File No. 33-11351
Rule 497(e)
STEIN ROE INVESTMENT TRUST
Stein Roe Asia Pacific Fund
Supplement to Oct. 19, 1998 Statement of Additional Information
__________________________
The section of this Statement of Additional Information
entitled Portfolio Transactions is amended to read as follows:
Newport Fund Management, Inc. (Newport) places the orders for
the purchase and sale of portfolio securities and options and
futures contracts for its clients, including the Fund. Newport
has complete discretion over the selection and amount of
securities to be bought or sold without obtaining specific client
consent. Newport also has complete discretion over the selection
of the broker to be used and the commission rates to be paid.
Newport may, however, seek input from individual clients regarding
their individual brokerage preferences. In selecting a broker or
dealer for any transaction or series of transactions, Newport may
consider a number of factors including, for example, net price,
research capability, reputation, financial strength and stability,
efficiency of execution, block trading and block positioning
capabilities, willingness to execute related or unrelated
difficult transactions in the future, order of call, offering to
Registrant complete on-line computer access to data regarding
clients' accounts, and other matters involved in the receipt of
brokerage services.
Newport may also purchase from a broker or allow a broker to
pay for certain research services, economic and market
information, portfolio strategy advice, industry and company
comments, technical data, recommendations, general reports,
consultations, performance measurement data and on-line pricing
and news service and periodical subscription fees. Newport may
pay a brokerage commission in excess of that which another broker-
dealer might charge for effecting the same transactions in
recognition of the value of these research services. In such a
case, however, Newport will determine in good faith that such
commission is reasonable in relation to the value of brokerage,
research, other services and soft-dollar relationships provided by
such broker-dealer, viewed in terms of either the specific
transaction or Newport's overall responsibilities to the
portfolios over which it exercises investment authority.
Research services furnished by brokers through whom Newport
intends to effect securities transactions may be used in servicing
all of Newport's accounts; not all of such services may be used by
Newport in connection with accounts which paid commissions to the
broker providing such services. In conducting all of its soft
dollar relationships, Newport will seek to take advantage of the
safe harbor provided by Section 28(e) of the Securities Exchange
Act of 1934, as amended.
Newport may implement a program of broker compensation that
consists of directing a certain amount of brokerage to a broker in
return for the broker's referral of prospective clients. In the
context of possible directed brokerage, Newport understands and
will scrupulously comply with its fiduciary obligations to its
advisory clients. In cases where brokerage is directed, it will
be disclosed to the client whose transactions are being directed,
and the client will be asked to acknowledge and consent to this
program. The directed transactions will be only for the account
of the specific client referred and not for other client accounts.
In such cases, this practice will be disclosed in writing to the
client, and Newport complies with the other requirements of Rule
206(4)-3 promulgated under the federal Investment Advisers Act of
1940, as amended.
Newport also employs solicitors to whom it pays cash or a
portion of the advisory fee paid by clients referred to it by
those solicitors. In such cases, this practice is disclosed in
writing to the client and Newport complies with the other
requirements of Rule 206(4)-3 under the Investment Advisers Act of
1940, as amended.
This Supplement is Dated June 10, 1999
<PAGE>
Statement of Additional Information Dated October 19, 1998
STEIN ROE INVESTMENT TRUST
Suite 3200, One South Wacker Drive, Chicago, Illinois 60606
800-338-2550
Stein Roe Asia Pacific Fund
This Statement of Additional Information is not a prospectus,
but provides additional information that should be read in
conjunction with the prospectus of Stein Roe Asia Pacific Fund
dated October 19, 1998, and any supplements thereto
("Prospectus"). The Prospectus may be obtained at no charge by
telephoning 800-338-2550.
TABLE OF CONTENTS
Page
General Information and History..........................2
Investment Policies......................................3
Portfolio Investments and Strategies.....................3
Investment Restrictions.................................23
Additional Investment Considerations....................26
Purchases and Redemptions...............................27
Management..............................................28
Principal Shareholders..................................31
Investment Advisory Services............................31
Distributor.............................................34
Transfer Agent..........................................34
Custodian...............................................34
Independent Public Accountants..........................35
Portfolio Transactions..................................35
Additional Income Tax Considerations....................37
Investment Performance..................................38
Appendix-Ratings........................................41
GENERAL INFORMATION AND HISTORY
Stein Roe Asia Pacific Fund (the "Fund") is a series of Stein
Roe Investment Trust (the "Trust"). On Feb. 1, 1996, the name of
the Trust was changed to separate "SteinRoe" into two words.
As of the date of this Statement of Additional Information,
12 series of the Trust are authorized and outstanding. Each share
of a series, without par value, 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 its 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.
Stein Roe & Farnham Incorporated (the "Adviser") provides
overall management, administrative, and bookkeeping and accounting
services to the Fund. Newport Fund Management, Inc. ("Newport")
has been engaged as sub-adviser to provide investment advisory
services to the Fund, subject to overall management by the
Adviser.
Special Considerations Regarding Master Fund/Feeder Fund Structure
Rather than invest in securities directly, the Fund may in
the future act as a "feeder fund"-that is, it would seek to
achieve its investment objective by pooling its assets with those
of other investment companies for investment in a "master fund"
having the same investment objective and substantially the same
investment policies as the feeder funds. The purpose of such an
arrangement is to achieve greater operational efficiencies and to
reduce costs. The Adviser is expected to manage the assets of any
master fund in which the Fund would invest. Such investment would
be made only if the trustees determine it to be in the best
interests of the Fund and its shareholders. Shareholders would
receive advance notice of any such change.
INVESTMENT POLICIES
The investment objective and policies are described in the
Prospectus under Investment Policies. In pursuing its objective,
the Fund may also employ the investment techniques described under
Portfolio Investments and Strategies in the Prospectus and in this
Statement of Additional Information. The investment objective is
a nonfundamental policy and may be changed by the Board of
Trustees without the approval of a "majority of the outstanding
voting securities." /1/
- ------------------
/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
are present or represented by proxy or (ii) more than 50% of the
outstanding shares.
- ------------------
PORTFOLIO INVESTMENTS AND STRATEGIES
Debt Securities
In pursuing its investment objective, the Fund may invest up
to 35% of its total assets in debt securities. The Fund has
established no minimum rating criteria for the emerging market and
domestic debt securities in which it may invest, and such
securities may be unrated. The Fund does not intend to purchase
debt securities that are in default or which the Adviser or
Newport believes will be in default. The Fund may also invest in
"Brady Bonds," which are debt securities issued under the
framework of the Brady Plan as a mechanism for debtor countries to
restructure their outstanding bank loans. Most "Brady Bonds" have
their principal collateralized by zero coupon U.S. Treasury bonds.
The risks inherent in debt securities held in the portfolio
depend primarily on the term and quality of the particular
obligations, as well as on market conditions. A decline in the
prevailing levels of interest rates generally increases the value
of debt securities. Conversely, an increase in rates usually
reduces the value of debt securities. Medium-quality debt
securities are considered to have speculative characteristics.
