<PAGE>
As filed with the Securities and Exchange Commission on March 2, 1998
Registration No. 33-13954
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No. ________ [ ]
Post-Effective Amendment No. 21 [X]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ ]
Amendment No. 22 [X]
(Check appropriate box or boxes)
Pacific Select Fund
(Exact Name of Registrant as Specified in Charter)
700 Newport Center Drive, P.O. Box 7500, Newport Beach, CA 92660
(Address of Principal Executive Offices ) (Zip Code)
Registrant's Telephone Number: (714) 640-3743
Diane N. Ledger
Vice President of
Pacific Life Insurance Company
700 Newport Center Drive
Post Office Box 9000
Newport Beach, CA 92660
(Name and Address of Agent for Service)
Copies to:
Jeffrey S. Puretz, Esq.
Dechert Price & Rhoads
1775 Eye Street, N.W.
Washington, D.C. 20006-2401
[X] It is proposed that this filing will become effective on May 1, 1998
pursuant to paragraph (a) of Rule 485.
The Registrant has registered an indefinite number of shares under the
Securities Act of 1933 pursuant to Rule 24f-2 under the Investment Company Act
of 1940, and will file its Rule 24f-2 Notice for the fiscal year ending December
31, 1997 within the time period required by Section 24 of the Investment Company
Act of 1940 and applicable regulations thereunder.
================================================================================
<PAGE>
CROSS-REFERENCE SHEET
REQUIRED BY RULE 495
UNDER THE SECURITIES ACT OF 1933
PART A
<TABLE>
<CAPTION>
Form N-1A
Item Number Caption in Prospectus
<S> <C>
1. Prospectus front cover
2. Prospectus Synopsis
3. Financial Highlights
4. Investment Objectives and Policies; Description of
Securities and Investment Techniques; Investment
Restrictions; Other Information
5A. N/A
5. Management of the Fund; Portfolio Transactions
6. Other Information
7. Purchase of Shares
8. Redemption of Shares
9. N/A
PART B
Form N-1A Caption in Statement
Item Number of Additional Information
10. Statement of Additional Information front cover
11. Table of Contents
12. N/A
13. Description of Securities and Investment Techniques;
Investment Restrictions
</TABLE>
<PAGE>
14. Management of the Fund
15. Control Persons and Principal Holders of Securities
16. Investment Adviser; Portfolio Management Agreements
17. Portfolio Transactions and Brokerage
18. Description of Securities and Investment Techniques
19. Purchases and Redemptions
20. Taxation
21. Distribution of Fund Shares
22. Performance Information
23. Financial Statements
PART C
Form N-1A
Item Number Caption in Part C
24. Financial Statements and Exhibits
25. Persons Controlled by or Under Common Control with
Registrant
26. Number of Holders of Securities
27. Indemnification
28. Business and Other Connections of Investment Adviser
29. Principal Underwriters
30. Location of Accounts and Records
31. Management Services
32. Undertakings
<PAGE>
PROSPECTUS
<PAGE>
[LOGO OF PACIFIC SELECT FUND]
PACIFIC SELECT FUND
700 NEWPORT CENTER
DRIVE
NEWPORT BEACH, CA 92660
Pacific Select Fund (the "Fund") is a mutual fund that currently offers
fourteen separate portfolios (each a "Portfolio"). The Portfolios serve as the
investment medium for variable life insurance policies and variable annuity
contracts (the "Variable Contracts") issued or administered by Pacific Life
Insurance Company ("Pacific Life" or the "Adviser", formerly known as Pacific
Mutual Life Insurance Company). You can instruct Pacific Life to allocate cash
value under your Variable Contract to investment options funded by an account
known as a "Separate Account," which invests in the Portfolios. Your
allocation rights are described in the accompanying Prospectus for the
Separate Account.
The fourteen Portfolios of the Fund are as follows:
The Money Market Portfolio* The Equity Income
The High Yield Bond Portfolio
Portfolio The Multi-Strategy
The Managed Bond Portfolio Portfolio
The Government Securities The Equity Portfolio
Portfolio The Bond and Income
The Growth Portfolio** Portfolio
The Aggressive Equity The Equity Index Portfolio
Portfolio The International
The Growth LT Portfolio Portfolio
The Emerging Markets
Portfolio
This Prospectus contains information about the investment objective and
policies of each Portfolio and related information. You should carefully
consider a Portfolio's investment objective and policies and potential risks
before investing.
THE FUND'S SHARES INVOLVE INVESTMENT RISK, INCLUDING LOSS OF PRINCIPAL, AND
ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK.
THE FUND'S SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY.
This Prospectus sets forth concisely the information a prospective investor
should know before investing in the Fund. A Statement of Additional
Information ("SAI"), dated May 1, 1998, containing additional and more
detailed information about the Fund has been filed with the Securities and
Exchange Commission and is hereby incorporated by reference into this
Prospectus. The SAI is available without charge and may be obtained by writing
to the Fund at the address printed above or calling the Fund at (800) 800-
7681.
- --------
* Investment in the Money Market Portfolio (or in any other Portfolio) is
neither insured nor guaranteed by the U.S. Government.
** The Growth Portfolio is not available for variable annuity contracts issued
on or after January 1, 1994 or for Pacific Corinthian variable annuity
contracts. See "How Do You Purchase Shares of the Fund?" on page 34.
----------------
THIS PROSPECTUS SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS OF
THE SEPARATE ACCOUNT, WHICH ACCOMPANIES THIS PROSPECTUS. BOTH
PROSPECTUSES SHOULD BE READ CAREFULLY AND RETAINED FOR
FUTURE REFERENCE.
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS MAY 1, 1998
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
THE FUND'S PORTFOLIOS AT A GLANCE.......................................... 1
CONDENSED FINANCIAL INFORMATION............................................ 1
THE PORTFOLIOS: INVESTMENT OBJECTIVES AND POLICIES......................... 4
General.................................................................. 4
Money Market Portfolio................................................... 5
High Yield Bond Portfolio................................................ 5
Managed Bond Portfolio................................................... 6
Government Securities Portfolio.......................................... 7
Growth Portfolio......................................................... 8
Aggressive Equity Portfolio.............................................. 9
Growth LT Portfolio...................................................... 9
Equity Income Portfolio.................................................. 10
Multi-Strategy Portfolio................................................. 11
Equity Portfolio......................................................... 12
Bond and Income Portfolio................................................ 12
Equity Index Portfolio................................................... 13
International Portfolio.................................................. 15
Emerging Markets Portfolio............................................... 16
All Portfolios: Diversification and Changes in Policies.................. 17
SECURITIES AND INVESTMENT TECHNIQUES....................................... 17
Derivatives.............................................................. 17
Mortgage-Related Securities.............................................. 18
High Yield Bonds......................................................... 19
Small Capitalization Stocks.............................................. 20
Borrowing................................................................ 21
Illiquid and Restricted Securities....................................... 21
Precious Metals-Related Securities....................................... 21
Foreign Securities....................................................... 21
Forward Foreign Currency Contracts....................................... 23
Options.................................................................. 23
Foreign Currency Options................................................. 24
Swap Agreements and Options on Swap Agreements........................... 24
Spread Transactions...................................................... 25
Futures Contracts and Futures Options.................................... 25
ORGANIZATION AND MANAGEMENT OF THE FUND.................................... 26
MORE ON THE FUND'S SHARES.................................................. 34
OTHER INFORMATION ABOUT THE FUND........................................... 36
TOTAL RETURN............................................................... 38
Prior Performance of A Comparable Fund Managed by Alliance Capital....... 39
Prior Performance of Comparable Accounts Managed by Goldman Sachs........ 40
APPENDIX................................................................... 42
Description of Bond Ratings.............................................. 42
</TABLE>
<PAGE>
THE FUND'S PORTFOLIOS AT A GLANCE
A summary of the highlights of Pacific Select Fund's Portfolios appears
below. THIS CHART IS ONLY A SUMMARY. YOU SHOULD ALSO READ THE COMPLETE
DESCRIPTIONS OF EACH PORTFOLIO'S INVESTMENT OBJECTIVES AND POLICIES, WHICH
BEGIN ON PAGE 4, AND RELATED INFORMATION. Pacific Life as investment adviser
to the Fund has retained other investment advisory firms as Portfolio Managers
for twelve of the Portfolios of the Fund.
<TABLE>
<CAPTION>
PRIMARY INVESTMENTS
PORTFOLIO OBJECTIVE (UNDER NORMAL CIRCUMSTANCES) PORTFOLIO MANAGER
<C> <C> <S> <C>
Money Market Current income consistent Highest quality money Pacific Life
with preservation of capital market instruments
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High Yield Bond High level of current income Intermediate and long- Pacific Life
term, high-yielding,
lower and medium quality
(high risk) fixed-income
securities
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Managed Bond Maximize total return Investment grade Pacific Investment
consistent with prudent marketable debt Management Company
investment management securities. Will
normally maintain an
average portfolio
duration of 3-7 years
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Government Maximize total return U.S. Government Pacific Investment
Securities consistent with prudent securities including Management Company
investment management futures and options
thereon and high-grade
corporate debt
securities. Will
normally maintain an
average portfolio
duration of 3-7 years
- ------------------------------------------------------------------------------------------------------------------
Growth Growth of capital Common stock Capital Guardian Trust Company
- ------------------------------------------------------------------------------------------------------------------
Aggressive Capital appreciation Common stock of small Alliance Capital Management L.P.
Equity emerging growth and
medium capitalization
companies
- ------------------------------------------------------------------------------------------------------------------
Growth LT Long-term growth of capital Common stock Janus Capital Corporation
consistent with the
preservation of capital
- ------------------------------------------------------------------------------------------------------------------
Equity Income Long-term growth of capital Dividend paying common J.P. Morgan Investment
and income stock Management Inc.
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Multi-Strategy High total return Equity and fixed income J.P. Morgan Investment
securities Management Inc.
- ------------------------------------------------------------------------------------------------------------------
Equity Capital appreciation Common stocks and Goldman Sachs Asset Management
securities convertible
into or exchangeable for
common stocks
- ------------------------------------------------------------------------------------------------------------------
Bond and Provide total return and income Investment grade debt Goldman Sachs Asset Management
Income consistent with prudent securities. Will
investment management normally maintain an
average portfolio
duration within one-half
year of a long-term bond
index
- ------------------------------------------------------------------------------------------------------------------
Equity Index Provide investment results that Stocks included in the Bankers Trust Company
correspond to the total return S&P 500
performance of common stocks
publicly traded in the U.S.
- ------------------------------------------------------------------------------------------------------------------
International Long-term capital Equity securities of Morgan Stanley Asset
appreciation corporations domiciled Management Inc.
outside the United
States
- ------------------------------------------------------------------------------------------------------------------
Emerging Markets Long-term growth of capital Common stocks of Blairlogie Capital Management
companies domiciled in
emerging market
countries
</TABLE>
CONDENSED FINANCIAL INFORMATION
The following tables present condensed financial information about each
Portfolio of the Fund. The tables present historical information based upon a
single share outstanding through each fiscal year. The information in the
tables for the years 1993 through 1997 is included and can be read in
conjunction with the Fund's financial statements, which are in the Fund's
Annual Report dated as of December 31, 1997. These financial statements have
been audited by Deloitte & Touche LLP, independent auditors, except for
information with respect to the Equity Portfolio and Bond and Income Portfolio
for years prior to 1994, which was audited by other independent auditors. The
Annual Report, which is available without charge, contains more information
about the Fund's performance.
1
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
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INVESTMENT ACTIVITIES DISTRIBUTIONS RATIOS/SUPPLEMENTAL DATA
---------------------------- -------------------------- -------------------------------------------------------------
RATIO
OF NET AVER-
NET INVEST- AGE
NET REALIZED DIVIDENDS MENT COM-
ASSET AND (FROM NET NET RATIO OF INCOME PORT- MIS-
VALUE, NET UNREALIZED TOTAL NET ASSET ASSETS, EXPENSES TO FOLIO SIONS
YEAR BEGIN- INVEST- GAIN FROM INVEST- FROM TOTAL VALUE, END OF TO AVERAGE AVERAGE TURN- PAID
ENDED NING OF MENT (LOSS) ON INVESTMENT MENT CAPITAL DISTRI- END OF TOTAL PERIOD (IN NET NET OVER PER
12/31 PERIOD INCOME SECURITIES OPERATIONS INCOME) GAINS BUTION PERIOD RETURN(8) THOUSANDS) ASSETS ASSETS RATE SHARE
- ------------------------------------------------------------------------------------------------------------------------------------
MONEY MARKET PORTFOLIO
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1997 $10.04 $0.51 $0.01 $0.52 $0.50 $0.00 $0.50 $10.06 5.28% $451,505 0.44% 5.17% N/A N/A
1996 10.02 0.47 0.02 0.49 0.47 0.00 0.47 10.04 5.07% 322,193 0.50% 4.93% N/A N/A
1995 10.03 0.54 0.00 0.54 0.55 0.00 0.55 10.02 5.54% 95,949 0.53% 5.41% N/A N/A
1994 9.99 0.33 0.04 0.37 0.33 0.00 0.33 10.03 3.76% 94,150 0.64% 3.94% N/A N/A
1993 9.96 0.23 0.03 0.26 0.23 0.00 0.23 9.99 2.58% 33,910 0.65% 2.56% N/A N/A
1992 9.94 0.29 0.02 0.31 0.29 0.00 0.29 9.96 3.22% 23,905 0.65% 3.13% N/A N/A
1991 9.94 0.56 0.00 0.56 0.56 0.00 0.56 9.94 5.74% 14,502 0.65% 5.53% N/A N/A
1990 9.82 0.79 (0.03) 0.76 0.64 0.00 0.64 9.94 7.92% 15,401 0.65% 7.57% N/A N/A
1989 9.81 0.82 0.01 0.83 0.82 0.00 0.82 9.82 8.73% 4,252 1.00% 8.38% N/A N/A
1988(1) 10.00 0.58 (0.01) 0.57 0.76 0.00 0.76 9.81 5.85% 3,913 1.65%* 6.04%* N/A N/A
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HIGH YIELD BOND PORTFOLIO
1997 $9.94 $0.78 $0.12 $0.90 $0.77 $0.09 $0.86 $9.98 9.44% $311,125 0.65% 7.89% 103.19% N/A
1996 9.79 0.79 0.25 1.04 0.79 0.10 0.89 9.94 11.31% 184,744 0.71% 8.28% 120.06% N/A
1995 8.91 0.76 0.88 1.64 0.76 0.00 0.76 9.79 18.87% 84,425 0.77% 8.51% 127.31% N/A
1994 9.67 0.73 (0.70) 0.03 0.73 0.06 0.79 8.91 0.42% 25,338 0.88% 8.13% 141.86% N/A
1993 9.24 0.86 0.77 1.63 0.86 0.34 1.20 9.67 18.01% 16,017 0.75% 8.37% 185.83% N/A
1992 8.54 0.87 0.69 1.56 0.86 0.00 0.86 9.24 18.72% 14,152 0.75% 9.46% 186.23% N/A
1991 7.84 0.91 0.95 1.86 0.91 0.25 1.16 8.54 24.58% 10,356 0.75% 10.77% 149.20% N/A
1990 8.90 1.04 (1.01) 0.03 1.04 0.05 1.09 7.84 0.38% 8,288 0.75% 12.02% 69.59% N/A
1989 9.72 1.20 (0.79) 0.41 1.23 0.00 1.23 8.90 4.16% 8,208 0.95% 12.48% 121.76% N/A
1988(1) 10.00 1.07 (0.26) 0.81 0.99 0.10 1.09 9.72 8.30% 7,871 1.65%* 10.63%* 69.14% N/A
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MANAGED BOND PORTFOLIO
1997 $10.75 $0.59 $0.44 $ 1.03 $0.60 $0.04 $0.64 $11.14 9.92% $468,575 0.66% 5.72% 230.87% N/A
1996 11.10 0.59 (0.15) 0.44 0.57 0.22 0.79 10.75 4.25% 260,270 0.71% 5.71% 386.16% N/A
1995 9.90 0.65 1.19 1.84 0.64 0.00 0.64 11.10 19.04% 126,992 0.76% 6.04% 191.39% N/A
1994 10.89 0.50 (0.98) (0.48) 0.50 0.01 0.51 9.90 (4.36)% 53,219 0.84% 5.04% 127.95% N/A
1993 10.62 0.52 0.70 1.22 0.52 0.43 0.95 10.89 11.63% 43,116 0.75% 4.74% 163.11% N/A
1992 10.79 0.68 0.23 0.91 0.67 0.41 1.08 10.62 8.68% 26,406 0.75% 6.39% 89.55% N/A
1991 10.35 0.82 0.88 1.70 0.82 0.44 1.26 10.79 17.03% 16,645 0.75% 7.74% 80.96% N/A
1990 10.43 0.85 (0.01) 0.84 0.85 0.07 0.92 10.35 8.52% 12,412 0.75% 8.32% 68.79% N/A
1989 9.99 0.86 0.56 1.42 0.86 0.12 0.98 10.43 14.74% 11,371 0.91% 8.36% 115.89% N/A
1988(1) 10.00 0.68 0.03 0.71 0.62 0.10 0.72 9.99 7.11% 9,031 1.69%* 6.76%* 209.49% N/A
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GOVERNMENT SECURITIES PORTFOLIO
1997 $10.38 $0.53 $0.42 $0.95 $0.55 $0.00 $0.55 $10.78 9.48% $129,900 0.66% 5.39% 203.01% N/A
1996 10.84 0.56 (0.27) 0.29 0.53 0.22 0.75 10.38 2.94% 97,542 0.72% 5.33% 307.13% N/A
1995 9.64 0.58 1.19 1.77 0.57 0.00 0.57 10.84 18.81% 59,767 0.82% 5.58% 298.81% N/A
1994 10.64 0.44 (0.99) (0.55) 0.44 0.01 0.45 9.64 (5.10)% 21,489 0.88% 4.29% 232.99% N/A
1993 10.48 0.34 0.78 1.12 0.34 0.62 0.96 10.64 10.79% 23,584 0.75% 3.15% 402.37% N/A
1992 10.55 0.51 0.27 0.78 0.51 0.34 0.85 10.48 7.52% 17,701 0.75% 4.95% 212.31% N/A
1991 10.07 0.69 0.93 1.62 0.71 0.43 1.14 10.55 16.67% 10,841 0.75% 6.90% 110.74% N/A
1990 10.22 0.79 (0.02) 0.77 0.78 0.14 0.92 10.07 8.01% 7,469 0.75% 7.87% 45.99% N/A
1989 9.82 0.84 0.56 1.40 0.84 0.16 1.00 10.22 14.61% 6,428 0.98% 8.22% 151.10% N/A
1988(1) 10.00 0.65 0.01 0.66 0.65 0.19 0.84 9.82 6.65% 5,523 1.77%* 6.42%* 284.30% N/A
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GROWTH PORTFOLIO(3)
1997 $21.45 $0.05 $5.65 $5.70 $0.05 $2.49 $2.54 $24.61 30.27% $246,555 0.70% 0.22% 52.20% $0.044
1996 18.57 0.08 4.11 4.19 0.09 1.22 1.31 21.45 23.62% 167,335 0.76% 0.44% 70.22% 0.047
1995 14.90 0.15 3.67 3.82 0.15 0.00 0.15 18.57 25.75% 129,741 0.79% 0.88% 46.76% 0.052
1994 18.20 0.10 (2.01) (1.91) 0.10 1.29 1.39 14.90 (10.49)% 81,451 0.86% 0.58% 40.42% N/A
1993 15.76 0.08 3.37 3.45 0.08 0.93 1.01 18.20 21.89% 77,405 0.71% 0.51% 35.08% N/A
1992 13.70 0.11 2.69 2.80 0.11 0.63 0.74 15.76 20.53% 34,747 0.75% 0.81% 39.97% N/A
1991 10.09 0.15 3.78 3.93 0.15 0.17 0.32 13.70 39.15% 13,482 0.75% 1.31% 31.48% N/A
1990 13.67 0.20 (2.39) (2.19) 0.19 1.20 1.39 10.09 (17.30)% 6,351 0.75% 1.75% 41.18% N/A
1989 11.15 0.18 3.70 3.88 0.17 1.19 1.36 13.67 34.96% 5,896 0.97% 1.42% 65.35% N/A
1988 10.00 0.00 1.53 1.53 0.02 0.36 0.38 11.15 15.31% 3,335 2.46%* 0.01%* 33.61% N/A
(1)(2)
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AGGRESSIVE EQUITY PORTFOLIO(12)
1997 $10.78 $(0.01) $0.41 $0.40 $0.00 $0.00 $0.00 $11.18 3.78% $122,752 0.86% (0.13)% 189.21% $0.054
1996(9) 10.00 0.01 0.78 0.79 0.01 0.00 0.01 10.78 7.86% 49,849 1.02%* (0.11)%* 79.86% 0.051
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GROWTH LT PORTFOLIO
1997 $16,50 $0.16 $1.51 $1.67 $0.09 $0.77 $0.86 $17.31 10.96% $677,147 0.82% 0.52% 145.17% $0.046
1996 14.12 0.14 2.37 2.51 0.13 0.00 0.13 16.50 17.87% 438,154 0.87% 0.74% 147.02% 0.045
1995 11.11 0.10 3.96 4.06 0.10 0.95 1.05 14.12 36.75% 200,785 0.94% 0.90% 165.83% 0.052
1994(4) 10.00 0.10 1.21 1.31 0.12 0.08 0.20 11.11 13.25% 49,374 1.08%* 1.32%* 257.20% N/A
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</TABLE>
(continued on next page)
[LOGO]
2
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
INVESTMENT ACTIVITIES DISTRIBUTIONS
------------------------------------- ------------------------------------------------
NET
NET REALIZED AND TOTAL DIVIDENDS
ASSET VALUE, NET UNREALIZED FROM (FROM NET FROM RETURN
YEAR ENDED BEGINNING OF INVESTMENT GAIN (LOSS) INVESTMENT INVESTMENT CAPITAL OF TOTAL
12/31 PERIOD INCOME ON SECURITIES OPERATIONS INCOME) GAINS CAPITAL DISTRIBUTION
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
EQUITY INCOME PORTFOLIO(3)(6)
1997 $20.45 $0.20 $5.35 $5.55 $0.20 $1.33 $0.00 $1.53
1996 18.21 0.24 3.15 3.39 0.24 0.91 0.00 1.15
1995 14.05 0.26 4.16 4.42 0.26 0.00 0.00 0.26
1994 15.52 0.20 (0.25) (0.05) 0.20 1.22 0.00 1.42
1993 15.11 0.26 0.98 1.24 0.26 0.57 0.00 0.83
1992 14.74 0.19 0.59 0.78 0.19 0.22 0.00 0.41
1991 11.64 0.32 3.28 3.60 0.32 0.18 0.00 0.50
1990 13.11 0.32 (1.30) (0.98) 0.32 0.17 0.00 0.49
1989 10.68 0.17 2.94 3.11 0.30 0.38 0.00 0.68
1988(1) 10.00 0.12 0.70 0.82 0.12 0.02 0.00 0.14
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<CAPTION>
RATIOS/SUPPLEMENTAL DATA
-----------------------------------------------------------------------------------------------------------
RATIO OF
NET
NET ASSETS, RATIO OF INVESTMENT AVERAGE
NET ASSET END OF PERIOD EXPENSES TO INCOME TO PORTFOLIO COMMISSIONS
YEAR ENDED VALUE, END TOTAL (IN AVERAGE AVERAGE TURNOVER PAID
12/31 OF PERIOD RETURN(8) THOUSANDS) NET ASSETS NET ASSETS RATE PER SHARE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
EQUITY INCOME PORTFOLIO(3)(6)
1997 $24.47 28.60% $806,112 0.70% 0.91% 105.93% $0.045
1996 20.45 19.43% 429,262 0.75% 1.31% 94.95% 0.048
1995 18.21 31.66% 206,653 0.83% 1.59% 86.47% 0.048
1994 14.05 (0.28)% 75,083 0.94% 1.39% 134.57% N/A
1993 15.52 8.29% 33,356 0.75% 1.74% 27.67% N/A
1992 15.11 5.36% 22,021 0.75% 1.39% 18.52% N/A
1991 14.74 31.42% 12,117 0.76% 2.49% 17.43% N/A
1990 11.64 (7.54)% 5,974 0.75% 2.67% 17.63% N/A
1989 13.11 29.22% 5,449 1.02% 2.52% 24.89% N/A
1988(1) 10.68 8.25% 3,292 2.45%* 1.21%* 8.15% N/A
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<CAPTION>
INVESTMENT ACTIVITIES DISTRIBUTIONS
------------------------------------- ------------------------------------------------
NET
NET REALIZED AND TOTAL DIVIDENDS
ASSET VALUE, NET UNREALIZED FROM (FROM NET FROM RETURN
YEAR ENDED BEGINNING OF INVESTMENT GAIN (LOSS) INVESTMENT INVESTMENT CAPITAL OF TOTAL
12/31 PERIOD INCOME ON SECURITIES OPERATIONS INCOME) GAINS CAPITAL DISTRIBUTION
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
MULTI-STRATEGY PORTFOLIO(3)(6)
1997 $14.75 $0.50 $2.23 $2.73 $0.50 $0.80 $0.00 $1.30
1996 14.20 0.48 1.20 1.68 0.48 0.65 0.00 1.13
1995 11.73 0.45 2.47 2.92 0.45 0.00 0.00 0.45
1994 12.66 0.32 (0.51) (0.19) 0.32 0.42 0.00 0.74
1993 12.18 0.35 0.77 1.12 0.35 0.29 0.00 0.64
1992 11.99 0.37 0.27 0.64 0.37 0.08 0.00 0.45
1991 10.14 0.46 1.93 2.39 0.45 0.09 0.00 0.54
1990 10.84 0.51 (0.66) (0.15) 0.48 0.07 0.00 0.55
1989 10.35 0.57 1.82 2.39 0.59 1.31 0.00 1.90
1988(1) 10.00 0.34 0.34 0.68 0.32 0.01 0.00 0.33
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<CAPTION>
RATIOS/SUPPLEMENTAL DATA
-----------------------------------------------------------------------------------------------------------
RATIO OF
NET
NET ASSETS, RATIO OF INVESTMENT AVERAGE
NET ASSET END OF PERIOD EXPENSES TO INCOME TO PORTFOLIO COMMISSIONS
YEAR ENDED VALUE, END TOTAL (IN AVERAGE AVERAGE TURNOVER PAID
12/31 OF PERIOD RETURN(8) THOUSANDS) NET ASSETS NET ASSETS RATE PER SHARE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
MULTI-STRATEGY PORTFOLIO(3)(6)
1997 $16.18 19.62% $367,128 0.71% 3.25% 71.89% $0.045
1996 14.75 12.56% 225,619 0.78% 3.37% 132.94% 0.048
1995 14.20 25.25% 134,501 0.84% 3.49% 176.45% 0.048
1994 11.73 (1.50)% 79,147 0.94% 2.78% 187.40% N/A
1993 12.66 9.25% 41,448 0.75% 3.01% 27.87% N/A
1992 12.18 5.57% 19,931 0.75% 3.36% 16.52% N/A
1991 11.99 24.03% 10,454 0.75% 4.30% 11.24% N/A
1990 10.14 (1.47)% 4,559 0.75% 4.77% 26.04% N/A
1989 10.84 23.42% 3,120 1.10% 4.38% 19.67% N/A
1988(1) 10.35 6.85% 4,111 2.20%* 3.33%* 22.30% N/A
--------------------------------------------------------------------------------------------------------------------------
<CAPTION>
INVESTMENT ACTIVITIES DISTRIBUTIONS
------------------------------------- ------------------------------------------------
NET
NET REALIZED AND TOTAL DIVIDENDS
ASSET VALUE, NET UNREALIZED FROM (FROM NET FROM RETURN
YEAR ENDED BEGINNING OF INVESTMENT GAIN (LOSS) INVESTMENT INVESTMENT CAPITAL OF TOTAL
12/31 PERIOD INCOME ON SECURITIES OPERATIONS INCOME) GAINS CAPITAL DISTRIBUTION
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
EQUITY PORTFOLIO (FORMERLY A SERIES OF PACIFIC CORINTHIAN VARIABLE FUND)(13)
1997 $21.07 $0.14 $3.58 $3.72 $0.13 $0.77 $0.00 $0.90
1996 17.52 0.02 4.71 4.73 0.02 1.16 0.00 1.18
1995 14.20 0.05 3.33 3.38 0.06 0.00 0.00 0.06
1994 14.94 0.32 (0.74) (0.42) 0.32 0.00 0.00 0.32
1993 14.39 0.22 1.90 2.12 0.22 0.81 0.54 1.57
1992 14.83 0.19 0.49 0.68 0.19 0.93 0.00 1.12
1991 11.71 0.33 3.12 3.45 0.33 0.00 0.00 0.33
1990 12.59 0.56 (0.88) (0.32) 0.56 0.00 0.00 0.56
1989 10.37 0.82 2.23 3.05 0.83 0.00 0.00 0.83
1988 10.23 0.56 0.14 0.70 0.56 0.00 0.00 0.56
---------------------------------------------------------------------------------------------------------------------------
<CAPTION>
RATIOS/SUPPLEMENTAL DATA
-----------------------------------------------------------------------------------------------------------
RATIO OF
NET
NET ASSETS, RATIO OF INVESTMENT AVERAGE
NET ASSET END OF PERIOD EXPENSES TO INCOME TO PORTFOLIO COMMISSIONS
YEAR ENDED VALUE, END TOTAL (IN AVERAGE AVERAGE TURNOVER PAID
12/31 OF PERIOD RETURN(8) THOUSANDS) NET ASSETS NET ASSETS RATE PER SHARE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
EQUITY PORTFOLIO (FORMERLY A SERIES OF PACIFIC CORINTHIAN VARIABLE FUND)(13)
1997 $23.89 18.18% $318,143 0.70% 0.59% 159.88% $0.060
1996 21.07 28.03% 207,897 0.74% 0.05% 90.98% 0.060
1995 17.52 23.80% 108,136 0.80% 0.27% 226.45% 0.060
1994 14.20 (2.87)% 73,125 0.96% 2.19% 178.63% N/A
1993 14.94 16.06% 84,791 0.93% 1.52% 229.77% N/A
1992 14.39 6.30% 81,902 0.93% 1.30% 242.37% N/A
1991 14.83 29.77% 107,366 0.91% 2.52% 449.75% N/A
1990 11.71 (2.55)% 178,191 0.86% 4.63% 541.61% N/A
1989 12.59 30.12% 239,478 0.74% 7.01% 621.45% N/A
1988 10.37 7.19% 233,020 0.69% 5.41% 402.26% N/A
---------------------------------------------------------------------------------------------------------------------------
<CAPTION>
INVESTMENT ACTIVITIES DISTRIBUTIONS
------------------------------------- ------------------------------------------------
NET
NET REALIZED AND TOTAL DIVIDENDS
ASSET VALUE, NET UNREALIZED FROM (FROM NET FROM RETURN
YEAR ENDED BEGINNING OF INVESTMENT GAIN (LOSS) INVESTMENT INVESTMENT CAPITAL OF TOTAL
12/31 PERIOD INCOME ON SECURITIES OPERATIONS INCOME) GAINS CAPITAL DISTRIBUTION
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BOND AND INCOME PORTFOLIO (FORMERLY A SERIES OF PACIFIC CORINTHIAN VARIABLE FUND)(13)
1997 $12.05 $0.80 $1.05 $1.85 $0.76 $0.17 $0.00 $0.93
1996 13.02 0.79 (0.94) (0.15) 0.79 0.03 0.00 0.82
1995 10.42 0.82 2.59 3.41 0.81 0.00 0.00 0.81
1994 13.05 0.83 (1.87) (1.04) 0.83 0.53 0.23 1.59
1993 11.70 0.87 1.35 2.22 0.87(10) 0.00 0.00 0.87
1992 11.69 0.89 0.01 0.90 0.89 0.00 0.00 0.89
1991 10.27 0.93 1.42 2.35 0.93 0.00 0.00 0.93
1990 10.93 0.97 (0.66) 0.31 0.97 0.00 0.00 0.97
1989 10.40 1.00 0.69 1.69 1.00 0.16 0.00 1.16
1988 10.75 1.01 (0.35) 0.66 1.01 0.00 0.00 1.01
---------------------------------------------------------------------------------------------------------------------------
<CAPTION>
RATIOS/SUPPLEMENTAL DATA
-----------------------------------------------------------------------------------------------------------
RATIO OF
NET
NET ASSETS, RATIO OF INVESTMENT AVERAGE
NET ASSET END OF PERIOD EXPENSES TO INCOME TO PORTFOLIO COMMISSIONS
YEAR ENDED VALUE, END TOTAL (IN AVERAGE AVERAGE TURNOVER PAID
12/31 OF PERIOD RETURN(8) THOUSANDS) NET ASSETS NET ASSETS RATE PER SHARE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BOND AND INCOME PORTFOLIO (FORMERLY A SERIES OF PACIFIC CORINTHIAN VARIABLE FUND)(13)
1997 $12.97 16.32% $112,507 0.66% 6.62% 15.32% N/A
1996 12.05 (0.80)% 81,810 0.71% 6.74% 26.50% N/A
1995 13.02 33.71% 56,853 0.80% 6.93% 51.84% N/A
1994 10.42 (8.36)% 34,078 0.93% 7.25% 31.97% N/A
1993 13.05 19.39% 43,223 0.84% 6.86% 41.92% N/A
1992 11.70 8.09% 42,731 0.85% 7.67% 21.99% N/A
1991 11.69 24.32% 59,323 0.78% 8.70% 131.40% N/A
1990 10.27 3.27% 107,921 0.73% 9.35% 43.52% N/A
1989 10.93 17.04% 146,310 0.61% 9.30% 108.64% N/A
1988 10.40 6.37% 161,208 0.61% 10.05% 50.49% N/A
- --------------------------------------------------------------------------------------------------------------------------
<CAPTION>
INVESTMENT ACTIVITIES DISTRIBUTIONS
------------------------------------- ------------------------------------------------
NET
NET REALIZED AND TOTAL DIVIDENDS
ASSET VALUE, NET UNREALIZED FROM (FROM NET FROM RETURN
YEAR ENDED BEGINNING OF INVESTMENT GAIN (LOSS) INVESTMENT INVESTMENT CAPITAL OF TOTAL
12/31 PERIOD INCOME ON SECURITIES OPERATIONS INCOME) GAINS CAPITAL DISTRIBUTION
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
EQUITY INDEX PORTFOLIO(3)
1997 $20.42 $0.37 $6.13 $6.50 $0.37 $0.84 $0.00 $1.21
1996 17.45 0.37 3.42 3.79 0.37 0.45 0.00 0.82
1995 13.02 0.34 4.43 4.77 0.34 0.00 0.00 0.34
1994 13.24 0.30 (0.18) 0.12 0.30 0.04 0.00 0.34
1993 12.43 0.29 0.86 1.15 0.29 0.05 0.00 0.34
1992 11.98 0.29 0.53 0.82 0.29 0.08 0.00 0.37
1991(5) 10.00 0.30 2.16 2.46 0.30 0.18 0.00 0.48
- --------------------------------------------------------------------------------------------------------------------------
<CAPTION>
RATIOS/SUPPLEMENTAL DATA
-----------------------------------------------------------------------------------------------------------
RATIO OF
NET
NET ASSETS, RATIO OF INVESTMENT AVERAGE
NET ASSET END OF PERIOD EXPENSES TO INCOME TO PORTFOLIO COMMISSIONS
YEAR ENDED VALUE, END TOTAL (IN AVERAGE AVERAGE TURNOVER PAID
12/31 OF PERIOD RETURN(8) THOUSANDS) NET ASSETS NET ASSETS RATE PER SHARE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
EQUITY INDEX PORTFOLIO(3)
1997 $25.71 32.96% $874,136 0.23% 1.61% 2.58% $0.022
1996 20.42 22.36% 393,412 0.31% 2.05% 20.28% 0.024
1995 17.45 36.92% 137,519 0.42% 2.26% 7.52% 0.036
1994 13.02 1.05% 40,612 0.51% 2.37% 2.02% N/A
1993 13.24 9.38% 33,836 0.50% 2.34% 1.15% N/A
1992 12.43 6.95% 23,030 0.50% 2.53% 3.52% N/A
1991(5) 11.98 24.88% 15,205 0.50%* 3.03%* 4.26% N/A
- --------------------------------------------------------------------------------------------------------------------------
<CAPTION>
INVESTMENT ACTIVITIES DISTRIBUTIONS
------------------------------------- ------------------------------------------------
NET
NET REALIZED AND TOTAL DIVIDENDS
ASSET VALUE, NET UNREALIZED FROM (FROM NET FROM RETURN
YEAR ENDED BEGINNING OF INVESTMENT GAIN (LOSS) INVESTMENT INVESTMENT CAPITAL OF TOTAL
12/31 PERIOD INCOME ON SECURITIES OPERATIONS INCOME) GAINS CAPITAL DISTRIBUTION
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INTERNATIONAL PORTFOLIO(3)(7)
1997 $15.40 $0.41 $1.00 $1.41 $0.29 $0.31 $0.00 $0.60
1996 12.93 0.28 2.54 2.82 0.23 0.12 0.00 0.35
1995 11.94 0.33 0.91 1.24 0.25 0.00 0.00 0.25
1994 12.09 0.07 0.30 0.37 0.07 0.45 0.00 0.52
1993 9.38 0.09 2.73 2.82 0.11(11) 0.00 0.00 0.11
1992 10.59 0.15 (1.19) (1.04) 0.17 0.00 0.00 0.17
1991 9.72 0.13 0.94 1.07 0.17 0.03 0.00 0.20
1990 12.44 0.16 (1.84) (1.68) 0.16 0.88 0.00 1.04
1989 11.29 0.02 2.30 2.32 0.06 1.11 0.00 1.17
1988(1) 10.00 0.09 1.66 1.75 0.06 0.40 0.00 0.46
--------------------------------------------------------------------------------------------------------------------------
<CAPTION>
RATIOS/SUPPLEMENTAL DATA
-----------------------------------------------------------------------------------------------------------
RATIO OF
NET
NET ASSETS, RATIO OF INVESTMENT AVERAGE
NET ASSET END OF PERIOD EXPENSES TO INCOME TO PORTFOLIO COMMISSIONS
YEAR ENDED VALUE, END TOTAL (IN AVERAGE AVERAGE TURNOVER PAID
12/31 OF PERIOD RETURN(8) THOUSANDS) NET ASSETS NET ASSETS RATE PER SHARE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
INTERNATIONAL PORTFOLIO(3)(7)
1997 $16.21 9.28% $764,036 1.02% 1.81% 84.34% $0.004
1996 15.40 21.89% 454,019 1.07% 2.28% 20.87% 0.011
1995 12.93 10.56% 182,199 1.12% 1.87% 16.07% 0.018
1994 11.94 3.01% 75,971 1.22% 1.28% 52.22% N/A
1993 12.09 30.02% 30,574 1.04% 0.92% 46.48% N/A
1992 9.38 (9.78)% 19,402 1.05% 1.43% 38.99% N/A
1991 10.59 10.92% 18,239 1.04% 1.19% 69.71% N/A
1990 9.72 (13.48)% 14,266 1.05% 1.48% 69.24% N/A
1989 12.44 20.51% 15,735 1.20% 0.14% 94.35% N/A
1988(1) 11.29 17.69% 13,980 1.69%* 0.84%* 62.48% N/A
--------------------------------------------------------------------------------------------------------------------------
<CAPTION>
INVESTMENT ACTIVITIES DISTRIBUTIONS
------------------------------------- ------------------------------------------------
NET
NET REALIZED AND TOTAL DIVIDENDS
ASSET VALUE, NET UNREALIZED FROM (FROM NET FROM RETURN
YEAR ENDED BEGINNING OF INVESTMENT GAIN (LOSS) INVESTMENT INVESTMENT CAPITAL OF TOTAL
12/31 PERIOD INCOME ON SECURITIES OPERATIONS INCOME) GAINS CAPITAL DISTRIBUTION
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
EMERGING MARKETS PORTFOLIO
1997 $ 9.68 $ 0.06 $(0.22) $(0.16) $0.05 $0.00 $0.00 $0.05
1996(9) 10.00 (0.02) (0.30) (0.32) 0.00 0.00 0.00 0.00
--------------------------------------------------------------------------------------------------------------------------
<CAPTION>
RATIOS/SUPPLEMENTAL DATA
-----------------------------------------------------------------------------------------------------------
RATIO OF
NET
NET ASSETS, RATIO OF INVESTMENT AVERAGE
NET ASSET END OF PERIOD EXPENSES TO INCOME TO PORTFOLIO COMMISSIONS
YEAR ENDED VALUE, END TOTAL (IN AVERAGE AVERAGE TURNOVER PAID
12/31 OF PERIOD RETURN(8) THOUSANDS) NET ASSETS NET ASSETS RATE PER SHARE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
EMERGING MARKETS PORTFOLIO
1997 $9.47 (1.69)% $99,425 1.46% 0.80% 69.60% $0.002
1996(9) 9.68 (3.23)% 44,083 2.18%* (0.11)%* 47.63% 0.001
</TABLE>
(continued on next page)
[LOGO]
3
<PAGE>
- --------
(1) Information is for the period from January 4, 1988 (commencement of
operations) to December 31, 1988.
(2) The net investment income per share for the Growth Portfolio for the
period from January 4, 1988 (commencement of operations) to December 31,
1988, has been calculated by dividing the Portfolio's net investment
income by the average shares of beneficial interest outstanding during
the period. Due to fluctuations in shares outstanding and in investment
income during the period, this acceptable method derives a more accurate
per share amount than the prescribed method.
(3) The ratios of expenses to average net assets for the years prior to 1994
have been restated for comparative purposes to reflect expenses exclusive
of foreign taxes on dividends which are reflected as a component of
dividend income.
(4) Information is for the period from January 4, 1994 (commencement of
operations) to December 31, 1994.
(5) Information is for the period from January 30, 1991 (commencement of
operations) to December 31, 1991.
(6) J.P. Morgan Investment began serving as Portfolio Manager to the Equity
Income and Multi-Strategy Portfolios on January 1, 1994. Prior to January
1, 1994, a different firm served as Portfolio Manager.
(7) Morgan Stanley began serving as Portfolio Manager to the International
Portfolio on June 1, 1997. Prior to June 1, 1997, different firms served
as Portfolio Manager.
(8) Total return includes reinvestment of dividends and distributions. Total
return does not include deductions at the separate account or contract
level for fees and charges that may be incurred under a variable
contract.
(9) Information is for the period from April 1, 1996 (commencement of
operations) to December 31, 1996.
(10) Including dividend in excess of $0.01 of net investment income.
(11) Including dividend in excess of $0.02 of net investment income.
(12) Alliance Capital Management L.P. began serving as Portfolio Manager to
the Aggressive Equity Portfolio on May 1, 1998. Prior to May 1, 1998, a
different firm served as Portfolio Manager.
(13) Goldman Sachs Asset Management began serving as Portfolio Manager to the
Equity and Bond and Income Portfolios on May 1, 1998. Prior to May 1,
1998, a different firm served as Portfolio Manager.
* Ratios are annualized.
THE PORTFOLIOS: INVESTMENT OBJECTIVES AND POLICIES
GENERAL
Each Portfolio of the Fund has its own investment objective and investment
policies which are described below. There can be no assurance that any
Portfolio will achieve its investment objective. YOU SHOULD CAREFULLY CONSIDER
THE INVESTMENT OBJECTIVE, INVESTMENT POLICIES, AND POTENTIAL RISKS OF ANY
PORTFOLIO BEFORE INVESTING. YOU SHOULD ALSO CAREFULLY CONSIDER AND CONSULT
YOUR INVESTMENT PROFESSIONAL ON THE ALLOCATION OF YOUR INVESTMENT TO A
PORTFOLIO OR PORTFOLIOS IN SEEKING YOUR FINANCIAL GOALS, AND CONSIDER THE
APPROPRIATENESS OF ANY PORTFOLIO OR PORTFOLIOS AS A COMPLETE INVESTMENT
PROGRAM. As with any security, a risk of loss is inherent in investment in the
Fund's shares. Each Portfolio is subject to varying degrees of financial,
market, and credit risks. Each Portfolio is subject to the risk of changing
economic conditions.
The different types of securities and investment techniques used by the
individual Portfolios all have attendant risks of varying degrees. For
example, for equity securities, there can be no assurance of capital
appreciation and there is a substantial risk of market decline. For debt
securities, there is a risk of market decline and there is the risk that the
issuer of a security may not be able to meet its obligations on interest or
principal payments at the time called for by an instrument. In addition,
because the value of debt instruments generally rises and falls inversely with
interest rates, the longer the maturity of a debt security and the average
portfolio duration of a Portfolio, the more volatile it can be in terms of
changes in value. Both equity and debt securities can also be subject to
general economic conditions, company and industry earnings prospects and
investor psychology.
Certain types of investments and investment techniques common to one or more
Portfolios are described in greater detail, including the risks of each, in
this Prospectus under "Securities and Investment Techniques" and in the SAI.
4
<PAGE>
MONEY MARKET PORTFOLIO
INVESTMENT OBJECTIVE. Current income consistent with preservation of
capital.
INVESTMENT POLICIES. The Portfolio invests at least 95% of its total assets,
measured at the time of investment, in a diversified portfolio of money market
securities that are in the highest rating category for short term instruments,
or, if not rated, are of equivalent quality. The Portfolio may also invest up
to 5% of its total assets, measured at the time of investment, in money market
securities that are in the second-highest rating category for short-term debt
obligations, or, if not rated, are of equivalent quality. Money market
securities in which the Portfolio may invest may include: U.S. Government
obligations; bank obligations; commercial paper; short-term corporate debt
securities; savings and loan obligations; repurchase agreements involving
these securities; and foreign securities--U.S. dollar denominated money market
securities issued by foreign issuers and foreign branches of U.S. banks. The
Portfolio may also lend its securities to brokers, dealers and other financial
institutions to earn income.
ELIGIBLE SECURITIES. The Portfolio may invest only in U.S. dollar
denominated money market instruments that present minimal credit risk. The
Adviser shall determine whether a security presents minimal credit risk under
procedures adopted by the Fund's Board of Trustees that conform to Securities
and Exchange Commission ("SEC") rules for money market funds.
The Money Market Portfolio's investments are limited to securities that
mature in 13 months or less from the date of purchase (except that securities
held subject to repurchase agreements having terms of 13 months or less from
the date of delivery may mature in excess of 13 months from such date). It is
anticipated that the dollar-weighted average portfolio maturity of the
Portfolio will not exceed 90 days. The Portfolio is subject to diversification
standards applicable to money market funds under SEC rules.
Unlike many money market funds that are offered to the public, the Fund's
Money Market Portfolio does not attempt to maintain a stable net asset value
of $1.00 per share.
HIGH YIELD BOND PORTFOLIO
INVESTMENT OBJECTIVE. High level of current income.
INVESTMENT POLICIES. The Portfolio invests primarily in a diversified
portfolio of intermediate and long-term, high-yielding, lower and medium
quality ("high risk") fixed-income securities, including corporate bonds and
notes, convertible securities and preferred stock. Such securities will be
rated Baa or lower by Moody's Investor Service, Inc. ("Moody's"), or BBB or
lower by Standard & Poor's Corporation ("S&P"), or, if not rated by Moody's or
S&P, be of equivalent investment quality as determined by the Adviser. These
debt securities include high yield bonds that are commonly referred to as
"junk bonds."
The convertible securities in which the Portfolio may invest include debt
securities convertible into or exchangeable for equity securities. The
Portfolio may also invest in: U.S. Government securities (including securities
of U.S. agencies and instrumentalities); bank obligations; commercial paper;
repurchase and reverse repurchase agreements involving these securities;
foreign securities--U.S. dollar-denominated debt securities issued by foreign
issuers and foreign branches of U.S. banks; dividend-paying common stocks
(including up to 10% of the market value of the Portfolio's total assets in
warrants to purchase common stocks) that are considered by Pacific Life to be
consistent with the investment objective of current income; and higher-quality
corporate bonds.
The Portfolio will hold short-term cash reserves (money market instruments
maturing in 13 months or less) as Pacific Life believes is advisable to
maintain liquidity or for temporary defensive purposes. During times that
Pacific Life believes that adoption of a temporary defensive position is
desirable due to prevailing market or economic conditions, the Portfolio may
invest to a greater degree in U.S. Government securities, higher-quality
corporate securities, and money market securities.
5
<PAGE>
OTHER TECHNIQUES. In seeking higher income or a reduction in principal
volatility, the Portfolio may purchase and sell put and call options on debt
securities, purchase or sell interest rate futures contracts and options on
interest rate futures contracts, and invest up to 5% of the Portfolio's total
assets in spread transactions, which give the Portfolio the right to sell or
receive a security or a cash payment with respect to an index at a fixed
dollar spread or yield spread in relationship to another security or index
which is used as a benchmark. The Portfolio may also lend its securities to
brokers, dealers, and other financial institutions to earn income. Certain of
these techniques may involve a greater degree or different type of risk than
those inherent in more conservative investment approaches.
HIGH YIELD BONDS. In general, debt securities rated lower than Baa by
Moody's or BBB by S&P or of equivalent quality ("high yield bonds") are not
considered to be investment grade, and are regarded as predominantly
speculative with respect to the issuer's continuing ability to meet principal
and interest payments. See the Appendix for a description of Moody's and S&P
ratings applicable to the fixed-income securities.
In an effort to reduce credit risk, the Portfolio diversifies its holdings
among many issuers. As of December 31, 1997, the Portfolio held securities of
136 corporate issuers, excluding short-term obligations. Based upon an average
of the Portfolio's holdings at the end of each month in 1997, an average of
approximately 71% of the Portfolio's holdings during 1997 were invested in
bonds rated lower than Baa by Moody's or BBB by S&P or if unrated, determined
to be of equivalent rating as determined by the Adviser. The asset composition
after this time may or may not be the same as shown in 1997.
VOLATILITY. Since shares of the Portfolio normally represent an investment
primarily in securities with fluctuating market prices, an investor should
understand that the value of the Portfolio's shares will vary as the aggregate
value of the Portfolio's securities increases or decreases. Changes in the
value of portfolio securities subsequent to their acquisition will normally
not affect the Portfolio's income, but will be reflected in the net asset
value of the Portfolio's shares. The Portfolio is intended for long-term
investors who can accept the risks associated with investment in high yield
securities.
MANAGED BOND PORTFOLIO
INVESTMENT OBJECTIVE. Maximize total return consistent with prudent
investment management.
INVESTMENT POLICIES. The Portfolio will primarily invest in the following
types of securities: obligations issued or guaranteed by the U.S. Government,
its agencies, or instrumentalities; U.S. dollar-denominated corporate debt
securities of domestic or foreign issuers; mortgage and other asset-backed
securities; variable and floating rate debt securities; U.S. dollar-
denominated obligations of foreign governments, foreign government agencies,
and international agencies (such as the International Bank for Reconstruction
and Development); and any of the following: high quality commercial paper;
certificates of deposit; fixed time deposits and bankers' acceptances issued
by domestic and foreign banks denominated in U.S. dollars; and repurchase and
reverse repurchase agreements.
The Portfolio, except as provided below, may invest only in securities rated
Baa or better by Moody's or BBB or better by S&P or, if not rated by Moody's
or S&P, determined by the Portfolio Manager to be of comparable quality. The
dollar-weighted average quality of all fixed-income securities held by the
Portfolio will be A or higher as rated by Moody's and S&P. The Portfolio may
also invest up to 10% of its assets in debt securities that are below
investment grade, but rated B or higher by Moody's or S&P or, if not rated by
Moody's or S&P, of equivalent quality. A security is generally of investment
grade when rated in one of the top four categories of investment ratings as
described by Moody's or S&P. In general, debt securities rated lower than Baa
by Moody's or BBB by S&P or of equivalent quality ("high yield/high risk
bonds") are not considered to be investment grade, and are regarded as
predominantly speculative with respect to the issuer's continuing ability to
meet principal and interest payments. For more information on the risks of
such securities, see "High Yield Bonds." In the event that a security owned by
the Portfolio is downgraded to below a rating of B, the Portfolio may
nonetheless retain the security. See the Appendix for a description of Moody's
and S&P ratings applicable
6
<PAGE>
to fixed income securities. For the year ended December 31, 1997, the amount
of the Portfolio's average total assets, measured on the basis of month-end
values, invested in debt securities rated less than investment grade was
approximately 4.77%.
SELECTION OF SECURITIES. The Portfolio invests in a diversified portfolio
primarily consisting of long, intermediate, and short-term marketable debt
securities. The proportion invested in each category of maturity can be
expected to vary depending upon the evaluation of market patterns and trends
by the Portfolio Manager. In selecting securities for the Portfolio, the
Portfolio Manager will use economic forecasting, interest rate anticipation,
credit and call risk analysis, and other security selection techniques. The
proportion of the Portfolio's assets committed to investment in securities
with particular characteristics of maturity, type, and coupon rate may vary
based on the Portfolio Manager's outlook for the economy, the financial
markets, and other factors.
DURATION. The Portfolio will invest in a portfolio of securities of varying
maturities and, under normal circumstances, will maintain an average portfolio
duration of 3 to 7 years. Duration is one of the fundamental tools used by the
Portfolio Manager in security selection. Historically, the maturity of a bond
was used as a proxy for the sensitivity of a bond's price to changes in
interest rates, otherwise known as a bond's "interest rate risk" or
"volatility." According to this measure, the longer the maturity of a bond,
the more its price will change for a given change in market interest rates.
However, this method ignores the amount and timing of all cash flows from the
bond prior to final maturity. Duration is a measure of average life of a bond
on a present value basis, which was developed to incorporate a bond's yield,
coupons, final maturity and call features into one measure. For point of
reference, the duration of a noncallable 7% coupon bond with a remaining
maturity of 5 years is approximately 4.5 years, and the duration of a
noncallable 7% coupon bond with a remaining maturity of 10 years is
approximately 8 years. Material changes in interest rates may impact the
duration calculation.
OTHER TECHNIQUES. In pursuing its investment objective, the Portfolio may
purchase and sell put and call options on debt securities; purchase and sell
spread transactions; and enter into interest rate, interest rate index, and
currency exchange rate swap agreements, and purchase and sell options thereon.
In addition, the Portfolio may purchase or sell interest rate futures
contracts and options on interest rate futures contracts. The Portfolio may
also lend its securities to brokers, dealers, and other financial institutions
to earn income, and borrow money for temporary administrative or emergency
purposes. In addition, the Portfolio may invest up to 20% of its assets in
debt securities of foreign issuers which may be denominated in foreign
currencies. Furthermore, the Portfolio may engage in forward currency
contracts, options on foreign currency contracts, and foreign currency futures
and options thereon, in anticipation of or to protect itself against
fluctuations in currency exchange rates with respect to investments in
securities of foreign issuers. These investment techniques may involve a
greater degree or different type of risk than those inherent in more
conservative investment approaches.
GOVERNMENT SECURITIES PORTFOLIO
INVESTMENT OBJECTIVE. Maximize total return consistent with prudent
investment management.
INVESTMENT POLICIES. The Portfolio invests primarily in securities that are
obligations of or guaranteed by the U.S. Government, its agencies or
instrumentalities. Among the securities the Portfolio may purchase are
mortgage-backed securities guaranteed by the Government National Mortgage
Association, the Federal Home Loan Mortgage Corporation, or the Federal
National Mortgage Association.
The Portfolio normally maintains at least 65% of its assets invested in U.S.
Government securities (including futures contracts and options thereon and
options relating to U.S. Government securities). The remainder of the
Portfolio's assets may be invested in corporate debt securities of domestic
issuers rated Aa or better by Moody's or AA or better by S&P, or, if not rated
by Moody's or S&P, of comparable quality as determined by the Portfolio
Manager, in mortgage-related securities, including collateralized mortgage
obligations and mortgage-backed bonds, and in cash or high quality money
market instruments. The Portfolio may increase the amount of its assets
invested in money market securities during times that the Portfolio Manager
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believes that adoption of a temporary defensive position is desirable due to
prevailing market or economic conditions.
DURATION. The Portfolio invests in securities of varying maturities and,
under normal circumstances, intends to maintain an average portfolio duration
of 3 to 7 years. A discussion of "duration" is provided above in the
description of the Managed Bond Portfolio and in the SAI.
OTHER TECHNIQUES. In pursuing its investment objective, the Portfolio may
purchase and sell put and call options on U.S. Government securities and on
other debt securities; purchase and sell spread transactions; and enter into
interest rate, interest rate index, and currency exchange rate swap
agreements, and purchase and sell options thereon. In addition, the Portfolio
may purchase or sell interest rate futures contracts and options on interest
rate futures contracts. The Portfolio also may make loans of portfolio
securities (up to an aggregate of 25% of its total assets) and enter into
reverse repurchase agreements. In addition, the Portfolio may invest up to 20%
of its assets in debt securities of foreign issuers, which may be denominated
in foreign currencies. Furthermore, the Portfolio may engage in forward
currency contracts, options on forward currency contracts, and foreign
currency futures and options thereon, in anticipation of or to protect itself
against fluctuations in currency exchange rates with respect to investments in
securities of foreign issuers. These investment techniques may involve a
greater degree or different type of risk than those inherent in more
conservative investment approaches.
GROWTH PORTFOLIO
THE GROWTH PORTFOLIO OFFERS ITS SHARES ONLY TO (1) SEPARATE ACCOUNTS OF
PACIFIC LIFE TO SERVE AS AN INVESTMENT MEDIUM FOR VARIABLE LIFE INSURANCE
POLICIES, AND (2) SEPARATE ACCOUNTS OF PACIFIC LIFE TO SERVE AS THE INVESTMENT
MEDIUM FOR VARIABLE ANNUITY CONTRACTS THAT WERE ISSUED PRIOR TO JANUARY 1,
1994. THE PORTFOLIO IS NOT AVAILABLE FOR VARIABLE ANNUITY CONTRACTS ISSUED ON
OR AFTER JANUARY 1, 1994.
INVESTMENT OBJECTIVE. Growth of capital. The realization of current income
will not be a factor in considering portfolio securities.
INVESTMENT POLICIES: The Portfolio seeks to invest in the common stocks of
growing and profitable companies, turnaround situations, and unseasoned
companies. The major portion of investments of the Portfolio will be in common
stocks. The Portfolio may also invest in convertible debt securities and in
convertible preferred stocks of companies which, in the opinion of the
Portfolio Manager, appear to have growth possibilities that are consistent
with the investment objective. If economic conditions warrant, the Portfolio
may temporarily invest in defensive type securities, including U.S. Government
securities, short-term corporate debt, preferred stocks, and money market
instruments.
Among the investments the Portfolio will consider are the stocks of smaller
emerging growth companies still in the developing stage of their life cycle or
companies embarking upon a new, promising development that is expected to
reverse a past downswing in earnings. These growing companies or "turnaround
situations" may offer the possibility of accelerating earnings growth due to
factors such as rejuvenated management, new innovative products, or change in
the economy. However, small-to-medium size companies often have limited
product and market diversification, fewer financial resources, or may be
dependent on a few key managers. Any one of the foregoing may change suddenly
and have an immediate impact on the value of the company's securities.
Furthermore, whenever the securities markets are experiencing rapid price
changes due to national economic trends, emerging growth securities, often
valued at premium standards by investors, have historically been subject to
exaggerated price changes. The Portfolio is intended for aggressive long-term
investors seeking above average gains who are willing to accept the risks
associated with small capitalization stocks.
OTHER INVESTMENTS. A portion of assets may also be held in cash. To a
limited extent, the Portfolio may also invest in various foreign securities if
U.S. exchange-listed.
Convertible bonds and other fixed income securities (other than money market
instruments) in which the Portfolio may invest will, at the time of
investment, be rated Baa or better by Moody's or BBB or better by S&P
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or, if not rated by Moody's or S&P, will be of comparable quality as
determined by the Portfolio Manager. In the event that an existing holding is
downgraded below these ratings, the Portfolio may nonetheless retain the
security.
AGGRESSIVE EQUITY PORTFOLIO
INVESTMENT OBJECTIVE. Capital appreciation. No consideration is given to
income.
INVESTMENT POLICIES. The Portfolio invests primarily in common stock and
other equity-type securities of small emerging-growth and medium-
capitalization companies. It may also invest in more well-established
companies. Investments may include preferred stocks, convertible debt, and
warrants. From time to time, the Portfolio may emphasize securities of
companies in cyclical industries, securities believed to be undervalued, and
companies in special situations. The Portfolio is intended for aggressive
long-term investors seeking above-average gains who are willing to accept the
greater risks associated with small-capitalization stocks.
The Portfolio may also invest a portion of its assets in high-quality money
market instruments. For temporary defensive purposes, the Portfolio may invest
to a significant degree in U.S. Government securities, mortgage-related and
other asset-backed securities, and in corporate fixed-income securities that
are rated, at the time of acquisition, investment grade, or, if not rated, are
determined by the Portfolio Manager to be of comparable quality.
The Portfolio may invest in securities of foreign issuers, although the
Portfolio may not acquire a security of a foreign issuer principally traded
outside of the United States, if, at the time of such investment, more than
20% of the Portfolio's total assets would be invested in such foreign
securities.
OTHER TECHNIQUES. For hedging purposes, the Portfolio may purchase put and
call options on securities and securities indexes and may write covered call
options. The Portfolio may purchase and sell stock index futures contracts and
options thereon. The Portfolio may make secured loans of its portfolio
securities to others with securities that constitute up to 25% of the
Portfolio's total assets. To hedge against the risk of currency fluctuation
associated with investment on foreign securities, the Portfolio may buy or
sell foreign currencies on a spot (cash) basis and enter into forward foreign
currency contracts or options on foreign currencies or foreign currency
futures contracts and options thereon. These investment techniques and
investment in securities of foreign issuers may involve a greater degree of
risk than more conservative approaches.
GROWTH LT PORTFOLIO
INVESTMENT OBJECTIVE. Long-term growth of capital in a manner consistent
with the preservation of capital.
INVESTMENT POLICIES. The Portfolio pursues its investment objective by
investing in the common stock of a large number of issuers of any size. The
Portfolio may invest in large, well-established companies, as well as smaller
emerging growth companies. Small-to-medium size companies may suffer more
significant losses as well as realize more substantial growth than larger,
more established issuers. Thus, investments in such companies tend to be more
volatile and somewhat speculative. The Portfolio may invest in securities of
both domestic and foreign issuers. The Portfolio is not designed as a short-
term trading vehicle.
STOCK SELECTION. The Portfolio invests substantially all of its assets in
common stocks when the Portfolio Manager believes that the relevant market
environment favors profitable investing in those securities. Common stock
investments are selected in industries and companies that the Portfolio
Manager believes are experiencing favorable demand for their products and
services, and which operate in a favorable competitive environment and
regulatory climate. The Portfolio Manager's analysis and selection process
focuses on earnings growth potential. In particular, the Portfolio intends to
buy stocks with earnings growth potential that may not be recognized by
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the market. Securities are selected solely for their capital growth potential;
investment income is not a consideration and any income realized on the
Portfolio's investments will be incidental to its primary objective. These
selection criteria apply equally to stocks of foreign issuers. In selecting
foreign stocks, factors such as expected levels of inflation, government
policies influencing business conditions, the outlook for currency
relationships, and prospects for relative economic growth among countries,
regions, or geographic areas may warrant greater consideration.
OTHER INVESTMENTS. Although the Portfolio normally invests primarily in
equity securities, it may increase its cash position when the Portfolio
Manager is unable to locate investment opportunities with desirable
risk/reward characteristics. The Portfolio may invest in government
securities, corporate bonds and debentures, high-grade commercial paper,
warrants, preferred stocks, certificates of deposit, or other debt securities
when the Portfolio Manager perceives an opportunity for capital growth from
such securities or so that the Portfolio may receive a return on idle cash.
The Portfolio may invest up to 10% of its assets, measured at the time of
investment, in debt securities that are lower rated bonds, i.e., rated below
investment grade by one of the primary rating agencies (or if not rated,
deemed to be of comparable quality by the Portfolio Manager), but which may
offer higher yields. When the Portfolio invests in fixed income securities,
investment income will increase and may constitute a large portion of the
return on the Portfolio, and the Portfolio probably would not participate in
market advances or declines to the extent that it would if it remained fully
invested in common stocks.
The Portfolio may invest up to 25% of its assets in foreign securities
denominated in a foreign currency and not publicly traded in the United
States. In addition, the Portfolio may purchase American Depositary Receipts
("ADRs"), European Depositary Receipts ("EDRs"), Global Depositary Receipts
("GDRs"), and other types of receipts of shares evidencing ownership of the
underlying foreign securities. In pursuing its investment objective, the
Portfolio may engage in the purchase and writing of put and call options on
securities, stock indexes and foreign currencies. In addition, the Portfolio
may purchase or sell interest rate, stock index, and foreign currency futures
contracts and options thereon. The Portfolio may also engage in forward
foreign currency contracts. These investment techniques may involve a greater
degree or different type of risk than those inherent in more conservative
investment approaches.
EQUITY INCOME PORTFOLIO
INVESTMENT OBJECTIVE. Long-term growth of capital and income.
INVESTMENT POLICIES. The Portfolio seeks to achieve its objective consistent
with reasonable investment risk. Ordinarily, the Portfolio pursues its
investment objective by investing primarily in dividend-paying common stock.
The Portfolio may also invest in other equity securities, consisting of, among
other things, nondividend-paying common stock, preferred stock, and securities
convertible into common stock, such as convertible preferred stock and
convertible bonds, and warrants. The Portfolio may also invest in ADRs and in
various foreign securities if U.S. exchange-listed.
STOCK SELECTION. The Portfolio is not subject to any limit on the size of
companies in which it may invest, but intends, under normal circumstances, to
be fully invested to the extent practicable in the large- and medium-sized
companies primarily included in the Standard & Poor's 500 Composite Stock
Price Index ("S&P 500" or the "Index"). The Portfolio is designed for
investors who want an actively managed equity portfolio of selected equity
securities that seeks to outperform the total return of the S&P 500. In
managing the Portfolio, the potential for appreciation and dividend growth is
given more weight than current dividends. Nonetheless, the Portfolio Manager
will normally strive for gross income for the Portfolio at a level not less
than 75% of the dividend income generated on the stocks included in the S&P
500, although this income level is merely a guideline and there can be no
certainty that this income level will be achieved.
The Portfolio does not seek to achieve its objective with any individual
portfolio security, but rather it aims to manage the portfolio as a whole in
such a way as to achieve its objective. The Portfolio attempts to reduce risk
by investing in many different economic sectors, industries and companies. The
Portfolio Manager may
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under- or over-weight selected economic sectors against the S&P 500's sector
weightings to seek to enhance the Portfolio's total return or reduce
fluctuations in market value relative to the S&P 500. In selecting securities,
the Portfolio Manager may emphasize securities that it believes to be
undervalued. Securities of a company may be undervalued for a variety of
reasons such as an overreaction by investors to unfavorable news about a
company, an industry, or the stock markets in general; or as a result of a
market decline, poor economic conditions, tax-loss selling, or actual or
anticipated unfavorable developments affecting a company.
OTHER SECURITIES. During ordinary market conditions, the Portfolio Manager
will keep the Portfolio as fully invested as practicable in the equity
securities described above. The Portfolio may also invest in money market
instruments, including U.S. Government securities, short term bank obligations
rated in the highest two rating categories by Moody's or S&P, or, if unrated,
determined to be of equal quality by the Portfolio's Manager, certificates of
deposit, time deposits and banker's acceptances issued by U.S. and foreign
banks and savings and loan institutions with assets of at least $500 million
as of the end of their most recent fiscal year; and commercial paper and
corporate obligations, including variable rate demand notes, that are issued
by U.S. and foreign issuers and that are rated in the highest two rating
categories by Moody's or S&P, or if unrated, determined to be of equal quality
by the Portfolio Manager. Under normal circumstances, the Portfolio will
invest in such money market instruments to invest temporary cash balances or
to maintain liquidity to meet redemptions or expenses. The Portfolio may also,
however, invest in these instruments, without limitation, as a temporary
defensive measure taken during, or in anticipation of, adverse market
conditions.
The Portfolio may also invest in convertible bonds and other fixed income
securities (other than money market instruments) including, but not limited to
high yield/high risk debt securities. For more information on the risks of
non-investment grade securities, see "High Yield Bonds." For more information
on ratings of fixed income securities, see the Appendix.
OTHER TECHNIQUES. In pursuing its investment objective, the Portfolio may
purchase and sell put and call options on securities and stock indexes. In
addition, the Portfolio may purchase or sell stock index futures contracts and
options thereon. These investment techniques may involve a greater degree or
different type of risk than those inherent in more conservative investment
approaches.
MULTI-STRATEGY PORTFOLIO
INVESTMENT OBJECTIVE. Provide a high total return from a portfolio of equity
and fixed income securities. Total return will consist of income plus realized
and unrealized capital gains and losses.
INVESTMENT POLICIES. The Portfolio is managed to earn current income on, and
to anticipate long-term capital growth of, the Portfolio as a whole rather
than any of its individual securities. The Portfolio's equity investments will
be primarily the common stock of large- and medium-size U.S. companies,
including common stock of any class or series or any similar equity interest.
The Portfolio's equity investments may also include preferred stock, warrants,
rights, and convertible securities. The Portfolio may also invest in the
equity securities of small companies and foreign issuers. The Portfolio's
equity securities may or may not pay dividends and may or may not carry voting
rights. It is contemplated that most of the Portfolio's common stock
investments will be made in securities listed on a U.S. stock exchange. Fixed
income securities may include corporate bonds, debentures, notes, mortgage-
related securities, and asset-backed securities, U.S. Government securities,
preferred stock, money market instruments, and other securities that may have
conversion or purchase rights.
ASSET ALLOCATION. Under normal circumstances, the Portfolio Manager expects
that approximately 60% of the Portfolio's assets will be invested in equities
and approximately 40% in fixed income securities. However, these amounts may
vary in that the Portfolio Manager may allocate the Portfolio's investments
between these asset classes in a manner consistent with the Portfolio's
investment objective and current market conditions. Using a variety of
analytical tools, the Portfolio Manager assesses the relative attractiveness
of each asset class and determines an allocation between them believed to be
optimal. The Portfolio Manager then selects securities in each asset class
based on fundamental research and quantitative analysis.
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OTHER TECHNIQUES. In pursuing its investment objective, the Portfolio may
purchase and sell put and call options on securities and stock indexes. In
addition, the Portfolio may purchase or sell interest rate and stock index
futures contracts and options thereon. The Portfolio may also invest up to 10%
of its assets in debt securities of foreign issuers which may be denominated
in foreign currencies. Furthermore, the Portfolio may engage in forward
currency contracts in anticipation of or to protect itself against
fluctuations in currency exchange rates with respect to investments in
securities of foreign issuers. These investment techniques may involve a
greater degree or different type of risk than those inherent in more
conservative investment approaches.
EQUITY PORTFOLIO
INVESTMENT OBJECTIVE. The primary investment objective of the Equity
Portfolio is capital appreciation. Current income is of secondary importance.
