[LOGO] STANDISH FUNDS(R)
Prospectus Standish International Fixed Income Fund
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May 1, 2000 (Service Class Shares)
The Securities and Exchange Commission has not
approved or disapproved these securities or
determined whether this prospectus is accurate
or complete. Any statement to the contrary is a crime.
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Contents
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Risk/Return Summary...............................3
Standish International Fixed Income Fund.......4
The Fund's Investments and Related Risks..........5
Additional investments.........................5
Additional investment policies.................5
[GRAPHIC OMITTED]
The Investment Adviser............................7
About SIMCO(R).................................7
Who can invest in the fund.....................7
Who may want to invest.........................7
Fund managers..................................8
Advisory services and fees.....................8
Investment and Account Information................9
How to purchase shares.........................9
How to exchange shares........................10
How to redeem shares..........................10
Transaction and account policies..............11
Valuation of shares...........................11
Dividends and distributions...................11
Fund Details.....................................12
Taxes.........................................12
The fund's service providers..................12
For More Information.............................16
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.
Standish International Fixed Income Fund (Service Class) 2
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Risk/Return Summary
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International Fixed Income Fund
Investment objective To maximize total return while realizing a market
level of income consistent with preserving principal
and liquidity.
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Key investments The fund invests, under normal circumstances, at
and strategies least 65% of assets in non-U.S. dollar denominated
fixed income securities of foreign governments and
companies located in various countries, including
emerging markets. The fund always invests in at
least 5 countries other than the U.S. At times, the
fund may invest a substantial part of its assets in
any one country. The fund will hedge most, but not
necessarily all, of its foreign currency exposure to
protect the U.S. dollar value of the fund's assets.
The fund may also invest in interest rate futures
contracts.
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Credit quality The fund invests primarily in investment grade
securities, but may invest up to 15% of assets in
below investment grade securities, sometimes
referred to as junk bonds. The fund will not invest
in securities rated lower than B. The adviser
selects fixed income securities that have the
potential to be upgraded.
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Targeted average In the range of A to AA/Aa
portfolio credit quality
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Maturity The fund is not subject to any maturity restrictions.
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How investments The adviser focuses on identifying undervalued
are selected government bond markets, currencies, sectors and
securities and deemphasizes the use of an interest
rate forecasting strategy. The adviser looks for
fixed income securities with the most potential for
added value, such as those involving the potential
for credit upgrades, unique structural
characteristics or innovative features. The adviser
selects securities for the fund's portfolio by:
o Using fundamental economic and quantitative
analysis to allocate assets among countries and
currencies based on a comparative evaluation of
interest and inflation rate trends, government
fiscal and monetary policies and the credit
quality of governmental debt.
o Focusing on sectors and individual securities that
appear to be relatively undervalued and actively
trading among sectors.
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Principal risks of Investors could lose money on their investment in
investing in the fund the fund or the fund could perform less well than
other possible investments if any of the following
occurs:
o Interest rates rise, which will make the prices of
fixed income securities and the value of the
fund's portfolio go down.
o The issuer of a security owned by the fund has its
credit rating downgraded or defaults on its
obligation to pay principal and/or interest. This
risk is higher for below investment grade bonds.
o When interest rates are declining, the issuer of a
security exercises its right to prepay principal
earlier than scheduled, forcing the fund to
reinvest in lower yielding securities. This is
known as call or prepayment risk.
o When interest rates are rising, the average life
of some securities may extend because of slower
than expected principal payments. This will lock
in a below-market interest rate, increase the
security's duration and reduce the value of the
security. This is known as extension risk.
o The adviser's judgment about the attractiveness,
relative value or potential appreciation of a
particular country, currency, sector, security or
hedging strategy proves to be incorrect.
o Prices of foreign securities go down because of
unfavorable foreign government actions, political,
economic or market instability or the absence of
accurate information about foreign companies. A
decline in the value of foreign currencies
relative to the U.S. dollar will reduce the value
of securities held by the fund and denominated in
those currencies. Foreign securities are sometimes
less liquid and harder to value than securities of
U.S. issuers. These risks are more severe for
securities of issuers in emerging market
countries.
o During periods of extreme interest rate volatility
the fund has difficulty closing out its position
in interest rate futures contracts or closing out
the position at a price which the adviser believes
would be advantageous to the fund.
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The fund is non-diversified. This means that the
fund may invest more of its assets in the securities
of a single issuer than diversified funds. To the
extent the fund invests more of its assets in a
single issuer, the fund's share price may be
adversely affected by events affecting that issuer.
3 Standish International Fixed Income Fund (Service Class)
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Risk/Return Summary
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Total return The bar chart and total return table indicate the
performance risks of investing in the fund. The bar chart shows
changes in the performance of the fund's
Institutional Class shares from year to year over
the life of that class for the full calendar periods
indicated, reduced to reflect the deduction of the
25 basis point service fee applicable to the fund's
Service Class shares. The total return table shows
how average annual returns of Institutional Class
shares (similarly reduced) for different calendar
periods compare to those of two widely recognized,
unmanaged indices of fixed income securities. Past
performance does not indicate how the fund will
perform in the future.
International Fixed Income Fund+
[The following table was depicted as a bar chart in the printed materials.]
14.8 7.82 23.48 -9.45 17.84 14.99 11.59 8.46 0.54
1991 1992 1993 1994 1995 1996 1997 1998 1999
Calendar Year Ended December 31
Quarterly returns:
Highest: 9.92% in 3rd quarter 1991
Lowest: -5.84% in 1st quarter 1994
+Institutional Class shares of the fund are not offered in this prospectus, but
Service Class shares would have had substantially similar but lower performance.
Institutional Class shares and Service Class shares are invested in the same
portfolio of securities and annual returns differ only to the extent that each
class has different expenses, such as the service fee applicable to Service
Class shares.
Average annual total returns for selected
periods ended December 31, 1999+
Life of
Institutional Inception
1 Year 5 Years Class Date*
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International Fixed Income 0.54 10.52 9.60 1/3/91
Fund (Institutional Class)
J.P. Morgan Non-U.S. Govt
Bond Index (Hedged)** 2.48 11.14 8.90 N/A
Lehman Brothers Aggregate*** -0.83 7.73 7.56 N/A
*Life of Institutional Class.
**The J.P. Morgan Non-U.S. Government Bond Index (Hedged) is an unmanaged broad
based index of non-U.S. government bonds with maturities of one year or more
that are currency-hedged into U.S. dollars.
***The Lehman Brothers Aggregate Index is an unmanaged, broad based index of
domestic, U.S. dollar denominated, fixed rate investment grade bonds.
Fees and expenses of the fund
This table describes the fees and expenses you may pay if you buy and hold
shares of the fund. Expenses are based on estimates for the current fiscal year.
Based on fiscal year International
ended 12/31/99 Fixed Income
Fund
(Service Class)
Shareholder fees (fees paid
directly from your investment) None
Annual fund operating expenses
(expenses that are deducted
from fund assets)
Management fees 0.40%
Distribution (12b-1) fees None
Other expenses 1.15%
Service fee 0.25%
Total annual fund operating
expenses 1.80%
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(1)Because Standish has agreed to cap the fund's operating expenses, the fund's
estimated expenses would have been:
Management fees 0.40%
Distributioon (12b-1) None
Other expenses 0.12%
Service fee 0.25%
Total annual fund
operating expenses 0.77%
These caps may be changed or eliminated.
Expense example
This example is intended to help you compare the cost of investing in the fund
with the cost of investing in other mutual funds. The example assumes that:
o You invest $10,000 in the fund for the time periods indicated;
o You redeem at the end of each period;
o Your investment has a 5% return each year; and
o The fund's operating expenses have not been capped and remain the same.
Although your actual costs may be higher or lower, under these assumptions your
costs would be:
After After After After
1 year 3 years 5 years 10 years
International Fixed Income
Fund (Service Class) $183 $566 $975 $2,116
Standish International Fixed Income Fund (Service Class) 4
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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
(including structured notes), mortgage-related securities, asset-backed
securities, convertible securities, eurodollar and Yankee dollar instruments,
preferred stocks and money market instruments. Fixed income securities may be
issued by U.S. and foreign corporations or entities; U.S. and foreign banks; the
U.S. government, its agencies, authorities, instrumentalities or sponsored
enterprises; state and municipal governments; and foreign governments and their
political subdivisions. These securities may have all types of interest rate
payment and reset terms, including fixed rate, adjustable rate, zero coupon,
contingent, deferred, payment in kind and auction rate features.
Asset-backed securities represent participations in, or are secured by and
payable from, assets such as installment sales or loan contracts, leases, credit
card receivables and other categories of receivables.
Mortgage-related securities may be issued by private companies or by agencies of
the U.S. government. Mortgage-related securities represent direct or indirect
participations in, or are collateralized by and payable from, mortgage loans
secured by real property. Mortgage-related and asset-backed securities are
especially sensitive to prepayment and extension risk.
For mortgage derivatives and structured securities that have imbedded leverage
features, small changes in interest or prepayment rates may cause large and
sudden price movements. Mortgage derivatives can also become illiquid and hard
to value in declining markets.
The fund may use mortgage dollar rolls to finance the purchase of additional
investments. In a mortgage dollar roll transaction, a fund sells a
mortgage-backed security to a financial institution and agrees to repurchase a
similar mortgage-backed security at a later date at a price that is agreed upon
at the time of the sale. The fund will earn income by investing the proceeds
from the sale in short-term securities. Dollar rolls expose the fund to the risk
that the return generated by the short-term invstments is lower than the
financing cost of the fund's obligations to repurchase similar securities at the
agreed upon date.
Information about the fund's other investment strategies
Emerging Market Investments The fund may invest 10% of assets in emerging
markets generally and 3% of assets in any single emerging market. At times the
fund invests substantially in fixed income securities of foreign governments or
their political subdivisions. This exposes the fund to additional risk if the
foreign government is unable or unwilling to repay principal or interest when
due.
Credit quality Securities are investment grade if they are rated in one of the
four highest long-term rating categories of a nationally recognized statistical
rating organization, have received a comparable short-term or other rating or
are unrated securities that the adviser believes are of comparable quality.
If a security receives "split" (different) ratings from multiple rating
organizations, the fund will treat the security as being rated in the higher
rating category. The fund may choose not to sell securities that are downgraded
below the fund's minimum acceptable credit rating after their purchase. The
fund's credit standards also apply to counterparties to OTC derivative
contracts.
5 Standish International Fixed Income Fund (Service Class)
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The Fund's Investments and Related Risks
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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 caused by changing interest rates or currency
exchange 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.
A derivative contract will obligate or entitle the fund to deliver or receive an
asset or a cash payment that is based on the change in value of a designated
security, currency or index. Even a small investment in derivative contracts can
have a big impact on a portfolio's interest rate or currency exposure.
Therefore, using derivatives can disproportionately increase portfolio losses
and reduce opportunities for gains when interest rates or currency rates are
changing. The fund may not fully benefit from or may lose money on derivatives
if changes in their value do not correspond accurately to changes in the value
of the fund's portfolio holdings.
Counterparties to OTC derivative contracts present the same types of credit risk
as issuers of fixed income securities. 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 the fund's performance.
Standish International Fixed Income Fund (Service Class) 6
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The Investment Adviser
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SIMCO offers a broad array of investment services that include management of
domestic and international equity and fixed income portfolios.
About SIMCO
Standish International Management Company, LLC (SIMCO), a limited liability
company and wholly owned subsidiary of Standish, Ayer & Wood, Inc. (Standish),
was established in 1991 and is the fund's investment adviser. SIMCO relies on a
combination of traditional fundamental research, which is the product of a
seasoned staff of specialists, and innovative quantitative analysis, which uses
sophisticated computer-based models to help identify potentially attractive
securities in equity and fixed income markets. In each market, SIMCO seeks to
uncover opportunity by utilizing detailed analysis and thorough adherence to a
strict set of disciplines. SIMCO uses fundamental research to identify a
security sufficiently complex as to have been misvalued by more traditional
analysis. SIMCO uses sophisticated quantitative techniques, which may help
identify market misvaluations that can be exploited by their portfolio managers.
Standish, established in 1933, has remained by choice a privately held
investment management firm over its more than 65 year history. Ownership is
shared by a limited number of employees, who are the directors of the firm.
Standish believes the firm's organizational structure has helped preserve an
entrepreneurial orientation, which reinforces its commitment to investment
performance.
Standish believes that experience is a prerequisite for long-term investment
success. But experience alone is insufficient in a world of complex new
securities and rapidly changing technologies. To keep pace with today's
investment markets, Standish has built a staff which balances enthusiasm and
intellectual curiosity with professional and technical expertise. This
combination of experience and enthusiasm, tradition and innovation has worked
well and serves as a blueprint for future growth at Standish.
SIMCO and Standish strive to balance individual insight with the shared wisdom
of the investment team. By combining technology and an experienced research
staff, SIMCO and Standish have built a powerful internal network of
complimentary resources.
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Who can invest in the fund
The fund is only available through account administrators that provide omnibus
services for groups of individuals who beneficially own fund shares. Omnibus
accounts include pension and retirement plans as well as taxable and
tax-deferred investing programs that provide personal or account maintenance
services to groups of individuals.
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Who may want to invest
The fund may be appropriate for investors:
o Interested in diversifying their fixed income investments beyond the U.S.
market.
o Prepared to accept the risks of investing in foreign and emerging markets,
which include political instability, currency fluctuations and
illiquidity.
o Willing to tolerate fluctuations in bond prices due to interest rate
changes.
o Looking for a hedge against inflation, which erodes the purchasing power
of money.
7 Standish International Fixed Income Fund (Service Class)
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The Investment Adviser
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Fund managers
<TABLE>
<CAPTION>
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Fund Fund managers Positions during past
five years
<S> <C> <C>
International Fixed Income Fund Richard S. Wood Executive vice president and director
of SIMCO and vice president and managing
director of Standish. President of
Standish Investment Trust and head of
non-dollar bond research group.
W. Charles Cook II Vice president of SIMCO and vice
(Co-manager since 1997) president and director of Standish.
Chairman of Derivative Committee
and responsible for non-dollar bond
research.
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</TABLE>
Advisory services and fees
SIMCO provides International Fixed Income Fund with portfolio management and
investment research services. SIMCO places orders to buy and sell the fund's
portfolio securities and Standish manages the fund's business affairs. The
adviser has agreed to limit the fund's total annual operating expenses
(excluding brokerage commissions, taxes and extraordinary expenses). The
agreement is temporary and may be terminated or changed at any time.
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Annual Advisory Fee Rate
(as a percentage of the fund's average net assets)
<TABLE>
<CAPTION>
Actual advisory fee paid Contractual advisory fee Current expense limitation*
<S> <C> <C> <C>
International Fixed N/A 0.40% Capped at a rate equal to the
Income Fund total expense ratio of Standish
(Service Class) International Fixed Income Fund
plus 0.25%.
