<PAGE>
SEI
Institutional
Managed Trust
ABOUT THIS PROSPECTUS
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The SEI Institutional Managed Trust is a mutual fund family that offers a number
of separate investment portfolios (Funds). The Funds have individual investment
goals and strategies and are designed primarily for institutional investors and
financial institutions and their clients. This prospectus gives you important
information about Class A Shares of the Tax-Managed Small Cap Fund that you
should know before investing. Please read this prospectus and keep it for future
reference.
THIS PROSPECTUS HAS BEEN ARRANGED INTO DIFFERENT SECTIONS SO THAT YOU CAN EASILY
REVIEW THIS IMPORTANT INFORMATION. ON THE NEXT PAGE, THERE IS SOME GENERAL
INFORMATION YOU SHOULD KNOW ABOUT RISK AND RETURN. FOR MORE DETAILED INFORMATION
ABOUT THE FUND, PLEASE SEE:
PRINCIPAL INVESTMENT STRATEGIES AND RISKS,
PERFORMANCE INFORMATION AND EXPENSES...............................2
MORE INFORMATION ABOUT FUND INVESTMENTS..............................4
THE INVESTMENT ADVISER AND SUB-ADVISERS..............................4
PURCHASING, SELLING AND EXCHANGING FUND SHARES.......................5
DIVIDENDS AND DISTRIBUTIONS..........................................7
TAXES................................................................7
HOW TO OBTAIN MORE INFORMATION ABOUT
SEI INSTITUTIONAL MANAGED TRUST.............................Back Cover
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ASSET ALLOCATION
The Tax-Managed Small Cap Fund has its own distinct risk and reward
characteristics, investment objectives, policies, and strategies. In addition to
managing the Fund, SEI Investments Management Corporation (SIMC) constructs and
maintains asset allocation strategies for certain clients, and the Fund is
designed in part to implement those strategies. The degree to which an
investor's portfolio is invested in the particular market segments and/or asset
classes represented by the Fund varies, as does the investment risk/return
potential represented by the Fund. The Fund may have extremely volatile returns.
Because of the historical lack of correlation among various asset classes, an
investment in a portfolio of the Fund representing a range of asset classes as
part of an asset allocation strategy may reduce the strategy's overall level of
volatility. As a result, an asset allocation strategy may reduce risk.
In managing the Fund, SIMC focuses on four key principles: asset allocation,
portfolio structure, the use of specialist managers, and continuous portfolio
management. Asset allocation across appropriate asset classes is the central
theme of SIMC's investment philosophy. SIMC seeks to reduce risk further by
creating a portfolio that is diversified within each asset class. SIMC then
oversees a network of specialist managers who invest the assets of the Fund in
distinct segments of the market or class represented by the Fund. These
specialist managers adhere to distinct investment disciplines, with the goal of
providing greater consistency and predictability of results, as well as broader
diversification across and within asset classes. Finally, SIMC regularly
rebalances to ensure that the appropriate mix of assets is constantly in place,
and constantly monitors and evaluates specialist managers for the Fund to ensure
that they do not deviate from their stated investment philosophy or process.
<PAGE>
PROSPECTUS 1
RISK/RETURN INFORMATION
The Fund is a mutual fund. A mutual fund pools shareholders' money and, using
professional investment managers, invests it in securities.
The Fund has its own investment goal and strategies for reaching that goal. The
Fund's assets are managed under the direction of SIMC and one or more
Sub-Advisers who manage the Fund's assets in a way that they believe will help
the Fund achieve its goal. SIMC acts as "manager of managers" for the Fund, and
attempts to ensure that the Sub-Adviser(s) comply with the Fund's investment
policies and guidelines. SIMC also recommends the appointment of additional or
replacement Sub-Advisers to the Fund's Board. Still, investing in the Fund
involves risks, and there is no guarantee that the Fund will achieve its goal.
SIMC and the Sub-Advisers make judgments about the securities markets, the
economy, and companies, but these judgments may not anticipate actual market
movements or the impact of economic conditions on company performance. In fact,
no matter how good a job the Sub-Advisers do, you could lose money on your
investment in the Fund, just as you could with other investments. A Fund share
is not a bank deposit, and it is not insured or guaranteed by the FDIC or any
government agency.
The value of your investment in the Fund is based on the market prices of the
securities the Fund holds. These prices change daily due to economic and other
events that affect particular companies and other issuers. These price
movements, sometimes called volatility, may be greater or lesser depending on
the types of securities the Fund owns and the markets in which they trade. The
estimated level of volatility for the Fund is set forth in the Fund Summary that
follows. The effect on the Fund of a change in the value of a single security
will depend on how widely the Fund diversifies its holdings.
<PAGE>
2 PROSPECTUS
TAX-MANAGED SMALL CAP FUND
FUND SUMMARY
<TABLE>
<S> <C>
INVESTMENT GOAL High long-term after-tax returns
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SHARE PRICE VOLATILITY High
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PRINCIPAL INVESTMENT STRATEGY Utilizing multiple sub-advisers, the Fund seeks
long-term capital appreciation while minimizing
the current tax impact on shareholders by buying
and holding small cap U.S. common stocks with
lower dividend yields.
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</TABLE>
INVESTMENT STRATEGY
The Tax-Managed Small Cap Fund invests primarily in common stocks of U.S.
companies with market capitalizations of less than $4 billion. The Fund uses a
multi-manager approach, relying upon a number of Sub-Advisers to manage portions
of the Fund's portfolio under the general supervision of SIMC. Generally, the
Sub-Advisers attempt to minimize taxes by using a "buy and hold" strategy, but
they will also utilize such techniques as investing in companies that pay
relatively low dividends; selling stocks with the highest tax cost first; and
offsetting losses against gains where possible. To protect against loss of value
during periods of market decline, the Sub-Advisers may use a variety of hedging
techniques, such as buying put options, selling index futures, short selling
"against the box" and entering into equity swaps.
WHAT ARE THE RISKS OF INVESTING IN THE FUND?
Since it purchases equity securities, the Fund is subject to the risk that stock
prices will fall over short or extended periods of time. Historically, the
equity markets have moved in cycles, and the value of the Fund's securities may
fluctuate drastically from day to day. Individual companies may report poor
results or be negatively affected by industry and/or economic trends and
developments. The prices of securities issued by such companies may suffer a
decline in response. However, efforts to protect against market declines may not
succeed because hedging activities also involve risk. These factors contribute
to price volatility, which is the principal risk of investing in the Fund.
The Fund is also subject to the risk that small capitalization stocks may
underperform other segments of the equity market or the equity markets as a
whole.
The smaller capitalization companies the Fund invests in may be more vulnerable
to adverse business or economic events than larger, more established companies.
In particular, these small companies may have limited product lines, markets and
financial resources, and may depend upon a relatively small management group.
Therefore, small cap stocks may be more volatile than those of larger companies.
These securities may be traded over the counter or listed on an exchange.
The Fund is managed to minimize tax consequences to investors, but will likely
earn taxable income and gains from time to time.
<PAGE>
PROSPECTUS 3
TAX-MANAGED SMALL CAP FUND
PERFORMANCE INFORMATION
As of October 15, 2000, the Fund had not commenced operations, and did not have
a performance history.
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FUND FEES AND EXPENSES
THIS TABLE DESCRIBES THE FEES AND EXPENSES THAT YOU MAY PAY IF YOU BUY AND HOLD
FUND SHARES.
ANNUAL FUND OPERATING EXPENSES
(EXPENSES DEDUCTED FROM FUND ASSETS)
<TABLE>
<CAPTION>
CLASS A SHARES
<S> <C>
Investment Advisory Fees 0.65%
Distribution (12b-1) Fees None
Other Expenses 0.62%*
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Total Annual Fund Operating Expenses 1.27%**
</TABLE>
* OTHER EXPENSES ARE BASED ON ESTIMATED AMOUNTS FOR THE CURRENT FISCAL YEAR.
** THE FUND'S TOTAL ACTUAL ANNUAL FUND OPERATING EXPENSES FOR THE CURRENT FISCAL
YEAR ARE EXPECTED TO BE LESS THAN THE AMOUNT SHOWN ABOVE BECAUSE THE DISTRIBUTOR
IS WAIVING A PORTION OF THE FEES IN ORDER TO KEEP TOTAL OPERATING EXPENSES AT A
SPECIFIED LEVEL. THE DISTRIBUTOR MAY DISCONTINUE ALL OR PART OF THESE WAIVERS AT
ANY TIME. WITH THESE FEE WAIVERS, THE FUND'S ACTUAL TOTAL OPERATING EXPENSES ARE
AS FOLLOWS:
<TABLE>
<S> <C>
TAX-MANAGED SMALL CAP FUND - CLASS A SHARES 1.10%
</TABLE>
FOR MORE INFORMATION ABOUT THESE FEES, SEE "THE INVESTMENT ADVISER AND
SUB-ADVISERS" AND "DISTRIBUTION OF FUND SHARES."
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 you
invest $10,000 in the Fund for the time periods indicated and that you sell your
shares at the end of the period. The Example also assumes that each year your
investment has a 5% return, Fund operating expenses remain the same and you
reinvest all dividends and distributions. Although your actual costs and returns
might be different, your approximate costs of investing $10,000 in the Fund
would be:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS
<S> <C> <C>
Tax-Managed Small Cap Fund - Class A
Shares $129 $403
</TABLE>
<PAGE>
4 PROSPECTUS
MORE INFORMATION ABOUT FUND INVESTMENTS
This prospectus describes the Fund's primary strategies, and the Fund will
normally invest at least 65% of its assets in the types of securities described
in this prospectus. However, the Fund also may invest in other securities, use
other strategies and engage in other investment practices. These investments and
strategies, as well as those described in this prospectus, are described in
detail in the Fund's Statement of Additional Information (SAI).
The investments and strategies described throughout this prospectus are those
that the Sub-Advisers use under normal conditions. During unusual economic or
market conditions or for temporary defensive or liquidity purposes, the Fund may
invest up to 100% of its assets in cash, money market instruments, repurchase
agreements and short-term obligations that would not ordinarily be consistent
with the Fund's objectives. The Fund will do so only if the Adviser or
Sub-Advisers believe that the risk of loss outweighs the opportunity for capital
gains or higher income. Of course, there is no guarantee that the Fund will
achieve its investment goal.
INVESTMENT ADVISER AND SUB-ADVISERS
SEI INVESTMENTS MANAGEMENT CORPORATION (SIMC) ACTS AS THE MANAGER OF MANAGERS OF
THE FUND, AND IS RESPONSIBLE FOR THE INVESTMENT PERFORMANCE OF THE FUND SINCE IT
ALLOCATES THE FUND'S ASSETS TO ONE OR MORE SUB-ADVISERS AND RECOMMENDS HIRING OR
CHANGING SUB-ADVISERS TO THE BOARD OF TRUSTEES.
Each Sub-Adviser makes investment decisions for the assets it manages and
continuously reviews, supervises and administers its investment program. SIMC
oversees the Sub-Advisers to ensure compliance with the Fund's investment
policies and guidelines, and monitors each Sub-Adviser's adherence to its
investment style. The Board of Trustees supervises SIMC and the Sub-Advisers;
establishes policies that they must follow in their management activities; and
oversees the hiring and termination of Sub-Advisers recommended by SIMC. SIMC
pays the Sub-Advisers out of the investment advisory fees it receives (described
below).
SIMC, an SEC-registered adviser, serves as the Adviser to the Fund. As of July
31, 2000, SIMC had approximately $32.6 billion in assets under management. It is
expected that SIMC will receive investment advisory fees of 0.65% of the average
daily net assets of the Tax-Managed Small Cap Fund.
SUB-ADVISERS AND PORTFOLIO MANAGERS
DAVID J. GREENE AND COMPANY, LLC: Benjamin H. Nahum and Michael C. Greene, Chief
Executive Officer, of David J. Greene and Company, LLC ("David J. Greene") serve
as portfolio managers of a portion of the assets of the Tax-Managed Small Cap
Fund. Messrs. Nahum and Greene have been Principals of David J. Greene for the
past five years.
LOOMIS, SAYLES AND COMPANY, L.P.: Christopher Ely, CFA, Portfolio Manager and
Vice President, Philip Fine, CFA, Portfolio Manager and Vice President and David
Smith, CFA, Portfolio Manager and Vice President of Loomis, Sayles and Company,
L.P. ("Loomis") serve as portfolio managers of a portion of the assets of the
Tax-Managed Small Cap Fund. Mr. Ely joined Loomis in 1996. Prior to joining
Loomis, Mr. Ely was a Portfolio Manager and Senior Vice President of Keystone
Investments. Mr. Fine joined Loomis in 1996. Prior to joining Loomis, Mr. Fine
was a Portfolio Manager and Vice President of Keystone Investments. Prior to
joining Loomis in 1996, Mr. Smith was a Portfolio Manager and Vice President of
Keystone Investments.
LSV ASSET MANAGEMENT, L.P.: Josef Lakonishok, Andrei Shleifer, and Robert Vishny
of LSV Asset Management, L.P. ("LSV"), serve as portfolio managers of a portion
of the assets of the Tax-Managed Small Cap Fund. They are officers and partners
of LSV. An affiliate of SIMC owns an interest in LSV. SIMC pays LSV a fee, which
is calculated and paid monthly, based on an annual rate of 0.20% of the average
monthly market value of the assets of the Fund managed by LSV.
MCKINLEY CAPITAL MANAGEMENT, INC.: Robert B. Gillam, Frederic H. Parke and
Sheldon Lien of McKinley Capital Management, Inc. ("McKinley Capital") serve as
portfolio managers to a portion of the assets of the Tax-Managed Small Cap
<PAGE>
PROSPECTUS 5
MORE INFORMATION ABOUT FUND INVESTMENTS
Fund. Mr. Gillam has been the Chief Investment Officer at McKinley Capital since
the firm's inception in 1990, and has over 20 years of investment experience.
Mr. Parke joined McKinley Capital in 1997. Prior to joining McKinley Capital,
Mr. Parke was a Trader and Portfolio Manager at TransGlobal Investments from
1995 to 1997. Mr. Parke has 19 years of investment experience. Mr. Lien has been
with McKinley Capital since 1995.
SAWGRASS ASSET MANAGEMENT, LLC: Dean McQuiddy of Sawgrass Asset Management, LLC
("Sawgrass"), serves as portfolio manager of a portion of the assets of the
Tax-Managed Small Cap Fund. Mr. McQuiddy, a founding Principal of Sawgrass, has
12 years of investment experience. Prior to joining Sawgrass, he created the
Barnett Small Cap Growth Product.
PURCHASING, SELLING AND EXCHANGING FUND SHARES
This section tells you how to purchase, sell (sometimes called "redeem") and
exchange shares of the Fund.
The Fund offers Class A Shares only to financial institutions for their own or
their customers' accounts. For information on how to open an account and set up
procedures for placing transactions, call 1-800-DIAL-SEI.
HOW TO PURCHASE FUND SHARES
You may purchase shares on any day that the New York Stock Exchange is open for
business (a Business Day).
Financial institutions and intermediaries may purchase Class A Shares by placing
orders with the Fund's Transfer Agent (or their authorized agent). Institutions
and intermediaries that use certain SEI proprietary systems may place orders
electronically through those systems. Cash investments must be transmitted or
delivered in federal funds to the Fund's wire agent by the close of business on
the day after the order is placed. The Fund may reject any purchase order if it
determines that accepting the order would not be in the best interests of the
Fund or its shareholders.
When you purchase, sell, or exchange Fund shares through certain financial
institutions (rather than directly from the Fund), you may have to transmit your
purchase, sale, and exchange requests to your financial institution at an
earlier time for your transaction to become effective that day. This allows your
financial institution time to process your requests and transmit them to the
Fund.
Certain other intermediaries, including certain broker-dealers and shareholder
organizations, are authorized to accept purchase, redemption, and exchange
requests for Fund shares. These requests are normally executed at the net asset
value per share (NAV) next determined after the intermediary receives the
request. These authorized intermediaries are responsible for transmitting
requests and delivering funds on a timely basis.
If you deal directly with a financial institution or financial intermediary, you
will have to follow the institution's or intermediary's procedures for
transacting with the Fund. For more information about how to purchase or sell
Fund shares through your financial institution, you should contact your
financial institution directly. Investors may be charged a fee for purchase
and/or redemption transactions effectuated through certain of these
broker-dealers or other financial intermediaries.
The price per share (the offering price) will be the NAV next determined after
the Fund receives your purchase order. The Fund's NAV is calculated once each
Business Day at the regularly-scheduled close of normal trading on the New York
Stock Exchange (normally, 4:00 p.m. Eastern time). So, for you to receive the
current Business Day's NAV, generally the Fund (or an authorized agent) must
receive your purchase order before 4:00 p.m. Eastern time.