INVESTMENT POLICIES. The Portfolio seeks to achieve this objective by
investing primarily in common stock, or securities convertible into or
exchangeable for common stock, including convertible preferred stocks,
convertible debentures, or warrants. The Portfolio invests, under normal
circumstances, at least 90% of its total assets in equity securities of U.S.
issuers.
The Portfolio Manager emphasizes a company's growth prospects in analyzing
equity securities to be purchased by the Portfolio. The Portfolio Manager
selects investments using both a variety of quantitative techniques and
fundamental research, while attempting to maintain risk, style,
capitalization, and industry characteristics similar to the Russell 1000
Growth Index ("Index"). The Portfolio seeks to maintain a portfolio comprised
of companies with capitalizations and earnings growth expectations that are
above the average of the Index and dividend yields that are below the average
of the Index. The Portfolio also may invest in U.S. Government securities,
corporate bonds, money market instruments, and enter into repurchase
agreements. The Portfolio may increase its investment in these securities when
in a temporary defensive position.
The Portfolio Manager utilizes a "Computer-Optimized, Research-Enhanced"
("CORE") investment strategy in connection with its management of the
Portfolio. Under the CORE strategy, the Portfolio Manager begins with a broad
universe of U.S. equity securities and then uses a proprietary multifactor
model ("Multifactor Model") to assign each equity security a rating. The
Multifactor Models are rigorous computerized rating systems for forecasting
the returns of different equity markets, currencies, and individual equity
securities according to fundamental investment characteristics. The
Multifactor Models contain variables that measure value, growth, momentum, and
risk (e.g. book/price ratio, earnings/price ratio, price momentum, price
volatility, consensus growth forecasts, earnings estimate revisions, and
earnings stability).
The weightings assigned to the factors in the Multifactor Models are derived
from a statistical formulation that considers each factor's historical
performance in different market environments. As such, the Multifactor Models
are designed to evaluate each security using only the factors that are
statistically related to returns in the anticipated market environment.
Because they include many disparate factors, the Portfolio Manager believes
that all the Multifactor Models are broader in scope and provide a more
thorough evaluation than most conventional quantitative models.
OTHER TECHNIQUES. In pursuing its investment objective, the Portfolio may
purchase and sell put and call options on securities and stock indexes. In
addition, the Portfolio may purchase or sell stock index futures contracts and
futures thereon. These investment techniques may involve a greater degree or
different type of risk than those inherent in more conservative investment
approaches.
BOND AND INCOME PORTFOLIO
INVESTMENT OBJECTIVE. Provide total return and income consistent with
prudent investment management.
INVESTMENT POLICIES. The Portfolio invests in the following types of
securities: U.S. dollar-denominated debt securities of U.S. or foreign
corporations; U.S. Government securities; mortgage-related and other asset-
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backed securities; U.S. dollar-denominated obligations of foreign governments,
foreign governmental agencies, and international agencies (such as the
International Bank for Reconstruction and Development); within certain limits
as described below, non-U.S. dollar-denominated obligations of foreign
corporations, governments, governmental agencies, and international agencies;
certain derivative instruments for hedging purposes; and high-quality short-
term instruments, including, among others, commercial paper, bank instruments,
and repurchase agreements. These securities may include securities with debt
characteristics such as convertible securities and preferred stock.
The Portfolio normally invests at least 80% of its assets in securities
rated, at the time of acquisition, investment grade by at least one nationally
recognized statistical rating organization ("NRSRO") (e.g., Baa or better by
Moody's or BBB or better by S&P), or, if not rated by an NRSRO, of comparable
quality as determined by the Portfolio Manager. The Portfolio may invest up to
20% of its assets in securities that are not rated investment grade by at
least one NRSRO, 15% of which may consist of debt securities of issuers
located in emerging market countries. This may include securities of foreign
governments or their agencies that are emerging market countries. Generally,
debt securities that are not considered investment grade are regarded as
predominantly speculative with respect to the issuer's continuing ability to
meet principal and interest payments. For more information on the risks of
non-investment grade securities, see "High Yield Bonds"; on mortgage-related
securities, see "Mortgage-Related Securities"; and on the risks of investment
in foreign issuers, see "Foreign Securities." For more information on ratings
of fixed income securities, see the Appendix.
Other limitations apply to the Portfolio to address potential volatility
associated with certain investment techniques. The Portfolio may not invest
more than 10% of its assets in the following types of mortgage-related
securities: inverse floaters, super floaters, interest-only ("IO's") and
principal-only ("PO's") tranches of stripped mortgage backed securities
(including planned amortization class certificates) and inverse IO's.
The Portfolio may invest up to 10% of its assets in non-U.S. dollar
denominated securities. The Portfolio may invest up to 15% of its assets in
restricted securities that are illiquid, which, for these purposes, does not
include securities that may be sold without registration to qualified
institutional buyers under the Trust's procedures for restricted securities
under SEC Rule 144A. Measurement of these limits is determined at the time of
acquiring a security.
DURATION. The Portfolio invests in securities of varying maturities. Under
normal circumstances, the Portfolio maintains an average portfolio duration
that is within one-half year of the duration of the Lehman Brothers Long Term
Government/Corporate Bond Index ("Index"). The average duration of the Index
as of January 31, 1998 was 10.13 years. It is expected that the duration of
the Index will change over time, but only gradually. The Bond and Income
Portfolio ordinarily will have the potential to be more volatile than fixed-
income funds of shorter duration.
OTHER TECHNIQUES. For hedging risk or adjusting interest rate exposure, the
Portfolio may (but is not obligated to) use several investment techniques. The
Portfolio may purchase put and call options on securities and on securities
indices and may write (sell) covered call options. The Portfolio also may
enter into the following: financial futures contracts and options thereon;
instruments such as interest rate caps, floors, and collars; and interest rate
swaps. To hedge against fluctuations in currency exchange rates that affect
non-U.S. dollar-denominated securities, the Portfolio may (but is not
obligated to) enter into spot (or cash) transactions in currency, forward
currency contracts, options on foreign currency contracts, foreign currency
futures and options thereon, and currency swaps. The Portfolio may invest up
to 5% of its assets in structured notes to hedge interest rate or currency
risk. The Portfolio may enter into swaps, caps, floors, collars, structured
notes, and non-exchange traded options only with counterparties that have
outstanding securities rated A or better by Moody's or S&P or that have
outstanding short-term securities rated P-2 or better by Moody's or A-2 or
better by S&P.
EQUITY INDEX PORTFOLIO
INVESTMENT OBJECTIVE. Provide investment results that correspond to the
total return performance of common stocks that are publicly traded in the
United States.
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INVESTMENT POLICIES. The Portfolio attempts to achieve its objective by
investing in stocks included in the S&P 500. The Portfolio attempts to
replicate the investment results of the S&P 500, while minimizing
transactional costs and other expenses. The Portfolio will purchase the common
stock of those companies included in the S&P 500, which the Portfolio Manager
believes, based on statistical data, will represent the industry
diversification of the entire S&P 500. The Portfolio will be managed to
attempt to minimize the degree to which the investment results of the
Portfolio (before taking into account the Portfolio's expenses) differ from
the results of the Index ("tracking error"). The Portfolio will incur expenses
not reflected in the investment results of the Index, including advisory and
administrative fees and transactional and other expenses. The degree to which
the Portfolio correlates with the Index will depend upon the size and cash
flow of the Portfolio, the liquidity of the securities represented in the
Index, and the Portfolio's expenses, among other factors. There is no fixed
number of component stocks in which the Portfolio will invest. However, it is
anticipated that under normal circumstances the Portfolio will hold between
200 and 450 of the stocks listed in the S&P 500.
The composition of the portfolio securities may be rebalanced by the
Portfolio Manager at such times as it deems advisable in order to minimize
tracking error. No attempt is made, however, to "manage" the Portfolio in the
traditional sense, such as by using economic, financial, and market analysis,
nor will the adverse financial situation of a company directly result in its
elimination from the Portfolio unless, of course, the company is removed from
the Index. From time to time, administrative adjustments may be made in the
Portfolio because of mergers, changes in the composition of the Index, and
similar reasons, but such changes should be infrequent and the attendant costs
minimized. Thus, portfolio turnover is expected to be lower than that of most
other investment company portfolios investing in common stock. As a
consequence, brokerage costs are expected to be relatively low. Due to
tracking error, transactional costs, and other expenses, the return on the
Portfolio likely will be lower than the return on the S&P 500.
OTHER TECHNIQUES. The Portfolio may purchase and sell stock index futures,
purchase options on stock indexes, and purchase options on stock index futures
that are based on stock indexes which the Portfolio attempts to track or which
tend to move together with stocks included in the index. The Portfolio may use
these techniques as an adjunct to its securities activities or to hedge
against changes in securities prices.
The Portfolio may invest in foreign equity securities if U.S. exchange
listed to the extent included in the S&P 500. The Portfolio may temporarily
invest cash balances, maintained for liquidity purposes or pending investment,
in short-term high quality debt instruments, including commercial paper, bank
obligations, and U.S. Government securities. Temporary investments will not be
made for defensive purposes in the event of or in anticipation of a general
decline in the market price of stocks in which the Portfolio invests. A
defensive investment posture is precluded by the investment objective to
provide investment results that correspond to the total return performance of
common stocks that are publicly traded in the United States; accordingly,
investors in the Portfolio bear the risk of general declines in stock prices
in the stock markets.
ABOUT THE S&P 500: The S&P 500 is a capitalization-weighted index, based on
the relative market capitalization of 500 different companies selected by S&P,
including companies in the industrial, utility, financial, and transportation
industry sectors. The weightings of stocks in the Index are based on each
component stock's relative total market value, that is, its market price per
share multiplied by the number of common shares outstanding for that company.
S&P may, from time to time, adjust the composition of common stocks in the
Index. Inclusion of a stock in the S&P 500 in no way implies an opinion by S&P
as to its attractiveness as an investment; nor is S&P a sponsor or in any way
affiliated with the Portfolio, the Fund, the Adviser, or the Portfolio
Manager.
The Fund reserves the right to change the index whose performance the
Portfolio will attempt to replicate or for the Portfolio to seek its
investment objective by means other than attempting to replicate an index,
such as by operating the Portfolio as a managed fund, and reserves the right
to do so without seeking shareholder approval, but only if operating the
Portfolio as described above is not permitted under applicable law for an
investment company that serves as an investment medium for variable insurance
contracts, or otherwise involves substantial legal risk. See "What is the
Federal Income Tax Status of the Fund" below.
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INTERNATIONAL PORTFOLIO
INVESTMENT OBJECTIVE. Seek long-term capital appreciation primarily through
investment in equity securities of corporations domiciled in countries other
than the United States. Current income from dividends and interest will not be
an important consideration.
INVESTMENT POLICIES. Other than when in a defensive posture, at least 70% of
the Portfolio's assets will consist of corporate securities, primarily common
stock and, to a lesser extent, securities convertible into common stock. The
Portfolio may, however, for defensive purposes as described below, invest in
nonconvertible fixed income securities denominated in currencies of foreign
countries and in United States dollars.
The Portfolio will attempt to maximize opportunity and reduce risk by
investing in a diversified portfolio of companies in different stages of
development. Portfolio companies will range from large, well established
companies to medium-size companies and smaller, less seasoned companies in
earlier stages of development.
The allocation of the Portfolio's assets among the various securities
markets in the different countries will be determined by the Portfolio
Manager. In making the allocation of assets among the securities markets, the
Portfolio Manager may consider such factors as technological developments in
the various countries, the condition and growth potential for the various
economies and securities markets, currency and taxation considerations, and
other pertinent financial, social, national, and political factors. Some of
these countries can be considered "emerging market countries," which generally
refers to countries whose economies are less developed or mature than
economies in other countries or whose markets are undergoing a process of
development. Under certain adverse investment conditions, the Portfolio may
restrict the securities markets in which its assets will be invested, and may
increase the proportion of assets invested in United States Government and
money market securities.
The Portfolio reserves the right as a defensive measure to invest in
nonconvertible fixed income securities denominated in currencies of foreign
countries and in United States dollars. (For this purpose, investments made
for defensive purposes will be maintained only during periods in which the
Portfolio Manager determines that economic or financial conditions are adverse
for holding equity securities of corporate issuers.) Securities held for
defensive purposes, which include nonconvertible preferred stock, debt
securities, government securities issued by United States and foreign
countries, and money market securities, may be held in such proportions as, in
the opinion of the Portfolio Manager, prevailing market or economic conditions
warrant. The Portfolio may invest up to 5% of its assets, measured at the time
of investment, in debt securities that are rated below investment grade, or if
not rated, of equivalent quality.
The Portfolio may also hold cash (in United States dollars or foreign
currencies) or short-term securities denominated in such currencies to provide
for redemptions; it is not expected that such reserve for redemptions will
exceed 10% of the Portfolio's assets. Money market securities which may be
held for defensive purposes, or to provide for redemptions, include short-term
corporate or U.S. Government obligations and bank certificates of deposit.
The Portfolio is subject to guidelines for diversification of foreign
security investments that prescribe the minimum number of countries in which
the Portfolio's assets may be invested. These guidelines are discussed under
"Foreign Securities."
OTHER TECHNIQUES. The Portfolio may enter into repurchase agreements and may
lend its securities to brokers, dealers, and other financial institutions to
earn income. The Portfolio may purchase and sell financial futures contracts,
stock index futures contracts, and foreign currency futures contracts and
options on such futures contracts.
RISKS OF FOREIGN INVESTMENT. Investing in the securities of foreign issuers
involves special risks and considerations not typically associated with
investing in U.S. companies. These risks include exposure to foreign
currencies and fluctuations in such currencies and political, economic,
regulatory, and operational factors
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associated with exposure to foreign countries. Investment in emerging market
countries presents risks in greater degree than, and in addition to, those
presented by investment in foreign issuers in general.
The United States Government has, from time to time in the past, imposed
restrictions, through taxation and otherwise, on foreign investments by United
States investors such as the Portfolio. If such restrictions should be
reinstituted, it might become necessary for the Portfolio to invest all, or
substantially all, of its assets in United States short-term securities. In
such event, the Portfolio would review its investment objective and investment
policies to determine whether changes are appropriate.
CURRENCY TECHNIQUES. The Portfolio may engage in foreign currency
transactions in anticipation of or to protect itself against fluctuations in
currency exchange rates. The Portfolio may enter into forward currency
contracts. The Portfolio may also purchase and write put and call options on
foreign currencies. The use of these techniques is discretionary with the
Portfolio Manager, and there is no commitment to use them.
EMERGING MARKETS PORTFOLIO
INVESTMENT OBJECTIVE. Long-term growth of capital.
INVESTMENT POLICIES. The Portfolio seeks its investment objective by
investing primarily in common stocks of companies domiciled in countries
identified as "emerging market countries" (See "International Portfolio--
Investment Policies"). The Morgan Stanley Capital International Emerging
Markets Free Index ("MSCI Index") is used as the basis for choosing the
countries in which the Portfolio invests. However, the Portfolio is not
limited to the countries and weightings in this index.
It is the policy of the Fund to be as fully invested in common stock as
practicable at all times. This policy precludes the Fund from investing in
debt securities as a defensive investment posture (although the Fund may
invest in such securities to provide for payment of expenses and meet
redemption requests). Accordingly, investors in this Fund bear the risk of
general declines in stock prices, and bear any risk that the Fund's exposure
to such declines cannot be lessened by investment in debt securities. The Fund
may temporarily not be invested primarily in equity securities after receipt
of significant new monies.
The Portfolio Manager applies two levels of screening in selecting
investments for the Portfolio. First, an active country selection model
analyzes world markets and assigns a relative value ranking, or "favorability
weighting," to each country in the relevant country universe to determine
markets that are relatively undervalued. Second, at the stock selection level,
quality analysis and value analysis are applied to each security, assessing
variables such as balance sheet strength and earnings growth (quality factors)
and performance relative to the industry, price to earnings ratios, and price
to book ratios (value factors). This two-level screening method identifies
undervalued securities for purchasing and provides a sell discipline for fully
valued securities.
For purposes of allocating the Portfolio's investments, a company is
considered to be located in the country in which it is domiciled, in which it
is primarily traded, from which it derives a significant portion of its
revenues, or in which a significant portion of its goods or services are
produced.
The Portfolio is subject to guidelines for diversification of foreign
security investments that prescribe the minimum number of countries in which
the Portfolio may invest its assets. These guidelines are discussed under
"Foreign Securities."
CURRENCY TECHNIQUES. Most of the foreign securities in which the Portfolio
invests will be denominated in foreign currencies. The Portfolio may engage in
foreign currency transactions to protect itself against fluctuations in
currency exchange rates in relation to the U.S. dollar or to the weighting of
a particular foreign currency on the MSCI Index. These foreign currency
transactions may include forward foreign currency contracts, currency exchange
transactions on a spot (i.e., cash) basis, put and call options on foreign
currencies, and foreign exchange futures contracts.
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OTHER TECHNIQUES. The Portfolio may invest up to 10% of its assets in U.S.
Government securities, high quality debt securities, money market obligations,
and in cash. Such money market obligations may include short-term corporate or
U.S. Government obligations and bank certificates of deposit. The debt
securities and money market obligations in which the Portfolio invests may be
issued by U.S. and foreign issuers and be denominated in U.S. dollars or
foreign currencies.
The Portfolio also may engage in transactions in options, futures, and
options on futures contracts on securities and securities indexes. The
Portfolio also may purchase convertible securities, enter into equity index
swap agreements, lend its portfolio securities, purchase warrants on
securities that it is eligible to purchase, invest in preferred stock, enter
into repurchase agreements and reverse repurchase agreements, and enter into
firm commitment transactions and purchase and sell securities on a when-issued
basis.
RISKS OF FOREIGN INVESTMENT. Investing in the securities of foreign issuers
involves special risks and considerations not typically associated with
investing in U.S. companies. Investment in emerging market countries presents
risks in greater degree than, and in addition to, those presented by
investment in foreign issuers in general. Some of these risks include
restrictions on foreign investment and repatriation of investment income or
gain, risks of currency fluctuations, inflation, and illiquid or volatile
securities markets. The Portfolio is intended for aggressive long-term
investors who can accept the risks associated with emerging market countries.
As noted previously, the United States Government has, from time to time in
the past, imposed restrictions, through taxation and otherwise, on foreign
investments by United States investors such as the Portfolio. If such
restrictions should be reinstated, it might become necessary for the Portfolio
to invest all, or substantially all, of its assets in United States short-term
securities. In such event, the Portfolio would review its investment objective
and investment policies to determine whether changes are appropriate.
ALL PORTFOLIOS: DIVERSIFICATION AND CHANGES IN POLICIES
Each of the Portfolios is diversified, so that with respect to 75% of the
assets of each Portfolio (100% for the Money Market Portfolio), it may not
invest more than 5% of its assets (taken at market value at the time of
investment) in securities of any one issuer, except that this restriction does
not apply to U.S. Government securities.
The investment policies for any of the Portfolios may be changed by the
Fund's Board of Trustees. The investment objective of each Portfolio, as
described in the previous section, is considered "fundamental." In addition,
the Portfolios are subject to investment restrictions that are described in
the SAI. Some of those investment restrictions, including the diversified
status of each Portfolio, are also designated as "fundamental." These
fundamental investment objectives and investment restrictions require a vote
of a majority of the shareholders of a Portfolio to be changed.
SECURITIES AND INVESTMENT TECHNIQUES
This section describes certain securities and investment techniques that may
be used by the Portfolios and the potential risks associated with these
securities and investment techniques. For more detailed information on these
investment techniques, see the SAI. The SAI also contains information on other
types of securities in which a Portfolio may invest, including U.S. Government
securities, debt securities generally, variable and floating rate securities,
repurchase agreements, reverse repurchase agreements, lending portfolio
securities, firm commitment agreements and when-issued securities, and
warrants.
DERIVATIVES
"Derivatives" is a broad term which may be used to describe many investment
instruments whose values are derived, at least in part, from the value of
another underlying asset or investment instrument. Some derivative
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instruments have simple structures and others have intricate components and
terms. Some are more volatile and some have equal or less volatility than the
investment instrument upon whose value the derivative is based. If used to
leverage a portfolio, derivatives could magnify risk. However, the Fund is not
permitted to engage in leveraging transactions. Derivatives are often used by
the Portfolio Managers to hedge positions, defray the risks of interest rate
or currency changes and reduce portfolio or market risk.
Each Portfolio has its own authorizations to use prescribed derivative
instruments, which may include forward foreign currency contracts, options,
foreign currency options, swap agreements, spread transactions, futures
contracts and options thereon, foreign futures, mortgage-related securities,
collateralized mortgage obligations ("CMOs"), CMO residuals, stripped
mortgage-backed securities and other asset-backed securities. Each of the
Portfolios has the authority to use some type of derivative instrument. The
strategy employed and the magnitude of the position maintained will determine
the level of risk a Portfolio may assume by utilizing derivative instruments.
The types and investment techniques employed with respect to the derivative
instruments which are most commonly purchased and sold by the Portfolios are
included among the descriptions below and in the SAI.
MORTGAGE-RELATED SECURITIES
APPLICABLE PORTFOLIOS: Money Market, High Yield Bond, Managed Bond,
Government Securities, Growth LT, Multi-Strategy, Equity, and Bond and Income
Portfolios. The Government Securities, Growth LT, and Multi-Strategy
Portfolios, and the Money Market Portfolio, subject to its investment
policies, may invest only in high-quality, mortgage-related (or other asset-
backed) securities either (i) issued by United States Government sponsored
corporations (currently GNMA, FHLMC, FNMA) or (ii) rated Aa or better by
Moody's or AA or better by S&P or, if not rated, determined to be of
equivalent investment quality.
Mortgage-related securities include mortgage pass-through securities, which
are securities under which payments of both interest and principal from an
underlying pool of mortgages are made periodically, in effect "passing
through" payments made by the individual borrowers on the mortgage loans.
Timely payment of principal and interest on mortgage backed securities known
as "GNMAs", which are guaranteed by the Government National Mortgage
Association, is guaranteed by the full faith and credit of the U.S.
Government. Some mortgage related securities are not backed by the full faith
and credit of the U.S. Government, but are guaranteed by agencies or
instrumentalities of the U.S. Government such as the Federal National Mortgage
Association ("FNMA") or the Federal Home Loan Mortgage Corporation ("FHLMC").
Other mortgage-related securities are issued by financial institutions such
as commercial banks, savings and loan associations, mortgage banks, and
securities broker-dealers (or affiliates) and are called collateralized
mortgage obligations ("CMOs"). CMOs are fully collateralized directly or
indirectly by a pool of mortgages, and in some instances by portfolios of
mortgage pass-through securities guaranteed by GNMA, FHLMC, or FNMA. Payments
are passed through to the holders, although not necessarily on a pro rata
basis, on the same schedule as they are received. CMOs are structured into
multiple classes, with each class bearing a different stated maturity. Monthly
payments of principal, including prepayments, generally are first returned to
investors holding the shortest maturity class; investors holding the longer
maturity classes receive principal only after the first class has been
retired.
The Managed Bond, Government Securities, Multi-Strategy, and Bond and Income
Portfolios may also invest in stripped mortgage-backed securities and CMO
residuals. Stripped mortgage-backed securities are usually structured with two
classes. One class will receive all of the interest (the interest-only class,
or "IO"), whereas the other class will receive all of the principal (the
principal-only class or "PO"). In addition, the Bond and Income Portfolio may
invest in inverse floaters and "IO" and "PO" tranches of planned amortization
class ("PAC") certificates. PAC Certificates are parallel-pay real estate
mortgage investment conduit ("REMIC") certificates that generally require that
specified amounts of principal be applied on each payment date to one or more
classes of REMIC Certificates, even though all other principal payments and
prepayments of the mortgage assets are then required to be applied to one or
more other classes of the Certificates. The scheduled principal
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payments for the PAC Certificates generally have the highest priority on each
payment date after interest due has been paid to all classes entitled to
receive interest currently. Shortfalls, if any, are added to the amount
payable on the next payment date. The PAC Certificate payment schedule is
taken into account in calculating the final distribution date of each class of
PAC. In order to create PAC Tranches, one or more tranches generally must be
created that absorb most of the volatility in the underlying mortgage assets.
These tranches tend to have market prices and yields that are much more
volatile than other PAC classes.
RISKS OF MORTGAGE-RELATED SECURITIES. Although mortgage loans underlying a
mortgage-related security may have maturities of up to 30 years, the actual
average life of a mortgage-backed security typically will be substantially
less because (1) the mortgages will be subject to normal principal
amortization, and (2) may be prepaid prior to maturity due to the sale of the
underlying property, the refinancing of the loan, or foreclosure. Early
repayment may expose a Portfolio to a lower rate of return upon reinvestment
of the principal. Prepayment rates vary widely and cannot be accurately
predicted. They may be affected by changes in market interest rates.
Therefore, prepayments will be reinvested at rates that are available upon
receipt, which likely will be higher or lower than the original yield on the
certificates. Accordingly, the actual maturity and realized yield on pass-
through or modified pass-through mortgage-related securities will vary from
the designated maturity and yield on the original security based upon the
prepayment experience of the underlying pool of mortgages.
Stripped mortgage-backed securities are likely to experience greater price
volatility than other types of mortgage securities. The yield to maturity on
the IO class is extremely sensitive, both to changes in prevailing interest
rates and to the rate of principal payments (including prepayments) on the
underlying mortgage assets. Similarly, the yield to maturity on CMO residuals
is extremely sensitive to prepayments on the related underlying mortgage
assets. In addition, if a series of a CMO includes a class that bears interest
at an adjustable rate, the yield to maturity on the related CMO residual will
also be extremely sensitive to changes in the level of the index upon which
interest rate adjustments are made. A Portfolio could fail to fully recover
its initial investment in a CMO residual or a stripped mortgage-backed
security.
OTHER ASSET-BACKED SECURITIES. The High Yield Bond, Managed Bond, Government
Securities, Growth LT, Multi-Strategy, Equity, and Bond and Income Portfolios,
and the Money Market Portfolio, subject to its investment policies, may
purchase other asset-backed securities which are backed by particular assets
such as automobile loans, installment sales contracts, home equity loans,
computer and other leases, credit card receivables, or other assets. As in the
case of mortgage-related securities, those asset-backed securities are subject
to prepayment risk, which will alter an instrument's maturity and yield. Other
risks relate to the nature of the underlying collateral. For example, credit
card debt receivables are generally unsecured and the debtors are entitled to
the protection of a number of consumer credit laws, many of which can result
in reductions in outstanding balances. Additionally, holders of asset-backed
securities may also experience delays in payments or losses if the full
amounts due on underlying sales contracts are not realized. Because asset-
backed securities are relatively new, the market experience in these
securities is limited and the market's ability to sustain liquidity through
all phases of the market cycle has not been tested.
HIGH YIELD BONDS
APPLICABLE PORTFOLIOS. High Yield Bond, Managed Bond (up to 10% of its
assets), Equity Income, Multi-Strategy, Growth LT (up to 10% of its assets),
Bond and Income (up to 20% of its assets), and International Portfolios (up to
5% of its assets).
Generally, high yield/high risk debt securities are those rated lower than
Baa or BBB, or, if not rated by Moody's or S&P, of equivalent quality
(although the Managed Bond Portfolio may not invest in securities rated lower
than B) and which are commonly referred to as "junk bonds". Investment in such
securities generally provides greater income and increased opportunity for
capital appreciation than investments in higher quality debt securities, but
they also typically entail greater potential price volatility and principal
and income risk.
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In general, high yield bonds are not considered to be investment grade. They
are regarded as predominately speculative with respect to the issuing
company's continuing ability to meet principal and interest payments. The
prices of high yield bonds have been found to be less sensitive to interest-
rate changes than higher-rated investments, but more sensitive to adverse
economic downturns or individual corporate developments. A projection of an
economic downturn or of a period of rising interest rates, for example, could
cause a decline in high yield bond prices. In the case of high yield bonds
structured as zero-coupon or pay-in-kind securities, their market prices are
affected to a greater extent by interest rate changes, and therefore tend to
be more volatile than securities which pay interest periodically and in cash.
The secondary market in which high yield bonds are traded is generally less
liquid than the market for higher grade bonds. Less liquidity in the secondary
trading market could adversely affect the price at which a Portfolio could
sell a high yield bond, and could adversely affect the daily net asset value
of the Portfolio's shares. At times of less liquidity, it may be more
difficult to value the high yield bonds because such valuation may require
more research, and elements of judgment may play a greater role in the
valuation because there is less reliable, objective data available.
In addition, up to 15% of the assets that the Bond and Income Portfolio may
invest in high-yield securities may be invested in debt securities of foreign
governments or their agencies that are from emerging market countries.
Investments in these debt securities will be considered "high yield"
investments and thus may possess many of the risks factors discussed above. In
addition, as foreign securities, emerging market debt instruments are subject
to many risk considerations generally not common to domestic high yield
issuers. For more information on the risks of investment in foreign
securities, see "Foreign Securities."
Included among the emerging market debt obligations in which the Bond and
Income Portfolio may invest are "Brady Bonds," which are created through the
exchange of existing commercial bank loans to sovereign entities for new
obligations in connection with debt restructuring under a plan introduced by
former U.S. Secretary of the Treasury, Nicholas F. Brady (the "Brady Plan").
Brady Bonds are not considered U.S. Government securities and are considered
speculative. Brady Bonds have been issued only recently, and accordingly, do
not have a long payment history. They may be collateralized or
uncollateralized, or have collateralized or uncollateralized elements, and
issued in various currencies (although most are U.S. dollar-denominated), and
are actively traded in the over-the-counter secondary market.
Brady Bonds involve various risk factors including residual risk and the
history of defaults with respect to commercial bank loans by public and
private entities of countries issuing Brady Bonds. There can be no assurance
that Brady Bonds in which the Portfolio may invest will not be subject to
restructuring arrangements or to requests for new credit, which may cause the
Portfolio to suffer a loss of interest or principal on any of its holdings.
SMALL CAPITALIZATION STOCKS
APPLICABLE PORTFOLIOS. Growth, Aggressive Equity, Growth LT, Equity, and
Emerging Markets Portfolios, and to a lesser degree, Equity Income and Multi-
Strategy Portfolios.
Investments in larger companies present certain advantages in that such
companies generally have greater financial resources, more extensive research
and development, manufacturing, marketing and service capabilities, more
stability and greater depth of management and technical personnel. Investments
in smaller, less seasoned companies may present greater opportunities for
growth but also involve greater risks than customarily are associated with
more established companies. The securities of smaller companies may be subject
to more abrupt or erratic market movements than larger, more established
companies. These companies may have limited product lines, markets or
financial resources, or they may be dependent upon a limited management group.
Their securities may be traded only in the over-the-counter market or on a
regional securities exchange and may not be traded every day or in the volume
typical of trading on a major securities exchange. As a result, the
disposition by a Portfolio of securities to meet redemptions, or otherwise,
may require the Portfolio to sell these securities at a discount from market
prices or to sell during a period when such disposition is not desirable or to
make many small sales over a lengthy period of time.
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BORROWING
APPLICABLE PORTFOLIOS. All Portfolios.
Though not an ordinary practice, each Portfolio may borrow money to help
meet redemptions or for other purposes. Borrowing may exaggerate the effect on
net asset value of any increase or decrease in the market value of a
Portfolio, and money borrowed will be subject to interest costs. For
information on limits on the ability of any Portfolio to borrow, see the SAI.
ILLIQUID AND RESTRICTED SECURITIES
APPLICABLE PORTFOLIOS: All Portfolios may acquire illiquid securities. The
Money Market, High Yield Bond, Managed Bond, Government Securities, Growth,
Aggressive Equity, Growth LT, Equity Income, Multi-Strategy, Equity, Bond and
Income, International, and Emerging Markets Portfolios may acquire restricted
securities.
A Portfolio may invest in an illiquid or restricted security if the
Portfolio Manager believes that it presents an attractive investment
opportunity. Generally, a security is considered illiquid if it cannot be
disposed of within seven days. Its illiquidity might prevent the sale of such
a security at a time when a Portfolio Manager might wish to sell, and these
securities could have the effect of decreasing the overall level of a
Portfolio's liquidity. Further, the lack of an established secondary market
may make it more difficult to value illiquid securities, requiring the Fund to
rely on judgments that may be somewhat subjective in determining value, which
could vary from the amount that a Portfolio could realize upon disposition.
Restricted securities, including private placements, are subject to legal or
contractual restrictions on resale. They can be eligible for purchase without
SEC registration by certain institutional investors known as "qualified
institutional buyers," and under the Fund's procedures, restricted securities
could be treated as liquid. However, some restricted securities may be
illiquid and restricted securities that are treated as liquid could be less
liquid than registered securities traded on established secondary markets. A
Portfolio may not invest more than 15%, (10% for the Money Market Portfolio),
of its total assets in illiquid securities, measured at the time of
investment.
PRECIOUS METALS-RELATED SECURITIES
APPLICABLE PORTFOLIOS. Equity Portfolio, and possibly other Portfolios that
invest in equity securities.
Precious-metals-related securities are considered equity securities of U.S.
and foreign companies involved in the exploration, mining, development,
production, or distribution of gold or other natural resources, including
minerals and metals such as copper, aluminum, silver, platinum, uranium,
strategic metals, diamonds, coal, oil, and phosphates.
The value of these securities may be affected by worldwide financial and
political factors, and prices may fluctuate sharply over short time periods.
For example, precious metals securities may be affected by changes in
inflation expectations in various countries, metal sales by central banks of
governments or international agencies, governmental restrictions on the
private ownership of certain precious metals or minerals and other factors.
FOREIGN SECURITIES
APPLICABLE PORTFOLIOS: The International and Emerging Markets Portfolios may
invest primarily in equity securities of foreign issuers and may invest in
debt securities and money market obligations of foreign issuers. The
Aggressive Equity Portfolio may invest up to 20% of its assets in securities
that are traded principally in securities markets outside the United States
(excluding Eurodollar certificates of deposit). The Growth LT Portfolio may
invest up to 25% of its assets in foreign securities denominated in a foreign
currency. The Growth, Growth LT, Equity Income, Multi-Strategy, and Equity
Index Portfolios may invest in equity securities of foreign issuers if U.S.
exchange listed or included in the S&P 500. The Managed Bond and Government
Securities Portfolios may invest up to 20% of their assets in foreign debt
securities denominated in a foreign currency. The
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Multi-Strategy and the Bond and Income Portfolios may invest up to 10% of
their assets in foreign debt securities denominated in a foreign currency. The
Money Market, High Yield Bond, Managed Bond, Government Securities, Aggressive
Equity, Growth LT, Multi-Strategy, Bond and Income, International, and
Emerging Markets Portfolios may invest in fixed income securities, including
money market instruments and bank obligations of foreign issuers, including
corporate, foreign governmental, and international agency issuers, that are
denominated in U.S. dollars. All Portfolios may purchase American Depositary
Receipts (ADRs), which are dollar-denominated receipts issued generally by
domestic banks and representing the deposit with the bank of a security of a
foreign issuer. ADRs are publicly traded on exchanges or over-the-counter in
the United States. The Growth LT and International Portfolios may invest in
European Depositary Receipts (EDRs), which are receipts issued in Europe,
typically by banking institutions in London or Brussels, which evidence an
ownership arrangement similar to ADRs and are designed for use in European
securities markets; and may invest in Global Depositary Receipts (GDRs), which
are similar to ADRs, but are issued and traded in several international
financial markets, as well as other types of receipts of shares evidencing
ownership of the underlying foreign securities.
Most foreign securities are denominated in foreign currencies and investment
in foreign securities involves exposure to currency fluctuations. Transactions
in most foreign securities are conducted in foreign currencies, so a
Portfolio's assets must be exchanged for another currency each time a security
is bought or sold or a dividend is paid. Similarly, share price quotations and
total return information reflect conversion into U.S. dollars. Fluctuations in
foreign exchange rates can significantly increase or decrease the U.S. dollar
value of a foreign investment, which will enhance or diminish the return of a
foreign security in its own currency.
Investing in the securities of foreign issuers involves other special risks
and considerations not typically associated with investing in U.S. companies.
These include differences in accounting, auditing and financial reporting
standards, generally higher commission rates on foreign portfolio
transactions, the possibility of expropriation, nationalization or
confiscatory taxation, adverse changes in investment or exchange control
regulations, political instability that could affect U.S. investments in
foreign countries, and potential restrictions on the flow of international
capital. In many countries, there is less publicly available information about
issuers than is available in reports about companies in the United States. It
may be more difficult to obtain and enforce judgments against foreign
entities. Additionally, income (including interest and dividends) derived from
foreign securities may be subject to foreign taxes, including foreign
withholding taxes, and other foreign taxes may apply with respect to
securities transactions. Foreign securities often trade with less frequency
and volume than domestic securities and therefore may exhibit greater price
volatility and less liquidity. These risks are intensified with respect to
investments in emerging market countries. In addition, a number of the
currencies of developing countries have experienced significant declines
against the U.S. dollar in recent years, and devaluation may occur subsequent
to investments in these currencies by a Portfolio. Inflation and rapid
fluctuations in inflation rates have had and may continue to have negative
effects on the economies and securities markets of certain emerging market
countries. Emerging markets have different clearance and settlement procedures
and in certain markets there have been times when settlements have been unable
to keep pace with the volume of securities transactions making it difficult to
conduct such transactions. The inability of the Fund to make intended security
purchases due to settlement problems could cause the Fund to miss attractive
investment opportunities. Inability to dispose of a portfolio security due to
settlement problems could result either in losses to the Fund due to
subsequent declines in the value of the portfolio security or, if the Fund has
entered into a contract to sell a security, could result in possible liability
of the Fund to the purchaser. Investment in foreign securities also involves
the risk of possible losses through the holding of securities in custodian
banks and securities depositories in foreign countries. For information on the
risks of investing in emerging market debt securities, see "High Yield Bonds."
For a description of the Fund's custody arrangements for foreign securities,
see "Foreign Securities" in the SAI.
DIVERSIFICATION. The International and Emerging Markets Portfolios are
subject to guidelines for diversification of foreign security investments that
are imposed by California insurance authorities. Under these guidelines,
foreign investments will be allocated to at least three countries at all
times. For further information regarding foreign diversification guidelines,
see "Foreign Securities" in the SAI.
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FORWARD FOREIGN CURRENCY CONTRACTS
APPLICABLE PORTFOLIOS: Managed Bond, Government Securities, Aggressive
Equity, Growth LT, Multi-Strategy, Bond and Income, International, and
Emerging Markets Portfolios.
A forward currency contract is an obligation to purchase or sell a currency
against another currency at a future date at a price set at the time of the
contract. A Portfolio could engage in a forward currency transaction in
anticipation of or to protect itself against fluctuations in currency exchange
rates. Although forward contracts typically will involve the purchase or sale
of a foreign currency against the dollar, a Portfolio also may purchase or
sell one foreign currency forward against another foreign currency. In
addition, a Portfolio may hedge a foreign currency with forward contracts on
another ("proxy") currency of which changes in value generally correlate with
the currency to be hedged. There are certain markets where it is not possible
to engage in effective foreign currency hedging. This may be true, for
example, for the currencies of various Latin American countries in which the
foreign exchange markets are not sufficiently developed to permit hedging
activity to take place.
A Portfolio's dealings in forward foreign exchange will be limited to
hedging involving either specific transactions or portfolio positions.
Transaction hedging is the purchase or sale of forward foreign currency to
"lock in" the U.S. dollar price of a security purchased or sold by a
Portfolio. Position hedging is the sale of forward foreign currency with
respect to portfolio security positions denominated in a foreign currency. A
Portfolio will not speculate in forward foreign exchange.
Employing hedging strategies with forward currency contracts does not
eliminate fluctuations in the prices of portfolio securities or prevent losses
if the prices of such securities decline. Forward contracts involve some
transactional expense for a Portfolio. Although forward contracts will be used
primarily to protect a Portfolio from adverse currency movements, they also
involve the risk that anticipated currency movements will not be accurately
predicted and a Portfolio's total return could be adversely affected as a
result.
OPTIONS
APPLICABLE PORTFOLIOS: The High Yield Bond, Managed Bond, Government
Securities, Growth LT, Equity Income, Multi-Strategy, Equity, Bond and Income
and Emerging Markets Portfolios may purchase put and call options on
securities in pursuing their investment objectives. The High Yield Bond,
Managed Bond, Government Securities, Aggressive Equity, Growth LT, Equity
Income, Multi-Strategy, and Emerging Markets Portfolios may write (sell)
covered call and secured put options. The Growth LT, Equity Income, Multi-
Strategy, and Equity Index Portfolios may purchase put and call options on
securities indexes that are exchange traded to protect against price movements
in the stock market generally (or in particular segments of the market) rather
than in individual stocks. The Aggressive Equity and Emerging Markets
Portfolios may purchase and sell put and call options on securities indexes
that are exchange traded or traded on over-the-counter markets. The Aggressive
Equity Portfolio may, for hedging purposes, purchase put and call options on
securities and securities indexes and may write covered call options.
RISKS OF OPTIONS TRANSACTIONS. The purchase and writing (selling) of options
involves certain risks. During the option period, the covered call writer has
given up the opportunity to profit from a price increase in the underlying
securities above the exercise price. The writer of an option has no control
over the time when it may be required to fulfill its obligation as a writer of
the option. If a put or call option purchased by a Portfolio is not sold when
it has remaining value, and if the market price of the underlying security, in
the case of a put, remains equal to or greater than the exercise price or, in
the case of a call, remains less than or equal to the exercise price, the
Portfolio will lose its entire investment in the option. Also, where a put or
call option is purchased to hedge against price movements in a particular
security or market, the price of the put or call option may move more or less
than the price of the related security or index. In this regard, index options
can never be a perfect hedge against the overall risk of a stock position
except where the stock position and the index are composed of exactly the same
stocks, in the same proportions. There can be no assurance that a liquid
market will exist when a Portfolio seeks to close out an option position.
Furthermore, if trading restrictions or suspensions are imposed on the options
markets, a Portfolio may be unable to close out a position.
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<PAGE>
FOREIGN CURRENCY OPTIONS
APPLICABLE PORTFOLIOS: Managed Bond, Government Securities, Aggressive
Equity, Growth LT, Bond and Income, International, and Emerging Markets
Portfolios.
Options on foreign currencies may be purchased or written as a hedge against
changes in the value of the U.S. dollar (or another currency) in relation to a
foreign currency in which a Portfolio's securities may be denominated.
Currency options traded on U.S. or other exchanges may be subject to position
limits which may limit the ability of the Portfolio to reduce foreign currency
risk using such options. Over-the-counter options may be negotiated, but they
generally do not have as much market liquidity as exchange-traded options.
Employing hedging strategies with options on currencies does not eliminate
fluctuations in the prices of portfolio securities or prevent losses if the
prices of such securities decline. Furthermore, such hedging transactions
reduce or preclude the opportunity for gain if the value of the hedged
currency should change relative to the U.S. dollar (or other hedged currency).
A Portfolio will not speculate in options on foreign currencies.
There is no assurance that a liquid secondary market will exist for any
particular foreign currency option, or at any particular time. In the event no
liquid secondary market exists, it might not be possible to effect closing
transactions in particular options. If a Portfolio cannot close out an option
which it holds, it would have to exercise its option in order to realize any
profit and would incur transactional costs on the sale of the underlying
assets.
SWAP AGREEMENTS AND OPTIONS ON SWAP AGREEMENTS
APPLICABLE PORTFOLIOS: Managed Bond, Government Securities, Bond and Income,
and Emerging Markets Portfolios.
The Emerging Markets Portfolio may enter into equity index swap agreements
for purposes of gaining exposure to the stocks making up an index of
securities in a foreign market without actually purchasing those stocks. The
Managed Bond and Government Securities Portfolios may enter into interest
rate, interest rate index, and currency exchange rate swap agreements, and may
purchase and sell options thereon. In a standard swap transaction, two parties
agree to exchange the returns (or differentials in rates of return) earned or
realized on particular predetermined investments or instruments, which may be
adjusted for an interest factor. The gross returns to be exchanged between the
parties (i.e., the return on or increase in value of a particular dollar
amount invested at a particular interest rate, or in a "basket" of securities
representing a particular index) generally are calculated with respect to a
"notional amount." The "notional amount" of the swap agreement is only a
fictive basis on which to calculate the obligations of the parties. A
Portfolio will not enter into a swap agreement with any single party if the
net amount owed or to be received under existing contracts with that party
would exceed 5% of the Portfolio's assets. The Bond and Income Portfolio may
invest in the following types of swap agreements: (1) "interest rate caps,"
under which, in return for a premium, one party agrees to make payments to the
other to the extent that interest rates exceed a specified rate, or "cap"; (2)
"interest rate floors," under which, in return for a premium, one party agrees
to make payments to the other to the extent that interest rates fall below a
certain level; and (3) "interest rate collars," under which one party sells a
cap and purchases a floor or vice-versa in an attempt to protect itself
against interest rate movements exceeding given minimum or maximum levels.
RISKS OF SWAP AGREEMENTS. Whether a Portfolio's use of swap agreements will
be successful in furthering its investment objective will depend on a
Portfolio Manager's ability to predict correctly whether certain types of
investments are likely to produce greater returns than other investments.
Because they are two-party contracts and because they may have terms of
greater than seven days, swap agreements may be considered to be illiquid
investments. It may not be possible to enter into a reverse swap or close out
a swap position prior to its original maturity and, therefore, a Portfolio may
bear the risk of such position until its maturity. Moreover, a Portfolio bears
the risk of loss of the amount expected to be received under a swap agreement
in the event of the default or bankruptcy of a swap agreement counterparty. A
Portfolio will enter into swap agreements only with counterparties that meet
certain standards for creditworthiness (generally, such counterparties would
have to be
24
<PAGE>
eligible counterparties under the terms of a Portfolio's repurchase agreement
guidelines). Certain tax considerations may limit a Portfolio's ability to use
swap agreements. The swaps market is a relatively new market and is largely
unregulated. It is possible that developments in the swaps market, including
potential government regulation, could adversely affect a Portfolio's ability
to terminate existing swap agreements or to realize amounts to be received
under such agreements. See "Swap Agreements and Options on Swap Agreements"
and "Taxation" in the SAI.
SPREAD TRANSACTIONS
APPLICABLE PORTFOLIOS: High Yield Bond, Managed Bond and Government
Securities Portfolios.
The High Yield Bond, Managed Bond and Government Securities Portfolios may
enter into spread transactions with securities dealers. Spread transactions
are not generally exchange listed or traded. Spread transactions may occur in
the form of options, futures, forwards, or swap transactions. The purchase of
a spread transaction gives a Portfolio the right to sell or receive a security
or a cash payment with respect to an index at a fixed dollar spread or fixed
yield spread in relationship to another security or index which is used as a
benchmark. The purchase and sale of spread transactions will be used in
furtherance of a Portfolio's objectives and to protect a Portfolio against
adverse changes in the yield spread between high quality and lower quality
securities. Such protection is only provided during the life of the spread
transaction. The sale of spread transactions will be "covered" or "secured" as
described in the "Options", "Options on Foreign Currencies", "Futures
Contracts and Options on Futures Contracts", and "Swap Agreements and Options
on Swap Agreements" sections in the SAI.
The risk of loss on a spread transaction includes the premium and any
transaction costs paid by a Portfolio to obtain the option. There is no
assurance that closing transactions will be available.
FUTURES CONTRACTS AND FUTURES OPTIONS
APPLICABLE PORTFOLIOS: The High Yield Bond, Managed Bond, Government
Securities, Growth LT, Multi-Strategy, Equity, Bond and Income, and
International Portfolios may purchase and sell interest rate futures contracts
and options thereon ("futures options"). The Aggressive Equity, Growth LT,
Equity Income, Multi-Strategy, Equity Index, International, and Emerging
Markets Portfolios may purchase and sell stock index futures contracts and may
purchase options thereon. The Managed Bond, Government Securities, Aggressive
Equity, Growth LT, International, and Emerging Markets Portfolios may purchase
and sell foreign currency futures contracts and options thereon. The Emerging
Markets Portfolio may invest in futures contracts on securities, and in
options thereon.
USE OF FUTURES. These investments, the purchase or sale of futures contracts
or options thereon, may be made for bona fide hedging purposes and as an
adjunct to a Portfolio's securities activities. A Portfolio is required to
collateralize or cover a futures transaction or futures option so that the
position will be unleveraged.
RISKS OF FUTURES AND FUTURES OPTIONS. There are several risks associated
with the use of futures and futures options. While a Portfolio's hedging
transactions may protect the Portfolio against adverse movements in the
general level of interest rates or stock or currency prices, such transactions
could also preclude the opportunity to benefit from favorable movements in the
level of interest rates or stock or currency prices. A hedging transaction may
not correlate perfectly with price movements in the assets being hedged. An
incorrect correlation could result in a loss on both the hedged assets in a
Portfolio and/or the hedging vehicle, so that the Portfolio's return might
have been better had hedging not been attempted.
There can be no assurance that a liquid market will exist at a time when a
Portfolio seeks to close out a futures contract or a futures option position.
Most futures exchanges and boards of trade limit the amount of fluctuation
permitted in futures contract prices during a single day; once the daily limit
has been reached on a particular contract, no trades may be made that day at a
price beyond that limit. In addition, certain of these instruments are
relatively new and lack a deep secondary market. Lack of a liquid market for
any reason may prevent a Portfolio from liquidating an unfavorable position
and the Portfolio would remain obligated to meet margin requirements until the
position is closed.
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<PAGE>
The High Yield Bond, Multi-Strategy, Equity Income and Equity Index
Portfolios will only enter into futures contracts or futures options which are
standardized and traded on a U.S. exchange or board of trade, or similar
entity, or, in the case of futures options, for which an established over-the-
counter market exists. Each Portfolio is subject to limitations on the amount
that may be invested in futures and futures options transactions for purposes
other than bona fide hedging, under which initial margin deposits for futures
contracts and premiums paid for futures options may not exceed 5% of a
Portfolio's total assets (net of amounts that are "in the money").
FOREIGN FUTURES. The Managed Bond, Government Securities, Aggressive Equity,
Growth LT, Bond and Income, International, and Emerging Markets Portfolios may
trade futures contracts and options on futures contracts on U.S. domestic
markets as well as on exchanges located outside of the United States. Foreign
markets may offer advantages such as trading in indices that are not currently
traded in the United States. Foreign markets, however, may have greater risk
potential than domestic markets. Unlike trading on domestic commodity
exchanges, trading on foreign commodity exchanges is not regulated by the
Commodity Futures Trading Commission ("CFTC"). Foreign exchanges generally are
principal markets so that no common clearing facility exists, and a Portfolio
might be able to look only to the broker for performance of the contract.
Amounts received for foreign futures or foreign options transactions may not
be provided the same protection as funds received in respect of transactions
on United States futures exchanges. Trading in foreign futures or foreign
options contracts may not be afforded certain of the protective measures
provided by U.S. law and regulation, including the right to use reparations
proceedings before the CFTC and arbitration proceedings provided by the
National Futures Association or any domestic futures exchange. In addition,
any profits that a Portfolio might realize in trading could be eliminated by
adverse changes in the exchange rate of the currency in which the transaction
is denominated. Transactions on foreign exchanges may include both commodities
that are traded on domestic exchanges or boards of trade and those that are
not.
The Fund reserves the right to engage in other types of futures transactions
in the future.
ORGANIZATION AND MANAGEMENT OF THE FUND
HOW IS THE FUND ORGANIZED? The Fund was organized as a Massachusetts
business trust on May 4, 1987, and currently consists of fourteen separate
Portfolios. The assets of each Portfolio are segregated, and your interest is
limited to the Portfolio to which proceeds from your Variable Contract's
Accumulated Value is allocated.
WHO OVERSEES THE BUSINESS OF THE FUND? The business and affairs of the Fund
are managed under the direction of the Board of Trustees under the Fund's
Agreement and Declaration of Trust. The Trustees are Thomas C. Sutton, Glenn
S. Schafer, Richard L. Nelson, Lyman W. Porter, and Alan Richards. Mr. Sutton
is also the Chief Executive Officer and Mr. Schafer is also the President of
Pacific Life. Messrs. Nelson, Porter, and Richards are independent Trustees.
See the SAI under the heading "Management of the Fund."
WHO IS THE FUND'S INVESTMENT ADVISER? Pacific Life Insurance Company. Under
an Investment Advisory Agreement with the Fund, Pacific Life, subject to the
supervision of the Fund's Board of Trustees, administers the affairs of the
Fund and supervises the investment program for the Fund's Portfolios. Pacific
Life also provides support services to the Fund pursuant to an Agreement for
Support Services with the Fund.
MORE ABOUT PACIFIC LIFE. Pacific Life is a life insurance company that is
domiciled in California. Pacific Life's operations include both life insurance
and annuity products as well as financial and retirement services. As of the
end of 1997, Pacific Life had over $80.0 billion of individual life insurance
in force and total admitted assets of approximately $31.8 billion. Pacific
Life has been ranked according to admitted assets as the largest life
insurance carrier in the nation for 1997. Together with its subsidiaries and
affiliated enterprises, Pacific Life has total assets and funds under
management of over $236 billion. Pacific Life is authorized to conduct life
insurance and annuity business in the District of Columbia and all states
except New York. Its principal offices are located at 700 Newport Center
Drive, Newport Beach, California 92660.
26
<PAGE>
Pacific Life was originally organized on January 2, 1868, under the name
"Pacific Mutual Life Insurance Company of California" and reincorporated as
"Pacific Mutual Life Insurance Company" on July 22, 1936. On September 1,
1997, Pacific Life converted from a mutual life insurance company to a stock
life insurance company ultimately controlled by a mutual holding company.
Pacific Life is a subsidiary of Pacific LifeCorp, a holding company which, in
turn, is a subsidiary of Pacific Mutual Holding Company, a mutual holding
company. Under their respective charters, Pacific Mutual Holding Company must
always hold at least 51% of the outstanding voting stock of Pacific LifeCorp,
and Pacific LifeCorp must always own 100% of the voting stock of Pacific Life.
Owners of Pacific Life's annuity contracts and life insurance policies have
certain membership interests in Pacific Mutual Holding Company, consisting
principally of the right to vote on the election of the Board of Directors of
the mutual holding company and on other matters, and certain rights upon
liquidation or dissolutions of the mutual holding company.
DOES PACIFIC LIFE MANAGE ANY OF THE PORTFOLIOS DIRECTLY? Pacific Life
directly manages both the High Yield Bond and the Money Market Portfolios.
Mr. Raymond J. Lee has primary responsibility for investment management of
the Money Market and the High Yield Bond Portfolios; is in charge of all
publicly traded bonds; and has responsibility for portfolio management of
pension assets for Pacific Life. Mr. Lee is Senior Vice President, Portfolio
Manager, of Pacific Life, and joined Pacific Life in 1976 after completing his
MBA in Finance from the Wharton School of the University of Pennsylvania. Mr.
Lee received his bachelor's degree in Economics from UCLA. He is a member of
the Los Angeles Society of Financial Analysts. Mr. Simon T. Lee, Vice
President, Securities, of Pacific Life, shares portfolio management
responsibilities for the High Yield Bond Portfolio and has responsibility for
portfolio management of Pacific Life's high yield and convertible bond assets.
Mr. Lee joined Pacific Life in 1985. He holds a bachelor's degree in Business
Administration and an MBA from Loyola Marymount University. He is a Chartered
Financial Analyst. Mr. Dale W. Patrick, Investment Analyst, shares in the
responsibility for investment management of the Money Market Portfolio. Mr.
Patrick joined Pacific Life in 1985 and holds a Bachelor of Arts degree in
Economics from the University of Colorado. Mr. Patrick has assisted in
management of the Money Market Portfolio since 1994. Mr. Patrick is also
responsible for the investment management of Pacific Life's short-term fixed
income investments.
Pacific Life and the Fund employ other investment advisory firms as
Portfolio Managers for all of the Fund's Portfolios, except the Money Market
and High Yield Bond Portfolios.
WHO IS THE PORTFOLIO MANAGER FOR THE MANAGED BOND AND GOVERNMENT SECURITIES
PORTFOLIOS? Pacific Investment Management Company ("PIMCO") is an investment
counseling firm founded in 1971, and had approximately $118 billion in assets
under management as of December 31, 1997. PIMCO is a subsidiary partnership of
PIMCO Advisors L.P. ("PIMCO Advisors"). A majority interest in PIMCO Advisors
is held by PIMCO Partners, G.P., a general partnership between PIMCO, a
California corporation and indirect wholly owned subsidiary of Pacific Life
Insurance Company, and PIMCO Partners, LLC, a limited liability company
controlled by the PIMCO managing directors. PIMCO also provides investment
advisory services to PIMCO Funds and several other mutual fund portfolios and
to private accounts for pension and profit sharing plans. PIMCO's address is
840 Newport Center Drive, Suite 360, Newport Beach, CA 92660.
Effective January 1, 1997, for the services provided, Pacific Life pays
PIMCO a fee based on a percentage of the combined average daily net assets of
the Managed Bond and Government Securities Portfolios according to the
following schedule:
MANAGED BOND AND GOVERNMENT SECURITIES PORTFOLIOS
<TABLE>
<CAPTION>
RATE
(%) BREAK POINT (ASSETS)
---- --------------------
<S> <C>
.50% On first $25 million
.375% On next $25 million
.25% On excess
</TABLE>
27
<PAGE>
WHO AT PIMCO MANAGES THE MANAGED BOND AND GOVERNMENT SECURITIES
PORTFOLIOS? Mr. John L. Hague, Managing Director and senior member of PIMCO's
Portfolio Management Group, has primary responsibility for investment
management of the Managed Bond and Government Securities Portfolios as well as
various other accounts of PIMCO. Mr. Hague joined Pacific Investment
Management Company in 1987. During his 15 years of investment experience, he
was associated with Salomon Brothers, Inc. specializing in international fixed
income products and mortgage securities and Morgan Guaranty in credit
research. Mr. Hague holds a bachelor's degree in Economic Analysis from
Bowdoin College and an MBA in Finance from Stanford University.
WHO IS THE PORTFOLIO MANAGER FOR THE GROWTH PORTFOLIO? Capital Guardian
Trust Company ("Capital Guardian"), a wholly-owned subsidiary of The Capital
Group Companies, Inc. ("CG"). Capital Guardian's address is 333 South Hope
Street, Los Angeles, California 90071. Capital Research and Management Company
("CRMC"), another wholly-owned subsidiary of CG, provides investment advisory
services to mutual funds known collectively as the American Funds Group.
For the services provided, Pacific Life pays Capital Guardian a fee based on
a percentage of the average daily net assets of the Growth Portfolio according
to the following schedule:
GROWTH PORTFOLIO
<TABLE>
<CAPTION>
RATE
(%) BREAK POINT (ASSETS)
---- --------------------
<S> <C>
.50% On first $30 million
.40% On next $30 million
.30% On excess
</TABLE>
WHO AT CAPITAL GUARDIAN MANAGES THE GROWTH PORTFOLIO? The following persons
are primarily responsible for the portfolio management of the Growth
Portfolio. Michael R. Ericksen, Senior Vice President of Capital Guardian, has
had 17 years experience as an investment professional (11 years with Capital
Guardian or its affiliates). Robert G. Kirby, Senior Partner of The Capital
Group Partners L.P., an affiliate of CRMC, has had 45 years of experience as
an investment professional (32 years with Capital Guardian or its affiliates).
K. Bryan Jacoboski, Vice President of Capital Guardian, has had 17 years of
experience as an investment professional (4 with Capital Guardian). He spent
11 years with Paine-Webber, where he was a Managing Director in equity
research prior to joining Capital Guardian in 1994. James S. Kang, Vice
President of Capital Guardian Research Company, has had 11 years experience as
an investment professional (10 years with Capital Guardian). Mr. Ericksen is
the lead portfolio manager, and along with Messrs. Kang, Kirby, and Jacoboski,
is responsible for management of the Portfolio.
WHO IS THE PORTFOLIO MANAGER FOR THE AGGRESSIVE EQUITY PORTFOLIO? Alliance
Capital Management L.P. ("Alliance Capital") is a leading international
investment manager supervising client accounts with assets as of December 31,
1997 totaling $218.7 billion. Alliance Capital is a Delaware limited
partnership. Alliance Capital Management Corporation ("ACMC") is the general
partner of Alliance Capital (and conducts no other active business). As of
June 30, 1997 The Equitable Life Assurance Society of the United States
("Equitable"), ACMC, Inc. and Equitable Capital Management Corporation
("ECMC") were the beneficial owners of approximately 57.1% of the outstanding
units of Alliance Capital. ACMC, ECMC and ACMC, Inc. are wholly owned
subsidiaries of The Equitable Companies Incorporated, a Delaware corporation
("ECI"). As of September 30, 1997, AXA-UAP, a French insurance holding
company, owned approximately 59% of the issued and outstanding shares of the
common stock of ECI.
Alliance Capital currently serves as investment adviser to other mutual
funds, as well as individual, corporate, retirement, and charitable accounts.
As of December 31, 1997, Alliance Capital was retained as an investment
manager of employee benefit fund assets for 31 of the Fortune 100 companies.
Alliance Capital's principal office is located at 1345 Avenue of the Americas,
New York, New York and has five additional offices in the United States and
subsidiaries and affiliates worldwide.
28
<PAGE>
Effective May 1, 1998, for the services provided, Pacific Life pays Alliance
Capital a fee based on a percentage of the Portfolio's average daily net
assets of the Aggressive Equity Portfolio according to the following schedule:
AGGRESSIVE EQUITY PORTFOLIO
<TABLE>
<CAPTION>
RATE
(%) BREAK POINT (ASSETS)
---- ---------------------
<S> <C>
.60% On first $100 million
.45% On next $400 million
.40% On excess
</TABLE>
WHO AT ALLIANCE CAPITAL MANAGES THE AGGRESSIVE EQUITY PORTFOLIO? Kevin J.
O'Brien, Senior Vice President and Portfolio Manager, and Alden M. Stewart,
Executive Vice President and Portfolio Manager, are primarily responsible for
the day to day management of the Aggressive Equity Portfolio. Mr. O'Brien has
had 19 years of investment experience (10 years with Alliance Capital). Prior
to joining Alliance Capital in 1988, he was a partner at Campbell Advisors and
a portfolio manager at Connecticut Mutual Life Insurance. Mr. O'Brien holds a
B.A. from Amherst College and an M.A. and Ph.D. from Cornell University. He is
a Chartered Financial Analyst and a member of Phi Beta Kappa. Mr. Stewart has
had 27 years of investment experience (6 years with Alliance Capital). He
began his career in 1971 as an analyst following various industry groups and
has been a portfolio manager since 1977. Mr. Stewart holds a B.A. from the
University of Oregon and an M.B.A. from the University of Chicago.
WHO IS THE PORTFOLIO MANAGER FOR THE GROWTH LT PORTFOLIO? Janus Capital
Corporation ("Janus"). Kansas City Southern Industries, Inc. owns
approximately 83% of the outstanding voting stock of Janus. Janus' address is
100 Fillmore Street, Denver, Colorado 80206-4923. Janus currently serves as
investment adviser or subadviser to the Janus Funds, as well as other mutual
funds and individual, corporate, charitable, and retirement accounts.
Effective January 1, 1997, for the services provided, Pacific Life pays
Janus a fee based on a percentage of the average daily net assets of the
Growth LT Portfolio according to the following schedule:
GROWTH LT PORTFOLIO
<TABLE>
<CAPTION>
RATE
(%) BREAK POINT (ASSETS)
---- ---------------------
<S> <C>
.55% On first $100 million
.50% On next $400 million
.45% On excess
</TABLE>
WHO AT JANUS MANAGES THE GROWTH LT PORTFOLIO? Warren B. Lammert, III, Vice
President of Janus, is primarily responsible for the day-to-day management and
implementation of Janus' investment strategy for the Growth LT Portfolio. Mr.
Lammert is portfolio manager and Executive Vice President of Janus Mercury
Fund and Janus Venture Fund, Executive Vice President of Janus Investment
Fund, and has been the portfolio manager of various growth oriented accounts
since 1991. He joined Janus as a securities analyst in 1987, taking an
educational sabbatical from 1988 to 1989. He received his undergraduate degree
in economics from Yale University and received his M.S. in economic history
(with distinction) from the London School of Economics, London, England. Mr.
Lammert is a Chartered Financial Analyst.
WHO IS THE PORTFOLIO MANAGER FOR THE EQUITY INCOME AND MULTI-STRATEGY
PORTFOLIOS? J.P. Morgan Investment Management Inc. ("J.P. Morgan Investment"),
a wholly-owned subsidiary of J.P. Morgan & Co. Incorporated ("Morgan"). J.P.
Morgan Investment's address is 522 Fifth Avenue, New York, New York 10036.
J.P. Morgan Investment is an investment manager for corporate, public, and
union employee benefit funds,
29
<PAGE>
foundations, endowments, insurance companies, government agencies and the
accounts of other institutional investors. Capital Guardian served as
portfolio manager to the Equity Income and Multi-Strategy Portfolios from
their commencement of operations in 1988 through December 31, 1993.
Effective January 1, 1997, for the services provided, Pacific Life pays J.P.
Morgan Investment a fee based on a percentage of the combined average daily
net assets of the Equity Income and Multi-Strategy Portfolios according to the
following schedule:
EQUITY INCOME AND MULTI-STRATEGY PORTFOLIOS
<TABLE>
<CAPTION>
RATE
(%) BREAK POINT (ASSETS)
---- ---------------------
<S> <C>
.45% On first $100 million
.40% On next $100 million
.35% On next $200 million
.30% On next $350 million
.20% On excess
</TABLE>
WHO AT J.P. MORGAN INVESTMENT MANAGES THE EQUITY INCOME AND MULTI-STRATEGY
PORTFOLIOS? William M. Riegel and William G. Tennille are primarily
responsible for the day-to-day management and implementation of J.P. Morgan
Investment's process for the Multi-Strategy Portfolio, and Henry D. Cavanna
shares responsibility with Mr. Riegel for the Equity Income Portfolio. William
M. Riegel, Managing Director, is a senior equity portfolio manager in the
Equity and Balanced Accounts Group. Joining Morgan in 1979, he became an
investment research analyst specializing in energy and machinery companies
after completing the firm's commercial bank management training program. Mr.
Riegel joined the Equity group in 1984, assisting with the management of the
Convertible Fund and separately managed accounts. He assumed responsibility
for managing convertible portfolios in 1987. Mr. Riegel graduated from
Williams College in 1978 and is a Chartered Financial Analyst. Henry D.
Cavanna, Managing Director, is a senior U.S. equity portfolio manager in the
U.S. Equity and Balanced Accounts Group. His responsibility for several major
institutional clients draws on his extensive experience in this area. Before
becoming a portfolio manager, he was responsible for marketing and business
development activities, while his first assignment at Morgan was in Pension
Administration. Mr. Cavanna was with the Wall Street firm, Harris Upham & Co.,
prior to joining Morgan in 1971. He received his B.A. degree from Boston
College and L.L.B. degree from the University of Pennsylvania. William G.
Tennille, Vice President, is a portfolio manager for separately managed and
commingled funds with an emphasis in mortgage securities and derivatives.
Prior to joining Morgan in 1992, he managed the investment portfolios of
Manufacturers Hanover Trust, Deposit Guaranty Bank, and First Florida Banks.
He is a graduate of the University of North Carolina.
WHO IS THE PORTFOLIO MANAGER FOR THE EQUITY PORTFOLIO AND BOND AND INCOME
PORTFOLIO? Goldman Sachs Asset Management ("Goldman Sachs") and its affiliates
are the investment management division of Goldman, Sachs & Co. Founded in
1869, Goldman, Sachs & Co. is one of the world's largest investment banking
firms and a leader in almost every field of finance.
As of December 22, 1997, Goldman Sachs and its affiliates manage, administer
and distribute over $135 billion for institutional and individual investors
worldwide. Headquartered in New York at One New York Plaza, New York, New York
10004, Goldman Sachs and its affiliates have offices in major U.S. cities as
well as London, Tokyo and Singapore.
30
<PAGE>
Effective May 1, 1998, for the services provided, Pacific Life pays Goldman
Sachs a fee based on a percentage of the combined average daily net assets of
the Equity and Bond and Income Portfolios according to the following schedule:
EQUITY AND BOND AND INCOME PORTFOLIOS
<TABLE>
<CAPTION>
RATE
(%) BREAK POINT (ASSETS)
---- ---------------------
<S> <C>
.35% On first $100 million
.30% On next $100 million
.25% On next $800 million
.20% On excess
</TABLE>
WHO AT GOLDMAN SACHS MANAGES THE EQUITY PORTFOLIO AND BOND AND INCOME
PORTFOLIO? Robert C. Jones, Managing Director, Victor H. Pinter, Vice
President, and Kent A. Clark, Vice President, are primarily responsible for
the day to day management of the Equity Portfolio. Mr. Jones brings 17 years
of investment experience to his work in developing and implementing Goldman
Sachs' quantitative equity management services. Prior to joining Goldman Sachs
in 1989, he was the senior quantitative analyst in the Investment Research
Department at Goldman Sachs & Co. and provided quantitative research for both
a major investment banking firm and an options consulting firm. Mr. Jones is a
Chartered Financial Analyst and holds a B.A. degree from Brown University and
an M.B.A. from the University of Michigan. Prior to joining Goldman Sachs in
1985, Mr. Pinter was a project manager in the Information Technology Division
of Goldman Sachs & Co and a consultant at Chase Econometrics/IDC. He holds a
B.S. degree from Brooklyn College and an M.B.A. from New York University's
Stern School of Business. Mr. Clark joined Goldman Sach's quantitative equity
management team in 1992. He is a Chartered Financial Analyst and holds a
Bachelor of Commerce degree from the University of Calgary and an M.B.A. from
the University of Chicago. Jonathan A. Beinner, Managing Director, and C.
Richard Lucy, Vice President, are primarily responsible for the day to day
management of the Bond and Income Portfolio. Mr. Beinner is co-head of the
U.S. Fixed Income Team and heads the mortgage-backed and asset-backed
securities group. He joined Goldman Sachs in 1990 after working in the trading
and arbitrage group of Franklin Savings Association. Mr. Beinner holds two
B.S. degrees from the University of Pennsylvania. Prior to joining Goldman
Sachs in 1992, Mr. Lucy spent nine years managing fixed income assets at Brown
Brothers Harriman & Co. He is a Chartered Financial Analyst and holds B.S. and
M.B.A. degrees from New York University.
WHO IS THE PORTFOLIO MANAGER OF THE EQUITY INDEX PORTFOLIO? Bankers Trust
Company ("BTCo"), a wholly-owned subsidiary of Bankers Trust New York
Corporation. BTCo's address is 130 Liberty Street, New York, New York 10006.
Bankers Trust conducts a variety of general banking and trust activities and
is a major supplier of financial services to the international and domestic
institutional markets. BTCo is a wholly-owned subsidiary of Bankers Trust New
York Corporation, the seventh largest bank holding company in the United
States. BTCo is responsible for the management of the Equity Index Portfolio.
As of December 31, 1997, BTCo managed assets approximating $317.8 billion.