Lower-quality debt securities rated lower than Baa by Moody's
Investors Service, Inc. ("Moody's") or lower than BBB by Standard
& Poor's Corp. ("S&P") and unrated securities of comparable
quality are considered to be below investment grade. These types
of debt securities are commonly referred to as "junk bonds" and
involve greater investment risk, including the possibility of
issuer default or bankruptcy. During a period of adverse economic
changes, issuers of junk bonds may experience difficulty in
servicing their principal and interest payment obligations. The
Fund does not expect to invest more than 5% of its net assets in
high-yield ("junk") bonds.
When Newport determines that adverse market or economic
conditions exist and 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.
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; 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 they are 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 Newport's
ability to correctly predict changes in the levels and directions
of movements in 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 currently intends to invest no more than 5% of its
net assets in any type of Derivative other than options, futures
contracts, futures options, and forward contracts. (See Options
and Futures below.)
Some mortgage-backed debt securities are of the "modified
pass-through type," which means the interest and principal
payments on mortgages in the pool are "passed through" to
investors. During periods of declining interest rates, there is
increased likelihood that mortgages will be prepaid, with a
resulting loss of the full-term benefit of any premium paid on
purchase of such securities; in addition, the proceeds of
prepayment would likely be invested at lower interest rates.
Mortgage-backed securities provide either a pro rata interest
in underlying mortgages or an interest in collateralized mortgage
obligations ("CMOs") that represent a right to interest and/or
principal payments from an underlying mortgage pool. CMOs are not
guaranteed by either the U.S. Government or by its agencies or
instrumentalities, and are usually issued in multiple classes each
of which has different payment rights, prepayment risks, and yield
characteristics. Mortgage-backed securities involve the risk of
prepayment on the underlying mortgages at a faster or slower rate
than the established schedule. Prepayments generally increase
with falling interest rates and decrease with rising rates but
they also are influenced by economic, social, and market factors.
If mortgages are pre-paid during periods of declining interest
rates, there would be a resulting loss of the full-term benefit of
any premium paid on purchase of the CMO, and the proceeds of
prepayment would likely be invested at lower interest rates.
Non-mortgage asset-backed securities usually have less
prepayment risk than mortgage-backed securities, but have the risk
that the collateral will not be available to support payments on
the underlying loans that finance payments on the securities
themselves.
Floating rate instruments provide for periodic adjustments in
coupon interest rates that are automatically reset based on
changes in amount and direction of specified market interest
rates. In addition, the adjusted duration of some of these
instruments may be materially shorter than their stated
maturities. To the extent such instruments are subject to
lifetime or periodic interest rate caps or floors, such
instruments may experience greater price volatility than debt
instruments without such features. Adjusted duration is an
inverse relationship between market price and interest rates and
refers to the approximate percentage change in price for a 100
basis point change in yield. For example, if interest rates
decrease by 100 basis points, a market price of a security with an
adjusted duration of 2 would increase by approximately 2%.
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, Newport 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 may purchase unrated securities
or securities rated below investment grade if the securities meet
Newport'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 investment
grade convertible securities, common stock or conventional debt
securities. As a result, Newport's own investment research and
analysis tend to be more important in the purchase of such
securities than other factors. Convertible securities rated below
investment grade will be deemed to be "junk" bonds for purposes of
the 5% limitation noted above. Subject to the above-mentioned
limitations, the Fund is not subject to a minimum rating
requirement with respect to convertible securities.
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 investment in securities of domestic issuers. For
this purpose, foreign securities do not include American
Depositary Receipts (ADRs) or securities guaranteed by a United
States person. ADRs are receipts typically issued by an American
bank or trust company evidencing ownership of the underlying
securities. 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 depositary and it may
have greater difficulty in receiving shareholder communications
than it would have with a sponsored ADR. The Fund does not intend
to invest more than 5% of its net assets in unsponsored ADRs. It
may also purchase foreign securities in the form of 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. 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.
With respect to portfolio securities that are issued by
foreign issuers or denominated in foreign currencies, 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 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 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, or other adverse political,
social or diplomatic developments that could affect investment in
these nations.
Investing in Emerging Markets. Investments in emerging
markets securities include special risks in addition to those
generally associated with foreign investing. Many investments in
emerging markets can be considered speculative, and the value of
those investments can be more volatile than in more developed
foreign markets. This difference reflects the greater
uncertainties of investing in less established markets and
economies. Emerging markets also have different clearance and
settlement procedures, and in certain markets there have been
times when settlements have not kept pace with the volume of
securities transactions, making it difficult to conduct such
transactions. Delays in settlement could result in temporary
periods when a portion of the assets is uninvested and no return
is earned thereon. The inability to make intended security
purchases due to settlement problems could cause the Fund to miss
attractive investment opportunities. Inability to dispose of
portfolio securities due to settlement problems could result
either in losses to the Fund due to subsequent declines in the
value of those securities or, if the Fund has entered into a
contract to sell a security, in possible liability to the
purchaser. Costs associated with transactions in emerging markets
securities are typically higher than costs associated with
transactions in U.S. securities. Such transactions also involve
additional costs for the purchase or sale of foreign currency.
Certain foreign markets (including emerging markets) may
require governmental approval for the repatriation of investment
income, capital or the proceeds of sales of securities by foreign
investors. In addition, if a deterioration occurs in an emerging
market's balance of payments or for other reasons, a country could
impose temporary restrictions on foreign capital remittances. The
Fund could be adversely affected by delays in, or a refusal to
grant, required governmental approval for repatriation of capital,
as well as by the application to the Fund of any restrictions on
investments.
The risk also exists that an emergency situation may arise in
one or more emerging markets. As a result, trading of securities
may cease or may be substantially curtailed and prices for the
Fund's securities in such markets may not be readily available.
The Fund may suspend redemption of its shares for any period
during which an emergency exists, as determined by the Securities
and Exchange Commission (the "SEC"). Accordingly, if the Fund
believes that appropriate circumstances exist, it will promptly
apply to the SEC for a determination that such an emergency is
present. During the period commencing from the Fund's
identification of such condition until the date of the SEC action,
the Fund's securities in the affected markets will be valued at
fair value determined in good faith by or under the direction of
the Trust's Board of Trustees.
Volume and liquidity in most foreign markets are lower than
in the U.S. Fixed commissions on foreign securities exchanges are
generally higher than negotiated commissions on U.S. exchanges,
although the Fund endeavors to achieve the most favorable net
results on its portfolio transactions. There is generally less
government supervision and regulation of business and industry
practices, securities exchanges, brokers, dealers and listed
companies than in the U.S. Mail service between the U.S. and
foreign countries may be slower or less reliable than within the
U.S., thus increasing the risk of delayed settlements of portfolio
transactions or loss of certificates for portfolio securities. In
addition, with respect to certain emerging markets, there is the
possibility of expropriation or confiscatory taxation, political
or social instability, or diplomatic developments which could
affect the Fund's investments in those countries. Moreover,
individual emerging market economies may differ favorably or
unfavorably from the U.S. economy in such respects as growth of
gross national product, rate of inflation, capital reinvestment,
resource self-sufficiency and balance of payments position.
Income from securities held by the Fund could be reduced by a
withholding tax on the source or other taxes imposed by the
emerging market countries in which the Fund invests. Net asset
value may also be affected by changes in the rates of methods or
taxation applicable to the Fund or to entities in which it has
invested. Newport will consider the cost of any taxes in
determining whether to acquire any particular investments, but can
provide no assurance that the taxes will not be subject to change.
