<PAGE>
SUPPLEMENT DATED MARCH 18, 1998 TO THE
PROSPECTUS FOR PACIFIC SELECT FUND (THE "FUND") DATED MAY 1, 1997,
AS SUPPLEMENTED SEPTEMBER 2, 1997 ("PROSPECTUS")
NEW PORTFOLIO MANAGER FOR THE AGGRESSIVE EQUITY PORTFOLIO
THE AGGRESSIVE EQUITY PORTFOLIO IS NOT AVAILABLE TO PACIFIC CORINTHIAN
VARIABLE ANNUITY CONTRACTS.
Columbus Circle Investors, the current Portfolio Manager for the Aggressive
Equity Portfolio, has provided written confirmation to Pacific Life Insurance
Company ("Pacific Life"), the Fund's Adviser, that it will not serve as
Portfolio Manager to the Portfolio after April 30, 1998. Alliance Capital
Management L.P. ("Alliance Capital") will become the Portfolio Manager for the
Aggressive Equity Portfolio effective May 1, 1998, pursuant to a portfolio
management agreement with the Adviser and the Fund (the "New Portfolio
Management Agreement"), subject to approval by Shareholders of the Portfolio.
The New Portfolio Management Agreement was approved by the Board of Trustees,
including a majority of the Trustees who are not parties to the New Portfolio
Management Agreement or interested persons of such parties, at a Board meeting
held on February 23, 1998. Variable Contract Owners having an interest in the
Aggressive Equity Portfolio as of record date March 6, 1998 will be asked to
approve the New Portfolio Management Agreement with Alliance Capital at a
special meeting of Shareholders scheduled for April 15, 1998.
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 the firm has five additional offices in the United
States and subsidiaries and affiliates worldwide.
Kevin J. O'Brien, Senior Vice President and Portfolio Manager, and Alden M.
Stewart, Executive Vice President and Portfolio Manager, will be 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 (27
years with Alliance Capital or affiliated companies). 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.
If the New Portfolio Management is approved by Shareholders, effective May
1, 1998, for the services provided, Pacific Life will pay Alliance Capital a
fee based on a percentage of the Portfolio's average daily net assets
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>
The advisory fee paid to Pacific Life by the Aggressive Equity Portfolio will
not change.
<PAGE>
CHANGES IN THE AGGRESSIVE EQUITY PORTFOLIO'S INVESTMENT POLICIES
The Portfolio's investment objective is capital appreciation. The investment
objective would not change. The Trustees have approved changes to certain of
the Portfolio's investment policies, which will become effective, if the
Shareholders approve the New Portfolio Management Agreement, on the date that
Alliance Capital would assume management responsibility for the Portfolio,
which is expected to be May 1, 1998. The Portfolio's investment objective and
investment policies, restated to reflect the changes in investment policies
that will become effective if the New Portfolio Management Agreement is
approved, are as follows:
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.
For additional information concerning descriptions of securities, investment
techniques, and the potential risks of various types of securities and
investment techniques, please refer to "Certain Investment Policies and
Related Risks" below and the Fund's Prospectus and Statement of Additional
Information.
COMPARISON OF MANAGEMENT STYLES
It is expected that if Shareholders approve the New Portfolio Management
Agreement with Alliance Capital, and the changes in investment policies become
effective, the differences in investment policies and the different investment
management styles of Alliance Capital and the current Portfolio Manager will
result in some changes in the Portfolio and its holdings. Under both the
current and revised policies, the Portfolio invests primarily in small and
medium capitalization companies, and therefore the Portfolio will continue to
be intended for long-term investors who are willing to accept the greater
risks associated with investment in such companies. However, the current
Portfolio Manager utilizes an investment discipline called "Positive Momentum
& Positive Surprise" and seeks companies doing better than expected. In
contrast, Alliance Capital selects companies that it believes have favorable
growth prospects.
In the event that Shareholders of the Portfolio approve the New Portfolio
Management Agreement, significant portfolio turnover may occur in connection
with a restructuring of the Portfolio's holdings to reflect the management
style of Alliance Capital. Such restructuring may result in increased
transactional costs in the Portfolio's current fiscal year.