BTCo is the investment manager to over 25 other mutual fund portfolios.
For the services provided, Pacific Life pays a quarterly fee in advance to
BTCo, based on the net assets of the Equity Index Portfolio at the beginning
of each calendar quarter according to the following schedule:
EQUITY INDEX PORTFOLIO
<TABLE>
<CAPTION>
RATE
(%) BREAK POINT (ASSETS)
---- ---------------------
<S> <C>
.07% On first $100 million
.03% On next $100 million
.01% On excess
</TABLE>
The fee is subject to a minimum annual fee of $100,000 for the calendar year
1997 and each year thereafter.
31
<PAGE>
WHO IS THE PORTFOLIO MANAGER OF THE INTERNATIONAL PORTFOLIO? Morgan Stanley
Asset Management Inc. ("Morgan Stanley"), a subsidiary of Morgan Stanley, Dean
Witter, Discover & Co. Morgan Stanley, who's address is 1221 Avenue of the
Americas, New York, New York 10020, became the Portfolio Manager effective
June 1, 1997. Morgan Stanley, together with its affiliated asset management
companies, conducts a worldwide portfolio management business and provides a
broad range of portfolio management services to customers in the United States
and abroad. As of December 31, 1997 Morgan Stanley, together with its
affiliated institutional asset management companies, had approximately $146
billion in assets under management as an investment manager or as a fiduciary
adviser. Morgan Stanley has been managing international securities since 1986.
Pacific Life will pay Morgan Stanley a fee at an annual rate of .35% based
on the average daily net assets of the International Portfolio.
WHO AT MORGAN STANLEY MANAGES THE INTERNATIONAL PORTFOLIO? Francine J.
Bovich, a Managing Director of Morgan Stanley, is primarily responsible for
the day-to-day investment management and implementation of Morgan Stanley's
investment strategy for the International Portfolio. Prior to joining Morgan
Stanley in 1993, Ms. Bovich was a Principal and Executive Vice President of
Westwood Management Corp., a registered investment adviser (1986-1993). Before
joining Westwood, she was a Managing Director of Citicorp Investment
Management, Inc. (Now Chancellor Capital Management), where she was
responsible for the Institutional Investment Management group (1980-1986). Ms.
Bovich began her investment career with Bankers Trust Company (1973-1980). She
holds a B.A. in Economics from Connecticut College and an M.B.A. in Finance
from New York University.
WHO IS THE PORTFOLIO MANAGER OF THE EMERGING MARKETS PORTFOLIO? Blairlogie
Capital Management ("Blairlogie"), a subsidiary partnership of PIMCO Advisors,
L.P., an affiliate of Pacific Life. Blairlogie's address is 4th Floor, 125
Princes Street, Edinburgh EH2 4AD, Scotland. Blairlogie Capital Management,
Ltd., the predecessor investment advisor to Blairlogie, commenced operations
in 1992. As of December 31, 1997, accounts managed by Blairlogie had combined
assets of approximately $647 million.
Effective January 1, 1997, for the services provided, Pacific Life pays
Blairlogie a fee based on a percentage of the average daily net assets of the
Emerging Markets Portfolio according to the following schedule:
EMERGING MARKETS PORTFOLIO
<TABLE>
<CAPTION>
RATE
(%) BREAK POINT (ASSETS)
---- --------------------
<S> <C>
.85% On first $50 million
.75% On next $50 million
.70% On next $50 million
.65% On next $50 million
.60% On excess
</TABLE>
WHO AT BLAIRLOGIE MANAGES THE EMERGING MARKETS PORTFOLIO? James Smith, Chief
Investment Officer and Managing Director of Blairlogie since 1992, is
primarily responsible for the day-to-day management of the Emerging Markets
Portfolio. He is responsible for managing an investment team of six
professionals, who, in turn, specialize in selection of stocks within Europe,
Asia, the Americas, and in currency and derivatives. He previously served as a
Senior Portfolio Manager at Murray Johnstone in Glasgow, Scotland, responsible
for international investment management for North American clients, and at
Schroder Investment Management in London. Mr. Smith received his bachelor's
degree in Economics from London University and his MBA from Edinburgh
University. He is an Associate of the Institute of Investment Management and
Research. Gavin Dobson, Chief Executive Officer and Managing Director of
Blairlogie Capital Management since 1992, oversees the relationship with the
Fund. He has 20 years of investment experience including the position of
President and Chief Operating Officer of Murray Johnstone International in
Chicago, Illinois from 1989 to 1992. Qualified as a Scottish attorney in 1976,
Mr. Dobson has degrees in Economics from Dundee University and Law from
Edinburgh University. Messrs. Dobson and Smith are co-founders of Blairlogie.
32
<PAGE>
HOW HAS THE FUND SECURED THE SERVICES OF THE INVESTMENT ADVISER AND THE
PORTFOLIO MANAGERS? The Fund has entered into an Investment Advisory Agreement
with Pacific Life under which Pacific Life serves as Investment Adviser to the
Fund. The Fund and Pacific Life have entered into Portfolio Management
Agreements with the Portfolio Managers. After initial two year terms, the
Investment Advisory Agreement and the Portfolio Management Agreements require
renewal by the Fund's Board of Trustees annually. Any of these agreements can
be terminated by the Fund's Board of Trustees. The Portfolio Management
Agreements can be terminated by Pacific Life or by any of the Portfolio
Managers. In the event of termination of a Portfolio Management Agreement, the
current Portfolio Manager could no longer service the applicable Portfolio.
Pacific Life could manage the applicable Portfolio directly or could recommend
a replacement to the Fund's Board of Trustees.
Under the Portfolio Management Agreements, the Portfolio Managers are
compensated by Pacific Life, and not by the Fund. Pacific Life derives the
amounts that it pays the Portfolio Managers from its own fees under the
Investment Advisory Agreement.
HOW MUCH DOES THE FUND PAY FOR THE ADVISORY SERVICES OF PACIFIC LIFE AND THE
PORTFOLIO MANAGERS? The Fund pays the Adviser for its services under the
Investment Advisory Agreement, a fee based on an annual percentage of the
average daily net assets of each Portfolio. For the Money Market Portfolio,
the Fund pays to the Adviser a fee at an annual rate of .40% of the first $250
million of the average daily net assets of the Portfolio, .35% of the next
$250 million of the average daily net assets of the Portfolio, and .30% of the
average daily net assets of the Portfolio in excess of $500 million. For the
Equity Index Portfolio, the Fund pays .25% of the first $100 million of the
average daily net assets of the Portfolio, .20% of the next $100 million of
the average daily net assets of the Portfolio, and .15% of the average daily
net assets of the Portfolio in excess of $200 million. For the Managed Bond,
High Yield Bond, Government Securities, and Bond and Income Portfolios, the
Fund pays .60% of the average daily net assets of each of the Portfolios. For
the Growth, Equity Income, Equity, and Multi-Strategy Portfolios, the Fund
pays .65% of the average daily net assets of each of the Portfolios. For the
Growth LT Portfolio, the Fund pays .75% of the average daily net assets of the
Portfolio. For the Aggressive Equity Portfolio, the Fund pays .80% of the
average daily net assets of the Portfolio. For the International Portfolio,
the Fund pays .85% of the average daily net assets of the Portfolio. For the
Emerging Markets Portfolio, the Fund pays 1.10% of the average daily net
assets of the Portfolio. These fees are computed and accrued daily and paid
monthly.
WHAT OTHER EXPENSES DOES THE FUND BEAR? The Fund bears all costs of its
operations. These costs may include expenses for custody, audit fees, fees and
expenses of the independent trustees, organizational expenses and other
expenses of its operations, including the cost of support services, and may,
if applicable, include extraordinary expenses such as expenses for special
consultants or legal expenses.
The Fund is also responsible for bearing the expense of various matters,
including, among other things, the expense of registering and qualifying the
Fund on state and federal levels, legal and accounting services, maintaining
the Fund's legal existence, shareholders' meetings and expenses associated
with preparing, printing and distributing reports, proxies and prospectuses to
shareholders.
The Fund and Pacific Life entered into an Agreement for Support Services
effective October 1, 1995, pursuant to which Pacific Life provides support
services such as those described above. Under the terms of the Agreement for
Support Services, it is not intended that Pacific Life will profit from these
services to the Fund.
Fund expenses directly attributable to a Portfolio are charged to that
Portfolio; other expenses are allocated proportionately among all the
Portfolios in relation to the net assets of each Portfolio. For the period
ended December 31, 1997, the total annualized expenses of each Portfolio that
had commenced operations on or before such date were the following percentages
of average daily net assets: Money Market Portfolio--.44%, High Yield Bond
Portfolio--.65%, Managed Bond Portfolio--.66%, Government Securities
Portfolio--.66%, Growth Portfolio--.70%, Aggressive Equity Portfolio--.86%,
Growth LT Portfolio--.82%, Equity Income Portfolio--.70%, Multi-Strategy
Portfolio--.71%, Equity Portfolio--.70%, Bond and Income Portfolio--.66%,
Equity Index Portfolio--.23%, International Portfolio--1.02%, and Emerging
Markets Portfolio--1.46%. The
33
<PAGE>
expenses of each Portfolio, expressed as a percentage of the Portfolio's
average daily net assets, is shown under "Ratio of Expenses to Average Net
Assets" in the Financial Highlights section at the beginning of this
Prospectus for each year of each Portfolio's operation. More information on
the expenses of the Portfolios is included in the Portfolios' Statements of
Operations, which can be found in the financial statements included in the
Fund's annual and semi-annual reports sent to shareholders.
WHAT IS PACIFIC LIFE DOING TO LIMIT FUND EXPENSES? Pacific Life has agreed,
until at least December 31, 1999, to reimburse each Portfolio for its
operating expenses to the extent that such expenses, exclusive of advisory
fees, additional custodial charges associated with holding foreign securities,
foreign taxes on dividends, interest, or gains, and extraordinary expenses,
exceed 0.25% of the Portfolio's average daily net assets. Pacific Life began
this expense reimbursement policy in April 1989. There can be no assurance
that this policy will be continued beyond December 31, 1999.
WHO DISTRIBUTES THE FUND'S SHARES? Shares of the Fund are distributed
through Pacific Mutual Distributors, Inc. (the "Distributor" or "PMD") a
subsidiary of Pacific Life. PMD's address is 700 Newport Center Drive, Newport
Beach, California 92660. PMD is a broker-dealer registered with the SEC and a
member of the National Association of Securities Dealers. PMD acts as
Distributor without remuneration from the Fund.
WHO IS THE CUSTODIAN OF THE FUND? Investor's Fiduciary Trust Company
("IFTC") provides the Fund with portfolio accounting and custodial services.
IFTC's address is 801 Pennsylvania, Kansas City, Missouri 64105.
MORE ON THE FUND'S SHARES
HOW DO YOU PURCHASE SHARES OF THE FUND? Shares of the Fund are not sold
directly to the general public. Shares of the Fund are currently offered only
for purchase by the Separate Accounts to serve as an investment medium for the
Variable Contracts issued or administered by Pacific Life. For information on
purchase of a Variable Contract, consult a prospectus for the Separate
Account. Shares of the Growth Portfolio are offered only to Separate Accounts
of Pacific Life that fund (1) variable life insurance policies, and (2)
variable annuity contracts that were issued by Pacific Life prior to January
1, 1994. The Portfolio is not available for variable annuity contracts issued
on or after January 1, 1994. The shares of the Aggressive Equity and Emerging
Markets Portfolios are not available for Pacific Corinthian variable annuity
contracts.
HOW ARE SHARES REDEEMED? Shares of any Portfolio may be redeemed on any
business day upon receipt of a request for redemption from the insurance
company whose separate account owns the shares. Redemptions are effected at
the per share net asset value next determined after receipt of the redemption
request. Redemption proceeds will ordinarily be paid within seven days
following receipt of instructions in proper form, or sooner, if required by
law. The right of redemption may be suspended by the Fund or the payment date
postponed beyond seven days when the New York Stock Exchange is closed (other
than customary weekend and holiday closings) or for any period during which
trading thereon is restricted because an emergency exists, as determined by
the SEC, making disposal of portfolio securities or valuation of net assets
not reasonably practicable, and whenever the SEC has by order permitted such
suspension or postponement for the protection of shareholders. If the Board of
Trustees should determine that it would be detrimental to the best interests
of the remaining shareholders of a Portfolio to make payment wholly or partly
in cash, the Portfolio may pay the redemption price in whole or part by a
distribution in kind of securities from the Portfolio, in lieu of cash, in
conformity with applicable rules of the SEC. If shares are redeemed in kind,
the redeeming shareholder might incur brokerage costs in converting the assets
into cash. Under the Investment Company Act of 1940, the Fund is obligated to
redeem shares solely in cash up to the lesser of $250,000 or 1 percent of its
net assets during any 90-day period for any one shareholder.
CAN YOU MAKE EXCHANGES AMONG THE PORTFOLIOS? Variable Contract Owners do not
deal directly with the Fund to purchase, redeem, or exchange shares of a
Portfolio, and Variable Contract Owners should refer to
34
<PAGE>
the Prospectus for the applicable Separate Account for information on the
allocation of premiums and on transfers of accumulated value among options
available under the contract.
HOW IS THE VALUE OF THE PORTFOLIOS' SHARES DETERMINED? Shares of each
Portfolio are sold at their respective net asset values (without a sales
charge) computed after receipt of a purchase order. Net asset value of a share
is determined by dividing the value of a Portfolio's net assets by the number
of its shares outstanding. That determination is made once each business day,
Monday through Friday, exclusive of federal holidays at or about 4:00 P.M.,
New York City time, on each day that the New York Stock Exchange is open for
trading. To calculate a Portfolio's net asset value, a Portfolio's assets are
valued and totaled, liabilities are subtracted, and the balance, called net
assets, is divided by the number of shares outstanding. In general, the value
of assets is based on actual or estimated market value, with special
provisions for assets not having readily available market quotations and
short-term debt securities. The value of foreign portfolio securities traded
on foreign exchanges is based upon the price of the close of the exchange
immediately preceding the time of the Fund's valuation, or, if earlier, at the
time of the Fund's valuation. Therefore, the calculation of the net asset
value of the International and Emerging Markets Portfolios or other Portfolios
that invest in foreign securities may not take place contemporaneously with
the determination of the prices of certain foreign securities used in the
calculation. Further, under the Fund's procedures, the prices of foreign
securities are determined using information derived from pricing services and
other sources. Prices derived under these procedures will be used in
determining daily net asset value. Information that becomes known to the Fund
or its agents after the time that net asset value is calculated on any
business day may be assessed in determining net asset value per share after
the time of receipt of the information, but will not be used to retroactively
adjust the price of the security so determined earlier or on a prior day.
Events affecting the values of portfolio securities that occur between the
time their prices are determined and the time the Portfolio's net asset value
is determined may not be reflected in the calculation of net asset value. If
events materially affecting the value of such securities occur during such
period, then these securities may be valued at fair value as determined by the
management and approved in good faith by the Board of Trustees. The Money
Market Portfolio's securities are valued using the amortized cost method of
valuation, which involves valuing a security at cost on the date of
acquisition and thereafter assuming a constant accretion of a discount or
amortization of a premium to maturity. The net asset values per share of each
Portfolio will fluctuate in response to changes in market conditions and other
factors. See the SAI.
INFORMATION ABOUT PORTFOLIO TRANSACTIONS. The Adviser or the Portfolio
Manager for a Portfolio places orders for the purchase and sale of portfolio
investments for a Portfolio with brokers or dealers selected by it in its
discretion. In effecting purchases and sales of portfolio securities in
transactions on United States stock exchanges for the account of the Fund, the
Adviser or Portfolio Manager may pay higher commission rates than the lowest
available when the Adviser or Portfolio Manager believes it is reasonable to
do so in light of the value of the brokerage and research services provided by
the broker effecting the transaction. Consistent with a policy of obtaining
best net results, a Portfolio Manager's affiliate may serve as the Fund's
broker in effecting portfolio transactions, including transactions on a
national securities exchange, and may retain commissions, in accordance with
certain regulations of the SEC.
INFORMATION ABOUT PORTFOLIO TURNOVER. The Portfolio turnover rate represents
the rate at which securities in a Portfolio other than short-term debt
obligations are replaced. This rate for the Portfolios is shown in the tables
in Condensed Financial Information. The High Yield Bond, Managed Bond,
Government Securities, Aggressive Equity, Growth LT, Equity Income, Multi-
Strategy, Equity, and Bond and Income Portfolios had portfolio turnover rates
in excess of 100% in certain years, which could be considered relatively high.
Such a Portfolio turnover rate may result in higher brokerage commissions or
other transactional expenses for these Portfolios than for other Portfolios,
which expenses must be borne, directly or indirectly, by a Portfolio and
ultimately by the Portfolio's shareholders. In addition, high portfolio
turnover may affect the ability of a Portfolio to qualify as a regulated
investment company. See "Taxation" and "Portfolio Turnover" in the SAI.
DO ANY ISSUES ARISE FROM THE FUND OFFERING ITS SHARES FOR VARIABLE ANNUITIES
AND VARIABLE LIFE INSURANCE POLICIES? The Fund serves as an investment medium
for both variable annuity contracts and variable
35
<PAGE>
life insurance policies. The Fund currently does not foresee any disadvantages
to Variable Contract Owners due to the fact that the Fund serves as an
investment medium for both variable life insurance policies and annuity
contracts; however, due to differences in tax treatment or other
considerations, it is theoretically possible that the interests of owners of
annuity contracts and insurance policies for which the Fund serves as
investment medium might at some time be in conflict. However, the Fund's Board
of Trustees, and Pacific Life are required to monitor events to identify any
material conflicts between variable annuity contract owners and variable life
policy owners, and will determine what action, if any, should be taken in the
event of such a conflict. If such a conflict were to occur, Pacific Life, or
another insurance company participating in the Fund might be required to
redeem the investment of one or more of its separate accounts from the Fund.
This might force the Fund to sell securities at disadvantageous prices.
OTHER INFORMATION ABOUT THE FUND
HOW IS THE FUND CAPITALIZED? The capitalization of the Fund consists solely
of an unlimited number of shares of beneficial interest with a par value of
$0.001 each. When issued, shares of the Fund are fully paid, freely
transferable, and non-assessable by the Fund.
Under Massachusetts law, shareholders could under certain circumstances, be
held personally liable for the obligations of the Fund. However, the
Declaration of Trust disclaims liability of the shareholders, Trustees, or
officers of the Fund for acts or obligations of the Fund, which are binding
only on the assets and property of the Fund and requires that notice of the
disclaimer be given in each contract or obligation entered into or executed by
the Fund or the Trustees. The Declaration of Trust provides for
indemnification out of Fund property for all loss and expense of any
shareholder held personally liable for the obligations of the Fund. The risk
of a shareholder incurring financial loss on account of shareholder liability
is limited to circumstances in which the Fund itself would be unable to meet
its obligations and thus should be considered remote.
WHAT IS THE FEDERAL INCOME TAX STATUS OF THE FUND? Each Portfolio intends to
qualify each year as a regulated investment company under Subchapter M of the
Internal Revenue Code ("Code"). A Portfolio so qualifying generally will not
be subject to federal income taxes to the extent that it distributes on a
timely basis its investment company taxable income and its net capital gains.
Such income and capital gains distributions are automatically reinvested in
additional shares of the Portfolio, unless the shareholder elects to receive
cash. Each Portfolio also intends to comply with diversification regulations
under section 817(h) of the Code, that apply to mutual funds underlying
variable contracts. Generally, a Portfolio will be required to diversify its
investments so that on the last day of each quarter of a calendar year no more
than 55% of the value of its total assets is represented by any one
investment, no more than 70% is represented by any two investments, no more
than 80% is represented by any three investments, and no more than 90% is
represented by any four investments. For this purpose, securities of a given
issuer generally are treated as one investment, but each U.S. Government
agency and instrumentality is treated as a separate issuer. Compliance with
the diversification rules under Section 817(h) of the Code generally will
limit the ability of any Portfolio, and in particular, the Government
Securities Portfolio, to invest greater than 55% of its total assets in direct
obligations of the U.S. Treasury (or any other issuer) or to invest primarily
in securities issued by a single agency or instrumentality of the U.S.
Government.
Reference is made to the Prospectus for the applicable Separate Account and
Contract for information regarding the Federal income tax treatment of
distributions to the Separate Account. See "Taxation" in the Fund's SAI for
more information on taxes.
WHAT VOTING RIGHTS DO SHAREHOLDERS HAVE? Shareholders of the Fund are given
certain voting rights. Each share of each Portfolio will be given one vote,
unless a different allocation of voting rights is required under applicable
law for a mutual fund that is an investment medium for variable insurance
products.
Massachusetts business trust law does not require the Fund to hold annual
shareholder meetings, although special meetings may be called for a specific
Portfolio, or for the Fund as a whole, for purposes such as electing
36
<PAGE>
or removing Trustees, changing fundamental policies, or approving a new or
amended advisory contract or portfolio management agreement. In accordance
with current laws, it is anticipated that an insurance company issuing a
Variable Contract that participates in the Fund will request voting
instructions from Variable Contract Owners and will vote shares or other
voting interests in the Separate Account in proportion to the voting
instructions received.
MAY THE FUND DISCONTINUE THE OFFERING OF ANY PORTFOLIO? The Fund reserves
the right to discontinue offering shares of one or more Portfolio at any time.
In the event that a Portfolio ceases offering its shares, any investments
allocated by an insurance company investing in the Fund to such Portfolio
will, subject to any necessary regulatory approvals, be invested in the
Portfolio deemed appropriate by the Trustees.
ADVERTISING PERFORMANCE. The Fund may, from time to time, include the yield
and effective yield of its Money Market Portfolio, the yield of the remaining
Portfolios, and the total return of all Portfolios in advertisements, sales
literature, or reports to shareholders or prospective investors. Total return
for the Fund will not be advertised or included in sales literature unless
accompanied by comparable performance information for a Separate Account to
which the Fund offers its shares.
Performance information should be considered in light of a Portfolio's
investment objectives and policies, characteristics of the Portfolio, and the
market conditions during the given time period, and should not be considered
as a representation of what may be achieved in the future. For a description
of the methods used to determine yield and total return for the Portfolios,
see the SAI.
YEAR 2000. The Fund's main task in addressing the year 2000 issue is to
ensure that its main service providers, such as the Fund's Custodian, Adviser
and Portfolio Managers, are or will be year 2000 compliant. The Fund has
surveyed each of these parties and each has advised the Fund that it is in the
process of its efforts to resolve the year 2000 issue and that it expects to
be year 2000 compliant and ready for testing by January 1999. The Fund's
Adviser will continue to survey the status of all service providers' year 2000
compliance and report to the Fund's Board. At this time, the Adviser does not
anticipate that the move to the year 2000 will have a material impact on the
Fund.
37
<PAGE>
TOTAL RETURN
The table below presents the total return for each Portfolio that began
operations before January, 1998. The total return shown in the table tells you
how much an investment in a Portfolio has changed in value year to year. It
reflects any net increase or decrease in the share price and assumes that all
dividends and distributions were reinvested in additional shares. The total
return does not include fees and charges at the Separate Account level under
the Variable Contracts or other fees and charges under the Variable Contracts.
<TABLE>
<CAPTION>
MONEY HIGH YIELD MANAGED GOVERNMENT AGGRESSIVE GROWTH
MARKET BOND BOND SECURITIES GROWTH EQUITY(7) LT
YEAR ENDED (%) (%) (%) (%) (%) (%) (%)
- ---------- ------ ----------- --------- ---------- ------ ---------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
12/31/84 -- -- -- -- -- -- --
12/31/85 -- -- -- -- -- -- --
12/31/86 -- -- -- -- -- -- --
12/31/87 -- -- -- -- -- -- --
12/31/88(1) 5.85 8.30 7.11 6.65 15.31 -- --
12/31/89 8.73 4.16 14.74 14.61 34.96 -- --
12/31/90 7.92 0.38 8.52 8.01 (17.30) -- --
12/31/91(2) 5.74 24.58 17.03 16.67 39.15 -- --
12/31/92 3.22 18.72 8.68 7.52 20.53 -- --
12/31/93 2.58 18.01 11.63 10.79 21.89 -- --
12/31/94(3) 3.76 0.42 (4.36) (5.10) (10.49) -- 13.25
12/31/95 5.54 18.87 19.04 18.81 25.75 -- 36.75
12/31/96(6) 5.07 11.31 4.25 2.94 23.62 7.86 17.87
12/31/97 5.28 9.44 9.92 9.48 30.27 3.78 10.96
Average annual total
return (for all years
shown) 5.35 11.13 9.47 8.83 16.91 6.64 19.31
<CAPTION>
EQUITY MULTI- BOND AND EQUITY EMERGING
INCOME(4) STRATEGY(4) EQUITY(5) INCOME(5) INDEX INTERNATIONAL(4) MARKETS
YEAR ENDED (%) (%) (%) (%) (%) (%) (%)
- ---------- --------- ----------- --------- ---------- ------ ---------------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
12/31/84 -- -- 9.80 14.76 -- -- --
12/31/85 -- -- 30.02 27.61 -- -- --
12/31/86 -- -- 20.92 21.39 -- -- --
12/31/87 -- -- 2.18 (2.09) -- -- --
12/31/88(1) 8.25 6.85 7.19 6.37 -- 17.69 --
12/31/89 29.22 23.42 30.12 17.04 -- 20.51 --
12/31/90 (7.54) (1.47) (2.55) 3.27 -- (13.48) --
12/31/91(2) 31.42 24.03 29.77 24.32 24.88 10.92 --
12/31/92 5.36 5.57 6.30 8.09 6.95 (9.78) --
12/31/93 8.29 9.25 16.06 19.39 9.38 30.02 --
12/31/94(3) (0.28) (1.50) (2.87) (8.36) 1.05 3.01 --
12/31/95 31.66 25.25 23.80 33.71 36.92 10.56 --
12/31/96(6) 19.43 12.56 28.03 (0.80) 22.36 21.89 (3.23)
12/31/97 28.60 19.62 18.18 16.32 32.96 9.28 (1.69)
Average annual total
return (for all years
shown) 14.61 11.93 15.01 12.48 18.75 9.25 (2.80)
</TABLE>
- --------
(1) Information is for the period from January 4, 1988 (commencement of
operations) to December 31, 1988 except as otherwise indicated.
(2) Information for the Equity Index Portfolio is for the period from January
30, 1991 (commencement of operations) to December 31, 1991.
(3) Information for the Growth LT Portfolio is for the period from January 4,
1994 (commencement of operations) to December 31, 1994.
(4) The performance results of the Equity Income and Multi-Strategy Portfolios
through December 31, 1993 and of the International Portfolio through
December 31, 1996 were achieved by different Portfolio Managers. J.P.
Morgan Investment began serving as Portfolio Manager to the Equity Income
Portfolio and Multi-Strategy Portfolio on January 1, 1994 and Morgan
Stanley began serving as Portfolio Manager of the International Portfolio
on June 1, 1997.
(5) The performance results of the Equity Portfolio and the Bond and Income
Portfolio are based on the performance of predecessor portfolios (series)
of Pacific Corinthian Variable Fund, which began their first full year of
operations on January 1, 1984 and were acquired by the Fund on December
31, 1994. Goldman Sachs Asset Management began serving as Portfolio
Manager to the Equity and Bond and Income Portfolios on May 1, 1998. Prior
to May 1, 1998, a different firm served as Portfolio Manager.
(6) Information for the Aggressive Equity and Emerging Markets Portfolios is
for the period from April 1, 1996 (commencement of operations) to December
31, 1996.
(7) Alliance Capital Management L.P. began serving as Portfolio Manager to the
Aggressive Equity Portfolio on May 1, 1998. Prior to May 1, 1998, a
different firm served as Portfolio Manager.
38
<PAGE>
PRIOR PERFORMANCE OF A COMPARABLE FUND MANAGED BY ALLIANCE CAPITAL
The table below sets forth the performance data relating to the historical
performance of the Alliance Aggressive Stock Portfolio, a series of the Hudson
River Trust. The Alliance Aggressive Stock Portfolio is a mutual fund managed
by Alliance and has substantially similar investment objectives, policies, and
strategies to those of the Aggressive Equity Portfolio (assuming effectiveness
of the revised investment policies described above). The performance
information for the Alliance Aggressive Stock Portfolio is presented in two
forms: (1) the first presentation reflects the fees and expenses of the
Alliance Aggressive Stock Portfolio; and (2) the second presentation uses the
gross performance of the Alliance Aggressive Stock Portfolio, which is
adjusted to reflect the fees and expenses of the Aggressive Equity Portfolio.
The investment results presented below are not those of the Fund and are not
intended to predict or suggest returns that might be experienced by the
Aggressive Equity Portfolio or an individual investor having an interest in
the Aggressive Equity Portfolio.
THE FOLLOWING PERFORMANCE DATA DOES NOT REFLECT THE DEDUCTION FOR SEPARATE
ACCOUNT OR CONTRACT LEVEL CHARGES.
TOTAL RETURN FOR THE ALLIANCE AGGRESSIVE STOCK PORTFOLIO
AND 50% RUSSELL 2000 INDEX/50% RUSSELL MIDCAP INDEX
<TABLE>
<CAPTION>
ALLIANCE AGGRESSIVE STOCK 50% RUSSELL
PORTFOLIO ADJUSTED TO 2000 INDEX/
ALLIANCE AGGRESSIVE REFLECT EXPENSES OF THE 50% RUSSELL
STOCK PORTFOLIO AGGRESSIVE EQUITY PORTFOLIO MIDCAP INDEX
------------------- --------------------------- ----------------
ANNUAL ANNUAL ANNUAL
YEAR TOTAL RETURN (%) TOTAL RETURN (%) TOTAL RETURN (%)
---- ------------------- --------------------------- ----------------
<S> <C> <C> <C>
1997 10.94 10.62 25.69
1996 22.20 21.66/2/ 17.75
1995 31.63 31.45
1994 (3.81) (1.96)
1993 16.77 16.60
1992 (3.16) 17.38
1991 86.87 43.78
1990 8.16 (15.51)
1989 43.50 21.26
1988 1.13 22.36
1987 7.30 (4.28)
1986 35.9/1/ N/A
<CAPTION>
TIME PERIOD AVERAGE ANNUAL AVERAGE ANNUAL AVERAGE ANNUAL
(THRU 12/31/97) TOTAL RETURN (%) TOTAL RETURN (%) TOTAL RETURN (%)
--------------- ------------------- --------------------------- ----------------
<S> <C> <C> <C>
1 year 10.94 10.62 25.69
3 years 21.29 24.88
5 years 14.92 17.33
10 years 19.00 16.75
Inception 1/27/86 19.41 14.32/3/
</TABLE>
- --------
(1) Annual total return for 1986 is rounded to the nearest tenth of a percent.
(2) Aggressive Equity Portfolio began operations on April 1, 1996. Expenses
used in calculating adjusted annual total returns for 1996 were
annualized.
(3) Average annual total return is for the period February 1, 1986 through
December 31, 1997.
39
<PAGE>
PRIOR PERFORMANCE OF COMPARABLE ACCOUNTS MANAGED BY GOLDMAN SACHS
The table below sets forth the performance data relating to the historical
performance of the Goldman Sachs CORE Large Cap Growth Composite
("Composite").
Each account represented in the Composite is managed by Goldman Sachs and
has substantially similar investment objectives, policies, and strategies to
those of the Equity Portfolio (assuming effectiveness of the revised
investment policies described above). In prior years the Composite consisted
of fewer advisory accounts and one mutual fund. The Composite currently
consists of 6 accounts, including 5 advisory accounts and 1 mutual fund. The
performance information for the Composite is presented in two forms: (1) the
first presentation reflects the fees and expenses charged to the accounts in
the Composite; and (2) the second presentation uses the gross performance of
the Composite as adjusted to reflect the fees and expenses of the Equity
Portfolio. The expenses shown for the Composite included investment advisory
fees but do not include the expense of custody, which if included, could
lessen performance and which is an expense the Portfolio bears. The Composite
performance figures also reflect the inclusion of any dividends and interest
income received, the deductions of any brokerage commissions, and other
related portfolio transaction expenses which are generally reflected as part
of the cost of a security.
The Composite data was calculated in accordance with recommended standards
of the Association for Investment Management and Research ("AIMR"),
retroactively applied to all time periods. Accounts under Goldman Sachs'
management are included in the Composite the month after operations commence
or the month after meeting minimum dollar criteria (if applicable) for
inclusion. To determine composite values, the beginning market value of each
comparable account is divided by the sum of the market values of all
comparable accounts, which results in a percentage number. The percentage
number is multiplied by each comparable account's rate of return. The sum of
all accounts for the comparable accounts results in a dollar-weighted
composite return. The Composite investment results are unaudited.
Because of the differences in computation methods, such as the method or
frequency of reinvesting dividends or measuring gains, the data for the
comparable accounts shown below may not be precisely comparable to performance
data for a mutual fund. In addition, the performance data for the advisory
accounts included in the Composite may not be representative of the Equity
Portfolio because those accounts are not subject to the obligation to redeem
shares upon request and to meet diversification requirements, specific tax
restrictions and investment limitations imposed on the Portfolio by the
Investment Company Act of 1940 or Subchapter M of the Internal Revenue Code,
which, if imposed, could have adversely affected the performance. In addition,
if the asset size of the comparable accounts varies from that of the Equity
Portfolio, this might reduce the comparability of the Equity Portfolio's
performance to that of the comparable accounts. Moreover, the Equity
Portfolio's current and future investments are not and will not necessarily be
identical to those of the comparable accounts. Investors should also be aware
that the use of a methodology different from that used to calculate these
Composite returns could result in different performance data.
The investment results presented below are not those of the Fund and are not
intended to predict or suggest returns that might be experienced by the Equity
Portfolio or an individual investor having an interest in the Equity
Portfolio. These total return figures represent past performance and do not
indicate future results, which will vary.
40
<PAGE>
THE FOLLOWING PERFORMANCE DATA DOES NOT REFLECT THE DEDUCTION FOR SEPARATE
ACCOUNT OR CONTRACT LEVEL CHARGES.
TOTAL RETURN FOR THE GOLDMAN SACHS CORE LARGE CAP
GROWTH COMPOSITE AND RUSSELL 1000 GROWTH INDEX
<TABLE>
<CAPTION>
GOLDMAN SACHS CORE
LARGE CAP GROWTH
COMPOSITE
GOLDMAN SACHS CORE ADJUSTED TO REFLECT
LARGE CAP GROWTH EXPENSES OF RUSSELL 1000
COMPOSITE THE EQUITY PORTFOLIO GROWTH INDEX
------------------ -------------------- ----------------
ANNUAL ANNUAL ANNUAL
YEAR TOTAL RETURN (%) TOTAL RETURN (%) TOTAL RETURN (%)
---- ------------------ -------------------- ----------------
<S> <C> <C> <C>
1997 32.21 32.16 30.49
1996 29.37 29.26 23.12
1995 38.11 37.98 37.19
1994 7.44 7.02 0.60
1993 12.09 11.72 0.87
1992 0.33 (0.10) N/A
<CAPTION>
TIME PERIOD AVERAGE ANNUAL AVERAGE ANNUAL AVERAGE ANNUAL
(THRU 12/31/97) TOTAL RETURN (%) TOTAL RETURN (%) TOTAL RETURN (%)
--------------- ------------------ -------------------- ----------------
<S> <C> <C> <C>
1 year 32.21 32.16 30.49
3 years 33.17 33.10 30.11
5 years 23.26 23.10 18.40
Inception (12/1/91) 21.52 21.34 17.54
</TABLE>
41
<PAGE>
APPENDIX
DESCRIPTION OF BOND RATINGS
Corporate Bonds: Bonds rated Aa by Moody's are judged by Moody's to be of
high quality by all standards. Together with bonds rated Aaa (Moody's highest
rating) they comprise what are generally known as high-grade bonds. Aa bonds
are rated lower than Aaa bonds because margins of protection may not be as
large as those of 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 those applicable to Aaa securities.
Bonds which are rated A by Moody's 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.
Moody's Baa rated bonds 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.
Bonds rated AA by Standard & Poor's are judged by Standard & Poor's to be
high-grade obligations and in the majority of instances differ only in small
degree from issues rated AAA (Standard & Poor's highest rating). Bonds rated
AAA are considered by Standard & Poor's to be the highest grade obligations
and possess the ultimate degree of protection as to principal and interest.
With AA bonds, as with AAA bonds, prices move with the long-term money market.
Bonds rated A by Standard & Poor's, regarded as upper medium grade, have a
strong capacity and interest, although they are somewhat more susceptible to
the adverse effects of changes in circumstances and economic conditions.
Standard & Poor's BBB rated bonds, or medium-grade category bonds, are
borderline between definitely sound obligations and those where the
speculative element begins to predominate. These bonds have adequate asset
coverage and normally are protected by satisfactory earnings. Their
susceptibility to changing conditions, particularly to depressions,
necessitates constant watching. These bonds generally are more responsive to
business and trade conditions than to interest rates. This group is the lowest
which qualifies for commercial bank investment.
Moody's Ba rated bonds 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 rated Ba. Bonds which are rated B by Moody's 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.
Bonds rated Caa by Moody's are considered to be of poor standing. Such
issues may be in default or there may be elements of danger with respect to
principal or interest. Bonds rated Ca are considered by Moody's to be
speculative in a high degree, often in default. Bonds rated C, the lowest
class of bonds under Moody's bond ratings, are regarded by Moody's as having
extremely poor prospects.
Moody's also applies numerical indicators 1, 2 and 3 to rating categories.
The modifier 1 indicates that the security is in the higher end of its rating
category; 2 indicates a mid-range ranking; and 3 indicates a ranking toward
the lower end of the category.
A bond rated BB, B, CCC, and CC by Standard & Poor's 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 CC the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposure to adverse conditions.
42
<PAGE>
Commercial Paper: The Prime rating is the highest commercial paper rating
assigned by Moody's. Among the factors considered by Moody's in assigning
ratings are the following: (1) evaluation of the management of the issuer; (2)
economic evaluation of the issuer's industry or industries and an appraisal of
speculative-type risks which may be inherent in certain areas; (3) evaluation
of the issuer's products in relation to competition and customer acceptance;
(4) liquidity; (5) amount and quality of long-term debt; (6) trend of earnings
over a period of ten years; (7) financial strength of a parent company and the
relationships which exist with the issuer; and (8) recognition by management
of obligations which may be present or may arise as a result of public
interest questions and preparations to meet such obligations. Issuers with
this Prime category may be given ratings 1, 2 or 3, depending on the relative
strengths of these factors.
Commercial paper rated A by Standard & Poor's has the following
characteristics: (i) liquidity ratios are adequate to meet cash requirements;
(ii) long-term senior debt rating should be A or better, although in some
cases BBB credits may be allowed if other factors outweigh the BBB rating,
(iii) the issuer should have access to at least two additional channels of
borrowing; (iv) basic earnings and cash flow should have an upward trend with
allowances made for unusual circumstances; and (v) typically the issuer's
industry should be well established and the issuer should have a strong
position within its industry and the reliability and quality of management
should be unquestioned. Issuers rated A are further referred to by use of
numbers 1, 2 and 3 to denote relative strength with this highest
classification.
43
<PAGE>
[LOGO OF PACIFIC SELECT FUND]
PACIFIC SELECT FUND
INVESTMENT ADVISER Pacific Investment Management Company
Pacific Life Insurance Company 840 Newport Center Drive, Suite 360
700 Newport Center Drive Newport Beach, California 92660
Post Office Box 9000
Newport Beach, California 92660 Morgan Stanley Asset Management Inc.
1221 Avenue of the Americas
PORTFOLIO MANAGERS New York, New York 10020
Bankers Trust Company
130 Liberty Street DISTRIBUTOR
New York, New York 10006 Pacific Mutual Distributors, Inc.
Member: NASD & SIPC
Blairlogie Capital Management 700 Newport Center Drive
4th Floor P.O. Box 9000
125 Princes Street Newport Beach, California 92660
Edinburgh EH2 4AD, Scotland
CUSTODIAN
Capital Guardian Trust Company Investors Fiduciary Trust Company
333 South Hope Street 801 Pennsylvania
Los Angeles, California 90071 Kansas City, Missouri 64105
AUDITORS
Alliance Capital Management L.P. Deloitte & Touche LLP
1345 Avenue of the Americas 695 Town Center Drive
New York, New York 10105 Suite 1200
Costa Mesa, California 92626
Goldman Sachs Asset Management COUNSEL
One New York Plaza Dechert Price & Rhoads
New York, New York, 10004 1775 Eye Street, N.W.
Washington, D.C. 20006-2401
Janus Capital Corporation
100 Fillmore Street
Denver, Colorado 80206-4923
J.P. Morgan Investment Management Inc.
522 Fifth Avenue
New York, New York 10036
Prospectus dated May 1, 1998
FORM NO. 15-15756-12
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
<PAGE>
[LOGO of PACIFIC SELECT FUND]
PACIFIC SELECT FUND
STATEMENT OF ADDITIONAL INFORMATION
DATE: MAY 1, 1998
----------------
Pacific Select Fund (the "Fund") is an open-end diversified management
investment company currently offering fourteen separate investment Portfolios:
the Money Market Portfolio; the High Yield Bond Portfolio; the Managed Bond
Portfolio; the Government Securities Portfolio; the Growth Portfolio; the
Aggressive Equity Portfolio; the Growth LT Portfolio; the Equity Income
Portfolio; the Multi-Strategy Portfolio; the Equity Portfolio; the Bond and
Income Portfolio; the Equity Index Portfolio; the International Portfolio; and
the Emerging Markets Portfolio. The Fund's Adviser is Pacific Life Insurance
Company.
This Statement of Additional Information ("SAI") is intended to supplement
the information provided to investors in the Prospectus dated May 1, 1998, of
the Fund and has been filed with the Securities and Exchange Commission as
part of the Fund's Registration Statement. Investors should note, however,
that this SAI is not itself a prospectus and should be read carefully in
conjunction with the Fund's Prospectus and retained for future reference. The
contents of this SAI are incorporated by reference in the Prospectus in their
entirety. A copy of the Prospectus may be obtained free of charge from the
Fund at the address and telephone numbers listed below.
----------------
Distributor:
Pacific Mutual Distributors, Inc.
700 Newport Center Drive
P.O. Box 9000
Newport Beach, CA 92660
(800) 800-7681
Adviser:
Pacific Life Insurance Company
700 Newport Center Drive
P.O. Box 9000
Newport Beach, CA 92660
(800) 800-7681
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
INTRODUCTION................................................................ 1
INVESTMENT POLICIES FOR MONEY MARKET PORTFOLIO.............................. 1
SECURITIES AND INVESTMENT TECHNIQUES........................................ 1
U.S. Government Securities................................................ 1
Mortgage-Related Securities............................................... 2
Mortgage Pass-Through Securities........................................ 2
GNMA Certificates....................................................... 2
FNMA and FHLMC Mortgage-Backed Obligations.............................. 3
Collateralized Mortgage Obligations (CMOs).............................. 3
FHLMC Collateralized Mortgage Obligations............................... 4
Other Mortgage-Related Securities....................................... 4
CMO Residuals........................................................... 5
Stripped Mortgage-Backed Securities..................................... 5
Other Asset-Backed Securities............................................. 6
High Yield Bonds.......................................................... 6
Bank Obligations.......................................................... 7
Corporate Debt Securities................................................. 8
Variable and Floating Rate Securities..................................... 9
Commercial Paper.......................................................... 9
Convertible Securities.................................................... 10
Repurchase Agreements..................................................... 11
Borrowing................................................................. 12
Reverse Repurchase Agreements and Other Borrowings........................ 12
Firm Commitment Agreements and When-Issued Securities..................... 13
Loans of Portfolio Securities............................................. 13
Short Sales Against the Box............................................... 13
Restricted Securities (Private Placements)................................ 13
Foreign Securities........................................................ 14
Foreign Currency Transactions............................................. 16
Forward Foreign Currency Contracts...................................... 16
Options................................................................... 18
Purchasing and Writing Options on Securities............................ 18
Purchasing Options on Stock Indexes..................................... 19
Risks of Options Transactions........................................... 20
Spread Transactions..................................................... 21
Options on Foreign Currencies............................................. 21
Futures Contracts and Options on Futures Contracts........................ 23
Interest Rate Futures................................................... 23
Stock Index Futures..................................................... 23
Futures Options......................................................... 24
Limitations............................................................. 25
Risks Associated with Futures and Futures Options....................... 25
Foreign Currency Futures and Options Thereon.............................. 26
Swap Agreements and Options on Swap Agreements............................ 27
Structured Notes.......................................................... 27
Warrants and Rights....................................................... 27
Duration.................................................................. 28
INVESTMENT RESTRICTIONS..................................................... 29
Fundamental Investment Restrictions....................................... 29
Nonfundamental Investment Restrictions.................................... 31
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
MANAGEMENT OF THE FUND...................................................... 32
Trustees and Officers..................................................... 32
Investment Adviser........................................................ 33
Portfolio Management Agreements........................................... 35
Distribution of Fund Shares............................................... 40
Purchases and Redemptions................................................. 41
PORTFOLIO TRANSACTIONS AND BROKERAGE........................................ 41
Investment Decisions...................................................... 41
Brokerage and Research Services........................................... 41
Portfolio Turnover........................................................ 43
NET ASSET VALUE............................................................. 43
PERFORMANCE INFORMATION..................................................... 45
TAXATION.................................................................... 47
Distributions............................................................. 48
Hedging Transactions...................................................... 49
OTHER INFORMATION........................................................... 49
Concentration Policy...................................................... 49
Capitalization............................................................ 49
Voting Rights............................................................. 49
Custodian and Transfer Agency and Dividend Disbursing Services............ 50
Financial Statements...................................................... 50
Independent Auditors...................................................... 50
Counsel................................................................... 50
Registration Statement.................................................... 50
</TABLE>
ii
<PAGE>
(THIS PAGE INTENTIONALLY LEFT BLANK)
<PAGE>
INTRODUCTION
This SAI is designed to elaborate upon information contained in the
Prospectus, including the discussion of certain securities and investment
techniques. The more detailed information contained herein is intended solely
for investors who have read the Prospectus and are interested in a more
detailed explanation of certain aspects of the Fund's securities and
investment techniques. Captions and defined terms in this SAI generally
correspond to like captions and terms in the Prospectus.
INVESTMENT POLICIES FOR MONEY MARKET PORTFOLIO
The investment objective and investment policies of the Money Market
Portfolio are described in the Prospectus. The following description presents
more detailed information on investment policies that apply to the Portfolio,
and is intended to supplement the information provided in the Prospectus. A
money market instrument will be considered to be highest quality (1) if the
instrument (or other comparable short-term instrument of the same issuer) is
rated in the highest rating category, (i.e., Aaa or Prime-1 by Moody's
Investors Service, Inc. ("Moody's"), AAA or A-1 by Standard & Poor's
Corporation ("S&P")) by (i) any two nationally recognized statistical rating
organizations ("NRSROs") or, (ii) if rated by only one NRSRO, by that NRSRO;
(2) an unrated security that is of comparable quality to a security in the
highest rating category as determined by the Adviser; or (3) a U.S. Government
security. With respect to 5% of its total assets, measured at the time of
investment, the Portfolio may also invest in money market instruments that are
in the second-highest rating category for short-term debt obligations (i.e.,
rated Aa or Prime-2 by Moody's or AA or A-2 by S&P). A money market instrument
will be considered to be in the second-highest rating category under the
criteria described above with respect to instruments considered highest
quality, as applied to instruments in the second-highest rating category. The
quality of securities subject to guarantees may be determined based solely on
the quality of the guarantee. Additional eligibility restrictions apply with
respect to guarantees and demand features.
The Portfolio may not invest more than 5% of its total assets, measured at
the time of investment, in securities of any one issuer that are of the
highest quality, except that this limitation shall not apply to U.S.
Government securities and repurchase agreements thereon. The Portfolio may not
invest more than the greater of 1% of its total assets or $1,000,000, measured
at the time of investment, in securities of any one issuer that are in the
second-highest rating category. In addition, securities subject to guarantees
not issued by a person in a control relationship with the issuer of such
securities are not subject to the preceding diversification requirements.
However, the Portfolio must generally, with respect to 75% of its total
assets, invest no more than 10% of its total assets in securities issued by or
subject to guarantees or demand features from the same entity. In the event
that an instrument acquired by the Portfolio is downgraded or otherwise ceases
to be of the quality that is eligible for the Portfolio, the Adviser, under
procedures approved by the Board of Trustees shall promptly reassess whether
such security presents minimal credit risk and determine whether or not to
retain the instrument.
SECURITIES AND INVESTMENT TECHNIQUES
U.S. GOVERNMENT SECURITIES
All Portfolios may invest in U.S. Government securities. U.S. Government
securities are obligations of, or guaranteed by, the U.S. Government, its
agencies, or instrumentalities. Treasury bills, notes, and bonds are direct
obligations of the U.S. Treasury and they differ with respect to certain items
such as coupons, maturities, and dates of issue. Treasury bills have a
maturity of one year or less. Treasury notes have maturities of one to ten
years and Treasury bonds generally have a maturity of greater than ten years.
Securities guaranteed by the U.S. Government include federal agency
obligations guaranteed as to principal and interest by the U.S. Treasury (such
as GNMA certificates (described below) and Federal Housing Administration
debentures). In guaranteed securities, the payment of principal and interest
is unconditionally guaranteed by the U.S. Government, and thus they are of the
highest credit quality. Such direct obligations or guaranteed securities are
subject to variations in market value due to fluctuations in interest rates,
but, if held to maturity, the U.S. Government is obligated to or guarantees to
pay them in full.
1
<PAGE>
Securities issued by U.S. Government instrumentalities and certain federal
agencies are neither direct obligations of, nor guaranteed by, the U.S.
Treasury. However, they involve federal sponsorship in one way or another:
some are backed by specific types of collateral; some are supported by the
issuer's right to borrow from the U.S. Treasury; some are supported by the
discretionary authority of the U.S. Treasury to purchase certain obligations
of the issuer; others are supported only by the credit of the issuing
government agency or instrumentality. These agencies and instrumentalities
include, but are not limited to Federal National Mortgage Association, Federal
Home Loan Bank, Federal Land Banks, Farmers Home Administration, Central Bank
for Cooperatives, Federal Intermediate Credit Banks, Federal Financing Bank,
Farm Credit Banks, and the Tennessee Valley Authority.
MORTGAGE-RELATED SECURITIES
Mortgage-related securities are interests in pools of mortgage loans made to
residential home buyers, including mortgage loans made by savings and loan
institutions, mortgage banks, commercial banks, and others. Pools of mortgage
loans are assembled as securities for sale to investors by various
governmental, government-related, and private organizations. The High Yield
Bond, Managed Bond, Government Securities, Growth LT, Multi-Strategy Equity,
and Bond and Income Portfolios, and the Money Market Portfolio, subject to its
investment policies, may invest in mortgage-related securities as well as debt
securities which are secured with collateral consisting of mortgage-related
securities, and in other types of mortgage-related securities. For information
concerning the characterization of mortgage-related securities (including
collateralized mortgage obligations) for various purposes including the Fund's
policies concerning diversification and concentration, see "Concentration
Policy" on page 49.
Mortgage Pass-Through Securities. These are securities representing
interests in "pools" of mortgages in which payments of both interest and
principal on the securities are made periodically, in effect "passing through"
periodic payments made by the individual borrowers on the residential mortgage
loans which underlie the securities (net of fees paid to the issuer or
guarantor of the securities). Early repayment of principal on mortgage pass-
through securities (arising from prepayments of principal due to sale of the
underlying property, refinancing, or foreclosure, net of fees and costs which
may be incurred) may expose a Portfolio to a lower rate of return upon
reinvestment of principal. Payment of principal and interest on some mortgage
pass-through securities may be guaranteed by the full faith and credit of the
U.S. Government (in the case of securities guaranteed by the Government
National Mortgage Association, or "GNMAs"); or guaranteed by agencies or
instrumentalities of the U.S. Government (in the case of securities guaranteed
by the Federal National Mortgage Association ("FNMA") or the Federal Home Loan
Mortgage Corporation ("FHLMC"), which are supported only by the discretionary
authority of the U.S. Government to purchase the agency's obligations).
Mortgage pass-through securities created by nongovernmental issuers (such as
commercial banks, savings and loan institutions, private mortgage insurance
companies, mortgage bankers, and other secondary market issuers) may be
supported by various forms of insurance or guarantees, including individual
loan, title, pool and hazard insurance and letters of credit, which may be
issued by governmental entities, private insurers, or the mortgage poolers.
GNMA Certificates. GNMA certificates are mortgage-backed securities
representing part ownership of a pool of mortgage loans on which timely
payment of interest and principal is guaranteed by the full faith and credit
of the U.S. Government. GNMA is a wholly-owned U.S. Government corporation
within the Department of Housing and Urban Development. GNMA is authorized to
guarantee, with the full faith and credit of the U.S. Government, the timely
payment of principal and interest on securities issued by institutions
approved by GNMA (such as savings and loan institutions, commercial banks, and
mortgage bankers) and backed by pools of mortgages insured by the Federal
Housing Administration ("FHA"), or guaranteed by the Department of Veterans
Affairs ("VA"). GNMA certificates differ from typical bonds because principal
is repaid monthly over the term of the loan rather than returned in a lump sum
at maturity. Because both interest and principal payments (including
prepayments) on the underlying mortgage loans are passed through to the holder
of the certificate, GNMA certificates are called "pass-through" securities.
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Interests in pools of mortgage-related securities differ from other forms of
debt securities, which normally provide for periodic payment of interest in
fixed amounts with principal payments at maturity or specified call dates.
Instead, these securities provide a periodic payment which consists of both
interest and principal payments. In effect, these payments are a "pass-
through" of the periodic payments made by the individual borrowers on the
residential mortgage loans, net of any fees paid to the issuer or guarantor of
such securities. Additional payments are caused by repayments of principal
resulting from the sale of the underlying residential property, refinancing or
foreclosure, net of fees or costs which may be incurred. Mortgage-related
securities issued by GNMA are described as "modified pass-through" securities.
These securities entitle the holder to receive all interest and principal
payments owed on the mortgage pool, net of certain fees, at the scheduled
payment dates regardless of whether or not the mortgagor actually makes the
payment. Although GNMA guarantees timely payment even if homeowners delay or
default, tracking the "pass-through" payments may, at times, be difficult.
Expected payments may be delayed due to the delays in registering the newly
traded paper securities. The custodian's policies for crediting missed
payments while errant receipts are tracked down may vary. Other mortgage-
backed securities such as those of FHLMC and FNMA trade in book-entry form and
are not subject to the risk of delays in timely payment of income.
Although the mortgage loans in the pool will have maturities of up to 30
years, the actual average life of the GNMA certificates typically will be
substantially less because the mortgages will be subject to normal principal
amortization and may be prepaid prior to maturity. Early repayments of
principal on the underlying mortgages may expose a Portfolio to a lower rate
of return upon reinvestment of principal. Prepayment rates vary widely and may
be affected by changes in market interest rates. In periods of falling
interest rates, the rate of prepayment tends to increase, thereby shortening
the actual average life of the GNMA certificates. Conversely, when interest
rates are rising, the rate of prepayment tends to decrease, thereby
lengthening the actual average life of the GNMA certificates. Accordingly, it
is not possible to accurately predict the average life of a particular pool.
Reinvestment of prepayments may occur at higher or lower rates than the
original yield on the certificates. Due to the prepayment feature and the need
to reinvest prepayments of principal at current rates, GNMA certificates can
be less effective than typical bonds of similar maturities at "locking in"
yields during periods of declining interest rates, although they may have
comparable risks of decline in value during periods of rising interest rates.
FNMA and FHLMC Mortgage-Backed Obligations. Government-related guarantors
(i.e., not backed by the full faith and credit of the U.S. Government) include
FNMA and FHLMC. FNMA, a federally chartered and privately-owned corporation,
issues pass-through securities representing interests in a pool of
conventional mortgage loans. FNMA guarantees the timely payment of principal
and interest but this guarantee is not backed by the full faith and credit of
the U.S. Government. FNMA is a government sponsored corporation owned entirely
by private stockholders. It is subject to general regulation by the Secretary
of Housing and Urban Development. FNMA purchases conventional (i.e., not
insured or guaranteed by any government agency) residential mortgages from a
list of approved seller/servicers which include state and federally-chartered
savings and loan associations, mutual savings banks, commercial banks and
credit unions, and mortgage bankers. FHLMC, a corporate instrumentality of the
United States, was created by Congress in 1970 for the purpose of increasing
the availability of mortgage credit for residential housing. Its stock is
owned by the 12 Federal Home Loan Banks. FHLMC issues Participation
Certificates ("PCs") which represent interests in conventional mortgages from
FHLMC's national portfolio. FHLMC guarantees the timely payment of interest
and ultimate collection of principal and maintains reserves to protect holders
against losses due to default, but PCs are not backed by the full faith and
credit of the U.S. Government. As is the case with GNMA certificates, the
actual maturity of and realized yield on particular FNMA and FHLMC pass-
through securities will vary based on the prepayment experience of the
underlying pool of mortgages.
Collateralized Mortgage Obligations (CMOs). A CMO is a hybrid between a
mortgage-backed bond and a mortgage pass-through security. Similar to a bond,
interest and prepaid principal is paid, in most cases, semiannually. CMOs may
be collateralized by whole mortgage loans but are more typically
collateralized by portfolios of mortgage pass-through securities guaranteed by
GNMA, FHLMC, or FNMA, and their income streams.
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CMOs are structured into multiple classes, each bearing a different stated
maturity. Actual maturity and average life will depend upon the prepayment
experience of the collateral. CMOs provide for a modified form of call
protection through a de facto breakdown of the underlying pool of mortgages
according to how quickly the loans are repaid. Monthly payment of principal
received from the pool of underlying mortgages, including prepayments,
generally is first returned to investors holding the shortest maturity class.
Investors holding the longer maturity classes receive principal only after the
first class has been retired. An investor is partially guarded against a
sooner than desired return of principal because of the sequential payments.
In a typical CMO transaction, a corporation ("issuer") issues multiple
series (e.g., A, B, C, Z) of CMO bonds ("Bonds"). Proceeds of the Bond
offering are used to purchase mortgages or mortgage pass-through certificates
("Collateral"). The Collateral is pledged to a third party trustee as security
for the Bonds. Principal and interest payments from the Collateral are used to
pay principal on the Bonds in the order A, B, C, Z. The series A, B, and C
Bonds all bear current interest. Interest on the series Z Bond is accrued and
added to principal and a like amount is paid as principal on the series A, B,
or C Bond currently being paid off. When the series A, B, and C Bonds are paid
in full, interest and principal on the series Z Bond begins to be paid
currently. With some CMOs, the issuer serves as a conduit to allow loan
originators (primarily builders or savings and loan associations) to borrow
against their loan portfolios.
FHLMC Collateralized Mortgage Obligations. FHLMC CMOs are debt obligations
of FHLMC issued in multiple classes having different maturity dates which are
secured by the pledge of a pool of conventional mortgage loans purchased by
FHLMC. Unlike FHLMC PCs, payments of principal and interest on the CMOs are
made semiannually, as opposed to monthly. The amount of principal payable on
each semiannual payment date is determined in accordance with FHLMC's
mandatory sinking fund schedule, which, in turn, is equal to approximately
100% of FHA prepayment experience applied to the mortgage collateral pool. All
sinking fund payments in the CMOs are allocated to the retirement of the
individual classes of bonds in the order of their stated maturities. Payment
of principal on the mortgage loans in the collateral pool in excess of the
amount of FHLMC's minimum sinking fund obligation for any payment date are
paid to the holders of the CMOs as additional sinking fund payments. Because
of the "pass-through" nature of all principal payments received on the
collateral pool in excess of FHLMC's minimum sinking fund requirement, the
rate at which principal of the CMOs is actually repaid is likely to be such
that each class of bonds will be retired in advance of its scheduled maturity
date.
If collection of principal (including prepayments) on the mortgage loans
during any semiannual payment period is not sufficient to meet FHLMC's minimum
sinking fund obligation on the next sinking fund payment date, FHLMC agrees to
make up the deficiency from its general funds.
Criteria for the mortgage loans in the pool backing the CMOs are identical
to those of FHLMC PCs. FHLMC has the right to substitute collateral in the
event of delinquencies and/or defaults.
Other Mortgage-Related Securities. Commercial banks, savings and loan
institutions, private mortgage insurance companies, mortgage bankers, and
other secondary market issuers also create pass-through pools of conventional
residential mortgage loans. Such issuers may, in addition, be the originators
and/or servicers of the underlying mortgage loans as well as the guarantors of
the mortgage-related securities. Pools created by such non-governmental
issuers generally offer a higher rate of interest than government and
government-related pools because there are no direct or indirect government or
agency guarantees of payments in the former pools. However, timely payment of
interest and principal of these pools may be supported by various forms of
insurance or guarantees, including individual loan, title, pool and hazard
insurance, and letters of credit. The insurance and guarantees are issued by
governmental entities, private insurers, and the mortgage poolers. Such
insurance and guarantees and the creditworthiness of the issuers thereof will
be considered in determining whether a mortgage-related security meets a
Portfolio's investment quality standards. There can be no assurance that the
private insurers or guarantors can meet their obligations under the insurance
policies or guarantee arrangements. A Portfolio may buy mortgage-related
securities without insurance or guarantees, if, in an examination of the loan
experience and practices of the originator/servicers and poolers, the Adviser
or Portfolio Manager determines
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that the securities meet a Portfolio's quality standards. Although the market
for such securities is becoming increasingly liquid, securities issued by
certain private organizations may not be readily marketable. A Portfolio will
not purchase mortgage-related securities or any other assets which in the
opinion of the Adviser or Portfolio Manager are illiquid if, as a result, more
than 15% of the value of a Portfolio's total assets (10% for the Money Market
Portfolio) will be illiquid. It is expected that governmental, government-
related, or private entities may create mortgage loan pools and other
mortgage-related securities offering mortgage pass-through and mortgage
collateralized investments in addition to those described above. As new types
of mortgage-related securities are developed and offered to investors, the
Adviser or Portfolio Manager will, consistent with a Portfolio's investment
objectives, policies, and quality standards, consider making investments in
such new types of mortgage-related securities.
CMO Residuals. CMO residuals are derivative mortgage securities issued by
agencies or instrumentalities of the U.S. Government or by private originators
of, or investors in, mortgage loans, including savings and loan associations,
homebuilders, mortgage banks, commercial banks, investment banks and special
purpose entities of the foregoing.
The cash flow generated by the mortgage assets underlying a series of CMOs
is applied first to make required payments of principal and interest on the
CMOs and second to pay the related administrative expenses of the issuer. The
residual in a CMO structure generally represents the interest in any excess
cash flow remaining after making the foregoing payments. Each payment of such
excess cash flow to a holder of the related CMO residual represents income
and/or a return of capital. The amount of residual cash flow resulting from a
CMO will depend on, among other things, the characteristics of the mortgage
assets, the coupon rate of each class of CMO, prevailing interest rates, the
amount of administrative expenses and the prepayment experience on the
mortgage assets. In particular, the yield to maturity on CMO residuals is
extremely sensitive to prepayments on the related underlying mortgage assets,
in the same manner as an interest-only ("IO") class of stripped mortgage-
backed securities. See "Other Mortgage-Related Securities--Stripped Mortgage-
Backed Securities." In addition, if a series of a CMO includes a class that
bears interest at an adjustable rate, the yield to maturity on the related CMO
residual will also be extremely sensitive to changes in the level of the index
upon which interest rate adjustments are based. As described below with
respect to stripped mortgage-backed securities, in certain circumstances a
Portfolio may fail to recoup fully its initial investment in a CMO residual.
CMO residuals are generally purchased and sold by institutional investors
through several investment banking firms acting as brokers or dealers. The CMO
residual market has only very recently developed and CMO residuals currently
may not have the liquidity of other more established securities trading in
other markets. Transactions in CMO residuals are generally completed only
after careful review of the characteristics of the securities in question. In
addition, CMO residuals may or, pursuant to an exemption therefrom, may not
have been registered under the Securities Act of 1933, as amended. CMO
residuals, whether or not registered under such Act, may be subject to certain
restrictions on transferability, and may be deemed "illiquid" and subject to a
Portfolio's limitations on investment in illiquid securities.
Stripped Mortgage-Backed Securities. Stripped mortgage-backed securities
("SMBS") are derivative multi-class mortgage securities. SMBS may be issued by
agencies or instrumentalities of the U.S. Government, or by private
originators of, or investors in, mortgage loans, including savings and loan
associations, mortgage banks, commercial banks, investment banks and special
purpose entities of the foregoing.
SMBS are usually structured with two classes that receive different
proportions of the interest and principal distributions on a pool of mortgage
assets. A common type of SMBS will have one class receiving some of the
interest and most of the principal from the mortgage assets, while the other
class will receive most of the interest and the remainder of the principal. In
the most extreme case, one class will receive all of the interest (the IO
class), while the other class will receive all of the principal (the
principal-only or "PO" class). The yield to maturity on an IO class is
extremely sensitive to the rate of principal payments (including prepayments)
on the related underlying mortgage assets, and a rapid rate of principal
payments may have a material adverse effect on
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the Portfolio's yield to maturity from these securities. If the underlying
mortgage assets experience greater than anticipated prepayments of principal,
a Portfolio may fail to fully recoup its initial investment in these
securities even if the security is in one of the highest rating categories.
Although SMBS are purchased and sold by institutional investors through
several investment banking firms acting as brokers or dealers, these
securities were only recently developed. As a result, established trading
markets have not yet developed and, accordingly, these securities may be
deemed "illiquid" and subject to a Portfolio's limitations on investment in
illiquid securities.
OTHER ASSET-BACKED SECURITIES
In addition to mortgage-related securities, the High Yield Bond, Managed
Bond, Government Securities, Growth LT, and Multi-Strategy Equity, and Bond
and Income Portfolios, and the Money Market Portfolio, subject to its
investment policies, may invest in other asset-backed securities which are
securities that directly or indirectly represent a participation interest in,
or are secured by and payable from a stream of payments generated by
particular assets such as automobile loans or installment sales contracts,
home equity loans, computer and other leases, credit card receivables, or
other assets. Generally, the payments from the collateral are passed through
to the security holder. Due to the possibility that prepayments (on automobile
loans and other collateral) will alter cash flow on asset-backed securities,
generally it is not possible to determine in advance the actual final maturity
date or average life of many asset-backed securities. Faster prepayment will
shorten the average life and slower prepayments will lengthen it. However, it
may be possible to determine what the range of that movement could be and to
calculate the effect that it will have on the price of the security. Other
risks relate to limited interests in applicable collateral. For example,
credit card debt receivables are generally unsecured and the debtors are
entitled to the protection of a number of state and federal consumer credit
laws, many of which give such debtors the right to set off certain amounts on
credit card debt thereby reducing the balance due. Additionally, holders of
asset-backed securities may also experience delays in payments or losses if
the full amounts due on underlying sales contracts are not realized. Because
asset-backed securities are relatively new, the market experience in these
securities is limited and the market's ability to sustain liquidity through
all phases of the market cycle has not been tested.
HIGH YIELD BONDS
The High Yield Bond Portfolio, the Bond and Income Portfolio (up to 20% of
its assets), the Managed Bond Portfolio (up to 10% of its assets), the Growth
LT Portfolio (up to 10% of its assets), and the International Portfolio (up to
5% of its assets), measured at the time of investment, may invest in high risk
debt securities rated lower than Baa or BBB, or, if not rated by Moody's or
S&P, of equivalent quality (although the Managed Bond Portfolio may not invest
in securities rated lower than B) ("high yield bonds," which are commonly
referred to as "junk bonds").
In general, high yield bonds are not considered to be investment grade, and
investors should consider the risks associated with high yield bonds before
investing in the pertinent Portfolio, and in particular the High Yield Bond
and Bond and Income Portfolios. Investment in such securities generally
provides greater income and increased opportunity for capital appreciation
than investments in higher quality securities, but they also typically entail
greater price volatility and principal and income risk.
Investment in high yield bonds involves special risks in addition to the
risks associated with investments in higher rated debt securities. High yield
bonds are regarded as predominately speculative with respect to the issuer's
continuing ability to meet principal and interest payments. The high yield
bond market is relatively new, and many of the outstanding high yield bonds
have not endured a lengthy business recession. A long-term track record on
bond default rates such as that for investment grade corporate bonds, does not
exist for the high yield market. Analysis of the creditworthiness of issuers
of debt securities that are high yield bonds may be more complex than for
issuers of higher quality debt securities, and the ability of a Portfolio to
achieve its investment
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objective may, to the extent of investment in high yield bonds, be more
dependent upon such creditworthiness analysis than would be the case if the
Portfolio were investing in higher quality bonds.
High yield bonds may be more susceptible to real or perceived adverse
economic and competitive industry conditions than investment grade bonds. The
prices of high yield bonds have been found to be less sensitive to interest-
rate changes than higher-rated investments, but more sensitive to adverse
economic downturns or individual corporate developments. A projection of an
economic downturn or of a period of rising interest rates, for example, could
cause a decline in high yield bond prices because the advent of a recession
could lessen the ability of a highly leveraged company to make principal and
interest payments on its debt securities. If an issuer of high yield bonds
defaults, in addition to risking payment of all or a portion of interest and
principal, a Portfolio may incur additional expenses to seek recovery. In the
case of high yield bonds structured as zero-coupon or pay-in-kind securities,
their market prices are affected to a greater extent by interest rate changes,
and therefore tend to be more volatile than securities which pay interest
periodically and in cash.
The secondary market on which high yield bonds are traded may be less liquid
than the market for higher grade bonds. Less liquidity in the secondary
trading market could adversely affect the price at which a Portfolio could
sell a high yield bond, and could adversely affect and cause large
fluctuations in the daily net asset value of the Portfolio's shares. Adverse
publicity and investor perceptions, whether or not based on fundamental
analysis, may decrease the values and liquidity of high yield bonds,
especially in a thinly-traded market. When secondary markets for high yield
bonds are less liquid than the market for higher grade bonds, it may be more
difficult to value the securities because such valuation may require more
research, and elements of judgment may play a greater role in the valuation
because there is less reliable, objective data available.
There are also certain risks involved in using credit ratings for evaluating
high yield bonds. For example, credit ratings evaluate the safety of principal
and interest payments, not the market value risk of high yield bonds. Also,
credit rating agencies may fail to timely reflect subsequent events.
BANK OBLIGATIONS
Bank obligations in which all Portfolios may invest include certificates of
deposit, bankers' acceptances, and fixed time deposits. Each Portfolio may
also hold funds on deposit with its sub-custodian bank in an interest-bearing
account for temporary purposes.
Certificates of deposit are negotiable certificates issued against funds
deposited in a commercial bank for a definite period of time and earning a
specified return. Bankers' acceptances are negotiable drafts or bills of
exchange, normally drawn by an importer or exporter to pay for specific
merchandise, which are "accepted" by a bank, meaning, in effect, that the bank
unconditionally agrees to pay the face value of the instrument on maturity.
