<PAGE>
As filed with the Securities and Exchange Commission on February 12, 1999
Registration No. 33-13954
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UNITED STATES
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. 23 [X]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ ]
Amendment No. 24 [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, including Area Code: (949) 725-6767
Robin Yonis Sandlaufer
Assistant Vice President and Investment Counsel 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
Approximate Date of Proposed Public Offering ___________________________________
It is proposed that this filing will become effective (check appropriate box)
[_] immediately upon filing pursuant to paragraph (b)
[_] on (date) pursuant to paragraph (b)
[X] 60 days after filing pursuant to paragraph (a)(1)
[_] on (date) pursuant to paragraph (a)(1)
[_] 75 days after filing pursuant to paragraph (a)(2)
[_] on (date) pursuant to paragraph (a)(2) of rule 485.
If appropriate, check the following box:
[_] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
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CROSS-REFERENCE SHEET
REQUIRED BY RULE 495
UNDER THE SECURITIES ACT OF 1933
PART A
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<CAPTION>
Form N-1A
Item Number Caption in Prospectus
<S> <C>
1. Prospectus front and back cover pages
2. About the Portfolios
3. About the Portfolios
4. About the Portfolios
5. N/A
6. Managing the Pacific Select Fund
7. Information for Investors
8. Information for Investors
9. Financial Highlights
PART B
Form N-1A Caption in Statement
Item Number of Additional Information
10. Statement of Additional Information front cover and
Table of Contents
11. Organization and Management of the Fund
12. Additional Investment Policies of the Portfolios;
Securities and Investment Techniques; Investment
Restrictions
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<TABLE>
<C> <S>
13. Trustees and Officers
14. Distribution of Fund Shares
15. Investment Adviser; Other Expenses of the Fund; Portfolio
Management Agreement; Distribution of Fund Shares
16. Portfolio Transactions and Brokerage
17. Other Information
18. Purchases and Redemptions
19. Taxation
20. Distribution of Fund Shares
21. Performance Information
22. Financial Statements
PART C
Form N-1A
Item Number Caption in Part C
23. Exhibits
24. Persons Controlled by or Under Common Control with the Fund
25. Indemnification
26. Business and Other Connections of the Investment Adviser
27. Principal Underwriters
28. Location of Accounts and Records
29. Management Services
30. Undertakings
</TABLE>
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PROSPECTUS
<PAGE>
PACIFIC SELECT FUND
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PROSPECTUS MAY 1, 1999
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You should be aware that the Securities and Exchange Commission has not reviewed
any of these portfolios for their investment merit, and does not guarantee that
the information in this prospectus is accurate or complete. It is a criminal
offense to say otherwise.
This prospectus tells you about the Pacific Select Fund's 18 portfolios. It's
designed to help you choose among the investment options available under your
variable annuity contract or variable life insurance policy issued or
administered by Pacific Life Insurance Company or its subsidiaries.
You'll find details about how your annuity contract or life insurance policy
works in the accompanying prospectus. Please read these documents carefully, and
keep them for future reference.
THE PACIFIC SELECT FUND PORTFOLIOS
Money Market Portfolio, managed by Pacific Life Insurance Company
High Yield Bond Portfolio, managed by Pacific Life Insurance Company
Managed Bond Portfolio, managed by Pacific Investment Management Company
Government Securities Portfolio, managed by Pacific Investment Management
Company
Growth Portfolio, managed by Capital Guardian Trust Company
Aggressive Equity Portfolio, managed by Alliance Capital Management L.P.
Growth LT Portfolio, managed by Janus Capital Corporation
Equity Income Portfolio, managed by J.P. Morgan Investment Management Inc.
Multi-Strategy Portfolio, managed by J.P. Morgan Investment Management Inc.
Large-Cap Value Portfolio, managed by Salomon Brothers Asset Management Inc.
Mid-Cap Value Portfolio, managed by Lazard Asset Management
Equity Portfolio, managed by Goldman Sachs Asset Management
Bond and Income Portfolio, managed by Goldman Sachs Asset Management
Equity Index Portfolio, managed by Bankers Trust Company
Small-Cap Index Portfolio, managed by Bankers Trust Company
REIT Portfolio, managed by Morgan Stanley Asset Management
International Portfolio, managed by Morgan Stanley Asset Management
Emerging Markets Portfolio, managed by Blairlogie Capital Management
<PAGE>
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YOUR GUIDE TO THIS PROSPECTUS
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Please contact Pacific Life if you have any questions about any of the Pacific
Select Fund portfolios.
Call toll-free:
Annuities: 1-800-722-2333
Life insurance: 1-800-800-7681
An investment in the fund is not a bank deposit, and it is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency.
This prospectus is designed to help you make informed decisions about the
investments available under your Pacific Life variable annuity contract or
variable life insurance policy.
We've divided the prospectus into five sections to make it easy for you to find
what you're looking for.
The first section, An overview of the Pacific Select Fund, contains a summary of
the objectives, holdings and risks of each of the Pacific Select Fund's 18
portfolios. It will help you understand the differences between the portfolios,
the risks associated with each, and how risk and investment objectives relate.
About the portfolios tells you five important things about each portfolio:
. The portfolio's investment goal - what the portfolio is trying to achieve.
. What the portfolio invests in - how the portfolio tries to meet its
investment goal. It tells you the portfolio's principal investments and
strategies, and any special focus, such as an emphasis on certain countries
or industry sectors. Some portfolios have policies on the amount they can
invest in certain kinds of securities. These policies apply at the time the
investment is made.
. Who manages the portfolio - the people who manage each portfolio. Pacific
Life is the fund's adviser and manages two of the portfolios directly. To
manage the other portfolios, Pacific Life and the fund have retained some of
the nation's other leading portfolio managers, many of which have a worldwide
market presence and extensive research capabilities. You'll find information
about Pacific Life and the other managers starting on page 42.
. Risks you should be aware of - the principal risks associated with each
portfolio. Risk is the chance that you'll lose money on an investment, or
that it will not earn as much as you expect. One of the most important
investment decisions you'll need to make is how much risk you're willing to
accept in exchange for potential return on an investment.
. How the portfolio has performed - lets you compare portfolio performance. The
bar chart and performance table show each portfolio's annual returns and year
to year performance, except for new portfolios, which show the performance of
other accounts with similar investment objectives and strategies that are
managed by the same portfolio manager. Performance tables include a relevant
index to allow you to measure the portfolio's performance against a
benchmark. Unlike the portfolios, the indexes are unmanaged and do not incur
any transaction costs.
Turn to the remaining three sections of the prospectus - Managing the Pacific
Select Fund, Information for investors and Financial highlights - for
information about how the portfolios are managed, how shares are priced, and
fund performance.
<PAGE>
An overview of the Pacific Select Fund 4
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About the portfolios
Money Market Portfolio 6
High Yield Bond Portfolio 8
Managed Bond Portfolio 10
Government Securities Portfolio 12
Growth Portfolio 14
Aggressive Equity Portfolio 16
Growth LT Portfolio 18
Equity Income Portfolio 20
Multi-Strategy Portfolio 22
Large-Cap Value Portfolio 24
Mid-Cap Value Portfolio 26
Equity Portfolio 28
Bond and Income Portfolio 30
Equity Index Portfolio 32
Small-Cap Index Portfolio 34
REIT Portfolio 36
International Portfolio 38
Emerging Markets Portfolio 40
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Managing the Pacific Select Fund 42
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Information for investors 47
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Financial highlights 48
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Where to go for more information back cover
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AN OVERVIEW OF THE PACIFIC SELECT FUND
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This table is a summary of the goals, investments and risks of each of the
Pacific Select Fund's 18 portfolios. It's designed to help you understand the
differences between the portfolios, the risks associated with each, and how risk
and investment goals relate.
The performance of all of the Pacific Select Fund portfolios is affected by
changes in the economy and other markets. The portfolios are also affected by
other kinds of risks, depending on the securities they invest in. There's also
the possibility that investment decisions portfolio managers make will not
accomplish what they were designed to achieve, or that the portfolio will not
achieve its investment goal.
Based on historical trends, equity securities offer the potential for greater
long-term growth than most fixed income securities, but they also tend to have
larger and more frequent changes in price, which means there's a greater risk
you could lose money over the short term. Fixed income securities are affected
primarily by the financial condition of the companies that have issued them, and
by changes in interest rates.
You'll find more information about each portfolio's recent strategies and
holdings in the most recent report to shareholders, and a more detailed
discussion of each portfolio's investments, strategies and risks in the
Statement of Additional Information. Please turn to the back cover for
information about how to get copies of these documents.
Many of the investment techniques and strategies discussed in this prospectus
and the SAI are discretionary, which means that portfolio managers can decide if
they want to use them or not. Portfolio managers may also use investment
techniques or make investments in securities that are not part of a portfolio's
principal investment strategy. A portfolio's investment goal - or objective -
cannot be changed without the approval of shareholders. Investment policies may
be changed from time to time by the fund's board of trustees.
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PORTFOLIO AND MANAGER THE PORTFOLIO'S INVESTMENT GOAL
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Money Market Portfolio Current income consistent with
Pacific Life Insurance Company preservation of capital.
High Yield Bond Portfolio High level of current income.
Pacific Life Insurance Company
Managed Bond Portfolio Maximize total return consistent
Pacific Investment Management Company with prudent investment
management.
Government Securities Portfolio Maximize total return consistent
Pacific Investment Management Company with prudent investment
management.
Growth Portfolio Growth of capital.
Capital Guardian Trust Company
Aggressive Equity Portfolio Capital appreciation.
Alliance Capital Management L.P.
Growth LT Portfolio Long-term growth of capital
Janus Capital Corporation consistent with the preservation
of capital.
Equity Income Portfolio Long-term growth of capital and
J.P. Morgan Investment Management Inc. income.
Multi-Strategy Portfolio High total return.
J.P. Morgan Investment Management Inc.
Large-Cap Value Portfolio Long-term growth of capital.
Salomon Brothers Asset Management Inc Current income is of secondary
importance.
Mid-Cap Value Portfolio Capital appreciation.
Lazard Asset Management
Equity Portfolio Capital appreciation. Current
Goldman Sachs Asset Management income is of secondary importance.
Bond and Income Portfolio Total return and income consistent
Goldman Sachs Asset Management with prudent investment
management.
Equity Index Portfolio Investment results that correspond
Bankers Trust Company to the total return of an index of
common stocks of large, publicly
traded companies.
Small-Cap Index Portfolio Investment results that correspond
Bankers Trust Company to the total return of an index of
small capitalization companies.
REIT Portfolio Current income and long-term
Morgan Stanley Asset Management capital appreciation.
International Portfolio Long-term capital appreciation.
Morgan Stanley Asset Management
Emerging Markets Portfolio Long-term growth of capital.
Blairlogie Capital Management
4
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PORTFOLIO AND MANAGER THE PORTFOLIO'S MAIN THE PORTFOLIO'S MAIN RISKS
INVESTMENTS
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<S> <C> <C>
Money Market Portfolio Highest quality money market Credit and interest rate risks that
Pacific Life Insurance instruments believed to have accompany an investment in high quality
Company limited credit risk. short-term instruments. Intended to have
the least investment risk of all of the
portfolios.
High Yield Bond Portfolio Fixed income securities with Credit, interest rate, liquidity and other
Pacific Life Insurance lower and medium-quality risks that accompany an investment in
Company credit ratings and lower-quality fixed income securities.
intermediate to long terms Particularly sensitive to credit risk
to maturity. during economic downturns.
Managed Bond Portfolio Medium and high-quality Credit, interest rate and other risks that
Pacific Investment Management fixed income securities with accompany an investment in medium and
Company varying terms to maturity. high-quality fixed income securities and
in mortgage related investments.
Government Securities Fixed income securities that Credit, interest rate and other risks that
Portfolio are issued or guaranteed by accompany an investment in government
Pacific Investment Management the U.S. government, bonds and in mortgage related investments.
Company its agencies or government- Generally has the least credit risk of the
sponsored enterprises. bond portfolios.
Growth Portfolio Equity securities of smaller Price volatility and other risks that
Capital Guardian Trust and medium-sized companies. accompany an investment in growth-oriented
Company and smaller and medium-sized companies.
Particularly sensitive to price swings
during periods of economic uncertainty.
Aggressive Equity Portfolio Equity securities of small Price volatility and other risks that
Alliance Capital Management emerging-growth companies accompany an investment in small emerging-
L.P. and medium-sized companies. growth companies and medium-sized
companies. Particularly sensitive to price
swings during periods of economic
uncertainty.
Growth LT Portfolio Equity securities of a large Price volatility and other risks that
Janus Capital Corporation number of companies of any accompany an investment in equity
size. securities.
Equity Income Portfolio Equity securities of large Price volatility and other risks that
J.P. Morgan Investment and medium-sized dividend- accompany an investment in equity
Management Inc. paying U.S. companies. securities.
Multi-Strategy Portfolio A mix of equity and fixed Price volatility and other risks that
J.P. Morgan Investment income securities. accompany an investment in equity
Management Inc. securities. Credit, interest rate and
other risks that accompany an investment
in fixed income securities.
Large-Cap Value Portfolio Equity securities of large Price volatility and other risks that
Salomon Brothers Asset U.S. companies. accompany an equity investment in large
Management Inc. companies.
Mid-Cap Value Portfolio Equity securities of medium- Price volatility and other risks that
Lazard Asset Management sized U.S. companies accompany an equity investment in medium-
believed to be undervalued. sized companies.
Equity Portfolio Equity securities of large Price volatility and other risks that
Goldman Sachs Asset U.S. growth-oriented accompany an equity investment in large,
Management companies. growth-oriented companies.
Bond and Income Portfolio A wide range of fixed income Credit, interest rate, liquidity and other
Goldman Sachs Asset securities with varying risks that accompany an investment in
Management terms to maturity, with an fixed income securities and in mortgage
emphasis on long-term bonds. related investments. Particularly
sensitive to credit risk during economic
downturns. Generally has the most interest
rate risk of the bond portfolios.
Equity Index Portfolio Equity securities of Price volatility and other risks that
Bankers Trust Company companies that are included accompany an investment in smaller
in the Standard & Poor's companies. May be particularly susceptible
500 Composite Stock Price to a general decline in the U.S. stock
Index. market because it cannot change its
investment strategy, even temporarily to
protect it from loss during poor economic
conditions.
Small-Cap Index Portfolio Equity securities of Price volatility and other risks that
Bankers Trust Company companies that are included accompany an investment in smaller
in the Russell 2000 Small companies. May be particularly susceptible
Stock Index. to a general decline in the U.S. stock
market because it cannot change its
investment strategy, even temporarily to
protect it from loss during poor economic
conditions.
REIT Portfolio Equity securities of real Price volatility and the risks associated
Morgan Stanley Asset estate investment trusts. with the real estate market. Particularly
Management sensitive to price swings because the
portfolio is classified as "non-
diversified" - it may hold securities from
a few number of issuers.
International Portfolio Equity securities of Price volatility and other risks that
Morgan Stanley Asset companies of any size accompany an investment in foreign
Management located in developed equities. Sensitive to currency exchange
countries outside of the rates, international political and
U.S. economic conditions and other risks that
affect foreign securities.
Emerging Markets Portfolio Equity securities of Price volatility and other risks that
Blairlogie Capital Management companies that are located accompany an investment in emerging
in countries generally markets. Sensitive to currency exchange
regarded as "emerging rates, international political and
market" countries. economic conditions and other risks that
affect foreign securities. May have
greater price swings than most of the
portfolios.
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5
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ABOUT THE PORTFOLIOS MONEY MARKET PORTFOLIO
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[GRAPHIC APPEARS HERE]
------------------------------------------
The portfolio's investment goal This portfolio seeks current income
consistent with preservation of capital.
[GRAPHIC APPEARS HERE]
------------------------------------------
What the portfolio invests in This portfolio's principal investment
strategy is to invest in money market
The Money Market instruments that the portfolio manager
Portfolio invests at believes have limited credit risk. These
least 95% of its investments principally include
assets in money commercial paper and U.S. government
market instruments obligations. The portfolio may also
that have been given invest in asset-backed money market
the highest credit instruments and foreign money market
rating for instruments denominated in U.S. dollars.
short-term debt It is anticipated that the portfolio's
securities, or have dollar-weighted average term to maturity
not been rated, but will not exceed 90 days.
are of comparable
quality. The portfolio manager looks for money
market instruments with the highest
yields within the highest credit rating
categories, based on the evaluation of
credit risk and interest rates. The
portfolio may also lend some of the
portfolio's assets, as long as the loans
are secured.
Unlike many money market funds, the
Money Market Portfolio is not managed to
maintain a constant net asset value.
Instead, the net asset value will change
with the value of the investments in the
portfolio.
[GRAPHIC APPEARS HERE]
------------------------------------------
Who manages the portfolio Raymond Lee is a senior vice president
of Pacific Life. He joined the company
[LOGO OF PACIFIC LIFE APPEARS HERE] in 1976, and has been managing the Money
Market Portfolio since 1987. He also
oversees the management of Pacific
Life's publicly traded bond portfolio.
He has an MBA in finance from the
Wharton School of the University of
Pennsylvania and a BA in economics from
UCLA.
Dale Patrick is an investment analyst at
The Money Market Pacific Life. He joined the company in
Portfolio is managed 1985, and has assisted in the management
by Pacific Life of the Money Market Portfolio since
Insurance Company. 1994. He is also responsible for the
You'll find more management of Pacific Life's short-term
about Pacific Life fixed income securities. Dale has a BA
on page *. in economics from the University of
Colorado.
6
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[GRAPHIC APPEARS HERE]
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Risks you should be aware of The Money Market Portfolio generally has
the least investment risk of the Pacific
Select Fund portfolios because its
principal investment strategy is to
invest in short-term securities that are
either government guaranteed or have
very high credit ratings. The value of
the portfolio may, however, be affected
by the following risks:
An investment in the . changes in interest rates - the value
portfolio is not a of the portfolio's investments may
bank deposit, and it fall when interest rates rise. Short-
is not insured or term money market instruments generally
guaranteed by the are affected less by changes in
Federal Deposit interest rates than fixed income
Insurance securities with longer terms to
Corporation or any maturity.
other government
agency. . credit risk - the portfolio could lose
money if the issuer of a money market
instrument is unable to meet its
financial obligations or goes
bankrupt.
[GRAPHIC APPEARS HERE]
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How the portfolio has performed Year by year total return (%)
as of December 31 each year
The bar chart shows the portfolio's
performance each year for the past
10 years. [BAR CHART APPEARS HERE]
The table below the bar chart 89 8.73
compares the portfolio's 90 7.92
performance with the Merrill Lynch 91 5.74
90-day T-Bill Index. 92 3.22
93 2.58
Looking at how a portfolio has 94 3.76
performed in the past is important - but 95 5.54
it's no guarantee of how it will perform 96 5.07
in the future. 97 5.28
98 XX
Best and worst quarterly performance
during this period: * quarter 19**: * %
* quarter 19**: * %
Average annual total return
as of December 31, 1998 1 year 5 years 10 years
- --------------------------------------------------------------------------------
Money Market Portfolio * % * % * %
Merrill Lynch 90-day T-Bill Index * % * % * %
7
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ABOUT THE PORTFOLIOS HIGH YIELD BOND PORTFOLIO
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[GRAPHIC APPEARS HERE]
------------------------------------------
The portfolio's investment goal This portfolio seeks a high level of
current income.
What the portfolio invests in [GRAPHIC APPEARS HERE]
------------------------------------------
This portfolio's principal investment
strategy is to invest in fixed income
securities with lower and medium-quality
credit ratings and intermediate to long
terms to maturity.
Bonds are given a credit rating Securities principally include high
based on the issuer's ability to yield bonds (often called "junk" bonds)
pay the quoted interest rate and and notes. The portfolio may also invest
maturity value on time. in fixed income securities that can be
converted into equity securities, and
preferred stocks and bonds of foreign
issuers that are denominated in U.S.
dollars.
When selecting securities, the portfolio
manager focuses on:
The High Yield Bond Portfolio . seeking high yields while addressing
invests principally in high yield risk by looking for securities that
or "junk" bonds, which are given a offer the highest yields for their
low credit rating by Moody's (Ba credit rating.
and lower), or Standard & Poor's
(BB and lower), or have not been . seeking gains by looking for securities
rated, but are of comparable that may be more creditworthy than
quality. High yield bonds are their credit rating indicates. This
considered to be mostly speculative involves an analysis of each potential
in nature. security, and may include meeting with
the company's management team.
. reducing credit risk by investing in
This gives the portfolio more many different issuers in a wide range
credit risk than the other bond of industries.
portfolios, but also gives it the
potential for higher income. To help the portfolio achieve its
investment goal, the portfolio may also
lend some of the portfolio's assets, as
long as the loans it makes are secured.
The managers may temporarily change
these strategies if they believe that
economic conditions make it necessary to
maintain liquidity or to try to protect
the portfolio from potential loss. In
this case, the portfolio may invest in
U.S. government securities,
higher-quality corporate fixed income
securities or money market securities.
[GRAPHIC APPEARS HERE]
------------------------------------------
Who manages the portfolio Raymond Lee is a senior vice president
of Pacific Life. He joined the company
in 1976, managed the High Yield Bond
Portfolio from 1987 until 1993, and has
[LOGO OF PACIFIC LIFE APPEARS HERE] overseen its management since that time.
He also oversees the management of
Pacific Life's publicly traded bond
portfolio. He has an MBA in finance from
the Wharton School of the University of
Pennsylvania and a BA in economics from
UCLA.
The High Yield Bond Portfolio is
managed by Pacific Life Insurance Simon Lee is a vice president of Pacific
Company. You'll find more about Life. He joined the company in 1985 and
Pacific Life on page 42. has shared management responsibility for
the High Yield Bond Portfolio since
1995. He also manages Pacific Life's
high yield and convertible bond assets.
He has both a BA and an MBA from Loyola
Marymount University.
8
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[GRAPHIC APPEARS HERE]
------------------------------------------
Risks you should be aware of Since the High Yield Bond Portfolio's
principal strategy is to invest in low
and medium quality fixed income
securities, it may be affected by the
following risks, among others:
. credit risk - the portfolio could lose
money if the issuer of a fixed income
security is unable to meet its financial
obligations or goes bankrupt. This
portfolio may be subject to more credit
risk than the other bond portfolios,
because it invests in high yield bonds.
This is especially true during periods
of economic uncertainty or economic
downturns.
. changes in interest rates - the value
of the portfolio's investments may fall
when interest rates rise. This
portfolio may be sensitive to changes
in interest rates because it may invest
in fixed income securities with
intermediate and long terms to
maturity.
. inability to sell securities - high
yield bonds may be less liquid than
higher quality investments. The
portfolio could lose money if it cannot
sell a security at the time and price
that would be most beneficial to the
portfolio. A security whose credit
rating has been lowered may be
particularly difficult to sell.
. risks of foreign investing - foreign
investments may be riskier than U.S.
investments for many reasons, including
changes in currency exchange rates,
unstable political and economic
conditions, a lack of adequate company
information, differences in the way
securities markets operate, less secure
foreign banks or securities depositories
than those in the U.S., and foreign
controls on investment.
. short-term trading - the portfolio can
engage in short-term trading, which
could result in higher trading costs.
[GRAPHIC APPEARS HERE]
------------------------------------------
How the portfolio has performed Year by year total return (%)
as of December 31 each year
The bar chart shows the portfolio's
performance each year for the past [BAR CHART APPEARS HERE]
10 years.
The table below the bar chart 89 4.16
compares the portfolio's 90 0.38
performance with the CS First 91 24.58
Boston High Yield Bond Index, an 92 18.72
index designed to mirror the 93 18.01
performance of the high-yield bond 94 0.42
market. 95 18.87
96 11.31
Looking at how a portfolio has 97 9.44
performed in the past is important 98 XX
- - but it's no guarantee of how it
will perform in the future.
Best and worst quarterly performance
during this period: * quarter 19**: * %
* quarter 19**: * %
Average annual total return
as of December 31, 1998 1 year 5 years 10 years
- --------------------------------------------------------------------------------
High Yield Bond Portfolio * % * % * %
CS First Boston High Yield Bond Index * % * % * %
9
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ABOUT THE PORTFOLIOS MANAGED BOND PORTFOLIO
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[GRAPHIC APPEARS HERE]
----------------------------------------
The portfolio's investment goal This portfolio seeks to maximize total
return consistent with prudent
investment management.
[GRAPHIC APPEARS HERE]
----------------------------------------
What the portfolio invests in This portfolio's principal investment
strategy is to invest in medium to
high-quality, investment grade fixed
income securities with varying terms to
maturity.
These securities include principally:
Total return is made up of income
plus any gains in the value of the . U.S. treasury bonds and notes, or
portfolio's securities. options or futures on them
. mortgage related securities, including
stripped mortgage related securities
. corporate bonds and notes, some of which
may be high yield ("junk") bonds
. commercial paper and other money market
instruments
. fixed income securities issued by
foreign governments and companies that
are denominated in U.S. dollars or
foreign currencies, some of which may
be issued by governments in emerging
market countries.
When selecting securities, the portfolio
manager:
Duration is a mathematical measure . decides what duration the portfolio
of the average life of a bond that should maintain. The portfolio manager
includes its yield, coupon, final uses duration management as a
maturity and call features. It's fundamental part of the management
often used to measure the potential strategy for this portfolio. The
volatility of a bond's price, portfolio usually maintains an average
and is considered a more accurate duration of three to seven years,
measure than maturity of a varying within this range based on the
security's sensitivity to changes in portfolio manager's outlook on the
interest rates. economy and interest rates. The
portfolio manager then decides what
proportion of securities in the
portfolio should have short,
intermediate and long durations and
maturities.
. decides what proportion of securities in
the portfolio should be invested in U.S.
government securities, foreign bonds,
U.S. corporate bonds and U.S mortgage
related securities.
. uses an analytical system developed by
the portfolio manager to help select
government and other securities that
meet yield, duration, maturity and other
criteria.
. chooses companies to invest in by
carrying out a credit analysis of each
potential investment, which may include
meetings or periodic contact with the
company's management.
. frequently uses options, futures and
forward contracts and other techniques
as a substitute for securities, to try
to increase returns or hedge against
changes in interest rates. The manager
may also use derivatives to hedge
against changes in currency exchange
rates.
To help the portfolio achieve its
investment goal, the portfolio may
also lend some of the portfolio's
assets, as long as the loans it makes
are secured.
[GRAPHIC APPEARS HERE]
----------------------------------------
Who manages the portfolio John Hague, managing director and senior
member of the portfolio manager group,
[LOGO OF PIMCO APPEARS HERE] joined PIMCO in 1987. He has been the
portfolio manager for the Managed Bond
The Managed Bond Portfolio is Portfolio since 1992. John has 17 years
managed by Pacific Investment of investment experience, including two
Management Company (PIMCO). years specializing in international
You'll find more about PIMCO fixed income products and
on page 45. mortgage-backed securities with Salomon
Brothers, Inc., and three years in
credit research with Morgan Guarantee.
He has a BA in economic analysis from
Bowdoin College and an MBA in finance
from Stanford University.
10
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[GRAPHIC APPEARS HERE]
------------------------------------------
Risks you should be aware of Since the Managed Bond Portfolio
principally invests in fixed income
securities, it may be affected by the
following risks, among others:
. changes in interest rates - the value of
the portfolio's investments may fall
when interest rates rise. Changes in
The price of bonds that are interest rates may have a significant
denominated in foreign effect on this portfolio, because it may
currencies is affected by the invest in securities with medium or long
value of the U.S. dollar. In terms to maturity and may use interest-
general, as the value of the sensitive derivatives. Bonds with longer
U.S. dollar falls, the U.S. durations tend to be more sensitive to
dollar price of a foreign bond changes in interest rates, usually
will rise, increasing the making them more volatile than bonds
value of the bond. As the with shorter durations. The portfolio
value of the U.S. dollar may also invest in mortgage related
rises, the U.S. dollar value securities, which can be paid off early
of a foreign bond will fall. if the owners of underlying mortgages
pay off their mortgages sooner than
scheduled. If interest rates are
falling, the portfolio will be forced to
reinvest this money at lower yields.
Stripped mortgage related securities can
be particularly sensitive to changes in
interest rates.
. credit risk - the portfolio could lose
money if the issuer of a fixed income
security is unable to meet its financial
obligations or goes bankrupt. This
portfolio may invest in high yield
("junk") bonds, which may make it
particularly subject to credit risk,
especially during periods of economic
uncertainty or during economic
downturns.
This portfolio may not invest
more than: . risks of foreign investing - foreign
investments may be riskier than U.S.
. 10% of its assets in investments for many reasons, including
lower-rated, high-yield changes in currency exchange rates,
("junk") bonds unstable political and economic
conditions, a lack of adequate company
. 20% of its assets in foreign information, differences in the way
investments. securities markets operate, less secure
foreign banks or securities depositories
than those in the U.S., and foreign
controls on investment.
. risks of using derivatives - this
portfolio frequently uses options,
futures and forward contracts and other
investment techniques to help it achieve
its investment goal. There's always a
risk that these techniques could reduce
returns or increase the portfolio's
volatility.
. short-term trading - the portfolio may
engage in short-term trading, which
could result in higher trading costs.
[GRAPHIC APPEARS HERE]
------------------------------------------
How the portfolio has performed Year by year total return (%)
as of December 31 each year
The bar chart shows the
portfolio's performance each [BAR GRAPH APPEARS HERE]
year for the past 10 years.
89 14.74
The table below the bar chart 90 8.52
compares the portfolio's 91 17.03
performance with the Lehman 92 8.68
Brothers Government/Corporate 93 11.63
Bond Index, an index of 94 -4.36
government and corporate fixed 95 19.04
income securities. 96 4.25
97 9.92
Looking at how a portfolio has 98 XX
performed in the past is important
- - but it's no guarantee of how it
will perform in the future.
Best and worst quarterly performance
during this period: * quarter 19**: * %
* quarter 19**: * %
Average annual total return
as of December 31, 1998 1 year 5 years 10 years
- --------------------------------------------------------------------------------
Managed Bond Portfolio * % * % * %
Lehman Brothers Government
Corporate Bond Index * % * % * %
11
<PAGE>
- --------------------------------------------------------------------------------
ABOUT THE PORTFOLIOS GOVERNMENT SECURITIES PORTFOLIO
- --------------------------------------------------------------------------------
[GRAPHIC APPEARS HERE]
-----------------------------------------
The portfolio's investment goal This portfolio seeks to maximize total
return consistent with prudent
investment management.
[GRAPHIC APPEARS HERE]
-----------------------------------------
What the portfolio invests in This portfolio's principal investment
strategy is to invest at least 65% of
its assets in fixed income securities
that are issued or guaranteed by the
U.S. government, its agencies, or
government-sponsored enterprises.
Total return is made up of
income plus any gains in the Specific securities are principally:
value of the portfolio's
securities. . U.S. treasury bonds or other fixed
income securities issued or guaranteed
by the U.S. government, its agencies,
government-sponsored enterprises or
options or futures on them.
. mortgage related securities, including
stripped mortgage related securities
. other securities, including corporate
bonds and notes, money market
instruments, and fixed income
securities issued by foreign
governments or companies that are
denominated in U.S. dollars or foreign
currencies.
When selecting securities, the
portfolio manager:
. decides what duration the portfolio
should maintain. The portfolio manager
Duration is a mathematical uses duration management as a
measure of the average life of fundamental part of the management
a bond that includes its strategy for this portfolio. The
yield, coupon, final maturity portfolio usually maintains an average
and call features. It is often duration of three to seven years,
used to measure the potential varying within this range based on the
volatility of a bond's price, portfolio manager's outlook on the
and is considered a more economy and interest rates. The
accurate measure than maturity portfolio manager then decides what
of a security's sensitivity to proportion of securities in the
changes in interest rates. portfolio should have short,
intermediate and long durations and
maturities
. decides what proportion of securities
in the portfolio should be invested in
U.S. government securities, foreign
bonds, U.S. corporate bonds and U.S
mortgage related securities. The
manager uses an analytical system it
has developed to help select securities
that meet yield, duration, maturity and
other criteria.
