STEINROE INVESTMENT TRUST
STEINROE INTERNATIONAL FUND
SUPPLEMENT TO FEBRUARY 1, 1995 PROSPECTUS
_________________________
Portfolio management for the International Fund is provided by
a team of investment professionals employed by the Fund's sub-
adviser, Rockefeller & Co., Inc. ("R&Co."). Members of the team
participate in the investment process from R&Co. offices in
London, Hong Kong, and New York City. R&Co. believes its team
approach benefits Fund investors by exploiting the diverse
expertise of team members over a range of dissimilar global
markets. (See page 27 of the Prospectus.)
From time to time, the Adviser may voluntarily waive its
management fee and/or absorb certain expenses for the Fund. The
Adviser has agreed to voluntarily waive its management fee and
absorb the expenses of the Fund to the extent that such fees and
expenses (excluding taxes, interest, all commissions and other
normal charges incident to the purchase and sale of portfolio
securities, and extraordinary charges such as litigation costs,
but including fees paid to the Adviser) on an annualized basis
exceed 1.65% of average net assets through January 31, 1996,
subject to earlier termination by the Adviser on 30 days' notice.
Effective May 1, 1995, there was a change in the services
provided by the Fund's transfer agent and a change in the fees
payable to the transfer agent. These changes are expected to
change the Fund's annual operating expenses as shown in the Fee
Table on page 4 of the Prospectus as follows:
Annual Fund Operating Expenses
(as a percentage of average net assets)
Management Fees ........................1.00%
12b-1 Fees..............................None
Other Expenses..........................0.65%
Total Fund Operating Expenses...........1.65%
In addition, the expenses payable on a $1,000 investment for
one and three years in the hypothetical example following the Fee
Table would be changed to $17 and $52 respectively.
The Date of this Supplement is May 1, 1995
<PAGE> 1
INTERNATIONAL FUND
The Fund seeks long-term growth of capital by investing in a
diversified portfolio of foreign securities.
The Fund is a "no-load" fund. There are no sales or
redemption charges, and the Fund has no 12b-1 plan. The Fund
is a series of the STEINROE INVESTMENT TRUST.
This prospectus contains information you should know before
investing in the Fund. Please read it carefully and retain
it for future reference.
A Statement of Additional Information dated February 1, 1995,
containing more detailed information, has been filed with the
Securities and Exchange Commission and (together with any
supplements thereto) is incorporated herein by reference.
The Statement of Additional Information and most recent
financial statements may be obtained without charge by
writing to the Secretary at the address shown on the back
cover or by calling 1-800-338-2550.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The date of this prospectus is February 1, 1995.
<PAGE>2
TABLE OF CONTENTS
Page
Summary 2
Fee Table 4
Financial Highlights 4
The Fund 5
How the Fund Invests 6
Portfolio Investments and Strategies 7
Restrictions on the Fund's Investments 11
Risks and Investment Considerations 12
How to Purchase Shares 14
By Check 15
By Wire 15
By Electronic Transfer 15
By Exchange 16
Purchase Price and Effective Date 16
Conditions of Purchase 16
Purchases Through Third Parties 16
How to Redeem Shares 17
By Written Request 17
By Exchange 17
Special Redemption Privileges 18
General Redemption Policies 20
Shareholder Services 21
Net Asset Value 23
Distributions and Income Taxes 24
Investment Return 26
Management of the Fund 27
Organization and Description of Shares 28
Certificate of Authorization 31
SUMMARY
The SteinRoe International Fund (the "Fund") is a series of
the SteinRoe Investment Trust, an open-end diversified
management investment company. The Fund is a "no-load" fund.
There are no sales or redemption charges. (See The Fund and
Organization and Description of Shares.)
INVESTMENT OBJECTIVE AND POLICIES. The Fund seeks long-term
growth of capital by investing primarily in a diversified
portfolio of foreign securities. The Fund invests primarily
in equity securities. Under normal market conditions, the
Fund will invest at least 65% of its total assets (taken at
market value) in foreign securities of at least three
countries outside the United States. The Fund diversifies
its investments among several countries and does not
concentrate investments in any particular industry.
There can be no guarantee that the Fund will achieve its
investment objective. Please see How the Fund Invests and
Portfolio Investments and Strategies for further information.
INVESTMENT RISKS. The Fund is intended for long-term
investors who can accept the risks entailed in investing in
foreign securities.
Since the Fund invests primarily in foreign securities,
investors should understand and
<PAGE>3
consider carefully the risks involved in foreign investing.
Investing in foreign securities involves certain
considerations involving both risks and opportunities not
typically associated with investing in U.S. securities. Such
risks include fluctuations in exchange rates on foreign
currencies, less public information, less government
supervision, less liquidity, and greater price volatility.
Please see How the Fund Invests, Portfolio Investments and
Strategies, and Risks and Investment Considerations for
further information.
PURCHASES. The minimum initial investment for the Fund is
$2,500 and additional investments must be at least $100 (only
$50 for purchases by electronic transfer). Shares may be
purchased by check, by bank wire, by electronic transfer, or
by exchange from another SteinRoe Fund. For more detailed
information, see How to Purchase Shares.
REDEMPTIONS. For information on redeeming Fund shares,
including the special redemption privileges, see How to
Redeem Shares.
NET ASSET VALUE. The purchase and redemption price of the
Fund's shares is its net asset value per share. The net
asset value is determined as of the close of trading on the
New York Stock Exchange. (For more detailed information, see
Net Asset Value.)
DISTRIBUTIONS. Dividends for the Fund are normally declared
and paid annually. Distributions will be reinvested into
your Fund account unless you elect to have them paid in cash,
deposited by electronic transfer into your bank checking
account, or invested in another SteinRoe Fund account. (See
Distributions and Income Taxes and Shareholder Services.)
ADVISERS AND FEES. Stein Roe & Farnham Incorporated (the
"Adviser") provides management services to the Fund and
Rockefeller & Co., Inc. (the "Sub-Adviser") has been engaged
to provide investment advisory services to the Fund, subject
to the overall management of the Fund by the Adviser. For a
description of the Adviser, the Sub-Adviser, and the advisory
fees paid by the Fund, see Management of the Fund.
If you have any additional questions about the Fund, please
feel free to discuss them with a relationship manager by
calling 1-800-338-2550.
<PAGE> 4
FEE TABLE
SHAREHOLDER TRANSACTION EXPENSES
Sales Load Imposed on Purchases None
Sales Load Imposed on Reinvested Dividends None
Deferred Sales Load None
Redemption Fees None
Exchange Fees None
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees 1.00%
12b-1 Fees None
Other Expenses 0.61%
-----
Total Fund Operating Expenses 1.61%
-----
EXAMPLE. You would pay the following expenses on a $1,000
investment assuming (1) 5% annual return and (2) redemption
at the end of each time period:
1 year 3 years
------ -------
$16 $51
The purpose of the Fee Table is to assist you in
understanding the various costs and expenses that you will
bear directly or indirectly as an investor in the Fund. The
table is based on expenses incurred in the last fiscal year.
(Also see Management of the Fund--Fees and Expenses.)
For purposes of the Example above, the figures assume that
the percentage amounts listed for the Fund under Annual Fund
Operating Expenses remain the same in each of the periods and
that all income dividends and capital gain distributions are
reinvested in additional Fund shares.
The figures in the Example are not necessarily indicative of
past or future expenses, and actual expenses may be greater
or less than those shown. Although information such as that
shown above is useful in reviewing the Fund's expenses and in
providing a basis for comparison with other mutual funds, it
should not be used for comparison with other investments
using different assumptions or time periods.
FINANCIAL HIGHLIGHTS
The table below reflects the results of operations of the
Fund on a per-share basis for the period shown and has been
audited by Arthur Andersen LLP, independent public
accountants. The auditors' report was unqualified. The
table should be read in conjunction with the Fund's financial
statements and notes thereto. The Fund's annual report,
which may be obtained from the Trust upon request without
charge, contains additional performance information.
<TABLE>
<CAPTION>
Period Ended
Sept. 30, 1994(a)
-----------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.00
-----
Income from Investment Operations
Net investment income .03
Net realized and unrealized gains on
investments and foreign currency transactions .58
Total from investment operations .61
-----
NET ASSET VALUE, END OF PERIOD $10.61
------
------
Ratio of expenses to average net asset *1.61%
Ratio of net investment income to average
net assets *0.61%
Portfolio turnover rate 48%
Total return 6.10%
Net assets, end of period (000 omitted) $74,817
<FN>
- ---------
*Annualized.
(a) From commencement of operations on March 1, 1994.
</TABLE>
THE FUND
The STEINROE INTERNATIONAL FUND (the "Fund") is a no-load,
diversified "mutual fund." Mutual funds sell their own
shares to investors and use the money they receive to invest
in a portfolio of securities such as common stocks. A mutual
fund allows you to pool your money with that of other
investors in order to obtain professional investment
management. Mutual funds generally make it possible for you
to obtain greater diversification of your investments and
simplify your recordkeeping. The Fund does not impose
commissions or charges when shares are purchased or redeemed.
The Fund is a series of the SteinRoe Investment Trust (the
"Trust"), an open-end management investment company, which is
authorized to issue shares of beneficial interest in separate
series. Each series represents interests in a separate
portfolio of securities and other assets, with its own
investment objectives and policies.
Stein Roe & Farnham Incorporated (the "Adviser") is
<PAGE> 6
responsible for the overall management of the Fund, subject
to the authority and direction of the Trust's Board of
Trustees. Rockefeller & Co., Inc. (the "Sub-Adviser") has
been engaged to provide investment advisory services,
including portfolio management, to the Fund, subject to the
supervision of the Adviser. The Adviser also manages and
provides investment advisory services for several other no-
load mutual funds with different investment objectives,
including equity funds, taxable and tax-exempt bond funds,
and money market funds. To obtain prospectuses and other
information on any of those mutual funds, please call 1-800-
338-2550.
HOW THE FUND INVESTS
The Fund invests as described below and may also employ
investment techniques described under Portfolio Investments
and Strategies in this prospectus.
The Fund's investment objective is to seek long-term growth
of capital by investing primarily in a diversified portfolio
of foreign securities. Current income is not a primary
factor in the selection of portfolio securities. The Fund
invests primarily in common stocks and other equity-type
securities (such as preferred stocks, securities convertible
or exchangeable for common stocks, and warrants or rights to
purchase common stocks). The Fund may invest in securities
of smaller emerging companies as well as securities of well-
seasoned companies of any size. Smaller companies, however,
involve higher risks in that they typically have limited
product lines, markets, and financial or management
resources. In addition, the securities of smaller companies
may trade less frequently and have greater price fluctuation
than larger companies, particularly those operating in
countries with developing markets.
The Fund diversifies its investments among several countries
and does not concentrate investments in any particular
industry. In pursuing its objective, the Fund varies the
geographic allocation and types of securities in which it
invests based on the continuing evaluation by the Sub-Adviser
of economic, market, and political trends throughout the
world. The Fund has not established limits on geographic
asset distribution but ordinarily invests in the securities
markets of at least three countries outside the United
States, including but not limited to Western European
countries (such as Belgium, France, Germany, Ireland, Italy,
The Netherlands, the countries of Scandinavia, Spain,
<PAGE> 7
Switzerland, and the United Kingdom), countries in the
Pacific Basin (such as Australia, Hong Kong, Japan, Malaysia,
the Philippines, Singapore, and Thailand), and countries in
the Americas (such as Argentina, Brazil, Chile, and Mexico).
Under normal market conditions, the Fund will invest at least
65% of its total assets (taken at market value) in foreign
securities. If, however, investments in foreign securities
appear to be relatively unattractive in the judgment of the
Sub-Adviser because of current or anticipated adverse
political or economic conditions, the Fund may hold cash or
invest any portion of its assets in securities of the U.S.
Government and equity and debt securities of U.S. companies,
as a temporary defensive strategy. To meet liquidity needs,
the Fund may also hold cash in domestic and foreign
currencies and invest in domestic and foreign money market
securities (including repurchase agreements and foreign money
market positions).
The U.S. Government has from time to time in the past imposed
restrictions, through taxation and otherwise, on foreign
investments by U.S. investors such as the Fund. If such
restrictions should be reinstated, it might become necessary
for the Fund to invest all or substantially all of its assets
in U.S. securities. In such event, the Fund would review its
investment objective and policies to determine whether
changes are appropriate.
The Fund may purchase foreign securities in the form of
American Depositary Receipts (ADRs), European Depositary
Receipts (EDRs), or other securities representing underlying
shares of foreign issuers. The Fund may invest in sponsored
or unsponsored ADRs. (For a description of ADRs and EDRs,
see the Statement of Additional Information.)
PORTFOLIO INVESTMENTS AND TECHNIQUES
DERIVATIVES. Consistent with its objective, the Fund may
invest in a broad array of financial instruments and
securities, including conventional exchange-traded and non-
exchange traded options, futures contracts, futures options,
forward contracts, securities collateralized by underlying
pools of mortgages or other receivables, floating rate
instruments, and other instruments that securitize assets of
various types ("Derivatives"). In each case, the value of
the instrument or security is "derived" from the performance
of an underlying asset or a "benchmark" such as a security
index, an interest rate, or a currency.
<PAGE> 8
The Fund does not expect to invest more than 5% of its net
assets in any type of Derivative except for options, futures
contracts, futures options, and forward contracts.
Derivatives are most often used to manage investment risk or
to create an investment position indirectly because it is
more efficient or less costly than direct investment. They
also may be used in an effort to enhance portfolio returns.
The successful use of Derivatives depends on the Adviser's
ability to correctly predict changes in the levels and
directions of movements in currency exchange rates, security
prices, interest rates and other market factors affecting the
Derivative itself or the value of the underlying asset or
benchmark. In addition, correlations in the performance of
an underlying asset to a Derivative may not be well
established. Finally, privately negotiated and over-the-
counter Derivatives may not be as well regulated and may be
less marketable than exchange-traded Derivatives. For
additional information on Derivatives, please refer to the
Statement of Additional Information.
The Fund may purchase and write both call options and put
options on securities, indexes and foreign currencies, enter
into interest rate, index and foreign currency futures
contracts and options on such futures contracts, and purchase
other types of forward or investment contracts linked to
individual securities, indexes, or other benchmarks in order
to achieve its desired investment objective, provide
additional revenue, or to hedge against changes in security
prices, interest rates or currency fluctuations. The Fund
may write a call or put option only if the option is covered.
As the writer of a covered call option, the Fund foregoes,
during the option's life, the opportunity to profit from
increases in market value of the security covering the call
option above the sum of the premium and the exercise price of
the call. There can be no assurance that a liquid market
will exist when the Fund seeks to close out a position. In
addition, because of low margin deposits required, the use of
futures contracts involves a high degree of leverage, and may
result in losses in excess of the amount of the margin
deposit.
DEBT SECURITIES. In pursuing its investment objective, the
Fund may invest up to 35% of its total assets in debt
securities. Investments in debt securities are limited to
those that are within the four highest grades (generally
<PAGE> 9
referred to as "investment grade") assigned by a nationally
recognized statistical rating organization or, if unrated,
deemed to be of comparable quality by the Adviser or by the
Sub-Adviser. Securities in the fourth highest grade may
possess speculative characteristics. If the rating of a
security held by the Fund is lost or reduced below investment
grade, the Fund is not required to dispose of the security,
but the Sub-Adviser will consider that fact in determining
whether the Fund should continue to hold the security. The
risks inherent in debt securities depend primarily on the
term and quality of the obligations in the Fund's portfolio,
as well as on market conditions. A decline in the prevailing
levels of interest rates generally increases the value of
debt securities, while an increase in rates usually reduces
the value of those securities.
SETTLEMENT TRANSACTIONS. When the Fund enters into a
contract for the purchase or sale of a foreign portfolio
security, it usually is required to settle the purchase
transaction in the relevant foreign currency or receive the
proceeds of the sale in that currency. In either event, the
Fund is obliged to acquire or dispose of an appropriate
amount of foreign currency by selling or buying an equivalent
amount of U.S. dollars. The Fund may wish to "lock-in" the
U.S. dollar value of a transaction at or near the time of the
purchase or sale of the foreign portfolio security at the
exchange rate or rates then prevailing between the U.S.
dollar and the currency in which the security is denominated.
The Fund may accomplish such "transaction hedging" by
purchasing or selling such foreign currencies on a "spot"
(i.e., cash) basis or on a forward basis whereby the Fund
purchases or sells a specific amount of foreign currency, at
a price set at the time of the contract, for receipt or
delivery at a specified date or at any time within a
specified time period. In so doing, the Fund will attempt to
insulate itself against possible losses and gains resulting
from a change in the relationship between the U.S. dollar and
the foreign currency during the period between the date the
security is purchased or sold and the date on which payment
is made or received. Similar transactions may be entered
into by using other currencies if the Fund seeks to move
investments denominated in one currency to investments
denominated in another.
CURRENCY HEDGING. Most of the Fund's portfolio will be
invested in foreign securities. As a result, in addition to
the risk of
<PAGE> 10
change in the market value of portfolio
securities, the value of the portfolio in U.S. dollars is
subject to fluctuations in the exchange rate between the
foreign currencies and the U.S. dollar. When, in the opinion
of the Sub-Adviser, it is desirable to limit or reduce
exposure in a foreign currency in order to moderate potential
changes in the U.S. dollar value of the portfolio, the Fund
may enter into a forward currency exchange contract to sell
or buy such foreign currency (or another foreign currency
that acts as a proxy for that currency) by which the U.S.
dollar value of certain underlying foreign portfolio
securities can be approximately matched by an equivalent U.S.
dollar liability. This technique is known as "currency
hedging" and, by locking in a rate of exchange, is
<PAGE> 11
intended to moderate or reduce the risk of change in the U.S.
dollar value of the Fund's portfolio only during the period
of the forward contract. Forward contracts are usually
entered into with banks and broker-dealers, are not exchange
traded, and are usually for less than one year, but may be
renewed. A default on the contract would deprive the Fund of
unrealized profits or force the Fund to cover its commitments
for purchase or sale of currency, if any, at the current
market price.
Neither type of foreign currency transaction will eliminate
fluctuations in the prices of the Fund's portfolio securities
or prevent loss if the price of such securities should
decline. In addition, such forward currency exchange
contracts will diminish the benefit of the appreciation in
the U.S. dollar value of that foreign currency. (For further
information on forward foreign currency exchange
transactions, see the Statement of Additional Information.)
PORTFOLIO TURNOVER. Although the Fund does not purchase
securities with a view to rapid turnover, there are no
limitations on the length of time portfolio securities must
be held. Accordingly, the portfolio turnover rate may vary
significantly from year to year, but is not expected to
exceed 100% under normal market conditions. Flexibility of
investment and emphasis on capital appreciation may involve
greater portfolio turnover than that of mutual funds that
have the objectives of income or maintenance of a balanced
investment position. A high rate of portfolio turnover may
result in increased transaction expenses and the realization
of capital gains and losses. (See Distributions and Income
Taxes.) The Fund is not intended to be an income-producing
investment.
OTHER TECHNIQUES. The Fund may invest in securities
purchased on a when-issued or delayed-delivery basis.
Although the payment terms of these securities are
established at the time the Fund enters into the commitment,
the securities may be delivered and paid for a month or more
after the date of purchase, when their value may have
changed. The Fund will make such commitments only with the
intention of actually acquiring the securities, but may sell
the securities before settlement date if it is deemed
advisable for investment reasons. The Fund may utilize spot
and forward foreign exchange transactions to reduce the risk
inherent in fluctuations in the exchange rate between one
currency and another when securities are purchased or sold on
a when-issued basis, and may invest in synthetic money market
instruments. The Fund may invest in repurchase agreements,
provided that it will not invest more than 15% of its net
assets in repurchase agreements maturing in more than seven
days and any other illiquid securities. (See the Statement
of Additional Information.)
RESTRICTIONS ON THE FUND'S INVESTMENTS
The Fund will not (i) with respect to more than 75% of its
total assets, invest more than 5% of its total assets in the
securities of any one issuer (except that this restriction
does not apply to securities of the U.S. Government or
repurchase agreements for such securities and except that the
Fund may invest all of its assets in shares of another
investment company having the identical investment
objective); (ii) acquire more than 10% of the outstanding
voting securities of any one issuer, except that the Fund may
invest all of its assets in shares of another investment
company having the identical investment objective; or (iii)
borrow money, except as a temporary measure for extraordinary
or emergency purposes, and then the aggregate borrowings at
any one time (including any reverse repurchase agreements and
dollar rolls) may not exceed 33 1/3% of its total assets (at
market). The Fund will not purchase additional securities
when its borrowings, less proceeds receivable from sales of
portfolio securities, exceed 5% of total assets.
The policies summarized above and the policy with respect to
concentration of investments in any one industry described
under
<PAGE> 12
Risks and Investment Considerations are fundamental policies
and, as such, can be changed only with the approval
of a "majority of the outstanding voting securities" of the
Fund as defined in the Investment Company Act of 1940. The
Fund's investment objective is non-fundamental and, as such,
may be changed by the Board of Trustees without shareholder
approval. Any such change may result in the Fund having an
investment objective different from the objective the
shareholder considered appropriate at the time of investment
in the Fund. All of the investment restrictions are set
forth in the Statement of Additional Information.
Nothing in the foregoing investment restrictions shall be
deemed to prohibit the Fund from purchasing the securities of
any issuer pursuant to the exercise of subscription rights
distributed to the Fund by the issuer, except that no such
purchase may be made if as a result the Fund will no longer
be a diversified investment company as defined in the
Investment Company Act of 1940 or fail to meet the
diversification requirements of the Internal Revenue Code.
RISKS AND INVESTMENT CONSIDERATIONS
All investments, including those in mutual funds, have risks.
No investment is suitable for all investors. THE FUND IS
INTENDED FOR LONG-TERM INVESTORS WHO CAN ACCEPT THE RISKS
ENTAILED IN INVESTING IN FOREIGN SECURITIES. Of course,
there can be no guarantee that the Fund will achieve its
objective.
Although the Fund does not attempt to reduce or limit risk
through wide industry diversification of investment, the Fund
usually allocates its investments among a number of different
industries rather than concentrating in a particular industry
or group of industries. However, the Fund will not invest
more than 25% of its total assets (at the time of investment)
in the securities of companies in any one industry.
FOREIGN INVESTING. The Fund provides long-term investors
with an opportunity to invest a portion of their assets in a
diversified portfolio of foreign securities. Non-U.S.
investments may be attractive because they increase
diversification, as compared to a portfolio comprised solely
of U.S. investments. In addition, many foreign economies
have, from time to time, grown faster than the U.S. economy,
and the returns on investments in these countries
<PAGE> 13
have exceeded those of similar U.S. investments, although
there can be no assurance that these conditions will
continue. International diversification allows the Fund and
an investor to achieve greater diversification and to take
advantage of changes in foreign economies and market conditions.
Investors should understand and consider carefully the
greater risks involved in foreign investing. Investing in
foreign securities, positions in which are generally
denominated in foreign currencies, and utilization of forward
foreign currency exchange contracts involve certain
considerations comprising both risks and opportunities not
typically associated with investing in U.S. securities.
These considerations include: fluctuations in exchange rates
of foreign currencies; possible imposition of exchange
control regulations or currency restrictions that would
prevent cash from being brought back to the United States;
less public information with respect to issuers of
securities; less governmental supervision of stock exchanges,
securities brokers, and issuers of securities; lack of
uniform accounting, auditing, and financial reporting
standards; lack of uniform settlement periods and trading
practices; less liquidity and frequently greater price
volatility in foreign markets than in the United States;
possible imposition of foreign taxes; possible investment in
the securities of companies in developing as well as
developed countries; and sometimes less advantageous legal,
operational, and financial protections applicable to foreign
sub-custodial arrangements. These risks are greater for
emerging market countries.
