<PAGE>
File 33-11351
Rule 497(e)
Stein Roe Asia Pacific Fund
Prospectus
February 1, 2000
The Securities and Exchange Commission has not approved or
disapproved these securities or determined whether this prospectus
is truthful or complete. Anyone who tells you otherwise is
committing a crime.
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1 The Fund
Investment Goal
Principal Investment Strategy
Principal Investment Risks
Fund Performance
Your Expenses
8 Financial Highlights
9 Your Account
Purchasing Shares
Opening an Account
Determining Share Price (NAV)
Selling Shares
Exchanging Shares
Reporting to Shareholders
Dividends and Distributions
16 Other Investments and Risks
18 The Fund's Management
Investment Adviser
Portfolio Managers
Master/Feeder Fund Structure
Please keep this prospectus as your reference manual.
<PAGE>
THE FUND
ASIA PACIFIC FUND
INVESTMENT GOAL Stein Roe Asia Pacific Fund seeks long-term
growth.
PRINCIPAL INVESTMENT STRATEGY Under normal conditions, Asia
Pacific Fund invests at least 65% of its total assets in stocks of
mid- and large-capitalization companies (companies with market
capitalizations of at least $500 million) located in Asia and the
Pacific Basin. The Pacific Basin countries the Fund invests in
include Australia and New Zealand. The Asian countries the Fund
invests in include Japan, Hong Kong/China, Singapore, South Korea,
Taiwan, Thailand, Indonesia and the Philippines. The Fund may
invest up to 35% of its total assets in equity and debt securities
of corporate and governmental issuers located anywhere in the
world, including the United States.
The Fund will consider an issuer of securities to be located in
the Pacific Basin if: (i) it is organized under the laws of a
country in the Pacific Basin and has a principal office in a
country in the Pacific Basin, (ii) it derives 50% or more of its
total revenues from business in the Pacific Basin, or (iii) its
equity securities are traded principally on a securities exchange
in the Pacific Basin.
The Fund invests in growth companies that the portfolio managers
believe have long-term growth prospects and quality management.
Growth companies are those companies which the portfolio managers
believe have above average growth potential. The portfolio
managers measure the growth potential of a company using cash
earnings and reserves.
The portfolio managers may sell a security if there is a
deterioration in a company's fundamentals or a change to a
company's management strategy, or if the portfolio managers
identify a different company with more attractive growth
prospects. The portfolio managers may also be required to sell
portfolio investments to fund redemptions.
PRINCIPAL INVESTMENT RISKS There are two basic risks for all
mutual funds that invest in stocks: management risk and market
risk. These risks tend to be greater when investing overseas.
These risks may cause you to lose money by investing in the Fund.
[Callout]
WHAT ARE MARKET AND MANAGEMENT RISKS?
Management risk means that the portfolio managers' stock
selections and other investment decisions might produce losses or
cause the Fund to underperform when compared to other funds with
similar goals. Market risk means that security prices in a
market, sector or industry may move down. Downward movements will
reduce the value of your investment. Because of management and
market risk, there is no guarantee that the Fund will achieve its
investment goal or perform favorably compared with competing
funds.
[End callout]
Because the Fund invests in stocks, the price of its shares-its
net asset value per share (NAV)-fluctuates daily in response to
changes in the market value of the securities.
Foreign securities are subject to special risks. Foreign stock
markets, especially in countries with developing stock markets,
can be extremely volatile. The liquidity of foreign securities
may be more limited than domestic securities, which means that the
Fund may at times be unable to sell them at desirable prices. In
addition, foreign governments may impose withholding taxes which
would reduce the amount of income available to distribute to
shareholders.
Currency exchange rates will affect the U.S. dollar value of the
Fund's foreign stocks. Most of the stocks the Fund owns are
traded and settled in a foreign currency. The Fund also incurs
costs when it buys and sells foreign currencies. If the foreign
currency loses value against the dollar, the Fund's investment may
be worth less in dollar terms even if the stock's value has grown
in local terms. In addition, foreign security transactions may be
more costly due to higher brokerage and custodial costs.
The prices of foreign securities may fluctuate substantially more
than the prices of U.S. securities because the price of a foreign
stock may depend on issues other than the performance of the
particular company. Foreign stocks, especially those of emerging
markets, are subject to political and economic risks such as
possible delays in settlement, the existence of less liquid
markets, the unavailability of reliable information about issuers,
the existence of exchange control regulations, political and
economic instability, immature economic structures, different
legal and accounting systems, and the possible seizure,
expropriation or nationalization of a company or its assets. In
some foreign markets, there may not be protection or legal
recourse against failure by other parties to complete
transactions.
Emerging markets are subject to additional risk. The risks of
foreign investments are typically increased in less developed
countries, which are sometimes referred to as "emerging markets."
For example, political, and economic structures in these countries
may be new and developing rapidly, which may cause instability.
These countries are also more likely to experience high levels of
inflation, deflation or currency devaluations, which could hurt
their economies and securities markets.
Debt securities. The Fund will invest in high quality debt
securities for defensive purposes. The Fund's investments in debt
securities, generally bonds, convertible bonds and sovereign debt,
expose the Fund to interest rate risk. Interest rate risk is the
risk of a change in the price of a bond when interest rates
increase or decrease. In general, if interest rates rise, bond
prices fall; and if interest rates fall, bond prices rise.
Changes in the value of bonds will not affect the amount of income
the Fund receives from them but will affect the value of the
Fund's shares. Interest rate risk is generally greater for bonds
having longer maturities.
An investment in the Fund is not a bank deposit and is not insured
or guaranteed by the Federal Deposit Insurance Corporation or any
other government agency. It is not a complete investment program.
For more information on the Fund's investment techniques, please
refer to "Other Investments and Risks."
Who Should Invest in Asia Pacific Fund?
You may want to invest in Asia Pacific Fund if you:
* are interested in investing in companies in Asia and the Pacific
Basin and can tolerate the greater share price volatility that
accompanies international investing
* want a regional overseas fund that is diversified among
countries and companies
* are a long-term investor and can afford to potentially lose
money on your investment
Asia Pacific Fund is not appropriate for investors who:
* want to avoid volatility or possible losses
* are saving for a short-term period
* need regular current income
FUND PERFORMANCE The following charts show the Fund's
performance for the calendar year ended December 31, 1999. The
returns include the reinvestment of dividends and distributions.
As with all mutual funds, past performance is no guarantee of
future results.
Annual Total Returns
This chart shows the Fund's total return for calendar year 1999.
It provides an indication of the risks of investing in the Fund.
[bar chart]
ANNUAL TOTAL RETURN
100% 105.00%
80%
60%
40%
20%
10%
0%
- -10%
1999
[ ] Asia Pacific Fund
[end bar chart]
Best quarter: 4th quarter 1999, +37.22%
Worst quarter: 1st quarter 1999, -7.55%
Average Annual Total Returns
Average annual total returns measure the Fund's performance over
time. We compare the Fund's returns with returns for the MSCI
Pacific Index. We show returns for calendar years to be
consistent with the way other mutual funds report performance in
their prospectuses. This provides an indication of the risks of
investing in the Fund.
AVERAGE ANNUAL TOTAL RETURNS
Periods ending December 31, 1999
1 yr Since Inception
- ---------------------------------------------------------------
(October 19, 1998)
Asia Pacific Fund 105.00% 92.89%
MSCI Pacific Index* 42.58% 56.96%
*The MSCI Pacific Index is an unmanaged group of Pacific Basin
stocks that differs from the Fund's composition; it is not
available for direct investment. Since inception performance
for the Index is from October 31, 1998 through December 31,
1999.
YOUR EXPENSES This table shows fees and expenses you may pay if
you buy and hold shares of the Fund. You do not pay any sales
charge when you purchase or sell your shares. However, you pay
various other indirect expenses because the Fund pays fees and
other expenses that reduce your investment return.
SHAREHOLDER FEES(a)
(expenses that are deducted from your account)
Redemption fee (as a percentage of amount redeemed) 1.00%
ANNUAL FUND OPERATING EXPENSES(b)
(expenses that are deducted from Fund assets)
Management fees(c) 1.10%
Distribution (12b-1) fees None
Other expenses 2.95%
Total annual fund operating expenses 4.05%
Expense reimbursement(d) (2.05%)
Net expenses 2.00%
(a) A 1% redemption fee, retained by the Fund, is imposed only on
redemptions of Fund shares held less than 90 days. There is a
$7 charge for wiring redemption proceeds to your bank. A fee
of $5 per quarter may be charged to accounts that fall below
the required minimum balance.
(b) Fund expenses include management fees and administrative costs
such as furnishing the Fund with offices and providing tax and
compliance services.
(c) Management fees includes both the management fee and the
administrative fee charged to the Fund.
(d) Stein Roe will reimburse the Fund if its annual ordinary
operating expenses exceed 2.00% of average daily net assets.
This commitment expires on January 31, 2001. After
reimbursement, management fees will be 0.00% and other
expenses will be 2.00%. A reimbursement lowers the expense
ratio and increases overall return to investors.
Expense Example
This example compares the cost of investing in the Fund to the
cost of investing in other mutual funds. It uses the same
hypothetical assumptions that other funds use in their
prospectuses:
* $10,000 initial investment
* 5% return each year
* the Fund's operating expenses remain constant as a percent of
net assets
* redemption at the end of each time period
Your actual costs may be higher or lower because in reality fund
returns and operating expenses change. Expense reimbursements are
in effect for the first year in the periods below. Expenses based
on these assumptions are:
EXPENSE EXAMPLE
1 yr 3 yrs 5 yrs 10 yrs
- -----------------------------------------------------------------
Asia Pacific Fund $203 $1,045 $1,904 $4,122
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FINANCIAL HIGHLIGHTS
The financial highlights table explains the Fund's financial
performance. Consistent with other mutual funds, we show
information for the period of the Fund's operations. The Fund's
fiscal year runs from October 1 to September 30. The total return
in the table represents the return that investors earned assuming
that they reinvested all dividends and distributions. Certain
information in the table reflects the financial results for a
single Fund share. This information is included in the Fund's
financial statements which have been audited by
PricewaterhouseCoopers LLP, independent accountants, whose report,
along with the financial statements, appears in the Fund's annual
report. To request an annual report, please call 800-338-2550.
Asia Pacific Fund
PER SHARE DATA
Period ended
September 30,
1999(b)
- ------------------------------------------------------------------
Net asset value, beginning of period $10.000
Income from investment operations
Net investment income (c)(f) 0.011
Net gains on securities (both realized and unrealized) 6.019
Total from investment operations 6.030
Net asset value, end of period $16.030
Total return (d) 60.30%(e)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000 omitted) $4,006
Ratio of net expenses to average net assets 2.00%(f)(g)
Ratio of net investment income to average net assets 0.10%(f)(g)
Fees and expenses waived or borne by Stein Roe 2.05%(f)(g)
Portfolio turnover rate 31%
(a) Net of fees and expenses waived or borne by Stein
Roe which amounted to: 0.23%
(b) From commencement of operations on October 19, 1998.
(c) Per share data was calculated using average shares
outstanding during the period.
(d) Had Stein Roe not waived or reimbursed a portion of
expenses, total return would have been reduced.
(e) Not annualized.
(f) The benefits derived from custody credits and directed
brokerage arrangements had an impact of 0.05% and $0.006 per
share.
(g) Annualized.
<PAGE>
YOUR ACCOUNT
PURCHASING SHARES You will not pay a sales charge when you
purchase Fund shares. Your purchases are made at the NAV next
determined after the Fund receives your check, wire transfer or
electronic transfer. If the Fund receives your check, wire
transfer or electronic transfer after the close of regular trading
on the New York Stock Exchange (NYSE)-normally 4 p.m. Eastern
time-your purchase is effective on the next business day.