2
<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 Capital 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
Aggressive Equity Portfolio's current and future investments are not and will
not necessarily be identical to those of the Alliance Aggressive Stock
Portfolio. Differences in the asset size of the two funds might reduce their
comparability. 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
Fund's 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. These total return figures represent past
performance and do not indicate future results, which will vary.
The following performance data does not reflect the deduction for separate
account or contract level charges.
TOTAL RETURN FOR THE ALLIANCE AGGRESSIVE
STOCK PORTFOLIO, THE RUSSELL 2000 INDEX AND THE RUSSELL MIDCAP INDEX
<TABLE>
<CAPTION>
ALLIANCE AGGRESSIVE STOCK
PORTFOLIO ADJUSTED
ALLIANCE TO REFLECT RUSSELL
AGGRESSIVE EXPENSES OF THE RUSSELL 2000 MIDCAP
STOCK PORTFOLIO* AGGRESSIVE EQUITY PORTFOLIO INDEX+ INDEX++
- -----------------------------------------------------------------------------------------------------
ANNUAL TOTAL ANNUAL ANNUAL ANNUAL
YEAR RETURN (%) TOTAL RETURN (%) TOTAL RETURN (%) TOTAL RETURN (%)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1997 10.94 10.62 22.36 29.01
1996 22.20 21.66(/2/) 16.49 19.00
1995 31.63 28.44 34.45
1994 (3.81) (1.82) (2.09)
1993 16.77 18.89 14.30
1992 (3.16) 18.42 16.34
1991 86.87 46.04 41.51
1990 8.16 (19.52) (11.50)
1989 43.50 16.24 26.27
1988 1.13 24.91 19.80
1987 7.30 (8.78) 0.23
1986 35.90(/1/) 4.04(/3/) 15.60(/3/)
- -----------------------------------------------------------------------------------------------------
<CAPTION>
TIME PERIOD AVERAGE ANNUAL AVERAGE ANNUAL AVERAGE ANNUAL AVERAGE ANNUAL
(THRU 12/31/97) TOTAL RETURN (%) TOTAL RETURN (%) TOTAL RETURN (%) TOTAL RETURN (%)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1 year 10.94 10.62 22.36 29.01
3 years 21.29 22.33 27.32
5 years 14.92 16.40 18.23
10 years 19.00 15.75 17.67
Inception (1/27/86) 19.41 12.57(/4/) 16.06(/4/)
</TABLE>
(/1/) 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 return for 1996 were
annualized.
(/3/) Total return is for the period 2/1/86 through 12/31/86.
(/4/) Average annual total return is for the period 2/1/86 through 12/31/97.
* Returns reflect the investment advisory fees and operating expenses of the
Alliance Aggressive Stock Portfolio.
+ The Russell 2000 Index measures the performance of the 2,000 smallest
companies in the Russell 3000 Index (an index comprised of the 3,000
largest companies in terms of market capitalization), which represents
3
<PAGE>
approximately 10% of the total market capitalization of the Russell 3000
Index. As of December 31, 1997, the dollar weighted average market
capitalization of the Russell 2000 Index was approximately $820 million and
the dollar weighted median market capitalization was approximately $750
million. For purposes of calculating total return, dividends declared by
any company in the Russell 2000 Index are reinvested on the ex-dividend
date. The Russell 2000 Index is unmanaged.
++ The Russell Midcap Index measures the performance of the 800 smallest
companies of the Russell 1000 Index (an index comprised of the
1,000 largest companies in the Russell 3000 Index in terms of market
capitalization), which represents approximately 35% of the total market
capitalization of the Russell 1000 Index. As of December 31, 1997, the
dollar weighted average market capitalization of the Russell Midcap Index
was approximately $5 billion and the dollar weighted median capitalization
was approximately $4.4 billion. For purposes of calculating total return,
dividends declared by any company in the Russell Midcap Index are
reinvested on the ex-dividend date. The Russell Midcap Index is unmanaged.