Fixed time deposits are bank obligations payable at a stated maturity date and
bearing interest at a fixed rate. Fixed time deposits may be withdrawn on
demand by the investor, but may be subject to early withdrawal penalties which
vary depending upon market conditions and the remaining maturity of the
obligation. There are no contractual restrictions on the right to transfer a
beneficial interest in a fixed time deposit to a third party, although there
is no market for such deposits. A Portfolio will not invest in fixed time
deposits which (i) are not subject to prepayment, or (ii) incur withdrawal
penalties upon prepayment (other than overnight deposits) if, in the
aggregate, more than 15% of its assets (10% for the Money Market Portfolio)
would be invested in such deposits, repurchase agreements maturing in more
than seven days, and other illiquid assets.
A Portfolio will not invest in any security issued by a commercial bank
unless: (i) the bank has total assets of at least U.S. $1 billion (U.S. $500
million in the case of the Equity Income Portfolio and U.S. $2 billion in the
case of the Bond and Income Portfolio), or the equivalent in other currencies,
or, in the case of domestic banks which do not have total assets of at least
U.S. $1 billion, the aggregate investment made in any one such bank is limited
to an amount, currently U.S. $100,000, insured in full by the Federal Deposit
Insurance Corporation ("FDIC"); (ii) in the case of U.S. banks, it is a member
of the FDIC; and (iii) in the case of foreign banks, the security is, in the
opinion of the Adviser or the Portfolio Manager, of an investment quality
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comparable with other debt securities of similar maturities which may be
purchased by the Portfolio. These limitations do not prohibit investments in
securities issued by foreign branches of U.S. banks, provided such U.S. banks
meet the foregoing requirements.
All Portfolios may invest in short-term debt obligations of savings and loan
associations provided that the savings and loan association issuing the
security (i) has total assets of at least $1 billion (U.S. $500 million in the
case of the Equity Income Portfolio and U.S. $2 billion in the case of the
Bond and Income Portfolio), or, in the case of savings and loan associations
which do not have total assets of at least $1 billion, the aggregate
investment made in any one savings and loan association is insured in full,
currently up to $100,000, by the Savings Association Insurance Fund ("SAIF");
(ii) the savings and loan association issuing the security is a member of the
Federal Home Loan Bank System; and (iii) the institution is insured by the
SAIF.
A Portfolio will not purchase any security of a small bank or savings and
loan association which is not readily marketable if, as a result, more than
15% of the value of its total assets (10% for the Money Market Portfolio)
would be invested in such securities, other illiquid securities, or securities
without readily available market quotations, such as restricted securities and
repurchase agreements maturing in more than seven days.
The International Portfolio may only invest in obligations of foreign banks
(including U.S. branches of foreign banks) which at the time of investment (i)
have more than U.S. $1 billion, or the equivalent in other currencies, in
total assets; and (ii) in the opinion of the Portfolio Manager, are of an
investment quality comparable to fixed income obligations in which the
Portfolio may invest. The Aggressive Equity and Emerging Markets Portfolios
may only invest in obligations of foreign banks (including U.S. branches of
foreign banks) which at the time of investment (i) have more than $10 billion,
or the equivalent in other currencies, in total assets; (ii) in terms of
assets are among the 75 largest foreign banks in the world; (iii) have
branches or agencies (limited purpose offices which do not offer all banking
services) in the U.S.; and (iv) in the opinion of the Portfolio Manager, are
of an investment quality comparable to obligations of U.S. banks in which the
Portfolios may invest. There is no limitation on the amount of a Portfolio's
assets which may be invested in obligations of foreign banks if the bank
obligations meet the appropriate conditions set forth above.
Obligations of foreign banks involve somewhat different investment risks
than those affecting obligations of U.S. banks, including: (i) the
possibilities that their liquidity could be impaired because of future
political and economic developments; (ii) their obligations may be less
marketable than comparable obligations of U.S. banks; (iii) a foreign
jurisdiction might impose withholding taxes on interest income payable on
those obligations; (iv) foreign deposits may be seized or nationalized; (v)
foreign governmental restrictions, such as exchange controls, may be adopted
which might adversely affect the payment of principal and interest on those
obligations; and (vi) the selection of those obligations may be more difficult
because there may be less publicly available information concerning foreign
banks or the accounting, auditing, and financial reporting standards,
practices and requirements applicable to foreign banks may differ from those
applicable to U.S. banks. Foreign banks are not generally subject to
examination by any U.S. Government agency or instrumentality.
The International Portfolio's investments in convertible securities,
described below, that are purchased in furtherance of the Portfolio's
investment objective, are not subject to the limitations described above with
respect to bank obligations.
CORPORATE DEBT SECURITIES
All Portfolios may invest in U.S. dollar-denominated corporate debt
securities of domestic issuers and the Money Market, High Yield Bond, Managed
Bond, Government Securities, Aggressive Equity, Growth LT, Multi-Strategy,
Bond and Income, International, and Emerging Markets Portfolios may invest in
U.S. dollar-denominated debt securities of foreign issuers. The Aggressive
Equity, Growth LT, International, and Emerging Markets Portfolios, and, to the
extent of 20% of their assets, the Managed Bond, and Government Securities
Portfolios, and to the extent of 10% of their assets the Multi-Strategy and
Bond and Income Portfolios, may also invest in debt securities of foreign
issuers denominated in foreign currencies. The debt securities in which any
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Portfolio other than the Money Market Portfolio may invest are limited to
corporate debt securities (corporate bonds, debentures, notes, and other
similar corporate debt instruments) which meet the minimum ratings criteria
set forth for that particular Portfolio, or, if not so rated, are, in the
Portfolio Manager's opinion, comparable in quality to corporate debt
securities in which a Portfolio may invest. The debt securities in which the
Money Market Portfolio may invest are described in the discussion of the
investment objective and policies of that Portfolio.
The investment return on corporate debt securities reflects interest
earnings and changes in the market value of the security. The market value of
corporate debt obligations may be expected to rise and fall inversely with
interest rates generally. There also exists the risk that the issuers of the
securities may not be able to meet their obligations on interest or principal
payments at the time called for by an instrument.
The High Yield Bond, Managed Bond, Growth, Aggressive Equity, Growth LT,
Equity Income, Multi-Strategy, Bond and Income, International, and Emerging
Markets Portfolios may invest in corporate debt securities rated Baa (Moody's)
or BBB (S&P), or, if not rated by Moody's or S&P, of equivalent quality. Such
securities are considered medium grade, and do not have economic
characteristics that provide the high degree of security with respect to
payment of principal and interest associated with higher rated bonds, and
generally have some speculative characteristics. A bond will be placed in this
rating category where interest payments and principal security appear adequate
for the present, but economic characteristics that provide longer term
protection may be lacking.
The High Yield Bond Equity Income and Multi-Strategy and, to the extent of
20% of its assets, the Bond and Income Portfolio and, to the extent of 10% of
their assets, the Managed Bond Portfolio and Growth LT Portfolio, and to the
extent of 5% of its assets, the International Portfolio, may invest in debt
securities rated lower than Baa or BBB (although the Managed Bond Portfolio
may not invest in securities rated lower than B), or, if not rated by Moody's
or S&P, of equivalent quality. Such securities are not considered to be
investment grade, and are regarded as predominately speculative with respect
to the issuer's continuing ability to meet principal and interest payments.
For more information on the risks of such securities, see the discussion of
"High Yield Bonds" above.
VARIABLE AND FLOATING RATE SECURITIES
All Portfolios may invest in variable and floating rate securities which
provide for a periodic adjustment in the interest rate paid on obligations.
The terms of such obligations must provide that interest rates are adjusted
periodically based upon an appropriate interest rate adjustment index as
provided in the respective obligations. The adjustment intervals may be
regular, and range from daily to annually, or may be event based, such as
based on a change in the prime rate.
COMMERCIAL PAPER
All of the Portfolios may invest in commercial paper (including variable
amount master demand notes). Each Portfolio, other than the Money Market and
Equity Portfolios may invest in commercial paper denominated in U.S. dollars,
issued by U.S. corporations or foreign corporations and (1) rated at the date
of investment Prime-1 or Prime-2 by Moody's or A-1 or A-2 by S&P or (2) if not
rated by either Moody's or S&P, issued by a corporation having an outstanding
debt issue rated Aa or better by Moody's or AA or better by S&P or (3) if not
rated, are determined to be of an investment quality comparable to rated
commercial paper in which a Portfolio may invest. If issued by a foreign
corporation, such commercial paper is U.S. dollar-denominated and not subject
at the time of purchase to foreign tax withholding. The Aggressive Equity,
International, and Emerging Markets Portfolios may, however, invest in
commercial paper denominated in foreign currencies. The Money Market Portfolio
may invest in commercial paper that meets the standards for money market
securities that that Portfolio may acquire as described in the Prospectus in
the section "Investment Objectives and Policies." The Equity Portfolio may
invest in commercial paper (1) rated at the time of purchase Prime-1 by
Moody's or A-1 by S&P or (2) if not rated by either Moody's or S&P, issued by
a corporation having an outstanding debt issue rated Aa or better by Moody's
or AA or better by S&P.
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Commercial paper obligations may include variable amount master demand
notes. These are obligations that permit the investment of fluctuating amounts
at varying rates of interest pursuant to direct arrangements between a
Portfolio, as lender, and the borrower. These notes permit daily changes in
the amounts borrowed. The lender has the right to increase the amount under
the note at any time up to the full amount provided by the note agreement, or
to decrease the amount, and the borrower may prepay up to the full amount of
the note without penalty. Because variable amount master demand notes are
direct lending arrangements between the lender and borrower, it is not
generally contemplated that such instruments will be traded and there is no
secondary market for these notes. However, they are redeemable (and thus
immediately repayable by the borrower) at face value, plus accrued interest,
at any time. In connection with master demand note arrangements, the Adviser
or Portfolio Manager will monitor, on an ongoing basis, the earning power,
cash flow, and other liquidity ratios of the borrower and its ability to pay
principal and interest on demand. The Adviser or Portfolio Manager also will
consider the extent to which the variable amount master demand notes are
backed by bank letters of credit. These notes generally are not rated by
Moody's or S&P; a Portfolio, other than the Money Market Portfolio, may invest
in them only if the Adviser or Portfolio Manager believes that at the time of
investment the notes are of comparable quality to the other commercial paper
in which the Portfolio may invest. With respect to the Money Market Portfolio,
determination of eligibility for the Portfolio will be in accordance with the
standards described in the discussion of the Portfolio in the Prospectus on
"Investment Objectives and Policies." Master demand notes are considered by
the Portfolio to have a maturity of one day unless the Adviser or Portfolio
Manager has reason to believe that the borrower could not make immediate
repayment upon demand. See the Appendix in the Prospectus for a description of
Moody's and S&P ratings applicable to commercial paper.
CONVERTIBLE SECURITIES
All Portfolios except the Money Market Portfolio may invest in convertible
securities. The convertible securities in the Portfolio's portfolios are
fixed-income securities which may be converted or exchanged at a stated
exchange ratio into underlying shares of common stock. The exchange ratio for
any particular convertible security may be adjusted from time to time due to
stock splits, dividends, spin-offs, other corporate distributions, or
scheduled changes in the exchange ratio. Convertible bonds and convertible
preferred stocks, until converted, have general characteristics similar to
both fixed-income and equity securities. Although to a lesser extent than with
fixed-income securities generally, the market value of convertible securities
tends to decline as interest rates increase and, conversely, tends to increase
as interest rates decline. In addition, because of the conversion or exchange
feature, the market value of convertible securities tends to vary with
fluctuations in the market value of the underlying common stocks, and,
therefore, also will react to variations in the general market for equity
securities. A unique feature of convertible securities is that as the market
price of the underlying common stock declines, convertible securities tend to
trade increasingly on a yield basis, and so may not experience market value
declines to the same extent as the underlying common stock. When the market
price of the underlying common stock increases, the prices of the convertible
securities tend to rise as a reflection of the value of the underlying common
stock. While no securities investments are without risk, investments in
convertible securities generally entail less risk than investments in common
stock of the same issuer.
As fixed-income securities, convertible securities are investments which
provide for a stable stream of income with generally higher yields than common
stocks. Of course, like all fixed-income securities, there can be no assurance
of current income because the issuers of the convertible securities may
default in their obligations. Convertible securities, however, generally offer
lower interest or dividend yields than non-convertible securities of similar
quality because of the potential for capital appreciation.
A convertible security, in addition to providing fixed-income, offers the
potential for capital appreciation through the conversion feature which
enables the holder to benefit from increases in the market price of the
underlying common stock. In selecting the securities for a Portfolio, the
Adviser or Portfolio Manager gives substantial consideration to the potential
for capital appreciation of the common stock underlying the convertible
securities. However, there can be no assurance of capital appreciation because
securities prices fluctuate.
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Convertible securities generally are subordinated to other similar but
nonconvertible securities of the same issuer although convertible bonds, as
corporate debt obligations, enjoy seniority in right of payment to all equity
securities, and convertible preferred stock is senior to common stock, of the
same issuer. However, because of the subordination feature, convertible bonds
and convertible preferred stock typically have lower ratings than similar non-
convertible securities.
A "synthetic convertible" is created by combining distinct securities which
possess the two principal characteristics of a true convertible, i.e., fixed-
income ("fixed-income component") and the right to acquire equity securities
("convertibility component"). This combination is achieved by investing in
nonconvertible fixed-income securities (nonconvertible bonds and preferred
stocks) and in warrants, granting the holder the right to purchase a specified
quantity of securities within a specified period of time at a specified price.
However, the synthetic convertible differs from the true convertible
security in several respects. Unlike a true convertible, which is a single
security having a unitary market value, a synthetic convertible is comprised
of two distinct securities, each with its own market value. Therefore, the
"market value" of a synthetic convertible is the sum of the values of its
fixed-income component and its convertibility component. For this reason, the
value of a synthetic convertible and a true convertible security will respond
differently to market fluctuations.
More flexibility is possible in the assembly of a synthetic convertible than
in the purchase of a convertible security in that its two components may be
purchased separately. For example, a Portfolio Manager may purchase a warrant
for inclusion in a synthetic convertible but temporarily hold short-term
investments while postponing purchase of a corresponding bond pending
development of more favorable market conditions.
A holder of a synthetic convertible faces the risk that the price of the
stock underlying the convertibility component will decline, causing a decline
in the value of the warrant; should the price of the stock fall below the
exercise price and remain there throughout the exercise period, the entire
amount paid for the warrant would be lost. Since a synthetic convertible
includes the fixed-income component as well, the holder of a synthetic
convertible also faces the risk that interest rates will rise, causing a
decline in the value of the fixed-income instrument.
REPURCHASE AGREEMENTS
All Portfolios may invest in repurchase agreements, which entail the
purchase of a portfolio eligible security from a bank or broker-dealer that
agrees to repurchase the security at the Portfolio's cost plus interest within
a specified time (normally one day). Repurchase agreements permit an investor
to maintain liquidity and earn income over periods of time as short as
overnight. If a Portfolio acquires securities from a bank or broker-dealer it
may simultaneously enter into a repurchase agreement with the seller wherein
the seller agrees at the time of sale to repurchase the security at a mutually
agreed upon time and price. The term of such an agreement is generally quite
short, possibly overnight or for a few days, although it may extend over a
number of months (up to one year) from the date of delivery. The resale price
is in excess of the purchase price by an amount which reflects an agreed upon
market rate of return, effective for the period of time the Portfolio is
invested in the security. This results in a fixed rate of return protected
from market fluctuations during the period of the agreement. This rate is not
tied to the coupon rate on the security subject to the repurchase agreement.
If the party agreeing to repurchase should default and if the value of the
securities held by a Portfolio should fall below the repurchase price, a loss
could be incurred. Repurchase agreements will be entered into only where the
underlying security is within the three highest credit categories assigned by
established rating agencies (Aaa, Aa, or A by Moody's or AAA, AA, or A by S&P)
or, if not rated by Moody's or S&P, are of equivalent investment quality as
determined by the Adviser or Portfolio Manager, except that the Money Market
Portfolio will enter into repurchase agreements only where the underlying
securities are of the quality that is eligible for the Portfolio as described
in the discussion of that Portfolio's investment objective and policies.
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Under the Investment Company Act of 1940 (the "1940 Act"), repurchase
agreements are considered to be loans by the purchaser collateralized by the
underlying securities. The Adviser or Portfolio Manager to a Portfolio
monitors the value of the underlying securities at the time the repurchase
agreement is entered into and at all times during the term of the agreement to
ensure that its value always equals or exceeds the agreed upon repurchase
price to be paid to the Portfolio. The Adviser or Portfolio Manager, in
accordance with procedures established by the Board of Trustees, also
evaluates the creditworthiness and financial responsibility of the banks and
brokers or dealers with which the Portfolio enters into repurchase agreements.
A Portfolio may not enter into a repurchase agreement having more than seven
days remaining to maturity if, as a result, such agreements, together with any
other securities which are not readily marketable, would exceed 15% of the
total assets of the Portfolio (10% for the Money Market Portfolio). If the
seller should become bankrupt or default on its obligations to repurchase the
securities, a Portfolio may experience delay or difficulties in exercising its
rights to the securities held as collateral and might incur a loss if the
value of the securities should decline. A Portfolio also might incur
disposition costs in connection with liquidating the securities.
BORROWING
Each Portfolio may borrow up to certain limits. A Portfolio may not borrow
if, as a result of such borrowing, the total amount of all money borrowed by
the Portfolio exceeds 33 1/3 of the value of its total assets (at the time of
such borrowing), including reverse repurchase agreements. This borrowing may
be unsecured. Borrowing may exaggerate the effect on net asset value of any
increase or decrease in the market value of a Portfolio. Money borrowed will
be subject to interest costs which may or may not be recovered by appreciation
of the securities purchased. A Portfolio also may be required to maintain
minimum average balances in connection with such borrowing or to pay a
commitment or other fee to maintain a line of credit; either of these
requirements would increase the cost of borrowing over the stated interest
rate. Reverse repurchase agreements will be included as borrowing subject to
the borrowing limitations described above.
REVERSE REPURCHASE AGREEMENTS AND OTHER BORROWINGS
Among the forms of borrowing in which the High Yield Bond, Managed Bond,
Government Securities, Aggressive Equity, Growth LT, Bond and Income, Equity
Index, and Emerging Markets Portfolios may engage is the entry into reverse
repurchase agreements, which involves the sale of a debt security held by the
Portfolio, with an agreement by that Portfolio to repurchase the security at a
stated price, date and interest payment.
A Portfolio will use the proceeds of a reverse repurchase agreement to
purchase other money market instruments which either mature at a date
simultaneous with or prior to the expiration of the reverse repurchase
agreement or which are held under an agreement to resell maturing as of that
time. The use of reverse repurchase agreements by a Portfolio creates leverage
which increases a Portfolio's investment risk. If the income and gains on
securities purchased with the proceeds of reverse repurchase agreements exceed
the cost of the agreements, the Portfolio's earnings or net asset value will
increase faster than otherwise would be the case; conversely, if the income
and gains fail to exceed the costs, earnings or net asset value would decline
faster than otherwise would be the case. A Portfolio will enter into a reverse
repurchase agreement only when the interest income to be earned from the
investment of the proceeds of the transaction is greater than the interest
expense of the transaction. However, reverse repurchase agreements involve the
risk that the market value of securities retained by the Portfolio may decline
below the repurchase price of the securities sold by the Portfolio which it is
obligated to repurchase.
A Portfolio may enter into reverse repurchase agreements with banks or
broker-dealers. Entry into such agreements with broker-dealers requires the
creation and maintenance of a segregated account consisting of U.S. Government
securities, cash or liquid securities marked-to-market daily at least equal in
value to its obligations in respect of reverse repurchase agreements.
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FIRM COMMITMENT AGREEMENTS AND WHEN-ISSUED SECURITIES
All Portfolios may enter into firm commitment agreements for the purchase of
securities at an agreed upon price on a specified future date. A Portfolio may
purchase new issues of securities on a "when-issued" basis, whereby the
payment obligation and interest rate on the instruments are fixed at the time
of the transaction. Such transactions might be entered into, for example, when
the Adviser or Portfolio Manager to a Portfolio anticipates a decline in the
yield of securities of a given issuer and is able to obtain a more
advantageous yield by committing currently to purchase securities to be issued
or delivered later.
A Portfolio will not enter into such a transaction for the purpose of
investment leverage. Liability for the purchase price--and all the rights and
risks of ownership of the securities--accrue to the Portfolio at the time it
becomes obligated to purchase such securities, although delivery and payment
occur at a later date. Accordingly, if the market price of the security should
decline, the effect of the agreement would be to obligate the Portfolio to
purchase the security at a price above the current market price on the date of
delivery and payment. During the time the Portfolio is obligated to purchase
such securities it will maintain in a segregated account U.S. Government
securities, cash or liquid securities marked-to-market daily of an aggregate
current value sufficient to make payment for the securities.
LOANS OF PORTFOLIO SECURITIES
For the purpose of realizing additional income, each Portfolio, except the
Growth, Equity Income, Multi-Strategy, and Equity Index Portfolios, may make
secured loans of its portfolio securities to broker-dealers or U.S. banks
provided: (i) such loans are secured continuously by collateral consisting of
cash, cash equivalents, or U.S. Government securities maintained on a daily
marked-to-market basis in an amount or at a market value at least equal to the
current market value of the securities loaned; (ii) the Portfolio may at any
time call such loans and obtain the securities loaned; (iii) the Portfolio
will receive an amount in cash at least equal to the interest or dividends
paid on the loaned securities; and (iv) the aggregate market value of
securities loaned will not at any time exceed 25% of the total assets of the
Portfolio. In addition, it is anticipated that the Portfolio may share with
the borrower some of the income received on the collateral for the loan or
that it will be paid a premium for the loan. It should be noted that in
connection with the lending of its portfolio securities, the Portfolio is
exposed to the risk of delay in recovery of the securities loaned or possible
loss of rights in the collateral should the borrower become insolvent. In
determining whether to lend securities, the Adviser or Portfolio Manager
considers all relevant facts and circumstances including the creditworthiness
of the borrower. Voting rights attached to the loaned securities may pass to
the borrower with the lending of portfolio securities. However, the Portfolio
intends to call loaned voting securities if important shareholder meetings are
imminent.
SHORT SALES AGAINST THE BOX
The Aggressive Equity and Equity Portfolios may enter into short sales
"against the box." A short sale is made by selling a security the Portfolio
does not own. A short sale is "against the box" when, at all times during
which a short position is open, the Portfolio owns an equal amount of such
securities, or owns securities giving it the right, without payment of future
consideration, to obtain an equal amount of securities sold short. No more
than 15% of the value of a Portfolio's net assets will be subject to such
short sales at any time.
RESTRICTED SECURITIES (PRIVATE PLACEMENTS)
All Portfolios except the Equity Index Portfolio may invest in restricted
securities (including privately placed securities) but a Portfolio will not
acquire such securities if they are illiquid and other securities that are
illiquid, such as repurchase agreements maturing in more than seven days, if
as a result they would comprise more than 15% of the value of the Portfolio's
total assets, and in the case of the Money Market Portfolio, 10% of the value
of its Portfolio assets. The privately placed securities in which these
Portfolios may invest are called restricted securities because there are
restrictions or conditions attached to their resale.
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Restricted securities may be sold only in a public offering with respect to
which a registration statement is in effect under the Securities Act of 1933
or in a transaction exempt from such registration such as certain privately
negotiated transactions. Where registration is required, the Portfolio may be
obligated to pay all or part of the registration expenses and a considerable
period may elapse between the time of the decision to sell and the time the
Portfolio may be permitted to sell a security under an effective registration
statement. If, during such a period, adverse market conditions were to
develop, the Portfolio might obtain a less favorable price than prevailed when
it decided to sell. Restricted securities will be priced at fair value as
determined in good faith under the direction of the Board of Trustees. If
through the appreciation of restricted securities or the depreciation of
unrestricted securities, the Portfolio should be in a position where more than
15% of the value of its total assets are invested in restricted securities
that are illiquid and other securities that are illiquid, the Portfolio
Manager will consider whether steps should be taken to assure liquidity.
Certain restricted securities may be purchased by certain "qualified
institutional buyers" without the necessity for registration of the
securities. A Portfolio may acquire such a security without the security being
treated as illiquid for purposes of the above-described limitation on
acquisition of illiquid assets if the Portfolio Manager determines that the
security is liquid under guidelines adopted by the Fund's Board of Trustees.
Investing in such restricted securities could have the effect of increasing
the level of the Portfolio's illiquidity to the extent that qualified
institutional buyers become, for a time, uninterested in purchasing these
securities.
FOREIGN SECURITIES
The Money Market, High Yield Bond, Managed Bond, Government Securities,
Aggressive Equity, Growth LT, Multi-Strategy, Bond and Income, International,
and Emerging Markets Portfolios may invest directly in U.S. dollar-denominated
corporate debt securities of foreign issuers, certain foreign bank obligations
and U.S. dollar-denominated obligations of foreign governments, foreign
government agencies and international agencies. The Growth, Growth LT, Equity
Income, Multi-Strategy and Equity Index Portfolios may invest in equity
securities of foreign issuers if U.S. exchange listed or if otherwise included
in the S&P 500. The Growth LT Portfolio may invest up to 25% of its assets in
foreign securities denominated in a foreign currency and not publicly traded
in the United States. The Aggressive Equity Portfolio may invest in securities
of foreign issuers that are traded in U.S. securities markets and may invest
up to 20% of its assets in securities that are traded principally in
securities markets outside of the United States. The International and
Emerging Markets Portfolios may invest in equity securities of foreign
corporations, nonconvertible fixed income securities denominated in foreign
currencies, and in securities represented by European Depositary Receipts
("EDRs"), Global Depositary Receipts ("GDRs"), or other securities convertible
into equity securities of foreign issuers. The Growth LT Portfolio may also
invest in EDRs and GDRs and other types of receipts of shares evidencing
ownership of the underlying foreign securities. The Managed Bond and
Government Securities Portfolios may each invest up to 20% of their assets in
non-U.S. dollar-denominated debt securities of foreign issuers. The Multi-
Strategy and the Bond and Income Portfolios may invest up to 10% of their
assets in non-U.S. dollar-denominated debt securities of foreign issuers. All
Portfolios may purchase American Depositary Receipts ("ADRs") which are
dollar-denominated receipts issued generally by domestic banks and
representing the deposit with the bank of a security of a foreign issuer. ADRs
are publicly-traded on exchanges or over-the-counter in the United States.
Investing in the securities of foreign issuers involves special risks and
considerations not typically associated with investing in U.S. companies.
These risks are intensified with respect to investments in emerging market
countries. These include differences in accounting, auditing and financial
reporting standards, generally higher commission rates on foreign portfolio
transactions, the possibility of expropriation, nationalization, or
confiscatory taxation, adverse changes in investment or exchange control
regulations, trade restrictions, political instability (which can affect U.S.
investments in foreign countries), and potential restrictions on the flow of
international capital. It may be more difficult to obtain and enforce
judgments against foreign entities. Additionally, income (including dividends
and interest) from foreign securities may be subject to foreign taxes,
including foreign withholding taxes, and other foreign taxes may apply with
respect to securities transactions. Transactions on foreign exchanges or over-
the-counter markets may involve greater time from the trade date until
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settlement than for domestic securities transactions and, if the securities
are held abroad, may involve the risk of possible losses through the holding
of securities in custodians and depositories in foreign countries. Foreign
securities often trade with less frequency and volume than domestic securities
and therefore may exhibit greater price volatility. Changes in foreign
exchange rates will affect the value of those securities which are denominated
or quoted in currencies other than the U.S. dollar. Investing in ADRs may
involve many of the same special risks associated with investing in securities
of foreign issuers other than liquidity risks.
There is generally less publicly available information about foreign
companies comparable to reports and ratings that are published about companies
in the United States. Foreign companies are also generally not subject to
uniform accounting and auditing and financial reporting standards, practices,
and requirements comparable to those applicable to U.S. companies.
It is contemplated that most foreign securities will be purchased in over-
the-counter markets or on stock exchanges located in the countries in which
the respective principal offices of the issuers of the various securities are
located, if that is the best available market. Foreign stock markets are
generally not as developed or efficient as those in the United States. While
growing in volume, they usually have substantially less volume than the New
York Stock Exchange, and securities of some foreign companies are less liquid
and more volatile than securities of comparable U.S. companies. Similarly,
volume and liquidity in most foreign bond markets is less than in the United
States and at times, volatility of price can be greater than in the United
States. Fixed commissions on foreign stock exchanges are generally higher than
negotiated commissions on U.S. exchanges, although the Portfolio will endeavor
to achieve the most favorable net results on its portfolio transactions. There
is generally less government supervision and regulation of stock exchanges,
brokers, and listed companies than in the United States.
With respect to certain foreign countries, there is the possibility of
adverse changes in investment or exchange control regulations,
nationalization, expropriation or confiscatory taxation, limitations on the
removal of funds or other assets of the Portfolio, political or social
instability, or diplomatic developments which could affect United States
investments in those countries. Moreover, individual foreign economies may
differ favorably or unfavorably from the United States' economy in such
respects as growth of gross national product, rate of inflation, capital
reinvestment, resource self-sufficiency, and balance of payments position.
The dividends and interest payable on certain of the Portfolios' foreign
portfolio securities may be subject to foreign withholding taxes, thus
reducing the net amount of income available for distribution.
Investors should understand that the expense ratio of the International and
Emerging Markets Portfolios can be expected to be higher than investment
companies investing in domestic securities since the cost of maintaining the
custody of foreign securities and the rate of advisory fees paid by the
Portfolios are higher.
Investment in foreign securities also involves the risk of possible losses
through the holding of securities in custodian banks and securities
depositories in foreign countries. The Fund has entered into a Custody
Agreement with Investors Fiduciary Trust Company ("IFTC"), a trust company
chartered under the laws of Missouri, which has entered into a Subcustodial
Agreement with The Chase Manhattan Bank ("Chase") under which Chase, together
with certain of its foreign branches and agencies and foreign banks and
securities depositories acting as subcustodian to Chase, will maintain custody
of the securities and other assets of foreign issuers for the Fund. Under
these agreements, Chase and IFTC have agreed (i) to use reasonable care in the
safekeeping of these securities, (ii) to indemnify and hold harmless the Fund
from and against any loss which shall occur as a result of the failure of a
foreign bank or securities depository holding such securities and (iii) to
exercise reasonable care in the safekeeping of such securities to the same
extent as if the securities were held in New York. Pursuant to requirements of
the Securities and Exchange Commission ("SEC"), Chase is required to use
reasonable care in the selection of foreign subcustodians, and to consider the
financial strength of the foreign subcustodian, its general reputation and
standing (for depository, its operating history and number of participants),
its ability to provide efficiently the custodial services required, its
relative costs for the services to be rendered, and the Fund's
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ability to obtain jurisdiction over the foreign subcustodian to enforce
judgments. No assurance can be given that expropriation, nationalization,
freezes, or confiscation of assets, which would impact assets of the
Portfolio, will not occur, and shareholders bear the risk of losses arising
from these or other events.
The International and Emerging Markets Portfolios may invest in shares of
investment companies organized to invest in foreign countries. Under the 1940
Act, the Portfolio may not own more than 3% of the outstanding voting stock of
an investment company, invest more than 5% of the Portfolio's total assets in
any one investment company, or invest more than 10% of the Portfolio's total
assets in the securities of investment companies.
The International and Emerging Markets Portfolios foreign investments will
be allocated to at least three countries at all times. In addition, each
Portfolio may not invest more than 50% of its assets in any one second tier
country or more than 25% of its assets in any one third tier country. First
tier countries are: Germany, the United Kingdom, Japan, the United States,
France, Canada, and Australia. Second tier countries are all countries not in
the first or third tier. Third tier countries are countries identified as
"emerging" or "developing" by the International Bank for Reconstruction and
Development ("World Bank") or International Finance Corporation. The
Portfolios are not subject to any limit upon investment in issuers domiciled
or primarily traded in the United States. Less diversification among countries
may create an opportunity for higher returns, but may also result in higher
risk of loss because of greater exposure to a market decline in a single
country.
FOREIGN CURRENCY TRANSACTIONS
Generally, the foreign exchange transactions of the Managed Bond, Government
Securities, Aggressive Equity, Growth LT, Multi-Strategy, Bond and Income,
International, and Emerging Markets Portfolios will be conducted on a spot,
i.e., cash, basis at the spot rate for purchasing or selling currency
prevailing in the foreign exchange market. This rate, under normal market
conditions, differs from the prevailing exchange rate in an amount generally
less than 0.15 of 1% due to the costs of converting from one currency to
another. However, the Managed Bond, Government Securities, Aggressive Equity,
Growth LT, Multi-Strategy, International, and Emerging Markets Portfolios have
authority to deal in forward foreign exchange as a hedge against possible
fluctuations in foreign exchange rates. This is accomplished through
contractual agreements to purchase or sell a specified currency at a specified
future date and price set at the time of the contract. A Portfolio's dealings
in forward foreign exchange will be limited to hedging involving either
specific transactions or portfolio positions. Transaction hedging is the
purchase or sale of forward foreign currency contracts with respect to
specific receivables or payables of a Portfolio arising from the purchase and
sale of portfolio securities, the sale and redemption of shares of a
Portfolio, or the payment of dividends and distributions by a Portfolio.
Position hedging is the sale of forward foreign currency contracts with
respect to portfolio security positions denominated or quoted in a foreign
currency. In connection with either of these types of hedging, a Portfolio may
also engage in proxy hedging. Proxy hedging entails entering into a forward
contract to buy or sell a currency whose changes in value are generally
considered to be moving in correlation with a currency or currencies in which
portfolio securities are or are expected to be denominated. Proxy hedging is
often used when a currency in which portfolio securities are denominated is
difficult to hedge. The precise matching of a currency with a proxy currency
will not generally be possible and there may be some additional currency risk
in connection with such hedging transactions. The Portfolios will not
speculate in forward foreign exchange.
Forward Foreign Currency Contracts. The Managed Bond, Government Securities,
Aggressive Equity, Growth LT, Multi-Strategy, Bond and Income, International,
and Emerging Markets Portfolios may enter into forward foreign currency
contracts only under the following circumstances. First, when a Portfolio
enters into a contract for the purchase or sale of a security denominated in a
foreign currency, it may desire to "lock in" the U.S. dollar price of the
security. By entering into a forward contract for the purchase or sale of the
amount of foreign currency involved in the underlying security transactions
(or a proxy currency considered to move in correlation with that currency) for
a fixed amount of dollars, a Portfolio may be able to protect itself against a
possible loss resulting from an adverse change in the relationship between the
U.S. dollar and the subject foreign currency during the period between the
date the security is purchased or sold and the date on which payment in made
or received.
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Second, when the Portfolio Manager of a Portfolio believes that the currency
of a particular foreign country may suffer a substantial movement against
another currency, it may enter into a forward contract to sell or buy the
amount of the former foreign currency (or a proxy currency considered to move
in correlation with that currency), approximating the value of some or all of
the Portfolio's portfolio securities denominated in such foreign currency. The
precise matching of the forward contract amounts and the value of the
securities involved will not generally be possible since the future value of
such securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date the forward
contract is entered into and the date it matures. The projection of short-term
currency market movements is extremely difficult and the successful execution
of a short-term hedging strategy is highly uncertain. In no event will a
Portfolio enter into forward contracts under this second circumstance, or
maintain a net exposure to such contracts, where the consummation of the
contracts would obligate the Portfolio to deliver an amount of foreign
currency in excess of the value of that Portfolio's portfolio securities or
other assets denominated in that foreign currency (or a proxy currency
considered to move in correlation with that currency). In addition, a
Portfolio will not enter into forward contracts under this second
circumstance, if, as a result, the Portfolio will have more than 25% of the
value of its total assets committed to the consummation of such contracts.
Under normal circumstances, consideration of the prospect for currency
parities will be incorporated into the longer term investment decisions made
with regard to overall diversification strategies. The Portfolios will cover
outstanding forward currency contracts by maintaining liquid portfolio
securities denominated in the currency underlying the forward contract or the
currency being hedged. To the extent that a Portfolio is not able to cover its
forward currency positions with underlying portfolio securities, the
Portfolio's custodian bank will place cash or liquid equity or debt securities
in a separate account of the Portfolio in an amount equal to the value of the
Portfolio's total assets committed to the consummation of forward foreign
currency exchange contracts. If the value of the securities used to cover a
position or the value of assets placed in the separate account declines, a
Portfolio will find alternative cover or additional cash or securities will be
placed in the account on a daily basis so that the value of the segregated
assets will equal the amount of the Portfolio's commitments with respect to
such contracts.
When a Portfolio Manager of a Portfolio believes that the currency of a
particular foreign country may suffer a decline against the U.S. dollar, that
Portfolio may enter into a forward contract to sell the amount of foreign
currency approximating the value of some or all of the Portfolio's holdings
denominated in such foreign currency. At the maturity of the forward contract
to sell, the Portfolio may either sell the portfolio security and make
delivery of the foreign currency or it may retain the security and terminate
its contractual obligation to deliver the foreign currency by purchasing an
"offsetting" contract with the same currency trader obligating the Portfolio
to purchase, on the same maturity date, the same amount of the foreign
currency.
It is impossible to forecast with absolute precision the market value of
portfolio securities at the expiration of the contract. Accordingly, it may be
necessary for a Portfolio to purchase additional foreign 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 foreign currency the Portfolio is
obligated to deliver and if a decision is made to sell the security and make
delivery of the foreign currency. Conversely, it may be necessary to sell on
the spot market some of the foreign currency received upon the sale of the
portfolio security if its market value exceeds the amount of foreign currency
the Portfolio is obligated to deliver.
If a Portfolio retains the portfolio security and engages in an offsetting
transaction, the Portfolio will incur a gain or a loss (as described below) to
the extent that there has been movement in forward contract prices. If the
Portfolio engages in an offsetting transaction, it may subsequently enter into
a new forward contract to sell the foreign currency. Should forward prices
decline during the period between the Portfolio's entering into a forward
contract for the sale of a foreign currency and the date it enters into an
offsetting contract for the purchase of the foreign currency, the Portfolio
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 Portfolio 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.
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A Portfolio's dealings in forward foreign currency exchange contracts will
be limited to the transactions described above. Of course, a Portfolio is not
required to enter into such transactions with regard to their foreign currency
denominated securities and will not do so unless deemed appropriate by its
Portfolio Manager. It also should be realized that this method of protecting
the value of a Portfolio's holdings in securities against a decline in the
value of a currency does not eliminate fluctuations in the underlying prices
of the securities. It simply establishes a rate of exchange which one can
achieve at some future point in time. Additionally, although such contracts
tend to minimize the risk of loss due to a decline in the value of the hedged
currency, at the same time they tend to limit any potential gain which might
result from the value of such currency increase.
Although a Portfolio values its shares in terms of U.S. dollars, it does not
intend to convert its holdings of foreign currencies into U.S. dollars on a
daily basis. It will do so from time to time, and investors should be aware of
the costs of currency conversion. Although foreign exchange dealers do not
charge a fee for conversion, they do realize a profit based on the difference
(the "spread") between the prices at which they are buying and selling various
currencies. Thus, a dealer may offer to sell a foreign currency to a Portfolio
at one rate, while offering a lesser rate of exchange should the Portfolio
desire to resell that currency to the dealer.
The Managed Bond, Government Securities, Aggressive Equity, Growth LT,
International, and Emerging Markets Portfolios may also purchase and write
options on foreign currencies, invest in foreign currency futures contracts,
and purchase and write options thereon, as described below.
OPTIONS
In pursuing their investment objectives, the High Yield Bond, Managed Bond,
Government Securities, Aggressive Equity, Growth LT, Equity Income, Multi-
Strategy, Equity, Bond and Income, and Emerging Markets Portfolios may engage
in the purchase and writing of put and call options on securities. In pursuing
their investment objectives, the Aggressive Equity, Growth LT, Equity Income,
Multi-Strategy, Equity, Bond and Income, Equity Index, and Emerging Markets
Portfolios may purchase put and call options on stock indexes. The Aggressive
Equity Portfolio may, for hedging purposes, purchase put and call options on
securities and securities indexes and may write covered call options.
Purchasing and Writing Options on Securities. The High Yield Bond, Managed
Bond, Government Securities, Aggressive Equity, Growth LT, Equity Income,
Multi-Strategy, Equity, Bond and Income, and Emerging Markets Portfolios may
purchase and write put and call options on securities. A Portfolio may
purchase and sell (write) (i) both put and call options on debt or other
securities in standardized contracts traded on national securities exchanges,
boards of trade, similar entities, or for which an established over-the-
counter market exists; and (ii) agreements, sometimes called cash puts, which
may accompany the purchase of a new issue of bonds from a dealer.
An option on a security is a contract that gives the holder of the option,
in return for a premium, the right to buy from (in the case of a call) or sell
to (in the case of a put) the writer of the option the security underlying the
option at a specified exercise price at any time during the term of the
option. The writer of an option on a security has the obligation upon exercise
of the option to deliver the underlying security upon payment of the exercise
price or to pay the exercise price upon delivery of the underlying security. A
Portfolio may purchase put options on securities to protect holdings in an
underlying or related security against a substantial decline in market value.
Securities are considered related if their price movements generally correlate
to one another. For example, the purchase of put options on debt securities
held in a Portfolio will enable a Portfolio to protect, at least partially, an
unrealized gain in an appreciated security without actually selling the
security. In addition, the Portfolio will continue to receive interest income
on such security.
A Portfolio may purchase call options on securities to protect against
substantial increases in prices of securities the Portfolio intends to
purchase pending its ability to invest in such securities in an orderly
manner. A Portfolio may sell put or call options it has previously purchased,
which could result in a net gain or loss depending on whether the amount
realized on the sale is more or less than the premium and other transaction
costs paid on the put or call option which is sold. A Portfolio may also allow
options to expire unexercised.
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In order to earn additional income on its portfolio securities or to protect
partially against declines in the value of such securities, a Portfolio may
write covered call options. The exercise price of a call option may be below,
equal to, or above the current market value of the underlying security at the
time the option is written. During the option period, a covered call option
writer may be assigned an exercise notice by the broker-dealer through whom
such call option was sold requiring the writer to deliver the underlying
security against payment of the exercise price. This obligation is terminated
upon the expiration of the option period or at such earlier time in which the
writer effects a closing purchase transaction. Closing purchase transactions
will ordinarily be effected to realize a profit on an outstanding call option,
to prevent an underlying security from being called, to permit the sale of the
underlying security, or to enable the Portfolio to write another call option
on the underlying security with either a different exercise price or
expiration date or both.
In order to earn additional income or to facilitate its ability to purchase
a security at a price lower than the current market price of such security, a
Portfolio may write secured put options. During the option period, the writer
of a put option may be assigned an exercise notice by the broker-dealer
through whom the option was sold requiring the writer to purchase the
underlying security at the exercise price.
A Portfolio may write call options and put options only if they are
"covered" or "secured." In the case of a call option on a security, the option
is "covered" if the Portfolio 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 placed in a segregated account by its
custodian) upon conversion or exchange of other securities held by the
Portfolio, or, if the Portfolio has a call on the same security if the
exercise price of the call held (i) is equal to or less than the exercise
price of the call written or (ii) is greater than the exercise price of the
call written, if the difference is maintained by the Portfolio in cash, U.S.
Government securities or liquid securities marked-to-market daily in a
segregated account with the Fund's custodian. A put is secured if the
Portfolio maintains cash, U.S. Government securities or liquid securities
marked-to-market daily with a value equal to the exercise price in a
segregated account or holds a put on the same underlying security at an equal
or greater exercise price.
In the case of options on certain U.S. Government securities, the Portfolio
will maintain, in a segregated account with the Fund's Custodian, cash, U.S.
Government securities or liquid securities marked-to-market daily with a value
sufficient to meet its obligations under the call, or by other means which
would permit immediate satisfaction of the Portfolio's obligation as writer of
the option.
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, exercise price, and expiration). There can be
no assurance, however, that a closing purchase or sale transaction can be
effected when the Portfolio desires.
A Portfolio 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 Portfolio 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 Portfolio will realize a capital gain
or, if it is less, the Portfolio 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 in relation to the exercise price of the option, the volatility of
the underlying security, and the time remaining until the expiration date.
The premium paid for a put or call option purchased by a Portfolio is an
asset of the Portfolio. The premium received for an option written by a
Portfolio 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.
Purchasing Options on Stock Indexes. The Aggressive Equity, Growth LT,
Equity Income, Multi-Strategy, Equity, Bond and Income, Equity Index and
Emerging Markets Portfolios may purchase put and call options on
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stock indexes which are standardized and traded on a U.S. exchange or board of
trade, or for which an established over-the-counter market exists. Like other
options listed on United States securities exchanges, index options are issued
by the Options Clearing Corporation ("OCC").
A stock index is a method of reflecting in a single number the market values
of many different stocks or, in the case of value weighted indices that take
into account prices of component stocks and the number of shares outstanding,
the market values of many different companies. Stock indexes are compiled and
published by various sources, including securities exchanges. An index may be
designed to be representative of the stock market as a whole, of a broad
market sector (e.g., industrials), or of a particular industry (e.g.,
electronics). An index may be based on the prices of all, or only a sample, of
the stocks whose value it is intended to represent.
A stock index is ordinarily expressed in relation to a "base" established
when the index was originated. The base may be adjusted from time to time to
reflect, for example, capitalization changes affecting component stocks. In
addition, stocks may from time to time be dropped from or added to an index
group. These changes are within the discretion of the publisher of the index.
Different stock indexes are calculated in different ways. Often the market
prices of the stocks in the index group are "value weighted;" that is, in
calculating the index level, the market price of each component stock is
multiplied by the number of shares outstanding. Because of this method of
calculation, changes in the stock prices of larger corporations will generally
have a greater influence on the level of a value weighted (or sometimes
referred to as a capitalization weighted) index than price changes affecting
smaller corporations.
In general, index options are very similar to stock options, and are
basically traded in the same manner. However, when an index option is
exercised, the exercise is settled by the payment of cash--not by the delivery
of stock. The assigned writer of a stock option is obligated to pay the
exercising holder cash in an amount equal to the difference (expressed in
dollars) between the closing level of the underlying index on the exercise
date and the exercise price of the option, multiplied by a specified index
"multiplier." A multiplier of 100, for example, means that a one-point
difference will yield $100.
Gains or losses on the Portfolios' transactions in securities index options
depend primarily on price movements in the stock market generally (or, for
narrow market indexes, in a particular industry or segment of the market)
rather than the price movements of individual securities held by a Portfolio
of the Fund. A Portfolio may sell securities index options prior to expiration
in order to close out its positions in stock index options which it has
purchased. A Portfolio may also allow options to expire unexercised.
Risks of Options Transactions. There are several risks associated with
transactions in options. For example, there are significant differences
between the securities and 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 a Portfolio
seeks to close out an option position. If a Portfolio were unable to close out
an option it had purchased on a security, it would have to exercise the option
to realize any profit or the option may expire worthless. If a Portfolio were
unable to close out a covered call option it had written on a security, it
would not be able to sell the underlying security unless the option expired
without exercise. As the writer of a covered call option, a Portfolio forgoes,
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 by a Portfolio, the
Portfolio would not be able to close out the option. If restrictions on
exercise were imposed, the Portfolio might be unable to exercise an option it
has purchased.
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With respect to index options, current index levels will ordinarily continue
to be reported even when trading is interrupted in some or all of the stocks
in an index group. In that event, the reported index levels will be based on
the current market prices of those stocks that are still being traded (if any)
and the last reported prices for those stocks that are not currently trading.
As a result, reported index levels may at times be based on non-current price
information with respect to some or even all of the stocks in an index group.
Exchange rules permit (and in some instances require) the trading of index
options to be halted when the current value of the underlying index is
unavailable or when trading is halted in stocks that account for more than a
specified percentage of the value of the underlying index. In addition, as
with other types of options, an exchange may halt the trading of index options
whenever it considers such action to be appropriate in the interests of
maintaining a fair and orderly market and protecting investors. If a trading
halt occurs, whether for these or for other reasons, holders of index options
may be unable to close out their positions and the options may expire
worthless.
Spread Transactions. The High Yield Bond, Managed Bond and Government
Securities Portfolios may enter into spread transactions with securities
dealers. Such spread transactions are not generally exchange listed or traded.
Spread transactions may occur in the form of options, futures, forwards or
swap transactions. The purchase of a spread transaction gives a Portfolio the
right to sell or receive a security or a cash payment with respect to an index
at a fixed dollar spread or fixed yield spread in relationship to another
security or index which is used as a benchmark. The risk to a Portfolio in
purchasing spread transactions is the cost of the premium paid for the spread
transaction and any transaction costs. The sale of a spread transaction
obligates a Portfolio to purchase or deliver a security or a cash payment with
respect to an index at a fixed dollar spread or fixed yield spread in
relationship to another security or index which is used as a benchmark. In
addition, there is no assurance that closing transactions will be available.
The purchase and sale of spread transactions will be used in furtherance of a
Portfolio's objectives and to protect a Portfolio against adverse changes in
prevailing credit quality spreads, i.e., the yield spread between high quality
and lower quality securities. Such protection is only provided during the life
of the spread transaction. The Fund does not consider a security covered by a
spread transaction to be "pledged" as that term is used in the Fund's policy
limiting the pledging or mortgaging of its assets. The sale of spread
transactions will be "covered" or "secured" as described in the "Options",
"Options on Foreign Currencies", "Futures Contracts and Options on Futures
Contracts", and "Swap Agreements and Options on Swap Agreements" sections.
OPTIONS ON FOREIGN CURRENCIES
The Managed Bond, Government Securities, Aggressive Equity, Growth LT, Bond
and Income, International, and Emerging Markets Portfolios may purchase and
sell options on foreign currencies for hedging purposes in a manner similar to
that in which futures or forward contracts on foreign currencies will be
utilized. For example, a decline in the U.S. dollar value of a foreign
currency in which portfolio securities are denominated will reduce the U.S.
dollar value of such securities, even if their value in the foreign currency
remains constant. In order to protect against such diminutions in the value of
portfolio securities, a Portfolio may buy put options on the foreign currency.
If the value of the currency declines, the Portfolio will have the right to
sell such currency for a fixed amount in U.S. dollars and will offset, in
whole or in part, the adverse effect on its portfolio.
Conversely, when a rise in the U.S. dollar value of a currency in which
securities to be acquired are denominated is projected, thereby increasing the
cost of such securities, a Portfolio may buy call options thereon. The
purchase of such options could offset, at least partially, the effects of the
adverse movements in exchange rates. As in the case of other types of options,
however, the benefit to the Portfolio from purchases of foreign currency
options will be reduced by the amount of the premium and related transaction
costs. In addition, if currency exchange rates do not move in the direction or
to the extent desired, the Portfolio could sustain losses on transactions in
foreign currency options that would require the Portfolio to forgo a portion
or all of the benefits of advantageous changes in those rates.
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A Portfolio may write options on foreign currencies for hedging purposes.
For example, to hedge against a potential decline in the U.S. dollar value of
foreign currency denominated securities due to adverse fluctuations in
exchange rates, the Portfolio could, instead of purchasing a put option, write
a call option on the relevant currency. If the expected decline occurs, the
option will most likely not be executed and the diminution in value of
portfolio securities will be offset by the amount of the premium received.
Similarly, instead of purchasing a call option to hedge against a potential
increase in the U.S. dollar cost of securities to be acquired, the Portfolio
could write a put option on the relevant currency which, if rates move in the
manner projected, will expire unexercised and allow the Portfolio to hedge the
increased cost up to the amount of the premium. As in the case of other types
of options, however, the writing of a foreign currency option will constitute
only a partial hedge up to the amount of the premium. If exchange rates do not
move in the expected direction, the option may be exercised and the Portfolio
would be required to buy or sell the underlying currency at a loss which may
not be offset by the amount of the premium. Through the writing of options on
foreign currencies, the Portfolio also may lose all or a portion of the
benefits which might otherwise have been obtained from favorable movements in
exchange rates.
A Portfolio may write covered call and put options on foreign currencies. A
call option written on a foreign currency by the Portfolio is "covered" if the
Portfolio (i) owns the underlying foreign currency covered by the call; (ii)
has an absolute and immediate right to acquire that foreign currency without
additional cash consideration (or for additional cash consideration held in a
segregated account by its custodian) upon conversion or exchange of other
foreign currency held in its portfolio; (iii) has a call on the same foreign
currency and in the same principal amount as the call written if the exercise
price of the call held (a) is equal to or less than the exercise price of the
call written, or (b) is greater than the exercise price of the call written,
if the difference is maintained by the Portfolio in government securities,
cash or liquid securities marked-to-market daily of that foreign currency,
and/or cash, U.S. Government securities, or liquid securities marked-to-market
daily in a segregated account with the Fund's custodian; or (iv) cross-hedges
the call option by segregating and marking-to-market cash or liquid assets
equal to the value of the underlying foreign currency. A put option written on
a foreign currency by a Portfolio is "covered" if the option is secured by (i)
government securities, cash or liquid securities marked-to-market daily of
that foreign currency, and/or U.S. Government securities, cash or liquid
securities marked-to-market daily at least equal to the exercise price in a
segregated account, or (ii) a put on the same underlying currency at an equal
or greater exercise price.
A Portfolio also may write call options on foreign currencies for cross-
hedging purposes that would not be deemed to be covered. A call option on a
foreign currency is for cross-hedging purposes if it is not covered but is
designed to provide a hedge against a decline due to an adverse change in the
exchange rate in the U.S. dollar value of a security which the Portfolio owns
or has the right to acquire and which is denominated in the currency
underlying the option. In such circumstances, the Portfolio collateralizes the
option by maintaining, in a segregated account with the Fund's custodian,
cash, U.S. Government Securities, or liquid securities marked-to-market daily
in an amount not less than the value of the underlying foreign currency in
U.S. dollars marked-to-market daily.
Foreign currency options are subject to the risks of the availability of a
liquid secondary market described above, as well as the risks regarding
adverse market movements, margining of options written, the nature of the
foreign currency market, possible intervention by governmental authorities and
the effects of other political and economic events. In addition, exchange-
traded options on foreign currencies involve certain risks not presented by
the over-the-counter market. For example, exercise and settlement of such
options must be made exclusively through the OCC, which has established
banking relationships in applicable foreign countries for this purpose. As a
result, the OCC may, if it determines that foreign governmental restrictions
or taxes would prevent the orderly settlement of foreign currency option
exercises, or would result in undue burdens on the OCC or its clearing member,
impose special procedures on exercise and settlement, such as technical
changes in the mechanics of delivery of currency, the fixing of dollar
settlement prices or prohibitions on exercise.
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In addition, options on foreign currencies may be traded on foreign
exchanges and over-the-counter in foreign countries. Such transactions are
subject to the risk of governmental actions affecting trading in or the prices
of foreign currencies or securities. The value of such positions also could be
adversely affected by (i) other complex foreign political and economic
factors, (ii) lesser availability than in the United States of data on which
to make trading decisions, (iii) delays in a Portfolio's ability to act upon
economic events occurring in foreign markets during non-business hours in the
United States, (iv) the imposition of different exercise and settlement terms
and procedures and margin requirements than in the United States, and (v) low
trading volume.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
The High Yield Bond, Managed Bond, Government Securities, Growth LT, Multi-
Strategy, and International Portfolios may invest in interest rate futures and
options thereon. The Aggressive Equity, Growth LT, Equity Income, Multi-
Strategy, Equity Index, Equity, International, and Emerging Markets Portfolios
may invest in stock index futures and options thereon.
Interest Rate Futures. (The High Yield Bond, Managed Bond, Government
Securities, Growth LT, Multi-Strategy, and International Portfolios.) An
interest rate futures contract is an agreement between two parties (buyer and
seller) to take or make delivery of a specified quantity of financial
instruments (such as GNMA certificates or Treasury bonds) at a specified price
at a future date. In the case of futures contracts traded on U.S. exchanges,
the exchange itself or an affiliated clearing corporation assumes the opposite
side of each transaction (i.e., as buyer or seller). A futures contract may be
satisfied or closed out by delivery or purchase, as the case may be, of the
financial instrument or by payment of the change in the cash value of the
index. Frequently, using futures to effect a particular strategy instead of
using the underlying or related security will result in lower transaction
costs being incurred. A public market exists in futures contracts covering
various financial instruments including U.S. Treasury bonds, U.S. Treasury
notes, GNMA certificates, three month U.S. Treasury bills, 90 day commercial
paper, bank certificates of deposit, and Eurodollar certificates of deposit.
As a hedging strategy a Portfolio might employ, a Portfolio would purchase
an interest rate futures contract when it is not fully invested in long-term
debt securities but wishes to defer their purchase for some time until it can
orderly invest in such securities or because short-term yields are higher than
long-term yields. Such purchase would enable the Portfolio to earn the income
on a short-term security while at the same time minimizing the effect of all
or part of an increase in the market price of the long-term debt security
which the Portfolio intended to purchase in the future. A rise in the price of
the long-term debt security prior to its purchase either would be offset by an
increase in the value of the futures contract purchased by the Portfolio or
avoided by taking delivery of the debt securities under the futures contract.
A Portfolio would sell an interest rate futures contract in order to
continue to receive the income from a long-term debt security, while
endeavoring to avoid part or all of the decline in market value of that
security which would accompany an increase in interest rates. If interest
rates did rise, a decline in the value of the debt security held by the
Portfolio would be substantially offset by the ability of the Portfolio to
repurchase at a lower price the interest rate futures contract previously
sold. While the Portfolio could sell the long-term debt security and invest in
a short-term security, ordinarily the Portfolio would give up income on its
investment, since long-term rates normally exceed short-term rates.
Stock Index Futures. (The Aggressive Equity, Growth LT, Equity Income,
Multi-Strategy, Equity Index, Equity, International, and Emerging Markets
Portfolios.) A stock index is a method of reflecting in a single number the
market values of many different stocks or, in the case of capitalization
weighted indices that take into account both stock prices and the number of
shares outstanding, many different companies. An index fluctuates generally
with changes in the market values of the common stocks so included. A stock
index futures contract is a bilateral agreement pursuant to which two parties
agree to take or make delivery of an amount of cash equal to a specified
dollar amount multiplied by the difference between the stock index value at
the close of the last trading day of the contract and the price at which the
futures contract is originally purchased or sold. No physical delivery of the
underlying stocks in the index is made.
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A Portfolio may purchase and sell stock index futures contracts to hedge its
securities portfolio. A Portfolio may engage in transactions in futures
contracts only in an effort to protect it against a decline in the value of
the Portfolio's portfolio securities or an increase in the price of securities
that the Portfolio intends to acquire. For example, a Portfolio may sell stock
index futures to protect against a market decline in an attempt to offset
partially or wholly a decrease in the market value of securities that the
Portfolio intends to sell. Similarly, to protect against a market advance when
the Portfolio is not fully invested in the securities market, the Portfolio
may purchase stock index futures that may partly or entirely offset increases
in the cost of securities that the Portfolio intends to purchase.
Futures Options. The High Yield Bond, Managed Bond, Government Securities,
Growth LT, Multi-Strategy, Bond and Income, and International Portfolios may
purchase and sell (write) call and put options on interest rate futures.
Futures options possess many of the same characteristics as options on
securities. 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 Aggressive Equity, Growth LT, Equity Income, Multi-Strategy, Equity
Index, Equity, International, and Emerging Markets Portfolios may purchase put
and call options on stock index futures. Options on stock index futures
contracts give the purchaser the right, in return for the premium paid, to
assume a position in a stock index futures contract (a long position if the
option is a call and a short position if the option is a put) at a specified
exercise price at any time during the period of the option. Upon exercise of
the option, the delivery of the futures position by the writer of the option
to the holder of the option will be accompanied by delivery of the accumulated
balance in the writer's futures margin account which represents the amount by
which the market price of the stock index futures contract, at exercise,
exceeds (in the case of a call) or is less than (in the case of a put) the
exercise price of the option on the stock index futures contract. If an option
is exercised on the last trading day prior to the expiration date of the
option, the settlement will be made entirely in cash equal to the difference
between the exercise price of the option and the closing level of the index on
which the futures contract is based on the expiration date. Purchasers of
options who fail to exercise their options prior to the exercise date suffer a
loss of the premium paid.
The High Yield Bond, Multi-Strategy, Equity Income and Equity Index
Portfolios will only enter into futures contracts and futures options which
are standardized and traded on a U.S. exchange, board of trade, or similar
entity, or in the case of futures options, for which an established over-the-
counter market exists.
If a purchase or sale of a futures contract is made by a Portfolio, the
Portfolio is required to deposit with its custodian (or broker, if legally
permitted) a specified amount of cash or U.S. Government securities ("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 Portfolio upon
termination of the contract, assuming all contractual obligations have been
satisfied. Each investing Portfolio expects to earn interest income on its
initial margin deposits. A futures contract held by a Portfolio is valued
daily at the official settlement price of the exchange on which it is traded.
Each day the Portfolio 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 does not represent a borrowing or loan
by a Portfolio but is instead settlement between the Portfolio and the broker
of the amount one would owe the other if the futures contract expired. In
computing daily net asset value, each Portfolio will mark-to-market its open
futures positions.
A Portfolio 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 Portfolio.
24
<PAGE>
Although some futures contracts call for making or taking delivery of the
underlying securities, generally these obligations are closed out prior to
delivery by offsetting purchases or sales of matching futures contracts (same
exchange, underlying security, and delivery month). If an offsetting purchase
price is less than the original sale price, the Portfolio realizes a capital
gain, or if it is more, the Portfolio realizes a capital loss. Conversely, if
an offsetting sale price is more than the original purchase price, the
Portfolio realizes a capital gain, or if it is less, the Portfolio realizes a
capital loss. The transaction costs must also be included in these
calculations.
Limitations. The Fund will comply with certain regulations of the Commodity
Futures Trading Commission ("CFTC") under which an investment company may
engage in futures transactions and qualify for an exclusion from being a
"commodity pool." Under these regulations, a Portfolio may only enter into a
futures contract or purchase an option thereon (1) for bona fide hedging
purposes and (2) for other purposes if, immediately thereafter, the initial
margin deposits for futures contracts held by that Portfolio plus premiums
paid by it for open futures option positions, less the amount by which any
such positions are "in-the-money," would not exceed 5% of the Portfolio's
total assets. 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, a Portfolio must maintain with its
custodian in a segregated account (or broker, if legally permitted) cash, U.S.
Government securities or other liquid securities marked-to-market daily
(including any margin) equal to the market value of such contract. When
writing a call option on a futures contract, the Portfolio similarly will
maintain with its custodian government securities, cash or liquid securities
marked-to-market daily of that foreign currency, and/or, U.S. Government
securities, cash, or other liquid securities marked-to-market daily (including
any margin) equal to the amount such option is in-the-money until the option
expires or is closed out by the Portfolio. When selling a futures contract or
selling a put option on a futures contract, the Portfolio is required to
maintain with its custodian government securities, cash or liquid securities
marked-to-market daily of that foreign currency, and/or U.S. Government
securities, cash, or other liquid securities marked-to-market daily (including
any margin) equal to the market value of such contract or exercise price of
such option, or to otherwise cover the position.
A Portfolio may not maintain open short positions in futures contracts or
call options written on futures contracts if, in the aggregate, the market
value of all such open positions exceeds the current value of its portfolio
securities, 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 Portfolio
has written call options on specific securities it owns, the value of those
securities will be deducted from the current market value of the securities
portfolio.
The Fund reserves the right to engage in other types of futures transactions
in the future and to use futures and related options for other than hedging
purposes to the extent permitted by regulatory authorities. If other types of
options, futures contracts, or futures options are traded in the future, a
Portfolio may also use such investment techniques, provided that the Board of
Trustees determines that their use is consistent with the Portfolio's
investment objective.
Risks Associated with Futures and Futures Options. There are several risks
associated with the use of futures contracts and futures options as hedging
techniques. A purchase or sale of a futures contract may result in losses in
excess of the amount invested in the futures contract. There can be
significant differences between the securities and futures markets that could
result in an imperfect correlation between the markets, causing a given hedge
not to achieve its objectives. The degree of imperfection of correlation
depends on circumstances such as variations in speculative market demand for
futures and futures options on securities, including technical influences in
futures trading and futures options, and differences between the portfolio
securities being hedged and the instruments underlying the hedging vehicle in
such respects as interest rate levels, maturities, conditions affecting
particular industries, and creditworthiness of issuers. A decision as to
whether, when, and how to hedge involves the exercise of skill and judgment
and even a well-conceived hedge may be unsuccessful to some degree because of
market behavior or unexpected interest rate trends.
25
<PAGE>
The price of futures contracts may not correlate perfectly with movement in
the underlying security or stock index, due to certain market distortions.
This might result from decisions by a significant number of market
participants holding stock index futures positions to close out their futures
contracts through offsetting transactions rather than to make additional
margin deposits. Also, increased participation by speculators in the futures
market may cause temporary price distortions. These factors may increase the
difficulty of effecting a fully successful hedging transaction, particularly
over a short time frame. With respect to a stock index futures contract, the
price of stock index futures might increase, reflecting a general advance in
the market price of the index's component securities, while some or all of the
portfolio securities might decline. If a Portfolio had hedged its portfolio
against a possible decline in the market with a position in futures contracts
on an index, it might experience a loss on its futures position until it could
be closed out, while not experiencing an increase in the value of its
portfolio securities. If a hedging transaction is not successful, the
Portfolio might experience losses which it would not have incurred if it had
not established futures positions. Similar risk considerations apply to the
use of interest rate and other futures contracts.
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.
The Managed Bond, Government Securities, Aggressive Equity, Growth LT,
International, and Emerging Markets Portfolios may trade futures contracts and
options on futures contracts not only on U.S. domestic markets, but also on
exchanges located outside of the United States. Foreign markets may offer
advantages such as trading in indices that are not currently traded in the
United States. Foreign markets, however, may have greater risk potential than
domestic markets. Unlike trading on domestic commodity exchanges, trading on
foreign commodity exchanges is not regulated by the CFTC and may be subject to
greater risk than trading on domestic exchanges. For example, some foreign
exchanges are principal markets so that no common clearing facility exists and
a trader may look only to the broker for performance of the contract. Trading
in foreign futures or foreign options contracts may not be afforded certain of
the protective measures provided by the Commodity Exchange Act, the CFTC's
regulations, and the rules of the National Futures Association and any
domestic exchange, including the right to use reparations proceedings before
the CFTC and arbitration proceedings provided by the National Futures
Association or any domestic futures exchange. Amounts received for foreign
futures or foreign options transactions may not be provided the same
protection as funds received in respect of transactions on United States
futures exchanges. In addition, any profits that the Portfolio might realize
in trading could be eliminated by adverse changes in the exchange rate of the
currency in which the transaction is denominated, or the Portfolio could incur
losses as a result of changes in the exchange rate. Transactions on foreign
exchanges may include both commodities that are traded on domestic exchanges
or boards of trade and those that are not.
There can be no assurance that a liquid market will exist at a time when a
Portfolio seeks to close out a futures or a futures option position, and that
Portfolio would remain obligated 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.
FOREIGN CURRENCY FUTURES AND OPTIONS THEREON
The Managed Bond, Government Securities, Aggressive Equity, Growth LT, Bond
and Income, International, and Emerging Markets Portfolios may enter into
contracts for the purchase or sale for future
26
<PAGE>
delivery of foreign currencies ("foreign currency futures") and may purchase
and write options on foreign currency futures. This investment technique will
be used only to hedge against anticipated future changes in exchange rates
which otherwise might adversely affect the value of the Portfolio's securities
or adversely affect the prices of securities that the Portfolio has purchased
or intends to purchase at a later date. The successful use of foreign currency
futures will usually depend on the Portfolio Manager's ability to forecast
currency exchange rate movements correctly. Should exchange rates move in an
unexpected manner, the Portfolio may not achieve the anticipated benefits of
foreign currency futures or may realize losses.
SWAP AGREEMENTS AND OPTIONS ON SWAP AGREEMENTS
The Emerging Markets Portfolio may enter into equity index swap agreements.
The Managed Bond and Government Securities Portfolios may enter into interest
rate, interest rate index, and currency exchange rate swap agreements, and may
purchase and sell options thereon. A Portfolio's current obligations (or
rights) under a swap agreement will generally be equal only to the net amount
to be paid or received under the agreement based on the relative values of the
positions held by each party to the agreement (the "net amount"). A
Portfolio's current obligations under a swap agreement will be accrued daily
(offset against any amounts owing to the Portfolio) and any accrued but unpaid
net amounts owed to a swap counterparty will be covered by the maintenance of
a segregated account consisting of cash, U.S. Government securities, and/or
liquid securities marked-to-market daily, to avoid any potential leveraging of
a Portfolio. The Bond and Income Portfolio may invest in the following types
of swap agreements: (1) "interest rate caps," under which, in return for a
premium, one party agrees to make payments to the other to the extent that
interest rates exceed a specified rate, or "cap"; (2) "interest rate floors,"
under which, in return for a premium, one party agrees to make payments to the
other to the extent that interest rates fall below a certain level; and (3)
"interest rate collars," under which one party sells a cap and purchases a
floor or vice-versa in an attempt to protect itself against interest rate
movements exceeding given minimum or maximum levels.
Generally, the swap agreement transactions in which a Portfolio will engage
are not regulated as futures or commodity option transactions under the
Commodity Exchange Act or by the Commodity Futures Trading Commission.
STRUCTURED NOTES
The Bond and Income Portfolio may invest in structured notes. The value of
the principal of and/or interest on such securities is determined by reference
to changes in the value of specific currencies, interest rates, commodities,
indices, or other financial indicators (the "Reference") or the relative
change in two or more References. The interest rate or the principal amount
payable upon maturity or redemption may be increased or decreased depending
upon changes in the applicable Reference. The terms of the structured notes
may provide that in certain circumstances no principal is due at maturity and,
therefore, result in the loss of a Portfolio's investment. Structured notes
may be positively or negatively indexed, so that appreciation of the Reference
may produce an increase or decrease in the interest rate or value of the
security at maturity. In addition, changes in the interest rates or the value
of the security at maturity may be a multiple of changes in the value of the
Reference. Consequently, structured notes may entail a greater degree of
market risk than other types of fixed-income securities. Structured notes may
also be more volatile, less liquid and more difficult to accurately price than
less complex securities.
WARRANTS AND RIGHTS
The Growth LT, Equity Income, Multi-Strategy, Equity, Bond and Income, and
High Yield Bond Portfolios may invest in warrants; however, not more than 10%
of the market value of a Portfolio's assets (at the time of purchase), and in
the case of the Equity Portfolio 5%, may be invested in warrants other than
warrants acquired in units or attached to other securities. The Aggressive
Equity and Emerging Markets Portfolios each may invest up to 5% of its net
assets in warrants or rights (valued at the lower of cost or market) to
purchase securities,
27
<PAGE>
provided that no more than 2% of its net assets are invested in warrants not
listed on the New York or American Stock Exchanges. Each of these Portfolios
may invest in warrants or rights acquired as part of a unit or attached to
securities at the time of purchase without limitation. Warrants may be
considered speculative in that they have no voting rights, pay no dividends,
and have no rights with respect to the assets of the corporation issuing them.