HOW THE FUND CALCULATES NAV
NAV for one Fund share is the value of that share's portion of the net assets of
the Fund. In calculating NAV, the Fund generally values its portfolio securities
at their market price. If market prices are unavailable or the Fund thinks that
they are unreliable, fair value prices may be determined in good faith using
methods approved by the Board of Trustees. The Fund
<PAGE>
6 PROSPECTUS
MORE INFORMATION ABOUT FUND INVESTMENTS
holds portfolio securities that are listed on foreign exchanges. These
securities may trade on weekends or other days when the Fund does not calculate
NAV. As a result, the market value of the Fund's investments may change on days
when you cannot purchase or sell Fund shares.
MINIMUM PURCHASES
To purchase shares for the first time, you must invest at least $100,000 in the
Fund, with minimum subsequent investments of at least $1,000. The Fund may
accept investments of smaller amounts at their discretion.
HOW TO SELL YOUR FUND SHARES
If you hold Class A Shares, you may sell your shares on any Business Day by
following the procedures established when you opened your account or accounts.
If you have questions, call 1-800-DIAL-SEI. If you own your shares through an
account with a broker or other institution, contact that broker or institution
to sell your shares. Your financial institution or intermediary may charge you a
fee for its services. The sale price of each share will be the next NAV
determined after the Fund (or authorized intermediary) receives your request.
RECEIVING YOUR MONEY
Normally, the Fund will make payment on your sale of shares on the Business Day
following the day on which they receive your request, but it may take up to
seven days. Your proceeds can be wired to your bank account.
REDEMPTIONS IN KIND
The Fund generally pays sale proceeds in cash. However, under unusual conditions
that make the payment of cash unwise (and for the protection of the Fund's
remaining shareholders) the Fund might pay all or part of your redemption
proceeds in liquid securities with a market value equal to the redemption price
(redemption in kind). Although, it is highly unlikely that your shares would
ever be redeemed in kind, you would probably have to pay brokerage costs to sell
the securities distributed to you, as well as taxes on any capital gains from
the sale of your shares as with any redemption.
SUSPENSION OF YOUR RIGHT TO SELL YOUR SHARES
The Fund may suspend your right to sell your shares if the New York Stock
Exchange restricts trading, the SEC declares an emergency or for other reasons.
More information about this is in the SAI.
HOW TO EXCHANGE YOUR SHARES
You may exchange Class A Shares of the Fund for Class A Shares of any other Fund
on any Business Day by contacting the Fund directly by mail or telephone. You
may also exchange shares through your financial institution or intermediary by
telephone. This exchange privilege may be changed or canceled at any time upon
60 days' notice. When you exchange shares, you are really selling your shares
and buying other Fund shares. So, your sale price and purchase price will be
based on the NAV next calculated after the Fund receives your exchange request.
TELEPHONE TRANSACTIONS
Purchasing and selling Fund shares over the telephone is extremely convenient,
but not without risk. Although the Fund has certain safeguards and procedures to
confirm the identity of callers and the authenticity of instructions, the Fund
is not responsible for any losses or costs incurred by following telephone
instructions the Fund reasonably believes to be genuine. If you or your
financial institution transact with the Fund over the telephone, you will
generally bear the risk of any loss.
<PAGE>
PROSPECTUS 7
MORE INFORMATION ABOUT FUND INVESTMENTS
DISTRIBUTION OF FUND SHARES
SEI Investments Distribution Co. (SIDCo.) is the distributor of the shares of
the Fund. SIDCo. receives no compensation for distributing the Fund's Class A
Shares.
For Class A Shares, shareholder servicing fees, as a percentage of average daily
net assets, may be up to 0.25%.
DIVIDENDS AND DISTRIBUTIONS
The Fund distributes its investment income quarterly as a dividend to
shareholders. The Fund makes distributions of capital gains, if any, at least
annually.
You will receive dividends and distributions in cash unless otherwise stated.
TAXES
PLEASE CONSULT YOUR TAX ADVISOR REGARDING YOUR SPECIFIC QUESTIONS ABOUT FEDERAL,
STATE AND LOCAL INCOME TAXES. Below the Fund has summarized some important tax
issues that affect the Fund and its shareholders. This summary is based on
current tax laws, which may change.
The Fund will distribute substantially all of its income and capital gains, if
any. The dividends and distributions you receive may be subject to federal,
state and local taxation, depending upon your tax situation. If so, they are
taxable whether or not you reinvest them. Income distributions are generally
taxable at ordinary income tax rates. Capital gains distributions are generally
taxable at the rates applicable to long-term capital gains. EACH SALE OR
EXCHANGE OF FUND SHARES IS A TAXABLE EVENT.
The Fund uses a tax management technique known as "highest in, first out." Using
this technique, the portfolio holdings that have experienced the smallest gain
or largest loss are sold first in an effort to minimize capital gains and
enhance after-tax returns.
MORE INFORMATION ABOUT TAXES IS IN THE FUND'S SAI.
<PAGE>
SEI
INVESTMENTS
The Art of People. The Science of Results.
More information about the Fund is available without charge through
the following:
STATEMENT OF ADDITIONAL INFORMATION (SAI)
The SAI dated October 15, 2000, contains more detailed information
about the Tax-Managed Small Cap Fund of the SEI Institutional Managed
Trust. The SAI is on file with the SEC and is incorporated by reference
into this prospectus. This means that the SAI, for legal purposes, is a
part of this prospectus.
ANNUAL AND SEMI-ANNUAL REPORTS
These reports list the Fund's holdings and contain information from the
Fund's managers about Fund strategies, and market conditions and
trends and their impact on Fund performance. The reports also
contain detailed financial information about the Fund.
TO OBTAIN AN SAI, ANNUAL OR SEMI-ANNUAL REPORT, OR
MORE INFORMATION:
By Telephone: Call 1-800-DIAL-SEI
By Mail: Write to the Fund at:
One Freedom Valley Drive
Oaks, PA 19456
By Internet: http://www.seic.com
From the SEC: You can also obtain the SAI or the Annual and
Semi-Annual reports, as well as other information about the SEI
Institutional Managed Trust, from the EDGAR Database on the SEC's
website ("http://www.sec.gov"). You may review and copy documents
at the SEC Public Reference Room in Washington, DC (for information
on the operation of the Public Reference Room call 1-202-942-8090).
You may request documents by mail from the SEC, upon payment of a
duplicating fee, by writing to: Securities and Exchange Commission,
Public Reference Section, Washington, DC 20549-0102. You may also
obtain this information, upon payment of a duplicating fee, by e-mailing
the SEC at the following public address: [email protected].
The SEI Institutional Managed Trust's Investment Company Act
registration number is 811-4878.
SEI-F-104-(10/00)
SEI
INVESTMENTS
PROSPECTUS AS OF OCTOBER 15, 2000
EQUITY
------------
Tax-Managed Small
Cap Fund
CLASS A
The Securities and Exchange
Commission has not approved
or disapproved these securities or
passed upon the adequacy of this
prospectus. Any representation to
the contrary is a criminal offense.
<PAGE>
SEI INSTITUTIONAL MANAGED TRUST
Administrator:
SEI Investments Fund Management
Distributor:
SEI Investments Distribution Co.
Adviser:
SEI Investments Management Corporation
Sub-Advisers:
David J. Greene and Company, LLC
Loomis, Sayles and Company, L.P.
LSV Asset Management, L.P.
McKinley Capital Management, Inc.
Sawgrass Asset Management, LLC
This STATEMENT OF ADDITIONAL INFORMATION is not a Prospectus. It is intended
to provide additional information regarding the activities and operations of the
SEI Institutional Managed Trust (the "Trust") and should be read in conjunction
with the Trust's Prospectus dated October 15, 2000. Prospectuses may be obtained
by writing the Trust's distributor, SEI Investments Distribution Co., at Oaks,
Pennsylvania 19456, or by calling 1-800-342-5734.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
The Trust................................................... S-2
Investment Objectives and Policies.......................... S-2
Description of Permitted Investments and Risk Factors....... S-2
Investment Limitations...................................... S-17
Year 2000................................................... S-18
Description of Ratings...................................... S-19
The Administrator and Transfer Agent........................ S-23
The Adviser and Sub-Advisers................................ S-23
Distribution and Shareholder Servicing...................... S-25
Trustees and Officers of the Trust.......................... S-25
Purchase and Redemption of Shares........................... S-29
Taxes....................................................... S-30
Portfolio Transactions...................................... S-32
Description of Shares....................................... S-33
Limitation of Trustees' Liability........................... S-34
Code of Ethics.............................................. S-34
Voting...................................................... S-34
Shareholder Liability....................................... S-34
5% Shareholders............................................. S-35
Master/Feeder Option........................................ S-35
Custodian................................................... S-35
Experts..................................................... S-35
Legal Counsel............................................... S-35
Financial Statements........................................ S-35
October 15, 2000
</TABLE>
SEI-F-048-12
<PAGE>
THE TRUST
SEI Institutional Managed Trust (the "Trust") is an open-end management
investment company that offers shares of diversified portfolios. The Trust was
established as a Massachusetts business trust pursuant to a Declaration of Trust
dated October 20, 1986. The Declaration of Trust permits the Trust to offer
separate series ("portfolios") of units of beneficial interest ("shares") and
separate classes of portfolios.
This Statement of Additional Information relates to the Tax-Managed Small
Cap Fund (the "Fund").
INVESTMENT OBJECTIVES AND POLICIES
The Fund's investment objective is to achieve high long-term after-tax
returns for its shareholders.
Under normal market conditions, the Fund will invest at least 80% of its
total assets in equity securities of small companies (I.E., companies with
market capitalizations of less than $4 billion at the time of purchase). Any
remaining assets may be invested in other equity securities, and investment
grade fixed income securities, including tax-exempt securities and variable and
floating rate securities. Investment grade securities are those rated in one of
the four highest categories at the time of investment, or determined by a
Sub-Adviser to be of equivalent quality. The Fund may acquire shares of other
investment companies, when-issued and delayed-delivery securities and zero
coupon obligations, and may invest in securities that are illiquid. The Fund may
also borrow money and lend its securities to qualified borrowers.
The Fund is designed for long-term taxable investors, including high net
worth individuals. While the Fund seeks to minimize taxes associated with the
Fund's investment income and realized capital gains, the Fund is very likely to
have taxable investment income and will likely realize taxable gains from time
to time.
The Fund seeks to achieve favorable after-tax returns for its shareholders
in part by minimizing the taxes they incur in connection with the Fund's
realization of investment income and capital gains. Taxable investment income
will be minimized by investing primarily in lower yielding securities. If this
strategy is carried out, the Fund can be expected to distribute relatively low
levels of taxable investment income.
When a decision is made to sell a particular appreciated security, the
Portfolio will attempt to select for sale those share lots with holding periods
sufficient to qualify for long-term capital gains treatment and among those, the
share lots with the highest cost basis. The Fund may, when prudent, sell
securities to realize capital losses that can be used to offset realized capital
gains.
The Fund's exposure to losses during stock market declines may be higher
than that of other funds that do not follow a general policy of avoiding sales
of highly-appreciated securities.
DESCRIPTION OF PERMITTED INVESTMENTS AND RISK FACTORS
ALL FUNDS MAY INVEST IN THE FOLLOWING INVESTMENTS UNLESS SPECIFICALLY NOTED
OTHERWISE.
AMERICAN DEPOSITORY RECEIPTS ("ADRs")--The Fund may invest in ADRs traded on
registered exchanges or on NASDAQ. ADRs are securities, typically issued by a
U.S. financial institution (a "depositary"), that evidence ownership interests
in a security or a pool or securities issued by a foreign issuer and deposited
with the depositary. ADRs may be available through "sponsored" or "unsponsored"
facilities. A sponsored facility is established jointly by the issuer of the
security underlying the receipt and a depositary, whereas an unsponsored
facility may be established by a depositary without participation by the issuer
of the underlying security. While the Fund typically invests in sponsored ADRs,
joint arrangements between the issuer and the depositary, some ADRs may be
unsponsored. Unlike sponsored ADRs, the holders of unsponsored ADRs bear all
expenses and the depositary may not be obligated to distribute shareholder
communications or to pass through the voting rights on the deposited securities.
ASSET-BACKED SECURITIES--Asset-backed securities are securities secured by
non-mortgage assets such as company receivables, truck and auto loans, leases
and credit card receivables. Such securities
S-2
<PAGE>
are generally issued as pass-through certificates, which represent undivided
fractional ownership interests in the underlying pools of assets. Such
securities also may be debt instruments, which are also known as collateralized
obligations and are generally issued as the debt of a special purpose entity,
such as a trust, organized solely for the purpose of owning such assets and
issuing such debt. Credit support for asset-backed securities may be based on
the underlying assets and/or provided by a third party through credit
enhancements. Credit enhancement techniques include letters of credit, insurance
bonds, limited guarantees (which are generally provided by the issuer),
senior-subordinated structures and overcollateralization.
Asset-backed securities are not issued or guaranteed by the United States
Government or its agencies or instrumentalities; however, the payment of
principal and interest on such obligations may be guaranteed up to certain
amounts and for a certain period by a letter of credit issued by a financial
institution (such as a bank or insurance company) unaffiliated with the issuers
of such securities. The purchase of asset-backed securities raises risk
considerations peculiar to the financing of the instruments underlying such
securities. For example, there is a risk that another party could acquire an
interest in the obligations superior to that of the holders of the asset-backed
securities. There also is the possibility that recoveries on repossessed
collateral may not, in some cases, be available to support payments on those
securities. Asset-backed securities entail prepayment risk, which may vary
depending on the type of asset, but is generally less than the prepayment risk
associated with mortgage-backed securities. In addition, credit card receivables
are unsecured obligations of the card holders.
The market for asset-backed securities is at a relatively early stage of
development. Accordingly, there may be a limited secondary market for such
securities.
BANKERS' ACCEPTANCES--A bankers' acceptance is a bill of exchange or time
draft drawn on and accepted by a commercial bank. It is used by corporations to
finance the shipment and storage of goods and to furnish dollar exchange.
Maturities are generally six months or less.
CERTIFICATES OF DEPOSIT--A certificate of deposit is a negotiable,
interest-bearing instrument with a specific maturity. Certificates of deposit
are issued by banks and savings and loan institutions in exchange for the
deposit of funds, and normally can be traded in the secondary market prior to
maturity. Certificates of deposit have penalties for early withdrawal.
COMMERCIAL PAPER--Commercial paper is the term used to designate unsecured,
short-term promissory notes issued by corporations and other entities.
Maturities on these issues vary from a day to nine months.
CONSTRUCTION LOANS--In general, construction loans are mortgages on
multifamily homes that are insured by the Federal Housing Administration ("FHA")
under various federal programs of the National Housing Act of 1934 and its
amendments. Several FHA programs have evolved to ensure the construction
financing and permanent mortgage financing on multifamily residences, nursing
homes, elderly residential facilities, and health care units. Project loans
typically trade in two forms: either as FHA- or GNMA-insured pass-through
securities. In this case, a qualified issuer issues the pass-through securities
while holding the underlying mortgage loans as collateral. Regardless of form,
all projects are government-guaranteed by the U.S. Department of Housing and
Urban Development ("HUD") through the FHA insurance fund. The credit backing of
all FHA and GNMA projects derives from the FHA insurance fund, and so projects
issued in either form enjoy the full faith and credit backing of the U.S.
Government.
Most project pools consist of one large mortgage loan rather than numerous
smaller mortgages, as is typically the case with agency single-family mortgage
securities. As such, prepayments on projects are driven by the incentives most
mortgagors have to refinance, and are very project-specific in nature. However,
to qualify for certain government programs, many project securities contain
specific prepayment restrictions and penalties.
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Under multifamily insurance programs, the government insures the
construction financing of projects as well as the permanent mortgage financing
on the completed structures. This is unlike the single-family mortgage market,
in which the government only insures mortgages on completed homes. Investors
purchase new projects by committing to fund construction costs on a monthly
basis until the project is built. Upon project completion, an investors
construction loan commitments are converted into a proportionate share of the
final permanent project mortgage loan. The construction financing portion of a
project trades in the secondary market as an insured Construction Loan
Certificate ("CLC"). When the project is completed, the investor exchanges all
the monthly CLCs for an insured Permanent Loan Certificate ("PLC"). The PLC is
an insured pass-through security backed by the final mortgage on the completed
property. As such, PLCs typically have a thirty-five to forty year maturity,
depending on the type of final project. There are vastly more PLCs than CLCs in
the market, owing to the long economic lives of the project structures. While
neither CLCs or PLCs are as liquid as agency single-family mortgage securities,
both are traded on the secondary market and would generally not be considered
illiquid. The benefit to owning these securities is a relatively high yield
combined with significant prepayment protection, which generally makes these
types of securities more attractive when prepayments are expected to be high in
the mortgage market. CLCs typically offer a higher yield due to the fact that
they are somewhat more administratively burdensome to account for.