Although the Fund will try to invest in companies and
governments of countries having stable political
environments, there is the possibility of expropriation or
confiscatory taxation, seizure or nationalization of foreign
bank deposits or other assets, establishment of exchange
controls, the adoption of foreign government restrictions,
and other adverse political, social or diplomatic
developments that could affect investment in these nations.
The price of securities of small, rapidly growing companies
is expected to fluctuate more widely than the general market
due to the difficulty in assessing financial prospects of
companies developing new products or operating in countries
with developing markets.
The strategy for selecting investments will be based on
various criteria. A company proposed for investment should
<PAGE> 14
have a good market position in a fast-growing segment of the
economy, strong management, preferably a leading position in
its business, prospects of superior financial returns,
ability to self-finance, and securities available for
purchase at a reasonable market valuation. Because of the
foreign domicile of such companies, however, information on
some of the above factors may be difficult, if not
impossible, to obtain.
To the extent portfolio securities are issued by foreign
issuers or denominated in foreign currencies, the Fund's
investment performance is affected by the strength or
weakness of the U.S. dollar against these currencies. If the
dollar falls relative to the Japanese yen, for example, the
dollar value of a yen-denominated stock held in the portfolio
will rise even though the price of the stock remains
unchanged. Conversely, if the dollar rises in value relative
to the yen, the dollar value of the yen-denominated stock
will fall. (See the discussion of portfolio and transaction
hedging under Portfolio Investments and Strategies.)
MASTER FUND/FEEDER FUND OPTION. Rather than invest in
securities directly, the Fund may in the future seek to
achieve its investment objective by pooling its assets with
assets of other mutual funds managed by the Adviser for
investment in another investment company having the same
investment objective and substantially the same investment
policies and restrictions as the Fund. The purpose of such
an arrangement is to achieve greater operational efficiencies
and reduce costs. It is expected that any such investment
company would be managed by the Adviser in substantially the
same manner as the Fund. Shareholders of the Fund will be
given at least 30 days' prior notice of any such investment,
although they will not be entitled to vote on the action.
Such investment would be made only if the Trustees determine
it to be in the best interests of the Fund and its
shareholders.
HOW TO PURCHASE SHARES
You may purchase Fund shares by check, by wire, by electronic
transfer, or by exchange from your account with another
SteinRoe Fund. The initial purchase minimum per Fund account
is $2,500; the minimum for Uniform Gifts/Transfers to Minors
Act ("UGMA") accounts is $1,000; the minimum for accounts
established under an automatic investment plan (i.e., Regular
Investments, Dividend Purchase Option, or the Automatic
Exchange Plan) is $1,000 for regular
<page 15>
accounts and $500 for UGMA accounts; and the minimum per
account for SteinRoe IRAs is $500. The initial purchase
minimum is waived for shareholders who participate in the
SteinRoe Counselor [service mark] and SteinRoe Counselor
Preferred [service mark] programs and for clients of the
Adviser. Subsequent purchases must be at least $100, or at
least $50 if you purchase by electronic transfer. If you
wish to purchase shares to be held by a tax-sheltered
retirement plan sponsored by the Adviser, you must obtain
special forms for those plans. (See Shareholder Services.)
BY CHECK. To make an initial purchase of shares of the Fund
by check, please complete and sign the Application and mail
it to P.O. Box 804058, Chicago, Illinois 60680, together with
a check made payable to SteinRoe Funds.
You may make subsequent investments by submitting a check
along with either the stub from your Fund account
confirmation statement or a note indicating the amount of the
purchase, your account number, and the name in which your
account is registered. Each individual check submitted for
purchase must be at least $100, and the Trust generally will
not accept cash, drafts, third party checks, or checks drawn
on banks outside of the United States. Should an order to
purchase shares of the Fund be cancelled because your check
does not clear, you will be responsible for any resulting
loss incurred by the Fund.
BY WIRE. You may also pay for shares by instructing your
bank to wire Federal funds (monies of member banks within the
Federal Reserve System) to the Fund's custodian bank. Your
bank may charge you a fee for sending the wire. If you are
opening a new account by wire transfer, you must first
telephone the Trust to request an account number and furnish
your social security or other tax identification number.
Neither the Fund nor the Trust will be responsible for the
consequences of delays, including delays in the banking or
Federal Reserve wire systems. Your bank must include the
full name(s) in which your account is registered and your
Fund account number, and should address its wire as follows:
State Street Bank & Trust Company
Boston, Massachusetts
Attention: Custody
Fund No. 7123; SteinRoe International Fund
Account of (exact name(s) in registration)
Shareholder Account No. _________
BY ELECTRONIC TRANSFER. You may also make subsequent
investments by an electronic
<PAGE> 16
transfer of funds from your bank
checking account. Electronic transfer allows you to make
purchases at your request ("Special Investments") by calling
1-800-338-2550 or at pre-scheduled intervals ("Regular
Investments"). (See Shareholder Services.) Electronic
transfer purchases are subject to a $50 minimum and a
$100,000 maximum. You may not open a new account through
electronic transfer. Should an order to purchase shares of
the Fund be cancelled because your electronic transfer does
not clear, you will be responsible for any resulting loss
incurred by the Fund.
BY EXCHANGE. You may purchase shares by exchange of shares
from another SteinRoe Fund account either by phone (if the
Telephone Exchange Privilege has been established on the
account from which the exchange is being made), by mail, in
person, or automatically at regular intervals (if you have
elected Automatic Exchanges). Restrictions apply; please
review the information on the Exchange Privilege under How to
Redeem Shares--By Exchange.
PURCHASE PRICE AND EFFECTIVE DATE. Each purchase of the
Fund's shares is made at the Fund's net asset value (see Net
Asset Value) next determined after receipt of payment as
follows:
A purchase by check or wire transfer is made at the net asset
value next determined after receipt by the Fund of the check
or wire transfer of funds in payment of the purchase.
A purchase by electronic transfer is made at the net asset
value next determined after the Fund receives the electronic
transfer from your bank. A Special Electronic Transfer
Investment order received by telephone on a business day
before 2:00 p.m., Chicago time, is effective on the next
business day.
CONDITIONS OF PURCHASE. Each purchase order for the Fund
must be accepted by an authorized officer of the Trust in
Chicago and is not binding until accepted and entered on the
books of the Fund. Once your purchase order has been
accepted, you may not cancel or revoke it; however, you may
redeem the shares. The Trust reserves the right not to
accept any purchase order that it determines not to be in the
best interest of the Trust or of the Fund's shareholders.
The Trust also reserves the right to waive or lower its
investment minimums for any reason.
PURCHASES THROUGH THIRD PARTIES.
You may purchase (or redeem) shares through investment
dealers, banks, or other financial institutions. These
<PAGE> 17
institutions may charge for their services or place
limitations on the extent to which you may use the services
offered by the Trust. There are no charges or limitations
imposed by the Trust (other than those described in this
prospectus) if shares are purchased (or redeemed) directly
from the Trust.
Some financial institutions that maintain nominee accounts
with the Fund for their clients for whom they hold Fund
shares charge an annual fee of up to 0.25% of the average net
assets held in such accounts for accounting, servicing, and
distribution services they provide with respect to the
underlying Fund shares. The Fund may pay a portion of those
fees not to exceed the fees and expenses the Fund would pay
to its transfer agent if the shares held in nominee name were
registered on the Fund's books in the individual names of the
beneficial owners of such shares. The balance of such fees
are paid by the Adviser.
HOW TO REDEEM SHARES
BY WRITTEN REQUEST. You may redeem all or a portion of your
shares of the Fund by submitting a written request in "good
order" to the Trust at P.O. Box 804058, Chicago, Illinois
60680. A redemption request will be considered to have been
received in good order if the following conditions are
satisfied:
(1) the request must be in writing, indicate the number of
shares or dollar amount to be redeemed, and identify the
shareholder's account number;
(2) the request must be signed by the shareholder(s) exactly
as the shares are registered;
(3) the signatures on the written redemption request must be
guaranteed (a signature guarantee is not a notarization, but
is a widely accepted way to protect you and the Fund by
verifying your signature);
(4) corporations and associations must submit with each
request a completed Certificate of Authorization included in
this prospectus (or a form of resolution acceptable to the
Trust); and
(5) other supporting legal documents may be required from
organizations, executors, administrators, trustees, or others
acting on accounts not registered in their names.
BY EXCHANGE. You may redeem all or any portion of your Fund
shares and use the proceeds to purchase shares of any other
SteinRoe Fund offered for sale in your state if your signed,
properly
<PAGE> 18
completed Application is on file. AN EXCHANGE
TRANSACTION IS A SALE AND PURCHASE OF SHARES FOR FEDERAL
INCOME TAX PURPOSES AND MAY RESULT IN CAPITAL GAIN OR LOSS.
Before exercising the Exchange Privilege, you should obtain
the prospectus for the SteinRoe Fund in which you wish to
invest and read it carefully. The registration of the
account to which you are making an exchange must be exactly
the same as that of the Fund account from which the exchange
is made and the amount you exchange must meet any applicable
minimum investment of the SteinRoe Fund being purchased. An
exchange may be made by following the redemption procedure
described above under By Written Request and indicating the
SteinRoe Fund to be purchased, except that a signature
guarantee normally is not required. (See also the discussion
below of the Telephone Exchange Privilege and Automatic
Exchanges.)
SPECIAL REDEMPTION PRIVILEGES. The Telephone Exchange
Privilege and the Telephone Redemption by Check Privilege
will be established automatically for you when you open your
account unless you decline these Privileges on your
Application. Other Privileges must be specifically elected.
If you do not want the Telephone Exchange and Redemption
Privileges, check the box(es) under the section "Telephone
Redemption Options" when completing your Application. In
addition, a signature guarantee may be required to establish
a Privilege after you open your account.
The Telephone Redemption by Check Privilege and Special
Electronic Transfer Redemptions are not available to redeem
shares held by a tax-sheltered retirement plan sponsored by
the Adviser. (See also General Redemption Policies.)
Telephone Exchange Privilege. You may use the Telephone
Exchange Privilege to exchange an amount of $1,000 or more
from your account by calling 1-800-338-2550 or by sending a
telegram; new accounts opened by exchange are subject to the
initial purchase minimum for the Fund being purchased.
GENERALLY, YOU WILL BE LIMITED TO FOUR TELEPHONE EXCHANGE
ROUND-TRIPS PER YEAR AND THE FUND MAY REFUSE REQUESTS FOR
TELEPHONE EXCHANGES IN EXCESS OF FOUR ROUND-TRIPS (A ROUND-
TRIP BEING THE EXCHANGE OUT OF THE FUND INTO ANOTHER STEINROE
FUND, AND THEN BACK TO THE FUND). Also, the Trust's general
redemption policies apply to redemptions of shares by
Telephone Exchange.
<PAGE> 19
(See General Redemption Policies.)
The Trust reserves the right at any time without prior notice
to suspend or terminate the use of the Telephone Exchange
Privilege by any person or class of persons. The Trust
believes that use of the Telephone Exchange Privilege by
investors utilizing market-timing strategies adversely
affects the Fund. THEREFORE, THE TRUST GENERALLY WILL NOT
HONOR REQUESTS FOR TELEPHONE EXCHANGES BY SHAREHOLDERS
IDENTIFIED BY THE TRUST AS "MARKET-TIMERS." Moreover, the
Trust reserves the right at any time without prior notice to
suspend, limit, modify, or terminate the Telephone Exchange
Privilege in its entirety. Because such a step would be
taken only if the Board of Trustees believes it would be in
the best interests of the Fund, the Trust expects that it
would provide shareholders with prior written notice of any
such action unless the resulting delay in the suspension,
limitation, modification, or termination of the Telephone
Exchange Privilege would adversely affect the Fund. IF THE
TRUST WERE TO SUSPEND, LIMIT, MODIFY, OR TERMINATE THE
TELEPHONE EXCHANGE PRIVILEGE, A SHAREHOLDER EXPECTING TO MAKE
A TELEPHONE EXCHANGE MIGHT FIND THAT AN EXCHANGE COULD NOT BE
PROCESSED OR THAT THERE MIGHT BE A DELAY IN THE
IMPLEMENTATION OF THE EXCHANGE. (See How to Redeem Shares--
By Exchange.) During periods of volatile economic and market
conditions, you may have difficulty placing your exchange by
telephone.
Automatic Exchanges. You may use the Automatic Exchange
Privilege to automatically redeem a fixed amount from your
Fund account for investment in another SteinRoe Fund account
on a regular basis.
Telephone Redemption by Check Privilege. You may use the
Telephone Redemption by Check Privilege to redeem an amount
of $1,000 or more from your account by calling 1-800-338-
2550. The proceeds will be sent by check to your registered
address. The Telephone Redemption by Check Privilege is not
available to redeem shares held by a tax-sheltered retirement
plan sponsored by the Adviser.
Electronic Transfer Privilege. You may redeem shares by
calling 1-800-338-2550 and requesting an electronic transfer
("Special Redemption") of the proceeds to a checking account
previously designated by you at a bank that is a member of
the Automated Clearing House or at scheduled intervals
("Automatic Redemptions"--see Shareholder Services).
Electronic transfers are subject to a $50 minimum and a
<PAGE> 20
$100,000 maximum. A Special Redemption request received by
telephone after 2:00 p.m., Chicago time, is deemed received
on the next business day.
GENERAL REDEMPTION POLICIES. You may not cancel or revoke
your redemption order once instructions have been received
and accepted. The Trust cannot accept a redemption request
that specifies a particular date or price for redemption or
any special conditions. Please telephone the Trust if you
have any questions about requirements for a redemption before
submitting your request. If you wish to redeem shares held
by a tax-sheltered retirement plan sponsored by the Adviser,
special procedures of those plans apply to such redemptions.
(See Shareholder Services--Tax-Sheltered Retirement Plans.)
The Trust reserves the right to require a properly completed
Application before making payment for shares redeemed.
The price at which your redemption order will be executed is
the net asset value next determined after proper redemption
instructions are received. (See Net Asset Value.) Because
the redemption price you receive depends upon the Fund's net
asset value per share at the time of redemption, it may be
more or less than the price you originally paid for the
shares and may result in a realized capital gain or loss.
The Trust will generally mail payment for shares redeemed
within seven days after proper instructions are received. If
you attempt to redeem shares within 15 days after they have
been purchased by check or electronic transfer, the Trust may
delay payment of the redemption proceeds to you until it can
verify that payment for the purchase of those shares has been
(or will be) collected. To reduce such delays, the Trust
recommends that your purchase be made by Federal funds wire
through your bank.
Generally, you may not use the Exchange Privilege or any
Special Redemption Privilege to redeem shares purchased by
check (other than certified or cashiers' checks) or
electronic transfer until 15 days after their date of
purchase.
The Trust reserves the right at any time without prior notice
to suspend, limit, modify, or terminate any Privilege or its
use in any manner by any person or class.
Neither the Trust, its transfer agent, nor their respective
officers, trustees, directors, employees, or agents will be
responsible for the authenticity of instructions provided
under the Privileges, nor for any loss, liability, cost or
expense for acting upon instructions
<PAGE> 21
furnished thereunder if they reasonably believe that such
instructions are genuine. The Fund employs procedures
reasonably designed to confirm that instructions communicated
by telephone under any Special Redemption Privilege or the
Special Electronic Transfer Redemption Privilege are genuine.
Use of any Special Redemption Privilege or the Special
Electronic Transfer Redemption Privilege authorizes the Fund
and its transfer agent to tape-record all instructions to
redeem. In addition, callers are asked to identify the
account number and registration, and may be required to
provide other forms of identification. Written confirmations
of transactions are mailed promptly to the registered
address; a legend on the confirmation requests the
shareholder to review the transactions and inform the Fund
immediately if there is a problem. If the Fund does not
follow reasonable procedures for protecting shareholders
against loss on telephone transactions, it may be liable for
any losses due to unauthorized or fraudulent instructions.
The Trust reserves the right to redeem shares in any account
and send the proceeds to the owner if the shares in the
account do not have a value of at least $1,000. A
shareholder would be notified that his account is below the
minimum and allowed 30 days to increase the account before
the redemption is processed.
Shares in any account you maintain with the Fund or any of
the other SteinRoe Funds may be redeemed to the extent
necessary to reimburse any SteinRoe Fund for any loss it
sustains that is caused by you (such as losses from
uncollected checks and electronic transfers for the purchase
of shares or any SteinRoe Fund liability under the Internal
Revenue Code provisions on backup withholding).
SHAREHOLDER SERVICES
REPORTING TO SHAREHOLDERS. You will receive a confirmation
statement reflecting each of your purchases and redemptions
of shares of the Fund, as well as periodic statements
detailing distributions made by the Fund. Shares purchased
by reinvestment of dividends, by cross-reinvestment of
dividends from another Fund, or pursuant to an automatic
investment plan will be confirmed to you quarterly. In
addition, the Trust will send you semiannual and annual
reports showing Fund portfolio holdings and will provide you
annually with tax information.
<PAGE> 22
FUNDS-ON-CALL [REGISTERED TRADEMARK] 24-HOUR INFORMATION
SERVICE. To access the SteinRoe Funds-on-Call [registered
trademark] automated telephone service, just call 1-800-338-
2550 on any touch-tone telephone and follow the recorded
instructions. Funds-on-Call [registered trademark] provides
yields, prices, latest dividends, account balances, last
transaction, and other information 24 hours a day, seven days
a week.
FUNDS-ON-CALL [REGISTERED TRADEMARK] AUTOMATED TELEPHONE
TRANSACTIONS. If you have established the Funds-on-Call
[REGISTERED TRADEMARK] transaction privilege (Funds-on-Call
[REGISTERED TRADEMARK] Application will be required), you may
initiate Special Investments and Redemptions, Telephone
Exchanges, and Telephone Redemptions by Check 24 hours a day,
seven days a week by calling 1-800-338-2550 on a touch-tone
telephone. These transactions are subject to the terms and
conditions of the individual privileges. (See How to
Purchase Shares and How to Redeem Shares.)
STEINROE COUNSELOR [SERVICE MARK] PROGRAM. The SteinRoe
Counselor [service mark] and SteinRoe Counselor Preferred
[service mark] programs are professional investment advisory
services available to shareholders. These programs are
designed to provide investment guidance in helping investors
to select a portfolio of SteinRoe Funds. The SteinRoe
Counselor Preferred [service mark] program, which
automatically adjusts client portfolios among the SteinRoe
Funds, has a fee of up to 1% of assets.
TAX-SHELTERED RETIREMENT PLANS. Booklets describing the
following programs and special forms necessary for
establishing them are available on request. You may use all
of the SteinRoe Funds, except those investing primarily in
tax-exempt securities, in these plans. Please read the
prospectus for each fund in which you plan to invest before
making your investment.
Individual Retirement Accounts ("IRAs") for employed persons
and their non-employed spouses.
Prototype Money Purchase Pension and Profit-Sharing Plans for
self-employed individuals, partnerships, and corporations.
Simplified Employee Pension Plans permitting employers to
provide retirement benefits to their employees by utilizing
IRAs while minimizing administration and reporting
requirements.
SPECIAL SERVICES. The following special services are
available to shareholders. Please call 1-800-338-2550 or
write the Trust for additional information and forms.
Dividend Purchase Option--to diversify your Fund investments
by having distributions
<PAGE> 23
from one Fund account automatically
invested in another SteinRoe Fund account. Before
establishing this option, you should obtain and read
carefully the prospectus of the SteinRoe Fund into which you
wish to have your distributions invested. The account from
which distributions are made must be of sufficient size that
each distribution will usually be at least $25. The account
into which distributions are to be invested may be opened
with an initial investment of only $1,000.
Automatic Dividend Deposit (electronic transfer)--to have
income dividends and capital gain distributions deposited
directly into your bank checking account.
Telephone Redemption by Check Privilege and Telephone
Exchange Privilege--established automatically when you open
your account unless you decline them on your Application
($1,000 minimum). (See How to Redeem Shares--Special
Redemption Privileges.)
Special Redemption Option (electronic transfer)--to redeem
shares at any time and have the proceeds deposited directly
to your bank checking account ($50 minimum; $100,000
maximum).
Regular Investments (electronic transfer)--to purchase Fund
shares at regular intervals directly from your bank checking
account ($50 minimum; $100,000 maximum).
Special Investments (electronic transfer)--to purchase Fund
shares by telephone and pay for them by electronic transfer
of funds from your checking account ($50 minimum; $100,000
maximum).
Automatic Exchange Plan--to automatically redeem a fixed
dollar amount from your Fund account and invest it in another
SteinRoe Fund account on a regular basis ($50 minimum;
$100,000 maximum).
Automatic Redemptions (electronic transfer)--to have a fixed
dollar amount redeemed and sent at regular intervals directly
to your bank checking account ($50 minimum; $100,000
maximum).
Systematic Withdrawals--to have a fixed dollar amount,
declining balance, or fixed percentage of your account
redeemed and sent at regular intervals by check to you or
another payee.
NET ASSET VALUE
The purchase and redemption price of the Fund's shares is its
net asset value per share. The net asset value of a share of
the Fund is determined as of the close of trading on the New
York Stock Exchange ("NYSE") (currently 3:00 p.m., Chicago
time) by dividing the difference between
<page 24>
the values of the Fund's assets and liabilities by the number
of shares outstanding. Net asset value will not be
determined on days when the NYSE is closed unless, in the
judgment of the Board of Trustees, the net asset value of the
Fund should be determined on any such day, in which case the
determination will be made at 3:00 p.m., Chicago time.
In computing the net asset value of the Fund, the values of
portfolio securities are generally based upon market
quotations which, depending upon local convention or
regulation, may be last sale price, last bid or asked price,
or the mean between the last bid and asked prices as of, in
each case, the close of the appropriate exchange or other
designated time. Trading in securities on European and Far
Eastern securities exchanges and over-the-counter markets is
normally completed at various times before the close of
business on each day on which the NYSE is open. Trading of
these securities may not take place on every NYSE business
day. In addition, trading may take place in various foreign
markets on Saturdays or on other days when the NYSE is not
open and on which the Fund's net asset value is not
calculated. Therefore, such calculation does not take place
contemporaneously with the determination of the prices of
many of the portfolio securities used in such calculation and
the value of the Fund's portfolio may be significantly
affected on days when shares of the Fund may not be purchased
or redeemed.
DISTRIBUTIONS AND INCOME TAXES
DISTRIBUTIONS. Income dividends for the Fund are normally
declared and paid annually. The Fund intends to distribute
by the end of each calendar year at least 98% of any net
capital gains realized from the sale of securities during the
twelve-month period ended October 31 in that year. The Fund
intends to distribute any undistributed net investment income
and net realized capital gains in the following year.
All of your income dividends and capital gain distributions
will be reinvested in additional shares unless you elect to
have distributions either (1) paid by check, (2) deposited by
electronic transfer into your bank checking account, (3)
applied to purchase shares in your account with another
SteinRoe Fund, or (4) applied to purchase shares in a
SteinRoe Fund account of another person. (See Shareholder
Services.) Reinvestment into the same Fund account normally
occurs one business day after the record date.
<PAGE> 25
Investment of distributions into another SteinRoe Fund
account occurs on the payable date. If you choose to receive
your distributions in cash, your distribution check normally
will be mailed approximately 15 days after the record date.
The Trust reserves the right to reinvest the proceeds and
future distributions in additional Fund shares if checks
mailed to you for distributions are returned as undeliverable
or are not presented for payment within six months.
U.S. FEDERAL INCOME TAXES. Your distributions will be
taxable to you, under income tax law, whether received in
cash or reinvested in additional shares. For Federal income
tax purposes, any distribution that is paid in January but
was declared in the prior calendar year is deemed paid in the
prior calendar year.
You will be subject to Federal income tax at ordinary rates
on income dividends and distributions of net short-term
capital gains. Distributions of net long-term capital gains
will be taxable to you as long-term capital gain regardless
of the length of time you have held your shares.
You will be advised annually as to the source of
distributions for tax purposes. If you are not subject to
tax on your income, you will not be required to pay tax on
these amounts.