Warrants basically are options to purchase equity securities at a specific
price valid for a specific period of time. They do not represent ownership of
the securities, but only the right to buy them. Warrants differ from call
options in that warrants are issued by the issuer of the security which may be
purchased on their exercise, whereas call options may be written or issued by
anyone. The prices of warrants do not necessarily move parallel to the prices
of the underlying securities.
DURATION
Duration is a measure of average life of a bond on a present value basis,
which was developed to incorporate a bond's yield, coupons, final maturity and
call features into one measure. Duration is one of the fundamental tools that
may be used by the Adviser or Portfolio Manager in fixed income security
selection. In this discussion, the term "bond" is generally used to connote
any type of debt instrument.
Most notes and bonds have provided interest ("coupon") payments in addition
to a final ("par") payment at maturity. Some obligations also feature call
provisions. Depending on the relative magnitude of these payments, debt
obligations may respond differently to changes in the level and structure of
interest rates. Traditionally, a debt security's "term to maturity" has been
used as a proxy for the sensitivity of the security's price to changes in
interest rates (which is the "interest rate risk" or "volatility" of the
security). However, "term to maturity" measures only the time until a debt
security provides its final payment, taking no account of the pattern of the
security's payments prior to maturity.
Duration is a measure of the average life of a fixed-income security on a
present value basis. Duration takes the length of the time intervals between
the present time and the time that the interest and principal payments are
scheduled or, in the case of a callable bond, expected to be received, and
weights them by the present values of the cash to be received at each future
point in time. For any fixed-income security with interest payments occurring
prior to the payment of principal, duration is always less than maturity. In
general, all other things being the same, the lower the stated or coupon rate
of interest of a fixed-income security, the longer the duration of the
security; conversely, the higher the stated or coupon rate of interest of a
fixed-income security, the shorter the duration of the security.
Although frequently used, the "term of maturity" of a bond is not a useful
measure of the longevity of a bond's cash flow because it refers only to the
time remaining to the repayment of principal or corpus and disregards earlier
coupon payments. Thus, for example, three bonds with the same maturity may not
have the same investment characteristics (such as risk or repayment time). One
bond may have large coupon payments early in its life, whereas another may
have payments distributed evenly throughout its life. Some bonds (such as zero
coupon bonds) make no coupon payments until maturity. Clearly, an investor
contemplating investing in these bonds should consider not only the final
payment or sum of payments on the bond, but also the timing and magnitude of
payments in order to make an accurate assessment of each bond. Maturity, or
the term to maturity, does not provide a prospective investor with a clear
understanding of the time profile of cash flows over the life of a bond.
Another way of measuring the longevity of a bond's cash flow is to compute a
simple average time to payment, where each year is weighted by the number of
dollars the bond pays that year. This concept is termed the "dollar-weighted
mean waiting time," indicating that it is a measure of the average time to
payment of a bond's cash flow. The critical shortcoming of this approach is
that it assigns equal weight to each dollar paid over the life of a bond,
regardless of when the dollar is paid. Since the present value of a dollar
decreases with the amount of time which must pass before it is paid, a better
method might be to weight each year by the present value of the dollars paid
that year. This calculation puts the weights on a comparable basis and creates
a definition of longevity which is known as duration.
28
<PAGE>
A bond's duration depends upon three variables: (i) the maturity of the
bond; (ii) the coupon payments attached to the bond; and (iii) the bond's
yield to maturity. Yield to maturity, or investment return as used here,
represents the approximate return an investor purchasing a bond may expect if
he holds that bond to maturity. In essence, yield to maturity is the rate of
interest which, if applied to the purchase price of a bond, would be capable
of exactly reproducing the entire time schedule of future interest and
principal payments.
Increasing the size of the coupon payments on a bond, while leaving the
maturity and yield unchanged, will reduce the duration of the bond. This
follows from the fact that because bonds with higher coupon payments pay
relatively more of their cash flows sooner, they have shorter durations.
Increasing the yield to maturity on a bond (e.g., by reducing its purchase
price), while leaving the terms to maturity and coupon payments unchanged,
also reduces the duration of the bond. Because a higher yield leads to lower
present values for more distant payments relative to earlier payments, and, to
relatively lower weights attached to the years remaining to those payments,
the duration of the bond is reduced.
There are some situations where even the standard duration calculation does
not properly reflect the interest rate exposure of a security. For example,
floating and variable rate securities often have final maturities of ten or
more years; however, their interest rate exposure corresponds to the frequency
of the coupon reset. Another example where the interest rate exposure is not
properly captured by duration is mortgage pass-throughs. The stated final
maturity is generally 30 years but current prepayment rates are more critical
in determining the securities' interest rate exposure. In these and other
similar situations, the Adviser or Portfolio Manager to a Portfolio will use
more sophisticated analytical techniques which incorporate the economic life
of a security into the determination of its interest rate exposure.
Futures, options, and options on futures have durations which, in general,
are closely related to the duration of the securities which underlie them.
Holding long futures or call option positions (backed by a segregated account
of cash and cash equivalents) will lengthen the portfolio duration if interest
rates go down and bond prices go up by approximately the same amount that
holding an equivalent amount of the underlying securities would.
Short futures or put option positions have durations roughly equal to the
negative duration of the securities that underlie those positions, and have
the effect of reducing portfolio duration if interest rates go up and bond
prices go down by approximately the same amount that selling an equivalent
amount of the underlying securities would.
INVESTMENT RESTRICTIONS
FUNDAMENTAL INVESTMENT RESTRICTIONS
Each Portfolio's investment objective as set forth under "Investment
Objectives and Policies," and the investment restrictions as set forth below,
are fundamental policies of each Portfolio and may not be changed with respect
to any Portfolio without the approval of a majority of the outstanding voting
shares of that Portfolio. The vote of a majority of the outstanding voting
securities of a Portfolio means the vote, at an annual or special meeting of
(a) 67% or more of the voting securities present at such meeting, if the
holders of more than 50% of the outstanding voting securities of such
Portfolio are present or represented by proxy; or (b) more than 50% of the
outstanding voting securities of such Portfolio, whichever is the less. Under
these restrictions, a Portfolio may not:
(i) invest in a security if, as a result of such investment, more than 25%
of its total assets (taken at market value at the time of such investment)
would be invested in the securities of issuers in any particular industry,
except that this restriction does not apply to securities issued or guaranteed
by the U.S. Government or its agencies or instrumentalities (or repurchase
agreements with respect thereto);
29
<PAGE>
(ii) with respect to 75% of its total assets, invest in a security if, as a
result of such investment, more than 5% of its total assets (taken at market
value at the time of such investment) would be invested in the securities of
any one issuer, except that this restriction does not apply to securities
issued or guaranteed by the U.S. Government or its agencies or
instrumentalities;
(iii) invest in a security if, as a result of such investment, it would hold
more than 10% (taken at the time of such investment) of the outstanding voting
securities of any one issuer;
(iv) 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);
(v) borrow money or pledge, mortgage or hypothecate its assets, except that
a Portfolio may: (a) borrow from banks but only if immediately after each
borrowing and continuing thereafter there is asset coverage of 300%; and (b)
enter into reverse repurchase agreements and transactions in options, futures,
and options on futures as described in the Prospectus and in the Statement of
Additional Information (the deposit of assets in escrow in connection with the
writing of covered put and call options and the purchase of securities on a
"when-issued" or delayed delivery basis and collateral arrangements with
respect to initial or variation margin deposits for futures contracts will not
be deemed to be pledges of a Portfolio's assets);
(vi) lend any funds or other assets, except that a Portfolio may, consistent
with its investment objective and policies: (a) invest in debt obligations
including bonds, debentures or other debt securities, bankers' acceptances,
and commercial paper, even though the purchase of such obligations may be
deemed to be the making of loans; (b) enter into repurchase agreements and
reverse repurchase agreements; and (c) lend its portfolio securities in an
amount not to exceed 25% of the value of its total assets, provided such loans
are made in accordance with applicable guidelines established by the
Securities and Exchange Commission and the Fund's Trustees;
(vii) act as an underwriter of securities of other issuers, except, when in
connection with the disposition of portfolio securities, it may be deemed to
be an underwriter under the federal securities laws; and
In addition, with respect to the Money Market, High Yield Bond, Managed
Bond, Government Securities, Growth, Growth LT, Equity Income, Multi-Strategy,
Equity Index and International Portfolios, unless otherwise indicated, such
Portfolios may not:
(viii) purchase or sell commodities or commodities contracts, except that,
subject to restrictions described in the Prospectus and in the Statement of
Additional Information (a) the Managed Bond, Equity Index, Government
Securities, High Yield Bond, Growth LT, Equity Income, Multi-Strategy, and
International Portfolios may engage in futures contracts and options on
futures contracts, (b) all Portfolios may enter into foreign forward currency
contracts; and (c) the Equity Index Portfolio may purchase and sell stock
index futures, purchase options on stock indexes, and purchase options on
stock index futures;
(ix) except the Growth LT Portfolio, purchase securities on margin (except
for use of short-term credit necessary for clearance of purchases and sales of
portfolio securities) but it may make margin deposits in connection with
transactions in options, futures, and options on futures;
(x) except the Growth LT Portfolio, maintain a short position, or purchase,
write, or sell puts, calls, straddles, spreads, or combinations thereof,
except as set forth in the Prospectus and in the SAI for transactions in
options, futures, and options on futures.
30
<PAGE>
NONFUNDAMENTAL INVESTMENT RESTRICTIONS
Each Portfolio is also subject to the following restrictions and policies
(which are not fundamental and may therefore be changed without shareholder
approval) relating to the investment of its assets and activities. Unless
otherwise indicated, a Portfolio may not:
(i) invest for the purpose of exercising control or management;
(ii) sell securities or property short, except short sales against the box;
(iii) purchase warrants if immediately after and as a result of such
purchase more than 10% of the market value of the total assets of the
Portfolio would be invested in such warrants;
(iv) purchase securities on margin (except for use of short-term credit
necessary for clearance of purchases and sales of portfolio securities) but it
may make margin deposits in connection with transactions in options, futures,
and options on futures;
(v) maintain a short position, or purchase, write, or sell puts, calls,
straddles, spreads, or combinations thereof, except as set forth in the
Prospectus and in the SAI for transactions in options, futures, and options on
futures;
(vi) invest in securities that are illiquid, or in repurchase agreements
maturing in more than seven days, if as a result of such investment, more than
15% of the total assets of the Portfolio (taken at market value at the time of
such investment) would be invested in such securities, and with respect to the
Money Market Portfolio, more than 10% of the total assets of the Portfolio
(taken at market value at the time of such investment) would be invested in
such securities; and
(vii) purchase or sell commodities or commodities contracts, except, (a)
futures contracts and options on futures contracts, (b) forward foreign
currency contracts and (c) stock index futures, options on stock indexes, and
options on stock index futures; subject to any applicable restrictions
described in the Prospectus and in the SAI.
Unless otherwise indicated, as in the restriction for borrowing or
hypothecating assets of a Portfolio, for example, all percentage limitations
listed above apply to each Portfolio only at the time into which a transaction
is entered. Accordingly, if a percentage restriction is adhered to at the time
of investment, a later increase or decrease in the percentage which results
from a relative change in values or from a change in a Portfolio's net assets
will not be considered a violation. For purposes of fundamental restriction
(v) and nonfundamental restriction (vii) as set forth above, an option on a
foreign currency shall not be considered a commodity or commodity contract.
For purposes of nonfundamental restriction (v), a short sale "against the box"
shall not be considered a short position.
31
<PAGE>
MANAGEMENT OF THE FUND
TRUSTEES AND OFFICERS
The Trustees and Executive Officers of the Fund, their business address, and
principal occupations during the past five years are:
<TABLE>
<CAPTION>
BUSINESS AFFILIATES AND
NAME AND ADDRESS POSITION WITH THE FUND PRINCIPAL OCCUPATIONS
---------------- ---------------------- -----------------------
<C> <C> <S>
Thomas C. Sutton* Chairman of the Chairman of the Board,
700 Newport Center Drive Board, Trustee Director and Chief Executive
Newport Beach, CA 92660 and President Officer of Pacific Life,
Age 55 Pacific Mutual Holding
Company and Pacific
LifeCorp; Former Equity
Board Member of PIMCO
Advisors L.P.; and similar
positions with other
subsidiaries of Pacific
Life; Director of Newhall
Land & Farming; Director of
The Irvine Company; Director
of Edison International.
Glenn S. Schafer* Trustee President and Director of
700 Newport Center Drive Pacific Life, Pacific Mutual
Newport Beach, CA 92660 Holding Company and Pacific
Age 48 LifeCorp and similar
positions with other
subsidiaries and affiliates
of Pacific Life.
Richard L. Nelson Trustee Business Consultant; retired
8 Cherry Hills Lane Partner with Ernst & Young;
Newport Beach, CA 92660 Director of Wynn's
Age 68 International, Inc.
Lyman W. Porter Trustee Professor of Management in
University of California the Graduate School of
at Irvine Management at the University
Irvine, CA 92717 of California, Irvine;
Age 68 Member of the Academic
Advisory Board of the
Czechoslovak Management
Center; and member of the
Board of Trustees of the
American University of
Armenia.
Alan Richards Trustee President of Alan Richards
7381 Elegans Place Consulting, Inc.; Chairman
Carlsbad, CA 92009 of IBIS Capital, LLC; Former
Age 68 Chairman of Advisory Board,
DCG Corporation; Former
Director of Western National
Corporation.
Brian D. Klemens Vice President Assistant Vice President,
700 Newport Center Drive and Treasurer Accounting and Assistant
Newport Beach, CA 92660 Controller, Corporate
Age 41 Finance of Pacific Life.
Diane N. Ledger Vice President Vice President, Variable
700 Newport Center Drive and Assistant Regulatory Compliance,
Newport Beach, CA 92660 Secretary Corporate Law of Pacific
Age 58 Life.
Sharon A. Cheever Vice President Vice President and
700 Newport Center Drive and General Investment Counsel of
Newport Beach, CA 92660 Counsel Pacific Life.
Age 42
Audrey L. Milfs Secretary Vice President, Director and
700 Newport Center Drive Corporate Secretary of
Newport Beach, CA 92660 Pacific Life; and similar
Age 52 positions with other
subsidiaries of Pacific
Life.
</TABLE>
32
<PAGE>
- --------
* Mr. Sutton and Mr. Schafer are "interested persons" of the Fund (as that
term is defined in the Investment Company Act) because of their positions
with Pacific Life as shown above.
Trustees other than those affiliated with Pacific Life Insurance Company
("Pacific Life" or the "Adviser", formerly known as Pacific Mutual Life
Insurance Company) or a Portfolio Manager, currently receive an annual fee of
$15,000 and $1,500 for each Board of Trustees meeting attended, including each
Audit, Policy, or Nominating Committee meeting attended, plus reimbursement of
related expenses. In addition, the Chairman of the Fund's Audit Committee and
Policy Committee each receives an additional annual fee of $2,000. The
following table summarizes the aggregate compensation paid by the Fund to each
Trustee who was not affiliated with Pacific Life or a Portfolio Manager in
1997. The table also shows total compensation paid to these Trustees in 1997
by the Fund and PIMCO Funds: Multi-Manager Series, an investment company
managed by an affiliate of Pacific Life for which Messrs. Nelson, Porter, and
Richards (but not Mr. Sutton or Mr. Schafer) also serve as trustees
(collectively, "Fund Complex").
<TABLE>
<CAPTION>
PENSION OR
RETIREMENT TOTAL
BENEFITS ESTIMATE COMPENSATION
ACCRUED ANNUAL FROM FUND
AGGREGATE AS PART OF BENEFITS COMPLEX
COMPENSATION FUND UPON PAID TO
NAME OF TRUSTEE FROM FUND EXPENSES RETIREMENT TRUSTEES
- --------------- ------------ ---------- ---------- ------------
<S> <C> <C> <C> <C>
Richard L. Nelson............... $28,500 0 0 $59,500
Lyman W. Porter................. $27,000 0 0 $57,500
Alan Richards................... $28,500 0 0 $64,500
</TABLE>
None of the Trustees or Officers directly own shares of the Fund. As of
February 27, 1998, the Trustees and Officers as a group owned Variable
Contracts that entitled them to give voting instructions with respect to less
than 1% of the outstanding shares of the Fund.
INVESTMENT ADVISER
Pacific Life serves as Investment Adviser to the Fund pursuant to an
Investment Advisory Agreement ("Advisory Contract") between Pacific Life and
the Fund. Pacific Life is responsible for administering the affairs of and
supervising the investment program for the Fund. Pacific Life also furnishes
to the Board of Trustees, which has overall responsibility for the business
and affairs of the Fund, periodic reports on the investment performance of
each Portfolio.
Under the terms of the Advisory Contract, Pacific Life is obligated to
manage the Fund's Portfolios in accordance with applicable laws and
regulations.
The Advisory Contract will continue in effect until December 31, 1998, and
from year to year thereafter, provided such continuance is approved annually
by (i) the holders of a majority of the outstanding voting securities of the
Fund or by the Board of Trustees, and (ii) a majority of the Trustees who are
not parties to such Advisory Contract or "interested persons", as defined in
the Investment Company Act of 1940 (the "1940 Act"), of any such party. The
Advisory Contract was originally approved by the Board of Trustees, including
a majority of the Trustees who are not parties to the Advisory Contract, or
interested persons of such parties, at its meeting held on July 21, 1987, and
by the shareholders of the Fund at a Meeting of Shareholders held on October
28, 1988. The Advisory Contract was also approved by the shareholders of the
Equity Index Portfolio of the Fund at a Meeting of Shareholders of the Equity
Index Portfolio held on April 21, 1992. An Addendum to the Advisory Contract
was approved by the Board of Trustees, including a majority of the Trustees
who are not parties to the Contract, or interested persons of such parties, at
a meeting held on October 28, 1988. An Addendum to the Advisory Contract which
increased the advisory fee schedule with respect to the High Yield Bond,
Managed Bond, Government Securities, Growth, Equity Income, Multi-Strategy,
and International Portfolios, and which included the Growth LT Portfolio as a
Portfolio to which the Adviser will perform services under the Advisory
Contract, was approved by the Board of Trustees, including a majority of the
Trustees who are not parties to the Contract, or interested persons of such
parties, at a meeting held on September 29, 1993, and was approved by
shareholders of the High Yield Bond, Managed Bond, Government Securities,
Growth, Equity Income, Multi-Strategy, and International Portfolios at a
Special Meeting of Shareholders on December 13, 1993. An Addendum
33
<PAGE>
to the Advisory Contract for the Equity Portfolio and Bond and Income
Portfolio was approved by the Board of Trustees, including a majority of the
Trustees who are not parties to the Advisory Contract or interested persons of
such parties, at a meeting held on August 12, 1994, and by the sole
shareholder of those Portfolios on September 6, 1994. An Addendum to the
Advisory Contract for the Aggressive Equity Portfolio and Emerging Markets
Portfolio was approved by the Board of Trustees, including a majority of the
Trustees who are not parties to the Advisory Contract or interested persons of
such parties, at a meeting held on November 17, 1995, and by the sole
shareholder of those Portfolios on January 30, 1996. The Advisory Contract may
be terminated without penalty by vote of the Trustees or the shareholders of
the Fund, or by the Adviser, on 60 days' written notice by either party to the
Advisory Contract and will terminate automatically if assigned.
The Fund pays the Adviser, for its services under the Agreement, a fee based
on an annual percentage of the average daily net assets of each Portfolio. For
the Money Market Portfolio, the Fund will pay to the Adviser a fee at an
annual rate of .40% of the first $250 million of the average daily net assets
of the Portfolio, .35% of the next $250 million of the average daily net
assets of the Portfolio, and .30% of the average daily net assets of the
Portfolio in excess of $500 million. For the High Yield Bond, Managed Bond,
Government Securities, and Bond and Income Portfolios, the Fund will pay .60%
of the average daily net assets of each of the Portfolios. For the Growth,
Equity Income, Multi-Strategy, and Equity Portfolios, the Fund will pay .65%
of the average daily net assets of each of the Portfolios. For the Aggressive
Equity Portfolio, the Fund pays to the Adviser a fee at an annual rate of .80%
of the average daily net assets of the Portfolio. For the Growth LT Portfolio,
the Fund will pay .75% of the average daily net assets of the Portfolio. For
the Equity Index Portfolio, the Fund will pay .25% of the first $100 million
of the average daily net assets of the Portfolio, .20% of the next $100
million of the average daily net assets of the Portfolio, and .15% of the
average daily net assets of the Portfolio in excess of $200 million. For the
International Portfolio, the Fund will pay .85% of the average daily net
assets of the Portfolio. For the Emerging Markets Portfolio, the Fund pays to
the Adviser a fee at an annual rate of 1.10% of the average daily net assets
of the Portfolio. The fee shall be computed and accrued daily and paid
monthly.
Pacific Life has agreed, until at least December 31, 1999, to waive its fees
or otherwise reimburse each Portfolio for its operating expenses to the extent
that such expenses, exclusive of advisory fees, additional custodial charges
associated with holding foreign securities, foreign taxes on dividends,
interest, or gains, and extraordinary expenses, exceed 0.25% of the
Portfolio's average daily net assets. Pacific Life began this expense
reimbursement policy in April 1989. There can be no assurance that this policy
will be continued beyond December 31, 1999.
Net advisory fees paid or owed to Pacific Life for 1997 were as follows:
Money Market Portfolio--$1,521,271, High Yield Bond Portfolio--$1,466,135,
Managed Bond Portfolio--$2,055,929, Government Securities Portfolio--$645,820,
Growth Portfolio--$1,355,092, Aggressive Equity Portfolio--$684,226, Growth LT
Portfolio--$4,193,552, Equity Income Portfolio--$4,062,587, Multi-Strategy
Portfolio--$1,866,445, Equity Portfolio--$1,818,664, Bond and Income
Portfolio--$568,647, Equity Index Portfolio--$1,080,856, International
Portfolio--$5,353,459, and Emerging Markets Portfolio--$868,075.
Net advisory fees paid or owed to Pacific Life for 1996 were as follows:
Money Market Portfolio--$625,727, High Yield Bond Portfolio--$783,894, Managed
Bond Portfolio--$1,071,851, Government Securities Portfolio--$483,849, Growth
Portfolio--$962,573, Aggressive Equity Portfolio--$153,495, Growth LT
Portfolio--$2,367,481, Equity Income Portfolio--$1,977,164, Multi-Strategy
Portfolio--$1,107,889, Equity Portfolio--$1,049,649, Bond and Income
Portfolio--$411,129, Equity Index Portfolio--$511,324, International
Portfolio--$2,586,397, and Emerging Markets Portfolio--$203,399.
Net advisory fees paid or owed to Pacific Life for 1995 were as follows:
Money Market Portfolio--$386,292, High Yield Bond Portfolio--$318,918, Managed
Bond Portfolio--$519,084, Government Securities Portfolio--$226,533, Growth
Portfolio--$708,702, Growth LT Portfolio--$845,391, Equity Income Portfolio--
$840,710, Multi-Strategy Portfolio--$650,409, Equity Portfolio--$564,917, Bond
and Income Portfolio--$255,233, Equity Index Portfolio--$194,604, and
International Portfolio--$1,030,744.
34
<PAGE>
The Fund paid Pacific Life $165,000 for its services under the Agreement for
Support Services during 1997 and $108,000 during 1996, representing 0.004% and
0.005%, respectively, of the Fund's average daily net assets and anticipates
that fees to be paid for 1998 under said Agreement will be approximately
0.003% of the Fund's average daily net assets.
PORTFOLIO MANAGEMENT AGREEMENTS
Pursuant to a Portfolio Management Agreement between the Fund, the Adviser,
and Pacific Investment Management Company ("PIMCO"), 840 Newport Center Drive,
Suite 360, Post Office Box 6430, Newport Beach, California 92658-6430, PIMCO
is the Portfolio Manager and provides investment advice and makes and
implements investment decisions with respect to the Managed Bond Portfolio and
Government Securities Portfolio. For the services provided, for the years 1996
and 1995, Pacific Life paid PIMCO a fee based on a percentage of each
Portfolio's average daily net assets according to the following schedule:
MANAGED BOND AND GOVERNMENT SECURITIES PORTFOLIOS
<TABLE>
<CAPTION>
RATE % BREAK POINT (ASSETS)
------ --------------------
<S> <C>
.50% On first $25 million
.375% On next $25 million
.25% On excess
</TABLE>
PIMCO is registered as an investment adviser with the SEC and a commodity
trading adviser with the CFTC. Such registration does not involve supervision
by the SEC over investment advice or supervision by the CFTC over commodities
trading. PIMCO is currently providing investment advisory services to the
PIMCO Funds Pacific Investment Manager Series, PIMCO Commercial Mortgage
Securities Trust, Inc., PIMCO Funds: Multi-Manager Series, the Harbor Bond
Fund of the Harbor Fund, The Total Return Bond and the Intermediate-Term Bond
Portfolios of the Target Portfolio Trust, the Fixed Income I Fund, Diversified
Bond Fund, Fixed Income III Fund, and Multi-Strategy Bond Fund of the Frank
Russell Investment Management Company, the PIMCO Total Return Bond Portfolio
of the American Skandia Trust, the Total Return Fund of Fremont Mutual Funds,
Inc., CitiSelect Foreign Bond Portfolio of the Landmark Funds I, CitiSelect
VIP Folio 200, 300, 400 and 500 of the Variable Annuity Portfolios, the Core
Bond Fund of the Russell Insurance Funds, the Low Duration U.S. Government
Income Fund of the PaineWebber Bond Funds, the Strategic Fixed Income
Portfolio of the PaineWebber Series Trust, the PACE Government Securities
Fixed Income Investments and PACE Strategic Fixed Income Investments of the
PaineWebber PACE Select Advisors Trust, as well as to managed accounts
consisting of proceeds from pension and profit sharing plans. Net fees paid or
owed by Pacific Life to PIMCO in 1997 were $929,041 for the Managed Bond
Portfolio and $292,079 for the Government Securities Portfolio, in 1996 were
$541,256 for the Managed Bond Portfolio and $295,607 for the Government
Securities Portfolio, and in 1995 were $310,529 for the Managed Bond Portfolio
and $171,814 for the Government Securities Portfolio.
Pursuant to a Portfolio Management Agreement between the Fund, the Adviser,
and Capital Guardian Trust Company ("Capital Guardian"), a wholly-owned
subsidiary of The Capital Group, Inc. ("CG"), 333 South Hope Street, Los
Angeles, California 90071, Capital Guardian is the Portfolio Manager and
provides investment advisory services to the Growth Portfolio. For the
services provided, for the years 1996 and 1995, Pacific Life paid Capital
Guardian a fee based on a percentage of the average daily net assets of the
Growth Portfolio according to the following schedule:
GROWTH PORTFOLIO
<TABLE>
<CAPTION>
RATE
(%) BREAK POINT (ASSETS)
---- --------------------
<S> <C>
.50% On first $30 million
.40% On next $30 million
.30% On excess
</TABLE>
Capital Guardian is a California state chartered trust company organized in
1968 which provides fiduciary and investment management services to a limited
number of large accounts such as employee benefit plans,
35
<PAGE>
college endowment funds, foundations, and individuals. Accounts managed by
Capital Guardian had combined assets, as of December 31, 1997, in excess of
$66 billion. Capital Guardian's research activities are conducted by a wholly-
owned subsidiary, Capital Guardian Research Company, and other affiliates that
have research facilities in Los Angeles, San Francisco, New York, Washington,
D.C., Atlanta, London, Geneva, Hong Kong, Singapore, and Tokyo.
CG, 333 South Hope Street, Los Angeles, CA 90071, is the parent of Capital
Guardian because it owns all of its outstanding shares of common stock. David
I. Fisher, Jon B. Lovelace, James F. Rothenberg and R. Michael Shanahan are
each beneficial owners of shares representing more than 5% but less than 10%
of the voting rights of CG.
Capital Research and Management Company ("CRMC"), another wholly-owned
subsidiary of CG, provides investment advisory services to the following
mutual funds, which are known collectively as the American Funds Group: AMCAP
Fund, Inc., American Balanced Fund, Inc. American High Income Trust, American
Mutual Fund, Inc., The Bond Fund of America, Inc. , Intermediate Bond Fund of
America, The Cash Management Trust of America, Capital Income Builder, Inc.,
Capital World Bond Fund, Inc., EuroPacific Growth Fund, Fundamental Investors,
Inc., The Growth Fund of America, Inc., The Income Fund of America, Inc., The
Investment Company of America, High-Income Municipal Bond Fund, Inc., Limited
Term Tax-Exempt Bond Fund of America, The New Economy Fund, The New
Perspective Fund, SMALLCAP World Fund, Inc., The Tax-Exempt Bond Fund of
America, Inc., The Tax-Exempt Fund of California, The Tax-Exempt Fund of
Maryland, The Tax-Exempt Fund of Virginia, The Tax-Exempt Money Fund of
America, U.S. Government Securities Fund, The U.S. Treasury Money Fund of
America, Washington Mutual Investors Fund, Inc., and Capital World Growth and
Income Fund, Inc. CRMC also provides investment advisory services to American
Variable Insurance Series and Anchor Pathway Fund, which are used exclusively
as underlying investment vehicles for variable insurance contracts and
policies, and to Endowments, Inc. and Bond Portfolio for Endowments, Inc.,
whose shares may be owned only by tax-exempt organizations. Capital
International Inc., an indirect wholly-owned subsidiary of CG, provides
investment advisory services to Emerging Market Growth Fund, Inc. which is a
closed-end investment company.
Net fees paid or owed by Pacific Life to Capital Guardian for the Growth
Portfolio in 1997 were $716,070, in 1996 were $534,580, and in 1995 were
$417,483.
From April 1, 1996 through April 30, 1998, pursuant to a Portfolio
Management Agreement between the Fund, the Adviser and Columbus Circle
Investors ("Columbus Circle Investors"), Metro Center, One Station Place, 8th
Floor, Stamford, Connecticut 06902, Columbus Circle Investors was the
Portfolio Manager and provided investment advisory services to the Aggressive
Equity Portfolio. For the services provided for the year 1997, Pacific Life
paid a fee to Columbus Circle Investors based on a percentage of the average
daily net assets of the Aggressive Equity Portfolio according to the following
schedule:
AGGRESSIVE EQUITY PORTFOLIO
<TABLE>
<CAPTION>
RATE
(%) BREAK POINT (ASSETS)
---- ---------------------
<S> <C>
.55% On first $100 million
.50% On next $150 million
.45% On next $250 million
.40% On excess
</TABLE>
For the services provided, for the year 1996, Pacific Life paid a fee to
Columbus Circle Investors based on a percentage of the Portfolio's average
daily net assets according to the following fee schedule:
AGGRESSIVE EQUITY PORTFOLIO
<TABLE>
<CAPTION>
RATE
(%) BREAK POINT (ASSETS)
---- ---------------------
<S> <C>
.55% On first $100 million
.50% On next $250 million
.45% On excess
</TABLE>
36
<PAGE>
Net fees paid or owed by Pacific Life to Columbus Circle Investors in 1997
were $468,441 and from April 1, 1996 (date of commencement of operations) to
December 31, 1996 were $106,272 for the Aggressive Equity Portfolio.
Pursuant to a Portfolio Management Agreement between the Fund, the Adviser,
and Janus Capital Corporation ("Janus"), 100 Fillmore Street, Denver, Colorado
80206-4923, Janus is the Portfolio Manager and provides investment advisory
services to the Growth LT Portfolio. For the services provided, for the years
1996 and 1995 Pacific Life paid Janus a fee based on a percentage of the
average daily net assets of the Growth LT Portfolio according to the following
schedule:
GROWTH LT PORTFOLIO
<TABLE>
<CAPTION>
RATE
(%) BREAK POINT (ASSETS)
---- ---------------------
<S> <C>
.60% On first $100 million
.55% On excess
</TABLE>
Janus serves as investment adviser to the Janus Funds, as well as other
mutual funds and individual, corporate, charitable, and retirement accounts.
Kansas City Southern Industries, Inc. ("KCSI") owns approximately 83% of the
outstanding voting stock of Janus. KCSI is a publicly traded holding company
whose primary subsidiaries are engaged in transportation and financial
services. Net fees paid or owed by Pacific Life to Janus for the Growth LT
Portfolio in 1997 were $2,813,259, in 1996 were $1,789,724, and in 1995 were
$664,739.
Pursuant to a Portfolio Management Agreement between the Fund, the Adviser,
and J.P. Morgan Investment Management Inc. ("J.P. Morgan Investment"), 522
Fifth Avenue, New York, New York 10036, J.P. Morgan Investment is the Portfolio
Manager and provides investment advisory services to the Equity Income
Portfolio and the Multi-Strategy Portfolio. For the services provided, for the
years 1996 and 1995, Pacific Life paid J.P. Morgan Investment a fee based on a
percentage of the combined average daily net assets of these two Portfolios
according to the following schedule:
EQUITY INCOME AND MULTI-STRATEGY PORTFOLIOS
<TABLE>
<CAPTION>
RATE
(%) BREAK POINT (ASSETS)
---- ---------------------
<S> <C>
.45% On first $100 million
.40% On next $100 million
.35% On next $200 million
.30% On excess
</TABLE>
J.P. Morgan Investment is an investment manager for corporate, public, and
union employee benefit funds, foundations, endowments, insurance companies,
government agencies and the accounts of other institutional investors. A
wholly-owned subsidiary of J.P. Morgan & Co. Incorporated ("Morgan"), J.P.
Morgan Investment was incorporated in the state of Delaware on February 7,
1984 and commenced operations on July 2, 1984. It was formed from the
Institutional Investment Group of Morgan Guaranty Trust Company of New York,
also a subsidiary of Morgan.
Morgan acquired its first tax-exempt client in 1913 and its first pension
account in 1940. As of December 31, 1997, Morgan, through J.P. Morgan
Investment and its other subsidiaries, has assets under management of
approximately $255 billion. With offices around the globe, J.P. Morgan
Investment draws from a worldwide resources base to provide comprehensive
service to an international group of clients.
Net fees paid or owed by Pacific Life to J.P. Morgan Investment in 1997 were
$1,998,776 for the Equity Income Portfolio and $920,564 for the Multi-Strategy
Portfolio, in 1996 were $1,135,557 for the Equity Income
37
<PAGE>
Portfolio and $637,384 for the Multi-Strategy Portfolio, and in 1995 were
$537,832 for the Equity Income Portfolio and $417,904 for the Multi-Strategy
Portfolio.
From January 1, 1995 through April 30, 1998, pursuant to a Portfolio
Management Agreement between the Fund, the Adviser, and Greenwich Street
Advisors Division of Smith Barney Mutual Funds Management Inc. ("Greenwich
Street Advisors"), 388 Greenwich Street, 23rd Floor, New York, New York 10048,
Greenwich Street Advisors was the Portfolio Manager and provided investment
advisory service to the Equity Portfolio and Bond and Income Portfolio. For
the services provided, for the year 1997, Pacific Life paid a fee to Greenwich
Street Advisors based on a percentage of the combined average daily net assets
of the Equity and Bond and Income Portfolios according to the following
schedule:
EQUITY AND BOND AND INCOME PORTFOLIOS
<TABLE>
<CAPTION>
RATE(%) BREAK POINT (ASSETS)
------- ---------------------
<S> <C>
.45% On first $100 million
.40% On next $100 million
.35% On next $200 million
.30% On next $600 million
.20% On excess
</TABLE>
For the services provided, for the years 1996 and 1995, Pacific Life paid a
fee to Greenwich Street Advisors based on a percentage of each Portfolio's
average daily net assets according to the following fee schedules:
EQUITY PORTFOLIO
<TABLE>
<CAPTION>
RATE
(%) BREAK POINT (ASSETS)
---- ---------------------
<S> <C>
.50% On first $500 million
.45% On next $500 million
.40% On excess
BOND AND INCOME PORTFOLIO
<CAPTION>
RATE
(%) BREAK POINT (ASSETS)
---- ---------------------
<S> <C>
.40% On first $500 million
.35% On next $500 million
.30% On excess
</TABLE>
Net fees paid or owed by Pacific Life to Greenwich Street Advisors in 1997
were $1,088,097 for the Equity Portfolio and $368,846 for the Bond and Income
Portfolio, in 1996 were $808,784 for the Equity Portfolio and $274,358 for the
Bond and Income Portfolio, and in 1995 were $435,730 for the Equity Portfolio
and $170,779 for the Bond and Income Portfolio.
38
<PAGE>
Pursuant to a Portfolio Management Agreement between the Fund, the Adviser
and Bankers Trust Company ("BTCo"), a wholly-owned subsidiary of Bankers Trust
New York Corporation, 130 Liberty Street, New York, New York 10006, BTCo is
the Portfolio Manager and provides investment advisory services to the Equity
Index Portfolio. For the services provided, for the years 1996 and 1995,
Pacific Life paid a quarterly fee in advance to BTCo, based on the net assets
of the Equity Index Portfolio at the beginning of each calendar quarter in
accordance with the following schedule:
EQUITY INDEX PORTFOLIO
<TABLE>
<CAPTION>
RATE
(%) BREAK POINT (ASSETS)
---- ---------------------
<S> <C>
.07% On first $100 million
.03% On next $100 million
.01% On excess
</TABLE>
This fee is subject to a minimum annual fee of $100,000 for the calendar
year 1996 and each year thereafter. For the calendar year 1995, the fee was
subject to a minimum annual fee of $75,000.
BTCo is a wholly-owned subsidiary of Bankers Trust New York Corporation, the
seventh largest bank holding company in the United States. BTCo is responsible
for the management of the Equity Index Portfolio. As of December 31, 1997,
BTCo managed assets approximating $317.8 billion. BTCo is the investment
manager to the following registered investment companies: Short-Intermediate
Fixed-Income Portfolio of Accessor Funds, Inc.; MidCap Index, Stock Index and
Small Cap Index Funds of American General Series Portfolio ("VALIC"); Equity
and Fixed Income Portfolios of the Bank Fiduciary Funds; Tax Free Money, NY
Tax Free Money, Cash Management, Treasury Money, Lifecycle Short-Range,
Lifecycle Mid-Range, Lifecycle Long-Range, Intermediate Tax Free, Global High
Yield Securities, International Equity, Capital Appreciation, Pacific Basin
Equity, Latin American Equity and Small Cap Portfolios of the BT Investment
Trust; Money Market, Limited Term U.S. Government Securities, Equity 500
Index, Equity Appreciation (Investment Class), Institutional Asset Management
and PreservationPlus (Investment and Institutional Classes) Portfolios of the
BT Pyramid Mutual Funds Trust; Equity 500 Index, Cash Management, Treasury
Money, Cash Reserves, Liquid Assets, Treasury Assets, Daily Assets and
International Equity (Classes I and II) Portfolios of the BT Institutional
Trust; Advisor and Institutional Classes of the EAFE Equity Index, Small Cap
Index and U.S. Bond Index Portfolios of the BT Advisor Trust; Small Cap,
International Equity, U.S. Bond Index, EAFE Equity Index, Equity 500 Index,
Small Cap Index and Managed Assets Funds of the BT Insurance Funds Trust; BT
Equity 500 Index, BT Small Company Index and BT International Equity Index
Portfolios of the EQ Advisors Trust; Spartan US Equity Index, Spartan Extended
Market Index, Spartan Market Index, Spartan Total Market Index, Spartan
International Index and VIP Index 500 Funds of the Fidelity Funds; Scudder
AARP US Stock Index Portfolio; and USAA S&P Index 500 Fund.
Net fees paid or owed by Pacific Life to BTCo in 1997 were $135,863, in 1996
were $100,000, and in 1995 were $75,000.
From January 1, 1994 through May 31, 1997, pursuant to a Portfolio
Management Agreement between the Fund, the Adviser, and Templeton Investment
Counsel, Inc. ("Templeton"), Broward Financial Centre, Suite 2100, Fort
Lauderdale, Florida 33394-3091, Templeton was the Portfolio Manager and
provided investment advice with respect to the International Portfolio. For
the services provided, for the period January 1, 1997 through May 31, 1997 and
for the years 1996 and 1995, Pacific Life paid a fee to Templeton based on a
percentage of the Portfolio's average daily net assets according to the
following fee schedule:
INTERNATIONAL PORTFOLIO
<TABLE>
<CAPTION>
RATE
(%) BREAK POINT (ASSETS)
---- --------------------
<S> <C>
.70% On first $25 million
.55% On next $25 million
.50% On next $50 million
.40% On excess
</TABLE>
39
<PAGE>
Net fees paid or owed by Pacific Life to Templeton for the International
Portfolio from January 1, 1997 to May 31, 1997 were $945,379, in 1996 were
$1,382,217, and in 1995 were $643,941.
Pursuant to a Portfolio Management Agreement between the Fund, the Adviser
and Morgan Stanley Asset Management Inc. ("Morgan Stanley"), 1221 Avenue of
the Americas, New York, New York 10020, Morgan Stanley serves as the Portfolio
Manager and provides investment advisory services to the International
Portfolio. For the services provided, for the period June 1, 1997 to December
31, 1997, Pacific Life paid a fee at an annual rate of .35% to Morgan Stanley
based on the Portfolio's average daily net assets.
Net fees paid or owed by Pacific Life to Morgan Stanley from June 1, 1997 to
December 31, 1997 were $1,478,065 for the International Portfolio.
Pursuant to a Portfolio Management Agreement between the Fund, the Adviser
and Blairlogie Capital Management ("Blairlogie"), 4th Floor, 125 Princes
Street, Edinburgh EH2 4AD, Scotland, Blairlogie serves as the Portfolio
Manager and provides investment advisory services to the Emerging Markets
Portfolio. For the services provided, for the year 1996, Pacific Life paid a
fee to Blairlogie based on a percentage of the Portfolio's average daily net
assets according to the following fee schedule:
EMERGING MARKETS PORTFOLIO
<TABLE>
<CAPTION>
RATE
(%) BREAK POINT (ASSETS)
---- --------------------
<S> <C>
.85% On first $50 million
.75% On next $50 million
.70% On next $50 million
.65% On excess
</TABLE>
Blairlogie is a subsidiary partnership of PIMCO Advisors, L.P. an affiliate
of Pacific Life. Blairlogie is a U.K. limited partnership with two general
partners and one limited partner. PIMCO Advisors L.P., the supervising general
partner of Blairlogie, has agreed to acquire one-fifth of Blairlogie's limited
partner's interest annually, beginning December 31, 1998.
Blairlogie manages a limited number of large accounts, such as employee
benefit plans, college endowment funds and foundations, as well as two funds
in the PIMCO Funds: Equity Advisors Series (formerly PIMCO Advisors
Institutional Funds). As of December 31, 1997, Blairlogie managed
approximately $647 million of assets, including approximately $320.8 million
of mutual fund assets.
Net fees paid or owed by Pacific Life to Blairlogie in 1997 were $642,982,
and from April 1, 1996 (date of commencement of operations) to December 31,
1996 were $158,193 for the Emerging Markets Portfolio.
The Portfolio Management Agreements are not exclusive, and PIMCO, Capital
Guardian, Alliance Capital Management L.P., Janus, J.P. Morgan Investment,
BTC, Goldman Sachs Asset Management, Morgan Stanley, and Blairlogie may
provide and currently are providing investment advisory services to other
clients, including other investment companies.
DISTRIBUTION OF FUND SHARES
Pacific Mutual Distributors, Inc. ("PMD") serves as the Fund's Distributor
pursuant to a Distribution Contract (the "Distribution Contract") with the
Fund. The Distributor is not obligated to sell any specific amount of Fund
shares. PMD bears all expenses of providing services pursuant to the
Distribution Contract including the costs of sales presentations, mailings,
advertising, and any other marketing efforts by PMD in connection with the
distribution or sale of the shares.
The expenses incurred by the Fund with respect to each Portfolio in
connection with the Fund's organization, its registration with the SEC and any
states where registered, and the public offering of its shares were advanced
on behalf of the Fund by the Adviser. These organizational expenses were
deferred and amortized
40
<PAGE>
by the Fund's Portfolios over a period of 60 months. Similarly, the
organizational expenses of Portfolios of the Fund that have been organized
after the Fund commenced operations have been advanced on behalf of the Fund
by the Adviser, and are deferred and amortized by the pertinent Portfolio over
a period of 60 months from the commencement of operations of the Portfolio.
See "Financial Statements."
As of April 24, 1998, Pacific Life beneficially owned 0% of the outstanding
shares of the Portfolios of the Fund. Pacific Life would exercise voting
rights attributable to any shares of the Fund owned by it in accordance with
voting instructions received by Owners of the Policies issued by Pacific Life.
To this extent, as of April 24, 1998, Pacific Life did not exercise control
over any Portfolio.
PURCHASES AND REDEMPTIONS
For information on purchase and redemption of shares, see "More on the
Fund's Shares" in the Fund's Prospectus. The Fund may suspend the right of
redemption of shares of any Portfolio and may postpone payment for more than
seven days for any period: (i) during which the New York Stock Exchange is
closed other than customary weekend and holiday closings or during which
trading on the New York Stock Exchange is restricted; (ii) when the SEC
determines that a state of emergency exists which may make payment or transfer
not reasonably practicable; (iii) as the SEC may by order permit for the
protection of the security holders of the Fund; or (iv) at any other time when
the Fund may, under applicable laws and regulations, suspend payment on the
redemption of its shares. If the Board of Trustees should determine that it
would be detrimental to the best interests of the remaining shareholders of a
Portfolio to make payment wholly or partly in cash, the Portfolio may pay the
redemption price in whole or in part by a distribution in kind of securities
from the portfolio of the Portfolio, in lieu of cash, in conformity with
applicable rules of the SEC. If shares are redeemed in kind, the redeeming
shareholder might incur brokerage costs in converting the assets into cash.
Under the 1940 Act, the Fund is obligated to redeem shares solely in cash up
to the lesser of $250,000 or 1 percent of its net assets during any 90-day
period for any one shareholder.
PORTFOLIO TRANSACTIONS AND BROKERAGE
INVESTMENT DECISIONS
Investment decisions for the Fund and for the other investment advisory
clients of the Adviser, or applicable Portfolio Manager, are made with a view
to achieving their respective investment objectives. Investment decisions are
the product of many factors in addition to basic suitability for the
particular client involved (including the Fund). Thus, a particular security
may be bought or sold for certain clients even though it could have been
bought or sold for other clients at the same time. It also sometimes happens
that two or more clients simultaneously purchase or sell the same security, in
which event each day's transactions in such security are, insofar as possible,
averaged as to price and allocated between such clients in a manner which in
the opinion of the Adviser or Portfolio Manager is equitable to each and in
accordance with the amount being purchased or sold by each. There may be
circumstances when purchases or sales of portfolio securities for one or more
clients will have an adverse effect on other clients.
BROKERAGE AND RESEARCH SERVICES
There is generally no stated commission in the case of fixed-income
securities, which are traded in the over-the-counter markets, but the price
paid by the Fund usually includes an undisclosed dealer commission or mark-up.
In underwritten offerings, the price paid by the Fund includes a disclosed,
fixed commission or discount retained by the underwriter or dealer.
Transactions on U.S. stock exchanges and other agency transactions involve the
payment by the Fund of negotiated brokerage commissions. Such commissions vary
among different brokers. Also, a particular broker may charge different
commissions according to such factors as the difficulty and size of the
transaction. In the case of securities traded on some foreign stock exchanges,
brokerage commissions may be fixed and the Adviser or Portfolio Manager may be
unable to negotiate commission rates for these transactions.
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The Adviser or Portfolio Manager for a Portfolio places all orders for the
purchase and sale of portfolio securities, options, and futures contracts and
other investments for a Portfolio through a substantial number of brokers and
dealers or futures commission merchants. In executing transactions, the
Adviser or Portfolio Manager will attempt to obtain the best net results for a
Portfolio taking into account such factors as price (including the applicable
brokerage commission or dollar spread), size of order, the nature of the
market for the security, the timing of the transaction, the reputation,
experience and financial stability of the broker-dealer involved, the quality
of the service, the difficulty of execution and operational facilities of the
firms involved, and the firm's risk in positioning a block of securities. In
transactions on stock exchanges in the United States, payments of brokerage
commissions are negotiated. In effecting purchases and sales of portfolio
securities in transactions on United States stock exchanges for the account of
the Fund, the Adviser or Portfolio Manager may pay higher commission rates
than the lowest available when the Adviser or Portfolio Manager believes it is
reasonable to do so in light of the value of the brokerage and research
services provided by the broker effecting the transaction, as described below.
In the case of securities traded on some foreign stock exchanges, brokerage
commissions may be fixed and the Adviser or Portfolio Manager may be unable to
negotiate commission rates for these transactions. In the case of securities
traded on the over-the-counter markets, there is generally no stated
commission, but the price includes an undisclosed commission or markup.
Consistent with the above policy of obtaining the best net results, a portion
of a Portfolio's brokerage and futures transactions may be conducted through
an affiliated broker. The brokerage commissions paid to an affiliated broker
will not exceed 25% of the brokerage commission incurred per year by the
Portfolio.
Some securities considered for investment by the Fund's Portfolios may also
be appropriate for other clients served by the Adviser or Portfolio Manager.
If a purchase or sale of securities consistent with the investment policies of
a Portfolio and one or more of these clients served by the Adviser or
Portfolio Manager is considered at or about the same time, transactions in
such securities will be allocated among the Portfolio and clients in a manner
deemed fair and reasonable by the Adviser or Portfolio Manager. Although there
is no specified formula for allocating such transactions, the various
allocation methods used by the Adviser or Portfolio Manager, and the results
of such allocations, are subject to periodic review by the Fund's Adviser and
Board of Trustees.
It has for many years been a common practice in the investment advisory
business for advisers of investment companies and other institutional
investors to receive research services from broker-dealers which execute
portfolio transactions for the clients of such advisers. Consistent with this
practice, the Adviser or Portfolio Manager for a Portfolio may receive
research services from many broker-dealers with which the Adviser or Portfolio
Manager places the Portfolio's portfolio transactions. These services, which
in some cases may also be purchased for cash, include such matters as general
economic and security market reviews, industry and company reviews,
evaluations of securities and recommendations as to the purchase and sale of
securities. Some of these services may be of value to the Adviser or Portfolio
Manager in advising its various clients (including the Portfolio), although
not all of these services are necessarily useful and of value in managing a
Portfolio. The advisory fee paid by the Portfolio is not reduced because the
Adviser or Portfolio Manager and its affiliates receive such services.
As permitted by Section 28(e) of the Securities Exchange Act of 1934, the
Adviser or Portfolio Manager may cause a Portfolio to pay a broker-dealer,
which provides "brokerage and research services" (as defined in the Act) to
the Adviser or Portfolio Manager, an amount of disclosed commission for
effecting a securities transaction for the Portfolio in excess of the
commission which another broker-dealer would have charged for effecting that
transaction.
During the years 1997, 1996 and 1995, respectively, the following Portfolios
incurred brokerage commissions as follows: the High Yield Bond Portfolio--
$2,500, $1,700 and $0, the Managed Bond Portfolio--$41,315, $33,718 and
$21,987, the Government Securities Portfolio--$21,349, $16,819 and $11,874,
the Growth Portfolio--$225,232, $242,837 and $167,561, the Aggressive Equity
Portfolio--$296,940 and $59,113, the Growth LT Portfolio--$1,057,621, $559,163
and $325,340, the Equity Income Portfolio--$1,162,083, $746,412 and $314,236,
the Multi-Strategy Portfolio--$283,791, $231,844 and $129,476, the Equity
Portfolio--$706,250,
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$286,596 and $335,550 of which $61,512 (8.71%), $60,498 (21.11%), and $68,472
(20.41%) was paid to Smith Barney Inc. and $23,700 (3.36%), $11,100 (3.87%),
and $22,500 (6.71%) was paid to Robinson Humphrey Co., Inc., affiliates of
Greenwich Street Advisors, the Bond and Income Portfolio--$0, $0 and $0, the
Equity Index Portfolio--$157,624, $137,980 and $43,415, the International
Portfolio--$1,606,247, $883,241 and $376,660 of which $39,617 (2.47%) was paid
to Morgan Stanley & Co. in 1997, an affiliate of Morgan Stanley Asset
Management Inc., and the Emerging Markets Portfolio--$712,505 and $302,384.
The Aggressive Equity and Emerging Markets Portfolios had not commenced
operations as of December 31, 1995.
PORTFOLIO TURNOVER
For reporting purposes, each Portfolio's portfolio turnover rate is
calculated by dividing the value of the lesser of purchases or sales of
portfolio securities for the fiscal year by the monthly average of the value
of portfolio securities owned by the Portfolio during the fiscal year. In
determining such portfolio turnover, long-term U.S. Government securities are
included. Short-term U.S. Government securities and all other securities whose
maturities at the time of acquisition were one year or less are excluded. A
100% portfolio turnover rate would occur, for example, if all of the
securities in the portfolio (other than short-term securities) were replaced
once during the fiscal year. The portfolio turnover rate for each of the
Portfolios will vary from year to year, depending on market conditions.
The portfolio turnover rates are not expected to exceed: 0% for the Money
Market Portfolio; 400% for the Managed Bond and Government Securities
Portfolios; and 150% for all other Portfolios. For the Portfolios other than
the Money Market Portfolio, portfolio turnover could be greater in periods of
unusual market movement and volatility. For the years 1997, 1996 and 1995,
respectively, the portfolio turnover rate for each of the Portfolios was as
follows: Money Market Portfolio--0%, 0% and 0%, High Yield Bond Portfolio--
103%, 120% and 127%, Managed Bond Portfolio--231%, 386% and 191%, Government
Securities Portfolio--203%, 307% and 299%, Growth Portfolio--52%, 70% and 47%,
Aggressive Equity Portfolio--189% and 80%, Growth LT Portfolio--145%, 147% and
166%, Equity Income Portfolio--106%, 95% and 86%, Multi-Strategy Portfolio--
72%, 133% and 176%, Equity Portfolio--160%, 91% and 226%, Bond and Income
Portfolio--15%, 27% and 52%, Equity Index Portfolio--3%, 20% and 8%,
International Portfolio--84%, 21% and 16% and Emerging Markets Portfolio--70%
and 48%. The 1996 portfolio turnover rate for the Aggressive Equity and
Emerging Markets Portfolios is based on the period from April 1, 1996
(commencement of operations) to December 31, 1996.
NET ASSET VALUE
As indicated under "Net Asset Value" in the Prospectus, the Fund's net asset
value per share for the purpose of pricing purchase and redemption orders is
determined at or about 4:00 P.M., New York City time, on each day the New York
Stock Exchange is open for trading. Net asset value will not be determined on
the following holidays: New Year's Day, Martin Luther King, Jr. Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day, and Christmas Day. With respect to the Portfolios that
invest in foreign securities, the value of foreign securities that are traded
on stock exchanges outside the United States are based upon the price on the
exchange as of the close of business of the exchange immediately preceding the
time of valuation. Securities traded in over-the-counter markets outside the
United States are valued at the last available price in the over-the-counter
market prior to the time of valuation. Trading in securities on exchanges and
over-the-counter markets in European and Pacific Basin countries is normally
completed well before 4:00 P.M., New York City time. In addition, European and
Pacific Basin securities trading may not take place on all business days in
New York. Furthermore, trading takes place in Japanese markets on certain
Saturdays and in various foreign markets on days which are not business days
in New York and on which the Fund's net asset value is not calculated.
Quotations of foreign securities in foreign currencies are converted to U.S.
dollar equivalents using the foreign exchange quotation in effect at the time
net asset value is computed. The calculation of the net asset value of the
Managed Bond, Government Securities, Aggressive Equity, Growth LT, Multi-
Strategy, International, and Emerging Markets Portfolios may not take place
contemporaneously with
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the determination of the prices of portfolio securities of foreign issuers
used in such calculation. Further, under the Fund's procedures, the prices of
foreign securities are determined using information derived from pricing
services and other sources every day that the Fund values its shares. Prices
derived under these procedures will be used in determining net asset value.
Information that becomes known to the Fund or its agents after the time that
net asset value is calculated on any business day may be assessed in
determining net asset value per share after the time of receipt of the
information, but will not be used to retroactively adjust the price of the
security so determined earlier or on a prior day. Events affecting the values
of portfolio securities that occur between the time their prices are
determined and the time a Portfolio's net asset value is determined may not be
reflected in the calculation of net asset value. If events materially
affecting net asset value occur during such period, the securities would be
valued at fair market value as determined by the management and approved in
good faith by the Board of Trustees of the Fund.
The Money Market Portfolio's portfolio securities are valued using the
amortized cost method of valuation. This involves valuing a security at cost
on the date of acquisition and thereafter assuming a constant accretion of a
discount or amortization of a premium to maturity, regardless of the impact of
fluctuating interest rates on the market value of the instrument. While this
method provides certainty in valuation, it may result in periods during which
value, as determined by amortized cost, is higher or lower than the price the
Portfolio would receive if it sold the instrument. During such periods the
yield to investors in the Portfolio may differ somewhat from that obtained in
a similar investment company which uses available market quotations to value
all of its portfolio securities.
The Commission's regulations require the Money Market Portfolio to adhere to
certain conditions. The Portfolio is required to maintain a dollar-weighted
average portfolio maturity of 90 days or less, to limit its investments to
instruments having remaining maturities of 13 months or less (except
securities held subject to repurchase agreements having 13 months or less to
maturity) and to invest only in securities that meet specified quality and
credit criteria.
All other Portfolios are valued as follows:
Portfolio securities for which market quotations are readily available are
stated at market value. Market value is determined on the basis of last
reported sales price, or, if no sales are reported, the mean between
representative bid and asked quotations obtained from a quotation reporting
system or from established market makers. In other cases, securities are
valued at their fair value as determined in good faith by the Board of
Trustees of the Fund, although the actual calculations may be made by persons
acting under the direction of the Board. Money market instruments are valued
at market value, except that instruments maturing in sixty days or less are
valued using the amortized cost method of valuation.
The value of a foreign security is determined in its national currency based
upon the price on the foreign exchange as of its close of business immediately
preceding the time of valuation. Securities traded in over-the-counter markets
outside the United States are valued at the last available price in the over-
the-counter market prior to the time of valuation.
Debt securities, including those to be purchased under firm commitment
agreements (other than obligations having a maturity of sixty days or less at
their date of acquisition), are normally valued on the basis of quotes
obtained from brokers and dealers or pricing services, which take into account
appropriate factors such as institutional-size trading in similar groups of
securities, yield, quality, coupon rate, maturity, type of issue, trading
characteristics, and other market data. Debt obligations having a maturity of
sixty days or less are generally valued at amortized cost unless the amortized
cost value does not approximate market value. Certain debt securities for
which daily market quotations are not readily available may be valued,
pursuant to guidelines established by the Board of Trustees, with reference to
debt securities whose prices are more readily obtainable and whose durations
are comparable to the securities being valued.
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When a Portfolio writes a put or call option, the amount of the premium is
included in the Portfolio's assets and an equal amount is included in its
liabilities. The liability thereafter is adjusted to the current market value
of the option. The premium paid for an option purchased by the Portfolio is
recorded as an asset and subsequently adjusted to market value. The values of
futures contracts are based on market prices. Quotations of foreign securities
in foreign currency are converted to U.S. dollar equivalents at the prevailing
market rates quoted by the custodian on the morning of valuation.
PERFORMANCE INFORMATION
The Fund may, from time to time, include the yield and effective yield of
its Money Market Portfolio, the yield of the remaining Portfolios, and the
total return of all Portfolios in advertisements, sales literature, or reports
to shareholders or prospective investors. Total return information for the
Fund will not be advertised or included in sales literature unless accompanied
by comparable performance information for a Separate Account to which the Fund
offers its shares.
Current yield for the Money Market Portfolio will be based on the change in
the value of a hypothetical investment (exclusive of capital charges) over a
particular 7-day period, less a pro-rata share of Portfolio expenses accrued
over that period (the "base period"), and stated as a percentage of the
investment at the start of the base period (the "base period return"). The
base period return is then annualized by multiplying by 365/7, with the
resulting yield figure carried to at least the nearest hundredth of one
percent. "Effective yield" for the Money Market Portfolio assumes that all
dividends received during an annual period have been reinvested. Calculation
of "effective yield" begins with the same "base period return" used in the
calculation of yield, which is then annualized to reflect weekly compounding
pursuant to the following formula:
Effective Yield = [(Base Period Return + 1) (To the power of 365/7)]-1
For the 7-day period ending December 31, 1997, the current yield of the
Money Market Portfolio was 5.54% and the effective yield of the Portfolio was
5.69%.
Quotations of yield for the remaining Portfolios will be based on all
investment income per share earned during a particular 30-day period
(including dividends and interest), less expenses accrued during the period
("net investment income"), and are computed by dividing net investment income
by the maximum offering price per share on the last day of the period,
according to the following formula:
2{[([(a-b)/c*d]+1)(To the power of 6)]-1}
where
a = dividends and interest earned during the period,
b = expenses accrued for the period (net of reimbursements),
c = the average daily number of shares outstanding during the period
that were entitled to receive dividends, and
d = the maximum offering price per share on the last day of the period.
For the 30 day period ended December 31, 1997, the yield of the remaining
Portfolios that had commenced operations on or before that date was as
follows: 8.40% for the High Yield Bond Portfolio, 5.76% for the Managed Bond
Portfolio, 5.44% for the Government Securities Portfolio, 0.30% for the Growth
Portfolio, 0.28% for the Aggressive Equity Portfolio, 0.37% for the Growth LT
Portfolio, 1.08% for the Equity Income Portfolio, 3.37% for the Multi-Strategy
Portfolio, 0.89% for the Equity Portfolio, 6.47% for the Bond and Income
Portfolio, 1.62% for the Equity Index Portfolio, 1.74% for the International
Portfolio, and 0.70% for the Emerging Markets Portfolio.
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Quotations of average annual total return for a Portfolio will be expressed
in terms of the average annual compounded rate of return of a hypothetical
investment in the Portfolio over certain periods that will include a period of
one year (or, if less, up to the life of the Portfolio), calculated pursuant
to the following formula: P (1 + T)n = ERV (where P = a hypothetical initial
payment of $1,000, T = the total return for the period, n = the number of
periods, and ERV = the ending redeemable value of a hypothetical $1,000
payment made at the beginning of the period). Quotations of total return may
also be shown for other periods. All total return figures reflect the
deduction of a proportional share of Portfolio expenses on an annual basis,
and assume that all dividends and distributions are reinvested when paid.
For the one year period ended December 31, 1997, the total return for each
Portfolio that had commenced operations on or before that date was as follows:
5.28% for the Money Market Portfolio, 9.44% for the High Yield Bond Portfolio,
9.92% for the Managed Bond Portfolio, 9.48% for the Government Securities
Portfolio, 30.27% for the Growth Portfolio, 3.78% for the Aggressive Equity
Portfolio, 10.96% for the Growth LT Portfolio, 28.60% for the Equity Income
Portfolio, 19.62% for the Multi-Strategy Portfolio, 18.18% for the Equity
Portfolio, 16.32% for the Bond and Income Portfolio, 32.96% for the Equity
Index Portfolio, 9.28% for the International Portfolio, and (1.69)% for the
Emerging Markets Portfolio.
For the five year period ended December 31, 1997, the average annual total
return for each Portfolio that had commenced operations on or before that date
was as follows: 4.44% for the Money Market Portfolio, 11.40% for the High
Yield Bond Portfolio, 7.81% for the Managed Bond Portfolio, 7.08% for the
Government Securities Portfolio, 17.18% for the Growth Portfolio, 16.90% for
the Equity Income Portfolio, 12.66% for the Multi-Strategy Portfolio, 16.12%
for the Equity Portfolio, 11.04% for the Bond and Income Portfolio, 19.74% for
the Equity Index Portfolio and 14.55% for the International Portfolio. The
Growth LT Portfolio did not begin operations until January 4, 1994. The
Aggressive Equity and Emerging Markets Portfolios did not begin operations
until April 1, 1996.
For the ten year period ended December 31, 1997, the average annual total
returns for the Equity Portfolio and Bond and Income Portfolio were 14.76% and
11.30%, respectively.
Based upon the period from the commencement of Fund operations on January 4,
1988 until December 31, 1997, the average annual total return for each
Portfolio, except the Growth LT, Aggressive Equity, Equity, Bond and Income,
Equity Index and Emerging Markets Portfolios, was as follows: 5.35% for the
Money Market Portfolio, 11.13% for the High Yield Bond Portfolio, 9.47% for
the Managed Bond Portfolio, 8.83% for the Government Securities Portfolio,
16.91% for the Growth Portfolio, 14.61% for the Equity Income Portfolio,
11.93% for the Multi-Strategy Portfolio, and 9.25% for the International
Portfolio. Based upon the period from the commencement of operations of the
Growth LT Portfolio on January 4, 1994 until December 31, 1997, the average
annual total return for the Growth LT Portfolio was 19.31%. Based upon the
period from the commencement of the first full year of operations of the
Equity Portfolio and Bond and Income Portfolio on January 1, 1984, the average
annual total return for each of these Portfolios was 15.01% and 12.48%,
respectively. Based upon the period from the commencement of the Equity Index
Portfolio operations on January 30, 1991 until December 31, 1997, the average
annual total return for the Equity Index Portfolio was 18.75%. Based upon the
period from the commencement of operations of the Aggressive Equity and
Emerging Markets Portfolios on April 1, 1996 until December 31, 1997, the
average annual total return for each of these Portfolios was 6.64% and
(2.80)%, respectively.
The performance results for the Equity Income, Multi-Strategy, and
International Portfolios occurred when these Portfolios were advised by
different Portfolio Managers. J.P. Morgan Investment began serving as
Portfolio Manager to the Equity Income Portfolio and the Multi-Strategy
Portfolio on January 1, 1994 and Morgan Stanley began serving as Portfolio
Manager to the International Portfolio on June 1, 1997. The performance
results for the Equity Portfolio and Bond and Income Portfolio are based, in
part, on the performance results of the predecessor series of Pacific
Corinthian Variable Fund, the assets of which were acquired by the Fund on
December 31, 1994.
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Performance information for a Portfolio may be compared, in advertisements,
sales literature, and reports to shareholders to: (i) the Standard & Poor's
500 Stock Index ("S&P 500"), the Dow Jones Industrial Average ("DJIA"), for
the Money Market Portfolio, Donoghue Money Market Institutional Averages; for
the Growth Portfolios, the Russell 2000 Index; for the Aggressive Equity
Portfolio 50% Russell 2000/50% Russell MidCap Index; for the Growth LT
Portfolio, the Russell 2500 Index; for the Equity Portfolio, the Russell 1000
Growth Index; for those Portfolios with investments in fixed income
securities, the Lehman Brothers Government Corporate Bond Index; for the
Government Securities Portfolio, the Lehman Brothers Government Bond Index;
for the High Yield Bond Portfolio, the First Boston High Yield Bond Index; for
the Multi-Strategy Portfolio, the Lehman Brothers Aggregate Index; for the
Bond and Income Portfolio, the Lehman Brothers Government/ Corporate Long-Term
Index; for the International Portfolio, Morgan Stanley Capital International's
EAFE Index, which represents the stock markets of Europe, Australia, and the
Far East; for the Emerging Markets Portfolio, the Morgan Stanley Capital
International Emerging Markets Free Index; or other unmanaged indexes, so that
investors may compare a Portfolio's results with those of a group of unmanaged
securities widely regarded by investors as representative of the securities
markets in general; (ii) other groups of mutual funds tracked by Lipper
Analytical Services, a widely used independent research firm which ranks
mutual funds by overall performance, investment objectives, and assets, or
tracked by other services, companies, publications, or persons who rank mutual
funds on overall performance or other criteria; and (iii) the Consumer Price
Index (measure for inflation) to assess the real rate of return from an
investment in the Portfolio. Unmanaged indexes may assume the reinvestment of
dividends but generally do not reflect deductions for administrative and
management costs and expenses.
Quotations of yield or total return for the Fund will not take into account
charges and deductions against any Separate Accounts to which the Fund shares
are sold or charges and deductions against the Contracts issued or
administered by Pacific Life. The Portfolio's yield and total return should
not be compared with mutual funds that sell their shares directly to the
public since the figures provided do not reflect charges against the Separate
Accounts or the Contracts. Performance information for any Portfolio reflects
only the performance of a hypothetical investment in the Portfolio during the
particular time period on which the calculations are based. Performance
information should be considered in light of the Portfolio's investment
objectives and policies, characteristics and quality of the portfolios and the
market conditions during the given time period, and should not be considered
as a representation of what may be achieved in the future.
TAXATION
Each Portfolio intends to qualify annually and to elect to be treated as a
regulated investment company under the Internal Revenue Code of 1986 (the
"Code").
To qualify as a regulated investment company, each Portfolio generally must,
among other things:(i) derive in each taxable year at least 90% of its gross
income from dividends, interest, payments with respect to securities loans,
and gains from the sale or other disposition of stock, securities or foreign
currencies, or other income derived with respect to its business of investing
in such stock, securities or currencies; (ii) diversify its holdings so that,
at the end of each quarter of the taxable year, (a) at least 50% of the market
value of the Portfolio's assets is represented by cash, U.S. Government
securities, the securities of other regulated investment companies and other
securities, with such other securities of any one issuer limited for the
purposes of this calculation to an amount not greater than 5% of the value of
the Portfolio's total assets and 10% of the outstanding voting securities of
such issuer, and (b) not more than 25% of the value of its total assets is
invested in the securities of any one issuer (other than U.S. Government
securities or the securities of other regulated investment companies); and
(iii) distribute at least 90% of its investment company taxable income (which
includes, among other items, dividends, interest, and net short-term capital
gains in excess of any net long-term capital losses) each taxable year.
As a regulated investment company, a Portfolio generally will not be subject
to U.S. federal income tax on its investment company taxable income and net
capital gains (any net long-term capital gains in excess of the
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sum of net short-term capital losses and capital loss carryovers from prior
years), if any, that it distributes to shareholders. Each Portfolio intends to
distribute to its shareholders, at least annually, substantially all of its
investment company taxable income and any net capital gains. In addition,
amounts not distributed by a Portfolio on a timely basis in accordance with a
calendar year distribution requirement are subject to a nondeductible 4%
excise tax. To avoid the tax, a Portfolio must distribute (or be deemed to
have distributed) during each calendar year, (i) at least 98% of its ordinary
income (not taking into account any capital gains or losses) for the calendar
year, (ii) at least 98% of its capital gains in excess of its capital losses
for the twelve month period ending on October 31 of the calendar year
(adjusted for certain ordinary losses), and (iii) all ordinary income and
capital gains for previous years that were not distributed during such years.
To avoid application of the excise tax, each Portfolio intends to make its
distributions in accordance with the calendar year distribution requirement. A
distribution will be treated as paid on December 31 of the calendar year if it
is declared by a Portfolio during October, November, or December of that year
to shareholders of record on a date in such a month and paid by the Portfolio
during January of the following calendar year. Such distributions will be
taxable to shareholders (the Separate Accounts) for the calendar year in which
the distributions are declared, rather than the calendar year in which the
distributions are received.