Many emerging markets have experienced substantial rates of
inflation for many years. Inflation and rapid fluctuations in
inflation rates have had and may continue to have adverse effects
on the economies and securities markets of certain emerging market
countries. In an attempt to control inflation, wage and price
controls have been imposed in certain countries. Of these
countries, some, in recent years, have begun to control inflation
through prudent economic policies.
Emerging market governmental issuers are among the largest
debtors to commercial banks, foreign governments, international
financial organizations and other financial institutions. Certain
emerging market governmental issuers have not been able to make
payments of interest or principal on debt obligations as those
payments have come due. Obligations arising from past
restructuring agreements may affect the economic performance and
political and social stability of those issuers.
Governments of many emerging market countries have exercised
and continue to exercise substantial influence over many aspects
of the private sector through ownership or control of many
companies, including some of the largest in any given country. As
a result, government actions in the future could have a
significant effect on economic conditions in emerging markets,
which in turn, may adversely affect companies in the private
sector, general market conditions and prices and yields of certain
of the securities in the portfolio. Expropriation, confiscatory
taxation, nationalization, political, economic or social
instability or other similar developments have occurred frequently
over the history of certain emerging markets and could adversely
affect the Fund's assets should these conditions recur.
The ability of emerging market country governmental issuers
to make timely payments on their obligations is likely to be
influenced strongly by the issuer's balance of payments, including
export performance, and its access to international credits and
investments. An emerging market whose exports are concentrated in
a few commodities could be vulnerable to a decline in the
international prices of one or more of those commodities.
Increased protectionism on the part of an emerging market's
trading partners could also adversely affect the country's exports
and diminish its trade account surplus, if any. To the extent
that emerging markets receive payment for their exports in
currencies other than dollars or non-emerging market currencies,
their ability to make debt payments denominated in dollars or non-
emerging market currencies could be affected.
Another factor bearing on the ability of an emerging market
country to repay debt obligations is the level of international
reserves of the country. Fluctuations in the level of these
reserves affect the amount of foreign exchange readily available
for external debt payments and thus could have a bearing on the
capacity of emerging market countries to make payments on these
debt obligations.
To the extent that an emerging market country cannot generate
a trade surplus, it must depend on continuing loans from foreign
governments, multilateral organizations or private commercial
banks, aid payments from foreign governments and on inflows of
foreign investment. The access of emerging markets to these forms
of external funding may not be certain, and a withdrawal of
external funding could adversely affect the capacity of emerging
market country governmental issuers to make payments on their
obligations. In addition, the cost of servicing emerging market
debt obligations can be affected by a change in international
interest rates since the majority of these obligations carry
interest rates that are adjusted periodically based upon
international rates.
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.
Foreign currency exchange transactions are limited to
transaction and portfolio hedging involving either specific
transactions or portfolio positions. Transaction hedging is the
purchase or sale of forward contracts with respect to specific
receivables or payables of the Fund arising 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 foreign currency.
Portfolio hedging allows the Fund to limit or reduce its exposure
in a foreign currency by entering into a forward contract to sell
such foreign currency (or another foreign currency that acts as a
proxy for that currency) at a future date for a price payable in
U.S. dollars so that the value of the foreign-denominated
portfolio securities can be approximately matched by a foreign-
denominated 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 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 it 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 it 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, it 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
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, it 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 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 total assets in
foreign securities issued by companies in the Pacific Basin.
Structured Notes
Structured Notes are Derivatives on which the amount of
principal repayment and or interest payments is based upon the
movement of one or more factors. These factors include, but are
not limited to, currency exchange rates, interest rates (such as
the prime lending rate and the London Interbank Offered Rate
("LIBOR")), stock indices such as the S&P 500 Index and the price
fluctuations of a particular security. In some cases, the impact
of the movements of these factors may increase or decrease through
the use of multipliers or deflators. The use of Structured Notes
allows the Fund to tailor its investments to the specific risks
and returns Newport wishes to accept while avoiding or reducing
certain other risks.
Eurodollar Instruments
The Fund may make investments in Eurodollar instruments.
Eurodollar instruments are U.S. dollar-denominated futures
contracts or options thereon which are linked to LIBOR, although
foreign currency-denominated instruments are available from time
to time. Eurodollar future contracts enable purchasers to obtain
a fixed rate for the lending of funds and sellers to obtain a
fixed rate for borrowings. The Fund might use Eurodollar futures
contracts and options thereon to hedge against changes in LIBOR,
to which many interest rate swaps and fixed income instruments are
linked.
Brady Bonds
The Fund may invest in "Brady Bonds," which are debt
securities issued under the framework of the Brady Plan as a
mechanism for debtor countries to restructure their outstanding
bank loans. Most "Brady Bonds" have their principal
collateralized by zero coupon U.S. Treasury bonds. Brady Bonds
have been issued only in recent years, and, accordingly, do not
have a long payment history.
U.S. dollar-denominated, collateralized Brady Bonds, which
may be fixed rate par bonds or floating rate discount bonds, are
generally collateralized in full as to principal due at maturity
by U.S. Treasury zero coupon obligations which have the same
maturity as the Brady Bonds. Interest payments on these Brady
Bonds generally are collateralized by cash or securities in an
amount that, in the case of fixed rate bonds, is equal to at least
one year of rolling interest payments or, in the case of floating
rate bonds, initially is equal to at least one year's rolling
interest payments based on the applicable interest rate at the
time and is adjusted at regular intervals thereafter. Certain
Brady Bonds are entitled to "value recovery payments" in certain
circumstances, which in effect constitute supplemental interest
payments but generally are not collateralized. Brady Bonds are
often viewed as having three or four valuation components: (i)
the collateralized repayment of principal at final maturity; (ii)
the collateralized interest payments; (iii) the uncollateralized
interest payments; and (iv) any uncollateralized repayment of
principal at maturity (these uncollateralized amounts constitute
the "residual risk"). In the event of a default with respect to
collateralized Brady Bonds as a result of which the payment
obligations of the issuer are accelerated, the U.S. Treasury zero
coupon obligations held as collateral for the payment of principal
will not be distributed to investors, nor will such obligations be
sold and the proceeds distributed. The collateral will be held to
the scheduled maturity of the defaulted Brady Bonds by the
collateral agent, at which time the face amount of the collateral
will equal the principal payments which would have then been due
on the Brady Bonds in the normal course. In addition, in light of
the residual risk of the Brady Bonds and, among other factors, the
history of defaults with respect to commercial bank loans by
public and private entities of countries issuing Brady Bonds,
investments in Brady Bonds will be viewed as speculative.
Sovereign Debt Obligations
The Fund may purchase sovereign debt instruments issued or
guaranteed by foreign governments or their agencies, including
debt of emerging market countries. Sovereign debt of emerging
market countries may involve a high degree of risk, and may be in
default or present the risk of default. Governmental entities
responsible for repayment of the debt may be unable or unwilling
to repay principal and interest when due, and may require
renegotiation or rescheduling of debt payments. In addition,
prospects for repayment of principal and interest may depend on
political as well as economic factors.