If you redeem shares of the Fund held for six months or less,
any loss on the sale of those shares will be a long-term
capital loss to the extent of any distributions of net long-
term capital gains you have received with respect to those
shares.
For Federal income tax purposes, the Fund is treated as a
separate taxable entity distinct from the other series of the
Trust.
FOREIGN INCOME TAXES. Investment income received by the Fund
from sources within foreign countries may be subject to
foreign income taxes withheld at the source. The United
States has entered into tax treaties with many foreign
countries that entitle the Fund to a reduced rate of tax or
exemption from tax on such income. It is impossible to
determine the effective rate of foreign tax in advance since
the amount of the Fund's assets to be invested within various
countries will fluctuate and the extent to which tax refunds
will be recovered is uncertain. The Fund intends to operate
so as to qualify for treaty-reduced tax rates where
applicable.
To the extent that the Fund is liable for foreign income
taxes withheld at the source, the Fund also intends to
operate so as to meet the requirements of the U.S. Internal
Revenue Code to "pass
<PAGE> 26
through" to the Fund's shareholders foreign income taxes
paid, but there can be no assurance that the Fund will be
able to do so.
This discussion of U.S. and foreign taxation is not intended
to be a full discussion of income tax laws and their effect
on shareholders. You may wish to consult your own tax
advisor. The foregoing information applies to U.S.
shareholders. Foreign shareholders should consult their tax
advisors as to the tax consequences of ownership of Fund
shares.
BACKUP WITHHOLDING. If (a) you fail to (i) furnish your
properly certified social security or other tax
identification number or (ii) certify that your tax
identification number is correct or that you are not subject
to backup withholding due to the underreporting of certain
income, or (b) the Internal Revenue Service informs the Trust
that your tax identification number is incorrect, the Trust
may be required to withhold Federal income tax ("backup
withholding") from certain payments (including redemption
proceeds) to you. These certifications are contained in the
Application that you should complete and return when you open
an account. The Fund must promptly pay to the IRS all
amounts withheld. Therefore, it is usually not possible for
the Fund to reimburse you for amounts withheld. However, you
may claim the amount withheld as a credit on your Federal
income tax return.
INVESTMENT RETURN
The total return from an investment in the Fund is measured
by the distributions received (assuming reinvestment) plus or
minus the change in the net asset value per share for a given
period. A total return percentage may be calculated by
dividing the value of a share at the end of the period
(including reinvestment of distributions) by the value of the
share at the beginning of the period and subtracting one.
For a given period, an average annual total return may be
calculated by finding the average annual compounded rate that
would equate a hypothetical $1,000 investment to the ending
redeemable value.
Comparison of the Fund's total return with alternative
investments should consider differences between the Fund and
the alternative investments, the periods and methods used in
calculation of the return being compared, and the impact of
taxes on alternative investments. Of course, past
performance is not necessarily indicative of future results.
<PAGE> 27
MANAGEMENT OF THE FUND
TRUSTEES AND ADVISERS. The Board of Trustees of the Trust
has overall management responsibility for the Trust and the
Fund. See the Statement of Additional Information for the
names of and additional information about the trustees and
officers. The Fund's Adviser, Stein Roe & Farnham
Incorporated, One South Wacker Drive, Chicago, Illinois
60606, is responsible for managing the Fund, subject to the
direction of the Board of Trustees. The Adviser is
registered as an investment adviser under the Investment
Advisers Act of 1940. The Adviser was organized in 1986 to
succeed to the business of Stein Roe & Farnham, a partnership
that had advised and managed mutual funds since 1949. The
Adviser is a wholly-owned indirect subsidiary of Liberty
Mutual Insurance Company ("Liberty Mutual").
The Sub-Adviser, Rockefeller & Co., Inc., subject to the
overall supervision of the Adviser, provides the Fund with
investment advisory services, including portfolio management.
The Sub-Adviser, which is registered as an investment adviser
under the Investment Advisers Act of 1940, is a private
investment advisory and management firm established by the
Rockefeller Family to serve its own needs and those of a
small number of other persons and institutions. As of
October 31, 1994, the Sub-Adviser managed over $2.5 billion
in assets, including $836 million in foreign securities. The
Sub-Adviser, with offices at 30 Rockefeller Plaza, New York,
New York 10112, is an indirect, wholly-owned subsidiary of
the Rockefeller Family Trust. The Sub-Adviser has previous
experience in advising mutual funds, serving as a sub-adviser
to a European emerging companies fund from 1990 to 1992.
PORTFOLIO MANAGER. Bruno Bertocci is primarily responsible
for the day-to-day management of the Fund's portfolio and has
been the portfolio manager of the Fund since its inception.
Mr. Bertocci is Senior Portfolio Manager for the Sub-Adviser,
and has been employed by the Sub-Adviser since 1983. He
received an A.B. from Oberlin College in 1976 and an M.B.A.
from Harvard University in 1980.
FEES AND EXPENSES. In return for its services, the Adviser
receives a monthly fee from the Fund, computed and accrued
daily, at an annual rate of 1% of average net assets. This
fee is higher than the fees paid by most mutual funds. With
respect to the portfolio assets of the Fund allocated by the
Adviser to the
<page 28>
Sub-Adviser, the Adviser pays the Sub-Adviser a fee of 0.5%
of average net assets.
Under a separate agreement with the Trust, the Adviser
provides certain accounting and bookkeeping services to the
Fund, including computation of the Fund's net asset value and
calculation of its net income and capital gains and losses on
disposition of Fund assets.
PORTFOLIO TRANSACTIONS. The Sub-Adviser places the orders
for the purchase and sale of portfolio securities and options
and futures transactions for the Fund. In doing so, the Sub-
Adviser seeks to obtain the best combination of price and
execution, which involves a number of judgmental factors.
TRANSFER AGENT. SteinRoe Services Inc., One South Wacker
Drive, Chicago, Illinois 60606, a wholly-owned indirect
subsidiary of Liberty Mutual, is the agent of the Trust for
the transfer of shares, disbursement of dividends, and
maintenance of shareholder accounting records.
DISTRIBUTOR. The shares of the Fund are offered for sale
through Liberty Securities Corporation ("Distributor")
without any sales commissions or charges to the Fund or to
its shareholders. The Distributor is a wholly-owned indirect
subsidiary of Liberty Mutual. The business address of the
Distributor is 600 Atlantic Avenue, Boston, Massachusetts
02210; however, all Fund correspondence (including purchase
and redemption orders) should be mailed to the Trust at P.O.
Box 804058, Chicago, Illinois 60680. All distribution and
promotional expenses are paid by the Adviser, including
payments to the Distributor for sales of Fund shares.
CUSTODIAN. State Street Bank and Trust Company (the "Bank"),
225 Franklin Street, Boston, Massachusetts 02101, is the
custodian for the Fund. Foreign securities are maintained in
the custody of foreign banks and trust companies that are
members of the Bank's Global Custody Network or foreign
depositories used by such members. (See Custodian in the
Statement of Additional Information.)
ORGANIZATION AND DESCRIPTION OF SHARES
The Trust is a Massachusetts business trust organized under
an Agreement and Declaration of Trust ("Declaration of
Trust") dated January 8, 1987, which provides that each
shareholder shall be deemed to have agreed to be bound by the
terms thereof. The Declaration of Trust may be amended by a
vote of either the
<PAGE> 29
Trust's shareholders or its trustees. The Trust may issue an
unlimited number of shares, in one or more series as the
Board may authorize. Currently, eight series are authorized
and outstanding.
Under Massachusetts law, shareholders of a Massachusetts
business trust such as the Trust could, in some
circumstances, be held personally liable for unsatisfied
obligations of the trust. The Declaration of Trust provides
that persons extending credit to, contracting with, or having
any claim against, the Trust or any particular Fund shall
look only to the assets of the Trust or of the respective
Fund for payment under such credit, contract or claim, and
that the shareholders, Trustees and officers of the Trust
shall have no personal liability therefor. The Declaration
of Trust requires that notice of such disclaimer of liability
be given in each contract, instrument or undertaking executed
or made on behalf of the Trust. The Declaration of Trust
provides for indemnification of any shareholder against any
loss and expense arising from personal liability solely by
reason of being or having been a shareholder. Thus, the risk
of a shareholder incurring financial loss on account of
shareholder liability is believed to be remote, because it
would be limited to circumstances in which the disclaimer was
inoperative and the Trust was unable to meet its obligations.
The risk of a particular Fund incurring financial loss on
account of unsatisfied liability of another Fund of the Trust
is also believed to be remote, because it would be limited to
claims to which the disclaimer did not apply and to
circumstances in which the other Fund was unable to meet its
obligations.
<PAGE> 30
<PAGE> 31
CERTIFICATE OF AUTHORIZATION (FOR USE BY CORPORATIONS AND
ASSOCIATIONS ONLY)
A corporation or association must complete this Certificate
and submit it with the Fund Application, each written
redemption, transfer or exchange request, and each request to
terminate or change any of the Privileges or special service
elections.
If the entity submitting the Certificate is an association,
the word "association" shall be deemed to appear each place
the word "corporation" appears. If the officer signing this
Certificate is named as an authorized person, another officer
must countersign the Certificate. If there is no other
officer, the person signing the Certificate must have his
signature guaranteed. If you are not sure whether you are
required to complete this Certificate, call the office of the
SteinRoe Funds, 1-800-338-2550 toll-free.
The undersigned hereby certifies that he is the duly elected
Secretary of ____________ _____________________________ (the
"Corporation") and (name of Corporation/Associaton)
that the following individual(s):
Authorized Persons
Name Title
Name Title
Name Title
is (are) duly authorized by resolution or otherwise to act on
behalf of the Corporation in connection with the
Corporation's ownership of shares of any mutual fund managed
by Stein Roe & Farnham Incorporated (individually, the "Fund"
and collectively, the "Funds") including, without limitation,
furnishing any such Fund and its transfer agent with
instructions to transfer or redeem shares of that Fund
payable to any person or in any manner, or to redeem shares
of that Fund and apply the proceeds of such redemption to
purchase shares of another Fund (an "exchange"), and to
execute any necessary forms in connection therewith.
Unless a lesser number is specified, all of the Authorized
Persons must sign written instructions. Number of signatures
required: ________.
If the undersigned is the only person authorized to act on
behalf of the Corporation, the undersigned certifies that he
is the sole shareholder, director, and officer of the
Corporation and that the Corporation's Charter and Bylaws
provide that he is the only person authorized to so act.
Unless expressly declined on the Application (or other form
acceptable to the Funds), the undersigned further certifies
that the Corporation has authorized by resolution or
otherwise the establishment of the Telephone Exchange and
Telephone Redemption by Check Privileges for the
Corporation's account with any Fund offering any such
Privilege. If elected on the Application (or other form
acceptable to the Funds), the undersigned also certifies that
the Corporation has similarly authorized establishment of the
Electronic Transfer, Telephone Redemption by Wire, and Check-
Writing Privileges for the Corporation's account with any
Fund offering said Privileges. The undersigned has further
authorized each Fund and its transfer agent to honor any
written, telephonic, or telegraphic instructions furnished
pursuant to any such Privilege by any person believed by the
Fund or its transfer agent or their agents, officers,
directors, trustees, or employees to be authorized to act on
behalf of the Corporation and agrees that neither the Fund
nor its transfer agent, their agents, officers, directors,
trustees, or employees will be liable for any loss,
liability, cost, or expense for acting upon any such
instructions.
These authorizations shall continue in effect until five
business days after the Fund and its transfer agent receive
written notice from the Corporation of any change.
IN WITNESS WHEREOF, I have hereunto subscribed my name as
Secretary and affixed the seal of this Corporation this ____
day of _________________, 19___.
Corporate
Seal
Here Secretary
Signature Guarantee*
*Only required if the person signing the
Certificate is the only person named as
"Authorized Person."
<PAGE>
[STEIN ROE & FARNHAM MUTUAL FUNDS LOGO]
The SteinRoe Funds
SteinRoe Government Reserves
SteinRoe Cash Reserves
SteinRoe Limited Maturity Income Fund
SteinRoe Government Income Fund
SteinRoe Intermediate Bond Fund
SteinRoe Income Fund
SteinRoe Municipal Money Market Fund
SteinRoe Intermediate Municipals
SteinRoe Managed Municipals
SteinRoe High-Yield Municipals
SteinRoe Total Return Fund
SteinRoe Prime Equities
SteinRoe Growth Stock Fund
SteinRoe Capital Opportunities Fund
SteinRoe Special Fund
SteinRoe International Fund
SteinRoe Young Investor Fund
SteinRoe Special Venture Fund
________________
SteinRoe International Fund
Prospectus
February 1, 1995
P.O. Box 804058
Chicago, Illinois 60680
1-800-338-2550
In Chicago, visit our Fund Center
at One South Wacker Drive
Liberty Securities Corporation, Distributor
06009
<PAGE>
STEINROE INVESTMENT TRUST
STEINROE INTERNATIONAL FUND
Supplement to February 1, 1995 Defined Contribution Plans Prospectus
_________________________
Portfolio management for the International Fund is provided by
a team of investment professionals employed by the Fund's sub-
adviser, Rockefeller & Co., Inc. ("R&Co."). Members of the team
participate in the investment process from R&Co. offices in
London, Hong Kong, and New York City. R&Co. believes its team
approach benefits Fund investors by exploiting the diverse
expertise of team members over a range of dissimilar global
markets. (See page 10 of the Prospectus.)
From time to time, the Adviser may voluntarily waive its
management fee and/or absorb certain expenses for the Fund. The
Adviser has agreed to voluntarily waive its management fee and
absorb the expenses of the Fund to the extent that such fees and
expenses (excluding taxes, interest, all commissions and other
normal charges incident to the purchase and sale of portfolio
securities, and extraordinary charges such as litigation costs,
but including fees paid to the Adviser) on an annualized basis
exceed 1.65% of average net assets through January 31, 1996,
subject to earlier termination by the Adviser on 30 days' notice.
Effective May 1, 1995, there was a change in the services
provided by the Fund's transfer agent and a change in the fees
payable to the transfer agent. These changes are expected to
change the Fund's annual operating expenses as shown in the Fee
Table on page 2 of the Prospectus as follows:
Annual Fund Operating Expenses
(as a percentage of average net assets)
Management Fees ........................1.00%
12b-1 Fees..............................None
Other Expenses..........................0.65%
Total Fund Operating Expenses...........1.65%
In addition, the expenses payable on a $1,000 investment for
one and three years in the hypothetical example following the Fee
Table would be changed to $17 and $52 respectively.
The Date of this Supplement is May 1, 1995
<PAGE> 1
[STEINROE MUTUAL FUNDS LOGO]
PROSPECTUS
DEFINED CONTRIBUTION PLANS
STEINROE INTERNATIONAL FUND
The Fund seeks long-term growth of capital by investing in a
diversified portfolio of foreign securities.
This prospectus relates only to shares of the Fund purchased
through eligible employer-sponsored defined contribution plans
("defined contribution plans").
The Fund is a "no-load" fund. There are no sales or redemption
charges, and the Fund has no 12b-1 plan. The Fund is a series of
the STEINROE INVESTMENT TRUST.
This prospectus contains information you should know before
investing in the Fund. Please read it carefully and retain it for
future reference.
A Statement of Additional Information dated February 1, 1995,
containing more detailed information, has been filed with the
Securities and Exchange Commission and (together with any
supplements thereto) is incorporated herein by reference. The
Statement of Additional Information and the most recent financial
statements may be obtained without charge by writing to the
Secretary at P.O. Box 804058, Chicago, IL 60680 or by calling 1-
800-322-1130.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS FEBRUARY 1, 1995
TABLE OF CONTENTS
Page
Fee Table................................2
Financial Highlights.....................2
The Fund.................................3
How the Fund Invests.....................3
Portfolio Investments and Strategies.....4
Restrictions on the Fund's Investments...6
Risks and Investment Considerations......6
How to Purchase Shares ..................8
How to Redeem Shares.....................8
Net Asset Value .........................8
Distributions and Income Taxes...........9
Investment Return.......................10
Management of the Fund..................10
Organization and Description of Shares..11
For More Information....................12
<PAGE> 2
FEE TABLE
SHAREHOLDER TRANSACTION EXPENSES
Sales Load Imposed on Purchases None
Sales Load Imposed on Reinvested Dividends None
Deferred Sales Load None
Redemption Fees None
Exchange Fees None
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees 1.00%
12b-1 Fees None
Other Expenses 0.61%
-----
Total Fund Operating Expenses 1.61%
-----
EXAMPLE. You would pay the following expenses on a $1,000
investment assuming (1) 5% annual return and (2) redemption
at the end of each time period:
1 year 3 years
------ -------
$16 $51
The purpose of the Fee Table is to assist you in understanding the
various costs and expenses that you will bear directly or
indirectly as an investor in the Fund. The information in the
table is based upon actual expenses incurred in the last fiscal
year. (Also see Management of the Fund--Fees and Expenses.) For
purposes of the Example above, the figures assume that the
percentage amounts listed for the Fund under Annual Fund Operating
Expenses remain the same in each of the periods and that all
income dividends and capital gain distributions are reinvested in
additional Fund shares. The figures in the Example are not
necessarily indicative of past or future expenses, and actual
expenses may be greater or less than those shown. Although
information such as that shown above is useful in reviewing the
Fund's expenses and in providing a basis for comparison with other
mutual funds, it should not be used for comparison with other
investments using different assumptions or time periods. The
example does not reflect any charges or expenses related to your
employer's plan.
FINANCIAL HIGHLIGHTS
The table below reflects the results of operations of the Fund for
the period shown on a per-share basis and has been audited by
Arthur Andersen LLP, independent public accountants. All of the
auditors' reports were unqualified. This table should be read in
conjunction with the Fund's financial statements and notes
thereto. The Fund's annual report, which may be obtained from the
Trust upon request without charge, contains additional performance
information.
<TABLE>
<CAPTION>
Period Ended
Sept. 30, 1994(a)
-----------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.00
-----
Income from Investment Operations
Net investment income .03
Net realized and unrealized gains on
investments and foreign currency transactions .58
Total from investment operations .61
-----
NET ASSET VALUE, END OF PERIOD $10.61
------
------
Ratio of expenses to average net asset *1.61%
Ratio of net investment income to average
net assets *0.61%
Portfolio turnover rate 48%
Total return 6.10%
Net assets, end of period (000 omitted) $74,817
<FN>
- ---------
*Annualized.
(a) From commencement of operations on March 1, 1994.
</TABLE>
<PAGE> 3
THE FUND
STEINROE INTERNATIONAL FUND (the "Fund") is a no-load, diversified
"mutual fund." Mutual funds sell their own shares to investors
and use the money they receive to invest in a portfolio of
securities such as common stocks. A mutual fund allows you to
pool your money with that of other investors in order to obtain
professional investment management. Mutual funds generally make
it possible for you to obtain greater diversification of your
investments and simplify your recordkeeping. The Fund does not
impose commissions or charges when shares are purchased or
redeemed.
The Fund is a series of the STEINROE INVESTMENT TRUST (the
"Trust"), an open-end management investment company, which is
authorized to issue shares of beneficial interest in separate
series. Each series represents interests in a separate portfolio
of securities and other assets, with its own investment objectives
and policies.
Stein Roe & Farnham Incorporated (the "Adviser") is responsible
for the overall management of the Fund, subject to the authority
and direction of the Trust's Board of Trustees. Rockefeller &
Co., Inc. (the "Sub-Adviser") has been engaged to provide
investment advisory services, including portfolio management, to
the Fund, subject to the supervision of the Adviser. The Adviser
also manages and provides investment advisory services for several
other no-load mutual funds with different investment objectives,
including equity funds, taxable and tax-exempt bond funds, and
money market funds. To obtain prospectuses and other information
on opening a regular account in any of these mutual funds, please
call 1-800-338-2550.
HOW THE FUND INVESTS
The Fund invests as described below. Further information on
portfolio investments and strategies may be found under Portfolio
Investments and Strategies in this prospectus and in the Statement
of Additional Information.
The Fund's investment objective is to seek long-term growth of
capital by investing primarily in a diversified portfolio of
foreign securities. Current income is not a primary factor in the
selection of portfolio securities. The Fund invests primarily in
common stocks and other equity-type securities (such as preferred
stocks, securities convertible or exchangeable for common stocks,
and warrants or rights to purchase common stocks). The Fund may
invest in securities of smaller emerging companies as well as
securities of well-seasoned companies of any size. Smaller
companies, however, involve higher risks in that they typically
have limited product lines, markets, and financial or management
resources. In addition, the securities of smaller companies may
trade less frequently and have greater price fluctuation than
larger companies, particularly those operating in countries with
developing markets.
The Fund diversifies its investments among several countries and
does not concentrate investments in any particular industry. In
pursuing its objective, the Fund varies the geographic allocation
and types of securities in which it invests based on the
continuing evaluation by the Sub-Adviser of economic, market, and
political trends throughout the world. The Fund has not
established limits on geographic asset distribution but ordinarily
invests in the securities markets of at least three countries
outside the United States, including but not limited to Western
European countries (such as Belgium, France, Germany, Ireland,
Italy, The Netherlands, the countries of Scandinavia, Spain,
Switzerland, and the United Kingdom), countries in the Pacific
Basin (such as Australia, Hong Kong, Japan, Malaysia, the
Philippines, Singapore, and Thailand), and countries in the
Americas (such as Argentina, Brazil, Chile, and Mexico).
Under normal market conditions, the Fund will invest at least 65%
of its total assets (taken at market value) in foreign securities.
If, however, investments in foreign securities appear to be
relatively unattractive in the judgment of the Sub-Adviser because
of current or anticipated adverse political or economic
conditions, the Fund may hold cash or invest any portion of its
assets in securities of the U.S. Government and equity and debt
securities of U.S. companies, as a temporary defensive strategy.
To meet liquidity needs, the Fund may also hold cash in
<PAGE> 4
domestic and foreign currencies and invest in domestic and foreign
money market securities (including repurchase agreements and
foreign money market positions).
The U.S. Government has from time to time in the past imposed
restrictions, through taxation and otherwise, on foreign
investments by U.S. investors such as the Fund. If such
restrictions should be reinstated, it might become necessary for
the Fund to invest all or substantially all of its assets in U.S.
securities. In such event, the Fund would review its investment
objective and policies to determine whether changes are
appropriate.
The Fund may purchase foreign securities in the form of American
Depositary Receipts (ADRs), European Depositary Receipts (EDRs),
or other securities representing underlying shares of foreign
issuers. The Fund may invest in sponsored or unsponsored ADRs.
(For a description of ADRs and EDRs, see the Statement of
Additional Information.)
PORTFOLIO INVESTMENTS AND STRATEGIES
DERIVATIVES.
Consistent with its objective, the Fund may invest in a broad
array of financial instruments and securities, including
conventional exchange-traded and non-exchange traded options,
futures contracts, futures options, forward contracts, securities
collateralized by underlying pools of mortgages or other
receivables, floating rate instruments, and other instruments that
securitize assets of various types ("Derivatives"). In each case,
the value of the instrument or security is "derived" from the
performance of an underlying asset or a "benchmark" such as a
security index, an interest rate, or a currency. The Fund does
not expect to invest more than 5% of its net assets in any type of
Derivative except for options, futures contracts, futures options,
and forward contracts.
Derivatives are most often used to manage investment risk or to
create an investment position indirectly because it is more
efficient or less costly than direct investment. They also may be
used in an effort to enhance portfolio returns.
The successful use of Derivatives depends on the Sub-Adviser's
ability to correctly predict changes in the levels and directions
of movements in currency exchange rates, security prices, interest
rates and other market factors affecting the Derivative itself or
the value of the underlying asset or benchmark. In addition,
correlations in the performance of an underlying asset to a
Derivative may not be well established. Finally, privately
negotiated and over-the-counter Derivatives may not be as well
regulated and may be less marketable than exchange-traded
Derivatives. For additional information on Derivatives, please
refer to the Statement of Additional Information.