If a Portfolio invests in shares of a foreign investment company, the
Portfolio may be subject to U.S. federal income tax on a portion of an "excess
distribution" from, or of the gain from the sale of part or all of the shares
in, such company. In addition, an interest charge may be imposed with respect
to deferred taxes arising from such distributions or gains. The Portfolio may
be eligible to elect alternative tax treatment that would mitigate the effects
of owning foreign investment company stock.
Under the Code, gains or losses attributable to fluctuations in exchange
rates which occur between the time a Portfolio accrues income or other
receivables or accrues expenses or other liabilities denominated in a foreign
currency and the time that Portfolio actually collects such receivables or
pays such liabilities generally are treated as ordinary income or ordinary
loss. Similarly, on disposition of debt securities denominated in a foreign
currency and on disposition of certain futures contracts, forward contracts,
and options, gains or losses attributable to fluctuations in the value of
foreign currency between the date of acquisition of the security or contract
and the date of disposition also are treated as ordinary gain or loss. These
gains or losses, referred to under the Code as "Section 988" gains or losses,
may increase or decrease the amount of a Portfolio's investment company
taxable income to be distributed to its shareholders as ordinary income.
The Treasury Department announced that it would issue future regulations or
rulings addressing the circumstances in which a variable contract owner's
control of the investments of a separate account may cause the contract owner,
rather than the insurance company, to be treated as the owner of the assets
held by the separate account. If the contract owner is considered the owner of
the securities underlying the separate account, income and gains produced by
those securities would be included currently in the contract owner's gross
income. It is not known what standards will be set forth in the regulations or
rulings.
In the event that the rules or regulations are adopted there can be no
assurance that the Portfolios will be able to operate as currently described
in the Prospectus, or that the Trust will not have to change any Portfolio's
investment objective or investment policies. While each Portfolio's investment
objective is fundamental and may be changed only by a vote of a majority of
its outstanding shares, the Trustees have reserved the right to modify the
investment policies of the Portfolios as necessary to prevent any such
prospective rules and regulations from causing the contract owners to be
considered the owners of the shares of the Portfolios underlying the Separate
Accounts.
DISTRIBUTIONS
Distributions by a Portfolio of any investment company taxable income (which
includes, among other items, dividends, interest, and any net realized short-
term capital gains in excess of net realized long-term capital losses),
whether received in cash or reinvested in additional Portfolio shares, will be
treated as ordinary income for tax purposes in the hands of a shareholder (a
Separate Account). Distributions of net capital gains (the excess
48
<PAGE>
of any net long-term capital gains over net short-term capital losses),
whether received in cash or reinvested in additional Portfolio shares, will
generally be treated by a Separate Account as either "20% Rate Gain" or "28%
Rate Gain," depending upon the Portfolio's holding period for the assets sold,
regardless of the length of time a Separate Account has held Portfolio shares.
HEDGING TRANSACTIONS
The diversification requirements applicable to a Portfolio's assets may
limit the extent to which a Portfolio will be able to engage in transactions
in options, futures contracts, or forward contracts.
OTHER INFORMATION
CONCENTRATION POLICY
Under each Portfolio's investment restrictions, a Portfolio may not invest
in a security if, as a result of such investment, more than 25% of its total
assets (taken at market value at the time of such investment) would be
invested in the securities of issuers in any particular industry, except
securities issued or guaranteed by the U.S. Government or its agencies or
instrumentalities (or repurchase agreements with respect thereto). Mortgage-
related securities, including CMOs, that are issued or guaranteed by the U.S.
Government, its agencies or instrumentalities ("government issued") are
considered government securities. The Portfolios take the position that
mortgage-related securities, whether government issued or privately issued, do
not represent interests in any particular "industry" or group of industries,
and therefore, the concentration restriction noted above does not apply to
such securities. For purposes of complying with this restriction, the Fund, in
consultation with its Portfolio Managers, utilizes its own industry
classifications.
CAPITALIZATION
The Fund is a Massachusetts business trust established under a Declaration
of Trust dated May 4, 1987. The capitalization of the Fund consists solely of
an unlimited number of shares of beneficial interest with a par value of
$0.001 each. The Board of Trustees may establish additional Portfolios (with
different investment objectives and fundamental policies) at any time in the
future. Establishment and offering of additional Portfolios will not alter the
rights of the Fund's shareholders. When issued, shares are fully paid,
redeemable, freely transferable, and non-assessable by the Fund. Shares do not
have preemptive rights or subscription rights. In liquidation of a Portfolio
of the Fund, each shareholder is entitled to receive his pro rata share of the
net assets of that Portfolio.
Expenses incurred by the Aggressive Equity, Growth LT, and Emerging Markets
Portfolios in connection with the Fund's organization and establishment of
those Portfolios and the public offering of the shares of those Portfolios,
aggregated approximately $23,410, $3,952, and $23,410, respectively. These
costs have been deferred by the Aggressive Equity, Growth LT, and Emerging
Markets Portfolios and are being amortized by them over a period of five years
from the beginning of operations of each of those Portfolios.
VOTING RIGHTS
Shareholders of the Fund are given certain voting rights. Each share of each
Portfolio will be given one vote, unless a different allocation of voting
rights is required under applicable law for a mutual fund that is an
investment medium for variable insurance products.
Under the Declaration of Trust, the Fund is not required to hold annual
meetings of Fund shareholders to elect Trustees or for other purposes. It is
not anticipated that the Fund will hold shareholders' meetings unless required
by law or the Declaration of Trust. In this regard, the Fund will be required
to hold a meeting to elect Trustees to fill any existing vacancies on the
Board if, at any time, fewer than a majority of the Trustees have
49
<PAGE>
been elected by the shareholders of the Fund. In addition, the Declaration of
Trust provides that the holders of not less than two-thirds of the outstanding
shares or other voting interests of the Fund may remove a person serving as
Trustee either by declaration in writing or at a meeting called for such
purpose. The Trustees are required to call a meeting for the purpose of
considering the removal of a person serving as Trustee, if requested in
writing to do so by the holders of not less than 10% of the outstanding shares
or other voting interests of the Fund. The Fund's shares do not have
cumulative voting rights.
CUSTODIAN AND TRANSFER AGENCY AND DIVIDEND DISBURSING SERVICES
Investors Fiduciary Trust Company ("IFTC") serves as Custodian for assets of
the Fund. Pursuant to a sub-custody agreement between IFTC and The Chase
Manhattan Bank ("Chase"), Chase serves as subcustodian of the Fund for the
custody of the foreign securities acquired by the Fund. Under the agreement,
and in accordance with applicable regulations, Chase may hold the foreign
securities at its principal office at One Chase Manhattan Plaza, New York, New
York 10081, at Chase's branches, at a foreign branch of a qualified U.S. bank,
an eligible foreign subcustodian, or an eligible foreign securities
depository. Pursuant to rules or other exemptions under the 1940 Act, the Fund
may maintain foreign securities and cash for the Fund in the custody of
certain eligible foreign banks and securities depositories. Selection of these
foreign custodial institutions is made by Chase under the supervision of the
Board of Trustees.
Pacific Life provides dividend disbursing and transfer agency services to
the Fund.
FINANCIAL STATEMENTS
The financial statements of the Fund as of December 31, 1997, including the
notes thereto, are incorporated by reference in this Statement of Additional
Information from the Annual Report of the Fund dated as of December 31, 1997.
The financial statements have been audited by Deloitte & Touche LLP,
independent auditors, except for information for the Equity Portfolio and Bond
and Income Portfolio for years before 1994, which was audited by other
independent auditors.
INDEPENDENT AUDITORS
Deloitte & Touche LLP serves as the independent auditors for the Fund. The
address of Deloitte & Touche LLP is 695 Town Center Drive, Suite 1200, Costa
Mesa, California 92626.
COUNSEL
Dechert Price & Rhoads, 1775 Eye Street, N.W., Washington, D.C. 20006-2401,
passes upon certain legal matters in connection with the shares offered by the
Fund and also acts as outside counsel to the Fund.
REGISTRATION STATEMENT
This Statement of Additional Information and the Prospectus do not contain
all the information included in the Fund's Registration Statement filed with
the SEC under the Securities Act of 1933 with respect to the securities
offered hereby, certain portions of which have been omitted pursuant to the
rules and regulations of the SEC. The Registration Statement, including the
exhibits filed therewith, may be examined at the offices of the SEC in
Washington, D.C.
Statements contained herein and in the Prospectus as to the contents of any
contract or other documents referred to are not necessarily complete, and, in
each instance, reference is made to the copy of such contract or other
documents filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference.
50
<PAGE>
FORM NO. 15-17595-14
<PAGE>
PACIFIC SELECT FUND
Part C: OTHER INFORMATION
Item 24. Financial Statements and Exhibits
---------------------------------
(a) Financial Statements
Part A:
Financial Highlights
Part B.
The following audited financial statements are incorporated
by reference in Part B from the Annual Report of the Fund
dated as of December 31, 1997;
(1) Statements of Assets and Liabilities
(2) Statements of Operations
(3) Statements of Changes in Net Assets
(4) Notes to Financial Statements
(5) Financial Highlights
(6) Portfolio of Investments
(b) Exhibits
(1)(a) Agreement and Declaration of Trust/4/
(1)(b) Establishment and Designation of Shares of
Beneficial Interest in the Equity Index Series/1/
(2) By-Laws of Registrant/1/
(3) Not Applicable
(4) Instruments Defining Rights of Holders of
Securities/1/
(5)(a) Investment Advisory Agreement/1/
(5)(b) Portfolio Management Agreement - Capital Guardian
Trust Company/1/
(5)(c) Portfolio Management Agreement - Bankers Trust
Company/1/
(5)(d) Portfolio Management Agreement - J.P. Morgan
Investment Management Inc./1/
(5)(e) Portfolio Management Agreement - Janus Capital
Corporation/1/
(5)(f) Portfolio Management Agreement - Morgan Stanley
Asset Management Inc./6/
(5)(g) Portfolio Management Agreement - Alliance Capital
Management L.P.
(5)(h) Portfolio Management Agreement - Goldman Sachs
Asset Management
II-1
<PAGE>
(5)(i) Portfolio Management Agreement - Pacific
Investment Management Company/1/
(5)(j) Portfolio Management Agreement - Blairlogie
Capital Management/1/
(5)(k) Addendum to Portfolio Management Agreement -
Janus Capital Corporation/5/
(5)(l) Addendum to Portfolio Management Agreement -
J.P. Morgan Investment Management Inc./5/
(5)(m) Addendum to Portfolio Management Agreement -
Pacific Investment Management Company/5/
(5)(n) Addendum to Portfolio Management Agreement -
Blairlogie Capital Management/5/
(6)(a) Distribution Agreement/1/
(7) Not Applicable
(8)(a) Custodian Agreement/1/
(8)(b) Custodian Agreement Fee Schedule/5/
(9)(a) Agency Agreement/1/
(9)(b) Participation Agreement/1/
(9)(c) Agreement for Support Services/2/
(10) Opinion and Consent of Counsel/1/
(11) Independent Auditor's Consent
(12) Annual Report - December 31, 1997/3/
(13) Not Applicable
(14) Not Applicable
(15) Not Applicable
(16) Performance Quotation Computations
(17) Financial Data Schedules - December 31, 1997
- ------------
/1/ Included in Registrant's Form Type N1A/A, Accession No. 0000898430-95-
002464 filed on November 22, 1995 and incorporated by reference herein.
/2/ Included in Registrant's Form Type N1A/A, Accession No. 0000898430-96-
000275 filed on February 1, 1996 and incorporated by reference herein.
/3/ Included in Registrant's Form Type N-30D, Accession No. 0001017062-98-
000289 filed on February 13, 1998 and incorporated by reference herein.
/4/ Included in Registrant's Form Type N1A/A, Accession No. 0000898430-96-
000919 filed on March 22, 1996 and incorporated by reference herein.
/5/ Included in Registrant's Form Type N1A/B, Accession No. 0001017062-97-
000728 filed on April 25, 1997 and incorporated by reference herein.
/6/ Included in Registrant's Form Type N1A/A, Accession No. 0001017062-97-
001012 filed on May 16, 1997 and incorporated by reference herein.
Item 25. Persons Controlled by or Under Common Control with Registrant
-------------------------------------------------------------
Pacific Life Insurance Company, on its own behalf and on behalf of its
Separate Account A, Separate Account B, Pacific Select Variable Annuity, Pacific
Select Exec, Pacific COLI, Pacific Select, and Pacific Corinthian Variable
Account Separate Accounts ("Separate Accounts"), owns all of the outstanding
shares of the Series of Registrant. Pacific Life Insurance Company will vote
fund shares in accordance with instructions received from Policy Owners having
interests in the Variable Accounts of its Separate Accounts.
Item 26. Numbers of Holders of Securities
--------------------------------
Pacific Life Insurance Company, on its own behalf and on behalf of its
Separate Account A, Separate Account B, Pacific Select, Pacific Select Variable
Annuity, Pacific Select Exec, Pacific COLI and Pacific Corinthian Variable
Account Separate Accounts, is the sole record owner of securities registered
pursuant to this registration statement.
Item 27. Indemnification
---------------
II-2
<PAGE>
Reference is made to Article V of the Registrant's Declaration of
Trust.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 ("Act") may be permitted to trustees, officers and controlling persons
of the Registrant by the Registrant pursuant to the Declaration of Trust or
otherwise, the Registrant is aware that in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as expressed
in the Act and, therefore, is unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by trustees, officers or controlling
persons of the Registrant in connection with the successful defense of any act,
suit or proceeding) is asserted by such trustees, officers or controlling
persons in connection with the shares being registered, the Registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issues.
Item 28. Business and Other Connections of Investment Adviser
----------------------------------------------------
Each investment adviser, and the trustees or directors and officers of each
investment adviser and their business and other connections are as follows:
<TABLE>
<CAPTION>
Name of Adviser Name of Individual Business and Other Connections
- ------------------------- ----------------------- --------------------------------------------
<S> <C> <C>
Pacific Life Insurance Company
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Name of Adviser Name of Individual Business and Other Connections
- ------------------------- ----------------------- --------------------------------------------
<S> <C> <C>
Pacific Life Thomas C. Sutton Director, Chairman of the Board and Chief
Executive Officer of Pacific Life Insurance
Company, January 1990 to present; Director,
Chairman of the Board and Chief Executive
Officer of Pacific Mutual Holding Company and
Pacific LifeCorp, August 1997 to present;
Director of: Mutual Service Corporation, PM
Group Life Insurance Co.; PM Realty Advisors,
Inc., and similar positions with various
affiliated companies of Pacific Life
Insurance Company; Director of: Newhall Land
& Farming; Edison International; The Irvine
Company and Immediate Past Chairman of the
American Council of Life Insurance; Former
Director of: Pacific Corinthian Life
Insurance Company, Cadence Capital Management
Corporation, NFJ Investment Group, Inc.,
Pacific Financial Asset Management
Corporation, Pacific Investment Management
Company, and Pacific Mutual Distributors,
Inc.
Pacific Life Richard M. Ferry Director of Pacific Life Insurance Company,
1986 to present; Director of Pacific Mutual
Holding Company and Pacific LifeCorp, August
1997 to present; Chairman of: Korn/Ferry
International; Director of: Korn/Ferry
International; Avery Dennison Corporation;
ConAm Management; First Business Bank;
Northwestern Restaurants, Inc.; Dole Food
Company; Mullin Consulting Inc.; Broco, Inc.;
Mrs. Field's Original Cookies, Inc.; and
Rainier Bells, Inc.
Pacific Life Donald E. Guinn Director of Pacific Life Insurance Company,
1984 to present; Director of Pacific Mutual
Holding Company and Pacific LifeCorp, August
1997 to present; Chairman Emeritus and Former
Director of: Pacific Telesis Group; Director
of: The Dial Corporation; Bank of America
NT&SA; BankAmerica Corporation
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
Name of Adviser Name of Individual Business and Other Connections
- ------------------------- ----------------------- --------------------------------------------
<S> <C> <C>
Pacific Life Ignacio E. Lozano, Jr. Director of Pacific Life Insurance Company,
March 1988 to present; Director of
Pacific Mutual Holding Company and Pacific
LifeCorp, August 1997 to present; Former
Chairman and Editor-in-Chief of La Opinion;
Director of: Pacific Enterprises; The
Walt Disney Company
Pacific Life Charles D. Miller Director of Pacific Life Insurance
Company, 1986 to present; Director of Pacific
Mutual Holding Company and Pacific LifeCorp,
August 1997 to present; Chairman, Chief
Executive Officer and Director of
Avery Dennison Corporation; Director of:
Nationwide Health Properties, Inc.;
Edison International; Korn/Ferry International;
Occidental College; Former Director of Great
Western Financial Corporation.
Pacific Life Donn B. Miller Director of Pacific Life Insurance
Company, 1977 to present; Director of Pacific
Mutual Holding Company and Pacific LifeCorp,
August 1997 to present; President,
Chief Executive Officer and Director of
Pearson-Sibert Oil Co. of Texas; Director
of: Automobile Club of Southern
California; The Irvine Company, St.
John's Hospital & Health Center
Foundation.
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
Name of Adviser Name of Individual Business and Other Connections
- ------------------------- ----------------------- --------------------------------------------
<S> <C> <C>
Pacific Life James R. Ukropina Director of Pacific Life Insurance Company,
January 1989 to present; Director of Pacific
Mutual Holding Company and Pacific LifeCorp,
August 1997 to present; Partner with the law
firm of O'Melveney & Meyers; Director of
Lockheed Martin Corporation; and Stanford
University
Pacific Life Raymond L. Watson Director of Pacific Life Insurance
Company, 1975 to present; Director of Pacific
Mutual Holding Company and Pacific LifeCorp,
August 1997 to present; Vice Chairman
and Director of: The Irvine Company; Director of:
The Walt Disney Company; The Mitchell
Energy and Development Company; The Tejon
Ranch; and Irvine Apartment Communities
Pacific Life Glenn S. Schafer Director and President of Pacific Life Insurance
Company, January 1995 to present; Director
and President of Pacific Mutual Holding Company
and Pacific LifeCorp, August 1997 to present;
Director of: PM Group Life Insurance Company;
Mutual Service Corporation; PM Realty Advisors,
Inc.; and similar positions with various
affiliated companies of Pacific Life Insurance
Company; Former Director of Pacific Corinthian
Life Insurance Company; and Pacific Mutual
Distributors, Inc.
Pacific Life Richard M. Rosenberg Director of Pacific Life Insurance Company,
1995 to present; Director of Pacific LifeCorp,
August 1997 to present; Director of Pacific
Mutual Holding Company, October 1997 to present;
Chairman and Chief Executive Officer (Retired)
of BankAmerica Corporation; Director of: Airborne
Express Corporation; BankAmerica Corporation;
Northrop Grumman Corporation;
Potlatch Corporation; Lucille Salter Packard
Children's Hospital at Stanford; UCSF/Stanford
Health Care Center; and SBC Communications;
Former Director of Pacific Telesis Group;
and K-2 Incorporated
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
Name of Adviser Name of Individual Business and Other Connections
- ------------------------- ----------------------- --------------------------------------------
<S> <C> <C>
Pacific Life David R. Carmichael Senior Vice President and General Counsel
of Pacific Life Insurance Company, April
1992 to present; Director of Pacific Life
Insurance Company, August 1997 to present;
Senior Vice President and General Counsel
of Pacific Mutual Holding Company and
Pacific LifeCorp, August 1997 to present;
Director of PM Group Life Insurance Company;
Association of California Health and Life
Insurance Companies; and Association of
Life Insurance Counsel; Former Director of
Pacific Corinthian Life Insurance Company
Pacific Life Audrey L. Milfs Vice President and Corporate Secretary of
Pacific Life Insurance Company, March 1991
to present; Director of Pacific Life
Insurance Company, August 1997 to present;
Vice President and Secretary of Pacific
Mutual Holding Company and Pacific LifeCorp,
August 1997 to present; Secretary to several
affiliated companies of Pacific Mutual Life
Insurance Company; 1981 to present
Pacific Life Edward R. Byrd Vice President and Controller of Pacific
Life Insurance Company, August 1992 to present;
Director, CFO and Treasurer of Pacific Mutual
Distributors, Inc.; Vice President and
Controller of Pacific Mutual Holding Company
and Pacific LifeCorp, August 1997 to present;
and similar positions with various affiliated
companies of Pacific Life Insurance Company
Pacific Life Khanh T. Tran Senior Vice President and Chief Financial
Officer of Pacific Life Insurance Company, June
1996 to present; Director of Pacific Life
Insurance Company, August 1997 to present; Vice
President and Treasurer of Pacific Life Insurance
Company, November 1991 to June 1996; Chief
Financial Officer and Treasurer to several
affiliated companies of Pacific Life, 1990 to
present
Pacific Investment Investment Advisor
Management
Company
("PIMCO")
PIMCO George C. Allan Vice President, PIMCO
PIMCO Tamara J. Arnold, CFA Vice President, PIMCO
PIMCO Denise C. Banno Vice President, PIMCO
PIMCO Leslie A. Barbi Senior Vice President, PIMCO
PIMCO William R. Benz, CFA Managing Director, PIMCO
PIMCO Gregory A. Bishop Vice President, PIMCO
PIMCO John B. Brynjolfsson Vice President, PIMCO
PIMCO Robert W. Burns Executive Vice President, PIMCO Funds
PIMCO Douglas Cummings Vice President, PIMCO
PIMCO Wendy W. Cupps Vice President, PIMCO
PIMCO Charles M. Daniels III Executive Vice President, PIMCO
PIMCO Michael G. Dow Vice President, PIMCO
PIMCO Anita Dunn Vice President, PIMCO
PIMCO David H. Edington Managing Director, PIMCO
</TABLE>
II-7
<PAGE>
<TABLE>
<CAPTION>
Name of Adviser Name of Individual Business and Other Connections
- ---------------------- ----------------------- --------------------------------------------
<S> <C> <C>
PIMCO Benjamin A. Ehlert, CFA, Executive Vice President, PIMCO
CIC
PIMCO Robert A. Ettl Vice President, PIMCO
PIMCO Anthony K. Faillace Vice President, PIMCO
PIMCO Teri Frisch Vice President, PIMCO
PIMCO William H. Gross, CFA Managing Director and Director, PIMCO
PIMCO John L. Hague Managing Director, PIMCO
PIMCO Gordon C. Hally, CIC Executive Vice President, PIMCO
PIMCO Pasi M. Hamalainen Senior Vice President, PIMCO Funds
PMICO John P. Hardaway Vice President, PIMCO Funds
PIMCO Brent R. Harris, CFA Managing Director, PIMCO
PIMCO Joseph Hattersohl Vice President, PIMCO
PIMCO Raymond C. Hayes Vice President, PIMCO
PIMCO David C. Hinman Vice President, PIMCO
PIMCO Lisa Hocson Vice President, PIMCO
PIMCO Douglas M. Hodge, CFA Executive Vice President, PIMCO
PIMCO Brent L. Holden, CFA Executive Vice President, PIMCO
PIMCO Dwight F. Holloway, Jr., Vice President, PIMCO
CFA, CIC
PIMCO Jane T. Howe, CFA Vice President, PIMCO
PIMCO Mark T. Hudoff Vice President, PIMCO
PIMCO Margaret E. Isberg Executive Vice President, PIMCO
PIMCO James M. Keller Vice President, PIMCO
PIMCO Raymond G. Kennedy, CFA Vice President, PIMCO
PIMCO Steven Kirkbaumer Vice President, PIMCO
PIMCO James Kociuba Vice President, PIMCO
PIMCO John S. Loftus, CFA Executive Vice President, PIMCO
PIMCO David Lown Vice President, PIMCO
PIMCO Joseph McDevitt Executive Vice President, PIMCO
PIMCO Dean S. Meiling, CFA Managing Director, PIMCO
PIMCO James F. Muzzy, CFA Managing Director, PIMCO
PIMCO Douglas J. Ongaro Vice President, PIMCO
PIMCO Thomas J. Otterbein, CFA Vice President, PIMCO
PIMCO William F. Podlich III Managing Director, PIMCO
PIMCO William C. Powers Managing Director, PIMCO
PIMCO Frank B. Rabinovitch Managing Director, PIMCO
PIMCO Edward P. Rennie, CFA, CFP Senior Vice President, PIMCO
PIMCO Scott L. Roney, CFA Vice President, PIMCO
PIMCO Michael J. Rosborough Senior Vice President, PIMCO
PIMCO Jeffrey M. Sargent Vice President, PIMCO
PIMCO Ernest L. Schmider Senior Vice President, Chief Administrative
and Legal Officer, PIMCO
PIMCO Leland T. Scholey, CFA Senior Vice President, PIMCO
PIMCO Richard Selby Senior Vice President, PIMCO
PIMCO Rita J. Seymour Vice President, PIMCO
PIMCO Christopher Sullivan, CFA Vice President, PIMCO
PIMCO Lee Thomas Managing Director, PIMCO
PIMCO William S. Thompson, Chief Executive Officer and Managing
Jr. Director, PIMCO
PIMCO Benjamin L. Trosky, CFA Managing Director, PIMCO
</TABLE>
II-8
<PAGE>
<TABLE>
<CAPTION>
Name of Adviser Name of Individual Business and Other Connections
- ------------------------- ----------------------- --------------------------------------------
<S> <C> <C>
PIMCO Marilyn Wegener Vice President, PIMCO
PIMCO Ram Willner Vice President, PIMCO
PIMCO Kristen M. Wilsey, CFA Vice President, PIMCO
PIMCO George H. Wood, CFA Senior Vice President, PIMCO
PIMCO Michael A. Yetter Vice President, PIMCO
PIMCO David Young Vice President, PIMCO
Capital Guardian Trust Investment Advisor
Company
Capital Guardian Trust Andrew F. Barth Director of Capital Guardian Trust
Company Company; Executive Vice President and
Research Manager of Capital Guardian
Research Company
Capital Guardian Trust Michael D. Beckman Senior Vice President, Treasurer and
Company Director, Capital Guardian Trust
Company; Director, Capital Guardian
Trust Company of Nevada
Capital Guardian Trust Larry Paul Director of Capital Guardian Trust
Company Clemmensen Company, American Funds Distributors,
Inc. and American Funds Service
Company; Director and President, The
Capital Group Companies, Inc.; Senior
Vice President and Director, Capital
Research and Management Company; Senior
Vice President and Treasurer, Capital
Income Builder, Inc. and Capital World
Growth & Income Fund, Inc.
Capital Guardian Trust Roberta A. Conroy Senior Vice President, Capital Guardian
Company Trust Company; Assistant General Counsel,
The Capital Group Companies, Inc.
Capital Guardian Trust John B. Emerson Senior Vice President, Capital Guardian
Company Trust Company
Capital Guardian Trust Michael R. Ericksen Senior Vice President, Capital Guardian
Company Trust Company
</TABLE>
II-9
<PAGE>
<TABLE>
<CAPTION>
Name of Adviser Name of Individual Business and Other Connections
- ------------------------- ----------------------- ----------------------------------------------
<S> <C> <C>
Capital Guardian Trust David I. Fisher Chairman of the Board, The Capital Group
Company Companies, Inc. and Capital International
S.A. and Capital Guardian Trust Company;
Vice Chairman of the Board, Capital
Guardian Trust Company, Capital International
Limited, Emerging Markets Growth
Fund, Inc., and Capital International
K.K.; President and Director, Capital
Group International, Inc., Capital
International, Inc. and Capital
International Limited (Bermuda);
Director, Capital Group Research, Inc.,
Capital Research International, Global
Capital Management Limited, New
Perspective Fund, Inc. and EuroPacific
Growth Fund, Inc.
Capital Guardian Trust Richard N. Havas Senior Vice President, Capital Guardian
Company Trust Company; Senior Vice President,
Capital Research International; Vice
President, Capital Research Limited
Capital Guardian Trust Frederick M. Hughes, Jr. Senior Vice President, Capital
Company Guardian Trust Company
Capital Guardian Trust William H. Hurt Senior Vice President and Director,
Company Capital Guardian Trust Company;
Chairman of the Board, Capital Guardian
Trust Company of Nevada and Capital
Strategy Research, Inc.; Director, The
Capital Group Companies, Inc.
Capital Guardian Trust Robert G. Kirby Senior Partner, The Capital Group
Partners L.P.
Capital Guardian Trust Nancy J. Kyle Senior Vice President and Director,
Company Capital Guardian Trust Company
Capital Guardian Trust Karen L. Larson Director, Capital Guardian Trust
Company Company; President, Director, and
Director of Research, Capital Guardian
Research Company; Director, Capital
Group Companies, Inc.
Capital Guardian Trust D. James Martin Director, Capital Guardian Trust
Company Company; Senior Vice President and
Director, Capital Guardian Research
Company
</TABLE>
II-10
<PAGE>
<TABLE>
<CAPTION>
Name of Adviser Name of Individual Business and Other Connections
- ------------------------- ----------------------- --------------------------------------------
<S> <C> <C>
Capital Guardian Trust John R. McIlwraith Senior Vice President and Director,
Company Capital Guardian Trust Company; Senior
Vice President and Director, Capital
International Limited
Capital Guardian Trust James R. Mulally Senior Vice President and Director,
Company Capital Guardian Trust Company; Senior
Vice President, Capital International
Limited; Director, Capital Guardian
Research Company; Vice President, Capital
Research Company
Capital Guardian Trust Shelby Notkin Senior Vice President, Capital
Company Guardian Trust Company
Capital Guardian Trust Mary M. O'Hern Senior Vice President, Capital
Company Guardian Trust Company
Capital Guardian Trust Jeffrey C. Paster Senior Vice President, Capital Guardian
Company Trust Company
Capital Guardian Trust Robert V. Pennington Senior Vice President, Capital Guardian
Company Trust Company; President, Capital
Guardian Trust Company of Nevada
Capital Guardian Trust Jason M. Pilalas Director, Capital Guardian Trust
Company Company; Senior Vice President and
Director, Capital Guardian Research
Company
Capital Guardian Trust Robert Ronus President, Capital Guardian Trust
Company Company; Chairman, Capital Research
International and Capital Guardian
Research Company; Senior Vice
President, Capital International Limited
and Capital International S.A.; Director,
Capital Group International, Inc., Capital
International, Inc., Capital International
Fund
Capital Guardian Trust Theodore R. Samuels Senior Vice President and Director,
Company Capital Guardian Trust Company;
Director, Capital Guardian Research
Company
Capital Guardian Trust John H. Seiter Executive Vice President and Director,
Company Capital Guardian Trust Company; Senior
Vice President, Capital Group
International, Inc.
Capital Guardian Trust Robert L. Spare Senior Vice President, Capital Guardian
Company Trust Company
</TABLE>
II-11
<PAGE>
<TABLE>
<CAPTION>
Name of Adviser Name of Individual Business and Other Connections
- ------------------------- ----------------------- --------------------------------------------
<S> <C> <C>
Capital Guardian Trust Eugene P. Stein Executive Vice President and Director,
Company Capital Guardian Trust Company;
Director, Capital Guardian Research
Company
Capital Guardian Trust Philip A. Swan Senior Vice President, Capital Guardian
Company Trust Company
Capital Guardian Trust Edus H. Warren, Jr. Senior Vice President, Capital Guardian
Company Trust Company; Senior Partner, The Capital
Group Partners L.P.
J.P. Morgan Investment Adviser
Investment
Management Inc.
J.P. Morgan Keith M. Schappert President, Director and Managing
Investment Director, J.P. Morgan Investment
Management Inc. Management Inc.; Managing Director, Morgan
Guaranty Trust Company of New York
J.P. Morgan William L. Cobb, Jr. Vice Chairman, Director, and Managing
Investment Director, J.P. Morgan Investment
Management Inc. Management Inc.; Managing Director,
Morgan Guaranty Trust Company of New York
J.P. Morgan Michael R. Granito Director and Managing Director, J.P. Morgan
Investment Investment Management Inc.; Managing Director,
Management Inc. Morgan Guaranty Trust Company of New York
J.P. Morgan Cary Nicholas Potter Chairman of the Board, J.P. Morgan
Investment Investment Management Inc.
Management Inc.
J.P. Morgan Kenneth W. Anderson Director and Managing Director, J.P.
Investment Morgan Investment Management Inc.;
Management Inc. Managing Director, Morgan Guaranty
Trust Company of New York
J.P. Morgan Robert A. Anselmi Director, Managing Director, and Secretary,
Investment J.P. Morgan Investment Management Inc.;
Management Inc. Assistant Secretary and Managing Director,
Morgan Guaranty Trust Company of New York
J.P. Morgan Jean L.P. Brunel Director and Managing Director, J.P. Morgan
Investment Investment Management Inc.; Managing Director,
Management Inc. J.P. Morgan & Co. Incorporated; Managing
Director, Morgan Guaranty Trust Company
of New York
</TABLE>
II-12
<PAGE>
<TABLE>
<CAPTION>
Name of Adviser Name of Individual Business and Other Connections
- ------------------------- ----------------------- --------------------------------------------
<S> <C> <C>
J.P. Morgan Thomas M. Luddy Director and Managing Director, J.P. Morgan
Investment Investment Management Inc.; Managing Director,
Management Inc. Morgan Guaranty Trust Company of New York
J.P. Morgan Michael E. Patterson Director, J.P. Morgan Investment Management
Investment Inc.; Vice Chairman and Director, J.P. Morgan
Management Inc. & Co. Incorporated; Vice Chairman and Director,
Morgan Guaranty Trust Co. of New York
J.P. Morgan John R. Thomas Director and Managing Director, J.P. Morgan
Investment Investment Management Inc.; Managing Director,
Management Inc. Morgan Guaranty Trust Company of New York
Janus Capital Investment Advisor
Corporation
Janus Capital Thomas H. Bailey President, Director and Chairman of the
Corporation Board 1978 to present, Chief Executive
Officer 1994 to present
Janus Capital James P. Craig, III Director April 1995 to present, Vice
Corporation Chairman and Chief Investment
Officer, December 1997 to present
Janus Capital Michael E. Herman Director, 1984 to present
Corporation
Janus Capital Thomas A. McDonnell Director, 1990 to present
Corporation
Janus Capital Landon H. Rowland Director, January 1996 to present
Corporation
Janus Capital Michael Stolper Director, 1984 to present
Corporation
Janus Capital Mark B. Whiston Vice President and Chief Marketing
Corporation Officer, June 1995 to present
Janus Capital Marjorie G. Hurd Vice President, July 1995 to present,
Corporation Chief Operations Officer, 1996 to present
</TABLE>
II-13
<PAGE>
<TABLE>
<CAPTION>
Name of Adviser Name of Individual Business and Other Connections
- ----------------------- ---------------------- ------------------------------
<S> <C> <C>
Janus Capital Steven R. Goodbarn Treasurer and Chief Financial
Corporation Officer, 1992 to present, Vice
President of Finance, June 1995
to present
Morgan Stanley Asset Investment Adviser
Management, Inc.
Morgan Stanley Asset Barton M. Biggs Director, Chairman and
Management Inc. Managing Director
Morgan Stanley Asset James M. Allwin Director, President and
Management Inc. Managing Director
Morgan Stanley Asset Peter A. Nadosy Director, Vice Chairman and
Management Inc. Managing Director
Morgan Stanley Asset John R. Alkire Managing Director
Management Inc.
Morgan Stanley Asset Francine J. Bovich Managing Director
Management Inc.
Morgan Stanley Asset Stuart J.M. Breslow Managing Director
Management Inc.
Morgan Stanley Asset P. Dominic Caldecott Managing Director
Management Inc.
Morgan Stanley Asset Frances Campion Managing Director
Management Inc.
Morgan Stanley Asset A. Macdonald Caputo Managing Director
Management Inc.
Morgan Stanley Asset Eah Wah Chin Managing Director
Management Inc.
Morgan Stanley Asset Stephen C. Cordy Managing Director
Management Inc.
Morgan Stanley Asset Madhav Dhar Managing Director
Management Inc.
Morgan Stanley Asset Kurt A. Feuerman Managing Director
Management Inc.
Morgan Stanley Asset Paul B. Ghaffari Managing Director
Management Inc.
</TABLE>
<TABLE>
<S> <C> <C>
Morgan Stanley Asset Gordon S. Gray Director and Managing Director
Management Inc.
Morgan Stanley Asset Marianne Laing Hay Managing Director
Management Inc.
Morgan Stanley Asset Gary D. Latainer Managing Director
Management Inc.
Morgan Stanley Asset Maryann K. Maiwald Managing Director
Management Inc.
Morgan Stanley Asset Mahmoud A. Mamdani Managing Director
Management Inc.
Morgan Stanley Asset Robert L. Meyer Managing Director
Management Inc.
Morgan Stanley Asset Margaret P. Naylor Managing Director
Management Inc.
Morgan Stanley Asset Russell C. Platt Managing Director
Management Inc.
Morgan Stanley Asset Robert A. Sargent Managing Director
Management Inc.
Morgan Stanley Asset Vinod R. Sethi Managing Director
Management Inc.
Morgan Stanley Asset Dennis G. Sherva Director and Managing Director
Management Inc.
Morgan Stanley Asset James L. Tanner Managing Director
Management Inc.
Morgan Stanley Asset Horacio A. Valeiras Managing Director
Management Inc.
Morgan Stanley Asset Richard G. Woolworth, Managing Director
Management Inc. Jr.
Morgan Stanley Asset Debra M. Aaron Principal
Management Inc.
</TABLE>
<TABLE>
<S> <C> <C>
Morgan Stanley Asset Warren Ackerman III Principal
Management Inc.
Morgan Stanley Asset Robert E. Angevine Principal
Management Inc.
Morgan Stanley Asset Suzanne S. Akers Principal
Management Inc.
Morgan Stanley Asset Gerald P. Barth- Principal
Management Inc. Wehrenalp
Morgan Stanley Asset William Bentley Principal
Management Inc.
Morgan Stanley Asset Theodore R. Bigman Principal
Management Inc.
Morgan Stanley Asset Richard L. Block Principal
Management Inc.
Morgan Stanley Asset Richard F. Brereton Principal
Management Inc.
Morgan Stanley Asset Andrew C. Brown Principal
Management Inc.
Morgan Stanley Asset Jeffrey P. Brown Principal
Management Inc.
Morgan Stanley Asset Terence P. Carmichael Principal
Management Inc.
Morgan Stanley Asset Arthur Certosimo Principal
Management Inc.
Morgan Stanley Asset Jacqueline A. Day Principal
Management Inc.
Morgan Stanley Asset Raye L. Dube Principal
Management Inc.
</TABLE>
<TABLE>
<S> <C> <C>
Morgan Stanley Asset Abigail Jones Feder Principal
Management Inc.
Morgan Stanley Asset Eugene Flood, Jr. Principal
Management Inc.
Morgan Stanley Asset Thomas C. Frame Principal
Management Inc.
Morgan Stanley Asset Nicoaas Simon Frita Principal
Management Inc. Fiene
Morgan Stanley Asset W. Blair Garff Principal
Management Inc.
Morgan Stanley Asset William B. Gerlach Principal
Management Inc.
Morgan Stanley Asset Perry E. Hall II Principal
Management Inc.
Morgan Stanley Asset Kimberly L. Hirschman Principal
Management Inc.
Morgan Stanley Asset Ruth A. Hughes-Guden Principal
Management Inc.
Morgan Stanley Asset Margaret Kinsley Principal
Management Inc. Johnson
Morgan Stanley Asset James Jolinger Principal
Management Inc.
Morgan Stanley Asset Michael F. Klein Principal
Management Inc.
Morgan Stanley Asset George Koshy Principal
Management Inc.
Morgan Stanley Asset Michael B. Kushma Principal
Management Inc.
Morgan Stanley Asset Arthur J. Lev Principal
Management Inc.
</TABLE>
<TABLE>
<S> <C> <C>
Morgan Stanley Asset Khoon-Min Lim Principal
Management Inc.
Morgan Stanley Asset Marianne J. Lippman Principal
Management Inc.
Morgan Stanley Asset William David Lock Principal
Management Inc.
Morgan Stanley Asset Gordon W. Loery Principal
Management Inc.
Morgan Stanley Asset Yvonne Longley Principal
Management Inc.
Morgan Stanley Asset Andrew Mack Principal
Management Inc.
Morgan Stanley Asset Gary J. Mangino Principal
Management Inc.
Morgan Stanley Asset Angelo G. Manioudakis Principal
Management Inc.
Morgan Stanley Asset Jeffrey Margolis Principal
Management Inc.
Morgan Stanley Asset M. Paul Martin Principal
Management Inc.
Morgan Stanley Asset Walter Maynard, Jr. Principal
Management Inc.
Morgan Stanley Asset Alexis E. McCarthy Principal
Management Inc.
Morgan Stanley Asset Yoshiro Okawa Principal
Management Inc.
Morgan Stanley Asset Christopher G. Petrow Principal
Management Inc.
Morgan Stanley Asset Akash Frakash Principal
Management Inc.
</TABLE>
<TABLE>
<S> <C> <C>
Morgan Stanley Asset Narayan Ramachandran Principal
Management Inc.
Morgan Stanley Asset Gail Hunt Reeke Principal
Management Inc.
Morgan Stanley Asset Christine I. Reilly Principal
Management Inc.
Morgan Stanley Asset Stefano Russo Principal
Management Inc.
Morgan Stanley Asset Bruce R. Sandberg Principal
Management Inc.
Morgan Stanley Asset Kiat Seng Seah Principal
Management Inc.
Morgan Stanley Asset Roberto M. Sella Principal
Management Inc.
Morgan Stanley Asset Stephen C. Sexauer Principal
Management Inc.
Morgan Stanley Asset Andy B. Skov Principal
Management Inc.
Morgan Stanley Asset Robert M. Smith Principal
Management Inc.
Morgan Stanley Asset Kim I. Spellman Principal
Management Inc.
Morgan Stanley Asset Joseph F. Stadler Principal
Management Inc.
Morgan Stanley Asset Kunihiko Sugio Principal
Management Inc.
Morgan Stanley Asset Ram K. Sundaram Principal
Management Inc.
Morgan Stanley Asset Joseph Y.S. Tern Principal
Management Inc.
</TABLE>
<TABLE>
<S> <C> <C>
Morgan Stanley Asset Roberto Vedovotto Principal
Management Inc.
Morgan Stanley Asset Marjorie M. Wilcox Principal
Management Inc.
Morgan Stanley Asset Philip W. Winters Principal
Management Inc.
Morgan Stanley Asset Bruce Wolfe Principal
Management Inc.
Morgan Stanley Asset Peter John Wright Principal
Management Inc.
Morgan Stanley Asset Alford E. Zick, Jr. Principal
Management Inc.
Morgan Stanley Asset Maryann Savadelis Agre Vice President
Management Inc.
Morgan Stanley Asset Peter Aliprantis Vice President
Management Inc.
Morgan Stanley Asset Jeffrey Alvino Vice President
Management Inc.
Morgan Stanley Asset Alistair Anderson Vice President
Management Inc.
Morgan Stanley Asset William S. Auslander Vice President
Management Inc.
Morgan Stanley Asset Kimberly L. Austin Vice President
Management Inc.
Morgan Stanley Asset Marshall T. Bassett Vice President
Management Inc.
Morgan Stanley Asset Joseph C. Benedetti Vice President
Management Inc.
Morgan Stanley Asset Frank J. Biondo Vice President
Management Inc.
</TABLE>
<TABLE>
<S> <C> <C>
Morgan Stanley Asset Richard Boon Vice President
Management Inc.
Morgan Stanley Asset Geraldine Boyle Vice President
Management Inc.
Morgan Stanley Asset Paul Boyne Vice President
Management Inc.
Morgan Stanley Asset L. Kenneth Brooks Vice President
Management Inc.
Morgan Stanley Asset Jonathan Paul Vice President
Management Inc. Buckeridge
Morgan Stanley Asset Wendy M. Cambor Vice President
Management Inc.
Morgan Stanley Asset Jacqueline M. Carr Vice President
Management Inc.
Morgan Stanley Asset Stefanie V. Chang Vice President
Management Inc.
Morgan Stanley Asset Mari M. Chezen Vice President
Management Inc.
Morgan Stanley Asset Lori A. Cohane Vice President
Management Inc.
Morgan Stanley Asset Jennifer C. Cole Vice President
Management Inc.
Morgan Stanley Asset William T. Corcoran Vice President
Management Inc.
Morgan Stanley Asset Kate Cornish-Bowden Vice President
Management Inc.
Morgan Stanley Asset Joseph C.S. D'Souza Vice President
Management Inc.
Morgan Stanley Asset Janet E. Day Vice President
Management Inc.
</TABLE>
<TABLE>
<S> <C> <C>
Morgan Stanley Asset Jan-Willem Adriaan Vice President
Management Inc. De Gues
Morgan Stanley Asset Nathalie Francoise Vice President
Management Inc. Degans
Morgan Stanley Asset Nancy J. Deutsch Vice President
Management Inc.
Morgan Stanley Asset Nikhil Dhaon Vice President
Management Inc.
Morgan Stanley Asset John F. Dougherty Vice President
Management Inc.
Morgan Stanley Asset Mimi B. Drake Vice President
Management Inc.
Morgan Stanley Asset Christine H. du Bois Vice President
Management Inc.
Morgan Stanley Asset Paul A. Durose Vice President
Management Inc.
Morgan Stanley Asset Steve Epstein Vice President
Management Inc.
Morgan Stanley Asset Richard S. Farden Vice President
Management Inc.
Morgan Stanley Asset Karen T. Frost Vice President
Management Inc.
Morgan Stanley Asset Lisa Gallo Vice President
Management Inc.
Morgan Stanley Asset Ramalingam Ganesh Vice President
Management Inc.
Morgan Stanley Asset Kaushik Ghosh Vice President
Management Inc.
Morgan Stanley Asset Josephine M. Glass Vice President
Management Inc.
</TABLE>
<TABLE>
<S> <C> <C>
Morgan Stanley Asset Charles A. Golden Vice President
Management Inc.
Morgan Stanley Asset Dimitri Goulandris Vice President
Management Inc.
Morgan Stanley Asset James A. Grasselino Vice President
Management Inc.
Morgan Stanley Asset Kenneth John Greig Vice President
Management Inc.
Morgan Stanley Asset Maureen A. Grover Vice President
Management Inc.
Morgan Stanley Asset Michael Hewett Vice President
Management Inc.
Morgan Stanley Asset Kenneth R. Holley Vice President
Management Inc.
Morgan Stanley Asset Joseph P. Hondros Vice President
Management Inc.
Morgan Stanley Asset Holly D. Hopps Vice President
Management Inc.
Morgan Stanley Asset Etsuko Fuyeya Jennings Vice President
Management Inc.
Morgan Stanley Asset Donald B. Johnston Vice President
Management Inc.
Morgan Stanley Asset Karen D. Kalinowski Vice President
Management Inc.
Morgan Stanley Asset Jaideep Khanna Vice President
Management Inc.
Morgan Stanley Asset Peter L. Kirby Vice President
Management Inc.
Morgan Stanley Asset Paul Koske Vice President
Management Inc.
</TABLE>
<TABLE>
<S> <C> <C>
Morgan Stanley Asset Daniel R. Lascano Vice President
Management Inc.
Morgan Stanley Asset Valerie Y. Lewis Vice President
Management Inc.
Morgan Stanley Asset Thomas J. Machowski Vice President
Management Inc.
Morgan Stanley Asset Marion S. Mitchell Vice President
Management Inc.
Morgan Stanley Asset Yogesh Prabbakar Modak Vice President
Management Inc.
Morgan Stanley Asset Paula J. Morgan Vice President
Management Inc.
Morgan Stanley Asset Nancy Morton Vice President
Management Inc.
Morgan Stanley Asset Cyril Moulle-Berteaux Vice President
Management Inc.
Morgan Stanley Asset John C. Murphy Vice President
Management Inc.
Morgan Stanley Asset Clare K. Muton Vice President
Management Inc.
Morgan Stanley Asset Terumi Nagata Vice President
Management Inc.
Morgan Stanley Asset Bradley Okita Vice President
Management Inc.
Morgan Stanley Asset James M. Olness Vice President
Management Inc.
Morgan Stanley Asset Martin O. Pearce Vice President
Management Inc.
Morgan Stanley Asset Alexander A. Pena Vice President
Management Inc.
</TABLE>
<TABLE>
<S> <C> <C>
Morgan Stanley Asset Anthony J. Pesce Vice President
Management Inc.
Morgan Stanley Asset Sheila R. Piernock Vice President
Management Inc.
Morgan Stanley Asset Karen Post Vice President
Management Inc.
Morgan Stanley Asset Paul C. Psaila Vice President
Management Inc.
Morgan Stanley Asset Vazquez Sergio Rivera Vice President
Management Inc.
Morgan Stanley Asset Gregg A. Robinson Vice President
Management Inc.
Morgan Stanley Asset Gerald D. Rubin Vice President
Management Inc.
Morgan Stanley Asset Donald P. Ryan Vice President
Management Inc.
Morgan Stanley Asset Kenneth M. Schlechter Vice President
Management Inc.
Morgan Stanley Asset Neil Siegel Vice President
Management Inc.
Morgan Stanley Asset Ashutosh Sinha Vice President
Management Inc.
Morgan Stanley Asset Michael James Smith Vice President
Management Inc.
Morgan Stanley Asset Christian K. Stadlinger Vice President
Management Inc.
Morgan Stanley Asset David Stanley Vice President
Management Inc.
Morgan Stanley Asset Catherine Steinhardt Vice President
Management Inc.
</TABLE>
<TABLE>
<S> <C> <C>
Morgan Stanley Asset Keiko Tamaki-Kuroda Vice President
Management Inc.
Morgan Stanley Asset Shunso Tatsumi Vice President
Management Inc.
Morgan Stanley Asset Louise Temple Vice President
Management Inc.
Morgan Stanley Asset Landon Thomas Vice President
Management Inc.
Morgan Stanley Asset Richard Boon Hwee Teh Vice President
Management Inc.
Morgan Stanley Asset Hiroshi Ueda Vice President
Management Inc.
Morgan Stanley Asset K.N. Vaidyanathan Vice President
Management Inc.
Morgan Stanley Asset Epco Diederik Van Vice President
Management Inc. Der Lende
Morgan Stanley Asset Oscar Jan Vermeulen Vice President
Management Inc.
Morgan Stanley Asset Willem Pieter Vinke Vice President
Management Inc.
Morgan Stanley Asset Dennis J. Walsh Vice President
Management Inc.
Morgan Stanley Asset Jacob Walthour Vice President
Management Inc.
Morgan Stanley Asset Patricia Woo Vice President
Management Inc.
Morgan Stanley Asset Hajime Yokoyama Vice President
Management Inc.
Morgan Stanley Asset Harold J. Schaaff, Jr. Principal, General Counsel
Management Inc. and Secretary
</TABLE>
<TABLE>
<S> <C> <C>
Morgan Stanley Asset Eileen K. Murray Treasurer
Management Inc.
Morgan Stanley Asset Madeline D. Barkhorn Assistant Secretary
Management Inc.
Morgan Stanley Asset Charlene R. Herzer Assistant Secretary
Management Inc.
</TABLE>
II-14
<PAGE>
<TABLE>
<CAPTION>
Name of Adviser Name of Individual Business and Other Connections
- ------------------------- ----------------------- --------------------------------------------
<S> <C> <C>
Bankers Trust Trust Company
Company ("Bankers
Trust")
Bankers Trust George B. Beitzel Director of Bankers Trust and Bankers
Trust New York Corporation
Bankers Trust William R. Howell Director of Bankers Trust and Bankers
Trust New York Corporation
Bankers Trust Lee A. Ault Director of Bankers Trust and Bankers
Trust New York Corporation
Bankers Trust Vernon E. Jordan, Jr. Director of Bankers Trust and Bankers
Trust New York Corporation
Bankers Trust Hamish Maxwell Director of Bankers Trust and Bankers
Trust New York Corporation
Bankers Trust N.J. Nicholas, Jr. Director of Bankers Trust and Bankers
Trust New York Corporation
Bankers Trust Russell E. Palmer Director of Bankers Trust and Bankers
Trust New York Corporation
Bankers Trust Frank N. Newman Chairman of the Board and Chief Executive
Officer and President of Bankers Trust
and Bankers Trust New York Corporation
Bankers Trust Patricia Carry Stewart Director of Bankers Trust and Bankers
Trust New York Corporation
Bankers Trust Phillip A. Griffiths Director of Bankers Trust and Bankers
Trust New York Corporation
Bankers Trust Donald L. Staheli Director of Bankers Trust and Bankers
Trust New York Corporation
Bankers Trust Paul A. Volcker Director of Bankers Trust and Bankers
Trust New York Corporation
Bankers Trust Neil R. Austrian Director of Bankers Trust and Bankers
Trust New York Corporation
Bankers Trust G. Richard Thomas Director of Bankers Trust and Bankers
Trust New York Corporation
</TABLE>
II-15
<PAGE>
<TABLE>
<CAPTION>
Name of Adviser Name of Individual Business and Other Connections
- ------------------------- ----------------------- --------------------------------------------
<S> <C> <C>
Bankers Trust George J. Vojta Vice Chairman of the Board of Bankers
Trust and Bankers Trust New York
Corporation
Goldman Sachs Asset Investment Adviser
Management
Goldman Sachs Asset Jon S. Corzine Chief Executive Officer
Management
Goldman Sachs Asset Robert J. Hurst Managing Director
Management
Goldman Sachs Asset Henry M. Paulson, Jr. Chief Operating Officer
Management
Goldman Sachs Asset John A. Thain Chief Financial Officer
Management
Goldman Sachs Asset John L. Thornton Managing Director
Management
Goldman Sachs Asset Roy J. Zuckerberg Managing Director
Management
</TABLE>
II-16
<PAGE>
<TABLE>
<CAPTION>
Name of Adviser Name of Individual Business and Other Connections
- ------------------------- ----------------------- --------------------------------------------
<S> <C> <C>
Blairlogie Capital Investment Advisor
Management
("Blairlogie")
Blairlogie Gavin Dobson Managing Director, Chief Executive
Officer and Limited Partner, Blairlogie
Capital Management
Blairlogie James Smith Managing Director, Chief Investment
Officer and Limited Partner, Blairlogie
Capital Management
</TABLE>
II-17
<PAGE>
<TABLE>
<CAPTION>
Name of Adviser Name of Individual Business and Other Connections
- -------------------------------- ------------------------------- ---------------------------------------------------------
<S> <C> <C>
Alliance Capital Management L.P. Dave H. Williams Chairman of the Board, Chief Executive Officer and
Director; Director of The Equitable Companies
Incorporated; Director of The Equitable Life Assurance
Society of the United States
Alliance Capital Management L.P. Benjamin D. Holloway Director and Financial Consultant
Alliance Capital Management L.P. Joseph J. Melone Director; President, Chief Executive Officer and Director
of The Equitable Companies Incorporated; Chairman,
President and Chief Executive Officer of The Equitable
Life Assurance Society of the United States
Alliance Capital Management L.P. Claude Bebear Director; Chairman of the Executive Board and Chief
Executive Officer of AXA-UAP; Chairman of The Equitable
Companies Incorporated
Alliance Capital Management L.P. Denis Duverne Director; Director of Alliance Capital Management
Corporation; Senior Vice President - International Life
of AXA-UAP
Alliance Capital Management L.P. Jean-Pierre Hellebuyck Director; Chairman of AXA-UAP
Alliance Capital Management L.P. Frank Savage Director; Senior Vice President of The Equitable Life
Assurance Society of the United States
Alliance Capital Management L.P. Luis J. Bastida Director; Chief Financial Officer and Member of the
Executive Committee of Banco Bilbao Vizcaya
Alliance Capital Management L.P. Henri de la Croix de la Castries Director; Senior Executive Vice President - Financial
Services and Life Insurance Activities of AXA-UAP
Alliance Capital Management L.P. Kevin C. Dolan Director; Senior Vice President of AXA-UAP
Alliance Capital Management L.P. Reba W. Williams Director, Special Projects and Art Historian
Alliance Capital Management L.P. Peter D. Noris Director; Executive Vice President and Chief Investment
Officer of The Equitable Life Assurance Society of the
United States
Alliance Capital Management L.P. Robert B. Zoellick Director; Executive Vice President of Fannie Mae
Alliance Capital Management L.P. Donald H. Brydon Director
Alliance Capital Management L.P. Edward D. Miller Director; President, Chief Executive Officer and Director
of The Equitable Companies Incorporated; Chairman of the
Board and Chief Executive Officer of The Equitable Life
Assurance Society of the United States
Alliance Capital Management L.P. Stanley B. Tullin Director
Alliance Capital Management L.P. John D. Carifa Director, President and Chief Operating Officer
Alliance Capital Management L.P. Bruce W. Calvert Director, Vice Chairman and Chief Investment Officer
Alliance Capital Management L.P. Alfred Harrison Director and Vice Chairman
Alliance Capital Management L.P. David R. Brewer, Jr. Senior Vice President, General Counsel and Secretary
Alliance Capital Management L.P. Robert H. Joseph, Jr. Senior Vice President and Chief Financial Officer
Alliance Capital Management L.P. Mark R. Manley Vice President, Counsel, Compliance Officer and Assistant
Secretary
</TABLE>
Item 29. Principal Underwriters
----------------------
(a) Pacific Mutual Distributors, Inc. ("PMD") member, NASD & SIPC
serves as Distributor of Shares of Pacific Select Fund. PMD is a
subsidiary of Pacific Life.
(b)
<TABLE>
<CAPTION>
Name and Principal****** Positions and Offices Positions and Offices
Business Address with Underwriter with Registrant
- ------------------------- ------------------------- ---------------------
<S> <C> <C>
Kathy R. Gough Assistant Vice None
President, Compliance
Audrey L. Milfs Secretary Secretary
Edward R. Byrd Chief Financial Officer, None
Treasurer and Director
Joseph P. Ruiz Vice President None
</TABLE>
II-18
<PAGE>
<TABLE>
<CAPTION>
Name and Principal/7/ Positions and Offices Positions and Offices
Business Address with Underwriter with Registrant
- ------------------------- --------------------------- ---------------------
<S> <C> <C>
Gerald W. Robinson Chairman, CEO and Director None
John L. Dixon President and Director None
</TABLE>
Item 30. Location of Accounts and Records
--------------------------------
The accounts, books and other documents required to be maintained by
Registrant pursuant to Section 31(a) of the Investment Company Act of 1940
and the rules under that section will be maintained by Pacific Life at
700 Newport Center Drive, Newport Beach, California 92660.
Item 31. Management Services
-------------------
Not applicable
Item 32. Undertakings
------------
The registrant hereby undertakes:
(a) Not applicable
(b) Not applicable
(c) Registrant hereby undertakes to furnish each person to whom a
prospectus is delivered with a copy of Registrant's latest annual report to
shareholders upon request and without charge.
- -----------------
/7/ Principal business address for all individuals listed is 700 Newport
Center Drive, Newport Beach, California 92660
II-19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Post-
Effective Amendment No. 21 to the Registration Statement to be signed on its
behalf by the undersigned thereunto duly authorized, in the City of Newport
Beach, and State of California, on this day of February 27, 1998.
PACIFIC SELECT FUND
By:
__________________________________
Thomas C. Sutton*
President
*By: /s/ DIANE N. LEDGER
_______________________________
Diane N. Ledger
as attorney-in-fact
II-20
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, this Post-
Effective Amendment No. 21 to the Registration Statement has been signed below
by the following persons in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
Chairman and President , 1998
- ------------------------------------ (Chief Executive Officer) -----------
Thomas C. Sutton*
Vice President and Treasurer , 1998
- ------------------------------------ (Assistant Vice President) -----------
Brian D. Klemens*
/s/ Glenn S. Schafer Trustee February 27, 1998
- ------------------------------------ (President)
Glenn S. Schafer
Trustee , 1998
- ------------------------------------ -----------
Richard L. Nelson*
Trustee , 1998
- ------------------------------------ -----------
Lyman W. Porter*
Trustee , 1998
- ------------------------------------ -----------
Alan Richards*
* By: /s/ DIANE N. LEDGER February 27, 1998
____________________________________
Diane N. Ledger
as attorney-in-fact
</TABLE>
PART C
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
above constitutes and appoints David R. Carmichael, Sharon A. Cheever, Diane N.
Ledger, Jeffrey S. Puretz, Paul F. Roye, and Robin Yonis-Sandlaufer his or her
true and lawful attorney-in-fact and agent, each with full power of substitution
and resubstitution for him or her in his or her name, place and stead, in any
and all Registration Statements applicable to Pacific Select Fund and any
amendments or supplements thereto, and to file the same, with all exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorney-in-fact and agent full power
and authority to do and perform each and every act and thing requisite and
necessary to be done, as fully to all intents and purposes as he or she might or
could do in person, hereby ratifying and confirming all that said attorney-in-
fact and agent, or his or her substitute or substitutes, may lawfully do or
cause to be done by virtue thereof.
*(Powers of Attorney are contained in Registrant's Form Type N1A/A, Accession
No. 0000898430-95-002463 filed on November 22, 1995 and Power of Attorney for
Mr. Klemens is contained in Registrant's Form Type N1A/B, Accession No.
0001017062-97-000728 filed on April 25, 1997)
II-21
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Number Exhibit Name
-------------- ------------
<S> <C>
99.5(f) Portfolio Management Agreement - Alliance Capital
Management L.P.
99.5(g) Portfolio Management Agreement - Goldman Sachs Asset
Management
99.11 Accountant's Consent
99.16 Performance Quotation Computations
99.17 Financial Data Schedules (EDGAR Exhibit EX-27)
</TABLE>
<PAGE>
EXHIBIT 99.5(f)
Portfolio Management Agreement
<PAGE>
EXHIBIT 99.5(f)
PORTFOLIO MANAGEMENT AGREEMENT
AGREEMENT made this ___ day of _______________, 1998 between Pacific Life
Insurance Company ("Adviser"), a California corporation, and Alliance Capital
Management L.P. ("Portfolio Manager"), a limited partnership organized and
existing under the laws of the State of Delaware, and the Pacific Select Fund
(the "Fund"), a Massachusetts Business Trust.
WHEREAS, the Fund is registered with the Securities and Exchange
Commission ("SEC") as an open-end, management investment company under the
Investment Company Act of 1940, as amended (the "1940 Act"); and
WHEREAS, the Fund is authorized to issue shares of beneficial interest
("Shares") in separate Portfolios, with each such portfolio representing
interests in a separate portfolio; and
WHEREAS, the Fund currently offers multiple Portfolios, one of which is
designated as the Aggressive Equity Portfolio, such Portfolio together with any
other Portfolio subsequently established by the Fund, with respect to which the
Fund and Adviser desire to retain the Portfolio Manager to render investment
advisory services hereunder, and with respect to which the Portfolio Manager is
willing to do so, being herein collectively referred to also as the "Portfolio";
and
WHEREAS, the Adviser is registered as an investment adviser under the
Investment Advisers Act of 1940 ("Advisers Act"); and
WHEREAS, the Portfolio Manager is registered with the SEC as an investment
adviser under the Advisers Act; and
WHEREAS, the Fund has retained the Adviser to render investment advisory
services to the Portfolio pursuant to an Advisory Agreement, as amended, and
such Agreement authorizes the Adviser to engage Portfolio Manager to discharge
the Adviser's responsibilities with respect to the investment management of the
Portfolio, a copy of which has been provided to the Portfolio Manager and is
incorporated by reference herein; and
WHEREAS, the Fund and the Adviser desire to retain the Portfolio Manager to
furnish investment advisory services to one or more Portfolios of the Fund, and
the Portfolio Manager is willing to furnish such services to such Portfolio and
the Adviser in the manner and on the terms hereinafter set forth; and
NOW THEREFORE, in consideration of the premises and the promises and mutual
covenants herein contained, it is agreed between the Fund, the Adviser, and the
Portfolio Manager as follows:
1
<PAGE>
1. Appointment. The Fund and the Adviser hereby appoint Alliance Capital
------------
Management L.P. to act as Portfolio Manager to the Aggressive Equity Portfolio
("the Portfolio") for the periods and on the terms set forth in this Agreement.
The Portfolio Manager accepts such appointment and agrees to furnish the
services herein set forth for the compensation herein provided.
In the event the Adviser wishes to retain the Portfolio Manager to render
investment advisory services to one or more Portfolio other than the Portfolio,
the Adviser shall notify the Portfolio Manager in writing. If the Portfolio
Manager is willing to render such services, it shall notify the Fund and Adviser
in writing, whereupon such portfolio shall become a Portfolio hereunder, and be
subject to this Agreement.
2. Portfolio Manager Duties. Subject to the supervision of the Fund's
-------------------------
Board of Trustees and the Adviser, the Portfolio Manager will provide a
continuous investment program for the Portfolio and determine the composition of
the assets of the Portfolio, including determination of the purchase, retention,
or sale of the securities, cash, and other investments, including futures
contracts and options thereon, for the Portfolio. The Portfolio Manager will
provide investment research and analysis, which may consist of computerized
investment methodology, and will conduct a continuous program of evaluation,
investment, sales, and reinvestment of the Portfolio's assets by determining the
securities and other investments that shall be purchased, entered into, sold,
closed, or exchanged for the Portfolio, when these transactions should be
executed, and what portion of the assets of the Portfolio should be held in the
various securities and other investments in which it may invest, and the
Portfolio Manager is hereby authorized to execute and perform such services on
behalf of the Portfolio. To the extent permitted by the investment policies of
the Portfolio, the Portfolio Manager shall make decisions for the Portfolio as
to foreign currency matters and make determinations as to the retention or
disposition of foreign currencies or securities or other instruments denominated
in foreign currencies, or derivative instruments based upon foreign currencies,
including forward foreign currency contracts and options and futures on foreign
currencies and shall execute and perform the same on behalf of the Portfolio.
The Portfolio Manager is authorized to exercise tender offers, exchange offers
and to vote proxies on behalf of the Fund, each as the Portfolio Manager
determines is in the best interest of the Fund. In performing these duties, the
Portfolio Manager:
(a) Will (1) manage the Portfolio so that it will qualify as a
regulated investment company under Subchapter M of the Internal Revenue Code
("IRC") and (2) manage the Portfolio so as to ensure compliance by the Portfolio
with the diversification requirements of Section 817(h) of the IRC and
Regulations issued thereunder. The Adviser will notify the Portfolio Manager of
any amendments to Section 817(h) of the IRC and Regulations issued thereunder.
In managing the Portfolio in accordance with these requirements, the Portfolio
Manager shall be entitled to receive and act upon advice of counsel to the Fund,
counsel to the Adviser, or counsel to the Portfolio Manager that is also
acceptable to the Adviser.
(b) Shall conform with (1) the 1940 Act and all rules and regulations
thereunder, and releases and interpretations related thereto (including any no-
action letters and exemptive orders which have been granted by the SEC to the
Fund, the Adviser or the Portfolio Manager), (2) with all other applicable
federal and state laws and regulations pertaining to the investment activities
of
2
<PAGE>
investment vehicles underlying variable annuity and/or variable life insurance
contracts, (3) with any applicable procedures, policies and guidelines adopted
by the Fund's Board of Trustees, (4) with the Portfolio's objectives, investment
policies and investment restrictions as stated in the Fund's Prospectus and
Statement of Additional Information, and (5) with the provisions of the Fund's
Registration Statement filed on Form N-1A under the Securities Act of 1933 (the
"1933 Act") and the 1940 Act, as supplemented or amended from time to time.
Until the Adviser delivers any supplements or amendments to the Portfolio
Manager, the Portfolio Manager shall be fully protected in relying on the Fund's
Registration Statement previously furnished to the Portfolio Manager by the
Adviser.
(c) Will: (i) use its best efforts to identify each position in the
Portfolio that constitutes stock in a Passive Foreign Investment Company
("PFIC"), as that term is defined in Section 1296 of the Internal Revenue Code,
and (ii) make such determinations and inform the Adviser at least annually, (or
more often and by such date(s) as the Adviser shall request), of any stock in a
PFIC.
(d) Is responsible, in connection with its responsibilities under this
Section 2, for decisions to buy and sell securities and other investments for
the Portfolio, for broker-dealer and futures commission merchant ("FCM")
selection, and for negotiation of commission rates. The Portfolio Manager's
primary consideration in effecting a security or other transaction will be to
obtain the best execution for the Portfolio, taking into account the factors
specified in the Prospectus and Statement of Additional Information for the
Fund, as they may be amended or supplemented from time to time. Subject to such
policies as the Board of Trustees may determine and consistent with Section
28(e) of the Securities Exchange Act of 1934, the Portfolio Manager shall not be
deemed to have acted unlawfully or to have breached any duty created by this
Agreement or otherwise solely by reason of its having caused the Portfolio to
pay a broker or dealer, acting as agent, for effecting a portfolio transaction
at a price in excess of the amount of commission another broker or dealer would
have charged for effecting that transaction, if the Portfolio Manager determines
in good faith that such amount of commission was reasonable in relation to the
value of the brokerage and research services provided by such broker or dealer,
viewed in terms of either that particular transaction or the Portfolio Manager's
(or its affiliates) overall responsibilities with respect to the Portfolio and
to its other clients as to which it exercises investment discretion. To the
extent consistent with these standards, and in accordance with Section 11(a) of
the Securities Exchange Act of 1934 and Rule 11a2-2(T) thereunder, and subject
to any other applicable laws and regulations including Section 17(e) of the 1940
Act, the Portfolio Manager is further authorized to place orders on behalf of
the Portfolio through the Portfolio Manager if the Portfolio Manager is
registered as a broker or dealer with the SEC or as a FCM with the Commodities
Futures Trading Commission ("CFTC"), to any of its affiliates that are brokers
or dealers or FCMs or such other entities which provide similar services in
foreign countries, or to such brokers or dealers that also provide research or
statistical research and material, or other services to the Portfolio or the
Portfolio Manager. Such allocation shall be in such amounts and proportions as
the Portfolio Manager shall determine consistent with the above standards, and,
upon request, the Portfolio Manager will report on said allocation to the
Adviser and Board of Trustees of the Fund, indicating the brokers, dealers or
FCMs to which such allocations have been made and the basis therefor.
3
<PAGE>
(e) When the purchase or sale of a security is deemed to be in the best
interest of the Portfolio as well as any other investment advisory clients, to
the extent permitted by applicable laws and regulations, but shall not be
obligated to, aggregate the securities to be so sold or purchased with those of
its other clients where such aggregation is not inconsistent with the policies
set forth in the Fund's Registration Statement. In such event, allocation of
the securities so purchased or sold, as well as the expenses incurred in the
transaction, will be made by the Portfolio Manager in a manner that is fair and
equitable in the judgment of the Portfolio Manager in the exercise of its
fiduciary obligations to the Fund and to such other clients.
(f) Will, in connection with the purchase and sale of securities for
the Portfolio, together with the Adviser, arrange for the transmission to the
custodian and recordkeeping agent for the Fund, on a daily basis, such
confirmation(s), trade tickets, and other documents and information, including,
but not limited to, Cusip, Sedol, or other numbers that identify securities to
be purchased or sold on behalf of the Portfolio, as may be reasonably necessary
to enable the custodian and recordkeeping agent to perform its administrative
and recordkeeping responsibilities with respect to the Portfolio, and with
respect to portfolio securities to be purchased or sold through the Depository
Trust Company, will arrange for the automatic transmission of the confirmation
of such trades to the Fund's custodian, and recordkeeping agent, and, if
required, the Adviser.