. chooses companies to invest in by
carrying out a credit analysis of each
potential investment, which may include
meetings or periodic contact with the
company's management.
. frequently uses options, futures and
forward contracts and other techniques
as a substitute for securities, to try
to increase returns or hedge against
changes in interest rates. The manager
may also use derivatives to hedge
against changes in currency exchange
rates.
To help the portfolio achieve its
investment goal, the portfolio may
also lend some of the portfolio's
assets, as long as the loans it makes
are secured.
The portfolio manager may temporarily
change these strategies if he believes
economic conditions make it necessary
to try to protect the portfolio from
potential loss. In this case, the
portfolio may invest more of its assets
in money market securities.
[GRAPHIC APPEARS HERE]
-----------------------------------------
Who manages the portfolio John Hague, managing director and
senior member of the portfolio manager
[LOGO OF PIMCO APPEARS HERE] group, joined PIMCO in 1987. He has
been the portfolio manager for the
The Government Securities Government Securities Portfolio since
Portfolio is managed by 1987. John has 17 years of investment
Pacific Investment Management experience, including two years
Company (PIMCO). You'll find specializing in international fixed
more about PIMCO on page 45. income products and mortgage-backed
securities with Salomon Brothers, Inc.
and three years in credit research with
Morgan Guarantee. He has a BA in
economic analysis from Bowdoin College
and an MBA in finance from Stanford
University.
12
<PAGE>
[GRAPHIC APPEARS HERE]
-----------------------------------------
Risks you should be aware of Since the Government Securities
Portfolio principally invests in fixed
income securities, it may be affected
by the following risks, among others:
. changes in interest rates - the value
of the portfolio may fall when interest
rates rise. This portfolio may be
particularly sensitive to interest
Government bonds tend to have rates because it primarily invests in
less credit risk than bonds U.S. government securities, may invest
issued by most companies in securities with long terms to
because the U.S. government is maturity, and may use hedging
less likely than a company to techniques. Bonds with longer durations
default on a debt. For this tend to be more sensitive to changes in
reason, government securities interest rates, usually making them
generally pay lower rates of more volatile than bonds with shorter
interest than corporate durations. The portfolio may also
securities with similar terms invest in mortgage related securities,
to maturity. which can be paid off early if the
owners of underlying mortgages pay off
their mortgages sooner than scheduled.
If interest rates are falling, the
portfolio will be forced to reinvest
this money at lower yields. Stripped
mortgage related securities can be
particularly sensitive to changes in
interest rates.
. credit risk - the portfolio could lose
money if the issuer of a fixed income
security is unable to meet its
financial obligations or goes bankrupt.
This portfolio is subject to less
credit risk than the other bond
portfolios because it principally
invests in fixed income securities
issued or guaranteed by the U.S.
government, its agencies and government
sponsored enterprises, and in high
This portfolio may not invest quality corporate bonds.
more than 20% of its assets in
foreign investments . risks of foreign investing - foreign
denominated in foreign investments may be riskier than U.S.
currencies. investments for many reasons, including
changes in currency exchange rates,
unstable political and economic
conditions, a lack of adequate company
information, differences in the way
securities markets operate, less secure
foreign banks or securities
depositories than those in the U.S.,
and foreign controls on investment.
. risks of using derivatives - this
portfolio frequently uses options,
futures and forward contracts and other
investment techniques to help it
achieve its investment goal. There's
always a risk that these techniques
could reduce returns or increase the
portfolio's volatility.
. short-term trading - the portfolio may
engage in short-term trading, which
could result in higher trading costs.
[GRAPHIC APPEARS HERE]
-----------------------------------------
How the portfolio has performed Year by year total return (%)
as of December 31 each year
The bar chart shows the [BAR CHART APPEARS HERE]
portfolio's performance each
year for the past 10 years. 89 14.61
90 8.01
The table below the bar chart 91 16.67
compares the portfolio's 92 7.52
performance with the Lehman 93 10.79
Brothers Government Bond 94 -5.10
Index, an index of fixed 95 18.81
income securities issued by 96 2.94
the U.S. government and its 97 9.48
agencies. 98 XX
Looking at how a portfolio
has performed in the past is Best and worst quarterly performance
important - but it's no during this period: * quarter 19**: * %
guarantee of how it will * quarter 19**: * %
perform in the future.
Average annual total return
as of December 31, 1998 1 year 5 years 10 years
- --------------------------------------------------------------------------------
Government Securities Portfolio * % * % * %
Lehman Brothers Government Bond Index * % * % * %
13
<PAGE>
- --------------------------------------------------------------------------------
ABOUT THE PORTFOLIOS GROWTH PORTFOLIO
- --------------------------------------------------------------------------------
[GRAPHIC APPEARS HERE]
-----------------------------------------
The portfolio's investment goal This portfolio seeks growth of capital
over the long term. The realization of
current income will not be a factor in
considering portfolio securities.
This portfolio is not available for:
. Pacific Corinthian variable annuity
contracts
. variable annuity contracts that were
issued on or after January 1, 1994.
[GRAPHIC APPEARS HERE]
-----------------------------------------
What the portfolio invests in This portfolio's principal investment
strategy is to invest in small to
medium-sized companies. It tends to
A company's "capitalization" emphasize companies that have a total
is a measure of its size. market capitalization of between $250
Capitalization is calculated million and $1 billion. It invests
by multiplying the current principally in common stocks. The
share price by the number of portfolio may also invest in fixed
shares held by investors. income securities, including those that
can be converted into equity securities,
and foreign securities that are listed
on a U.S. stock exchange or over the
counter market.
The portfolio is managed by a team of
portfolio managers. The portfolio is
divided into segments, and each has its
own manager who makes independent
decisions within portfolio guidelines
and objectives.
When assessing companies, the team uses
A smaller company with a a value-oriented approach in which it
promising product or operating tries to identify the difference between
in a dynamic field may have the underlying value of a company and
greater potential for rapid the price of its security. Value is
earnings growth than a larger identified in a number of ways,
one. However, it may have a including the relationship of the
harder time securing financing stock's current price to earnings, the
and may be more sensitive to a strength of the company's balance sheet,
setback in sales or to and price-to-book value. The team looks
economic downturns than at a number of variables, including the
larger, more established fundamental long-term outlook for the
companies. company, the extent to which shares may
be considered undervalued and the
expectations of the market as a whole.
The team considers strong company
management important, and investment
decisions may be based on meetings with
the company's senior executives and its
competitors, as well as on information
from economists, government officials
and industry specialists.
To help it achieve its investment goal,
the portfolio may lend some of its
assets, as long as the loans it makes
are secured.
The team may temporarily change
these strategies if it believes economic
conditions make it necessary to try to
protect the portfolio from potential
loss. In this case, the portfolio may
invest in money market securities,
short-term corporate debt, preferred
stocks and U.S. government securities.
[GRAPHIC APPEARS HERE]
-----------------------------------------
Who manages the portfolio Michael Ericksen, senior vice president
of Capital Guardian, is the lead
[LOGO OF CAPITAL GUARDIAN portfolio manager. He has 17 years of
APPEARS HERE] experience as an investment
professional, including 11 years with
The Growth Portfolio is Capital Guardian or its affiliates.
managed by a team of portfolio
managers at Capital Guardian Robert Kirby, a senior partner of The
Trust Company. You'll find Capital Group Partners L.P., has 45
more about Capital Guardian on years of experience as an investment
page 43. professional, including 32 years with
Capital Guardian or its affiliates.
James Kang, vice president of Capital
Guardian Research Company, has 11 years
of experience as an investment
professional, including 10 years with
Capital Guardian.
14
<PAGE>
[GRAPHIC APPEARS HERE]
-----------------------------------------
Risks you should be aware of The Growth Portfolio principally invests
in equity securities, which go up or
down in value, sometimes rapidly and
unpredictably. While equities may offer
the potential for greater long-term
growth than most fixed income
securities, they generally have higher
volatility. The portfolio may be
affected by the following risk, among
others:
. price volatility - the value of the
portfolio changes as the prices of its
investments go up or down. This
portfolio invests in companies with
smaller capitalizations, which may give
the portfolio a higher risk of price
volatility than a portfolio that invests
in companies with larger
capitalizations.
In addition, the securities of smaller
companies generally have less liquidity
and may be more susceptible to greater
price swings than larger companies
because they may have fewer financial
resources, limited product and market
diversification and many are dependent
on a few key managers.
[GRAPHIC APPEARS HERE]
-----------------------------------------
How the portfolio has performed Year by year total return (%)
as of December 31 each year
The bar chart shows the [BAR CHART APPEARS HERE]
portfolio's performance each
year for the past 10 years.
89 34.96
The table below the bar chart 90 -17.30
compares the portfolio's 91 39.15
performance with the Russell 92 20.53
2000 Index, an index of the 93 21.89
stocks of approximately 2,000 94 -10.49
U.S. small-capitalization 95 25.75
companies. 96 23.62
97 30.27
Looking at how a portfolio 98 XX
has performed in the past
is important - but it's
no guarantee of how it will Best and worst quarterly performance
perform in the future. during this period: * quarter 19**: * %
* quarter 19**: * %
Average annual total return
as of December 31, 1998 1 year 5 years 10 years
- --------------------------------------------------------------------------------
Growth Portfolio * % * % * %
Russell 2000 Index * % * % * %
15
<PAGE>
- --------------------------------------------------------------------------------
ABOUT THE PORTFOLIOS AGGRESSIVE EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
[GRAPHIC APPEARS HERE]
-----------------------------------------
The portfolio's investment goal This portfolio seeks capital
appreciation. No consideration is given
to income.
This portfolio is not available for:
. Pacific Corinthian variable annuity
contracts.
[GRAPHIC APPEARS HERE]
-----------------------------------------
What the portfolio invests in This portfolio's principal investment
strategy is to invest in small
emerging-growth companies and
medium-sized companies, but it may also
invest in larger, more well-established
companies. It tends to emphasize
companies that have a total market
capitalization of up to $5 billion. The
portfolio focuses primarily on U.S.
A company's "capitalization" companies, but may invest in companies
is a measure of its size. located outside of the U.S.
Capitalization is calculated
by multiplying the current Investments principally include common
share price by the number of stock, as well as preferred stocks,
shares held by investors. fixed income securities, some of which
can be converted to equity securities,
and warrants.
The portfolio management team looks for
Price to earnings ratio (P/E) companies that are expected to meet
is one way of measuring the growth targets set by the team, and that
value of a company. It's have a price to earnings ratio that is
simply the price of a stock lower than its expected growth rate.
divided by its estimated or Within these guidelines, the team looks
actual earnings per share. A for three kinds of companies:
high P/E ratio could indicate
a high level of investor . undervalued companies, whose shares
confidence in the company. are being sold at a discount relative to
the shares of similar companies, and
that the team believes are likely to
exceed growth expectations
. companies in cyclical industries, like
technology or financial services, that
the team believes are likely to
experience rapid growth in the current
economy
. companies that are experiencing
changes, like a change in corporate
structure, that the team believes are
likely to result in growth.
Before investing in a company, the team
usually meets with the company's
management team, customers, competitors
and suppliers, and may consult with
external industry analysts. The team
also analyzes the company's cash flow
trends to try to determine its financial
stability and the reliability of its
projected earnings. The portfolio
management team may also buy index
options to try to increase returns, and
use options and other derivatives to
offset changes in currency exchange
rates. The portfolio may lend some of
its assets, as long as the loans it
makes are secured.
The team may temporarily change these
strategies if it believes economic
conditions make it necessary to try to
protect the portfolio from potential
loss. In this case, the portfolio may
invest in U.S. government securities,
higher-quality corporate fixed income
securities or money market instruments.
[GRAPHIC APPEARS HERE]
-----------------------------------------
Who manages the portfolio Kevin O'Brien is senior vice president
of Alliance Capital. He joined Alliance
[LOGO OF ALLIANCE CAPITAL Capital in 1988 and took over management
APPEARS HERE] of the Aggressive Equity Portfolio in
1998. Before joining Alliance Capital,
he was a partner at Campbell Advisors
The Aggressive Equity and a portfolio manager at Connecticut
Portfolio is managed by a team Mutual Life Insurance. He has over 19
of portfolio managers at years of experience in asset management,
Alliance Capital Management is a chartered financial analyst and a
L.P. You'll find more about member of Phi Beta Kappa. Kevin has a BA
Alliance Capital on page 42. from Amherst College and an MA and PhD
from Cornell University.
Alden Stewart is executive vice
president of Alliance Capital. He joined
Alliance Capital in 1971 as an analyst
following various industry groups, and
has been a portfolio manager since 1977.
He began managing the Aggressive Equity
Portfolio in 1998. Alden has 27 years of
investment experience, a BA from the
University of Oregon and an MBA from the
University of Chicago.
16
<PAGE>
[GRAPHIC APPEARS HERE]
-----------------------------------------
Risks you should be aware of The Aggressive Equity Portfolio
principally invests in equity
securities, which may go up or down in
value, sometimes rapidly and
unpredictably. While equities may offer
the potential for greater long-term
growth than most fixed income
securities, they generally have higher
volatility. The portfolio may be
affected by the following risks, among
others:
. price volatility - the value of the
Companies that have recently portfolio changes as the prices of its
undergone a change in investments go up or down. This
corporate structure may have a portfolio invests in companies that the
greater degree of price team thinks have the potential for rapid
volatility than more growth, which may give the portfolio a
established companies because higher risk of price volatility than a
there's no guarantee that the portfolio that invests principally in
new management structure will equities that are "undervalued."
result in growth.
Small emerging growth companies may be
more susceptible to larger price swings
than larger companies because they may
have fewer financial resources, limited
product and market diversification and
many are dependent on a few key
managers. Emerging growth companies and
companies in cyclical industries may be
particularly susceptible to rapid price
swings during periods of economic
uncertainty.
. risks of foreign investing - foreign
This portfolio may not invest investments may be riskier than U.S.
more than 20% of its assets in investments for many reasons, including
foreign investments that are changes in currency exchange rates,
principally traded outside the unstable political and economic
U.S. conditions, a lack of adequate company
information, differences in the way
securities markets operate, less secure
foreign banks or securities depositories
than those in the U.S., and foreign
controls on investment.
. risks of using derivatives - this
portfolio may use index options and
other investment techniques to help it
achieve its investment goal. There's
always a risk that these techniques
could reduce returns or increase the
portfolio's volatility.
. short-term trading - the portfolio may
engage in short-term trading, which
could result in higher trading costs.
[GRAPHIC APPEARS HERE]
-----------------------------------------
How the portfolio has performed Year by year total return (%)
as of December 31 each year/1/
The bar chart shows the [BAR CHART APPEARS HERE]
portfolio's performance each
year since its inception.
The table below the bar chart 96 7.86
compares the portfolio's 97 3.78
performance with the Russell 98 XX
2500 Index, an index of the
stocks of approximately 2,500
mid-capitalization U.S. companies. Best and worst quarterly performance
during this period: * quarter 19**: * %
Looking at how a portfolio * quarter 19**: * %
has performed in the
past is important - but it's
no guarantee of how it will
perform in the future.
Average annual total return Since inception
as of December 31, 1998 1 year (April 1, 1996)
- --------------------------------------------------------------------------------
Aggressive Equity Portfolio/1/ * % *
Russell 2500 Index * % *
/1/ Alliance Capital Management L.P. began managing the portfolio on May 1, 1998
and some investment policies changed at that time. Another firm managed the
portfolio before that date.
17
<PAGE>
- --------------------------------------------------------------------------------
ABOUT THE PORTFOLIOS GROWTH LT PORTFOLIO
- --------------------------------------------------------------------------------
[GRAPHIC APPEARS HERE]
-----------------------------------------
The portfolio's investment goal This portfolio seeks long-term growth of
capital in a manner consistent with the
preservation of capital.
[GRAPHIC APPEARS HERE]
-----------------------------------------
What the portfolio invests in This portfolio's principal investment
strategy is to invest in a large number
of companies of any size, from small
emerging growth to well established
companies. It principally invests in
common stock.
The portfolio manager looks for
This portfolio may invest some companies that have high potential for
of its assets in foreign earnings growth that may not be
companies. Investing globally recognized by other investors. The
offers greater diversification portfolio manager generally does not
because the portfolio can take limit security selection to any industry
advantage of investment sector or use other defined selection
opportunities that are not procedures. The realization of income is
available in the U.S. not a significant factor in considering
portfolio securities. Before investing
in a company, the portfolio manager may
consider:
. how much demand there is for the
company's products and services
. how the company is positioned against
its competitors
. the regulatory environment in which
the company operates.
When selecting companies located outside
the U.S., the portfolio manager may also
consider:
. expected levels of inflation
. government policies influencing
business conditions
. the outlook for currency relationships
. prospects for relative economic growth
among countries, regions or geographic
areas.
The portfolio may also invest in fixed
income securities, including lower-rated
"junk" bonds.
The portfolio manager may use options,
futures and other techniques to try to
increase returns or to try to hedge
against changes in interest rates or
market declines. The manager may also
use forward foreign currency contracts
or derivatives to hedge against changes
in currency exchange rates. The
portfolio may lend some of its assets,
as long as the loans it makes are
secured.
The portfolio may invest in U.S.
government securities, higher-quality
corporate fixed income securities, money
market instruments or repurchase
agreements if the manager believes they
have growth potential or cannot find
equity investments that meet investment
criteria. The portfolio manager may
temporarily change these strategies if
he believes economic conditions make it
necessary to try to protect the
portfolio from potential loss.
[GRAPHIC APPEARS HERE]
-----------------------------------------
Who manages the portfolio Warren Lammert, III, vice president of
Janus Capital Corporation, joined Janus
[LOGO OF JANUS APPEARS HERE] in 1987 and is portfolio manager and
executive vice president of Janus
The Growth LT Portfolio is Mercury Fund and executive vice
managed by Janus Capital president of Janus Investment Fund. He
Corporation. You'll find more has also been the portfolio manager of
about Janus on page 44. various growth-oriented accounts since
1991. He has a BA in economics from Yale
University and an MA in economic history
(with distinction) from the London
School of Economics, and is a chartered
financial analyst.
18
<PAGE>
[GRAPHIC APPEARS HERE]
-----------------------------------------
Risks you should be aware of The Growth LT Portfolio principally
invests in equity securities, which may
go up or down in value, sometimes
rapidly and unpredictably. While
equities may offer the potential for
greater long-term growth than most fixed
income securities, they generally have
higher volatility. The portfolio may
also be affected by the following risks,
among others:
This portfolio may not invest . price volatility - the value of the
more than: portfolio changes as the prices of its
investments go up or down. This
. 10% of its assets in lower-rated portfolio invests in companies that the
"junk" bonds portfolio manager believes have the
potential for rapid growth, which may
. 25% of its assets in foreign give the portfolio a higher risk of
investments. price volatility than a portfolio that
invests in equities that are
"undervalued," for example.
This portfolio may also invest in small
and medium-sized companies, which may be
more susceptible to greater price swings
than larger companies because they may
have fewer financial resources, limited
product and market diversification and
many are dependent on a few key
managers.
. risks of foreign investing - foreign
investments may be riskier than U.S.
investments for many reasons, including
changes in currency exchange rates,
unstable political and economic
conditions, a lack of adequate company
information, differences in the way
securities markets operate, less secure
foreign banks or securities depositories
than those in the U.S., and foreign
controls on investment.
. risks of using derivatives - this
portfolio may use options, futures
contracts and other investment
techniques to help it achieve its
investment goal. There's always a risk
that these techniques could reduce
returns or increase the portfolio's
volatility.
. short-term trading - the portfolio may
engage in short-term trading, which
could result in higher trading costs.
[GRAPHIC APPEARS HERE]
-----------------------------------------
How the portfolio has performed Year by year total return (%)
as of December 31 each year
The bar chart shows the
portfolio's performance each [BAR CHART APPEARS HERE]
year since its inception.
The table below the bar chart 94 13.25
compares the portfolio's 95 36.75
performance with the Russell 96 17.87
2500 Index, an index of 2,500 97 10.96
U.S. mid-cap companies, and 98 XX
the Standard & Poor's 500
Composite Stock Price Index,
an index of the stocks of
approximately 500 Best and worst quarterly performance
large-capitalization U.S. during this period: * quarter 19**: * %
companies. * quarter 19**: * %
Looking at how a portfolio has
performed in the past is
important - but it's
no guarantee of how it will
perform in the future.
Average annual total return Since inception
as of December 31, 1998 1 year (January 4, 1994)
- --------------------------------------------------------------------------------
Growth LT Portfolio * % * %
Russell 2500 Index * % * %
Standard & Poor's 500 Composite Stock Price Index * % * %
19
<PAGE>
- --------------------------------------------------------------------------------
ABOUT THE PORTFOLIOS EQUITY INCOME PORTFOLIO
- --------------------------------------------------------------------------------
[GRAPHIC APPEARS HERE]
------------------------------------------
The portfolio's investment goal This portfolio seeks long-term growth of
capital and income.
[GRAPHIC APPEARS HERE]
------------------------------------------
What the portfolio invests in This portfolio's principal investment
strategy is to invest in common stocks
of large and medium-sized U.S.
companies, but it may invest in small
The portfolio manager tries to companies or in companies located
achieve gross income of 75% of outside the U.S. that are listed on a
the dividend income generated U.S. stock exchange.
on the stocks included in the
Standard and Poor's 500 The portfolio is managed by a team of
Composite Stock Price Index. portfolio managers who maintain industry
When selecting stocks, sector weightings that are similar to
however, the manager puts more those of the Standard & Poor's 500
emphasis on the potential for Composite Stock Price Index. The team
capital appreciation than on moderately underweights or overweights
current dividends. sectors when it believes this will
enhance performance.
The team chooses companies to invest in
within these industry sectors using a
three-step process:
Research - the team looks at company
prospects over the short term as well as
over a relatively long period - often
as much as five years - to gain insight
into a company's real growth potential.
Value - the team ranks the companies in
each industry group according to their
relative value using quantitative
earnings, cash flow and dividend
analysis and forecasts. The more the
team's estimated worth of a company
exceeds the current market price of its
stock, the more undervalued it considers
the company.
Stock selection - using the research
and valuation rankings as a guide, the
team buys stocks that are undervalued
and considers selling them when they
appear overvalued. Along with attractive
valuation, the team considers a number
of other criteria, including:
. events that could trigger a rise in a
stock's price
. high potential reward compared with
potential risk
. temporary mispricings caused by market
overreactions.
The portfolio invests principally in
dividend-paying common stock. It may
also invest in other equity securities
like non-dividend-paying common stock
and preferred stock, and in fixed income
securities that can be converted into
equity securities.
The portfolio may invest in index
options, stock index futures and other
techniques to try to increase returns,
to try to gain access to a market or as
a substitute for buying the securities
in the index. The portfolio may also
lend some of its assets, as long as the
loans it makes are secured. The team may
temporarily change these strategies if
it believes economic conditions make it
necessary to try to protect the
portfolio from potential loss.
[GRAPHIC APPEARS HERE]
------------------------------------------
Who manages the portfolio William Riegel, managing director, is a
senior equity portfolio manager in the
[LOGO OF J.P. MORGAN INVESTMENT U.S. equity and balanced accounts group.
APPEARS HERE] He started his career with J.P. Morgan
in 1979 as an investment research
The Equity Income Portfolio is analyst specializing in energy and
managed by a team of portfolio machinery companies, and joined the
managers at J.P. Morgan equity group in 1984. He assumed
Investment Management Inc. responsibility for managing convertible
You'll find more about J.P. portfolios in 1987, and began managing
Morgan on page 44. the Equity Income Portfolio in 1997. He
graduated from Williams College in 1978
and is a chartered financial analyst.
Henry Cavanna, managing director, is a
senior equity portfolio manager in the
U.S. equity and balanced accounts group.
He joined J.P. Morgan in 1971 and his
first assignment was in pension
administration. He began managing the
Equity Income Portfolio in 1997, and has
a BA from Boston College and an LLB from
the University of Pennsylvania.
20
<PAGE>
[GRAPHIC APPEARS HERE]
------------------------------------------
Risks you should be aware of The Equity Income Portfolio principally
invests in equity securities, which may
go up or down in value, sometimes
rapidly and unpredictably. While
equities may offer the potential for
greater long-term growth than most fixed
income securities, they generally have
higher volatility. The portfolio may be
affected by the following risks, among
others:
. price volatility - the value of the
portfolio changes as the prices of its
investments go up or down. The portfolio
manager tries to control price
volatility by investing in many
different companies in a wide range of
industries.
. risks of using derivatives - this
portfolio may use options, futures
contracts and other investment
techniques to help it achieve its
investment goal. There's always a risk
that these techniques could reduce
returns or increase the portfolio's
volatility.
. risks of foreign investing - foreign
investments may be riskier than U.S.
investments for many reasons, including
changes in currency exchange rates,
unstable political and economic
conditions, a lack of adequate company
information, differences in the way
securities markets operate, less secure
foreign banks or securities depositories
than those in the U.S., and foreign
controls on investment.
[GRAPHIC APPEARS HERE]
------------------------------------------
How the portfolio has performed Year by year total return (%)
as of December 31 each year/1/
The bar chart shows the [BAR CHART APPEARS HERE]
portfolio's performance each
year for the past 10 years. 89 29.22
90 -7.54
The table below the bar chart 91 31.42
compares the portfolio's 92 5.36
performance with the Standard 93 8.29
& Poor's 500 Composite Stock 94 -0.28
Price Index, an index of the 95 31.66
stocks of approximately 500 96 19.43
large-capitalization U.S. 97 28.60
companies. 98 XX
Looking at how a portfolio Best and worst quarterly performance
has performed in the past is during this period: * quarter 19**:
important - but it's no * % * quarter 19**: * %
guarantee of how it will
perform in the future.
Average annual total return
as of December 31, 1998 1 year 5 years 10 years
- --------------------------------------------------------------------------------
Equity Income Portfolio/1/ * % * % * %
Standard & Poor's 500
Composite Stock Price Index * % * % * %
/1/ J.P. Morgan Investment Management Inc. began managing the portfolio on
January 1, 1994, and some investment policies changed at that time. Another
firm managed the portfolio before that date.
21
<PAGE>
- --------------------------------------------------------------------------------
ABOUT THE PORTFOLIOS MULTI-STRATEGY PORTFOLIO
- --------------------------------------------------------------------------------
[GRAPHIC APPEARS HERE]
------------------------------------------
The portfolio's investment goal This portfolio seeks to 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.
[GRAPHIC APPEARS HERE]
------------------------------------------
What the portfolio invests in This portfolio's principal investment
strategy is to invest in a mix of equity
and fixed income securities.
A portfolio that invests in a Equity securities, which usually make up
mix of fixed income and equity about 60% of the portfolio, are
securities tends to be less principally the common stock of large
volatile than a portfolio that and medium-sized U.S. companies. The
invests principally in portfolio may also invest in preferred
equities. stock, warrants, rights and fixed income
securities that can be converted into
Duration is a mathematical equity securities. Fixed income
measure of the average life of securities of any credit rating, which
a bond that includes its usually make up about 40% of the
yield, coupon, final maturity portfolio, are principally bonds and
and call features. It's often notes issued by U.S. and foreign
used to measure the potential companies and governments, and mortgage
volatility of a bond's price, related securities including stripped
and is considered a more mortgage related securities.
accurate measure than maturity
of a security's sensitivity to The portfolio management team allocates
changes in interest rates. assets among equity and fixed income
securities using a variety of analytical
tools, and then periodically rebalances
the portfolio to try to increase returns
and reduce risk. The team will vary the
percentage allocated to the two types of
securities depending on its analysis of
market conditions.
Within the equity portion of the
portfolio, the team uses the same
three-step investment process it uses
for the Equity Income Portfolio. That
process includes research, valuation of
companies using quantitative dividend
analysis, and selection of individual
stocks based on their relative
valuation.
Within the fixed income portion of the
portfolio, the team sets duration
objectives based on the yield curve,
allocates assets across a broad range of
fixed income sectors, and then selects
individual securities based on research
by a team of managers, analysts and
traders. The average duration of the
portfolio will usually be within one
year of the duration of the Lehman
Brothers Aggregate Bond Index. The index
had an average duration of [4.75] years
on March 31, 1999.
The team may use options, futures
contracts and other techniques to try to
increase returns or to try to hedge
changes in interest rates. The team may
also use derivatives to hedge against
changes in currency exchange rates. The
portfolio may lend some of its assets,
as long as the loans it makes are
secured.
[GRAPHIC APPEARS HERE]
------------------------------------------
Who manages the portfolio William Riegel, managing director, is a
senior equity portfolio manager in the
[LOGO OF J.P. MORGAN INVESTMENT] equity and balanced accounts group. He
APPEARS HERE] started his career with J.P. Morgan in
1979 as an investment research analyst
The Multi-Strategy Portfolio specializing in energy and machinery
is managed by a team of companies, and joined the equity group
portfolio managers at J.P. in 1984. He assumed responsibility for
Morgan Investment Management managing convertible portfolios in 1987,
Inc. You'll find more about and began managing the Multi-Strategy
J.P. Morgan on page 44. Portfolio in 1997. He graduated from
Williams College in 1978 and is a
chartered financial analyst.
Henry Cavanna, managing director, is a
senior equity portfolio manager in the
U.S. equity and balanced accounts group.
He joined J.P. Morgan in 1971 and his
first assignment was in pension
administration. He began managing the
Multi-Strategy Portfolio in 1997. He has
a BA from Boston College and an LLB from
the University of Pennsylvania.
William Tennille, vice president, joined
J.P. Morgan in 1992. He began managing
the Multi-Strategy Portfolio in 1997. He
is a fixed income portfolio manager for
pension and institutional accounts and
also serves as a mortgage-backed and
derivatives investment specialist for
the fixed income group. He is a graduate
of the University of North Carolina.
22
<PAGE>
[GRAPHIC APPEARS HERE]
------------------------------------------
Risks you should be aware of The Multi-Strategy Portfolio invests in
a mix of equity and fixed income
securities. While equities may offer the
potential for greater long-term growth
than most fixed income securities, they
generally have higher volatility. Fixed
income securities are affected primarily
by the financial condition of the
company that has issued it, and changes
in interest rates. The portfolio may be
affected by the following risks, among
others:
. price volatility - the value of the
portfolio changes as the prices of its
investments go up or down. This
portfolio invests in large and
medium-sized companies, which tend to
have less volatile prices than smaller
companies. The portfolio may, however,
invest in smaller companies.
. changes in interest rates - the
portfolio's fixed income investments may
make it sensitive to changes in interest
rates. The value of the portfolio may
fall when interest rates rise.
. credit risk - the portfolio could lose
money if the issuer of a fixed income
security is unable to meet its financial
This portfolio may not invest obligations or goes bankrupt.
more than 10% of its assets in
foreign fixed income . risks of foreign investing - foreign
securities. investments may be riskier than U.S.
investments for many reasons, including
changes in currency exchange rates,
unstable political and economic
conditions, a lack of adequate company
information, differences in the way
securities markets operate, less secure
foreign banks or securities depositories
than those in the U.S., and foreign
controls on investment.
. risks of using derivatives - this
portfolio may use index options, futures
contracts and other investment
techniques to help it achieve its
investment goal. There's always a risk
that these techniques could reduce
returns or increase the portfolio's
volatility.
. short-term trading - the portfolio can
engage in short-term trading, which
could result in higher trading costs.