The Fund may purchase and write both call options and put options
on securities, indexes and foreign currencies, enter into interest
rate, index and foreign currency futures contracts and options on
such futures contracts, and purchase other types of forward or
investment contracts linked to individual securities, indexes, or
other benchmarks in order to achieve its desired investment
objective, provide additional revenue, or to hedge against changes
in security prices, interest rates or currency fluctuations. The
Fund may write a call or put option only if the option is covered.
As the writer of a covered call option, the Fund foregoes, during
the option's life, the opportunity to profit from increases in
market value of the security covering the call option above the
sum of the premium and the exercise price of the call. There can
be no assurance that a liquid market will exist when the Fund
seeks to close out a position. In addition, because of low margin
deposits required, the use of futures contracts involves a high
degree of leverage, and may result in losses in excess of the
amount of the margin deposit.
DEBT SECURITIES.
In pursuing its investment objective, the Fund may invest up to
35% of its total assets in debt securities. Investments in debt
securities are limited to those that are within the four highest
grades (generally referred to as "investment grade") assigned by a
nationally recognized statistical rating organization or, if
unrated, deemed to be of comparable quality by the Adviser or by
the Sub-Adviser. Securities in the
<PAGE> 5
fourth highest grade may possess speculative characteristics. If
the rating of a security held by the Fund is lost or reduced below
investment grade, the Fund is not required to dispose of the
security, but the Sub-Adviser will consider that fact in
determining whether the Fund should continue to hold the security.
SETTLEMENT TRANSACTIONS.
When the Fund enters into a contract for the purchase or sale of a
foreign portfolio security, it usually is required to settle the
purchase transaction in the relevant foreign currency or receive
the proceeds of the sale in that currency. In either event, the
Fund is obliged to acquire or dispose of an appropriate amount of
foreign currency by selling or buying an equivalent amount of U.S.
dollars. The Fund may wish to "lock-in" the U.S. dollar value of
a transaction at or near the time of the purchase or sale of the
foreign portfolio security at the exchange rate or rates then
prevailing between the U.S. dollar and the currency in which the
security is denominated. The Fund may accomplish such
"transaction hedging" by purchasing or selling such foreign
currencies on a "spot" (i.e., cash) basis or on a forward basis
whereby the Fund purchases or sells a specific amount of foreign
currency, at a price set at the time of the contract, for receipt
or delivery at a specified date or at any time within a specified
time period. In so doing, the Fund will attempt to insulate
itself against possible losses and gains resulting from a change
in the relationship between the U.S. dollar and the foreign
currency during the period between the date the security is
purchased or sold and the date on which payment is made or
received. Similar transactions may be entered into by using other
currencies if the Fund seeks to move investments denominated in
one currency to investments denominated in another.
CURRENCY HEDGING.
Most of the Fund's portfolio will be invested in foreign
securities. As a result, in addition to the risk of change in the
market value of portfolio securities, the value of the portfolio
in U.S. dollars is subject to fluctuations in the exchange rate
between the foreign currencies and the U.S. dollar. When, in the
opinion of the Sub-Adviser, it is desirable to limit or reduce
exposure in a foreign currency in order to moderate potential
changes in the U.S. dollar value of the portfolio, the Fund may
enter into a forward currency exchange contract to sell or buy
such foreign currency (or another foreign currency that acts as a
proxy for that currency) by which the U.S. dollar value of certain
underlying foreign portfolio securities can be approximately
matched by an equivalent U.S. dollar liability. This technique is
known as "currency hedging" and, by locking in a rate of exchange,
is intended to moderate or reduce the risk of change in the U.S.
dollar value of the Fund's portfolio only during the period of the
forward contract. Forward contracts are usually entered into with
banks and broker-dealers, are not exchange traded, and are usually
for less than one year, but may be renewed. A default on the
contract would deprive the Fund of unrealized profits or force the
Fund to cover its commitments for purchase or sale of currency, if
any, at the current market price.
Neither type of foreign currency transaction will eliminate
fluctuations in the prices of the Fund's portfolio securities or
prevent loss if the price of such securities should decline. In
addition, such forward currency exchange contracts will diminish
the benefit of the appreciation in the U.S. dollar value of that
foreign currency. (For further information on forward foreign
currency exchange transactions, see the Statement of Additional
Information.)
OTHER TECHNIQUES.
The Fund may invest in securities purchased on a when-issued or
delayed-delivery basis. Although the payment terms of these
securities are established at the time the Fund enters into the
commitment, the securities may be delivered and paid for a month
or more after the date of purchase, when their value may have
changed. The Fund will make such commitments only with the
intention of actually acquiring the securities, but may sell the
securities before settlement date if it is deemed advisable for
investment reasons. The Fund may utilize spot and forward foreign
exchange transactions to reduce the risk inherent in fluctuations
in the exchange rate between one currency and another when
securities are purchased or sold on a when-issued basis, and may
invest in synthetic money market instruments. The Fund may invest
in repurchase agreements, provided that it will not invest more
than 15% of its net assets in repurchase agreements maturing in
more than seven days and any other illiquid securities. (See the
Statement of Additional Information.)
<PAGE> 6
PORTFOLIO TURNOVER.
Although the Fund does not purchase securities with a view to
rapid turnover, there are no limitations on the length of time
portfolio securities must be held. Accordingly, the portfolio
turnover rate may vary significantly from year to year, but is not
expected to exceed 100% under normal market conditions.
Flexibility of investment and emphasis on capital appreciation may
involve greater portfolio turnover than that of mutual funds that
have the objectives of income or maintenance of a balanced
investment position. A high rate of portfolio turnover may result
in increased transaction expenses and the realization of capital
gains and losses. (See Distributions and Income Taxes.) The Fund
is not intended to be an income-producing investment.
RESTRICTIONS ON THE FUND'S INVESTMENTS
The Fund will not (i) with respect to 75% of its total assets,
invest more than 5% of its total assets in the securities of any
one issuer (except that this restriction does not apply to
securities of the U.S. Government or repurchase agreements for
such securities, and except that the Fund may invest all of its
assets in shares of another investment company having the
identical investment objective); (ii) acquire more than 10% of the
outstanding voting securities of any one issuer (except that the
Fund may invest all of its assets in shares of another investment
company having the identical investment objective); or (iii)
borrow money, except as a temporary measure for extraordinary or
emergency purposes, and then the aggregate borrowings at any one
time (including any reverse repurchase agreements and dollar
rolls) may not exceed 33 1/3% of its total assets (at market).
The Fund will not purchase additional securities when its
borrowings, less proceeds receivable from sales of portfolio
securities, exceed 5% of total assets.
The Fund may invest in repurchase agreements, /1/ provided that
the Fund will not invest more than 15% of its net assets in
repurchase agreements maturing in more than seven days, and any
other illiquid securities.
The policies summarized in the first paragraph under Restrictions
on the Fund's Investments and the policy with respect to
concentration of investments in any one industry described under
Risks and Investment Considerations are fundamental policies and,
as such, can be changed only with the approval of a "majority of
the outstanding voting securities" of the Fund as defined in the
Investment Company Act of 1940. The Fund's investment objective
is non-fundamental and, as such, may be changed by the Board of
Trustees without shareholder approval. Any such change may result
in the Fund having an investment objective different from the
objective the shareholder considered appropriate at the time of
investment in the Fund. All of the investment restrictions are
set forth in the Statement of Additional Information.
Nothing in the foregoing investment restrictions shall be deemed
to prohibit the Fund from purchasing the securities of any issuer
pursuant to the exercise of subscription rights distributed to the
Fund by the issuer, except that no such purchase may be made if as
a result the Fund will no longer be a diversified investment
company as defined in the Investment Company Act of 1940 or fail
to meet the diversification requirements of the Internal Revenue
Code.
RISKS AND INVESTMENT CONSIDERATIONS
All investments, including those in mutual funds, have risks. No
investment is suitable for all investors. The Fund is intended
for long-term investors who can accept the risks entailed in
investing in foreign securities. Of course, there can be no
guarantee that the Fund will achieve its objective.
/1/ A sale of securities to the Fund in which the seller agrees to
repurchase the securities at a higher price, which includes an
amount representing interest on the purchase price, within a
specified time. In the event of bankruptcy of the seller, the
Fund could experience both losses and delays in liquidating its
collateral.
<PAGE> 7
Although the Fund does not attempt to reduce or limit risk through
wide industry diversification of investment, the Fund usually
allocates its investments among a number of different industries
rather than concentrating in a particular industry or group of
industries. However, the Fund will not invest more than 25% of
its total assets (at the time of investment) in the securities of
companies in any one industry.
FOREIGN INVESTING.
The Fund provides long-term investors with an opportunity to
invest a portion of their assets in a diversified portfolio of
foreign securities. Non-U.S. investments may be attractive
because they increase diversification, as compared to a portfolio
comprised solely of U.S. investments. In addition, many foreign
economies have, from time to time, grown faster than the U.S.
economy, and the returns on investments in these countries have
exceeded those of similar U.S. investments, although there can be
no assurance that these conditions will continue. International
diversification allows the Fund and an investor to achieve greater
diversification and to take advantage of changes in foreign
economies and market conditions.
Investors should understand and consider carefully the greater
risks involved in foreign investing. Investing in foreign
securities, positions in which are generally denominated in
foreign currencies, and utilization of forward foreign currency
exchange contracts involve certain considerations comprising both
risks and opportunities not typically associated with investing in
U.S. securities. These considerations include: fluctuations in
exchange rates of foreign currencies; possible imposition of
exchange control regulations or currency restrictions that would
prevent cash from being brought back to the United States; less
public information with respect to issuers of securities; less
governmental supervision of stock exchanges, securities brokers,
and issuers of securities; lack of uniform accounting, auditing,
and financial reporting standards; lack of uniform settlement
periods and trading practices; less liquidity and frequently
greater price volatility in foreign markets than in the United
States; possible imposition of foreign taxes; possible investment
in the securities of companies in developing as well as developed
countries; and sometimes less advantageous legal, operational, and
financial protections applicable to foreign sub-custodial
arrangements. These risks are greater for emerging markets.
Although the Fund will try to invest in companies and governments
of countries having stable political environments, there is the
possibility of expropriation or confiscatory taxation, seizure or
nationalization of foreign bank deposits or other assets,
establishment of exchange controls, the adoption of foreign
government restrictions, and other adverse political, social or
diplomatic developments that could affect investment in these
nations.
The price of securities of small, rapidly growing companies is
expected to fluctuate more widely than the general market due to
the difficulty in assessing financial prospects of companies
developing new products or operating in countries with developing
markets.
The strategy for selecting investments will be based on various
criteria. A company proposed for investment should have a good
market position in a fast-growing segment of the economy, strong
management, preferably a leading position in its business,
prospects of superior financial returns, ability to self-finance,
and securities available for purchase at a reasonable market
valuation. Because of the foreign domicile of such companies,
however, information on some of the above factors may be
difficult, if not impossible, to obtain.
To the extent portfolio securities are issued by foreign issuers
or denominated in foreign currencies, the Fund's investment
performance is affected by the strength or weakness of the U.S.
dollar against these currencies. If the dollar falls relative to
the Japanese yen, for example, the dollar value of a yen-
denominated stock held in the portfolio will rise even though the
price of the stock remains unchanged. Conversely, if the dollar
rises in value relative to the yen, the dollar value of the yen-
denominated stock will fall. (See the discussion of portfolio and
transaction hedging under Portfolio Investments and Strategies.)
MASTER FUND/FEEDER FUND OPTION.
Rather than invest in securities directly, the Fund may in the
future seek to achieve its investment objective by pooling its
assets with assets of other mutual funds managed by the Adviser
for investment in another investment company having the same
investment objective and substantially the same
<PAGE> 8
investment policies and restrictions as the Fund. The purpose of
such an arrangement is to achieve greater operational efficiencies
and reduce costs. It is expected that any such investment company
would be managed by the Adviser in substantially the same manner
as the Fund. Shareholders of the Fund will be given at least 30
days' prior notice of any such investment, although they will not
be entitled to vote on the action. Such investment would be made
only if the Trustees determine it to be in the best interests of
the Fund and its shareholders.
HOW TO PURCHASE SHARES
All shares must be purchased through your employer's defined
contribution plan. For more information about how to purchase
shares of the Fund through your employer or limitations on the
amount that may be purchased, please consult your employer.
Shares are sold to eligible defined contribution plans at the
Fund's net asset value (see Net Asset Value) next determined after
receipt of payment by the Fund.
Each purchase order for the Fund must be accepted by an authorized
officer of the Trust in Chicago and is not binding until accepted
and entered on the books of the Fund. Once your purchase order
has been accepted, you may not cancel or revoke it; however, you
may redeem the shares. The Trust reserves the right not to accept
any purchase order that it determines not to be in the best
interest of the Trust or of the Fund's shareholders.
Shares purchased by reinvestment of dividends will be confirmed
quarterly. All other purchases and redemptions will be confirmed
as transactions occur.
HOW TO REDEEM SHARES
Subject to restrictions imposed by your employer's plan, Fund
shares may be redeemed any day the New York Stock Exchange is
open. For more information about how to redeem your shares of the
Fund through your employer's plan, including any charges that may
be imposed by the plan, please consult with your employer.
EXCHANGE PRIVILEGE.
Subject to your plan's restrictions, you may redeem all or any
portion of your Fund shares and use the proceeds to purchase
shares of any other SteinRoe Fund available through your
employer's defined contribution plan. (An exchange is commonly
referred to as a "transfer.") Before exercising the Exchange
Privilege, you should obtain the prospectus for the SteinRoe Fund
in which you wish to invest and read it carefully. Contact your
plan administrator for instructions on how to exchange your shares
or to obtain prospectuses of other SteinRoe Funds available
through your plan. The Fund reserves the right to suspend, limit,
modify, or terminate the Exchange Privilege or its use in any
manner by any person or class; shareholders would be notified of
such a change.
GENERAL REDEMPTION POLICIES.
Redemption instructions may not be cancelled or revoked once they
have been received and accepted by the Trust. The Trust cannot
accept a redemption request that specifies a particular date or
price for redemption or any special conditions.
The price at which your redemption order will be executed is the
net asset value next determined after proper redemption
instructions are received. (See Net Asset Value.) Because the
redemption price you receive depends upon the Fund's net asset
value per share at the time of redemption, it may be more or less
than the price you originally paid for the shares.
NET ASSET VALUE
The purchase and redemption price of the Fund's shares is its net
asset value per share. The net asset value of a share of the Fund
is determined as of the close of trading on the New York Stock
Exchange ("NYSE") (currently 3:00 p.m., Chicago time) by dividing
the difference between the values of the Fund's
<PAGE> 9
assets and liabilities by the number of shares outstanding. Net
asset value will not be determined on days when the NYSE is closed
unless, in the judgment of the Board of Trustees, the net asset
value of the Fund should be determined on any such day, in which
case the determination will be made at 3:00 p.m., Chicago time.
In computing the net asset value of the Fund, the values of
portfolio securities are generally based upon market quotations
which, depending upon local convention or regulation, may be last
sale price, last bid or asked price, or the mean between the last
bid and asked prices as of, in each case, the close of the
appropriate exchange or other designated time. Trading in
securities on European and Far Eastern securities exchanges and
over-the-counter markets is normally completed at various times
before the close of business on each day on which the NYSE is
open. Trading of these securities may not take place on every
NYSE business day. In addition, trading may take place in various
foreign markets on Saturdays or on other days when the NYSE is not
open and on which the Fund's net asset value is not calculated.
Therefore, such calculation does not take place contemporaneously
with the determination of the prices of many of the portfolio
securities used in such calculation and the value of the Fund's
portfolio may be significantly affected on days when shares of the
Fund may not be purchased or redeemed.
DISTRIBUTIONS AND INCOME TAXES
DISTRIBUTIONS.
Income dividends are normally declared and paid annually. The
Fund intends to distribute by the end of each calendar year at
least 98% of any net capital gains realized from the sale of
securities during the twelve-month period ended October 31 in that
year. The Fund intends to distribute any undistributed net
investment income and net realized capital gains in the following
year.
The terms of your plan will govern how you may receive
distributions from the Fund. Generally, dividend and capital
gains distributions will be reinvested in additional shares of the
Fund.
U.S. FEDERAL INCOME TAXES.
The Fund intends to qualify as a "regulated investment company"
for Federal income tax purposes and to meet all other requirements
that are necessary for it to be relieved of Federal taxes on
income and gain it distributes. The Fund will distribute
substantially all of its ordinary income and net capital gains on
a current basis. Generally, Fund distributions are taxable as
ordinary income, except that any distributions of net long-term
capital gains will be taxed as such. However, distributions by
the Fund to employer-sponsored defined contribution plans that
qualify for tax-exempt treatment under Federal income tax laws
will not be taxable. Special tax rules apply to investments
through such plans. You should consult your tax advisor to
determine the suitability of the Fund as an investment through
such a plan and the tax treatment of distributions (including
distributions of amounts attributable through an investment in the
Fund) from such a plan. This section is not intended to be a full
discussion of income tax laws and their effect on shareholders.
FOREIGN INCOME TAXES.
Investment income received by the Fund from sources within foreign
countries may be subject to foreign income taxes withheld at the
source. The United States has entered into tax treaties with many
foreign countries that entitle the Fund to a reduced rate of tax
or exemption from tax on such income. It is impossible to
determine the effective rate of foreign tax in advance since the
amount of the Fund's assets to be invested within various
countries will fluctuate and the extent to which tax refunds will
be recovered is uncertain. The Fund intends to operate so as to
qualify for treaty-reduced tax rates where applicable.
To the extent that the Fund is liable for foreign income taxes
withheld at the source, the Fund also intends to operate so as to
meet the requirements of the U.S. Internal Revenue Code to "pass
through" to the Fund's shareholders foreign income taxes paid, but
there can be no assurance that the Fund will be able to do so.
<PAGE> 10
This discussion of U.S. and foreign taxation is not intended to be
a full discussion of income tax laws and their effect on
shareholders. You may wish to consult your own tax advisor. The
foregoing information applies to U.S. shareholders. Foreign
shareholders should consult their tax advisors as to the tax
consequences of ownership of Fund shares.
INVESTMENT RETURN
The total return from an investment in the Fund is measured by the
distributions received (assuming reinvestment) plus or minus the
change in the net asset value per share for a given period. A
total return percentage may be calculated by dividing the value of
a share at the end of the period (including reinvestment of
distributions) by the value of the share at the beginning of the
period and subtracting one. For a given period, an average annual
total return may be calculated by finding the average annual
compounded rate that would equate a hypothetical $1,000 investment
to the ending redeemable value.
Comparison of the Fund's total return with alternative investments
should consider differences between the Fund and the alternative
investments, the periods and methods used in calculation of the
return being compared, and the impact of taxes on alternative
investments. The Fund's total return does not reflect any charges
or expenses related to your employer's plan. Of course, past
performance is not necessarily indicative of future results.
MANAGEMENT OF THE FUND
TRUSTEES AND ADVISERS.
The Board of Trustees of the Trust has overall management
responsibility for the Trust and the Fund. See the Statement of
Additional Information for the names of and additional information
about the trustees and officers. The Fund's Adviser, Stein Roe &
Farnham Incorporated, One South Wacker Drive, Chicago, Illinois
60606, is responsible for managing the Fund, subject to the
direction of the Board of Trustees. The Adviser is registered as
an investment adviser under the Investment Advisers Act of 1940.
The Adviser was organized in 1986 to succeed to the business of
Stein Roe & Farnham, a partnership that had advised and managed
mutual funds since 1949. The Adviser is a wholly-owned indirect
subsidiary of Liberty Mutual Insurance Company ("Liberty Mutual").
The Sub-Adviser, Rockefeller & Co., Inc., subject to the overall
supervision of the Adviser, provides the Fund with investment
advisory services, including portfolio management. The Sub-
Adviser, which is registered as an investment adviser under the
Investment Advisers Act of 1940, is a private investment advisory
and management firm established by the Rockefeller Family to serve
its own needs and those of a small number of other persons and
institutions. As of October 31, 1994, the Sub-Adviser managed
over $2.5 billion in assets, including $836 million in foreign
securities. The Sub-Adviser, with offices at 30 Rockefeller
Plaza, New York, New York 10112, is an indirect, wholly-owned
subsidiary of the Rockefeller Family Trust. The Sub-Adviser has
previous experience in advising mutual funds, serving as a sub-
adviser to a European emerging companies fund from 1990 to 1992.
PORTFOLIO MANAGER.
Bruno Bertocci is primarily responsible for the day-to-day
management of the Fund's portfolio and has been the portfolio
manager of the Fund since its inception. Mr. Bertocci is Senior
Portfolio Manager for the Sub-Adviser, and has been employed by
the Sub-Adviser since 1983. He received an A.B. from Oberlin
College in 1976 and an M.B.A. from Harvard University in 1980.
FEES AND EXPENSES.
In return for its services, the Adviser receives a monthly fee
from the Fund, computed and accrued daily, at an annual rate of 1%
of average net assets. This fee is higher than the fees paid by
most mutual funds. With respect to the portfolio assets of the
Fund allocated by the Adviser to the Sub-Adviser, the Adviser pays
the Sub-Adviser a fee of 0.5% of average net assets.
<PAGE> 11
Under a separate agreement with the Trust, the Adviser provides
certain accounting and bookkeeping services to the Fund, including
computation of the Fund's net asset value and calculation of its
net income and capital gains and losses on disposition of Fund
assets.
PORTFOLIO TRANSACTIONS.
The Sub-Adviser places the orders for the purchase and sale of
portfolio securities and options and futures transactions for the
Fund. In doing so, the Sub-Adviser seeks to obtain the best
combination of price and execution, which involves a number of
judgmental factors.
TRANSFER AGENT.
SteinRoe Services Inc., One South Wacker Drive, Chicago, Illinois
60606, a wholly-owned indirect subsidiary of Liberty Mutual, is
the agent of the Trust for the transfer of shares, disbursement of
dividends, and maintenance of shareholder accounting records.
DISTRIBUTOR.
The shares of the Fund are offered for sale through Liberty
Securities Corporation ("Distributor") without any sales
commissions or charges to the Fund or to its shareholders. The
Distributor is a wholly-owned indirect subsidiary of Liberty
Mutual. The business address of the Distributor is 600 Atlantic
Avenue, Boston, Massachusetts 02210; however, all Fund
correspondence (including purchase and redemption orders) should
be mailed to the Trust at P.O. Box 804058, Chicago, Illinois
60680. All distribution and promotional expenses are paid by the
Adviser, including payments to the Distributor for sales of Fund
shares.
CUSTODIAN.
State Street Bank and Trust Company (the "Bank"), 225 Franklin
Street, Boston, Massachusetts 02101, is the custodian for the
Fund. Foreign securities are maintained in the custody of foreign
banks and trust companies that are members of the Bank's Global
Custody Network or foreign depositories used by such members.
(See Custodian in the Statement of Additional Information.)
ORGANIZATION AND DESCRIPTION OF SHARES
The Trust is a Massachusetts business trust organized under an
Agreement and Declaration of Trust ("Declaration of Trust") dated
January 8, 1987, which provides that each shareholder shall be
deemed to have agreed to be bound by the terms thereof. The
Declaration of Trust may be amended by a vote of either the
Trust's shareholders or its trustees. The Trust may issue an
unlimited number of shares, in one or more series as the Board may
authorize. Currently, eight series are authorized and
outstanding.
