instrument. An American style put or call option may be exercised
at any time during the option period while a European style put or call option
may be exercised only upon expiration or during a fixed period prior thereto.
The fund is authorized to purchase and sell exchange listed options and OTC
options. Exchange listed options are issued by a regulated intermediary such as
the Options Clearing Corporation ("OCC"), which guarantees the performance of
the obligations of the parties to such options. The discussion below uses the
OCC as an example, but is also applicable to other financial intermediaries.
With certain exceptions, exchange listed options generally settle by
physical delivery of the underlying security or currency, although in the future
cash settlement may become available. Index options and Eurodollar instruments
are cash settled for the net amount, if any, by which the option is in-the-money
(i.e., where the value of the underlying instrument exceeds, in the case of a
call option, or is less than, in the case of a put option, the exercise price of
the option) at the time the option is exercised. Frequently, rather than taking
or making delivery of the underlying instrument through the process of
exercising the option, listed options are closed by entering into offsetting
purchase or sale transactions that do not result in ownership of the new option.
The fund's ability to close out its position as a purchaser or seller of
an exchange listed put or call option is dependent, in part, upon the liquidity
of the option market. There is no assurance that a liquid
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option market on an exchange will exist. In the event that the relevant market
for an option on an exchange ceases to exist, outstanding options on that
exchange would generally continue to be exercisable in accordance with their
terms.
The hours of trading for listed options may not coincide with the hours
during which the underlying financial instruments are traded. To the extent that
the option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct agreement with
the Counterparty. In contrast to exchange listed options, which generally have
standardized terms and performance mechanics, all the terms of an OTC option,
including such terms as method of settlement, term, exercise price, premium,
guarantees and security, are set by negotiation of the parties. The fund will
generally sell (write) OTC options that are subject to a buy-back provision
permitting the fund to require the Counterparty to sell the option back to the
fund at a formula price within seven days. OTC options purchased by the fund,
and portfolio securities "covering" the amount of the fund's obligation pursuant
to an OTC option sold by it (the cost of the sell-back plus the in-the-money
amount, if any) are subject to the fund's restriction on illiquid securities,
unless determined to be liquid in accordance with procedures adopted by the
Boards of Trustees. For OTC options written with "primary dealers" pursuant to
an agreement requiring a closing purchase transaction at a formula price, the
amount which is considered to be illiquid may be calculated by reference to a
formula price. The funds expect generally to enter into OTC options that have
cash settlement provisions, although they are not required to do so.
Unless the parties provide for it, there is no central clearing or
guaranty function in an OTC option. As a result, if the Counterparty fails to
make delivery of the security, currency or other instrument underlying an OTC
option it has entered into with the fund or fails to make a cash settlement
payment due in accordance with the terms of that option, the fund will lose any
premium it paid for the option as well as any anticipated benefit of the
transaction. Accordingly, the adviser must assess the creditworthiness of each
such Counterparty or any guarantor or credit enhancement of the Counterparty's
credit to determine the likelihood that the terms of the OTC option will be
satisfied. The fund will engage in OTC option transactions only with U.S.
Government securities dealers recognized by the Federal Reserve Bank of New York
as "primary dealers," or broker-dealers, domestic or foreign banks or other
financial institutions which have received, combined with any credit
enhancements, a long-term debt rating of A from Standard & Poors or Moody's or
an equivalent rating from any other nationally recognized statistical rating
organization ("NRSRO") or the debt of which is determined to be of equivalent
credit quality by the adviser.
If the fund sells (writes) a call option, the premium that it receives may
serve as a partial hedge, to the extent of the option premium, against a
decrease in the value of the underlying securities or instruments in its
portfolio or will increase the fund's income. The sale (writing) of put options
can also provide income.
The fund may purchase and sell (write) call options on securities
including U.S. Treasury and agency securities, mortgage-backed securities, asset
backed securities, corporate debt securities, equity securities (including
convertible securities) and Eurodollar instruments that are traded on U.S. and
foreign securities exchanges and in the OTC markets, and on securities indices
and futures contracts. All calls sold by the fund must be covered (i.e., the
fund must own the securities or the futures contract subject to the call) or
must meet the asset segregation requirements described below as long as the call
is outstanding. In addition, the fund may cover a written call option or put
option by entering into an offsetting forward contract and/or by purchasing an
offsetting option or any other option which, by virtue
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of its exercise price or otherwise, reduces the fund's net exposure on its
written option position. Even though the fund will receive the option premium to
help offset any loss, the fund may incur a loss if the exercise price is below
the market price for the security subject to the call at the time of exercise. A
call sold by the fund also exposes the fund during the term of the option to
possible loss of opportunity to realize appreciation in the market price of the
underlying security or instrument and may require the fund to hold a security or
instrument which it might otherwise have sold.
The fund may purchase and sell (write) put options on securities including
U.S. Treasury and agency securities, mortgage backed securities, asset backed
securities, foreign sovereign debt, corporate debt securities, equity securities
(including convertible securities) and Eurodollar instruments (whether or not it
holds the above securities in its portfolio), and on securities indices,
currencies and futures contracts. The fund will not sell put options if, as a
result, more than 50% of the fund's assets would be required to be segregated to
cover its potential obligations under such put options other than those with
respect to futures and options thereon. In selling put options, there is a risk
that the fund may be required to buy the underlying security at a price above
the market price.
Options on Securities Indices and Other Financial Indices. The fund may
also purchase and sell (write) call and put options on securities indices and
other financial indices. Options on securities indices and other financial
indices are similar to options on a security or other instrument except that,
rather than settling by physical delivery of the underlying instrument, they
settle by cash settlement. For example, an option on an index gives the holder
the right to receive, upon exercise of the option, an amount of cash if the
closing level of the index upon which the option is based exceeds, in the case
of a call, or is less than, in the case of a put, the exercise price of the
option (except if, in the case of an OTC option, physical delivery is
specified). This amount of cash is equal to the differential between the closing
price of the index and the exercise price of the option, which also may be
multiplied by a formula value. The seller of the option is obligated, in return
for the premium received, to make delivery of this amount upon exercise of the
option. In addition to the methods described above, the fund may cover call
options on a securities index by owning securities whose price changes are
expected to be similar to those of the underlying index, or by having an
absolute and immediate right to acquire such securities without additional cash
consideration (or for additional cash consideration held in a segregated account
by its custodian) upon conversion or exchange of other securities in its
portfolio.
General Characteristics of Futures. The fund may enter into financial
futures contracts or purchase or sell put and call options on such futures.
Futures are generally bought and sold on the commodities exchanges where they
are listed and involve payment of initial and variation margin as described
below. All futures contracts entered into by the fund are traded on U.S.
exchanges or boards of trade that are licensed and regulated by the Commodity
Futures Trading Commission ("CFTC") or on certain foreign exchanges.
The sale of futures contracts creates a firm obligation by the fund, as
seller, to deliver to the buyer the specific type of financial instrument called
for in the contract at a specific future time for a specified price (or, with
respect to index futures and Eurodollar instruments, the net cash amount). The
purchase of futures contracts creates a corresponding obligation by the fund, as
purchaser to purchase a financial instrument at a specific time and price.
Options on futures contracts are similar to options on securities except that an
option on a futures contract gives the purchaser the right in return for the
premium paid to assume a position in a futures contract and obligates the seller
to deliver such position, if the option is exercised.
The fund's use of financial futures and options thereon will in all cases
be consistent with applicable regulatory requirements and in particular the
regulations of the CFTC relating to exclusions from regulation as a commodity
pool operator. Those regulations currently provide that the fund may use
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commodity futures and option positions (i) for bona fide hedging purposes
without regard to the percentage of assets committed to margin and option
premiums, or (ii) for other purposes permitted by the CFTC to the extent that
the aggregate initial margin and option premiums required to establish such
non-hedging positions (net of the amount that the positions were "in the money"
at the time of purchase) do not exceed 5% of the net asset value of the fund's
portfolio, after taking into account unrealized profits and losses on such
positions. Typically, maintaining a futures contract or selling an option
thereon requires the fund to deposit, with its custodian for the benefit of a
futures commission merchant, or directly with the futures commission merchant,
as security for its obligations an amount of cash or other specified assets
(initial margin) which initially is typically 1% to 10% of the face amount of
the contract (but may be higher in some circumstances). Additional cash or
assets (variation margin) may be required to be deposited directly with the
futures commission merchant thereafter on a daily basis as the value of the
contract fluctuates. The purchase of an option on financial futures involves
payment of a premium for the option without any further obligation on the part
of the fund. If the fund exercises an option on a futures contract it will be
obligated to post initial margin (and potential subsequent variation margin) for
the resulting futures position just as it would for any position. Futures
contracts and options thereon are generally settled by entering into an
offsetting transaction but there can be no assurance that the position can be
offset prior to settlement at an advantageous price, nor that delivery will
occur. The segregation requirements with respect to futures contracts and
options thereon are described below.
Combined Transactions. The 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 and interest rate transactions ("component transactions"),
instead of a single Strategic Transaction, as part of a single or combined
strategy when, in the opinion of the adviser, it is in the best interests of the
funds to do so. A combined transaction will usually contain elements of risk
that are present in each of its component transactions. Although combined
transactions are normally entered into based on the adviser's judgment that the
combined strategies will reduce risk or otherwise more effectively achieve the
desired portfolio management goal, it is possible that the combination will
instead increase such risks or hinder achievement of the portfolio management
objective.
Swaps, Caps, Floors and Collars. Among the Strategic Transactions into
which the fund may enter are interest rate and index swaps and the purchase or
sale of related caps, floors and collars. The fund expects to enter into these
transactions primarily for hedging purposes, including, but not limited to,
preserving a return or spread on a particular investment or portion of the
fund's portfolio, protecting against currency fluctuations, as a duration
management technique or protecting against an increase in the price of
securities the fund anticipates purchasing at a later date. Swaps, caps, floors
and collars may also be used to enhance potential gain in circumstances where
hedging is not involved although, as described above, the fund will attempt to
limit its net loss exposure resulting from swaps, caps, floors and collars and
other Strategic Transactions entered into for such purposes. The fund will
attempt to limit net loss exposure from Strategic Transactions entered into for
non-hedging purposes to not more than 3% of net assets.
The fund will not sell interest rate caps or floors where it does not own
securities or other instruments providing the income stream the fund may be
obligated to pay. Interest rate swaps involve the exchange by the fund with
another party of their respective commitments to pay or receive interest (i.e.,
an exchange of floating rate payments for fixed rate payments with respect to a
notional amount of principal). 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
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predetermined interest rate or amount. A collar is a combination of a cap and a
floor that preserves a certain rate of return within a predetermined range of
interest rates or values.
The fund will usually enter into swaps on a net basis (i.e., the two
payment streams are netted out in a cash settlement on the payment date or dates
specified in the instrument) with the fund receiving or paying, as the case may
be, only the net amount of the two payments. The fund will not enter into any
swap, cap, floor or collar transaction unless, at the time of entering into such
transaction, the unsecured long-term debt of the Counterparty, combined with any
credit enhancements, is rated at least A by Standard & Poors or Moody's or has
an equivalent rating from an NRSRO or the Counterparty issues debt that is
determined to be of equivalent credit quality by the adviser. If there is a
default by the Counterparty, the fund may have contractual remedies pursuant to
the agreements related to the transaction. The swap market has grown
substantially in recent years with a large number of banks and investment
banking firms acting both as principals and as agents utilizing standardized
swap documentation. As a result, the swap market has become relatively liquid.
Caps, floors and collars are more recent innovations for which standardized
documentation has not yet been fully developed. Swaps, caps, floors and collars
are considered illiquid for purposes of the fund's policy regarding illiquid
securities, unless it is determined, based upon continuing review of the trading
markets for the specific security, that such security is liquid. The Boards of
Trustees of the Portfolio Trust and the Trust have adopted guidelines and
delegated to the adviser the daily function of determining and monitoring the
liquidity of swaps, caps, floors and collars. The Boards of Trustees, however,
retain oversight focusing on factors such as valuation, liquidity and
availability of information and are ultimately responsible for such
determinations. The Staff of the SEC currently takes the position that swaps,
caps, floors and collars are illiquid, and are subject to the fund's limitation
on investing in illiquid securities.
Use of Segregated Accounts. The fund will hold securities or other
instruments whose values are expected to offset its obligations under the
Strategic Transactions. The fund will cover Strategic Transactions as required
by interpretive positions of the SEC. The fund will not enter into Strategic
Transactions that expose the fund to an obligation to another party unless it
owns either (i) an offsetting position in securities or other options, futures
contracts or other instruments or (ii) cash, receivables or liquid securities
with a value sufficient to cover its potential obligations. The fund may have to
comply with any applicable regulatory requirements for Strategic Transactions,
and if required, will set aside cash and other liquid assets on the fund's
records or in a segregated account in the amount prescribed. If the market value
of these securities declines or the fund's obligation on the underlying
Strategic Transaction increases, additional cash or liquid securities will be
segregated daily so that the aggregate market value of the segregated securities
is at least equal to the amount of the fund's obligations on the underlying
Strategic Transactions. Segregated assets would not be sold while the Strategic
Transaction is outstanding, unless they are replaced with similar assets. As a
result, there is a possibility that segregation of a large percentage of the
fund's assets could impede portfolio management or the fund's ability to meet
redemption requests or other current obligations.