Closed-End Investment Companies
The Fund may also invest in closed-end investment companies
investing primarily in the emerging markets. To the extent the
Fund invests in such closed-end investment companies, shareholders
will incur certain duplicate fees and expenses. Generally,
securities of closed-end investment companies will be purchased
only when market access or liquidity restricts direct investment
in the market.
Swaps, Caps, Floors and Collars
The Fund may enter into swaps and may purchase or sell
related caps, floors and collars. The Fund would enter into these
transactions primarily to preserve a return or spread on a
particular investment or portion of its portfolio, to protect
against currency fluctuations, as a duration management technique
or to protect against any increase in the price of securities it
purchases at a later date. The Fund intends to use these
techniques as hedges and not as speculative investments and will
not sell interest rate income stream the Fund may be obligated to
pay.
A swap agreement is generally individually negotiated and
structured to include exposure to a variety of different types of
investments or market factors. Depending on its structure, a swap
agreement may increase or decrease the Fund's exposure to changes
in the value of an index of securities in which it might invest,
the value of a particular security or group of securities, or
foreign currency values. Swap agreements can take many different
forms and are known by a variety of names. The Fund may enter
into any form of swap agreement if Newport determines it is
consistent with its investment objective and policies.
A swap agreement tends to shift the Fund's investment
exposure from one type of investment to another. For example, if
the Fund agrees to exchange payments in dollars at a fixed rate
for payments in a foreign currency the amount of which is
determined by movements of a foreign securities index, the swap
agreement would tend to increase exposure to foreign stock market
movements and foreign currencies. Depending on how it is used, a
swap agreement may increase or decrease the overall volatility of
the Fund's investments and its net asset value.
The performance of a swap agreement is determined by the
change in the specific currency, market index, security, or other
factors that determine the amounts of payments due to and from the
Fund. If a swap agreement calls for payments by the Fund, it must
be prepared to make such payments when due. If the counterparty's
creditworthiness declines, the value of a swap agreement would be
likely to decline, potentially resulting in a loss. The Fund will
not enter into any swap, cap, floor or collar transaction unless,
at the time of entering into such transaction, the unsecured long-
term debt of the counterparty, combined with any credit
enhancements, is rated at least A by S&P or Moody's or has an
equivalent rating from a nationally recognized statistical rating
organization or is determined to be of equivalent credit quality
by Newport.
The purchase of a cap entitles the purchaser to receive
payments on a notional principal amount from the party selling the
cap to the extent that a specified index exceeds a predetermined
interest rate or amount. The purchase of a floor entitles the
purchaser to receive payments on a notional principal amount from
the party selling such floor to the extent that a specified index
falls below a predetermined interest rate or amount. A collar is
a combination of a cap and floor that preserves a certain return
within a predetermined range of interest rates or values.
At the time the Fund enters into swap arrangements or
purchases or sells caps, floors or collars, liquid assets having a
value at least as great as the commitment underlying the
obligations will be segregated on the books of the Fund and held
by the custodian throughout the period of the obligation.
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 Newport'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. The Fund does not
currently intend to loan more than 5% of its net assets.
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.
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 Newport deems it advisable for
investment reasons. The Fund does not currently intend to have
commitments to purchase when-issued securities in excess of 5% of
its net assets. It 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 it 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.
Short Sales "Against the Box"
The Fund may sell securities short against the box; that is,
enter into short sales of securities that it currently owns or has
the right to acquire through the conversion or exchange of other
securities that it owns at no additional cost. The Fund may make
short sales of securities only if at all times when a short
position is open it owns at least an equal amount of such
securities or securities convertible into or exchangeable for
securities of the same issue as, and equal in amount to, the
securities sold short, at no additional cost.
In a short sale against the box, the Fund does not deliver
from its portfolio the securities sold. Instead, the Fund borrows
the securities sold short from a broker-dealer through which the
short sale is executed, and the broker-dealer delivers such
securities, on behalf of the Fund, to the purchaser of such
securities. The Fund is required to pay to the broker-dealer the
amount of any dividends paid on shares sold short. Finally, to
secure its obligation to deliver to such broker-dealer the
securities sold short, the Fund must deposit and continuously
maintain in a separate account with its custodian an equivalent
amount of the securities sold short or securities convertible into
or exchangeable for such securities at no additional cost. The
Fund is said to have a short position in the securities sold until
it delivers to the broker-dealer the securities sold. The Fund
may close out a short position by purchasing on the open market
and delivering to the broker-dealer an equal amount of the
securities sold short, rather than by delivering portfolio
securities.
Short sales may protect the Fund against the risk of losses
in the value of its portfolio securities because any unrealized
losses with respect to such portfolio securities should be wholly
or partially offset by a corresponding gain in the short position.
However, any potential gains in such portfolio securities should
be wholly or partially offset by a corresponding loss in the short
position. The extent to which such gains or losses are offset
will depend upon the amount of securities sold short relative to
the amount the Fund owns, either directly or indirectly, and, in
the case where it owns convertible securities, changes in the
conversion premium.
Short sale transactions involve certain risks. If the price
of the security sold short increases between the time of the short
sale and the time the Fund replaces the borrowed security, it will
incur a loss and if the price declines during this period, it will
realize a short-term capital gain. Any realized short-term
capital gain will be decreased, and any incurred loss increased,
by the amount of transaction costs and any premium, dividend or
interest which the Fund may have to pay in connection with such
short sale. Certain provisions of the Internal Revenue Code may
limit the degree to which the Fund is able to enter into short
sales. There is no limitation on the amount of assets that, in
the aggregate, may be deposited as collateral for the obligation
to replace securities borrowed to effect short sales and allocated
to segregated accounts in connection with short sales. The Fund
currently expects that no more than 5% of its total assets would
be involved in short sales against the box.
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 Securities Act of 1933. 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. Newport, under the supervision of the Board
of Trustees, will consider whether securities purchased under Rule
144A are illiquid and thus subject to the restriction of investing
no more than 15% of 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, Newport will
consider the trading markets for the specific security, taking
into account the unregistered nature of a Rule 144A security. In
addition, Newport 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 that have not been deemed to be liquid by Newport.
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.
Interfund Borrowing and Lending Program
Pursuant to an exemptive order issued by the Securities and
Exchange Commission, the Fund may lend money to and borrow money
from other mutual funds advised by the Adviser. The Fund will
borrow through the program when borrowing is necessary and
appropriate and the costs are equal to or lower than the costs
of bank loans.
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
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, but is not expected to exceed 100% under normal
market conditions. A high rate of portfolio turnover, if it
should occur, would result in increased transaction expenses,
which it must bear. 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, it realizes a
capital gain equal to the premium received at the time the option
was written. If an option purchased by the Fund expires, it
realizes a capital loss equal to the premium paid.
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, it 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 on Securities and Indexes.
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, it 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.
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.
- -------------
/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.
- -------------
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 its securities or
the price of the securities that the Fund intends to purchase.
Although other techniques could be used to reduce or increase
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 accurate
predictions of changes in the level and direction of stock prices,
interest rates, currency exchange rates and other factors. Should
those predictions be incorrect, the return might have been better
had the transaction not been attempted; however, in the absence of
the ability to use futures contracts, Newport might have taken
portfolio actions in anticipation of the same market movements
with similar investment results but, presumably, at greater
transaction costs.