[GRAPHIC APPEARS HERE]
------------------------------------------
How the portfolio has performed Year by year total return (%)
as of December 31 each year/1/
The bar chart shows the portfolio's
performance each year for the past [BAR CHART APPEARS HERE]
10 years.
89 23.42
The table below the bar chart 90 -1.47
compares the portfolio's 91 24.03
performance with the Standard & 92 5.57
Poor's 500 Composite Stock Price 93 9.25
Index, an index of the stocks of 94 -1.50
approximately 500 95 25.25
large-capitalization U.S. 96 12.56
companies, and the Lehman Brothers 97 19.62
Aggregate Bond Index, an index of 98 XX
fixed income securities.
Looking at how a portfolio Best and worst quarterly performance
has performed in the past is during this period: * quarter 19**: * %
important - but it's no guarantee * quarter 19**: * %
of how it will perform in the future.
Average annual total return
as of December 31, 1998 1 year 5 years 10 years
- --------------------------------------------------------------------------------
Multi-Strategy Portfolio/1/ * % * % * %
Standard & Poor's 500
Composite Stock Price Index * % * % * %
/1/ J.P. Morgan Investment Management Inc. began managing the portfolio on
January 1, 1994, and some investment policies changed at that time. Another
firm managed the portfolio before that date.
23
<PAGE>
- --------------------------------------------------------------------------------
ABOUT THE PORTFOLIOS LARGE-CAP VALUE PORTFOLIO
- --------------------------------------------------------------------------------
[GRAPHIC APPEARS HERE]
------------------------------------------
The portfolio's investment goal This portfolio seeks long-term growth of
capital. Current income is of secondary
importance.
This portfolio is not available for:
. Pacific Corinthian variable annuity
contracts
. Pacific Select variable life insurance
policies.
[GRAPHIC APPEARS HERE]
------------------------------------------
What the portfolio invests in This portfolio's principal investment
strategy is to invest in common and
preferred stocks of large U.S.
companies. It tends to emphasize
companies with a total market
A company's "capitalization" capitalization of more than $5 billion
is a measure of its size. that are included in the Standard &
Capitalization is calculated Poor's 500 Composite Stock Price Index.
by multiplying the current It may also invest in foreign companies
share price by the number of and fixed income securities and
shares held by investors. securities that can be converted into
equity securities.
Undervalued companies may be
fundamentally strong, but not The portfolio management team looks for
fully recognized by investors. companies that are undervalued or
Their shares could be good expected to grow. It focuses on
investments because their companies that meet one or more of the
prices do not reflect the true following criteria:
value of the company.
. companies that are believed to be
fundamentally strong, but that aren't
fully recognized by other investors
. companies that are experiencing or
that are expected to experience internal
changes, like changes in corporate
structure or capitalization
. companies that are developing new
products, expanding into new markets, or
taking advantage of changes in
technology or of other changes in the
industry or regulatory environment.
The portfolio manager may use options,
futures contracts and other techniques
to try to increase returns or to try to
hedge against changes in interest rates.
The manager may also use derivatives to
hedge changes in currency exchange
rates. The portfolio may lend some of
its assets, as long as the loans it
makes are secured.
The portfolio may invest any amount in
fixed income securities for current
income.
The team may temporarily change these
strategies if it believes economic
conditions make it necessary to try to
protect the portfolio from potential
loss.
[GRAPHIC APPEARS HERE]
------------------------------------------
Who manages the portfolio Jack Cunningham is a portfolio manager
and vice president of SaBAM, and is
[LOGO OF SALOMON BROTHERS responsible for directing investment
ASSET MANAGEMENT APPEARS policy and strategy. He is a portfolio
HERE] manager of the Salomon Brothers
Investors Fund and an equity analyst
The Large-Cap Value Portfolio responsible for covering the food,
is managed by a team of tobacco, restaurant and real estate
portfolio managers at Salomon industries. He has managed the Large-Cap
Brothers Asset Management Inc Value Portfolio since it started on
(SaBAM). You'll find more January 4, 1999. Before joining SaBAM in
about SaBAM on page 45. 1996, Jack worked as an investment
banker and financial analyst for Salomon
Brothers Energy Group. He holds a BA in
English from the University of Virginia
and an MBA from the Amos Tuck School at
Dartmouth College.
Jack is supported by a team of 18 U.S.
equity professionals, each of whom have
specific fundamental and quantitative
research skills relating to all stages
of SaBAM's equity investment process.
24
<PAGE>
[GRAPHIC APPEARS HERE]
------------------------------------------
Risks you should be aware of The Large-Cap Value Portfolio
principally invests in equity
securities, which may go up or down in
value, sometimes rapidly and
unpredictably. While equities may offer
the potential for greater long-term
growth than most fixed income
securities, they generally have higher
volatility. The portfolio may be
affected by the following risks, among
others:
. price volatility - the value of the
portfolio changes as the prices of the
investments it holds go up or down. The
portfolio invests in large companies,
which tend to have more stable prices
than smaller companies.
This portfolio may not invest . risks of foreign investing - foreign
more than 20% of its assets in investments may be riskier than U.S.
foreign securities. investments for many reasons, including
changes in currency exchange rates,
unstable political and economic
conditions, a lack of adequate company
information, differences in the way
securities markets operate, less secure
foreign banks or securities depositories
than those in the U.S., and foreign
controls on investment.
. risks of using derivatives - this
portfolio may use options, futures
contracts and other investment
techniques to help it achieve its
investment goal. There's always a risk
that these techniques could reduce
returns or increase the portfolio's
volatility.
Salomon Brothers
Assets Management Inc
This portfolio has no
historical performance because
it started on January 4, 1999.
The chart to the right shows
the historical performance of
the Salomon Brothers Investors
Fund, a mutual fund managed by
Salomon Brothers Investment
Management Inc since May 1,
1990. This fund has investment
objectives, policies and
strategies that are similar to
those of the Large-Cap Value
Portfolio.
This information is designed
to demonstrate the historical
track record of the portfolio
manager. The total returns
represent past performance
of the Salomon Investors Fund,
and not the Large-Cap Value
Portfolio. This information is
not intended to imply how the
Large-Cap Portfolio has
performed or will perform.
These returns do not reflect
deductions for separate
account or contract level
charges.
[GRAPHIC APPEARS HERE]
- --------------------------------------------------------------------------------
Performance of a similar account managed by SaBAM
Annual total returns, and average annual total returns for the periods ending
December 31, 1998
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
Salomon Investors Fund,
adjusted to reflect estimated
Salomon Investors Fund, expenses of the Large-Cap
Year Class O (%) Value Portfolio (%) S&P 500 (%)
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1998 *.** *.** *.**
1997 26.47 26.56 33.36
1996 30.55 30.58 22.96
1995 35.48 35.73 37.58
1994 (1.26) (1.46) 1.32
1993 15.17 15.08 10.08
1992 7.44 7.30 7.62
1991 29.31 29.32 30.47
one year *.** *.** *.**
three years *.** *.** *.**
five years *.** *.** *.**
since inception
5/1/90/1/ *.** *.** *.**
- ------------------------------------------------------------------------------------------
</TABLE>
/1/ Salomon Investors Fund has been managed by SaBAM since May 1, 1990. It was
managed by another firm prior to that date.
The returns in the first column in the table reflect advisory fees and
operating expenses of the Salomon Investors Fund, Class O.
The second column shows gross performance of the Salomon Investors Fund,
adjusted to reflect estimated fees and expenses of the Large-Cap Value
Portfolio.
The third column shows performance of the S&P 500, an index of the stocks of
approximately 500 large-capitalization U.S. companies, during the same
periods.
25
<PAGE>
- --------------------------------------------------------------------------------
ABOUT THE PORTFOLIOS MID-CAP VALUE PORTFOLIO
- --------------------------------------------------------------------------------
[GRAPHIC APPEARS HERE]
----------------------------------------
The portfolio's investment goal This portfolio seeks capital
appreciation.
This portfolio is not available for:
. Pacific Corinthian variable annuity
contracts
. Pacific Select variable life insurance
policies.
[GRAPHIC APPEARS HERE]
----------------------------------------
What the portfolio invests in This portfolio's principal investment
strategy is to invest at least 80% of
A company's "capitalization" its assets in the common stocks of
is a measure of its size. medium-sized U.S. companies that are
Capitalization is calculated believed to be undervalued. It tends
by multiplying the current to emphasize companies with a total
share price by the number of market capitalization of between $1
shares held by investors. billion and $5 billion that are
included in the Russell Midcap Index.
Selling short is the opposite
of a typical stock market The portfolio management team
transaction. Instead of buying determines a company's value by
a stock and then selling comparing its share price with its
it--hopefully at a higher return on total capital or equity.
price--you sell the stock Companies are considered undervalued
first, and then buy it back, when their share price is lower than
hopefully at a lower price. In their estimated worth or growth
a short sale, you normally prospects.
borrow the stock you're
selling. The portfolio management team attempts
to identify undervalued securities
using traditional measures of value,
including low price to earnings ratio,
high yield, unrecognized assets,
potential for management change and
the potential to improve
profitability. The team's global
investment specialists apply both
quantitative and qualitative analysis
to securities selection. The team
focuses on individual stock selection
rather than on forecasting stock
market trends.
The team may also invest in equity
securities of larger companies, fixed
income securities, and foreign equity
and fixed income securities.
To help it achieve its investment
goal, the portfolio may lend some of
its assets, as long as the loans it
makes are secured. It may use borrowed
money to make investments, which may
include short selling securities it
doesn't own. The portfolio manager may
use options, futures contracts and
other techniques to try to increase
returns or to try to hedge against
changes in interest rates. The manager
may also use derivatives to hedge
against changes in currency exchange
rates.
The team may temporarily change these
strategies if it believes economic
conditions make it necessary to
protect the portfolio from potential
loss. In this case, the portfolio may
invest any amount in larger companies,
short-term money market instruments or
cash.
[GRAPHIC APPEARS HERE]
----------------------------------------
Who manages the portfolio Herbert W. Gullquist, chief investment
officer of Lazard and a managing
[LOGO OF LAZARD APPEARS HERE] director, is responsible for ensuring
that all investment activity follows
The Mid-Cap Value Portfolio is Lazard's investment philosophy and
managed by a team of portfolio guidelines. He has managed the Mid-Cap
managers at Lazard Asset Value Portfolio since it started on
Management. You'll find more January 4, 1999. He has 37 years of
about Lazard on page 44. investment management experience.
Before joining Lazard in 1982, Mr.
Gullquist was a general partner of
Oppenheimer & Company Inc. and a
managing director and the chief
investment officer of Oppenheimer
Capital Corp. He has a BA from
Northwestern University.
Eileen D. Alexanderson, managing
director of Lazard Freres & Co. LLC,
is responsible for U.S./global equity
management and overseeing the day-to-
day operations of the U.S. equity
investment team. She has managed the
Mid-Cap Value Portfolio since it
started on January 4, 1999. Ms.
Alexanderson joined Lazard in 1979 and
has 18 years of investment experience.
She is a chartered financial analyst
and has a BS from St. John's
University.
26
<PAGE>
[GRAPHIC APPEARS HERE]
-----------------------------------------
Risks you should be aware of The Mid-Cap Value Portfolio
principally invests in equity
securities, which may go up or down in
value, sometimes rapidly and
unpredictably. While equities may
offer the potential for greater long-
term growth than most fixed income
securities, they generally have higher
volatility. The portfolio may also be
affected by the following risks, among
others:
This portfolio may not invest . price volatility - the value of the
more than 15% of its assets in portfolio changes as the prices of the
foreign investments. investments it holds go up or down.
This portfolio invests in medium-sized
companies, which are more susceptible
to price swings than larger companies,
but usually tend to have less volatile
price swings than smaller companies.
. risks of foreign investing - foreign
investments may be riskier than U.S.
investments for many reasons,
including changes in currency exchange
rates, unstable political and economic
conditions, a lack of adequate company
information, differences in the way
securities markets operate, less
secure foreign banks or securities
depositories than those in the U.S.,
and foreign controls on investment.
. risks of using derivatives - this
portfolio may use options, futures
contracts and other investment
techniques to help it achieve its
investment goal. There's always a risk
that these techniques could reduce
returns or increase the portfolio's
volatility.
. risks of leveraging - leveraging, or
using borrowed money to buy
securities, can magnify the gain --
and the loss -- on the security. The
portfolio will be charged interest on
any money it borrows. The lender will
have priority over shareholders
against the portfolio's assets.
Lazard Asset Management
This portfolio has no historical
performance because it started on
January 4, 1999.
The chart to the right shows the
historical performance of the Lazard
U.S. Mid Cap Equity Composite which
is made up of five of Lazard's
advisory accounts. Each account in
the composite has investment objectives,
policies and strategies that are similar
to those of the Mid-Cap Value Portfolio,
except that leverage has not been a
strategy used for the Lazard accounts.
This information is designed to
demonstrate the historical track record
of the portfolio manager. The total
returns represent past performance of the
Lazard U.S. Equity Composite and not the
Mid-Cap Value Portfolio. This information
is not intended to imply how the Mid-Cap
Value Portfolio has performed or will
perform. These returns do not reflect
deductions for separate account or
contract level charges.
[GRAPHIC APPEARS HERE]
- --------------------------------------------------------------------------------
Performance of similar accounts managed by Lazard Asset Management
Annual total returns, and average annual total returns for the periods ending
December 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Lazard U.S. Mid-Cap Equity
Composite, adjusted to reflect
Lazard U.S. Mid-Cap estimated expenses of the Russell Midcap
Year Equity Composite (%) Mid-Cap Value Portfolio (%) Index (%)
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1998 *.** *.** *.**
1997 28.46 27.83 29.01
1996 24.70 24.06 19.00
one year *.** *.** *.**
since inception
1/1/96 *.** *.** *.**
</TABLE>
The results shown above are a composite of actual performance for five advisory
accounts, calculated according to the standards set by the Association for
Investment Management and Research (AIMR). The accounts in the composite were
not subject to the requirements of the Investment Company Act of 1940 or
Subchapter M of the Internal Revenue Code, which if imposed, could have affected
the performance.
The first column in the table shows performance of the Lazard U.S. Mid-Cap
Equity Composite after average advisory fees and other expenses charged to the
accounts in the composite have been deducted. The fees and expenses of the
composite include investment advisory fees, but not custody fees or other
expenses normally paid by mutual funds and which the Mid-Cap Value Portfolio
will pay. If these were included, returns would be lower.
The second column shows the gross performance of the composite, adjusted to
reflect the estimated fees and expenses of the Mid-Cap Value Portfolio.
The third column shows performance of the Russell Midcap Index, an index
consisting of 800 of the smallest companies in the Russell 1000 Index, for the
same periods. The Russell 1000 Index is an index of the 1,000 largest companies
in the Russell 3000 Index. The Russell 3000 Index is an index of the 3,000
largest U.S. companies. Results include reinvested dividends.
27
<PAGE>
- --------------------------------------------------------------------------------
ABOUT THE PORTFOLIOS EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
[GRAPHIC APPEARS HERE]
----------------------------------------
The portfolio's investment goal This portfolio's primary investment
objective is capital appreciation.
Current income is of secondary
importance.
[GRAPHIC APPEARS HERE]
----------------------------------------
What the portfolio invests in This portfolio's principal investment
strategy is to invest in large U.S.
companies that have better prospects for
growth than the general U.S. economy. It
normally invests at least 90% of its
assets in equity securities of U.S.
issuers.
This portfolio is managed using a Investments include principally common
computerized rating system that stock, but the portfolio may also invest
tries to forecast how companies in fixed income securities that can be
will perform based on an analysis converted into equity securities, and
of a broad range of variables warrants. The portfolio management team
that measure their value, growth, uses the Russell 1000 Growth Index as an
momentum and risk, and on the overall model for the portfolio. The
portfolio managers' outlook on team tries to:
the market.
. maintain industry, style, capitalization
and risk characteristics that are
similar to the index.
. find companies with capitalizations and
earnings growth expectations that are
above the average of the index and with
dividend yields that are below the
average of the index.
The team selects individual companies
using a comprehensive proprietary
computerized rating system, called a
"multifactor model," combined with
fundamental research.
The portfolio managers may use index
options to try to increase returns. The
portfolio may also lend some of its
assets, as long as the loans it makes
are secured.
The team may temporarily change these
strategies if it believes that economic
conditions make it necessary to try to
protect the portfolio from potential
loss. In this case, the portfolio may
invest in U.S. government securities,
corporate bonds, repurchase agreements,
or money market instruments, which may
prevent the portfolio from achieving its
investment goal.
[GRAPHIC APPEARS HERE]
----------------------------------------
Who manages the portfolio Robert Jones, managing director, has 17
years of investment experience. Before
[LOGO OF GOLDMAN SACHS APPEARS HERE] joining Goldman Sachs in 1989, he
provided quantitative research for a
major banking firm and an options
consulting firm. His articles on
quantitative techniques have been
published in leading financial journals.
He has a BA from Brown University and an
MBA from the University of Michigan, and
is a chartered financial analyst. He
began managing the Equity Portfolio in
1998.
The Equity Portfolio is managed
by a team of portfolio managers Victor Pinter, vice president, was a
at Goldman Sachs Asset Management. consultant at Chase Econometrics/IDC and
You'll find more about Goldman a project manager in the Information
Sachs on page 43. Technology Division of Goldman Sachs
before he joined Goldman Sachs in 1985.
He has a BS from Brooklyn College and an
MBA from New York University's Stern
School of Business. He joined the
quantitative equity management team in
1992.
Kent Clark, vice president, has a
Bachelor of Commerce from the University
of Calgary and an MBA from the
University of Chicago, and is a
chartered financial analyst. His
research has been published in The
Journal of Financial and Quantitative
Analysis. He joined the quantitative
equity management team in 1992.
Melissa Brown, vice president, is a
product manager for the quantitative
equity group. Before joining Goldman
Sachs in 1998, she was the director of
quantitative equity research at
Prudential Securities for 14 years, was
on Prudential's investment policy
committee, and appeared on Institutional
Investor Magazine's "All-Star" list
every year from 1988 to 1997. She is a
chartered financial analyst, and has a
BS in economics from the Wharton School
of the University of Pennsylvania and an
MBA in finance from New York University.
28
<PAGE>
[GRAPHIC APPEARS HERE]
----------------------------------------
Risks you should be aware of The Equity Portfolio principally invests
in equity securities, which may go up or
down in value, sometimes rapidly and
unpredictably. While equities may offer
the potential for greater long-term
growth than most fixed income
securities, they generally have higher
volatility. The portfolio may be
affected by the following risks, among
others:
. price volatility - the value of the
portfolio changes as the prices of the
investments it holds go up or down. This
portfolio principally invests in large
companies, which tend to have less
volatile prices than smaller companies.
The portfolio managers also look for
companies they think have the potential
for rapid growth, which may give the
portfolio a higher risk of price
volatility than a portfolio that invests
in equities that are "undervalued," for
example.
. risks of using derivatives - this
portfolio may use index options and
other investment techniques to help it
achieve its investment goals. There's
always a risk that these techniques
could reduce returns or increase the
portfolio's volatility.
. short-term trading - the portfolio can
engage in short-term trading, which
could result in higher trading costs.
[GRAPHIC APPEARS HERE]
------------------------------------------
How the portfolio has performed Year by year total return (%)
as of December 31 each year/1/
The bar chart shows the portfolio's 89 30.12
performance each year for the past 90 -2.55
10 years. 91 29.77
92 6.30
The table below the bar chart 93 16.06
compares the portfolio's performance 94 -2.87
with the Russell 1000 Growth Index, 95 23.80
an index of large companies that 96 28.03
have high price-to-book ratios 97 18.18
and forecasted growth values. It 98 XX
also compares performance with
the Standard & Poor's 500 Composite
Stock Price Index, an index of Best and worst quarterly performance
the stocks of approximately 500 during this period: * quarter 19**: * %
large-capitalization U.S. companies. * quarter 19**: * %
Looking at how a portfolio has
performed in the past is
important - but it's no guarantee
of how it will perform in the future.
<TABLE>
<CAPTION>
Average annual total return
as of December 31, 1998 1 year 5 years 10 years
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Equity Portfolio/1/ * % * % * %
Russell 1000 Growth Index * % * % * %
Standard & Poor's 500 Composite Stock Price Index * % * % * %
</TABLE>
/1/ Goldman Sachs Asset Management began managing the portfolio on May 1, 1998,
and some investment policies changed at that time. Another firm managed the
portfolio before that date. Performance of the Equity Portfolio before 1995
is based on the performance of the portfolio of the Pacific Corinthian
Variable Fund, which the Pacific Select Fund acquired on December 31, 1994.
29
<PAGE>
- --------------------------------------------------------------------------------
ABOUT THE PORTFOLIOS BOND AND INCOME PORTFOLIO
- --------------------------------------------------------------------------------
[GRAPHIC APPEARS HERE]
----------------------------------------
The portfolio's investment goal This portfolio seeks to provide total
return and income consistent with
prudent investment management.
[GRAPHIC APPEARS HERE]
----------------------------------------
What the portfolio invests in This portfolio's principal investment
strategy is to invest in a wide range of
fixed income securities with varying
Total return is made up of income terms to maturity, with an emphasis on
plus any gains in the value of the long-term bonds. The portfolio normally
portfolio's securities. invests at least 80% of its assets in
securities that are rated investment
grade at the time of investment by a
credit rating agency, or that have not
been rated, but the portfolio management
team considers to be of comparable
quality.
These principally include:
. corporate bonds and notes of U.S.
companies, some of which may be high
yield ("junk") bonds
. U.S. treasury bonds and notes, or
options or futures on them
Duration is a mathematical measure
of the average life of a bond that . fixed income securities issued by
includes its yield, coupon, final foreign companies and governments
maturity and call features. It is that are denominated in U.S. dollars or
often used to measure the potential foreign currencies, some of which may
volatility of a bond's price, and be issued by governments in emerging
is considered a more accurate market countries
measure than maturity of a
security's sensitivity to changes . mortgage related securities, including
in interest rates. stripped mortgage related securities and
other assetbacked securities
. fixed income securities with variable
interest rates
. fixed income securities that can
be converted to equity securities.
The portfolio management team chooses
investments that have short,
intermediate and long terms to maturity.
The team uses duration management as a
fundamental part of the portfolio's
strategy. The average duration of the
portfolio will usually be within
one-half year of the duration of the
Lehman Brothers Government/Corporate
Long-Term Bond Index. The index had an
average duration of [10.13] years on
March 31, 1999.
The team may also use options, futures
contracts and other hedging techniques
when necessary to try to offset the
effects of changes in interest rates and
currency exchange rates. The portfolio
may lend some of its assets, as long as
the loans it makes are secured.
[GRAPHIC APPEARS HERE]
----------------------------------------
Who manages the portfolio Jonathan Beinner, managing director, is
co-head of the U.S. fixed income team,
[LOGO OF GOLDMAN SACHS APPEARS HERE] and heads the mortgage-backed and
asset-backed securities group. He has
two BS degrees from the University of
Pennsylvania. He worked in the trading
and arbitrage group of Franklin Savings
Associates before joining Goldman Sachs
in 1990. He began managing the Bond and
Income Portfolio in 1998.
The Bond and Income Portfolio is Richard Lucy, vice president, is a
managed by a team of portfolio chartered financial analyst and holds BS
managers at Goldman Sachs Asset and MBA degrees from New York
Management. You'll find more about University. He managed fixed income
Goldman Sachs on page 43. assets at Brown Brothers Harriman & Co.
for nine years before joining Goldman
Sachs in 1992. He began managing the
Bond and Income Portfolio in 1998.
30
<PAGE>
[GRAPHIC APPEARS HERE]
-----------------------------------------
Risks you should be aware of Since the Bond and Income Portfolio
principally invests in fixed income
securities of both U.S. and foreign
issuers, it may be affected by the
following risks, among others:
. changes in interest rates - the value
The Bond and Income Portfolio tends of the portfolio may fall when
to have the most interest rate risk interest rates rise. Changes in
of the Pacific Select Fund bond interest rates may have a significant
portfolios, because it invests in effect on this portfolio, because it
bonds with longer terms to maturity, primarily invests in securities with
and maintains a longer average long terms to maturity and may use
portfolio duration. hedging techniques. Bonds with longer
durations tend to be more sensitive
to changes in interest rates, making
This portfolio may not invest more them more volatile than bonds with
than: shorter durations. The portfolio may
also invest in mortgage related
. 20% of its assets in securities and fixed income securities
lower-rated "junk" bonds, with variable interest rates. These can
of which 15% may be in reduce returns if interest rates go
emerging markets down. Stripped mortgage related
securities can be particularly
. 10% of its assets in foreign sensitive to changes in interest rates.
investments denominated in
foreign currencies . credit risk - the portfolio could lose
money if the issuer of a fixed income
. 10% of its assets in security is unable to meet its financial
stripped mortgage related obligations or goes bankrupt. This
securities. portfolio may invest in high yield
bonds, which may make it particularly
subject to credit risk, especially
during periods of economic uncertainty
or during economic downturns.
. inability to sell investments - the
portfolio could lose money or not
realize potential gains if it cannot
sell an investment at the time and price
that would be most beneficial to the
portfolio. Securities whose credit
ratings have been lowered, or that have
been issued in emerging market
countries, may be particularly difficult
to sell.
. risks of foreign investing - foreign
investments may be riskier than U.S.
investments for many reasons, including
changes in currency exchange rates,
unstable political and economic
conditions, a lack of adequate company
information, differences in the way
securities markets operate, less secure
foreign banks or securities depositories
than those in the U.S., and foreign
controls on investment.
. risks of using derivatives - this
portfolio may use options, futures
contracts and other investment
techniques to help it achieve its
investment goal. There's always a risk
that these techniques could reduce
returns or increase the portfolio's
volatility.
[GRAPHIC APPEARS HERE]
------------------------------------------
How the portfolio has performed Year by year total return (%)
as of December 31 each year/1/
The bar chart shows the portfolio's
performance each year for the past [BAR CHART APPEARS HERE]
10 years.
The table below the bar chart 89 17.04
compares the portfolio's performance 90 3.27
with the Lehman Brothers 91 24.32
Government/Corporate Long-Term Bond 92 8.09
Index, an index of bonds with 93 19.39
maturities of 10 years or more. 94 -8.36
95 33.71
Looking at how a portfolio has 96 -0.80
performed in the past is important 97 16.32
- - but it's no guarantee of how it 98 XX
will perform in the future.
Best and worst quarterly performance
during this period: * quarter 19**: * %
* quarter 19**: * %
Average annual total return
as of December 31, 1998 1 year 5 years 10 years
- --------------------------------------------------------------------------------
Bond and Income Portfolio/1/ * % * % * %
Lehman Brothers Government/Corporate
Long-Term Bond Index * % * % * %
/1/ Goldman Sachs Asset Management began managing the portfolio on May 1, 1998,
and some investment policies changed at that time. Another firm managed the
portfolio before that date. Performance of the Bond and Income Portfolio
before 1995 is based on the performance of the portfolio of the Pacific
Corinthian Variable Fund, which the Pacific Select Fund acquired on December
31, 1994.
31
<PAGE>
- --------------------------------------------------------------------------------
ABOUT THE PORTFOLIOS EQUITY INDEX PORTFOLIO
- --------------------------------------------------------------------------------
[GRAPHIC APPEARS HERE]
-----------------------------------------
The portfolio's investment goal This portfolio seeks to provide
investment results that correspond to
the total return of common stocks that
are publicly traded in the United
States.
[GRAPHIC APPEARS HERE]
-----------------------------------------
What the portfolio invests in This portfolio's principal investment
strategy is to invest in companies that
are included in the Standard & Poor's
500 Composite Stock Price Index. It
principally invests in common stock.
The portfolio management team has two
objectives:
The goal of an index fund is to . match the returns of the index before
mirror the performance of a taking into account portfolio costs
specific index. Because individual
investment selection is virtually The portfolio usually holds between
eliminated, active portfolio 200 and 450 of the stocks in the index
management is not required. and tries to match its industry
weightings. Since the portfolio
This portfolio invests in companies generally invests in securities that
that are included in the are included in the index, it has
Standard & Poor's 500 Composite similar risk characteristics and
Stock Price Index, an index of the performance. The team periodically
stocks of approximately 500 reviews and rebalances the portfolio's
large-capitalization U.S. investments to more closely track the
companies. performance of the index. It will not,
however, actively manage the portfolio
or carry out a financial analysis of its
holdings.
The team frequently uses index futures
as a substitute for securities or to
hedge against changes in securities
prices.
Portfolio returns will likely be lower
than the index because of transaction
costs and other expenses the portfolio
has to pay. The portfolio's ability to
match the returns of the index will also
depend on the size of the portfolio, its
cash flow, and how easy it is to sell
the investments it holds.
. lower transaction costs
This portfolio is expected to have lower
transaction costs than actively managed
portfolios because it generally makes
fewer transactions.
To help it achieve its investment goal,
the portfolio may lend some of its
assets, as long as the loans it makes
are secured. The portfolio may hold some
cash for liquidity, but the team will
not change these strategies at any time
for any other reason.
Who manages the portfolio [GRAPHIC APPEARS HERE]
------------------------------------------
[LOGO OF BANKERS TRUST APPEARS HERE] The Equity Index Portfolio is managed by
the Global Investment Management Group
of Bankers Trust Company. Founded in
1903, Bankers Trust is among the largest
index fund managers in the world. You'll
find more about Bankers Trust on page
42.
32
<PAGE>
[GRAPHIC APPEARS HERE]
------------------------------------------
Risks you should be aware of The Equity Index Portfolio principally
invests in equity securities, which may
go up or down in value, sometimes
rapidly and unpredictably. While
equities may offer the potential for
greater long-term growth than most fixed
income securities, they generally have
higher volatility. The portfolio may be
affected by the following risks, among
others:
. price volatility - the value of the
portfolio changes as the prices of the
investments it holds go up or down. This
portfolio primarily invests in large
companies, which sometimes have less
volatile prices than smaller companies.
. stock market risk - The portfolio is
not actively managed, and invests in
securities included in the index
regardless of their investment merit.
The team cannot change this investment
strategy, even temporarily to protect
the portfolio from loss during poor
economic conditions. This means the
portfolio is susceptible to a general
decline in the U.S. stock market.
. risks of using derivatives - this
portfolio frequently uses index futures
and other investment techniques to help
it achieve its investment goals. There's
always a risk that these techniques
could reduce returns or increase the
portfolio's volatility.
[GRAPHIC APPEARS HERE]
------------------------------------------
How the portfolio has performed Year by year total return (%)
as of December 31 each year
The bar chart shows the portfolio's
performance each year since its [BAR CHART APPEARS HERE]
inception.
The table below the bar chart compares 91 24.88
the portfolio's performance with the 92 6.95
Standard & Poor's 500 Composite Stock 93 9.38
Price Index, an index of the stocks 94 1.05
of approximately 500 95 36.92
large-capitalization U.S. companies. 96 22.36
97 32.96
Looking at how a portfolio has 98 XX
performed in the past is important -
but it's no guarantee of how it will Best and worst quarterly performance
perform in the future. during this period: * quarter 19**: * %
* quarter * 19**: * %
<TABLE>
<CAPTION>
Average annual total return
as of December 31, 1998 Since inception
1 year 5 years (January 30, 1991)
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Equity Index Portfolio * % * % * %
Standard & Poor's 500 Composite Stock Price Index * % * % * %
</TABLE>
33
<PAGE>
- --------------------------------------------------------------------------------
ABOUT THE PORTFOLIOS SMALL-CAP INDEX PORTFOLIO
- --------------------------------------------------------------------------------
[GRAPHIC APPEARS HERE]
-------------------------------------------
The portfolio's investment goal This portfolio seeks investment results
that correspond to the total return of
an index of small capitalization
companies.