</TABLE>
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*Current expense limitations represent a voluntary cap on the fund's total
expenses. If the actual advisory fee paid in column one is less than the
contractual advisory fee rate, the cap was triggered and advisory fees were
waived by SIMCO.
Investment Adviser
Standish International Management Company, LLC
One Financial Center
Boston, Massachusetts 02111-2662
Standish International Fixed Income Fund (Service Class) 8
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Investment and Account Information
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How to purchase shares
Who may purchase fund shares Only account administrators for omnibus accounts
may purchase the fund's shares. Individuals may not purchase shares directly
from the fund.
o If you are an individual investing assets in a retirement plan sponsored
by your employer, contact your employer to find out how to purchase fund
shares.
o If you are an individual investing assets in a self-administered
retirement plan, contact your account administrator to find out how to
purchase fund shares.
Minimum initial investment for the fund is $100,000 per omnibus account. This
minimum does not apply to investments by individual participants in an omnibus
account. Also, this minimum does not apply to omnibus accounts that use Standish
or one its affiliates as their investment adviser.
All orders to purchase shares received by the distributor or certain account
administrators before the close of regular trading on the New York Stock
Exchange (generally at 4:00 p.m., New York time) will be executed at that day's
share price if payment is received by the fund's custodian by a specified time
on the next business day. Orders received after that time will be executed at
the next business day's price. Financial intermediaries acting on a purchaser's
behalf are responsible for transmitting orders to the distributor or its agent
by the specified deadline. All orders must be in good form and accompanied by
payment. The fund reserves the right to reject purchase orders or to stop
offering its shares without notice to shareholders.
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Account administrators should:
o Open an account with the fund by sending to the distributor a completed
original account application.
o Transmit electronically or by telephone to the distributor the name of the
fund, the dollar amount of shares to be purchased and the applicable
account number.
o Wire the purchase price in immediately available funds not later than 3:00
p.m. eastern time on the next business day.
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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]
9 Standish International Fixed Income Fund (Service Class)
<PAGE>
Investment and Account Information
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How to exchange shares
Account administrators may exchange Service Class shares of International Fixed
Income Fund for Service Class shares of any other Standish fund, if the
registration of both accounts is identical. Individuals should contact their
employers or account administrators to find out how to exchange fund shares. 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
Account administrators should:
o Send a letter of instruction to the distributor signed by each registered
account owner.
o Provide the name of the current fund, the fund to exchange into, the class
of shares (if applicable) and dollar amount to be exchanged.
o Provide both account numbers.
o Signature guarantees may be required.
By telephone
Account administrators should:
o If the account has telephone privileges, call the distributor.
o Provide the name of the current fund, the fund to exchange into, the class
of shares (if applicable) and dollar amount to be exchanged.
o Provide both account numbers.
o The distributor may ask for identification and all telephone transactions
may be recorded.
How to redeem shares
All orders to redeem shares received by the distributor or its agent before the
close of regular trading on the New York Stock Exchange (generally at 4:00 p.m.,
New York time) will be executed at that day's share price. Orders accepted after
that time will be executed at the next business day's price. All redemption
orders must be in good form. The fund has the right to suspend redemptions of
shares and to postpone payment of proceeds for up to seven days, as permitted by
law. Individuals should contact their employers or account administrators to
find out how to redeem fund shares.
By mail
Account administrators should:
o Send a letter of instruction to the distributor signed by each registered
account owner.
o State the name of the fund the class of shares (if applicable) and number
of shares or dollar amount to be sold.
o Provide the account number.
o Signature guarantees may be required (see page 11).
By telephone
Account administrators should:
o If the account has telephone privileges, call the distributor.
o Proceeds will be mailed by check payable to the shareholder of record to
the address, or wired to the bank as directed, on the account application.
o The distributor may ask for identification and all telephone transactions
may be recorded.
Standish International Fixed Income Fund (Service Class) 10
<PAGE>
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Transaction and account policies
Accounts with low balances. If an omnibus account falls below $50,000 as a
result of redemptions (and not because of performance), the distributor may
notify the account administrator that omnibus account participants should
increase the size of the account to $50,000 within 30 days. If the omnibus
account does not increase to $50,000 the distributor may redeem the account at
net asset value and remit the proceeds to the administrator.
In-kind purchases and redemptions. Securities held in an omnibus account may be
used to purchase shares of the fund. The adviser will determine if the
securities are consistent with the fund's objective and policies. If accepted,
the securities will be valued the same way the fund values securities it already
owns. The fund may make payment for redeemed shares wholly or in part by giving
the investor portfolio securities. A redeeming shareholder will pay transaction
costs to dispose of these securities.
Signature guarantees. A signature guarantee may be required for any written
request to sell or exchange shares, or to change account information for
telephone transactions.
The distributor will accept signature guarantees from:
o members of the STAMP program or the Exchange's Medallion Signature Program
o a broker or securities dealer
o a federal savings, cooperative or other type of bank
o a savings and loan or other thrift institution
o a credit union
o a securities exchange or clearing agency
A notary public cannot provide a signature guarantee.
Valuation of shares
The fund offers its shares at the NAV per share of the class. 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. The fund calculates the NAV of each class of shares separately. 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 the 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.
11 Standish International Fixed Income Fund (Service Class)
<PAGE>
Fund Details
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Taxes
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Transactions Federal Tax Status (for taxable investors only)
Sales or exchanges of shares. Usually capital gain or loss.
Tax rate depends on how long
shares are held.
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Distributions of long term Taxable as long-term capital
capital gain. gain. Tax rate depends on how
long the fund held the
portfolio securities sold and
other factors.
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Distributions of short term Taxable as ordinary income.
capital gain.
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Dividends from net investment Taxable as ordinary income.
income.
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Every January, the fund provides information to certain account administrators
about the fund's dividends and distributions, which are taxable even if
reinvested, and about the accounts' redemptions during the previous calendar
year. Any account administrator who does not provide the fund with a correct
taxpayer identification number and required certification may subject the
account to federal backup withholding tax.
Taxable investors should generally avoid investing in the fund shortly before an
expected dividend or capital gain distribution. Otherwise, an investor may pay
taxes on dividends or distributions that are economically equivalent to a
partial return of the shareholder's investment.
Investors should consult their tax advisers about their own particular tax
situations.
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
Standish International Fixed Income Fund (Service Class) 12
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13 Standish International Fixed Income Fund (Service Class)
<PAGE>
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Standish International Fixed Income Fund (Service Class) 14
<PAGE>
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15 Standish International Fixed Income Fund (Service Class)
<PAGE>
For More Information
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Standish, Ayer & Wood, Inc. is an independent investment counseling firm that
has been managing assets for institutional investors and high net worth
individuals, as well as mutual funds, for more than 65 years. Standish offers a
broad array of investment services that includes management of domestic and
international equity and fixed income portfolios.
For investors who want more information about the Standish International Fixed
Income Fund, the following documents are available free upon request.
Annual/Semiannual Reports
Additional information about the fund's investments is available in the fund's
annual and semiannual reports to Institutional Class shareholders. The fund's
annual report contains a discussion of the market conditions and investment
strategies that significantly affected the performance of the fund's
Institutional Class during its last fiscal year.
Statement of Additional Information (SAI)
The SAI provides more detailed information about the fund and is incorporated
into this prospectus by reference.
Investors can get free copies of reports and SAIs, request other information and
discuss their questions about the fund by contacting the fund at:
Standish Funds
P.O. Box 1407
Boston, MA 02205-1407
Telephone: 1.800.729.0066
Email:
[email protected]
Internet:
http://www.standishonline.com
Investors can review the fund's reports and SAIs at the Public Reference Room of
the Securities and Exchange Commission. Call 202.942.8090 for hours of
operation. Investors can get text-only copies.
o For a fee, by writing the Public Reference Room of the Commission,
Washington, D.C. 20549-6009
o For a fee, by sending an email or electronic request to the Public
Reference Room of the Commission at [email protected]
o Free from the Commission's Internet website at http://www.sec.gov
[LOGO] STANDISH FUNDS(R)
One Financial Center
Boston, MA 02111-2662
800.729.0066
Investment Company Act
file number (811-4813)
00-142
Standish International Fixed Income Fund (Service Class) 16
<PAGE>
May 1, 2000
STANDISH INTERNATIONAL FIXED INCOME FUND
SERVICE CLASS
One Financial Center
Boston, Massachusetts 02111
(800) 729-0066
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information (SAI) is not a prospectus. The
SAI expands upon and supplements the information contained in the prospectus
dated May 1, 2000, as amended and/or supplemented from time to time, of the
Standish International Fixed Income Fund Service Class (the 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.
Additional information about the fund's investments is available in the fund's
annual and semi-annual reports to shareholders. Investors can get free copies of
reports and the prospectus, request other information and discuss their
questions about the fund by contacting the fund at the phone number above. The
fund's financial statements which are included in the 1999 annual report to
shareholders are incorporated by reference into this SAI.
-----------------------------
CONTENTS
INVESTMENT OBJECTIVE AND POLICIES..............................................1
INVESTMENT RESTRICTIONS.......................................................26
CALCULATION OF PERFORMANCE DATA...............................................28
MANAGEMENT....................................................................29
SERVICE PLAN..................................................................34
PURCHASE AND REDEMPTION OF SHARES.............................................36
PORTFOLIO TRANSACTIONS........................................................36
DETERMINATION OF NET ASSET VALUE..............................................37
THE FUND AND ITS SHARES.......................................................38
TAXATION......................................................................39
ADDITIONAL INFORMATION........................................................43
EXPERTS AND FINANCIAL STATEMENTS..............................................44
APPENDIX......................................................................45
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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 International Management Company, LLC ("SIMCO") is the
investment adviser to fund. SIMCO is sometimes referred to in this SAI as the
"adviser."
Suitability. The fund is not intended to provide an investment program
meeting all of the requirements of an investor. Notwithstanding the fund's
ability to spread risk by holding securities of a number of portfolio companies,
shareholders should be able and prepared to bear the risk of investment losses
which may accompany the investments contemplated by the fund.
Credit Quality. Investment grade securities are those that are rated at
Baa or higher by Moody's Investors Service, Inc. ("Moody's") or BBB or higher by
Standard & Poor's Ratings Group ("Standard & Poors"), Duff 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.
Fixed income securities rated Ba and below by Moody's or BB and below by
Standard & Poor's, Duff or Fitch, if unrated, determined by the adviser to be of
comparable credit quality are considered below investment grade obligations.
Below investment grade securities, commonly referred to as "junk bonds," carry a
higher degree of risk than medium grade securities and are considered
speculative by the rating agencies. To the extent the fund invests in medium
grade or non-investment grade fixed income securities, the adviser attempts to
select those fixed income securities that have the potential for upgrade.
If a security is rated differently by two or more rating agencies, the
adviser uses the highest rating to compute the fund's credit quality and also to
determine the security's rating category. In the case of unrated sovereign and
subnational debt of foreign countries, the adviser may take into account, but
will not rely entirely on, the ratings assigned to the issuers of such
securities. If the rating of a security held by the fund is downgraded below the
minimum rating required for the fund, the adviser will determine whether to
retain that security in the fund's portfolio.
Maturity and Duration. The fund generally invests in securities with final
maturities, average lives or interest rate reset frequencies of 15 years or
less. However, the fund may purchase individual securities with effective
maturities that are outside of these ranges. The effective maturity of an
individual portfolio security in which the fund invests is defined as the period
remaining until the earliest date when the fund can recover the principal amount
of such security through mandatory redemption or prepayment by the issuer, the
exercise by the fund of a put option, demand feature or tender option granted by
the issuer or a third party or the payment of the principal on the stated
maturity date. The effective maturity of variable rate securities is calculated
by reference to their coupon reset dates. Thus, the effective maturity of a
security may be substantially shorter than its final stated maturity. 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
<PAGE>
increasing interest rate environment, the rate of prepayment may be expected to
decrease. A higher than anticipated rate of unscheduled principal prepayments on
securities purchased at a premium or a lower than anticipated rate of
unscheduled payments on securities purchased at a discount may result in a lower
yield (and total return) to the fund than was anticipated at the time the
securities were purchased. The fund's reinvestment of unscheduled prepayments
may be made at rates higher or lower than the rate payable on such security,
thus affecting the return realized by the fund.
Duration of an individual portfolio security is a measure of the
security's price sensitivity taking into account expected cash flow and
prepayments under a wide range of interest rate scenarios. In computing the
duration of its portfolio, the fund will have to estimate the duration of
obligations that are subject to prepayment or redemption by the issuer taking
into account the influence of interest rates on prepayments and coupon flows.
The fund may use various techniques to shorten or lengthen the option-adjusted
duration of its portfolio, including the acquisition of debt obligations at a
premium or discount, and the use of mortgage swaps and interest rate swaps,
caps, floors and collars.
Securities. The fund invests primarily in all types of fixed income
securities. In addition, the fund may purchase shares of other investment
companies and real estate investment trusts ("REITs"). The fund may also enter
into repurchase agreements and forward dollar roll transactions, may purchase
zero coupon and deferred payment securities and may buy securities on a
when-issued or delayed delivery basis. Please refer to the fund's specific
investment objective and policies and "Description of Securities and Related
Risks" for a more comprehensive list of permissible securities and investments.
Additional Investment Information. Under normal market conditions, the
fund invests at least 65% of its total assets in fixed income securities of
foreign governments or their political subdivisions and companies located in
foreign countries.
Country Selection. Under normal market conditions, the fund's assets are
invested in securities of issuers located in at least five countries, not
including the United States. The fund may invest a substantial portion of its
assets in one or more of those five countries. The fund may also invest up to
10% of its total assets in emerging markets generally and may invest up to 3% of
its total assets in any one emerging market.
Credit Quality. The fund invests primarily in investment grade fixed
income securities. The fund may, however, invest up to 15% of its total assets
in securities rated Ba or below by Moody's or BB or below by Standard and
Poor's, Duff or Fitch, or, if not rated, judged by SIMCO to be of equivalent
credit quality. The average dollar-weighted credit quality of the fund's
portfolio is expected to be in the range of A to Aa according to Moody's or A to
AA according to Standard & Poor's, Duff or FitchIBCA.
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. The fund is also subject to risks associated with direct
investments in foreign securities as described under the "Specific Risks"
section.
Interest Rate Risk. When interest rates decline, the market value of fixed
income securities tends to increase. Conversely, when interest rates increase,
the market value of fixed income securities tends to
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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.