"When-Issued", "Delayed Delivery" and "Forward Commitment" Securities. The
fund places no limit on investments in when-issued or delayed delivery
securities. Delivery and payment for securities purchased on a when-issued or
delayed delivery basis will normally take place 15 to 45 days after the date of
the transaction. The payment obligation and interest rate on the securities are
fixed at the time that the fund enters into the commitment, but interest will
not accrue to the fund until delivery of and payment for the securities.
Although the fund will only make commitments to purchase "when-issued" and
"delayed delivery" securities with the intention of actually acquiring the
securities, the fund may sell the securities before the settlement date if
deemed advisable by the adviser.
Unless the fund has entered into an offsetting agreement to sell the
securities purchased on a when-issued or forward commitment basis, the fund will
segregate, on its records or with its custodian,
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cash or liquid obligations with a market value at least equal to the amount of
the fund's commitment. If the market value of these securities declines,
additional cash or securities will be segregated daily so that the aggregate
market value of the segregated securities is at least equal to the amount of the
fund's commitment.
Securities purchased on a "when-issued", "delayed delivery" or "forward
commitment" basis may have a market value on delivery which is less than the
amount paid by the fund. Changes in market value may be based upon the public's
perception of the creditworthiness of the issuer or changes in the level of
interest rates. Generally, the value of "when-issued", "delayed delivery" and
"forward commitment" securities will fluctuate inversely to changes in interest
rates, i.e., they will appreciate in value when interest rates fall and will
depreciate in value when interest rates rise.
Repurchase Agreements. The fund may invest up to 25% of its net assets in
repurchase agreements. A repurchase agreement is an agreement under which the
fund acquires money market instruments (generally U.S. Government securities)
from a commercial bank, broker or dealer, subject to resale to the seller at an
agreed-upon price and date (normally the next business day). The resale price
reflects an agreed-upon interest rate effective for the period the instruments
are held by the fund and is unrelated to the interest rate on the instruments.
The instruments acquired by the fund (including accrued interest) must have an
aggregate market value in excess of the resale price and will be held by the
fund's custodian bank until they are repurchased. In evaluating whether to enter
into a repurchase agreement, the adviser will carefully consider the
creditworthiness of the seller pursuant to procedures reviewed and approved by
the Board of Trustees of the Trust.
The use of repurchase agreements involves certain risks. For example, if
the seller defaults on its obligation to repurchase the instruments acquired by
the fund at a time when their market value has declined, the fund may incur a
loss. If the seller becomes insolvent or subject to liquidation or
reorganization under bankruptcy or other laws, a court may determine that the
instruments acquired by the fund are collateral for a loan by the fund and
therefore are subject to sale by the trustee in bankruptcy. Finally, it is
possible that the fund may not be able to substantiate its interest in the
instruments it acquires. While the trustees acknowledge these risks, it is
expected that they can be controlled through careful documentation and
monitoring.
Forward Roll Transactions. To seek to enhance current income, the fund
places no limit on investments in forward roll transactions involving
mortgage-backed securities. In a forward roll transaction, the fund sells a
mortgage-backed security to a financial institution, such as a bank or
broker-dealer, and simultaneously agrees to repurchase a similar security from
the institution at a later date at an agreed-upon price. The mortgage-backed
securities that are repurchased will bear the same interest rate as those sold,
but generally will be collateralized by different pools of mortgages with
different prepayment histories than those sold. During the period between the
sale and repurchase, the fund will not be entitled to receive interest and
principal payments on the securities sold. Proceeds of the sale will be invested
in short-term instruments, such as repurchase agreements or other short-term
securities, and the income from these investments, together with any additional
fee income received on the sale and the amount gained by repurchasing the
securities in the future at a lower price, will generate income and gain for the
fund which is intended to exceed the yield on the securities sold. Forward roll
transactions involve the risk that the market value of the securities sold by
the fund may decline below the repurchase price of those securities. At the time
that the fund enters into a forward roll transaction, it will place cash or
liquid assets in a segregated account that is marked to market daily having a
value equal to the repurchase price (including accrued interest).
Leverage. The use of forward roll transactions involves leverage. Leverage
allows any investment gains made with the additional monies received (in excess
of the costs of the forward roll
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transaction) to increase the net asset value of the fund faster than would
otherwise be the case. On the other hand, if the additional monies received are
invested in ways that do not fully recover the costs of such transactions to the
fund, the net asset value of the fund would fall faster than would otherwise be
the case.
Short Sales. The fund may engage in short sales and short sales against
the box. In a short sale, the fund sells a security it does not own in
anticipation of a decline in the market value of that security. In a short sale
against the box, the fund either owns or has the right to obtain at no extra
cost the security sold short. The broker holds the proceeds of the short sale
until the settlement date, at which time the fund delivers the security (or an
identical security) to cover the short position. The fund receives the net
proceeds from the short sale. When the fund enters into a short sale other than
against the box, the fund must first borrow the security to make delivery to the
buyer and must segregate cash or liquid assets on its records or in a segregated
account with the fund's custodian that is marked to market daily. Short sales
other than against the box involve unlimited exposure to loss. No securities
will be sold short if, after giving effect to any such short sale, the total
market value of all securities sold short would exceed 5% of the value of the
funds net assets.
Restricted and Illiquid Securities. The fund may invest up to 15% of its
net assets in illiquid securities. Illiquid securities are those that are not
readily marketable, repurchase agreements maturing in more than seven days, time
deposits with a notice or demand period of more than seven days, certain SMBS,
swap transactions, certain OTC options and certain restricted securities. Based
upon continuing review of the trading markets for a specific restricted
security, the security may be determined to be eligible for resale to qualified
institutional buyers pursuant to Rule 144A under the Securities Act of 1933 and,
therefore, to be liquid. Also, certain illiquid securities may be determined to
be liquid if they are found to satisfy relevant liquidity requirements.
The Boards of Trustees have adopted guidelines and delegated to the
advisers the function of determining and monitoring the liquidity of portfolio
securities, including restricted and illiquid securities. The Boards of
Trustees, however, retain oversight and are ultimately responsible for such
determinations. The purchase price and subsequent valuation of illiquid
securities normally reflect a discount, which may be significant, from the
market price of comparable securities for which a liquid market exists.
Money Market Instruments and Repurchase Agreements. Money market
instruments include short-term U.S. and foreign Government securities,
commercial paper (promissory notes issued by corporations to finance their
short-term credit needs), negotiable certificates of deposit, non-negotiable
fixed time deposits, bankers' acceptances and repurchase agreements.
U.S. Government securities include securities which are direct obligations
of the U.S. Government backed by the full faith and credit of the United States
and securities issued by agencies and instrumentalities of the U.S. Government
which may be guaranteed by the U.S. Treasury or supported by the issuer's right
to borrow from the U.S. Treasury or may be backed by the credit of the federal
agency or instrumentality itself. Agencies and instrumentalities of the U.S.
Government include, but are not limited to, Federal Land Banks, the Federal Farm
Credit Bank, the Central Bank for Cooperatives, Federal Intermediate Credit
Banks, Federal Home Loan Banks and the Federal National Mortgage Association.
The fund may invest in commercial paper rated P-1 by Moody's or A-1 by
Standard & Poors or Duff-1 by Duff, which are the highest ratings assigned by
these rating services (even if rated lower by one or more of the other
agencies), or, if not rated or rated lower by one or more of the agencies and
not rated by the other agency or agencies, judged by the adviser to be of
equivalent quality to the securities so
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rated. In determining whether securities are of equivalent quality, the adviser
may take into account, but will not rely entirely on, ratings assigned by
foreign rating agencies.
Temporary Defensive Investments. The fund may maintain cash balances and
purchase money market instruments for cash management and liquidity purposes.
The fund may adopt a temporary defensive position during adverse market
conditions by investing without limit in high quality money market instruments,
including short-term U.S. Government securities, negotiable certificates of
deposit, non-negotiable fixed time deposits, bankers' acceptances, commercial
paper, floating-rate notes and repurchase agreements.
Portfolio Turnover. It is not the policy of the fund to purchase or sell
securities for trading purposes. However, the fund places no restrictions on
portfolio turnover and it may sell any portfolio security without regard to the
period of time it has been held. The fund may therefore generally change its
portfolio investments at any time in accordance with the adviser's appraisal of
factors affecting any particular issuer or market, or the economy in general. A
rate of turnover of 100% would occur if the value of the lesser of purchases and
sales of portfolio securities for a particular year equaled the average monthly
value of portfolio securities owned during the year (excluding short-term
securities). A high rate of portfolio turnover (100% or more) involves a
correspondingly greater amount of brokerage commissions and other costs which
must be borne directly by the fund and thus indirectly by its shareholders. It
may also result in the realization of larger amounts of net short-term capital
gains, distributions of which are taxable to the fund's shareholders as ordinary
income.
Portfolio Diversification and Concentration. The fund is diversified which
means that, with respect to 75% of its total assets (i) no more than 5% of its
total assets may be invested in the securities of a single issuer and (ii) it
will purchase no more than 10% of the outstanding voting securities of a single
issuer. The fund will not concentrate (invest 25% or more of its total assets)
in the securities of issuers in any one industry. The fund's policies concerning
diversification and concentration are fundamental and may not be changed without
shareholder approval.
INVESTMENT RESTRICTIONS
The fund has adopted the following fundamental policies. The fund's
fundamental policies cannot be changed unless the change is approved by the
"vote of a majority of the outstanding voting securities" of the fund which
phrase as used herein means the lesser of (i) 67% or more of the voting
securities of the fund present at a meeting, if the holders of more than 50% of
the outstanding voting securities of the fund are present or represented by
proxy, or (ii) more than 50% of the outstanding voting securities of the fund.
High Grade Bond Fund
As a matter of fundamental policy, the fund may not:
1 Issue senior securities. For purposes of this restriction, borrowing money
in accordance with paragraph 2 below, making loans in accordance with
paragraph 6 below, the issuance of shares of beneficial interest in
multiple classes or series, the deferral of trustees' fees, the purchase
or sale of options, futures contracts, forward commitments and repurchase
agreements entered into in accordance with the fund's investment policies
or within the meaning of paragraph 5 below, are not deemed to be senior
securities.
2. Borrow money, except in amounts not to exceed 33 1/3% of the value of the
fund's total assets (including the amount borrowed) taken at market value
(i) from banks for temporary or
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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 and (iii) in order to fulfill commitments or
plans to purchase additional securities pending the anticipated sale of
other portfolio securities or assets, except that 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.
3. 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.
4. 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.
5. 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.
6. 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.
7. With respect to 75% of its total assets, purchase securities of an issuer
(other than the U.S. Government, its agencies, instrumentalities or
authorities or repurchase agreements collateralized by U.S. Government
securities and other investment companies), if: (a) such purchase would
cause more than 5% of the 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.
8. Invest more than 25% of its total assets in the securities of one or more
issuers conducting their principal business activities in the same
industry (excluding the U.S. Government or its agencies or
instrumentalities).
The following restrictions are not fundamental policies and may be changed
by the trustees of the Trust without investor approval in accordance with
applicable laws, regulations or regulatory policy. The fund may not:
a. 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).
19
<PAGE>
b. Invest in the securities of an issuer for the purpose of exercising
control or management, but it may do so where it is deemed advisable
to protect or enhance the value of an existing investment.
c. Purchase the securities of any other investment company except to
the extent permitted by the 1940 Act.
d. Invest more than 15% of its net assets in securities which are
illiquid.
e. Purchase additional securities if the fund's borrowings exceed 5% of
its net assets.
******
If any percentage restriction described above is adhered to at the time of
investment, a subsequent increase or decrease in the percentage resulting from a
change in the value of the fund's assets will not constitute a violation of the
restriction.
CALCULATION OF PERFORMANCE DATA
As indicated in the prospectus, the fund may, from time to time, advertise
certain total return and yield information. The average annual total return of
the fund for a period is computed by subtracting the net asset value per share
at the beginning of the period from the net asset value per share at the end of
the period (after adjusting for the reinvestment of any income dividends and
capital gain distributions), and dividing the result by the net asset value per
share at the beginning of the period. In particular, the fund's average annual
total return ("T") is computed by using the redeemable value at the end of a
specified period of time ("ERV") of a hypothetical initial investment of $1,000
("P") over a period of time ("n") according to the formula P(1+T)n=ERV.
The fund's yield is computed by dividing the net investment income per
share earned during a base period of 30 days, or one month, by the maximum
offering price per share on the last day of the period. For the purpose of
determining net investment income, the calculation includes, among expenses of
the funds, all recurring fees that are charged to all shareholder accounts and
any non-recurring charges for the period stated. In particular, yield is
determined according to the following formula:
Yield = 2[(A - B + 1)^6 - 1]
-----
CD
Where:
A=interest earned during the period; B=net expenses accrued for the
period; C=the average daily number of shares outstanding during the period that
were entitled to receive dividends; D=the maximum offering price per share (net
asset value) on the last day of the period.