This portfolio is not available for:
. Pacific Corinthian variable
annuity contracts
. Pacific Select variable life
insurance policies.
[GRAPHIC APPEARS HERE]
-------------------------------------------
What the portfolio invests in This portfolio's principal investment
strategy is to invest in companies that
are included in the Russell 2000 Small
Stock Index. It principally invests in
common stock.
The portfolio management team has two
objectives:
The goal of an index fund is to . match the returns of the index
mirror the performance of a specific before taking into account
index. Because individual investment portfolio costs
selection is virtually eliminated,
active portfolio management is not The portfolio can invest in any number
required and transaction costs are of the stocks in the index and tries to
reduced. match its industry weightings. Since the
portfolio generally invests in
securities that are included in the
This portfolio invests in companies index, it has similar risk
that are included in the Russell 2000 characteristics and performance. The
Small Stock Index, a broadly based team periodically reviews and rebalances
index of the stocks of 2,000 smaller the portfolio's investments to more
companies listed on a U.S. exchange. closely track the performance of the
index. It will not, however, actively
manage the portfolio or carry out a
financial analysis of its holdings.
The team frequently uses index futures
as a substitute for securities or to
hedge against changes in securities
prices.
Portfolio returns will likely be lower
than the index because of transaction
costs and other expenses the portfolio
has to pay. The portfolio's ability to
match the returns of the index will also
depend on the size of the portfolio, its
cash flow, and how easy it is to sell
the investments it holds.
. lower transaction costs
This portfolio is expected to have lower
transaction costs than actively managed
portfolios because it generally makes
fewer transactions.
To help it achieve its investment goal,
the portfolio may lend some of its
assets, as long as the loans it makes
are secured. The portfolio may hold some
cash for liquidity, but the team will
not change these strategies at any time
for any other reason.
[GRAPHIC APPEARS HERE]
-------------------------------------------
Who manages the portfolio The Small-Cap Index Portfolio is managed
by the Global Investment Management
[LOGO OF BANKERS TRUST Group of Bankers Trust Company. Founded
APPEARS HERE] in 1903, Bankers Trust is among the
largest index fund managers in the
world. You'll find more about Bankers
Trust on page 42.
34
<PAGE>
[GRAPHIC APPEARS HERE]
------------------------------------------
Risks you should be aware of The Small-Cap Index Portfolio
principally invests in equity
securities, which may go up or down in
value, sometimes rapidly and
unpredictably. While equities may offer
the potential for greater long-term
growth than most fixed income
securities, they generally have higher
volatility. The portfolio may be
affected by the following risks, among
others:
. price volatility - the value of the
portfolio changes as the prices of the
investments it holds go up or down. This
portfolio invests in small-cap
companies, which tend to have higher
price swings than larger companies
because they have fewer financial
resources, limited product and market
diversification and many are dependent
on a few key managers.
. stock market risk - The portfolio is not
actively managed, and invests in
securities included in the index
regardless of their investment merit. It
cannot modify its investment strategy to
respond to changes in the economy, which
means the portfolio is susceptible to a
general decline in the U.S. stock
market.
. risks of using derivatives - this
portfolio frequently uses index options
and other investment techniques to help
it achieve its investment goals. There's
always a risk that these techniques
could reduce returns or increase the
portfolio's volatility.
Bankers Trust Company
This portfolio has no historical
performance because it started on
January 4, 1999.
The chart to the right shows the
historical performance of the BT
Advisor Small-Cap Index Fund, a mutual
fund managed by Bankers Trust. This
fund has investment objectives,
policies and strategies that are
similar to those of the Small-Cap
Index Portfolio.
This information is designed to
demonstrate the historical track
record of the portfolio manager.
The total returns represent past
performance of the BT Advisor
Small-Cap Index Fund, Institutional
Class, and not the Small-Cap Index
Portfolio. This information is not
intended to imply how the Small-Cap
Index Portfolio has performed or
will perform. These returns do not
reflect deductions for separate
account or contract level charges.
[GRAPHIC APPEARS HERE]
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
Performance of a similar account managed by Bankers Trust Company
Annual total returns, and average annual total returns for the periods ending
December 31, 1998
- ---------------------------------------------------------------------------------------------
BT Advisor Small-Cap
BT Advisor Small-Cap Index Fund, adjusted to reflect
Index Fund, estimated expenses of the Russell 2000 Small
Year Institutional Class (%) Small-Cap Index Portfolio (%) Stock Index (%)
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1998 *.** *.** *.**
1997 23.00 23.69 22.36
1996/1/ 4.76 4.68 5.19
one year *.** *.** *.**
since inception
7/10/96/1/ *.** *.** *.**
- ---------------------------------------------------------------------------------------------
</TABLE>
/1/ Returns are calculated from July 31, 1996.
The returns in the first column in the table reflect the advisory fees and
operating expenses of the BT Advisor Small-Cap Index Fund, Institutional
Class.
The second column shows the gross performance of the fund, adjusted to
reflect estimated fees and expenses of the Small-Cap Index Portfolio.
The third column shows performance of the Russell 2000 Small Stock Index, an
index of 2,000 small companies listed on a U.S. exchange, for the same
periods. Results include reinvested dividends.
35
<PAGE>
- --------------------------------------------------------------------------------
ABOUT THE PORTFOLIOS REIT PORTFOLIO
- --------------------------------------------------------------------------------
[GRAPHIC APPEARS HERE]
------------------------------------------
The portfolio's investment goal This portfolio seeks current income and
long-term capital appreciation.
This portfolio is not available for:
. Pacific Corinthian variable annuity
contracts
. Pacific Select variable life insurance
policies.
[GRAPHIC APPEARS HERE]
------------------------------------------
What the portfolio invests in This portfolio's principal investment
strategy is to invest at least 65% of
its assets in securities of real estate
investment trusts. It may also invest in
equity securities of real estate
operating companies whose principal
business is in the U.S. real estate
industry. Some of these companies may be
foreign.
Real estate investment trusts The portfolio may also invest in
(REITs) and real estate operating properties, including office and
companies are entities that own industrial buildings, apartments,
portfolios of real estate. REITs manufactured homes and hotels.
invest primarily in properties that
produce income and in real The portfolio management team tries to
estate-related loans or interests. earn gross income that's higher than the
dividend yield of the Standard & Poor's
500 Composite Stock Price Index.
The portfolio management team uses a
"top-down" process to determine how
assets are allocated. The team focuses
on key regional criteria that include
demographic and macroeconomic factors
like population, employment, household
formation and income. When selecting
securities, the team uses a "bottom-up"
process that emphasizes value, and looks
at underlying asset values, values per
square foot and property yields.
The team may use options and other
techniques to try to increase returns,
and futures contracts, interest rate
derivative products and structured notes
to try to hedge against changes in
interest rates. To help it achieve its
investment goal, the portfolio may lend
some of its assets, as long as the loans
it makes are secured.
The team may change these strategies if
it believes economic conditions make it
necessary to try to protect the
portfolio from a potential loss. In this
case, the portfolio may invest any
amount in investment grade short- and
medium-term fixed income securities or
cash.
[GRAPHIC APPEARS HERE]
------------------------------------------
Who manages the portfolio Theodore Bigman, principal, joined MSAM
in 1995 and manages its U.S. real estate
[LOGO OF MORGAN STANLEY investment business. He has managed the
ASSET MANAGEMENT INC. REIT Portfolio since it started on
APPEARS HERE] January 4, 1999. Before joining MSAM, he
was a director at CS First Boston, where
The REIT Portfolio is managed by he established and managed the REIT
Morgan Stanley Asset Management effort, and had primary responsibility
(MSAM). You'll find more about MSAM for $2.5 billion of initial public
on page 44. offerings by real estate investment
trusts. He graduated from Brandeis
University in 1983 with a BA in
Economics and received an MBA from
Harvard University in 1987.
Douglas A. Funke, vice president, joined
MSAM in 1993. He is responsible for
providing research and analytical
support for its real estate investment
business. He has been associated with
the REIT Portfolio since its inception
and was named associate portfolio
manager on January [22], 1999. Before
joining MSAM, he was a member of Morgan
Stanley's Interest Rate and Foreign
Exchange Risk Management Group, where he
assisted in more than $3 billion of
structured financings and firm-related
risk management projects. He graduated
from the University of Chicago in 1993
with a B.A. in Economics and Political
Science.
36
<PAGE>
[GRAPHIC APPEARS HERE]
------------------------------------------
Risks you should be aware of The REIT Portfolio principally invests
in equity securities, which may go up or
down in value, sometimes rapidly and
unpredictably. While equities may offer
the potential for greater long-term
The portfolio is considered to be growth than most fixed income
"non-diversified" because it may securities, they generally have higher
invest in securities of a fewer volatility. The portfolio may also be
number of issuers than other affected by the following risks, among
portfolios. This increases the risk others:
that its value could go down because
of the poor performance of a single . price volatility - the value of the
investment. portfolio changes as the prices of the
investments it holds go up or down. This
portfolio invests in companies
participating in the real estate
industry. The prices of these companies
are affected by real estate cycles, cash
flows, availability of mortgage
financing, changes in interest rates,
overbuilding, property taxes and
operating expenses, environmental
regulation and changes in zoning laws
and regulations.
. risks of real estate investment trusts
(REITs) - REITs expose the portfolio to
the risks of the real estate market. For
example, some REITs may invest in a
limited number of properties, in a
narrow geographic area, or in a single
property type, which increases the risk
that the portfolio could be unfavorably
affected by the poor performance of a
single investment. Borrowers could
default on or sell investments the REIT
holds, which could reduce the cash flow
needed to make distributions to
investors. In addition, a REIT may not
qualify for preferential tax treatments
or exemptions. REITs require specialized
management and have to pay management
expenses.
. risks of foreign investing - foreign
investments may be riskier than U.S.
investments for many reasons, including
changes in currency exchange rates,
unstable political and economic
conditions, a lack of adequate company
information, differences in the way
securities markets operate, less secure
foreign banks or securities depositories
than those in the U.S., and foreign
controls on investment.
. risks of using derivatives - this
portfolio may use options, futures
contracts and other investment
techniques such as interest-sensitive
derivative products and structured notes
to help it achieve its investment goal.
There's always a risk that these
techniques could reduce returns or
increase the portfolio's volatility.
When it invests in structured notes and
other derivatives, this portfolio is
particularly sensitive to the risk that
the other party to the derivative cannot
meet its financial obligations to pay
the portfolio.
Morgan Stanley Asset Management
This portfolio has no historical
performance because it started on
January 4, 1999.
The chart to the right shows the
historical performance of the Morgan
Stanley U.S. Real Estate Fund, a
mutual fund managed by Morgan
Stanley Asset Management. This fund
has investment objectives, policies
and strategies that are similar to
those of the REIT Portfolio.
This information is designed to
demonstrate the historical track
record of the portfolio manager.
The total returns represent past
performance of the Morgan Stanley
U.S. Real Estate Fund, Class A and
not the REIT Portfolio. This
information is not intended to
imply how the REIT Portfolio has
performed or will perform. These
returns do not reflect deductions
for separate account or contract
level charges.
[GRAPHIC APPEARS HERE]
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
Performance of a similar account managed by Morgan Stanley Asset Management
Annual total returns and average annual total returns for the periods ending
December 31, 1998
- ---------------------------------------------------------------------------------------------
Morgan Stanley U.S. Real
Morgan Stanley Estate Fund, adjusted
U.S. Real Estate Fund, to reflect estimated expenses NAREIT Equity
Year Class A (%) of the REIT Portfolio (%) Index (%)
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1998 *.** *.** *.**
1997 27.62 27.70 20.29
1996 39.56 39.72 35.26
1995/1/ 21.07 20.93 14.99
one year *.** *.** *.**
since inception
2/24/95 *.** *.** *.**
- ---------------------------------------------------------------------------------------------
</TABLE>
/1/ Total return is based on the period from February 24, 1995 to December 31,
1995.
The returns in the first column reflect advisory fees and expenses of the
Morgan Stanley U.S. Real Estate Fund, Class A.
The second column shows performance of the Morgan Stanley U.S. Real Estate
Fund, Class A, adjusted to reflect estimated fees and expenses of the REIT
Portfolio.
The third column shows the gross performance of the North American Real
Estate Investment Trust (NAREIT) Equity Index, an index of all tax-qualified
REITs listed on the New York Stock Exchange, American Stock Exchange and
NASDAQ, for the same periods. Results include reinvested dividends.
37
<PAGE>
- --------------------------------------------------------------------------------
ABOUT THE PORTFOLIOS INTERNATIONAL PORTFOLIO
- --------------------------------------------------------------------------------
[GRAPHIC APPEARS HERE]
----------------------------------------
The portfolio's investment goal This portfolio seeks long-term capital
appreciation primarily through
investment in equity securities of
corporations domiciled in countries with
developed economies and markets other
than the United States. Current income
from dividends and interest will not be
an important consideration.
[GRAPHIC APPEARS HERE]
----------------------------------------
What the portfolio invests in This portfolio's principal investment
strategy is to invest in companies of
any size located in developed countries
outside of the U.S. It may also invest
in securities issued in emerging market
countries.
The Morgan Stanley Capital It invests at least 70% of its assets in
International Europe, Australasia, common stock, but it may also invest in
Far East (EAFE) Index is made up fixed income securities that can be
of over 1,100 stocks from 21 converted into equity securities.
developed markets in Europe,
Australia, New Zealand and Asia. The The portfolio management team uses a
index reflects the relative size of two-step process to manage the
each market and is a commonly used portfolio:
benchmark for the performance of
companies in developed countries . allocates assets among three geographic
outside North America. regions - the team decides on the
optimal allocation of the portfolio's
assets principally among Europe, Japan
and developed Asia, including Australia
and New Zealand, but may also invest
in other countries. Regional allocation
decisions are based on a variety of
factors, including relative valuations,
earnings expectations, macroeconomic
factors, as well as input from the
regional stock selection teams and from
the firm's asset allocation committee,
which is made up of eight of the
company's most senior investment
professionals.
. invests in companies that are
undervalued - once the team has
determined the asset allocation,
individual stocks are selected by
regional portfolio management teams in
London, Tokyo and Singapore. Each
regional team is responsible for buying
securities in Europe, Japan and Asia,
respectively. The regional teams look
for stocks with an estimated worth that
they believe to be higher than their
current share price. The regional
specialists review each company's
finances, products and management, and
in many cases will meet with company
management, before buying the stock for
the portfolio. The portfolio may invest
in companies of any size.
The team may use currency hedging
techniques like foreign currency forward
contracts or options to offset changes
in foreign exchange rates. The team may
also use stock index futures to invest
in foreign markets. To meet cash flow
needs, the portfolio may invest some of
its assets in cash or money market
securities denominated in U.S. dollars
or foreign currencies. It may also lend
some of its assets, as long as the loans
it makes are secured.
The team may change these strategies if
it believes economic conditions make it
necessary to try to protect the
portfolio from a potential loss. In this
case, the portfolio may invest a portion
of its assets in foreign or U.S. fixed
income securities or money market
instruments.
[GRAPHIC APPEARS HERE]
------------------------------------------
Who manages the portfolio Francine Bovich has been a portfolio
manager at Morgan Stanley Asset
[LOGO OF MORGAN STANLEY Management since April 1993, and began
ASSET MANAGEMENT INC. managing the International Portfolio in
APPEARS HERE] 1997. She serves as the U.S.
Representative to the United Nations
The International Portfolio is Investment Committee. She graduated from
managed by Morgan Stanley Asset Connecticut College with a BA in
Management (MSAM). You'll find more economics and received her MBA in
about MSAM on page 44. finance from New York University.
38
<PAGE>
[GRAPHIC APPEARS HERE]
--------------------------------------------
Risks you should be aware of The International Portfolio principally
invests in equity securities, which may
go up or down in value, sometimes
rapidly and unpredictably. While
equities may offer the potential for
greater long-term growth than most fixed
income securities, they generally have
higher volatility. The portfolio may be
affected by the following risks, among
others:
. price volatility - the value of the
portfolio changes as the prices of the
investments it holds go up or down.
Small-cap and mid-cap companies may be
more susceptible to larger price swings
than larger companies because they may
have fewer financial resources, limited
product and market diversification and
many are dependent on a few key
managers.
. risks of foreign investing - foreign
investments may be riskier than U.S.
investments for many reasons, including
changes in currency exchange rates,
unstable political and economic
conditions, a lack of adequate company
information, differences in the way
securities markets operate, less secure
foreign banks or securities depositories
than those in the U.S., and foreign
controls on investment.
. risks of using derivatives - this
portfolio may invest in foreign currency
transactions, forward foreign currency
contracts or options, index options,
futures and other investment techniques
to help it achieve its investment goals.
There's always a risk that these
techniques could reduce returns or
increase the portfolio's volatility.
[GRAPHIC APPEARS HERE]
--------------------------------------------
How the portfolio has performed Year by year total return (%)
as of December 31 each year/1/
The bar chart shows the portfolio's
performance each year for the past
10 years. [BAR CHART APPEARS HERE]
The table below the bar chart 89 20.51
compares the portfolio's performance 90 -13.48
with the Morgan Stanley Capital 91 10.92
International Europe, Australasia, 92 -9.78
Far East Index (MSCI EAFE Index), an 93 30.02
index of stocks from 21 countries in 94 3.01
Europe, Australia, New Zealand and 95 10.56
Asia. 96 21.89
97 9.28
Looking at how a portfolio has 98 XX
performed in the past is important -
but it's no guarantee of how it will
perform in the future. Best and worst quarterly performance
during this period: * quarter 19**: * %
* quarter 19**: * %
Average annual total return
as of December 31, 1998 1 year 5 years 10 years
- -------------------------------------------------------------------------------
International Portfolio/1/ * % * % * %
MSCI EAFE Index * % * % * %
/1/ Morgan Stanley Asset Management began managing this portfolio on June 1,
1997.
Other firms managed the portfolio before that date.
39
<PAGE>
- --------------------------------------------------------------------------------
ABOUT THE PORTFOLIOS EMERGING MARKETS PORTFOLIO
- --------------------------------------------------------------------------------
[GRAPHIC APPEARS HERE]
------------------------------------------
The portfolio's investment goal This portfolio seeks long-term growth of
capital.
This portfolio is not available for:
. Pacific Corinthian variable annuity
contracts.
[GRAPHIC APPEARS HERE]
------------------------------------------
What the portfolio invests in This portfolio's principal investment
strategy is to invest in companies that
are located in countries that are
generally regarded as "emerging market"
countries. It principally invests in
common stock.
Emerging market countries are
typically less developed economically The portfolio management team uses a
than industrialized countries and two-step process to manage the
offer high growth potential as well portfolio:
as considerable investment risk.
These countries are generally located . allocates assets among countries that
in South America, Asia, the Middle are considered to be undervalued -
East and Eastern Europe. the team analyzes emerging markets
around the world and assigns a ranking
to each country to reflect those it
believes to be relatively undervalued.
The team may -- but is not required
to -- use the Morgan Stanley Capital
International (MSCI) Emerging Markets
Free Index as a guide when selecting
countries to invest in.
. chooses companies within this country
allocation using two criteria - the team
looks for high quality companies that
are undervalued and expected to grow.
The value of a company is determined by
comparing its estimated worth with its
current market price. The quality of a
company and its growth potential are
determined by its growth in earnings and
the strength of its balance sheet.
The team may use options, futures
contracts and other techniques to try to
increase returns. It may also use
derivatives to hedge changes in currency
exchange rates. The portfolio may lend
some of its assets, as long as the loans
it makes are secured.
The portfolio's policy is to have almost
all portfolio assets in common stock at
all times. The portfolio may, however,
invest in U.S. government securities,
high-quality corporate fixed income
securities, or money market instruments,
to meet cash flow needs or if the U.S.
government ever imposes restrictions on
foreign investing.
[GRAPHIC APPEARS HERE]
------------------------------------------
Who manages the portfolio James Smith is a co-founder of
Blairlogie, and has been its chief
[LOGO OF BLAIRLOGIE investment officer and a managing
APPEARS HERE] director since 1992. He is the portfolio
manager and is responsible for setting
investment policy, asset allocation, and
managing a team of six professionals who
specialize in stocks in Europe, Asia,
and the Americas, and in currency and
derivatives. He has a BA in Economics
from London University and an MBA from
Edinburgh University. He began managing
the Emerging Markets portfolio in 1996.
The Emerging Markets Portfolio is
managed by a team of portfolio
managers at Blairlogie Capital
Management. You'll find more about
Blairlogie on page 43.
40
<PAGE>
[GRAPHIC APPEARS HERE]
-------------------------------------------
Risks you should be aware of The Emerging Markets Portfolio
principally invests in equity
securities, which may go up or down in
value, sometimes rapidly and
unpredictably. While equities may offer
the potential for greater long-term
growth than most fixed income
securities, they generally have higher
volatility. The portfolio may be
affected by the following risks, among
others:
Companies in emerging markets may be . price volatility - the value of the
especially volatile. The value of portfolio changes as the prices of
this portfolio may have greater price its investments go up or down. This
swings than most of the Pacific portfolio invests in companies in
Select Fund portfolios. emerging markets, which may be
particularly volatile. It also invests
in smaller companies, which tend to
have higher price swings than larger
companies because they have fewer
financial resources, limited product
and market diversification and many
are dependent on a few key managers.
. risks of foreign investing - foreign
investments may be riskier than U.S.
investments for many reasons,
including changes in currency exchange
rates, unstable political and economic
conditions, a lack of adequate company
information, differences in the way
securities markets operate, less
secure foreign banks or securities
depositories than those in the U.S.,
and foreign controls on investment.
Investments in emerging markets
countries are generally riskier than
other kinds of foreign investments,
partly because emerging market
countries may be less politically and
economically stable than other
countries. It may also be more
difficult to buy and sell securities
in emerging markets countries.
. risks of using derivatives - this
portfolio may invest in foreign
currency transactions, forward foreign
currency contracts or options, futures
and use other investment techniques to
help it achieve its investment goals.
There's always a risk that these
techniques could reduce returns or
increase the portfolio's volatility.
[GRAPHIC APPEARS HERE]
-------------------------------------------
How the portfolio has performed Year by year total return (%)
as of December 31 each year
[BAR CHART APPEARS HERE]
The bar chart shows the portfolio's 96 -3.23
performance each year since its 97 -1.69
inception. 98 XX
The table below the bar chart
compares the portfolio's performance
with the Morgan Stanley Capital
International (MSCI) Emerging Markets Best and worst quarterly performance
Free Index, an index of approximately during this period: * quarter 19**: *
* stocks from approximately 26 % * quarter 19**: * %
emerging market countries.
Looking at how a portfolio has
performed in the past is important -
but it's no guarantee of how it will
perform in the future.
Average annual total return Since inception
as of December 31, 1998 1 year (April 1, 1996)
- --------------------------------------------------------------------------------
Emerging Markets Portfolio * % * %
MSCI Emerging Markets Free Index * % * %
41
<PAGE>
- --------------------------------------------------------------------------------
MANAGING THE PACIFIC SELECT FUND
- --------------------------------------------------------------------------------
-------------------------------------------
Founded in 1868, Pacific Life ranks
among the 20 largest life insurance
companies in America based on admitted
assets. The Pacific Life family of
companies managed $* billion in assets
as of December 31, 1998, making it one
[LOGO OF PACIFIC LIFE APPEARS HERE] of the largest financial institutions in
America.
Pacific Life Insurance Company Pacific Life provides life and health
700 Newport Center Drive insurance products, group employee
Newport Beach, California 92660 benefits and individual annuities, and
offers a variety of investment products
and services to individuals, businesses
and pension plans.
In its role as the fund's investment
adviser, Pacific Life supervises the
management of all of the fund's
portfolios. Pacific Life manages two
portfolios directly: the Money Market
Portfolio and the High Yield Bond
Portfolio. To manage the other
portfolios, it has retained some of the
nation's leading portfolio managers,
many of which have a worldwide market
presence and extensive research
capabilities. Pacific Life oversees and
monitors the performance of these asset
managers.
Pacific Life and the other portfolio
managers provide their services under
agreements that are reviewed by the
fund's board of trustees every year
after the first two years, and can be
canceled. Pacific Life and the fund can
replace the other portfolio managers or
change their contracts without
shareholder approval under an exemptive
order from the SEC.
-------------------------------------------
[LOGO OF ALLIANCE CAPITAL Founded in *, Alliance Capital manages
APPEARS HERE] assets for corporate and individual
clients, including 31 of America's
Alliance Capital Management L.P. Fortune 100 companies. Alliance Capital
1345 Avenue of the Americas employs over 190 investment
New York, New York 10105 professionals in over 26 offices around
the world, and had over $* billion in
assets under management as of December
31, 1998.
Alliance Capital focuses on individual
companies. Its nine-person Aggressive
Growth team, which includes two
portfolio managers and seven analysts,
seeks a strong rapport with, and
conviction in, the management teams of
every company Alliance Capital invests
in.
Alliance Capital manages the Aggressive
Equity Portfolio.
-------------------------------------------
[LOGO OF BANKERS TRUST Founded in 1903, Bankers Trust has over
APPEARS HERE] 400 institutional clients around the
world, and manages more than 25 other
mutual fund portfolios. It had over $*
Bankers Trust Company billion in assets under management as of
130 Liberty Street December 31, 1998. Bankers Trust
New York, New York 10006 specializes in the management of index
funds. Its trading strategies - which
include extensive trading networks and
automated trading systems - help it
increase portfolio returns while keeping
transaction and custody costs to a
minimum. Bankers Trust manages the
Equity Index Portfolio and the Small-Cap
Index Portfolio.
In November 1998, Deutsche Bank AG
entered into an agreement to acquire all
outstanding shares of the common stock
of Bankers Trust Corporation, which owns
Bankers Trust Company. The acquisition
is tentatively scheduled to close in the
second quarter of 1999, and must be
approved by shareholders representing
two-thirds of all Bankers Trust
Corporation common stock shares and by
various worldwide regulatory
authorities. If the acquisition results
in a change of control under the 1940
Act, new portfolio management agreements
with Bankers Trust will be required. In
anticipation of this, the sole
shareholder of the Small-Cap Index
Portfolio has approved a new agreement
in which Bankers Trust would continue as
the portfolio manager. The new agreement
will come into effect if the acquisition
is completed. The shareholders of the
Equity Index Portfolio may also be
required to vote on a new portfolio
management agreement. A supplement will
be added to this prospectus if the
acquisition is not completed according
to the schedule described above.
42
<PAGE>
------------------------------------------
[LOGO OF BLAIRLOGIE APPEARS HERE] Blairlogie began operations in 1992 and
had over $* billion in assets under
management as of December 31, 1998.
Blairlogie Capital Management Blairlogie is a subsidiary of Alleghany
4th Floor, 125 Princes Street Asset Management, Inc. and its
Edinburgh EH2 4AD Scotland affiliates.
Based in Scotland, Blairlogie's team of
seven investment professionals focuses
on a top-down analysis of countries
located in Europe, Asia and the
Americas.
Gavin Dobson is a co-founder of
Blairlogie, and has been its chief
executive officer and a managing
director since 1992. He is responsible
for Blairlogie's business development
and oversees the relationship between
the company and its institutional
clients. He has 20 years of investment
experience, including four years as
president and chief operating officer of
Murray Johnstone International in
Chicago, Illinois. He has a BA in
economics from Dundee University and a
degree in Law from Edinburgh University.
Blairlogie manages the Emerging Markets
Portfolio.
------------------------------------------
[LOGO OF CAPITAL GUARDIAN Capital Guardian Trust Company (CGTC), a
APPEARS HERE] wholly-owned subsidiary of The Capital
Group Companies, Inc., was established
Capital Guardian Trust Company in 1968 as a non-depository trust
333 South Hope Street company. As of December 31, 1998, CGTC
Los Angeles, California 90071 managed over $* billion, primarily for
large institutional clients.
CGTC uses a multiple portfolio
management system under which a group of
portfolio managers each have investment
discretion over a portion of a client's
account. Portfolio management is
supported by the research efforts of
over 200 investment professionals within
the Capital Group organization in 11
offices in seven countries around the
world. The Capital Group organization
spends over $100 million a year on its
research efforts.
CGTC manages the Growth Portfolio.
------------------------------------------
[LOGO OF GOLDMAN SACHS APPEARS HERE] Created in 1988, Goldman Sachs Asset
Management (Goldman Sachs) is a separate
Goldman Sachs Asset Management operating division of Goldman Sachs &
One New York Plaza Co. Founded in 1869, Goldman Sachs & Co.
New York, New York 10004 is one of the world's largest investment
banking, securities and asset management
firms.
As of December 31, 1998, Goldman Sachs
and its affiliates managed, administered
and distributed over $* billion for
institutional and individual investors
around the world.
Portfolio management at Goldman Sachs is
conducted by teams that are supported by
600 investment research professionals,
20 market strategists and 30 economists
around the world. The company has more
than 10,000 professionals in 37 offices
worldwide.
Goldman Sachs manages the Equity
Portfolio and the Bond and Income
Portfolio.
43
<PAGE>
- --------------------------------------------------------------------------------
MANAGING THE PACIFIC SELECT FUND
- --------------------------------------------------------------------------------
----------------------------------------
[LOGO OF JANUS APPEARS HERE] Formed in 1969, Janus manages accounts
for more than 1,000 corporations,
individuals, retirement plans and
Janus Capital Corporation non-profit organizations, and serves as
100 Fillmore Street the adviser or subadviser to the Janus
Denver, Colorado 80206 Funds and other mutual funds. Janus had
over $* billion in assets under
management as of December 31, 1998.
The Janus investment team focuses on
individual companies, using an
investment process supported by the
company's 15 portfolio managers and 22
securities analysts.
Janus manages the Growth LT Portfolio.
----------------------------------------
[LOGO OF J.P. MORGAN INVESTMENT Formed in 1969, J.P. Morgan Investment
APPEARS HERE] Management Inc. manages portfolios for
corporations, governments and endowments
J.P. Morgan Investment Management Inc. as well as many of the largest corporate
522 Fifth Avenue retirement plans in the nation. As of
New York, New York 10036 December 31, 1998, it had over $*
billion in assets under management.
J.P. Morgan Investment believes that
strong portfolio management depends on
access to information. It has one of the
largest research organizations in the
investment management field, with more
than 117 analysts who carry out fixed
income, equity, capital market, credit
and economic research around the world.
J.P. Morgan Investment manages the
Equity Income Portfolio and the
Multi-Strategy Portfolio.
----------------------------------------
[LOGO OF LAZARD APPEARS HERE] Formed in 1848, Lazard Freres provides
individual investors and institutional
Lazard Asset Management, clients with a wide variety of
a division of Lazard Freres & Co. LLC investment banking, brokerage and
30 Rockefeller Plaza related services worldwide. Lazard has
New York, New York 10112 affiliates in Cairo, Frankfurt, London,
Paris, Sydney and Tokyo, and had,
together with its affiliates, over $*
billion in assets under management as of
December 31, 1998.
Teamwork is the foundation of Lazard.
Based in New York, Lazard's team of more
than 50 global analysts drives its
bottom-up approach to understanding
individual companies within the global
marketplace.
Lazard manages the Mid-Cap Value
Portfolio.
----------------------------------------
[LOGO OF MORGAN STANLEY ASSET Formed in 1975, Morgan Stanley Dean
MANAGEMENT APPEARS HERE] Witter Investment Management Inc., doing
Morgan Stanley Asset Management business as Morgan Stanley Asset
1221 Avenue of the Americas Management (MSAM), a subsidiary of
New York, New York 10020 Morgan Stanley, Dean Witter, Discover &
Co., conducts a worldwide portfolio
management business and provides a broad
range of portfolio management services
to customers in the U.S. and abroad.
MSAM and its affiliates managed or acted
as fiduciary adviser for over $* billion
in assets as of December 31, 1998.