Corporate Debt Obligations. The fund may invest in corporate debt
obligations and zero coupon securities issued by financial institutions and
companies, including obligations of industrial, utility, banking and other
financial issuers. Corporate debt obligations are subject to the risk of an
issuer's inability to meet principal and interest payments on the obligations
and may also be subject to price volatility due to such factors as market
interest rates, market perception of the creditworthiness of the issuer and
general market liquidity.
U.S. Government Securities. The fund may invest in U.S. Government
securities. Generally, these securities include U.S. Treasury obligations and
obligations issued or guaranteed by U.S. Government agencies, instrumentalities
or sponsored enterprises which are supported by (a) the full faith and credit of
the U.S. Treasury (such as the Government National Mortgage Association
("GNMA")), (b) the right of the issuer to borrow from the U.S. Treasury (such as
securities of the Student Loan Marketing Association ("SLMA")), (c) the
discretionary authority of the U.S. Government to purchase certain obligations
of the issuer (such as the Federal National Mortgage Association ("FNMA") and
Federal Home Loan Mortgage Corporation ("FHLMC")), or (d) only the credit of the
agency. No assurance can be given that the U.S. Government will provide
financial support to U.S. Government agencies, instrumentalities or sponsored
enterprises in the future. U.S. Government securities also include Treasury
receipts, zero coupon bonds, U.S. Treasury inflation-indexed bonds, deferred
interest securities and other stripped U.S. Government securities, where the
interest and principal components of stripped U.S. Government securities are
traded independently ("STRIPs").
Foreign Securities. Investing in the securities of foreign issuers
involves risks that are not typically associated with investing in U.S.
dollar-denominated securities of domestic issuers. Investments in foreign
issuers may be affected by changes in currency rates, changes in foreign or U.S.
laws or restrictions applicable to such investments and in exchange control
regulations (i.e., currency blockage). A decline in the exchange rate of the
currency (i.e., weakening of the currency against the U.S. dollar) in which a
portfolio security is quoted or denominated relative to the U.S. dollar would
reduce the value of the portfolio security. In addition, if the exchange rate
for the currency in which the fund receives interest payments declines against
the U.S. dollar before such income is distributed as dividends to shareholders,
the fund may have to sell portfolio securities to obtain sufficient cash to
enable the fund to pay such
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dividends. Commissions on transactions in foreign securities may be higher than
those for similar transactions on domestic stock markets and foreign custodial
costs are higher than domestic custodial costs. In addition, clearance and
settlement procedures may be different in foreign countries and, in certain
markets, such procedures have on occasion been unable to keep pace with the
volume of securities transactions, thus making it difficult to conduct such
transactions.
Foreign issuers are not generally subject to uniform accounting, auditing
and financial reporting standards comparable to those applicable to U.S.
issuers. There may be less publicly available information about a foreign issuer
than about a U.S. issuer. In addition, there is generally less government
regulation of foreign markets, companies and securities dealers than in the U.S.
Most foreign securities markets may have substantially less trading volume than
U.S. securities markets and securities of many foreign issuers are less liquid
and more volatile than securities of comparable U.S. issuers. Furthermore, with
respect to certain foreign countries, there is a possibility of nationalization,
expropriation or confiscatory taxation, imposition of withholding or other taxes
on dividend or interest payments (or, in some cases, capital gains), limitations
on the removal of fund or other assets, political or social instability or
diplomatic developments which could affect investments in those countries.
Investing in Emerging Markets. Although the fund invests primarily in
securities of established issuers based in developed foreign countries, the fund
may also invest in securities of issuers in emerging markets, including issuers
in Asia (including Russia), Eastern Europe, Latin and South America, the
Mediterranean and Africa. The fund may invest up to 10% of its total assets in
issuers located in emerging markets generally, with a limit of 3% of total
assets invested in issuers located in any one emerging market. These limitations
do not apply to investments denominated or quoted in the euro.
The fund may also invest in currencies of such countries and may engage in
strategic transactions in the markets of such countries. Investing in the
securities of emerging market countries involves considerations and potential
risks not typically associated with investing in the securities of U.S. issuers
whose securities are principally traded in the United States. These risks may be
related to (i) restrictions on foreign investment and repatriation of capital;
(ii) differences in size, liquidity and volatility of, and the degree and manner
of regulation of, the securities markets of the emerging market countries
compared to the U.S. securities markets; (iii) economic, political and social
factors; and (iv) foreign exchange matters such as fluctuations in exchange
rates between the U.S. dollar and the currencies in which the fund's portfolio
securities are quoted or denominated, exchange control regulations and costs
associated with currency exchange. The 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 the fund's
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
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<PAGE>
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. Due to restrictions on
direct investment in equity securities in certain emerging market countries,
such as Taiwan, the fund may invest only through investment funds in such
emerging market countries.
The repatriation of both investment income and capital from several
emerging market countries is subject to restrictions such as the need for
certain governmental consents. Even where there is no outright restriction on
repatriation of capital, the mechanics of repatriation may affect certain
aspects of the operation of the fund to the extent that 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 the 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. To the extent that
any emerging market country experiences rapid increases in its money supply and
investment in equity securities is made for speculative purposes, the equity
securities traded in any such country may trade at price-earnings ratios higher
than those of comparable companies trading on securities markets in the United
States. Such price-earnings ratios may not be sustainable.
Settlement procedures in emerging market countries are less developed and
reliable than those in the United States and in other developed markets, and 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
-5-
<PAGE>
those in the United States, so that they are more susceptible to financial
failure in times of market, political or economic stress. In addition, existing
laws and regulations are often inconsistently applied. As legal systems in
emerging market countries develop, foreign investors may be adversely affected
by new or amended laws and regulations. In circumstances where adequate laws
exist, it may not be possible to obtain swift and equitable enforcement of the
law.
Financial Information and Standards. Issuers in emerging market countries
generally are subject to accounting, auditing and financial standards and
requirements that differ, in some cases significantly, from those applicable to
U.S. issuers. In particular, the assets and profits appearing on the financial
statements of an emerging market company may not reflect its financial position
or results of operations in the same manner as financial statements for U.S.
companies. Substantially less information may be publicly available about
issuers in emerging market countries than is available about issuers in the
United States.
Economic, Political and Social Factors. Many emerging market countries may
be subject to a greater degree of economic, political and social instability
than is the case in the United States and Western European countries. Such
instability may result from, among other things: (i) authoritarian governments
or military involvement in political and economic decision-making, including
changes or attempted changes in government through extra-constitutional means;
(ii) popular unrest associated with demands for improved economic, political and
social conditions; (iii) internal insurgencies; (iv) hostile relations with
neighboring countries; and (v) ethnic, religious and racial disaffection and
conflict. Such economic, political and social instability could significantly
disrupt financial markets of emerging market countries and adversely affect the
value of the 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 the fund held in emerging market or other foreign
countries. Governments in certain emerging market countries participate to a
significant degree, through ownership interests or regulation, in their
respective economies. Actions by these governments could have a significant
adverse effect on market prices of securities and payment of dividends.
Currency Risks. The U.S. dollar value of foreign securities denominated in
a foreign currency will vary with changes in currency exchange rates, which can
be volatile. Accordingly, changes in the
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value of these currencies against the U.S. dollar will result in corresponding
changes in the U.S. dollar value of the fund's assets quoted in those
currencies. Exchange rates are generally affected by the forces of supply and
demand in the international currency markets, the relative merits of investing
in different countries and the intervention or failure to intervene of U.S. or
foreign governments and central banks. Some emerging market countries also may
have managed currencies, which are not free floating against the U.S. dollar. In
addition, emerging markets may restrict the free conversion of their currencies
into other currencies. Any devaluations in the currencies in which the fund's
securities are denominated may have a detrimental impact on the fund's net asset
value except to the extent such foreign currency exposure is subject to hedging
transactions. The fund may utilize various investment strategies to seek to
minimize the currency risks described above. These strategies include the use of
currency transactions such as currency forward and futures contracts, cross
currency forward and futures contracts, currency swaps and currency options. The
fund's use of currency transactions may expose it to risks independent of its
securities positions. See "Strategic Transactions" within the "Investment
Techniques and Related Risks" section for a discussion of the risks associated
with such strategies.
Economic and Monetary Union (EMU). EMU occurred on January 1, 1999, when
11 European countries adopted a single currency - the euro. For participating
countries, EMU means sharing a single currency and single official interest rate
and adhering to agreed upon limits on government borrowing. Budgetary decisions
remain in the hands of each participating country, but are now subject to each
country's commitment to avoid "excessive deficits" and other more specific
budgetary criteria. A European Central Bank is responsible for setting the
official interest rate to maintain price stability within the euro zone.
EMU is driven by the expectation of a number of economic benefits,
including lower transaction costs, reduced exchange risk, greater competition,
and a broadening and deepening of European financial markets. However, there are
a number of significant risks associated with EMU. Monetary and economic union
on this scale has never been attempted before. There is a significant degree of
uncertainty as to whether participating countries will remain committed to EMU
in the face of changing economic conditions. This uncertainty may increase the
volatility of European markets and may adversely affect the prices of securities
of European issuers in the fund's portfolios.
Below Investment Grade Fixed Income Securities. The fund may invest up to
15% of its total assets in non-investment grade securities. Non-investment grade
fixed income securities are considered predominantly speculative by traditional
investment standards. In some cases, these securities may be highly speculative
and have poor prospects for reaching investment grade standing. Non-investment
grade fixed income securities and unrated securities of comparable credit
quality are subject to the increased risk of an issuer's inability to meet
principal and interest obligations. These securities, also referred to as high
yield securities or "junk bonds," may be subject to greater price volatility due
to such factors as specific corporate developments, interest rate sensitivity,
negative perceptions of the high yield markets generally and less secondary
market liquidity.
The amount of high yield, fixed income securities proliferated in the
1980s and early 1990s as a result of increased merger and acquisition and
leveraged buyout activity. Such securities are also issued by less-established
corporations desiring to expand. Risks associated with acquiring the securities
of such issuers generally are greater than is the case with higher rated
securities because such issuers are often less creditworthy companies or are
highly leveraged and generally less able than more established or less leveraged
entities to make scheduled payments of principal and interest.
The market values of high yield, fixed income securities tend to reflect
individual corporate developments to a greater extent than do those of higher
rated securities, which react primarily to fluctuations in the general level of
interest rates. Issuers of such high yield securities may not be able to
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make use of more traditional methods of financing and their ability to service
debt obligations may be more adversely affected than issuers of higher rated
securities by economic downturns, specific corporate developments or the
issuers' inability to meet specific projected business forecasts. These
non-investment grade securities also tend to be more sensitive to economic
conditions than higher-rated securities. Negative publicity about the high yield
bond market and investor perceptions regarding lower rated securities, whether
or not based on the fund's fundamental analysis, may depress the prices for such
securities.
Since investors generally perceive that there are greater risks associated
with non-investment grade securities of the type in which the fund invest, the
yields and prices of such securities may tend to fluctuate more than those for
higher rated securities. In the lower quality segments of the fixed-income
securities market, changes in perceptions of issuers' creditworthiness tend to
occur more frequently and in a more pronounced manner than do changes in higher
quality segments of the fixed-income securities market, resulting in greater
yield and price volatility.
Another factor which causes fluctuations in the prices of fixed-income
securities is the supply and demand for similarly rated securities. In addition,
the prices of fixed-income securities fluctuate in response to the general level
of interest rates. Fluctuations in the prices of portfolio securities subsequent
to their acquisition will not affect cash income from such securities but will
be reflected in the fund's net asset value.
The risk of loss from default for the holders of high yield, fixed-income
securities is significantly greater than is the case for holders of other debt
securities because such high yield, fixed-income securities are generally
unsecured and are often subordinated to the rights of other creditors of the
issuers of such securities.
The secondary market for high yield, fixed-income securities is dominated
by institutional investors, including mutual fund portfolios, insurance
companies and other financial institutions. Accordingly, the secondary market
for such securities is not as liquid as and is more volatile than the secondary
market for higher-rated securities. In addition, the trading volume for high
yield, fixed-income securities is generally lower than that of higher rated
securities and the secondary market for high yield, fixed-income securities
could contract under adverse market or economic conditions independent of any
specific adverse changes in the condition of a particular issuer. These factors
may have an adverse effect on the fund's ability to dispose of particular
portfolio investments. Prices realized upon the sale of such lower rated or
unrated securities, under these circumstances, may be less than the prices used
in calculating the fund's net asset value. A less liquid secondary market also
may make it more difficult for the fund to obtain precise valuations of the high
yield securities in its portfolio.
Proposed federal legislation could adversely affect the secondary market
for high yield securities and the financial condition of issuers of these
securities. The form of any proposed legislation and the probability of such
legislation being enacted is uncertain.
Non-investment grade or high yield, fixed-income securities also present
risks based on payment expectations. High yield, fixed-income securities
frequently contain "call" or buy-back features which permit the issuer to call
or repurchase the security from its holder. If an issuer exercises such a "call
option" and redeems the security, the fund may have to replace such security
with a lower yielding security, resulting in a decreased return for investors.
The fund may also incur additional expenses to the extent that either is
required to seek recovery upon a default in the payment of principal or interest
on a portfolio security.
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Credit ratings issued by credit rating agencies are designed to evaluate
the safety of principal and interest payments of rated securities. They do not,
however, evaluate the market value risk of non-investment grade securities and,
therefore, may not fully reflect the true risks of an investment. In addition,
credit rating agencies may or may not make timely changes in a rating to reflect
changes in the economy or in the conditions of the issuer that affect the market
value of the security. Consequently, credit ratings are used only as a
preliminary indicator of investment quality. Investments in non-investment grade
and comparable unrated obligations will be more dependent on the adviser's
credit analysis than would be the case with investments in investment-grade debt
obligations. The adviser employs its own credit research and analysis, which
includes a study of existing debt, capital structure, ability to service debt
and to pay dividends, the issuer's sensitivity to economic conditions, its
operating history and the current trend of earnings. The adviser continually
monitors the investments in the fund's portfolio and evaluates whether to
dispose of or to retain non-investment grade and comparable unrated securities
whose credit ratings or credit quality may have changed.
For the fiscal year ended December 31, 1999, the fund's investments, on an
average dollar-weighted basis, calculated at the end of each month, had the
following credit quality characteristics:
International Fixed Income Fund
Investments Percentage
----------- ----------
U.S. Governmental securities 0%
U.S. Government Agency securities 3.2%
Corporate Bonds:
Aaa or AAA 49.2%
Aa or AA 20.2%
A 5.3%
Baa or BBB 11.6%
Ba or BB 6.6%
B 3.7%
Below B 0.2%
------
100.0%
======
Sovereign Debt Obligations. The fund may invest in sovereign debt
obligations, which involve special risks that are not present in corporate debt
obligations. The foreign issuer of the sovereign debt or the foreign
governmental authorities that control the repayment of the debt may be unable or
unwilling to repay principal or interest when due, and the fund may have limited
recourse in the event of a default. During periods of economic uncertainty, the
market prices of sovereign debt, and the fund's net asset value, to the extent
it invests in such securities, may be more volatile than prices of debt
obligations of U.S. issuers. In the past, certain foreign countries have
encountered difficulties in servicing their debt obligations, withheld payments
of principal and interest and declared moratoria on the payment of principal and
interest on their sovereign debt.