NEW PORTFOLIO MANAGER FOR THE EQUITY PORTFOLIO
AND FOR THE BOND AND INCOME PORTFOLIO
Greenwich Street Advisors, the current Portfolio Manager for the Equity
Portfolio and Bond and Income Portfolio, has provided written confirmation to
Pacific Life, the Fund's Adviser, that it will not serve as Portfolio Manager
to the Portfolios after April 30, 1998. Goldman Sachs Asset Management
("Goldman Sachs"), a separate operating division of Goldman, Sachs & Co., will
become the Portfolio Manager for the Equity Portfolio and the Bond and Income
Portfolio effective May 1, 1998, pursuant to a portfolio management agreement
with the Adviser and the Fund (the "New Portfolio Management Agreement"),
subject to approval by Shareholders of the Portfolios. The New Portfolio
Management Agreement was approved by the Board of Trustees, including a
majority of the Trustees who are not parties to the New Portfolio Management
Agreement or interested persons of such parties, at a Board meeting held on
February 23, 1998. Variable Contract Owners having an interest in the Equity
Portfolio and/or the Bond and Income Portfolio as of record date March 6, 1998
will be asked to approve the New Portfolio Management Agreement with Goldman
Sachs at a special meeting of Shareholders scheduled for April 15, 1998.
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 January 26, 1998, Goldman Sachs and its affiliates manage, administer
and distribute over $140 billion for institutional and individual investors
worldwide, including fixed income assets in excess of $32 billion for which
they acted as investment adviser. 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.
Robert C. Jones, Managing Director, Victor H. Pinter, Vice President, and
Kent A. Clark, Vice President, will be 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, will be 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-
4
<PAGE>
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.
If the New Portfolio Management Agreement is approved by Shareholders,
effective May 1, 1998, for the services provided, Pacific Life will pay
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>
The Advisory fees paid to Pacific Life by the Equity and Bond and Income
Portfolios will not change.
CHANGES IN THE EQUITY PORTFOLIO'S INVESTMENT POLICIES
The Portfolio's primary investment objective is to achieve capital
appreciation, with current income being of secondary importance. The Trustees
have approved changes to certain of the Portfolio's investment policies, which
will become effective, if the Shareholders approve the New Portfolio
Management Agreement, on the date that Goldman Sachs would assume management
responsibility for the Portfolio, which is expected to be May 1, 1998. The
investment objective would not change. The Portfolio's investment objective
and investment policies, restated to reflect the changes in investment
policies that will become effective if the New Portfolio Management Agreement
is approved, are as follows:
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 Model is a rigorous computerized rating system for
forecasting the returns of individual equity securities according to
fundamental investment characteristics. The Multifactor Model contains
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).
5
<PAGE>
The weightings assigned to the factors in the Multifactor Model are
derived from a statistical formulation that considers each factor's
historical performance in different market environments. As such, the
Multifactor Model is designed to evaluate each security using only the
factors that are statistically related to returns in the anticipated market
environment. Because it includes many disparate factors, the Portfolio
Manager believes that the Multifactor Model is broader in scope and
provides 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 indices. 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.
For additional information concerning a description of securities,
investment techniques, and the potential risks associated with various types
of securities and investment techniques, please refer to "Certain Investment
Policies and Related Risks" below and the Fund's Prospectus and Statement of
Additional Information.
COMPARISON OF MANAGEMENT STYLES
It is expected that if Shareholders approve the New Portfolio Management
Agreement with Goldman Sachs, and the changes in investment policies become
effective, the differences in investment policies referenced above and the
different investment management styles of Goldman Sachs and the current
Portfolio Manager will result in some changes in the Portfolio and its
holdings. Under both the current and revised policies, the Portfolio invests
primarily in equity securities of U.S. issuers, and therefore Shareholders
will continue to be exposed to the market and financial risks of investment in
common stock. Under the current investment policies, from time to time the
Portfolio could be invested in fewer industries or groups of industries than
more broad-based equity portfolios, which may create an opportunity for higher
returns, but may also result in higher risk because of greater exposure to an
industry or group of industries. Under the revised investment policies, it is
expected that the Portfolio would normally be diversified across a broad
spectrum of industries.