When a purchase or sale of a futures contract is made by the
Fund, it 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 realizes a capital
gain, or if it is more, it realizes a capital loss. Conversely,
if an offsetting sale price is more than the original purchase
price, the Fund realizes a capital gain, or if it is less, it
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 market and the securities underlying 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 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 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
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 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 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.
- -----------
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, 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%].
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 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 /4/ other 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.
- --------------
/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).
- --------------
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: (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
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.
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). 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.
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 other investments, and
shareholders are advised of the nature of the payments.
The Taxpayer Relief Act of 1997 (the "Act") imposed
constructive sale treatment for federal income tax purposes on
certain hedging strategies with respect to appreciated securities.
Under these rules, taxpayers will recognize gain, but not loss,
with respect to securities if they enter into short sales of
"offsetting notional principal contracts" (as defined by the Act)
or futures or "forward contracts" (as defined by the Act) with
respect to the same or substantially identical property, or if
they enter into such transactions and then acquire the same or
substantially identical property. These changes generally apply
to constructive sales after June 8, 1997. Furthermore, the
Secretary of the Treasury is authorized to promulgate regulations
that will treat as constructive sales certain transactions that
have substantially the same effect as short sales, offsetting
notional principal contracts, and futures or forward contracts to
deliver the same or substantially similar property.
INVESTMENT RESTRICTIONS
The Fund operates under the following investment
restrictions. It 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 U. S. Government 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 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, although it may (a) lend portfolio securities
and participate in an interfund lending program with other Stein
Roe Funds and Portfolios provided that no such loan may be made
if, as a result, the aggregate of such loans would exceed 33 1/3%
of the value of its total assets (taken at market value at the
time of such loans); (b) purchase money market instruments and
enter into repurchase agreements; and (c) acquire publicly
distributed or privately placed debt securities;
(6) borrow except that it may (a) borrow for nonleveraging,
temporary or emergency purposes, (b) engage in reverse repurchase
agreements and make other borrowings, provided that the
combination of (a) and (b) shall not exceed 33 1/3% of the value
of its total assets (including the amount borrowed) less
liabilities (other than borrowings) or such other percentage
permitted by law, and (c) enter into futures and options
transactions; it may borrow from banks, other Stein Roe Funds and
Portfolios, and other persons to the extent permitted by
applicable law;
(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, /5/ 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
- ------------
/5/ 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.
- ------------
(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 nonfundamental restrictions and policies, which may
be changed by the Board of Trustees. None of the following
restrictions shall prevent the Fund from investing all or
substantially all of its assets in another investment company
having the same investment objective and substantially the same
investment policies as the Fund. The Fund may not:
(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 it 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 (iv) limited partnerships in real estate
unless they are readily marketable;
(b) invest in companies for the purpose of exercising control
or management;
(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 its 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;
(d) 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 a recognized foreign exchange;
(e) write an option on a security unless the option is issued
by the Options Clearing Corporation, an exchange, or similar
entity;
(f) 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;
(g) 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) it 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 it expects to
receive in a recapitalization, reorganization, or other exchange
for securities it 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;
(h) invest more than 5% of its total assets (taken at market
value at the time of a particular investment) in restricted
securities, other than securities eligible for resale pursuant to
Rule 144A under the Securities Act of 1933;
(i) invest more than 15% of its net assets (taken at market
value at the time of a particular investment) in illiquid
securities, including repurchase agreements maturing in more than
seven days.
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 its 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 interest of the Fund 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 portfolio
securities with the result that it would be forced either to sell
securities at a time when it might not otherwise have done so, to
forego exercising the rights.
ADDITIONAL INVESTMENT CONSIDERATIONS
The Adviser seeks to provide superior long-term investment
results through a disciplined, research-intensive approach to
investment selection and prudent risk management. In working to
build wealth for generations it has been guided by three primary
objectives which it believes are the foundation of a successful
investment program. These objectives are preservation of capital,
limited volatility through managed risk, and consistent above-
average returns as appropriate for the particular client or
managed account. Because every investor's needs are different,
Stein Roe mutual funds are designed to accommodate different
investment objectives, risk tolerance levels, and time horizons.
In selecting a mutual fund, investors should ask the following
questions:
What are my investment goals?
It is important to a choose a fund that has investment objectives
compatible with your investment goals.
What is my investment time frame?
If you have a short investment time frame (e.g., less than three
years), a mutual fund that seeks to provide a stable share price,
such as a money market fund, or one that seeks capital
preservation as one of its objectives may be appropriate. If you
have a longer investment time frame, you may seek to maximize your
investment returns by investing in a mutual fund that offers
greater yield or appreciation potential in exchange for greater
investment risk.
What is my tolerance for risk?
All investments, including those in mutual funds, have risks which
will vary depending on investment objective and security type.
However, mutual funds seek to reduce risk through professional
investment management and portfolio diversification.
In general, equity mutual funds emphasize long-term capital
appreciation and tend to have more volatile net asset values than
bond or money market mutual funds. Although there is no guarantee
that they will be able to maintain a stable net asset value of
$1.00 per share, money market funds emphasize safety of principal
and liquidity, but tend to offer lower income potential than bond
funds. Bond funds tend to offer higher income potential than
money market funds but tend to have greater risk of principal and
yield volatility.
In addition, the Adviser believes that investment in a high
yield fund provides an opportunity to diversify an investment
portfolio because the economic factors that affect the performance
of high-yield, high-risk debt securities differ from those that
affect the performance of high quality debt securities or equity
securities.
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, 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. 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 mutual funds disclose in their statements
of additional information, as a reminder to any such bank or
institution, that it must be registered as a securities dealer in
Texas.
You may purchase (or redeem) shares through certain broker-
dealers, banks, or other intermediaries ("Intermediaries"). These
Intermediaries 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 the prospectus, if shares are
purchased (or redeemed) directly from the Trust. Some
Intermediaries that maintain nominee accounts with the Fund for
their clients for whom they hold Fund shares charge an annual fee
of up to 0.35% 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 Adviser and the Fund's
transfer agent share in the expense of these fees, and the Adviser
pays all sales and promotional expenses.
The net asset value of the Fund 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 January, 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 should be determined on any such day, in
which case the determination will be made at 3:00 p.m., Central
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.
The Trust reserves the right to redeem shares in any account
and send the proceeds to the owner of record if the shares in the
account do not have a value of at least $1,000. If the value of
the account is more than $10, a shareholder would be notified that
his account is below the minimum and would be allowed 30 days to
increase the account before the redemption is processed. The
Trust reserves the right to redeem any account with a value of $10
or less without prior written notice to the shareholder. Due to
the proportionately higher costs of maintaining small accounts,
the transfer agent may charge and deduct from the account a $5 per
quarter minimum balance fee if the account is a regular account
with a balance below $2,000 or an UGMA account with a balance
below $800. This minimum balance fee does not apply to: (1)
shareholders whose accounts in the Stein Roe Funds total $50,000
or more, (2) Stein Roe IRAs, (3) other Stein Roe prototype
retirement plans, (4) accounts with automatic investment plans
(unless regular investments have been discontinued), or (5)
omnibus or nominee accounts. The transfer agent may waive the
fee, at its discretion, in the event of significant market
corrections. 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 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
not reasonably practicable.