A sovereign debtor's willingness or ability to repay principal and pay
interest in a timely manner may be affected by, among other factors, its cash
flow situation, the extent of its foreign currency reserves, the availability of
sufficient foreign exchange, the relative size of the debt service burden, the
sovereign debtor's policy toward principal international lenders and local
political constraints. Sovereign debtors may also be dependent on expected
disbursements from foreign governments, multilateral agencies and other entities
to reduce principal and interest arrearages on their debt. The failure of a
sovereign debtor to implement economic reforms, achieve specified levels of
economic performance or repay principal or interest when due may result in the
cancellation of third party commitments to lend
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fund to the sovereign debtor, which may further impair such debtor's ability or
willingness to service its debts.
Brady Bonds. The fund may invest in Brady Bonds. Brady Bonds are
securities created through the exchange of existing commercial bank loans to
public and private entities in certain emerging markets for new bonds in
connection with debt restructurings. In light of the history of defaults of
countries issuing Brady Bonds on their commercial bank loans, investments in
Brady Bonds may be viewed as speculative. Brady Bonds may be fully or partially
collateralized or uncollateralized, are issued in various currencies (but
primarily in U.S. dollars) and are actively traded in OTC secondary markets.
Incomplete collateralization of interest or principal payment obligations
results in increased credit risk. U.S. dollar-denominated collateralized Brady
Bonds, which may be fixed-rate bonds or floating-rate bonds, are generally
collateralized by U.S. Treasury zero coupon bonds having the same maturity as
the Brady Bonds.
Obligations of Supranational Entities. The fund may invest in obligations
of supranational entities designated or supported by governmental entities to
promote economic reconstruction or development and of international banking
institutions and related government agencies. Examples include the International
Bank for Reconstruction and Development (the "World Bank"), the European Coal
and Steel Community, the Asian Development Bank and the Inter-American
Development Bank. The supranational entity's lending activities are limited to a
percentage of its total capital (including "callable capital" contributed by its
governmental members at the entity's call), reserves and net income. There is no
assurance that participating governments will be able or willing to honor their
commitments to make capital contributions to a supranational entity.
Eurodollar and Yankee Dollar Investments. The fund may invest in
Eurodollar and Yankee Dollar instruments. Eurodollar instruments are bonds of
foreign corporate and government issuers that pay interest and principal in U.S.
dollars generally held in banks outside the United States, primarily in Europe.
Yankee Dollar instruments are U.S. dollar denominated bonds typically issued in
the U.S. by foreign governments and their agencies and foreign banks and
corporations. The fund may invest in Eurodollar Certificates of Deposit
("ECDs"), Eurodollar Time Deposits ("ETDs") and Yankee Certificates of Deposit
("Yankee CDs"). ECDs are U.S. dollar-denominated certificates of deposit issued
by foreign branches of domestic banks; ETDs are U.S. dollar-denominated deposits
in a foreign branch of a U.S. bank or in a foreign bank; and Yankee CDs are U.S.
dollar-denominated certificates of deposit issued by a U.S. branch of a foreign
bank and held in the U.S. These investments involve risks that are different
from investments in securities issued by U.S. issuers, including potential
unfavorable political and economic developments, foreign withholding or other
taxes, seizure of foreign deposits, currency controls, interest limitations or
other governmental restrictions which might affect payment of principal or
interest.
Mortgage-Backed Securities. The fund may invest in privately issued
mortgage-backed securities and mortgage-backed securities issued or guaranteed
by the U.S. Government or any of its agencies, instrumentalities or sponsored
enterprises, including, but not limited to, GNMA, FNMA or FHLMC. Mortgage-backed
securities represent direct or indirect participations in, or are collateralized
by and payable from, mortgage loans secured by real property. Mortgagors can
generally prepay interest or principal on their mortgages whenever they choose.
Therefore, mortgage-backed securities are often subject to more rapid repayment
than their stated maturity date would indicate as a result of principal
prepayments on the underlying loans. This can result in significantly greater
price and yield volatility than is the case with traditional fixed income
securities. During periods of declining interest rates, prepayments can be
expected to accelerate, and thus impair the fund's ability to reinvest the
returns of principal at comparable yields. Conversely, in a rising interest rate
environment, a declining prepayment
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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. See the
SAI for additional descriptions of GNMA, FNMA and FHLMC certificates.
Multiple class securities include collateralized mortgage obligations
("CMOs") and Real Estate Mortgage Investment Conduit ("REMIC") pass-through or
participation certificates. CMOs provide an investor with a specified interest
in the cash flow from a pool of underlying mortgages or other mortgage-backed
securities. CMOs are issued in multiple classes, each with a specified fixed or
floating interest rate and a final scheduled distribution date. In most cases,
payments of principal are applied to the CMO classes in the order of their
respective stated maturities, so that no principal payments will be made on a
CMO class until all other classes having an earlier stated maturity date are
paid in full. A REMIC is a CMO that qualifies for special tax treatment under
the Internal Revenue Code of 1986, as amended (the "Code"), and invests in
certain mortgages principally secured by interests in real property and other
permitted investments. The 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 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.
GNMA Certificates. The Government National Mortgage Association ("GNMA")
was established in 1968 when the Federal National Mortgage Association ("FNMA")
was separated into two organizations, GNMA and FNMA. GNMA is a wholly owned
government corporation within the Department of Housing and Urban Development.
GNMA developed the first mortgage-backed pass-through instruments in 1970 for
Farmers Home Administration-FHMA- insured, Federal Housing
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Administration-FHA-insured and for Veterans Administration-or VA-guaranteed
mortgages ("government mortgages").
GNMA purchases government mortgages and occasionally conventional
mortgages to support the housing market. GNMA is known primarily, however, for
its role as guarantor of pass-through securities collateralized by government
mortgages. Under the GNMA securities guarantee program, government mortgages
that are pooled must be less than one year old by the date GNMA issues its
commitment. Loans in a single pool must be of the same type in terms of interest
rate and maturity. The minimum size of a pool is $1 million for single-family
mortgages and $500,000 for manufactured housing and project loans.
Under the GNMA II program, loans with different interest rates can be
included in a single pool and mortgages originated by more than one lender can
be assembled in a pool. In addition, loans made by a single lender can be
packaged in a custom pool (a pool containing loans with specific characteristics
or requirements).
GNMA Guarantee. The National Housing Act authorizes GNMA to guarantee the
timely payment of principal of and interest on securities backed by a pool of
mortgages insured by FHA or FHMA, or guaranteed by VA. The GNMA guarantee is
backed by the full faith and credit of the United States. GNMA is also empowered
to borrow without limitation from the U.S. Treasury if necessary to make any
payments required under its guarantee.
Yield Characteristics of GNMA Certificates. The coupon rate of interest on
GNMA Certificates is lower than the interest rate paid on the VA-guaranteed,
FHMA-insured or FHA-insured mortgages underlying the Certificates, but only by
the amount of the fees paid to GNMA and the issuer. For the most common type of
mortgage pool, containing single-family dwelling mortgages, GNMA receives an
annual fee of 0.06% of the outstanding principal for providing its guarantee,
and the issuer is paid an annual fee of 0.44% for assembling the mortgage pool
and for passing through monthly payments of interest and principal to GNMA
Certificate holders.
The coupon rate by itself, however, does not indicate the yield which will
be earned on the GNMA Certificates for several reasons. First, GNMA Certificates
may be issued at a premium or discount, rather than at par, and, after issuance,
GNMA Certificates may trade in the secondary market at a premium or discount.
Second, interest is paid monthly, rather than semi-annually as with traditional
bonds. Monthly compounding has the effect of raising the effective yield earned
on GNMA Certificates. Finally, the actual yield of each GNMA Certificate is
influenced by the prepayment experience of the mortgage pool underlying the GNMA
Certificate. If mortgagors prepay their mortgages, the principal returned to
GNMA Certificate holders may be reinvested at higher or lower rates.
Market for GNMA Certificates. Since the inception of the GNMA
mortgage-backed securities program in 1970, the amount of GNMA Certificates
outstanding has grown rapidly. The size of the market and the active
participation in the secondary market by securities dealers and many types of
investors make the GNMA Certificates a highly liquid instrument. Prices of GNMA
Certificates are readily available from securities dealers and depend on, among
other things, the level of market rates, the GNMA Certificate's coupon rate and
the prepayment experience of the pools of mortgages backing each GNMA
Certificate.
FHLMC Participation Certificates. The Federal Home Loan Mortgage
Corporation ("FHLMC") was created by the Emergency Home Finance Act of 1970. It
is a private corporation, initially capitalized by the Federal Home Loan Bank
System, charged with supporting the mortgage lending activities of savings and
loan associations by providing an active secondary market for conventional
mortgages. To
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finance its mortgage purchases, FHLMC issues FHLMC Participation Certificates
and Collateralized Mortgage Obligations ("CMOs").
Participation Certificates represent an undivided interest in a pool of
mortgage loans. FHLMC purchases whole loans or participations on 30-year and
15-year fixed-rate mortgages, adjustable-rate mortgages ("ARMs") and home
improvement loans. Under certain programs, it will also purchase FHA and VA
mortgages.
Loans pooled for FHLMC must have a minimum coupon rate equal to the
Participation Certificate rate specified at delivery, plus a required spread for
the corporation and a minimum servicing fee, generally 0.375% (37.5 basis
points). The maximum coupon rate on loans is 2% (200 basis points) in excess of
the minimum eligible coupon rate for Participation Certificates. FHLMC requires
a minimum commitment of $1 million in mortgages but imposes no maximum amount.
Negotiated deals require a minimum commitment of $10 million. FHLMC guarantees
timely payment of the interest and the ultimate payment of principal of its
Participation Certificates. This guarantee is backed by reserves set aside to
protect against losses due to default. The FHLMC CMO is divided into varying
maturities with prepayment set specifically for holders of the shorter term
securities. The CMO is designed to respond to investor concerns about early
repayment of mortgages.
FHLMC's CMOs are general obligations, and FHLMC will be required to use
its general funds to make principal and interest payments on CMOs if payments
generated by the underlying pool of mortgages are insufficient to pay principal
and interest on the CMO.
A CMO is a cash-flow bond in which mortgage payments from underlying
mortgage pools pay principal and interest to CMO bondholders. The CMO is
structured to address two major shortcomings associated with traditional
pass-through securities: payment frequency and prepayment risk. Traditional
pass-through securities pay interest and amortized principal on a monthly basis
whereas CMOs normally pay principal and interest semi-annually. In addition,
mortgage-backed securities carry the risk that individual mortgagors in the
mortgage pool may exercise their prepayment privileges, leading to irregular
cash flow and uncertain average lives, durations and yields.
A typical CMO structure contains four tranches, which are generally
referred to as classes A, B, C and Z. Each tranche is identified by its coupon
and maturity. The first three classes are usually current interest-bearing bonds
paying interest on a quarterly or semi-annual basis, while the fourth, Class Z,
is an accrual bond. Amortized principal payments and prepayments from the
underlying mortgage collateral redeem principal of the CMO sequentially;
payments from the mortgages first redeem principal on the Class A bonds. When
principal of the Class A bonds has been redeemed, the payments then redeem
principal on the Class B bonds. This pattern of using principal payments to
redeem each bond sequentially continues until the Class C bonds have been
retired. At this point, Class Z bonds begin paying interest and amortized
principal on their accrued value.
The final tranche of a CMO is usually a deferred interest bond, commonly
referred to as the Z bond. This bond accrues interest at its coupon rate but
does not pay this interest until all previous tranches have been fully retired.
While earlier classes remain outstanding, interest accrued on the Z bond is
compounded and added to the outstanding principal. The deferred interest period
ends when all previous tranches are retired, at which point the Z bond pays
periodic interest and principal until it matures. The adviser would purchase a Z
bond for the fund if it expected interest rates to decline.
FNMA Securities. FNMA was created by the National Housing Act of 1938. In
1968, the agency was separated into two organizations, GNMA to support a
secondary market for government mortgages and FNMA to act as a private
corporation supporting the housing market.
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FNMA pools may contain fixed-rate conventional loans on one-to-four-family
properties. Seasoned FHA and VA loans, as well as conventional growing equity
mortgages, are eligible for separate pools. FNMA will consider other types of
loans for securities pooling on a negotiated basis. A single pool may include
mortgages with different loan-to-value ratios and interest rates, though rates
may not vary beyond two percentage points.
Privately-Issued Mortgage Loan Pools. Savings associations, commercial
banks and investment bankers issue pass-through securities secured by a pool of
mortgages.
Generally, only conventional mortgages on single-family properties are
included in private issues, though seasoned loans and variable rate mortgages
are sometimes included. Private placements allow purchasers to negotiate terms
of transactions. Maximum amounts for individual loans may exceed the loan limit
set for government agency purchases. Pool size may vary, but the minimum is
usually $20 million for public offerings and $10 million for private placements.
Privately-issued mortgage-related obligations do not carry government or
quasi-government guarantees. Rather, mortgage pool insurance generally is used
to insure against credit losses that may occur in the mortgage pool. Pool
insurance protects against credit losses to the extent of the coverage in force.
Each mortgage, regardless of original loan-to-value ratio, is insured to 100% of
principal, interest and other expenses, to a total aggregate loss limit stated
on the policy. The aggregate loss limit of the policy generally is 5% to 7% of
the original aggregate principal of the mortgages included in the pool.
In addition to the insurance coverage to protect against defaults on the
underlying mortgages, mortgage-backed securities can be protected against the
nonperformance or poor performance of servicers. Performance bonding of
obligations such as those of the servicers under the origination, servicing or
other contractual agreement will protect the value of the pool of insured
mortgages and enhance the marketability.
The rating received by a mortgage security will be a major factor in its
marketability. For public issues, a rating is always required, but it may be
optional for private placements depending on the demands of the marketplace and
investors. Before rating an issue, a rating agency such as Standard & Poor's or
Moody's will consider several factors, including: the creditworthiness of the
issuer; the issuer's track record as an originator and servicer; the type, term
and characteristics of the mortgages, as well as loan-to-value ratio and loan
amounts; the insurer and the level of mortgage insurance and hazard insurance
provided. Where an equity reserve account or letter of credit is offered, the
rating agency will also examine the adequacy of the reserve and the strength of
the issuer of the letter of credit.