(g) Will assist the custodian and recordkeeping agent for the Fund in
determining or confirming, consistent with the procedures and policies stated in
the Registration Statement for the Fund, the value of any portfolio securities
or other assets of the Portfolio for which the custodian and recordkeeping agent
seeks assistance from the Portfolio Manager or identifies for review by the
Portfolio Manager. In this regard, the Portfolio Manager may be required, if
requested by the Fund's Adviser or custodian and recordkeeping agent, to obtain
and provide broker and/or market-maker quotations, to verify prices obtained
from Fund pricing sources, to price portfolio securities for which there is no
readily available market and/or to take such other actions as may be required to
insure the Fund is valued at fair market value in accordance with the Fund's
pricing procedures.
(h) Will make available to the Fund and the Adviser promptly upon
request, any of the Portfolio's investment records and ledgers maintained by the
Portfolio Manager (which shall not include the records and ledgers maintained by
the custodian and recordkeeping agent for the Fund), as are necessary to assist
the Fund and the Adviser to comply with requirements of the 1940 Act and the
Advisers Act, as well as other applicable laws, and will furnish to regulatory
authorities having the requisite authority any information or reports in
connection with such services which may be requested in order to ascertain
whether the operations of the Fund are being conducted in a manner consistent
with applicable laws and regulations.
(i) Will regularly report to the Fund's Board of Trustees on the
investment program for the Portfolio and the issuers and securities represented
in the Portfolio's Portfolio, and will furnish the Fund's Board of Trustees with
respect to the portfolio such periodic and special reports as the Trustees and
the Adviser may reasonably request.
4
<PAGE>
(j) Will not disclose or use any records or information obtained
pursuant to this Agreement (excluding investment research and investment advice)
in any manner whatsoever except as expressly authorized in this Agreement or in
the ordinary course of business in connection with placing orders for the
purchase and sale of securities or obtaining investment licenses in various
countries or the opening of custody accounts and dealing with settlement agents
in various countries, and will keep confidential any information obtained
pursuant to the Agreement, and disclose such information only if the Board of
Trustees of the Fund has authorized such disclosure, or if such disclosure is
required by applicable federal or state law or regulations or regulatory
authorities having the requisite authority. The Fund and the Adviser will not
disclose or use any records or information respecting the Portfolio Manager
obtained pursuant to this Agreement in any manner whatsoever except as expressly
authorized in this Agreement, and will keep confidential any information
obtained pursuant to this Agreement, and disclose such information only as
expressly authorized in this Agreement, if the Board of Trustees of the Fund has
authorized such disclosure, or if such disclosure is required by applicable
federal or state law or regulations or regulatory authorities having the
requisite authority.
(k) Shall not permit any employee of the Portfolio Manager to have any
material connection with the handling of the Portfolio if such employee has:
(i) been convicted, in the last ten (10) years, of any felony or
misdemeanor involving the purchase or sale of any security or arising out of
such person's conduct as an underwriter, broker, dealer, investment adviser,
municipal securities dealer, government securities broker, government securities
dealer, transfer agent, or entity or person required to be registered under the
Commodity Exchange Act, or as an affiliated person, salesperson, or employee of
any investment company, bank, insurance company, or entity or person required to
be registered under the Commodity Exchange Act; or
(ii) been permanently or temporarily enjoined by reason of any
misconduct, by order, judgment, or decree of any court of competent jurisdiction
from acting as an underwriter, broker, dealer, investment adviser, municipal
securities dealer, government securities broker, government securities dealer,
transfer agent, or entity or person required to be registered under the
Commodity Exchange Act, or as an affiliated person, salesperson or employee of
any investment company, bank, insurance company, or entity or person required to
be registered under the Commodity Exchange Act, or from engaging in or
continuing any conduct or practice in connection with any such activity or in
connection with the purchase or sale of any security.
(l) Shall provide to Adviser a copy of Portfolio Manager's Form ADV as
filed with the SEC and a list of persons who Portfolio Manager wishes to have
authorized to give written and/or oral instructions to custodians of Fund assets
for the Portfolio.
(m) The Portfolio Manager agrees that it will notify the Fund and the
Adviser of any change in the membership of the general partnership of the
Portfolio Manager.
5
<PAGE>
3. Disclosure about Portfolio Manager. The Portfolio Manager has reviewed
----------------------------------
the current Registration Statement for the Fund filed with the SEC and
represents and warrants that, with respect to the disclosure about the Portfolio
Manager or information relating, directly or indirectly, to the Portfolio
Manager, such Registration Statement contains, as of the date hereof, no untrue
statement of any material fact and does not omit any statement of a material
fact which was required to be stated therein or necessary to make the statements
contained therein not misleading. The Portfolio Manager further represents and
warrants that it is a duly registered investment adviser under the Advisers Act
and a duly registered investment adviser in all states in which the Portfolio
Manager is required to be registered. The Adviser has received a current copy
of the Portfolio Manager's Uniform Application for Investment Adviser
Registration on Form ADV, as filed with the SEC. On an annual basis, (or more
frequently if requested by the Adviser or the Fund's Board of Trustees) the
Portfolio Manager agrees to provide the Adviser with current copies of the
Portfolio Manager's Form ADV, and any supplements or amendments thereto, as
filed with the SEC.
4. Expenses. During the term of this Agreement, the Portfolio Manager
--------
will pay all expenses incurred by it and its staff and for their activities in
connection with its services under this Agreement. The Portfolio Manager shall
not be responsible for, including but not limited to, any of the following:
(a) Expenses of all audits by the Fund's independent public
accountants;
(b) Expenses of the Fund's transfer agent, registrar, dividend
disbursing agent, and shareholder recordkeeping services;
(c) Expenses of the Fund's custodial services including recordkeeping
services provided by the custodian;
(d) Expenses of the Fund's recordkeeping services provided by the
recordkeeping agent;
(e) Expenses of obtaining quotations for calculating the value of the
Portfolio's net assets;
(f) Expenses of obtaining portfolio activity reports for the Portfolio;
(g) Expenses of maintaining the Fund's tax records;
(h) Salaries and other compensation of any of the Fund's executive
officers and employees, if any, who are not officers, directors, stockholders,
or employees of the Portfolio Manager or its subsidiaries or affiliates (except
that the Adviser, or any of its subsidiaries or affiliates, shall bear the
expense with respect to executive officers and employees, if any, who are
officers, directors, stockholders or employees of the Adviser or of its
subsidiaries or affiliates);
(i) Taxes, if any, levied against the Fund or any of its Portfolios;
6
<PAGE>
(j) Brokerage fees and commissions in connection with the purchase and
sale of portfolio securities for the Portfolio;
(k) Costs, including the interest expenses, of borrowing money;
(l) Costs and/or fees incidental to meetings of the Fund's
shareholders, the preparation and mailings of proxy statements, prospectuses,
statements of additional information and reports of the Fund to its
shareholders, the filing of reports with regulatory bodies, the maintenance of
the Fund's existence, and the registration of shares with federal and state
securities or insurance authorities;
(m) The Fund's legal fees, including the legal fees related to the
registration and continued qualification of the Fund's shares for sale;
(n) Costs of printing "share" stock certificates, if any, representing
shares of the Fund;
(o) Trustees' fees and expenses of Trustees of the Fund who are not
officers, employees, or stockholders of the Portfolio Manager or any affiliate
thereof (except that the Adviser shall bear the expense of any Trustee who is an
officer, employee, or stockholder of the Adviser or any affiliate thereof);
(p) The Fund's fidelity bond required by Section 17(g) of the 1940 Act,
or other insurance premiums;
(q) Association membership dues;
(r) Extraordinary expenses of the Fund as may arise including expenses
incurred in connection with litigation, proceedings and other claims and the
legal obligations of the Fund to indemnify its Trustees, officers, employees,
shareholders, distributors, and agents with respect thereto (unless Portfolio
Manager is responsible for such expenses under Section 14 of this Agreement);
and
(s) Organizational and offering expenses and, if applicable,
reimbursement (with interest) of underwriting discounts and commissions.
5. Compensation. For the services provided and the expenses borne by the
------------
Portfolio Manager pursuant to this Agreement, the Adviser will pay to the
Portfolio Manager a fee in accordance with the Fee Schedule attached to this
Agreement. This fee will be computed and accrued daily and payable monthly.
6. Seed Money. The Adviser agrees that the Portfolio Manager shall not be
----------
responsible for providing money for the initial capitalization of any Portfolio.
7
<PAGE>
7. Compliance.
----------
(a) The Portfolio Manager agrees that it shall immediately notify the
Adviser and the Fund in the event (i) that the SEC has censured the Portfolio
Manager; placed limitations upon its activities, functions or operations;
suspended or revoked its registration as an investment adviser; or has commenced
proceedings or an investigation that can reasonably be expected to result in any
of these actions, (ii) upon having a reasonable basis for believing that a
Portfolio has ceased to qualify or might not qualify as a regulated investment
company under Subchapter M of the Internal Revenue Code, and (iii) upon having a
reasonable basis for believing that the Portfolio has ceased to comply with the
diversification provisions of Section 817(h) of the IRC or the Regulations
thereunder. The Portfolio Manager further agrees to notify the Adviser and the
Fund immediately of any material fact known to the Portfolio Manager respecting
or relating to the Portfolio Manager that is not contained in the Registration
Statement or prospectus for the Fund, or any amendment or supplement thereto, or
of any statement contained therein that becomes untrue in any material respect.
(b) The Adviser agrees that it shall immediately notify the Portfolio
Manager in the event (i) that the SEC has censured the Adviser or the Fund;
placed limitations upon either of their activities, functions, or operations;
suspended or revoked the Adviser's registration as an investment adviser; or has
commenced proceedings or an investigation that may result in any of these
actions, (ii) upon having a reasonable basis for believing that a Portfolio has
ceased to qualify or might not qualify as a regulated investment company under
Subchapter M of the Internal Revenue Code, and (iii) upon having a reasonable
basis for believing that the Portfolio has ceased to comply with the
diversification provisions of Section 817(h) of the IRC or the Regulations
thereunder.
8. Independent Contractor. The Portfolio Manager shall for all purposes
----------------------
herein be deemed to be an independent contractor and shall, unless otherwise
expressly provided herein or authorized by the Adviser from time to time, have
no authority to act for or represent the Adviser in any way or otherwise be
deemed its agent. The Portfolio Manager understands that unless provided herein
or authorized from time to time by the Fund, the Portfolio Manager shall have no
authority to act for or represent the Fund in any way or otherwise be deemed the
Fund's Agent.
9. Books and Records. In compliance with the requirements of Rule 31a-3
-----------------
under the 1940 Act, the Portfolio Manager hereby agrees that all records which
it maintains for the Portfolio are the property of the Fund and further agrees
to surrender promptly to the Fund any of such records upon the Fund's or the
Adviser's request, although the Portfolio Manager may, at its own expense, make
and retain a copy of such records. The Portfolio Manager further agrees to
preserve for the periods prescribed by Rule 31a-2 under the 1940 Act the records
required to be maintained by Rule 31a-1 under the 1940 Act with respect to its
activities as Portfolio Manager and to preserve such records required by Rule
204-2 under the Advisers Act for the period specified in the Rule.
10. Cooperation. Each party to this Agreement agrees to cooperate with
-----------
each other party and with all appropriate governmental authorities having the
requisite jurisdiction (including, but not limited to, the SEC and state
insurance authorities) in connection with any investigation or inquiry relating
to this Agreement or the Fund.
8
<PAGE>
11. Responsibility and Control. Notwithstanding any other provision of
--------------------------
this Agreement, it is understood and agreed that the Fund shall at all times
retain the ultimate responsibility for and control of all functions performed
pursuant to this Agreement and reserves the right to direct, approve or
disapprove any action hereunder taken on its behalf by the Portfolio Manager.
12. Services Not Exclusive. It is understood that the services of the
----------------------
Portfolio Manager are not exclusive, and nothing in this Agreement shall prevent
the Portfolio Manager (or its affiliates) from providing similar services to
other clients, including investment companies (whether or not their investment
objectives and policies are similar to those of the Portfolio) or from engaging
in other activities.
13. Liability. Except as provided in Section 14 and as may otherwise be
---------
required by the 1940 Act or the rules thereunder or other applicable law, the
Fund and the Adviser agree that the Portfolio Manager, any affiliated person of
the Portfolio Manager, and each person, if any, who, within the meaning of
Section 15 of the 1933 Act, controls the Portfolio Manager shall not be liable
for, or subject to any damages, expenses, or losses in connection with, any act
or omission connected with or arising out of any services rendered under this
Agreement, except by reason of willful misfeasance, bad faith, or gross
negligence in the performance of the Portfolio Manager's duties, or by reason of
reckless disregard of the Portfolio Manager's obligations and duties under this
Agreement.
14. Indemnification.
---------------
(a) The Portfolio Manager agrees to indemnify and hold harmless, the
Adviser, any affiliated person within the meaning of Section 2(a)(3) of the 1940
Act ("affiliated person") of the Adviser, and each person, if any, who, within
the meaning of Section 15 of the 1933 Act, controls ("controlling person") the
Adviser (collectively, "Adviser Indemnified Persons") against any and all
losses, claims, damages, liabilities or litigation (including legal and other
expenses), to which the Adviser or such affiliated person or controlling person
may become subject under the 1933 Act, 1940 Act, the Advisers Act, under any
other statute, at common law or otherwise, arising out of the Portfolio
Manager's responsibilities to the Fund which (i) may be based upon any willful
misfeasance, bad faith, or gross negligence of, or by reckless disregard of, the
Portfolio Manager's obligations and/or duties under this Agreement by the
Portfolio Manager or by any of its directors, officers or employees, or any
affiliate acting on behalf of the Portfolio Manager (other than an Adviser
Indemnified Person), or (ii) may be based upon any untrue statement or alleged
untrue statement of a material fact contained in a registration statement or
prospectus covering the shares of the Fund or any Portfolio, or any amendment
thereof or any supplement thereto, or the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, if such a statement or omission was made in
reliance upon information furnished in writing to the Adviser, the Fund, or any
affiliated person of the Fund for the purpose of inclusion in such registration
statements by the Portfolio Manager or any affiliated person of the Portfolio
Manager (other than a Adviser Indemnified Person); provided, however, that in no
case is the Portfolio Manager's indemnity in favor of the Adviser or any
affiliated person or controlling person of the Adviser deemed to protect such
person against any liability to which any
9
<PAGE>
such person would otherwise be subject by reason of willful misfeasance, bad
faith, or gross negligence in the performance of his or her duties, or by reason
of his or her reckless disregard of obligation and duties under this Agreement.
(b) The Adviser agrees to indemnify and hold harmless the Portfolio
Manager, any affiliated person within the meaning of Section 2(a)(3) of the 1940
Act of the Portfolio Manager and each person, if any, who, within the meaning of
Section 15 of the 1933 Act controls ("controlling person") the Portfolio Manager
(collectively, "Portfolio Manager Indemnified Persons") against any and all
losses, claims, damages, liabilities or litigation (including legal and other
expenses) to which a Portfolio Manager Indemnified Person may become subject
under the 1933 Act, the 1940 Act, the Advisers Act, under any other statute, at
common law or otherwise, arising out of the Adviser's responsibilities as
adviser of the Fund which (i) may be based upon any willful misfeasance, bad
faith or gross negligence by the Adviser, any of its employees or any affiliate
acting on behalf of the Adviser (other than a Portfolio Manager Indemnified
Person) or (ii) may be based upon any untrue statement or alleged untrue
statement of a material fact contained in the Registration Statement or
prospectus covering Shares of the Fund or any Portfolio, or any amendment
thereof or any supplement thereto, or the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statement therein not misleading, unless such statement or omission was made in
reliance upon written information furnished to the Fund or the Adviser or any
affiliated person of the Adviser by a Portfolio Manager Indemnified Person
(other than an Adviser Indemnified Person); provided however, that in no case is
the indemnity of the Adviser in favor of the Portfolio Manager Indemnified
Persons deemed to protect such person against any liability to which any such
person would otherwise be subject by reason of willful misfeasance, bad faith,
or gross negligence in the performance of his duties, or by reason of his
reckless disregard of obligations and duties under this Agreement.
15. Duration and Termination. This Agreement shall become effective as of
------------------------
the date of execution first written above, and shall continue in effect for two
years from such date and continue thereafter on an annual basis with respect to
the Portfolio; provided that such annual continuance is specifically approved at
least annually (a) by the vote of a majority of the Board of Trustees of the
Fund, or (b) by the vote of a majority of the outstanding voting shares of the
Portfolio, and provided that continuance is also approved by the vote of a
majority of the Board of Trustees of the Fund who are not parties to this
Agreement or "interested persons" (as such term is defined in the 1940 Act) of
the Fund, the Adviser, or the Portfolio Manager, cast in person at a meeting
called for the purpose of voting on such approval. This Agreement may not be
materially amended without a majority vote of the outstanding shares (as defined
in the 1940 Act) of the Portfolio. This Agreement may be terminated:
(a) by the Fund at any time with respect to the services provided by
the Portfolio Manager, without the payment of any penalty, forfeiture,
compulsory buyout amount, or performance of any other obligation which could
deter termination, by vote of a majority of the entire Board of Trustees of the
Fund or by a vote of a majority of the outstanding voting shares of the Fund or,
with respect to a particular Portfolio, by vote of a majority of the outstanding
voting shares of such Portfolio, on 60 days' written notice to the Portfolio
Manager and the Adviser;
10
<PAGE>
(b) by the Portfolio Manager at any time, without the payment of any
penalty, forfeiture, compulsory buyout amount or performance of any other
obligation which could deter termination, upon 60 days' written notice to the
Adviser and the Fund.
(c) by the Adviser at any time, without the payment of any penalty,
forfeiture, compulsory buyout amount or performance of any other obligation
which could deter termination, upon 60 days' written notice to the Portfolio
Manager and the Fund.
However, any approval of this Agreement by the holders of a majority of the
outstanding shares (as defined in the 1940 Act) of a particular Portfolio shall
be effective to continue this Agreement with respect to such Portfolio
notwithstanding (a) that this Agreement has not been approved by the holders of
a majority of the outstanding shares of any other Portfolio or (b) that this
Agreement has not been approved by the vote of a majority of the outstanding
shares of the Fund, unless such approval shall be required by any other
applicable law or otherwise. In the event of termination for any reason, all
records of the Portfolio(s) shall promptly be returned to the Adviser or the
Fund, free from any claim or retention of rights in such record by the Portfolio
Manager, although the Portfolio Manager may, at its own expense, make and retain
a copy of such records. This Agreement will terminate automatically in event of
its assignment (as that term is defined in the 1940 Act), but shall not
terminate in connection with any transaction not deemed an assignment within the
meaning of Rules 2a-6 under the 1940 Act, or any other rule adopted by the SEC
regarding transactions not deemed to be assignments. In the event this
Agreement is terminated or is not approved in the manner described above, the
Sections or Paragraphs numbered 2(h), 2(j), 9, 10, 11, 13, 14 and 16 of this
Agreement as well as any applicable provision of this Paragraph numbered 15
shall remain in effect.
16. Use of Name.
-----------
(a) It is understood that the name "Pacific Life Insurance Company" or
"Pacific Life", or "Pacific Select Fund" or any derivative thereof or logo
associated with that name is the valuable property of the Adviser and its
affiliates, and that the Portfolio Manager has the right to use such name (or
derivative or logo) only with the prior written approval of the Adviser and only
so long as the Adviser is an investment adviser to the Fund and/or the
Portfolio. Upon termination of the Investment Advisory Agreement between the
Fund and the Adviser, the Portfolio Manager shall forthwith cease to use such
name (or derivative or logo).
(b) It is understood that the name "Alliance Capital Management L.P."
or "Alliance Capital" or any derivative thereof or logo associated with that
name is the valuable property of the Portfolio Manager and that the Adviser has
the right to use such name (or derivative or logo), in offering materials of the
Fund and/or Portfolio with the approval of the Portfolio Manager and for so long
as the Portfolio Manager is a Portfolio Manager to the Fund and/or the
Portfolio. Upon termination of this Agreement between the Fund, the Adviser and
the Portfolio Manager, the Fund and the Adviser shall forthwith cease to use
such name (or derivative or logo).
11
<PAGE>
(c) Neither the Fund nor the Advisers shall use the Portfolio Manager's
name in promotional or sales related materials prepared by or on behalf of the
Adviser or the Fund, without prior review and approval by the Portfolio Manager,
which may not be unreasonably withheld.
17. Limitation of Liability. A copy of the Amended and Restated Agreement
-----------------------
and Declaration of Trust for the Fund is on file with the Secretary of the
Commonwealth of Massachusetts. The Agreement and Declaration of Trust has been
executed on behalf of the Fund by a Trustee of the Fund in his capacity as
Trustee of the Fund and not individually. The obligations of this Agreement
shall be binding upon the assets and property of the Fund and shall not be
binding upon any Trustee, officer, employee, agent or shareholder, whether past,
present, or future, of the Fund individually.
18. Miscellaneous.
-------------
(a) This Agreement shall be governed by the laws of California,
provided that nothing herein shall be construed in a manner inconsistent with
the 1940 Act, the Advisers Act or rules or orders of the SEC thereunder. The
term "affiliate" or "affiliated person" as used in this Agreement shall mean
"affiliated person" as defined in Section 2(a)(3) of the 1940 Act.
(b) The captions of this Agreement are included for convenience only
and in no way define or limit any of the provisions hereof or otherwise affect
their construction or effect.
(c) To the extent permitted under Section 15 of this Agreement, this
Agreement may only be assigned by any party with prior written consent of the
other parties.
(d) If any provision of this Agreement shall be held or made invalid by
a court decision, statute, rule or otherwise, the remainder of this Agreement
shall not be affected thereby, and to this extent, the provisions of this
Agreement shall be deemed to be severable. To the extent that any provision of
this Agreement shall be held or made invalid by a court decision, statute, rule
or otherwise with regard to any party hereunder, such provisions with respect to
other parties hereto shall not be affected thereby.
(e) This Agreement may be executed in several counterparts, each of
which shall be deemed to be an original, and all such counterparts shall
together constitute one and the same Agreement.
12
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed as of the day and year first written above.
PACIFIC LIFE INSURANCE COMPANY
Attest: By:
____________________________________ _____________________________
Title: Title:
By:
_____________________________
Title:
ALLIANCE CAPITAL MANAGEMENT L.P.
BY: ALLIANCE CAPITAL MANAGEMENT
CORP., GENERAL PARTNER
Attest: By:
____________________________________ _____________________________
Title: Title:
PACIFIC SELECT FUND
Attest: By:
____________________________________ _____________________________
Title: Title:
13
<PAGE>
PACIFIC SELECT FUND
FEE SCHEDULE
Portfolio: Aggressive Equity
Fee:
The Adviser will pay to the Portfolio Manager a monthly fee based on the average
daily net assets of this Portfolio at an annual rate equal to:
.60% of the first $100 million
.45% on the next $400 million
.40% on excess over $500 million
14
<PAGE>
EXHIBIT 99.5(g)
Portfolio Management Agreement
<PAGE>
EXHIBIT 99.5(g)
PORTFOLIO MANAGEMENT AGREEMENT
AGREEMENT made this 1st day of May, 1998 between Pacific Life Insurance
--- ----
Company ("Adviser"), a California corporation, and Goldman Sachs Asset
Management, a separate operating division of Goldman Sachs & Co. ("Portfolio
Manager"), a partnership organized and existing under the laws of the State of
New York, and Pacific Select Fund (the "Fund"), a Massachusetts Business Trust.
WHEREAS, the Fund is registered with the Securities and Exchange
Commission ("SEC") as an open-end, management investment company under the
Investment Company Act of 1940, as amended (the "1940 Act"); and
WHEREAS, the Fund is authorized to issue shares of beneficial interest
("Shares") in separate portfolios, with each such portfolio representing
interests in a separate portfolio; and
WHEREAS, the Fund currently offers multiple Portfolios, two of which are
designated as the Equity Portfolio and the Bond and Income Portfolio, such
Portfolios together with any other Portfolios subsequently established by the
Fund, with respect to which the Fund and Adviser desire to retain the Portfolio
Manager to render investment advisory services hereunder, and with respect to
which the Portfolio Manager is willing to do so, being herein collectively
referred to also as the "Portfolios"; and
WHEREAS, the Adviser is registered as an investment adviser under the
Investment Advisers Act of 1940 ("Advisers Act"); and
WHEREAS, the Portfolio Manager is registered with the SEC as an investment
adviser under the Advisers Act; and
WHEREAS, the Fund has retained the Adviser to render investment advisory
services to the Portfolios pursuant to an Advisory Agreement, as amended, and
such Agreement authorizes the Adviser to engage Portfolio Manager to discharge
the Adviser's responsibilities with respect to the investment management of the
Portfolios, a copy of which has been provided to the Portfolio Manager and is
incorporated by reference herein; and
WHEREAS, the Fund and the Adviser desire to retain the Portfolio Manager to
furnish investment advisory services to one or more Portfolios of the Fund and
the Portfolio Manager is willing to furnish such services to such Portfolios and
the Adviser in the manner and on the terms hereinafter set forth; and
NOW THEREFORE, in consideration of the premises and the promises and mutual
covenants herein contained, it is agreed between the Fund, the Adviser, and the
Portfolio Manager as follows:
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<PAGE>
1. Appointment. The Fund and the Adviser hereby appoint Goldman Sachs
------------
Asset Management to act as Portfolio Manager to the Equity Portfolio and the
Bond and Income Portfolio ("the Portfolios") for the periods and on the terms
set forth in this Agreement. The Portfolio Manager accepts such appointment and
agrees to furnish the services herein set forth for the compensation herein
provided.
In the event the Adviser wishes to retain the Portfolio Manager to render
investment advisory services to one or more portfolios other than the
Portfolios, the Adviser shall notify the Portfolio Manager in writing. If the
Portfolio Manager is willing to render such services, it shall notify the Fund
and Adviser in writing, whereupon such portfolio shall become a Portfolio
hereunder, and be subject to this Agreement.
2. Portfolio Manager Duties. Subject to the supervision of the Fund's
-------------------------
Board of Trustees and the Adviser, the Portfolio Manager will provide a
continuous investment program for the Portfolios and determine the composition
of the assets of the Portfolios, including determination of the purchase,
retention, or sale of the securities, cash, and other investments, including
futures contracts and options thereon, for the Portfolios. The Portfolio
Manager will provide investment research and analysis, which may consist of
computerized investment methodology, and will conduct a continuous program of
evaluation, investment, sales, and reinvestment of the Portfolios' assets by
determining the securities and other investments that shall be purchased,
entered into, sold, closed, or exchanged for the Portfolios, when these
transactions should be executed, and what portion of the assets of the
Portfolios should be held in the various securities and other investments in
which it may invest, and the Portfolio Manager is hereby authorized to execute
and perform such services on behalf of the Portfolios. To the extent permitted
by the investment policies of the Portfolios, the Portfolio Manager shall make
decisions for the Portfolios as to foreign currency matters and make
determinations as to the retention or disposition of foreign currencies or
securities or other instruments denominated in foreign currencies, or derivative
instruments based upon foreign currencies, including forward foreign currency
contracts and options and futures on foreign currencies and shall execute and
perform the same on behalf of the Portfolios. The Portfolio Manager is
authorized to exercise tender offers, exchange offers and to vote proxies on
behalf of the Fund, each as the Portfolio Manager determines is in the best
interest of the Fund. In performing these duties, the Portfolio Manager:
(a) Shall conform with (1) the 1940 Act and all rules and regulations
thereunder, and releases and interpretations related thereto (including any no-
action letters and exemptive orders which have been granted by the SEC to the
Fund and/or the Adviser, provided that the Fund or Adviser notifies Portfolio
Manager of any conditions set forth therein, or any no-action letters and
exemptive orders which have been granted to the Portfolio Manager) which the
Portfolio Manager shall provide copies of to the Fund and the Adviser, (2) with
all other applicable federal and state laws and regulations pertaining to
investment vehicles underlying variable annuity and/or variable life insurance
contracts, provided Adviser informs Portfolio Manager of all applicable state
insurance laws relating to the investment and management of the Portfolios,
including restrictions or limitations on
2
<PAGE>
investments in the Portfolios, and further provided that Adviser promptly
notifies Portfolio Manager of any changes in such laws or requirements, (3) any
applicable procedures, policies and/or guidelines, including but not limited to
diversification procedures, adopted by the Fund's Board of Trustees,or
implemented by the Adviser with respect to Portfolio Manager; provided that with
respect to procedures governing transactions involving affiliates (such as those
adopted pursuant to 1940 Act Rules 17a-7, 17e-1 and 10f-3), such procedures will
identify any affiliate of the Adviser and the Fund, other than affiliates of the
Portfolio Manager, (4) with the Portfolios' objectives, investment policies and
investment restrictions as stated in the Fund's Prospectus and Statement of
Additional Information ("SAI"), and (5) with the provisions of the Fund's
Registration Statement filed on Form N-1A under the Securities Act of 1933 (the
"1933 Act") and the 1940 Act, as supplemented or amended from time to time.
Until the Adviser delivers any supplements or amendments to the Portfolio
Manager, the Portfolio Manager shall be fully protected in relying on the Fund's
Registration Statement previously furnished to the Portfolio Manager by the
Adviser.
(b) Is responsible, in connection with its responsibilities under this
Section 2, for decisions to buy and sell securities and other investments for
the Portfolios, for broker-dealer and futures commission merchant ("FCM")
selection, and for negotiation of commission rates. The Portfolio Manager's
primary consideration in effecting a security or other transaction will be to
obtain the best execution for the Portfolios, taking into account the factors
specified in the Prospectus and SAI for the Fund, as they may be amended or
supplemented from time to time. Subject to such policies as the Board of
Trustees may determine and consistent with Section 28(e) of the Securities
Exchange Act of 1934, the Portfolio Manager shall not be deemed to have acted
unlawfully or to have breached any duty created by this Agreement or otherwise
solely by reason of its having caused the Portfolio to pay a broker or dealer,
acting as agent, for effecting a portfolio transaction at a price in excess of
the amount of commission another broker or dealer would have charged for
effecting that transaction, if the Portfolio Manager determines in good faith
that such amount of commission was reasonable in relation to the value of the
brokerage and research services provided by such broker or dealer, viewed in
terms of either that particular transaction or the Portfolio Manager's (or its
affiliates) overall responsibilities with respect to the Portfolios and to its
other clients as to which it exercises investment discretion. To the extent
consistent with these standards, and in accordance with Section 11(a) of the
Securities Exchange Act of 1934 and Rule 11a2-2(T) thereunder, and subject to
any other applicable laws and regulations including Section 17(e) of the 1940
Act, the Portfolio Manager is further authorized to place orders on behalf of
the Portfolios through the Portfolio Manager or any affiliate thereof if the
Portfolio Manager or its affiliate is registered as a broker or dealer with the
SEC or as a FCM with the Commodities Futures Trading Commission ("CFTC"), to any
of its affiliates that are brokers or dealers or FCMs or such other entities
which provide similar services in foreign countries, or to such brokers or
dealers that also provide research or statistical research and material, or
other services to the Portfolios or the Portfolio Manager. Such allocation
shall be in such amounts and proportions as the Portfolio Manager shall
determine consistent with the above standards, and, upon request, the Portfolio
Manager will report on said allocation to the Adviser and Board of Trustees of
the Fund, indicating the brokers, dealers or FCMs to which such allocations have
been made and the basis therefor.
3
<PAGE>
(c) May, on occasion when the purchase or sale of a security is deemed
to be in the best interest of a Portfolio as well as any other investment
advisory clients, to the extent permitted by applicable laws and regulations,
but shall not be obligated to, aggregate the securities to be so sold or
purchased with those of its other clients where such aggregation is not
inconsistent with the policies set forth in the Fund's Registration Statement.
In such event, allocation of the securities so purchased or sold, as well as the
expenses incurred in the transaction, will be made by the Portfolio Manager in a
manner that is fair and equitable in the judgment of the Portfolio Manager in
the exercise of its fiduciary obligations to the Fund and to such other clients.
(d) Will, in connection with the purchase and sale of securities for
the Portfolios, together with the Adviser, arrange for the transmission to the
custodian and recordkeeping agent for the Fund, on a daily basis, such
confirmation(s), trade tickets, and other documents and information, including,
but not limited to, Cusip, Sedol, or other numbers that identify securities to
be purchased or sold on behalf of the Portfolio, as may be reasonably necessary
to enable the custodian and recordkeeping agent to perform its administrative
and recordkeeping responsibilities with respect to the Portfolios, and with
respect to portfolio securities to be purchased or sold through the Depository
Trust Company, will arrange for the automatic transmission of the confirmation
of such trades to the Fund's custodian, and recordkeeping agent, and, if
required, the Adviser.
(e) Will assist the custodian and recordkeeping agent for the Fund in
determining or confirming, consistent with the procedures and policies stated in
the Registration Statement for the Fund, the value of any portfolio securities
or other assets of the Portfolios for which the custodian and recordkeeping
agent seeks assistance from the Portfolio Manager or identifies for review by
the Portfolio Manager. In this regard, the Portfolio Manager may be required,
if requested by the Fund's Adviser or custodian and recordkeeping agent, to
obtain and provide broker and/or market-maker quotations, to verify prices
obtained from Fund pricing sources, to price portfolio securities for which
there is no readily available market and/or to take such other actions as may be
required to ensure the Fund is valued at fair market value in accordance with
the Fund's pricing procedures.
(f) Will make available to the Fund and the Adviser promptly upon
request, any of the Portfolios' investment records and ledgers maintained by the
Portfolio Manager (which shall not include the records and ledgers maintained by
the custodian and recordkeeping agent for the Fund), as are necessary to assist
the Fund and the Adviser to comply with requirements of the 1940 Act and the
Advisers Act, as well as other applicable laws, and will furnish to regulatory
authorities having the requisite authority any information or reports in
connection with such services which may be requested in order to ascertain
whether the operations of the Fund are being conducted in a manner consistent
with applicable laws and regulations.
(g) Will regularly report to the Fund's Board of Trustees on the
investment program for the Portfolios and the issuers and securities represented
in the Portfolios' portfolios, and will furnish the Fund's Board of Trustees
with respect to the portfolio such periodic and special reports as the Trustees
and the Adviser may reasonably request.
4
<PAGE>
(h) Will not disclose or use any records or information obtained
pursuant to this Agreement (excluding investment research and investment advice)
in any manner whatsoever except as expressly authorized in this Agreement or in
the ordinary course of business in connection with placing orders for the
purchase and sale of securities or obtaining investment licenses in various
countries or the opening of custody accounts and dealing with settlement agents
in various countries, and will keep confidential any information obtained
pursuant to the Agreement, and disclose such information only if the Board of
Trustees of the Fund has authorized such disclosure, or if such disclosure is
otherwise made public or is required by applicable federal or state law or
regulations or regulatory authorities having the requisite authority, or as may
be required by the legal process or in connection with any litigation arising
out of the subject matter of this Agreement. The Fund and the Adviser will not
disclose or use any records or information respecting the Portfolio Manager
obtained pursuant to this Agreement in any manner whatsoever except as expressly
authorized in this Agreement, and will keep confidential any information
obtained pursuant to this Agreement, and disclose such information only as
expressly authorized in this Agreement, if the Board of Trustees of the Fund has
authorized such disclosure, or if such disclosure is otherwise made public or is
required by applicable federal or state law or regulations or regulatory
authorities having the requisite authority, or as may be required by the legal
process or in connection with any litigation arising out of the subject matter
of this Agreement.
(i) Shall not permit any employee of the Portfolio Manager to have any
material connection with the handling of the Portfolios if such employee has:
(i) been convicted, in the last ten (10) years, of any felony or
misdemeanor involving the purchase or sale of any security or arising out of
such person's conduct as an underwriter, broker, dealer, investment adviser,
municipal securities dealer, government securities broker, government securities
dealer, transfer agent, or entity or person required to be registered under the
Commodity Exchange Act, or as an affiliated person, salesperson, or employee of
any investment company, bank, insurance company, or entity or person required to
be registered under the Commodity Exchange Act; or
(ii) been permanently or temporarily enjoined by reason of any
misconduct, by order, judgment, or decree of any court of competent jurisdiction
from acting as an underwriter, broker, dealer, investment adviser, municipal
securities dealer, government securities broker, government securities dealer,
transfer agent, or entity or person required to be registered under the
Commodity Exchange Act, or as an affiliated person, salesperson or employee of
any investment company, bank, insurance company, or entity or person required to
be registered under the Commodity Exchange Act, or from engaging in or
continuing any conduct or practice in connection with any such activity or in
connection with the purchase or sale of any security.
(j) Shall provide to Adviser a copy of Portfolio Manager's Form ADV as
filed with the SEC and a list of persons who Portfolio Manager wishes to have
authorized to give written and/or oral instructions to custodians of Fund assets
for the Portfolios.
5
<PAGE>
(k) The Portfolio Manager agrees that it will immediately notify the
Fund and the Adviser of any change in the control (as defined in the 1940 Act)
of the Portfolio Manager.
3. Disclosure about Portfolio Manager. The Portfolio Manager has reviewed
----------------------------------
the current Registration Statement for the Fund filed with the SEC and
represents and warrants that, with respect to the disclosure about the Portfolio
Manager or information relating, directly or indirectly, to the Portfolio
Manager, such Registration Statement contains, as of the date hereof, no untrue
statement of any material fact and does not omit any statement of a material
fact which was required to be stated therein or necessary to make the statements
contained therein not misleading. The Portfolio Manager further represents and
warrants that it is a duly registered investment adviser under the Advisers Act
and a duly registered investment adviser in all states in which the Portfolio
Manager is required to be registered. The Adviser has received a current copy
of the Portfolio Manager's Uniform Application for Investment Adviser
Registration on Form ADV, as filed with the SEC. On an annual basis, (or more
frequently if requested by the Adviser or the Fund's Board of Trustees) the
Portfolio Manager agrees to provide the Adviser with current copies of the
Portfolio Manager's Form ADV, and any supplements or amendments thereto, as
filed with the SEC.
4. Certain Diversification Matters. Adviser shall perform quarterly and
-------------------------------
annual tax compliance tests to ensure that the Portfolios are in compliance with
Subchapter M of the Internal Revenue Code ("IRC") and Section 817(h) of the IRC.
Adviser shall apprise the Portfolio Manager promptly after each quarter end of
any non-compliance with the diversification requirements in such IRC provisions.
If so advised, the Portfolio Manager shall take prompt action to bring the
Portfolio(s) back into compliance with such IRC diversification provisions, as
directed by the Adviser. The Portfolio Manager agrees that it shall not be
absolved of its responsibilities, duties and obligations to manage the
Portfolios in a manner consistent with Diversification Procedures or other
procedures, policies and/or guidelines adopted by the Fund, or implemented by
the Adviser with respect to Portfolio Manager.
5. Expenses. During the term of this Agreement, the Portfolio Manager
--------
will pay all expenses incurred by it and its staff and for their activities in
connection with its services under this Agreement. The Portfolio Manager shall
not be responsible for any of the following:
(a) Expenses of all audits by the Fund's independent public
accountants;
(b) Expenses of the Fund's transfer agent, registrar, dividend
disbursing agent, and shareholder recordkeeping services;
(c) Expenses of the Fund's custodial services including recordkeeping
services provided by the custodian;
(d) Expenses of the Fund's recordkeeping services provided by the
recordkeeping agent;
6
<PAGE>
(e) Expenses of obtaining quotations for calculating the value of the
Portfolio's net assets;
(f) Expenses of obtaining portfolio activity reports for each
Portfolio;
(g) Expenses of maintaining the Fund's tax records;
(h) Salaries and other compensation of any of the Fund's executive
officers and employees, if any, who are not officers, directors, stockholders,
or employees of the Portfolio Manager or its subsidiaries or affiliates (except
that the Adviser, or any of its subsidiaries or affiliates, shall bear the
expense with respect to executive officers and employees, if any, who are
officers, directors, stockholders or employees of the Adviser or of its
subsidiaries or affiliates);
(i) Taxes, if any, levied against the Fund or any of its Portfolios;
(j) Brokerage fees and commissions in connection with the purchase and
sale of portfolio securities for the Portfolios;
(k) Costs, including the interest expenses, of borrowing money;
(l) Costs and/or fees incidental to meetings of the Fund's
shareholders, the preparation and mailings of proxy statements, prospectuses,
statements of additional information and reports of the Fund to its
shareholders, the filing of reports with regulatory bodies, the maintenance of
the Fund's existence, and the registration of shares with federal and state
securities or insurance authorities;
(m) The Fund's legal fees, including the legal fees related to the
registration and continued qualification of the Fund's shares for sale;
(n) Costs of printing "share" stock certificates, if any, representing
shares of the Fund;
(o) Trustees' fees and expenses of Trustees of the Fund who are not
officers, employees, or stockholders of the Portfolio Manager or any affiliate
thereof (except that the Adviser shall bear the expense of any trustee who is an
officer, employee, or stockholder of the Adviser or any affiliate thereof);
(p) The Fund's fidelity bond required by Section 17(g) of the 1940 Act,
or other insurance premiums;
(q) Association membership dues;
(r) Extraordinary expenses of the Fund as may arise including expenses
incurred in connection with litigation, proceedings and other claims and the
legal obligations of the Fund to
7
<PAGE>
indemnify its trustees, officers, employees, shareholders, distributors, and
agents with respect thereto (unless Portfolio Manager is responsible for such
expenses under Section 14 of this Agreement); and
(s) Organizational and offering expenses and, if applicable,
reimbursement (with interest) of underwriting discounts and commissions.
6. Compensation. For the services provided and the expenses borne by the
------------
Portfolio Manager pursuant to this Agreement, the Adviser will pay to the
Portfolio Manager a fee in accordance with the Fee Schedule attached to this
Agreement. This fee will be computed and accrued daily and payable monthly.
7. Seed Money. The Adviser agrees that the Portfolio Manager shall not
----------
be responsible for providing money for the initial capitalization of any
Portfolio.
8. Duty to Notify
--------------
(a) The Portfolio Manager agrees that it shall immediately notify the
Adviser and the Fund in the event (i) that the SEC has censured the Portfolio
Manager; placed limitations upon its activities, functions or operations;
suspended or revoked its registration as an investment adviser; or has commenced
proceedings or an investigation that can reasonably be expected to result in any
of these actions, (ii) the Portfolio Manager has a reasonable basis for
believing that the Portfolio has ceased to qualify or might not qualify as a
regulated investment company under Subchapter M of the IRC, or (iii) the
Portfolio Manager knows of any material fact respecting or relating to the
Portfolio Manager that is not contained in the Registration Statement or
prospectus for the Fund, or any amendment or supplement thereto, or of any
statement contained therein that becomes untrue in any material respect.
(b) The Adviser agrees that it shall immediately notify the Portfolio
Manager in the event (i) that the SEC has censured the Adviser or the Fund;
placed limitations upon either of their activities, functions, or operations;
suspended or revoked the Adviser's registration as an investment adviser; or has
commenced proceedings or an investigation that may result in any of these
actions, (ii) upon having a reasonable basis for believing that a Portfolio has
ceased to qualify or might not qualify as a regulated investment company under
Subchapter M of the IRC, and (iii) upon having a reasonable basis for believing
that the Portfolio has ceased to comply with the diversification provisions of
Section 817(h) of the IRC or the Regulations thereunder.
8
<PAGE>
9. Independent Contractor. The Portfolio Manager shall for all purposes
----------------------
herein be deemed to be an independent contractor and shall, unless otherwise
expressly provided herein or authorized by the Adviser from time to time, have
no authority to act for or represent the Adviser in any way or otherwise be
deemed its agent. The Portfolio Manager understands that unless provided herein
or authorized from time to time by the Fund, the Portfolio Manager shall have no
authority to act for or represent the Fund in any way or otherwise be deemed the
Fund's Agent.
10. Books and Records. In compliance with the requirements of Rule 31a-3
-----------------
under the 1940 Act, the Portfolio Manager hereby agrees that all records which
it maintains for the Portfolio are the property of the Fund and further agrees
to surrender promptly to the Fund any of such records upon the Fund's or the
Adviser's request, although the Portfolio Manager may, at its own expense, make
and retain a copy of such records. The Portfolio Manager further agrees to
preserve for the periods prescribed by Rule 31a-2 under the 1940 Act the records
required to be maintained by Rule 31a-1 under the 1940 Act and to preserve the
records required by Rule 204-2 under the Advisers Act for the period specified
in the Rule.
11. Cooperation. Each party to this Agreement agrees to cooperate with
-----------
each other party and with all appropriate governmental authorities having the
requisite jurisdiction (including, but not limited to, the SEC and state
insurance authorities) in connection with any investigation or inquiry relating
to this Agreement or the Fund.
12. Responsibility and Control. Notwithstanding any other provision of
--------------------------
this Agreement, it is understood and agreed that the Fund shall at all times
retain the ultimate responsibility for and control of all functions performed
pursuant to this Agreement and reserves the right to direct, approve or
disapprove any action hereunder taken on its behalf by the Portfolio Manager.
13. Services Not Exclusive. It is understood that the services of the
----------------------
Portfolio Manager are not exclusive, and nothing in this Agreement shall prevent
the Portfolio Manager (or its affiliates) from providing similar services to
other clients, including investment companies (whether or not their investment
objectives and policies are similar to those of the Portfolios) or from engaging
in other activities.
14. Liability. Except as provided in Section 14 and as may otherwise be
---------
required by the 1940 Act or the rules thereunder or other applicable law, the
Fund and the Adviser agree that the Portfolio Manager, any affiliated person of
the Portfolio Manager, and each person, if any, who, within the meaning of
Section 15 of the 1933 Act, controls the Portfolio Manager shall not be liable
for, or subject to any damages, expenses, or losses in connection with, any act
or omission connected with or arising out of any services rendered under this
Agreement, except by reason of willful misfeasance, bad faith, or gross
negligence in the performance of the Portfolio Manager's duties, or by reason of
reckless disregard of the Portfolio Manager's obligations and duties under this
Agreement.
15. Indemnification.
---------------
9
<PAGE>
(a) The Portfolio Manager agrees to indemnify and hold harmless, the
Adviser, any affiliated person within the meaning of Section 2(a)(3) of the 1940
Act ("affiliated person") of the Adviser, and each person, if any, who, within
the meaning of Section 15 of the 1933 Act, controls ("controlling person") the
Adviser (collectively, "Adviser Indemnified Persons") against any and all
losses, claims, damages, liabilities or litigation (including reasonable legal
and other expenses), to which the Adviser or such affiliated person or
controlling person may become subject under the 1933 Act, 1940 Act, the Advisers
Act, under any other statute, at common law or otherwise, arising out of the
Portfolio Manager's responsibilities to the Fund which (i) may be based upon any
willful misfeasance, bad faith, or gross negligence of, or by reckless disregard
of, the Portfolio Manager's obligations and/or duties under this Agreement by
the Portfolio Managers or by any of its directors, officers or employees, or any
affiliate acting on behalf of the Portfolio Manager (other than an Adviser
Indemnified Person), or (ii) may be based upon any untrue statement or alleged
untrue statement of a material fact contained in a registration statement or
prospectus covering the Shares of the Fund or any Portfolio, or any amendment
thereof or any supplement thereto, or the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, if such a statement or omission was made in
reliance upon information furnished in writing to the Adviser, the Trust, or any
affiliated person of the Fund by the Portfolio Manager or any affiliated person
of the Portfolio Manager (other than an Adviser Indemnified Person); provided,
however, that in no case is the Portfolio Manager's indemnity in favor of the
Adviser or any affiliated person or controlling person of the Adviser deemed to
protect such person against any liability to which any such person would
otherwise be subject by reason of willful misfeasance, bad faith, or gross
negligence in the performance of his or her duties, or by reason of his or her
reckless disregard of obligation and duties under this Agreement.
(b) The Adviser agrees to indemnify and hold harmless the Portfolio
Manager, any affiliated person within the meaning of Section 2(a)(3) of the 1940
Act of the Portfolio Manager and each person, if any, who, within the meaning of
Section 15 of the 1933 Act controls ("controlling person") the Portfolio Manager
(collectively, "Portfolio Manager Indemnified Persons") against any and all
losses, claims, damages, liabilities or litigation (including reasonable legal
and other expenses) to which a Portfolio Manager Indemnified Person may become
subject under the 1933 Act, the 1940 Act, the Advisers Act, under any other
statute, at common law or otherwise, arising out of the Adviser's
responsibilities as adviser of the Fund which (i) may be based upon any willful
misfeasance, bad faith or gross negligence by the Adviser, any of its employees
or any affiliate acting on behalf of the Adviser (other than a Portfolio Manager
Indemnified Person) or (ii) may be based upon any untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement or
prospectus covering Shares of the Fund or any Portfolio, or any amendment
thereof or any supplement thereto, or the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statement therein not misleading, unless such statement or omission was made in
reliance upon written information furnished to the Fund or the Adviser or any
affiliated person of the Adviser by a Portfolio Manager Indemnified Person
(other than an Adviser Indemnified Person); provided however, that in no case is
the indemnity of the Adviser in favor of the Portfolio Manager Indemnified
Persons deemed to protect such person against any liability to which any such
person would otherwise be subject by reason of willful misfeasance, bad faith,
or
10
<PAGE>
gross negligence in the performance of his duties, or by reason of his reckless
disregard of obligations and duties under this Agreement.
16. Duration and Termination. This Agreement shall become effective as
------------------------
of the date of execution first written above, and shall continue in effect for
two years from such date and continue thereafter on an annual basis with respect
to the Portfolios; provided that such annual continuance is specifically
approved at least annually (a) by the vote of a majority of the Board of
Trustees of the Fund, or (b) by the vote of a majority of the outstanding voting
shares of each Portfolio, and provided that continuance is also approved by the
vote of a majority of the Board of Trustees of the Fund who are not parties to
this Agreement or "interested persons" (as such term is defined in the 1940 Act)
of the Fund, the Adviser, or the Portfolio Manager, cast in person at a meeting
called for the purpose of voting on such approval. This Agreement may not be
materially amended without a majority vote of the outstanding shares (as defined
in the 1940 Act) of the Portfolios. This Agreement may be terminated:
(a) by the Fund at any time with respect to the services provided by
the Portfolio Manager, without the payment of any penalty, forfeiture,
compulsory buyout amount, or performance of any other obligation which could
deter termination, by vote of a majority of the entire Board of Trustees of the
Fund or by a vote of a majority of the outstanding voting shares of the Fund or,
with respect to a particular Portfolio, by vote of a majority of the outstanding
voting shares of such Portfolio, on 60 days' written notice to the Portfolio
Manager and the Adviser;
(b) by the Portfolio Manager at any time, without the payment of any
penalty, forfeiture, compulsory buyout amount or performance of any other
obligation which could deter termination, upon 60 days' written notice to the
Adviser and the Fund.
(c) by the Adviser at any time, without the payment of any penalty,
forfeiture, compulsory buyout amount or performance of any other obligation
which could deter termination, upon 60 days' written notice to the Portfolio
Manager and the Fund.
However, any approval of this Agreement by the holders of a majority of the
outstanding shares (as defined in the 1940 Act) of a particular Portfolio shall
be effective to continue this Agreement with respect to such Portfolio
notwithstanding (a) that this Agreement has not been approved by the holders of
a majority of the outstanding shares of any other Portfolio or (b) that this
Agreement has not been approved by the vote of a majority of the outstanding
shares of the Fund, unless such approval shall be required by any other
applicable law or otherwise. In the event of termination for any reason, all
records of the Portfolio(s) shall promptly be returned to the Adviser or the
Fund, free from any claim or retention of rights in such record by the Portfolio
Manager, although the Portfolio Manager may, at its own expense, make and retain
a copy of such records. This Agreement will terminate automatically in event of
its assignment (as that term is defined in the 1940 Act), but shall not
terminate in connection with any transaction not deemed an assignment within the
meaning of Rules 2a-6 under the 1940 Act, or any other rule adopted by the SEC
regarding transactions not deemed to be assignments. In the event this
Agreement is terminated or is not approved in the manner described above, the
Sections or Paragraphs numbered 2(h), 2(j), 9, 10, 11,
11
<PAGE>
13, 14 and 16 of this Agreement as well as any applicable provision of this
Paragraph numbered 15 shall remain in effect.
17. Use of Name.
-----------
(a) It is understood that the name "Pacific Life Insurance Company" or
"Pacific Life", or "Pacific Select Fund" or any derivative thereof, any
tradename, trademark, trade device, service mark, symbol or logo associated with
those names are the valuable property of the Adviser and its affiliates, and
that the Portfolio Manager has the right to use such name (or derivative or
logo) only with the prior written approval of the Adviser and only so long as
the Adviser is an investment adviser to the Fund and/or the Portfolios. Upon
termination of the Investment Advisory Agreement between the Fund and the
Adviser, the Portfolio Manager shall forthwith cease to use such name (or
derivative or logo).
(b) It is understood that the name "Goldman Sachs & Co." or "Goldman
Sachs" or any derivative thereof, any tradename, trademark, trade device,
service mark, symbol or logo associated with those names are the valuable
property of the Portfolio Manager and that the Adviser has the right to use such
name (or derivative or logo), in offering materials of the Fund and/or
Portfolios with the prior written approval of the Portfolio Manager and for so
long as the Portfolio Manager is a Portfolio Manager to the Fund and/or the
Portfolios. Upon termination of this Agreement between the Fund, the Adviser and
the Portfolio Manager, the Fund and the Adviser shall forthwith cease to use
such name (or derivative or logo).
(c) Neither the Fund nor the Advisers shall use the Portfolio Manager's
name (or that of any affiliate, including the name "Goldman Sachs") in
promotional or sales related materials prepared by or on behalf of the Adviser
or the Fund, without prior review and approval by the Portfolio Manager, which
may not be unreasonably withheld.
18. Limitation of Liability. A copy of the Amended and Restated Agreement
-----------------------
and Declaration of Trust for the Fund is on file with the Secretary of the
Commonwealth of Massachusetts. The Agreement and Declaration of Trust has been
executed on behalf of the Trust by a Trustee of the Trust in his capacity as
Trustee of the Trust and not individually. The obligations of this Agreement
shall be binding upon the assets and property of the Fund and shall not be
binding upon any Trustee, officer, employee, agent or shareholder, whether past,
present, or future, of the Fund individually.
19. Miscellaneous.
-------------
(a) This Agreement shall be governed by the laws of California,
provided that nothing herein shall be construed in a manner inconsistent with
the 1940 Act, the Advisers Act or rules or orders of the SEC thereunder. The
term "affiliate" or "affiliated person" as used in this Agreement shall mean
"affiliated person" as defined in Section 2(a)(3) of the 1940 Act.
12
<PAGE>
(b) The captions of this Agreement are included for convenience only
and in no way define or limit any of the provisions hereof or otherwise affect
their construction or effect.
(c) To the extent permitted under Section 15 of this Agreement, this
Agreement may only be assigned by any party with prior written consent of the
other parties.
(d) If any provision of this Agreement shall be held or made invalid by
a court decision, statute, rule or otherwise, the remainder of this Agreement
shall not be affected thereby, and to this extent, the provisions of this
Agreement shall be deemed to be severable. To the extent that any provision of
this Agreement shall be held or made invalid by a court decision, statute, rule
or otherwise with regard to any party hereunder, such provisions with respect to
other parties hereto shall not be affected thereby.
(e) This Agreement may be executed in several counterparts, each of
which shall be deemed to be an original, and all such counterparts shall
together constitute one and the same Agreement.
13
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed as of the day and year first written above.
PACIFIC LIFE INSURANCE COMPANY
Attest:______________________________ By:_______________________________
Title: Title:
By:_______________________________
Title:
GOLDMAN SACHS ASSET
MANAGEMENT, A DIVISION OF
GOLDMAN, SACHS & CO.
Attest:______________________________ By:_______________________________
Title: Title:
PACIFIC SELECT FUND
Attest:______________________________ By:_______________________________
Title: Title:
Title:
14
<PAGE>
PACIFIC SELECT FUND
FEE SCHEDULE
Portfolios: Equity and Bond and Income Portfolios
Fee:
The Adviser will pay to the Portfolio Manager a monthly fee based on the
combined average daily net assets of these Portfolios at an annual rate equal
to:
.35% of the first $100 million
.30% on the next $100 million
.25% on the next $800 million
.20% on excess
However, this rate will be reduced if the Portfolio Manager is paid lower fees
by another variable insurance client, advised or sub-advised by Portfolio
Manager or any of its affiliates with (i) initial assets of $750 million or
less, or (ii) the combined daily net assets of the Equity and Bond and Income
Portfolios, whichever is greater. The fee structure set forth above shall be
automatically reduced so that fees paid to Portfolio Manager for services under
this Agreement are at a rate equal to the most favorable rate paid to Portfolio
Manager or any of its affiliates by such of its investment management
clients/accounts as described above.
15
<PAGE>
EXHIBIT 99.11
Accountant's Consent
<PAGE>
EXHIBIT 11
[LETTERHEAD OF DELOITTE & TOUCHE LLP]
CONSENT OF INDEPENDENT AUDITORS
Pacific Select Fund:
We consent to the incorporation by reference in this Post-Effective
Amendment No. 21 to Registration Statement No. 33-13954 on Form N-1A of our
report dated February 6, 1997 related to the financial statements of Pacific
Select Fund as of and for the period ended December 31, 1997 appearing in such
Registration Statement.
We also consent to the references to us under the heading "Condensed
Financial Information" appearing in the Prospectus of Pacific Select Fund and
under the headings, "Financial Statements" and "Independent Auditors" in the
Statement of Additional Information, which is a part of such Registration
Statement.