The utilization of the CORE methodology, as described above, would result in
a different investment strategy for security selection if Goldman Sachs is
approved. It is expected that under the CORE methodology, the risk,
capitalization, and industry characteristics of the Portfolio would be more
closely aligned to the Russell 1000 Growth Index (the "Russell Index") than
under the current investment policies. In addition, the revised investment
policies would reflect a greater emphasis on seeking to outperform the total
return of the Russell Index.
In the event that Shareholders of the Portfolio approve the New Portfolio
Management Agreement, significant portfolio turnover may occur in connection
with a restructuring of the Portfolio's holdings to reflect the management
style of Goldman Sachs. Such restructuring may result in increased
transactional costs in the Portfolio's current fiscal year.
PRIOR PERFORMANCE OF ACCOUNTS MANAGED BY GOLDMAN SACHS COMPARABLE TO THE
EQUITY PORTFOLIO
The table below sets forth the performance data relating to the historical
performance of the Goldman Sachs CORE Large Cap Growth Composite (the
"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). The Composite currently consists of 8
accounts, including 6 advisory accounts and 2 mutual funds. In prior years,
the Composite consisted of less advisory accounts and no mutual funds. The
performance information for the Composite is presented in two forms: (1) the
first presentation reflects the average 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 in the first
presentation include investment advisory fees; expenses do not include the
expenses for custody (or other expenses for the mutual funds), which if
included, could lessen performance and which are expenses the Portfolio bears.
The average fees for the
6
<PAGE>
Composite from January 1995 through December 1997 are estimated. 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 using the methodology recommended by 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. 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.
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 THE RUSSELL 1000 GROWTH INDEX
<TABLE>
<CAPTION>
GOLDMAN SACHS CORE
LARGE CAP GROWTH COMPOSITE
ADJUSTED TO REFLECT
GOLDMAN SACHS CORE EXPENSES OF THE EQUITY RUSSELL 1000
LARGE CAP GROWTH COMPOSITE* PORTFOLIO GROWTH INDEX+
- ------------------------------------------------------------------------------------------
ANNUAL ANNUAL ANNUAL
YEAR TOTAL RETURN (%) TOTAL RETURN (%) TOTAL RETURN (%)
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1997 32.46 32.41 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 32.46 32.41 30.49
3 years 33.26 33.19 30.11
5 years 23.31 23.15 18.40
Inception
(12/1/91) 21.55 21.37 17.54
</TABLE>
* Returns reflect the average investment advisory fees and expenses charged
to the accounts in the Composite. Expenses do not include the expenses for
custody (or other expenses for mutual funds), which if included, could
lessen performance and which are expenses the Equity Portfolio bears.
7
<PAGE>
+ The Russell 1000 Growth Index measures the performance of those companies
in the Russell 1000 Index with higher price-to-book ratios and higher
forecasted growth values than other companies in the Russell 1000 Index.
The Russell 1000 Index measures the performance of the 1,000 largest
companies of the Russell 3000 Index, an index that measures the performance
of the largest 3,000 companies in terms of market capitalization. For
purposes of calculating total return, dividends declared by any company in
the Russell 1000 Growth Index are reinvested on the ex-dividend date. The
Russell 1000 Growth Index is unmanaged.
CHANGES IN THE BOND AND INCOME PORTFOLIO'S INVESTMENT OBJECTIVE AND POLICIES
The current investment objective of the Bond and Income Portfolio is to
provide as high a level of current income as is consistent with prudent
investment management and preservation of capital. Shareholders of the Bond
and Income Portfolio will also be asked to approve an amendment to the
Portfolio's investment objective under which the Portfolio would seek to
provide total return and income consistent with prudent investment management.
This change, and related changes to the Portfolio's investment policies (which
are not subject to Shareholder approval), are intended to modernize the
Portfolio's policies and to reflect the investment management style that
Goldman Sachs would utilize in managing the Portfolio. The proposed change in
investment objective is contingent upon Shareholder approval of the New
Portfolio Management Agreement.