Under Massachusetts law, shareholders of a Massachusetts business
trust such as the Trust could, in some circumstances, be held
personally liable for unsatisfied obligations of the trust. The
Declaration of Trust provides that persons extending credit to,
contracting with, or having any claim against, the Trust or any
particular series shall look only to the assets of the Trust or of
the respective series for payment under such credit, contract or
claim, and that the shareholders, Trustees and officers of the
Trust shall have no personal liability therefor. The Declaration
of Trust requires that notice of such disclaimer of liability be
given in each contract, instrument or undertaking executed or made
on behalf of the Trust. The Declaration of Trust provides for
indemnification of any shareholder against any loss and expense
arising from personal liability solely by reason of being or
having been a shareholder. Thus, the risk of a shareholder
incurring financial loss on account of shareholder liability is
believed to be remote, because it would be limited to
circumstances in which the disclaimer was inoperative and the
Trust was unable to meet its obligations.
The risk of a particular series incurring financial loss on
account of unsatisfied liability of another series of the Trust is
also believed to be remote, because it would be limited to claims
to which the disclaimer did not apply and to circumstances in
which the other series was unable to meet its obligations.
<PAGE> 12
FOR MORE INFORMATION
Contact a SteinRoe Retirement Plan Representative at 1-800-322-
1130 for more information about this Fund.
<PAGE>
STEINROE INVESTMENT TRUST
SteinRoe International Fund
Supplement to February 1, 1995 Statement of Additional Information
_________________________
Effective May 1, 1995, the fees for transfer agency services
described in this Statement of Additional information under the caption
Transfer Agent have been changed. The revised fee schedule calls for
the Fund to pay to SteinRoe Services Inc. at an annual rate of 0.22% of
the Fund's average daily net assets.
The Date of this Supplement is May 1, 1995.
<PAGE>
Statement of Additional Information Dated February 1, 1995
STEINROE INVESTMENT TRUST
P.O. Box 804058, Chicago, Illinois 60680
1-800-338-2550
STEINROE INTERNATIONAL FUND
The SteinRoe International Fund is a series of the SteinRoe Investment
Trust (the "Trust"). Each series of the Trust represents shares of
beneficial interest in a separate portfolio of securities and other assets,
with its own objectives and policies. This Statement of Additional
Information is not a prospectus, but provides additional information that
should be read in conjunction with the Fund's prospectus dated February 1,
1995, and any supplements thereto ("Prospectus"). The Prospectus may be
obtained at no charge by telephoning 1-800-338-2550.
TABLE OF CONTENTS
Page
General Information and History 2
Investment Policies 3
Portfolio Investments and Strategies 4
Investment Restrictions 18
Purchases and Redemptions 21
Management 22
Financial Statements........................25
Principal Shareholders......................25
Investment Advisory Services................26
Distributor.................................29
Transfer Agent ............................ 29
Custodian...................................30
Independent Public Accountants..............30
Portfolio Transactions......................31
Additional Income Tax Considerations........32
Investment Performance......................34
Appendix--Ratings...........................38
<PAGE> 2
GENERAL INFORMATION AND HISTORY
As used herein, "the Fund," refers to the series of the Trust designated
SteinRoe International Fund. Currently eight series are authorized and
outstanding.
Stein Roe & Farnham Incorporated (the "Adviser") is responsible for the
overall management of the Fund, subject to the authority and direction of the
members of the Trust's Board. Rockefeller & Co., Inc. (the "Sub-Adviser")
has been engaged to provide investment advisory services, including portfolio
management, subject to the supervision of the Adviser.
Each share of a series is entitled to participate pro rata in any
dividends and other distributions declared by the Board on shares of that
series, and all shares of a series have equal rights in the event of
liquidation of that series.
Each whole share (or fractional share) outstanding on the record date
established in accordance with the By-Laws shall be entitled to a number of
votes on any matter on which it is entitled to vote equal to the net asset
value of the share (or fractional share) in United States dollars determined
at the close of business on the record date (for example, a share having a
net asset value of $10.50 would be entitled to 10.5 votes). As a business
trust, the Trust is not required to hold annual shareholder meetings.
However, special meetings may be called for purposes such as electing or
removing trustees, changing fundamental policies, or approving an investment
advisory contract. If requested to do so by the holders of at least 10% of
the Trust's outstanding shares, the Trust will call a special meeting for the
purpose of voting upon the question of removal of a trustee or trustees and
will assist in the communications with other shareholders as if the Trust
were subject to Section 16(c) of the Investment Company Act of 1940. All
shares of all series of the Trust are voted together in the election of
trustees. On any other matter submitted to a vote of shareholders, shares
are voted in the aggregate and not by individual series, except that shares
are voted by individual series when required by the Investment Company Act of
1940 or other applicable law, or when the Board of Trustees determines that
the matter affects only the interests of one or more series, in which case
shareholders of the unaffected series are not entitled to vote on such
matters.
SPECIAL CONSIDERATIONS REGARDING MASTER FUND/FEEDER FUND STRUCTURE
The Fund may in the future seek to achieve its objective by pooling its
assets with assets of other mutual funds managed by the Adviser for
investment in another mutual fund having the same investment objective and
substantially the same investment policies and restrictions as the Fund. The
purpose of such an arrangement is to achieve greater operational efficiencies
and reduce costs. The Adviser is expected to manage any such mutual fund in
which a Fund would invest. Such investment would be subject to determination
by the Trustees that it was in the best interests of the Fund and its
shareholders, and shareholders would receive advance notice of any such
change.
<PAGE> 3
INVESTMENT POLICIES
In pursuing its objective, the Fund will invest as described below and
may employ the investment techniques described in the Prospectus and under
Portfolio Investments and Strategies in this Statement of Additional
Information. The Fund's investment objective is non-fundamental and may be
changed by the Board of Trustees without the approval of a "majority of the
outstanding voting securities"/1/ of the Fund. In pursuing its investment
objective, the Fund may invest in debt securities. Investments in debt
securities are limited to those that are within the four highest grades
assigned by a nationally recognized statistical rating organization or, if
unrated, deemed to be of comparable quality by the Sub-Adviser (referred to
as "investment grade"). If the rating of a security held by the Fund is
lost or reduced, the Fund is not required to sell the security, but the Sub-
Adviser will consider such fact in determining whether the Fund should
continue to hold the security.
The Fund's investment objective is to seek long-term growth of capital
by investing primarily in a diversified portfolio of foreign securities.
Current income is not a primary factor in the selection of portfolio
securities. The Fund invests primarily in common stocks and other equity-
type securities (such as preferred stocks, securities convertible or
exchangeable for common stocks, and warrants or rights to purchase common
stocks). The Fund may invest in securities of smaller emerging companies as
well as securities of well-seasoned companies of any size. Smaller
companies, however, involve higher risks in that they typically have limited
product lines, markets, and financial or management resources. In addition,
the securities of smaller companies may trade less frequently and have
greater price fluctuation than larger companies, particularly those operating
in countries with developing markets.
The Fund diversifies its investments among several countries and does
not concentrate investments in any particular industry. In pursuing its
objective, the Fund varies the geographic allocation and types of securities
in which it invests based on the continuing evaluation by the Sub-Adviser of
economic, market, and political trends throughout the world. The Fund has
not established limits on geographic asset distribution but ordinarily
invests in the securities markets of at least three countries outside the
United States, including but not limited to Western European countries (such
as Belgium, France, Germany, Ireland, Italy, The Netherlands, the countries
of Scandinavia, Spain, Switzerland, and the United Kingdom), countries in the
Pacific Basin (such as Australia, Hong Kong, Japan, Malaysia, the
Philippines, Singapore, and Thailand), and countries in the Americas (such as
Argentina, Brazil, Chile, and Mexico).
Under normal market conditions, the Fund will invest at least 65% of its
total assets (taken at market value) in foreign securities. If, however,
investments in foreign securities appear to be relatively unattractive in the
judgment of the Sub-Adviser because of current or anticipated adverse
political or economic conditions, the Fund may
______________
/1/ A "majority of the outstanding voting securities" means the approval of
the lesser of (i) 67% or more of the shares 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 outstanding shares of the
Fund.
<PAGE> 4
hold cash or invest any portion of its assets in securities of the U.S.
Government and equity and debt securities of U.S. companies, as a temporary
defensive strategy. To meet liquidity needs, the Fund may also hold cash in
domestic and foreign currencies and invest in domestic and foreign money
market securities (including repurchase agreements and "synthetic" foreign
money market positions).
The U.S. Government has from time to time in the past imposed
restrictions, through taxation and otherwise, on foreign investments by U.S.
investors such as the Fund. If such restrictions should be reinstated, it
might become necessary for the Fund to invest all or substantially all of its
assets in U.S. securities. In such event, the Fund would review its
investment objective and policies to determine whether changes are
appropriate.
PORTFOLIO INVESTMENTS AND STRATEGIES
DERIVATIVES
Consistent with its objective, the Fund may invest in a broad array of
financial instruments and securities, including conventional exchange-traded
and non-exchange traded options, futures contracts, futures options, forward
contracts, securities collateralized by underlying pools of mortgages or
other receivables, floating rate instruments, and other instruments that
securitize assets of various types ("Derivatives"). In each case, the value
of the instrument or security is "derived" from the performance of an
underlying asset or a "benchmark" such as a security index, an interest rate,
or a currency.
Derivatives are most often used to manage investment risk or to create
an investment position indirectly because it is more efficient or less costly
than direct investment that cannot be readily established directly due to
portfolio size, cash availability, or other factors. They also may be used
in an effort to enhance portfolio returns.
The successful use of Derivatives depends on the Sub-Adviser's ability
to correctly predict changes in the levels and directions of movements in
currency exchange rates, security prices, interest rates and other market
factors affecting the Derivative itself or the value of the underlying asset
or benchmark. In addition, correlations in the performance of an underlying
asset to a Derivative may not be well established. Finally, privately
negotiated and over-the-counter Derivatives may not be as well regulated and
may be less marketable than exchange-traded Derivatives.
The Fund does not currently intend to invest more than 5% of its net
assets in any type of Derivative, except for options, futures contracts,
futures options, and forward contracts. (See Options and Futures in this
Statement of Additional Information.)
<PAGE> 5
DEFENSIVE INVESTMENTS
When the Sub-Adviser considers a temporary defensive position advisable,
the Fund may invest, without limitation, in high-quality fixed-income
securities or hold assets in cash or cash equivalents.
FOREIGN SECURITIES
The Fund invests primarily in foreign securities, which may entail a
greater degree of risk (including risks relating to exchange rate
fluctuations, tax provisions, or expropriation of assets) than does
investment in securities of domestic issuers. The Fund may also purchase
foreign securities in the form of American Depositary Receipts (ADRs),
European Depositary Receipts (EDRs), or other securities representing
underlying shares of foreign issuers. Positions in these securities are not
necessarily denominated in the same currency as the common stocks into which
they may be converted. ADRs are receipts typically issued by an American
bank or trust company evidencing ownership of the underlying securities.
EDRs are European receipts evidencing a similar arrangement. Generally,
ADRs, in registered form, are designed for the U.S. securities markets and
EDRs, in bearer form, are designed for use in European securities markets.
The Fund may invest in sponsored or unsponsored ADRs. In the case of an
unsponsored ADR, the Fund is likely to bear its proportionate share of the
expenses of the depository and it may have greater difficulty in receiving
shareholder communications than it would have with a sponsored ADR.
With respect to portfolio securities that are issued by foreign issuers
or denominated in foreign currencies, the Fund's investment performance is
affected by the strength or weakness of the U.S. dollar against these
currencies. For example, if the dollar falls in value relative to the
Japanese yen, the dollar value of a yen-denominated stock held in the
portfolio will rise even though the price of the stock remains unchanged.
Conversely, if the dollar rises in value relative to the yen, the dollar
value of the yen-denominated stock will fall. (See discussion of transaction
hedging and portfolio hedging under Currency Exchange Transactions.)
Investors should understand and consider carefully the risks involved in
foreign investing. Investing in foreign securities, positions in which are
generally denominated in foreign currencies, and utilization of forward
foreign currency exchange contracts involve certain considerations comprising
both risks and opportunities not typically associated with investing in U.S.
securities. These considerations include: fluctuations in exchange rates of
foreign currencies; possible imposition of exchange control regulation or
currency restrictions that would prevent cash from being brought back to the
United States; less public information with respect to issuers of securities;
less governmental supervision of stock exchanges, securities brokers, and
issuers of securities; lack of uniform accounting, auditing, and financial
reporting standards; lack of uniform settlement periods and trading
practices; less liquidity and frequently greater price volatility in foreign
markets than in the United States; possible imposition of foreign taxes;
possible investment in securities of companies in develop-
<PAGE> 6
ing as well as developed countries; and sometimes less advantageous legal,
operational, and financial protections applicable to foreign sub-custodial
arrangements.
Although the Fund will try to invest in companies and governments of
countries having stable political environments, there is the possibility of
expropriation or confiscatory taxation, seizure or nationalization of foreign
bank deposits or other assets, establishment of exchange controls, the
adoption of foreign government restrictions, or other adverse political,
social or diplomatic developments that could affect investment in these
nations.
Currency Exchange Transactions. Currency exchange transactions may be
conducted either on a spot (i.e., cash) basis at the spot rate for purchasing
or selling currency prevailing in the foreign exchange market or through
forward currency exchange contracts ("forward contracts"). Forward contracts
are contractual agreements to purchase or sell a specified currency at a
specified future date (or within a specified time period) and price set at
the time of the contract. Forward contracts are usually entered into with
banks and broker-dealers, are not exchange traded, and are usually for less
than one year, but may be renewed.
Forward currency transactions may involve currencies of the different
countries in which the Fund may invest, and serve as hedges against possible
variations in the exchange rate between these currencies. The Fund's
currency transactions are limited to transaction hedging and portfolio
hedging involving either specific transactions or portfolio positions, except
to the extent described below under "Synthetic Foreign Money Market
Positions." Transaction hedging is the purchase or sale of forward contracts
with respect to specific receivables or payables of the Fund accruing in
connection with the purchase and sale of its portfolio securities. Portfolio
hedging is the use of forward contracts with respect to portfolio security
positions denominated or quoted in a particular currency. Portfolio hedging
allows the Sub-Adviser to limit or reduce exposure in a foreign currency by
entering into a forward contract to sell or buy such foreign currency (or
another foreign currency that acts as a proxy for that currency) so that the
U.S. dollar value of certain underlying foreign portfolio securities can be
approximately matched by an equivalent U.S. dollar liability. The Fund may
not engage in portfolio hedging with respect to the currency of a particular
country to an extent greater than the aggregate market value (at the time of
making such sale) of the securities held in its portfolio denominated or
quoted in that particular currency, except that the Fund may hedge all or
part of its foreign currency exposure through the use of a basket of
currencies or a proxy currency where such currencies or currency act as an
effective proxy for other currencies. In such a case, the Fund may enter
into a forward contract where the amount of the foreign currency to be sold
exceeds the value of the securities denominated in such currency. The use of
this basket hedging technique may be more efficient and economical than
entering into separate forward contracts for each currency held in the Fund.
The Fund may not engage in "speculative" currency exchange transactions.
At the maturity of a forward contract to deliver a particular currency,
the Fund may either sell the portfolio security related to such contract and
make delivery of the
<PAGE> 7
currency, or it may retain the security and either acquire the currency on
the spot market or terminate its contractual obligation to deliver the
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
currency.
It is impossible to forecast with absolute precision the market value of
portfolio securities at the expiration of a forward contract. Accordingly,
it may be necessary for the Fund to purchase additional currency on the spot
market (and bear the expense of such purchase) if the market value of the
security is less than the amount of currency the Fund is obligated to deliver
and if a decision is made to sell the security and make delivery of the
currency. Conversely, it may be necessary to sell on the spot market some of
the currency received upon the sale of the portfolio security if its market
value exceeds the amount of currency the Fund is obligated to deliver.
If the Fund retains the portfolio security and engages in an offsetting
transaction, the Fund will incur a gain or a loss to the extent that there
has been movement in forward contract prices. If the Fund engages in an
offsetting transaction, it may subsequently enter into a new forward contract
to sell the currency. Should forward prices decline during the period
between the Fund's entering into a forward contract for the sale of a
currency and the date it enters into an offsetting contract for the purchase
of the currency, the Fund will realize a gain to the extent the price of the
currency it has agreed to sell exceeds the price of the currency it has
agreed to purchase. Should forward prices increase, the Fund will suffer a
loss to the extent the price of the currency it has agreed to purchase
exceeds the price of the currency it has agreed to sell. A default on the
contract would deprive the Fund of unrealized profits or force the Fund to
cover its commitments for purchase or sale of currency, if any, at the
current market price.
Hedging against a decline in the value of a currency does not eliminate
fluctuations in the prices of portfolio securities or prevent losses if the
prices of such securities decline. Such transactions also preclude the
opportunity for gain if the value of the hedged currency should rise.
Moreover, it may not be possible for the Fund to hedge against a devaluation
that is so generally anticipated that the Fund is not able to contract to
sell the currency at a price above the devaluation level it anticipates. The
cost to the Fund of engaging in currency exchange transactions varies with
such factors as the currency involved, the length of the contract period, and
prevailing market conditions. Since currency exchange transactions are
usually conducted on a principal basis, no fees or commissions are involved.
Synthetic Foreign Money Market Positions. The Fund may invest in money
market instruments denominated in foreign currencies. In addition to, or in
lieu of, such direct investment, the Fund may construct a synthetic foreign
money market position by (a) purchasing a money market instrument denominated
in one currency, generally U.S. dollars, and (b) concurrently entering into a
forward contract to deliver a corresponding amount of that currency in
exchange for a different currency on a future date and at a specified rate of
exchange. For example, a synthetic money market position in Japanese yen
could be constructed by purchasing a U.S. dollar money market
<PAGE> 8
instrument, and entering concurrently into a forward contract to deliver a
corresponding amount of U.S. dollars in exchange for Japanese yen on a
specified date and at a specified rate of exchange. Because of the
availability of a variety of highly liquid short-term U.S. dollar money
market instruments, a synthetic money market position utilizing such U.S.
dollar instruments may offer greater liquidity than direct investment in
foreign currency money market instruments. The result of a direct investment
in a foreign currency and a concurrent construction of a synthetic position
in such foreign currency, in terms of both income yield and gain or loss from
changes in currency exchange rates, in general should be similar, but would
not be identical because the components of the alternative investments would
not be identical. Except to the extent a synthetic foreign money market
position consists of a money market instrument denominated in a foreign
currency, the synthetic foreign money market position shall not be deemed a
"foreign security" for purposes of the policy that, under normal conditions,
the Fund will invest at least 65% of its total assets in foreign securities.
LENDING OF PORTFOLIO SECURITIES
Subject to restriction (5) under Investment Restrictions in this
Statement of Additional Information, the Fund may lend its portfolio
securities to broker-dealers and banks. Any such loan must be continuously
secured by collateral in cash or cash equivalents maintained on a current
basis in an amount at least equal to the market value of the securities
loaned by the Fund. The Fund would continue to receive the equivalent of the
interest or dividends paid by the issuer on the securities loaned, and would
also receive an additional return that may be in the form of a fixed fee or a
percentage of the collateral. The Fund would have the right to call the loan
and obtain the securities loaned at any time on notice of not more than five
business days. The Fund would not have the right to vote the securities
during the existence of the loan but would call the loan to permit voting of
the securities if, in the Sub-Adviser's judgment, a material event requiring
a shareholder vote would otherwise occur before the loan was repaid. In the
event of bankruptcy or other default of the borrower, the Fund could
experience both delays in liquidating the loan collateral or recovering the
loaned securities and losses, including (a) possible decline in the value of
the collateral or in the value of the securities loaned during the period
while the Fund seeks to enforce its rights thereto, (b) possible subnormal
levels of income and lack of access to income during this period, and (c)
expenses of enforcing its rights.
REPURCHASE AGREEMENTS
The Fund may invest in repurchase agreements, provided that it will not
invest more than 15% of net assets in repurchase agreements maturing in more
than seven days and any other illiquid securities. A repurchase agreement is
a sale of securities to the Fund in which the seller agrees to repurchase the
securities at a higher price, which includes an amount representing interest
on the purchase price, within a specified time. In the event of bankruptcy
of the seller, the Fund could experience both losses and delays in
liquidating its collateral.
<PAGE> 9
WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES; REVERSE REPURCHASE AGREEMENTS
The Fund may purchase securities on a when-issued or delayed-delivery
basis. Although the payment and interest terms of these securities are
established at the time the Fund enters into the commitment, the securities
may be delivered and paid for a month or more after the date of purchase,
when their value may have changed. The Fund makes such commitments only with
the intention of actually acquiring the securities, but may sell the
securities before settlement date if the Sub-Adviser deems it advisable for
investment reasons. The Fund may utilize spot and forward foreign currency
exchange transactions to reduce the risk inherent in fluctuations in the
exchange rate between one currency and another when securities are purchased
or sold on a when-issued or delayed-delivery basis.
The Fund may enter into reverse repurchase agreements with banks and
securities dealers. A reverse repurchase agreement is a repurchase agreement
in which the Fund is the seller of, rather than the investor in, securities
and agrees to repurchase them at an agreed-upon time and price. Use of a
reverse repurchase agreement may be preferable to a regular sale and later
repurchase of securities because it avoids certain market risks and
transaction costs.
At the time the Fund enters into a binding obligation to purchase
securities on a when-issued basis or enters into a reverse repurchase
agreement, liquid assets (cash, U.S. Government securities or other "high-
grade" debt obligations) of the Fund having a value at least as great as the
purchase price of the securities to be purchased will be segregated on the
books of the Fund and held by the custodian throughout the period of the
obligation. The use of these investment strategies, as well as borrowing
under a line of credit as described below, may increase net asset value
fluctuation.
CONVERTIBLE SECURITIES
By investing in convertible securities, the Fund obtains the right to
benefit from the capital appreciation potential in the underlying stock upon
exercise of the conversion right, while earning higher current income than
would be available if the stock were purchased directly. In determining
whether to purchase a convertible, the Sub-Adviser will consider
substantially the same criteria that would be considered in purchasing the
underlying stock. While convertible securities purchased by the Fund are
frequently rated investment grade, the Fund also may purchase unrated
securities or securities rated below investment grade if the securities meet
the Sub-Adviser's other investment criteria. Convertible securities rated
below investment grade (a) tend to be more sensitive to interest rate and
economic changes, (b) may be obligations of issuers who are less creditworthy
than issuers of higher quality convertible securities, and (c) may be more
thinly traded due to such securities being less well known to investors than
either common stock or conventional debt securities. As a result, the Sub-
Adviser's own investment research and analysis tends to be more important in
the purchase of such securities than other factors.
<PAGE> 10
SHORT SALES
The Fund may make short sales "against the box." In a short sale, the
Fund sells a borrowed security and is required to return the identical
security to the lender. A short sale "against the box" involves the sale of
a security with respect to which the Fund already owns an equivalent security
in kind and amount. A short sale "against the box" enables the Fund to
obtain the current market price of a security which it desires to sell but is
unavailable for settlement.
RULE 144A SECURITIES
The Fund may purchase securities that have been privately placed but
that are eligible for purchase and sale under Rule 144A under the 1933 Act.
That Rule permits certain qualified institutional buyers, such as the Fund,
to trade in privately placed securities that have not been registered for
sale under the 1933 Act. The Sub-Adviser, under the supervision of the Board
of Trustees, will consider whether securities purchased under Rule 144A are
illiquid and thus subject to the Fund's restriction of investing no more than
15% of its net assets in illiquid securities. A determination of whether a
Rule 144A security is liquid or not is a question of fact. In making this
determination, the Sub-Adviser will consider the trading markets for the
specific security, taking into account the unregistered nature of a Rule 144A
security. In addition, the Sub-Adviser could consider the (1) frequency of
trades and quotes, (2) number of dealers and potential purchasers, (3) dealer
undertakings to make a market, and (4) nature of the security and of
marketplace trades (e.g., the time needed to dispose of the security, the
method of soliciting offers, and the mechanics of transfer). The liquidity
of Rule 144A securities would be monitored and, if as a result of changed
conditions, it is determined that a Rule 144A security is no longer liquid,
the Fund's holdings of illiquid securities would be reviewed to determine
what, if any, steps are required to assure that the Fund does not invest more
than 15% of its assets in illiquid securities. Investing in Rule 144A
securities could have the effect of increasing the amount of the Fund's
assets invested in illiquid securities if qualified institutional buyers are
unwilling to purchase such securities. The Fund does not expect to invest as
much as 5% of its total assets in Rule 144A securities.