The fund may also quote non-standardized yield, such as yield-to-maturity
("YTM"). YTM represents the rate of return an investor will receive if a
long-term, interest bearing investment, such as a bond, is held to its maturity
date. YTM does not take into account purchase price, redemption value, time to
maturity, coupon yield and the time between interest payments.
With respect to the treatment of discount and premium on mortgage or other
receivables-backed obligations which are expected to be subject to monthly
payments of principal and interest ("pay downs"), the fund accounts for gain or
loss attributable to actual monthly pay downs as an increase or decrease to
interest income during the period.
20
<PAGE>
In addition, the fund may elect (i) to amortize the discount or premium
remaining on a security, based on the cost of the security, to the weighted
average maturity date, if such information is available, or to the remaining
term of the security, if the weighted average maturity date is not available, or
(ii) not to amortize the discount or premium remaining on a security.
In addition to average annual return quotations, the fund may quote
quarterly and annual performance on a net (with management and administration
fees deducted) and gross basis as follows:
These performance quotations should not be considered as representative of
the fund's performance for any specified period in the future. The fund's
performance may be compared in sales literature and advertisements to the
performance of other mutual funds and separately managed discretionary accounts
(including private investment companies) having similar objectives or to
standardized indices or other measures of investment performance. In particular
the fund may compare its performance to the Lehman Brothers Aggregate Bond Index
which is composed of securities from the Lehman Brothers Government/Corporate
Bond Index, Mortgage Backed Securities Index and Yankee Bond Index, and is
generally considered to be representative of all unmanaged, domestic, dollar
denominated, fully taxable, non-convertible fixed rate investment grade bonds.
Securities in the Index must have at least one year to final maturity regardless
of call features, have at least $150 million par amount outstanding and be rated
investment grade (Baa3 or better).
Comparative performance may also be expressed by reference to a ranking
prepared by a mutual fund monitoring service or by one or more newspapers,
newsletters or financial periodicals. Performance comparisons may be useful to
investors who wish to compare the fund's past performance to that of other
mutual funds and investment products. Of course, past performance is not a
guarantee of future results.
MANAGEMENT
Trustees and Officers of the Trust and Portfolio Trust
The Board of Trustees has established the investment objective and
policies which govern the fund's operation. The Board has appointed officers of
the Trust who conduct the day-to-day business of the fund. The Board, however,
remains responsible for ensuring that the fund is operating consistently
according to its objective and policies and requirements of the federal
securities laws. The trustees and executive officer of the Trust are listed
below. All executive officers of the Trust are affiliates of Standish, Ayer &
Wood, Inc.
<TABLE>
<CAPTION>
Name, Address and Date of Birth Position Held With Trust Principal Occupation During Past 5 Years
- -------------------------------------------- -------------------------------- --------------------------------------------
<S> <C> <C>
*D. Barr Clayson, 7/29/35 Trustee and Vice President Managing Director,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.;
One Financial Center Chairman and Director, Standish
Boston, MA 02111 International Management Company, LLC
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Samuel C. Fleming, 9/30/40 Trustee Chairman of the Board
c/o Decision Resources, Inc. and Chief Executive Officer,
1100 Winter Street Decision Resources, Inc.;
Waltham, MA 02451 Trustee, Cornell University; Director,
CareGroup Inc.
Benjamin M. Friedman, 8/5/44 Trustee William Joseph Maier,
c/o Harvard University Professor of Political Economy,
Cambridge, MA 02138 Harvard University
John H. Hewitt, 4/11/35 Trustee Trustee, The Peabody Foundation; Trustee,
P.O. Box 233 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 & Wood,
One Financial Center Inc.;
Boston, MA 02111 Director of 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
Beverly, MA 01915 Company; Director, Carter Family
Corporation; Board Member, Gordon-Conwell
Theological Seminary; Chairman of the
Advisory Board, Salvation Army; Chairman,
Vision New England
*Richard S. Wood, 5/21/54 President and Trustee Managing Director, Standish, Ayer & Wood,
c/o Standish, Ayer & Wood, Inc. 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
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Paul G. Martins, 3/10/56 Vice President and Treasurer Vice President of Finance, Standish, Ayer
c/o Standish, Ayer & Wood, Inc. & Wood, Inc. since October 1996; formerly
One Financial Center Senior Vice President, Treasurer and Chief
Boston, MA 02111 Financial Officer of Liberty Financial
Bank Group
Beverly E. Banfield, 7/6/56 Vice President 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, Mutual Funds
c/o Standish, Ayer & Wood, Inc. Operations,
One Financial Center Standish, Ayer & Wood, Inc.
Boston, MA 02111
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
Rosalind J. Lillo, 2/6/38 Vice President Broker/Dealer Administrator
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc. since October
One Financial Center 1995; formerly Compliance Administrator,
Boston, MA 02111 New England Securities Corp.
Deborah Rafferty-Maple, 1/4/69 Vice President Assistant Vice President, Financial
c/o Standish, Ayer & Wood, Inc. Planner and Registered Investment Networks
One Financial Center Marketing Manager, Standish, Ayer & Wood,
Boston, MA 02111 Inc.
Lisa Kane, 6/25/70 Vice President Client Service Professional,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc.
One Financial Center
Boston, MA 02111
Steven M. Anderson, 7/14/65 Vice President Mutual Funds Controller,
c/o Standish, Ayer & Wood, Inc. Standish, Ayer & Wood, Inc. since 1996;
One Financial Center formerly Independent Consultant for
Boston, MA 02111 Banking and Financial Services
</TABLE>
* Indicates that trustee is an interested person of the Trust for purposes
of the 1940 Act.
Compensation of Trustees and Officers
The Trust does not pay compensation to the trustees of the Trust that are
affiliated with Standish or to the Trust's officers. None of the trustees or
officers have engaged in any financial transactions (other than the purchase or
redemption of the fund's shares) with the Trust or the advisers during the year
23
<PAGE>
ended December 31, 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 estimated to be paid to
the Trust's trustees as of the fund's initial fiscal year ending December 31,
2000:
Aggregate Compensation from the Funds
<TABLE>
<CAPTION>
Pension or Retirement Total Compensation from Funds and Other Funds in
High Grade Benefits Accrued as Part Complex**
Name of Trustee Bond Fund* of Funds' Expenses
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
D. Barr Clayson $0 $0 $0
Samuel C. Fleming $1,661 $0 $57,000
Benjamin M. Friedman $1,661 $0 $57,000
John H. Hewitt $1,720 $0 $62,000
Edward H. Ladd $0 $0 $0
Caleb Loring, III $1,661 $0 $57,000
Richard S. Wood $0 $0 $0
</TABLE>
- ----------
* Estimated. The fund is newly organized and has not paid any trustees fees.
** As of the date of this Statement of Additional Information there were 25
funds in the fund complex. Total compensation is presented for the calendar year
ended December 31, 1999.
Investment Adviser.
Standish serves as the adviser to the fund pursuant to a written
investment advisory agreement. Standish is a Massachusetts corporation organized
in 1933 and is registered under the Investment Advisers Act of 1940.
The following, constituting all of the Directors and all of the
shareholders of Standish, are Standish controlling persons: Caleb F. Aldrich,
Nicholas S. Battelle, David H. Cameron, Karen K. Chandor, D. Barr Clayson,
Lavina B. Chase, 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.
Subject to the supervision and direction of the trustees of the Trust, the
adviser recommends investment decisions and, places orders to purchase and sell
securities for the fund. In addition to those services, the adviser provides the
fund with office space for managing its affairs, with the services of required
executive personnel, and with certain clerical services and facilities. Under
the investment advisory agreement, the adviser is paid a fee at the rate of
0.40% of the fund's average daily net asset value. The advisory fee is payable
monthly. Since the fund commenced operations on June 1, 2000, it did not pay
advisory fees during the last three years.
Pursuant to the investment advisory agreement, the fund bears expenses of
its operations other than those incurred by the adviser pursuant to the
investment advisory agreement. Among other
24
<PAGE>
expenses, the fund will pay share pricing and shareholder servicing fees and
expenses; custodian fees and expenses; legal and auditing fees and expenses;
expenses of prospectuses, statements of additional information and shareholder
reports; registration and reporting fees and expenses; and trustees' fees and
expenses.
Unless terminated as provided below, the investment advisory agreement
continues in full force and effect for an initial two year period and thereafter
from year to year but only so long as each such continuance is approved annually
(i) by the trustees of the Trust or by the "vote of a majority of the
outstanding voting securities" of the fund, and, in either event (ii) by vote of
a majority of the trustees of the Trust who are not parties to the investment
advisory agreement or "interested persons" (as defined in the 1940 Act) of any
such party, cast in person at a meeting called for the purpose of voting on such
approval. The investment advisory agreement may be terminated at any time
without the payment of any penalty by vote of the trustees of the Trust or by
the "vote of a majority of the outstanding voting securities" of the fund or by
the adviser, on sixty days' written notice to the other parties. The investment
advisory agreement terminates in the event of its assignment as defined in the
1940 Act.
In an attempt to avoid any potential conflict with portfolio transactions
for the fund, the Trust, the adviser and the Principal Underwriter have each
adopted a Code of Ethics which are designed to maintain a high standard of
personal conduct by directing that all personnel place the interests of the fund
and its shareholders ahead of their own when effecting personal securities
transactions. While the codes do permit personnel to invest in securities for
their own accounts, the codes impose extensive restrictions on personal
securities trading including the pre-clearance of all personal securities
transactions and a prohibition of purchasing during initial public offerings of
securities. Each code is on public file with, and is available from, the SEC.
Distributor of the Fund
Standish Fund Distributors, L.P. (the "Principal Underwriter"), an
affiliate of the adviser, serves as the Trust's exclusive principal underwriter
and holds itself available to receive purchase orders for the fund's shares. In
that capacity, Standish Fund Distributors has been granted the right, as agent
of the Trust, to solicit and accept orders for the purchase of the fund's shares
in accordance with the terms of the Underwriting Agreement between the Trust and
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 fund's 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 the fund until two years after its execution and for
successive periods of one year thereafter only if it is approved at least
annually thereafter (i) by a vote of the holders of a majority of the fund's
outstanding shares or by the trustees of the Trust or (ii) by a vote of a
majority of the trustees of the Trust who are not "interested persons" (as
defined by the 1940 Act) of the parties to the Underwriting Agreement, cast in
person at a meeting called for the purpose of voting on such approval. The
Underwriting Agreement will terminate automatically if assigned by either party
thereto and is terminable with respect to the 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, with respect to
the fund, 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.
25
<PAGE>
In addition to Standish Fund Distributors and other agents of the Trust,
the fund has authorized one or more brokers and dealers to accept on its behalf
orders for the purchase and redemption of fund shares. Under certain conditions,
such authorized brokers and dealers may designate other intermediaries to accept
orders for the purchase and redemption of fund shares. In accordance with a
position taken by the staff of the Securities and Exchange Commission, such
purchase and redemption orders are considered to have been received by 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 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 the fund of
securities owned by it or determination by the fund of the value of its net
assets is not reasonably practicable; or (iii) for such other periods as the SEC
may permit for the protection of shareholders of the funds.
The Trust intends to pay redemption proceeds in cash for all fund shares
redeemed but, under certain conditions, the Trust may make payment wholly or
partly in fund portfolio securities. Portfolio securities distributed upon
redemption of fund shares will be valued at their then current market value. The
Trust has elected to be governed by the provisions of Rule 18f-1 under the 1940
Act which limits 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 the 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, (ii) furnishing seminars,
information, analyses and reports concerning issuers, industries, securities,
trading markets and methods, legislative developments, changes in accounting
practices, economic factors and trends, portfolio strategy, access to research
analysts, corporate management personnel, industry experts and economists,
comparative performance evaluation and technical measurement services and
quotation services, and products and other services (such as third party
publications, reports and analysis, and computer and electronic access,
equipment, software, information and accessories that deliver, process or
otherwise utilize information, including the research described above) that
assist the adviser in carrying out its responsibilities and (iii) effecting
securities transactions and performing functions incidental thereto (such as
clearance and settlement). Research services furnished by firms through which
the funds effect their securities transactions may be used by the adviser in
servicing other accounts; not all of these services may be used by the adviser
in connection with the funds generating the soft dollar credits. The
26
<PAGE>
investment advisory fees paid by the funds under the investment advisory
agreements will not be reduced as a result of the adviser's receipt of research
services.
The adviser also places portfolio transactions for other advisory
accounts. The adviser will seek to allocate portfolio transactions equitably
whenever concurrent decisions are made to purchase or sell securities for the
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 the 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.
Because most of the fund's securities transactions will be effected on a
principal basis involving a "spread" or "dealer mark-up," the fund does not
expect to pay any brokerage commissions.
DETERMINATION OF NET ASSET VALUE
The 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 the fund's shares is determined as of the
close of regular trading on the New York Stock Exchange (normally 4:00 p.m., New
York time). If the New York Stock Exchange closes early, the calculation of net
asset value will be accelerated to the actual closing time. Net asset value is
computed by dividing the value of all securities and other assets of the fund
less all liabilities by the number of 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.
