<PAGE> 1
As filed with the Securities and Exchange Commission on April 17, 2000
Securities Act File No. 33-14227
Investment Company Act File No. 811-5157
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
PRE-EFFECTIVE AMENDMENT NO. [ ]
POST-EFFECTIVE AMENDMENT NO. 18 [X]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 17 [X]
(Check appropriate box or boxes)
ANCHOR PATHWAY FUND
(Exact Name of Registrant as Specified in Charter)
1 SunAmerica Center
Los Angeles, CA 90067-6022
(Address of Principal Executive Office)(Zip Code)
Registrant's telephone number, including area code: (310) 772-6000
Robert M. Zakem
Senior Vice President and General Counsel
SunAmerica Asset Management Corp.
The SunAmerica Center
733 Third Avenue - 3rd Floor
New York, NY 10017-3204
(Name and Address for Agent for Service)
Copy to:
Susan L. Harris, Esq.
Senior Vice President and General Counsel
SunAmerica Inc.
1 SunAmerica Center
Los Angeles, CA 90067-6022
Margery K. Neale, Esq.
Swidler Berlin Shereff Friedman, LLP
919 Third Avenue
New York, NY 10022
Approximate Date of Proposed Public Offering: As soon as practicable
after this Registration Statement becomes effective.
It is proposed that this filing will become effective (check
appropriate box)
[ ] immediately upon filing pursuant to paragraph (b)
[X] on April 20, 2000 pursuant to paragraph (b)
[ ] 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 June 25, 1999 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.
<PAGE> 2
----------------------------------------------
PROSPECTUS
APRIL 20, 2000
----------------------------------------------
----------------------------------------------
[ANCHOR PATHWAY FUND LOGO]
----------------------------------------------
-- GROWTH SERIES
-- INTERNATIONAL SERIES
-- GROWTH-INCOME SERIES
-- ASSET ALLOCATION SERIES
-- HIGH-YIELD BOND SERIES
-- U.S. GOVERNMENT/AAA-RATED
SECURITIES SERIES
-- CASH MANAGEMENT SERIES
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT
APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED
UPON THE ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE> 3
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
FUND HIGHLIGHTS............................................. 3
Q&A....................................................... 3
MORE INFORMATION ABOUT THE SERIES........................... 12
Investment Strategies..................................... 12
Glossary.................................................. 14
Investment Terminology................................. 14
Risk Terminology....................................... 14
MANAGEMENT.................................................. 16
Investment Advisor........................................ 16
Business Manager.......................................... 16
Portfolio Management...................................... 16
Custodian, Transfer and Dividend Paying Agent............. 19
ACCOUNT INFORMATION......................................... 20
Transaction Policies...................................... 20
Dividend Policies and Taxes............................... 20
FINANCIAL HIGHLIGHTS........................................ 21
FOR MORE INFORMATION........................................ 22
</TABLE>
2
<PAGE> 4
- --------------------------------------------------------------------------------
FUND HIGHLIGHTS
- --------------------------------------------------------------------------------
The following questions and answers are designed to give you an overview of
Anchor Pathway Fund (the "Fund"), and to provide you with information about the
Fund's seven investment portfolios, or "Series," and their investment goals and
principal strategies. More complete investment information is provided in the
chart, under "More Information About the Series," which is on page 12, and the
glossary that follows on page 16.
Q: WHAT ARE THE SERIES' INVESTMENT GOALS AND PRINCIPAL INVESTMENT STRATEGIES?
A: Each Series operates as a separate mutual fund, and has its own investment
goal, which may not be changed without shareholder approval, and a principal
investment strategy for pursuing its goal. There can be no assurance that
any Series' investment goal will be met or that the net return on an
investment in a Series will exceed what could have been obtained through
other investment or savings vehicles.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
SERIES INVESTMENT GOAL PRINCIPAL INVESTMENT STRATEGY
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Growth Series growth of capital invests primarily in common stocks or
securities with common stock
characteristics that demonstrate the
potential for appreciation.
---------------------------------------------------------------------------------------------------
International long-term growth of capital invests primarily in common stocks or
Series securities with common stock
characteristics of issuers that are
domiciled outside the U.S., including
those domiciled in developing countries.
---------------------------------------------------------------------------------------------------
Growth-Income growth of capital and invests primarily in common stocks or
Series income securities with common stock
characteristics that demonstrate the
potential for solid growth and dividends.
---------------------------------------------------------------------------------------------------
Asset Allocation high total return invests in a diversified portfolio of
Series (including income and common stocks, bonds and money market
capital gains) consistent instruments; under normal market
with preservation of conditions the portfolio will include:
capital over the long-term 40%-80% in equity securities, 20%-50% in
fixed-income securities, and 0% to 40% in
money market instruments.
---------------------------------------------------------------------------------------------------
High-Yield Bond high current income with invests primarily in intermediate and
Series capital appreciation as a long-term corporate debt securities, with
secondary objective emphasis on higher yielding, higher risk,
lower rated or unrated corporate bonds,
which are commonly known as "junk bonds."
---------------------------------------------------------------------------------------------------
U.S. Government/ high current income invests primarily in a combination of
AAA-Rated consistent with prudent securities issued or guaranteed by the
Securities Series investment risk and U.S. government (i.e., backed by the full
preservation of capital faith and credit of the U.S. government)
and other debt securities rated in the
highest rating category (or that are
determined to be of comparable quality by
the Investment Adviser).
---------------------------------------------------------------------------------------------------
Cash Management high current yield while invests primarily in high quality money
Series preserving capital market instruments.