Purchases through Third Parties
If you purchase Fund shares through certain broker-dealers, banks
or other intermediaries (intermediaries), they may charge a fee
for their services. They may also place limits on your ability to
use services the Fund offers. There are no charges or limitations
if you purchase shares directly from the Fund, except those fees
described in this prospectus.
If an intermediary is an agent or designee of the Fund, orders are
processed at the NAV next calculated after the intermediary
receives the order. The intermediary must segregate any orders it
receives after the close of regular trading on the NYSE and
transmit those orders separately for execution at the NAV next
determined.
Conditions of Purchase
An order to purchase Fund shares is not binding unless and until
an authorized officer, agent or designee of the Fund accepts it.
Once we accept your purchase order, you may not cancel or revoke
it; however, you may redeem your shares. The Fund may reject any
purchase order if it determines that the order is not in the best
interests of the Fund and its shareholders. The Fund may waive or
lower its investment minimums for any reason. If you participate
in the Stein Roe Counselor [service mark] program or are a client
of Stein Roe Private Capital Management, the minimum initial
investment is determined by those programs.
ACCOUNT MINIMUMS
Minimum to Minimum Minimum
Type of Account Open an Account Addition Balance
- ------------------------------------------------------------
Regular $2,500 $100 $1,000
Custodial (UGMA/UTMA) $1,000 $100 $1,000
Automatic Investment Plan $1,000 $50 -
Roth and Traditional IRA $500 $50 $500
Educational IRA $500 $50* $500
*Maximum $500 contribution per calendar year per child.
Opening an Account
OPENING OR ADDING TO AN ACCOUNT
Opening an Account BY MAIL:
Complete the application.
Make check payable to Stein Roe Mutual Funds.
Mail application and check to:
SteinRoe Services Inc.
P.O. Box 8900
Boston, MA 02205
BY WIRE:
Mail your application to the address listed on
the left, then call 800-338-2550 to obtain an
account number. Include your Social Security
Number. To wire funds, use the instructions
below.
Adding to an Account BY MAIL:
Make check payable to Stein Roe Mutual Funds.
Be sure to write your account number on the
check.
Fill out investment slip (stub from your
statement or confirmation) or include a note
indicating the amount of your purchase, your
account number, and the name in which your
account is registered.
Mail check with investment slip or note to the
address above.
BY WIRE:
Wire funds to:
First National Bank of Boston
ABA: 011000390
Attn: SSI, Account No. 560-99696
Fund No.22; Stein Roe Asia Pacific Fund
Your name (exactly as in the registration).
Fund account number.
OPENING OR ADDING TO AN ACCOUNT
Opening an Account BY ELECTRONIC FUNDS TRANSFER:
You cannot open a new account via electronic
transfer.
BY EXCHANGE:
By mail, phone, automatically (be
sure to elect the Automatic Exchange Privilege
on your application).
THROUGH AN INTERMEDIARY;
Contact your financial professional.
Adding to an Account BY ELECTRONIC FUNDS TRANSFER;
Call 800-338-2550 to make your purchase. To
set up prescheduled purchases, be sure to
elect the Automatic Investment Plan (Stein Roe
Asset [SERVICE MARK] Builder) option on your
application.
BY EXCHANGE:
By mail, phone, automatically (be
sure to elect the Automatic Exchange Privilege
on your application).
THROUGH AN INTERMEDIARY:
Contact your financial professional.
All checks must be made payable in U. S. dollars and drawn on U.S.
banks. Money orders and third-party checks will not be accepted.
DETERMINING SHARE PRICE (NAV) The Fund's share price is its NAV
next determined. NAV is the difference between the values of the
Fund's assets and liabilities divided by the number of Fund shares
outstanding. We determine NAV at the close of regular trading on
the NYSE-normally 4 p.m. Eastern time. If you place an order
after that time, you receive the share price determined on the
next business day.
In computing the net asset value, the values of portfolio
securities are generally based upon market quotations. Depending
upon local convention or regulation, these market quotations may
be the last sale price, last bid or asked price, or the mean
between the last bid and asked prices as of, in each case, the
close of the appropriate exchange or other designated time.
Trading in securities on European and Far Eastern securities
exchanges and over-the-counter markets is normally completed at
various times before the close of business on each day that the
NYSE is open. Trading of these securities may not take place on
every NYSE business-day. Foreign securities may trade on days
when the NYSE is closed. We will not price shares on days the
NYSE is closed for trading. You will not be able to purchase or
redeem shares until the next NYSE-trading day.
We value a security at fair value when events have occurred after
the last available market price and before the close of the NYSE
that materially affect the security's price. In the case of
foreign securities, this could include events occurring after the
close of a foreign market and before the close of the NYSE.
SELLING SHARES You may sell your shares any day the Fund is open
for business. Please follow the instructions below.
SELLING SHARES
BY MAIL: Send a letter of instruction, in English, including
your account number and the dollar value or number
of shares you wish to sell. Sign the request
exactly as the account is registered. Be sure to
include a signature guarantee. All supporting legal
documents as required from executors, trustees,
administrators, or others acting on accounts not
registered in their names, must accompany the
request. We will mail the check to your registered
address.
BY PHONE: This feature is automatically added to your account
unless you decline it on your application. Call
800-338-2550 to redeem an amount of $1,000 or more.
We will mail a check to your registered address.
BY WIRE: Fill out the appropriate areas of the account
application for this feature. Proceeds of $1,000 or
more ($100,000 maximum) may be wired to your
predesignated bank account. Call 800-338-2550 to
give instructions to Stein Roe. There is a $7
charge for wiring redemption proceeds to your bank.
BY ELECTRONIC TRANSFER: Fill out the appropriate areas of the
account application for this feature. To request an
electronic transfer (not less than $50; not more
than $100,000), call 800-338-2550. We will transfer
your sale proceeds electronically to your bank. The
bank must be a member of the Automated Clearing
House.
BY EXCHANGE: Call 800-338-2550 to exchange any portion of your
Fund shares for shares in any other Stein Roe no-
load fund.
BY AUTOMATIC EXCHANGE: Fill out the appropriate areas of the
account application for this feature. Redeem a
fixed amount on a regular basis (not less than $50
per month; not more than $100,000) from a Fund for
investment in another Stein Roe no-load fund.
What You Need to Know When Selling Shares
Once we receive and accept your order to sell shares, you may not
cancel or revoke it. We cannot accept an order to sell that
specifies a particular date or price or any other special
conditions. If you have any questions about the requirements for
selling your shares, please call 800-338-2550 before submitting
your order.
The Fund redeems shares at the NAV next determined after an order
has been accepted. We mail the proceeds within seven days after
the sale. The Fund normally pays wire redemption or electronic
transfer proceeds on the next business day.
We will not pay sale proceeds until your shares are paid for. If
you attempt to sell shares purchased by check or electronic
transfer within 15 days of the purchase date, we will delay
sending the sale proceeds until we can verify that those shares
are paid for. You may avoid this delay by purchasing shares by a
federal funds wire.
We use procedures reasonably designed to confirm that telephone
instructions are genuine. These include recording the
conversation, testing the identity of the caller by asking for
account information, and sending prompt written confirmation of
the transaction to the shareholder of record. If these procedures
are followed, the Fund and its service providers will not be
liable for any losses due to unauthorized or fraudulent
instructions.
If the amount you redeem is in excess of the lesser of (1)
$250,000 or (2) 1% of the Fund's net assets, the Fund may pay the
redemption "in kind." This is payment in portfolio securities
rather than cash. If this occurs, you may incur transaction costs
when you sell the securities.
Redemption Fee
The Fund charges a 1% redemption fee on sales of Fund shares that
you have held less than 90 days. The fee is retained by the Fund
for the benefit of the remaining shareholders. The fee is waived
for shares purchased through certain retirement plans, including
401(k) plans, 403(b) plans, 457 plans, Keogh accounts, and Stein
Roe Profit Sharing and Money Purchase Pension Plans. The fee
waiver may not apply to shares purchased through an intermediary
maintaining an omnibus account with the Fund. Before purchasing
shares, please check with your account representative concerning
the availability of the waiver. The fee waiver does not apply to
IRA and SEP-IRA accounts. The redemption fee is intended to
encourage long-term investment in the Fund, to avoid transaction
and other expenses caused by early redemptions, and to facilitate
portfolio management. The fee does not benefit Stein Roe in any
way. The Fund may modify the terms of, terminate, or waive this
fee at any time.
Involuntary Redemption
If your account value falls below $1,000, the Fund may redeem your
shares and send the proceeds to the registered address. You will
receive notice 30 days before this happens. If your account falls
below $10, the Fund may redeem your shares without notice to you.
Low Balance Fee
Due to the expense of maintaining accounts with low balances, if
your account balance falls below $2,000 ($800 for custodial
accounts), you will be charged a low balance fee of $5 per
quarter. The low 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 Fund can waive the fee, at its discretion, in the
event of significant market corrections.
EXCHANGING SHARES You may exchange Fund shares for shares of
other Stein Roe no-load funds. Call 800-338-2550 to request a
prospectus and application for the fund you wish to exchange into.
Please be sure to read the prospectus carefully before you
exchange your shares.
The account you exchange into must be registered exactly the same
as the account you exchange from. You must meet all investment
minimum requirements for the fund you wish to exchange into before
we can process your exchange transaction.
An exchange is a redemption and purchase of shares for tax
purposes, and you may realize a gain or a loss when you exchange
Fund shares for shares of another fund.
We may change, suspend or eliminate the exchange service after
notification to you.
Generally, we limit you to four telephone exchanges "roundtrips"
per year. A roundtrip is an exchange out of the Fund into another
Stein Roe no-load fund and then back to the Fund.
REPORTING TO SHAREHOLDERS To reduce the volume of mail you
receive, only one copy of certain materials, such as shareholder
reports, will be mailed to your household (same address). Please
call 800-338-2550 if you want to receive additional copies free of
charge. This policy may not apply if you purchase shares through
an intermediary.
DIVIDENDS AND DISTRIBUTIONS The Fund distributes, at least once
a year, virtually all of its net investment income and net
realized capital gains.
A dividend from net investment income represents the income the
Fund earns from dividends and interest paid on its investments,
after payment of the Fund's expenses.
A capital gain is the increase in value of a security that the
Fund holds. The gain is "unrealized" until the security is sold.
Each realized capital gain is either short term or long term
depending on whether the Fund held the security for one year or
less or more than one year, regardless of how long you have held
your Fund shares.
When the Fund makes a distribution of income or capital gains, the
distribution is automatically invested in additional shares of the
Fund unless you elect on the account application to have
distributions paid by check.
[callout]
OPTIONS FOR RECEIVING DISTRIBUTION AND REDEMPTION PROCEEDS:
* by check
* by electronic transfer into your bank account
* a purchase of shares of another Stein Roe fund
* a purchase of shares in a Stein Roe fund account of another
person
[/callout]
If you elect to receive distributions by check and a distribution
check is returned to the Fund as undeliverable, or if you do not
present a distribution check for payment within six months, we
will change the distribution option on your account and reinvest
the proceeds of the check in additional shares of the Fund. You
will not receive any interest on amounts represented by uncashed
distribution or redemption checks.
Tax Consequences
You are subject to federal income tax on both dividends and
capital gains distributions whether you elect to receive them in
cash or reinvest them in additional Fund shares. If the Fund
declares a distribution in December, but does not pay it until
after December 31, you will be taxed as if the distribution were
paid in December. Stein Roe will process your distributions and
send you a statement for tax purposes each year showing the source
of distributions for the preceding year.
TRANSACTION TAX STATUS
- ----------------------------------------------------------------
Income dividend Ordinary income
Short-term capital gain distribution Ordinary income
Long-term capital gain distribution Capital gain
Sale of shares owned one year or less Gain is ordinary income;
loss is subject to special
rules
Sale of shares owned more than one year Capital gain or loss
In addition to the dividends and capital gains distributions made
by the Fund, you may realize a capital gain or loss when selling
and exchanging Fund shares. Such transactions may be subject to
federal income tax.