CONVERTIBLE SECURITIES--Convertible securities are corporate securities that
are exchangeable for a set number of another security at a prestated price.
Convertible securities have characteristics similar to both fixed income and
equity securities. Because of the conversion feature, the market value of
convertible securities tends to move together with the market value of the
underlying stock. As a result, the Fund's selection of convertible securities is
based, to a great extent, on the potential for capital appreciation that may
exist in the underlying stock. The value of convertible securities is also
affected by prevailing interest rates, the credit quality of the issuer and any
call provisions.
EQUITY SECURITIES-- Equity securities include common stock, preferred stock,
warrants or rights to subscribe to common stock and, in general, any security
that is convertible into or exchangeable for common stock.
Equity securities represent ownership interests in a company or corporation,
and include common stock, preferred stock, and warrants and other rights to
acquire such instruments. Investments in equity securities in general are
subject to market risks that may cause their prices to fluctuate over time. The
value of convertible equity securities is also affected by prevailing interest
rates, the credit quality of the issuer and any call provisions. Fluctuations in
the value of equity securities in which the Fund invests will cause the net
asset value of the Fund to fluctuate.
Investments in small or middle capitalization companies involve greater risk
than is customarily associated with larger, more established companies due to
the greater business risks of small size, limited markets and financial
resources, narrow product lines and the frequent lack of depth of management.
The securities of small or medium-sized companies are often traded
over-the-counter, and may not be traded in volumes typical of securities traded
on a national securities exchange. Consequently, the securities of smaller
companies may have limited market stability and may be subject to more abrupt or
erratic market movements than securities of larger, more established companies
or the market averages in general.
FIXED INCOME SECURITIES--Fixed income securities are debt obligations issued
by corporations, municipalities and other borrowers. The market value of the
Fund's fixed income investments will change in response to interest rate changes
and other factors. During periods of falling interest rates, the values of
outstanding fixed income securities generally rise. Conversely, during periods
of rising interest rates, the values of such securities generally decline.
Securities with longer maturities are subject to greater fluctuations in value
than securities with shorter maturities. Fixed income securities rated in the
fourth highest rating category lack outstanding investment characteristics, and
have speculative characteristics as well. Changes by an NRSRO in the rating of
any fixed income security and in the ability of an issuer to make payments of
interest and principal also affect the value of these investments. Changes in
the value of
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the Fund's securities will not affect cash income derived from these securities
but will affect the Fund's net asset value.
Securities held by the Fund that are guaranteed by the U.S. Government, its
agencies or instrumentalities guarantee only the payment of principal and
interest, and do not guarantee the securities' yield or value or the yield or
value of the Fund's shares.
There is a risk that the current interest rate on floating and variable rate
instruments may not accurately reflect existing market interest rates.
FOREIGN SECURITIES--The Fund may invest in U.S. dollar denominated
obligations or securities of foreign issuers, including Yankee Obligations.
Permissible investments may consist of obligations of foreign branches of U.S.
banks and foreign banks, including European Certificates of Deposit, European
Time Deposits, Canadian Time Deposits, Yankee Certificates of Deposit and
investments in Canadian Commercial Paper, foreign securities and Europaper.
These instruments may subject the Fund to investment risks that differ in some
respects from those related to investments in obligations of U.S. issuers.
Investing in the securities of foreign companies and the utilization of forward
foreign currency contracts involve special risks and considerations not
typically associated with investing in U.S. companies. These risks and
considerations include differences in accounting, auditing and financial
reporting standards, generally higher commission rates on foreign portfolio
transactions, the possibility of expropriation or confiscatory taxation, adverse
changes in investment or exchange control regulations, political instability
that could affect U.S. investment in foreign countries and potential
restrictions of the flow of international capital and currencies. Such
investments may also entail higher custodial fees and sales commissions than
domestic investments. Foreign issuers of securities or obligations are often
subject to accounting treatment and engage in business practices different from
those respecting domestic issuers of similar securities or obligations. Foreign
branches of U.S. banks and foreign banks may be subject to less stringent
reserve requirements than those applicable to domestic branches of U.S. banks.
FORWARD FOREIGN CURRENCY CONTRACTS--A forward contract involves an
obligation to purchase or sell a specific currency amount at a future date,
agreed upon by the parties, at a price set at the time of the contract. The Fund
may enter into a contract to sell, for a fixed amount of U.S. dollars or other
appropriate currency, the amount of foreign currency approximating the value of
some or all of the Fund's securities denominated in such foreign currency.
By entering into forward foreign currency contracts, the Fund will seek to
protect the value of its investment securities against a decline in the value of
a currency. However, these forward foreign currency contracts will not eliminate
fluctuations in the underlying prices of the securities. Rather, they simply
establish a rate of exchange which one can obtain at some future point in time.
Although such contracts tend to minimize the risk of loss due to a decline in
the value of the hedged currency, they also tend to limit any potential gain
which might result should the value of such currency increase. At the maturity
of a forward contract, the Fund may either sell a portfolio security and make
delivery of the foreign currency, or it may retain the security and terminate
its contractual obligation to deliver the foreign currency by purchasing an
"offsetting" contract with the same currency trader, obligating it to purchase,
on the same maturity date, the same amount of the foreign currency. The Fund may
realize a gain or loss from currency transactions. The Fund will place assets in
a segregated account to assure that its obligations under forward foreign
currency contracts are covered.
FUTURES AND OPTIONS ON FUTURES--Futures contracts provide for the future
sale by one party and purchase by another party of a specified amount of a
specific security at a specified future time and at a specified price. An option
on a futures contract gives the purchaser the right, in exchange for a premium,
to assume a position in a futures contract at a specified exercise price during
the term of the option. The Fund may use futures contracts and related options
for BONA FIDE hedging purposes, to offset changes in the value of securities
held or expected to be acquired or be disposed of, to minimize fluctuations in
foreign currencies, or to gain exposure to a particular market or instrument.
The Fund will minimize the risk that it
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will be unable to close out a futures contract by only entering into futures
contracts that are traded on national futures exchanges.
An index futures contract is a bilateral agreement pursuant to which two
parties agree to take or make delivery of an amount of cash equal to a specified
dollar amount times the difference between the bond index value at the close of
trading of the contract and the price at which the futures contract is
originally struck. No physical delivery of the bonds comprising the index is
made; generally contracts are closed out prior to the expiration date of the
contract.
In order to avoid leveraging and related risks, when the Fund invests in
futures contracts, it will cover its position by depositing an amount of cash or
liquid securities equal to the market value of the futures positions held, less
margin deposits, in a segregated account and that amount will be marked to
market on a daily basis.
The Fund may enter into futures contracts and options on futures contracts
traded on an exchange regulated by the Commodities Futures Trading Commission
("CFTC"), so long as, to the extent that such transactions are not for "bona
fide hedging purposes," the aggregate initial margin and premiums on such
positions (excluding the amount by which such options are in the money) do not
exceed 5% of the Fund's net assets.
There are risks associated with these activities, including the following:
(1) the success of a hedging strategy may depend on an ability to predict
movements in the prices of individual securities, fluctuations in markets and
movements in interest rates, (2) there may be an imperfect or no correlation
between the changes in market value of the securities held by the Fund and the
prices of futures and options on futures, (3) there may not be a liquid
secondary market for a futures contract or option, (4) trading restrictions or
limitations may be imposed by an exchange, and (5) government regulations may
restrict trading in futures contracts and options on futures. In addition, some
strategies reduce the Fund's exposure to price fluctuations, while others tend
to increase its market exposure. Futures and options on futures can be volatile
instruments and involve certain risks that could negatively impact the Fund's
return.
ILLIQUID SECURITIES--Illiquid securities are securities that cannot be
disposed of within seven business days at approximately the price at which they
are being carried on the Fund's books. Illiquid securities include demand
instruments with demand notice periods exceeding seven days, securities for
which there is no active secondary market, and repurchase agreements with
maturities over seven days in length.
LOWER RATED SECURITIES--Lower rated securities, commonly referred to as
"junk bonds" or high-yield/high-risk securities, are defined as securities below
the fourth highest rating category by an NRSRO. Such obligations are speculative
and may be in default. There is no bottom limit on the ratings of high-yield
securities that may be purchased or held by the Fund. In addition, the Fund may
invest in unrated securities. Fixed income securities are subject to the risk of
an issuer's ability to meet principal and interest payments on the obligation
(credit risk), and may also be subject to price volatility due to such factors
as interest rate sensitivity, market perception of the creditworthiness of the
issuer and general market liquidity (market risk). Lower rated or unrated (I.E.,
high yield) securities are more likely to react to developments affecting market
and credit risk than are more highly rated securities, which primarily react to
movements in the general level of interest rates. The market values of
fixed-income securities tend to vary inversely with the level of interest rates.
Yields and market values of high yield securities will fluctuate over time,
reflecting not only changing interest rates but the market's perception of
credit quality and the outlook for economic growth. When economic conditions
appear to be deteriorating, medium to lower rated securities may decline in
value due to heightened concern over credit quality, regardless of prevailing
interest rates. Investors should carefully consider the relative risks of
investing in high yield securities and understand that such securities are not
generally meant for short-term investing.
The high yield market is relatively new and its growth has paralleled a long
period of economic expansion and an increase in merger, acquisition and
leveraged buyout activity. Adverse economic
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developments can disrupt the market for high yield securities, and severely
affect the ability of issuers, especially highly leveraged issuers, to service
their debt obligations or to repay their obligations upon maturity which may
lead to a higher incidence of default on such securities. In addition, the
secondary market for high yield securities, which is concentrated in relatively
few market makers, may not be as liquid as the secondary market for more highly
rated securities. As a result, the Fund's advisers could find it more difficult
to sell these securities or may be able to sell the securities only at prices
lower than if such securities were widely traded. Furthermore the Trust may
experience difficulty in valuing certain securities at certain times. 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.
Prices for high yield securities may be affected by legislative and
regulatory developments. These laws could adversely affect the Fund's net asset
value and investment practices, the secondary market value for high yield
securities, the financial condition of issuers of these securities and the value
of outstanding high yield securities.
Lower rated or unrated debt obligations also present risks based on payment
expectations. If an issuer calls the obligations for redemption, the Fund may
have to replace the security with a lower yielding security, resulting in a
decreased return for investors. If the Fund experiences unexpected net
redemptions, it may be forced to sell its higher rated securities, resulting in
a decline in the overall credit quality of the Fund's investment portfolio and
increasing the exposure of the Fund to the risks of high yield securities.
GROWTH OF HIGH-YIELD BOND, HIGH-RISK BOND MARKET. The widespread expansion
of government, consumer and corporate debt within the U.S. economy has made the
corporate sector more vulnerable to economic downturns or increased interest
rates. Further, an economic downturn could severely disrupt the market for lower
rated bonds and adversely affect the value of outstanding bonds and the ability
of the issuers to repay principal and interest.
SENSITIVITY TO INTEREST RATE AND ECONOMIC CHANGES. Lower rated bonds are
very sensitive to adverse economic changes and corporate developments. During an
economic down turn or substantial period of rising interest rates, highly
leveraged issuers may experience financial stress that would adversely affect
their ability to service their principal and interest payment obligations, to
meet projected business goals, and to obtain additional financing. If the issuer
of a bond defaulted on its obligations to pay interest or principal or entered
into bankruptcy proceedings, the Fund may incur losses or expenses in seeking
recovery of amounts owed to it. In addition, periods of economic uncertainty and
change can be expected to result in increased volatility of market prices of
high-yield, high-risk bonds and the Fund's net asset value.
PAYMENT EXPECTATIONS. High-yield, high-risk bonds may contain redemption or
call provisions. If an issuer exercised these provisions in a declining interest
rate market, the Fund would have to replace the security with a lower yielding
security, resulting in a decreased return for investors. Conversely, a high-
yield, high-risk bond's value will decrease in a rising interest rate market, as
will the value of the Fund's assets. If the Fund experiences significant
unexpected net redemptions, this may force it to sell high-yield, high-risk
bonds without regard to their investment merits, thereby decreasing the asset
base upon which expenses can be spread and possibly reducing the Fund's rate of
return.
TAXES. The Fund may purchase debt securities (such as zero-coupon or
pay-in-kind securities) that contain original issue discount. Original issue
discount that accrues in a taxable year is treated as earned by a Fund and
therefore is subject to the distribution requirements of the tax code. Because
the original issue discount earned by the Fund in a taxable year may not be
represented by cash income, the Fund may have to dispose of other securities and
use the proceeds to make distributions to shareholders.
MONEY MARKET SECURITIES--The Fund may hold cash reserves and invest in money
market instruments (including securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities, repurchase agreements,
certificates of deposit and bankers' acceptances issued by banks or savings
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and loan associations having net assets of at least $500 million as of the end
of their most recent fiscal year, high-grade commercial paper and other
short-term debt securities) rated at the time of purchase in the top two
categories by an NRSRO, or, if not rated, determined by the advisers to be of
comparable quality at the time of purchase.
MORTGAGE-BACKED SECURITIES--Mortgage-backed securities represent pools of
mortgage loans assembled for sale to investors by various governmental agencies
such as the Government National Mortgage Association ("GNMA") and
government-related organizations such as Fannie Mae and the Federal Home Loan
Mortgage Corporation ("FHLMC"), as well as by non-governmental issuers such as
commercial banks, savings and loan institutions, mortgage bankers, and private
mortgage insurance companies. Mortgage-backed securities are instruments that
entitle the holder to a share of all interest and principal payments from
mortgages underlying the security. The mortgages backing these securities
include conventional fifteen- and thirty-year fixed-rate mortgages, graduated
payment mortgages, adjustable rate mortgages and balloon mortgages. During
periods of declining interest rates, prepayment of mortgages underlying
mortgage-backed securities can be expected to accelerate. Prepayment of
mortgages which underlie securities purchased at a premium often results in
capital losses, while prepayment of mortgages purchased at a discount often
results in capital gains. Because of these unpredictable prepayment
characteristics, it is often not possible to predict accurately the average life
or realized yield of a particular issue. Although certain mortgage-backed
securities are guaranteed by a third party or otherwise similarly secured, the
market value of the security, which may fluctuate, is not so secured. If the
Fund purchases a mortgage-backed security at a premium, that portion may be lost
if there is a decline in the market value of the security whether resulting from
changes in interest rates or prepayments in the underlying mortgage collateral.
As with other interest-bearing securities, the prices of such securities are
inversely affected by changes in interest rates. However, though the value of a
mortgage-backed security may decline when interest rates rise, the converse is
not necessarily true since in periods of declining interest rates the mortgages
underlying the securities are prone to prepayment. When the mortgage-backed
securities held by the Fund are prepaid, the Fund must reinvest the proceeds in
securities the yield of which reflects prevailing interest rates, which may be
lower than the prepaid security. For this and other reasons, a mortgage-backed
security's stated maturity may be shortened by unscheduled prepayments on the
underlying mortgages and, therefore, it is not possible to predict accurately
the security's return to the Fund. In addition, regular payments received in
respect of mortgage-backed securities include both interest and principal. No
assurance can be given as to the return the Fund will receive when these amounts
are reinvested.
The Fund may also invest in mortgage-backed securities that are
collateralized mortgage obligations structured on pools of mortgage pass-through
certificates or mortgage loans. For purposes of determining the average maturity
of a mortgage-backed security in its investment portfolio, the Fund will utilize
the expected average life of the security, as estimated in good faith by the
Fund's advisers. Unlike most single family residential mortgages, commercial
real estate property loans often contain provisions which substantially reduce
the likelihood that such securities will be prepaid. The provisions generally
impose significant prepayment penalties on loans and, in some cases there may be
prohibitions on principal prepayments for several years following origination.
GOVERNMENT PASS-THROUGH SECURITIES: These are securities that are issued or
guaranteed by a U.S. Government agency representing an interest in a pool of
mortgage loans. The primary issuers or guarantors of these mortgage-backed
securities are GNMA, Fannie Mae and the FHLMC. GNMA, Fannie Mae and FHLMC
guarantee timely distributions of interest to certificate holders. GNMA and
Fannie Mae also guarantee timely distributions of scheduled principal. FHLMC
generally guarantees only the ultimate collection of principal of the underlying
mortgage loan. Fannie Mae and FHLMC obligations are not backed by the full faith
and credit of the U.S. Government as GNMA certificates are, but Fannie Mae and
FHLMC securities are supported by the instrumentalities' right to borrow from
the U.S. Treasury.
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Government and private guarantees do not extend to the securities' value, which
is likely to vary inversely with fluctuations in interest rates.