The Fund's Board of Trustees also has approved changes to certain of the
Portfolio's investment policies, which will become effective, if the
Shareholders approve the New Portfolio Management Agreement, on the date that
Goldman Sachs would assume management responsibility for the Portfolio, which
is expected to be May 1, 1998. The Portfolio's investment objective and
investment policies, restated to reflect the proposed change in investment
objective and changes in investment policies that will become effective if the
New Portfolio Management Agreement is approved, are as follows:
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-
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.
Other limitations apply to the Portfolio to address potential volatility
associated with certain investment techniques. The Portfolio may invest up
to 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
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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.
For additional information concerning descriptions of securities, investment
techniques, and the potential risks of various types of securities and
investment techniques, see "Certain Investment Policies and Related Risks"
below and the Fund's Prospectus and Statement of Additional Information.
COMPARISON OF INVESTMENT OBJECTIVE AND POLICIES
The change in the Portfolio's investment objective and policies reflect a
modernization in the Portfolio's investment policies and differences in the
management styles between Goldman Sachs and the current Portfolio Manager. By
including total return in the Portfolio's investment objective, it signifies
that the Portfolio may invest in debt securities for purposes other than
achieving income. For instance, the Portfolio could invest in debt securities
that the Portfolio Manager believes are attractively priced for the purpose of
realizing appreciation in value over time.
The new investment policies will also expand the range of eligible
investments for the Portfolio. The current investment policies of the
Portfolio provide that, among other things, the Portfolio may invest in
corporate bonds which are rated Baa or better by Moody's Investor Service,
Inc. ("Moody's"), or BBB or better by Standard & Poor's Corporation ("S&P").
Moody's describes securities rated Baa as having speculative characteristics
and, according to S&P, fixed income securities rated BBB normally exhibit
adequate protection parameters, although adverse economic conditions or
changing circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal. Nevertheless, these ratings are considered to be
"investment grade." In contrast, the new investment policies would require the
Portfolio to invest 80% of its assets in debt securities that are considered
to be "investment grade" and permit the remaining 20%, subject to the
limitations set forth above, to be invested among a variety of securities that
may present higher degrees of risk. Specifically, the Portfolio may invest up
to 20% of its assets in non-investment grade debt securities, 15% of which may
consist of debt securities of issuers, including governmental issuers located
in emerging market countries, and may invest up to 10% of its assets in non-
U.S. dollar-denominated securities.
In addition, under the revised investment policies, the Portfolio generally
will seek an average portfolio duration that is tied closely to the average
duration of the Lehman Brothers Long Term Government/Corporate
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Bond Index. Duration is a measure of the 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. Debt securities with longer
durations generally are subject to greater price volatility than shorter term
debt securities in the event of changes in interest rates. The average
portfolio duration of the Index was 10.19 years as of December 31, 1997. On
that same date, the Portfolio's average portfolio duration was 12.5 years.
While the duration of the Index is long in relation to other fixed-income
funds, it is shorter than the Portfolio's duration under current policies.
This shorter duration is likely to result in the Portfolio having somewhat
less total return potential in a rising bond market than the Portfolio under
current policies, but somewhat less volatility and potential loss in a falling
bond market.
In the event that Shareholders of the Bond and Income Portfolio approve the
New Portfolio Management Agreement, significant portfolio turnover may occur
in connection with a restructuring of the Portfolio's holdings to reflect the
management style of Goldman Sachs.
CERTAIN INVESTMENT POLICIES AND RELATED RISKS
The following passages provide information regarding certain risks
associated with some of the investment policies for each Portfolio (if the
Portfolio Management Agreement for each Portfolios are approved by
Shareholders of the respective Portfolio and if the amended investment
objective for the Bond and Income Portfolio is approved by Shareholders of
that Portfolio), including those investment policies that currently are not
used by any current Portfolio Manager of the Fund. For a complete description
of securities, other investment techniques, and related risks, please refer to
the Fund's Prospectus or Statement of Additional Information.
EMERGING MARKET DEBT SECURITIES
If Shareholders approve Goldman Sachs as the New Portfolio Manager of the
Bond and Income Portfolio and the amended investment objective, the Portfolio
may also invest in the debt securities of issuers, which may include
governments, from developing or "emerging market" countries. Most, if not all,
of these securities are unrated and exhibit many of the same characteristics
as high-yield debt securities. In the case of many emerging market debt
securities, the amount of publicly-available information may be even less than
for domestic high-yield debt 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
they are 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.