This tax information provides only a general overview. It does
not apply if you invest in a tax-deferred retirement account such
as an IRA. Please consult your own tax advisor about the tax
consequences of an investment in the Fund.
<PAGE>
OTHER INVESTMENTS AND RISKS
The first portion of this prospectus describes the Fund's
principal investment strategy and principal investment risks. In
seeking to meet its investment goals, the Fund also may invest in
other securities and use other investment techniques. The Fund
may elect not to buy any of these other securities or use any of
these other investment techniques. The Fund may not always
achieve its investment goal.
This section describes other securities and techniques, and risks
associated with them. The Statement of Additional Information
(SAI) contains additional information about the Fund's securities
and investment techniques (including other securities and
techniques) and the risks associated with them. Such risks could
cause you to lose money by investing in the Fund or could cause
the Fund's total return to decrease. The SAI also contains the
Fund's fundamental and non-fundamental investment policies.
The Board of Trustees can change the Fund's investment objective
without shareholder approval.
COUNTRY ALLOCATION The Pacific Basin countries that the Fund
invests in include Australia and New Zealand. The Asian countries
the Fund invests in include Japan, Hong Kong/China, Singapore,
South Korea, Taiwan, Malaysia, Thailand, Indonesia, and the
Philippines. The Fund considers an issuer of securities to be
located in the Pacific Basin if:
* it is organized under the laws of a country in the Pacific Basin
and has a principal office in a country in the Pacific Basin,
* it derives 50% or more of its total revenues from business in
the Pacific Basin, or
* its equity securities are traded principally on a securities
exchange in the Pacific Basin.
As of September 30, 1999, the Fund had more than 5% of its total
assets in each of the following countries:
Country Allocation
Countries Percentage of
Total Assets
---------------------------------
Japan 37.7%
Hong Kong/China 42.8%
Singapore 13.8%
FOREIGN CURRENCY TRANSACTIONS The Fund engages in a variety of
foreign currency transactions. It may buy and sell foreign
currencies in the spot market (commodities market in which goods
are sold for cash and delivered immediately). The Fund may also
buy or sell forward contracts (buy or sell currency on a
prespecified date in the future). It may buy and sell foreign
currency futures contracts. It also may buy and sell options on
foreign currencies and foreign currency futures. The Fund uses
these transactions for two primary purposes. First, it may seek
to lock in a particular foreign exchange rate for the settlement
of a purchase or sale of a foreign security or for the receipt of
interest, principal or dividend payments on a foreign security it
holds. Second, it may seek to hedge against a decline in the
value, in U.S. dollars or in another currency, of a foreign
currency in which its securities are denominated. These hedging
techniques limit the potential gain from currency value increases.
ADRS AND EDRS. The Fund may purchase American Depositary
Receipts (ADRs) and European Depositary Receipts (EDRs). ADRs are
securities guaranteed by a United States person and 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 investor 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. EDRs are 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.
PORTFOLIO TURNOVER There are no limits on turnover. Turnover
may vary significantly from year to year. Stein Roe does not
expect it to exceed 100% under normal conditions. The Fund
generally intends to purchase securities for long-term investment
although, to a limited extent, it may purchase securities
(including securities purchased in initial public offerings) in
anticipation of relatively short-term price gains. Portfolio
turnover typically produces capital gains or losses resulting in
tax consequences for Fund investors. It also increases
transaction expenses, which reduce the Fund's return.
TEMPORARY DEFENSIVE POSITIONS When Stein Roe believes that a
temporary defensive position is necessary, the Fund may hold cash
or invest any portion of its assets in securities of the U.S.
government and equity and debt securities of U.S. companies, as a
temporary defensive strategy. To meet liquidity needs, it may
also hold cash in domestic and foreign currencies and invest in
domestic and foreign money market securities (including repurchase
agreements and foreign money market positions). Stein Roe is not
required to take a temporary defensive position, and market
conditions may prevent such an action. The Fund may not achieve
its investment objective if it takes a temporary defensive
position.
INTERFUND LENDING PROGRAM The Fund may lend money to and borrow
money from other funds advised by Stein Roe. It will do so when
Stein Roe believes such lending or borrowing is necessary and
appropriate. Borrowing costs will be the same as or lower than
the costs of a bank loan.
<PAGE>
THE FUND'S MANAGEMENT
INVESTMENT ADVISER Stein Roe & Farnham Incorporated (Stein Roe),
One South Wacker Drive, Chicago, IL 60606, manages the day-to-day
operations of the Fund. Stein Roe (and its predecessor) has
advised and managed mutual funds since 1949. For the fiscal year
ended September 30, 1999, the Fund paid to Stein Roe aggregate
fees of 0.00% of average net assets, after reimbursement of
expenses by Stein Roe.
Stein Roe's mutual funds and institutional investment advisory
businesses are part of a larger business unit known as Liberty
Funds Group (LFG) that includes several separate legal entities.
LFG includes certain affiliates of Stein Roe, including Colonial
Management Associates, Inc. (Colonial). The LFG business unit is
managed by a single management team. Colonial and other LFG
entities also share personnel, facilities, and systems with Stein
Roe that may be used in providing administrative or operational
services to the Funds. Colonial is a registered investment
adviser. Stein Roe also has a wealth management business that is
not part of LFG and is managed by a different team. Stein Roe
and the other entities that make up LFG are subsidiaries of
Liberty Financial Companies, Inc.
Stein Roe may use the services of AlphaTrade Inc., an affiliated
broker-dealer, when buying or selling equity securities for the
Fund's portfolio, pursuant to procedures adopted by the Board of
Trustees.
The Fund's sub-adviser is Newport Pacific Management, Inc., 580
California Street, Suite 1960, San Francisco, CA 94104. Newport
is subject to the overall supervision of Stein Roe 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. It is an affiliate of Stein Roe. For its
services as sub-adviser, Stein Roe pays Newport an annual fee of
0.55% of the Fund's average net assets. As of September 30, 1999,
Newport managed approximately $1 billion in assets, all of which
were invested in foreign securities.
PORTFOLIO MANAGERS Thomas R. Tuttle, Christopher Legallet, and
David Smith have been co-portfolio managers of the Fund since its
inception in 1998.
Mr. Tuttle is senior vice president of Newport. Mr. Tuttle has
been affiliated with Newport since 1983 and has managed other
funds or accounts since that time. He received a B.S. degree from
Williams College.
Mr. Legallet is a senior vice president of Newport. He joined
Newport in 1997 and has managed other funds and accounts since
that time. Prior to his affiliation with Newport, Mr. Legallet
was a Managing Director of Jupiter Tyndall (Asia) Ltd. in Hong
Kong, serving as lead manager for investment in Asia since 1992.
He received his B.A. and M.B.A. degrees from UCLA.
Mr. Smith is a senior vice president of Newport, which he joined
in 1994 and has managed other funds and accounts for Newport since
that time. He also manages the portion of the portfolios of
Newport's private clients invested in Japan as well as analyzing
North Asian markets. He has 29 years of experience in the
investment business as a money manager, institutional broker, and
investment banker. Mr. Smith graduated from San Francisco State
University with a degree in finance and economics.
MASTER/FEEDER FUND STRUCTURE The Fund could convert into a
"feeder" fund in a "master/feeder" structure at some future date.
This means that all of the Fund's assets would be invested in a
larger "master" portfolio of securities that has investment
objectives and policies substantially identical to those of the
Fund.
<PAGE>
FOR MORE INFORMATION
You can obtain more information about the Fund's investments in
its semiannual and annual reports to investors. These reports
discuss the market conditions and investment strategies that
affected the Fund's performance over the past six months and year.
You may wish to read the Fund's SAI for more information. The SAI
is incorporated into this prospectus by reference, which means
that it is considered to be part of this prospectus and you are
deemed to have been told of its contents.
To obtain free copies of the Fund's semiannual and annual reports,
latest quarterly profile, or the SAI or to request other
information about the Fund, write or call:
Stein Roe Mutual Funds
One Financial Center
Boston, MA 02111-2621
800-338-2550
www.steinroe.com
Information about the Fund (including the SAI) can be reviewed and
copied at the Public Reference Room of the Securities and Exchange
Commission (SEC) in Washington, D.C. Information on the Public
Reference Room may be obtained by calling the SEC at 202-942-8090.
Reports and other information about the Fund are available on the
EDGAR database on the SEC's Internet site at http://www.sec.gov.
Copies of this information may be obtained, after paying a
duplicating fee, by electronic request at the following E-mail
address: [email protected] or by writing the SEC's Public
Reference Section, Washington, D.C. 20549-0102.
Investment Company Act file number of Liberty-Stein Roe Funds
Investment Trust: 811-04978
LIBERTY FUNDS DISTRIBUTOR, INC.
- -----------------------------------------------------------------
<PAGE>
Statement of Additional Information Dated February 1, 2000
LIBERTY-STEIN ROE FUNDS INVESTMENT TRUST
One Financial Center, Boston, MA 02111-2621
800-338-2550
Stein Roe Asia Pacific Fund
This Statement of Additional Information (SAI) is not a
prospectus, but provides additional information that should be
read in conjunction with the Fund's prospectus dated February 1,
2000, and any supplements thereto ("Prospectus"). Financial
statements, which are contained in the Fund's September 30, 1999,
Annual Report, are incorporated by reference into this SAI. The
Prospectus and Annual Reports 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.................................24
Additional Investment Considerations....................27
Purchases and Redemptions...............................27
Management..............................................31
Financial Statements....................................35
Principal Shareholders..................................35
Investment Advisory and Other Services..................35
Distributor.............................................37
Transfer Agent..........................................37
Custodian...............................................37
Independent Accountants.................................38
Portfolio Transactions..................................38
Additional Income Tax Considerations....................43
Investment Performance..................................45
Appendix-Ratings........................................48
<PAGE>
GENERAL INFORMATION AND HISTORY
Stein Roe Asia Pacific Fund (the "Fund"), the mutual fund
described in this SAI, is a separate series of Liberty-Stein Roe
Funds Investment Trust (the "Trust"). The Fund commenced
operations on October 19, 1998.
On February 1, 1996, the name of the Trust was changed to
separate "SteinRoe" into two words. The name of the Trust was
changed on October 18, 1999 from "Stein Roe Investment Trust" to
"Liberty-Stein Roe Funds Investment Trust."
The Trust is a Massachusetts business trust organized under
an Agreement and Declaration of Trust ("Declaration of Trust")
dated January 8, 1987, which provides that each shareholder shall
be deemed to have agreed to be bound by the terms thereof. The
Declaration of Trust may be amended by a vote of either the
Trust's shareholders or its trustees. The Trust may issue an
unlimited number of shares, in one or more series, each with one
or more classes of shares, as the Board may authorize. Currently,
12 series are authorized and outstanding. Each series invests in
a separate portfolio of securities and other assets, with its own
objectives and policies.
Under Massachusetts law, shareholders of a Massachusetts
business trust such as the Trust could, in some circumstances, be
held personally liable for unsatisfied obligations of the trust.
The Declaration of Trust provides that persons extending credit
to, contracting with, or having any claim against the Trust or any
particular series shall look only to the assets of the Trust or of
the respective series for payment under such credit, contract or
claim, and that the shareholders, trustees and officers shall have
no personal liability therefor. The Declaration of Trust requires
that notice of such disclaimer of liability be given in each
contract, instrument or undertaking executed or made on behalf of
the Trust. The Declaration of Trust provides for indemnification
of any shareholder against any loss and expense arising from
personal liability solely by reason of being or having been a
shareholder. Thus, the risk of a shareholder incurring financial
loss on account of shareholder liability is believed to be remote,
because it would be limited to circumstances in which the
disclaimer was inoperative and the Trust was unable to meet its
obligations. The risk of a particular series incurring financial
loss on account of unsatisfied liability of another series of the
Trust also is believed to be remote, because it would be limited
to claims to which the disclaimer did not apply and to
circumstances in which the other series was unable to meet its
obligations.