---------------------------------------------------------------------------------------------------
</TABLE>
3
<PAGE> 5
Q: WHAT ARE THE PRINCIPAL RISKS OF INVESTING IN THE SERIES?
A: The following section describes the principal risks of each Series, while
the charts beginning on page 12 describe various additional risks.
Risks of Investing in Equity Securities
The GROWTH, INTERNATIONAL and GROWTH-INCOME SERIES invest primarily in
equity securities. In addition, the ASSET ALLOCATION Series invests
significantly in equities. As with any equity fund, the value of your
investment in any of these Series may fluctuate in response to stock market
movements. Growth Stocks are historically volatile, which will particularly
affect the GROWTH, INTERNATIONAL and GROWTH-INCOME SERIES. You should be
aware that the performance of different types of equity stocks may rise or
decline under varying market conditions -- for example, "value" stocks may
perform well under circumstances in which "growth" stocks have fallen, and
vice versa. In addition, individual stocks selected for a Series may
underperform the market generally.
Risks of Investing in Bonds
The HIGH-YIELD BOND and U.S. GOVERNMENT/AAA-RATED SECURITIES SERIES invest
primarily in bonds. In addition, the ASSET ALLOCATION SERIES invests
significantly in bonds. As a result, as with any bond fund, the value of
your investment in these Series may go up or down in response to changes in
interest rates or defaults (or even the potential for future default) by
bond issuers. In addition, there is a risk the securities selected for any
Series will underperform the markets generally.
Risks of Investing in Junk Bonds
The HIGH-YIELD BOND SERIES invests primarily in high yield, high risk
securities, also known as "junk bonds," which are considered speculative.
The ASSET ALLOCATION SERIES may also invest significantly in junk bonds.
While the Fund's Investment Adviser seeks to diversify the Series and to
engage in a credit analysis of each junk bond issuer in which it invests,
junk bonds carry a substantial risk of default or may already be in
default. The market price for junk bonds may fluctuate more than
higher-quality securities and may decline significantly. In addition, it
may be more difficult for a Series to dispose of junk bonds or to determine
their value. Junk bonds may contain redemption or call provisions that, if
exercised during a period of declining interest rates, may force a Series
to replace the security with a lower yielding security, which would
decrease the return on such Series.
Risks in Investing in Money Market Securities
While an investment in the CASH MANAGEMENT SERIES should present the least
market risk of any of the Series since it invests only in high-quality
short-term debt obligations, you should be aware that an investment in the
CASH MANAGEMENT SERIES will be subject to changes in interest rates. You
should also be aware that your return on an investment in the CASH
MANAGEMENT SERIES will be affected by fees at the contract level. The CASH
MANAGEMENT SERIES does not seek to maintain a stable net asset value of
$1.00.
Risks of Investing in Foreign Securities
The INTERNATIONAL SERIES invests primarily, and each other Series may
invest to some degree, in foreign securities. Investing outside the U.S.
presents special risks, particularly in certain developing countries. While
investing internationally may reduce your risk by increasing the
diversification of your investment, the value of your investment may be
affected by fluctuating currency values, changing local and regional
economic, political and social conditions, greater market volatility,
differing securities regulations, and administrative difficulties such as
delays in clearing and settling portfolio transactions. In addition,
foreign securities may not be as liquid as domestic securities.
Additional Principal Risks
Shares of a Series are not bank deposits and are not guaranteed or insured
by any bank, government entity or the Federal Deposit Insurance
Corporation. As with any mutual fund, there is no guarantee that a Series
will be able to achieve its investment goals. If the value of the assets of
a Series goes down, you could lose money.
4
<PAGE> 6
Q: HOW HAVE THE SERIES PERFORMED HISTORICALLY?
A: The following Risk/Return Bar Charts and Tables provide some indication of
the risks of investing in the Series by showing changes in the Series'
performance from year to year, and compare the Series' average annual
returns to those of an appropriate market index for the calendar years
presented. Fees and expenses incurred at the contract level are not
reflected in the bar chart. If these amounts were reflected, returns would
be less than those shown. Of course, past performance is not necessarily an
indication of how a Series will perform in the future. In addition you
should be aware that the comparative indices are unmanaged and therefore not
subject to sales charges, commissions and expenses.
- --------------------------------------------------------------------------------
GROWTH SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GROWTH
------
<S> <C>
1990 -3.96%
1991 35.84%
1992 12.34%
1993 18.98%
1994 0.46%
1995 34.47%
1996 14.56%
1997 28.14%
1998 36.35%
1999 47.49%
</TABLE>
During the 10-year period shown in the bar chart, the highest return for a
quarter was 29.38% (quarter ended 12/31/98) and the lowest return for a quarter
was -18.38% (quarter ended 09/30/90). For the most recent calendar quarter ended
3/31/00 the return was 16.88%.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS (AS OF THE PAST ONE PAST FIVE PAST TEN RETURN SINCE
CALENDAR YEAR ENDED DECEMBER 31, 1999) YEAR YEARS YEARS INCEPTION***
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------
Growth Series 47.49% 31.75% 21.40% 20.40%
- -----------------------------------------------------------------------------------------------
S&P 500(R)* 21.01% 28.49% 18.17% 18.59%
- -----------------------------------------------------------------------------------------------
Consumer Price Index** 2.68% 2.37% 2.93% 3.21%
- -----------------------------------------------------------------------------------------------
</TABLE>
* The S&P 500(R) Composite Stock Price Index (S&P 500(R)) is an unmanaged,
weighted index of 500 large company stocks that is widely recognized as
representative of the performance of the U.S. stock market.