There are a number of important differences among the agencies and
instrumentalities of the U.S. Government that issue mortgage-backed securities
and among the securities that they issue. Mortgage-backed securities issued by
the GNMA include GNMA Mortgage Pass-Through Certificates (also known as "Ginnie
Maes") that are guaranteed as to the timely payment of principal and interest by
GNMA and are backed by the full faith and credit of the United States. GNMA is a
wholly-owned U.S. Government corporation within HUD. GNMA certificates also are
supported by the authority of GNMA to borrow funds from the U.S. Treasury to
make payments under its guarantee. Mortgage-backed securities issued by Fannie
Mae include Fannie Mae Guaranteed Mortgage Pass-Through Certificates (also known
as "Fannie Maes") that are solely the obligations of Fannie Mae and are not
backed by or entitled to the full faith and credit of the United States. Fannie
Mae is a government-sponsored organization owned entirely by private
stockholders. Fannie Maes are guaranteed as to timely payment of the principal
and interest by Fannie Mae. Mortgage-backed securities issued by the FHLMC
include FHLMC Mortgage Participation Certificates (also known as "Freddie Macs"
or "PC's"). The FHLMC is a corporate instrumentality of the United States,
created pursuant to an Act of Congress, which is owned entirely by Federal Home
Loan Banks. Freddie Macs are not guaranteed by the United States or by any
Federal Home Loan Banks and do not constitute a debt or obligation of the United
States or of any Federal Home Loan Bank. Freddie Macs entitle the holder to
timely payment of interest, which is guaranteed by the FHLMC. The FHLMC
guarantees either ultimate collection or timely payment of all principal
payments on the underlying mortgage loans. When the FHLMC does not guarantee
timely payment of principal, FHLMC may remit the amount due on account of its
guarantee of ultimate payment of principal at any time after default on an
underlying mortgage, but in no event later than one year after it becomes
payable. For FHLMC REMIC Certificates, FHLMC guarantees the timely payment of
interest, and also guarantees the payment of principal as payments are required
to be made on the underlying mortgage participation certificates. Fannie Mae
REMIC Certificates are issued and guaranteed as to timely distribution of
principal and interest by Fannie Mae.
PRIVATE PASS-THROUGH SECURITIES: These are mortgage-backed securities
issued by a non-governmental entity, such as a trust. While they are generally
structured with one or more types of credit enhancement, private pass-through
securities typically lack a guarantee by an entity having the credit status of a
governmental agency or instrumentality.
COMMERCIAL MORTGAGE-BACKED SECURITIES ("CMBS"): CMBS are generally
multi-class or pass-through securities backed by a mortgage loan or a pool of
mortgage loans secured by commercial property, such as industrial and warehouse
properties, office buildings, retail space and shopping malls, multifamily
properties and cooperative apartments. The commercial mortgage loans that
underlie CMBS are generally not amortizing or not fully amortizing. That is, at
their maturity date, repayment of the remaining principal balance or "balloon"
is due and is repaid through the attainment of an additional loan of sale of the
property.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOs"): CMOs are debt obligations of
multiclass pass-through certificates issued by agencies or instrumentalities of
the U.S. Government or by private originators or investors in mortgage loans.
Principal payments on the underlying mortgage assets may cause CMOs to be
retired substantially earlier then their stated maturities or final distribution
dates, resulting in a loss of all or part of any premium paid. Each class of a
CMO is issued with a specific fixed or floating coupon rate and has a stated
maturity or final distribution date.
REMICs: A REMIC is a CMO that qualifies for special tax treatment under the
Internal Revenue Code and invests in certain mortgages principally secured by
interests in real property. Investors may purchase beneficial interests in
REMICs, which are known as "regular" interests, or "residual" interests.
Guaranteed REMIC pass-through certificates ("REMIC Certificates") issued by
Fannie Mae, GNMA or
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FHLMC represent beneficial ownership interests in a REMIC trust consisting
principally of mortgage loans or Fannie Mae, FHLMC or GNMA-guaranteed mortgage
pass-through certificates. For FHLMC REMIC Certificates, FHLMC guarantees the
timely payment of interest, and also guarantees the payment of principal as
payments are required to be made on the underlying mortgage participation
certificates. Fannie Mae REMIC Certificates are issued and guaranteed as to
timely distribution of principal and interest by Fannie Mae. GNMA REMIC
Certificates are backed by the full faith and credit of the U.S. Government.
PARALLEL PAY SECURITIES; PAC BONDS: Parallel pay CMOs and REMICS are
structured to provide payments of principal on each payment date to more than
one class. These simultaneous payments are taken into account in calculating the
stated maturity date or final distribution date of each class, which must be
retired by its stated maturity date or final distribution date, but may be
retired earlier. Planned Amortization Class CMOs ("PAC Bonds") generally require
payments of a specified amount of principal on each payment date. PAC Bonds are
always parallel pay CMOs with the required principal payment on such securities
having the highest priority after interest has been paid to all classes.
STRIPPED MORTGAGE-BACKED SECURITIES ("SMBs"): SMBs are usually structured
with two classes that receive specified proportions of the monthly interest and
principal payments from a pool of mortgage securities. One class may receive all
of the interest payments, while the other class may receive all of the principal
payments. The market for SMBs is not as fully developed as other markets; SMBs,
therefore, may be illiquid.
MORTGAGE DOLLAR ROLLS--Mortgage "dollar rolls" are transactions in which
mortgage-backed securities are sold for delivery in the current month and the
seller simultaneously contracts to repurchase substantially similar securities
on a specified future date. The difference between the sale price and the
purchase price (plus any interest earned on the cash proceeds of the sale) is
netted against the interest income foregone on the securities sold to arrive at
an implied borrowing rate. Alternatively, the sale and purchase transactions can
be executed at the same price, with a Portfolio being paid a fee as
consideration for entering into the commitment to purchase. Mortgage dollar
rolls may be renewed prior to cash settlement and initially may involve only a
firm commitment agreement by a Fund to buy a security. If the broker-dealer to
whom a Fund sells the security becomes insolvent, the Fund's right to repurchase
the security may be restricted. Other risks involved in entering into mortgage
dollar rolls include the risk that the value of the security may change
adversely over the term of the mortgage dollar roll and that the security a Fund
is required to repurchase may be worth less than the security that the Fund
originally held.
To avoid any leveraging concerns, a Fund will place U.S. Government or other
liquid securities in a segregated account in an amount sufficient to cover its
repurchase obligation.
MUNICIPAL SECURITIES--Municipal securities consist of (i) debt obligations
issued by or on behalf of public authorities to obtain funds to be used for
various public facilities, for refunding outstanding obligations, for general
operating expenses, and for lending such funds to other public institutions and
facilities, and (ii) certain private activity and industrial development bonds
issued by or on behalf of public authorities to obtain funds to provide for the
construction, equipment, repair or improvement of privately operated facilities.
The two principal classifications of Municipal Securities are "general
obligation" and "revenue" issues. General obligation issues are issues involving
the credit of an issuer possessing taxing power and are payable from the
issuer's general unrestricted revenues, although the characteristics and method
of enforcement of general obligation issues may vary according to the law
applicable to the particular issuer. Revenue issues are payable only from the
revenues derived from a particular facility or class of facilities or other
specific revenue source. The Fund may also invest in "moral obligation" issues,
which are normally issued by special purpose authorities. Moral obligation
issues are not backed by the full faith and credit of the state and are
generally backed by the agreement of the issuing authority to request
appropriations from the state legislative body. Municipal Securities include
debt obligations issued by governmental entities to obtain funds for various
public purposes, such as the construction of a wide range
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of public facilities, the refunding of outstanding obligations, the payment of
general operating expenses, and the extension of loans to other public
institutions and facilities. Certain private activity bonds that are issued by
or on behalf of public authorities to finance various privately-owned or
operated facilities are included within the term "Municipal Securities." Private
activity bonds and industrial development bonds are generally revenue bonds, the
credit and quality of which are directly related to the credit of the private
user of the facilities.
Municipal Securities may also include general obligation notes, tax
anticipation notes, bond anticipation notes, revenue anticipation notes, project
notes, certificates of indebtedness, demand notes, tax-exempt commercial paper,
construction loan notes and other forms of short-term, tax-exempt loans. Such
instruments are issued with a short-term maturity in anticipation of the receipt
of tax funds, the proceeds of bond placements or other revenues. Project notes
are issued by a state or local housing agency and are sold by HUD. While the
issuing agency has the primary obligation with respect to its project notes,
they are also secured by the full faith and credit of the United States through
agreements with the issuing authority which provide that, if required, the
federal government will lend the issuer an amount equal to the principal of and
interest on the project notes.
The quality of Municipal Securities, both within a particular classification
and between classifications, will vary, and the yields on Municipal Securities
depend upon a variety of factors, including general money market conditions, the
financial condition of the issuer (or other entity whose financial resources are
supporting the securities), general conditions of the municipal bond market, the
size of a particular offering, the maturity of the obligation and the rating(s)
of the issue. In this regard, it should be emphasized that the ratings of any
NRSRO are general and are not absolute standards of quality. Municipal
Securities with the same maturity, interest rate and rating(s) may have
different yields, while Municipal Securities of the same maturity and interest
rate with different rating(s) may have the same yield.
An issuer's obligations under its Municipal Securities are subject to the
provisions of bankruptcy, insolvency, and other laws affecting the rights and
remedies of creditors, such as the Federal Bankruptcy Code, and laws, if any,
which may be enacted by Congress or state legislatures extending the time for
payment of principal or interest, or both, or imposing other constraints upon
the enforcement of such obligations or upon the ability of municipalities to
levy taxes. The power or ability of an issuer to meet its obligations for the
payment of interest on and principal of its Municipal Securities may be
materially adversely affected by litigation or other conditions.
MUNICIPAL LEASES--The Fund may invest in instruments, or participations in
instruments, issued in connection with lease obligations or installment purchase
contract obligations of municipalities ("municipal lease obligations"). Although
municipal lease obligations do not constitute general obligations of the issuing
municipality, a lease obligation is ordinarily backed by the municipality's
covenant to budget for, appropriate funds for, and make the payments due under
the lease obligation. However, certain lease obligations contain
"non-appropriation" clauses, which provide that the municipality has no
obligation to make lease or installment purchase payments in future years unless
money is appropriated for such purpose in the relevant years. Municipal lease
obligations are a relatively new form of financing, and the market for such
obligations is still developing. Municipal leases will be treated as liquid only
if they satisfy criteria set forth in guidelines established by the Board of
Trustees, and there can be no assurance that a market will exist or continue to
exist for any municipal lease obligation.
OPTIONS--The Fund may purchase and write put and call options on indices and
enter into related closing transactions. A put option on a security gives the
purchaser of the option the right to sell, and the writer of the option the
obligation to buy, the underlying security at any time during the option period.
A call option on a security gives the purchaser of the option the right to buy,
and the writer of the option the obligation to sell, the underlying security at
any time during the option period. The premium paid to the writer is the
consideration for undertaking the obligations under the option contract.
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The Fund may purchase and write put and call options on foreign currencies
(traded on U.S. and foreign exchanges or over-the-counter markets) to manage its
exposure to exchange rates. Call options on foreign currency written by the Fund
will be "covered," which means that the Fund will own an equal amount of the
underlying foreign currency.
Put and call options on indices are similar to options on securities except
that options on an index give the holder the right to receive, upon exercise of
the option, an amount of cash if the closing level of the underlying index is
greater than (or less than, in the case of puts) the exercise price of the
option. This amount of cash is equal to the difference between the closing price
of the index and the exercise price of the option, expressed in dollars
multiplied by a specified number. Thus, unlike options on individual securities,
all settlements are in cash, and gain or loss depends on price movements in the
particular market represented by the index generally, rather than the price
movements in individual securities.
All options written on indices or securities must be covered. When the Fund
writes an option or security on an index or a foreign currency, it will
establish a segregated account containing cash or liquid securities in an amount
at least equal to the market value of the option and will maintain the account
while the option is open or will otherwise cover the transaction.
The Fund may trade put and call options on securities and securities
indices, as the advisers determine is appropriate in seeking the Fund's
investment objective, and except as restricted by the Fund's investment
limitations as set forth below. See "Investment Limitations."
The initial purchase (sale) of an option contract is an "opening
transaction." In order to close out an option position, the Fund may enter into
a "closing transaction," which is simply the sale (purchase) of an option
contract on the same security with the same exercise price and expiration date
as the option contract originally opened. If the Fund is unable to effect a
closing purchase transaction with respect to an option it has written, it will
not be able to sell the underlying security until the option expires or the Fund
delivers the security upon exercise.
The Fund may purchase put and call options on securities to protect against
a decline in the market value of the securities in its portfolio or to
anticipate an increase in the market value of securities that the Fund may seek
to purchase in the future. The Fund purchasing put and call options pays a
premium therefor. If price movements in the underlying securities are such that
exercise of the options would not be profitable for the Fund loss of the premium
paid may be offset by an increase in the value of the Fund's securities or by a
decrease in the cost of acquisition of securities by the Fund.
The Fund may write covered call options on securities as a means of
increasing the yield on its fund and as a means of providing limited protection
against decreases in its market value. When the Fund writes an option, if the
underlying securities do not increase or decrease to a price level that would
make the exercise of the option profitable to the holder thereof, the option
generally will expire without being exercised and the Fund will realize as
profit the premium received for such option. When a call option of which the
Fund is the writer is exercised, the Fund will be required to sell the
underlying securities to the option holder at the strike price, and will not
participate in any increase in the price of such securities above the strike
price. When a put option of which the Fund is the writer is exercised, the Fund
will be required to purchase the underlying securities at a price in excess of
the market value of such securities.
The Fund may purchase and write options on an exchange or over-the-counter.
Over-the-counter options ("OTC options") differ from exchange-traded options in
several respects. They are transacted directly with dealers and not with a
clearing corporation, and therefore entail the risk of non-performance by the
dealer. OTC options are available for a greater variety of securities and for a
wider range of expiration dates and exercise prices than are available for
exchange-traded options. Because OTC options are not traded on an exchange,
pricing is done normally by reference to information from a market maker. It is
the position of the Securities and Exchange Commission (the "SEC") that OTC
options are generally illiquid.
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The market value of an option generally reflects the market price of an
underlying security. Other principal factors affecting market value include
supply and demand, interest rates, the pricing volatility of the underlying
security and the time remaining until the expiration date.
RISK FACTORS. Risks associated with options transactions include: (1) the
success of a hedging strategy may depend on an ability to predict movements in
the prices of individual securities, fluctuations in markets and movements in
interest rates; (2) there may be an imperfect correlation between the movement
in prices of options and the securities underlying them; (3) there may not be a
liquid secondary market for options; and (4) while the Fund will receive a
premium when it writes covered call options, it may not participate fully in a
rise in the market value of the underlying security.
PAY-IN-KIND BONDS--Investments of the Fund in fixed-income securities may
include pay-in-kind bonds. These are securities which, at the issuer's option,
pay interest in either cash or additional securities for a specified period.
Pay-in-kind bonds, like zero coupon bonds, are designed to give an issuer
flexibility in managing cash flow. Pay-in-kind bonds are expected to reflect the
market value of the underlying debt plus an amount representing accrued interest
since the last payment. Pay-in-kind bonds are usually less volatile than zero
coupon bonds, but more volatile than cash pay securities.
RECEIPTS--Receipts are interests in separately traded interest and principal
component parts of U.S. Government obligations that are issued by banks or
brokerage firms and are created by depositing U.S. Government obligations into a
special account at a custodian bank. The custodian holds the interest and
principal payments for the benefit of the registered owners of the certificates
or receipts. The custodian arranges for the issuance of the certificates or
receipts evidencing ownership and maintains the register. Receipts include
"Treasury Receipts" ("TRs"), "Treasury Investment Growth Receipts" ("TIGRs"),
"Liquid Yield Option Notes" ("LYONs") and "Certificates of Accrual on Treasury
Securities" ("CATS"). LYONs, TIGRs and CATS are interests in private proprietary
accounts while TRs and Separately Traded Registered Interest and Principal
Securities ("STRIPS") (See "U.S. Treasury Obligations") are interests in
accounts sponsored by the U.S. Treasury. Receipts are sold as zero coupon
securities, which means that they are sold at a substantial discount and
redeemed at face value at their maturity date without interim cash payments of
interest or principal. This discount is accreted over the life of the security,
and such accretion will constitute the income earned on the security for both
accounting and tax purposes. Because of these features, such securities may be
subject to greater interest rate volatility than interest paying securities.
REITs--REITs are trusts that invest primarily in commercial real estate or
real estate-related loans. A REIT is not taxed on income distributed to its
shareholders or unitholders if it complies with regulatory requirements relating
to its organization, ownership, assets and income, and with a regulatory
requirement that it distribute to its shareholders or unitholders at least 95%
of its taxable income for each taxable year. Generally, REITs can be classified
as Equity REITs, Mortgage REITs and Hybrid REITs. Equity REITs invest the
majority of their assets directly in real property and derive their income
primarily from rents and capital gains from appreciation realized through
property sales. Mortgage REITs invest the majority of their assets in real
estate mortgages and derive their income primarily from interest payments.