Each share of a series (or class thereof) is entitled to
participate pro rata in any dividends and other distributions
declared by the Board on shares of that series (or class thereof),
and all shares of a series have equal rights in the event of
liquidation of that series (or class thereof). 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.
Special Considerations Regarding Master Fund/Feeder Fund Structure
The Fund may at some time in the future convert into a feeder
fund. Rather than invest in securities directly, a feeder fund
seeks to achieve its objective by pooling its assets with those of
other investment companies for investment in a master fund having
the identical investment objective and substantially the same
investment policies as its feeder funds. The purpose of such an
arrangement is to achieve greater operational efficiencies and
reduce costs.
Stein Roe & Farnham Incorporated ("Stein Roe") provides
administrative and accounting and recordkeeping services to the
Fund. Newport Pacific Management, Inc. has been engaged as sub-
adviser to provide investment advisory services to the Fund,
subject to overall management by Stein Roe.
INVESTMENT POLICIES
The Trust is an open-end management investment company. The
Fund is diversified, as that term is defined in the Investment
Company Act of 1940.
The investment objectives and policies are described in the
Prospectus under The Fund. In pursuing its objective, the Fund
may employ the investment techniques described in the Prospectus
and Portfolio Investments and Strategies in this SAI. The
investment objective is a non-fundamental 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 in
debt securities of corporate and governmental issuers. The risks
inherent in debt securities depend primarily on the term and
quality of the obligations in the portfolio as well as on market
conditions. A decline in the prevailing levels of interest rates
generally increases the value of debt securities, while an
increase in rates usually reduces the value of those securities.
In pursuing its investment objective, Asia Pacific Fund may
invest up to 35% of its 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 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 ("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 the investment adviser 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 using them is
more efficient or less costly than direct investment that cannot
be readily established directly due to portfolio size, cash
availability, or other factors. They also may be used in an
effort to enhance portfolio returns.
The successful use of Derivatives depends on the investment
adviser'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 by the
Fund 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 by the Fund 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 two years 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, the investment adviser will consider substantially
the same criteria that would be considered in purchasing the
underlying stock. While convertible securities purchased by the
Fund are frequently rated investment grade, the Fund may purchase
unrated securities or securities rated below investment grade if
the securities meet the investment adviser's other investment
criteria. Convertible securities rated below investment grade (a)
tend to be more sensitive to interest rate and economic changes,
(b) may be obligations of issuers who are less creditworthy than
issuers of higher quality convertible securities, and (c) may be
more thinly traded due to such securities being less well known to
investors than investment grade convertible securities, common
stock or conventional debt securities. As a result, the
investment adviser's own investment research and analysis tend to
be more important in the purchase of such securities than other
factors.
Foreign Securities
The Fund invests primarily in foreign securities. Investment
in foreign securities 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 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. The investment adviser 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 the Fund
to purchase additional currency on the spot market (and bear the
expense of such purchase) if the market value of the security is
less than the amount of currency the Fund is obligated to deliver
and if a decision is made to sell the security and make delivery
of the currency. Conversely, it may be necessary to sell on the
spot market some of the currency received upon the sale of the
portfolio security if its market value exceeds the amount of
currency the Fund is obligated to deliver.
If the Fund retains the portfolio security and engages in an
offsetting transaction, the Fund will incur a gain or a loss to
the extent that there has been movement in forward contract
prices. If the Fund engages in an offsetting transaction, it may
subsequently enter into a new forward contract to sell the
currency. Should forward prices decline during the period between
the Fund's entering into a forward contract for the sale of a
currency and the date it enters into an offsetting contract for
the purchase of the currency, the Fund will realize a gain to the
extent the price of the currency it has agreed to sell exceeds the
price of the currency it has agreed to purchase. Should forward
prices increase, the Fund will suffer a loss to the extent the
price of the currency it has agreed to purchase exceeds the price
of the currency it has agreed to sell. A default on the contract
would deprive the Fund of unrealized profits or force the Fund to
cover its commitments for purchase or sale of currency, if any, at
the current market price.
Hedging against a decline in the value of a currency does not
eliminate fluctuations in the prices of portfolio securities or
prevent losses if the prices of such securities decline. Such
transactions also preclude the opportunity for gain if the value
of the hedged currency should rise. Moreover, it may not be
possible for the Fund to hedge against a devaluation that is so
generally anticipated that the Fund is not able to contract to
sell the currency at a price above the devaluation level it
anticipates. The cost to the Fund of engaging in currency
exchange transactions varies with such factors as the currency
involved, the length of the contract period, and prevailing market
conditions. Since currency exchange transactions are usually
conducted on a principal basis, no fees or commissions are
involved.
Synthetic Foreign Money Market Positions. The Fund may
invest in money market instruments denominated in foreign
currencies. In addition to, or in lieu of, such direct
investment, the Fund may construct a synthetic foreign money
market position by (a) purchasing a money market instrument
denominated in one currency, generally U.S. dollars, and (b)
concurrently entering into a forward contract to deliver a
corresponding amount of that currency in exchange for a different
currency on a future date and at a specified rate of exchange.
For example, a synthetic money market position in Japanese yen
could be constructed by purchasing a U.S. dollar money market
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.
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.
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 the investment adviser wishes to accept while avoiding
or reducing certain other risks.
Brady Bonds
Asia Pacific 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
Asia Pacific 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
Asia Pacific 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 the Fund 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 the investment adviser
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 Standard & Poor's or Moody's
Investors Service, Inc. or has an equivalent rating from a
nationally recognized statistical rating organization or is
determined to be of equivalent credit quality by the investment
adviser.
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 of the
Fund 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 SAI, the Fund may lend its portfolio securities to broker-
dealers and banks. Any such loan must be continuously secured by
collateral in cash or cash equivalents maintained on a current
basis in an amount at least equal to the market value of the
securities loaned by the Fund. The Fund would continue to receive
the equivalent of the interest or dividends paid by the issuer on
the securities loaned, and would also receive an additional return
that may be in the form of a fixed fee or a percentage of the
collateral. The Fund would have the right to call the loan and
obtain the securities loaned at any time on notice of not more
than five business days. The Fund would not have the right to
vote the securities during the existence of the loan but would
call the loan to permit voting of the securities if, in the
investment adviser's judgment, a material event requiring a
shareholder vote would otherwise occur before the loan was repaid.
In the event of bankruptcy or other default of the borrower, the
Fund could experience both delays in liquidating the loan
collateral or recovering the loaned securities and losses,
including (a) possible decline in the value of the collateral or
in the value of the securities loaned during the period while the
Fund seeks to enforce its rights thereto, (b) possible subnormal
levels of income and lack of access to income during this period,
and (c) expenses of enforcing its rights. The Fund did not lend
portfolio securities during the fiscal year ended September 30,
1999 nor does it 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 the investment adviser deems it
advisable for investment reasons. During its last fiscal year, the
Fund had no commitments to purchase when-issued securities in
excess of 5% of its net assets. The Fund may utilize spot and
forward foreign currency exchange transactions to reduce the risk
inherent in fluctuations in the exchange rate between one currency
and another when securities are purchased or sold on a when-issued
or delayed-delivery basis.
The Fund may enter into reverse repurchase agreements with
banks and securities dealers. A reverse repurchase agreement is a
repurchase agreement in which the Fund is the seller of, rather
than the investor in, securities and agrees to repurchase them at
an agreed-upon time and price. Use of a reverse repurchase
agreement may be preferable to a regular sale and later repurchase
of securities because it avoids certain market risks and
transaction costs. The Fund did not enter into reverse repurchase
agreements during the fiscal year ended September 30, 1999.
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 the Fund 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, the
Fund will incur a loss and if the price declines during this
period, the Fund 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 the Fund's 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.
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. The investment adviser, 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 its net assets in
illiquid securities. A determination of whether a Rule 144A
security is liquid or not is a question of fact. In making this
determination, the investment adviser will consider the trading
markets for the specific security, taking into account the
unregistered nature of a Rule 144A security. In addition, the
investment adviser could consider the (1) frequency of trades and
quotes, (2) number of dealers and potential purchasers, (3) dealer
undertakings to make a market, and (4) nature of the security and
of marketplace trades (e.g., the time needed to dispose of the
security, the method of soliciting offers, and the mechanics of
transfer). The liquidity of Rule 144A securities would be
monitored and if, as a result of changed conditions, it is
determined that a Rule 144A security is no longer liquid, the
Fund's holdings of illiquid securities would be reviewed to
determine what, if any, steps are required to assure that the Fund
does not invest more than 15% of its assets in illiquid
securities. Investing in Rule 144A securities could have the
effect of increasing the amount of the Fund's assets invested in
illiquid securities if qualified institutional buyers are
unwilling to purchase such securities. The Fund does not expect
to invest as much as 5% of its total assets in Rule 144A
securities that have not been deemed to be liquid by the
investment adviser.
Line of Credit
Subject to restriction (6) under Investment Restrictions in
this SAI, 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 Stein Roe. 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. A high rate of portfolio turnover, if it
should occur, would result in increased transaction expenses,
which must be borne by the Fund. High portfolio turnover may also
result in the realization of capital gains or losses and, to the
extent net short-term capital gains are realized, any
distributions resulting from such gains will be considered
ordinary income for federal income tax purposes.
Options on Securities and Indexes
The Fund may purchase and sell put options and call options
on securities, indexes or foreign currencies in standardized
contracts traded on recognized securities exchanges, boards of
trade, or similar entities, or quoted on Nasdaq. The Fund may
purchase agreements, sometimes called cash puts, that may
accompany the purchase of a new issue of bonds from a dealer.
An option on a security (or index) is a contract that gives
the purchaser (holder) of the option, in return for a premium, the
right to buy from (call) or sell to (put) the seller (writer) of
the option the security underlying the option (or the cash value
of the index) at a specified exercise price at any time during the
term of the option (normally not exceeding nine months). The
writer of an option on an individual security or on a foreign
currency has the obligation upon exercise of the option to deliver
the underlying security or foreign currency upon payment of the
exercise price or to pay the exercise price upon delivery of the
underlying security or foreign currency. Upon exercise, the
writer of an option on an index is obligated to pay the difference
between the cash value of the index and the exercise price
multiplied by the specified multiplier for the index option. (An
index is designed to reflect specified facets of a particular
financial or securities market, a specific group of financial
instruments or securities, or certain economic indicators.)
The Fund will write call options and put options only if they
are "covered." For example, in the case of a call option on a
security, the option is "covered" if the Fund owns the security
underlying the call or has an absolute and immediate right to
acquire that security without additional cash consideration (or,
if additional cash consideration is required, cash or cash
equivalents in such amount are held in a segregated account by its
custodian) upon conversion or exchange of other securities held in
its portfolio.
If an option written by the Fund expires, the Fund realizes a
capital gain equal to the premium received at the time the option
was written. If an option purchased by the Fund expires, the Fund
realizes a capital loss equal to the premium paid.
Prior to the earlier of exercise or expiration, an option may
be closed out by an offsetting purchase or sale of an option of
the same series (type, exchange, underlying security or index,
exercise price, and expiration). There can be no assurance,
however, that a closing purchase or sale transaction can be
effected when the Fund desires.
The Fund will realize a capital gain from a closing purchase
transaction if the cost of the closing option is less than the
premium received from writing the option, or, if it is more, the
Fund will realize a capital loss. If the premium received from a
closing sale transaction is more than the premium paid to purchase
the option, the Fund will realize a capital gain or, if it is
less, the Fund will realize a capital loss. The principal factors
affecting the market value of a put or a call option include
supply and demand, interest rates, the current market price of the
underlying security or index in relation to the exercise price of
the option, the volatility of the underlying security or index,
and the time remaining until the expiration date.
A put or call option purchased by the Fund is an asset of the
Fund, valued initially at the premium paid for the option. The
premium received for an option written by the Fund is recorded as
a deferred credit. The value of an option purchased or written is
marked-to-market daily and is valued at the closing price on the
exchange on which it is traded or, if not traded on an exchange or
no closing price is available, at the mean between the last bid
and asked prices.