MANAGEMENT
The following table sets forth certain information with
respect to the trustees and officers of the Trust:
<TABLE>
<CAPTION>
Position(s) held Principal occupation(s)
Name, Age with the Trust During past five years
- ------------------------- ----------------------- ---------------------------
- ------------------
<S> <C> <C>
William D. Andrews, 50(4) Executive Vice-President Executive vice president of Stein Roe & Farnham
Incorporated (the "Adviser")
Gary A. Anetsberger, 42 Senior Vice-President Chief financial officer and chief administrative
officer of the Mutual Funds division of the Adviser;
senior vice president of the Adviser since April
1996; vice president of the Adviser prior thereto
William W. Boyd, 71 (2)(3) Trustee Chairman and director of Sterling Plumbing
(manufacturer of plumbing products)
David P. Brady, 34 Vice-President Portfolio manager for the Adviser; senior vice
president of the Adviser since March 1998; vice
president of the Adviser from Nov. 1995 to March 1998;
equity investment analyst, State Farm Mutual
Automobile Insurance Company prior thereto
Thomas W. Butch, 41 (1) (2) Trustee; President President of the Mutual Funds division of the Adviser
since March 1998; senior vice president of the
Adviser from Sept. 1994 to March 1998; first vice
president, corporate communications, of Mellon Bank
Corporation prior thereto
Daniel K. Cantor, 39 Vice-President Senior vice president of the Adviser
Kevin M. Carome, 42 Vice-President; Associate general counsel and (since Feb. 1995) vice
Assistant Secretary president of Liberty Financial Companies, Inc.; general
counsel and secretary of the Adviser since Jan. 1998
Lindsay Cook, 46 (1) Trustee Executive vice president of Liberty Financial
Companies, Inc. (the indirect parent of the Adviser)
since March 1997; senior vice president prior thereto
Erik P. Gustafson, 35 Vice-President Senior portfolio manager for the Adviser; senior vice
president of the Adviser since April 1996; vice
president of the Adviser from May 1994 to April 1996;
associate of the Adviser prior thereto
Douglas A. Hacker, 42 (3) Trustee Senior vice president and chief financial officer of
UAL, Inc. (airline) since July 1994; senior vice
president, finance of UAL, Inc. prior thereto
Loren A. Hansen, 50 Executive Vice-President Chief investment officer/equity of Colonial Management
Associates, Inc. since 1997; executive vice president
of the Adviser since Dec. 1995; vice president of The
Northern Trust (bank) prior thereto
David P. Harris, 34 Vice-President Senior vice president of the Adviser since March
1998; vice president of Colonial Management
Associates, Inc. since Jan. 1996; vice president of
the Adviser from May 1995 to March 1998; global
equity portfolio manager with Rockefeller & Co. prior
thereto
Harvey B. Hirschhorn, 48 Vice-President Executive vice president, senior portfolio manager,
and chief economist and investment strategist of the
Adviser; director of research of the Adviser, 1991 to
1995
Janet Langford Kelly, 40(3) Trustee Senior vice president, secretary and general counsel
of Sara Lee Corporation (branded, packaged, consumer-
products manufacturer) since 1995; partner of Sidley
& Austin (law firm) prior thereto
Eric S. Maddix, 34 Vice-President Senior vice president of the Adviser since March
1998; vice president of the Adviser from Nov. 1995 to
March 1998; portfolio manager or research assistant
for the Adviser since 1987
Lynn C. Maddox, 57 Vice-President Senior vice president of the Adviser
Arthur J. McQueen, 40 Vice-President Senior vice president of the Adviser
Charles R. Nelson, 56 (3) Trustee Van Voorhis Professor of Political Economy,
Department of Economics of the University of
Washington
Nicolette D. Parrish, 48 Vice-President; Senior legal assistant and assistant secretary of the
Assistant Secretary Adviser
Sharon R. Robertson, 36 Controller Accounting manager for the Adviser's Mutual Funds
division
Janet B. Rysz, 42 Assistant Secretary Senior legal assistant and assistant secretary of the
Adviser
M. Gerard Sandel, 44 Vice-President Senior vice president of the Adviser since July 1997;
vice president of M&I Investment Management
Corporation from Oct. 1993 to June 1997; vice
president of Acorn Asset Management Corporation prior
thereto
Gloria J. Santella, 40 Vice-President Senior vice president of the Adviser since Nov. 1995;
vice president of the Adviser prior thereto
Thomas C. Theobald, 61 (3) Trustee Managing director, William Blair Capital Partners
(private equity fund) since 1994; chief executive
officer and chairman of the Board of Directors of
Continental Bank Corporation, 1987-1994
Scott E. Volk, 27 Treasurer Financial reporting manager for the Adviser's Mutual
Funds division since Oct. 1997; senior auditor with
Ernst & Young LLP from Sept. 1993 to April 1996 and
from Oct. 1996 to Sept. 1997; financial analyst with
John Nuveen & Company Inc. from May 1996 to Sept.
1996
Heidi J. Walter, 31 Vice-President; Secretary Vice president of the Adviser since March 1998;
senior legal counsel for the Adviser since Feb. 1998;
legal counsel for the Adviser from March 1995 to Jan.
1998; associate with Beeler Schad & Diamond, PC (law
firm) prior thereto
Hans P. Ziegler, 57 Executive Vice-President Chief executive officer of the Adviser since May
1994; president of the Investment Counsel division of
the Adviser prior thereto
Margaret O. Zwick, 32 Assistant Treasurer Project manager for the Adviser's Mutual Funds
division since April 1997; compliance manager from
Aug. 1995 to April 1997; compliance accountant, Jan.
1995 to July 1995; section manager, Jan. 1994 to Jan.
1995; supervisor 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. Mr. Anetsberger, Mr. Butch, and Ms. Walter are also
officers of Liberty Funds Distributor, Inc., the Fund's
distributor. The address of Mr. Boyd is 2900 Golf Road, Rolling
Meadows, Illinois 60008; that of Mr. Cook is 600 Atlantic Avenue,
Boston, Massachusetts 02210; that of Mr. Hacker is P.O. Box 66100,
Chicago, IL 60666; that of Ms. Kelly is Three First National
Plaza, Chicago, Illinois 60602; that of Mr. Nelson is Department
of Economics, University of Washington, Seattle, Washington 98195;
that of Mr. Theobald is Suite 3300, 222 West Adams Street,
Chicago, IL 60606; that of Messrs. Cantor and Harris is 1330
Avenue of the Americas, New York, New York 10019; and that of the
other officers is One South Wacker Drive, Chicago, Illinois 60606.