MSAM's portfolio managers are supported
by a network of experienced research
professionals based in New York, London,
Singapore and Tokyo.
MSAM manages the REIT Portfolio and the
International Portfolio.
44
<PAGE>
------------------------------------------
[LOGO OF PIMCO APPEARS HERE] Founded in 1971, Pacific Investment
Management Company (PIMCO) has nearly
300 clients, including some of the
Pacific Investment Management Company largest employee benefit plans,
840 Newport Center Drive, Suite 300 endowments and foundations in America.
Newport Beach, California 92660 PIMCO had over $* billion in assets
under management as of December 31,
1998.
PIMCO specializes in the management of
fixed income portfolios. It has a
long-term investment philosophy, and
uses a variety of techniques, including
software programs it has developed, to
help increase portfolio performance
while controlling volatility. PIMCO is a
subsidiary of PIMCO Advisors, L.P.,
which is an affiliate of Pacific Life.
PIMCO manages the Managed Bond Portfolio
and the Government Securities Portfolio.
------------------------------------------
[LOGO OF SALOMON BROTHERS Formed in 1989, Salomon Brothers Asset
ASSET MANAGEMENT APPEARS HERE] Management Inc (SaBAM) has affiliates in
London, Frankfurt, Tokyo and Hong Kong.
Salomon Brothers Asset Management Inc Together, they provide a broad range of
Seven World Trade Center equity and fixed income investment
New York, New York 10048 management services to clients around
the world. SaBAM also provides
investment advisory services to other
investment companies. As of December 31,
1998, SaBAM and its affiliates had over
$* billion in assets under management.
As a subsidiary of Citigroup Inc., SaBAM
is able to leverage the resources of one
of the world's largest and most
innovative financial services companies.
SaBAM manages the Large-Cap Value
Portfolio.
45
<PAGE>
- --------------------------------------------------------------------------------
MANAGING THE PACIFIC SELECT FUND
- --------------------------------------------------------------------------------
-----------------------------------------
Fees and expenses paid by the fund The fund pays Pacific Life an advisory
fee for the services it provides as
investment adviser. It also pays for all
of the costs of its operations, as well
as for other services Pacific Life
provides through a support services
agreement.
The table below shows the advisory fee
as an annual percentage of each
portfolio's average daily net assets.
Pacific Life uses part of this fee to
pay for the services of the portfolio
managers.
The table also shows expenses the fund
paid in 1998 as an annual percentage of
each portfolio's average daily net
assets. To help limit fund expenses,
Pacific Life has agreed to waive all or
part of its investment advisory fees or
otherwise reimburse each portfolio for
expenses (not including advisory fees,
costs associated with foreign investing
and extraordinary expenses) that exceed
0.25% of its average daily net assets.
It does this voluntarily, but does not
guarantee that it will continue to do
so after December 31, 2000. No
reimbursement was necessary for 1998.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------
Advisory fee Expenses
-----------------------------------------------------------------------------
As an annual % of average daily net assets
<S> <C> <C>
Money Market Portfolio *.** *.**
High Yield Bond Portfolio 0.60 *.**
Managed Bond Portfolio 0.60 *.**
Government Securities Portfolio 0.60 *.**
Growth Portfolio 0.65 *.**
Aggressive Equity Portfolio 0.80 *.**
Growth LT Portfolio 0.75 *.**
Equity Income Portfolio 0.65 *.**
Multi-Strategy Portfolio 0.65 *.**
Large-Cap Value Portfolio/1/ 0.85 *.**
Mid-Cap Value Portfolio/1/ 0.85 *.**
Equity Portfolio 0.65 *.**
Bond and Income Portfolio 0.60 *.**
Equity Index Portfolio *.** *.**
Small-Cap Index Portfolio/1/ 0.50 *.**
REIT Portfolio 1.10 *.**
International Portfolio 0.85 *.**
Emerging Markets Portfolio 1.10 *.**
-----------------------------------------------------------------------------
</TABLE>
/1/ Expenses are estimated. There were
no actual advisory fees or expenses
for these portfolios in 1998 because
the Portfolio started on January 4,
1999.
-----------------------------------------
How the fund is organized The Pacific Select Fund is organized as
a Massachusetts business trust. Its
business and affairs are managed by its
board of trustees.
Under Massachusetts law, shareholders
could, under certain circumstances, be
held personally liable if the fund is
not able to meet its financial
obligations. It is very unlikely that
this will ever happen, and the fund's
declaration of trust protects
shareholders from liability.
Each portfolio intends to qualify each
year as a regulated investment company
under Subchapter M of the Internal
Revenue Code. Portfolios that qualify do
not have to pay income tax as long as
they distribute sufficient taxable
income and net capital gains.
The Pacific Select Fund may discontinue
offering shares of any portfolio at any
time. If a portfolio is discontinued,
any allocation to that portfolio will be
allocated to another portfolio the
trustees believe is suitable, as long as
any required regulatory approvals are
met.
46
<PAGE>
- --------------------------------------------------------------------------------
INFORMATION FOR INVESTORS
- --------------------------------------------------------------------------------
The Pacific Select Fund is available
only to people who own a variable
annuity contract or variable life
insurance policy issued or administered
by Pacific Life Insurance Company or its
subsidiaries. You do not buy, sell or
exchange shares of the fund's portfolios
- you choose investment options through
your annuity contract or life insurance
policy. Pacific Life then invests in the
portfolios of the Pacific Select Fund
according to the investment options
you've chosen. You'll find information
about how this works in the accompanying
product prospectus or offering
memorandum.
-------------------------------------------
An example of how share Each Pacific Select Fund portfolio is
prices are calculated divided into shares. The price of a
portfolio's shares is called its net
$80 million portfolio's assets asset value per share.
- - $3 million portfolio's liabilities
- ------------- We calculate net asset value per share
$77 million by taking the total value of a
divide 7 million outstanding shares portfolio's assets, subtracting its
- ------------- liabilities, and then dividing by the
= $11 net asset value number of shares that have already been
============= per share issued. This is a standard calculation,
and forms the basis for all transactions
involving buying, selling, exchanging or
reinvesting shares.
-------------------------------------------
Valuing securities in a portfolio We calculate each portfolio's net asset
value per share once a day, every day
the New York Stock Exchange (NYSE) is
open, usually at or about 4:00 p.m.
Eastern time. The value of a portfolio's
assets is based on the total market
value of all of the securities it holds.
In general, the value of each security
is based on its actual or estimated
market value, with special provision for
assets without readily available market
quotes, and for short-term debt
securities.
A delay may happen in any of the
following situations:
. the New York Stock Exchange closes on
a day other than a regular holiday or
weekend
. trading on the New York Stock Exchange
is restricted
. an emergency exists as determined by
the SEC, as a result of which the sale
of securities is not practicable, or
it is not practicable to determine the
value of a variable account's assets,
or
. the SEC permits a delay.
-------------------------------------------
Preparing for the year 2000 The transition to the year 2000 is a
technological challenge for any company
that relies on computer systems. The
Pacific Select Fund's operations are
heavily dependent on computer
technology, and the fund also relies on
the computer systems of each of the
portfolio managers and other service
providers.
All of the fund's primary service
providers have confirmed that they are
reviewing their computer systems and
expect to be prepared to deal with the
year 2000 by the beginning of 1999. In
addition, Pacific Life has many efforts
underway, and has engaged the services
of an outside consultant to test and
correct all of its own internal systems.
Many of the companies the portfolios
invest in also rely on computer systems.
There is no guarantee, however, that the
computer systems of all of the fund's
service providers, or the computer
systems of companies the portfolios
invest in, will be ready for the year
2000. If these systems are unable to
process and calculate date-related
information in the year 2000, there will
be a negative effect on the fund's
operations, and on the value of the
securities the portfolios hold.
47
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The financial highlights table is designed to help you understand how the
Pacific Select Fund portfolios have performed for the past five years (or since
inception, if shorter). Certain information reflects financial results for a
single portfolio share. Total investment return indicates how much an investment
in the portfolio would have earned, assuming all dividends and distributions had
been reinvested. Financial highlights do not appear for the Large-Cap Value,
Mid-Cap Value, Small-Cap Index and REIT Portfolios because these portfolios
started on January 4, 1999.
This information has been audited by ___. You'll find the auditor's report and
the Pacific Select Fund's financial statements in the annual report. Please turn
to the back cover to find out how you can get a copy.
<TABLE>
<CAPTION>
----------------------------------------- -----------------------------------------
Money Market Portfolio High Yield Bond Portfolio
----------------------------------------- -----------------------------------------
1994 1995 1996 1997 1998 1994 1995 1996 1997 1998
- --------------------------------------------- ----------------------------------------- -----------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING PERFORMANCE
Net asset value, beginning of year $ 9.99 10.03 10.02 10.04 00.00 9.67 8.91 9.79 9.94 00.00
Plus income from investment operations
Net investment income $ 0.33 0.54 0.47 0.51 00.00 0.73 0.76 0.79 0.78 00.00
Net realized and unrealized gain (loss) on
securities $ 0.04 -- 0.02 0.01 00.00 (0.70) 0.88 0.25 0.12 00.00
- --------------------------------------------- ----------------------------------------- -----------------------------------------
Total from investment operations $ 0.37 0.54 0.49 0.52 00.00 0.03 1.64 1.04 0.90 00.00
Less distributions
Dividends (from net investment income) $ (0.33) (0.55) (0.47) (0.50) 00.00 (0.73) (0.76) (0.79) (0.77) 00.00
Distributions (from capital gains) $ -- -- -- -- 00.00 (0.06) -- (0.10) (0.09) 00.00
- --------------------------------------------- ----------------------------------------- -----------------------------------------
Total distributions $ (0.33) (0.55) (0.47) (0.50) 00.00 (0.79) (0.76) (0.89) (0.86) 00.00
Net asset value, end of year $ 10.03 10.02 10.04 10.06 00.00 8.91 9.79 9.94 9.98 00.00
============================================= ========================================= =========================================
Total investment return/1/ % 3.76 5.54 5.07 5.28 00.00 0.42 18.87 11.31 9.44 00.00
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of year (in thousands) $ 94,150 95,949 322,193 451,505 00.00 25,338 84,425 184,744 311,125 00.00
Ratio of expenses to average net assets
.before waivers, reimbursements and credits % 0.64 0.53 0.50 0.44 00.00 0.97 0.77 0.71 0.66 00.00
.after waivers, reimbursements and credits % 0.64 0.53 0.50 0.44 00.00 0.88 0.77 0.71 0.65 00.00
Ratio of net investment income to average
net assets
.before waivers, reimbursements and credits % 3.94 5.41 4.93 5.17 00.00 8.04 8.51 8.28 7.89 00.00
.after waivers, reimbursements and credits % 3.94 5.41 4.93 5.17 00.00 8.13 8.51 8.28 7.89 00.00
Portfolio turnover rate % -- -- -- -- -- 141.86 127.31 120.06 103.19 00.00
<CAPTION>
----------------------------------------- -----------------------------------------
Managed Bond Portfolio Government Securities Portfolio
----------------------------------------- -----------------------------------------
1994 1995 1996 1997 1998 1994 1995 1996 1997 1998
- --------------------------------------------- ----------------------------------------- -----------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING PERFORMANCE
Net asset value, beginning of year $ 10.89 9.90 11.10 10.75 00.00 10.64 9.64 10.84 10.38 00.00
Plus income from investment operations
Net investment income $ 0.50 0.65 0.59 0.59 00.00 0.44 0.58 0.56 0.53 00.00
Net realized and unrealized gain (loss) on
securities $ (0.98) 1.19 (0.15) 0.44 00.00 (0.99) 1.19 (0.27) 0.42 00.00
- --------------------------------------------- ----------------------------------------- -----------------------------------------
Total from investment operations $ (0.48) 1.84 0.44 1.03 00.00 (0.55) 1.77 0.29 0.95 00.00
Less distributions
Dividends (from net investment income) $ (0.50) (0.64) (0.57) (0.60) 00.00 (0.44) (0.57) (0.53) (0.55) 00.00
Distributions (from capital gains) $ (0.01) -- (0.22) (0.04) 00.00 (0.01) -- (0.22) -- 00.00
- --------------------------------------------- ----------------------------------------- -----------------------------------------
Total distributions $ (0.51) (0.64) (0.79) (0.64) 00.00 (0.45) (0.57) (0.75) (0.55) 00.00
Net asset value, end of year $ 9.90 11.10 10.75 11.14 00.00 9.64 10.84 10.38 10.78 00.00
============================================= ========================================= =========================================
Total investment return/1/ % (4.36) 19.04 4.25 9.92 00.00 (5.10) 18.81 2.94 9.48 00.00
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of year (in thousands) $ 53,219 126,992 260,270 468,575 00.00 21,489 59,767 97,542 129,900 00.00
Ratio of expenses to average net assets
.before waivers, reimbursements and credits % 0.84 0.76 0.71 0.66 00.00 0.95 0.82 0.72 0.67 00.00
.after waivers, reimbursements and credits % 0.84 0.76 0.71 0.66 00.00 0.88 0.82 0.72 0.66 00.00
Ratio of net investment income to average
net assets
.before waivers, reimbursements and credits % 5.04 6.04 5.71 5.72 00.00 4.22 5.58 5.33 5.38 00.00
.after waivers, reimbursements and credits % 5.04 6.04 5.71 5.72 00.00 4.29 5.58 5.33 5.39 00.00
Portfolio turnover rate % 127.95 191.39 386.16 230.87 00.00 232.99 298.81 307.13 203.01 00.00
</TABLE>
48
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
----------------------------------------- -----------------------------------------
Growth Portfolio Aggressive Equity Portfolio
----------------------------------------- -----------------------------------------
1994 1995 1996 1997 1998 1996/2/ 1997 1998/3/
- ---------------------------------------------- ----------------------------------------- -----------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING PERFORMANCE
Net asset value, beginning of year $ 18.20 14.90 18.57 21.45 00.00 10.00 10.78 00.00
Plus income from investment operations
Net investment income (loss) $ 0.10 0.15 0.08 0.05 00.00 0.01 (0.01) 00.00
Net realized and unrealized gain (loss) on
securities $ (2.01) 3.67 4.11 5.65 00.00 0.78 0.41 00.00
- ---------------------------------------------- ----------------------------------------- -----------------------------------------
Total from investment operations $ (1.91) 3.82 4.19 5.70 00.00 0.79 0.40 00.00
Less distributions
Dividends (from net investment income) $ (0.10) (0.15) (0.09) (0.05) 00.00 (0.01) -- 00.00
Distributions (from capital gains) $ (1.29) -- (1.22) (2.49) 00.00 -- -- 00.00
- ---------------------------------------------- ----------------------------------------- -----------------------------------------
Total distributions $ (1.39) (0.15) (1.31) (2.54) 00.00 (0.01) -- 00.00
Net asset value, end of year $ 14.90 18.57 21.45 24.61 00.00 10.78 11.18 00.00
============================================== ========================================= =========================================
Total investment return/1/ % (10.49) 25.75 23.62 30.27 00.00 7.86 3.78 00.00
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of year (in thousands) $ 81,451 129,741 167,335 246,555 00.00 49,849 122,752 00.00
Ratio of expenses to average net assets
.before waivers, reimbursements and credits % 0.86 0.79 0.76 0.70 00.00 1.03 0.87 00.00
.after waivers, reimbursements and credits % 0.86 0.79 0.76 0.70 00.00 1.02 0.86 00.00
Ratio of net investment income to average
net assets
.before waivers, reimbursements and credits % 0.58 0.88 0.43 0.21 00.00 (0.12) (0.13) 00.00
.after waivers, reimbursements and credits % 0.58 0.88 0.44 0.22 00.00 (0.11) (0.13) 00.00
Portfolio turnover rate % 40.42 46.76 70.22 52.20 00.00 79.86 189.21 00.00
<CAPTION>
----------------------------------------- -----------------------------------------
Growth LT Portfolio Equity Income Portfolio
----------------------------------------- -----------------------------------------
1994/4/ 1995 1996 1997 1998 1994 1995 1996 1997 1998
- ---------------------------------------------- ----------------------------------------- -----------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING PERFORMANCE
Net asset value, beginning of year $ 10.00 11.11 14.12 16.50 00.00 15.52 14.05 18.21 20.45 00.00
Plus income from investment operations
Net investment income $ 0.10 0.10 0.14 0.16 00.00 0.20 0.26 0.24 0.20 00.00
Net realized and unrealized gain (loss) on
securities $ 1.21 3.96 2.37 1.51 00.00 (0.25) 4.16 3.15 5.35 00.00
- ---------------------------------------------- ----------------------------------------- -----------------------------------------
Total from investment operations $ 1.31 4.06 2.51 1.67 00.00 (0.05) 4.42 3.39 5.55 00.00
Less distributions
Dividends (from net investment income) $ (0.12) (0.10) (0.13) (0.09) 00.00 (0.20) (0.26) (0.24) (0.20) 00.00
Distributions (from capital gains) $ (0.08) (0.95) -- (0.77) 00.00 (1.22) -- (0.91) (1.33) 00.00
- ---------------------------------------------- ----------------------------------------- -----------------------------------------
Total distributions $ (0.20) (1.05) (0.13) (0.86) 00.00 (1.42) (0.26) (1.15) (1.53) 00.00
Net asset value, end of year $ 11.11 14.12 16.50 17.31 00.00 14.05 18.21 20.45 24.47 00.00
============================================== ========================================= =========================================
Total investment return/1/ % 13.25 36.75 17.87 10.96 00.00 (0.28) 31.66 19.43 28.60 00.00
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of year (in thousands) $ 49,374 200,785 438,154 677,147 00.00 75,083 206,653 429,262 806,112 00.00
Ratio of expenses to average net assets
.before waivers, reimbursements and credits % 1.23 0.94 0.87 0.82 00.00 1.00 0.83 0.75 0.70 00.00
.after waivers, reimbursements and credits % 1.08 0.94 0.87 0.82 00.00 0.94 0.83 0.75 0.70 00.00
Ratio of net investment income to average
net assets
.before waivers, reimbursements and credits % 1.17 0.90 0.74 0.52 00.00 1.34 1.59 1.31 0.91 00.00
.after waivers, reimbursements and credits % 1.32 0.90 0.74 0.52 00.00 1.39 1.59 1.31 0.91 00.00
Portfolio turnover rate % 257.20 165.83 147.02 145.17 00.00 134.57 86.47 94.95 105.93 00.00
</TABLE>
49
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
----------------------------------------- -----------------------------------------
Multi-Strategy Portfolio Equity Portfolio
----------------------------------------- -----------------------------------------
1994 1995 1996 1997 1998 1994 1995 1996 1997 1998/5/
- ---------------------------------------------- ----------------------------------------- -----------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING PERFORMANCE
Net asset value, beginning of year $ 12.66 11.73 14.20 14.75 00.00 14.94 14.20 17.52 21.07 00.00
Plus income from investment operations
Net investment income $ 0.32 0.45 0.48 0.50 00.00 0.32 0.05 0.02 0.14 00.00
Net realized and unrealized gain (loss) on
securities $ (0.51) 2.47 1.20 2.23 00.00 (0.74) 3.33 4.71 3.58 00.00
- ---------------------------------------------- ----------------------------------------- -----------------------------------------
Total from investment operations $ (0.19) 2.92 1.68 2.73 00.00 (0.42) 3.38 4.73 3.72 00.00
Less distributions
Dividends (from net investment income) $ (0.32) (0.45) (0.48) (0.50) 00.00 (0.32) (0.06) (0.02) (0.13) 00.00
Distributions (from capital gains) $ (0.42) -- (0.65) (0.80) 00.00 -- -- (1.16) (0.77) 00.00
- ---------------------------------------------- ----------------------------------------- -----------------------------------------
Total distributions $ (0.74) (0.45) (1.13) (1.30) 00.00 (0.32) (0.06) (1.18) (0.90) 00.00
Net asset value, end of year $ 11.73 14.20 14.75 16.18 00.00 14.20 17.52 21.07 23.89 00.00
============================================== ========================================= =========================================
Total investment return/1/ % (1.50) 25.25 12.56 19.62 00.00 (2.87) 23.80 28.03 18.18 00.00
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of year (in thousands) $ 79,147 134,501 225,619 367,128 00.00 73,125 108,136 207,897 318,143 00.00
Ratio of expenses to average net assets
.before waivers, reimbursements and credits % 0.94 0.84 0.78 0.71 00.00 0.96 0.80 0.74 0.70 00.00
.after waivers, reimbursements and credits % 0.94 0.84 0.78 0.71 00.00 0.96 0.80 0.74 0.70 00.00
Ratio of net investment income to average
net assets
.before waivers, reimbursements and credits % 2.77 3.49 3.37 3.25 00.00 2.19 0.27 0.05 0.59 00.00
.after waivers, reimbursements and credits % 2.78 3.49 3.37 3.25 00.00 2.19 0.27 0.05 0.59 00.00
Portfolio turnover rate % 187.40 176.45 132.94 71.89 00.00 178.63 226.45 90.98 159.88 00.00
<CAPTION>
----------------------------------------- -----------------------------------------
Bond and Income Portfolio Equity Index Portfolio
----------------------------------------- -----------------------------------------
1994 1995 1996 1997 1998/5/ 1994 1995 1996 1997 1998
- ---------------------------------------------- ----------------------------------------- -----------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING PERFORMANCE
Net asset value, beginning of year $ 13.05 10.42 13.02 12.05 00.00 13.24 13.02 17.45 20.42 00.00
Plus income from investment operations
Net investment income $ 0.83 0.82 0.79 0.80 00.00 0.30 0.34 0.37 0.37 00.00
Net realized and unrealized gain (loss) on
securities $ (1.87) 2.59 (0.94) 1.05 00.00 (0.18) 4.43 3.42 6.13 00.00
- ---------------------------------------------- ----------------------------------------- -----------------------------------------
Total from investment operations $ (1.04) 3.41 (0.15) 1.85 00.00 0.12 4.77 3.79 6.50 00.00
Less distributions
Dividends (from net investment income) $ (0.83) (0.81) (0.79) (0.76) 00.00 (0.30) (0.34) (0.37) (0.37) 00.00
Distributions (from capital gains) $ (0.23) -- -- -- 00.00 -- -- -- -- 00.00
Return of capital $ (0.53) -- (0.03) (0.17) 00.00 (0.04) -- (0.45) (0.84) 00.00
- ---------------------------------------------- ----------------------------------------- -----------------------------------------
Total distributions $ (1.59) (0.81) (0.82) (0.93) 00.00 (0.34) (0.34) (0.82) (1.21) 00.00
Net asset value, end of year $ 10.42 13.02 12.05 12.97 00.00 13.02 17.45 20.42 25.71 00.00
============================================== ========================================= =========================================
Total investment return/1/ % (8.36) 33.71 0.80 16.32 00.00 1.05 36.92 22.36 32.96 00.00
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of year (in thousands) $ 34,078 56,853 81,810 112,507 00.00 40,612 137,519 393,412 874,136 00.00
Ratio of expenses to average net assets
.before waivers, reimbursements and credits % 0.93 0.80 0.71 0.66 00.00 0.53 0.42 0.31 0.23 00.00
.after waivers, reimbursements and credits % 0.93 0.80 0.71 0.66 00.00 0.51 0.42 0.31 0.23 00.00
Ratio of net investment income to average
net assets
.before waivers, reimbursements and credits % 7.25 6.93 6.74 6.62 00.00 2.35 2.26 2.04 1.61 00.00
.after waivers, reimbursements and credits % 7.25 6.93 6.74 6.62 00.00 2.37 2.26 2.05 1.61 00.00
Portfolio turnover rate % 31.97 51.84 26.50 15.32 00.00 2.02 7.52 20.28 2.58 00.00
</TABLE>
50
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
----------------------------------------- -----------------------------------------
International Portfolio Emerging Markets Portfolio
----------------------------------------- -----------------------------------------
1994 1995 1996 1997/6/ 1998 1996/2/ 1997 1998
- ---------------------------------------------- ----------------------------------------- -----------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING PERFORMANCE
Net asset value, beginning of year $ 12.09 11.94 12.93 15.40 00.00 10.00 9.68 00.00
Plus income from investment operations
Net investment income (loss) $ 0.07 0.33 0.28 0.41 00.00 (0.02) 0.06 00.00
Net realized and unrealized gain (loss) on
securities $ 0.30 0.91 2.54 1.00 00.00 (0.30) (0.22) 00.00
- ---------------------------------------------- ----------------------------------------- -----------------------------------------
Total from investment operations $ 0.37 1.24 2.82 1.41 00.00 (0.32) (0.16) 00.00
Less distributions
Dividends (from net investment income) $ (0.07) (0.25) (0.23) (0.29) 00.00 -- (0.05) 00.00
Distributions (from capital gains) $ (0.45) -- (0.12) (0.31) 00.00 -- -- 00.00
- ---------------------------------------------- ----------------------------------------- -----------------------------------------
Total distributions $ (0.52) (0.25) (0.35) (0.60) 00.00 -- (0.05) 00.00
Net asset value, end of year $ 11.94 12.93 15.40 16.21 00.00 9.68 9.47 00.00
============================================== ========================================= =========================================
Total investment return/1/ % 3.01 10.56 21.89 9.28 00.00 (3.23) (1.69) 00.00
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of year (in thousands) $ 75,971 182,199 454,019 764,036 00.00 44,083 99,425 00.00
Ratio of expenses to average net assets
.before waivers, reimbursements and credits % 1.22 1.12 1.07 1.03 00.00 2.22 1.47 00.00
.after waivers, reimbursements and credits % 1.22 1.12 1.07 1.02 00.00 2.18 1.46 00.00
Ratio of net investment income to average
net assets
.before waivers, reimbursements and credits % 1.28 1.87 2.28 1.79 00.00 (0.14) 0.79 00.00
.after waivers, reimbursements and credits % 1.28 1.87 2.28 1.81 00.00 (0.11) 0.80 00.00
Portfolio turnover rate % 52.22 16.07 20.87 84.34 00.00 47.63 69.60 00.00
</TABLE>
/1/ Assumes all dividends and distributions have been reinvested. Does not
include deductions at the separate account or contract level for fees
and charges that may be incurred by a variable contract.
/2/ Information is for the period from April 1, 1996 (commencement of
operations) to December 31, 1996. The ratio of expenses to average net
assets and the ratio of net investment income to average net assets are
annualized.
/3/ Alliance Capital Management L.P. began managing the portfolio on May 1,
1998. Another firm managed the portfolio before that date.
/4/ Information is for the period from January 4, 1994 (commencement of
operations) to December 31, 1994. The ratio of expenses to average net
assets and the ratio of net investment income to average net assets are
annualized.
/5/ Goldman Sachs Asset Management began managing the portfolio on May 1,
1998. Another firm managed the portfolio before that date.
/6/ Morgan Stanley began managing the portfolio on June 1, 1997. Other
firms managed the portfolio before that date.
51
<PAGE>
PACIFIC SELECT FUND WHERE TO GO FOR MORE INFORMATION
<TABLE>
<C> <S>
The Pacific Select Fund is available only to You'll find more information about the Pacific Select Fund in the following
people who own a variable annuity contract documents:
or variable life insurance policy issued or
administered by Pacific Life Insurance Annual and semi-annual reports
Company or its subsidiaries. You'll find The fund's annual and semi-annual reports list the holdings of the fund's
out how your annuity contract or life portfolios, describe portfolio performance, and tell you how investment
insurance policy works in the prospectus strategies and portfolio performance have responded to recent market conditions
that accompanies this document. and economic trends.
Statement of Additional Information (SAI)
The SAI contains detailed information about each portfolio's investments,
strategies and risks, and is considered to be part of this prospectus because it
is incorporated by reference.
You can get a copy of these documents:
Please contact Pacific Life if you have any By calling or writing to Pacific Life
questions about any of the Pacific Select
Fund portfolios. Pacific Life Insurance Company
700 Newport Center Drive
Post Office Box 9000
Newport Beach, California 92660
Annuities: 1-800-722-2333
Life insurance: 1-800-800-7681
By contacting the Securities and Exchange Commission
Public Reference Section of the SEC
Washington, D.C. 20549-6009
1-800-SEC-0330
Internet: www.sec.gov
The SEC may charge you a fee for this information.
</TABLE>
SEC file number 811-5141
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
<PAGE>
[LOGO OF PACIFIC SELECT FUND]
PACIFIC SELECT FUND
STATEMENT OF ADDITIONAL INFORMATION
Date: May 1, 1999
----------------
The Pacific Select Fund is an open-end investment management company
currently offering eighteen separate investment portfolios. The following
seventeen of those portfolios are classified as diversified: 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; Mid-Cap Value Portfolio; the Equity Income
Portfolio; the Multi-Strategy Portfolio; the Equity Portfolio; the Bond and
Income Portfolio; the Equity Index Portfolio; the International Portfolio; the
Emerging Markets Portfolio; the Small-Cap Index Portfolio; and the Large-Cap
Value Portfolio. The REIT Portfolio is classified as non-diversified. 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, 1999, 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
Annuities (800) 722-2333
Life Insurance (800) 800-7681
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
INTRODUCTION................................................................ 1
ADDITIONAL INVESTMENT POLICIES OF THE PORTFOLIOS............................ 1
Money Market Portfolio.................................................... 1
High Yield Bond Portfolio................................................. 2
Managed Bond Portfolio.................................................... 2
Government Securities Portfolio........................................... 3
Growth Portfolio.......................................................... 3
Aggressive Equity Portfolio............................................... 3
Growth LT Portfolio....................................................... 4
Equity Income Portfolio................................................... 4
Multi-Strategy Portfolio.................................................. 4
Large-Cap Value Portfolio................................................. 5
Mid-Cap Value Portfolio................................................... 5
Equity Portfolio.......................................................... 6
Bond and Income Portfolio................................................. 6
Equity Index Portfolio.................................................... 7
Small-Cap Index Portfolio................................................. 7
REIT Portfolio............................................................ 7
International Portfolio................................................... 8
Emerging Markets Portfolio................................................ 8
Diversification Versus Non-Diversification................................ 9
SECURITIES AND INVESTMENT TECHNIQUES........................................ 9
U.S. Government Securities................................................ 9
Real Estate Investment Trusts............................................. 10
Mortgage-Related Securities............................................... 10
Mortgage Pass-Through Securities........................................ 10
GNMA Certificates....................................................... 11
FNMA and FHLMC Mortgage-Backed Obligations.............................. 11
Collateralized Mortgage Obligations (CMOs).............................. 12
FHLMC Collateralized Mortgage Obligations............................... 12
Other Mortgage-Related Securities....................................... 13
CMO Residuals........................................................... 13
Stripped Mortgage-Backed Securities..................................... 14
Mortgage Dollar Rolls................................................... 14
Other Asset-Backed Securities............................................. 15
High Yield Bonds.......................................................... 15
Bank Obligations.......................................................... 16
Municipal Securities...................................................... 18
Small Capitalization Stocks............................................... 18
Corporate Debt Securities................................................. 18
Variable and Floating Rate Securities..................................... 19
Commercial Paper.......................................................... 20
Convertible Securities.................................................... 20
Repurchase Agreements..................................................... 22
Borrowing................................................................. 22
Reverse Repurchase Agreements and Other Borrowings........................ 23
Firm Commitment Agreements and When-Issued Securities..................... 23
Loans of Portfolio Securities............................................. 23
Short Sales............................................................... 24
Short Sales Against the Box............................................... 24
Illiquid and Restricted Securities (Private Placements)................... 24
Precious Metals-Related Securities........................................ 25
Foreign Securities........................................................ 25
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
Foreign Currency Transactions............................................. 27
Forward Foreign Currency Contracts...................................... 28
Options................................................................... 29
Purchasing and Writing Options on Securities............................ 30
Purchasing Options on Stock Indexes..................................... 31
Risks of Options Transactions........................................... 32
Spread Transactions..................................................... 32
Options on Foreign Currencies............................................. 33
Investments in SPDRs...................................................... 34
Futures Contracts and Options on Futures Contracts........................ 35
Interest Rate Futures................................................... 35
Stock Index Futures..................................................... 35
Futures Options......................................................... 36
Limitations............................................................. 37
Risks Associated with Futures and Futures Options....................... 37
Foreign Currency Futures and Options Thereon.............................. 38
Swap Agreements and Options on Swap Agreements............................ 39
Risks of Swap Agreements................................................ 39
Structured Notes.......................................................... 39
Warrants and Rights....................................................... 40
Duration.................................................................. 40
INVESTMENT RESTRICTIONS..................................................... 42
Fundamental Investment Restrictions....................................... 42
Nonfundamental Investment Restrictions.................................... 43
ORGANIZATION AND MANAGEMENT OF THE FUND..................................... 44
Trustees and Officers..................................................... 44
Investment Adviser........................................................ 45
Other Expenses of the Fund................................................ 47
Portfolio Management Agreements........................................... 48
Distribution of Fund Shares............................................... 57
Purchases and Redemptions................................................. 58
Exchanges Among the Portfolios............................................ 58
PORTFOLIO TRANSACTIONS AND BROKERAGE........................................ 58
Investment Decisions...................................................... 58
Brokerage and Research Services........................................... 59
Portfolio Turnover........................................................ 60
NET ASSET VALUE............................................................. 61
PERFORMANCE INFORMATION..................................................... 63
TAXATION.................................................................... 65
Distributions............................................................. 66
Hedging Transactions...................................................... 66
OTHER INFORMATION........................................................... 67
Concentration Policy...................................................... 67
Capitalization............................................................ 67
Voting Rights............................................................. 67
Custodian and Transfer Agency and Dividend Disbursing Services............ 68
Financial Statements...................................................... 68
Independent Auditors...................................................... 68
Counsel................................................................... 68
Registration Statement.................................................... 68
APPENDIX.................................................................... 69
Description of Bond Ratings............................................... 69
</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.