Hybrid REITs combine the characteristics of both Equity and Mortgage REITs. By
investing in REITs indirectly through a Fund, shareholders will bear not only
the proportionate share of the expenses of the Fund, but also, indirectly,
similar expenses of underlying REITs.
The Fund may be subject to certain risks associated with the direct
investments of the REITs. REITs may be affected by changes in their underlying
properties and by defaults by borrowers or tenants. Mortgage REITs may be
affected by the quality of the credit extended. Furthermore, REITs are dependent
on specialized management skills. Some REITs may have limited diversification
and may be subject to risks inherent in financing a limited number of
properties. REITs depend generally on their ability to generate cash flow to
make distributions to shareholders or unitholders, and may be subject to
defaults by borrowers and to self-liquidations. In addition, a REIT may be
affected by its failure to qualify for tax-free pass-
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through of income under the Internal Revenue Code of 1986, as amended ("Code")
or its failure to maintain exemption from registration under the Investment
Company Act of 1940, as amended ("1940 Act").
REPURCHASE AGREEMENTS--Repurchase agreements are agreements under which
securities are acquired from a securities dealer or bank subject to resale on an
agreed upon date and at an agreed upon price which includes principal and
interest. The Fund involved bears a risk of loss in the event that the other
party to a repurchase agreement defaults on its obligations and the Fund is
delayed or prevented from exercising its rights to dispose of the collateral
securities. An adviser enters into repurchase agreements only with financial
institutions that it deems to present minimal risk of bankruptcy during the term
of the agreement, based on guidelines that are periodically reviewed by the
Board of Trustees. These guidelines currently permit the Fund to enter into
repurchase agreements only with approved banks and primary securities dealers,
as recognized by the Federal Reserve Bank of New York, which have minimum net
capital of $100 million, or with a member bank of the Federal Reserve System.
Repurchase agreements are considered to be loans collateralized by the
underlying security. Repurchase agreements entered into by the Fund will provide
that the underlying security at all times shall have a value at least equal to
102% of the price stated in the agreement. This underlying security will be
marked to market daily. The advisers will monitor compliance with this
requirement. Under all repurchase agreements entered into by the Fund, the
Custodian or its agent must take possession of the underlying collateral.
However, if the seller defaults, the Fund could realize a loss on the sale of
the underlying security to the extent the proceeds of the sale are less than the
resale price. In addition, even though the Bankruptcy Code provides protection
for most repurchase agreements, if the seller should be involved in bankruptcy
or insolvency proceedings, a Fund may incur delay and costs in selling the
security and may suffer a loss of principal and interest if the Fund is treated
as an unsecured creditor. Repurchase agreements are considered loans under the
1940 Act.
RESTRICTED SECURITIES--Restricted securities are securities that may not be
sold freely to the public absent registration under the Securities Act of 1933,
as amended (the "1933 Act"), or an exemption from registration. Section
4(2) commercial paper is issued in reliance on an exemption from registration
under Section 4(2) of the 1933 Act, and is generally sold to institutional
investors who purchase for investment. Any resale of such commercial paper must
be in an exempt transaction, usually to an institutional investor through the
issuer or investment dealers who make a market on such commercial paper.
Additionally, a Fund may purchase restricted securities in excess of the Fund's
limitation on investments in illiquid securities if the Adviser or Sub-Adviser
determines that such restricted securities are liquid. Rule 144A securities are
securities re-sold in reliance on an exemption from registration provided by
Rule 144A under the 1933 Act.
SECURITIES LENDING--Loans are made only to borrowers deemed by the advisers
to be in good standing and when, in the judgment of the advisers, the
consideration that can be earned currently from such loaned securities justifies
the attendant risk. Any loan may be terminated by either party upon reasonable
notice to the other party. The Fund may use the Distributor as a broker in these
transactions.
TIME DEPOSITS--Time deposits are non-negotiable receipts issued by a bank in
exchange for the deposit of funds. Like a certificate of deposit, it earns a
specified rate of interest over a definite period of time; however, it cannot be
traded in the secondary market. Time deposits with a withdrawal penalty are
considered to be illiquid securities.
U.S. GOVERNMENT AGENCY OBLIGATIONS--Obligations issued or guaranteed by
agencies of the U.S. Government, including, among others, the Federal Farm
Credit Bank, the FHA and the Small Business Administration, and obligations
issued or guaranteed by instrumentalities of the U.S. Government, including,
among others, the FHLMC, the Federal Land Banks and the U.S. Postal Service.
Some of these securities are supported by the full faith and credit of the U.S.
Treasury, and others are supported by the right of the issuer to borrow from the
Treasury, while still others are supported only by the credit of the
instrumentality. Guarantees of principal by agencies or instrumentalities of the
U.S. Government may be a guarantee of payment at the maturity of the obligation
so that in the event of a default prior to maturity
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there might not be a market and thus no means of realizing on the obligation
prior to maturity. Guarantees as to the timely payment of principal and interest
do not extend to the value or yield of these securities nor to the value of the
Funds' shares.
U.S. TREASURY OBLIGATIONS--U.S. Treasury obligations consist of bills, notes
and bonds issued by the U.S. Treasury, as well as separately traded interest and
principal component parts of such obligations, known as STRIPS that are
transferable through the Federal book-entry system.
U.S. TREASURY RECEIPTS--U.S. Treasury receipts are interests in separately
traded interest and principal component parts of U.S. Treasury obligations that
are issued by banks or brokerage firms and are created by depositing U.S.
Treasury notes and obligations into a special account at a custodian bank. The
custodian holds the interest and principal payments for the benefit of the
registered owners of the certificates of receipts. The custodian arranges for
the issuance of the certificates or receipts evidencing ownership and maintains
the register.
VARIABLE OR FLOATING RATE INSTRUMENTS--Certain obligations may carry
variable or floating rates of interest, and may involve a conditional or
unconditional demand feature. Such instruments bear interest at rates which are
not fixed, but which vary with changes in specified market rates or indices. The
interest rates on these securities may be reset daily, weekly, quarterly or some
other reset period, and may have a floor or ceiling on interest rate changes.
These instruments may involve a demand feature and may include variable amount
master demand notes available through the Custodian. Variable or floating rate
instruments bear interest at a rate which varies with changes in market rates.
The holder of an instrument with a demand feature may tender the instrument back
to the issuer at par prior to maturity. A variable amount master demand note is
issued pursuant to a written agreement between the issuer and the holder, its
amount may be increased by the holder or decreased by the holder or issuer, it
is payable on demand, and the rate of interest varies based upon an agreed
formula. The quality of the underlying credit must, in the opinion of the Fund's
advisers, be equivalent to the long-term bond or commercial paper ratings
applicable to permitted investments for the Fund. The Fund's advisers will
monitor on an ongoing basis the earning power, cash flow, and liquidity ratios
of the issuers of such instruments and will similarly monitor the ability of an
issuer of a demand instrument to pay principal and interest on demand. There is
a risk that the current interest rate on such obligations may not accurately
reflect existing market interest rates. A demand instrument with a demand notice
exceeding seven days may be considered illiquid if there is no secondary market
for such security.
In case of obligations which include a put feature at the option of the debt
holder, the date of the put may be used as an effective maturity date for the
purpose of determining weighted average portfolio maturity.
WARRANTS--Warrants are instruments giving holders the right, but not the
obligation, to buy equity or fixed income securities of a company at a given
price during a specified period.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES--When-Issued securities are
securities that involve the purchase of debt obligations on a when-issued basis,
in which case delivery and payment normally take place within 45 days after the
date of commitment to purchase. The payment obligation and the interest rate
that will be received on the securities are each fixed at the time the purchaser
enters into the commitment. Purchasing when-issued obligations results in
leveraging, and can involve a risk that the yields available in the market when
the delivery takes place may actually be higher than those obtained in the
transaction itself. In that case there could be an unrealized loss at the time
of delivery. The Fund will establish a segregated account with the Custodian and
maintain liquid assets in an amount at least equal in value to the Fund's
commitments to purchase when-issued securities. If the value of these assets
declines, the Fund involved will place additional liquid assets in the account
on a daily basis so that the value of the assets in the account is equal to the
amount of such commitments.
One form of when-issued or delayed-delivery security that the Fund may
purchase is a TBA mortgage-backed security. A TBA mortgage-backed security
transaction arises when a mortgage-backed security,
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such as a GNMA pass-through security, is purchased or sold with specific pools
that will constitute that GNMA pass-through security to be announced on a future
settlement date.
YANKEE OBLIGATIONS--Yankee obligations ("Yankees") are U.S.
dollar-denominated instruments of foreign issuers who either register with the
SEC or issue securities under Rule 144A of the 1933 Act. These consist of debt
securities (including preferred or preference stock of non-governmental
issuers), certificates of deposit, fixed time deposits and bankers' acceptances
issued by foreign banks, and debt obligations of foreign governments or their
subdivisions, agencies and instrumentalities, international agencies and
supranational entities. Some securities issued by foreign governments or their
subdivisions, agencies and instrumentalities may not be backed by the full faith
and credit of the foreign government. Yankee obligations as obligations of
foreign issuers, are subject to the same types of risks discussed in "Foreign
Securities" above.]
The yankee obligations selected for the Fund will adhere to the same quality
standards as those utilized for the selection of domestic debt obligations.
ZERO COUPON, PAY-IN-KIND AND DEFERRED PAYMENT SECURITIES--Zero coupon
securities are securities that are sold at a discount to par value and
securities 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. While interest payments are not made on such securities, holders of
such securities are deemed to have received "phantom income" annually. Because
the Fund will distribute its "phantom 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. In the event of adverse market
conditions, zero coupon, pay-in-kind and deferred payment securities may be
subject to greater fluctuations in value and may be less liquid than comparably
rated securities paying cash interest at regular interest payment periods.
STRIPS and Receipts (TRs, TIGRs, LYONs and CATS) are sold as zero coupon
securities, that is, fixed income securities that have been stripped of their
unmatured interest coupons. Zero coupon securities are sold at a (usually
substantial) discount and redeemed at face value at their maturity date without
interim cash payments of interest or principal. The amount of this discount is
accreted over the life of the security, and the accretion constitutes the income
earned on the security for both accounting and tax purposes. Because of these
features, the market prices of zero coupon securities are generally more
volatile than the market prices of securities that have similar maturity but
that pay interest periodically. Zero coupon securities are likely to respond to
a greater degree to interest rate changes than are non-zero coupon securities
with similar maturity and credit qualities. The Fund may have to dispose of its
portfolio securities under disadvantageous circumstances to generate cash, or
may have to leverage itself by borrowing cash to satisfy income distribution
requirements. The Fund accrues income with respect to the securities prior to
the receipt of cash payments. Pay-in-kind securities are securities that have
interest payable by delivery of additional 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.
CORPORATE ZERO COUPON SECURITIES--Corporate zero coupon securities are:
(i) notes or debentures which do not pay current interest and are issued at
substantial discounts from par value, or (ii) notes or debentures that pay no
current interest until a stated date one or more years into the future, after
which date the issuer is obligated to pay interest until maturity, usually at a
higher rate than if interest were payable from the date of issuance, and may
also make interest payments in kind (E.G., with identical zero coupon
securities). Such corporate zero coupon securities, in addition to the risks
identified above, are subject to the risk of the issuer's failure to pay
interest and repay principal in accordance with the terms of the obligation.
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INVESTMENT LIMITATIONS
FUNDAMENTAL POLICIES
The Fund may not:
1. With respect to 75% of its assets, (i) purchase the securities of any issuer
(except securities issued or guaranteed by the United States Government, its
agencies or instrumentalities) if, as a result, more than 5% of its total
assets would be invested in the securities of such issuer; or (ii) acquire
more than 10% of the outstanding voting securities of any one issuer.
2. Purchase any securities which would cause more than 25% of the total assets
of the Fund to be invested in the securities of one or more issuers
conducting their principal business activities in the same industry,
provided that this limitation does not apply to investments in obligations
issued or guaranteed by the United States Government, its agencies or
instrumentalities.
3. Borrow money in an amount exceeding 33 1/3% of the value of its total
assets, provided that, for purposes of this limitation, investment
strategies which either obligate the Fund to purchase securities or require
the Fund to segregate assets are not considered to be borrowings. To the
extent that its borrowings exceed 5% of its assets, (i) all borrowings will
be repaid before making additional investments and any interest paid on such
borrowings will reduce income; and (ii) asset coverage of at least 300% is
required.
4. Make loans if, as a result, more than 33 1/3% of its total assets would be
loaned to other parties, except that each Fund may (i) purchase or hold debt
instruments in accordance with its investment objective and policies;
(ii) enter into repurchase agreements; and (iii) lend its securities.
5. Purchase or sell real estate, physical commodities, or commodities
contracts, except that each Fund may purchase (i) marketable securities
issued by companies which own or invest in real estate (including REITs),
commodities, or commodities contracts; and (ii) commodities contracts
relating to financial instruments, such as financial futures contracts and
options on such contracts.
6. Issue senior securities (as defined in the 1940 Act) except as permitted by
rule, regulation or order of the SEC.
7. Act as an underwriter of securities of other issuers except as it may be
deemed an underwriter in selling a portfolio security.
The foregoing percentages will apply at the time of the purchase of a
security and shall not be considered violated unless an excess or deficiency
occurs immediately after or as a result of a purchase of such security. These
investment limitations and the investment limitations in the Prospectus are
fundamental policies of the Trust and may not be changed without shareholder
approval.
NON-FUNDAMENTAL POLICIES
The Fund may not:
1. Pledge, mortgage or hypothecate assets except to secure borrowings permitted
by the Fund's fundamental limitation on borrowing.
2. Invest in companies for the purpose of exercising control.
3. Purchase securities on margin or effect short sales, except that the Fund
may (i) obtain short-term credits as necessary for the clearance of security
transactions; (ii) provide initial and variation margin payments in
connection with transactions involving futures contracts and options on such
contracts; and (iii) make short sales "against the box" or in compliance
with the SEC's position regarding the asset segregation requirements imposed
by Section 18 of the 1940 Act.
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4. Invest its assets in securities of any investment company, except as
permitted by the 1940 Act or an order of exemption therefrom.
5. Purchase or hold illiquid securities, I.E., securities that cannot be
disposed of for their approximate carrying value in seven days or less
(which term includes repurchase agreements and time deposits maturing in
more than seven days) if, in the aggregate, more than 15% of its net assets
would be invested in illiquid securities.
Under rules and regulations established by the SEC, the Fund is typically
prohibited from acquiring the securities of other investment companies if, as a
result of such acquisition, the Fund owns more than 3% of the total voting stock
of the company; securities issued by any one investment company represent more
than 5% of the total Fund's assets; or securities (other than treasury stock)
issued by all investment companies represent more than 10% of the total assets
of the Fund. However, certain Funds may rely upon SEC exemptive orders issued to
the Trust which permit the Funds to invest in other investment companies beyond
these percentage limitations. The Fund's purchase of such investment company
securities results in the bearing of expenses such that shareholders would
indirectly bear a proportionate share of the operating expenses of such
investment companies, including advisory fees.
Each of the foregoing percentage limitations (except with respect to the
limitation on investing in illiquid securities) apply at the time of purchase.
These limitations are non-fundamental and may be changed by the Trust's Board of
Trustees without a vote of shareholders.
YEAR 2000 TRANSITION
The Fund and its service providers do not appear to have been adversely
affected by computer problems related to the transition to the year 2000.
However, there remains a risk that such problems could arise or be discovered in
the future. Year 2000 related problems also may negatively affect issuers whose
securities the Fund purchases, which could have an impact on the value of your
investment.
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DESCRIPTION OF RATINGS
DESCRIPTION OF CORPORATE BOND RATINGS
The following descriptions of corporate bond ratings have been published by
Moody's, S&P, Duff and Phelps, Inc. ("Duff"), Fitch Investor's Services, Inc.
("Fitch"), IBCA Limited ("IBCA") and Thomson BankWatch ("Thomson"),
respectively.
DESCRIPTION OF MOODY'S LONG-TERM RATINGS
Aaa Bonds 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
edged". 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 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 risk appear somewhat larger than
the Aaa securities.
A Bonds 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 some time in the future.
Baa Bonds 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.
DESCRIPTION OF S&P'S LONG-TERM RATINGS
INVESTMENT GRADE
AAA Debt rated "AAA" has the highest rating assigned by S&P. 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 highest rated debt 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 adverse effects of changes in
circumstances and economic conditions than debt in higher-rated categories.
BBB Debt rated "BBB" is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal
for debt in this category than in higher rated categories.