Asset-Backed Securities. 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.
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Convertible Securities. The fund may invest in convertible securities
consisting of bonds, notes, debentures and preferred stocks. Convertible debt
securities and preferred stock acquired by the fund entitle the fund to exchange
such instruments for common stock of the issuer at a predetermined rate.
Convertible securities are subject both to the credit and interest rate risks
associated with debt obligations and to the stock market risk associated with
equity securities.
Warrants. Warrants acquired by the fund entitle it to buy common stock
from the issuer at a specified price and time. Warrants are subject to the same
market risks as stocks, but may be more volatile in price. The fund's investment
in warrants will not entitle it to receive dividends or exercise voting rights
and will become worthless if the warrants cannot be profitably exercised before
their expiration dates.
Common Stocks. Common stocks are shares of a corporation or other entity
that entitle the holder to a pro rata share of the profits of the corporation,
if any, without preference over any other shareholder or class of shareholders,
including holders of the entity's preferred stock and other senior equity.
Common stock usually carries with it the right to vote and frequently an
exclusive right to do so.
Investments in Other Investment Companies. The fund is permitted to invest
up to 10% of its total assets in shares of investment companies and up to 5% of
its total assets in any one investment company as long as that investment does
not represent more than 3% of the total voting stock of the acquired investment
company. Investments in the securities of other investment companies may involve
duplication of advisory fees and other expenses. The fund may invest in
investment companies that are designed to replicate the composition and
performance of a particular index. For example, World Equity Benchmark Series
("WEBS") are exchange traded shares of open-end investment companies designed to
replicate the composition and performance of publicly traded issuers in
particular countries. Investments in index baskets involve the same risks
associated with a direct investment in the types of securities included in the
baskets.
Real Estate Investment Trusts. The fund may invest in REITs. REITs are
pooled investment vehicles that invest in real estate or real estate loans or
interests. Investing in REITs involves risks similar to those associated with
investing in equity securities of small capitalization companies. REITs are
dependent upon management skills, are not diversified, and are subject to risks
of project financing, default by borrowers, self-liquidation, and the
possibility of failing to qualify for the exemption from taxation on distributed
amounts under the Code.
Inverse Floating Rate Securities. The fund may invest in inverse floating
rate securities. The interest rate on an inverse floater resets in the opposite
direction from the market rate of interest to which the inverse floater is
indexed. An inverse floater may be considered to be leveraged to the extent that
its interest rate varies by a magnitude that exceeds the magnitude of the change
in the index rate of interest. The higher the degree of leverage of an inverse
floater, the greater the volatility of its market value.
Zero Coupon and Deferred Payment Securities. The fund may invest in zero
coupon and deferred payment securities. Zero coupon securities are securities
sold at a discount to par value and on which interest payments are not made
during the life of the security. Upon maturity, the holder is entitled to
receive the par value of the security. The fund is required to accrue income
with respect to these securities prior to the receipt of cash payments. Because
the fund will distribute this accrued income to shareholders, to the extent that
shareholders elect to receive dividends in cash rather than reinvesting such
dividends in additional shares, the fund will have fewer assets with which to
purchase income producing securities. Deferred payment securities are securities
that remain zero coupon securities until a predetermined date, at which time the
stated coupon rate becomes effective and interest becomes payable at regular
intervals. Zero coupon and deferred payment securities may be subject to greater
fluctuation in
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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 fund's limitations on investments in illiquid
securities. The fund has no limit on investments in structured or hybrid notes.
However, it is expected that not more than 5% of the fund's net assets will be
at risk as a result of such investments.
Tax-Exempt Securities. The fund is managed without regard to potential tax
consequences. The fund's distributions of interest earned from these investments
will be taxable.
Investment Techniques and Related Risks
Strategic Transactions. The fund may, but is not required to, utilize
various investment strategies to seek to hedge various market risks (such as
interest rates, currency exchange rates, and broad or specific fixed income
market movements), to manage the effective maturity or duration of fixed-equity
securities, or to seek to enhance potential gain. Such strategies are generally
accepted as part of modern portfolio management and are regularly utilized by
many mutual funds and other institutional investors. Techniques and instruments
used by the fund may change over time as new instruments and strategies are
developed or regulatory changes occur.
In the course of pursuing its investment objectives, the fund may purchase
and sell (write) exchange-listed and OTC put and call options on securities,
equity and fixed-income indices and other financial instruments; purchase and
sell financial futures contracts and options thereon; enter into various
interest rate transactions such as swaps, caps, floors or collars; and enter
into various currency transactions such as currency forward contracts,
cross-currency future contracts, currency futures contracts, currency swaps or
options on currencies or currency futures (collectively, all the above are
called "Strategic Transactions"). Strategic Transactions may be used to seek to
protect against possible changes in the market value of securities held in or to
be purchased for the fund's portfolios 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.
The fund will attempt to limit net loss exposure from Strategic Transaction
entered into for non-hedging purposes to not more than 3% of net assets at any
one time. To the extent necessary, the fund will close out
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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 fund's activities involving Strategic Transactions may be
limited in order to allow the applicable fund to satisfy the requirements of
Subchapter M of the Code for qualification as a regulated investment company.
Risks of Strategic Transactions. Strategic Transactions have risks
associated with them including possible default by the other party to the
transaction, illiquidity and, to the extent the adviser's view as to certain
market or interest rate movements is incorrect, the risk that the use of such
Strategic Transactions could result in losses greater than if they had not been
used. The writing of put and call options may result in losses to the fund,
force the purchase or sale, respectively, of portfolio securities at inopportune
times or for prices higher than (in the case of purchases due to the exercise of
put options) or lower than (in the case of sales due to the exercise of call
options) current market values, limit the amount of appreciation the fund can
realize on its investments or cause the fund to hold a security it might
otherwise sell or sell a security it might otherwise hold. The use of currency
transactions can result in the fund incurring losses as a result of a number of
factors including the imposition of exchange controls, suspension of
settlements, or the inability to deliver or receive a specified currency. The
use of options and futures transactions entails certain other risks. In
particular, the variable degree of correlation between price movements of
futures contracts and price movements in the related portfolio position of the
fund creates the possibility that losses on the hedging instrument may be
greater than gains in the value of the fund's position. The writing of options
could significantly increase the fund's portfolio turnover rate and, therefore,
associated brokerage commissions or spreads. In addition, futures and options
markets may not be liquid in all circumstances and certain OTC options may have
no markets. As a result, in certain markets, the fund might not be able to close
out a transaction without incurring substantial losses, if at all. Although the
use of futures and options transactions for hedging should tend to minimize the
risk of loss due to a decline in the value of the hedged position, at the same
time, in certain circumstances, they tend to limit any potential gain which
might result from an increase in value of such position. The loss incurred by
the fund in writing options on futures and entering into futures transactions is
potentially unlimited; however, as described above, the fund will attempt to
limit its net loss exposure resulting from Strategic Transactions entered into
for non-hedging purposes. Futures markets are highly volatile and the use of
futures may increase the volatility of the fund's net asset value. Finally,
entering into futures contracts would create a greater ongoing potential
financial risk than would purchases of options where the exposure is limited to
the cost of the initial premium. Losses resulting from the use of Strategic
Transactions would reduce net asset value and the net result may be less
favorable than if the Strategic Transactions had not been utilized.
General Characteristics of Options. Put options and call options typically
have similar structural characteristics and operational mechanics regardless of
the underlying instrument on which they are purchased or sold. Thus, the
following general discussion relates to each of the particular types of options
discussed in greater detail below. In addition, many Strategic Transactions
involving options require
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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 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
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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 fund expects 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, foreign sovereign debt, corporate debt securities, equity
securities (including convertible securities) and Eurodollar instruments that
are traded on U.S. and foreign securities exchanges and in the OTC markets, and
on securities indices, currencies and futures contracts. All calls sold by the
fund must be covered (i.e., the fund must own the securities or the futures
contract subject to the call) or must meet the asset segregation requirements
described below as long as the call is outstanding. In addition, the fund may
cover a written call option or put option by entering into an offsetting forward
contract and/or by purchasing an offsetting option or any other option which, by
virtue of its exercise price or otherwise, reduces the fund's net exposure on
its written option position. Even though the fund will receive the option
premium to help offset any loss, the fund may incur a loss if the exercise price
is below the market price for the security subject to the call at the time of
exercise. A call sold by the fund also exposes the fund during the term of the
option to possible loss of opportunity to realize appreciation in the market
price of the underlying security or instrument and may require the fund to hold
a security or instrument which it might otherwise have sold.
The fund may purchase and sell (write) put options on securities including
U.S. Treasury and agency securities, mortgage backed securities, asset backed
securities, foreign sovereign debt, corporate debt securities, equity securities
(including convertible securities) and Eurodollar instruments (whether or not it
holds the above securities in its portfolio), and on securities indices,
currencies and futures contracts. The fund will not sell put options if, as a
result, more than 50% of 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,
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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
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.
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Currency Transactions. The fund may engage in currency transactions with
Counterparties to seek to hedge the value of portfolio holdings denominated in
particular currencies against fluctuations in relative value or to enhance
potential gain. Currency transactions include currency contracts, exchange
listed currency futures, exchange listed and OTC options on currencies, and
currency swaps. A forward currency contract involves a privately negotiated
obligation to purchase or sell (with delivery generally required) a specific
currency at a future date, which may be any fixed number of days from the date
of the contract agreed upon by the parties, at a price set at the time of the
contract. A currency swap is an agreement to exchange cash flows based on the
notional (agreed upon) difference among two or more currencies and operates
similarly to an interest rate swap, which is described below. The fund may enter
into over-the-counter currency transactions with Counterparties which have
received, combined with any credit enhancements, a long term debt rating of A by
Standard & Poors or Moody's, respectively, or that have an equivalent rating
from a NRSRO or (except for OTC currency options) whose obligations are
determined to be of equivalent credit quality by the adviser.
The fund's transactions in forward currency contracts and other currency
transactions such as futures, options, options on futures and swaps will
generally be limited to hedging involving either specific transactions or
portfolio positions. See "Strategic Transactions." Transaction hedging is
entering into a currency transaction with respect to specific assets or
liabilities of the fund or the fund, which will generally arise in connection
with the purchase or sale of its portfolio securities or the receipt of income
therefrom. Position hedging is entering into a currency transaction with respect
to portfolio security positions denominated or generally quoted in that
currency.
The fund will not enter into a transaction to hedge currency exposure to
an extent greater, after netting all transactions intended wholly or partially
to offset other transactions, than the aggregate market value (at the time of
entering into the transaction) of the securities held in its portfolio that are
denominated or generally quoted in or currently convertible into such currency,
other than with respect to non-hedging transactions or proxy hedging as
described below.
The fund may also cross-hedge currencies by entering into transactions to
purchase or sell one or more currencies that are expected to decline in value in
relation to other currencies to which the fund has or in which the fund expects
to have portfolio exposure. For example, a fund may hold a South Korean
government bond and the adviser may believe that the Korean won will deteriorate
against the Japanese yen. The fund would sell Korean won to reduce its exposure
to that currency and buy Japanese yen. This strategy would be a hedge against a
decline in the value of Korean won, although it would expose the fund to
declines in the value of the Japanese yen relative to the U.S. dollar.
To seek to reduce the effect of currency fluctuations on the value of
existing or anticipated holdings of portfolio securities, the fund may also
engage in proxy hedging. Proxy hedging is often used when the currency to which
the fund's portfolio is exposed is difficult to hedge or to hedge against the
U.S. dollar. Proxy hedging entails entering into a forward contract to sell a
currency whose changes in value are generally considered to be linked to a
currency or currencies in which certain of the fund's portfolio securities are
or are expected to be denominated, and to buy U.S. dollars. The amount of the
contract would not exceed the value of the portfolio securities denominated in
linked currencies. For example, if the adviser considers that the Korean won is
linked to the Japanese yen, and a portfolio contains securities denominated in
won and the adviser believes that the value of won will decline against the U.S.
dollar, the adviser may enter into a contract to sell yen and buy dollars. Proxy
hedging involves some of the same risks and considerations as other transactions
with similar instruments. Currency transactions can result in losses to the fund
if the currency being hedged fluctuates in value to a degree or in a direction
that is not anticipated. Further, there is the risk that the perceived linkage
between various currencies may not be present or may not be present during the
particular time that the fund is engaging in
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proxy hedging. If the fund enters into a currency hedging transaction, it will
comply with the asset segregation requirements described below.
Risks of Currency Transactions. Currency transactions are subject to risks
different from those of other portfolio transactions. Because currency control
is of great importance to the issuing governments and influences economic
planning and policy, purchases and sales of currency and related instruments can
be negatively affected by government exchange controls, blockages, and
manipulations or exchange restrictions imposed by governments. These can result
in losses to the fund if they are unable to deliver or receive currency or funds
in settlement of obligations and could also cause hedges they have entered into
to be rendered useless, resulting in full currency exposure as well as incurring
transaction costs. Buyers and sellers of currency futures are subject to the
same risks that apply to the use of futures generally. Further, settlement of a
currency futures contract for the purchase of most currencies must occur at a
bank based in the issuing nation. Trading options on currency futures is
relatively new, and the ability to establish and close out positions on such
options is subject to the maintenance of a liquid market which may not always be
available. Currency exchange rates may fluctuate based on factors extrinsic to
that country's economy.
Combined Transactions. The fund may enter into multiple transactions,
including multiple options transactions, multiple futures transactions, multiple
currency transactions including forward currency contracts and multiple interest
rate transactions, structured notes and any combination of futures, options,
currency and interest rate transactions ("component transactions"), instead of a
single Strategic Transaction, as part of a single or combined strategy when, in
the opinion of the adviser, it is in the best interests of the fund to do so. A
combined transaction will usually contain elements of risk that are present in
each of its component transactions. Although combined transactions are normally
entered into based on the adviser's judgment that the combined strategies will
reduce risk or otherwise more effectively achieve the desired portfolio
management goal, it is possible that the combination will instead increase such
risks or hinder achievement of the portfolio management objective.
Swaps, Caps, Floors and Collars. Among the Strategic Transactions into
which the fund may enter are interest rate, currency and index swaps and the
purchase or sale of related caps, floors and collars. The fund expect to enter
into these transactions primarily for hedging purposes, including, but not
limited to, preserving a return or spread on a particular investment or portion
of the fund's portfolio, protecting against currency fluctuations, as a duration
management technique or protecting against an increase in the price of
securities the fund anticipates purchasing at a later date. Swaps, caps, floors
and collars may also be used to enhance potential gain in circumstances where
hedging is not involved although, as described above, the fund will attempt to
limit its net loss exposure resulting from swaps, caps, floors and collars and
other Strategic Transactions entered into for such purposes. The fund will
attempt to limit net loss exposure from Strategic Transactions entered into for
non-hedging purposes to not more than 3% of net assets.