Investing in emerging market debt securities also involves the risks of
investing in foreign securities generally. Please see "High Yield Bonds" and
"Foreign Securities in the Prospectus and Statement of Additional Information"
for a summary of these risk factors.
Interest Rate Swap Agreements: The Bond and Income Portfolio may invest in
interest rate swap agreements. Swap agreements are two party contracts entered
into primarily by institutional investors for periods ranging from a few weeks
to more than a year. In a standard "swap" transaction, two parties agree to
exchange
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the returns (or differentials in rates of return) earned or realized on
particular predetermined investments or instruments. The gross returns to be
exchanged or "swapped" between the parties are calculated with respect to a
"notional amount," i.e., the return on or increase in value of a particular
dollar amount invested at a particular interest rate, in a particular foreign
currency, or in a "basket" of securities representing the particular index.
The "notional amount" of the swap agreement is only a fictive basis on which
to calculate the obligations which the parties to a swap agreement have agreed
to exchange. Commonly used swap agreements include interest rate caps,
interest rate floors, and collars.
Interest Rate Caps: 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."
Interest Rate Floors: 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.
Interest Rate Collars: Under this arrangement, 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.
Whether a Portfolio's use of a swap agreement will be successful in
furthering its investment objective will depend on the Portfolio Manager's
ability to correctly predict 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. Moreover, a Portfolio bears the
risk of loss of the amount expected to be received under a swap agreement in
the event of default or bankruptcy of a swap agreement counterparty. A
Portfolio Manager will enter into swap agreements 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.
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.
Stripped Mortgage Backed Securities: Stripped mortgage-backed securities
("SMBS") are derivative multi-class 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 interest and principal distributions on a pool of mortgage
assets. For instance, a common type of SMBS will have one class receiving some
of the interest and most of the principal from mortgage assets, while the
other class will receive most of the interest and the remainder of the
principal.
Moreover, there are SMBS under which one class will receive all of the
interest (the interest-only or "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 a 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 some 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.
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
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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 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 of have market prices and yields that are
much more volatile than other PAC classes.
A PAC IO is a PAC bond that pays an extremely high coupon rate, such as
200%, on its outstanding principal balance, and pays down according to a
designated PAC schedule. Due to their high-coupon interest, PAC IO's are
priced at very high premiums to par. Due to the nature of PAC prepayment bands
and PAC collars, the PAC IO has a greater call (contraction) potential and
thus would be impacted negatively by a sustained increase in payment speeds.
Floating and Variable Rate Securities
Floating and variable rate securities provide for a specific adjustment in
the interest rate paid on the obligations. The terms of such obligations must
provide that the interest rates are adjusted periodically based upon an
interest rate adjustment index as provided in the respective obligations. The
adjustment intervals may be regular, and range from daily up to annually, or
may be based on an event, such as a change in the prime rate.
The interest rate on a floating rate debt instrument ("floater") is a
variable rate which is tied to another interest rate, such as a money market
index or Treasury bill rate. The interest rate on a floater resets
periodically, typically every six months. While, because of the interest rate
reset feature, floaters provide Portfolios with a certain degree of protection
against rises in interest rates, Portfolios investing in floaters will
participate in any declines in interest rates as well.
The interest rate on a leveraged inverse floating rate debt instrument
("inverse floater") resets in the opposite direction from the market rate of
interest to which the inverse floater is indexed. An inverse floater may be
considered to be leveraged to the extent that its interest rate varies by a
magnitude that exceeds the magnitude of the change in the index rate of
interest. The higher degree of leverage inherent in inverse floaters is
associated with greater volatility in their market values. Accordingly,
duration of an inverse floater may exceed its stated final maturity. Certain
inverse floaters may be deemed to be illiquid securities for purposes of a
Portfolio's limitations on investments in such securities.
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 securities 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.
Form No.VASUPP-1
15-21031-00
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