Risks Associated with Options 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, the Fund would not be able to close out the option.
If restrictions on exercise were imposed, the Fund might be unable
to exercise an option it has purchased.
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 the Fund's
securities or the price of the securities that the Fund intends to
purchase. Although other techniques could be used to reduce or
increase the Fund's exposure to stock price, interest rate and
currency fluctuations, the Fund may be able to achieve its
exposure more effectively and perhaps at a lower cost by using
futures contracts and futures options.
The Fund will only enter into futures contracts and futures
options that are standardized and traded on an exchange, board of
trade, or similar entity, or quoted on an automated quotation
system.
The success of any futures transaction depends on 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, the investment adviser 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, the Fund is required to deposit with its custodian (or
broker, if legally permitted) a specified amount of cash or U.S.
Government securities or other securities acceptable to the broker
("initial margin"). The margin required for a futures contract is
set by the exchange on which the contract is traded and may be
modified during the term of the contract. The initial margin is
in the nature of a performance bond or good faith deposit on the
futures contract, which is returned to the Fund upon termination
of the contract, assuming all contractual obligations have been
satisfied. The Fund expects to earn interest income on its
initial margin deposits. A futures contract held by the Fund is
valued daily at the official settlement price of the exchange on
which it is traded. Each day the Fund pays or receives cash,
called "variation margin," equal to the daily change in value of
the futures contract. This process is known as "marking-to-
market." Variation margin paid or received by the Fund does not
represent a borrowing or loan by the Fund but is instead
settlement between the Fund and the broker of the amount one would
owe the other if the futures contract had expired at the close of
the previous day. In computing daily net asset value, the Fund
will mark-to-market its open futures positions.
The Fund is also required to deposit and maintain margin with
respect to put and call options on futures contracts written by
it. Such margin deposits will vary depending on the nature of the
underlying futures contract (and the related initial margin
requirements), the current market value of the option, and other
futures positions held by the Fund.
Although some futures contracts call for making or taking
delivery of the underlying securities, usually these obligations
are closed out prior to delivery by offsetting purchases or sales
of matching futures contracts (same exchange, underlying security
or index, and delivery month). If an offsetting purchase price is
less than the original sale price, the Fund engaging in the
transaction realizes a capital gain, or if it is more, the Fund
realizes a capital loss. Conversely, if an offsetting sale price
is more than the original purchase price, the Fund realizes a
capital gain, or if it is less, the Fund realizes a capital loss.
The transaction costs must also be included in these calculations.
Risks Associated with Futures
There are several risks associated with the use of futures
contracts and futures options. A purchase or sale of a futures
contract may result in losses in excess of the amount invested in
the futures contract. In trying to increase or reduce market
exposure, there can be no guarantee that there will be a
correlation between price movements in the futures contract and in
the portfolio exposure sought. In addition, there are significant
differences between the securities and futures markets that could
result in an imperfect correlation between the markets, causing a
given transaction not to achieve its objectives. The degree of
imperfection of correlation depends on circumstances such as:
variations in speculative market demand for futures, futures
options and the related securities, including technical influences
in futures and futures options trading and differences between the
securities 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
Fund's investment objective.
The Fund will not enter into a futures contract or purchase
an option thereon if, immediately thereafter, the initial margin
deposits for futures contracts held by the Fund plus premiums paid
by it for open futures option positions, less the amount by which
any such positions are "in-the-money,"/3/ would exceed 5% of the
Fund's total assets.
- --------------
/3/ A call option is "in-the-money" if the value of the futures
contract that is the subject of the option exceeds the exercise
price. A put option is "in-the-money" if the exercise price
exceeds the value of the futures contract that is the subject of
the option.
- --------------
When purchasing a futures contract or writing a put option on
a futures contract, the Fund must maintain with its custodian (or
broker, if legally permitted) cash or cash equivalents (including
any margin) equal to the market value of such contract. When
writing a call option on a futures contract, the Fund similarly
will maintain with its custodian cash or cash equivalents
(including any margin) equal to the amount by which such option is
in-the-money until the option expires or is closed out by the
Fund.
The Fund may not maintain open short positions in futures
contracts, call options written on futures contracts or call
options written on indexes if, in the aggregate, the market value
of all such open positions exceeds the current value of the
securities in its portfolio, plus or minus unrealized gains and
losses on the open positions, adjusted for the historical relative
volatility of the relationship between the portfolio and the
positions. For this purpose, to the extent the Fund has written
call options on specific securities in its portfolio, the value of
those securities will be deducted from the current market value of
the securities portfolio.
In order to comply with Commodity Futures Trading Commission
Regulation 4.5 and thereby avoid being deemed a "commodity pool
operator," the Fund will use commodity futures or commodity
options contracts solely for bona fide hedging purposes within the
meaning and intent of Regulation 1.3(z), or, with respect to
positions in commodity futures and commodity options contracts
that do not come within the meaning and intent of 1.3(z), the
aggregate initial margin and premiums required to establish such
positions will not exceed 5% of the fair market value of the
assets of the Fund, after taking into account unrealized profits
and unrealized losses on any such contracts it has entered into
[in the case of an option that is in-the-money at the time of
purchase, the in-the-money amount (as defined in Section 190.01(x)
of the Commission Regulations) may be excluded in computing such
5%].
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 by the
Fund: (1) will affect the holding period of the hedged securities;
and (2) may cause unrealized gain or loss on such securities to be
recognized upon entry into the hedge.
If the Fund were to enter into a short index future, short
index futures option or short index option position and the
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 Fund's 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 non-fundamental 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 or 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 10% 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 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
Stein Roe seeks to provide superior long-term investment
results through a disciplined, research-intensive approach to
investment selection and prudent risk management. In working to
take sensible risks and make intelligent investments 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.
PURCHASES AND REDEMPTIONS
Purchases Through Third Parties
You may purchase (or redeem) shares through certain broker-
dealers, banks, or other intermediaries ("Intermediaries"). The
state of Texas has asked that investment companies disclose in
their SAIs, as a reminder to any such bank or institution, that it
must be registered as a securities dealer in Texas.
Intermediaries may charge for their services or place limitations
on the extent to which you may use the services offered by the
Trust. It is the responsibility of any such Intermediary to
establish procedures insuring the prompt transmission to the Trust
of any such purchase order. An Intermediary, who accepts orders
that are processed at the net asset value next determined after
receipt of the order by the Intermediary, accepts such orders as
authorized agent or designee of the Fund. The Intermediary is
required to segregate any orders received on a business day after
the close of regular session trading on the New York Stock
Exchange and transmit those orders separately for execution at the
net asset value next determined after that business day.
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. Stein Roe and
the Fund's transfer agent share in the expense of these fees, and
Stein Roe pays all sales and promotional expenses.
Net Asset Value
The net asset value of the Fund is determined on days on
which the New York Stock Exchange (the "NYSE") is open for regular
session 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, the net asset value should be determined on any such
day, in which case the determination will be made at 4 p.m.,
Eastern time. Please refer to Your Account-Determining Share
Price in the Prospectus for additional information on how the
purchase and redemption price of Fund shares is determined.
General Redemption Policies
The Trust intends to pay all redemptions in cash. The Trust
retains the right, subject to the Rule 18f-1 notice described
below, to alter this policy to provide for redemptions in whole or
in part by a distribution in kind of securities held by the Fund
in lieu of cash. If redemptions were made in kind, the redeeming
shareholders might incur transaction costs in selling the
securities received in the redemptions. The Trust filed a
Notification of Election pursuant to Rule 18f-1 under the
Investment Company Act of 1940 with the Securities and Exchange
Commission which commits the Fund to pay in cash all requests for
redemptions by any shareholder, limited in amount with respect to
each shareholder during any 90-day period to the lesser of
$250,000 or 1% of the net asset value of the Fund at the beginning
of such period.
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.
You may not cancel or revoke your redemption order once
instructions have been received and accepted. The Trust cannot
accept a redemption request that specifies a particular date or
price for redemption or any special conditions. Please call 800-
338-2550 if you have any questions about requirements for a
redemption before submitting your request. The Trust reserves the
right to require a properly completed application before making
payment for shares redeemed.
The Trust will generally mail payment for shares redeemed
within seven days after proper instructions are received.
However, the Trust normally intends to pay proceeds of a Telephone
Redemption paid by wire on the next business day. If you attempt
to redeem shares within 15 days after they have been purchased by
check or electronic transfer, the Trust will delay payment of the
redemption proceeds to you until it can verify that payment for
the purchase of those shares has been (or will be) collected. To
reduce such delays, the Trust recommends that your purchase be
made by federal funds wire through your bank.
Generally, you may not use any Special Redemption Privilege
to redeem shares purchased by check (other than certified or
cashiers' checks) or electronic transfer until 15 days after their
date of purchase. The Trust reserves the right at any time
without prior notice to suspend, limit, modify, or terminate any
Privilege or its use in any manner by any person or class.
Neither the Trust, its transfer agent, nor their respective
officers, trustees, directors, employees, or agents will be
responsible for the authenticity of instructions provided under
the Privileges, nor for any loss, liability, cost or expense for
acting upon instructions furnished thereunder if they reasonably
believe that such instructions are genuine. The Fund employs
procedures reasonably designed to confirm that instructions
communicated by telephone under any Special Redemption Privilege
or the Special Electronic Transfer Redemption Privilege are
genuine. Use of any Special Redemption Privilege or the Special
Electronic Transfer Redemption Privilege authorizes the Fund and
its transfer agent to tape-record all instructions to redeem. In
addition, callers are asked to identify the account number and
registration, and may be required to provide other forms of
identification. Written confirmations of transactions are mailed
promptly to the registered address; a legend on the confirmation
requests that the shareholder review the transactions and inform
the Fund immediately if there is a problem. If the Fund does not
follow reasonable procedures for protecting shareholders against
loss on telephone transactions, it may be liable for any losses
due to unauthorized or fraudulent instructions.
Shares in any account you maintain with the Fund or any of
the other Stein Roe Funds may be redeemed to the extent necessary
to reimburse any Stein Roe Fund for any loss you cause it to
sustain (such as loss from an uncollected check or electronic
transfer for the purchase of shares, or any liability under the
Internal Revenue Code provisions on backup withholding).
The Trust reserves the right to suspend or terminate, at any
time and without prior notice, the use of the Telephone Exchange
Privilege by any person or class of persons. The Trust believes
that use of the Telephone Exchange Privilege by investors
utilizing market-timing strategies adversely affects the Fund.
Therefore, regardless of the number of telephone exchange round-
trips made by an investor, the Trust generally will not honor
requests for Telephone Exchanges by shareholders identified by the
Trust as "market-timers" if the officers of the Trust determine
the order not to be in the best interests of the Trust or its
shareholders. The Trust generally identifies as a "market-timer"
an investor whose investment decisions appear to be based on
actual or anticipated near-term changes in the securities markets
other than for investment considerations. Moreover, the Trust
reserves the right to suspend, limit, modify, or terminate, at any
time and without prior notice, the Telephone Exchange Privilege in
its entirety. Because such a step would be taken only if the
Board of Trustees believes it would be in the best interests of
the Fund, the Trust expects that it would provide shareholders
with prior written notice of any such action unless the resulting
delay in the suspension, limitation, modification, or termination
of the Telephone Exchange Privilege would adversely affect the
Fund. If the Trust were to suspend, limit, modify, or terminate
the Telephone Exchange Privilege, a shareholder expecting to make
a Telephone Exchange might find that an exchange could not be
processed or that there might be a delay in the implementation of
the exchange. During periods of volatile economic and market
conditions, you may have difficulty placing your exchange by
telephone.