ADDITIONAL INVESTMENT POLICIES OF THE PORTFOLIOS
The investment objective and investment policies of each Portfolio are
described in the Prospectus. The following descriptions present more detailed
information on investment policies that apply to each Portfolio, and are
intended to supplement the information provided in the Prospectus.
Money Market Portfolio
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. The Portfolio may
invest only in U.S. dollar denominated securities 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.
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 Rating
Services ("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.
In addition to the securities identified in the Prospectus, the Portfolio
may also invest in short-term corporate debt securities, bank obligations,
savings and loan obligations, and repurchase agreements involving these
securities. The Portfolio's investments are limited to securities that mature
within 13 months or less from the date if 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). The
Portfolio is subject to diversification standards applicable to money market
funds under SEC rules.
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High Yield Bond Portfolio
The Portfolio invests primarily in fixed-income securities rated Baa or
lower by Moody's, or BBB or lower by S&P, or, if not rated by Moody's or S&P,
are of equivalent investment quality as determined by the Adviser. 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.
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 thereon, and
invest up to 5% of the its 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 portfolio securities, in an amount not to exceed 25% of the
value of its total assets, to brokers, dealers, and other financial
institutions to earn income.
In an effort to reduce credit risk, the Portfolio diversifies its holdings
among many issuers. As of December 31, 1998, the Portfolio held securities of
corporate issuers, excluding short-term obligations. As of December 31,
1998, the amount of the Portfolio's average total assets, measured on the
basis of month-end values, invested in bonds rated lower than Baa by Moody's
or BBB by S&P or, if not rated by Moody's or S&P, determined to be of
equivalent quality by Pacific Life, was approximately %. The asset
composition after this time may or may not be the same as shown in 1998.
Managed Bond Portfolio
In addition to the securities identified in the Prospectus, the Portfolio
may also invest in obligations issued or guaranteed by the U.S. Government,
its agencies, or instrumentalities; asset-backed securities; variable and
floating rate debt securities; U.S. dollar-denominated obligations of
international agencies (such as the International Bank for Reconstruction and
Development); and repurchase and reverse repurchase agreements. The Portfolio
may invest up to 20% of its assets in debt securities of foreign issuers
denominated in foreign currencies.
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. In the event that a security owned by
the Portfolio is downgraded to below a B rating, the Portfolio may nonetheless
retain the security. See the Appendix for a description of Moody's and S&P
ratings applicable to fixed income securities. For the year ended December 31,
1998, 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 %.
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. The
Portfolio may also purchase or sell interest rate futures contracts and
options thereon. The Portfolio may also lend its portfolio securities, in an
amount not to exceed 25% of the value of its total assets, to brokers,
dealers, and other financial institutions to earn income, and borrow money for
temporary administrative or emergency purposes.
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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.
Government Securities Portfolio
In addition to its investments in U.S. government securities and related
investments, as described in the Prospectus, the Portfolio may invest up to
35% of its assets in the following: 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; mortgage-related securities, including collateralized mortgage
obligations and mortgage-backed bonds, and in cash or high quality money
market instruments. The Portfolio may also lend its portfolio securities, in
an amount not to exceed 25% of the value of its total assets, to brokers,
dealers, and other financial institutions to earn income.
The Portfolio may also purchase and sell spread transactions; enter into
interest rate, interest rate index, and currency exchange rate swap agreements
and purchase and sell options thereon; engage in forward currency contracts,
options on foreign currency contracts, and foreign currency futures and
options thereon; and purchase and sell interest rate futures contracts and
options thereon. In addition, the Portfolio may invest up to 20% of its total
assets in debt securities of foreign issuers, which may be denominated in
foreign currencies. The Portfolio may also lend its portfolio securities, in
an amount not to exceed 25% of the value of its total assets, to brokers,
dealers, and other financial institutions to earn income, and may enter into
reverse repurchase agreements.
Growth Portfolio
This Portfolio is not available for:
.Pacific Corinthian variable annuity contracts
.variable annuity contracts that were issued on or after January 1, 1994.
In addition to the investment policies and techniques described in the
Prospectus, the Portfolio may invest in various foreign securities if listed
on a U.S. exchange. In addition, the Portfolio may hold a portion of its
assets in cash.
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, 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.
The Portfolio may also lend its portfolio securities, in an amount not to
exceed 25% of the value of its total assets, to brokers, dealers, and other
financial institutions to earn income.
Aggressive Equity Portfolio
This Portfolio is not available for:
.Pacific Corinthian variable annuity contracts.
In addition to the investment policies and techniques described in the
Prospectus, the Portfolio may also invest a portion of its assets in high-
quality money market instruments. The Portfolio may also invest in securities
of foreign issuers, provided that the Portfolio may not acquire a security of
a foreign issuer principally traded outside 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.
For hedging purposes, the Portfolio may purchase put and call options on
securities and securities indexes and may write covered call and secured put
options. The Portfolio may also purchase and sell stock index futures
contracts and options thereon. To hedge against the risk of currency
fluctuation associated with investment in foreign securities, the Portfolio
may buy or sell foreign currencies on a spot (cash) basis and enter into
forward
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foreign currency contracts or options on foreign currencies or foreign
currency futures contracts and options thereon. The Portfolio may also lend
its portfolio securities, in an amount not to exceed 25% of the value of its
total assets, to brokers, dealers, and other financial institutions to earn
income.
Growth LT Portfolio
In addition to the investment policies and techniques described in the
Prospectus, the Portfolio may also invest in 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 also invest
in money market funds, including those managed by Janus Capital Corporation as
a means of receiving a return on idle cash, pursuant to an exemptive order
received by Janus Capital Corporation from the SEC. The Portfolio may also
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.
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"), and Global Depositary
Receipts ("GDRs"), and other types of receipts 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 and sell interest rate, stock index, and foreign currency futures
contracts and options thereon. The Portfolio may also engage in forward
foreign currency contracts. The Portfolio may also lend its portfolio
securities, in an amount not to exceed 25% of the value of its total assets,
to brokers, dealers, and other financial institutions to earn income.
Equity Income Portfolio
In addition to the investment policies and techniques described in the
Prospectus, the Portfolio may also invest in ADRs and in various foreign
securities if they are listed on a U.S. exchange. To invest temporary cash
balances, to maintain liquidity to meet redemptions or expenses, or for
temporary defensive purposes, the Portfolio may invest in money market
instruments, including U.S. government securities, short term bank obligations
rated in the highest two rating categories by Moody's, S&P, or, if not rated
by Moody's or S&P, determined to be of equal quality by the Portfolio 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 not rated by Moody's or S&P,
determined to be of equal quality by the Portfolio Manager. The Portfolio may
also invest in convertible bonds and other fixed income securities including
but not limited to high yield/high risk debt securities.
In addition to the derivatives described in the Prospectus, the Portfolio
may also purchase and sell put and call options on securities and stock
indexes and may purchase or sell stock index futures contracts and options
thereon. The Portfolio may also lend its portfolio securities, in an amount
not to exceed 25% of the value of its total assets, to brokers, dealers, and
other financial institutions to earn income.
Multi-Strategy Portfolio
In addition to the investment policies and techniques described in the
Prospectus, the Portfolio may also invest in 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. The Portfolio may
also invest up to 10% of its assets in debt securities of foreign issuers
which may be denominated in foreign currencies. Fixed income securities in
which the portfolio may invest may include debentures, asset-backed securities
and money market instruments.
The Portfolio may purchase and sell put and call options on securities and
stock indexes and may purchase or sell interest rate and stock index futures
contracts and options thereon. The Portfolio may also engage in
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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. The Portfolio may also lend its portfolio
securities, in an amount not to exceed 25% of the value of its total assets,
to brokers, dealers, and other financial institutions to earn income.
Large-Cap Value Portfolio
This Portfolio is not available for:
.Pacific Corinthian variable annuity contracts
.Pacific Select variable life insurance policies.
In addition to the investment policies and techniques described in the
Prospectus, the Portfolio may invest a portion of its assets in short-term
fixed income securities, such as repurchase agreements, cash or cash
equivalents, to meet operating expenses, to serve as collateral in connection
with certain investment techniques, or to meet anticipated redemption
requests. The Portfolio may invest up to 20% of its net assets, measured at
the time of investment, in foreign companies. In addition, the Portfolio may
invest without limit in convertible securities rated below investment grade,
and may, from time to time, invest up to 5% of its net assets in non-
convertible debt securities rated below investment grade by S&P or Moody's.
The Portfolio may also lend its portfolio securities, in an amount not to
exceed 33 1/3% of the value of its total assets, to brokers, dealers, and
other financial institutions to earn income.
The Portfolio may also purchase put and call options on securities and
securities indexes and enter into the following: stock, index and currency
futures contracts and options thereon and currency forward contracts, currency
swaps, and options on currencies. The Portfolio may also invest in equity real
estate investment trusts ("REITS"), restricted securities, and up to 15% of
its net assets in illiquid securities.
Mid-Cap Value Portfolio
This Portfolio is not available for:
.Pacific Corinthian variable annuity contracts
.Pacific Select variable life insurance policies.
The equity securities in which the Portfolio may invest include common
stocks, preferred stocks, securities convertible into or exchangeable for
common stocks, rights and warrants, ADRs, and GDRs. The Portfolio may also
invest a portion of its assets in investment grade debt securities, including
U.S. Government Securities, commercial paper and other short-term corporate
and bank obligations.
The Portfolio may borrow for investment purposes in an amount up to 33 1/3%
of the value of its total assets and may enter into reverse repurchase
agreements with banks, brokers or dealers. The Portfolio may also invest up to
15% of its total assets, determined at the time of investment, in foreign
equity or debt securities. The Portfolio will not engage in "short sales," in
which the Portfolio sells a security it does not own, and "short sales against
the box," in which the Portfolio sells short a security it owns, if, at the
time of investment, the total market value of all securities sold and held
short would exceed 25% of the Portfolio's net assets. The Portfolio may also
lend its portfolio securities, in an amount not to exceed 33 1/3% of the value
of its total assets, to brokers, dealers, and other financial institutions to
earn income.
In pursuing its investment objective, the Portfolio may also purchase and
sell put and call options on securities, stock indexes and foreign currencies
and may purchase cash-settled options on interest rate swaps and equity index
swaps. In addition, the Portfolio may purchase or sell futures contracts on
securities, stock indexes, currency futures, and options thereon. The
Portfolio may engage in foreign currency transactions: (1) to fix in U.S.
dollars the value of a security the Portfolio has agreed to buy or sell
between the trade and settlement dates; and (2) to hedge the U.S. dollar value
of securities the Portfolio already owns. The Portfolio may also invest in
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equity real estate investment trusts ("REITs"), although it currently intends
to limit its investments in REITs to no more than 5% of its assets. The
Portfolio may also invest in repurchase agreements, illiquid securities (up to
15% of its net assets) and restricted securities.
Equity Portfolio
In pursuing its investment objective, the Portfolio invests, under normal
circumstances, at least 90% of its total assets in equity securities of U.S.
issuers. The Portfolio may also invest in U.S. government securities,
corporate bonds, money market instruments, and enter in repurchase agreements.
The Portfolio may also lend its portfolio securities, in an amount not to
exceed 25% of the value of its total assets, to brokers, dealers, and other
financial institutions to earn income.
The Portfolio may also purchase and sell put and call options on securities
and stock indices and enter into stock index futures contracts and options
thereon. The Portfolio may also purchase Standard & Poor's Depository Receipts
("SPDRs"), which represent ownership interests in the SPDR Trust, a long-term
unit investment trust established to accumulate and hold a portfolio of common
stocks that is intended to track the price performance and dividend yield of
the Standard & Poor's 500 Composite Stock Price Index ("S&P 500").
Bond and Income Portfolio
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") (i.e., Baa or better by
Moody's or BBB or better by S&P), or, if not rated by a 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.
In addition to the investment policies and techniques described in the
Prospectus, the Portfolio may invest up to 10% of its assets in non-U.S.
dollar denominated securities. The Portfolio may also invest in municipal
securities issued by or on behalf of states, territories and possessions of
the U.S. (including the District of Columbia) and their political
subdivisions, agencies, or instrumentalities, which securities may include
private activity bonds or industrial development bonds, which are issued by or
on behalf of public authorities to obtain funds for privately operated
facilities; high-quality short-term instruments, including, among others,
commercial paper, bank instruments, and repurchase agreements; asset-backed
securities; U.S. dollar-denominated obligations of foreign governmental
agencies and international agencies; and preferred stock. The Portfolio may
invest up to 10% of its assets in the following types of mortgage-related
securities: inverse floaters, super floating rate CMO's, interest only
("IO's") and principal-only ("PO's") tranches of stripped mortgage backed
securities (including planned amortization class certificates) and inverse
IO's. In addition, the Portfolio may invest up to 15% of its net assets in
restricted securities that are illiquid. The Portfolio may also lend its
portfolio securities, in an amount not to exceed 25% of the value of its total
assets, to brokers, dealers, and other financial institutions to earn income.
The Portfolio may purchase put and call options on securities and on
securities indexes and may write covered call options. The Portfolio may also
enter into the following types of transactions: 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 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, or, if not rated by Moody's or S&P, of equivalent quality.
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Equity Index Portfolio
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 also invest in
foreign equity securities of 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 are not 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. The Portfolio may also lend its portfolio
securities, in an amount not to exceed 25% of the value of its total assets,
to brokers, dealers, and other financial institutions to earn income.
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.
Small-Cap Index Portfolio
This Portfolio is not available for:
.Pacific Corinthian variable annuity contracts
.Pacific Select variable life insurance policies.
Under normal conditions, the Portfolio invests at least 80% of the value of
its total assets in the common stock of companies included in the Russell 2000
Small Stock Index ("Russell 2000"). The Portfolio will be managed in an
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 Russell 2000.
In addition to the investment policies and techniques described in the
Prospectus, the Portfolio may purchase and sell stock index futures and
options thereon and options on stock indexes that are based on the Russell
2000 or other indexes of small capitalization companies.
The Portfolio may invest in foreign equity securities if U.S. exchange
listed to the extent included in the Russell 2000. The Portfolio is also
permitted to invest in when-issued and delayed delivery securities, warrants,
and securities that are convertible into common stock. The Portfolio may also
invest in illiquid securities (up to 15% of its net assets) and in restricted
securities. The Portfolio may also lend its portfolio securities, in an amount
not to exceed 33 1/3% of the value of its total assets, to brokers, dealers,
and other financial institutions to earn income.
The Portfolio may maintain a portion to its assets in short-term debt
securities and money market instruments to meet redemption requests or pending
investment in the securities of the Russell 2000. These investments will not
be made in anticipation of a general decline in the market prices of stocks in
which the Portfolio invests.
REIT Portfolio
This Portfolio is not available for:
.Pacific Corinthian variable annuity contracts
.Pacific Select variable life insurance policies.
The Portfolio is a "non-diversified" portfolio. For purposes of the
Portfolio's investment policies, a company is principally engaged in the real
estate industry if: (1) it derives at least 50% of its revenues or profits
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from the ownership, construction, management, financing or sale of
residential, commercial or industrial real estate; or (2) it has at least 50%
of the fair market value of its assets invested in residential, commercial, or
industrial real estate.
During periods when the Portfolio Manager believes that changes in economic,
financial, or political conditions make it advisable, the Portfolio may, for
temporary defensive purposes, invest up to 100% of its total assets in
investment grade short-term and medium-term debt obligations or hold cash.
The Portfolio may buy and sell put and call options on securities and may
purchase and sell futures contracts on interest rates. The Portfolio may also
invest in the following: repurchase agreements; interest rate derivative
products, such as swaps, caps, collars and floors; and structured notes. The
Portfolio may also lend its portfolio securities, in an amount not to exceed
33 1/3% of the value of its total assets, to brokers, dealers, and other
financial institutions to earn income.
International Portfolio
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 degree, securities convertible into common stock. 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 corporate or U.S. Government obligations and bank
certificates of deposit denominated in such currencies to provide for
redemptions; it is generally not expected that such reserve for redemptions
will exceed 10% of the Portfolio assets. Securities which may be held for
defensive purposes include nonconvertible preferred stock, debt securities,
government securities issued by U.S. and foreign countries and money market
securities. 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."
The Portfolio may also enter into repurchase agreements and may lend its
portfolio securities, in an amount not to exceed 25% of the value of its total
assets, to brokers, dealers, and other financial institutions to earn income.
The Portfolio may also purchase and sell financial futures contracts, stock
index futures contracts, and foreign currency futures contracts and options
thereon. The Portfolio may also 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 and may
purchase and write put and call options on foreign currencies.
Emerging Markets Portfolio
This Portfolio is not available for:
.Pacific Corinthian variable annuity contracts.
The Portfolio's policy of being as fully invested in common stock as
practicable at all times precludes the Portfolio from investing in debt
securities as a defensive investment posture (although the Portfolio may
invest in such securities to provide for payment of expenses and to meet
redemption requests.) 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."
The types of foreign currency transactions in which the Portfolio may enter
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.
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
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which the Portfolio invests may be issued by U.S. and foreign issuers and may
be denominated in U.S. dollars or foreign currencies.
The Portfolio also may engage in transaction in options, futures, and
options on futures contracts on securities and securities indexes. The
Portfolio may purchase and sell stock index futures and options thereon. The
Portfolio also may purchase convertible securities, enter into equity index
swap agreements, 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. The Portfolio may also
lend its portfolio securities, in an amount not to exceed 33 1/3% of the value
of its total assets, to brokers, dealers, and other financial institutions to
earn income.
Diversification Versus Non-Diversification
Each of the Portfolios, other than the REIT Portfolio, is diversified, so
that with respect to 75% of each such Portfolio's assets (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 REIT Portfolio is "non-diversified," which means that the proportion of
the Portfolio's assets that may be invested in the securities of a single
issuer is not limited by the Investment Company Act of 1940, as amended ("1940
Act"). However, to meet Federal tax requirements, the REIT Portfolio may not
have more than 25% of its total assets invested in any one issuer and, with
respect to 50% of its total assets, no more than 5% of its total assets
invested in any one issuer, except that this restriction does not apply to
U.S. Government securities. Nonetheless, because the REIT Portfolio may invest
in a smaller number of companies than a diversified fund, an investment in
this Portfolio may, under certain circumstances, present greater risk to an
investor than an investment in a diversified fund. This risk includes greater
exposure to potential poor earnings or default of fewer issuers than would be
the case for a more diversified fund.
SECURITIES AND INVESTMENT TECHNIQUES
Unless otherwise stated in the prospectus, many investment techniques,
including various hedging techniques and techniques which may be used to help
add incremental income, are discretionary. That means portfolio managers may
elect to engage or not to engage in the various techniques at their sole
discretion. Hedging may not be cost-effective or portfolio managers may simply
elect not to engage in hedging and have the portfolio assume full risk of the
investments. Investors should not assume that any portfolio will be hedged at
all times or that it will be hedged at all; nor should investors assume that
any particular discretionary investment technique or strategy will be employed
at all times, or ever employed.
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.
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.
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Real Estate Investment Trusts
REITs are primary investments for the REIT Portfolio. The Large-Cap Value
and Mid-Cap Value Portfolios may also invest in equity REITs.
REITs pool investors' funds for investment primarily in income-producing
real estate or in loans or interests related to real estate. A REIT is not
taxed on income distributed to its shareholders or unitholders if it complies
with a regulatory requirement that it distributes to its shareholders or
unitholders at least 95% of its taxable income for each taxable year.
Generally, REITs can be classified as equity REITs, mortgage REITs or hybrid
REITs. Equity REITs invest a majority of their assets directly in real
property and derive their income primarily from rents and capital gains from
appreciation realized through property sales. Equity REITs are further
categorized according to the types of real estate securities they own, e.g.,
apartment properties, retail shopping centers, office and industrial
properties, hotels, health-care facilities, manufactured housing and mixed-
property types. Mortgage REITs invest a majority of their assets in real
estate mortgages and derive their income primarily from income payments.
Hybrid REITs combine the characteristics of both equity and mortgage REITs.
REITs depend generally on their ability to generate cash flow to make
distributions to shareholders or unitholders, and may be subject to changes in
the value of their underlying properties, defaults by borrowers, and to self-
liquidations. Some REITs may have limited diversification and may be subject
to risks inherent in investments in a limited number of properties, in a
narrow geographic area, or in a single property type. Equity REITs may be
affected by changes in underlying property values. Mortgage REITs may be
affected by the quality of the credit extended. REITs are dependent upon
specialized management skills and incur management expenses. In addition, the
performance of a REIT may be affected by its failure to qualify for tax-free
pass-through of income under the Internal Revenue Code of 1986, as amended, or
its failure to maintain an exemption from registration under the 1940 Act.
REITs also involve risks such as refinancing, changes in property values,
general or specific economic risk on the real estate industry, dependency on
management skills, and other risks similar to small company investing.
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, Aggressive Equity, Growth LT,
Multi-Strategy, Large-Cap Value, Mid-Cap Value, 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 50.
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,
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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.
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)
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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.
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.
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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 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 net
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
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securities in question. 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.
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 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 the PAC certificate. In order to
create PAC Tranches, generally one or more tranches 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.
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 prepayment
speeds.
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 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.
Mortgage Dollar Rolls. The Bond and Income Portfolio may enter into mortgage
"dollar rolls" in which the Portfolio sells securities for delivery in the
current month and simultaneously contracts with the same counterparty to
repurchase substantially similar (same type, coupon and maturity) but not
identical securities on a specified future date. During the roll period, the
Portfolio loses the right to receive principal and interest paid on the
securities sold. However, the Portfolio would benefit to the extent of any
difference between the price received for the securities sold and the lower
forward price for the future purchase or fee income plus the interest earned
on the cash proceeds of the securities sold until the settlement date for the
forward purchase. Unless such benefits exceed the income, capital appreciation
and gain or loss due to mortgage prepayments that would have
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been realized on the securities sold as part of the mortgage dollar roll, the
use of this technique will diminish the investment performance of the
Portfolio. The Portfolio will hold and maintain in a segregated account until
the settlement date cash or liquid assets in an amount equal to the forward
purchase price. For financial reporting and tax purposes, the Portfolio treats
mortgage dollar rolls as two separate transactions; one involving the purchase
of a security and a separate transaction involving a sale. The Portfolio does
not currently intend to enter into mortgage dollar rolls that are accounted
for as a financing.
Other Asset-Backed Securities
In addition to mortgage-related securities, the High Yield Bond, Managed
Bond, Government Securities, Aggressive Equity, Growth LT, 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, Managed Bond (up to 10% of its assets), Growth LT (up
to 10% of its assets), Equity Income, Multi-Strategy, Large-Cap Value (no
limit on convertible high yield securities, and up to 5% of its net assets in
non-convertible high yield securities), Bond and Income (up to 20% of its
assets, 15% of which may be invested in debt securities of foreign governments
or their agencies that are from emerging market countries), and International
(up to 5% of its assets) Portfolios, 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 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.
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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.
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.
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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 net 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
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 net 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.
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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.
Municipal Securities
The Bond and Income Portfolio may invest up to 5% of its net assets in
municipal securities. Municipal securities consist of bonds, notes and other
instruments issued by or on behalf of states, territories and possessions of
the United States (including the District of Columbia) and their political
subdivisions, agencies or instrumentalities, the interest on which is exempt
from regular federal income tax. Municipal securities are often issued to
obtain funds for various public purposes. Municipal securities also include
"private activity bonds" or industrial development bonds, which are issued by
or on behalf of public authorities to obtain funds for privately operated
facilities, such as airports and waste disposal facilities, and, in some
cases, commercial and industrial facilities.
The yields and market values of municipal securities are determined
primarily by the general level of interest rates, the creditworthiness of the
issuers of municipal securities and economic and political conditions
affecting such issuers. Due to their tax exempt status, the yields and market
prices of municipal securities may be adversely affected by changes in tax
rates and policies, which may have less effect on the market for taxable fixed
income securities. Moreover, certain types of municipal securities, such as
housing revenue bonds, involve prepayment risks which could affect the yield
on such securities.
Investments in municipal securities are subject to the risk that the issuer
could default on its obligations. Such a default could result from the
inadequacy of the sources or revenues from which interest and principal
payments are to be made or the assets collateralizing such obligations.
Revenue bonds, including private activity bonds, are backed only by specific
assets or revenue sources and not by the full faith and credit of the
governmental issuer.
Small Capitalization Stocks
The Growth, Aggressive Equity, Growth LT. Equity, and Emerging Markets
Portfolios, and to a lesser degree, the Equity Income, Multi-Strategy, Large-
Cap Value and Mid-Cap Value Portfolios, may invest in small capitalization
stocks. 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.
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,
Mid-Cap Value, 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, Mid-Cap Value, 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, Mid-Cap Value,
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and Bond and Income Portfolios, may also invest in debt securities of foreign
issuers denominated in foreign currencies. The debt securities in which any
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 Portfolios and, to the
extent of 10% of their assets, the Managed Bond and Growth LT Portfolios, and,
to the extent of 20% of its assets, the Bond and Income 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.
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.
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The Bond and Income Portfolio may invest in super floating rate CMOs ("super
floaters"). A super floater is a leveraged floating-rate tranche in a CMO
issue. At each monthly reset date, a super floater's coupon rate is determined
by a slated formula. Typically, the rate is a multiple of some index minus a
fixed-coupon amount. When interest rates rise, a super floater is expected to
outperform regular floating rate CMOs because of its leveraging factor and
higher lifetime caps. Conversely, when interest rates fall, a super floater is
expected to underperform floating rate CMOs because its coupon rate drops by
the leveraging factor. In addition, a super floater may reach its cap as
interest rates increase and may no longer provide the benefits associated with
increasing coupon rates.
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 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.
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
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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.
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
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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.
Under 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 net
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.
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The Mid-Cap Value Portfolio may borrow for investment purposes
("leveraging") to the extent permitted under the 1940 Act, which permits an
investment company to engage in borrowing, provided that it maintains
continuous asset coverage of 300% of the amount borrowed. If the required
coverage should decline as a result of market fluctuations or other reasons,
the Mid-Cap Value Portfolio may be required to sell some of its portfolio
securities within three days to reduce the amount of its borrowings and to
restore the 300% asset coverage, even though it may be disadvantageous from an
investment standpoint to sell securities at that time.
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, Mid-Cap Value, Bond and
Income, Equity Index, and Emerging Markets Portfolios may engage and enter
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.
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 may make
secured loans of its portfolio securities to broker-dealers or U.S. banks
provided: (i) such loans are secured continuously by collateral
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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 except for the Large-Cap Value, the Mid-Cap Value, the Small-Cap
Index, and the REIT Portfolios, each of which may loan portfolio securities in
an amount not to exceed 33 1/3% of the value of its total assets. 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. The Fund has contracted with State
Street Bank & Trust Company to engage in securities lending of domestic
securities and Chase Manhattan Bank ("Chase") to engage in securities lending
of foreign securities (collectively, the "Lending Agents"). In determining
whether to lend securities, the Lending Agents consider 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. The Portfolio may recall securities if the Portfolio
Manager wishes to vote on matters put before shareholders.
Short Sales
The Mid-Cap Value Portfolio may engage in short sales. A short sale is a
transaction in which a Portfolio sells a security it does not own in
anticipation of a decline in the market price. Even during normal or favorable
market conditions, the Portfolio may make short sales in an attempt to
maintain portfolio flexibility and facilitate the rapid implementation of
investment strategies if the Portfolio Manager believes that the price of a
particular security or group of securities is likely to decline.
When the Portfolio makes a short sale, the Portfolio must arrange through a
broker to borrow the security to deliver to the buyer; and, in so doing, the
Portfolio becomes obligated to replace the security borrowed at its market
price at the time of replacement, whatever that price may be. The Portfolio
may have to pay a premium to borrow the security. The Portfolio must also pay
any dividends or interest payable on the security until the Portfolio replaces
the security.
The Portfolio's obligation to replace the security borrowed in connection
with the short sale will be secured by collateral deposited with the broker,
consisting of cash, U.S. Government securities or other securities acceptable
to the broker. In addition, with respect to any short sale, other than short
sales against the box, the Portfolio will be required to deposit collateral
consisting of cash or liquid securities, marked-to-market daily, in a
segregated account with its custodian in an amount such that the value of the
sum of both collateral deposits is at all times equal to at least 100% of the
current market value of the securities sold short.
Short Sales Against the Box
The Aggressive Equity, Mid-Cap Value 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.
Illiquid and Restricted Securities (Private Placements)
All Portfolios may acquire illiquid securities. Generally, a security is
considered illiquid if it cannot be disposed of within seven days. Its
illiquidity might prevent the sale of such 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
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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.
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
net 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.
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 net 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.
Precious Metals-Related Securities
The Equity Portfolio, and possibly other Portfolios that invest in equity
securities, may invest in precious metals-related 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
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
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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 Large-Cap Value Portfolio may invest up to
20% of its net assets in securities of foreign companies and the Mid-Cap Value
Portfolio may invest up to 15% of its total assets in foreign equity or debt
securities, which may include GDRs. The Multi-Strategy and Bond and Income
Portfolios may invest up to 10% of their assets in non-U.S. dollar-denominated
debt securities of foreign issuers. The Small-Cap Index Portfolio may invest
in foreign equity securities if they are U.S. exchange listed and if they are
included in the Russell 2000 Index. All Portfolios, except the Equity
Portfolio, 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
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
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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 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, Large-Cap Value,
Mid-Cap Value, 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, Large-Cap Value, Mid-Cap Value,
Bond and Income, International, and Emerging Markets
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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. The Mid-Cap
Value Portfolio may engage in foreign currency transactions: (1) to fix in
U.S. dollars the value of a security that the Portfolio already owns; and (2)
to hedge the U.S. dollar value of securities the Portfolio already owns. 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, Large-Cap Value, Mid-Cap Value,
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.