** The Consumer Price Index (or Cost of Living Index) is published by the U.S.
Bureau of Labor Statistics and is a statistical measure of periodic change
in the price of goods and services in major expenditure groups.
*** Inception date for the Series is February 8, 1984. Except for the S&P
500(R), the since inception returns for the comparative indices are based
on the nearest month-end inception date.
5
<PAGE> 7
- --------------------------------------------------------------------------------
INTERNATIONAL SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INTERNATIONAL
-------------
<S> <C>
1991 9.42%
1992 -1.53%
1993 34.48%
1994 -0.72%
1995 13.43%
1996 21.43%
1997 12.13%
1998 19.16%
1999 63.24%
</TABLE>
During the 9-year period shown in the bar chart, the highest return for a
quarter was 37.69% (quarter ended 12/31/99) and the lowest return for a quarter
was -12.07% (quarter ended 09/30/98). For the most recent calendar quarter ended
3/31/00 the return was 7.02%.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS (AS OF THE PAST ONE PAST FIVE PAST TEN RETURN SINCE
CALENDAR YEAR ENDED DECEMBER 31, 1999) YEAR YEARS YEARS INCEPTION***
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------
International Series 63.24% 24.61% N/A 16.01%
- -----------------------------------------------------------------------------------------------
MSCI EAFE Index* 27.30% 13.15% 7.33% 10.18%
- -----------------------------------------------------------------------------------------------
Consumer Price Index** 2.68% 2.37% 2.93% 2.80%
- -----------------------------------------------------------------------------------------------
</TABLE>
* The Morgan Stanley Capital International (MSCI) Europe, Australia and Far
East (EAFE) Index is an arithmetic, market value-weighted average of
performance of over 900 securities on the stock exchanges of countries in
Europe, Australia and the Far East.
** The Consumer Price Index (or Cost of Living Index) is published by the U.S.
Bureau of Labor Statistics and is a statistical measure of periodic change
in the price of goods and services in major expenditure groups.
*** Inception date for the Series is May 9, 1990. The since inception returns
for the comparative indices are based on the nearest month-end inception
date.
6
<PAGE> 8
- --------------------------------------------------------------------------------
GROWTH-INCOME SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GROWTH-INCOME
-------------
<S> <C>
1990 -4.51%
1991 27.65%
1992 7.33%
1993 13.18%
1994 0.86%
1995 33.77%
1996 19.14%
1997 28.09%
1998 17.82%
1999 9.30%
</TABLE>
During the 10-year period shown in the bar chart, the highest return for a
quarter was 17.68% (quarter ended 12/31/98) and the lowest return for a quarter
was -14.05% (quarter ended 09/30/90). For the most recent calendar quarter ended
3/31/00 the return was 2.04%.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS (AS OF THE PAST ONE PAST FIVE PAST TEN RETURN SINCE
CALENDAR YEAR ENDED DECEMBER 31, 1999) YEAR YEARS YEARS INCEPTION***
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------
Growth-Income Series 9.30% 21.33% 14.66% 16.22%
- -----------------------------------------------------------------------------------------------
S&P 500(R)* 21.01% 24.02% 18.17% 18.59%
- -----------------------------------------------------------------------------------------------
Consumer Price Index** 2.68% 2.37% 2.93% 3.21%
- -----------------------------------------------------------------------------------------------
</TABLE>
* The S&P 500(R) Composite Stock Price Index (S&P 500(R)) is an unmanaged,
weighted index of 500 large company stocks that is widely recognized as
representative of the performance of the U.S. stock market.
** The Consumer Price Index (or Cost of Living Index) is published by the U.S.
Bureau of Labor Statistics and is a statistical measure of periodic change
in the price of goods and services in major expenditure groups.
*** Inception date for the Series is February 8, 1984. Except for the S&P
500(R), the since inception returns for the comparative indices are based
on the nearest month-end inception date.
7
<PAGE> 9
- --------------------------------------------------------------------------------
ASSET ALLOCATION SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSET ALLOCATION
----------------
<S> <C>
1990 -0.27%
1991 23.00%
1992 8.46%
1993 10.52%
1994 -0.52%
1995 30.86%
1996 15.77%
1997 20.65%
1998 10.04%
1999 10.39%
</TABLE>
During the 10-year period shown in the bar chart, the highest return for a
quarter was 11.80% (quarter ended 12/31/98) and the lowest return for a quarter
was -9.62% (quarter ended 09/30/98). For the most recent calendar quarter ended
3/31/00 the return was 3.41%.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS (AS OF THE PAST ONE PAST FIVE PAST TEN RETURN SINCE
CALENDAR YEAR ENDED DECEMBER 31, 1999) YEAR YEARS YEARS INCEPTION****
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------
Asset Allocation Series 10.39% 17.29% 12.50% 12.83 %
- ------------------------------------------------------------------------------------------------
S&P 500(R)* 21.01% 28.49% 18.17% 18.88 %
- ------------------------------------------------------------------------------------------------
Salomon Smith Barney Broad Investment-Grade
(BIG) Bond Index** -0.83% 7.74% 7.75% 8.32 %
- ------------------------------------------------------------------------------------------------
Consumer Price Index*** 2.68% 2.37% 2.93% 2.98 %
- ------------------------------------------------------------------------------------------------
</TABLE>
* The S&P 500(R) Composite Stock Price Index (S&P 500(R)) is an unmanaged,
weighted index of 500 large company stocks that is widely recognized as
representative of the performance of the U.S. stock market.