The Telephone Exchange Privilege and the Telephone Redemption
by Check Privilege will be established automatically for you when
you open your account unless you decline these Privileges on your
application. Other Privileges must be specifically elected. A
signature guarantee may be required to establish a Privilege after
you open your account. If you establish both the Telephone
Redemption by Wire Privilege and the Electronic Transfer
Privilege, the bank account that you designate for both Privileges
must be the same. The Telephone Redemption by Check Privilege,
Telephone Redemption by Wire Privilege, and Special Electronic
Transfer Redemptions may not be used to redeem shares held by a
tax-sheltered retirement plan sponsored by Stein Roe.
Redemption Privileges
Exchange Privilege. You may redeem all or any portion of
your Fund shares and use the proceeds to purchase shares of any
other no-load Stein Roe Fund offered for sale in your state if
your signed, properly completed application is on file. An
exchange transaction is a sale and purchase of shares for federal
income tax purposes and may result in capital gain or loss.
Before exercising the Exchange Privilege, you should obtain the
prospectus for the no-load Stein Roe Fund in which you wish to
invest and read it carefully. The registration of the account to
which you are making an exchange must be exactly the same as that
of the Fund account from which the exchange is made and the amount
you exchange must meet any applicable minimum investment of the
no-load Stein Roe Fund being purchased.
Telephone Exchange Privilege. You may use the Telephone
Exchange Privilege to exchange an amount of $50 or more from your
account by calling 800-338-2550 or by sending a telegram; new
accounts opened by exchange are subject to the $2,500 initial
purchase minimum. Generally, you will be limited to four
Telephone Exchange round-trips per year and the Fund may refuse
requests for Telephone Exchanges in excess of four round-trips (a
round-trip being the exchange out of the Fund into another no-load
Stein Roe Fund, and then back to the Fund). In addition, the
Trust's general redemption policies apply to redemptions of shares
by Telephone Exchange.
Automatic Exchanges. You may use the Automatic Exchange
Privilege to automatically redeem a fixed amount from your Fund
account for investment in another no-load Stein Roe Fund account
on a regular basis ($50 minimum; $100,000 maximum).
Telephone Redemption by Wire Privilege. You may use this
Privilege to redeem shares from your account ($1,000 minimum;
$100,000 maximum) by calling 800-338-2550. The proceeds will be
transmitted by wire to your account at a commercial bank
previously designated by you that is a member of the Federal
Reserve System. The fee for wiring proceeds (currently $7.00 per
transaction) will be deducted from the amount wired.
Telephone Redemption by Check Privilege. You may use the
Telephone Redemption by Check Privilege to redeem an amount of
$1,000 or more from your account by calling 800-338-2550. The
proceeds will be sent by check to your registered address.
Electronic Transfer Privilege. You may redeem shares by
calling 800-338-2550 and requesting an electronic transfer
("Special Redemption") of the proceeds to a bank account
previously designated by you at a bank that is a member of the
Automated Clearing House. You may also request electronic
transfers at scheduled intervals ("Automatic Redemptions"). A
Special Redemption request received by telephone after 4 p.m.,
Eastern time, is deemed received on the next business day. You
may purchase Fund shares directly from your bank account either at
regular intervals ("Regular Investments") or upon your request
("Special Investments"). Electronic transfers are subject to a
$50 minimum and a $100,000 maximum. You may also have income
dividends and capital gains distributions deposited directly into
your bank account ("Automatic Dividend Deposits").
Systematic Withdrawals. You may have a fixed dollar amount,
declining balance, or fixed percentage of your account redeemed
and sent at regular intervals by check to you or another payee.
Dividend Purchase Option. You may have distributions from
one Fund account automatically invested in another no-load Stein
Roe Fund account. Before establishing this option, you should
obtain and read the prospectus of the Stein Roe Fund into which
you wish to have your distributions invested. The account from
which distributions are made must be of sufficient size to allow
each distribution to usually be at least $25.
MANAGEMENT
The Board of Trustees of the Trust has overall management
responsibility for the Trust and the Fund. The following table
sets forth certain information with respect to the trustees and
officers of the Trust:
Name, Age at February 1, 2000;
Address
Position(s) held with the Trust
Principal occupation(s) during past five years
William D. Andrews, 52; One South Wacker Drive, Chicago, IL 60606
Executive Vice-President
Executive vice president of Stein Roe
John A. Bacon Jr., 72;
4N640 Honey Hill Road, Box 296, Wayne, IL 60184 (3)
Trustee
Private investor
Christine Balzano, 34;
245 Summer Street, Boston, MA 02210
Vice-President
Senior vice president of Liberty Funds Services, Inc.; formerly
vice president and assistant vice president
William W. Boyd, 73;
2900 Golf Road, Rolling Meadows, IL 60008 (2)(3)
Trustee
Chairman and director of Sterling Plumbing (manufacturer of
plumbing products)
David P. Brady, 35;
One South Wacker Drive, Chicago, IL 60606
Vice-President
Senior vice president of Stein Roe since March 1998; vice
president of Stein Roe from Nov. 1995 to March 1998; portfolio
manager for Stein Roe since 1993
Daniel K. Cantor, 40;
1330 Avenue of the Americas, New York, NY 10019
Vice-President
Senior vice president of Stein Roe
Kevin M. Carome, 43;
One Financial Center, Boston, MA 02111
Executive Vice-President; Secretary
Senior vice president, legal, Liberty Funds Group LLC (an
affiliate of Stein Roe) since Jan. 1999; general counsel and
secretary of Stein Roe since Jan. 1998; associate general counsel
and vice president of Liberty Financial Companies, Inc. (the
indirect parent of Stein Roe) through Jan. 1999
Denise E. Chasmer, 30;
12100 East Iliff Avenue, Aurora, CO 80014
Vice-President
Employee of Liberty Funds Services, Inc. and assistant vice
president of Stein Roe since Nov. 1999; manager with Scudder
Kemper Investments from Oct. 1995 to Nov. 1999; assistant manager
with Scudder Kemper prior thereto
J. Kevin Connaughton, 35;
245 Summer Street, Boston, MA 02210
Vice-President; Treasurer
Vice president of Colonial Management Associates, Inc. ("CMA"),
since February 1998; senior tax manager, Coopers & Lybrand, LLP
from April 1996 to January 1998; vice president, 440 Financial
Group/First Data Investor Services Group prior thereto
Lindsay Cook, 47;
600 Atlantic Avenue, Boston, MA 02210 (1)(2)
Trustee
Executive vice president of Liberty Financial Companies, Inc.
since March 1997; senior vice president prior thereto
Michael G. Fisher, 30;
245 Summer Street, Boston, MA 02210
Vice-President
Tax manager with Liberty Funds Group since Oct. 1998; tax manager
with PricewaterhouseCoopers LLP prior thereto
William M. Garrison, 34;
One South Wacker Drive, Chicago, IL 60606
Vice-President
Vice president of Stein Roe since Feb. 1998; associate portfolio
manager for Stein Roe since August 1994
Stephen E. Gibson, 46;
One Financial Center, Boston, MA 02111
President
Vice chairman of Stein Roe since Aug. 1998; chairman, CEO,
president and director of Liberty Funds Group since Dec. 1998;
chairman of the Colonial Group from July 1998 to Dec. 1998;
president of the Colonial Group from Dec. 1996 to Dec. 1998;
chairman of Colonial Management Associates, Inc. since Dec. 1998;
CEO, president and director of Colonial Management Associates
since July 1996; managing director of Putnam Financial Services
prior thereto
Erik P. Gustafson, 36;
One South Wacker Drive, Chicago, IL 60606
Vice-President
Senior portfolio manager of Stein Roe; senior vice president of
Stein Roe since April 1996; vice president of Stein Roe prior
thereto
Douglas A. Hacker, 44;
P.O. Box 66100, Chicago, IL 60666 (3)
Trustee
Executive vice president and chief financial officer of UAL, Inc.
(airline) since July 1999; senior vice president and chief
financial officer of UAL, Inc. prior thereto
Loren A. Hansen, 51;
One South Wacker Drive, Chicago, IL 60606
Executive Vice-President
Chief investment officer/equity of CMA since 1997; executive vice
president of Stein Roe since Dec. 1995; vice president of The
Northern Trust Company (bank) prior thereto
Harvey B. Hirschhorn, 50;
One South Wacker Drive, Chicago, IL 60606
Vice-President
Executive vice president, senior portfolio manager, and chief
economist and investment strategist of Stein Roe; director of
research of Stein Roe, 1991 to 1995
Timothy J. Jacoby, 47;
One Financial Center, Boston, MA 02111
Senior Vice-President
Fund treasurer for Liberty Funds Group LLC since Sept. 1996 and
chief financial officer since Aug. 1997; senior vice president of
Fidelity Investments prior thereto
Janet Langford Kelly, 42;
One Kellogg Square, Battle Creek, MI 49016 (3)
Trustee
Executive vice president-corporate development, general counsel
and secretary of Kellogg Company since Sept. 1999; senior vice
president, secretary and general counsel of Sara Lee Corporation
(branded, packaged, consumer-products manufacturer) from 1995 to
Aug. 1999; partner of Sidley & Austin (law firm) prior thereto
Gail D. Knudsen, 37;
245 Summer Street, Boston, MA 02210
Vice-President; Controller
Vice president and assistant controller of CMA
Mary Dillon McKenzie, 45;
One Financial Center, Boston, MA 02111
Vice-President
President of Liberty Funds Services, Inc.
Charles R. Nelson, 57;
Department of Economics, University of Washington, Seattle, WA
98195 (3)
Trustee
Van Voorhis Professor of Political Economy, Department of
Economics of the University of Washington
Nicholas S. Norton, 40;
12100 East Iliff Avenue, Aurora, CO 80014
Vice-President
Senior vice president of Liberty Funds Services, Inc. since Aug.
1999; vice president of Scudder Kemper, Inc. prior thereto
Nicolette D. Parrish, 50;
One South Wacker Drive, Chicago, IL 60606
Vice-President; Assistant Secretary
Senior legal assistant and assistant secretary of Stein Roe
Thomas C. Theobald, 62;
Suite 1300, 222 West Adams Street, Chicago, IL 60606 (3)
Trustee
Managing director, William Blair Capital Partners (private equity
fund)
_________________________
(1) Trustee who is an "interested person" of the Trust and of
Stein Roe, 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.
Certain of the trustees and officers of the Trust are
trustees or officers of other investment companies managed by
Stein Roe; and some of the officers are also officers of Liberty
Funds Distributor, Inc., the Fund's distributor.
Officers and trustees affiliated with Stein Roe 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 Stein Roe 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 September 30, 1999, to each of the trustees:
Compensation from the
Stein Roe Fund Complex*
-----------------------
Aggregate Compensation Total Average
Name of Trustee from the Trust Compensation Per Series
- ------------------- -------------------- ------------ ----------
Thomas W. Butch** -0- -0- -0-
Lindsay Cook -0- -0- -0-
John A. Bacon Jr.** $25,500 $117,850 $2,562
William W. Boyd 22,450 104,100 2,263
Douglas A. Hacker 20,650 93,900 2,041
Janet Langford Kelly 22,450 103,400 2,248
Charles R. Nelson 22,450 103,900 2,259
Thomas C. Theobald 22,450 103,400 2,248
_______________
* At September 30, 1999, the Stein Roe Fund Complex consisted of
12 series of the Trust, one series of Liberty-Stein Roe Funds
Trust, four series of Liberty-Stein Roe Funds Municipal Trust,
four series of Liberty-Stein Roe Funds Income Trust, five series
of Liberty-Stein Roe Advisor Trust, five series of SteinRoe
Variable Investment Trust, 12 portfolios of SR&F Base Trust,
Liberty-Stein Roe Advisor Floating Rate Fund, Liberty-Stein Roe
Institutional Floating Rate Income Fund, and Stein Roe Floating
Rate Limited Liability Company.
**Mr. Butch served as a trustee until November 3, 1998; Mr. Bacon
was elected a trustee effective November 3, 1998.