DESCRIPTION OF DUFF'S LONG-TERM RATINGS
AAA Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
S-19
<PAGE>
AA+ High credit quality. Protection factors are strong.
AA- Risk is modest but may vary slightly from time to time because of economic
conditions.
A+ Protection factors are average but adequate. However,
A- risk factors are more variable and greater in periods of economic stress.
BBB+ Below average protection factors but still considered
BBB- sufficient for prudent investment. Considerable variability in risk during
economic cycles.
DESCRIPTION OF FITCH'S LONG-TERM RATINGS
INVESTMENT GRADE BOND
AAA Bonds rated AAA are judged to be strictly high grade, broadly marketable,
suitable for investment by trustees and fiduciary institutions liable to
slight market fluctuation other than through changes in the money rate. The
prime feature of an AAA bond is a showing of earnings several times or many
times greater than interest requirements, with such stability of applicable
earnings that safety is beyond reasonable question whatever changes occur
in conditions.
AA Bonds rated AA are judged to be of safety virtually beyond question and are
readily salable, whose merits are not unlike those of the AAA class, but
whose margin of safety is less strikingly broad. The issue may be the
obligation of a small company, strongly secured but influenced as to rating
by the lesser financial power of the enterprise and more local type market.
A Bonds rated A are 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 rated BBB are considered to be investment grade and of satisfactory
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.
DESCRIPTION OF IBCA'S LONG-TERM RATINGS
AAA Obligations rated AAA have 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 significantly.
AA Obligations for which there is a very low expectation of investment risk
are rated AA. 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 Bonds rated A are obligations for which there is a low expectation of
investment risk. Capacity for timely repayment of principal and interest is
strong, although adverse changes in business, economic or financial
conditions may lead to increased investment risk.
BBB Bonds rated BBB are 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.
S-20
<PAGE>
DESCRIPTION OF THOMSON'S LONG-TERM DEBT RATINGS
INVESTMENT GRADE
AAA Bonds rated AAA indicate that the ability to repay principal and interest
on a timely basis is very high.
AA Bonds rated AA indicate a superior ability to repay principal and interest
on a timely basis, with limited incremental risk compared to issues rated
in the highest category.
A Bonds rated A indicate the ability to repay principal and interest is
strong. Issues rated A could be more vulnerable to adverse developments
(both internal and external) than obligations with higher ratings.
BBB Bonds rated BBB indicate an acceptable capacity to repay principal and
interest. Issues rated BBB are, however, more vulnerable to adverse
developments (both internal and external) than obligations with higher
ratings.
DESCRIPTION OF COMMERCIAL PAPER RATINGS
The following descriptions of commercial paper ratings have been published
by Moody's, Standard and Poor's, Duff and Phelps, Fitch, IBCA and Thomson
BankWatch, respectively.
DESCRIPTION OF MOODY'S SHORT-TERM RATINGS
PRIME-1 Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1
repayment ability will often be evidenced by many of the following
characteristics:
- Leading market positions in well-established industries.
- High rates of return on funds employed.
- Conservative capitalization structure with moderate reliance on debt and
ample asset protection.
- Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
- Well-established access to a range of financial markets and assured
sources of alternate liquidity.
PRIME-2 Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This will
normally be evidenced by many of the characteristics cited above but to a
lesser degree. Earnings trends and coverage ratios, while sound, may be more
subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample alternate
liquidity is maintained.
S&P'S SHORT-TERM RATINGS
<TABLE>
<S> <C>
A-1 This highest category indicates that the degree of safety
regarding timely payment is strong. Debt determined to
possess extremely strong safety characteristics is denoted
with a plus sign (+) designation.
A-2 Capacity for timely payment on issues with this designation
is satisfactory. However, the relative degree of safety is
not as high as for issues designated "A-1".
</TABLE>
S-21
<PAGE>
<TABLE>
<S> <C>
DESCRIPTION OF DUFF'S SHORT-TERM RATINGS
Duff 1+ Highest certainty of timely payment. Short-term liquidity,
including internal operating factors and/or access to
alternative sources of funds, is outstanding, and safety is
just below risk-free U.S. Treasury short-term obligations.
Duff 1 Very high certainty of timely payment. Liquidity factors are
excellent and supported by good fundamental protection
factors. Risk factors are minor.
Duff 1- High certainty of timely payment. Liquidity factors are
strong and supported by good fundamental protection factors.
Risk factors are very small.
GOOD GRADE
Duff 2 Good certainty of timely payment. Liquidity factors and
company fundamentals are sound. Although ongoing funding
needs may enlarge total financing requirements, access to
capital markets is good. Risk factors are small.
DESCRIPTION OF FITCH'S SHORT-TERM RATINGS
F-1+ Exceptionally Strong Credit Quality. Issues assigned this
rating are regarded as having the strongest degree of
assurance for timely payment.
F-1 Very Strong Credit Quality. Issues assigned this rating
reflect an assurance of timely payment only slightly less in
degree than issues rated "F-1+"
F-2 Good Credit Quality. Issues assigned this rating have a
satisfactory degree of assurance for timely payment, but the
margin of safety is not as great as for issues assigned
"F-1+" and "F-1" ratings.
LOC The symbol LOC indicates that the rating is based on a
letter of credit issued by a commercial bank.
DESCRIPTION OF IBCA'S SHORT-TERM RATINGS (UP TO 12 MONTHS)
A1+ Obligations supported by the highest capacity for timely
repayment.
A1 Obligations supported by a strong capacity for timely
repayment.
A2 Obligations supported by a satisfactory capacity for timely
repayment, although such capacity may be susceptible to
adverse changes in business, economic, or financial
conditions.
DESCRIPTION OF THOMSON'S SHORT-TERM RATINGS
TBW-1 The highest category; indicates a very high likelihood that
principal and interest will be paid on a timely basis.
TBW-2 The second-highest category; while the degree of safety
regarding timely repayment of principal and interest is
strong, the relative degree of safety is not as high as for
issues rated "TBW-1".
</TABLE>
S-22
<PAGE>
THE ADMINISTRATOR AND TRANSFER AGENT
SEI Investments Fund Management ("SEI Management" or the "Administrator")
provides the Trust with overall administrative services, regulatory reporting,
all necessary office space, equipment, personnel and facilities, and acts as
dividend disbursing agent. SEI Management also serves as transfer agent (the
"Transfer Agent") for the Funds.
The Trust and SEI Management has entered into an Administration Agreement
("the Administration Agreement"). The Administration Agreement provides that the
Manager shall not be liable for any error of judgment or mistake of law or for
any loss suffered by the Trust in connection with the matters to which the
Administration Agreement relates, except a loss resulting from willful
misfeasance, bad faith or gross negligence on the part of SEI Management in the
performance of its duties or from reckless disregard of its duties and
obligations thereunder.
The continuance of the Administration Agreement must be specifically
approved at least annually (i) by the vote of a majority of the Trustees or by
the vote of a majority of the outstanding voting securities of the Fund, and
(ii) by the vote of a majority of the Trustees of the Trust who are not parties
to the Administration Agreement or an "interested person" (as that term is
defined in the 1940 Act) of any party thereto, cast in person at a meeting
called for the purpose of voting on such approval. The Administration Agreement
is terminable at any time without penalty by the Trustees of the Trust, by a
vote of a majority of the outstanding shares of the Fund or by SEI Management on
not less than 30 days' nor more than 60 days' written notice.
The Administrator, a Delaware business trust, has its principal business
offices at Oaks, Pennsylvania 19456. SEI Investments Management Corporation
("SIMC"), a wholly-owned subsidiary of SEI Investments Company ("SEI
Investments"), is the owner of all beneficial interest in the Administrator. SEI
Investments and its subsidiaries and affiliates, including the Administrator,
are leading providers of funds evaluation services, trust accounting systems,
and brokerage and information services to financial institutions, institutional
investors, and money managers. The Administrator and its affiliates also serve
as administrator or sub-administrator to the following other mutual funds: The
Achievement Funds Trust, The Advisors' Inner Circle Fund, Alpha Select Funds,
Amerindo Funds Inc., The Arbor Fund, ARK Funds, Armada Funds, The Armada
Advantage Fund, Bishop Street Funds, Boston 1784 Funds-Registered Trademark-,
CNI Charter Funds, CUFUND, The Expedition Funds, First American Funds, Inc.,
First American Investment Funds, Inc., First American Strategy Funds, Inc.,
Friends Ivory Funds, HighMark Funds, Huntington Funds, Huntington VA Funds, The
Nevis Funds, Inc., Oak Associates Funds, The Parkstone Group of Funds, The PBHG
Funds, Inc., PBHG Insurance Series Fund, Inc., The Pillar Funds, SEI Asset
Allocation Trust, SEI Daily Income Trust, SEI Index Funds, SEI Institutional
International Trust, SEI Institutional Investments Trust, SEI Institutional
Managed Trust, SEI Insurance Products Trust, SEI Liquid Asset Trust, SEI Tax
Exempt Trust, STI Classic Funds, STI Classic Variable Trust, TIP Funds, UAM
Funds Trust, UAM Funds, Inc. and UAM Funds, Inc. II.
If operating expenses of any Fund exceed applicable limitations, SEI
Management will pay such excess. SEI Management will not be required to bear
expenses of the Fund to an extent which would result in the Portfolio's
inability to qualify as a regulated investment company under provisions of the
Code. The term "expenses" is defined in such laws or regulations, and generally
excludes brokerage commissions, distribution expenses, taxes, interest and
extraordinary expenses.
THE ADVISER AND SUB-ADVISERS
SEI Investments Management Corporation ("SIMC" or the "Adviser") is a
wholly-owned subsidiary of SEI Investments, a financial services company. The
principal business address of SIMC and SEI Investments is Oaks, Pennsylvania,
19456. SEI Investments was founded in 1968, and is a leading provider of
investment solutions to banks, institutional investors, investment advisers and
insurance companies. Affiliates of SIMC have provided consulting advice to
institutional investors for more than 20 years,
S-23
<PAGE>
including advice regarding selection and evaluation of sub-advisers. SIMC and
its affiliates currently serves as adviser or administrator to more than 46
investment companies, including more than 367 funds, SIMC had more than
$56 billion in assets as of December 31, 1999.
SIMC is the investment Adviser for each of the Funds, and operates as a
"manager of managers." As Adviser, SIMC oversees the investment advisory
services provided to the Fund and manages the cash portion of the Fund's assets.
Pursuant to separate sub-advisory agreements with SIMC, and under the
supervision of the Adviser and the Board of Trustees, a number of sub-advisers
(the "Sub-Advisers") are responsible for the day-to-day investment management of
all or a discrete portion of the assets of the Fund. Sub-Advisers are selected
for the Fund based primarily upon the research and recommendations of SIMC,
which evaluates quantitatively and qualitatively a Sub-Adviser's skills and
investment results in managing assets for specific asset classes, investment
styles and strategies.
Subject to Board review, SIMC allocates and, when appropriate, reallocates
the Fund's assets among Sub-Advisers, monitors and evaluates Sub-Adviser
performance, and oversees Sub-Adviser compliance with the Fund's investment
objectives, policies and restrictions. SIMC HAS ULTIMATE RESPONSIBILITY FOR THE
INVESTMENT PERFORMANCE OF THE FUND DUE TO ITS RESPONSIBILITY TO OVERSEE
SUB-ADVISERS AND RECOMMEND THEIR HIRING, TERMINATION AND REPLACEMENT.
For its advisory services, SIMC is entitled to a fee based on the average
net assets of the Fund, which is calculated daily and paid monthly, at the
annual rate of 0.65%.
SIMC pays the Sub-Advisers a fee out of its advisory fee which is based on a
percentage of the average monthly market value of the assets managed by each
Sub-Advisor.
The Advisory Agreement and certain of the Sub-Advisory Agreements provide
that SIMC (or any Sub-Adviser) shall not be protected against any liability to
the Trust or its shareholders by reason of willful misfeasance, bad faith or
gross negligence on its part in the performance of its duties, or from reckless
disregard of its obligations or duties thereunder. In addition, certain of the
Sub-Advisory Agreements provide that the Sub-Adviser shall not be protected
against any liability to the Trust or its shareholders by reason of willful
misfeasance, bad faith or negligence on its part in the performance of its
duties, or from reckless disregard of its obligations or duties thereunder.
The continuance of each Advisory and Sub-Advisory Agreement must be
specifically approved at least annually (i) by the vote of a majority of the
outstanding shares of the Fund or by the Trustees, and (ii) by the vote of a
majority of the Trustees who are not parties to such Agreement or "interested
persons" of any party thereto, cast in person at a meeting called for the
purpose of voting on such approval. Each Advisory or Sub-Advisory Agreement will
terminate automatically in the event of its assignment, and is terminable at any
time without penalty by the Trustees of the Trust or, with respect to the Fund,
by a majority of the outstanding shares of the Fund, on not less than 30 days'
nor more than 60 days' written notice to the Adviser (or Sub-Adviser) or by the
Adviser (or Sub-Adviser) on 90 days' written notice to the Trust.
SIMC and the Trust have obtained an exemptive order from the SEC that
permits SIMC, with the approval of the Trust's Board of Trustees, to retain
Sub-Advisers unaffiliated with SIMC for the Fund without submitting the
Sub-Adviser agreements to a vote of the Fund's shareholders. The exemptive
relief permits SIMC to disclose only the aggregate amount payable by SIMC to the
Sub-Advisers under all such Sub-Adviser agreements for the Fund. The Fund will
notify shareholders in the event of any addition or change in the identity of
its Sub-Advisers.
THE SUB-ADVISERS
DAVID J. GREENE AND COMPANY, LLC--David J. Greene and Company, LLC
("David J. Greene") serves a Sub-Adviser to a portion of the assets of the
Tax-Managed Small Cap Fund. As of June 30, 2000, David J. Greene had
approximately $1.7 million in assets under management.
S-24
<PAGE>
LOOMIS, SAYLES AND COMPANY, L.P.--Loomis, Sayles and Company, L.P.
("Loomis") serves as a Sub-Adviser to a portion of the assets of the Tax-Managed
Small Cap Fund. As of June 30, 2000, Loomis had approximately $5.7 billion in
assets under management.
LSV ASSET MANAGEMENT, L.P.--LSV Asset Management, L.P. ("LSV") serves as a
Sub-Adviser to a portion of the assets of the Tax-Managed Small Cap Fund. As of
June 30, 2000, LSV managed approximately $5.7 billion in client assets.
MCKINLEY CAPITAL MANAGEMENT, INC.--McKinley Capital Management, Inc.
("McKinley") serves a Sub-Adviser to a portion of the assets of the Tax-Managed
Small Cap Fund. As of June 30, 2000, McKinley had approximately $4.8 billion in
assets under management.
SAWGRASS ASSET MANAGEMENT, LLC--Sawgrass Asset Management, LLC ("Sawgrass")
serves as a Sub-Adviser for a portion of the assets of the Tax-Managed Small Cap
Fund. As of June 30, 2000, Sawgrass had approximately $1.1 million in assets
under management.
SHAREHOLDER SERVICING PLAN
The Funds have also adopted a shareholder servicing plan for their Class A
shares (the "Service Plan"). Under the Service Plan, the Distributor may
perform, or may compensate other service providers for performing, the following
shareholder services: maintaining client accounts; arranging for bank wires;
responding to client inquiries concerning services provided on investments;
assisting clients in changing dividend options, account designations and
addresses; sub-accounting; providing information on share positions to clients;
forwarding shareholder communications to clients; processing purchase, exchange
and redemption orders; and processing dividend payments. Under the Service Plan,
the Distributor may retain as a profit any difference between the fee it
receives and the amount it pays to third parties.
Although banking laws and regulations prohibit banks from distributing
shares of open-end investment companies such as the Trust, according to an
opinion issued to the staff of the SEC by the Office of the Comptroller of the
Currency, financial institutions are not prohibited from acting in other
capacities for investment companies, such as providing shareholder services.
Should future legislative, judicial or administrative action prohibit or
restrict the activities of financial institutions in connection with providing
shareholder services, the Trust may be required to alter materially or
discontinue its arrangements with such financial institutions.
TRUSTEES AND OFFICERS OF THE TRUST
The management and affairs of the Trust are supervised by the Trustees under
the laws of the Commonwealth of Massachusetts. The Trustees have approved
contracts under which, as described above, certain companies provide essential
management services to the Trust.