Portfolio securities are valued at the last sales prices on the exchange
or national securities market on which they are primarily traded. Securities not
listed on an exchange or national securities market, or securities for which
there were no reported transactions, are valued at the last quoted bid price.
Securities for which quotations are not readily available and all other assets
are valued at fair value as determined in good faith at the direction of the
trustees.
Portfolio securities that are fixed income securities (other than money
market instruments) for which accurate market prices are readily available are
valued at their current market value on the basis of quotations, which may be
furnished by a pricing service or provided by dealers in such securities. Fixed
income securities for which accurate market prices are not readily available and
other assets are valued at fair value as determined in good faith by the adviser
in accordance with procedures approved by the trustees, which may include the
use of yield equivalents or matrix pricing.
Money market instruments with less than sixty days remaining to maturity
when acquired by the fund are valued on an amortized cost basis. If the fund
acquires a money market instrument with more than sixty days remaining to its
maturity, it is valued at current market value until the sixtieth day prior to
maturity and will then be valued at amortized cost based upon the value on such
date unless the trustees determine during such sixty-day period that amortized
cost does not represent fair value.
27
<PAGE>
THE FUNDS AND THEIR SHARES
The fund is a diversified investment series of the Trust, an open-end
management investment company organized as an unincorporated business trust
under the laws of The Commonwealth of Massachusetts pursuant to an Agreement and
Declaration of Trust dated August 13, 1986. Under the Agreement and Declaration
of Trust, the trustees of the Trust have authority to issue an unlimited number
of shares of beneficial interest, par value $.01 per share, of the fund. Each
share represents an equal proportionate interest in the fund with each other
share and is entitled to such dividends and distributions as are declared by the
trustees. Shareholders are not entitled to any preemptive, conversion or
subscription rights. All shares, when issued, will be fully paid and
non-assessable by the Trust. Upon any liquidation of the fund, shareholders 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 the fund to invest all of its investible assets in a single open-end
investment company that has substantially the same investment objectives,
policies and restrictions as the fund.
All fund shares have equal rights with regard to voting, and shareholders
of the fund have the right to vote as a separate class with respect to matters
as to which their interests are not identical to those of shareholders of other
classes of the Trust, including the approval of an investment advisory contract
and any change of investment policy requiring the approval of shareholders.
Under Massachusetts law, shareholders of the Trust could, under certain
circumstances, be held liable for the obligations of the Trust. However, the
Agreement and Declaration of Trust disclaims shareholder liability for acts or
obligations of the Trust and requires that notice of this disclaimer be given in
each agreement, obligation or instrument entered into or executed by the Trust
or a trustee. The Declaration also provides for indemnification from the assets
of the Trust for all losses and expenses of any Trust shareholder held liable
for the obligations of the Trust. Thus, the risk of a shareholder incurring a
financial loss on account of his or its liability as a shareholder of the Trust
is limited to circumstances in which the Trust would be unable to meet its
obligations. The possibility that these circumstances would occur is remote.
Upon payment of any liability incurred by the Trust, the shareholder paying the
liability will be entitled to reimbursement from the general assets of the
Trust. The Declaration also provides that no series of the Trust is liable for
the obligations of any other series. The trustees intend to conduct the
operations of the Trust to avoid, to the extent possible, ultimate liability of
shareholders for liabilities of the Trust.
TAXATION
Each series of the Trust, including the fund, is treated as a separate
entity for U.S. federal income tax purposes. The fund presently has elected to
be treated, has qualified 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 timely distributions of its income to its shareholders, and the
diversification of its assets, the fund will not be subject to U.S. federal
income tax on its investment company taxable income and net capital gain which
are distributed to shareholders.
28
<PAGE>
In order to qualify as a regulated investment company under Subchapter M,
the fund must, among other things, derive at least 90% of its gross income for
each taxable year from dividends, interest, payments with respect to securities
loans, gains from the sale or other disposition of stock, securities or foreign
currencies, or other income (including gains from options, futures and forward
contracts) derived with respect to its business of investing in such stock,
securities or currencies (the "90% Income Test") and satisfy certain annual
distribution and quarterly diversification requirements.
The fund will be subject to a 4% non deductible federal excise tax on a
portion of its undistributed ordinary income and capital gains if it fails to
meet certain distribution requirements with respect to each calendar year. The
fund intends under normal circumstances to seek to avoid liability for such tax
by satisfying such distribution requirements in a timely manner. Certain
distributions made in order to satisfy the Code's distribution requirements may
be declared by the fund as of a record date in October, November or December of
the year but paid during the following January. Such distributions will be
treated for federal income tax purposes as received by shareholders as if
received on December 31 of the year in which the distributions are declared,
rather than the year in which the distributions are received.
For U.S. federal income tax purposes, all dividends are taxable whether a
shareholder takes them in cash or reinvests them in additional shares in the
fund. Dividends from investment company taxable income, which includes net
investment income and net short-term capital gain in excess of net long-term
capital loss are treated as ordinary income. Dividends from net long-term
capital gain in excess of net short-term capital loss ("net capital gain"), if
any, are treated as long-term capital gain for federal income tax purposes
without regard to the length of time shares of the fund have been held.
If, as anticipated, the fund continues to qualify as regulated investment
company under the Code, the fund will not be required to pay any Massachusetts
income, corporate excise or franchise taxes.
The fund will not distribute net capital gains realized in any year to the
extent that a capital loss is carried forward from prior years against such
gain. For U.S. federal income tax purposes, a fund is permitted to carry forward
a net capital loss in any year to offset its own net capital gains, if any,
during the eight years following the year of the loss. To the extent subsequent
net capital gains are offset by such losses, they would not result in federal
income tax liability to the fund.
If the fund invests in certain pay-in-kind securities, zero coupon
securities, deferred interest securities or, in general, other securities with
original issue discount (or with market discount if the fund elects to include
market discount in income currently), the fund must accrue income on such
investments for each taxable year, which generally will be prior to the receipt
of the corresponding cash payments. However, the fund must distribute, at least
annually, all or substantially all of its net income to shareholders to qualify
as a regulated investment company under the Code and avoid U.S. federal income
and excise taxes. Therefore, the fund may have to dispose of its portfolio
securities under disadvantageous circumstances to generate cash, or may have to
leverage itself by borrowing the cash, to satisfy the distribution requirements.
Certain options, futures contracts or forward transactions entered into by
the fund may cause the fund to recognize gains or losses from marking-to-market
even though such options may not have lapsed, been closed out or exercised or
such futures or forward contracts may not have been performed or closed out. The
tax rules applicable to these contracts may affect the characterization of some
capital gains and losses realized by a fund as long-term or short-term. Certain
options and futures may be subject to Section 988 of the Code, as described
below, and may accordingly produce ordinary income or loss. Additionally, a fund
may be required to recognize gain if an option, futures contract, forward
contract, short sale, swap or other Strategic Transaction that is not subject to
the mark to market rules is treated as a
29
<PAGE>
"constructive sale" of an "appreciated financial position" held by the fund
under Section 1259 of the Code. Any net mark to market gains and/or gains from
constructive sales may also have to be distributed by a fund to satisfy the
distribution requirements referred to above even though a fund may receive no
corresponding cash amounts, possibly requiring the disposition of portfolio
securities or borrowing to obtain the necessary cash. Also, losses on certain
options, futures or forward contracts and/or offsetting positions (portfolio
securities or other positions with respect to which a fund's risk of loss is
substantially diminished by one or more options, futures or forward contracts)
may also be deferred under the tax straddle rules of the Code, which may also
affect the characterization of capital gains or losses from straddle positions
and certain successor positions as long-term or short-term. Certain tax
elections may be available that would enable the fund to ameliorate some adverse
effects of the tax rules described in this paragraph. The tax rules applicable
to options, futures or forward contracts and straddles may affect the amount,
timing and character of the fund's distributions to shareholders. The fund will
take into account the special tax rules applicable to options, futures, forward
contracts and constructive sales in order to minimize any potential adverse tax
consequences.
The federal income tax rules applicable to certain structured or hybrid
securities, dollar rolls and interest rate swaps, caps, floors and collars are
unclear in certain respects, and the fund will limit its transactions in these
instruments so that each can account for these instruments in a manner that is
intended to allow the fund to continue to qualify as a regulated investment
company. Due to possible unfavorable consequences under present tax law, the
fund does not currently intend to acquire "residual" interests in real estate
mortgage investment conduits ("REMICs"), although the funds may acquire
"regular" interests in REMICs.
If the fund acquires any equity interest (including, under future
regulations, not only stock but also 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" actually or constructively
received from such companies or on gain from the actual or deemed sale of stock
in such companies, even if all income or gain actually realized by the fund is
timely distributed to its shareholders. The fund would not be able to pass
through to its shareholders any credit or deduction for such a tax. Certain
elections may, if available, ameliorate these adverse tax consequences, but any
such election would require the fund to recognize taxable income or gain
(subject to tax distribution requirements) without the concurrent receipt of
cash. These investments could also result in the treatment of associated capital
gains as ordinary income. The fund may limit and/or manage its holdings, if any,
in passive foreign investment companies to limit the fund's tax liability or
maximize its return from these investments.
Investment in debt obligations by the fund that are at risk of or in
default presents special tax issues for the fund. Tax rules are not entirely
clear about issues such as when the fund may cease to accrue interest, original
issue discount, or market discount, when and to what extent deductions may be
taken for bad debts or worthless securities, how payments received on
obligations in default should be allocated between principal and income, and
whether exchanges of debt obligations in a workout context are taxable. These
and other issues will be addressed by the fund, in the event that it invests in
such securities, in order to seek to ensure that the fund distributes sufficient
income to preserve its status as a regulated investment company and does not
become subject to U.S. federal income or excise tax.
The fund's distributions to its corporate shareholders would potentially
qualify in their hands for the corporate dividends received deduction, subject
to certain holding period requirements and limitations on debt financing under
the Code, only to the extent a fund earned dividend income from stock
investments in U.S. domestic corporations. The fund is permitted to acquire
stocks of U.S. domestic
30
<PAGE>
corporations, and it is therefore possible that a small portion of the fund's
distributions, from the dividends attributable to such stocks, may qualify for
the dividends received deduction. Such qualifying portion, if any, may affect a
corporate shareholder's liability for alternative minimum tax and/or result in
basis reductions and other consequences in certain circumstances.
At the time of an investor's purchase of fund shares, a portion of the
purchase price may be attributable to undistributed taxable income and/or
realized or unrealized appreciation in the fund's portfolio. Consequently,
subsequent distributions by the fund with respect to such shares from such
income and/or appreciation may be taxable to such investor even if the net asset
value of the investor's shares is, as a result of the distributions, reduced
below the investor's cost for such shares, and the distributions economically
represent a return of a portion of the purchase price.
Upon a redemption or other disposition of shares of the fund in a
transaction that is treated as a sale for tax purposes, a shareholder may
realize a taxable gain or loss, depending upon the difference between the
redemption proceeds and the shareholder's tax basis in his shares. Such gain or
loss will generally be treated as capital gain or loss if the shares are capital
assets in the shareholder's hands. Any loss realized on a redemption or other
disposition may be disallowed under "wash sale" rules to the extent the shares
disposed of are replaced with other shares of the same fund (including those
made pursuant to reinvestment of dividends and/or capital gain distributions)
within a period of 61 days beginning 30 days before and ending 30 days after a
redemption or other disposition of the shares. In such a case, the disallowed
portion of the loss generally would be included in the federal tax basis of the
shares acquired. Any loss realized upon the redemption or other disposition of
shares with a tax holding period of six months or less will be treated as a
long-term capital loss to the extent of any amounts treated as distributions of
long-term capital gain with respect to such shares. Shareholders should consult
their own tax advisers regarding their particular circumstances to determine
whether a disposition of fund shares is properly treated as a sale for tax
purposes, as is assumed in the foregoing discussion.
Different tax treatment, including penalties on certain excess
contributions and deferrals, certain pre-retirement and post-retirement
distributions and certain prohibited transactions, is accorded to accounts
maintained as qualified retirement plans. Shareholders should consult their tax
adviser for more information.
The foregoing discussion relates solely to U.S. federal income tax law
consequences for shareholders who are U.S. persons, i.e., U.S. citizens or
residents and U.S. domestic corporations, partnerships, trusts or estates, and
who are subject to U.S. federal income tax. The discussion does not address
special tax rules applicable to certain types of investors, such as tax-exempt
or tax-deferred plans, accounts or entities, insurance companies, financial
institutions, and securities dealers. Dividends, capital gain distributions, and
ownership of or gains realized on the redemption (including an exchange) of fund
shares may also be subject to state and local taxes. A state income (and
possibly local income and/or intangible property) tax exemption is generally
available to the extent, if any, the fund's distributions are derived from
interest on (or, in the case of intangible property taxes, the value of its
assets is attributable to) investments in certain U.S. Government obligations,
provided in some states that certain thresholds for holdings of such obligations
and/or reporting requirements are satisfied. Shareholders should consult their
tax advisers regarding the applicable requirements in their particular states,
as well as the Federal, and any other state or local, tax consequences of
ownership of shares of, and receipt of distributions from, the fund in their
particular circumstances.