FINANCIAL STATEMENTS
Please refer to the September 30, 1999 Financial Statements
(statement of assets and liabilities and schedule of investments
as of September 30, 1999 and the statement of operations, changes
in net assets, financial highlights, and notes thereto) and the
report of independent accountants contained in the September 30,
1999 Annual Report. The Financial Statements and the report of
independent accountants are incorporated herein by reference. The
Annual Report may be obtained at no charge by telephoning 800-338-
2550.
PRINCIPAL SHAREHOLDERS
As of February 1, 2000, Liberty Financial Companies, Inc.,
600 Atlantic Avenue, Federal Reserve Plaza, Boston, MA 02210,
owned 100% of the Fund's outstanding shares.
INVESTMENT ADVISORY AND OTHER SERVICES
Stein Roe & Farnham Incorporated provides administrative
services to the Fund. Stein Roe 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
Liberty Management Corporation, which is a wholly owned subsidiary
of Liberty Corporate Holdings, Inc., which is a wholly 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 sole director of Stein Roe is C. Allen Merritt, Jr. Mr.
Merritt is Chief Operating Officer of Liberty Financial. His
business address is Federal Reserve Plaza, 600 Atlantic Avenue,
Boston, MA 02210.
Stein Roe Counselor [service mark] is a professional
investment advisory service offered by Stein Roe to Fund
shareholders. Stein Roe Counselor [service mark] is designed to
help shareholders construct Fund investment portfolios to suit
their individual needs. Based on information shareholders provide
about their financial goals and objectives in response to a
questionnaire, Stein Roe's investment professionals create
customized portfolio recommendations. Shareholders participating
in Stein Roe Counselor [service mark] are free to self direct
their investments while considering Stein Roe's recommendations.
In addition to reviewing shareholders' goals and objectives
periodically and updating portfolio recommendations to reflect any
changes, Stein Roe provides shareholders participating in these
programs with dedicated representatives. Other distinctive
services include specially designed account statements with
portfolio performance and transaction data, asset allocation
planning tools, newsletters, customized website content, and
regular investment, economic and market updates. A $50,000
minimum investment is required to participate in the program.
The Fund's sub-investment adviser, Newport Pacific
Management, Inc., 580 California Street, Suite 1960, San
Francisco, CA 94104, is subject to the overall supervision of
Stein Roe 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 Stein Roe, is a wholly owned subsidiary of Liberty
Financial. As of September 30, 1999, Newport managed
approximately $1 billion in assets, all of which were invested in
foreign securities. The directors of Newport are John M. Mussey
and Lindsay Cook.
In return for its services, Stein Roe is entitled to receive
a monthly administrative and a monthly management fee from the
Fund. The table below shows the annual rates of such fees as a
percentage of average net assets (shown in millions), gross fees
payable for the period ended September 30, 1999, and any expense
reimbursements by Stein Roe:
Type Current Rates Year Ended 9/30/99
------------------------------------------------------------
Management 0.95% $26,920
Administrative 0.15% 4,251
Reimbursement 2.00% (58,091)
Stein Roe provides office space and executive and other
personnel to the Fund, and bears any sales or promotional
expenses. The Fund pays all expenses other than those paid by
Stein Roe, 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 Stein Roe shall
reimburse the Fund to the extent that total annual expenses of the
Fund (including fees paid to Stein Roe, 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
shares of the Fund are being offered for sale to the public;
provided, however, Stein Roe 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, Stein Roe may waive its fees and/or absorb certain
expenses for the Fund. Any such reimbursement will enhance the
yield of the Fund.
The management agreement provides that neither Stein Roe, 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
Stein Roe 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 a series of the Trust are
paid solely out of the assets of that series. Any expenses
incurred by the Trust that are not solely attributable to a
particular series are apportioned in such manner as Stein Roe
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, Stein Roe
receives a fee for performing certain bookkeeping and accounting
services. For such services, Stein Roe 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 September 30, 1997, 1998
and 1999, Stein Roe received aggregate fees of $315,067, $358,936
and $354,273, respectively, from the Trust for services performed
under this Agreement.
DISTRIBUTOR
Fund shares are distributed by Liberty Funds Distributor,
Inc. ("Distributor"), One Financial Center, Boston, MA 02111,
under a Distribution Agreement. 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 prospectus and other expenses.
As agent, the Distributor offers shares of the Fund to
investors in states where the shares are qualified for sale, at
net asset value, without sales commissions or other sales load to
the investor. In addition, no sales commission or "12b-1" payment
is paid by the Fund. The Distributor offers the Fund's shares
only on a best-efforts basis.
TRANSFER AGENT
SteinRoe Services Inc. ("SSI"), One South Wacker Drive,
Chicago, IL 60606, is the agent of the Trust for the transfer of
shares, disbursement of dividends, and maintenance of shareholder
accounting records. For performing these services, SSI receives
from the Fund a fee based on an annual rate of 0.22 of 1% of the
Fund's 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 and Other Services.)
CUSTODIAN
State Street Bank and Trust Company (the "Bank"), 225
Franklin Street, Boston, MA 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, as well as by
Stein Roe 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 ACCOUNTANTS
The independent accountants for the Fund are
PricewaterhouseCoopers LLP, 160 Federal Street, Boston, MA 02110.
The independent accountants audit and report on the annual
financial statements and provide tax return services and
assistance and consultation in connection with the review of
various SEC filings.
PORTFOLIO TRANSACTIONS
Stein Roe places the orders for the purchase and sale of
portfolio securities and options and futures contracts for its
clients, including private clients and mutual fund clients
("Clients"). Stein Roe and its affiliate Colonial Management
Associates, Inc. ("Colonial") maintain a single, unified trading
operation for trading equity securities. Stein Roe's 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
commissions, 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 Stein Roe'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; Stein Roe's knowledge of the financial
condition of the broker or dealer selected and such other brokers
and dealers; and Stein Roe's knowledge of actual or apparent
operation problems of any broker or dealer.
Recognizing the value of these factors, Stein Roe may cause a
Client to pay a brokerage commission in excess of that which
another broker may have charged for effecting the same
transaction. Stein Roe 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 Stein Roe has
discretion to select the broker or dealer by which the transaction
is to be executed. Stein Roe has discretion for all trades of the
Fund. 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 Stein Roe.
Evaluations of the reasonableness of brokerage commissions, based
on the factors described in the preceding paragraph, are made by
Stein Roe's trading personnel while effecting portfolio
transactions. The general level of brokerage commissions paid is
reviewed by Stein Roe, and reports are made annually to the Board
of Trustees.
Stein Roe maintains and periodically updates a list of
approved brokers and dealers which, in Stein Roe's judgment, are
generally capable of providing best price and execution and are
financially stable. Stein Roe's traders are directed to use only
brokers and dealers on the approved list, except in the case of
Client designations of brokers or dealers to effect transactions
for such Clients' accounts. Stein Roe generally posts certain
Client information on the "Alert" broker database system as a
means of facilitating the trade affirmation and settlement
process.
It is Stein Roe's practice, when feasible, to aggregate for
execution as a single transaction orders for the purchase or sale
of a particular security for the accounts of several Clients (and,
when feasible, Colonial clients), in order to seek a lower
commission or more advantageous net price. The benefit, if any,
obtained as a result of such aggregation generally is allocated
pro rata among the accounts of Clients which participated in the
aggregated transaction. In some instances, this may involve the
use of an "average price" execution wherein a broker or dealer to
which the aggregated order has been given will execute the order
in several separate transactions during the course of a day at
differing prices and, in such case, each Client participating in
the aggregated order will pay or receive the same price and
commission, which will be an average of the prices and commissions
for the several separate transactions executed by the broker or
dealer.
Stein Roe sometimes makes use of an indirect electronic
access to the New York Stock Exchange's "SuperDOT" automated
execution system, provided through a NYSE member floor broker, W&D
Securities, Inc., a subsidiary of Jefferies & Co., Inc.,
particularly for the efficient execution of smaller orders in NYSE
listed equities. Stein Roe sometimes uses similar arrangements
through Billings & Co., Inc. and Driscoll & Co., Inc., floor
broker members of the Chicago Stock Exchange, for transactions to
be executed on that exchange. In using these arrangements, Stein
Roe must instruct the floor broker to refer the executed
transaction to another brokerage firm for clearance and
settlement, as the floor brokers do not deal with the public.
Transactions of this type sometimes are referred to as "step-in"
or "step-out" transactions. The brokerage firm to which the
executed transaction is referred may include, in the case of
transactions effected through W&D Securities, brokerage firms
which provide Stein Roe investment research or related services.
Stein Roe places certain trades for the Fund through its
affiliate AlphaTrade, Inc. ("ATI"). ATI is a wholly owned
subsidiary of Colonial Management Associates, Inc. ATI is a fully
disclosed introducing broker that limits its activities to
electronic execution of transactions in listed equity securities.
The Fund pays ATI a commission for these transactions. The Fund
has adopted procedures consistent with Investment Company Act Rule
17e-1 governing such transactions. Certain of Stein Roe's
officers also serve as officers, directors and/or employees of
ATI.
Consistent with the Rules of Fair Practice of the National
Association of Securities Dealers, Inc. and subject to seeking
best execution and such other policies as the trustees of the Fund
may determine, Stein Roe may consider sales of shares of a Fund as
a factor in the selection of broker-dealers to execute such mutual
fund securities transactions.
Investment Research Products and Services Furnished by Brokers and
Dealers
Stein Roe engages in the long-standing practice in the money
management industry of acquiring research and brokerage products
and services ("research products") from broker-dealer firms in
return directing trades for Client accounts to those firms. In
effect, Stein Roe is using the commission dollars generated from
these Client accounts to pay for these research products. The
money management industry uses the term "soft dollars" to refer to
this industry practice. Stein Roe may engage in soft dollar
transactions on trades for those Client accounts for which Stein
Roe has the discretion to select the broker-dealers.
The ability to direct brokerage for a Client account belongs
to the Client and not to Stein Roe. When a Client grants Stein
Roe the discretion to select broker-dealers for Client trades,
Stein Roe has a duty to seek the best combination of net price and
execution. Stein Roe faces a potential conflict of interest with
this duty when it uses Client trades to obtain soft dollar
products. This conflict exists because Stein Roe is able to use
the soft dollar products in managing its Client accounts without
paying cash ("hard dollars") for the product. This reduces Stein
Roe's expenses.
Moreover, under a provision of the federal securities laws
applicable to soft dollars, Stein Roe is not required to use the
soft dollar product in managing those accounts that generate the
trade. Thus, the Client accounts that generate the brokerage
commission used to acquire the soft dollar product may not benefit
directly from that product. In effect, those accounts are cross
subsidizing Stein Roe's management of the other accounts that do
benefit directly from the product. This practice is explicitly
sanctioned by a provision of the Securities Exchange Act of 1934,
which creates a "safe harbor" for soft dollar transactions
conducted in a specified manner. Although it is inherently
difficult, if not impossible, to document, Stein Roe believes that
over time most, if not all, Clients benefit from soft dollar
products such that cross subsidizations even out.
Stein Roe attempts to reduce or eliminate this conflict by
directing Client trades for soft dollar products only if Stein Roe
concludes that the broker-dealer supplying the product is capable
of providing a combination of the best net price and execution on
the trade. As noted above, the best net price, while significant,
is one of a number of judgmental factors Stein Roe considers in
determining whether a particular broker is capable of providing
the best net price and execution. Stein Roe may cause a Client
account to pay a brokerage commission in a soft dollar trade in
excess of that which another broker-dealer might have charged for
the same transaction.
Stein Roe acquires two types of soft dollar research
products: (i) proprietary research created by the broker-dealer
firm executing the trade and (ii) other products created by third
parties that are supplied to Stein Roe through the broker-dealer
firm executing the trade.