LINE OF CREDIT
Subject to restriction (6) under Investment Restrictions in this
Statement of Additional Information, the Fund may establish and maintain a
line of credit with a major bank in order to permit borrowing on a temporary
basis to meet share redemption requests in circumstances in which temporary
borrowing may be preferable to liquidation of portfolio securities.
PORTFOLIO TURNOVER
Although the Fund does not purchase securities with a view to rapid
turnover, there are no limitations on the length of time that portfolio
securities must be held. Portfolio turnover can occur for a number of
reasons such as general conditions in the
<PAGE> 11
securities markets, more favorable investment opportunities in other
securities, or other factors relating to the desirability of holding or
changing a portfolio investment. Because of the Fund's flexibility of
investment and emphasis on growth of capital, it may have greater portfolio
turnover than that of mutual funds that have primary objectives of income or
maintenance of a balanced investment position. The future turnover rate may
vary greatly from year to year. A high rate of portfolio turnover in the
Fund, if it should occur, would result in increased transaction expense,
which must be borne by the Fund. High portfolio turnover may also result in
the realization of capital gains or losses and, to the extent net short-term
capital gains are realized, any distributions resulting from such gains will
be considered ordinary income for Federal income tax purposes. (See Risks
and Investment Considerations and Distributions and Income Taxes in the
Prospectus, and Additional Income Tax Considerations in this Statement of
Additional Information.)
OPTIONS ON SECURITIES AND INDEXES
The Fund may purchase and sell put options and call options on
securities, indexes or foreign currencies in standardized contracts traded on
recognized securities exchanges, boards of trade, or similar entities, or
quoted on NASDAQ. The Fund may purchase agreements, sometimes called cash
puts, that may accompany the purchase of a new issue of bonds from a dealer.
An option on a security (or index) is a contract that gives the
purchaser (holder) of the option, in return for a premium, the right to buy
from (call) or sell to (put) the seller (writer) of the option the security
underlying the option (or the cash value of the index) at a specified
exercise price at any time during the term of the option (normally not
exceeding nine months). The writer of an option on an individual security or
on a foreign currency has the obligation upon exercise of the option to
deliver the underlying security or foreign currency upon payment of the
exercise price or to pay the exercise price upon delivery of the underlying
security or foreign currency. Upon exercise, the writer of an option on an
index is obligated to pay the difference between the cash value of the index
and the exercise price multiplied by the specified multiplier for the index
option. (An index is designed to reflect specified facets of a particular
financial or securities market, a specific group of financial instruments or
securities, or certain economic indicators.)
The Fund will write call options and put options only if they are
"covered." For example, in the case of a call option on a security, the
option is "covered" if the Fund owns the security underlying the call or has
an absolute and immediate right to acquire that security without additional
cash consideration (or, if additional cash consideration is required, cash or
cash equivalents in such amount are held in a segregated account by its
custodian) upon conversion or exchange of other securities held in its
portfolio.
If an option written by the Fund expires, the Fund realizes a capital
gain equal to the premium received at the time the option was written. If an
option purchased by the Fund expires, the Fund realizes a capital loss equal
to the premium paid.
<PAGE> 12
Prior to the earlier of exercise or expiration, an option may be closed
out by an offsetting purchase or sale of an option of the same series (type,
exchange, underlying security or index, exercise price, and expiration).
There can be no assurance, however, that a closing purchase or sale
transaction can be effected when the Fund desires.
The Fund will realize a capital gain from a closing purchase transaction
if the cost of the closing option is less than the premium received from
writing the option, or, if it is more, the Fund will realize a capital loss.
If the premium received from a closing sale transaction is more than the
premium paid to purchase the option, the Fund will realize a capital gain or,
if it is less, the Fund will realize a capital loss. The principal factors
affecting the market value of a put or a call option include supply and
demand, interest rates, the current market price of the underlying security
or index in relation to the exercise price of the option, the volatility of
the underlying security or index, and the time remaining until the expiration
date.
A put or call option purchased by the Fund is an asset of the Fund,
valued initially at the premium paid for the option. The premium received
for an option written by the Fund is recorded as a deferred credit. The
value of an option purchased or written is marked-to-market daily and is
valued at the closing price on the exchange on which it is traded or, if not
traded on an exchange or no closing price is available, at the mean between
the last bid and asked prices.
Risks Associated with Options. There are several risks associated with
transactions in options. For example, there are significant differences
between the securities markets, the currency markets, and the options markets
that could result in an imperfect correlation between these markets, causing
a given transaction not to achieve its objectives. A decision as to whether,
when and how to use options involves the exercise of skill and judgment, and
even a well-conceived transaction may be unsuccessful to some degree because
of market behavior or unexpected events.
There can be no assurance that a liquid market will exist when the Fund
seeks to close out an option position. If the Fund were unable to close out
an option that it had purchased on a security, it would have to exercise the
option in order to realize any profit or the option would expire and become
worthless. If the Fund were unable to close out a covered call option that
it had written on a security, it would not be able to sell the underlying
security until the option expired. As the writer of a covered call option on
a security, the Fund foregoes, during the option's life, the opportunity to
profit from increases in the market value of the security covering the call
option above the sum of the premium and the exercise price of the call.
If trading were suspended in an option purchased or written by the Fund,
the Fund would not be able to close out the option. If restrictions on
exercise were imposed, the Fund might be unable to exercise an option it has
purchased.
<PAGE> 13
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
The Fund may use interest rate futures contracts, index futures
contracts, and foreign currency futures contracts. An interest rate, index
or foreign currency futures contract provides for the future sale by one
party and purchase by another party of a specified quantity of a financial
instrument or the cash value of an index /2/ at a specified price and time.
A public market exists in futures contracts covering a number of indexes
(including, but not limited to: the Standard & Poor's 500 Index, the Value
Line Composite Index, and the New York Stock Exchange Composite Index) as
well as financial instruments (including, but not limited to: U.S. Treasury
bonds, U.S. Treasury notes, Eurodollar certificates of deposit, and foreign
currencies). Other index and financial instrument futures contracts are
available and it is expected that additional futures contracts will be
developed and traded.
The Fund may purchase and write call and put futures options. Futures
options possess many of the same characteristics as options on securities,
indexes and foreign currencies (discussed above). A futures option gives the
holder the right, in return for the premium paid, to assume a long position
(call) or short position (put) in a futures contract at a specified exercise
price at any time during the period of the option. Upon exercise of a call
option, the holder acquires a long position in the futures contract and the
writer is assigned the opposite short position. In the case of a put option,
the opposite is true. The Fund might, for example, use futures contracts to
hedge against or gain exposure to fluctuations in the general level of stock
prices, anticipated changes in interest rates or currency fluctuations that
might adversely affect either the value of the Fund's securities or the price
of the securities that the Fund intends to purchase. Although other
techniques could be used to reduce or increase the Fund's exposure to stock
price, interest rate and currency fluctuations, the Fund may be able to
achieve its exposure more effectively and perhaps at a lower cost by using
futures contracts and futures options.
The Fund will only enter into futures contracts and futures options that
are standardized and traded on an exchange, board of trade, or similar
entity, or quoted on an automated quotation system.
The success of any futures transaction depends on the Sub-Adviser
correctly predicting changes in the level and direction of stock prices,
interest rates, currency exchange rates and other factors. Should those
predictions be incorrect, the Fund's return might have been better had the
transaction not been attempted; however, in the absence of the ability to use
futures contracts, the Sub-Adviser might have taken portfolio actions in
anticipation of the same market movements with similar investment results
but, presumably, at greater transaction costs.
__________
/2/ A futures contract on an index is an agreement pursuant to which two
parties agree to take or make delivery of an amount of cash equal to the
difference between the value of the index at the close of the last trading
day of the contract and the price at which the index contract was originally
written. Although the value of a securities index is a function of the value
of certain specified securities, no physical delivery of those securities is
made.
<PAGE> 14
When a purchase or sale of a futures contract is made by the Fund, the
Fund is required to deposit with its custodian (or broker, if legally
permitted) a specified amount of cash or U.S. Government securities or other
securities acceptable to the broker ("initial margin"). The margin required
for a futures contract is set by the exchange on which the contract is traded
and may be modified during the term of the contract. The initial margin is
in the nature of a performance bond or good faith deposit on the futures
contract, which is returned to the Fund upon termination of the contract,
assuming all contractual obligations have been satisfied. The Fund expects
to earn interest income on its initial margin deposits. A futures contract
held by the Fund is valued daily at the official settlement price of the
exchange on which it is traded. Each day the Fund pays or receives cash,
called "variation margin," equal to the daily change in value of the futures
contract. This process is known as "marking-to-market." Variation margin
paid or received by the Fund does not represent a borrowing or loan by the
Fund but is instead settlement between the Fund and the broker of the amount
one would owe the other if the futures contract had expired at the close of
the previous day. In computing daily net asset value, the Fund will mark-to-
market its open futures positions.
The Fund is also required to deposit and maintain margin with respect to
put and call options on futures contracts written by it. Such margin
deposits will vary depending on the nature of the underlying futures contract
(and the related initial margin requirements), the current market value of
the option, and other futures positions held by the Fund.
Although some futures contracts call for making or taking delivery of
the underlying securities, usually these obligations are closed out prior to
delivery by offsetting purchases or sales of matching futures contracts (same
exchange, underlying security or index, and delivery month). If an
offsetting purchase price is less than the original sale price, the Fund
engaging in the transaction realizes a capital gain, or if it is more, the
Fund realizes a capital loss. Conversely, if an offsetting sale price is
more than the original purchase price, the Fund engaging in the transaction
realizes a capital gain, or if it is less, the Fund realizes a capital loss.
The transaction costs must also be included in these calculations.
RISKS ASSOCIATED WITH FUTURES
There are several risks associated with the use of futures contracts and
futures options. A purchase or sale of a futures contract may result in
losses in excess of the amount invested in the futures contract. In trying
to increase or reduce market exposure, there can be no guarantee that there
will be a correlation between price movements in the futures contract and in
the portfolio exposure sought. In addition, there are significant
differences between the securities and futures markets that could result in
an imperfect correlation between the markets, causing a given transaction not
to achieve its objectives. The degree of imperfection of correlation depends
on circumstances such as: variations in speculative market demand for
futures, futures options and the related securities, including technical
influences in futures and futures options trading and differences between the
securities markets and the securities underlying
<PAGE> 15
the standard contracts available for trading. For example, in the case of
index futures contracts, the composition of the index, including the issuers
and the weighting of each issue, may differ from the composition of the
Fund's portfolio, and, in the case of interest rate futures contracts, the
interest rate levels, maturities, and creditworthiness of the issues
underlying the futures contract may differ from the financial instruments
held in the Fund's portfolio. A decision as to whether, when and how to use
futures contracts involves the exercise of skill and judgment, and even a
well-conceived transaction may be unsuccessful to some degree because of
market behavior or unexpected stock price or interest rate trends.
Futures exchanges may limit the amount of fluctuation permitted in
certain futures contract prices during a single trading day. The daily limit
establishes the maximum amount that the price of a futures contract may vary
either up or down from the previous day's settlement price at the end of the
current trading session. Once the daily limit has been reached in a futures
contract subject to the limit, no more trades may be made on that day at a
price beyond that limit. The daily limit governs only price movements during
a particular trading day and therefore does not limit potential losses
because the limit may work to prevent the liquidation of unfavorable
positions. For example, futures prices have occasionally moved to the daily
limit for several consecutive trading days with little or no trading, thereby
preventing prompt liquidation of positions and subjecting some holders of
futures contracts to substantial losses. Stock index futures contracts are
not normally subject to such daily price change limitations.
There can be no assurance that a liquid market will exist at a time when
the Fund seeks to close out a futures or futures option position. The Fund
would be exposed to possible loss on the position during the interval of
inability to close, and would continue to be required to meet margin
requirements until the position is closed. In addition, many of the
contracts discussed above are relatively new instruments without a
significant trading history. As a result, there can be no assurance that an
active secondary market will develop or continue to exist.
LIMITATIONS ON OPTIONS AND FUTURES
If other options, futures contracts, or futures options of types other
than those described herein are traded in the future, the Fund may also use
those investment vehicles, provided the Board of Trustees determines that
their use is consistent with the Fund's investment objective.
The Fund will not enter into a futures contract or purchase an option
thereon if, immediately thereafter, the initial margin deposits for futures
contracts held by the Fund plus premiums paid by it for open futures option
positions, less the amount by which any such positions are "in-the-money,"
/3/ would exceed 5% of the Fund's total assets.
________________
/3/ A call option is "in-the-money" if the value of the futures contract
that is the subject of the option exceeds the exercise price. A put option
is "in-the-money" if the exercise price exceeds the value of the futures
contract that is the subject of the option.
<PAGE> 16
When purchasing a futures contract or writing a put option on a futures
contract, the Fund must maintain with its custodian (or broker, if legally
permitted) cash or cash equivalents (including any margin) equal to the
market value of such contract. When writing a call option on a futures
contract, the Fund similarly will maintain with its custodian cash or cash
equivalents (including any margin) equal to the amount by which such option
is in-the-money until the option expires or is closed out by the Fund.
The Fund may not maintain open short positions in futures contracts,
call options written on futures contracts or call options written on indexes
if, in the aggregate, the market value of all such open positions exceeds the
current value of the securities in its portfolio, plus or minus unrealized
gains and losses on the open positions, adjusted for the historical relative
volatility of the relationship between the portfolio and the positions. For
this purpose, to the extent the Fund has written call options on specific
securities in its portfolio, the value of those securities will be deducted
from the current market value of the securities portfolio.
In order to comply with Commodity Futures Trading Commission Regulation
4.5 and thereby avoid being deemed a "commodity pool operator," the Fund will
use commodity futures or commodity options contracts solely for bona fide
hedging purposes within the meaning and intent of Regulation 1.3(z), or, with
respect to positions in commodity futures and commodity options contracts
that do not come within the meaning and intent of 1.3(z), the aggregate
initial margin and premiums required to establish such positions will not
exceed 5% of the fair market value of the assets of the Fund, after taking
into account unrealized profits and unrealized losses on any such contracts
it has entered into [in the case of an option that is in-the-money at the
time of purchase, the in-the-money amount (as defined in Section 190.01(x) of
the Commission Regulations) may be excluded in computing such 5%].
As long as the Fund continues to sell its shares in certain states, the
Fund's options and futures transactions will also be subject to certain non-
fundamental investment restrictions set forth under Investment Restrictions
in this Statement of Additional Information.
TAXATION OF OPTIONS AND FUTURES
If the Fund exercises a call or put option that it holds, the premium
paid for the option is added to the cost basis of the security purchased
(call) or deducted from the proceeds of the security sold (put). For cash
settlement options and futures options exercised
<PAGE> 17
by the Fund, the difference between the cash received at exercise and the
premium paid is a capital gain or loss.
If a call or put option written by the Fund is exercised, the premium is
included in the proceeds of the sale of the underlying security (call) or
reduces the cost basis of the security purchased (put). For cash settlement
options and futures options written by the Fund, the difference between the
cash paid at exercise and the premium received is a capital gain or loss.
Entry into a closing purchase transaction will result in capital gain or
loss. If an option written by the Fund was in-the-money at the time it was
written and the security covering the option was held for more than the long-
term holding period prior to the writing of the option, any loss realized as
a result of a closing purchase transaction will be long-term. The holding
period of the securities covering an in-the-money option will not include the
period of time the option is outstanding.
If the Fund writes an equity call option other /4/ than a "qualified
covered call option," as defined in the Internal Revenue Code, any loss on
such option transaction, to the extent it does not exceed the unrealized
gains on the securities covering the option, may be subject to deferral until
the securities covering the option have been sold.
A futures contract held until delivery results in capital gain or loss
equal to the difference between the price at which the futures contract was
entered into and the settlement price on the earlier of delivery notice date
or expiration date. If the Fund delivers securities under a futures
contract, the Fund also realizes a capital gain or loss on those securities.
For Federal income tax purposes, the Fund generally is required to
recognize as income for each taxable year its net unrealized gains and losses
as of the end of the year on futures, futures options and non-equity options
positions ("year-end mark-to-market"). Generally, any gain or loss
recognized with respect to such positions (either by year-end mark-to-market
or by actual closing of the positions) is considered to be 60% long-term and
40% short-term, without regard to the holding periods of the contracts.
However, in the case of positions classified as part of a "mixed straddle,"
the recognition of losses on certain positions (including options, futures
and futures options positions, the related securities and certain successor
positions thereto) may be deferred to a later taxable year. Sale of futures
contracts or writing of call options (or futures call options) or buying put
options (or futures put options) that are intended to hedge against a change
in the value of securities held by the Fund: (1) will affect the holding
period of the hedged securities; and (2) may cause unrealized gain or loss on
such securities to be recognized upon entry into the hedge.
If the Fund were to enter into a short index future, short index futures
option or short index option position and the Fund's portfolio were deemed to
"mimic" the performance of the index underlying such contract, the option or
futures contract position and the Fund's stock positions would be deemed to
be positions in a mixed straddle, subject to the above-mentioned loss
deferral rules.
______________
/4/ An equity option is defined to mean any option to buy or sell stock, and
any other option the value of which is determined by reference to an index of
stocks of the type that is ineligible to be traded on a commodity futures
exchange (e.g., an option contract on a sub-index based on the price of nine
hotel-casino stocks). The definition of equity option excludes options on
broad-based stock indexes (such as the Standard & Poor's 500 index).
<PAGE> 18
In order for the Fund to continue to qualify for Federal income tax
treatment as a regulated investment company, at least 90% of its gross income
for a taxable year must be derived from qualifying income; i.e., dividends,
interest, income derived from loans of securities, and gains from the sale of
securities or foreign currencies, or other income (including but not limited
to gains from options, futures, or forward contracts). In addition, gains
realized on the sale or other disposition of securities held for less than
three months must be limited to less than 30% of the Fund's annual gross
income. Any net gain realized from futures (or futures options) contracts
will be considered gain from the sale of securities and therefore be
qualifying income for purposes of the 90% requirement. In order to avoid
realizing excessive gains on securities held less than three months, the Fund
may be required to defer the closing out of certain positions beyond the time
when it would otherwise be advantageous to do so.
The Fund distributes to shareholders annually any net capital gains that
have been recognized for Federal income tax purposes (including year-end
mark-to-market gains) on options and futures transactions. Such
distributions are combined with distributions of capital gains realized on
the Fund's other investments, and shareholders are advised of the nature of
the payments.
INVESTMENT RESTRICTIONS
The Fund operates under the following investment restrictions. The Fund
may not:
(1) with respect to 75% of its total assets, invest more than 5% of its
total assets, taken at market value at the time of a particular purchase, in
the securities of a single issuer, except for securities issued or guaranteed
by the government of the U.S., or any of its agencies or instrumentalities or
repurchase agreements for such securities and except that all or
substantially all of the assets of the Fund may be invested in another
registered investment company having the same investment objective and
substantially similar investment policies as the Fund;
(2) acquire more than 10%, taken at the time of a particular purchase,
of the outstanding voting securities of any one issuer, except that all or
substantially all of the assets of the Fund may be invested in another
registered investment company having the same investment objective and
substantially similar investment policies as the Fund;
(3) act as an underwriter of securities, except insofar as it may be
deemed an underwriter for purposes of the Securities Act of 1933 on
disposition of securities acquired subject to legal or contractual
restrictions on resale, except that all or substantially all of the assets of
the Fund may be invested in another registered investment company having the
same investment objective and substantially similar investment policies as
the Fund;
(4) purchase or sell real estate (although it may purchase securities
secured by real estate or interests therein, or securities issued by
companies which invest in real
<PAGE> 19
estate or interests therein), commodities, or commodity contracts, except
that it may enter into (a) futures and options on futures and (b) forward
contracts;
(5) make loans, but this restriction shall not prevent the Fund from (a)
buying a part of an issue of bonds, debentures, or other obligations which
are publicly distributed, or from investing up to an aggregate of 15% of its
total assets (taken at market value at the time of each purchase) in parts of
issues of bonds, debentures or other obligations of a type privately placed
with financial institutions, (b) investing in repurchase agreements, /5/ or
(c) lending portfolio securities, provided that it may not lend securities
if, as a result, the aggregate value of all securities loaned would exceed
33% of its total assets (taken at market value at the time of such loan);
(6) borrow, except that it may (a) borrow up to 33 1/3% of its total
assets, taken at market value at the time of such borrowing, as a temporary
measure for extraordinary or emergency purposes, but not to increase
portfolio income (the total of reverse repurchase agreements and such
borrowings will not exceed 33 1/3% of its total assets, and the Fund will not
purchase additional securities when its borrowings, less proceeds receivable
from sales of portfolio securities, exceed 5% of its total assets) and (b)
enter into transactions in options, futures, and options on futures;
(7) invest in a security if more than 25% of its total assets (taken at
market value at the time of a particular purchase) would be invested in the
securities of issuers in any particular industry, /6/ except that this
restriction does not apply to securities issued or guaranteed by the U.S.
Government or its agencies or instrumentalities and except that all or
substantially all of the assets of the Fund may be invested in another
registered investment company having the same investment objective and
substantially similar investment policies as the Fund; or
(8) issue any senior security except to the extent permitted under the
Investment Company Act of 1940.
The above restrictions are fundamental policies and may not be changed
without the approval of a "majority of the outstanding voting securities," as
defined above. The Fund is also subject to the following non-fundamental
restrictions and policies, which may be changed by the Board of Trustees.
The Fund may not:
- ---------------
/5/ A repurchase agreement involves the sale of securities to the Fund, with
the concurrent agreement of the seller to repurchase the securities at the
same price plus an amount representing interest at an agreed-upon interest
rate, within a specified time, usually less than one week, but, on occasion,
at a later time. Repurchase agreements entered into by the Fund will be
fully collateralized and will be marked-to-market daily. In the event of a
bankruptcy or other default of a seller of a repurchase agreement, the Fund
could experience both delays in liquidating the underlying securities and
losses, including: (a) possible decline in the value of the collateral
during the period while the Fund seeks to enforce its rights thereto; (b)
possible subnormal levels of income and lack of access to income during this
period; and (c) expenses of enforcing its rights.
/6/ For purposes of this investment restriction, the Fund uses industry
classifications contained in Morgan Stanley Capital International
Perspective, which is published by Morgan Stanley, an international
investment banking and brokerage firm.