** The Salomon Smith Barney Broad Investment-Grade (BIG) Bond Index is a
market-weighted index that contains approximately 4700 individually priced
investment grade corporate bonds rated "BBB" or better, U.S.
Treasury/agency issues and Mortgage pass through securities.
*** The Consumer Price Index (or Cost of Living Index) is published by the
U.S. Bureau of Labor Statistics and is an statistical measure of periodic
change in the price of goods and services in major expenditure groups.
**** Inception date for the Series is May 5, 1989. Except for the S&P 500(R),
the since inception returns for the comparative indices are based on the
nearest month-end inception date.
8
<PAGE> 10
- --------------------------------------------------------------------------------
HIGH-YIELD BOND SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
HIGH-YIELD BOND
---------------
<S> <C>
1990 1.73%
1991 28.96
1992 13.18
1993 16.04
1994 -5.03
1995 20.07
1996 13.69
1997 12.82
1998 1.99
1999 -1.54
</TABLE>
During the 10-year period shown in the bar chart, the highest return for a
quarter was 12.10% (quarter ended 03/31/91) and the lowest return for a quarter
was -6.98% (quarter ended 09/30/98). For the most recent calendar quarter ended
3/31/00 the return was -1.79%.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS (AS OF THE PAST ONE PAST FIVE PAST TEN RETURN SINCE
CALENDAR YEAR ENDED DECEMBER 31, 1999) YEAR YEARS YEARS INCEPTION****
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------
High-Yield Bond Series -1.54% 9.11% 9.69% 11.21%
- ------------------------------------------------------------------------------------------------
Salomon Smith Barney Long-Term High-Yield
Index* 0.27% 12.46% 12.48% 11.71%
- ------------------------------------------------------------------------------------------------
Salomon Smith Barney Broad Investment-Grade
(BIG) Bond Index** 0.83% 7.74% 7.75% 9.54%
- ------------------------------------------------------------------------------------------------
Consumer Price Index*** 2.68% 2.37% 2.93% 3.21%
- ------------------------------------------------------------------------------------------------
</TABLE>
* The Salomon Smith Barney Long-Term High-Yield Index generally represents
the performance of high-yield debt securities during various market
conditions.
** The Salomon Smith Barney Broad Investment-Grade (BIG) Bond Index is a
market-weighted index that contains approximately 4700 individually priced
investment grade corporate bonds rated "BBB" or better, U.S.
Treasury/agency issues and mortgage pass-through securities.
*** The Consumer Price Index (or Cost of Living Index) is published by the
U.S. Bureau of Labor Statistics and is a statistical measure of periodic
change in the price of goods and services in major expenditure groups.
**** Inception date for the Series is February 8, 1984. The since inception
returns for the comparative indices are based on the nearest month-end
inception date.
9
<PAGE> 11
- --------------------------------------------------------------------------------
U.S. GOVERNMENT/AAA-RATED SECURITIES SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
U.S. GOVERNMENT/AAA-RATED SECURITIES
------------------------------------
<S> <C>
1990 8.41%
1991 16.37
1992 7.52
1993 11.18
1994 -3.85
1995 16.59
1996 3.01
1997 8.27
1998 8.02
1999 -0.04
</TABLE>
During the 10-year period shown in the bar chart, the highest return for a
quarter was 6.06% (quarter ended 09/30/91) and the lowest return for a quarter
was -3.03% (quarter ended 03/31/94). For the most recent calendar quarter ended
3/31/00 the return was 2.58%.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS (AS OF THE PAST ONE PAST FIVE PAST TEN RETURN SINCE
CALENDAR YEAR ENDED DECEMBER 31, 1999) YEAR YEARS YEARS INCEPTION***
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------
U.S. Government/AAA-Rated Securities Series -0.04% 7.02% 7.37% 7.87%
- -----------------------------------------------------------------------------------------------
Salomon Smith Barney Treasury/ Government-
Sponsored/Mortgage Index* -0.59% 7.66% 7.64% 8.42%
- -----------------------------------------------------------------------------------------------
Consumer Price Index** 2.68% 2.37% 2.93% 3.13%
- -----------------------------------------------------------------------------------------------
</TABLE>
* The Salomon Smith Barney Treasury/Government Sponsored/Mortgage Bond Index
is a market-capitalization weighted index and includes fixed-rate Treasury,
Government-Sponsored, and Mortgage issues with a maturity of one year or
longer. The minimum amount outstanding for U.S. Treasury and mortgage
issues is $1 billion for both entry and exit. For Government-sponsored
issues, the entry and exit amount is $100 million.
** The Consumer Price Index (or Cost of Living Index) is published by the U.S.
Bureau of Labor Statistics and is a statistical measure of periodic change
in the price of goods and services in major expenditure groups.
*** Inception date for the Series is November 19, 1985. The since inception
returns for the comparative indices are based on the nearest month-end
inception date.