Proprietary research consists primarily of traditional
research reports, recommendations and similar materials produced
by the in house research staffs of broker-dealer firms. This
research includes evaluations and recommendations of specific
companies or industry groups, as well as analyses of general
economic and market conditions and trends, market data, contacts
and other related information and assistance. Stein Roe's
research analysts periodically rate the quality of proprietary
research produced by various broker-dealer firms. Based on these
evaluations, Stein Roe develops target levels of commission
dollars on a firm-by-firm basis. Stein Roe attempts to direct
trades to each firm to meet these targets.
Stein Roe also uses soft dollars to acquire products created
by third parties that are supplied to Stein Roe through broker-
dealers executing the trade (or other broker-dealers who "step in"
to a transaction and receive a portion of the brokerage commission
for the trade). These products include the following:
* Database Services-comprehensive databases containing current
and/or historical information on companies and industries.
Examples include historical securities prices, earnings
estimates, and SEC filings. These services may include software
tools that allow the user to search the database or to prepare
value-added analyses related to the investment process (such as
forecasts and models used in the portfolio management process).
* Quotation/Trading/News Systems-products that provide real time
market data information, such as pricing of individual
securities and information on current trading, as well as a
variety of news services.
* Economic Data/Forecasting Tools-various macro economic
forecasting tools, such as economic data and economic and
political forecasts for various countries or regions.
* Quantitative/Technical Analysis-software tools that assist in
quantitative and technical analysis of investment data.
* Fundamental Industry Analysis-industry-specific fundamental
investment research.
* Fixed Income Security Analysis-data and analytical tools that
pertain specifically to fixed income securities. These tools
assist in creating financial models, such as cash flow
projections and interest rate sensitivity analyses, that are
relevant to fixed income securities.
* Other Specialized Tools-other specialized products, such as
specialized economic consulting analyses and attendance at
investment oriented conferences.
Many third-party products include computer software or on-
line data feeds. Certain products also include computer hardware
necessary to use the product.
Certain of these third party services may be available
directly from the vendor on a hard dollar basis. Others are
available only through broker-dealer firms for soft dollars.
Stein Roe evaluates each product to determine a cash ("hard
dollars") value of the product to Stein Roe. Stein Roe then on a
product-by-product basis targets commission dollars in an amount
equal to a specified multiple of the hard dollar value to the
broker-dealer that supplies the product to Stein Roe. In general,
these multiples range from 1.25 to 1.85 times the hard dollar
value. Stein Roe attempts to direct trades to each firm to meet
these targets. (For example, if the multiple is 1.5:1.0, assuming
a hard dollar value of $10,000, Stein Roe will target to the
broker-dealer providing the product trades generating $15,000 in
total commissions.)
The targets that Stein Roe establishes for both proprietary
and for third party research products typically will reflect
discussions that Stein Roe has with the broker-dealer providing
the product regarding the level of commissions it expects to
receive for the product. However, these targets are not binding
commitments, and Stein Roe does not agree to direct a minimum
amount of commissions to any broker-dealer for soft dollar
products. In setting these targets, Stein Roe makes a
determination that the value of the product is reasonably
commensurate with the cost of acquiring it. These targets are
established on a calendar year basis. Stein Roe will receive the
product whether or not commissions directed to the applicable
broker-dealer are less than, equal to or in excess of the target.
Stein Roe generally will carry over target shortages and excesses
to the next year's target. Stein Roe believes that this practice
reduces the conflicts of interest associated with soft dollar
transactions, since Stein Roe can meet the non-binding
expectations of broker-dealers providing soft dollar products over
flexible time periods. In the case of third party products, the
third party is paid by the broker-dealer and not by Stein Roe.
Stein Roe may enter into a contract with the third party vendor to
use the product. (For example, if the product includes software,
Stein Roe will enter into a license to use the software from the
vendor.)
In certain cases, Stein Roe uses soft dollars to obtain
products that have both research and non-research purposes.
Examples of non-research uses are administrative and marketing
functions. These are referred to as "mixed use" products. As of
the date of this SAI, Stein Roe acquires two mixed use products.
These are (i) a fixed income security data service and (ii) a
mutual fund performance ranking service. In each case, Stein Roe
makes a good faith evaluation of the research and non-research
uses of these services. These evaluations are based upon the time
spent by Firm personnel for research and non-research uses. Stein
Roe pays the provider in cash ("hard dollars") for the non-
research portion of its use of these products.
Stein Roe may use research obtained from soft dollar trades
in the management of any of its discretionary accounts. Thus,
consistent with industry practice, Stein Roe does not require that
the Client account that generates the trade receive any benefit
from the soft dollar product obtained through the trade. As noted
above, this may result in cross subsidization of soft dollar
products among Client accounts. As so noted, this practice is
explicitly sanctioned by a provision of the Securities Exchange
Act of 1934, which creates a "safe harbor" for soft dollar
transactions conducted in a specified manner.
In certain cases, Stein Roe will direct a trade to one
broker-dealer with the instruction that it execute the trade and
pay over a portion of the commission from the trade to another
broker-dealer who provides Stein Roe with a soft dollar research
product. The broker-dealer executing the trade "steps out" of a
portion of the commission in favor of the other broker-dealer
providing the soft dollar product. Stein Roe may engage in step
out transactions in order to direct soft dollar commissions to a
broker-dealer which provides research but may not be able to
provide best execution. Brokers who receive step out commissions
typically are brokers providing a third party soft dollar product
that is not available on a hard dollars basis. Stein Roe has not
engaged in step out transactions as a manner of compensating
broker-dealers that sell shares of investment companies managed by
Stein Roe.
The table below shows information on brokerage commissions
paid by the Fund:
Total amount of brokerage commissions paid during
fiscal year ended 9/30/99 $8,020
Amount of commissions paid to brokers or dealers
who supplied research services to Stein Roe 3,117
Total dollar amount involved in such transactions
(000 omitted) 372
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 qualify under Subchapter M of the
Internal Revenue Code and 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 gains 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 substantially less than 100% of its
dividends will qualify for the deduction for dividends received by
corporate shareholders.
The Fund may be subject to withholding and other taxes
imposed by foreign countries. Tax treaties between certain
countries and the United States may reduce or eliminate such
taxes. Investors may be entitled to claim U.S. foreign tax
credits with respect to such taxes, subject to certain provisions
and limitations contained in the Code. Specifically, if more than
50% of the Fund's total assets at the close of any fiscal year
consist of stock or securities of foreign corporations, the Fund
may file an election with the Internal Revenue Service pursuant to
which shareholders of the Fund will be required to (i) include in
ordinary gross income (in addition to taxable dividends actually
received) their pro rata shares of foreign income taxes paid by
the Fund even though not actually received, (ii) treat such
respective pro rata shares as foreign income taxes paid by them,
and (iii) deduct such pro rata shares in computing their taxable
incomes, or, alternatively, use them as foreign tax credits,
subject to applicable limitations, against their United States
income taxes. Shareholders who do not itemize deductions for
federal income tax purposes will not, however, be able to deduct
their pro rata portion of foreign taxes paid by the Fund, although
such shareholders will be required to include their share of such
taxes in gross income. Shareholders who claim a foreign tax
credit may be required to treat a portion of dividends received
from the Fund as separate category income for purposes of
computing the limitations on the foreign tax credit available to
such shareholders. Tax-exempt shareholders will not ordinarily
benefit from this election relating to foreign taxes. Each year,
the Fund will notify shareholders of the amount of (i) each
shareholder's pro rata share of foreign income taxes paid by the
Fund and (ii) the portion of Fund dividends which represents
income from each foreign country, if the Fund qualifies to pass
along such credit.
Passive Foreign Investment Companies. The Fund may purchase
the securities of certain foreign investment funds or trusts
called passive foreign investment companies ("PFICs"). In
addition to bearing their proportionate share of Fund expenses
(management fees and operating expenses), shareholders will also
indirectly bear similar expenses of PFICs. Capital gains on the
sale of PFIC holdings will be deemed to be ordinary income
regardless of how long it holds its investment. In addition, the
Fund may be subject to corporate income tax and an interest charge
on certain dividends and capital gains earned from PFICs,
regardless of whether such income and gains are distributed to
shareholders.
In accordance with tax regulations, the Fund intends to treat
PFICs as sold on the last day of their fiscal year and recognize
any gains for tax purposes at that time; losses will not be
recognized. Such gains will be considered ordinary income which
it will be required to distribute even though it has not sold the
security or received cash to pay such distributions.
INVESTMENT PERFORMANCE
The Fund may quote certain total return figures from time to
time. A "Total Return" on a per share basis is the amount of
dividends distributed per share plus or minus the change in the
net asset value per share for a period. A "Total Return
Percentage" may be calculated by dividing the value of a share at
the end of a period by the value of the share at the beginning of
the period and subtracting one. For a given period, an "Average
Annual Total Return" may be computed by finding the average annual
compounded rate that would equate a hypothetical initial amount
invested of $1,000 to the ending redeemable value.
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).
Total return performance as of September 30, 1999, for the
life of the Fund (from October 19, 1998) was 60.30%.
Investment performance figures assume reinvestment of all
dividends and distributions and do not take into account any
federal, state, or local income taxes which shareholders must pay
on a current basis. They are not necessarily indicative of future
results. The performance of the Fund is a result of conditions in
the securities markets, portfolio management, and operating
expenses. Although investment performance information is useful
in reviewing the Fund's performance and in providing some basis
for comparison with other investment alternatives, it should not
be used for comparison with other investments using different
reinvestment assumptions or time periods.
The Fund may 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
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 compare
its performance to the Consumer Price Index (All Urban), a widely
recognized measure of inflation. The Fund's performance may be
compared to the following indexes or averages:
Dow-Jones Industrial Average New York Stock Exchange Composite
Index
Standard & Poor's 500 Stock American Stock Exchange Composite
Index Index
Standard & Poor's 400 Nasdaq Composite
Industrials Nasdaq Industrials
Russell 2000 Index
Wilshire 5000
(These indexes are widely (These indexes generally reflect
recognized indicators of the performance of stocks traded
general U.S. stock market in the indicated markets.)
results.)
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
*Includes Morningstar Aggressive Growth, Growth,
Balanced, Equity Income, and Growth and Income Averages.
The Lipper International Fund Index reflects the net asset
value weighted return of the ten largest international funds. 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 the Fund into) a new
category, the Fund may compare its performance or ranking with
those of other funds in the newly assigned category, as published
by the service.
The Fund may also cite its rating, recognition, or other
mention by Morningstar or any other entity. Morningstar's rating
system is based on risk-adjusted total return performance and is
expressed in a star-rating format. The risk-adjusted number is
computed by subtracting 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 January 1, for any specified
period, in both a Tax-Deferred Investment and a Taxable
Investment, that both investments earn either 6%, 8% or 10%
compounded annually, and that the investor withdrew the entire
amount at the end of the period. (A tax rate of 39.6% is applied
annually to the Taxable Investment and on the withdrawal of
earnings on the Tax-Deferred Investment.)
TAX-DEFERRED INVESTMENT VS. TAXABLE INVESTMENT
Interest
Rate 3% 5% 7% 9%
- --------------------------------------------
Compound-
ing
Years Tax-Deferred Investment
- ---- ------------------------------------
30 $82,955 $108,031 $145,856 $203,239
25 65,164 80,337 101,553 131,327
20 49,273 57,781 68,829 83,204
15 35,022 39,250 44,361 50,540
10 22,184 23,874 25,779 27,925
5 10,565 10,969 11,393 11,840
1 2,036 2,060 2,085 2,109
Interest
Rate 3% 5% 7% 9%
- -------------------------------------------
Compound-
ing
Years Taxable Investment
- ---- ----------------------------------
30 $80,217 $98,343 $121,466 $151,057
25 63,678 75,318 89,528 106,909
20 48,560 55,476 63,563 73,028
15 34,739 38,377 42,455 47,025
10 22,106 23,642 25,294 27,069
5 10,557 10,943 11,342 11,754
1 2,036 2,060 2,085 2,109
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] program 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, Stein Roe believes that the quality of debt
securities 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 ("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.
_______________________