<PAGE> 20
(a) invest in any of the following: (i) interests in oil, gas, or other
mineral leases or exploration or development programs (except readily
marketable securities, including but not limited to master limited
partnership interests, that may represent indirect interests in oil, gas, or
other mineral exploration or development programs); (ii) puts, calls,
straddles, spreads, or any combination thereof (except that the Fund may
enter into transactions in options, futures, and options on futures); (iii)
shares of other open-end investment companies, except in connection with a
merger, consolidation, acquisition, or reorganization, and except that all or
substantially all of the assets of the Fund may be invested in another
registered investment company having the same investment objective and
substantially similar investment policies as the Fund; and (iv) limited
partnerships in real estate unless they are readily marketable;
(b) invest in companies for the purpose of exercising control or
management, except that all or substantially all of the assets of the Fund
may be invested in another registered investment company having the same
investment objective and substantially similar investment policies as the
Fund;
(c) purchase more than 3% of the stock of another investment company or
purchase stock of other investment companies equal to more than 5% of the
Fund's total assets (valued at time of purchase) in the case of any one other
investment company and 10% of such assets (valued at time of purchase) in the
case of all other investment companies in the aggregate; any such purchases
are to be made in the open market where no profit to a sponsor or dealer
results from the purchase, other than the customary broker's commission,
except for securities acquired as part of a merger, consolidation or
acquisition of assets, and except that all or substantially all of the assets
of the Fund may be invested in another registered investment company having
the same investment objective and substantially similar investment policies
as the Fund;
(d) purchase or hold securities of an issuer if 5% of the securities of
such issuer are owned by those officers, trustees, or directors of the Trust
or of its investment adviser, who each own beneficially more than 1/2 of 1%
of the securities of that issuer;
(e) purchase securities of issuers (other than issuers of Federal agency
obligations or securities issued or guaranteed by any foreign country or
asset-backed securities) that, including their predecessors or unconditional
guarantors, have been in operation for less than three years, if by reason of
such purchase the value of the Fund's investment in all such securities will
exceed 5% of its total assets (valued at time of purchase), except that all
or substantially all of the assets of the Fund may be invested in another
registered investment company having the same investment objective and
substantially similar investment policies as the Fund;
(f) mortgage, pledge, or hypothecate its assets, except as may be
necessary in connection with permitted borrowings or in connection with
options, futures, and options on futures;
(g) invest more than 5% of its net assets (valued at time of purchase)
in warrants, nor more than 2% of its net assets in warrants that are not
listed on the New York or American stock exchange or a recognized foreign
exchange;
<PAGE> 21
(h) write an option on a security unless the option is issued by the
Options Clearing Corporation, an exchange, or similar entity;
(i) buy or sell an option on a security, a futures contract, or an
option on a futures contract unless the option, the futures contract, or the
option on the futures contract is offered through the facilities of a
recognized securities association or listed on a recognized exchange or
similar entity;
(j) purchase a put or call option if the aggregate premiums paid for all
put and call options exceed 20% of its net assets (less the amount by which
any such positions are in-the-money), excluding put and call options
purchased as closing transactions;
(k) invest more than 10% of its total assets in restricted securities,
other than securities eligible for resale pursuant to Rule 144A under the
Securities Act of 1933;
(l) invest more than 15% of its net assets (taken at market value at the
time of each purchase) in illiquid securities, including repurchase
agreements maturing in more than seven days; and
(m) purchase securities on margin (except for use of short-term credits
as are necessary for the clearance of transactions), or sell securities short
unless (i) the Fund owns or has the right to obtain securities equivalent in
kind and amount to those sold short at no added cost or (ii) the securities
sold are "when issued" or "when distributed" securities which the Fund
expects to receive in a recapitalization, reorganization, or other exchange
for securities the Fund contemporaneously owns or has the right to obtain and
provided that transactions in options, futures, and options on futures are
not treated as short sales.
Notwithstanding the foregoing investment restrictions, the Fund may
purchase securities pursuant to the exercise of subscription rights, subject
to the condition that such purchase will not result in the Fund's ceasing to
be a diversified investment company. Far Eastern and European corporations
frequently issue additional capital stock by means of subscription rights
offerings to existing shareholders at a price substantially below the market
price of the shares. The failure to exercise such rights would result in the
Fund's interest in the issuing company being diluted. The market for such
rights is not well developed in all cases and, accordingly, the Fund may not
always realize full value on the sale of rights. The exception applies in
cases where the limits set forth in the investment restrictions would
otherwise be exceeded by exercising rights or would have already been
exceeded as a result of fluctuations in the market value of the Fund's
portfolio securities with the result that the Fund would be forced either to
sell securities at a time when it might not otherwise have done so, to forego
exercising the rights.
PURCHASES AND REDEMPTIONS
Purchases and redemptions are discussed in the Prospectus under the
headings How to Purchase Shares, How to Redeem Shares, Net Asset Value, and
Shareholder Services,
<PAGE> 22
and that information is incorporated herein by reference. The Prospectus
discloses that you may purchase (or redeem) shares through investment
dealers, banks, or other institutions. The staff of the Securities and
Exchange Commission has asked the Trust to disclose that it is the
responsibility of any such institution to establish procedures insuring the
prompt transmission to the Trust of any such purchase order. The state of
Texas has asked that the Trust disclose in its Statement of Additional
Information, as a reminder to any such bank or institution, that it must be
registered as a securities dealer in Texas.
The Fund's net asset value is determined on days on which the New York
Stock Exchange (the "NYSE") is open for trading. The NYSE is regularly
closed on Saturdays and Sundays and on New Year's Day, the third Monday in
February, Good Friday, the last Monday in May, Independence Day, Labor Day,
Thanksgiving, and Christmas. If one of these holidays falls on a Saturday or
Sunday, the NYSE will be closed on the preceding Friday or the following
Monday, respectively. Net asset value will not be determined on days when
the NYSE is closed unless, in the judgment of the Board of Trustees, net
asset value of the Fund should be determined on any such day, in which case
the determination will be made at 3:00 p.m., Chicago time.
The Trust intends to pay all redemptions in cash and is obligated to
redeem shares solely in cash up to the lesser of $250,000 or one percent of
the net assets of the Trust during any 90-day period for any one shareholder.
However, redemptions in excess of such limit may be paid wholly or partly by
a distribution in kind of securities. If redemptions were made in kind, the
redeeming shareholders might incur transaction costs in selling the
securities received in the redemptions.
Due to the relatively high cost of maintaining smaller accounts, the
Trust reserves the right to redeem shares in any account for their then-
current value (which will be promptly paid to the investor) if at any time
the shares in the account do not have a value of at least $1,000. An
investor will be notified that the value of his account is less than that
minimum and allowed at least 30 days to bring the value of the account up to
at least $1,000 before the redemption is processed. The Agreement and
Declaration of Trust also authorizes the Trust to redeem shares under certain
other circumstances as may be specified by the Board of Trustees.
The Trust reserves the right to suspend or postpone redemptions of
shares of the Fund during any period when: (a) trading on the NYSE is
restricted, as determined by the Securities and Exchange Commission, or the
NYSE is closed for other than customary weekend and holiday closings; (b) the
Securities and Exchange Commission has by order permitted such suspension; or
(c) an emergency, as determined by the Securities and Exchange Commission,
exists, making disposal of portfolio securities or valuation of net assets of
the Fund not reasonably practicable.
MANAGEMENT
The following table sets forth certain information with respect to the
trustees and officers of the Trust:
<PAGE> 23
<TABLE>
<CAPTION>
NAME POSITION(S) HELD WITH THE TRUST PRINCIPAL OCCUPATION(S) DURING PAST FIVE YEARS
<S> <C> <C>
Gary A. Anetsberger Senior Vice-President; Controller Vice-President of Stein Roe & Farnham
Incorporated (the "Adviser") since January,
1991; associate of the Adviser prior thereto
Timothy K. Armour President; Trustee President of the Mutual Funds division of the
(1)(2) Adviser and Director of the Adviser since June,
1992; senior vice president and director of
marketing of Citibank Illinois prior thereto
Jilaine Hummel Bauer Executive Vice-President; Senior Vice President (since April, 1992) and
; Secretary Assistant Secretary (since May, 1990) of the
Adviser; vice president of the Adviser, prior
thereto
Kenneth L. Block (3) Trustee Chairman Emeritus of A. T. Kearney, Inc.
(international management consultants)
William W. Boyd (3) Trustee Chairman and Director of Sterling Plumbing
Group, Inc. (manufacturer of plumbing products)
since 1992; chairman, president, and chief
executive officer of Sterling Plumbing Group,
Inc. prior thereto
N. Bruce Callow Executive Vice-President President of the Investment Counsel division of
the Adviser since June, 1994; senior vice
president of trust and financial services for
The Northern Trust prior thereto
Daniel K. Cantor Vice-President Vice President of the Adviser since January,
1992; associate of the Adviser prior thereto
Robert A. Christensen Vice-President Senior Vice President of the Adviser since
January, 1991; first vice president of the
Adviser prior thereto
Lindsay Cook (1) Trustee Senior Vice President of Liberty Financial
Companies, Inc. (the indirect parent of the
Adviser)
Kenneth W. Corba Vice-President Senior Vice President of the Adviser
E. Bruce Dunn Vice-President Senior Vice President of the Adviser
Erik P. Gustafson Vice-President Vice President of the Adviser since May, 1994;
associate of the Adviser from April, 1992 to
May, 1994; associate attorney with Fowler White
Burnett Hurley Banick & Strickroot prior thereto
Philip D. Hausken Vice-President Legal Counsel for the Adviser since July, 1994;
assistant regional director, midwest regional
office of the Securities and Exchange Commission
prior thereto
Millie Adams Hurwitz Vice-President Associate of the Adviser since 1992; senior vice
president of OLC Corporation prior thereto
Kenneth A. Kalina Treasurer Associate of the Adviser
Stephen P. Lautz Vice-President Vice President of the Adviser since May, 1994;
associate of the Adviser prior thereto
Lynn C. Maddox Vice-President Senior Vice President of the Adviser
<PAGE> 24
Anne E. Marcel Vice-President Manager, Mutual Fund Sales & Services of the
Adviser since October, 1994; supervisor of the
Counselor Department of the Adviser from
October, 1992 to October, 1994; vice president
of Selected Financial Services from May, 1990 to
March, 1992; assistant vice president of
Carnegie Capital prior thereto
Francis W. Morley (3) Trustee Chairman of Employer Plan Administrators and
Consultants Co. (designer, administrator, and
communicator of employee benefit plans)
Charles R. Nelson (3) Trustee Professor, Department of Economics of the
University of Washington
Nicolette D. Parrish Vice-President; Assistant Associate of the Adviser
Secretary
Richard B. Peterson Vice-President Senior Vice President of the Adviser since June,
1991; officer of State Farm Investment
Management Corporation prior thereto
Janet B. Rysz Assistant Secretary Assistant Secretary of the Adviser
Gloria J. Santella Vice-President Vice President of the Adviser since January,
1992; associate of the Adviser prior thereto
Thomas P. Sorbo Vice-President Senior Vice President of the Adviser since
January, 1994; vice president of the Adviser
from September, 1992 to December, 1993;
associate of Travelers Insurance Company prior
thereto
Shary Risting Stadler Vice-President Senior Vice President & Director of Marketing of
the Adviser since November, 1993; vice
president, marketing of Citicorp from April,
1990 to October, 1993; assistant vice president
of Citicorp prior thereto
Gordon R. Worley Trustee Private investor
(2)(3)
Hans P. Ziegler Executive Vice-President Chief Executive Officer of the Adviser since
May, 1994; president of the Investment Counsel
division of the Adviser from July, 1993 to June,
1994; president and chief executive officer,
Pitcairn Financial Management Group prior
thereto
<FN>
______________________________
(1) Trustee who is an "interested person" of the Trust and of the Adviser, as
defined in the Investment Company Act of 1940.
(2) Member of the Executive Committee of the Board of Trustees, which is
authorized to exercise all powers of the Board with certain statutory
exceptions.
(3) Member of the Audit Committee of the Board, which makes recommendations
to the Board regarding the selection of auditors and confers with the
auditors regarding the scope and results of the audit.
</TABLE>
Certain of the trustees and officers of the Trust are trustees or
officers of other investment companies managed by the Adviser. Ms. Bauer is
a vice president of the Fund's distributor, Liberty Securities Corporation.
The address of Mr. Block is 11 Woodley Road, Winnetka, Illinois 60093; that
of Mr. Boyd is 2900 Golf Road, Rolling
<PAGE> 25
Meadows, Illinois 60008; that of Mr. Cook is 600 Atlantic Avenue, Boston,
Massachusetts 02210; that of Mr. Morley is 20 North Wacker Drive, Suite
2275, Chicago, Illinois 60606; that of Mr. Nelson is Department of Economics,
University of Washington, Seattle, Washington 98195; that of Mr. Worley is
1407 Clinton Place, River Forest, Illinois 60305; and that of the officers is
One South Wacker Drive, Chicago, Illinois 60606.
The only compensation paid to the trustees and officers of the Trust for
their services as such consists of fees paid to each trustee who is not an
"interested person" of the Trust or the Adviser. The fee schedule provides
for an annual retainer of $8,000 (divided equally among the Funds of the
Trust) plus an attendance fee from each Fund for each meeting of the Board or
committee thereof attended at which business for that Fund is conducted. The
attendance fees (other than for a Nominating Committee meeting) are based on
each Fund's net assets as of the preceding December 31. For a Fund with net
assets of less than $251 million, the fee is $200 per meeting; with $251
million to $500 million, $350; with $501 million to $750 million, $500; with
$750 million to $1 billion, $650; and with over $1 billion in net assets,
$800. Each non-interested trustee also receives an aggregate of $500 for
attending each meeting of the Nominating Committee. The trustees
collectively received from the Trust an aggregate of $90,600 in fees for the
fiscal year ended September 30, 1994.
FINANCIAL STATEMENTS
Please refer to the Fund's 9/30/94 Financial Statements (balance sheets
and schedules of investments as of 9/30/94 and the statements of operations,
changes in net assets, and notes thereto) and the report of independent
public accountants contained in the 9/30/94 Annual Report. The Financial
Statements and the report of independent public accountants (but no other
material from the Annual Report) are incorporated herein by reference. The
Annual Report may be obtained at no charge by telephoning 1-800-338-2550.
PRINCIPAL SHAREHOLDERS
As of October 31, 1994 the only person known by the Trust to own of
record or "beneficially" 5% or more of the outstanding shares of the Fund
within the definition of that term as contained in Rule 13d-3 under the
Securities Exchange Act of 1934 was as follows:
Approximate Percentage of
Name and Address Outstanding Shares Held
First Bank National Association* 9.9%
410 N. Michigan Avenue
Chicago, IL 60611
___________________
*Shares held of record, but not beneficially.
The following table shows shares of the Fund held by the categories of
persons indicated, and in each case the approximate percentage of outstanding
shares represented:
<PAGE> 26
Clients of the Adviser
in their Client Accounts Trustees and Officers
as of 10/31/94* as of 10/31/94
Shares Held Percent Shares Held Percent
5,664,183 80.1% 34,946 **
______________
*The Adviser may have discretionary authority over such shares and,
accordingly, they could be deemed to be owned "beneficially" by the Adviser
under Rule 13d-3. However, the Adviser disclaims actual beneficial
ownership of such shares.
**Represents less than 1% of the outstanding shares.
INVESTMENT ADVISORY SERVICES
The Adviser, Stein Roe & Farnham Incorporated, is a wholly-owned
subsidiary of SteinRoe Services Inc. ("SSI"), the Fund's transfer agent,
which in turn is a wholly-owned indirect subsidiary of Liberty Mutual
Insurance Company ("Liberty Mutual"). Liberty Mutual is a mutual insurance
company, principally in the property/casualty insurance field, organized
under the laws of Massachusetts in 1912.
The directors of the Adviser are Gary L. Countryman, Kenneth R. Leibler,
Timothy K. Armour, N. Bruce Callow, and Hans P. Ziegler. Mr. Countryman is
Chairman of Liberty Mutual Insurance Company; Mr. Leibler is President and
Chief Operating Officer of Liberty Financial Companies; Mr. Armour is
President of the Adviser's Mutual Funds division; Mr. Callow is President of
the Adviser's Investment Counsel division; and Mr. Ziegler is Chief Executive
Officer of the Adviser. The business address of Mr. Countryman is 175
Berkeley Street, Boston, Massachusetts 02117; that of Mr. Leibler is Federal
Reserve Plaza, Boston, Massachusetts 02210; and that of Messrs. Armour,
Callow, and Ziegler is One South Wacker Drive, Chicago, Illinois 60606.
The Adviser and its predecessor have been providing investment advisory
services since 1932. The Adviser acts as investment adviser to wealthy
individuals, trustees, pension and profit sharing plans, charitable
organizations, and other institutional investors. As of December 31, 1994,
the Adviser managed over $22.8 billion in assets: over $5.4 billion in
equities and over $17.4 billion in fixed-income securities (including $2.3
billion in municipal securities). The $22.8 billion in managed assets
included over $6.4 billion held by open-end mutual funds managed by the
Adviser (approximately 25% of the mutual fund assets were held by clients of
the Adviser). These mutual funds were owned by over 149,000 shareholders.
The $6.4 billion in mutual fund assets included over $504 million in over
33,000 IRA accounts. In managing those assets, the Adviser utilizes a
proprietary computer-based information system that maintains and regularly
updates information for approximately 6,500 companies. The Adviser also
monitors over 1,400 issues via a proprietary credit analysis system. At
December 31, 1994, the Adviser employed 20 research analysts and 42 account
managers. The average investment-related experience of these individuals was
19 years.
Rockefeller & Co., Inc. (the "Sub-Adviser"), which is registered as an
investment adviser under the Investment Advisers Act of 1940, is a private
investment advisory and management firm established by the Rockefeller Family
to serve its own needs and those of a small number of other persons and
institutions. As of October 31,
<PAGE> 27
1994, the Sub-Adviser managed over $2.5 billion in assets, including $836
million in foreign securities. The Sub-Adviser, with offices at 30
Rockefeller Plaza, New York, New York 10112, is a wholly-owned subsidiary of
Rockefeller Financial Services, Inc., all of the voting shares of which are
owned by the Rockefeller Family Trust. The directors of the Sub-Adviser are
Walter M. Cabot, Colin G. Campbell, Abby O. Caulkins, Pamela P. Flaherty,
Laird I. Grant, Judy C. Lewent, Abby M. O'Neill, David Rockefeller, David
Rockefeller, Jr., Peter C. Rockefeller, Richard G. Rockefeller, Rodman C.
Rockefeller, Sharon P. Rockefeller, and Joseph D. Williams. Mr. Cabot is a
Senior Adviser of Standish, Ayer & Wood; Mr. Campbell is President of
Rockefeller Brothers Fund; Mrs. Caulkins is a director of Rockefeller
Financial Services, Inc.; Ms. Flaherty is a Division Executive of Citibank
A.N.A.; Ms. Grant is President and Chief Executive Officer of the Sub-
Adviser; Ms. Lewent is Senior Vice President and Chief Financial Officer of
Merck & Co., Inc.; Mrs. O'Neill is a Trustee of Massachusetts Financial
Services Company; Mr. David Rockefeller is Chairman of The Rockefeller Group;
Mr. David Rockefeller, Jr. is Chairman of Rockefeller Financial Services,
Inc. and Chairman of the Sub-Adviser; Mr. Peter Rockefeller is an Investment
Banking Associate of Donaldson Lufkin & Jenrette Securities Corp.; Dr.
Richard Rockefeller is a practicing physician; Mr. Rodman Rockefeller is
Chairman of Pocantico Associates, Inc.; Mrs. Rockefeller is President and
Chief Executive Officer of WETA-TV; and Mr. Williams is Chairman of the
Executive Committee of Warner-Lambert Company. The trustees of the
Rockefeller Family Trust are George L. Shinn, D. Ronald Daniel, and Richard
D. Parsons. John T. Leyden is Vice-President--Finance and Treasurer of the
Sub-Adviser; J. Murray Logan is Vice President of the Sub-Adviser; and David
A. Strawbridge is Vice President, Secretary, and General Counsel of the Sub-
Adviser.
The Rockefeller Family Trust was established in 1979, primarily for the
benefit of the grandchildren of John D. Rockefeller, Jr. and their
descendants. The grantors of the trust property are the senior members of
the Rockefeller Family. In 1980, the Sub-Adviser was registered as an
investment adviser and commenced providing management services to non-
Rockefeller Family clients. Rockefeller & Co. provides integrated
investments in the global equity and fixed-interest markets. It allocates
capital to asset classes that have superior investment return potential
commensurate with the overall risk level and financial objectives of the
clients. The asset classes are managed by specialized investment units, each
with its own experts and disciplines suited to particular asset classes or
geographic regions. These investment units include global small capitalized
equities, global large capitalized equities, and global unquoted equities.
As of October 31, 1994, the Sub-Adviser employed approximately 62 investment
professionals and support staff in offices located in New York, London, and
Hong Kong.
SteinRoe Counselor [service mark] and SteinRoe Counselor Preferred
[service mark] are professional investment advisory services offered to Fund
shareholders. Each is designed to help shareholders construct Fund
investment portfolios to suit their individual needs. Based on information
shareholders provide about their financial circumstances, goals, and
objectives in response to a questionnaire, the Adviser's investment
professionals create customized portfolio recommendations for investments in
the Fund and other mutual funds managed by the Adviser. Shareholders
participating in SteinRoe
<PAGE> 28
Counselor [service mark] are free to self direct their investments while
considering the Adviser's recommendations; shareholders participating in
SteinRoe Counselor Preferred [service mark] enjoy the added benefit of
having the Adviser implement portfolio recommendations automatically for a
fee of 1% or less, depending on the size of their portfolios. In addition to
reviewing shareholders' circumstances, goals, and objectives periodically and
updating portfolio recommendations to reflect any changes, the shareholders
who participate in these programs are assigned a dedicated Counselor [service
mark] representative. Other distinctive services include specially designed
account statements with portfolio performance and transaction data,
newsletters, and regular investment, economic, and market updates. A $50,000
minimum investment is required to participate in either program.
Please refer to the description of the Adviser, the Sub-Adviser,
advisory agreements, advisory fee, and transfer agency services under
Management of the Fund in the Prospectus, which is incorporated herein by
reference. From the Fund's inception on March 1, 1994 through September 30,
1994, the Adviser received payments of $343,107 in advisory fees from the
Fund.
The Adviser provides office space and executive and other personnel to
the Fund and bears any sales or promotional expenses. The Sub-Adviser pays
the cost of maintaining the staff and personnel necessary for it to perform
its services to the Fund including the expenses of office rent, telephone,
and other facilities necessary to enable it to perform its investment
management services. The Fund pays all expenses other than those paid by the
Adviser or the Sub-Adviser, including but not limited to printing and postage
charges and securities registration and custodian fees and expenses
incidental to its organization.
The investment advisory agreement provides that the Adviser shall
reimburse the Fund to the extent that total annual expenses of the Fund
(including fees paid to the Adviser, but excluding taxes, interest, brokers'
commissions and other normal charges incident to the purchase and sale of
portfolio securities and expenses of litigation to the extent permitted under
applicable state law) exceed the applicable limits prescribed by any state in
which shares of the Fund are being offered for sale to the public; provided,
however, that the Adviser shall not be required to reimburse the Fund an
amount in excess of the management fee from the Fund for such year. The
Trust believes that currently the most restrictive state limit on mutual fund
expenses is that of California, which limit currently is 2 1/2% of the first
$30 million of average net assets, 2% of the next $70 million, and 1 1/2%
thereafter.
The advisory agreement and the portfolio management agreement also
provide that neither the Adviser, the Sub-Adviser, nor any of their
respective directors, officers, stockholders (or partners of stockholders),
agents, or employees shall have any liability to the Trust or any shareholder
of the Trust for any error of judgment, mistake of law or any loss arising
out of any investment, or for any other act or omission in the performance by
the Adviser or the Sub-Adviser of their duties under the agreements, except
for liability resulting from willful misfeasance, bad faith or gross
negligence on their part in the performance of their duties or from reckless
disregard by them of their obligations and duties under the agreements.
<PAGE> 29
Any expenses that are attributable solely to the organization,
operation, or business of the Fund shall be paid solely out of the Fund's
assets. Any expenses incurred by the Trust that are not solely attributable
to a particular series are apportioned in such manner as the Adviser
determines is fair and appropriate, unless otherwise specified by the Board
of Trustees.
BOOKKEEPING AND ACCOUNTING AGREEMENT
Pursuant to a separate agreement with the Trust, the Adviser receives a
fee for performing certain bookkeeping and accounting services for the Fund.
For these services, the Adviser receives an annual fee of $25,000 per Fund
plus .0025 of 1% of average net assets over $50 million.