Officers and trustees affiliated with the Adviser serve
without any compensation from the Trust. In compensation for
their services to the Trust, trustees who are not "interested
persons" of the Trust or the Adviser are paid an annual retainer
plus an attendance fee for each meeting of the Board or standing
committee thereof attended. The Trust has no retirement or
pension plan. The following table sets forth compensation paid
during the fiscal year ended Sept. 30, 1997 to each of the
trustees:
Name of Trustee Aggregate Compensation Total Compensation from
from the Trust the Stein Roe Fund Complex*
- -------------------- ---------------------- -------------------------
Timothy K. Armour** -0- -0-
Thomas W. Butch** -0- -0-
Lindsay Cook -0- -0-
Kenneth L. Block** $21,076 $84,743
Douglas A. Hacker 21,926 90,643
Janet Langford Kelly 17,650 77,500
William W. Boyd 22,426 92,164
Francis W. Morley** 21,926 90,993
Charles R. Nelson 22,426 92,643
Thomas C. Theobald 21,926 90,643
Gordon R. Worley** 4,276 13,143
_______________
* At Sept. 30, 1997, the Stein Roe Fund Complex consisted of ten
series of the Trust, seven series of Stein Roe Advisor Trust,
six series of Stein Roe Income Trust, four series of Stein Roe
Municipal Trust, one series of Stein Roe Institutional Trust,
one series of Stein Roe Trust, and nine series of SR&F Base
Trust.
** Mr. Worley retired as a trustee on Dec. 31, 1996 and Messrs.
Block and Morley retired on Dec. 31, 1997. Mr. Armour resigned
as a trustee and Mr. Butch was elected a trustee on April 14,
1998.
PRINCIPAL SHAREHOLDERS
As of the date of this Statement of Additional Information,
the Fund had no shareholders.
INVESTMENT ADVISORY SERVICES
Stein Roe & Farnham Incorporated provides overall management
and administrative services to the Fund. The Adviser is a wholly
owned subsidiary of SteinRoe Services Inc. ("SSI"), the Fund's
transfer agent, which is a wholly owned subsidiary of Liberty
Financial Companies, Inc. ("Liberty Financial"), which is a
majority owned subsidiary of LFC Holdings, Inc., which is a wholly
owned subsidiary of Liberty Mutual Equity Corporation, which is a
wholly owned subsidiary of Liberty Mutual Insurance Company.
Liberty Mutual Insurance Company 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 Kenneth R. Leibler, C. Allen
Merritt, Jr., Thomas W. Butch, and Hans P. Ziegler. Mr. Leibler
is President and Chief Executive Officer of Liberty Financial; Mr.
Merritt is Chief Operating Officer of Liberty Financial; Mr. Butch
is President of the Adviser's Mutual Funds division; and Mr.
Ziegler is Chief Executive Officer of the Adviser. The business
address of Messrs. Leibler and Merritt is Federal Reserve Plaza,
Boston, Massachusetts 02210; and that of Messrs. Butch 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 June 30, 1998, the Adviser managed
over $29.1 billion in assets: over $11.2 billion in equities and
over $17.9 billion in fixed income securities (including $1.7
billion in municipal securities). The $29.1 billion in managed
assets included over $9.3 billion held by open-end mutual funds
managed by the Adviser (approximately 14% of the mutual fund
assets were held by clients of the Adviser). These mutual funds
were owned by over 289,000 shareholders. The $9.3 billion in
mutual fund assets included over $748 million in over 42,000 IRA
accounts. In managing those assets, the Adviser utilizes a
proprietary computer-based information system that maintains and
regularly updates information for approximately 9,000 companies.
The Adviser also monitors over 1,400 issues via a proprietary
credit analysis system. At June 30, 1998, the Adviser employed 18
research analysts and 55 account managers. The average
investment-related experience of these individuals was 24 years.
The sub-adviser, Newport Fund Management, Inc., 580
California Street, Suite 1960, San Francisco, CA 94104, is subject
to the overall supervision of the Adviser and provides the Fund
with investment advisory services, including portfolio management.
Newport is registered as an investment adviser under the
Investment Advisers Act of 1940 and specializes in investing in
the Pacific region. Newport, an affiliate of the Adviser, is a
wholly owned subsidiary of Newport Pacific Management, Inc., which
is a wholly owned subsidiary of Liberty Financial. As of March
31, 1998, Newport managed approximately $1.5 billion in assets,
all of which were invested in foreign securities. The directors
of Newport are Sabino Marinella, John M. Mussey, Kenneth R.
Leibler, Lindsay Cook, Thomas R. Tuttle, Pamela Frantz and Linda
Couch.
Stein Roe Counselor [service mark] and Stein Roe Personal
Counselor [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 mutual
funds managed by the Adviser. Shareholders participating in Stein
Roe Counselor [service mark] are free to self direct their
investments while considering the Adviser's recommendations;
shareholders participating in Stein Roe Personal Counselor
[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 descriptions of the Adviser and Newport,
management agreement, administrative agreement, fees, expense
limitations, and transfer agency services under Fee Table and
Management in the Prospectus, which is incorporated herein by
reference.
The Adviser provides office space and executive and other
personnel to the Fund, and bears any sales or promotional
expenses. Newport 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, including but not limited to printing and
postage charges, securities registration and custodian fees, and
expenses incidental to its organization.
The administrative agreement provides that the Adviser shall
reimburse the Fund to the extent that its total annual expenses
(including fees paid to the Adviser, but excluding taxes,
interest, 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 its
shares are being offered for sale to the public; provided,
however, the Adviser is not required to reimburse the Fund an
amount in excess of fees paid by the Fund under that agreement for
such year. In addition, in the interest of further limiting
expenses of the Fund, the Adviser may voluntarily waive its fees
and/or absorb certain expenses, as described under Fee Table in
the Prospectus. Any such reimbursement will enhance the yield of
the Fund.
The management agreement provides that neither the Adviser,
nor any of its 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 of its duties under the agreement, except for
liability resulting from willful misfeasance, bad faith or gross
negligence on its part in the performance of its duties or from
reckless disregard by it of its obligations and duties under the
agreement.
Any expenses that are attributable solely to the
organization, operation, or business of the Fund shall be paid
solely out of its 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 services provided to the Trust, the
Adviser receives an annual fee of $25,000 per series plus .0025 of
1% of average net assets over $50 million. During the fiscal
years ended Sept. 30, 1995, 1996 and 1997, the Adviser received
aggregate fees of $192,479, $265,246 and $315,067, respectively,
from the Trust for services performed under this Agreement.
DISTRIBUTOR
Shares of the Fund are distributed by Liberty Funds
Distributor, Inc. ("Distributor") under a Distribution Agreement
as described under Management in the Prospectus, which is
incorporated herein by reference. The Distributor is a subsidiary
of Colonial Management Associates, Inc., which is an indirect
subsidiary of Liberty Financial. 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.
As agent, the Distributor offers shares 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. The Distributor offers Fund shares only on a
best-efforts basis.
TRANSFER AGENT
SSI performs certain transfer agency services for the Trust,
as described under Management in the Prospectus. For performing
these services, SSI receives from the Fund a fee based on an
annual rate of .22 of 1% of average net assets. The Trust
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,
receiving and paying for securities purchased, delivering against
payment securities sold, receiving and collecting income from
investments, making all payments covering expenses, and performing
other administrative duties, all as directed by authorized
persons. The Bank does not exercise any supervisory function in
such matters as purchase and sale of portfolio securities, payment
of dividends, or payment of expenses.
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 interests of the Fund and its shareholders to
maintain 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 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 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
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 Bank and may
purchase or sell securities from or to the Bank.
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 annual financial statements,
review certain regulatory reports and the federal income tax
returns, and perform other professional accounting, auditing, tax
and advisory services when engaged to do so by the Trust on behalf
of the Fund.