10
<PAGE> 12
- --------------------------------------------------------------------------------
CASH MANAGEMENT SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CASH MANAGEMENT
---------------
<S> <C>
1990 7.91%
1991 5.58
1992 3.19
1993 2.58
1994 3.74
1995 5.52
1996 4.95
1997 5.03
1998 4.96
1999 4.64
</TABLE>
During the 10-year period shown in the bar chart, the highest return for a
quarter was 1.99% (quarter ended 03/31/90) and the lowest return for a quarter
was 0.60% (quarter ended 03/31/93). For the most recent calendar quarter ended
3/31/00 the return was 1.27%.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS (AS OF THE PAST ONE PAST FIVE PAST TEN RETURN SINCE
CALENDAR YEAR ENDED DECEMBER 31, 1999) YEAR YEARS YEARS INCEPTION*
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------
Cash Management Series 4.64% 5.02% 4.80% 5.79%
- -----------------------------------------------------------------------------------------------
</TABLE>
* Inception date for the Series is February 8, 1984.
11
<PAGE> 13
- --------------------------------------------------------------------------------
MORE INFORMATION ABOUT THE SERIES
- --------------------------------------------------------------------------------
INVESTMENT STRATEGIES
Each Series has its own investment goal and principal strategy for pursuing it
as described in the charts on page 3. The following charts summarize information
about each Series' investments. We have included a glossary to define the
investment and risk terminology used in the charts and throughout this
Prospectus. Unless otherwise indicated, investment restrictions, including
percentage limitations, apply at the time of purchase.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
SERIES
- ------------------------------------------------------------------------------------------------------
GROWTH INTERNATIONAL GROWTH-INCOME
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
What are the - Equity securities: - Equity securities: - Equity securities:
Series' PRINCIPAL - common stocks - common stocks - common stocks
investments? - Foreign securities
- ------------------------------------------------------------------------------------------------------
In what other types - Foreign securities N/A - Foreign securities
of investments may (up to 10% outside the (up to 10% outside the
the Series U.S. and not in the S&P U.S. and not in the S&P
SIGNIFICANTLY 500(R)) 500(R))
invest?
- ------------------------------------------------------------------------------------------------------
What other types of - Short-term investments - Short-term investments - Short-term investments
investments may the
Series use as part
of efficient
portfolio
management or to
enhance return?
- ------------------------------------------------------------------------------------------------------
What risks NORMALLY - Market volatility - Market volatility - Market volatility
affect the Series? - Securities selection - Securities selection - Securities selection
- Growth stocks - Growth stocks - Growth stocks
- Foreign exposure
- Currency volatility
- ------------------------------------------------------------------------------------------------------
</TABLE>
12
<PAGE> 14
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
SERIES
- ---------------------------------------------------------------------------------------------------------
GOVERNMENT/ AAA-
RATED
ASSET ALLOCATION HIGH-YIELD BOND SECURITIES CASH MANAGEMENT
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
What are the - Equity - Fixed income - Fixed income - Short-term
Series' PRINCIPAL securities: securities: securities: investments
investments? - common stocks - junk bonds - U.S. government
securities
- pass-through
securities
- ---------------------------------------------------------------------------------------------------------
In what other types - Fixed income - Foreign N/A - U.S. government
of investments may securities securities securities
the Series - Junk bonds (up to 25%)
SIGNIFICANTLY (up to 25% of - Equity securities
invest? fixed-income (up to 15%)
securities)
- Foreign
securities
(up to 10% in
equity securities
outside the U.S.
and not in the S&P
500(R); up to 5% in
fixed-income
securities)
- ---------------------------------------------------------------------------------------------------------
What other types of - U.S. government - Short-term - Short-term N/A
investments securities investments investments
may the Series - Short-term
use as part of investments
efficient portfolio
management or to
enhance return?
- ---------------------------------------------------------------------------------------------------------
What risks NORMALLY - Market volatility - Market volatility - Market volatility - Interest rate
affect the Series? - Securities - Securities - Interest rate fluctuations
selection selection fluctuations - Securities
- Interest rate - Interest rate - Prepayment selection
fluctuation fluctuations - Securities
- Credit quality - Credit quality selection
- Foreign exposure - Foreign exposure
- ---------------------------------------------------------------------------------------------------------
</TABLE>
13
<PAGE> 15
- --------------------------------------------------------------------------------
GLOSSARY
- --------------------------------------------------------------------------------
INVESTMENT TERMINOLOGY
EQUITY SECURITIES, such as COMMON STOCKS, represent shares of equity ownership
in a corporation. Common stocks may or may not receive dividend payments.
FIXED INCOME SECURITIES are broadly classified as securities that provide for
periodic payment, typically interest or dividend payments, to the holder of the
security at a stated rate. Most fixed income securities, such as bonds,
represent indebtedness of the issuer and provide for repayment of principal at a
stated time in the future. Other do not provide for repayment of a principal
amount. The issuer of a SENIOR FIXED INCOME SECURITY is obligated to make
payments on this security ahead of other payments to security holders.
Investments in fixed income securities may include:
- U.S. GOVERNMENT SECURITIES are issued or guaranteed by the U.S.
government, its agencies and instrumentalities. Some U.S. government
securities are issued or unconditionally guaranteed by the U.S.
Treasury. They are of the highest possible credit quality. While
these securities are subject to variations in market value due to
fluctuations in interest rates, they will be paid in full if held to
maturity. Other U.S. government securities are neither direct
obligations of, nor guaranteed by, the U.S. Treasury. However, they
involve federal sponsorship in one way or another. For example, some
are backed by specific types of collateral; some are supported by
the issuer's right to borrow from the Treasury; some are supported
by the discretionary authority of the Treasury to purchase certain
obligations of the issuer; and others are supported only by the
credit of the issuing government agency or instrumentality.
- A JUNK BOND is a high yield, high risk bond that does not meet the
credit quality standards of an investment grade security. Junk bonds
are considered speculative.