DISTRIBUTOR
Shares of the Fund are distributed by Liberty Securities Corporation
("LSC") under a Distribution Agreement as described under Management of the
Fund in the Prospectus, which is incorporated herein by reference. The
Distribution Agreement continues in effect from year to year, provided such
continuance is approved annually (i) by a majority of the trustees or by a
majority of the outstanding voting securities of the Trust, and (ii) by a
majority of the trustees who are not parties to the Agreement or interested
persons of any such party. The Trust has agreed to pay all expenses in
connection with registration of its shares with the Securities and Exchange
Commission and auditing and filing fees in connection with registration of
its shares under the various state blue sky laws and assumes the cost of
preparation of prospectuses and other expenses. The Adviser bears all sales
and promotional expenses, including payments to LSC for the sales of Fund
shares. The Adviser also makes payments to other broker-dealers, banks, and
other institutions for the sales of Fund shares of 0.20% of the annual
average value of accounts of such shares.
As agent, LSC offers shares of the Fund to investors in states where the
shares are qualified for sale, at net asset value, without sales commissions
or other sales load to the investor. In addition, no sales commission or
"12b-1" payment is paid by the Fund. LSC offers the Fund's shares only on a
best-efforts basis.
TRANSFER AGENT
SSI performs certain transfer agency services for the Trust, as
described under Management of the Fund in the Prospectus. For performing
these services, SSI receives the following payments from the Fund: (1) a fee
of $4.00 for each new account opened; (2) monthly payments of $1.063 per open
shareholder account; (3) payments of $0.367 per closed shareholder account
for each month through June of the calendar year following the year in which
the account is closed; (4) $0.3025 per shareholder account for each dividend
paid; and (5) $1.415 for each shareholder-initiated transaction. In
addition, the Fund reimburses SSI for any charges for certain services
provided to it by DST Systems, Inc. in connection with transfer agency
services to the Fund. The Trust
<PAGE> 30
believes the charges by SSI to the Fund are comparable to those of other
companies performing similar services. (See Investment Advisory Services.)
CUSTODIAN
State Street Bank and Trust Company (the "Bank"), 225 Franklin Street,
Boston, Massachusetts 02101, is the custodian for the Trust. It is
responsible for holding all securities and cash of the Fund, receiving and
paying for securities purchased, delivering against payment securities sold,
receiving and collecting income from investments, making all payments
covering expenses of the Fund, and performing other administrative duties,
all as directed by authorized persons. The custodian does not exercise any
supervisory function in such matters as purchase and sale of portfolio
securities, payment of dividends, or payment of expenses of the Fund.
Portfolio securities purchased in the U.S. are maintained in the custody
of the Bank or of other domestic banks or depositories. Portfolio securities
purchased outside of the U.S. are maintained in the custody of foreign banks
and trust companies that are members of the Bank's Global Custody Network and
foreign depositories ("foreign sub-custodians"). Each of the domestic and
foreign custodial institutions holding portfolio securities has been approved
by the Board of Trustees in accordance with regulations under the Investment
Company Act of 1940.
The Board of Trustees reviews, at least annually, whether it is in the
best interest of the Fund and its shareholders to maintain Fund assets in
each of the countries in which the Fund invests with particular foreign sub-
custodians in such countries, pursuant to contracts between such respective
foreign sub-custodians and the Bank. The review includes an assessment of
the risks of holding Fund assets in any such country (including risks of
expropriation or imposition of exchange controls), the operational capability
and reliability of each such foreign sub-custodian, and the impact of local
laws on each such custody arrangement. The Board of Trustees is aided in its
review by the Bank, which has assembled the network of foreign sub-custodians
utilized by the Fund, as well as by the Adviser, the Sub-Adviser, and
counsel. However, with respect to foreign sub-custodians, there can be no
assurance that the Fund, and the value of its shares, will not be adversely
affected by acts of foreign governments, financial or operational
difficulties of the foreign sub-custodians, difficulties and costs of
obtaining jurisdiction over, or enforcing judgments against, the foreign sub-
custodians, or application of foreign law to the Fund's foreign sub-custodial
arrangements. Accordingly, an investor should recognize that the non-
investment risks involved in holding assets abroad are greater than those
associated with investing in the United States.
The Fund may invest in obligations of the custodian and may purchase or
sell securities from or to the custodian.
INDEPENDENT PUBLIC ACCOUNTANTS
The independent public accountants for the Trust are Arthur Andersen
LLP, 33 West Monroe Street, Chicago, Illinois 60603. The accountants audit
and report on the
<PAGE> 31
Fund's annual financial statements, review certain regulatory reports and the
Fund's Federal income tax returns, and perform other professional accounting,
auditing, tax and advisory services when engaged to do so by the Trust.
PORTFOLIO TRANSACTIONS
The Sub-Adviser places the orders for the purchase and sale of the
Fund's portfolio securities and options and futures contracts. The Sub-
Adviser's overriding objective in effecting portfolio transactions is to seek
to obtain the best combination of price and execution. The best net price,
giving effect to brokerage commissions, if any, and other transaction costs,
normally is an important factor in this decision, but a number of other
judgmental factors may also enter into the decision. These include: the Sub-
Adviser's knowledge of negotiated commission rates currently available and
other current transaction costs; the nature of the security being traded; the
size of the transaction; the desired timing of the trade; the activity
existing and expected in the market for the particular security;
confidentiality; the execution, clearance and settlement capabilities of the
broker or dealer selected and others which are considered; the Sub-Adviser's
knowledge of the financial stability of the broker or dealer selected and
such other brokers or dealers; and the Sub-Adviser's knowledge of actual or
apparent operational problems of any broker or dealer. Recognizing the value
of these factors, the Fund may pay a brokerage commission in excess of that
which another broker or dealer may have charged for effecting the same
transaction. Evaluations of the reasonableness of brokerage commissions,
based on the foregoing factors, are made on an ongoing basis by the Sub-
Adviser's staff while effecting portfolio transactions. The general level of
brokerage commissions paid is reviewed by the Sub-Adviser, and reports are
made annually to the Board of Trustees.
With respect to issues of securities involving brokerage commissions,
when more than one broker or dealer is believed to be capable of providing
the best combination of price and execution with respect to a particular
portfolio transaction for the Fund, the Sub-Adviser often selects a broker or
dealer that has furnished it with research products or services such as
research reports, subscriptions to financial publications and research
compilations, compilations of securities prices, earnings, dividends, and
similar data, and computer data bases, quotation equipment and services,
research-oriented computer software and services, and services of economic
and other consultants. Selection of brokers or dealers is not made pursuant
to an agreement or understanding with any of the brokers or dealers; however,
the Sub-Adviser uses an internal allocation procedure to identify those
brokers or dealers who provide it with research products or services and the
amount of research products or services they provide, and endeavors to direct
sufficient commissions generated by its clients' accounts in the aggregate,
including the Fund, to such brokers or dealers to ensure the continued
receipt of research products or services the Sub-Adviser feels are useful.
In certain instances, the Sub-Adviser may receive from brokers and dealers
products or services that are used both as investment research and for
administrative, marketing, or other non-research purposes. In such
instances, the Sub-Adviser will make a good faith effort to determine the
relative proportions of such products or services which may be considered as
investment research. The portion of the costs of such products
<PAGE> 32
or services attributable to research usage may be defrayed by the Sub-Adviser
(without prior agreement or understanding, as noted above) through brokerage
commissions generated by transactions by clients (including the Fund), while
the portions of the costs attributable to non-research usage of such products
or services is paid by the Sub-Adviser in cash. No person acting on behalf
of the Fund is authorized, in recognition of the value of research products
or services, to pay a commission in excess of that which another broker or
dealer might have charged for effecting the same transaction. Research
products or services furnished by brokers and dealers may be used in
servicing any or all of the clients of the Sub-Adviser and not all such
research products or services are used in connection with the management of
the Fund.
With respect to the Fund's purchases and sales of portfolio securities
transacted with a broker or dealer on a net basis, the Sub-Adviser may also
consider the part, if any, played by the broker or dealer in bringing the
security involved to the Sub-Adviser's attention, including investment
research related to the security and provided to the Fund.
The table below shows information on brokerage commissions paid by the
Fund:
Total amount of brokerage commissions paid during
fiscal year ended 9/30/94 ..................................$ 145,832
Amount of commissions paid to brokers or dealers who
supplied research services to the Adviser.......................145,832
Total dollar amount involved in such transactions...............37,295,964
Amount of commissions paid to brokers or dealers that
were allocated to such brokers or dealers by the
Fund's portfolio manager because of research services
provided to the Fund ......................................... N/A
Total dollar amount involved in such transactions.................. N/A
The Trust has arranged for its custodian to act as a soliciting dealer
to accept any fees available to the custodian as a soliciting dealer in
connection with any tender offer for Fund portfolio securities. The
custodian will credit any such fees received against its custodial fees. In
addition, the Board of Trustees has reviewed the legal developments
pertaining to and the practicability of attempting to recapture underwriting
discounts or selling concessions when portfolio securities are purchased in
underwritten offerings. The Board of Trustees has been advised by counsel
that recapture in foreign securities underwritings is permitted and has
directed the Sub-Adviser to attempt to recapture to the extent consistent
with best price and execution.
ADDITIONAL INCOME TAX CONSIDERATIONS
The Fund intends to comply with the special provisions of the Internal
Revenue Code that relieve it of Federal income tax to the extent of its net
investment income and capital gains currently distributed to shareholders.
Because dividend and capital gain distributions reduce net asset value,
a shareholder who purchases shares shortly before a record date will, in
effect, receive a
<PAGE> 33
return of a portion of his investment in such distribution. The distribution
would nonetheless be taxable to him, even if the net asset value of shares
were reduced below his cost. However, for Federal income tax purposes the
shareholder's original cost would continue as his tax basis.
The Fund expects that less than 100% of its dividends will qualify for
the deduction for dividends received by corporate shareholders.
To the extent the Fund invests in foreign securities, it may be subject
to withholding and other taxes imposed by foreign countries. Tax treaties
between certain countries and the United States may reduce or eliminate such
taxes. Investors may be entitled to claim U.S. foreign tax credits with
respect to such taxes, subject to certain provisions and limitations
contained in the Code. Specifically, if more than 50% of the Fund's total
assets at the close of any fiscal year consist of stock or securities of
foreign corporations, the Fund may file an election with the Internal Revenue
Service pursuant to which shareholders of the Fund will be required to (i)
include in ordinary gross income (in addition to taxable dividends actually
received) their pro rata shares of foreign income taxes paid by the Fund even
though not actually received, (ii) treat such respective pro rata shares as
foreign income taxes paid by them, and (iii) deduct such pro rata shares in
computing their taxable incomes, or, alternatively, use them as foreign tax
credits, subject to applicable limitations, against their United States
income taxes. Shareholders who do not itemize deductions for Federal income
tax purposes will not, however, be able to deduct their pro rata portion of
foreign taxes paid by the Fund, although such shareholders will be required
to include their share of such taxes in gross income. Shareholders who claim
a foreign tax credit may be required to treat a portion of dividends received
from the Fund as separate category income for purposes of computing the
limitations on the foreign tax credit available to such shareholders. Tax-
exempt shareholders will not ordinarily benefit from this election relating
to foreign taxes. Each year, the Fund will notify shareholders of the amount
of (i) each shareholder's pro rata share of foreign income taxes paid by the
Fund and (ii) the portion of Fund dividends which represents income from each
foreign country, if the Fund qualifies to pass along such credit.
PASSIVE FOREIGN INVESTMENT COMPANIES. The Fund may purchase the
securities of certain foreign investment funds or trusts called passive
foreign investment companies ("PFICs"). In addition to bearing their
proportionate share of the Fund's expenses (management fees and operating
expenses), shareholders will also indirectly bear similar expenses of PFICs.
Capital gains on the sale of PFIC holdings will be deemed to be ordinary
income regardless of how long the Fund holds its investment. In addition,
the Fund may be subject to corporate income tax and an interest charge on
certain dividends and capital gains earned from PFICs, regardless of whether
such income and gains are distributed to shareholders.
In accordance with tax regulations, the Fund intends to treat PFICs as
sold on the last day of the Fund's fiscal year and recognize any gains for
tax purposes at that time; losses will not be recognized. Such gains will be
considered ordinary income
<PAGE> 34
which the Fund will be required to distribute even though it has not sold the
security and received cash to pay such distributions.
INVESTMENT PERFORMANCE
The Fund may quote certain total return figures from time to time. A
"Total Return" on a per share basis is the amount of dividends distributed
per share plus or minus the change in the net asset value per share for a
period. A "Total Return Percentage" may be calculated by dividing the value
of a share at the end of a period by the value of the share at the beginning
of the period and subtracting one. For a given period, an "Average Annual
Total Return" may be computed by finding the average annual compounded rate
that would equate a hypothetical initial amount invested of $1,000 to the
ending redeemable value.
Average Annual Total Return is computed as follows: ERV = P(1+T)n
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000
payment made at the beginning of the period at the end of
the period (or fractional portion thereof).
For example, for a $1,000 investment in the Fund, the "Total Return,"
the "Total Return Percentage," and the "Average Annual Total Return" at
September 30, 1994 were:
Total Return Total Return Percentage
*Life of Fund $1,061 6.10%
________________________
*Life of Fund is from its date of public offering, 3/1/94.
Investment performance figures assume reinvestment of all dividends and
distributions and do not take into account any Federal, state, or local
income taxes which shareholders must pay on a current basis. They are not
necessarily indicative of future results. The performance of the Fund is a
result of conditions in the securities markets, portfolio management, and
operating expenses. Although investment performance information is useful in
reviewing the Fund's performance and in providing some basis for comparison
with other investment alternatives, it should not be used for comparison with
other investments using different reinvestment assumptions or time periods.
In advertising and sales literature, the Fund may compare its
performance with that of other mutual funds, indexes or averages of other
mutual funds, indexes of related financial assets or data, and other
competing investment and deposit products available from or through other
financial institutions. The composition of these indexes or averages differs
from that of the Fund. Comparison of the Fund to an alternative investment
should be made with consideration of differences in features and expected
performance.
<PAGE> 35
All of the indexes and averages noted below will be obtained from the
indicated sources or reporting services, which the Fund believes to be
generally accurate. The Fund may also note its mention or recognition in
newspapers, magazines, or other media from time to time. However, the Fund
assumes no responsibility for the accuracy of such data. Newspapers and
magazines which might mention the Fund include, but are not limited to, the
following:
Architectural Digest
Arizona Republic
Atlanta Constitution
Barron's
Boston Herald
Business Week
Chicago Tribune
Chicago Sun-Times
Cleveland Plain Dealer
CNBC
Crain's Chicago Business
Consumer Reports
Consumer Digest
Financial World
Forbes
Fortune
Fund Action
Gourmet
Investor's Business Daily
Kiplinger's Personal Finance Magazine
Knight-Ridder
Los Angeles Times
Money
Mutual Fund Letter
Mutual Fund News Service
Mutual Fund Values (Morningstar)
Newsweek
The New York Times
No-Load Fund Investor
Pension World
Pensions and Investment
Personal Investor
Physicians Financial News
Jane Bryant Quinn (syndicated column)
The San Francisco Chronicle
Smart Money
Smithsonian
Stanger's Investment Adviser
Time
Travel & Leisure
United Mutual Fund Selector
USA Today
U.S. News and World Report
The Wall Street Journal
Working Women
Worth
Your Money
The Fund may compare its performance to the Consumer Price Index (All
Urban), a widely recognized measure of inflation.
The Fund's performance may be compared to the following indexes or
averages:
Dow-Jones Industrial Average New York Stock Exchange Composite Index
Standard & Poor's 500 Stock Index American Stock Exchange Composite Index
Standard & Poor's 400 Industrials NASDAQ Composite
Wilshire 5000 NASDAQ Industrials
<PAGE> 36
(These indexes are widely recognized indicators of general U.S. stock market
results.) (These indexes generally reflect the performance of stocks
traded in the indicated markets.)
EAFE Index
Financial Times Actuaries World Index (Ex-U.S.)
Morgan Stanley Capital International World Index
(These indexes are widely recognized indicators of the international markets)
In addition, the Fund may compare performance to the indices indicated
below:
Lipper International & Global Funds Average
Lipper General Equity Funds Average
Lipper Equity Funds Average
Lipper International Fund Index
(The Lipper averages are unweighted averages of total return
performance as classified, calculated, and published by
Lipper.)
ICD International Equity Funds Average
ICD All Equity Funds Average
ICD General Equity Average*
ICD Global Equity Funds Average
ICD International Equity and Global Equity Funds Average
ICD Foreign Securities Index
Morningstar International Stock Average
Morningstar U.S. Diversified Average
Morningstar Equity Fund Average
Morningstar Hybrid Fund Average
Morningstar All Equity Funds Average
Morningstar General Equity Average**
*Includes ICD Aggressive Growth, Growth & Income, Long-Term Growth, and
Total Return Averages.
**Includes Morningstar Aggressive Growth, Growth, Balanced, Equity
Income, and Growth & Income Averages.
The ICD Indexes reflect the unweighted average total return of the
largest twenty funds within their respective category as calculated and
published by ICD.
The Lipper International Fund index reflects the net asset value
weighted return of the ten largest international funds.
The Lipper, ICD, and Morningstar averages are unweighted averages of
total return performance of mutual funds as classified, calculated, and
published by these independent services that monitor the performance of
mutual funds. The Fund may also use comparative performance as computed in a
ranking by Lipper or category averages and rankings provided by another
independent service. Should Lipper or another service reclassify the Fund to
a different category or develop (and place the Fund into) a new category, the
Fund may compare its performance or ranking with those of other funds in the
newly assigned category, as published by the service.
The Fund may also cite its rating, recognition, or other mention by
Morningstar or any other entity. Morningstar's rating system is based on
risk-adjusted total return performance and is expressed in a star-rating
format. The risk-adjusted number is computed by subtracting the Fund's risk
score (which is a function of the Fund's
<PAGE> 37
monthly returns less the 3-month T-bill return) from the Fund's load-adjusted
total return score. This numerical score is then translated into rating
categories, with the top 10% labeled five star, the next 22.5% labeled four
star, the next 35% labeled three star, the next 22.5% labeled two star, and
the bottom 10% one star. A high rating reflects either above-average returns
or below-average risk, or both.
Of course, past performance is not indicative of future results.
________________
To illustrate the historical returns on various types of financial
assets, the Fund may use historical data provided by Ibbotson Associates,
Inc. ("Ibbotson"), a Chicago-based investment firm. Ibbotson constructs (or
obtains) very long-term (since 1926) total return data (including, for
example, total return indexes, total return percentages, average annual total
returns and standard deviations of such returns) for the following asset
types:
Common stocks
Small company stocks
Long-term corporate bonds
Long-term government bonds
Intermediate-term government bonds
U.S. Treasury bills
Consumer Price Index
The Fund may also use hypothetical returns to be used as an example in a
mix of asset allocation strategies. One such example is reflected in the
chart below, which shows the effect of tax deferral on a hypothetical
investment. This chart assumes that an investor invested $2,000 a year on
January 1, for any specified period, in both a Tax-Deferred Investment and a
Taxable Investment, that both investments earn either 6%, 8% or 10%
compounded annually, and that the investor withdrew the entire amount at the
end of the period. (A tax rate of 39.6% is applied annually to the Taxable
Investment and on the withdrawal of earnings on the Tax-Deferred Investment.)
TAX-DEFERRED INVESTMENT VS. TAXABLE INVESTMENT
INTEREST RATE 6% 8% 10% 6% 8% 10%
Compounding
Years Tax-Deferred Investment Taxable Investment
30 $124,992 $171,554 $242,340 $109,197 $135,346 $168,852
25 90,053 115,177 150,484 82,067 97,780 117,014
20 62,943 75,543 91,947 59,362 68,109 78,351
15 41,684 47,304 54,099 40,358 44,675 49,514
10 24,797 26,820 29,098 24,453 26,165 28,006
5 11,178 11,613 12,072 11,141 11,546 11,965
1 2,072 2,096 2,121 2,072 2,096 2,121
Dollar Cost Averaging. Dollar cost averaging is an investment strategy
that requires investing a fixed amount of money in Fund shares at set
intervals. This allows you to purchase more shares when prices are low and
fewer shares when prices are high. Over time, this tends to lower your
average cost per share.
<PAGE> 38
Like any investment strategy, dollar cost averaging can't guarantee a
profit or protect against losses in a steadily declining market. Dollar cost
averaging involves uninterrupted investing regardless of share price and
therefore may not be appropriate for every investor.
From time to time, the Fund may offer in its advertising and sales
literature to send an investment strategy guide, a tax guide, or other
supplemental information to investors and shareholders. It may also mention
the SteinRoe Counselor [service mark] and the SteinRoe Counselor Preferred
[service mark] programs and asset allocation and other investment strategies.
APPENDIX--RATINGS
RATINGS IN GENERAL
A rating of a rating service represents the service's opinion as to the
credit quality of the security being rated. However, the ratings are general
and are not absolute standards of quality or guarantees as to the
creditworthiness of an issuer. Consequently, the Adviser believes that the
quality of debt securities in which the Fund invests should be continuously
reviewed and that individual analysts give different weightings to the
various factors involved in credit analysis. A rating is not a
recommendation to purchase, sell or hold a security because it does not take
into account market value or suitability for a particular investor. When a
security has received a rating from more than one service, each rating should
be evaluated independently. Ratings are based on current information
furnished by the issuer or obtained by the rating services from other sources
which they consider reliable. Ratings may be changed, suspended or withdrawn
as a result of changes in or unavailability of such information, or for other
reasons.
The following is a description of the characteristics of ratings of
corporate debt securities used by Moody's Investors Service, Inc. ("Moody's")
and Standard & Poor's Corporation ("S&P").
RATINGS BY MOODY'S
AAA. Bonds rated Aaa are judged to be the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt
edge." Interest payments are protected by a large or an exceptionally stable
margin and principal is secure. Although the various protective elements are
likely to change, such changes as can be visualized are more unlikely to
impair the fundamentally strong position of such bonds.
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 bonds or fluctuation of protective
elements may be of greater
<PAGE>
amplitude or there may be other elements present which make the long-term
risks appear somewhat larger than in Aaa bonds.
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 sometime 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.
BA. Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B. Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may
be small.
CAA. Bonds which are rated Caa are of poor standing. Such issues may
be in default or there may be present elements of danger with respect to
principal or interest.
CA. Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings.
NOTE: Moody's applies numerical modifiers 1, 2, and 3 in each generic
rating classification from Aa through B in its corporate bond rating system.
The modifier 1 indicates that the security ranks in the higher end of its
generic rating category; the modifier 2 indicates a mid-range ranking; and
the modifier 3 indicates that the issue ranks in the lower end of its generic
rating category.
RATINGS BY S&P
AAA. Debt rated AAA has the highest rating. 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 issues only in small degree.
<PAGE> 40
A. Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
BBB. Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity to pay interest and repay
principal for debt in this category than for debt in higher rated categories.
BB, B, CCC, CC, AND C. Debt rated BB, B, CCC, CC, or C is regarded, on
balance, as predominantly speculative with respect to capacity to pay
interest and repay principal in accordance with the terms of the obligation.
BB indicates the lowest degree of speculation and C the highest degree of
speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
C1. This rating is reserved for income bonds on which no interest is
being paid.
D. Debt rated D is in default, and payment of interest and/or repayment
of principal is in arrears. The D rating is also used upon the filing of a
bankruptcy petition if debt service payments are jeopardized.
NOTES:
The ratings from AA to CCC may be modified by the addition of a plus (+) or
minus (-) sign to show relative standing within the major rating categories.
Foreign debt is rated on the same basis as domestic debt measuring the
creditworthiness of the issuer; ratings of foreign debt do not take into
account currency exchange and related uncertainties.
The "r" is attached to highlight derivative, hybrid, and certain other
obligations that S&P believes may experience high volatility or high
variability in expected returns due to non-credit risks. Examples of such
obligations are: securities whose principal or interest return is indexed to
equities, commodities, or currencies; certain swaps and options; and interest
only and principal only mortgage securities. The absence of an "r" symbol
should not be taken as an indication that an obligation will exhibit no
volatility or variability in total return.