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
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<PAGE>
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.
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,
Large-Cap Value, Mid-Cap Value, Bond and Income, 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, Large-Cap Value, Mid-Cap Value, Equity, Bond
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and Income, REIT, 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, Large-Cap Value, Mid-Cap Value, Equity, Bond and Income, Equity
Index, Small-Cap Index and Emerging Markets Portfolios may purchase put and
call options on stock indexes.
Purchasing and Writing Options on Securities. The High Yield Bond, Managed
Bond, Government Securities, Aggressive Equity, Growth LT, Equity Income,
Multi-Strategy, Large-Cap Value, Mid-Cap Value, Equity, Bond and Income, REIT,
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.
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
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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, Large-Cap Value, Mid-Cap Value, Equity, Bond
and Income, Equity Index and Emerging Markets Portfolios may purchase put and
call options on 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. The Aggressive Equity and Emerging Markets Portfolios may sell
put and call options on securities indexes that are exchange traded or traded
on over-the-counter markets. Like other options listed on United States
securities exchanges, index options are issued by the Options Clearing
Corporation ("OCC"). The Small-Cap Index Portfolio may purchase and sell
options on stock indexes that are based on the Russell 2000 or other indexes
of small capitalization companies.
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.
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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.
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
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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,
Large-Cap Value, Mid-Cap Value, 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.
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
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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.
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.
Investments in SPDRs
Under the 1940 Act, a Portfolio may not own more than 3% of the outstanding
voting stock of an investment company, invest more than 5% of its total assets
in any one investment company, or invest more than 10% of its total assets in
the securities of investment companies.
The Equity Portfolio may also invest in SPDRs in compliance with the 1940
Act. SPDRs are interests in a unit investment trust ("UIT") that may be
obtained from the UIT or purchased in the secondary market (SPDRs are listed
on the American Stock Exchange). The UIT has been established to accumulate
and hold a portfolio of common stocks that is intended to track the price
performance and dividend yields of the S&P 500.
Individual investments in SPDRs are not redeemable, except upon termination
of the UIT. However, large quantities of SPDRs known as "Creation Units" are
redeemable from the sponsor of the UIT. The liquidity of small holdings of
SPDRs, therefore, will depend upon the existence of a secondary market.
The price of SPDRs is derived from and based upon the securities held by the
UIT. Accordingly, the level of risk involved in the purchase or sale of a SPDR
is similar to the risk involved in the purchase or sale of
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traditional common stock, with the exception that the pricing mechanism for
SPDRs is based on a basket of stocks. Disruptions in the markets for the
securities underlying SPDRs purchased or sold by the Equity Portfolio could
result in losses on SPDRs. Trading in SPDRs involves risks similar to those
risks, described under "Risks of Options Transactions."
Futures Contracts and Options on Futures Contracts
The High Yield Bond, Managed Bond, Government Securities, Growth LT, Multi-
Strategy, Bond and Income, REIT, and International Portfolios may invest in
interest rate futures and options thereon. The Aggressive Equity, Growth LT,
Equity Income, Multi-Strategy, Large-Cap Value, Mid-Cap Value, Equity, Equity
Index, Small-Cap Index, 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, Bond and Income, REIT, 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, Large-Cap Value, Mid-Cap Value, Equity, Equity Index, Small-
Cap Index, 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, REIT, 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, Large-Cap
Value, Mid-Cap Value, Equity, Equity Index, Small-Cap Index, 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, Large-Cap Value, Mid-Cap
Value, Equity, Equity Index and Small-Cap 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.
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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.
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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,
Large-Cap Value, Mid-Cap Value, Bond and Income, 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,
Large-Cap Value, Mid-Cap Value, Bond and Income, International, and Emerging
Markets Portfolios may enter into contracts for the
38
<PAGE>
purchase or sale for future delivery of foreign currencies ("foreign currency
futures") and may purchase and write options on foreign currency futures. In
addition, a Portfolio may engage in cross-hedging activities, which involve
the sale of a futures contract on one foreign currency to hedge against
changes in exchange rates for a different ("proxy") currency if there is an
established historical pattern of correlation between the two currencies.
These investment techniques 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 Mid-Cap Value and Emerging Markets Portfolio may enter into equity index
swap agreements. The Managed Bond, Government Securities, Mid-Cap Value, and
REIT Portfolios may enter into interest rate, and interest rate index, and/or
currency exchange rate swap agreements, and the Managed Bond, Government
Securities and Mid-Cap Value Portfolios may purchase and sell options thereon.
The Large-Cap Value Portfolio may enter into currency swaps. 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, or "floor"; (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; and (4) "currency exchange rate swap agreements."
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.
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 eligible counterparties under the terms of a Portfolio's repurchase
agreement guidelines unless otherwise specified in the investment policies of
the Portfolio). 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 received under such agreements. See "Taxation".
Structured Notes
The Bond and Income and REIT Portfolios 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,
39
<PAGE>
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.
Warrants and Rights
The High Yield Bond, Growth LT, Equity Income, Multi-Strategy, Mid-Cap
Value, Equity, Bond and Income, and Small-Cap Index 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 Mid-Cap Value Portfolio may invest up to 5% of its
total assets in rights. 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, 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.
40
<PAGE>
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.
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.
41
<PAGE>
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) except for the REIT Portfolio, 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). This
restriction does not apply to the REIT Portfolio, which will normally invest
more than 25% of its total assets in securities of issuers of real estate
investment trusts and in industries related to real estate;
(ii) with respect to 75% of its total assets (or, in the case of the REIT
Portfolio, with respect to 50% of its 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, except the Large-
Cap Value, Mid-Cap Value, Small-Cap Index, and REIT Portfolios, each of which
may lend its Portfolio securities in an amount not to exceed 33 1/3% of the
value of its total assets;
(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:
42
<PAGE>
(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.
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 property short, sell securities short, except the Mid-Cap Value
Portfolio, sell short against the box, except the Aggressive Equity, Equity
and Mid-Cap Value Portfolios;
(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) except the Mid-Cap Value 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;
(v) except the Mid-Cap Value 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;
(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 net 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.
43
<PAGE>
ORGANIZATION AND MANAGEMENT OF THE FUND
The Fund was organized as a Massachusetts business trust on May 4, 1987, and
currently consists of eighteen 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.
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.
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 56 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 49 LifeCorp and similar
positions with other
subsidiaries and affiliates
of Pacific Life.
Lucie H. Moore Trustee Former Partner with Gibson,
1825 Port Manleigh Place Dunn & Crutcher.
Newport Beach, CA 92660
Age 42
Richard L. Nelson Trustee Business Consultant; retired
8 Cherry Hills Lane Partner with Ernst & Young;
Newport Beach, CA 92660 Director of Wynn's
Age 69 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 69 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 Chairman of IBIS Capital,
7381 Elegans Place LLC; President of Alan
Carlsbad, CA 92009 Richards Consulting, Inc.;
Age 69 Former 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 42 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 59 Life.
</TABLE>
44
<PAGE>
<TABLE>
<CAPTION>
Business Affiliates and
Name and Address Position with the Fund Principal Occupations
---------------- ---------------------- -----------------------
<C> <C> <S>
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 43
Audrey L. Milfs Secretary Vice President, Director and
700 Newport Center Drive Corporate Secretary of
Newport Beach, CA 92660 Pacific Life; and similar
Age 53 positions with other
subsidiaries of Pacific
Life.
</TABLE>
- --------
* 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, Policy and
Nominating Committees each receive 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
1998. The table also shows total compensation paid to these Trustees in 1998
by the Fund and PIMCO Funds: Multi-Manager Series (formerly Equity Advisors
Series), an investment company managed by an affiliate of Pacific Life for
which Messrs. Nelson, Porter, and Richards (but not Mr. Sutton, Mr. Schafer or
Ms. Moore) also serve as trustees (collectively, "Fund Complex").
<TABLE>
<CAPTION>
Pension or
Retirement Total
Benefits Estimated 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............... $ 0 0 0 $ 0
Lyman W. Porter................. $ 0 0 0 $ 0
Alan Richards................... $ 0 0 0 $ 0
Lucie H. Moore*................. $ 0 0 0 $ 0
</TABLE>
- --------
* Ms. Moore became a Trustee effective October 1, 1998.
None of the Trustees or Officers directly own shares of the Fund. As of
February 27, 1999, 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 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 1998, Pacific Life
had $ billion of individual life insurance in force and total admitted
assets of approximately $ billion. Pacific Life has been ranked according
to admitted assets as the th largest life insurance carrier in the nation
for 1998. The Pacific Life family of companies has total assets and funds
under management of over $ 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.
45
<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.
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, 1999, 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 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. An addendum to the Advisory Contract
for the Large-Cap Value, Mid-Cap Value, Small-Cap Index, and REIT Portfolios
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 6, 1998, and by the sole shareholder of
those Portfolios on , 1998. 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 pays to the Adviser
46
<PAGE>
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 pays
.60% of the average daily net assets of each of the Portfolios. For the
Growth, Equity Income, Multi-Strategy, and Equity Portfolios, the Fund pays
.65% of the average daily net assets of each of the Portfolios. For the
Aggressive Equity Portfolio, the Fund pays .80% of the average daily net
assets of the Portfolio. For the Growth LT Portfolio, the Fund pays .75% of
the average daily net assets of the Portfolio. 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 $200 million. For the Small-Cap Index Portfolio, the
Fund pays 0.50% of the average daily net assets of the Portfolio. For the
Large-Cap Value, Mid-Cap Value and International Portfolios, the Fund pays
.85% of the average daily net assets of the Portfolio. For the REIT and
Emerging Markets Portfolios, the Fund pays to the Adviser a fee at an annual
rate of 1.10% of the average daily net assets of the Portfolio. The fee shall
be computed and accrued daily and paid monthly.
Net advisory fees paid or owed to Pacific Life for 1998 were as follows:
Money Market Portfolio--$ , High Yield Bond Portfolio--$ , Managed Bond
Portfolio--$ , Government Securities Portfolio--$ , Growth Portfolio--
$ , Aggressive Equity Portfolio--$ , Growth LT Portfolio--$ , Equity
Income Portfolio--$ , Multi--Strategy Portfolio--$ , Equity Portfolio--
$ , Bond and Income Portfolio--$ , Equity Index Portfolio--$ ,
International Portfolio--$ , and Emerging Markets Portfolio--$ .
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.
Pacific Life has agreed, until at least December 31, 2000, 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, 2000.
Other Expenses of the Fund
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,
47
<PAGE>
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.
The Fund paid Pacific Life $ for its services under the Agreement for
Support Services during 1998, $165,000 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 1999 under said
Agreement will be approximately % of the Fund's average daily net assets.
Portfolio Management Agreements
Pacific Life directly manages both the Money Market and the High Yield Bond
Portfolios. For the other sixteen Portfolios Pacific Life employs other
investment advisory firms as Portfolio Manager, subject to Portfolio
Management Agreements, the terms of which are discussed below.
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 in 1996, Pacific
Life paid PIMCO a fee based on a percentage of each Portfolio's average daily
net assets according to the following schedule. Effective January 1, 1997, for
the services provided, Pacific Life pays PIMCO a fee based on an annual
percentage of the combined average daily net assets of the 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>
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 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 (formerly
Equity Advisors 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
48
<PAGE>
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 1998 were $ for the
Managed Bond Portfolio and $ for the Government Securities Portfolio,
in 1997 were $929,041 for the Managed Bond Portfolio and $292,079 for the
Government Securities Portfolio, and in 1996 were $541,256 for the Managed
Bond Portfolio and $295,607 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, Pacific Life pays Capital Guardian a fee based on an annual
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, college endowment
funds, foundations, and individuals. Accounts managed by Capital Guardian had
combined assets, as of December 31, 1998, in excess of $ 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 1998 were $ , in 1997 were $716,070, and in 1996 were
$534,580.
49
<PAGE>
Pursuant to a Portfolio Management Agreement between the Fund, the Adviser,
and Alliance Capital Management, L.P. ("Alliance Capital"), 1345 Avenue of the
Americas, New York, NY 10105, which became effective May 1, 1998, Alliance
Capital is the Portfolio Manager and provides investment advisory services to
the Aggressive Equity Portfolio. For the services provided, Pacific Life pays
a fee to Alliance Capital based on an annual percentage of the 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>
Alliance Capital is a leading international investment manager supervising
client accounts with assets as of December 31, 1998 totaling $ 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 , AXA-UAP, a French
insurance holding company, owned approximately % 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, 1998, Alliance Capital was retained as an investment
manager of employee benefit fund assets for 31 of the Fortune 100 companies.
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 and from January 1, 1998 through
April 30, 1998, Pacific Life paid a fee to Columbus Circle Investors based on
an annual percentage of the average daily net assets 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, in 1996, Pacific Life paid a fee to Columbus
Circle Investors based on an annual 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>
50
<PAGE>
Net fees paid or owed by Pacific Life to Alliance Capital from May 1, 1998
through December 31, 1998 were $ . Net fees paid or owed by Pacific Life
to Columbus Circle Investors from January 1, 1998 through April 30, 1998 were
$ , 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
80206-4928, Janus is the Portfolio Manager and provides investment advisory
services to the Growth LT Portfolio.
Effective January 1, 1997, for the services provided, Pacific Life pays
Janus a fee based on an annual 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>
For the services provided in 1996, Pacific Life paid Janus a fee based on an
annual 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 1998 were $ , in 1997 were $2,813,259 and in 1996 were
$1,789,724.
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.
Effective January 1, 1997, for the services provided, Pacific Life pays J.P.
Morgan Investment a fee based on an annual 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>
51
<PAGE>
For the services provided in 1996, Pacific Life paid J.P. Morgan Investment a
fee based on an annual 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 1998 were
$ for the Equity Income Portfolio and $ for the Multi-Strategy
Portfolio, in 1997 were $1,998,776 for the Equity Income Portfolio and
$920,564 for the Multi-Strategy Portfolio, and in 1996 were $1,135,557 for the
Equity Income Portfolio and $637,384 for the Multi-Strategy Portfolio.
Pursuant to a Portfolio Management Agreement between the Fund, the Adviser,
and Salomon Brothers Asset Management, Inc. ("SBAM"), Seven World Trade
Center, New York, New York 10048, which became effective , SBAM
is the Portfolio Manager and provides investment advisory services to the
Large-Cap Value Portfolio. For the services provided under this Agreement,
Pacific Life pays a fee to SBAM based on an annual percentage of the average
daily net assets according to the following schedule:
Large-Cap Value Portfolio
<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
.25% On next $250 million
.20% On excess
</TABLE>
SBAM, a wholly-owned subsidiary of Salomon Brothers Holding Company Inc.,
which is wholly-owned by Salomon Smith Barney Holdings Inc. which is, in turn,
wholly-owned by Citigroup, Inc. SBAM was incorporated in 1987 and, together
with SBAM affiliates in London, Frankfurt, Tokyo and Hong Kong, provides a
broad range of fixed-income and equity investment advisory services to various
individuals and institutional clients located throughout the world, and serves
as investment adviser to various investment companies. As of December 31,
1998, SBAM and such affiliates managed approximately $ billion of assets.
52
<PAGE>
Pursuant to a Portfolio Management Agreement between the Fund, the Adviser,
and Lazard Asset Management ("Lazard"), 30 Rockefeller Plaza, New York, New
York 10112, which became effective , Lazard is the Portfolio
Manager and provides investment advisory services to the Mid-Cap Value
Portfolio. For the services provided under this Agreement, Pacific Life pays a
fee to Lazard based on a percentage of an annual average daily net assets
according to the following schedule:
Mid-Cap Value Portfolio
<TABLE>
<CAPTION>
Rate (%) Break Point (assets)
-------- ---------------------
<S> <C>
.55% On first $200 million
.50% On next $200 million
.45% On next $200 million
.40% On next $200 million
.30% On next $200 million
.25% On excess
</TABLE>
Lazard, a division of Lazard Freres & Co. LLC ("Lazard Freres"). Lazard
Freres, a New York limited liability company, is a registered investment
adviser with the Securities and Exchange Commission (the "Commission") and is
a member of the New York, American and Midwest Stock Exchanges. Lazard Freres
provides its clients with a wide variety of investment banking, brokerage and
related services. Lazard and its affiliates provide investment management
services to client discretionary accounts with assets totaling approximately
$ billion as of December 31, 1998. Lazard's clients are both individuals and
institutions, some of whose accounts have investment policies similar to those
of the Portfolio.
Pursuant to a Portfolio Management Agreement between the Fund, the Adviser,
and Goldman Sachs Asset Management ("Goldman Sachs"), One New York Plaza, New
York, New York 10004, which became effective May 1, 1998, Goldman Sachs is the
Portfolio Manager and provides investment advisory services to the Equity and
Bond and Income Portfolios. For these services, Pacific Life pays a fee to
Goldman Sachs based on an annual percentage of the average daily net assets of
each Portfolio 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>
Goldman Sachs is a separate operating division of Goldman, Sachs & Co.
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 31, 1998, Goldman Sachs and its affiliates manage,
administer and distribute over $ billion for institutional and individual
investors worldwide, including fixed income assets in excess of $ billion
for which they acted as investment adviser.
53
<PAGE>
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 an annual 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 in 1996, Pacific Life paid a fee to Greenwich
Street Advisors based on an annual 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 Goldman Sachs from May 1, 1998
through December 31, 1998 were $ for the Equity Portfolio and
$ for the Bond and Income Portfolio. Net fees paid or owed to
Greenwich Street Advisors from January 1, 1998 through April 30, 1998 were
$ for the Equity Portfolio and $ for the Bond and Income
Portfolio, in 1997 were $1,088,097 for the Equity Portfolio and $368,846 for
the Bond and Income Portfolio, and in 1996 were $808,784 for the Equity
Portfolio and $274,358 for the Bond and Income Portfolio.
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 and Small-Cap Index Portfolios. For these services, Pacific Life pays a
fee to BTCo, at the beginning of each calendar quarter, a fee based on an
annual percentage of the combined daily net assets of the Equity Index and
Small-Cap Index Portfolios, according to the following schedule, subject to a
minimum annual fee of $100,000:
Equity Index and Small-Cap Index Portfolios
<TABLE>
<CAPTION>
Rate (%) Break Point (assets)
-------- ---------------------
<S> <C>
.08% On first $100 million
.04% On next $100 million
.02% On excess
</TABLE>
54
<PAGE>
For the services provided, for the years 1997 and 1996 with respect to the
Equity Index Portfolio, 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 at an annual rate 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>
As was the case with the current fee, this fee was subject to a minimum
annual fee of $100,000 for the calendar years 1996 and 1997.
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, 1998,
BTCo managed assets approximating $ 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 with respect to the Equity
Index Portfolio in 1998 were $ , in 1997 were $135,863, and in 1996 were
$100,000.
Pursuant to a Portfolio Management Agreement between the Fund, the Adviser,
and Morgan Stanley Asset Management Inc. ("MSAM"), a subsidiary of Morgan
Stanley, Dean Witter, Discover & Co., whose address is 1221 Avenue of the
Americas, New York, New York 10020, MSAM is the Portfolio Manager and provides
investment advisory services to the REIT and International Portfolios.
For the services provided under the Agreement for the International
Portfolio, which became effective June 1, 1997, Pacific Life pays a fee at an
annual rate of 0.35% based on the average daily net assets of the
International Portfolio.
From January 1, 1995 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
55
<PAGE>
advice with respect to the International Portfolio. For the services provided,
for the period January 1, 1997 through May 31, 1997 and in 1996, Pacific Life
paid a fee to Templeton based on an annual 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>
Net fees paid or owed by Pacific Life to MSAM for the International
Portfolio for 1998 were $ , and from June 1, 1997 through December 31, 1997
were $1,478,065. 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,
and in 1996 were $1,382,217.
For the services provided under the Agreement for the REIT Portfolio, which
became effective , Pacific Life pays a fee to MSAM based on an annual
percentage of the REIT Portfolio's average daily net assets according to the
following schedule:
REIT Portfolio
<TABLE>
<CAPTION>
Rate (%) Break Point (assets)
-------- -------------------------
<S> <C>
.60% On first $100 million
.45% On next $150 million
.40% On next $250 million
.35% On next $500 million
.30% On excess over $1 billion
</TABLE>
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, 1998 Morgan Stanley, together with its affiliated
institutional asset management companies, had approximately $ billion in
assets under management as an investment manager or as a fiduciary adviser.
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, Pacific Life pays a fee to Blairlogie
based on an annual percentage of the Emerging Market Portfolio's average daily
net assets 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>
56
<PAGE>
For the services provided in the year 1996, Pacific Life paid a fee to
Blairlogie based on an annual 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 of Alleghany Asset Management, Inc. and its
affiliates.
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, 1998, Blairlogie managed
approximately $ million of assets, including approximately $ million
of mutual fund assets.
Net fees paid or owed by Pacific Life to Blairlogie in 1998 were $ , in
1997 were $642,976, 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, Lazard Asset Management,
Salomon Brothers Asset Management, Inc. 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 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 , 1999, Pacific Life beneficially owned 0% of the outstanding
shares of the Portfolios of the Fund. Pacific Financial Asset Management
Corporation ("PFAMCo"), a wholly-owned subsidiary of Pacific Life,
beneficially owned % of the outstanding shares of the Large-Cap Value, Mid-
Cap Value, Small-Cap Index and REIT Portfolios, including monies paid in
connection with the initial capital advances made to the Fund, and 0%, of the
outstanding shares of the other fourteen Portfolios of the Fund. Pacific Life
and PFAMCO would exercise voting rights attributable to any shares of the Fund
owned by them in accordance with voting instructions received by Owners of the
Policies issued by Pacific Life. To this extent, as of April , 1999, Pacific
Life did not exercise control over any Portfolio.
57
<PAGE>
Purchases and Redemptions
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 or its affiliates. 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
shares of the Large-Cap Value, Mid-Cap Value, Small-Cap Index and REIT
Portfolios are not available for Pacific Select variable universal life
insurance policies. The shares of the Large-Cap Value, Mid-Cap Value, Small-
Cap Index, REIT, Growth, Aggressive Equity and Emerging Markets Portfolios are
not available for Pacific Corinthian variable annuity contracts.
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. 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.
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 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.
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
58
<PAGE>
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
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.
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.
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
59
<PAGE>
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 1998, 1997 and 1996, respectively, the following Portfolios
incurred brokerage commissions as follows: the High Yield Bond Portfolio--
$ , $2,500 and $1,700, the Managed Bond Portfolio--$ , $41,315 and
$33,718, the Government Securities Portfolio--$ , $21,349 and $16,819, the
Growth Portfolio--$ , $225,232 and $242,837, the Aggressive Equity
Portfolio--$ , $296,940 and $59,113, the Growth LT Portfolio--$ ,
$1,057,621 and $559,163, the Equity Income Portfolio--$ , $1,162,083 and
$746,412, the Multi-Strategy Portfolio--$ , $283,791 and $231,844, the
Equity Portfolio--$ , $706,250 and $286,596 of which $ ( %), $61,512
(8.71%) and $60,498 (21.11%) was paid to Smith Barney Inc. and $ ( %),
$23,700 (3.36%) and $11,100 (3.87%) was paid to Robinson Humphrey Co., Inc.,
affiliates of Greenwich Street Advisors, the Bond and Income Portfolio--$0, $0
and $0, the Equity Index Portfolio--$ , $157,621 and $137,890, the
International Portfolio--$ , $1,606,247 and $883,241 of which $ ( %)
and $39,617 (2.47%) was paid to Morgan Stanley & Co. in 1998 and 1997,
respectively, an affiliate of Morgan Stanley Asset Management Inc., and the
Emerging Markets Portfolio--$ , $712,505 and $302,384.
On December 31, 1998, the Portfolio held securities of and
valued at $ and $ , respectively; and the Portfolio held
securities of and valued at $ and $ , respectively,
each of which is a broker or dealer regularly used for brokerage transactions
by that Portfolio. On December 31, 1997, the Managed Bond Portfolio held
securities of Salomon Brothers Inc. and Goldman Sachs & Co. valued at
$10,146,828 and $8,000,664, respectively; the Growth LT Portfolio held
securities of Charles Schwab & Co. valued at $7,580,203; and the Equity Index
Portfolio held securities of Merrill Lynch & Co. valued at $2,786,212, each of
which is a broker or dealer regularly used for brokerage transactions by that
Portfolio.
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.
60
<PAGE>
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.
NET ASSET VALUE
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
usually at or about 4:00 p.m. Eastern time, on each day that the New York
Stock Exchange is open for trading. The New York Stock Exchange and other
exchanges usually close for trading at 4:00 p.m. New York City time. In the
event that the New York Stock Exchange or other exchanges close early, the
Fund normally will deem the closing price of each Portfolio's assets to be the
price of those assets at 4:00 p.m., New York City time. 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. 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. 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.,
Eastern 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 any Portfolio which invests in foreign securities
which are principally traded in a foreign market may not take place
contemporaneously with 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 (which
may be after 4:00 p.m. Eastern time) 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. In determining the fair value of securities, the Fund may consider
available information including information that becomes known after 4:00 p.m.
Eastern time, and the values that are determined will be deemed to be the
price at 4:00 p.m. Eastern time.
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
61
<PAGE>
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.
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.
62
<PAGE>
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, 1998, the current yield of the
Money Market Portfolio was % and the effective yield of the Portfolio was
%.
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 + 1) (To the power of 6) - 1]
---
cd
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, 1998, the yield of the remaining
Portfolios that had commenced operations on or before that date was as
follows: % for the High Yield Bond Portfolio, % for the Managed Bond
Portfolio, % for the Government Securities Portfolio, % for the Growth
Portfolio, % for the Aggressive Equity Portfolio, % for the Growth LT
Portfolio, % for the Equity Income Portfolio, % for the Multi-Strategy
Portfolio, % for the Equity Portfolio, % for the Bond and Income
Portfolio, % for the Equity Index Portfolio, % for the International
Portfolio, and % for the Emerging Markets Portfolio.
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.
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For the one year period ended December 31, 1998, the total return for each
Portfolio that had commenced operations on or before that date was as follows:
% for the Money Market Portfolio, % for the High Yield Bond Portfolio,
% for the Managed Bond Portfolio, % for the Government Securities
Portfolio, % for the Growth Portfolio, % for the Aggressive Equity
Portfolio, % for the Growth LT Portfolio, % for the Equity Income
Portfolio, % for the Multi-Strategy Portfolio, % for the Equity
Portfolio, % for the Bond and Income Portfolio, % for the Equity
Index Portfolio, % for the International Portfolio, and % for the
Emerging Markets Portfolio.
For the five year period ended December 31, 1998, the average annual total
return for each Portfolio that had commenced operations on or before that date
was as follows: % for the Money Market Portfolio, % for the High
Yield Bond Portfolio, % for the Managed Bond Portfolio, % for the
Government Securities Portfolio, % for the Growth Portfolio, % for
the Equity Income Portfolio, % for the Multi-Strategy Portfolio, %
for the Equity Portfolio, % for the Bond and Income Portfolio, % for
the Equity Index Portfolio and % 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, 1998, the average annual total
returns for the Equity Portfolio and Bond and Income Portfolio were % and
%, respectively.
Based upon the period from the commencement of Fund operations on January 4,
1988 until December 31, 1998, 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: % for the
Money Market Portfolio, % for the High Yield Bond Portfolio, % for
the Managed Bond Portfolio, % for the Government Securities Portfolio,
% for the Growth Portfolio, % for the Equity Income Portfolio,
% for the Multi-Strategy Portfolio, and % 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, 1998, the average
annual total return for the Growth LT Portfolio was %. 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 % and %,
respectively. Based upon the period from the commencement of the Equity Index
Portfolio operations on January 30, 1991 until December 31, 1998, the average
annual total return for the Equity Index Portfolio was %. Based upon the
period from the commencement of operations of the Aggressive Equity and
Emerging Markets Portfolios on April 1, 1996 until December 31, 1998, the
average annual total return for each of these Portfolios was % and %,
respectively.
The performance results for the Aggressive Equity, Equity Income, Multi-
Strategy, Equity, Bond and Income, and International Portfolios are based, in
part, on performance results when these Portfolios were advised by different
Portfolio Managers. Alliance Capital began serving as Portfolio Manager to the
Aggressive Equity Portfolio on May 1, 1998, J.P. Morgan Investment began
serving as Portfolio Manager to the Equity Income Portfolio and the Multi-
Strategy Portfolio on January 1, 1994, Morgan Stanley began serving as
Portfolio Manager to the International Portfolio on June 1, 1997 and Goldman
Sachs began serving as Portfolio Manager to the Equity and Bond and Income
Portfolios on May 1, 1998. 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.
Performance information for a Portfolio may be compared, in advertisements,
sales literature, and reports to shareholders to various indices 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.
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<PAGE>
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 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.
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
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<PAGE>
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.
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 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.
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<PAGE>
OTHER INFORMATION
Concentration Policy
Under each Portfolio's investment restrictions, except the REIT Portfolio's,
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.
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.
Expenses incurred in connection with the Fund's organization and
establishment of the Aggressive Equity Portfolio (1996), Growth LT Portfolio
(1994), and Emerging Markets Portfolio (1996) 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.
Expenses incurred in connection with the Fund's organization and
establishment of the Large-Cap Value, Mid-Cap Value, Small-Cap Index and REIT
Portfolios and the public offering of the shares of those Portfolios,
aggregated approximately $ , $ , $ , and $ , respectively.
These costs will be applied separately to each of the Portfolios during each
Portfolio's first year of operations.
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 and Massachusetts business trust law, 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, although special meetings may
be called for a specific Portfolio, or for the Fund as a whole, for purposes
such as electing or removing Trustees, changing fundamental
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<PAGE>
policies, or approving a new or amended advisory contract or portfolio
management agreement. 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 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. 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. 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. The address of IFTC is 801 Pennsylvania, Kansas City, MO 64105-1716.
Pursuant to a sub-custody agreement between IFTC and 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 270 Park
Avenue, 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.
Pacific Life provides dividend disbursing and transfer agency services to
the Fund.
Financial Statements
The financial statements of the Fund as of December 31, 1998, 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, 1998.
The financial statements have been audited by 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
serves as the independent auditors for the Fund. The address of
is .
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.
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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.
The ratings from AA to CCC may be modified by the addition of a plus (+) or
minus (-) sign to show relative standing within the rating categories.
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.
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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.
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.