- PASS-THROUGH SECURITIES involve various debt obligations that are
backed by a pool of mortgages or other assets. Principal and
interest payments made on the underlying asset pools are typically
passed through to investors. Types of pass-through securities
include mortgage-backed securities, collateralized mortgage
obligations, commercial mortgage-backed securities, and asset-backed
securities.
FOREIGN SECURITIES are issued by companies located outside of the United States,
including developing countries. Foreign securities may include foreign corporate
and government bonds, foreign equity securities, foreign investment companies,
passive foreign investment companies (PFICs), American Depositary Receipts
(ADRs) or other similar securities that represent interests in foreign equity
securities, such as European Depositary Receipts (EDRs) and Global Depositary
Receipts (GDRs). A DEVELOPING COUNTRY is generally one with a low or middle
income or economy or that is in the early stages of its industrialization cycle.
For fixed income investments, developing countries includes those where the
sovereign credit rating is below investment grade. Developing countries may
change over time depending on market and economic conditions.
SHORT-TERM INVESTMENTS include money market securities such as short-term U.S.
government obligations, repurchase agreements, commercial paper, bankers'
acceptances and certificates of deposit. These securities provide a Series with
sufficient liquidity to meet redemptions and cover expenses.
RISK TERMINOLOGY
CREDIT QUALITY: The creditworthiness of the issuer is always a factor in
analyzing fixed income securities. An issuer with a lower credit rating will be
more likely than a higher rated issuer to default or otherwise become unable to
honor its financial obligations. This type of issuer will typically issue JUNK
BONDS. In addition to the risk of default, junk bonds may be more volatile, less
liquid, more difficult to value and more susceptible to adverse economic
conditions or investor perceptions than other bonds.
14
<PAGE> 16
CURRENCY VOLATILITY: The value of a Series's foreign investments may fluctuate
due to changes in currency rates. A decline in the value of foreign currencies
relative to the U.S. dollar generally can be expected to depress the value of
the Series's non-U.S. dollar denominated securities.
FOREIGN EXPOSURE: Investors in foreign countries are subject to a number of
risks. A principal risk is that fluctuations in the exchange rates between the
U.S. dollar and foreign currencies may negatively affect an investment. In
addition, there may be less publicly available information about a foreign
company and it may not be subject to the same uniform accounting, auditing and
financial reporting standards as U.S. companies. Foreign governments may not
regulate securities markets and companies to the same degree as in the U.S.
Foreign investments will also be affected by local, political or economic
developments and governmental actions. Consequently, foreign securities may be
less liquid, more volatile and more difficult to price than U.S. securities.
These risks are heightened when an issuer is in a DEVELOPING COUNTRY.
Historically, the markets of DEVELOPING countries have been more volatile than
more developed markets; however, such markets can provide higher rates of return
to investors.
GROWTH STOCKS: Growth stocks can be volatile for several reasons. Since the
issuers usually reinvest a high portion of earnings in their own business,
growth stocks may lack the comfortable dividend yield associated with value
stocks that can cushion total return in a bear market. Also, growth stocks
normally carry a higher price/earnings ratio than many other stocks.
Consequently, if earnings expectations are not met, the market price of growth
stocks will often go down more than other stocks. However, the market frequently
rewards growth stocks with price increases when expectations are met or
exceeded.
INTEREST RATE FLUCTUATIONS: The volatility of fixed income securities is due
principally to changes in interest rates. The market value of bonds and other
fixed income securities usually tends to vary inversely with the level of
interest rates. As interest rates rise the value of such securities typically
falls, and as interest rates fall, the value of such securities typically rise.
Longer-term and lower coupon bonds tend to be more sensitive to changes in
interest rates.
MARKET VOLATILITY: The stock and/or bond markets as a whole could go up or down
(sometimes dramatically). This could affect the value of the securities in a
Series's portfolio.
PREPAYMENT: Prepayment risk is the possibility that the principal of the loans
underlying mortgage-backed or other pass-through securities may be prepaid at
any time. As a general rule, prepayments increase during a period of falling
interest rates and decrease during a period of rising interest rates. As a
result of prepayments, in periods of declining interest rates a Series may be
required to reinvest its assets in securities with lower interest rates. In
periods of increasing interest rates, prepayments generally may decline, with
the effect that the securities subject to prepayment risk held by a Series may
exhibit price characteristics of longer-term debt securities.
SECURITIES SELECTION: A strategy used by a Series, or securities selected by
its portfolio manager, may fail to produce the intended return.