Federal law requires that the fund withhold (as "backup withholding") 31%
of reportable payments, including dividends, capital gain distributions and the
proceeds of redemptions or repurchases of fund shares paid to shareholders who
have not complied with IRS regulations. In order to avoid this withholding
requirement shareholders must certify on their Account Purchase Applications, or
on
31
<PAGE>
separate IRS Forms W-9, that the Social Security Number or other Taxpayer
Identification Number they provide is their correct number and that they are not
currently subject to backup withholding, or that they are exempt from backup
withholding. The fund may nevertheless be required to withhold if it receives
notice from the IRS or a broker that the number provided is incorrect or backup
withholding is applicable as a result of previous underreporting of interest or
dividend income.
Investors other than U.S. person may be subject to different U.S. tax
treatment, including a 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 withholding certificate is on file, to 31% backup withholding
on certain other payments from the fund. Non-U.S. investors should consult their
tax advisers regarding such treatment and the application of foreign taxes to an
investment in the fund.
ADDITIONAL INFORMATION
The fund's 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 Commission or by accessing the SEC's Web site at
http://www.sec.gov.
EXPERTS AND FINANCIAL STATEMENTS
The fund's financial statements for the fiscal year ending December 31,
2000 will be audited by PricewaterhouseCoopers LLP.
32
<PAGE>
APPENDIX
MOODY'S RATINGS DEFINITIONS FOR
CORPORATE BONDS AND SOVEREIGN,
SUBNATIONAL AND SOVEREIGN
RELATED ISSUES
Aaa - Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa - Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long term risks appear somewhat larger than in Aaa securities.
A - Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa - Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba - Bonds which are rated Ba are judged to have speculative elements.
Their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B - Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
STANDARD & POOR'S RATINGS
DEFINITIONS
AAA - Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA- Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
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<PAGE>
A - Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB - Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB - Debt rated BB is regarded, on balance, as predominantly speculative
with respect to capacity to pay interest and repay principal in accordance with
the terms of the obligation. While such debt will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or major
risk exposures to adverse conditions.
B - Debt rated B has a greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The B rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
BB or BB- rating.
STANDARD & POOR'S
CHARACTERISTICS OF SOVEREIGN DEBT
OF FOREIGN COUNTRIES
AAA - Stable, predictable governments with demonstrated track record of
responding flexibly to changing economic and political circumstances
Key players in the global trade and financial system:
- Prosperous and resilient economies, high per capita incomes
- Low fiscal deficits and government debt, low inflation
- Low external debt.
AA - Stable, predictable governments with demonstrated track record of
responding to changing economic and political circumstances
- slightly integrated into global trade and financial system
- Differ from AAAs only to a small degree because:
- Economies are smaller, less prosperous and generally more vulnerable
to adverse external influences (e.g., protection and terms of trade
shocks)
- More variable fiscal deficits, government debt and inflation
- Moderate to high external debt.
A - Politics evolving toward more open, predictable forms of governance in
environment of rapid economic and social change
- Established trend of integration into global trade and financial
system
- Economies are smaller, less prosperous and generally more vulnerable
to adverse external influences (e.g., protection and terms of trade
shocks), but
- Usually rapid growth in output and per capita incomes
- Manageable through variable fiscal deficits, government debt and
inflation
- Usually low but variable debt
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<PAGE>
- Integration into global trade and financial system growing but
untested
- Low to moderate income developing economies but variable performance
and quite vulnerable to adverse external influences
- Variable to high fiscal deficits, government debt and inflation
- Very high and variable debt, often graduates of Brady plan but track
record not well established.
BBB - Political factors a source of significant uncertainty, either
because system is in transition or due to external threats, or both, often in
environment of rapid economic and social change
- Integration into global trade and financial system growing but
untested
- Economies less prosperous and often more vulnerable to adverse
external influences
- Variable to high fiscal deficits, government debt and inflation
- High and variable external debt.
BB - Political factors a source of major uncertainty, either because
system is in transition or due to external threats, or both, often in
environment of rapid economic and social change
- Integration into global trade and financial system growing but
untested
- Low to moderate income developing economies, but variable
performance and quite vulnerable to adverse external influences
- Variable to high fiscal deficits, government debt and inflation
- Very high and variable debt, often graduates of Brady Plan but track
record not well established
In the case of sovereign, subnational and sovereign related issuers, a
fund uses the foreign currency or domestic (local) currency rating depending
upon how a security in the portfolio is denominated. In the case where a fund
holds a security denominated in a domestic (local) currency and one of the
rating services does not provide a domestic (local) currency rating for the
issuer, the fund will use the foreign currency rating for the issuer; in the
case where a fund holds a security denominated in a foreign currency and one of
the rating services does not provide a foreign currency rating for the issuer,
the fund will treat the security as being unrated.
DESCRIPTION OF DUFF & PHELPS
RATINGS FOR CORPORATE BONDS AND
FOR SOVEREIGN, SUBNATIONAL AND
SOVEREIGN RELATED ISSUERS
AAA - Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA - High credit quality. Protection factors are strong. Risk is modest
but may vary slightly from time to time because of economic conditions.
A - Protection factors are average but adequate. However, risk factors are
more variable and greater in periods of economic stress.
BBB - Below average protection factors but still considered sufficient for
prudent investment. Considerable variability in risk during economic cycles.
35
<PAGE>
BB - Below investment grade but deemed likely to meet obligations when
due. Present or prospective financial protection factors fluctuate according to
industry conditions or company fortunes. Overall quality may move up or down
frequently within this category.
B - Below investment grade and possessing risk that obligations will not
be met when due. Financial protection factors will fluctuate widely according to
economic cycles, industry conditions and/or company fortunes. Potential exists
for frequent changes in the rating within this category or into a higher or
lower rating guide.
FITCH IBCA INTERNATIONAL
LONG-TERM CREDIT RATING
DEFINITIONS
AAA - Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and
repay principal, which is unlikely to be affected by reasonably foreseeable
events.
AA - Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is very
strong, although not quite as strong as bonds rated AAA. Because bonds rated in
the AAA and AA categories are not significantly vulnerable to foreseeable future
developments, short-term debt of these issuers is generally rated F-1+.
A - Bonds considered to be investment grade and of high credit quality.
The obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB - Bonds considered to be investment grade and of good credit quality.
The obligor's ability to pay interest and repay principal is considered to be
adequate. Adverse changes in economic conditions and circumstances, however, are
more likely to have adverse impact on these bonds, and therefore impair timely
payment. The likelihood that the ratings of these bonds will fall below
investment grade is higher than for bonds with higher ratings.
BB - Bonds are considered speculative. The obligor's ability to pay
interest and repay principal may be affected over time by adverse economic
changes. However, business and financial alternatives can be identified which
could assist the obligor in satisfying its debt service requirements.
B - Bonds are considered highly speculative. The obligor's ability to pay
interest and repay principal are currently being met, but a limited margin
safety remains. However, capacity for continued payment is contingent upon a
sustained, favorable business and economic environment.
FITCH IBCA LONG-TERM RATINGS FOR
NATIONAL ISSUES
AAA - Obligations for which there is the lowest expectation of investment
risk. Capacity for timely repayment of principal and interest is substantial,
such that adverse changes in business, economic or financial conditions are
unlikely to increase investment risk substantially.
AA - Obligations for which there is a very low expectation of investment
risk. Capacity for timely repayment of principal and interest is substantial.
Adverse changes in business, economic or financial conditions may increase
investment risk, albeit not very significantly.
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<PAGE>
A - Obligations for which there is currently a low expectation of
investment risk. Capacity for timely repayment of principal and interest is
strong, although adverse changes in business, economic or financial conditions
may lead to increased investment risk.
BBB - Obligations for which there is currently a low expectation of
investment risk. Capacity for timely repayment of principal and interest is
adequate, although adverse changes in business, economic or financial conditions
are more likely to lead to increased investment risk than for obligations in
other categories.
BB - Obligations for which capacity for timely repayment of principal and
interest is uncertain relative to other obligors in the same country. Within the
context of the country, these obligations are speculative to some degree and
capacity for timely repayment remains susceptible over time to adverse changes
in business, financial or economic conditions.
B - Obligations for which capacity for timely repayment of principal and
interest is uncertain relative to other obligors in the same country. Timely
repayment of principal and interest is not sufficiently protected against
adverse changes in business, economic or financial conditions and these
obligations are more speculative than those in higher rated categories.
37
<PAGE>
PART C
OTHER INFORMATION
Item 24. Exhibits
(a) Agreement and Declaration of Trust dated August 13, 1986***
(a1) Certificate of Designation of Standish Fixed Income Fund***
(a2) Certificate of Designation of Standish International Fund***
(a3) Certificate of Designation of Standish Securitized Fund***
(a4) Certificate of Designation of Standish Short-Term Asset
Reserve Fund***
(a5) Certificate of Designation of Standish Marathon Fund***
(a6) Certificate of Amendment dated November 21, 1989***
(a7) Certificate of Amendment dated November 29, 1989***
(a8) Certificate of Amendment dated April 24, 1990***
(a9) Certificate of Designation of Standish Equity Fund***
(a10) Certificate of Designation of Standish International Fixed
Income Fund***
(a11) Certificate of Designation of Standish Intermediate Tax Exempt
Bond Fund***
(a12) Certificate of Designation of Standish Massachusetts
Intermediate Tax Exempt Bond Fund***
(a13) Certificate of Designation of Standish Global Fixed Income
Fund***
(a14) Certificate of Designation of Standish Controlled Maturity
Fund and Standish Fixed Income Fund II***
(a15) Certificate of Designation of Standish Tax-Sensitive Small Cap
Equity Fund and Standish Tax-Sensitive Equity Fund***
(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***
<PAGE>
(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***
(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***
- 2 -
<PAGE>
(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.***
(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#
- 3 -
<PAGE>
(k) Not applicable
(l) Not applicable
(m) Not applicable
(n) Not applicable
(o) Multiple Class Plan pursuant to Rule 18f-3 relating to
Standish Small Capitalization Equity Fund II and Standish
International Fixed Income Fund****
(p1) Code of Ethics for Standish, Ayer & Wood Investment Trust,
Standish, Ayer & Wood Master Portfolio and Standish Fund
Distributors, L.P.#
(p2) Code of Ethics for Standish, Ayer & Wood, Inc. and Standish
International Management Company, LLC#
(q1) Power of Attorney for Registrant (Richard S. Wood)^
(q2) Power of Attorney for Registrant (Samuel C. Fleming)^
(q3) Power of Attorney for Registrant (Benjamin M. Friedman)^
(q4) Power of Attorney for Registrant (John H. Hewitt)^
(q5) Power of Attorney for Registrant (Edward H. Ladd)^
(q6) Power of Attorney for Registrant (Caleb Loring III)^
(q7) Power of Attorney for Registrant (D. Barr Clayson)^
(q8) Power of Attorney for Registrant (Paul G. Martins)**
(q9) Power of Attorney for Portfolio Trust (Richard S. Wood)^
(q10) 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)+
(q11) 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.
- 4 -
<PAGE>
** Filed electronically as an exhibit to Registration Statement
No. 33-8214 (Post-Effective Amendment No. 82) and incorporated
herein by reference thereto.
*** Filed electronically as an exhibit to Registration Statement
No. 33-8214 (Post-Effective Amendment No. 88) and incorporated
by reference thereto.
**** Filed electronically as an exhibit to Registration Statement
No. 33-8214 (Post-Effective Amendment No. 91) and incorporated
by reference thereto.
***** Filed 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 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
- 5 -
<PAGE>
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, LLC ("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
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 Cap Growth Fund
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
- 6 -
<PAGE>
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.
Item 29. Management Services
Not applicable
Item 30. Undertakings
Not applicable.
- 7 -
<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 17th day of March, 2000.
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.
- 8 -
<PAGE>
Signature Title Date
Richard S. Wood* Trustee and President March 17, 2000
- ------------------------ (principal executive
Richard S. Wood officer)
/s/ Paul G. Martins Treasurer (principal March 17, 2000
- -------------------------- financial and accounting
Paul G. Martins officer)
D. Barr Clayson* Trustee March 17, 2000
- ------------------------
D. Barr Clayson
Samuel C. Fleming* Trustee March 17, 2000
- ------------------------
Samuel C. Fleming
Benjamin M. Friedman* Trustee March 17, 2000
- ------------------------
Benjamin M. Friedman
John H. Hewitt* Trustee March 17, 2000
- ------------------------
John H. Hewitt
Edward H. Ladd* Trustee March 17, 2000
- ------------------------
Edward H. Ladd
Caleb Loring III* Trustee March 17, 2000
- ------------------------
Caleb Loring III
*By: /s/ Paul G. Martins
- ------------------------
Paul G. Martins
Attorney-In-Fact
- 9 -
<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, in the city of Nashua, New Hampshire on the 17th day
of March, 2000.