PORTFOLIO TRANSACTIONS
Newport places the orders for the purchase and sale of
portfolio securities and options and futures contracts. The
overriding objective in selecting brokers and dealers to effect
portfolio transactions is to seek the best combination of net
price and execution. The best net price, giving effect to
brokerage commission, if any, is an important factor in this
decision; however, a number of other judgmental factors may also
enter into the decision. These factors include Newport's
knowledge of negotiated commission rates currently available and
other current transaction costs; the nature of the security being
purchased or sold; the size of the transaction; the desired timing
of the transaction; 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 considered; Newport's knowledge of the
financial condition of the broker or dealer selected and such
other brokers and dealers; and its knowledge of actual or apparent
operation problems of any broker or dealer. Recognizing the value
of these factors, Newport may cause a client to pay a brokerage
commission in excess of that which another broker may have charged
for effecting the same transaction.
Newport has established internal policies for the guidance of
its trading personnel, specifying minimum and maximum commissions
to be paid for various types and sizes of transactions and
effected for clients in those cases where Newport has discretion
to select the broker or dealer by which the transaction is to be
executed. Transactions which vary from the guidelines are subject
to periodic supervisory review. These guidelines are reviewed and
periodically adjusted, and the general level of brokerage
commissions paid is periodically reviewed by Newport. Evaluations
of the reasonableness of brokerage commissions, based on the
factors described in the preceding paragraph, are made by
Newport's trading personnel while effecting portfolio
transactions. The general level of brokerage commissions paid is
reviewed by the Adviser and Newport, and reports are made annually
to the Board of Trustees.
Where more than one broker or dealer is believed to be
capable of providing a combination of best net price and execution
with respect to a particular portfolio transaction, Newport often
selects a broker or dealer that has furnished it with investment
research products or services such as: economic, industry or
company research reports or investment recommendations;
subscriptions to financial publications or research data
compilations; compilations of securities prices, earnings,
dividends, and similar data; computerized data bases; quotation
equipment and services; research or analytical computer software
and services; or services of economic and other consultants. Such
selections are not made pursuant to any agreement or understanding
with any of the brokers or dealers. However, Newport does in some
instances request a broker to provide a specific research or
brokerage product or service which may be proprietary to the
broker or produced by a third party and made available by the
broker and, in such instances, the broker in agreeing to provide
the research or brokerage product or service frequently will
indicate to Newport a specific or minimum amount of commissions
which it expects to receive by reason of its provision of the
product or service. Newport does not agree with any broker to
direct such specific or minimum amounts of commissions; however,
it does maintain an internal procedure to identify those brokers
who provide it with research products or services and the value of
such products or services, and endeavors to direct sufficient
commissions on client transactions (including commissions on
transactions in fixed income securities effected on an agency
basis and, in the case of transactions for certain types of
clients, dealer selling concessions on new issues of securities)
to ensure the continued receipt of research products or services
it feels are useful.
In a few instances, Newport receives from brokers products or
services which are used both for investment research and for
administrative, marketing, or other non-research or brokerage
purposes. In such instances, Newport makes a good faith effort to
determine the relative proportion of its use of such product or
service which is for investment research or brokerage, and that
portion of the cost of obtaining such product or service may be
defrayed through brokerage commissions generated by client
transactions, while the remaining portion of the costs of
obtaining the product or service is paid by Newport in cash.
Newport may also receive research in connection with selling
concessions and designations in fixed income offerings.
The Fund does not believe it pays brokerage commissions
higher than those obtainable from other brokers in return for
research or brokerage products or services provided by brokers.
Research or brokerage products or services provided by brokers may
be used in servicing any or all of its clients and such research
products or services may not necessarily be used in connection
with client accounts which paid commissions to the brokers
providing such products or services.
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
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. However, the Board has been advised by
counsel that recapture by a mutual fund currently is not permitted
under the Rules of the Association of the National Association of
Securities Dealers.
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 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 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 its shareholders 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.
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.
n
Average Annual Total Return is computed as follows: ERV = P(1+T)
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).
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 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.
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
Atlantic Monthly
Associated Press
Barron's
Bloomberg
Boston Globe
Boston Herald
Business Week
Chicago Tribune
Chicago Sun-Times
Cleveland Plain Dealer
CNBC
CNN
Crain's Chicago Business
Consumer Reports
Consumer Digest
Dow Jones Investment Advisor
Dow Jones Newswire
Fee Advisor
Financial Planning
Financial World
Forbes
Fortune
Fund Action
Fund Marketing Alert
Gourmet
Individual Investor
Investment Dealers' Digest
Investment News
Investor's Business Daily
Kiplinger's Personal Finance Magazine
Knight-Ridder
Lipper Analytical Services
Los Angeles Times
Louis Rukeyser's Wall Street
Money
Money on Line
Morningstar
Mutual Fund Market News
Mutual Fund News Service
Mutual Funds Magazine
Newsday
Newsweek
New York Daily News
The New York Times
No-Load Fund Investor
Pension World
Pensions and Investment
Personal Investor
Physicians Financial News
Jane Bryant Quinn (syndicated column)
Reuters
The San Francisco Chronicle
Securities Industry Daily
Smart Money
Smithsonian
Strategic Insight
Street.com
Time
Travel & Leisure
USA Today
U.S. News & World Report
Value Line
The Wall Street Journal
The Washington Post
Working Women
Worth
Your Money
The Fund may compare its performance to the Consumer Price
Index (All Urban), a widely recognized measure of inflation. Its
performance also 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
(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.)
In addition, the Fund may compare its performance to the
following benchmarks:
Lipper Equity Fund Average
Lipper General Equity Fund Average
Lipper International & Global Funds Average
Lipper International Fund Index
Lipper Pacific Region Index
Morningstar All Equity Funds Average
Morningstar Equity Fund Average
Morningstar General Equity Average
Morningstar Hybrid Fund Average
Morningstar International Stock Average
Morningstar Total Fund Average
Morningstar U.S. Diversified Average
MSCI AC Far East Index
The Lipper 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 it 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 a fund's risk score (which is a function
of the fund's monthly returns less the 3-month T-bill return) from
its 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 Jan. 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.)
<TABLE>
<CAPTION>
TAX-DEFERRED INVESTMENT VS. TAXABLE INVESTMENT
Interest
Rate 3% 5% 7% 9% 3% 5% 7% 9%
- --------------------------------------------------------------------------------
Com-
pound-
ing
Years Tax-Deferred Investment Taxable
Investment
- ---- ------------------------------------ ------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
30 $82,955 $108,031 $145,856 $203,239 $80,217 $98,343 $121,466 $151,057
25 65,164 80,337 101,553 131,327 63,678 75,318 89,528 106,909
20 49,273 57,781 68,829 83,204 48,560 55,476 63,563 73,028
15 35,022 39,250 44,361 50,540 34,739 38,377 42,455 47,025
10 22,184 23,874 25,779 27,925 22,106 23,642 25,294 27,069
5 10,565 10,969 11,393 11,840 10,557 10,943 11,342 11,754
1 2,036 2,060 2,085 2,109 2,036 2,060 2,085 2,109
</TABLE>
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. 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 Stein Roe Counselor
[service mark] and the Stein Roe Personal Counselor [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, Newport believes that the quality of debt securities
in which a 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 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.
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.
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