The Trustees and Executive Officers of the Trust, their respective dates of
birth, and their principal occupations for the last five years are set forth
below. Each may have held other positions with the named companies during that
period. Unless otherwise noted, the business address of each Trustee and each
Executive Officer is SEI Investments Company, Oaks, Pennsylvania 19456. Certain
officers of the Trust also serve as officers of some or all of the following:
The Achievement Funds Trust, The Advisors' Inner Circle Fund, Alpha Select
Funds, The Arbor Fund, ARK Funds, Armada Funds, The Armada Advantage Fund,
Bishop Street Funds, CNI Charter Funds, CUFUND, The Expedition Funds, First
American Funds, Inc., First American Investment Funds, Inc., First American
Strategy Funds, Inc., Friends Ivory Funds, HighMark Funds, Huntington Funds,
Huntington VA Funds, The Nevis Fund, Inc., Oak Associates Funds, The PBHG Funds,
Inc., PBHG Insurance Series Fund, Inc., The Pillar Funds, SEI Asset Allocation
Trust, SEI Daily Income Trust, SEI Index Funds, SEI Institutional International
Trust, SEI Institutional Investments Trust, SEI Institutional Managed Trust, SEI
Insurance Products Trust, SEI Liquid Asset Trust, SEI Tax Exempt Trust, STI
Classic Funds, STI Classic Variable Trust, TIP Funds, UAM Funds Trust, UAM
Funds, Inc. and UAM Funds, Inc, II, each of which is an open-end management
investment company
S-25
<PAGE>
managed by SEI Investments Fund Management or its affiliates and distributed by
SEI Investments Distribution Co.
ROBERT A. NESHER (DOB 08/17/46)--Chairman of the Board of
Trustees*--Currently performs various services on behalf of SEI Investments for
which Mr. Nesher is compensated. Executive Vice President of SEI Investments,
1986-1994. Director and Executive Vice President of the Adviser, the
Administrator and the Distributor, 1981-1994. Trustee of The Advisors' Inner
Circle Fund, The Arbor Fund, Bishop Street Funds, The Expedition Funds, Pillar
Funds, SEI Asset Allocation Trust, SEI Daily Income Trust, SEI Index Funds, SEI
Institutional International Trust, SEI Institutional Investments Trust, SEI
Institutional Managed Trust, SEI Insurance Products Trust, SEI Liquid Asset
Trust and SEI Tax Exempt Trust.
WILLIAM M. DORAN (DOB 05/26/40)--Trustee*--1701 Market Street, Philadelphia,
PA 19103. Partner, Morgan, Lewis & Bockius LLP (law firm), counsel to the Trust,
SEI Investments, the Adviser, the Administrator and the Distributor. Director of
SEI Investments since 1974; Secretary of SEI Investments since 1978. Trustee of
The Advisors' Inner Circle Fund, The Arbor Fund, The Expedition Funds, SEI Asset
Allocation Trust, SEI Daily Income Trust, SEI Index Funds, SEI Institutional
International Trust, SEI Institutional Investments Trust, SEI Institutional
Managed Trust, SEI Insurance Products Trust, SEI Liquid Asset Trust and SEI Tax
Exempt Trust.
F. WENDELL GOOCH (DOB 12/03/32)--Trustee**--President, Orange County
Publishing Co., Inc.; Publisher, Paoli News and Paoli Republican; and Editor,
Paoli Republican, October 1981-January 1997. President, H&W Distribution, Inc.,
since July 1984. Executive Vice President, Trust Department, Harris Trust and
Savings Bank and Chairman of the Board of Directors of The Harris Trust Company
of Arizona before January 1981. Trustee of SEI Asset Allocation Trust, SEI Daily
Income Trust, SEI Index Funds, SEI Institutional International Trust, SEI
Institutional Investments Trust, SEI Institutional Managed Trust, SEI Insurance
Products Trust, SEI Liquid Asset Trust, SEI Tax Exempt Trust, STI Classic Funds
and STI Classic Variable Trust.
JAMES M. STOREY (DOB 04/12/31)--Trustee**--Partner, Dechert Price & Rhoads,
September 1987-December 1993. Trustee of The Advisors' Inner Circle Fund, The
Arbor Fund, The Expedition Funds, SEI Asset Allocation Trust, SEI Daily Income
Trust, SEI Index Funds, SEI Institutional International Trust, SEI Institutional
Investments Trust, SEI Institutional Managed Trust, SEI Insurance Products
Trust, SEI Liquid Asset Trust and SEI Tax Exempt Trust.
GEORGE J. SULLIVAN, JR. (DOB 11/13/42)--Trustee**--Chief Executive Officer,
Newfound Consultants Inc. since April 1997. General Partner, Teton Partners,
L.P., June 1991-December 1996; Chief Financial Officer, Noble Partners, L.P.,
March 1991-December 1996; Treasurer and Clerk, Peak Asset Management, Inc.,
since 1991; Trustee, Navigator Securities Lending Trust, since 1995. Trustee of
The Advisors' Inner Circle Fund, The Arbor Fund, The Expedition Funds, SEI Asset
Allocation Trust, SEI Daily Income Trust, SEI Index Funds, SEI Institutional
International Trust, SEI Institutional Investments Trust, SEI Institutional
Managed Trust, SEI Insurance Products Trust, SEI Liquid Asset Trust and SEI Tax
Exempt Trust.
ROSEMARIE B. GRECO (DOB 03/31/46)--Trustee**--Principal, Grecoventures
(consulting firm) since August 1997. President, Corestates Financial Corp.,
1991-1997; Chief Executive Officer and President, Corestates Bank, N.A.
1991-1997; Director, Sonoco, Inc.; Director, PECO Energy; Director, Radian,
Inc.; Trustee, Pennsylvania Real Estate Investment Trust; Director, Cardone
Industries, Inc.; Director, Genuardi Markets, Inc.; Director, PRWT Comserve,
Inc. Trustee of SEI Asset Allocation Trust, SEI Daily Income Trust, SEI Index
Funds, SEI Institutional International Trust, SEI Institutional Investments
Trust, SEI Institutional Managed Trust, SEI Insurance Products Trust, SEI Liquid
Asset Trust and SEI Tax Exempt Trust.
EDWARD D. LOUGHLIN (DOB 03/07/51)--President and Chief Executive
Officer--Executive Vice President and President--Asset Management Division of
SEI Investments since 1993. Executive Vice
S-26
<PAGE>
President of the Adviser and the Administrator since 1994. Senior Vice President
of the Distributor, 1986-1991; Vice President of the Distributor, 1981-1986.
TIMOTHY D. BARTO (DOB 3/28/68)--Vice President and Assistant
Secretary--Employed by SEI Investments since October 1999. Vice President and
Assistant Secretary of the Administrator and Distributor since December 1999.
Associate at Dechert Price & Rhoads, 1997-1999. Associate at Richer, Miller &
Finn, 1994-1997.
TODD B. CIPPERMAN (DOB 02/14/66)--Vice President and Assistant
Secretary--Senior Vice President and General Counsel of SEI Investments; Senior
Vice President, General Counsel and Secretary of the Adviser, the Administrator
and the Distributor since 2000. Vice President and Assistant Secretary of SEI
Investments, the Adviser, the Administrator and the Distributor, 1995-2000.
Associate, Dewey Ballantine (law firm), 1994-1995. Associate, Winston & Strawn
(law firm), 1991-1994.
JAMES R. FOGGO (DOB 06/30/64)--Vice President and Assistant Secretary--Vice
President and Assistant Secretary of SEI Investments since January 1998. Vice
President and Secretary of the Adviser, Administrator and Distributor since
May 1999. Associate, Paul Weiss, Rifkind, Wharton & Garrison (law firm), 1998.
Associate, Baker & McKenzie (law firm), 1995-1998. Associate, Battle Fowler
L.L.P. (law firm), 1993-1995. Operations Manager, The Shareholder Services
Group, Inc., 1986-1990.
LYDIA A. GAVALIS (DOB 06/05/64)--Vice President and Assistant
Secretary--Vice President and Assistant Secretary of SEI Investments, the
Adviser, the Administrator and the Distributor since 1998. Assistant General
Counsel and Director of Arbitration, Philadelphia Stock Exchange, 1989-1998.
KATHY HEILIG (DOB 12/21/58)--Vice President and Assistant
Secretary--Treasurer of SEI Investments since 1997; Vice President of SEI
Investments since 1991. Vice President and Treasurer of the Adviser and the
Administrator since 1997. Assistant Controller of SEI Investments and Vice
President of the Distributor since 1995. Director of Taxes of SEI Investments,
1987-1991. Tax Manager, Arthur Andersen LLP prior to 1987.
CHRISTINE M. MCCULLOUGH (DOB 12/05/60)--Vice President and Assistant
Secretary--Employed by SEI Investments since November 1, 1999. Vice President
and Assistant Secretary of the Administrator and Distributor since December
1999. Associate, Montgomery, Walker and Rhoads (law firm), 1990-1991.
CYNTHIA M. PARRISH (DOB 10/23/59)--Vice President and Assistant
Secretary--Vice President and Assistant Secretary of SEI Investments, the
Adviser, the Administrator and the Distributor since August 1997. Branch Chief,
Division of Enforcement, U.S. Securities and Exchange Commission,
January 1995-August 1997. Senior Counsel--Division of Enforcement, U.S.
Securities and Exchange Commission, September 1992-January 1995. Staff
Attorney--Division of Enforcement, U.S. Securities and Exchange Commission,
September 1990-September 1992.
RICHARD W. GRANT (DOB 10/25/45)--Secretary--1701 Market Street,
Philadelphia, PA 19103. Partner, Morgan, Lewis & Bockius LLP (law firm), counsel
to the Trust, SEI Investments, the Adviser, the Administrator and the
Distributor.
MARK E. NAGLE (DOB 10/20/59)--Controller and Chief Financial
Officer--President of the Administrator and Senior Vice President of SEI
Investments Mutual Funds Services Operations Group since 1998. Vice President of
the Administrator and Vice President of Fund Accounting and Administration of
SEI Investments Mutual Funds Services, 1996-1998. Vice President of the
Distributor since December 1997. Senior Vice President, Fund Administration,
BISYS Fund Services, September 1995-November 1996. Senior Vice President and
Site Manager, Fidelity Investments 1981-September 1995.
S-27
<PAGE>
Compensation of officers and affiliated Trustees of the Trust is paid by the
Administrator. The Trust pays the fees for unaffiliated Trustees. For the fiscal
year ended September 30, 1999, the Trust paid the following amounts to the
Trustees.
<TABLE>
<CAPTION>
AGGREGATE PENSION OR TOTAL COMPENSATION FROM
COMPENSATION RETIREMENT BENEFITS ESTIMATED ANNUAL REGISTRANT AND FUND
FROM REGISTRANT ACCRUED AS PART OF BENEFITS UPON COMPLEX PAID TO TRUSTEES
NAME OF PERSON AND POSITION FOR FYE 9/30/98 FUND EXPENSES RETIREMENT FOR FYE 9/30/99
--------------------------- ----------------- ------------------- ---------------- --------------------------
<S> <C> <C> <C> <C>
Robert A. Nesher, Trustee*....... $ 0 $0 $0 $0 for services on
8 boards
William M. Doran, Trustee*....... $ 0 $0 $0 $0 for services on
8 boards
F. Wendell Gooch, Trustee**...... $29,190 $0 $0 $108,250 for services on
8 boards
Rosemarie B. Greco, Trustee**+... $ 0 $0 $0
James M. Storey, Trustee**....... $28,502 $0 $0 $108,250 for services on
8 boards
Frank E. Morris, Trustee***...... $ 6,808 $0 $0 $25,750 for services on
8 boards
George J. Sullivan, Trustee**.... $28,483 $0 $0 $108,250 for services on
8 boards
</TABLE>
------------------------
Mr. Edward W. Binshadler is a Trustee Emeritus of the Trust. Mr. Binshadler
serves as a consultant to the Audit Committee and receives as compensation,
$5,000 per Audit Committee meeting attended.
------------------------
+ Ms. Greco was not a member of the Board of Trustees during fiscal year ended
September 30, 1999 and, as such, received no compensation from the Trust.
* Messrs. Nesher and Doran are Trustees who may be deemed to be "interested
persons" of the Trust as the term is defined in the 1940 Act.
** Messrs. Gooch, Storey, Sullivan and Ms. Greco serve as members of the Audit
Committee of the Trust.
*** Mr. Morris retired on December 31, 1998.
S-28
<PAGE>
PURCHASE AND REDEMPTION OF SHARES
The purchase and redemption price of shares is the net asset value of each
share. A Fund's securities are valued by SEI Management pursuant to valuations
provided by an independent pricing service (generally the last quoted sale
price). Fund securities listed on a securities exchange for which market
quotations are available are valued at the last quoted sale price on each
Business Day (defined as days on which the New York Stock Exchange ("NYSE") is
open for business ("Business Day")) or, if there is no such reported sale, at
the most recently quoted bid price. Unlisted securities for which market
quotations are readily available are valued at the most recently quoted bid
price. The pricing service may also use a matrix system to determine valuations.
This system considers such factors as security prices, yields, maturities, call
features, ratings and developments relating to specific securities in arriving
at valuations. The procedures of the pricing service and its valuations are
reviewed by the officers of the Trust under the general supervision of the
Trustees.
Information about the market value of each portfolio security may be
obtained by SEI Management from an independent pricing service. The pricing
service relies primarily on prices of actual market transactions as well as
trader quotations. However, the pricing service may use a matrix system to
determine valuations of fixed income securities. This system considers such
factors as security prices, yields, maturities, call features, ratings and
developments relating to specific securities in arriving at valuations. The
procedures used by the pricing service and its valuations are reviewed by the
officers of the Trust under the general supervision of the Trustees.
Securities with remaining maturities of 60 days or less will be valued by
the amortized cost method, which involves valuing a security at its cost on the
date of purchase and thereafter (absent unusual circumstances) assuming a
constant amortization to maturity of any discount or premium, regardless of the
impact of fluctuations in general market rates of interest on the value of the
instrument. While this method provides certainty in valuation, it may result in
periods during which value, as determined by this method, is higher or lower
than the price the Trust would receive if it sold the instrument. During periods
of declining interest rates, the daily yield of the Fund may tend to be higher
than a like computation made by a company with identical investments utilizing a
method of valuation based upon market prices and estimates of market prices for
all of its portfolio securities. Thus, if the use of amortized cost by the Fund
resulted in a lower aggregate portfolio value on a particular day, a prospective
investor in the Fund would be able to obtain a somewhat higher yield that would
result from investment in a company utilizing solely market values, and existing
shareholders in the Fund would experience a lower yield. The converse would
apply during a period of rising interest rates.
It is currently the Trust's policy to pay all redemptions in cash. The Trust
retains the right, however, to alter this policy to provide for redemptions in
whole or in part by a distribution in kind of readily marketable securities held
by the Fund in lieu of cash. Shareholders may incur brokerage charges on the
sale of any such securities so received in payment of redemptions. However, a
shareholder will at all times be entitled to aggregate cash redemptions during
any 90-day period of up to the lesser of $250,000 or 1% of the Trust's net
assets.
A gain or loss for federal income tax purposes may be realized by a taxable
shareholder upon an in-kind redemption depending upon the shareholder's basis in
the shares of the Trust redeemed.
Purchases and redemptions of shares of the Fund may be made on any day the
NYSE is open for business. Currently, the following holidays are observed by the
Trust: 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 Trust reserves the right to suspend the right of redemption
and/or to postpone the date of payment upon redemption for any period during
which trading on the NYSE is restricted, or during the existence of an emergency
(as determined by the SEC by rule or regulation) as a result of which disposal
or evaluation of the portfolio securities is not reasonably practicable, or for
such other periods as the SEC may by order permit. The Trust also reserves the
right to suspend sales of shares of the Fund for
S-29
<PAGE>
any period during which the NYSE, the Manager, the Distributor, and/or the
Custodian are not open for business.
TAXES
The following is only a summary of certain additional federal tax
considerations generally affecting the Funds and their shareholders that are not
described in the Funds' prospectuses. No attempt is made to present a detailed
explanation of the federal, state or local tax treatment of the Fund or their
shareholders and the discussion here and in the Fund's prospectuses is not
intended as a substitute for careful tax planning.
This discussion of federal income tax consequences is based on the Code, and
the regulations issued thereunder, in effect on the date of this Statement of
Additional Information. New legislation, as well as administrative changes or
court decisions, may significantly change the conclusions expressed herein, and
may have a retroactive effect with respect to the transactions contemplated
herein.