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PACIFIC SELECT FUND
Part C: OTHER INFORMATION
Item 23. Exhibits
--------
(a)(1) Agreement and Declaration of Trust/4/
(a)(2) Establishment and Designation of Shares of
Beneficial Interest in the Equity Index Series/1/
(a)(3) Amendment to Agreement and Declaration of Trust/8/
(b) By-Laws of Registrant/1/
(c) Instruments Defining Rights of Holders of
Securities/1/
(d)(1) Investment Advisory Agreement/1/
(d)(2) Portfolio Management Agreement - Capital Guardian
Trust Company/1/
(d)(3) Portfolio Management Agreement - Bankers Trust
Company/1/
(d)(4) Portfolio Management Agreement - J.P. Morgan
Investment Management Inc./1/
(d)(5) Portfolio Management Agreement - Janus Capital
Corporation/1/
(d)(6) Portfolio Management Agreement - Morgan Stanley
Asset Management Inc./6/
(d)(7) Portfolio Management Agreement - Alliance Capital
Management L.P./7/
(d)(8) Portfolio Management Agreement - Goldman Sachs
Asset Management/7/
II-1
<PAGE>
(d)(9) Portfolio Management Agreement - Pacific
Investment Management Company/1/
(d)(10) Portfolio Management Agreement - Blairlogie
Capital Management/1/
(d)(11) Addendum to Portfolio Management Agreement -
Janus Capital Corporation/5/
(d)(12) Addendum to Portfolio Management Agreement -
J.P. Morgan Investment Management Inc./5/
(d)(13) Addendum to Portfolio Management Agreement -
Pacific Investment Management Company/5/
(d)(14) Addendum to Portfolio Management Agreement -
Blairlogie Capital Management/5/
(d)(15) Addendum to Advisory Agreement/8/
(d)(16) Portfolio Management Agreement - Salomon Brothers
Asset Management Inc./8/
(d)(17) Portfolio Management Agreement - Lazard Asset
Management/8/
(d)(18) Addendum to Portfolio Management Agreement -
Morgan Stanley Asset Management Inc./8/
(d)(19) Addendum to Portfolio Management Agreement -
Bankers Trust Company/8/
(e)(1) Distribution Agreement/1/
(e)(2) Addendum to Distribution Agreement/8/
(f) Not Applicable
(g)(1) Custodian Agreement/1/
(g)(2) Custodian Agreement Fee Schedule/5/
(g)(3) Addendum to Custodian Agreement/8/
(h)(1) Agency Agreement/1/
(h)(2) Participation Agreement/1/
(h)(3) Agreement for Support Services/2/
(h)(4) Addendum to Agency Agreement/8/
(h)(5) Addendum to Participation Agreement/8/
(i) Opinion and Consent of Counsel/1/
(j) Not Applicable
(k) Not Applicable
(l) Not Applicable
(m) Not Applicable
(n) Financial Data Schedules*
(o) Not Applicable
- ------------
* To be filed by amendment
/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.
/7/ Included in Registrant's Form Type N1A/A, Accession No. 0001017062-98-
000424 filed on March 2, 1998 and incorporated by reference herein.
/8/ Included in Registrant's Form Type N1A/A, Accession No. 0001017062-98-
001954 filed on September 4, 1998 and incorporated by reference herein.
Item 24. Persons Controlled by or Under Common Control with the Fund
-----------------------------------------------------------
Pacific Life Insurance Company ("Pacific Life"), 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 25. 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 26. Business and Other Connections of the 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; Mellon West Coast Advisory
Board; Northwestern Restaurants, Inc.; Dole
Food Company; Mullin Consulting Inc.; Broco,
Inc.; Mrs. Field's Original Cookies, Inc.;
and Rainier Bells, Inc.; Former Director of
First Business Bank
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; and BankAmerica
Corporation; Former Director of Bank of
America NT&SA
</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; Chairman
and former Editor-in-Chief of La Opinion;
Director of: The Walt Disney Company and
Southern California Gas Company; Sempra
Energy and San Diego Gas and Electric Company;
Former Director of Pacific Enterprises
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, Director
and former Chief Executive Officer of Avery
Dennison Corporation; Director of: Nationwide
Health Properties, Inc. and Edison International;
Advisory Board Member of Korn/Ferry
International and Mellon Bank; Trustee of
Occidental College and Johns Hopkins
University; 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, and former
Director of 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 LLP; 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; Irvine Apartment
Communities; and former Director of the Tejon Ranch
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; SBC Communications; Age Wave;
and Chronicle Publishing; 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;
Senior Vice President and General Counsel of
PM Group Life Insurance Company, July 1998
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 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 Adviser
Management
Company
("PIMCO")
PIMCO Michael R. Asay Vice President
PIMCO George C. Allan Senior Vice President
PIMCO Tamara J. Arnold, CFA Senior Vice President
PIMCO Brian P. Baker Vice President
PIMCO Leslie A. Barbi Senior Vice President
PIMCO Stephen B. Beaumont Vice President
PIMCO William R. Benz, CFA Managing Director
PIMCO Gregory A. Bishop Vice President
PIMCO Andrew Brick Senior Vice President
PIMCO John B. Brynjolfsson Vice President
PIMCO Robert W. Burns Executive Vice President
PIMCO Carl J. Cohen Vice President
PIMCO Jerry L. Coleman Vice President
PIMCO Cyrille Conseil Vice President
PIMCO Douglas Cummings Vice President
PIMCO Wendy W. Cupps Vice President
PIMCO Chris P. Dialynas Managing Director
PIMCO David J. Dorff Vice President
PIMCO Michael G. Dow Vice President
PIMCO Anita Dunn Vice President
</TABLE>
II-7
<PAGE>
<TABLE>
<CAPTION>
Name of Adviser Name of Individual Business and Other Connections
- ---------------------- ----------------------- --------------------------------------------
<S> <C> <C>
PIMCO A. Benjamin Ehlert, CFA, Executive Vice President
CIC
PIMCO Robert A. Ettl Senior Vice President
PIMCO Anthony K. Faillace Vice President
PIMCO Teri Frisch Vice President
PIMCO William H. Gross, CFA Managing Director and Director
PIMCO John L. Hague Managing Director
PIMCO Gordon C. Hally, CIC Executive Vice President
PIMCO Pasi M. Hamalainen Executive Vice President
PIMCO John P. Hardaway Vice President
PIMCO Brent R. Harris, CFA Managing Director
PIMCO Joseph Hattersohl Vice President
PIMCO Raymond C. Hayes Vice President
PIMCO Robert G. Herin Vice President
PIMCO David C. Hinman Vice President
PIMCO Lisa Hocson Vice President
PIMCO Douglas M. Hodge, CFA Executive Vice President
PIMCO Brent L. Holden, CFA Executive Vice President
PIMCO Dwight F. Holloway, Jr., Vice President
CFA, CIC
PIMCO Jane T. Howe, CFA Vice President
PIMCO Mark T. Hudoff Vice President
PIMCO Margaret E. Isberg Executive Vice President
PIMCO Thomas J. Kelleher Vice President
PIMCO James M. Keller Vice President
PIMCO Raymond G. Kennedy, CFA Senior Vice President
PIMCO Mark R. Kiesel Vice President
PIMCO Sharon K. Kilmer Executive Vice President
PIMCO Steven Kirkbaumer Vice President
PIMCO Vice President
PIMCO John S. Loftus, CFA Executive Vice President
PIMCO David Lown Vice President
PIMCO Joseph McDevitt Executive Vice President
PIMCO Andre J. Mallegol Vice President
PIMCO Michael E. Martini Vice President
PIMCO Scott A. Mather Vice President
PIMCO Benjamin L. Mayer Vice President
PIMCO Jonathan D. Moll Vice President
PIMCO Dean S. Meiling, CFA Managing Director
PIMCO James F. Muzzy, CFA Managing Director
PIMCO Doris Nakamura Vice President
PIMCO Douglas J. Ongaro Vice President
PIMCO Thomas J. Otterbein, CFA Senior Vice President
PIMCO Victoria M. Paradis Vice President
PIMCO Elizabeth M. Philipp Vice President
PIMCO David J. Pittman Vice President
PIMCO William F. Podlich III Managing Director
PIMCO William C. Powers Managing Director
PIMCO Managing Director
PIMCO Edward P. Rennie, CFA, CFP Senior Vice President
PIMCO Terry Randall Vice President
PIMCO Scott L. Roney, CFA Senior Vice President
PIMCO Michael J. Rosborough Senior Vice President
PIMCO Seth R. Ruthen Vice President
PIMCO Jeffrey M. Sargent Vice President
PIMCO Ernest L. Schmider Executive Vice President, Chief
Administrative and Legal Officer
PIMCO Leland T. Scholey, CFA Senior Vice President
PIMCO Richard Selby Senior Vice President
PIMCO Denise C. Seliga Vice President
PIMCO Rita J. Seymour Vice President
PIMCO Christopher Sullivan, CFA Vice President
PIMCO Cheryl L. Sylwester Vice President
PIMCO Lee Thomas Managing Director
PIMCO William S. Thompson, Chief Executive Officer and Managing
Jr. Director
PIMCO Benjamin L. Trosky, CFA Managing Director
PIMCO Richard E. Tyson Vice President
PIMCO Peter A. Van de Zilver Vice President
PIMCO Koichi Watanabe Vice President
</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 Paul C. Westhead Vice President
PIMCO Kristen M. Wilsey, CFA Senior Vice President
PIMCO George H. Wood, CFA Senior Vice President
PIMCO Michael A. Yetter Vice President
PIMCO David Young Vice President
Capital Guardian Trust Investment Adviser
Company
Capital Guardian Trust Donnalisa Barnum Senior Vice President, Capital
Company Guardian Trust Company; Vice
President, Capital International
Limited
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; Treasurer,
Capital Guardian Research Company
Capital Guardian Trust Elizabeth A. Burns Senior Vice President, Capital Guardian
Company Trust Company
Capital Guardian Trust Larry Paul Director of Capital Guardian Trust
Company Clemmensen Company, American Funds Distributors,
Inc.; Chairman of the Board, American
Funds Service Company; Director and
President, The Capital Group Companies,
Inc.; Senior Vice President and Director,
Capital Research and Management Company;
President and Director, Capital Management
Services, Inc.; Treasurer, Capital
Strategy Research, Inc.; Senior Vice
President, Capital Income Builder, Inc.
and Capital World Growth & Income Fund, Inc.
Capital Guardian Trust Roberta A. Conroy Senior Vice President, Director and Counsel,
Company Capital Guardian Trust Company; Senior Vice
President and Secretary, Capital
International, Inc. and Emerging Markets
Growth Fund, Inc.; Assistant General Counsel,
The Capital Group Companies, Inc.; Secretary,
Capital Management Services, Inc.
Capital Guardian Trust John B. Emerson Senior Vice President, Capital Guardian
Company Trust Company; Deputy Assistant to the
President for Intergovernmental Affairs,
Deputy Director of Presidential Personnel,
The White House
Capital Guardian Trust Michael R. Ericksen Senior Vice President, Capital Guardian
Company Trust Company; Senior Vice President,
Capital International, Limited
</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 and Director of The Capital Group
Company Companies, Inc. and Capital Guardian Trust
Company; Vice Chairman and Director, Capital
International Inc., Capital International
K.K., Capital International Limited, and
Emerging Markets Growth Fund, Inc.; President
and Director, Capital Group International,
Inc., and Capital International Limited
(Bermuda); Presidente du Conseil, Capital
International S.A.; Director, Capital Group
Research, Inc., Capital Research
International, New Perspective Fund, Inc. and
EuroPacific Growth Fund, Inc.
Capital Guardian Trust William Flumenbaum Senior Vice President, Capital Guardian Trust
Company Company, Personal Investment Management
Division; Vice President, Capital Guardian
Trust Company, a Nevada Corporation;
Director, Principal Gifts-UCLA Development;
Executive Director, UCLA Jonsson Cancer Center
Foundation; Deputy Director UCLA Health
Science Development
Capital Guardian Trust Richard N. Havas Senior Vice President, Capital Guardian
Company Trust Company, Capital International Limited,
Capital Research International, and Capital
Guardian Canada, Inc.
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.
Capital Guardian Trust Robert G. Kirby Chairman Emeritus, Capital Guardian Trust
Company; Senior Partner, The Capital Group
Partners L.P.
Capital Guardian Trust Nancy J. Kyle Senior Vice President and Director,
Company Capital Guardian Trust Company; President,
Capital Guardian Canada, Inc. and Vice
President, Emerging Markets Growth Fund, Inc.
Capital Guardian Trust Karin L. Larson Director, Capital Guardian Trust
Company Company and The Capital Group Companies, Inc.;
President, Director, and Director of Research,
Capital Guardian Research Company;
Chairperson, President and Director, Capital
Group Research, Inc.; President, Director and
Director of International Research, Capital
Research International
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; Director, Capital
Guardian Trust Company of Nevada
Capital Guardian Trust Mary M. O'Hern Senior Vice President, Capital
Company Guardian Trust Company and Capital
International Limited; Vice President,
Capital International, Inc.
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 and Director, Capital Guardian
Company Trust Company; Chairman and Director,
Capital Guardian Canada, Inc., Capital
Research International and Capital Guardian
Research Company; Senior Vice President,
Capital International Limited; Directeur,
Capital International S.A.; Director,
Capital Group International, Inc., The
Capital Group Companies, Inc. and Capital
International Fund, S.A.
Capital Guardian Trust Theodore R. Samuels Senior Vice President and Director,
Company Capital Guardian Trust Company;
Director, Capital Guardian Research
Company
Capital Guardian Trust Lionel A. Sauvage Senior Vice President, Capital Guardian
Company Trust Company; Director, Capital Guardian
Research Company; Vice President,
Capital International Research, Inc.
Capital Guardian Trust John H. Seiter Executive Vice President of Client Relations
Company and Marketing and Director, Capital Guardian
Trust Company; Senior Vice President, Capital
Group International, Inc.; Vice President,
The Capital Group Companies, 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 Bente L. Strong Senior Vice President, Capital Guardian
Company Trust Company Personal Investment Management
Division; Publisher, Capital Publishing's
The American Benefactor Magazine
Capital Guardian Trust Philip A. Swan Senior Vice President, Capital Guardian
Company Trust Company
Capital Guardian Trust Shaw B. Wagener Director, Capital Guardian Trust Company,
Company Capital International Asia Pacific
Management Company, S.A., Capital
International Management Company, Capital
International Emerging Countries Fund and
Capital International Latin American Fund;
President and Director, Capital
International, Inc; Senior Vice President,
Capital Group International, Inc. and
Emerging Markets Growth Fund, Inc.
Capital Guardian Trust Eugene M. Waldron Senior Vice President, Capital Guardian Trust
Company Company; Vice President, Loomis, Sayles &
Company
Capital Guardian Trust N. Dexter Williams Senior Vice President, Capital Guardian
Company Trust Company Personal Investment
Management Division; Senior Vice President,
American Funds Distributors, Inc.
J.P. Morgan Investment Adviser
Investment
Management Inc.
J.P. Morgan Keith M. Schappert President, 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 Jeff M. Garrity Director and Managing Director,
Investment J.P. Morgan Investment Management
Management Inc. Inc.; Managing Director, Morgan
Guaranty Trust Company of New York
J.P. Morgan Isabel H. Sloane 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 Gilbert Van Hassel 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 Hendrik Van Riel Director and Managing Director,
Investment J.P. Morgan Investment Management Inc.;
Management Inc. Managing Director, Morgan Guaranty
Trust Company of New York
J.P. Morgan Kenneth W. Anderson Director and Managing Director, J.P. Morgan
Investment Investment Management Inc.; Managing
Management Inc. Director, Morgan Guaranty Trust Company
of New York
Michael E. Patterson Director; Vice Chairman, Director, J.P.
Morgan & Co. Incorporated and Morgan
Guaranty Trust Company of New York
John W. Schmidlin Director; 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 John W. Schmidlin Director, J.P. Morgan Investment Management
Investment Inc.; Managing Director, Morgan Guaranty
Management Inc. 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 Anthony Della Pietra Secretary and Vice President, J.P. Morgan
Investment Investment Management Inc.; Vice President,
Management Inc. Morgan Guaranty Trust Company of New York
Janus Capital Investment Adviser
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 Peter Dominic Managing Director and Member
Management Inc. Caldecott of Executive Committee
Morgan Stanley Asset Frank P.L. Minard Managing Director
Management Inc.
Morgan Stanley Asset Dennis G. Sherva Director and Managing Director
Management Inc.
Morgan Stanley Asset Marna C. Whittington Chief Operating Officer,
Management Inc. Managing Director, and Member
of Executive Committee
Morgan Stanley Asset Donald P. Ryan Principal and Compliance Officer
Management Inc.
Morgan Stanley Asset Harold J. Schaaff, Jr. Principal, General Counsel
Management Inc. and Secretary
Morgan Stanley Asset Alexander C. Frank Treasurer
Management Inc.
Morgan Stanley Asset Richard B. Worley President, Director, Portfolio
Management Inc. Manager and Member of Executive
Committee
Morgan Stanley Asset Thomas L. Bennett Member of Executive Committee
Management Inc. and Portfolio Manager
Morgan Stanley Asset Frank P.L. Minard Managing Director and Member
Management Inc. of Executive Committee
Morgan Stanley Asset Alan E. Goldberg Member of Executive Committee
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 Corporation
Bankers Trust William R. Howell Director of Bankers Trust Corporation
Bankers Trust Lee A. Ault III Director of Bankers Trust Corporation
Bankers Trust Vernon E. Jordan, Jr. Director of Bankers Trust Corporation
Bankers Trust Hamish Maxwell Director of Bankers Trust Corporation
Bankers Trust N.J. Nicholas, Jr. Director of Bankers Trust Corporation
Bankers Trust Russell E. Palmer Director of Bankers Trust Corporation
Bankers Trust Frank N. Newman Chairman of the Board and Chief Executive
Officer and President of Bankers Trust
Corporation
Bankers Trust Patricia Carry Stewart Director of Bankers Trust Corporation
Bankers Trust Philip A. Griffiths Director of Bankers Trust Corporation
Bankers Trust Donald L. Staheli Director of Bankers Trust Corporation
Bankers Trust Paul A. Volcker Director of Bankers Trust Corporation
Bankers Trust Neil R. Austrian Director of Bankers Trust Corporation
Bankers Trust G. Richard Thoman Director of Bankers Trust Corporation
Bankers Trust Richard H. Daniel Vice Chairman and Chief Financial
Officer of Bankers Trust Corporation
Bankers Trust Eugene A. Ludwig Vice Chairman of Bankers Trust Corporation
Bankers Trust Mark Bieler Executive Vice President of Bankers Trust
Corporation
Bankers Trust Mary Cirillo Executive Vice President of Bankers Trust
Corporation
Bankers Trust Robert A. Ferguson Executive Vice President of Bankers Trust
Corporation
Bankers Trust Duncan P. Hennes Executive Vice President and Treasurer of
Bankers Trust Corporation
Bankers Trust Joseph A. Manganello, Jr. Executive Vice President and Chief Credit
Officer of Bankers Trust Corporation
Bankers Trust I. David Marshall Executive Vice President and Chief
Information Officer of Bankers Trust
Corporation
Bankers Trust Melvin A. Yellin Executive Vice President and General
Counsel of Bankers Trust Corporation
Bankers Trust Yves de Balmann Vice Chairman of Bankers Trust
Corporation
Bankers Trust Mayo A. Shattuck, III Vice Chairman of Bankers Trust
Corporation
Bankers Trust Rodney A. McLauchlan Executive Vice President of Bankers
Trust 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 Corporation
Goldman Sachs Asset Investment Adviser
Management
Goldman Sachs Asset Jon S. Corzine Chief Executive Officer, Goldman, Sachs & Co.
Management
Goldman Sachs Asset Robert J. Hurst Managing Director, Goldman, Sachs & Co.
Management
Goldman Sachs Asset Henry M. Paulson, Jr. Chief Operating Officer, Goldman, Sachs & Co.
Management
Goldman Sachs Asset John A. Thain Chief Financial Officer, Goldman, Sachs & Co.
Management
Goldman Sachs Asset John L. Thornton Managing Director, Goldman, Sachs & Co.
Management
Goldman Sachs Asset Roy J. Zuckerberg Managing Director, Goldman, Sachs & Co.
Management
</TABLE>
II-16
<PAGE>
<TABLE>
<CAPTION>
Name of Adviser Name of Individual Business and Other Connections
- ------------------------- ----------------------- --------------------------------------------
<S> <C> <C>
Blairlogie Capital Investment Adviser
Management
("Blairlogie")
Blairlogie Gavin Dobson Chief Executive Officer and Limited Partner,
Blairlogie Capital Management
Blairlogie James Smith Chief Investment Officer and Limited Partner,
Blairlogie Capital Management
</TABLE>
II-17
<PAGE>
<TABLE>
<CAPTION>
Adviser and Governing
Board of Directors Name of Individual Business and Other Connections
- -------------------------------- ------------------------------- ---------------------------------------------------------
<S> <C> <C>
Alliance Capital Management L.P. Investment Adviser
Alliance Capital Management L.P. Dave H. Williams Director; Chairman of the Board, Alliance Capital
Management Corporation; Director of The Equitable
Companies Incorporated; Director of The Equitable Life
Assurance Society of the United States
Alliance Capital Management L.P. Michael Hegarty Director; Vice Chairman, Chief Operating Officer and
Director, The Equitable Companies Incorporated;
President, Chief Operating Officer and Director, The
Equitable Life Assurance Society of the U.S.
Alliance Capital Management L.P. Benjamin D. Holloway Director and Financial Consultant
Alliance Capital Management L.P. Denis Duverne Director; Senior Vice President - International Life of
AXA-UAP
Alliance Capital Management L.P. Herve Hatt Director; Executive Vice President, 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; Chief
Executive Officer, AXA Investment Managers S.A.
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; John M. Olin Professor in National Security
Affairs - The United States Naval Academy
Alliance Capital Management L.P. Donald H. Brydon Director; Chairman and Chief Executive Officer, AXA
Investment Managers S.A.
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; Senior Executive
Vice President, AXA-UAP
Alliance Capital Management L.P. Stanley B. Tulin Director; Executive Vice President and Chief Financial
Officer, The Equitable Companies Incorporated; Vice
Chairman and Chief Financial Officer, The Equitable Life
Assurance Society of the U.S.
Alliance Capital Management L.P. John D. Carifa Director, President and Chief Operating Officer
Alliance Capital Management L.P. Bruce W. Calvert Director and Chief Executive 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 Senior Vice President, Counsel, Compliance Officer and
Assistant Secretary
</TABLE>
Salomon Brothers Asset Management Inc. ("SABAM")
SABAM, an indirect, wholly-owned subsidiary of Citigroup, is an investment
adviser registered under the Investment Advisers Act of 1940 (the "Advisers
Act") and renders investment advice to a wide variety of individual,
institutional and investment advisory clients.
The list required by this Item 26 of officers and directors of SABAM, together
with information as to any other business, profession, vocation or employment of
a substantial nature engaged in by such officers and directors during the past
two years, is hereby incorporated by reference to Schedules A and D of Form ADV
filed by SABAM pursuant to the Advisers Act (SEC File No. 801-32046).
<TABLE>
<S> <C> <C>
Lazard Asset Management Investment Adviser
("Lazard")
Lazard Eileen D. Alexanderson General Member
Lazard William Araskog General Member
Lazard F. Harlan Batrus General Member; Director of Mutual of America Capital Management Corp.;
Director of Ryan Labs, Inc.
Lazard Gerardo Braggiotti General Member; Managing Director of Lazard SpA; Managing Director of Lazard
Brothers & Co. Ltd.; Director of Centrale of Mediobanca SpA
Lazard Patrick J. Callahan, Jr. General Member; Director of Berry Metal Co.; Director of Michigan Wheel Corp.;
Director of Rotation Dynamics Corp.; Director of Somerset Technologies, Inc.
Lazard Michel David-Weill General Member; Director of The Dannon Company, Inc.; President and Chairman
of the Board of Eurafrance; Director of Exor Group; Director of Euralux;
Director of Group Danone; Director of ITT Industries, Inc.; Director of La
France S.A.; Director of La France-Iard; Director of La France-Vie; Director
of Lazard Brothers & Co., Limited; Director of Pearson plc; Director of
Publicis S.A.; Director of S.A. de la Rue Imperiale de Lyon
Lazard John V. Doyle General Member
Lazard Thomas F. Dunn General Member
Lazard Norman Eig General Member; Vice Chairman of Lazard Freres & Co. LLC; Chairman and
Director of The Lazard Funds, Inc.; Chairman and Director of Lazard Retirement
Series, Inc.; Director of Lazard Investment Funds Limited; Director and Chief
Investment Officer and Treasurer of Lazard Pension Management, Inc.; Director
of Lazard Asset Management Holdings Limited; Director of Lazard Asset
Management Pacific Co.; Director of Lazard Asset Management Limited
Lazard Richard P. Emerson General Member
Lazard Peter R. Ezersky General Member
Lazard Eli H. Fink General Member; Partner & Vice Chairman of Deloitte & Touche LLP; Member of
the Supervisory Board of Lazard Asset Management (Deutschland) GmbH; Managing
Director of Lazard Asset Management (Deutschland) Gesallschajt
Lazard Jonathan F. Foster General Member
Lazard Robert P. Freeman General Member; Vice President of Lazard Freres Real Estate Investors, LLC
Lazard Albert H. Garner General Member
Lazard James S. Gold General Member; Director of Smart & Final Inc.
Lazard Jeffrey A. Golman General Member
Lazard Steven J. Golub General Member; Director of Mineral Technologies Inc.
Lazard Herbert W. Gullquist General Member; Vice Chairman of Lazard Freres & Co. LLC; President and
Director of The Lazard Funds, Inc.; President and Director of Lazard
Retirement Series, Inc.; Director of Lazard Far East Investors Limited;
President and Director of Lazard Pension Management, Inc.; Director of Lazard
Asset Management Holdings Limited; Director and President of Lazard Asset
Management (Canada), Inc.; Director and Chairman of Lazard Asset Management
Pacific Co.; Director of Lazard Asset Management Limited; Director of Lazard
London International Investment Mgmt Limited; Member of the Supervisory Board
of Lazard Asset Management (Deutschland) GmbH; Managing Director of Lazard
Asset Management (Deutschland) Gesallschajt)
Lazard Thomas R. Haack General Member
Lazard Ira O. Handler General Member
Lazard Yasushi Hatakeyama General Member; Director of Lazard Freres & Co. LLC (prior to 12/98)
Lazard Melvin L. Heineman General Member; Director of Lazard Freres & Co., Ltd; Director of Lazard
Asset Management Pacific Co.
Lazard Scott D. Hoffman General Member; Director of Lazard Freres & Co. LLC (prior to 12/98)
Lazard Robert E. Hougie General Member
Lazard Kenneth M. Jacobs General Member
Lazard James L. Kempner General Member
Lazard Larry A. Kohn General Member
Lazard Lee O. Kraus General Member
Lazard Sandra A. Lamb General Member
Lazard Michael S. Liss General Member
Lazard William R. Loomis, Jr. General Member; Director of Englehard Hanovia Inc.; Director of Minorco S.A.;
Director of Minorco (U.S.A.) Inc.; Director of Terra Industries, Inc.
Lazard J. Robert Lovejoy General Member
Lazard Matthew J. Luetig General Member
Lazard Thomas E. Lynch General Member; Managing Director of The Blackstone Group
Lazard Mark T. McMaster General Member
Lazard Anthony E. Meyer General Member; Managing Director of Lazard Freres Real Estate Investors, LLC
Lazard Damon Mezzacappa General Member; Director of Corporate Property Investors
Lazard Richard W. Moore Jr. General Member; Director of Lazard Freres & Co. LLC (prior to 12/98)
Lazard Robert P. Morgenthau General Member; Director and Vice President of Lazard Asset Management
(Canada) Inc.; Director of Lazard Investment Funds limited; Director of Lazard
Fund Manager (CI) Limited; Director of Lazard Global Bond Fund plc; Director
of Lazard Global Equity Fund plc; Director of Lazard Global Liquidity Fund
plc; Director of Lazard Strategic Yield Fund plc; Director of Global Funds
Management Plc; Director of Lazard Asset Management (CI) Holdings Ltd;
Director of Lazard Asset Management (CI) Ltd.; Director of Lazard Investment
Funds (CI) Ltd.; Director of Lazard Funds Administration Services (CI) Ltd.
Lazard Steven J. Niemczyk General Member
Lazard Hamish W. M. Norton General Member
Lazard James A. Paduano General Member; Director of Donovan Data Systems, Inc.; Director of Secure
Products Inc.
Lazard Adam P. Parten General Member
Lazard Louis Perlmutter General Member
Lazard Russell E. Planitzer General Member
Lazard Steven L. Rattner General Member; Director of Falcon Holding Group L.P.
Lazard John R. Reinsberg General Member; Executive Vice President and Director of Lazard Asset
Management Pacific Co.; Member of the Supervisory Board of Lazard Asset
Management (Deutschland) GmbH
Lazard Louis G. Rice General Member
Lazard Luis E. Rinaldini General Member
Lazard Bruno M. Roger General Member; Director of CAP Gemini Sogeti; Director of Compagnie De
Credit; Director of Compagnie De Saint-Gobain; Director of Eurafrance;
Director of Financiere Et Industrielle Gaz Et Eaux; Director of Fonds
Partenaires Gestion (F.P.G.); Director of Lazard & Co. GmbH; Director of LVMH-
Moet Hennessy Louis Vuitton; Director of Marine-Wendel; Director of Pinault-
Printemps-Redoute; Director of Sidel; Director of Societe Centrale Puour
L'Industrie; Director of Societe Financiere Generale Immobiliere (S.F.G.I.);
Director of Sofina (Belgique); Director of Sovaclux S.A.; Director of Thomson
S.A.; Director of Thomson CSF; Director of U.A.P.
Lazard Michael S. Rome General Member
Lazard Steven H. Sands General Member
Lazard Gary S. Shedlin General Member
Lazard Arthur P. Solomon General Member
Lazard David A. Tanner General Member; Managing Director of E.M. Warburg, Pincus & Co. LLC; Director
of Golden Books Family Entertainment Inc.; Director of Renaissance Re Holdins
Ltd.; Director of Poserdon Resources Inc.; Director of Charter Financial,
Inc.; Director of TAC Bancshares
Lazard David L. Tashjian General Member
Lazard J. Mikesell Thomas General Member
Lazard Michael P. Triguboff General Member; Managing Director of Lazard Asset Management Pacific Co.
Lazard Donald A. Wagner General Member
Lazard Ali E. Wambold General Member; Director of The Albert Fisher Group plc; Director of Lazard
Freres & Co., Ltd.; Director of Tomkins PLC; Member of Investment Advisory
Board of Corporate Advisors L.P.
Lazard Michael A. Weinstock General Member
Lazard Antonio F. Weiss General Member, Director of Lazard Freres & Co. LLC (prior to 12/98)
Lazard Alexander E. Zagorneos General Member; Director of The Egypt Trust; Director of Lazard Emerging World
Fund; Director of Flemings Continental European Investment Trust plc; Director
of Gartmore Emerging Pacific Investment Trust plc; Director of Greek Progress
Fund; Director of Jupiter International Green Investment Trust plc; Director
of New Zealand Investment Trust plc; Director of Taiwan Opportunities Fund
Ltd; Director of The World Trust Fund; Director of Lazard Select Fund;
Director of Ermitage Selz Fund; Director of Lazard Asset Management Egypt;
Director of Latin American Investment Trust, plc; Director of Taiwan American
Fund Limited; Director of Latin American Investment Trust plc; Director of
Taiwan American Fund Limited
</TABLE>
Item 27. 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/9/ 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
Philip M. Gainsborough Director None
John K. Hinfey Director None
</TABLE>
II-18
<PAGE>
<TABLE>
<CAPTION>
Name and Principal/9/ 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 28. 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 29. Management Services
-------------------
Not applicable
Item 30. Undertakings
------------
The registrant hereby undertakes:
Not applicable
- -----------------
/9/ 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. 23 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 12th day of February, 1999.
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. 23 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, Trustee and President , 1999
- ------------------------------------ (Chief Executive Officer) -----------
Thomas C. Sutton*
Vice President and Treasurer , 1999
- ------------------------------------ (Assistant Vice President) -----------
Brian D. Klemens*
Trustee , 1999
- ------------------------------------ (President) -----------
Glenn S. Schafer*
Trustee , 1999
- ------------------------------------ ----------
Richard L. Nelson*
Trustee , 1999
- ------------------------------------ ----------
Lyman W. Porter*
Trustee , 1999
- ------------------------------------ ----------
Alan Richards*
/s/ Lucie H. Moore Trustee February 12, 1999
- ------------------------------------
Lucie H. Moore
* By: /s/ DIANE N. LEDGER February 12, 1999
- ------------------------------------
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, 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 and Power of Attorney for Mr. Schafer is
contained in Registrant's Form Type N1A/A, Accession No. 0001017062-98-000424
filed on March 2, 1998.)
II-21