The fund will not sell interest rate caps or floors where it does not own
securities or other instruments providing the income stream the fund may be
obligated to pay. Interest rate swaps involve the exchange by the fund with
another party of their respective commitments to pay or receive interest (i.e.,
an exchange of floating rate payments for fixed rate payments with respect to a
notional amount of principal). A currency swap is an agreement to exchange cash
flows on a notional amount of two or more currencies based on the relative value
differential among them and an index swap is an agreement to swap cash flows on
a notional amount based on changes in the values of the reference indices. The
purchase of a cap entitles the purchaser to receive payments on a notional
principal amount from the party selling such cap to the extent that a specified
index exceeds a predetermined interest rate or amount. The purchase of a floor
entitles the purchaser to receive payments on a notional principal amount from
the party selling such floor to the extent that a specified index falls below a
predetermined interest rate or
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amount. A collar is a combination of a cap and a floor that preserves a certain
rate of return within a predetermined range of interest rates or values.
The fund will usually enter into swaps on a net basis (i.e., the two
payment streams are netted out in a cash settlement on the payment date or dates
specified in the instrument) with the fund receiving or paying, as the case may
be, only the net amount of the two payments. The fund will not enter into any
swap, cap, floor or collar transaction unless, at the time of entering into such
transaction, the unsecured long-term debt of the Counterparty, combined with any
credit enhancements, is rated at least A by Standard & Poors or Moody's or has
an equivalent rating from an NRSRO or the Counterparty issues debt that is
determined to be of equivalent credit quality by the adviser. If there is a
default by the Counterparty, the fund may have contractual remedies pursuant to
the agreements related to the transaction. The swap market has grown
substantially in recent years with a large number of banks and investment
banking firms acting both as principals and as agents utilizing standardized
swap documentation. As a result, the swap market has become relatively liquid.
Caps, floors and collars are more recent innovations for which standardized
documentation has not yet been fully developed. Swaps, caps, floors and collars
are considered illiquid for purposes of the fund's policy regarding illiquid
securities, unless it is determined, based upon continuing review of the trading
markets for the specific security, that such security is liquid. The Board of
Trustees of the Trust 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.
Risks of Strategic Transactions Outside the United States. The fund may
use strategic transactions to seek to hedge against currency exchange rate
risks. When conducted outside the United States, Strategic Transactions may not
be regulated as rigorously as in the United States, may not involve a clearing
mechanism and related guarantees, and are subject to the risk of governmental
actions affecting trading in, or the prices of, foreign securities, currencies
and other instruments. The value of such positions also could be adversely
affected by: (i) lesser availability than in the United States of data on which
to make trading decisions, (ii) delays in the fund's ability to act upon
economic events occurring in foreign markets during non-business hours in the
United States, (iii) the imposition of different exercise and settlement terms
and procedures and margin requirements than in the United States, (iv) lower
trading volume and liquidity, and (v) other complex foreign political, legal and
economic factors. At the same time, Strategic Transactions may offer advantages
such as trading in instruments that are not currently traded in the United
States or arbitrage possibilities not available in the United States.
Use of Segregated Accounts. The fund will hold securities or other
instruments whose values are expected to offset its obligations under the
Strategic Transactions. The fund will cover Strategic Transactions as required
by interpretive positions of the SEC. The fund will not enter into Strategic
Transactions that expose the fund to an obligation to another party unless it
owns either (i) an offsetting position in securities or other options, futures
contracts or other instruments or (ii) cash, receivables or liquid securities
with a value sufficient to cover its potential obligations. The fund may have to
comply with any applicable regulatory requirements for Strategic Transactions,
and if required, will set aside cash and other liquid assets on the fund's
records or in a segregated account in the amount prescribed. If the market value
of these securities declines or the fund's obligation on the underlying
Strategic Transaction increases, additional cash or liquid securities will be
segregated daily so that the aggregate market value of the segregated securities
is at least equal to the amount of the fund's obligations on the underlying
Strategic Transactions. Segregated assets would not be sold while the Strategic
Transaction is outstanding, unless they are replaced with similar assets. As a
result, there is a possibility that
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segregation of a large percentage of the fund's assets could impede portfolio
management or the fund's ability to meet redemption requests or other current
obligations.
"When-Issued," "Delayed Delivery" and "Forward Commitment" Securities. The
fund may invest up to 25% of its net assets in securities purchased on a
when-issued or delayed delivery basis. Delivery and payment for securities
purchased on a when-issued or delayed delivery basis will normally take place 15
to 45 days after the date of the transaction. The payment obligation and
interest rate on the securities are fixed at the time that the fund enters into
the commitment, but interest will not accrue to the fund until delivery of and
payment for the securities. Although the fund will only make commitments to
purchase "when-issued" and "delayed delivery" securities with the intention of
actually acquiring the securities, the fund may sell the securities before the
settlement date if deemed advisable by the adviser.
Unless the fund has entered into an offsetting agreement to sell the
securities purchased on a when-issued or forward commitment basis, the fund will
segregate, on its records or with its custodian, cash or liquid obligations with
a market value at least equal to the amount of the fund's commitment. If the
market value of these securities declines, additional cash or securities will be
segregated daily so that the aggregate market value of the segregated securities
is at least equal to the amount of the fund's commitment.
Securities purchased on a "when-issued," "delayed delivery" or "forward
commitment" basis may have a market value on delivery which is less than the
amount paid by the fund. Changes in market value may be based upon the public's
perception of the creditworthiness of the issuer or changes in the level of
interest rates. Generally, the value of "when-issued," "delayed delivery" and
"forward commitment" securities will fluctuate inversely to changes in interest
rates, i.e., they will appreciate in value when interest rates fall and will
depreciate in value when interest rates rise.
Repurchase Agreements. The fund may invest up to 25% of its net assets in
repurchase agreements. A repurchase agreement is an agreement under which 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 may
invest up to 10% of its net assets in forward roll transactions involving
mortgage-backed securities. In a forward roll transaction, the fund sells a
mortgage-backed security to a financial institution, such as a bank or
broker-dealer, and simultaneously agrees to repurchase a similar security from
the institution at a later date at an agreed-upon price. The mortgage-backed
securities that are repurchased will bear the same
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interest rate as those sold, but generally will be collateralized by different
pools of mortgages with different prepayment histories than those sold. During
the period between the sale and repurchase, the fund will not be entitled to
receive interest and principal payments on the securities sold. Proceeds of the
sale will be invested in short-term instruments, such as repurchase agreements
or other short-term securities, and the income from these investments, together
with any additional fee income received on the sale and the amount gained by
repurchasing the securities in the future at a lower price, will generate income
and gain for the fund which is intended to exceed the yield on the securities
sold. Forward roll transactions involve the risk that the market value of the
securities sold by the fund may decline below the repurchase price of those
securities. At the time that the fund enters into a forward roll transaction, it
will place cash or liquid assets in a segregated account that is marked to
market daily having a value equal to the repurchase price (including accrued
interest).
Leverage. The use of forward roll transactions and reverse repurchase
agreements involves leverage. Leverage allows any investment gains made with the
additional monies received (in excess of the costs of the forward roll
transaction or reverse repurchase agreement) to increase the net asset value of
the fund faster than would otherwise be the case. On the other hand, if the
additional monies received are invested in ways that do not fully recover the
costs of such transactions to the fund, the net asset value of the fund would
fall faster than would otherwise be the case.
Short Sales. The fund may engage in short sales and short sales against
the box. In a short sale, the fund sells a security it does not own in
anticipation of a decline in the market value of that security. In a short sale
against the box, the fund either owns or has the right to obtain at no extra
cost the security sold short. The broker holds the proceeds of the short sale
until the settlement date, at which time the fund delivers the security (or an
identical security) to cover the short position. The fund receives the net
proceeds from the short sale. When the fund enters into a short sale other than
against the box, the fund must first borrow the security to make delivery to the
buyer and must segregate cash or liquid assets on its records or in a segregated
account with the fund's custodian that is marked to market daily. Short sales
other than against the box involve unlimited exposure to loss. No securities
will be sold short if, after giving effect to any such short sale, the total
market value of all securities sold short would exceed 5% of the value of the
fund 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
adviser the daily function of determining and monitoring the liquidity of
portfolio securities, including restricted and illiquid securities. The Boards
of Trustees, however, retain oversight and are ultimately responsible for such
determinations. The purchase 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.
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U.S. Government securities include securities which are direct obligations
of the U.S. Government backed by the full faith and credit of the United States
and securities issued by agencies and instrumentalities of the U.S. Government
which may be guaranteed by the U.S. Treasury or supported by the issuer's right
to borrow from the U.S. Treasury or may be backed by the credit of the federal
agency or instrumentality itself. Agencies and instrumentalities of the U.S.
Government include, but are not limited to, Federal Land Banks, the Federal Farm
Credit Bank, the Central Bank for Cooperatives, Federal Intermediate Credit
Banks, Federal Home Loan Banks and the Federal National Mortgage Association.
The fund may invest in commercial paper rated P-1 by Moody's or A-1 by
Standard & Poors or Duff-1 by Duff, which are the highest ratings assigned by
these rating services (even if rated lower by one or more of the other
agencies), or, if not rated or rated lower by one or more of the agencies and
not rated by the other agency or agencies, judged by the adviser to be of
equivalent quality to the securities so rated. In determining whether securities
are of equivalent quality, the adviser may take into account, but will not rely
entirely on, ratings assigned by foreign rating agencies.
Temporary Defensive Investments. The fund may maintain cash balances and
purchase money market instruments for cash management and liquidity purposes.
The fund may adopt a temporary defensive position during adverse market
conditions by investing without limit in high quality money market instruments,
including short-term U.S. Government securities, negotiable certificates of
deposit, non-negotiable fixed time deposits, bankers' acceptances, commercial
paper, floating-rate notes and repurchase agreements.
Portfolio Turnover. It is not the policy of the fund to purchase or sell
securities for trading purposes. However, the fund places no restrictions on
portfolio turnover and it may sell any portfolio security without regard to the
period of time it has been held. The fund may therefore generally change its
portfolio investments at any time in accordance with the adviser's appraisal of
factors affecting any particular issuer or market, or the economy in general. A
rate of turnover of 100% would occur if the value of the lesser of purchases and
sales of portfolio securities for a particular year equaled the average monthly
value of portfolio securities owned during the year (excluding short-term
securities). A high rate of portfolio turnover (100% or more) involves a
correspondingly greater amount of brokerage commissions and other costs which
must be borne directly by the fund and thus indirectly by its shareholders. It
may also result in the realization of larger amounts of net short-term capital
gains, distributions of which are taxable to the fund's shareholders as ordinary
income.
Portfolio Diversification and Concentration. The fund is non-diversified
which means that it may, with respect to up to 50% of its total assets, invest
more than 5% of its total assets in the securities of a single issuer. Investing
a significant amount of the fund's assets in the securities of a small number of
foreign issuers will cause the fund's net asset value to be more sensitive to
events affecting those issuers. The fund'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.
-26-
<PAGE>
As a matter of fundamental policy, the International Fixed Income Fund may
not:
1. Invest, with respect to at least 50% of its total assets, more than 5% in
the securities of any one issuer (other than the U.S. Government, its
agencies or instrumentalities) or acquire more than 10% of the outstanding
voting securities of any issuer.
2. Issue senior securities, borrow money or securities or pledge or mortgage
its assets, except that the fund may (a) borrow money from banks as a
temporary measure for extraordinary or emergency purposes (but not for
investment purposes) in an amount up to 15% of the current value of its
total assets, (b) enter into forward roll transactions, and (c) pledge its
assets to an extent not greater than 15% of the current value of its total
assets.
3. Lend portfolio securities, except that the fund may lend its portfolio
securities with a value up to 20% of its total assets (with a 10% limit
for any borrower) and may enter into repurchase agreements with respect to
25% of the value of its net assets.
4. Invest more than 25% of the current value of its total assets in any
single industry, provided that this restriction shall not apply to debt
securities issued or guaranteed by the United States government or its
agencies or instrumentalities.
5. Underwrite the securities of other issuers, except to the extent that, in
connection with the disposition of portfolio securities, the fund may be
deemed to be an underwriter under the Securities Act of 1933.
6. Purchase real estate or real estate mortgage loans, although the fund may
purchase marketable securities of companies which deal in real estate,
real estate mortgage loans or interests therein.
7. Purchase securities on margin (except that the Fund may obtain such
short-term credits as may be necessary for the clearance of purchases and
sales of securities).
8. Purchase or sell commodities or commodity contracts except that the fund
may purchase and sell financial futures contracts and options on financial
futures contracts and engage in foreign currency exchange transactions.
The following restrictions are not fundamental policies and may be changed
by the Trustees without shareholder approval, in accordance with applicable
laws, regulations or regulatory policy. The fund may not:
a. Invest in the securities of an issuer for the purpose of exercising
control or management, but it may do so where it is deemed advisable to
protect or enhance the value of an existing investment.
b. Purchase securities of any other investment company except to the extent
permitted by the 1940 Act.
c. Invest more than 15% of its net assets in securities which are illiquid.
d. Purchase additional securities if the fund's borrowings exceed 5% of its
net assets.
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<PAGE>
CALCULATION OF PERFORMANCE DATA
As indicated in the prospectus, the fund may, from time to time, advertise
certain total return and yield information. The average annual total return of
the fund for a period is computed by subtracting the net asset value per share
at the beginning of the period from the net asset value per share at the end of
the period (after adjusting for the reinvestment of any income dividends and
capital gain distributions), and dividing the result by the net asset value per
share at the beginning of the period. In particular, the fund's average annual
total return ("T") is computed by using the redeemable value at the end of a
specified period of time ("ERV") of a hypothetical initial investment of $1,000
("P") over a period of time ("n") according to the formula P(1+T)n=ERV.
The fund's yield is computed by dividing the net investment income per
share earned during a base period of 30 days, or one month, by the maximum
offering price per share on the last day of the period. For the purpose of
determining net investment income, the calculation includes, among expenses of
the fund, all recurring fees that are charged to all shareholder accounts and
any non-recurring charges for the period stated. In particular, yield is
determined according to the following formula:
Yield = 2[(A - B + 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 account for gain or
loss attributable to actual monthly pay downs as an increase or decrease to
interest income during the period.
In addition, the fund may elect (i) to amortize the discount or premium
remaining on a security, based on the cost of the security, to the weighted
average maturity date, if such information is available, or to the remaining
term of the security, if the weighted average maturity date is not available, or
(ii) not to amortize the discount or premium remaining on a security.