/s/ DELOITTE & TOUCHE LLP
- ------------------------------------------
February 27, 1998
<PAGE>
EXHIBIT 99.16
Performance Quotation Computations
<PAGE>
PERFORMANCE QUOTATION COMPUTATIONS
PACIFIC SELECT FUND
30-DAY SEC YIELD
FOR THE PERIOD ENDED DECEMBER 31, 1997
YIELD = 2*{[((A-B)/(C*D)+1) To the power of 6]-1}
<TABLE>
<CAPTION>
MONEY MANAGED GOVERNMENT HIGH YIELD
MARKET BOND SECURITIES BOND GROWTH
<S> <C> <C> <C> <C> <C>
Dividend and Interest earned (A) 2,089,433 2,357,292 605,168 2,206,267 152,852
Net Expenses (B) 77,889 203,452 52,426 118,362 92,049
Average Shares Outstanding (C) 43,889,043 40,795,275 11,448,267 30,401,369 9,938,904
Maximum Offering Price (D) 10.06 11.14 10.78 9.98 24.61
-----------------------------------------------------------------------------
Yield 5.53 5.76 5.44 8.40 0.30
=============================================================================
<CAPTION>
EQUITY MULTI- INTER- EQUITY
INCOME STRATEGY NATIONAL INDEX GROWTH LT
<S> <C> <C> <C> <C> <C>
Dividend and Interest earned (A) 1,060,801 1,134,236 1,708,280 1,229,236 587,737
Net Expenses (B) 346,745 148,506 637,235 65,631 380,640
Average Shares Outstanding (C) 32,541,448 21,830,313 45,824,445 33,559,710 38,741,633
Maximum Offering Price (D) 24.47 16.18 16.21 25.71 17.31
-----------------------------------------------------------------------------
Yield 1.08 3.37 1.74 1.62 0.37
=============================================================================
<CAPTION>
BOND AND AGGRESSIVE EMERGING
EQUITY INCOME EQUITY MARKETS
<S> <C> <C> <C> <C>
Dividend and Interest earned (A) 378,749 635,999 71,336 175,065
Net Expenses (B) 142,808 43,874 43,487 118,993
Average Shares Outstanding (C) 13,272,754 8,576,723 10,664,391 10,230,632
Maximum Offering Price (D) 23.89 12.97 11.18 9.47
-------------------------------------------------------------
Yield 0.89 6.47 0.28 0.70
=============================================================
</TABLE>
<PAGE>
PACIFIC SELECT FUND - MONEY MARKET SERIES
PERFORMANCE QUOTATION COMPUTATIONS
YIELD FOR THE PERIOD ENDED DECEMBER 31, 1997
CURRENT YIELD = [(BASE PERIOD RETURN)*(365/7)]
<TABLE>
<S> <C>
Last published NAV for the period (12/31/97) 10.055254
DIVIDENDS 0.049516373
-----------
Adjusted ending N.A.V. 12/31/97 10.104770
N.A.V. @ 7 days prior (end of day) to the last published NAV 10.094047
-----------
CHANGE IN VALUE 0.010723
TOTAL RETURN 0.106%
===========
YIELD 5.54%
</TABLE>
<PAGE>
PACIFIC SELECT FUND -- MONEY MARKET SERIES
PERFORMANCE QUOTATION COMPUTATIONS
YIELD FOR THE PERIOD ENDED DECEMBER 31, 1997
EFFECTIVE YIELD = [(BASE PERIOD RETURN + 1) (To the power of) 365/7] - 1
<TABLE>
<CAPTION>
<S> <C>
Last published NAV for the period (12/31/97) 10.055254
DIVIDENDS 0.049516373
-----------
Adjusted ending N.A.V. 12/31/97 10.104770
N.A.V. @ 7 days prior (end of day) to the last published NAV 10.094047
-----------
CHANGE IN VALUE 0.010723
TOTAL RETURN 0.106%
===========
YIELD 5.69%
</TABLE>
<PAGE>
PACIFIC SELECT FUND
PERFORMANCE INFORMATION
YEAR TO DATE RETURN
As of 12/31/97
<TABLE>
<CAPTION>
MM MB GS HYB GR EQ INC MS
------------ ------------ ------------ ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
12/31/96 10.043999 10.747542 10.382914 9.940728 21.451041 20.446321 14.749492
12/31/97 10.055254 11.137199 10.778981 9.975192 24.606687 24.472905 16.181890
SHARES OWNED 1.051669 1.060781 1.054613 1.090626 1.135681 1.074436 1.090348
CHANGE IN VALUE 0.530804 1.066585 0.984738 0.938479 6.494298 5.848250 2.894405
365/365 1.000000 1.000000 1.000000 1.000000 1.000000 1.000000 1.000000
----------- ----------- ----------- ----------- ----------- ----------- -----------
YTD RETURN 5.28% 9.92% 9.48% 9.44% 30.27% 28.60% 19.62%
ANNUALIZED 5.28% 9.92% 9.48% 9.44% 30.27% 28.60% 19.62%
=========== =========== =========== --========= ========== =========== ===========
<CAPTION>
IN EI LT B&I EQUITY AG EQ EM
------------ ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
12/31/96 15.399159 20.418348 16.495971 12.050356 21.065201 10.775608 9.676549
12/31/97 16.206865 25.714095 17.305278 12.969996 23.893116 11.182889 9.466847
SHARES OWNED 1.038329 1.055749 1.057716 1.080744 1.041933 1.000000 1.004910
CHANGE IN VALUE 1.428897 6.729277 1.808094 1.966883 3.829816 0.407281 (0.163222)
365/365 1.000000 1.000000 1.000000 1.000000 1.000000 1.000000 1.000000
----------- ------------ ----------- ----------- ----------- ----------- -----------
YTD RETURN 9.28% 32.96% 10.96% 16.32% 18.18% 3.78% -1.69%
ANNUALIZED 9.28% 32.96% 10.96% 16.32% 18.18% 3.78% -1.69%
=========== =========== =========== =========== =========== =========== ===========
</TABLE>
<PAGE>
PACIFIC SELECT FUND
PERFORMANCE INFORMATION
RETURNS SINCE INCEPTION
THRU DECEMBER 1997
<TABLE>
<CAPTION>
GOVERN- HIGH
MONEY MANAGED MENT YIELD EQUITY MULTI- INTER- EQUITY
MARKET BOND SECURITIES BOND GROWTH INCOME STRATEGY NATIONAL INDEX
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCEPTION DATE 1/4/88 1/4/88 1/4/88 1/4/88 1/4/88 1/4/88 1/4/88 1/4/88 1/30/91
INITIAL INVESTMENT 1,000.00 1,000.00 1,000.00 1,000.00 1,000.00 1,000.00 1,000.00 1,000.00 1,000.00
RETURN - 1984
REDEEMABLE VALUE
RETURN - 1985
REDEEMABLE VALUE
RETURN - 1986
REDEEMABLE VALUE
RETURN - 1987
REDEEMABLE VALUE
RETURN - 1988 5.85% 7.11% 6.65% 8.30% 15.31% 8.25% 6.85% 17.69%
ENDING REDEEMABLE
VALUE - 1988 1,058.50 1,071.10 1,066.50 1,083.00 1,153.10 1,082.50 1,068.50 1,176.90
RETURN - 1989 8.73% 14.74% 14.61% 4.16% 34.96% 29.22% 23.42% 20.51%
ENDING REDEEMABLE
VALUE - 1989 1,150.91 1,228.98 1,222.32 1,128.05 1,556.22 1,398.81 1,318.74 1,418.28
RETURN - 1990 7.92% 8.52% 8.01% 0.38% -17.30% -7.54% -1.47% -13.48%
ENDING REDEEMABLE
VALUE - 1990 1,242.06 1,333.69 1,320.22 1,132.34 1,287.00 1,293.34 1,299.36 1,227.10
RETURN - 1991 5.74% 17.03% 16.67% 24.58% 39.15% 31.42% 24.03% 10.92% 24.88%
ENDING REDEEMABLE
VALUE - 1991 1,313.35 1,560.82 1,540.30 1,410.67 1,790.86 1,699.70 1,611.59 1,361.10 1,248.80
RETURN - 1992 3.22% 8.68% 7.52% 18.72% 20.53% 5.36% 5.57% -9.78% 6.95%
ENDING REDEEMABLE
VALUE - 1992 1,355.64 1,696.30 1,656.14 1,674.75 2,158.52 1,790.81 1,701.36 1,227.98 1,335.59
RETURN - 1993 2.58% 11.63% 10.79% 18.01% 21.89% 8.29% 9.25% 30.02% 9.38%
ENDING REDEEMABLE
VALUE - 1993 1,390.62 1,893.57 1,834.83 1,976.37 2,631.02 1,939.26 1,858.73 1,596.62 1,460.87
RETURN - 1994 3.76% -4.36% -5.10% 0.42% -10.49% -0.28% -1.50% 3.01% 1.05%
ENDING REDEEMABLE
VALUE - 1994 1,442.91 1,811.01 1,741.26 1,984.67 2,355.03 1,933.83 1,830.85 1,644.68 1,476.21
<CAPTION>
GROWTH BOND & AGGRESSIVE EMERGING
LT INCOME EQUITY EQUITY MARKETS
----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INCEPTION DATE 1/3/94 1/1/84 1/1/84 4/1/96 4/1/96
INITIAL INVESTMENT 1,000.00 1,000.00 1,000.00 1,000.00 1,000.00
RETURN - 1984 16.84% 11.38%
REDEEMABLE VALUE 1,168.40 1,113.80 1,000.00 1,000.00
RETURN - 1985 30.88% 30.02%
REDEEMABLE VALUE 1,529.20 1,448.16 1,000.00 1,000.00
RETURN - 1986 19.02% 20.92%
REDEEMABLE VALUE 1,820.06 1,751.12 1,000.00 1,000.00
RETURN - 1987 -2.09% 2.18%
REDEEMABLE VALUE 1,782.02 1,789.29 1,000.00 1,000.00
RETURN - 1988 6.37% 7.39%
ENDING REDEEMABLE
VALUE - 1988 1,895.53 1,921.52 1,000.00 1,000.00
RETURN - 1989 17.04% 30.12%
ENDING REDEEMABLE
VALUE - 1989 2,218.53 2,500.28 1,000.00 1,000.00
RETURN - 1990 3.27% -2.55%
ENDING REDEEMABLE
VALUE - 1990 2,291.08 2,436.53 1,000.00 1,000.00
RETURN - 1991 24.32% 29.74%
ENDING REDEEMABLE
VALUE - 1991 2,848.27 3,161.15 1,000.00 1,000.00
RETURN - 1992 8.09% 6.33%
ENDING REDEEMABLE
VALUE - 1992 3,078.69 3,361.25 1,000.00 1,000.00
RETURN - 1993 19.39% 16.07%
ENDING REDEEMABLE
VALUE - 1993 3,675.65 3,901.40 1,000.00 1,000.00
RETURN - 1994 13.25% -8.36% -2.87%
ENDING REDEEMABLE
VALUE - 1994 1,132.50 3,368.36 3,789.43 1,000.00 1,000.00
</TABLE>
<PAGE>
PACIFIC SELECT FUND
PERFORMANCE INFORMATION
RETURNS SINCE INCEPTION
THRU DECEMBER 1997
<TABLE>
<CAPTION>
GOVERN- HIGH
MONEY MANAGED MENT YIELD EQUITY
MARKET BOND SECURITIES BOND GROWTH INCOME
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
RETURN - 1995 5.54% 19.04% 18.81% 18.87% 25.75% 31.66%
ENDING REDEEMABLE
VALUE - 1995 1,522.85 2,155.83 2,068.79 2,359.18 2,961.45 2,546.08
RETURN - 1996 5.07% 4.25% 2.94% 11.31% 23.62% 19.43%
ENDING REDEEMABLE
VALUE - 1996 1,600.09 2,247.53 2,129.65 2,625.93 3,660.93 3,040.75
RETURN - 1997 5.28% 9.92% 9.48% 9.44% 30.27% 28.60%
ENDING REDEEMABLE
VALUE - 1997 1,684.65 2,470.57 2,331.63 2,873.84 4,769.28 3,910.49
CHANGE IN VALUE 684.65 1,470.57 1,331.63 1,873.84 3,769.28 2,910.49
------------------------------------------------------------------------------------
RETURN SINCE
INCEPTION 68.47% 147.06% 133.16% 187.38% 376.93% 291.05%
===================================================================================
<CAPTION>
MULTI- INTER- EQUITY GROWTH BOND &
STRATEGY NATIONAL INDEX LT INCOME EQUITY
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
RETURN - 1995 25.25% 10.56% 36.92% 36.75% 33.71% 23.80%
ENDING REDEEMABLE
VALUE - 1995 2,293.14 1,818.36 2,021.23 1,548.69 4,503.83 4,691.31
RETURN - 1996 12.56% 21.89% 22.36% 17.87% -0.80% 28.03%
ENDING REDEEMABLE
VALUE - 1996 2,581.13 2,216.41 2,473.08 1,825.39 4,467.63 6,006.28
RETURN - 1997 19.62% 9.28% 32.96% 10.96% 16.32% 18.18%
ENDING REDEEMABLE
VALUE - 1997 3,087.64 2,422.07 3,288.13 2,025.47 5,196.85 7,098.27
CHANGE IN VALUE 2,087.64 1,422.07 2,288.13 1,025.47 4,196.85 6,098.27
--------------------------------------------------------------------------------------
RETURN SINCE
INCEPTION 208.76% 142.21% 228.81% 102.55% 419.68% 609.83%
=======================================================================================
<CAPTION>
AGGRESSIVE EMERGING
EQUITY MARKETS
-----------------------
<S> <C> <C>
RETURN - DEC 1995 YTD
ENDING REDEEMABLE
VALUE - 1995 1,000.00 1,000.00
RETURN - DEC 1996 YTD 7.86% -3.23%
ENDING REDEEMABLE
VALUE - 1996 1,078.60 967.70
RETURN - DEC 1997 YTD 3.78% -1.69%
ENDING REDEEMABLE
VALUE - 1997 1,119.37 951.38
CHANGE IN VALUE 119.37 (48.62)
------------------------
RETURN SINCE
INCEPTION 11.94% -4.86%
========================
</TABLE>
<PAGE>
PERFORMANCE QUOTATION COMPUTATIONS
PACIFIC SELECT FUND
AVERAGE ANNUAL RETURN
FROM COMMENCEMENT OF OPERATIONS
THRU DECEMBER 1997
AAR = (ERV/P) (to the power of) [1/(N/365)]-1
<TABLE>
<CAPTION>
MONEY MANAGED GOVERNMENT HIGH YIELD
MARKET BOND SECURITIES BOND GROWTH
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
P (HYPOTHETICAL
INITIAL INVESTMENT) $ 1,000 $ 1,000 $ 1,000 $ 1,000 $ 1,000
ERV (ENDING
REDEEMABLE VALUE) 1,685 2,471 2,332 2,874 4,769
---------------------------------------------------------------------------
T (TOTAL RETURN) 68.47% 147.06% 133.16% 187.38% 376.93%
N (NUMBER OF DAYS) 3,650 3,650 3,650 3,650 3,650
---------------------------------------------------------------------------
AAR (AVERAGE
ANNUAL RETURN) 5.35% 9.47% 8.83% 11.13% 16.91%
===========================================================================
<CAPTION>
EQUITY MULTI- INTER- EQUITY
INCOME STRATEGY NATIONAL INDEX GROWTH LT
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
P (HYPOTHETICAL
INITIAL INVESTMENT) $ 1,000 $ 1,000 $ 1,000 $ 1,000 $ 1,000
ERV (ENDING
REDEEMABLE VALUE) 3,910 3,088 2,422 3,288 2,025
---------------------------------------------------------------------------
T (TOTAL RETURN) 291.05% 208,76% 142.21% 228.81% 102.55%
N (NUMBER OF DAYS) 3,650 3,650 3,650 2,528 1,459
---------------------------------------------------------------------------
AAR (AVERAGE
ANNUAL RETURN) 14.61% 11.93% 9.25% 18.75% 19.31%
===========================================================================
<CAPTION>
BOND AND AGGRESSIVE EMERGING
INCOME EQUITY EQUITY MARKETS
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
P (HYPOTHETICAL
INITIAL INVESTMENT) $ 1,000 $ 1,000 $ 1,000 $ 1,000
ERV (ENDING
REDEEMABLE VALUE) 5,197 7,098 1,119 951
---------------------------------------------------------------------------
T (TOTAL RETURN) 419.68% 609.83% 11.94% -4.86%
N (NUMBER OF DAYS) 5,114 5,114 640 640
---------------------------------------------------------------------------
AAR (AVERAGE
ANNUAL RETURN) 12.48% 15.01% 6.64% -2.80%
===========================================================================
</TABLE>
<PAGE>
PACIFIC SELECT FUND
DECEMBER 31, 1997
MONEY MARKET
- ------------
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Additional Accumulative
Dividend Dates Dividend Rate NAV Shares Shares
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FIVE YEAR ACCUMULATIVE SHARES 1.000000
MAR 1993 0.065558317 9.959377 0.006583 1.006583
JUNE 1993 0.064387874 9.956652 0.006509 1.013092
SEPT 1993 0.047229510 9.973043 0.004798 1.017890
DEC 1993 0.049008620 9.988520 0.004994 1.022884
MAR 1994 0.050440816 10.003252 0.005158 1.028042
JUNE 1994 0.081036015 10.006413 0.008326 1.036367
SEPT 1994 0.096627413 10.012163 0.010002 1.046369
DEC 1994 0.106809359 10.024968 0.011148 1.057518
MARCH 1995 0.139463164 10.023294 0.014714 1.072232
APRIL 1995 0.045798557 10.020432 0.004901 1.077132
MAY 1995 0.052516888 10.018207 0.005646 1.082779
JUNE 1995 0.042928829 10.020322 0.004639 1.087418
JULY 1995 0.045948685 10.020806 0.004986 1.092404
AUGUST 1995 0.046716203 10.019339 0.005093 1.097497
SEPTEMBER 1995 0.043061727 10.018313 0.004717 1.102215
OCTOBER 1995 0.043853562 10.020603 0.004824 1.107038
NOVEMBER 1995 0.045364321 10.018910 0.005013 1.112051
DECEMBER 1995 0.047814964 10.014087 0.005310 1.117361
JANUARY 1996 0.045217267 10.015487 0.005045 1.122405
FEBRUARY 1996 0.034641167 10.020198 0.003880 1.126286
MARCH 1996 0.037479246 10.020389 0.004213 1.130498
APRIL 1996 0.041334937 10.020568 0.004663 1.135162
MAY 1996 0.041819040 10.019593 0.004738 1.139899
JUNE 1996 0.033125978 10.023803 0.003767 1.143667
JULY 1996 0.040472277 10.027939 0.004616 1.148282
AUGUST 1996 0.040765941 10.027798 0.004668 1.152950
SEPTEMBER 1996 0.044933941 10.024589 0.005168 1.158118
OCTOBER 1996 0.040308846 10.026048 0.004656 1.162774
NOVEMBER 1996 0.038783805 10.026418 0.004498 1.167272
DECEMBER 1996 0.028072775 10.043999 0.003263 1.170535
JANUARY 1997 0.041917080 10.044691 0.004885 1.175419
FEBRUARY 1997 0.037315543 10.045557 0.004366 1.179786
MARCH 1997 0.039740801 10.047714 0.004666 1.184452
APRIL 1997 0.042348277 10.047629 0.004992 1.189444
MAY 1997 0.042611420 10.047781 0.005044 1.194489
JUNE 1997 0.043718944 10.047479 0.005198 1.199686
JULY 1997 0.042353471 10.049119 0.005056 1.204742
AUGUST 1997 0.037717904 10.052052 0.004521 1.209263
SEPTEMBER 1997 0.045739694 10.052025 0.005503 1.214765
OCTOBER 1997 0.043091725 10.055612 0.005206 1.219971
NOVEMBER 1997 0.041310396 10.054696 0.005012 1.224983
DECEMBER 1997 0.049516373 10.055254 0.006032 1.231016
NAV AS OF DECEMBER 1992 9.960324
NAV AS OF DECEMBER 1997 10.055254
5 YEAR ADJUSTED NAV DECEMBER 1997 12.378175
CHANGE IN VALUE 2.417851
TOTAL RETURN 24.27%
-------------
AVG ANNUAL RETURN 4.44%
-------------
- ---------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
PACIFIC SELECT FUND
DECEMBER 31, 1997
MANAGED BOND
- ------------
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
Additional Accumulative
Dividend Dates Dividend Rate NAV Shares Shares
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FIVE YEAR ACCUMULATIVE SHARES 1.000000
MAR 1993 0.146885726 10.982867 0.013374 1.013374
JUNE 1993 0.138454163 11.198153 0.012529 1.025903
SEPT 1993 0.129692945 11.392665 0.011679 1.037582
DEC 1993 0.538443469 10.886204 0.051320 1.088902
MAR 1994 0.128875276 10.433064 0.013451 1.102353
JUNE 1994 0.122534929 10.085112 0.013394 1.115747
SEPT 1994 0.125950384 10.025298 0.014017 1.129764
DEC 1994 0.136071038 9.899377 0.015529 1.145293
MAR 1995 0.154132840 10.272449 0.017185 1.162478
APRIL 1995 0.053749262 10.356870 0.006033 1.168511
MAY 1995 0.057022351 10.665324 0.006247 1.174758
JUNE 1995 0.051795318 10.654107 0.005711 1.180469
JULY 1995 0.051899309 10.575872 0.005793 1.186262
AUGUST 1995 0.050887581 10.673012 0.005656 1.191918
SEPTEMBER 1995 0.051630532 10.724778 0.005738 1.197656
OCTOBER 1995 0.054432094 10.855564 0.006005 1.203661
NOVEMBER 1995 0.053359603 11.003736 0.005837 1.209498
DECEMBER 1995 0.059467330 11.098953 0.006480 1.215979
JANUARY 1996 0.085876376 11.111026 0.009398 1.225377
FEBRUARY 1996 0.000000000 10.850635 0.000000 1.225377
MARCH 1996 0.248426762 10.524343 0.028925 1.254302
APRIL 1996 0.050261966 10.421577 0.006049 1.260351
MAY 1996 0.018170769 10.379224 0.002206 1.262558
JUNE 1996 0.043489531 10.498451 0.005230 1.267788
JULY 1996 0.057590999 10.448114 0.006988 1.274776
AUGUST 1996 0.046708359 10.382998 0.005735 1.280511
SEPTEMBER 1996 0.049291073 10.572480 0.005970 1.286481
OCTOBER 1996 0.050356368 10.784138 0.006007 1.292488
NOVEMBER 1996 0.047668818 10.964746 0.005619 1.298107
DECEMBER 1996 0.091419559 10.747542 0.011042 1.309149
JANUARY 1997 0.043437327 10.740935 0.005294 1.314443
FEBRUARY 1997 0.052383760 10.707819 0.006430 1.320873
MARCH 1997 0.049800775 10.510259 0.006259 1.327132
APRIL 1997 0.083721293 10.596166 0.010486 1.337618
MAY 1997 0.047258404 10.636042 0.005943 1.343561
JUNE 1997 0.053952984 10.698445 0.006776 1.350337
JULY 1997 0.050704763 10.969915 0.006241 1.356578
AUGUST 1997 0.052202518 10.798314 0.006558 1.363136
SEPTEMBER 1997 0.048147145 10.930985 0.006004 1.369141
OCTOBER 1997 0.031098653 11.057220 0.003851 1.372991
NOVEMBER 1997 0.057012910 11.056200 0.007080 1.380071
DECEMBER 1997 0.069792543 11.137199 0.008648 1.388720
NAV AS OF DECEMBER 1992 10.618626
NAV AS OF DECEMBER 1997 11.137199
5 YEAR ADJUSTED NAV DECEMBER 1997 15.466448
CHANGE IN VALUE 4.847822
TOTAL RETURN 45.65%
----------
AVG ANNUAL RETURN 7.81%
----------
- ---------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
PACIFIC SELECT FUND
DECEMBER 31, 1997
GOVERNMENT SECURITIES
- ---------------------
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
Additional Accumulative
Dividend Dates Dividend Rate NAV Shares Shares
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FIVE YEAR ACCUMULATIVE SHARES 1.000000
MAR 1993 0.100210952 10.845859 0.009240 1.009240
JUNE 1993 0.083556481 11.088593 0.007605 1.016845
SEPT 1993 0.087699819 11.296165 0.007894 1.024739
DEC 1993 0.686131602 10.639271 0.066086 1.090825
MAR 1994 0.100903920 10.141056 0.010854 1.101679
JUNE 1994 0.103541245 9.838942 0.011594 1.113272
SEPT 1994 0.124557711 9.728789 0.014253 1.127526
DEC 1994 0.128827654 9.639542 0.015069 1.142594
MAR 1995 0.133223990 10.006123 0.015213 1.157807
APRIL 1995 0.047469776 10.103034 0.005440 1.163247
MAY 1995 0.051362129 10.422172 0.005733 1.168980
JUNE 1995 0.045829309 10.415494 0.005144 1.174123
JULY 1995 0.046885266 10.336796 0.005326 1.179449
AUGUST 1995 0.046720165 10.416275 0.005290 1.184739
SEPTEMBER 1995 0.045446630 10.473483 0.005141 1.189880
OCTOBER 1995 0.046930662 10.614590 0.005261 1.195141
NOVEMBER 1995 0.047104506 10.749647 0.005237 1.200378
DECEMBER 1995 0.058885578 10.842169 0.006519 1.206897
JANUARY 1996 0.074198625 10.845282 0.008257 1.215154
FEBRUARY 1996 0.000000000 10.583265 0.000000 1.215154
MARCH 1996 0.260891824 10.234743 0.030975 1.246130
APRIL 1996 0.044444468 10.122916 0.005471 1.251601
MAY 1996 0.015741765 10.062334 0.001958 1.253559
JUNE 1996 0.031052213 10.190503 0.003820 1.257379
JULY 1996 0.049479854 10.150078 0.006130 1.263508
AUGUST 1996 0.044997003 10.086318 0.005637 1.269145
SEPTEMBER 1996 0.043757130 10.230985 0.005428 1.274573
OCOTBER 1996 0.046131470 10.452836 0.005625 1.280198
NOVEMBER 1996 0.042875323 10.615732 0.005171 1.285369
DECEMBER 1996 0.096873616 10.382914 0.011993 1.297361
JANUARY 1997 0.043949952 10.344993 0.005512 1.302873
FEBRUARY 1997 0.047835112 10.303333 0.006049 1.308922
MARCH 1997 0.046506453 10.108658 0.006022 1.314944
APRIL 1997 0.044517001 10.229910 0.005722 1.320666
MAY 1997 0.042163237 10.274516 0.005420 1.326085
JUNE 1997 0.047855552 10.337611 0.006139 1.332224
JULY 1997 0.046466327 10.600354 0.005840 1.338064
AUGUST 1997 0.048442317 10.438104 0.006210 1.344274
SEPTEMBER 1997 0.046198913 10.553666 0.005885 1.350158
OCTOBER 1997 0.018768901 10.722148 0.002363 1.352522
NOVEMBER 1997 0.071168263 10.704570 0.008992 1.361514
DECEMBER 1997 0.053042502 10.778981 0.006700 1.368214
NAV AS OF DECEMBER 1992 10.475121
NAV AS OF DECEMBER 1997 10.778981
5 YEAR ADJUSTED NAV DECEMBER 1997 14.747951
CHANGE IN VALUE 4.272830
TOTAL RETURN 40.79%
----------
AVG ANNUAL RETURN 7.08%
----------
- -----------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
PACIFIC SELECT FUND
DECEMBER 31, 1997
HIGH YIELD BOND
- ----------------
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Additional Accumulative
Dividend Dates Dividend Rate NAV Shares Shares
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FIVE YEAR ACCUMULATIVE SHARES 1.000000
MAR 1993 0.190915645 9.632669 0.019820 1.019820
JUNE 1993 0.190862253 9.891293 0.019678 1.039498
SEPT 1993 0.253409965 9.870381 0.026688 1.066186
DEC 1993 0.556324154 9.670045 0.061338 1.127524
MARCH 1994 0.200989011 9.374455 0.024174 1.151698
JUNE 1994 0.178993332 9.174269 0.022470 1.174169
SEPT 1994 0.188041850 9.125499 0.024195 1.198364
DEC 1994 0.223638475 8.912566 0.030070 1.228434
MAR 1995 0.167556352 9.234279 0.022290 1.250724
APRIL 1995 0.062142191 9.351327 0.008311 1.259035
MAY 1995 0.063767711 9.528696 0.008426 1.267461
JUNE 1995 0.072590069 9.496786 0.009688 1.277149
JULY 1995 0.063352540 9.586210 0.008440 1.285589
AUGUST 1995 0.069543645 9.549849 0.009362 1.294951
SEPTEMBER 1995 0.062835081 9.592160 0.008483 1.303434
OCTOBER 1995 0.061119016 9.681748 0.008228 1.311662
NOVEMBER 1995 0.067923487 9.699629 0.009185 1.320847
DECEMBER 1995 0.066983703 9.786473 0.009041 1.329888
JANUARY 1996 0.063475152 9.905952 0.008522 1.338409
FEBRUARY 1996 0.070630935 9.926947 0.009523 1.347932
MARCH 1996 0.165729935 9.678292 0.023082 1.371014
APRIL 1996 0.068628137 9.612301 0.009789 1.380803
MAY 1996 0.063000451 9.582764 0.009078 1.389880
JUNE 1996 0.064282970 9.513612 0.009391 1.399272
JULY 1996 0.068539433 9.515215 0.010079 1.409351
AUGUST 1996 0.063595116 9.615863 0.009321 1.418672
SEPTEMBER 1996 0.065782278 9.744018 0.009578 1.428249
OCOTBER 1996 0.064038182 9.754978 0.009376 1.437625
NOVEMBER 1996 0.064877143 9.893610 0.009427 1.447052
DECEMBER 1996 0.070326258 9.940728 0.010237 1.457290
JANUARY 1997 0.062920111 9.967776 0.009199 1.466489
FEBRUARY 1997 0.060973169 10.058383 0.008890 1.475378
MARCH 1997 0.065890795 9.843833 0.009876 1.485254
APRIL 1997 0.150326956 9.735700 0.022934 1.508188
MAY 1997 0.064396479 9.873220 0.009837 1.518024
JUNE 1997 0.064762110 9.952797 0.009878 1.527902
JULY 1997 0.067475599 10.122600 0.010185 1.538087
AUGUST 1997 0.063152541 9.998220 0.009715 1.547802
SEPTEMBER 1997 0.066815283 10.102936 0.010236 1.558038
OCTOBER 1997 0.066279191 9.948482 0.010380 1.568418
NOVEMBER 1997 0.061194971 9.969114 0.009628 1.578046
DECEMBER 1997 0.071508856 9.975192 0.011312 1.589358
NAV AS OF DECEMBER 1992 9.239243
NAV AS OF DECEMBER 1997 9.975192
5 YEAR ADJUSTED NAV DECEMBER 1997 15.854156
CHANGE IN VALUE 6.614913
TOTAL RETURN 71.60%
-------------
AVG ANNUAL RETURN 11.40%
--------------
- ---------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
PACIFIC SELECT FUND
DECEMBER 31, 1997
GROWTH
- ------
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Additional Accumulative
Dividend Dates Dividend Rate NAV Shares Shares
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FIVE YEAR ACCUMULATIVE SHARES 1.000000
MAR 1993 0.018078545 16.754280 0.001079 1.001079
JUNE 1993 0.017483379 16.883657 0.001037 1.002116
SEPT 1993 0.023692959 18.214984 0.001303 1.003419
DEC 1993 0.948262140 18.194829 0.052295 1.055714
MAR 1994 0.015794045 17.203584 0.000969 1.056684
JUNE 1994 0.020849925 16.634966 0.001324 1.058008
SEPT 1994 0.020906589 17.327718 0.001277 1.059285
DEC 1994 1.334616763 14.896795 0.094902 1.154187
MARCH 1995 0.039487300 15.782701 0.002888 1.157075
APRIL 1995 0.007507673 15.964585 0.000544 1.157619
MAY 1995 0.014693474 16.300431 0.001043 1.158662
JUNE 1995 0.017052362 16.878993 0.001171 1.159833
JULY 1995 0.006314465 18.023473 0.000406 1.160239
AUGUST 1995 0.005365178 18.607810 0.000335 1.160574
SEPTEMBER 1995 0.007709648 18.469614 0.000484 1.161058
OCTOBER 1995 0.036365365 17.830757 0.002368 1.163426
NOVEMBER 1995 0.008065988 18.335349 0.000512 1.163938
DECEMBER 1995 0.009251205 18.567051 0.000580 1.164518
JANUARY 1996 0.007005710 18.581772 0.000439 1.164957
FEBRUARY 1996 0.003686384 19.299526 0.000223 1.165179
MARCH 1996 1.233030756 18.663785 0.076978 1.242157
APRIL 1996 0.003879902 19.313724 0.000250 1.242407
MAY 1996 0.007964439 20.303767 0.000487 1.242894
JUNE 1996 0.005545114 19.634714 0.000351 1.243245
JULY 1996 0.005521317 18.457435 0.000372 1.243617
AUGUST 1996 0.004005425 19.637961 0.000254 1.243871
SEPTEMBER 1996 0.016239150 20.333138 0.000993 1.244864
OCTOBER 1996 0.006076095 19.829810 0.000381 1.245246
NOVEMBER 1996 0.005593002 21.277799 0.000327 1.245573
DECEMBER 1996 0.007844159 21.451041 0.000455 1.246029
JANUARY 1997 0.003003335 22.973693 0.000163 1.246191
FEBRUARY 1997 0.006974455 22.289530 0.000390 1.246581
MARCH 1997 0.008027908 21.110424 0.000474 1.247055
APRIL 1997 2.494484931 18.703414 0.166320 1.413376
MAY 1997 0.003402830 21.088867 0.000228 1.413604
JUNE 1997 0.002994242 22.295855 0.000190 1.413794
JULY 1997 0.000000000 23.972169 0.000000 1.413794
AUGUST 1997 0.000000000 25.361152 0.000000 1.413794
SEPTEMBER 1997 0.000000000 26.891748 0.000000 1.413794
OCTOBER 1997 0.014584171 25.119868 0.000821 1.414615
NOVEMBER 1997 0.000000000 24.459857 0.000000 1.414615
DECEMBER 1997 0.008278345 24.606687 0.000476 1.415091
NAV AS OF DECEMBER 1992 15.759380
NAV AS OF DECEMBER 1997 24.606687
5 YEAR ADJUSTED NAV DECEMBER 1997 34.820691
CHANGE IN VALUE 19.061311
TOTAL RETURN 120.95 %
--------------
AVG ANNUAL RETURN 17.18%
---------------
- ---------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
PACIFIC SELECT FUND
DECEMBER 31, 1997
EQUITY INCOME
- -------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
Additional Accumulative
Dividend Dates Dividend Rate NAV Shares Shares
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FIVE YEAR ACCUMULATIVE SHARES 1.000000
MAR 1993 0.047664429 15.466097 0.003082 1.003082
JUNE 1993 0.067731584 15.235285 0.004459 1.007541
SEPT 1993 0.078865708 15.859135 0.005010 1.012552
DEC 1993 0.635853456 15.523109 0.041476 1.054028
MAR 1994 0.044731780 15.014998 0.003140 1.057168
JUN 1994 0.053364408 14.964055 0.003770 1.060938
SEPT 1994 0.055581260 15.766085 0.003740 1.064678
DEC 1994 0.270945940 14.053199 0.096288 1.160965
MAR 1995 0.074295224 15.370495 0.005612 1.166577
APRIL 1995 0.011670285 15.637392 0.000871 1.167448
MAY 1995 0.047496239 16.185590 0.003426 1.170874
JUNE 1995 0.009219660 16.375970 0.000659 1.171533
JULY 1995 0.010970548 16.955804 0.000758 1.172291
AUGUST 1995 0.036411579 16.925025 0.002522 1.174813
SEPTEMBER 1995 0.015796677 17.438052 0.001064 1.175877
OCTOBER 1995 0.010866515 17.057644 0.000749 1.176626
NOVEMBER 1995 0.036468652 18.004052 0.002383 1.179009
DECEMBER 1995 0.013297744 18.205935 0.000861 1.179871
JANUARY 1996 0.012378166 18.477610 0.000790 1.180661
FEBRUARY 1996 0.033465381 18.820327 0.002099 1.182760
MARCH 1996 0.923831119 18.131186 0.060265 1.243025
APRIL 1996 0.006658664 18.487044 0.000448 1.243473
MAY 1996 0.042313973 18.709659 0.002812 1.246285
JUNE 1996 0.011604218 18.428092 0.000785 1.247070
JULY 1996 0.010890487 17.577878 0.000773 1.247842
AUGUST 1996 0.026132687 18.084201 0.001803 1.249646
SEPTEMBER 1996 0.022643506 18.879894 0.001499 1.251144
OCTOBER 1996 0.002318424 19.212666 0.000151 1.251295
NOVEMBER 1996 0.032963434 20.788238 0.001984 1.253280
DECEMBER 1996 0.023198831 20.446321 0.001422 1.254702
JANUARY 1997 0.002115208 21.720270 0.000122 1.254824
FEBRUARY 1997 0.032447676 21.795007 0.001868 1.256692
MARCH 1997 0.011137040 20.945167 0.000668 1.257360
APRIL 1997 1.335180331 20.429390 0.082176 1.339536
MAY 1997 0.036256230 21.772793 0.002231 1.341767
JUNE 1997 0.006752029 22.404850 0.000404 1.342171
JULY 1997 0.008912861 24.482089 0.000489 1.342660
AUGUST 1997 0.026336713 23.728540 0.001490 1.344150
SEPTEMBER 1997 0.012859593 24.833355 0.000696 1.344846
OCTOBER 1997 0.007703478 23.714811 0.000437 1.345283
NOVEMBER 1997 0.033673122 24.201763 0.001872 1.347154
DECEMBER 1997 0.017114736 24.472905 0.000942 1.348097
NAV AS OF DECEMBER 1992 15.109367
NAV AS OF DECEMBER 1997 24.472905
5 YEAR ADJUSTED NAV DECEMBER 1997 32.991839
CHANGE IN VALUE 17.882472
TOTAL RETURN 118.35%
------------
AVG ANNUAL RETURN 16.90%
------------
- -------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
PACIFIC SELECT FUND
DECEMBER 31, 1997
MULTI-STRATEGY
- --------------
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Additional Accumulative
Dividend Dates Dividend Rate NAV Shares Shares
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FIVE YEAR ACCUMULATIVE SHARES 1.000000
MAR 1993 0.092187227 12.569432 0.007334 1.007334
JUNE 1993 0.093964310 12.483299 0.007582 1.014917
SEPT 1993 0.099622673 12.830905 0.007880 1.022797
DEC 1993 0.355161369 12.657523 0.028699 1.051496
MAR 1994 0.061059687 12.235029 0.005248 1.056743
JUNE 1994 0.072808765 12.099444 0.006359 1.063102
SEPT 1994 0.092806229 12.449689 0.007925 1.071027
DEC 1994 0.510414151 11.730492 0.046602 1.117629
MARCH 1995 0.119784040 12.466478 0.010739 1.128368
APRIL 1995 0.033822750 12.634793 0.003021 1.131389
MAY 1995 0.050152413 13.068299 0.004342 1.135731
JUNE 1995 0.029958860 13.172596 0.002583 1.138314
JULY 1995 0.030251153 13.403631 0.002569 1.140883
AUGUST 1995 0.043161371 13.416061 0.003670 1.144553
SEPTEMBER 1995 0.035176290 13.671922 0.002945 1.147498
OCTOBER 1995 0.034084293 13.568273 0.002883 1.150381
NOVEMBER 1995 0.045283618 14.039341 0.003711 1.154091
DECEMBER 1995 0.028464391 14.199676 0.002313 1.156405
JANUARY 1996 0.031387567 14.336574 0.002532 1.158936
FEBRUARY 1996 0.040930535 14.391888 0.003296 1.162232
MARCH 1996 0.767000480 13.662076 0.065249 1.227481
APRIL 1996 0.033520268 13.721671 0.002999 1.230480
MAY 1996 0.045783679 13.766512 0.004092 1.234572
JUNE 1996 0.000000000 13.748767 0.000000 1.234572
JULY 1996 0.007635383 13.435754 0.000702 1.235273
AUGUST 1996 0.041695494 13.607587 0.003785 1.239059
SEPTEMBER 1996 0.040962179 14.009381 0.003623 1.242681
OCTOBER 1996 0.034969230 14.277675 0.003044 1.245725
NOVEMBER 1996 0.044817454 14.992578 0.003724 1.249449
DECEMBER 1996 0.043245741 14.749492 0.003663 1.253112
JANUARY 1997 0.034723827 15.198861 0.002863 1.255975
FEBRUARY 1997 0.045173471 15.203849 0.003732 1.259707
MARCH 1997 0.041907243 14.781188 0.003571 1.263278
APRIL 1997 0.840595870 14.333473 0.074086 1.337364
MAY 1997 0.045569769 14.842436 0.004106 1.341470
JUNE 1997 0.040031192 15.126942 0.003550 1.345020
JULY 1997 0.035680520 16.079896 0.002985 1.348005
AUGUST 1997 0.041073882 15.677796 0.003532 1.351536
SEPTEMBER 1997 0.044725767 16.169068 0.003739 1.355275
OCTOBER 1997 0.041263284 15.871001 0.003524 1.358798
NOVEMBER 1997 0.043299426 16.045361 0.003667 1.362465
DECEMBER 1997 0.045888200 16.181890 0.003864 1.366329
NAV AS OF DECEMBER 1992 12.182625
NAV AS OF DECEMBER 1997 16.181890
5 YEAR ADJUSTED NAV DECEMBER 1997 22.109784
CHANGE IN VALUE 9.927159
TOTAL RETURN 81.49%
-------------
AVG ANNUAL RETURN 12.66%
--------------
- ---------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
PACIFIC SELECT FUND
DECEMBER 31, 1997
EQUITY INDEX
- ------------
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
Additional Accumulative
Dividend Dates Dividend Rate NAV Shares Shares
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FIVE YEAR ACCUMULATIVE SHARES 1.000000
MAR 1993 0.070667147 12.878920 0.005487 1.005487
JUN 1993 0.077961683 12.844836 0.006103 1.011590
SEPT 1993 0.075069419 13.067510 0.005811 1.017401
DEC 1993 0.123337494 13.236827 0.009480 1.026881
MAR 1994 0.075177338 12.644950 0.006105 1.032986
JUNE 1994 0.079055019 12.615728 0.006473 1.039459
SEPT 1994 0.074598781 13.147797 0.005898 1.045357
DEC 1994 0.116382391 13.022683 0.009342 1.054699
MAR 1995 0.075136418 14.209272 0.005577 1.060276
APRIL 1995 0.016696346 14.612950 0.001211 1.061488
MAY 1995 0.049827695 15.141013 0.003493 1.064981
JUNE 1995 0.023894793 15.472037 0.001645 1.066626
JULY 1995 0.016371870 15.961857 0.001094 1.067720
AUGUST 1995 0.039235433 15.947302 0.002627 1.070347
SEPTEMBER 1995 0.029096415 16.580284 0.001878 1.072225
OCTOBER 1995 0.018172426 16.500225 0.001181 1.073406
NOVEMBER 1995 0.039963915 17.179684 0.002497 1.075903
DECEMBER 1995 0.029110969 17.450466 0.001795 1.077698
JANUARY 1996 0.021429033 18.014039 0.001282 1.078980
FEBRUARY 1996 0.037903977 18.128743 0.002256 1.081236
MARCH 1996 0.480680626 17.814058 0.029175 1.110411
APRIL 1996 0.020156275 18.039179 0.001241 1.111652
MAY 1996 0.045173062 18.443237 0.002723 1.114374
JUNE 1996 0.024005860 18.494633 0.001446 1.115821
JULY 1996 0.025749654 17.651087 0.001628 1.117449
AUGUST 1996 0.036720692 17.978917 0.002282 1.119731
SEPTEMBER 1996 0.032431058 18.954519 0.001916 1.121647
OCTOBER 1996 0.023706312 19.449810 0.001367 1.123014
NOVEMBER 1996 0.037335963 20.877911 0.002008 1.125022
DECEMBER 1996 0.035077640 20.418348 0.001933 1.126955
JANUARY 1997 0.020348655 21.673483 0.001058 1.128013
FEBRUARY 1997 0.037729318 21.794194 0.001953 1.129966
MARCH 1997 0.031605511 20.858602 0.001712 1.131678
APRIL 1997 0.855316253 21.254614 0.045540 1.177218
MAY 1997 0.043307082 22.504736 0.002265 1.179484
JUNE 1997 0.024623266 23.478602 0.001237 1.180721
JULY 1997 0.028471001 25.308147 0.001328 1.182049
AUGUST 1997 0.032864370 23.852593 0.001629 1.183678
SEPTEMBER 1997 0.032291749 25.102602 0.001523 1.185200
OCTOBER 1997 0.026168246 24.243829 0.001279 1.186479
NOVEMBER 1997 0.036184655 25.314545 0.001696 1.188175
DECEMBER 1997 0.034753456 25.714095 0.001606 1.189781
NAV AS OF DECEMBER 1992 12.426842
NAV AS OF DECEMBER 1997 25.714095
5 YEAR ADJUSTED NAV DECEMBER 1997 30.594150
CHANGE IN VALUE 18.167308
TOTAL RETURN 146.19%
-------------
AVG ANNUAL RETURN 19.74%
--------------
- ---------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
PACIFIC SELECT FUND
DECEMBER 31, 1997
INTERNATIONAL
- -------------
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
Additional Accumulative
Dividend Dates Dividend Rate NAV Shares Shares
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FIVE YEAR ACCUMULATIVE SHARES 1.000000
DEC 1993 0.111807196 12.088834 0.009249 1.009249
DEC 1994 0.517252882 11.935174 0.043739 1.052988
MAR 1995 0.016711150 11.684091 0.001506 1.054494
DECEMBER 1995 0.238949426 12.937346 0.019476 1.073970
MARCH 1996 0.139379856 13.459290 0.011122 1.085092
DECEMBER 1996 0.208648078 15.399159 0.014702 1.099794
APRIL 1997 0.367229307 15.682504 0.025753 1.125548
DECEMBER 1997 0.236153197 16.206865 0.016401 1.141948
NAV AS OF DECEMBER 1992 9.383861
NAV AS OF DECEMBER 1997 16.206865
5 YEAR ADJUSTED NAV DECEMBER 1997 18.507401
CHANGE IN VALUE 9.123540
TOTAL RETURN 97.23%
--------------
AVG ANNUAL RETURN 14.55%
--------------
- ------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
PACIFIC SELECT FUND
DECEMBER 31, 1997
EQUITY
- ------
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
Additional Accumulative
Dividend Dates Dividend Rate NAV Shares Shares
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FIVE YEAR ACCUMULATIVE SHARES 1.000000
JANUARY 1993 0.002661359 14.837296 0.000179 1.000179
FEBRUARY 1993 1.379213669 13.318782 0.103573 1.103752
MARCH 1993 0.040075837 13.669750 0.003236 1.106988
APRIL 1993 0.004918031 13.388471 0.000407 1.107395
MAY 1993 0.035467043 13.694751 0.002868 1.110262
JUNE 1993 0.011833109 13.926864 0.000943 1.111206
JULY 1993 0.008533818 13.978980 0.000678 1.111884
AUGUST 1993 0.035579265 14.446166 0.002738 1.114623
SEPTEMBER 1993 0.007973380 14.693206 0.000605 1.115227
OCTOBER 1993 0.000109724 14.839065 0.000008 1.115236
NOVEMBER 1993 0.033197072 14.656405 0.002526 1.117762
DECEMBER 1993 0.001984805 14.941376 0.000148 1.117910
JANUARY 1994 0.001280600 15.599130 0.000092 1.118002
FEBRUARY 1994 0.174365900 15.288211 0.012751 1.130753
MARCH 1994 0.003481000 14.571105 0.000270 1.131023
APRIL 1994 0.002869500 14.629531 0.000222 1.131245
MAY 1994 0.021517200 14.736860 0.001652 1.132897
JUNE 1994 0.013288700 14.109000 0.001067 1.133964
JULY 1994 0.005212700 14.209388 0.000416 1.134380
AUGUST 1994 0.034145600 14.873153 0.002604 1.136984
SEPTEMBER 1994 0.012520000 14.270171 0.000998 1.137982
OCTOBER 1994 0.001901300 14.778154 0.000146 1.138128
NOVEMBER 1994 0.052528500 14.293964 0.004182 1.142311
MARCH 1995 0.021289731 14.592702 0.001667 1.143977
APRIL 1995 0.008104629 14.753894 0.000628 1.144606
MAY 1995 0.018936200 15.074655 0.001438 1.146043
JUNE 1995 0.008869316 15.700194 0.000647 1.146691
MARCH 1996 1.177980038 18.258224 0.073982 1.220673
APRIL 1996 0.000000000 19.296759 0.000000 1.220673
MAY 1996 0.000000000 20.262674 0.000000 1.220673
JUNE 1996 0.000000000 20.376439 0.000000 1.220673
JULY 1996 0.000000000 18.541704 0.000000 1.220673
AUGUST 1996 0.000000000 19.397824 0.000000 1.220673
SEPTEMBER 1996 0.000000000 20.888513 0.000000 1.220673
OCTOBER 1996 0.000000000 20.698737 0.000000 1.220673
NOVEMBER 1996 0.000000000 22.000274 0.000000 1.220673
DECEMBER 1996 0.000000000 21.065201 0.000000 1.220673
JANUARY 1997 0.000000000 23.137267 0.000000 1.220673
FEBRUARY 1997 0.000000000 22.207678 0.000000 1.220673
MARCH 1997 0.000000000 21.264787 0.000000 1.220673
APRIL 1997 0.786638395 21.171369 0.045355 1.266028
MAY 1997 0.006593802 22.134266 0.000377 1.266405
JUNE 1997 0.000000000 23.036371 0.000000 1.266405
JULY 1997 0.015812354 24.907089 0.000804 1.267209
AUGUST 1997 0.000000000 23.870024 0.000000 1.267209
SEPTEMBER 1997 0.021139172 25.014343 0.001071 1.268280
OCTOBER 1997 0.017944371 23.694750 0.000960 1.269240
NOVEMBER 1997 0.032541780 23.755239 0.001739 1.270979
DECEMBER 1997 0.016538219 23.893116 0.000880 1.271859
NAV AS OF DECEMBER 1992 14.391188
NAV AS OF DECEMBER 1997 23.893116
5 YEAR ADJUSTED NAV DECEMBER 1997 30.388667
CHANGE IN VALUE 15.997479
TOTAL RETURN 111.16%
-----------
AVG ANNUAL RETURN 16.12%
-----------
- -----------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
PACIFIC SELECT FUND
DECEMBER 31, 1997
BOND AND INCOME
- ---------------
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
Additional Accumulative
Dividend Dates Dividend Rate NAV Shares Shares
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FIVE YEAR ACCUMULATIVE SHARES 1.000000
JANUARY 1993 0.072096979 12.003528 0.006006 1.006006
FEBRUARY 1993 0.067198520 12.413409 0.005446 1.011452
MARCH 1993 0.085323326 12.199285 0.007074 1.018526
APRIL 1993 0.075661987 12.245436 0.006293 1.024820
MAY 1993 0.067904425 12.246505 0.005682 1.030502
JUNE 1993 0.079899313 12.689401 0.006489 1.036991
JULY 1993 0.073224327 12.850460 0.005909 1.042900
AUGUST 1993 0.073555822 13.345594 0.005748 1.048648
SEPTEMBER 1993 0.069310337 13.479949 0.005392 1.054040
OCTOBER 1993 0.065871229 13.493884 0.005145 1.059185
NOVEMBER 1993 0.071522823 13.092555 0.005786 1.064971
DECEMBER 1993 0.070411112 13.046607 0.005748 1.070719
JANUARY 1994 0.071095400 13.317657 0.005716 1.076435
FEBRUARY 1994 0.674514400 12.129527 0.059860 1.136294
MARCH 1994 0.069059700 11.537376 0.006802 1.143096
APRIL 1994 0.065809800 11.232058 0.006698 1.149793
MAY 1994 0.070897700 11.033858 0.007388 1.157181
JUNE 1994 0.069447500 10.917000 0.007361 1.164543
JULY 1994 0.069401200 11.220469 0.007203 1.171746
AUGUST 1994 0.069932000 11.059854 0.007409 1.179155
SEPTEMBER 1994 0.070077400 10.610582 0.007788 1.186942
OCTOBER 1994 0.070524100 10.513299 0.007962 1.194905
NOVEMBER 1994 0.070672600 10.476844 0.008060 1.202965
DECEMBER 1994 0.217417900 10.423590 0.025092 1.228057
MARCH 1995 0.206522152 11.033341 0.022987 1.251043
APRIL 1995 0.070275693 11.162527 0.007876 1.258920
MAY 1995 0.069187200 12.091218 0.007204 1.266123
JUNE 1995 0.068614326 12.137037 0.007158 1.273281
JULY 1995 0.068449476 11.867032 0.007344 1.280625
AUGUST 1995 0.067752430 12.126197 0.007155 1.287781
SEPTEMBER 1995 0.066568185 12.306526 0.006966 1.294746
OCTOBER 1995 0.066706420 12.476717 0.006922 1.301669
NOVEMBER 1995 0.066645850 12.664150 0.006850 1.308519
DECEMBER 1995 0.065553940 13.014351 0.006591 1.315110
JANUARY 1996 0.064829635 12.912101 0.006603 1.321713
FEBRUARY 1996 0.065413522 12.154316 0.007113 1.328826
MARCH 1996 0.118662972 11.830877 0.013328 1.342154
APRIL 1996 0.066770222 11.599295 0.007726 1.349880
MAY 1996 0.065827920 11.484721 0.007737 1.357617
JUNE 1996 0.034601711 11.645249 0.004034 1.361651
JULY 1996 0.069763910 11.551096 0.008224 1.369875
AUGUST 1996 0.065841942 11.320742 0.007967 1.377842
SEPTEMBER 1996 0.066047858 11.585531 0.007855 1.385697
OCTOBER 1996 0.067185527 12.013926 0.007749 1.393447
NOVEMBER 1996 0.063967990 12.427631 0.007172 1.400619
DECEMBER 1996 0.071238520 12.050356 0.008280 1.408899
JANUARY 1997 0.066107777 11.881963 0.007839 1.416738
FEBRUARY 1997 0.066453343 11.865509 0.007935 1.424672
MARCH 1997 0.067424806 11.470473 0.008374 1.433047
APRIL 1997 0.237330318 11.486273 0.029610 1.462656
MAY 1997 0.066068888 11.541647 0.008373 1.471029
JUNE 1997 0.065044809 11.726189 0.008160 1.479189
JULY 1997 0.065444491 12.517833 0.007733 1.486922
AUGUST 1997 0.063358969 11.990598 0.007857 1.494779
SEPTEMBER 1997 0.067478657 12.272761 0.008219 1.502998
OCTOBER 1997 0.000000000 12.641926 0.000000 1.502998
NOVEMBER 1997 0.072359904 12.770944 0.008516 1.511514
DECEMBER 1997 0.095630006 12.969996 0.011145 1.522659
NAV AS OF DECEMBER 1992 11.700725
NAV AS OF DECEMBER 1997 12.969996
5 YEAR ADJUSTED NAV DECEMBER 1997 19.748876
CHANGE IN VALUE 8.048151
TOTAL RETURN 68.78%
------------
AVG ANNUAL RETURN 11.04%
------------
- ----------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
PACIFIC SELECT FUND
DECEMBER 31, 1997
EQUITY
- ------
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
Additional Accumulative
Dividend Dates Dividend Rate NAV Shares Shares
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
TEN YEAR ACCUMULATIVE SHARES 1.000000
JANUARY 31, 1988 0.024068700 10.452000 0.002303 1.002303
FEBRUARY 28, 1988 0.042245400 10.770000 0.003932 1.006234
MARCH 28, 1988 0.021900400 10.368000 0.002125 1.008360
APRIL 30, 1988 0.024197100 10.206000 0.002391 1.010750
MAY 31, 1988 0.042821000 10.154000 0.004262 1.015013
JUNE 28, 1988 0.026639200 10.440000 0.002590 1.017603
JULY 31, 1988 0.021957400 10.334000 0.002162 1.019765
AUGUST 30, 1988 0.071302000 9.968000 0.007294 1.027060
SEPTEMBER 30, 1988 0.028281900 10.280000 0.002826 1.029885
OCTOBER 31, 1988 0.060394400 10.519000 0.005913 1.035798
NOVEMBER 29, 1988 0.082092400 10.354000 0.008212 1.044011
DECEMBER 28, 1988 0.156336600 10.370000 0.015739 1.059750
JANUARY 31, 1989 0.025941000 10.899000 0.002522 1.062272
FEBRUARY 28, 1989 0.033630300 10.641000 0.003357 1.065630
MARCH 28, 1989 0.035918500 10.932000 0.003501 1.069131
APRIL 30, 1989 0.021330500 11.500000 0.001983 1.071114
MAY 31, 1989 0.185296200 11.858000 0.016738 1.087851
JUNE 28, 1989 0.033462800 11.764000 0.003094 1.090946
JULY 31, 1989 0.234193700 12.750000 0.020039 1.110984
AUGUST 30, 1989 0.075916200 12.621000 0.006683 1.117667
SEPTEMBER 30, 1989 0.079932500 12.696000 0.007037 1.124704
OCTOBER 31, 1989 0.035724500 12.397000 0.003241 1.127945
NOVEMBER 29, 1989 0.040137000 12.546000 0.003609 1.131553
DECEMBER 28, 1989 0.042545000 12.595000 0.003822 1.135376
JANUARY 31, 1990 0.033203000 11.906000 0.003166 1.138542
FEBRUARY 28, 1990 0.054629900 11.959000 0.005201 1.143743
MARCH 28, 1990 0.031569600 12.237000 0.002951 1.146694
APRIL 30, 1990 0.036729300 12.003000 0.003509 1.150202
MAY 31, 1990 0.049190500 12.815000 0.004415 1.154618
JUNE 28, 1990 0.035110800 12.734000 0.003184 1.157801
JULY 31, 1990 0.116175200 12.590000 0.010684 1.168485
AUGUST 30, 1990 0.053396300 11.560000 0.005397 1.173882
SEPTEMBER 30, 1990 0.050353800 11.125000 0.005313 1.179195
OCTOBER 31, 1990 0.039741400 11.168000 0.004196 1.183392
NOVEMBER 29, 1990 0.036702300 11.568000 0.003755 1.187146
DECEMBER 28, 1990 0.023745900 11.714564 0.002406 1.189552
JANUARY 31, 1991 0.037160700 11.979630 0.003690 1.193242
FEBRUARY 28, 1991 0.032290300 12.791576 0.003012 1.196255
APRIL 30, 1991 0.023189938 13.035176 0.002128 1.198383
MAY 31, 1991 0.068974008 13.233383 0.006246 1.204629
JUNE 28, 1991 0.020433502 12.734000 0.001933 1.206562
JULY 31, 1991 0.021254417 13.405237 0.001913 1.208475
AUGUST 30, 1991 0.038004634 13.723683 0.003347 1.211822
SEPTEMBER 30, 1991 0.026487584 13.540886 0.002370 1.214192
OCTOBER 31, 1991 0.006190892 13.858064 0.000542 1.214734
NOVEMBER 29, 1991 0.023151580 13.128824 0.002142 1.216877
DECEMBER 31, 1991 0.012686175 14.825609 0.001041 1.217918
JANUARY 31, 1992 0.004731262 15.181105 0.000380 1.218297
FEBRUARY 29, 1992 0.021836089 15.451924 0.001722 1.220019
(Page 1 of 3)
- ------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
PACIFIC SELECT FUND
DECEMBER 31, 1997
EQUITY
- ------
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
Additional Accumulative
Dividend Dates Dividend Rate NAV Shares Shares
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
TEN YEAR ACCUMULATIVE SHARES (cont'd)
MARCH 31, 1992 0.014354387 14.825119 0.001181 1.221200
APRIL 30, 1992 0.013204816 14.634727 0.001102 1.222302
MAY 31, 1992 0.030081494 14.570480 0.002524 1.224826
JUNE 30, 1992 0.009122727 14.097054 0.000793 1.225618
JULY 31, 1992 0.016403885 14.420727 0.001394 1.227012
AUGUST 31, 1992 0.034519491 13.844022 0.003060 1.230072
SEPTEMBER 30, 1992 0.004441105 13.982219 0.000391 1.230463
OCTOBER 7, 1992 1.026000563 12.644647 0.099841 1.330304
OCTOBER 1992 0.007424565 13.498129 0.000732 1.331036
NOVEMBER 1992 0.028348852 14.071127 0.002682 1.333717
DECEMBER 1992 0.004304565 14.391188 0.000399 1.334116
JANUARY 1993 0.002661359 14.837296 0.000239 1.334355
FEBRUARY 1993 1.379213669 13.318782 0.138178 1.472533
MARCH 1993 0.040075837 13.669750 0.004317 1.476850
APRIL 1993 0.004918031 13.388471 0.000542 1.477393
MAY 1993 0.035467043 13.694751 0.003826 1.481219
JUNE 1993 0.011833109 13.926864 0.001259 1.482478
JULY 1993 0.008533818 13.978980 0.000905 1.483383
AUGUST 1993 0.035579265 14.446166 0.003653 1.487036
SEPTEMBER 1993 0.007973380 14.693206 0.000807 1.487843
OCTOBER 1993 0.000109724 14.839065 0.000011 1.487854
NOVEMBER 1993 0.033197072 14.656405 0.003370 1.491224
DECEMBER 1993 0.001984805 14.941376 0.000198 1.491422
JANUARY 1994 0.001280600 15.599130 0.000122 1.491544
FEBRUARY 1994 0.174365900 15.288211 0.017011 1.508556
MARCH 1994 0.003481000 14.571105 0.000360 1.508916
APRIL 1994 0.002869500 14.629531 0.000296 1.509212
MAY 1994 0.021517200 14.736860 0.002204 1.511416
JUNE 1994 0.013288700 14.109000 0.001424 1.512839
JULY 1994 0.005212700 14.209388 0.000555 1.513394
AUGUST 1994 0.034145600 14.873153 0.003474 1.516869
SEPTEMBER 1994 0.012520000 14.270171 0.001331 1.518200
OCTOBER 1994 0.001901300 14.778154 0.000195 1.518395
NOVEMBER 1994 0.052528500 14.293964 0.005580 1.523975
MARCH 1995 0.021289731 14.592702 0.002223 1.526198
APRIL 1995 0.008104629 14.753894 0.000838 1.527037
MAY 1995 0.018936200 15.074655 0.001918 1.528955
JUNE 1995 0.008869316 15.700194 0.000864 1.529819
MARCH 1996 1.177980038 18.258224 0.098700 1.628519
APRIL 1996 0.000000000 19.296759 0.000000 1.628519
MAY 1996 0.000000000 20.262674 0.000000 1.628519
JUNE 1996 0.000000000 20.376439 0.000000 1.628519
JULY 1996 0.000000000 18.541704 0.000000 1.628519
AUGUST 1996 0.000000000 19.397824 0.000000 1.628519
SEPTEMBER 1996 0.000000000 20.888513 0.000000 1.628519
OCTOBER 1996 0.000000000 20.698737 0.000000 1.628519
NOVEMBER 1996 0.000000000 22.000274 0.000000 1.628519
DECEMBER 1996 0.000000000 21.065201 0.000000 1.628519
JANUARY 1997 0.000000000 23.137267 0.000000 1.628519
(PAGE 2 OF 3)
- ------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
PACIFIC SELECT FUND
DECEMBER 31, 1997
EQUITY
- ------
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
Additional Accumulative
Dividend Dates Dividend Rate NAV Shares Shares
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
TEN YEAR ACCUMULATIVE SHARES (cont'd)
FEBRUARY 1997 0.000000000 22.207678 0.000000 1.628519
MARCH 1997 0.000000000 21.264787 0.000000 1.628519
APRIL 1997 0.786638395 21.171369 0.060509 1.689028
MAY 1997 0.006593802 22.134266 0.000503 1.689531
JUNE 1997 0.000000000 23.036371 0.000000 1.689531
JULY 1997 0.015812354 24.907089 0.001073 1.690604
AUGUST 1997 0.000000000 23.870024 0.000000 1.690604
SEPTEMBER 1997 0.021139172 25.014343 0.001429 1.692032
OCTOBER 1997 0.017944371 23.694750 0.001281 1.693314
NOVEMBER 1997 0.032541780 23.755239 0.002320 1.695633
DECEMBER 1997 0.016538219 23.893116 0.001174 1.696807
NAV AS OF DECEMBER 1987 10.233000
NAV AS OF DECEMBER 1997 23.893116
10 YEAR ADJUSTED NAV DECEMBER 1997 40.542008
CHANGE IN VALUE 30.309008
TOTAL RETURN 296.19%
-----------
AVG ANNUAL RETURN 14.76%
-----------
(Page 3 of 3)
- ------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
PACIFIC SELECT FUND
DECEMBER 31, 1997
BOND AND INCOME
- ---------------
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
Additional Accumulative
Dividend Dates Dividend Rate NAV Shares Shares
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
TEN YEAR ACCUMULATIVE SHARES 1.000000
JANUARY 31, 1988 0.079637600 11.227000 0.007093 1.007093
FEBRUARY 28, 1988 0.085225900 11.241000 0.007635 1.014729
MARCH 28, 1988 0.085296600 10.920000 0.007926 1.022655
APRIL 30, 1988 0.084483100 10.618000 0.008137 1.030792
MAY 31, 1988 0.089288700 10.409000 0.008842 1.039634
JUNE 28, 1988 0.082077800 10.688000 0.007984 1.047618
JULY 31, 1988 0.081746800 10.455000 0.008191 1.055809
AUGUST 30, 1988 0.087156100 10.446000 0.008809 1.064618
SEPTEMBER 30, 1988 0.084327100 10.673000 0.008412 1.073030
OCTOBER 31, 1988 0.083899200 10.657000 0.008448 1.081477
NOVEMBER 29, 1988 0.085442400 10.411000 0.008876 1.090353
DECEMBER 28, 1988 0.085801300 10.398000 0.008997 1.099350
JANUARY 31, 1989 0.083893000 10.552000 0.008740 1.108091
FEBRUARY 28, 1989 0.084951300 10.272000 0.009164 1.117255
MARCH 28, 1989 0.085265300 10.267000 0.009279 1.126533
APRIL 30, 1989 0.080591100 10.387000 0.008741 1.135274
MAY 31, 1989 0.094112300 10.647000 0.010035 1.145309
JUNE 28, 1989 0.084592900 11.156000 0.008685 1.153993
JULY 31, 1989 0.085066100 11.225000 0.008745 1.162739
AUGUST 30, 1989 0.084018700 10.971000 0.008905 1.171643
SEPTEMBER 30, 1989 0.081153000 10.953000 0.008681 1.180324
OCTOBER 31, 1989 0.086333700 11.166000 0.009126 1.189450
NOVEMBER 29, 1989 0.079708300 11.102000 0.008540 1.197990
DECEMBER 28, 1989 0.237832300 10.930000 0.026068 1.224058
JANUARY 31, 1990 0.080842600 10.759000 0.009198 1.233255
FEBRUARY 28, 1990 0.079913200 10.454000 0.009427 1.242683
MARCH 28, 1990 0.081243300 10.332000 0.009772 1.252454
APRIL 30, 1990 0.082160000 10.065000 0.010224 1.262678
MAY 31, 1990 0.081648600 10.351000 0.009960 1.272638
JUNE 28, 1990 0.080467000 10.540000 0.009716 1.282354
JULY 31, 1990 0.084114100 10.608000 0.010168 1.292522
AUGUST 30, 1990 0.081779000 10.189000 0.010374 1.302896
SEPTEMBER 30, 1990 0.076278600 10.088000 0.009852 1.312748
OCTOBER 31, 1990 0.087516100 10.076000 0.011402 1.324150
NOVEMBER 29, 1990 0.082972600 10.267000 0.010701 1.334851
DECEMBER 28, 1990 0.081603707 10.269221 0.010607 1.345458
JANUARY 31, 1991 0.082905497 10.162900 0.010976 1.356434
FEBRUARY 28, 1991 0.082919310 10.454690 0.010758 1.367192
MARCH 31, 1991 0.077256300 10.540120 0.010021 1.377213
APRIL 30, 1991 0.086828103 10.679552 0.011197 1.388410
MAY 31, 1991 0.092356067 10.663106 0.012025 1.400436
JUNE 28, 1991 0.073242618 10.605544 0.009672 1.410107
JULY 31, 1991 0.082261709 10.694533 0.010846 1.420954
AUGUST 30, 1991 0.076779943 10.918314 0.009992 1.430946
(Page 1 of 3)
- -------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
PACIFIC SELECT FUND
DECEMBER 31, 1997
BOND AND INCOME
- ---------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Additional Accumulative
Dividend Dates Dividend Rate NAV Shares Shares
- --------------------------------------------------------------------------------
TEN YEAR ACCUMULATIVE SHARES (cont'd)
<S> <C> <C> <C> <C>
SEPTEMBER 30, 1991 0.074930734 11.136629 0.009628 1.440574
OCTOBER 31, 1991 0.074005381 11.137746 0.009572 1.450146
NOVEMBER 29, 1991 0.072225767 11.282914 0.009283 1.459429
DECEMBER 31, 1991 0.074312744 11.694512 0.009274 1.468703
JANUARY 31, 1992 0.074525441 11.513277 0.009507 1.478210
FEBRUARY 29, 1992 0.070738418 11.500198 0.009093 1.487302
MARCH 31, 1992 0.081056533 11.359164 0.010613 1.497915
APRIL 30, 1992 0.076006833 11.290722 0.010084 1.507999
MAY 31, 1992 0.071821010 11.560333 0.009369 1.517368
JUNE 30, 1992 0.076751744 11.656030 0.009991 1.527359
JULY 31, 1992 0.073740531 11.977912 0.009403 1.536762
AUGUST 31, 1992 0.074335804 12.020718 0.009503 1.546266
SEPTEMBER 30, 1992 0.077667199 12.156669 0.009879 1.556144
OCTOBER 1992 0.077450149 11.637658 0.010356 1.566501
NOVEMBER 1992 0.074960263 11.509573 0.010202 1.576703
DECEMBER 1992 0.074635411 11.700725 0.010057 1.586761
JANUARY 1993 0.072096979 12.003528 0.009531 1.596291
FEBRUARY 1993 0.067198520 12.413409 0.008641 1.604932
MARCH 1993 0.085323326 12.199285 0.011225 1.616158
APRIL 1993 0.075661987 12.245436 0.009986 1.626143
MAY 1993 0.067904425 12.246505 0.009017 1.635160
JUNE 1993 0.079899313 12.689401 0.010296 1.645456
JULY 1993 0.073224327 12.850460 0.009376 1.654832
AUGUST 1993 0.073555822 13.345594 0.009121 1.663953
SEPTEMBER 1993 0.069310337 13.479949 0.008556 1.672508
OCTOBER 1993 0.065871229 13.493884 0.008164 1.680673
NOVEMBER 1993 0.071522823 13.092555 0.009181 1.689854
DECEMBER 1993 0.070411112 13.046607 0.009120 1.698974
JANUARY 1994 0.071095400 13.317657 0.009070 1.708044
FEBRUARY 1994 0.674514400 12.129527 0.094983 1.803027
MARCH 1994 0.069059700 11.537376 0.010792 1.813820
APRIL 1994 0.065809800 11.232058 0.010627 1.824447
MAY 1994 0.070897700 11.033858 0.011723 1.836170
JUNE 1994 0.069447500 10.917000 0.011681 1.847851
JULY 1994 0.069401200 11.220469 0.011429 1.859280
AUGUST 1994 0.069932000 11.059854 0.011756 1.871036
SEPTEMBER 1994 0.070077400 10.610582 0.012357 1.883393
OCTOBER 1994 0.070524100 10.513299 0.012634 1.896027
NOVEMBER 1994 0.070672600 10.476844 0.012790 1.908817
DECEMBER 1994 0.217417900 10.423590 0.039815 1.948632
MARCH 1995 0.206522152 11.033341 0.036475 1.985106
APRIL 1995 0.070275693 11.162527 0.012498 1.997604
MAY 1995 0.069187200 12.091218 0.011430 2.009034
JUNE 1995 0.068614326 12.137037 0.011358 2.020392
(Page 2 of 3)
- --------------------------------------------------------------------------------
</TABLE>
<PAGE>
PACIFIC SELECT FUND
DECEMBER 31, 1997
BOND AND INCOME
- ---------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Additional Accumulative
Dividend Dates Dividend Rate NAV Shares Shares
- --------------------------------------------------------------------------------
TEN YEAR ACCUMULATIVE SHARES
<S> <C> <C> <C> <C>
JULY 1995 0.068449476 11.867032 0.011654 2.032046
AUGUST 1995 0.067752430 12.126197 0.011354 2.043399
SEPTEMBER 1995 0.066568185 12.306526 0.011053 2.054453
OCTOBER 1995 0.066706420 12.476717 0.010984 2.065437
NOVEMBER 1995 0.066645850 12.664150 0.010869 2.076306
DECEMBER 1995 0.065553940 13.014351 0.010458 2.086765
JANUARY 1996 0.064829635 12.912101 0.010477 2.097242
FEBRUARY 1996 0.065413522 12.154316 0.011287 2.108529
MARCH 1996 0.118662972 11.830877 0.021148 2.129677
APRIL 1996 0.066770222 11.599295 0.012259 2.141937
MAY 1996 0.065827920 11.484721 0.012277 2.154214
JUNE 1996 0.034601711 11.645249 0.006401 2.160615
JULY 1996 0.069763910 11.551096 0.013049 2.173664
AUGUST 1996 0.065841942 11.320742 0.012642 2.186306
SEPTEMBER 1996 0.066047858 11.585531 0.012464 2.198770
OCTOBER 1996 0.067185527 12.013926 0.012296 2.211066
NOVEMBER 1996 0.063967990 12.427631 0.011381 2.222447
DECEMBER 1996 0.071238520 12.050356 0.013139 2.235586
JANUARY 1997 0.066107777 11.881963 0.012438 2.248024
FEBRUARY 1997 0.066453343 11.865509 0.012590 2.260614
MARCH 1997 0.067424806 11.470473 0.013288 2.273902
APRIL 1997 0.237330318 11.486273 0.046984 2.320886
MAY 1997 0.066068888 11.541647 0.013286 2.334171
JUNE 1997 0.065044809 11.726189 0.012948 2.347119
JULY 1997 0.065444491 12.517833 0.012271 2.359390
AUGUST 1997 0.063358969 11.990598 0.012467 2.371857
SEPTEMBER 1997 0.067478657 12.272761 0.013041 2.384898
OCTOBER 1997 0.000000000 12.641926 0.000000 2.384898
NOVEMBER 1997 0.072359904 12.770944 0.013513 2.398411
DECEMBER 1997 0.095630006 12.969996 0.017684 2.416095
NAV AS OF DECEMBER 1987 10.746000
NAV AS OF DECEMBER 1997 12.969996
10 YEAR ADJUSTED NAV DEC 1997 31.336738
CHANGE IN VALUE 20.590738
TOTAL RETURN 191.61%
---------
AVG ANNUAL RETURN 11.30%
---------
(Page 3 of 3)
- --------------------------------------------------------------------------------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000813900
<NAME> PACIFIC SELECT FUND
<SERIES>
<NUMBER> 1
<NAME> MONEY MARKET PORTFOLIO
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 450,276
<INVESTMENTS-AT-VALUE> 450,276
<RECEIVABLES> 2,086
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 1
<TOTAL-ASSETS> 452,363
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 858
<TOTAL-LIABILITIES> 858
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 451,531
<SHARES-COMMON-STOCK> 44,902
<SHARES-COMMON-PRIOR> 32,078
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (26)
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 451,505
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 22,411
<OTHER-INCOME> 2
<EXPENSES-NET> 1,753
<NET-INVESTMENT-INCOME> 20,660
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 20,660
<EQUALIZATION> 1,437
<DISTRIBUTIONS-OF-INCOME> (20,660)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 69,265
<NUMBER-OF-SHARES-REDEEMED> (58,497)
<SHARES-REINVESTED> 2,056
<NET-CHANGE-IN-ASSETS> 129,312
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> (26)
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,521
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,753
<AVERAGE-NET-ASSETS> 399,294
<PER-SHARE-NAV-BEGIN> 10.04
<PER-SHARE-NII> 0.51
<PER-SHARE-GAIN-APPREC> 0.01
<PER-SHARE-DIVIDEND> (0.50)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.06
<EXPENSE-RATIO> 0.44
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000813900
<NAME> PACIFIC SELECT FUND
<SERIES>
<NUMBER> 2
<NAME> HIGH YIELD BOND PORTFOLIO
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 301,231
<INVESTMENTS-AT-VALUE> 305,419
<RECEIVABLES> 6,102
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 1
<TOTAL-ASSETS> 311,522
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 397
<TOTAL-LIABILITIES> 397
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 303,801
<SHARES-COMMON-STOCK> 31,190
<SHARES-COMMON-PRIOR> 18,586
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (19)
<ACCUMULATED-NET-GAINS> 3,155
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 4,188
<NET-ASSETS> 311,125
<DIVIDEND-INCOME> 38
<INTEREST-INCOME> 20,734
<OTHER-INCOME> 132
<EXPENSES-NET> 1,602
<NET-INVESTMENT-INCOME> 19,302
<REALIZED-GAINS-CURRENT> 3,142
<APPREC-INCREASE-CURRENT> (924)
<NET-CHANGE-FROM-OPS> 21,520
<EQUALIZATION> 2,059
<DISTRIBUTIONS-OF-INCOME> (19,302)
<DISTRIBUTIONS-OF-GAINS> (1,910)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 16,492
<NUMBER-OF-SHARES-REDEEMED> (6,021)
<SHARES-REINVESTED> 2,133
<NET-CHANGE-IN-ASSETS> 126,381
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 1,922
<OVERDISTRIB-NII-PRIOR> (19)
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,466
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,602
<AVERAGE-NET-ASSETS> 244,703
<PER-SHARE-NAV-BEGIN> 9.94
<PER-SHARE-NII> 0.78
<PER-SHARE-GAIN-APPREC> 0.12
<PER-SHARE-DIVIDEND> (0.77)
<PER-SHARE-DISTRIBUTIONS> (0.09)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.98
<EXPENSE-RATIO> 0.65
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000813900
<NAME> PACIFIC SELECT FUND
<SERIES>
<NUMBER> 3
<NAME> GOVERNMENT SECURITIES PORTFOLIO
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 137,559
<INVESTMENTS-AT-VALUE> 138,593
<RECEIVABLES> 1,151
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 321
<TOTAL-ASSETS> 140,065
<PAYABLE-FOR-SECURITIES> 10,065
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 100
<TOTAL-LIABILITIES> 10,165
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 126,127
<SHARES-COMMON-STOCK> 12,051
<SHARES-COMMON-PRIOR> 9,394
<ACCUMULATED-NII-CURRENT> 56
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 2,458
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,259
<NET-ASSETS> 129,900
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 6,518
<OTHER-INCOME> 0
<EXPENSES-NET> 716
<NET-INVESTMENT-INCOME> 5,802
<REALIZED-GAINS-CURRENT> 3,111
<APPREC-INCREASE-CURRENT> 1,172
<NET-CHANGE-FROM-OPS> 10,085
<EQUALIZATION> 317
<DISTRIBUTIONS-OF-INCOME> (5,801)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 4,335
<NUMBER-OF-SHARES-REDEEMED> (2,233)
<SHARES-REINVESTED> 555
<NET-CHANGE-IN-ASSETS> 32,358
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> (54)
<OVERDIST-NET-GAINS-PRIOR> (544)
<GROSS-ADVISORY-FEES> 646
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 716
<AVERAGE-NET-ASSETS> 107,725
<PER-SHARE-NAV-BEGIN> 10.38
<PER-SHARE-NII> 0.53
<PER-SHARE-GAIN-APPREC> 0.42
<PER-SHARE-DIVIDEND> (0.55)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.78
<EXPENSE-RATIO> 0.66
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000813900
<NAME> PACIFIC SELECT FUND
<SERIES>
<NUMBER> 4
<NAME> MANAGED BOND PORTFOLIO
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 498,798
<INVESTMENTS-AT-VALUE> 507,128
<RECEIVABLES> 5,751
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 840
<TOTAL-ASSETS> 513,719
<PAYABLE-FOR-SECURITIES> 44,889
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 255
<TOTAL-LIABILITIES> 45,144
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 452,105
<SHARES-COMMON-STOCK> 42,073
<SHARES-COMMON-PRIOR> 24,217
<ACCUMULATED-NII-CURRENT> 297
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 6,812
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 9,361
<NET-ASSETS> 468,575
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 21,900
<OTHER-INCOME> 4
<EXPENSES-NET> 2,262
<NET-INVESTMENT-INCOME> 19,642
<REALIZED-GAINS-CURRENT> 6,755
<APPREC-INCREASE-CURRENT> 8,282
<NET-CHANGE-FROM-OPS> 34,679
<EQUALIZATION> 4,541
<DISTRIBUTIONS-OF-INCOME> (19,640)
<DISTRIBUTIONS-OF-GAINS> (954)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 18,496
<NUMBER-OF-SHARES-REDEEMED> (2,540)
<SHARES-REINVESTED> 1,900
<NET-CHANGE-IN-ASSETS> 208,305
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 1,439
<OVERDISTRIB-NII-PRIOR> (133)
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 2,056
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,262
<AVERAGE-NET-ASSETS> 343,226
<PER-SHARE-NAV-BEGIN> 10.75
<PER-SHARE-NII> 0.59
<PER-SHARE-GAIN-APPREC> 0.44
<PER-SHARE-DIVIDEND> (0.60)
<PER-SHARE-DISTRIBUTIONS> (0.04)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.14
<EXPENSE-RATIO> 0.66
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000813900
<NAME> PACIFIC SELECT FUND
<SERIES>
<NUMBER> 5
<NAME> GROWTH PORTFOLIO
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 201,478
<INVESTMENTS-AT-VALUE> 245,813
<RECEIVABLES> 2,548
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 1
<TOTAL-ASSETS> 248,362
<PAYABLE-FOR-SECURITIES> 1,675
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 132
<TOTAL-LIABILITIES> 1,807
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 175,053
<SHARES-COMMON-STOCK> 10,020
<SHARES-COMMON-PRIOR> 7,801
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (20)
<ACCUMULATED-NET-GAINS> 27,187
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 44,335
<NET-ASSETS> 246,555
<DIVIDEND-INCOME> 1,243
<INTEREST-INCOME> 661
<OTHER-INCOME> 3
<EXPENSES-NET> 1,456
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<NAME> EQUITY INCOME PORTFOLIO
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<NAME> PACIFIC SELECT FUND
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<NUMBER> 7
<NAME> MULTI-STRATEGY PORTFOLIO
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<S> <C>
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<CIK> 0000813900
<NAME> PACIFIC SELECT FUND
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<NAME> INTERNATIONAL PORTFOLIO
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<S> <C>
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<PAGE>
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<CIK> 0000813900
<NAME> PACIFIC SELECT FUND
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<NUMBER> 9
<NAME> EQUITY INDEX PORTFOLIO
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<S> <C>
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<PAGE>
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<CIK> 0000813900
<NAME> PACIFIC SELECT FUND
<SERIES>
<NUMBER> 10
<NAME> GROWTH LT PORTFOLIO
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<S> <C>
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<CIK> 0000813900
<NAME> PACIFIC SELECT FUND
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<NAME> EQUITY PORTFOLIO
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<S> <C>
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<PAGE>
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<CIK> 0000813900
<NAME> PACIFIC SELECT FUND
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<NAME> BOND AND INCOME PORTFOLIO
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<S> <C>
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<CIK> 0000813900
<NAME> PACIFIC SELECT FUND
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<NAME> AGGRESSIVE EQUITY PORTFOLIO
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<PAGE>
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<CIK> 0000813900
<NAME> PACIFIC SELECT FUND
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<NAME> EMERGING MARKETS PORTFOLIO
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</TABLE>