STANDISH, AYER & WOOD
INVESTMENT TRUST
/s/ Paul G. Martins
--------------------------------------
Paul G. Martins, Treasurer
Pursuant to the requirements of the Securities Act of 1933, this Post-Effective
Amendment to the Registration Statement of Standish, Ayer & Wood Investment
Trust has been signed by the following persons in their capacities with
Standish, Ayer & Wood Master Portfolio and on the date indicated.
Signature Title Date
Richard S. Wood* Trustee and President March 17, 2000
- ------------------------ (principal executive
Richard S. Wood officer)
/s/ Paul G. Martins* Treasurer (principal March 17, 2000
- -------------------------- financial and accounting
Paul G. Martins officer)
D. Barr Clayson* Trustee March 17, 2000
- ------------------------
D. Barr Clayson
Samuel C. Fleming* Trustee March 17, 2000
- ------------------------
Samuel C. Fleming
- 10 -
<PAGE>
Benjamin M. Friedman* Trustee March 17, 2000
- ------------------------
Benjamin M. Friedman
John H. Hewitt* Trustee March 17, 2000
- ------------------------
John H. Hewitt
Edward H. Ladd* Trustee March 17, 2000
- ------------------------
Edward H. Ladd
Caleb Loring III* Trustee March 17, 2000
- ------------------------
Caleb Loring III
*By: /s/ James E. Hollis III
- ----------------------------
James E. Hollis, III
Attorney-In-Fact
- 11 -
<PAGE>
EXHIBIT INDEX
Exhibit
(j) Consent of Independent Public Accountants for the Registrant
(p1) Code of Ethics for Standish, Ayer & Wood Investment Trust, Standish,
Ayer & Wood Master Portfolio and Standish Fund Distributors, L.P. #
(p2) Code of Ethics for Standish, Ayer & Wood, Inc. and Standish International
Management Company, LLC.#
- 12 -
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the reference to our Firm under the heading "Experts and
Financial Statements" in the Post Effective Amendment No. 98 to the Registration
Statement on Form N-1A of Standish, Ayer & Wood Investment Trust: Standish High
Grade Bond Fund.
PricewaterhouseCoopers LLP
Boston, Massachusetts
March 17, 2000
CODE OF ETHICS OF
STANDISH, AYER & WOOD INVESTMENT TRUST,
STANDISH, AYER & WOOD MASTER PORTFOLIO
STANDISH, AYER & WOOD DOMESTIC MASTER PORTFOLIO,
STANDISH, AYER & WOOD, INC.
STANDISH INTERNATIONAL MANAGEMENT COMPANY, L.P.
AND
STANDISH FUND DISTRIBUTORS, L.P.
Dated: January 17, 1990 as amended
September 6, 1991, November 8, 1995, February 9, 1996 and December 18, 1996
<PAGE>
(2)
CODE OF ETHICS
This CODE OF ETHICS, adopted pursuant to Section 17 (j) of the Investment
Company Act of 1940 and Rule 17j-1 thereunder, applies to Access Persons (as
defined below) of Standish, Ayer & Wood Investment Trust (the "Fund Trust"),
Standish, Ayer & Wood Master Portfolio (the "Portfolio Trust") and Standish,
Ayer & Wood Domestic Master Portfolio (the "Domestic Portfolio Trust") and
Standish, Ayer & Wood, Inc. and Standish International Management Company, L.P.
(together, the "Adviser") and Standish Fund Distributors, L.P. (the "Principal
Underwriter") (The Fund Trust, the Portfolio Trust and the Domestic Portfolio
Trust are sometimes referred to here as the "Trust"). Rule 17-1 was adopted in
order to prevent persons who are actively involved in the management, portfolio
selection or underwriting of registered investment companies from engaging in
fraudulent, deceptive or manipulative acts, practices or courses of business in
connection with the purchase or sale of securities held or to be acquired by
such companies. This Code is designed to prevent persons who have access to
information concerning the portfolio securities transactions of the Trust from
using that information for their personal benefit. The Code prohibits any Access
Person from purchasing or selling a Security (as defined below) for any personal
account if such Access Person knows or should know that the Trust is purchasing
or selling, or considering purchasing or selling, such Security.
I.
DEFINITIONS
As used in this Code, the following terms shall have the meanings set forth
below unless the context thereof otherwise requires:
"Access Person" with respect to the Trust or the Adviser means any director,
trustee, officer, general partner (or director or officer of a general partner)
or Advisory Person of the Trust or the Adviser or the General Partner of the
Adviser. "Access Person" with respect to the Principal Underwriter means any
director, trustee, officer or general partner (or director or officer of a
general partner) of the Principal Underwriter who in the ordinary course of his
or her business makes, participates in or obtains information regarding the
purchase or sale of Securities for the Trust, or whose functions or duties as
part of the ordinary course of his or her business relate to making of any
recommendation to the Trust regarding the purchase or sale of Securities.
"Adviser" has the meaning designated in the preamble hereto.
"Advisory Person" means (i) any employee of the Trust or the Adviser (or of any
company in control relationship to the Trust or the Adviser) who, in connection
with his or her regular functions or duties, makes, participates in or obtains
information regarding the purchase or sale of any Security by the Trust, or
whose functions relate to the making of any recommendations with respect to such
purchases to sales and (ii) any natural person in a control relationship to the
Trust or the Adviser who obtains information concerning recommendations made to
the Trust regarding the purchase or sale of any Security.
"Beneficial ownership" shall be interpreted in the same manner as it is in
determining whether a person is subject to the provisions of Section 16 of the
Securities Exchange Act of 1934 and the rules and regulations thereunder, both
as amended from time to time, except that the determination of beneficial
ownership shall apply to all Securities which an Access Person has or acquires.
(3)
"Control" has the meaning designated in Section 2(a) (9) of the 1940 Act.
"Independent Trustee" means any trustee of the Trust who is not an "interested
person" of the Trust within
<PAGE>
the meaning of Section 2 (a) (19) of the 1940 Act.
"1940 Act" means the Investment Company Act of 1940 and the rules and
regulations thereunder, both as amended from time to time, and any order or
orders thereunder which may from time to time be applicable to the Trust.
"Purchase or sale of a Security" includes, among other things, the writing of an
option to purchase or sell a Security.
"Security" has the meaning designated in Section 2(a) (36) of the 1940 Act;
provided, however, that it shall not include securities issued by the U.S.
government, short-term securities issued by agencies or instrumentalities of the
U.S. government, money market instruments, bankers' acceptances or certificates
of deposit of a domestic bank, commercial paper, savings or demand deposits with
a domestic bank, and shares of registered open-end investment companies.
"Security held or to be acquired" by the Trust means any Security which, within
the most recent 15 days, (i) is or has been held by the Trust, or (ii) is being
or has been considered by the Trust or the Adviser for purchase by the Trust.
"Trust" has the meaning designated in the preamble hereto.
II.
PROHIBITED PRACTICES AND TRANSACTIONS
Section 2.1. Prohibited Practices. No Access Person shall:
(a) employ any device, scheme or artifice to defraud the Trust;
(b) make to the Trust any untrue statement of a material fact or omit to state
to the Trust a material fact necessary in order to make the statements made, in
light of the circumstances under which they are made, not misleading;
(c) engage in any act, practice, or course of business which operates or would
operate as a fraud or deceit upon the Trust; or
(d) engage in any manipulative practice with respect to the Trust.
Section 2.2. Prohibited Transactions. Except as otherwise provided in Section
2.3 below, no Access Person shall purchase or sell, directly or indirectly, any
Security in which he or she has, or by reason of such transaction acquires, any
direct or indirect beneficial ownership, if such Access Person knows or in the
ordinary course of fulfilling his duties should know, that the Security is
currently being considered for purchase or sale or is purchased or sold by the
Trust without first obtaining prior written clearance from the Compliance
Officer of the Trust authorizing such purchase or sale. This prohibition shall
continue until the time that the Trust completes the purchase or sale or
determines not to make the purchase or sale.
Section 2.3. Exempt Transactions. The prohibitions set forth in Section 2.2
above shall
(4)
not apply to the following types of transactions:
(a) purchases or sales effected in any account over which the Access Person has
no direct or indirect influence or control;
<PAGE>
(b) purchases or sales of Securities which are not eligible for purchase or sale
by the Trust;
(c) purchase or sales which are non-volitional on the part of either the Access
Person or the Trust; and
(d) purchases effected upon the exercise of rights issued by an issuer pro rata
to all holders of a class of its securities to the extent such rights were
acquired from the issuer, and sales of such rights so acquired.
III.
REPORTING
Section 3.1. Reporting by Access Persons. (i) Every access Person who is not an
Independent Trustee, whether or not one or more of the exemptions set forth in
Section 2.3 above applies, shall report to the Trust every transaction in a
Security in which such Access Person has, or by reason of such transaction
acquires, any beneficial ownership and (ii) every Access Person who is an
Independent Trustee shall report to the Trust each transaction in a Security if
such Independent Trustee, at the time of such transaction, knew or in the
ordinary course of fulfilling his or her official duties as a trustee should
have known, that during the 15-day period immediately preceding or following the
date of such transaction, such Security is or was purchased or sold by the Trust
or such purchase or sale by the Trust is or was being considered by the Trust or
the Adviser. Every report required be made hereunder shall be made not later
than ten days after the end of the calendar quarter in which the transaction to
which the report relates was effected.
Section 3.2. Information Required to be Reported. Every report made pursuant to
Section 3.1. shall be made to the Compliance Officer of the Trust and shall
contain the following information:
(a) the date of the transaction, the title and amount of shares, or the
principal amount of the Security involved;
(b) the nature of the transaction (i.e., purchase, sale or any other type of
acquisition or disposition);
(c) the price at which the transaction was effected; and
(d) the name of the broker, dealer, bank or other financial institution through
which the transaction was effected.
Section 3.3. Disclaimer of Beneficial Ownership. Any report submitted hereunder
shall not be construed as an admission that the Access Person making such report
has any direct or indirect beneficial ownership in any Security.
Section 3.4. Confidentiality. All reports and any other information furnished
pursuant to the requirements of this Code shall be treated as confidential, but
shall be subject to review by representatives of the Securities and Exchange
Commission.
(5)
IV.
RULES APPLICABLE TO ACCESS PERSONS OF THE TRUST WHO ARE ALSO
ACCESS PERSON OF THE ADVISER OR THE PRINCIPAL UNDERWRITER
Section 4.1. Incorporation of the Adviser's and the Principal Underwriter's Code
of Ethics. The provisions of the Adviser's and the Principal Underwriter's Code
of Ethics dated May, 1995 and as amended from time to time (the "Adviser's Code
of Ethics") are hereby incorporated herein by reference as the Trust's Code of
Ethics applicable to Access Persons of the Trust who are also Access Persons of
the Adviser or of the Principal Underwriter. Such Access Persons shall remain
subject to the provisions of this Code of Ethics, other than Article III, in
addition to the requirements of the Adviser's Code of Ethics. In
<PAGE>
lieu of the reporting requirements of Article III of this Code of Ethics, such
Access Persons shall submit reports as required by the Adviser's Code of Ethics.
The Adviser's Code of Ethics is attached hereto as Exhibit.
Section 4.2. Violation of the Adviser's Code of Ethics. A violation of the
Adviser's Code of Ethics by an Access Person of the Trust who is also an Access
Person of the Adviser or the Principal Underwriter shall constitute a violation
of this Code of Ethics.
Section 4.3. Amendment to the Adviser's Code of Ethics. Any amendment to the
Adviser's Code of Ethics shall be deemed an amendment to this Code of Ethics
effective ninety (90) days after written notice of each amendment shall have
been received by the Secretary of the Trust, unless the Trust's Board of
Trustees expressly determines that such amendment shall become effective at an
earlier date or shall not be adopted.
V.
ENFORCEMENT
Section 5.1. Compliance Officer. The Board of Trustees of the Trust shall
appoint a Compliance Officer to carry out the duties of such office, which
duties shall include the following:
(a) identifying all Access Persons who are under a duty to make reports
hereunder and notifying such Access Person of such duty;
(b) inquiring into potential or apparent violations of this Code;
(c) maintaining compliance records; and
(d) furnishing to the Board of Trustees of the Trust quarterly compliance
reports and such other information as the Board may from time to time request.
Section 5.2. Maintenance of Records. The Trust shall maintain the following
records at their principal place of business in the manner and to the extent set
forth below:
(a) A copy of this Code and of any other code of ethics which is, or at any time
within the past five years has been, in effect shall be preserved in an easily
accessible place.
(6) (b) A list of all persons who are, or within the past five years have been,
required to make reports pursuant to Rule 17j-1 under the 1940 Act shall be
maintained in an easily accessible place.
(c) A record of any violation of this Code, and of any action taken as a result
of such violation, shall be preserved in an easily accessible place for a period
of not less than five years following the end of the fiscal year in which the
violation occurs.
(d) A copy of each report made by an Access Person pursuant to this Code shall
be preserved for a period of not less than five years from the end of the fiscal
year in which it is made, the first two years in an easily accessible place.
The compliance records maintained pursuant to this Section 4.2 shall be
available to the Securities and Exchange Commission or any representative
thereof at any time and from time to time for reasonable periodic, special or
other examination.