The fund's average annual total return for the one-, five- and ten-year
(or life-of-fund, if shorter) periods ended December 31, 1999 and average
annualized yield for the 30-day period ended December 31, 1999 were as follows:
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<PAGE>
Average Annual Total Return
Fund 1-Year 5-Year 10-Year Yield
- ---- ------ ------ ------- -----
International Fixed Income Fund(1,2) 0.54% 10.52% 9.60%(3) N/A
- ---------------------------
(1) International Fixed Income Fund Service Class has not yet commenced
operations.
(2) Because the International Fixed Income Fund has not yet commenced
operations, the average annual total return quotations for the one, five,
ten year and life-of-fund periods include the performance record of its
corresponding Institutional Class adjusted to reflect the imposition of
service fees at the rate of 0.25% of average daily net assets. The
adjustment is made by reducing the corresponding International Fixed
Income Fund Service Class's performance record for rolling one month
periods by .020833% (the fraction of the .25% service fee paid monthly)
and then aggregating those performance results for the appropriate one,
five, ten or life of fund period.
(3) The Institutional Class of the International Fixed Income Fund commenced
operations on January 3, 1991.
These performance quotations should not be considered as representative of
the fund's performance for any specified period in the future.
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. The fund may
compare its performance to the J.P. Morgan Non-U.S. Government Bond Index, which
is generally considered to be representative of unmanaged government bonds in
foreign market, and the Lehman Brothers Aggregate Index, which is composed of
securities from the Lehman Brothers Government/Corporate Bond Index,
Mortgage-Backed Securities Index and Yankee Bond Index, and is generally
considered to be representative of all unmanaged, domestic, dollar denominated
fixed rate investment grade bonds.
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
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 officers of the Trust are listed
below. All executive officers of the Trust are affiliates of Standish, Ayer &
Wood, Inc. ("Standish").
-29-
<PAGE>
<TABLE>
<CAPTION>
Principal Occupation
Name, Address and Date of Birth Position Held With Trust During Past 5 Years
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
*D. Barr Clayson, 7/29/35 Trustee and Vice Managing Director,
c/o Standish, Ayer & Wood, Inc. President Standish, Ayer & Wood, Inc.;
One Financial Center Chairman and Director, Standish
Boston, MA 02111 International Management Company,
LLC
Samuel C. Fleming, 9/30/40 Trustee Chairman of the Board
c/o Decision Resources, Inc. and Chief Executive Officer,
1100 Winter Street Decision Resources, Inc.;
Waltham, MA 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;
P.O. Box 233 Trustee, Mertens House, Inc.
New London, NH 03257
*Edward H. Ladd, 1/3/38 Trustee and Vice Chairman of the Board and
c/o Standish, Ayer & Wood, Inc. President Managing Director, Standish, Ayer
One Financial Center & Wood, 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
c/o Standish, Ayer & Wood, Inc. & Wood, Inc.;
One Financial Center Executive Vice President and
Boston, MA 02111 Director, Standish International
Management Company, LLC
James E. Hollis III, 11/21/48 Executive Vice President Director, Standish, Ayer & Wood,
c/o Standish, Ayer & Wood, Inc. Inc.
One Financial Center
Boston, MA 02111
</TABLE>
-30-
<PAGE>
<TABLE>
<CAPTION>
Principal Occupation
Name, Address and Date of Birth Position Held With Trust During Past 5 Years
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Anne P. Herrmann, 1/26/56 Vice President and Assistant Vice President and
c/o Standish, Ayer & Wood, Inc. Secretary Senior Fund Administration
One Financial Center Manager, Standish, Ayer & Wood,
Boston, MA 02111 Inc.
Paul G. Martins, 3/10/56 Vice President and Vice President of Finance,
c/o Standish, Ayer & Wood, Inc. Treasurer Standish, Ayer & Wood, Inc. since
One Financial Center October 1996; formerly Senior Vice
Boston, MA 02111 President, Treasurer and Chief
Financial Officer of Liberty
Financial Bank Group
Beverly E. Banfield, 7/6/56 Vice President Associate Director and Compliance
c/o Standish, Ayer & Wood, Inc. Officer, Standish, Ayer & Wood,
One Financial Center Inc.
Boston, MA 02111
Denise B. Kneeland, 8/19/51 Vice President Vice President and Manager, Mutual
c/o Standish, Ayer & Wood, Inc. Funds Operations,
One Financial Center Standish, Ayer & Wood, Inc.
Boston, MA 02111
Tami M. Pester, 10/29/67 Vice President Assistant Vice President,
c/o Standish, Ayer & Wood, Inc. Assistant Compliance Manager and
One Financial Center Compliance Officer, Standish, Ayer
Boston, MA 02111 & Wood, Inc. since 1998;
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
One Financial Center October 1995; formerly Compliance
Boston, MA 02111 Administrator, New England
Securities Corp.
Deborah Rafferty-Maple, 1/4/69 Vice President Assistant Vice President,
c/o Standish, Ayer & Wood, Inc. Financial Planner and Registered
One Financial Center Investment Networks Marketing
Boston, MA 02111 Manager, Standish, Ayer & Wood,
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
One Financial Center April, 1998; formerly Independent
Boston, MA 02111 Consultant for Banking and
Financial Services
</TABLE>
* Indicates that trustee is an interested person of the Trust for purposes
of the 1940 Act.
-31-
<PAGE>
Compensation of Trustees and Officers
Trust does not pay compensation to the trustees of the Trust that are
affiliated with Standish or to the Trust's officers. None of the trustees or
officers have engaged in any financial transactions (other than the purchase or
redemption of the fund's shares) with the Trust or the adviser during the year
ended December 31, 1999, except that certain trustees and officers who are
directors and shareholders of Standish, may from time to time, purchase
additional shares of common stock of Standish.
The following table sets forth all compensation paid to the Trust's
trustees as of the fund's fiscal years ended December 31, 1999:
Aggregate Compensation from the Fund
International Pension or Retirement Total Compensation
Fixed Benefits Accrued as from Fund & Other
Name of Trustee Income Fund Part of Fund's Expense Funds in Complex*
- --------------------------------------------------------------------------------
D. Barr Clayson $0 $0 $0
Samuel C. Fleming $0 $0 $57,000
Benjam M. Friedman $0 $0 $57,000
John H. Hewitt $0 $0 $62,000
Edward H. Ladd $0 $0 $0
Caleb Loring, III $0 $0 $57,000
Richard S. Wood $0 $0 $0
* As of the date of this Statement of Additional Information there were 24
funds in the fund complex.
Certain Shareholders
At April 14, 2000, trustees and officers of the Trust as a group
beneficially owned (i.e., had voting and/or investment power) less than 1% of
the then outstanding shares of the fund. Also at that date, no person owned
beneficially or of record 5% or more of the then outstanding shares of the fund
except:
Percentage of
Name and Address Outstanding Shares
- --------------------------------------------------------------------------------
Bell Atlantic Master Trust 29.94%(1)
Boston & Co.
P. O. Box 3198
Pittsburgh, PA 15230
(1)Institutional Class
Investment Adviser
SIMCO serves as investment adviser to the fund pursuant to an investment
advisory agreement. SIMCO was organized as a Delaware limited partnership in
1991 and converted to a Delaware limited liability company in 1999. SIMCO, a
registered investment adviser under the Investment Advisers Act of 1940, is a
wholly owned subsidiary of Standish.
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<PAGE>
The following, constituting all of the Directors and all of the
shareholders of Standish, are Standish controlling persons: Caleb F. Aldrich,
Nicholas S. Battelle, David H. Cameron, Karen K. Chandor, D. Barr Clayson,
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, places orders to purchase and sell
securities and permits the fund to use the name "Standish." In addition to those
services, the adviser provides the fund with office space for managing their
affairs, with the services of required executive personnel, and with certain
clerical services and facilities. Under the investment advisory agreement, the
adviser is paid a fee based upon a percentage of the fund's average daily net
asset value computed as set forth below. The advisory fees are payable monthly.
Contractual Advisory Fee Rate (as a
Fund percentage of average daily net assets)
------------------------------- ---------------------------------------
International Fixed Income Fund 0.40%
During the last three fiscal years ended December 31, the fund paid
advisory fees in the following amounts:
Fund 1997 1998 1999
- ---- ---- ---- ----
International Fixed Income Fund $4,012,641 5,359,632 5,348,212
Pursuant to the investment advisory agreement the fund bears expenses of
its operations other than those incurred by the adviser pursuant to the
investment advisory agreement. Among other expenses, the fund will pay share
pricing and shareholder servicing fees and expenses; custodian fees and
expenses; legal and auditing fees and expenses; expenses of prospectuses,
statements of additional information and shareholder reports; registration and
reporting fees and expenses; and trustees' fees and expenses.
Unless terminated as provided below, the investment advisory agreement
continues in full force and effect from year to year but only so long as each
such continuance is approved annually (i) by either the trustees of the Trust or
by the "vote of a majority of the outstanding voting securities" of the fund
and, in either event (ii) by vote of a majority of the trustees of the Trust who
are not parties to the investment advisory agreement or "interested persons" (as
defined in the 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
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<PAGE>
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 Standish, 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
the 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 fund 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.
SERVICE PLAN
The Trust, with respect to International Fixed Income Fund Service Class,
has adopted a service plan (the "Service Plan"). The Service Plan provides that
the fund may compensate entities ("Account Administrators") that provide omnibus
accounting services for groups of individuals who beneficially own fund shares
("Omnibus Accounts") for providing certain personal, account administration
and/or shareholder liaison services to participants in the Omnibus Accounts.
Pursuant to the Service Plan, the fund may enter into agreements with Account
Administrators which purchase shares of the fund ("Service Agreements"). Under
such Service Agreements or otherwise, Account Administrators may perform some or
all of the following services: (a) establishing and maintaining Omnibus Accounts
with the fund; (b) establishing and maintaining subaccounts and subaccount
balances for Omnibus Accounts and their participants ("Participants"); (c)
processing orders by Omnibus Accounts and Participants to purchase, redeem and
exchange fund shares promptly and in accordance with the effective prospectus
relating to such shares; (d) transmitting to the fund (or its agent) on each
Business Day (as defined below) a net subscription or net redemption order
reflecting subscription, redemption and exchange orders received by it with
respect to the Omnibus Accounts; (e) receiving and transmitting funds
representing the purchase price or redemption proceeds relating to such orders;
(f) mailing fund prospectuses, statements of additional information, periodic
reports, transaction confirmations and subaccount information to Omnibus
Accounts and Participants; (g) answering Omnibus Account and Participant
inquiries about the fund, subaccount balances, distribution options and such
other administrative services for the Omnibus Account and the Participants as
provided for in the service agreements between the Account
-34-
<PAGE>
Administrator and the Omnibus Account; and (h) providing such statistical and
other information as may be reasonably requested by the fund or necessary for
the fund to comply with applicable federal or state laws.
As compensation for such services, the fund may pay each Account
Administrator a service fee in an amount of up to 0.25% (on an annualized basis)
of the fund's average daily net assets attributable to fund shares that are
attributable to or held in the name of such Account Administrator. Account
Administrators may from time to time be required to meet certain other criteria
in order to receive service fees.
In accordance with the terms of the Service Plan, Standish provides to the
Trust for review by the Trustees a quarterly written report of the amounts
expended under the Service Plan and the purpose for which such expenditures were
made. In the Trustees' quarterly review of the Service Plan, they will consider
the continued appropriateness and the level of compensation that the Service
Plan provides.
Conflict of interest restrictions (including the Employee Retirement
Income Security Act of 1974 ("ERISA")) may apply to an Account Administrator's
receipt of compensation paid by the fund in connection with the investment of
fiduciary assets in fund shares. Account Administrators that are subject to the
jurisdiction of the SEC, the Department of Labor or state securities
commissions, are urged to consult legal advisers before investing fiduciary
assets in fund shares and receiving service fees.
The Trust believes that fiduciaries of ERISA plans may properly receive
fees under the Service Plan if the plan fiduciary otherwise properly discharges
its fiduciary duties, including (if applicable) those under ERISA. Under ERISA,
a plan fiduciary, such as a trustee or investment manager, must meet the
fiduciary responsibility standards set forth in part 4 of title 1 of ERISA.
These standards are designed to help ensure that the fiduciary's decisions are
made in the best interests of the plan and are not colored by self-interest.
Section 403(c)(1) of ERISA provides, in part, that the assets of a plan
shall be held for the exclusive purpose of providing benefits to the plan's
participants and their beneficiaries and defraying reasonable expenses of
administering the plan. Section 404(a)(1) sets forth a similar requirement on
how a plan fiduciary must act prudently and solely in the interest of the
participants and beneficiaries. These basic provisions are supplemented by the
per se prohibitions of certain classes of transactions set forth in Section 406
of ERISA.
Section 406(a)(1)(D) of ERISA prohibits a fiduciary of an ERISA plan from
causing that plan to engage in a transaction if he knows or should know that the
transaction would constitute a direct or indirect transfer to, or use by or for
the benefit of, a party in interest, of any assets of the plan. Section 3(14)
includes, within the definition of "party in interest" with respect to a plan,
any fiduciary with respect to that plan. Thus, Section 406(a)(1)(D) would not
only prohibit a fiduciary from causing the plan to engage in a transaction which
would benefit a third person who is a party in interest, but it also would
prohibit the fiduciary from similarly benefiting himself. In addition, Section
406(b)(1) specifically prohibits a fiduciary with respect to a plan from dealing
with the assets of that plan in his own interest or for his own account. Section
406(b)(3) supplements these provisions by prohibiting a plan fiduciary from
receiving any consideration for his own personal account from any party dealing
with the plan in connection with a transaction involving the assets of the plan.
In accordance with the foregoing, however, a fiduciary of an ERISA plan
may properly receive service fees under the Service Plan if the fees are used
for the exclusive purpose of providing benefits to the plan's participants and
their beneficiaries or for defraying reasonable expenses of administering the
plan for which the plan would otherwise be liable. See, e.g., Department of
Labor ERISA Technical
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<PAGE>
Release No. 86-1 (stating a violation of ERISA would not occur where a
broker-dealer rebates commission dollars to a plan fiduciary who, in turn,
reduces its fees for which the plan is otherwise responsible for paying). Thus,
the fiduciary duty issues involved in a plan fiduciary's receipt of the service
fee must be assessed on a case-by-case basis by the relevant plan fiduciary.
PURCHASE AND REDEMPTION OF SHARES
Detailed information on purchase and redemption of shares is included in
the prospectus.
In addition to Standish Fund Distributors and other agents of the Trust,
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 the fund
when accepted by the authorized broker or dealer or, if applicable, the
authorized broker's or dealer's designee. Also in accordance with the position
taken by the staff of the 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
Securities and Exchange Commission may permit for the protection of shareholders
of the fund.