15
<PAGE> 17
- --------------------------------------------------------------------------------
MANAGEMENT
- --------------------------------------------------------------------------------
INVESTMENT ADVISER
Capital Research and Management Company, a large and experienced investment
management organization founded in 1931, is the Investment Adviser to the Fund
and other funds, including those in The American Funds Group. The Investment
Adviser is headquartered at 333 South Hope Street, Los Angeles, California
90071. For the fiscal year ended February 29, 2000 each Series paid the
Investment Adviser an annual fee equal to the following percentage of average
daily net assets:
<TABLE>
<CAPTION>
SERIES FEE
- ------ ---
<S> <C>
Growth...................................................... 0.30%
International............................................... 0.60%
Growth-Income............................................... 0.30%
Asset Allocation............................................ 0.31%
High-Yield Bond............................................. 0.32%
U.S. Government/AAA-Rated Securities........................ 0.33%
Cash Management............................................. 0.32%
</TABLE>
BUSINESS MANAGER
SunAmerica Asset Management Corp. (SAAMCo) manages the business affairs and the
administration of the Fund. The Business Manager, located at The SunAmerica
Center, 733 Third Avenue, New York, New York 10017, is a corporation organized
in 1982 under the laws of the state of Delaware. In addition to serving as
Business Manager to the Fund, SAAMCo serves as adviser and/or administrator to
Anchor Series Trust, Seasons Series Trust, SunAmerica Style Select Series, Inc.,
SunAmerica Equity Funds, SunAmerica Income Funds, SunAmerica Money Market Funds,
Inc., SunAmerica Series Trust, SunAmerica Strategic Investment Series, Inc. and
Brazos Mutual Funds. For the fiscal year ended February 29, 2000 each Series
paid the Business Manager a fee equal to the following percentage of average
daily net assets:
<TABLE>
<CAPTION>
SERIES FEE
- ------ ---
<S> <C>
Growth...................................................... 0.20%
International............................................... 0.24%
Growth-Income............................................... 0.20%
Asset Allocation............................................ 0.21%
High-Yield Bond............................................. 0.22%
U.S. Government/AAA-Rated Securities........................ 0.22%
Cash Management............................................. 0.22%
</TABLE>
PORTFOLIO MANAGEMENT
The basic investment philosophy of the Investment Adviser is to seek fundamental
values at reasonable prices, using a system of multiple portfolio counselors in
managing mutual fund assets. Under this system, the portfolios of the Series are
divided into segments managed by individual counselors. Each counselor decides
how his or her segment will be invested, within the limits prescribed by each
Series' investment goal and the Investment Adviser's investment committee. In
addition, the Investment Adviser's research professionals make investment
decisions with respect to a portion of each Series' portfolio. The primary
portfolio counselors for each Series is set forth in the following table.
16
<PAGE> 18
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------
YEARS OF EXPERIENCE IN
THE INVESTMENT INDUSTRY
----------------------------------------
WITH CAPITAL
RESEARCH AND
YEARS OF EXPERIENCE AS MANAGEMENT
PORTFOLIO COUNSELORS PRIMARY TITLE(S) PORTFOLIO COUNSELOR COMPANY OR TOTAL
FOR THE FUND FOR THE SERIES ITS AFFILIATES YEARS
INDICATED AS INVESTMENT
(APPROXIMATE) COUNSELOR
OR RESEARCH
PROFESSIONAL
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Timothy D. Armour Chairman and Chief Asset Allocation 17 17
Executive Officer, Series -- 4 years
Capital Research
Company*
-------------------------------------------------------------------------------------------------------------
David C. Barclay Senior Vice High-Yield Bond 12 19
President, Capital Series -- 11 years
Research Company*
-------------------------------------------------------------------------------------------------------------
Alan N. Berro Senior Vice Growth-Income 9 14
President, Capital Series -- 3 years
Research Company* Asset Allocation
Series -- less than 1
year
-------------------------------------------------------------------------------------------------------------
Martial Chaillet Senior Vice International 28 28
President and Series -- 7 years
Director, Capital
Research Company*
-------------------------------------------------------------------------------------------------------------
Gordon Crawford Senior Vice Growth Series -- 6 29 29
President and years (plus 5 years
Director, Capital as a research
Research and professional for the
Management Company Series prior to
becoming a portfolio
counselor for the
Series)
-------------------------------------------------------------------------------------------------------------
James E. Drasdo Senior Vice Growth Series -- 14 23 28
President and years
Director, Capital
Research and
Management Company
-------------------------------------------------------------------------------------------------------------
James K. Dunton Senior Vice Growth-Income 38 38
President and Series -- since the
Director, Capital Series began
Research and operations in 1984
Management Company
-------------------------------------------------------------------------------------------------------------
Abner D. Goldstine Senior Vice Asset Allocation 33 48
President and Series -- since the
Director, Capital Series began
Research and operations in 1989
Management Company
-------------------------------------------------------------------------------------------------------------
</TABLE>
17
<PAGE> 19
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------
YEARS OF EXPERIENCE IN
THE INVESTMENT INDUSTRY
----------------------------------------
WITH CAPITAL
RESEARCH AND
YEARS OF EXPERIENCE AS MANAGEMENT
PORTFOLIO COUNSELORS PRIMARY TITLE(S) PORTFOLIO COUNSELOR COMPANY OR TOTAL
FOR THE FUND FOR THE SERIES ITS AFFILIATES YEARS
INDICATED AS INVESTMENT
(APPROXIMATE) COUNSELOR
OR RESEARCH
PROFESSIONAL
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Alwyn Heong Vice President, International 8 12
Capital Research Series -- 4 years
Company
-------------------------------------------------------------------------------------------------------------
Thomas Hogh Vice President, Growth-Income 10 13
Investment Series -- 1 year
Management Group,
Capital Research
and Management
Company
-------------------------------------------------------------------------------------------------------------
Claudia P. Senior Vice Growth-Income 25 27
Huntington President, Capital Series -- 6 years
Research and (plus 5 years as a
Management Company research professional
for the Series prior
to becoming portfolio
counselor for the
Series)
-------------------------------------------------------------------------------------------------------------
Robert W. Lovelace Executive Vice International 15 15
President and Series -- 6 years
Director, Capital
Research Company*
-------------------------------------------------------------------------------------------------------------
Robert G. O'Donnell Senior Vice Growth-Income 25 28
President and Series -- 10 years
Director, Capital (plus 1 year as a
Research and research professional
Management Company for the Series prior
to becoming a
portfolio counselor
for the Series)
-------------------------------------------------------------------------------------------------------------
Donald D. O'Neal Vice President, Growth Series -- 9 15 15
Capital Research years (plus 4 years
and Management as a research
Company professional for the
Series prior to
becoming a portfolio
counselor for the
Series)
-------------------------------------------------------------------------------------------------------------
</TABLE>
18
<PAGE> 20
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------
YEARS OF EXPERIENCE IN
THE INVESTMENT INDUSTRY
----------------------------------------
WITH CAPITAL
RESEARCH AND
YEARS OF EXPERIENCE AS MANAGEMENT
PORTFOLIO COUNSELORS PRIMARY TITLE(S) PORTFOLIO COUNSELOR COMPANY OR TOTAL
FOR THE FUND FOR THE SERIES ITS AFFILIATES YEARS
INDICATED AS INVESTMENT
(APPROXIMATE) COUNSELOR
OR RESEARCH
PROFESSIONAL
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
John H. Smet Vice President, U.S. Government/ 17 18
Capital Research AAA-Rated Securities
and Management Series -- 8 years
Company
-------------------------------------------------------------------------------------------------------------
Susan M. Tolson Senior Vice High-Yield Bond 10 12
President and Series -- 2 years
Director, Capital
Research Company*
-------------------------------------------------------------------------------------------------------------
</TABLE>
- ---------------
* Company affiliated with Capital Research and Management Company.