Section 5.3. Sanctions. Upon finding of a violation of this Code, the Board of
Trustees of the Trust
<PAGE>
may impose such sanctions as they deem appropriate, which may include censure,
suspension or termination of status of the violator.
ACKNOWLEDGMENT
I hereby acknowledge that I have received and read a copy of this Code of Ethics
of Standish, Ayer & Wood Investment Trust, Standish, Ayer & Wood Master Trust,
Standish, Ayer & Wood Domestic Master Portfolio, Standish, Ayer & Wood, Inc.,
Standish International Management Company, L.P. and Standish Fund Distributors,
L.P. dated January 17, 1990, as amended September 6, 1991, November 8, 1995,
February 9, 1996, and December 18, 1996 and agree to comply with its terms and
provisions.
Date:_____________________________Signature:______________________________
<PAGE>
(7)
EXHIBIT A
REPORT OF SECURITY TRANSACTIONS
To: , Compliance Officer
FROM:
The following is a record of every transaction in a Security in which I
had or by reason of which I acquired, any direct or indirect beneficial
ownership during the calendar quarter ended:
Name, Description of Price Per Share/Unit Date Name of Broker, Dealer
Security and amount of Purchased/Sold or Bank
Shares/Units -------------- -------
- ------------
Note: This Report shall not be construed as an admission by me that I have
acquired direct or indirect beneficial ownership in the securities
involved in those transactions that have been marked with an
asterisk (*). Such Transactions are reported pursuant to the Code of
Ethics of Standish, Ayer & Wood Investment Trust, Standish, Ayer &
Wood Master Trust, Standish, Ayer & Wood Domestic Master Portfolio,
Standish, Ayer & Wood, Inc., Standish International Management
Company, L.P. and Standish Fund Distributors, L.P. in order to meet
the requirements of Section 17(j) of the Investment Company Act of
1940 and Rule 17j-1 thereunder.
Date: ______________ Signature: _______________________________
PLEASE RETURN THIS REPORT NO LATER THAN 10 DAYS AFTER THE END OF EACH
CALENDAR QUARTER.
<PAGE>
(8)
APPENDIX
EXAMPLES OF BENEFICIAL OWNERSHIP
"Beneficial ownership" of a security has been addressed by the Securities
and Exchange Commission in a number of releases and encompasses many
diverse situations, including the following:
1. Securities held by you for your own benefit, whether bearer form,
registered in your name, or otherwise.
2. Securities held by others for your benefit (regardless of whether or how
they are registered), such as securities held for you by a custodian,
broker, relative, executor or administrator.
3. Securities held for your account by a pledgee.
4. Securities held by a trust in which you have an income or remainder
interest, unless you only interest is to receive principal if (i) some
other remainderman dies before distribution, or (ii) some other person by
will directs a distribution of trust property or income to you.
5. Securities held by you as trustee or co-trustee, if either you or a member
of your immediate family (i.e., your spouse, children and their
descendants, step-children, parents and their ancestors, and step-parents
[treating a legal adoption as a blood relationship]) have an income or
remainder interest in the trust.
6. Securities held by a trust of which you are the settlor, if you have the
power to revoke the trust without obtaining the consent of all the
beneficiaries.
7. Securities held by any partnership in which you are a partner.
8. Securities held by a personal holding company controlled by you alone or
jointly with others.
9. Securities held in the name of your spouse unless you are legally
separated.
10. Securities held in the name of your minor child or in the name of any
relative of yours or of your spouse (including an adult child) who is
presently sharing your home, even if the securities were not received from
you and the dividends are not actually used for the maintenance of your
home.
11. Securities held in the name of another person (other than those listed in
examples 9 and 10 above), if by reason of any contract, understanding,
relationship, agreement or other arrangement, you obtain benefits
substantially equivalent the those of ownership.
12. Securities held in the name of any person other than yourself, even though
you do not obtain benefits substantially equivalent to those of ownership
(as described in example 11 above), if you can vest or revest title in
yourself.
Standish Ayer & Wood, Inc.
Standish International Management Co., LLC
Code of Ethics
A. Statement of Policy.
This Code of Ethics is based upon the principle that the officers,
directors and employees of Standish, Ayer & Wood, Inc. and Standish
International Management Co., LLC (each, the "Adviser") owe a fiduciary
duty to the investment companies registered under the Investment Company
Act of 1940 (each a "Fund") and other clients for which the Adviser acts
as investment adviser or subadviser. Accordingly, each officer, director
and employee of the Adviser should conduct personal trading activities in
a manner that does not interfere with a client's portfolio transactions or
take advantage of a relationship with any client. Persons covered by this
Code of Ethics must adhere to these general principles as well as the
Code's specific requirements.
The fundamental position of the Adviser is that in effecting personal
securities transactions personnel of the Adviser must place at all times
the interests of clients ahead of their own pecuniary interests. All
personal securities transactions by these persons must be conducted in
accordance with this Code of Ethics and in a manner to avoid any actual or
potential conflict of interest or any abuse of any person's position of
trust and responsibility. Further, these persons should not take
inappropriate advantage of their positions with or on behalf of a client.
Without limiting the foregoing, it is the intention of the Adviser that
this Code of Ethics not prohibit personal securities transactions by the
Adviser's personnel made in accordance with the letter and the spirit of
the Code.
B. Definitions.
For purposes of this Code of Ethics, the following definitions will apply:
1. Access Person. The term "Access Person" means any director, officer or
advisory person (as defined below) of the Adviser.
2. Acquisition. The term "acquisition" or "acquire" includes the receipt
of any gift of Covered Securities.
3. Advisory Person. The term "Advisory Person" means
(a) Every employee or on-site independent contractor of the Adviser
(or of any company in a control relationship to the Adviser) who, in
connection with his or her regular functions or duties, makes,
participates in, or obtains information regarding, the purchase or
sale of Covered Securities (as defined below) by a Fund or other
client, or whose functions relate to the making of any
<PAGE>
recommendations concerning the purchase or sale of Covered
Securities by a Fund or other client; and
(b) Every natural person in a control relationship to the Adviser
who obtains information concerning recommendations made to a Fund
concerning the purchase or sale of a Covered Security and every
other employee or on-site independent contractor of the Adviser
designated as an Access Person by the Code of Ethics Supervisor.
4. Beneficial Ownership. The term "Beneficial Ownership" means a direct or
indirect "pecuniary interest" (as defined in subparagraph (a)(2) of Rule
16a-1 under the Securities Exchange Act of 1934 (the "1934 Act")) that is
held or shared by a person directly or indirectly (through any contract,
arrangement, understanding, relationship or otherwise) in a security.
While the definition of "pecuniary interest" in subparagraph (a)(2) of
Rule 16a-1 is complex, this term generally means the opportunity directly
or indirectly to profit or share in any profit derived from a transaction
in a security. An indirect pecuniary interest in securities by a person
would be deemed to exist as a result of:
(a) ownership of securities by any of that person's immediate
family members sharing the same household (including a child,
stepchild, grandchild, parent, stepparent, grandparent,
spouse, sibling, mother- or father-in-law, sister- or
brother-in-law, and son- or daughter-in-law);
(b) the person's partnership interest in the portfolio securities
held by a general or limited partnership which such person
controls;
(c) the person's right to receive dividends from a security if
this right is separate or separable from the underlying
securities;
(d) the person's interest in securities held by a trust under
certain circumstances; and
(e) the person's right to acquire securities through the exercise
or conversion of a "derivative security" (which term excludes
(i) a broad-based index option or future, (ii) a right with an
exercise or conversion privilege at a price that is not fixed,
and (iii) a security giving rise to the right to receive
another security only pro rata and by virtue of a merger,
consolidation or exchange offer involving the issuer of the
first security).
5. Code of Ethics Supervisor. The term "Code of Ethics Supervisor" means
the officer of the Adviser designated from time to time by the Adviser's
compliance officer to (a) authorize or deny permission to purchase or sell
Covered Securities, (b) receive and review reports of purchases and sales
by Access Persons and (c) receive and review other reports that may be
required from time to time. The term "Alternative Code of Ethics
Supervisor" means the officer of the Adviser designated from time to time
by the Adviser to perform the duties of the Code of Ethics Supervisor in
connection with personal transactions by the Code of Ethics Supervisor or
in the absence of the Code of Ethics Supervisor.
Page 2 of 11
<PAGE>
6. Conflicts Committee. The term "Conflicts Committee" means any committee
designated as such by the management of the Adviser or any successor
committee or person that performs substantially the same functions as the
Conflicts Committee.
7. Control. The term "Control" has the same meaning as that set forth in
Section 2(a)(9) of the 1940 Act. Section 2(a)(9) provides that Control
means the power to exercise a controlling influence over the management or
policies of the Adviser, unless such power is solely the result of an
official position with the Adviser.
8. Covered Security. The term "Covered Security" means a security as
defined in Section 2(a)(36) of the 1940 Act, except that it does not
include:
(a) Direct obligations of the government of the United States.
(b) Bankers' acceptances, bank certificates of deposit, commercial
paper and high quality short-term debt instruments, including
repurchase agreements.
(c) Shares issued by open-end management investment companies
registered under the 1940 Act.
(d) Any other security determined by the Securities and Exchange
Commission ("SEC") or its staff to be excluded from the definition
of "Covered Security" contained in Rule 17j-1 under the 1940 Act.
9. Disposition. The term "disposition" or "dispose" includes the making of
any personal or charitable gift of Covered Securities.
10. Family Account. The term "Family Account" means any brokerage or other
account containing securities (including but not limited to Covered
Securities) (1) in which an immediate family member of the Access Person
not sharing the same household has Beneficial Ownership and (2) over which
the Access Person exercises direct or indirect, sole or shared, investment
control.
11. Fund. The term "Fund" has the meaning designated in the preamble
hereto.
12. Initial Public Offering. The term "Initial Public Offering" means an
offering of securities registered under the Securities Act of 1933, as
amended (the "1933 Act"), by an issuer, which immediately before
registration, was not subject to reporting requirements of Section 13 or
15(d) of the 1934 Act.
13. Investment Decision Maker. The term "Investment Decision Maker" means
any portfolio manager of the Adviser and any other Advisory Person who
assists a portfolio manager in making investment decisions for a Fund or
other client, including, but not limited to, all analysts of the Adviser
or of any company in a control relationship to the Adviser.
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14. Limited or Private Offering. The term "Limited or Private Offering"
means an offering that is exempt from registration under Section 4(2) or
4(6) of the 1933 Act or Rule 504, 505 or 506 thereunder.
15. 1940 Act. The term "1940 Act" means the Investment Company Act of 1940
and the rules and regulations thereunder, both as amended from time to
time, and any order or orders thereunder which may from time to time be
applicable to any Fund.
16. Purchase. The term "Purchase" includes the writing of an option to
purchase.
17. Sale. The term "Sale" includes a short sale, the writing of an option
to sell and the making of a gift.
18. Security being Considered for Purchase or Sale. A security is "being
considered for purchase or sale" when a recommendation to purchase or sell
a security has been made and communicated and, with respect to the person
making the recommendation, when such person seriously considers making
such a recommendation.
19. Security to be Held or Acquired. The phrase "security held or to be
acquired" means any Covered Security which, within the most recent 15
days, is or has been held by a Fund or is being or has been considered by
the Adviser for purchase by a Fund or any option to purchase or sell and
any security convertible into, or exchangeable for, such Covered Security.
C. Prohibited and Restricted Activities.
While the scope of actions which may violate the Statement of Policy set
forth above cannot be exactly defined, these actions would always include
at least the following prohibited activities.
1. Competing with Client Trades. No Access Person may, directly or
indirectly, purchase or sell securities if the Access Person knows, or
reasonably should know, that these securities transactions compete in the
market with actual or considered securities transactions for a client, or
otherwise personally act to injure a client's securities transactions.
2. Personal Use of Client Trading Knowledge. No Access Person may use the
knowledge about securities purchased or sold by a client or securities
being considered for purchase or sale by a client to profit personally,
directly or indirectly, by the market effect of such transactions.
3. Disclosure of Client Trading Knowledge. No Access Person may, directly
or indirectly, communicate to any person who is not an Access Person any
non-public information relating to a client including, without limitation,
the purchase or sale or considered purchase or sale of a security on
behalf of a client, except to the extent necessary to effectuate
securities transactions on behalf of a client.
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4. Initial Public Offerings. No Access Person may, directly or indirectly,
purchase any security sold in an Initial Public Offering, unless the
Conflicts Committee exempts the purchase because of special conditions
associated with the purchase.
5. Limited or Private Offerings. No Access Person may, directly or
indirectly purchase any security issued pursuant to a Limited or Private
Offering without obtaining prior written approval from the Conflicts
Committee. Access Persons who have received authorization to purchase
securities in a Limited or Private Offering must disclose their Beneficial
Ownership of these securities when these Access Persons are involved in
considering the purchase on behalf of a Fund or other client of securities
of the issuer of the privately placed securities. A decision to purchase
securities of this issuer must be independently reviewed by an investment
person with no personal interest in that issuer.
6. Acceptance of Gifts. No Access Person may accept any gift or other
thing of more than de minimis value from any person or entity that does
business with or on behalf of the Adviser. The Compliance Committee will
from time to time specify the value which will be considered de minimis
for purposes of this restriction.