The Trust intends to pay redemption proceeds in cash for all fund shares
redeemed but, under certain conditions, the Trust may make payment wholly or
partly in fund portfolio securities. Portfolio securities distributed upon
redemption of fund shares will be valued at their then current market value. The
Trust, on behalf of each of its series, has elected to be governed by the
provisions of Rule 18f-1 under the 1940 Act which limits 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 fund and not
according to any formula. The primary consideration in all portfolio
transactions will be prompt execution of orders in an efficient manner at the
most favorable price. In selecting broker-dealers and in negotiating
commissions, the adviser will consider the firm's reliability, the quality of
its execution services on a continuing basis and its financial condition. When
more than one firm is believed to meet these criteria, preference may be given
to firms which also sell shares of the 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, the fund may pay commissions to such broker in
an amount greater than the amount another firm may charge. Research services may
include (i) furnishing advice as to the value of securities, the advisability of
investing in, purchasing or selling securities, (ii) furnishing seminars,
information, analyses and reports concerning issuers, industries, securities,
trading markets and
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methods, legislative developments, changes in accounting practices, economic
factors and trends, portfolio strategy, access to research analysts, corporate
management personnel, industry experts and economists, comparative performance
evaluation and technical measurement services and quotation services, and
products and other services (such as third party publications, reports and
analysis, and computer and electronic access, equipment, software, information
and accessories that deliver, process or otherwise utilize information,
including the research described above) that assist the adviser in carrying out
its responsibilities, and (iii) effecting securities transactions and performing
functions incidental thereto (such as clearance and settlement). Research
services furnished by firms through which the fund 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 fund generating
the soft dollar credits. The investment advisory fees paid by the fund under the
investment advisory agreements will not be reduced as a result of the adviser's
receipt of research services.
The adviser also places portfolio transactions for other advisory
accounts. The adviser will seek to allocate portfolio transactions equitably
whenever concurrent decisions are made to purchase or sell securities for the
fund and another advisory account. In some cases, this procedure could have an
adverse effect on the price or the amount of securities available to the fund.
In making such allocations, the main factors considered by the adviser will be
the respective investment objectives, the relative size of portfolio holdings of
the same or comparable securities, the availability of cash for investment, the
size of investment commitments generally held, and opinions of the persons
responsible for recommending the investment. 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 are effected on a
principal basis involving a "spread" or "dealer mark-up," the fund has not paid
any brokerage commissions during the past three years.
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 Day. 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 City 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 fund 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
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fair value as determined in good faith by the adviser in accordance with
procedures approved by the trustees, which may include the use of yield
equivalents or matrix pricing.
Money market instruments with less than sixty days remaining to maturity
when acquired by the fund are valued on an amortized cost basis. If the fund
acquires a money market instrument with more than sixty days remaining to its
maturity, it is valued at current market value until the sixtieth day prior to
maturity and will then be valued at amortized cost based upon the value on such
date unless the trustees determine during such sixty-day period that amortized
cost does not represent fair value.
Generally, trading in securities on foreign exchanges is substantially
completed each day at various times prior to the close of regular trading on the
New York Stock Exchange. If a security's primary exchange is outside the U.S.,
the value of such security used in computing the net asset value of the fund's
shares is determined as of such times. Foreign currency exchange rates are also
generally determined prior to the close of regular trading on the New York Stock
Exchange. Occasionally, events which affect the values of such securities and
such exchange rates may occur between the times at which they are determined and
the close of regular trading on the New York Stock Exchange and will therefore
not be reflected in the computation of the fund's net asset values. If events
materially affecting the value of such securities occur during such period, then
these securities may be valued at their fair value as determined in good faith
by the trustees of the Trust.
THE FUND AND ITS SHARES
The fund is a diversified investment series of the Trust, an open-end
management investment company organized as an unincorporated business trust
under the laws of The Commonwealth of Massachusetts pursuant to an Agreement and
Declaration of Trust dated August 13, 1986. Under the Agreement and Declaration
of Trust, the trustees of the Trust have authority to issue an unlimited number
of shares of beneficial interest, par value $.01 per share, of the fund. The
fund offers two classes of Shares: Service Class and Institutional Class. Shares
of Institutional Class are offered through another prospectus and SAI. Shares of
the fund represent interests in the fund in proportion to each share's net asset
value. The per share net asset value of each class of shares is calculated
separately and may differ as a result of the service fee applicable to Service
Class shares and the allocation of certain class specific expenses which apply
to only one of the classes or which differ between the classes. Shareholders are
not entitled to any preemptive, conversion or subscription rights. All shares,
when issued, will be fully paid and non-assessable by the Trust. Upon any
liquidation of 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 the
fund. The trustees have established other series of the Trust. Pursuant to the
Declaration, the Board may establish and issue multiple classes of shares for
each series of the Trust. Pursuant to the Declaration of Trust and subject to
shareholder approval (if then required by applicable law), the trustees may
authorize the fund to invest all of its investable assets in a single open-end
investment company that has substantially the same investment objectives,
policies and restrictions as the fund.
All fund shares have equal rights with regard to voting, and shareholders
of the fund have the right to vote as a separate class with respect to matters
as to which their interests are not identical to those of shareholders of other
classes of the Trust, including the approval of an investment advisory contract
and any change of investment policy requiring the approval of shareholders.
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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" ("RIC") under Subchapter M of the Code. As such and by
complying with the applicable provisions of the Code regarding the sources of
its income, 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.
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, net short-term capital gain in excess of net long-term
capital loss, and certain net foreign exchange gains, 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
companies under the Code, the fund will not be required to pay any Massachusetts
income, corporate excise or franchise taxes.
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The fund will not distribute net capital gains realized in any year to the
extent that a capital loss is carried forward from prior years against such
gain. For federal income tax purposes, the fund is permitted to carry forward a
net capital loss in any year to offset its own net capital gains, if any, during
the eight years following the year of the loss. To the extent subsequent net
capital gains are offset by such losses, they would not result in federal income
tax liability to the fund. The fund has accumulated capital loss carryforwards
in the amounts of $42,835,858 which expire on December 31 of 2007.
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.
Limitations imposed by the Code on regulated investment companies like the
fund may restrict the fund's ability to enter into futures, options or currency
forward transactions.
Certain options, futures contracts or currency 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 the fund as
long-term or short-term. Certain options, futures and forward contracts relating
to foreign currency may be subject to Section 988 of the Code, as described
below, and may accordingly produce ordinary income or loss. Additionally, the
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 "constructive sale" of an "appreciated
financial position" held by the fund under Section 1259 of the Code. Any net
mark to market gains and/or gains from constructive sales may also have to be
distributed by the fund to satisfy the distribution requirements referred to
above even though the 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 the fund's or portfolio'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, currency swaps, 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
regulated investment companies. Due to possible unfavorable consequences under
present tax law, the fund does not currently intend to acquire "residual"
interests in real estate mortgage investment conduits ("REMICs"), although the
fund may acquire "regular" interests in REMICs.
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Foreign exchange gains and losses realized by the fund in connection with
certain transactions, if any, involving foreign currency-denominated debt
securities, certain foreign currency futures and options, foreign currency
forward contracts, foreign currencies, or payables or receivables denominated in
a foreign currency are subject to Section 988 of the Code, which generally
causes such gains and losses to be treated as ordinary income and losses and may
affect the amount, timing and character of fund distributions to shareholders.
Under future regulations, any such transactions that are not directly related to
the fund's investment in stock or securities, (or the options or futures
contracts with respect to stock or securities) may have to be limited in order
to enable the fund to satisfy the 90% income test. If the net foreign exchange
loss for a year were to exceed the fund's investment company taxable income
(computed without regard to such loss), the resulting ordinary loss for such
year would not be deductible by the fund or their shareholders in future years.
In some countries, restrictions on repatriation may make it difficult or
impossible for the fund to obtain cash corresponding to its earnings from such
countries, which may cause the fund to have difficulty obtaining cash necessary
to satisfy tax distribution requirements.
The fund may be subject to withholding and other taxes imposed by foreign
countries, including taxes on interest, dividends and capital gains, with
respect to their investments in foreign securities, which would, if imposed,
reduce the yield on or return from those investments. Tax conventions between
certain countries and the U.S. may reduce or eliminate such taxes in some cases.
Investors in the fund would be entitled to claim U.S. foreign tax credits or
deductions with respect to such taxes, subject to certain holding period
requirements and other provisions and limitations contained in the Code, only if
more than 50% of the value of the fund's total assets at the close of any
taxable year were to consist of stock or securities of foreign corporations and
the fund were to file an election with the Internal Revenue Service.
The fund may meet the 50% threshold referred to in the previous paragraph
for a year and, if it does, it may file an election with the Internal Revenue
Service pursuant to which shareholders of the fund will be required to (i)
include in ordinary gross income (in addition to taxable dividends and
distributions actually received) their pro rata shares of qualified foreign
taxes paid by the fund and (ii) treat such respective pro rata portions as
foreign taxes paid by them.
Qualified foreign taxes generally include taxes that would be treated as
income taxable under U.S. tax regulations but do not include most other taxes,
such as stamp taxes, securities transaction taxes and similar taxes. If the fund
makes this election, shareholders may then deduct such pro rata portions of
qualified foreign taxes in computing their taxable incomes, or, alternatively,
use them as foreign tax credits, subject to applicable holding period
requirements and other limitations, against their U.S. federal income taxes.
Shareholders who do not itemize deductions for federal income tax purposes will
not, however, be able to deduct their pro rata portion of qualified foreign
taxes paid by the fund, although such shareholders will be required to include
their share of such taxes in gross income. Shareholders who claim a foreign tax
credit for such foreign taxes may be required to treat a portion of dividends
received from the applicable fund as a separate category of income for purposes
of computing the limitations on the foreign tax credit. Tax-exempt shareholders
will ordinarily not benefit from this election. Each year (if any) that the fund
files the election described above, its shareholders will be notified of the
amount of (i) each shareholder's pro rata share of qualified foreign taxes paid
by the fund and (ii) the portion of fund dividends which represents income from
each foreign country.
If the fund acquires 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
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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 their shareholders
any credit or deduction for such a tax. Certain elections may, if available,
ameliorate these adverse tax consequences, but any such election would require
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 their 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.
Distributions from the fund's current or accumulated earnings and profits
("E&P"), as computed for Federal income tax purposes, will be treated under the
Code as ordinary income (if they are from the fund's investment company taxable
income) or long-term capital gain (if they are from the fund's net capital gain
and are designated by the fund as "capital gain dividends") whether taken in
shares or in cash. Distributions, if any, in excess of E&P will constitute a
return of capital, which will first reduce an investor's tax basis in fund
shares and thereafter (after such basis is reduced to zero) will generally give
rise to capital gains. Shareholders electing to receive distributions in the
form of additional shares will have a cost basis for federal income tax purposes
in each share so received equal to the amount of cash they would have received
had they elected to receive the distributions in cash, divided by the number of
shares received.
The fund's distributions to its corporate shareholders would potentially
qualify in their hands for the corporate dividends received deduction, subject
to certain holding period requirements and limitations on debt financing under
the Code, only to the extent the fund earned dividend income from stock
investments in U.S. domestic corporations. The fund is permitted to acquire
stocks of U.S. domestic corporations, and it is therefore possible that a small
portion of the fund's distributions, from the dividends attributable to such
preferred 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
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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 will be adjusted to reflect the
disallowed loss. Any loss realized or other disposition upon the redemption of
shares with a tax holding period of six months or less will be treated as a
long-term capital loss to the extent of any amounts treated as distributions of
long-term capital gain with respect to such shares. Shareholders should consult
their own tax advisers regarding their particular circumstances to determine
whether a disposition of fund shares is properly treated as a sale for tax
purposes, as is assumed in the foregoing discussion.
Different tax treatment, including penalties on certain excess
contributions and deferrals, certain pre-retirement and post-retirement
distributions and certain prohibited transactions, is accorded to accounts
maintained as qualified retirement plans. Shareholders should consult their tax
adviser for more information.
The foregoing discussion relates solely to U.S. federal income tax law
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,
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 separate IRS Forms W-9, that the Social Security Number or other Taxpayer
Identification Number they provided 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. persons may be subject to different U.S.
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,
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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 its Institutional Class contained in
the 1999 Annual Report of the fund have been audited by PricewaterhouseCoopers
LLP, independent accountants, and are incorporated by reference into this SAI.
The financial statements for the year ended December 31, 1999 are
incorporated by reference from the 1999 Annual Report, which have previously
been sent to shareholders and were filed with the SEC on or about March 6, 2000,
1940 Act File No. 811-04813.
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APPENDIX
MOODY'S RATINGS DEFINITIONS FOR
CORPORATE BONDS AND SOVEREIGN,
SUBNATIONAL AND SOVEREIGN
RELATED ISSUES
Aaa - Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa - Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long term risks appear somewhat larger than in Aaa securities.
A - Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa - Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba - Bonds which are rated Ba are judged to have speculative elements.
Their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B - Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
STANDARD & POOR'S RATINGS
DEFINITIONS
AAA - Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA - Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A - Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
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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
- 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
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- 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, the
fund uses the foreign currency or domestic (local) currency rating depending
upon how a security in the portfolio is denominated. In the case where the 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 the fund holds a security denominated in a foreign currency and one
of the rating services does not provide a foreign currency rating for the
issuer, the fund will treat the security as being unrated.
DESCRIPTION OF DUFF & PHELPS
RATINGS FOR CORPORATE BONDS AND
FOR SOVEREIGN, SUBNATIONAL AND
SOVEREIGN RELATED ISSUERS
AAA - Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA - High credit quality. Protection factors are strong. Risk is modest
but may vary slightly from time to time because of economic conditions.
A - Protection factors are average but adequate. However, risk factors are
more variable and greater in periods of economic stress.
BBB - Below average protection factors but still considered sufficient for
prudent investment. Considerable variability in risk during economic cycles.
BB - Below investment grade but deemed likely to meet obligations when
due. Present or prospective financial protection factors fluctuate according to
industry conditions or company fortunes. Overall quality may move up or down
frequently within this category.
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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 IBAC LONG-TERM RATINGS FOR
NATIONAL ISSUES
AAA - Obligations for which there is the lowest expectation of investment
risk. Capacity for timely repayment of principal and interest is substantial,
such that adverse changes in business, economic or financial conditions are
unlikely to increase investment risk substantially.
AA - Obligations for which there is a very low expectation of investment
risk. Capacity for timely repayment of principal and interest is substantial.
Adverse changes in business, economic or financial conditions may increase
investment risk, albeit not very significantly.
A - Obligations for which there is currently a low expectation of
investment risk. Capacity for timely repayment of principal and interest is
strong, although adverse changes in business, economic or financial conditions
may lead to increased investment risk.
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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.
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