The Fund is treated as a separate entity for federal income tax purposes and
is not combined with the Trust's other Funds. The Fund intends to qualify as a
regulated investment company ("RIC") under Subchapter M of the Code so that it
will be relieved of federal income tax on that part of its income that is
distributed to shareholders. In order to qualify for treatment as a RIC, the
Fund must distribute annually to its shareholders at least 90% of its net
interest income excludable from net income, 90% of its investment company
taxable income (generally, net investment income plus the excess, if any, of net
short-term capital gain over net long-term capital losses) ("Distribution
Requirement") and also must meet several additional requirements. Among these
requirements are the following: (i) at least 90% of the Fund's gross income each
taxable year must be derived from dividends, interest, payments with respect to
securities loans, and gains from the sale or other disposition of stock or
securities, or other income derived with respect to its business of investing in
such stock or securities; (ii) at the close of each quarter of the Fund's
taxable year, at least 50% of the value of its total assets must be represented
by cash and cash items, U.S. government securities, securities of other RICs and
other securities, with such other securities limited, in respect of any one
issuer, to an amount that does not exceed 5% of the value of the Fund's assets
and that does not represent more than 10% of the outstanding voting securities
of such issuer; and (iii) at the close of each quarter of the Fund's taxable
year, not more than 25% of the value of its assets may be invested in securities
(other than U.S. Government securities or the securities of other RICs) of any
one issuer or of two or more issuers engaged in the same, similar, or related
trades or businesses if the Fund owns at least 20% of the voting power of such
issuers.
Notwithstanding the Distribution Requirement described above, which only
requires the Fund to distribute at least 90% of its annual investment company
taxable income and does not require any minimum distribution of net capital
gain, the Fund will be subject to a nondeductible 4% federal excise tax to the
extent it fails to distribute by the end of any calendar year at least 98% of
its ordinary income for that year and 98% of its capital gain net income (the
excess of short- and long-term capital gain over short-and long-term capital
loss) for the one-year period ending on October 31 of that year, plus certain
other amounts. The Fund intends to make sufficient distributions to avoid
liability for the federal excise tax. The Fund may in certain circumstances be
required to liquidate portfolio investments in order to make sufficient
distributions to avoid federal excise tax liability when the investment advisor
might not otherwise have chosen to do so, and liquidation of investments in such
circumstances may affect the ability of a Fund to satisfy the requirements for
qualification as a RIC.
If the Fund's distributions exceed its taxable income and capital gains
realized during a taxable year, all or a portion of the distributions made in
the same taxable year may be recharacterized as a return of capital to
shareholders. A return of capital distribution will generally not be taxable,
but will reduce each shareholder's cost basis in the Fund and result in a higher
reported capital gain or lower reported capital loss when those shares on which
the distribution was received are sold.
S-30
<PAGE>
Any gain or loss recognized on a sale, exchange or redemption of shares of
the Fund by a shareholder who is not a dealer in securities will generally, for
individual shareholders, be treated as a long-term capital gain or loss if the
shares have been held for more than one year and otherwise will be treated as
short-term capital gain or loss. However, if shares on which a shareholder has
received a net capital gain distribution are subsequently sold, exchanged or
redeemed and such shares have been held for six months or less, any loss
recognized will be treated as a long-term capital loss to the extent of the net
capital gain distribution. Long-term capital gains are currently taxed at a
maximum rate of 20% and short-term capital gains are currently taxed at ordinary
income tax rates.
If the Fund fails to qualify as a RIC for any year, all of its taxable
income will be subject to tax at regular corporate rates without any deduction
for distributions to shareholders, and its distributions (including capital
gains distributions) out of its accumulated or current earnings and profits
generally will be taxable as ordinary income dividends to its shareholders,
subject to the dividends received deduction for corporate shareholders. The
board reserves the right not to maintain the qualification of the Fund as a
regulated investment company if it determines such course of action to be
beneficial to shareholders.
The Fund may invest in complex securities that may be subject to numerous
special and complex tax rules. These rules could affect whether gains and losses
recognized by the Fund are treated as ordinary income or capital gain,
accelerate the recognition of income to the Fund and/or defer the Funds ability
to recognize losses. In turn, those rules may affect the amount, timing or
character of the income distributed to you by the Fund.
The Fund will be required in certain cases to withhold and remit to the
United States Treasury 31% of amounts payable to any shareholder who (1) has
provided the Fund either an incorrect tax identification number or no number at
all, (2) who is subject to backup withholding by the Internal Revenue Service
for failure to properly report payments of interest or dividends, or (3) who has
failed to certify to the Fund that such shareholder is not subject to backup
withholding.
Non-U.S. investors in a Fund may be subject to U.S. withholding and estate
tax and are encouraged to consult their tax advisor prior to investing in a
Fund.
In the case of corporate shareholders, Fund distributions (other than
capital gains distributions) generally qualify for the dividends-received
deduction to the extent of the gross amount of qualifying dividends received by
the Fund for the year. Generally, and subject to certain limitations (including
certain holding period limitations), a dividend will be treated as a qualifying
dividend if it has been received from a domestic corporation. All dividends
(including the deducted portion) must be included in your alternative minimum
taxable income calculation. With respect to investments in STRIPS, TR's, TIGR's,
LYONs, CATS and other Zero Coupon securities which are sold at original issue
discount and thus do not make periodic cash interest payments, the Fund will be
required to include as part of its current income the imputed interest on such
obligations even though the Fund has not received any interest payments on such
obligations during that period. Because the Fund distributes all of its net
investment income to its shareholders, the Fund may have to sell Fund securities
to distribute such imputed income which may occur at a time when the advisers
would not have chosen to sell such securities and which may result in taxable
gain or loss.
STATE TAXES
The Fund is not liable for any income or franchise tax in Massachusetts if
it qualifies as a RIC for federal income tax purposes. Rules of state and local
taxation of dividend and capital gains distributions from RICs often differ from
the rules for federal income taxation described above. Depending upon state and
local law, distributions by the Fund to shareholders and the ownership of shares
may be subject to state and local taxes. Shareholders are urged to consult their
tax advisers regarding the affect of federal, state and local taxes in their own
individual circumstances.
S-31
<PAGE>
PORTFOLIO TRANSACTIONS
The Trust has no obligation to deal with any broker-dealer or group of
brokers or dealers in the execution of transactions in portfolio securities.
Subject to policies established by the Trustees, the advisers are responsible
for placing orders to execute Fund transactions. In placing orders, it is the
Trust's policy to seek to obtain the best net results taking into account such
factors as price (including the applicable dealer spread), size, type and
difficulty of the transaction involved, the firm's general execution and
operational facilities, the firm's risk in positioning the securities involved
and the firm's research services. While the advisers generally seek reasonably
competitive spreads or brokerage commissions, the Trust will not necessarily be
paying the lowest spread or commission available. The Trust will not purchase
portfolio securities from any affiliated person acting as principal except in
conformity with the regulations of the SEC.
It is expected that the Fund may execute brokerage or other agency
transactions through the Distributor, a registered broker-dealer, for a
commission in conformity with the 1940 Act, the Securities Exchange Act of 1934,
as amended, ("1934 Act") and rules and regulations of the SEC. Under these
provisions, the Distributor is permitted to receive and retain compensation for
effecting portfolio transactions for the Fund on an exchange if a written
contract is in effect between the Distributor and the Trust expressly permitting
the Distributor to receive and retain such compensation. These provisions
further require that commissions paid to the Distributor by the Trust for
exchange transactions not exceed "usual and customary" brokerage commissions.
The rules define "usual and customary" commissions to include amounts which are
"reasonable and fair compared to the commission, fee or other remuneration
received or to be received by other brokers in connection with comparable
transactions involving similar securities being purchased or sold on a
securities exchange during a comparable period of time." In addition, the Fund
may direct commission business to one or more designated broker-dealers,
including the Distributor, in connection with such broker-dealer's payment of
certain of the Fund's expenses. The Trustees, including those who are not
"interested persons" of the Trust, have adopted procedures for evaluating the
reasonableness of commissions paid to the Distributor and will review these
procedures periodically.
In connection with transactions effected for Fund operating within the
"Manager of Managers" structure, SIMC and the various firms that serve as
sub-advisers to certain Funds of the Trust, in the exercise of joint investment
discretion over the assets of the Fund, may direct a substantial portion of a
Fund's brokerage to the Distributor. All such transactions directed to the
Distributor must be accomplished in a manner that is consistent with the Trust's
policy to achieve best net results, and must comply with the Trust's procedures
regarding the execution of transactions through affiliated brokers.
Consistent with their duty to obtain best execution, the Trust's
Sub-Advisers may allocate brokerage or principal business to certain
broker-dealers in recognition of the sale of Fund shares. In addition, the
Fund's advisers or sub-advisers may place portfolio orders with qualified
broker-dealers who recommend the Trust to clients, and may, when a number of
brokers and dealers can provide best price and execution on a particular
transaction, consider such recommendations by a broker or dealer in selecting
among broker-dealers.
The Trust does not expect to use one particular broker or dealer, but the
Fund's advisers or sub-advisers may, consistent with the interests of the Fund,
select brokers on the basis of the research services they provide to the Fund's
advisers. Such services may include analysis of the business or prospects of a
company, industry or economic sector or statistical and pricing services.
Information so received by the advisers will be in addition to and not in lieu
of the services required to be performed by the Fund's advisers under the
Advisory and Sub-Advisory Agreements. If in the judgement of the Fund's
advisers, the Fund, or other accounts managed by the Fund's advisers, will be
benefitted by supplemental research services, the Fund's advisers are authorized
to pay brokerage commissions to a broker furnishing such services that are in
excess of commissions which another broker may have charged for effecting the
same
S-32
<PAGE>
transaction. The expenses of the Fund's advisers will not necessarily be reduced
as a result of the receipt of such supplemental information.
The Trust is required to identify any securities of its "regular brokers or
dealers" (as such term is defined in the 1940 Act) which the Trust has acquired
during its most recent fiscal year. As of September 30, 1999, the Trust held the
following securities:
<TABLE>
<CAPTION>
AMOUNT
FUND TYPE OF SECURITY NAME OF ISSUER (000)
---- ---------------- --------------------- ------
<S> <C> <C> <C>
Large Cap Value................ Debt J.P. Morgan $ 46,994
Equity Bear Stearns $ 10,724
Equity Lehman Brothers $ 10,071
Equity Morgan Stanley $ 11,728
Large Cap Growth............... Equity Morgan Stanley $ 30,431
Debt Morgan Stanley $ 56,182
Equity Goldman Sachs $ 1,263
Tax-Managed Large Cap.......... Equity Morgan Stanley $ 9,008
Debt Morgan Stanley $ 23,077
Small Cap Value................ Debt Morgan Stanley $ 25,005
Debt Merrill Lynch $ 879
Small Cap Growth............... Debt J.P. Morgan $ 38,948
Mid-Cap........................ Equity Bear Stearns $ 238
Debt J.P. Morgan $ 219
Equity Lehman Brothers $ 198
Equity Paine Webber $ 149
Capital Appreciation........... Debt J.P. Morgan $ 3,052
Equity Income.................. Debt J.P. Morgan $ 6,535
Equity Merrill Lynch $ 894
Equity Morgan Stanley $ 314
Balanced....................... Debt Merrill Lynch $ 807
Debt J.P. Morgan $ 601
Debt Paine Webber $ 392
Core Fixed Income.............. Debt Bear Stearns $ 2,222
Debt J.P. Morgan $406,372
Debt Lehman Brothers $ 22,242
Debt Merrill Lynch $ 4,771
Debt Paine Webber $ 12,146
Debt Salomon Bros. $ 5,536
Debt Goldman Sachs $ 4,600
High Yield Bond................ Debt Merrill Lynch $ 32,999
</TABLE>
DESCRIPTION OF SHARES
The Declaration of Trust authorizes the issuance of an unlimited number of
shares of the Fund, each of which represents an equal proportionate interest in
the Fund. Each share upon liquidation entitles a shareholder to a PRO RATA share
in the net assets of the Fund. Shareholders have no preemptive rights. The
Declaration of Trust provides that the Trustees of the Trust may create
additional series of shares or separate classes of portfolios. Share
certificates representing the shares will not be issued.
S-33
<PAGE>
LIMITATION OF TRUSTEES' LIABILITY
The Declaration of Trust provides that a Trustee shall be liable only for
his or her own willful defaults and, if reasonable care has been exercised in
the selection of officers, agents, employees or administrators, shall not be
liable for any neglect or wrongdoing of any such person. The Declaration of
Trust also provides that the Trust will indemnify its Trustees and officers
against liabilities and expenses incurred in connection with actual or
threatened litigation in which they may be involved because of their offices
with the Trust unless it is determined in the manner provided in the Declaration
of Trust that they have not acted in good faith in the reasonable belief that
their actions were in the best interests of the Trust. However, nothing in the
Declaration of Trust shall protect or indemnify a Trustee against any liability
for his or her wilful misfeasance, bad faith, gross negligence or reckless
disregard of his or her duties.
CODE OF ETHICS
The Board of Trustees of the Trust has adopted a Code of Ethics pursuant to
Rule 17j-1 under the 1940 Act. In addition, the Investment Adviser,
Sub-Advisers, and Distributor have adopted Codes of Ethics pursuant to
Rule 17j-1. These Codes of Ethics apply to the personal investing activities of
trustees, officers and certain employees ("access persons"). Rule 17j-1 and the
Codes are designed to prevent unlawful practices in connection with the purchase
or sale of securities by access persons. Under each Code of Ethics, access
persons are permitted to engage in personal securities transactions, but are
required to report their personal securities transactions for monitoring
purposes. In addition, certain access persons are required to obtain approval
before investing in initial public offerings or private placements. Copies of
these Codes of Ethics are on file with the SEC, and are available to the public.
VOTING
Each share held entitles the shareholder of record to one vote. The
shareholders of the Fund or class will vote separately on matters pertaining
solely to that Fund or class, such as any distribution plan. As a Massachusetts
business trust, the Trust is not required to hold annual meetings of
shareholders, but approval will be sought for certain changes in the operation
of the Trust and for the election of Trustees under certain circumstances. In
addition, a Trustee may be removed by the remaining Trustees or by shareholders
at a special meeting called upon written request of shareholders owning at least
10% of the outstanding shares of the Trust. In the event that such a meeting is
requested, the Trust will provide appropriate assistance and information to the
shareholders requesting the meeting.
Where the Trust's Prospectuses or Statement of Additional Information state
that an investment limitation or a fundamental policy may not be changed without
shareholder approval, such approval means the vote of: (i) 67% or more of the
Fund's shares present at a meeting if the holders of more than 50% of the
outstanding shares of the Fund are present or represented by proxy; or
(ii) more than 50% of the Fund's outstanding shares, whichever is less.
SHAREHOLDER LIABILITY
The Trust is an entity of the type commonly known as a "Massachusetts
business trust." Under Massachusetts law, shareholders of such a business trust
could, under certain circumstances, be held personally liable as partners for
the obligations of the trust. Even if, however, the Trust were held to be a
partnership, the possibility of the shareholders incurring financial loss for
that reason appears remote because the Trust's Declaration of Trust contains an
express disclaimer of shareholder liability for obligations of the Trust and
requires that notice of such disclaimer be given in each agreement, obligation
or instrument entered into or executed by or on behalf of the Trust or the
Trustees, and because the Declaration of Trust provides for indemnification out
of the Trust property for any shareholders held personally liable for the
obligations of the Trust.
S-34
<PAGE>
5% SHAREHOLDERS
As of October 12, 2000, SEI Investments Management Company, One Freedom
Valley Drive, Oaks, Pennsylvania 19456, was the sole shareholder of the Fund.
MASTER/FEEDER OPTION
The Fund may in the future seek to achieve its investment objective by
investing all of its assets in another investment company having the same
investment objective and substantially the same investment policies and
restrictions as those applicable to the Fund. It is expected that any such
investment company would be managed by SIMC in substantially the same manner as
the Fund. The initial shareholder(s) of the Fund voted to vest such authority in
the sole discretion of the Trustees and such investment may be made without
further approval of the shareholders of the Fund. However, shareholders of the
Fund will be given 30 days' prior notice of any such investment. Such investment
would be made only if the Trustees determine it to be in the best interests of
the Fund and its shareholders. In making that determination, the Trustees will
consider, among other things, the benefits to shareholders and/or the
opportunity to reduce costs and achieve operational efficiencies. Although the
Fund believes that the Trustees will not approve an arrangement that is likely
to result in higher costs, no assurance is given that costs will be materially
reduced if this option is implemented.
CUSTODIAN
First Union National Bank, Broad and Chestnut Streets, P.O. Box 7618,
Philadelphia, Pennsylvania 19101 (the "Custodian"), acts as custodian and wire
agent of the assets. The Custodian holds cash, securities and other assets of
the Trust as required by the 1940 Act.
EXPERTS
PricewaterhouseCoopers LLP serves as the independent accountants for the
Fund.
LEGAL COUNSEL
Morgan, Lewis & Bockius LLP, 1701 Market Street, Philadelphia, Pennsylvania
19103, serves as counsel to the Trust.
FINANCIAL STATEMENTS
The Trust's financial statements for the fiscal year ended September 30,
2000, including notes thereto and the report of PricewaterhouseCoopers LLP
thereon, are herein incorporated by reference from the Trust's 2000 Annual
Report. A copy of the 2000 Annual Report must accompany the delivery of this
Statement of Additional Information.
S-35