7. Board Service; Outside Employment. No Access Person may serve on the
board of directors or trustees of any organization, whether publicly
traded or otherwise, absent prior written authorization and determination
by the Conflicts Committee that the board service would be consistent with
the interests of the Funds and other clients of the Adviser. If board
service is authorized, Access Persons serving as directors or trustees of
issuers may not take part in an investment decision on behalf of the Funds
or other clients concerning securities of these issuers. Likewise, no
access person may accept any outside employment absent the prior written
authorization of the Conflicts Committee.
8. Transactions During Blackout Period. No Investment Decision Maker may,
directly or indirectly, (a) purchase or sell any Covered Security in which
he or she has any Beneficial Ownership or (b) purchase any Covered
Security if that purchase would cause the Investment Decision Maker to
acquire any Beneficial Ownership, in each case within a period of seven
(7) calendar days before and after any Fund or other client as to which he
or she is an Investment Decision Maker has purchased or sold such Covered
Security.
9. Short-Term Trading. No Access Person may purchase and sell, or sell and
purchase, the same (or equivalent) Covered Securities within a 60 calendar
day period. The Conflicts Committee may, upon request, exempt an Access
Person from this prohibition if the Conflicts Committee determines that
extenuating circumstances warrant the exemption.
10. Disclosure of Personal Interest. No Investment Decision Maker may
recommend any securities transaction by a client without having previously
disclosed any Beneficial Ownership in these securities or the issuer
thereof to the Adviser, including without limitation:
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(a) That Investment Decision Maker's Beneficial Ownership of any
securities of the issuer;
(b) Any contemplated transaction by that Investment Decision Maker
in these securities;
(c) Any position with the issuer or its affiliates; and
(d) Any present or proposed business relationship between the
issuer or its affiliates and that Investment Decision Maker or
any party in which the Investment Decision Maker has a
significant interest.
An interested Investment Decision Maker may not participate in a decision
to purchase and sell securities of the issuer on behalf of a Fund or any
other client.
11. "Good Until Cancelled" or "Limit Orders." No Access Person may place
any "good until cancelled" or "limit" order that does not expire on the
day preclearance is granted.
D. Exempt Transactions.
The following transactions are exempt from the preclearance requirements
and substantive prohibitions and restrictions of the Code, but are not
exempt from the reporting requirements imposed by Section H of this Code.
1. Purchases or sales for an account over which the Access Person has no
direct or indirect influence or control;
2. Purchases or sales which are non-volitional on the part of the Access
Person;
3. Purchases which are part of an automatic dividend reinvestment plan,
but only to the extent the access person makes no voluntary adjustment in
the rate or type of investment or divestment;
4. Purchases or sales for which the Access Person has received prior
written approval from the Code of Ethics Supervisor. Prior approval will
be granted only if a purchase or sale of Covered Securities is consistent
with the purposes of this Code of Ethics, Section 17(j) of the 1940 Act
and the rules thereunder; and
5. Purchases in an Initial Public Offering if (a) the offering is part of
the "demutualization" or similar transaction of a mutual bank, insurance
company or similar issuer and the Access Person's ability to participate
is the direct result of the Access Person's ownership of insurance
policies or deposits issued or maintained by the issuer and (b) the
allocation of shares available for acquisition by the Access Person is
based on the Access Person's ownership of these policies or deposits.
6. Transactions involving the disposition solely of fractional shares of
equity Covered Securities.
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7. The receipt of any gift of Covered Securities.
Subject to applicable law, the Conflicts Committee may, upon consideration
of all of the relevant facts and circumstances, grant a written exemption
from provisions of this Code of Ethics with respect to any transaction
based on a determination that the transaction does not conflict with the
interests of any Fund or client.
E. Joint Participation.
A specific provision of the 1940 Act prohibits Access Persons, in the
absence of an order of the SEC, from effecting a transaction in which a
Fund is a "joint or a joint and several participant" with that Access
Person. Any transaction which suggests the possibility of a question in
this area should be presented to the Code of Ethics Supervisor and legal
counsel for review.
F. Duplicate Brokerage Confirmations and Statements.
Each Access Person must direct the Access Person's brokers to supply to
the Code of Ethics Supervisor, on a timely basis and not less frequently
than every calendar quarter, duplicate copies of confirmations of and
account statements reflecting all Covered Securities transactions and
holdings (1) in which the Access Person has or acquires a direct or
indirect Beneficial Ownership interest and (2) that are included in a
Family Account, in each case whether or not one of the exemptions listed
in Section D above applies.
G. Preclearance Procedures For Transactions in Securities.
1. Every Access Person must request and obtain preclearance from the
Code of Ethics Supervisor before effecting any personal securities
transactions in Covered Securities in or as to which the Access
Person both: (a) has or acquires a Beneficial Ownership and (b) has
direct or indirect, sole or shared, investment control, except for
exempt transactions described in Section D above. The Access Person
must submit to the Code of Ethics Supervisor a preclearance request
on a form designated by the Code of Ethics Supervisor from time to
time for each purchase or sale of a Covered Security on behalf of
such Access Person prior to the execution of such transaction.
2. The Code of Ethics Supervisor will compare the proposed transaction
to the daily Restricted List maintained by the Adviser. Preclearance
will be denied if: (a) the Covered Security is being considered for
purchase or sale by a Fund or other client or (b) there is an order
pending for a Fund or other client with respect to such Covered
Security. The transaction may not be effected unless the Code of
Ethics Supervisor pre-clears the transaction in writing or orally
(and subsequently confirming the oral preclearance in writing).
Preclearance is valid only for the trading day on which it is
issued.
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H. Reporting Requirements.
Every Access Person subject to this Section H must submit to the Code of Ethics
Supervisor, on forms designated by the Code of Ethics Supervisor, the following
reports as to (1) all Covered Securities and brokerage accounts in which the
Access Person has, or by reason of a transaction, acquires Beneficial Ownership,
whether or not the Access Person had any direct or indirect control over the
Covered Securities or accounts and (2) all Family Accounts, in each case,
including reports covering securities exempted by Section D.
1. Initial Holdings Reports. Not later than 10 days after an Access Person
becomes an Access Person, the following information:
(a) The title, number of shares and principal amount of each Covered
Security (x) in which the Access Person had any direct or indirect
Beneficial Ownership and (y) that was included in a Family Account
when the Access Person became an Access Person;
(b) The name of any broker, dealer or bank with whom the Access
Person maintained (x) an account containing securities (including
but not limited to Covered Securities) in which the Access Person
had any direct or indirect Beneficial Ownership or (y) a Family
Account, each as of the date the Access Person became an Access
Person.
(c) The date the report is being submitted by the Access Person.
2. Quarterly Transaction Reports. Not later than 10 days after the end of
each calendar quarter, the following information:
(a) Covered Securities Transactions. With respect to any acquisition
or disposition during the calendar quarter of a Covered Security (x)
in which the Access Person had any direct or indirect Beneficial
Ownership and (y) that was included in a Family Account:
(i) The date of the acquisition or disposition, the title,
the interest rate and maturity date (if applicable), the
number of shares and the principal amount of each
Covered Security;
(ii) The nature of the acquisition or disposition (i.e.,
purchase, sale, gift or any other type of acquisition or
disposition)
(iii) The price of the Covered Security at which the
acquisition or disposition was effected;
(iv) The name of the broker, dealer or bank with or through
which the acquisition or disposition was effected; and
(v) The date the report is being submitted by the Access
Person.
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However, if no reportable transactions in any Covered Securities
were effected during a calendar quarter, the affected Access Person
must submit to the Code of Ethics Supervisor, within ten calendar
days after the end of the quarter, a report stating that no
reportable Covered Securities transactions were effected.
(b) Brokerage Accounts. With respect to (x) any account established
by the Access Person containing securities (including but not
limited to Covered Securities) in which the person had a direct or
indirect Beneficial Ownership and (y) a Family Account during the
quarter:
(i) The name of the broker, dealer or bank with whom the
Access Person established the account;
(ii) The date the account was established; and
(iii) The date the report is being submitted by the Access
Person.
3. Annual Holdings Reports. By a date specified by the Code of Ethics
Supervisor and as of a date within 30 days before this reporting deadline,
the following information:
(a) The title, number of shares and principal amount of each Covered
Security (x) in which the Access Person had any direct or indirect
Beneficial Ownership and (y) that was included in a Family Account:;
(b) The name of any broker, dealer or bank with whom the Access
Person maintained (x) an account containing securities in which the
Access Person had any direct or indirect Beneficial Ownership and
(y) a Family Account.
(c) The date the report is being submitted by the Access Person.
4. Every report concerning a Covered Securities transaction that would be
prohibited by Section C if an exemption were not available under Section D
must identify the exemption relied upon and describe the circumstances of
the transaction.
5. Notwithstanding subparagraph 2 of this Section H, an Access Person need
not make quarterly transaction reports pursuant to this Code of Ethics if
the reported information would duplicate information reported pursuant to
Rule 204-2(a)(12) under the Investment Advisers Act of 1940 (the "Advisers
Act").
6. Any report submitted by an Access Person in accordance with this Code
may contain a statement that the report will not be construed as an
admission by that person that he or she has any direct or indirect
Beneficial Ownership in any Covered Security to which the report relates.
The existence of any report will not by itself be construed as an
admission that any event reported thereon constitutes a violation of this
Code.
7. To the extent consistent with Rule 17j-1 under the 1940 Act, and Rule
204-2(a)(12) under the Advisers Act, the Code of Ethics Supervisor may
approve other alternative reporting procedures from time to time.
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I. Initial and Annual Certification of Compliance.
1. Each Access Person, within ten (10) days after becoming an Access
Person, must certify, on a form designated by the Code of Ethics
Supervisor, that the Access Person:
(a) Has received, read and understands this Code of Ethics and
recognizes that the Access Person is subject hereto;
(b) Will comply with all the requirements of this Code of Ethics;
and
(c) Has disclosed to the Code of Ethics Supervisor all holdings of
Covered Securities and all accounts required to be disclosed
pursuant to the requirements of this Code of Ethics.
2. Each Access Person must also certify annually (by a date specified
by and on the form designated by the Code of Ethics Supervisor) that
the Access Person
(a) Has received, read and understand this Code of Ethics and
recognizes that the Access Person is subject hereto;
(b) Has complied with all the requirements of this Code of Ethics;
and
(c) Has disclosed or reported all personal securities transactions,
holdings and accounts required to be disclosed or reported in
compliance with the requirements of this Code of Ethics.
J. Confidentiality.
All information obtained from any Access Person hereunder normally will be
kept in strict confidence by the Adviser, except that reports of
transactions and other information obtained hereunder may be made
available to the Securities and Exchange Commission or any other
regulatory or self-regulatory organization or other civil or criminal
authority to the extent required by law or regulation or to the extent
considered appropriate by senior management of the Adviser in light of all
the circumstances. In addition, in the event of violations or apparent
violations of the Code, this information may be disclosed to affected
clients.
K. Identification of and Notice to Access Persons.
The Code of Ethics Supervisor will identify all persons who are considered
to be "Access Persons" and Investment Decision Makers and inform these
persons of their respective duties and provide these persons with copies
of this Code of Ethics.
L. Review of Reports.
The Code of Ethics Supervisor will review the information to be compiled
under this Code of Ethics in accordance with such review procedures as the
Code of Ethics
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Supervisor and senior management of the Adviser may from time to time
determine to be appropriate in light of the purposes of this Code of
Ethics.
M. Sanctions.
Any violation of this Code of Ethics will result in the imposition of such
sanctions as the Adviser may deem appropriate under the circumstances,
which may include, but are not limited to, a warning, disgorgement of
profits obtained in connection with a violation, the imposition of fines,
suspension, demotion, termination of employment or referral to civil or
criminal authorities.
N. Recordkeeping Requirements.
The Adviser will maintain and preserve:
1. In an easily accessible place, a copy of this Code of Ethics (and any
prior code of ethics that was in effect at any time during the past five
years) for a period of five years;
2. In an easily accessible place, a record of any violation of this Code
of Ethics (and any prior code of ethics that was in effect at any time
during the past five years) and of any action taken as a result of such
violation for a period of five years following the end of the fiscal year
in which the violation occurs;
3. A copy of each report (or computer printout) submitted under this Code
of Ethics for a period of five years, provided that for the first two
years such reports must be maintained and preserved in an easily
accessible place;
4. In an easily accessible place, a list of all persons who are, or within
the past five years were, required to make or required to review, reports
pursuant to this Code of Ethics.
5. A copy of each report provided to any Fund as required by paragraph
(c)(2)(ii) of Rule 17j-1 under the 1940 Act or any successor provision for
a period of five years following the end of the fiscal year in which the
report is made, provided that for the first two years such record will be
preserved in an easily accessible place; and
6. A written record of any decision, and the reasons supporting any
decision, to approve the purchase by an Access Person of any security in
an Initial Public Offering or in a Limited or Private Offering for a
period of five years following the end of the fiscal year in which the
approval is granted.
Approved: February 25, 2000
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