CUSTODIAN, TRANSFER AND DIVIDEND PAYING AGENT
State Street Bank and Trust Company, Boston, Massachusetts, acts as Custodian of
the Fund's assets as well as Transfer and Dividend Paying Agent and in so doing
performs certain bookkeeping, data processing and administrative services.
19
<PAGE> 21
- --------------------------------------------------------------------------------
ACCOUNT INFORMATION
- --------------------------------------------------------------------------------
Shares of the Series are not offered directly to the public. Instead, shares are
currently offered only to the Variable Separate Account, which is a separate
account of Anchor National Life Insurance Company. So if you would like to
invest in a Series, you must purchase a variable annuity contract from Anchor
National. You should be aware that the contracts involve fees and expenses that
are not described in this Prospectus, and that the contracts also may involve
certain restrictions and limitations. Certain Series may not be available in
connection with a particular contract. You will find information about
purchasing a variable annuity contract in the prospectus that offers the
contracts, which accompanies this Prospectus.
TRANSACTION POLICIES
VALUATION OF SHARES The net asset value per share (NAV) for each Series is
determined each business day at the close of regular trading on the New York
Stock Exchange (generally 4:00 p.m., Eastern time) by dividing its net assets by
the number of its shares outstanding. Investments for which market quotations
are readily available are valued at market. All other securities and assets are
valued at "fair value" following procedures approved by the Trustees.
The International Series may invest to a large extent in securities that are
primarily listed on foreign exchanges that trade on weekends or other days when
the Fund does not price its shares. As a result, the value of this Series'
shares may change on days when the Fund is not open for purchases or
redemptions.
BUY AND SELL PRICES The Variable Separate Account buys and sells shares of a
Series at NAV, without any sales or other charges.
EXECUTION OF REQUESTS The Fund is open on those days when the New York Stock
Exchange is open for regular trading. Buy and sell requests are executed at the
next NAV to be calculated after the request is accepted by the Fund. If the
order is received by the Fund before the Fund's close of business (generally
4:00 p.m., Eastern time), the order will receive that day's closing price. If
the order is received after that time, it will receive the next business day's
closing price.
During periods of extreme volatility or market crisis, a Series may temporarily
suspend the processing of sell requests, or may postpone payment of proceeds for
up to seven business days or longer, as allowed by federal securities laws.
DIVIDEND POLICIES AND TAXES
DISTRIBUTIONS Each Series annually declares and distributes substantially all
of its net investment income in the form of dividends and capital gains
distributions.
DISTRIBUTION REINVESTMENT The dividends and distributions will be reinvested
automatically in additional shares of the same Series on which they were paid.
TAXABILITY OF A SERIES Each Series intends to continue to qualify as a
regulated investment company under the Internal Revenue Code of 1986, as
amended. As long as each Series is qualified as a regulated investment company,
it will not be subject to federal income tax on the earnings that it distributes
to its shareholders.
20
<PAGE> 22
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
(SHARES OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH PERIOD)
- --------------------------------------------------------------------------------
The Fund's Financial Highlights, which are intended to help you understand the
Series' financial performance for the past five years, are incorporated herein
by reference to the Fund's 2000 annual report to shareholders which accompanies
this Prospectus. The Financial Highlights have been audited by
PricewaterhouseCoopers LLP, whose report, along with each Series' financial
statements, are incorporated by reference into the Statement of Additional
Information (SAI), which is available upon request. For a description of the
information contained in the Fund's annual report and SAI please refer to
section entitled "For More Information" on page 24 of the Prospectus.
21
<PAGE> 23
- --------------------------------------------------------------------------------
FOR MORE INFORMATION
- --------------------------------------------------------------------------------
The following documents contain more information about the Series and are
available free of charge upon request:
ANNUAL/SEMI-ANNUAL REPORTS. Contain financial statements, performance
data and information on portfolio holdings. The annual report also
contains a written analysis of market conditions and investment
strategies that significantly affected a Series' performance for the
most recently completed fiscal year.
STATEMENT OF ADDITIONAL INFORMATION (SAI). Contains additional
information about the Series' policies, investment restrictions and
business structure. This prospectus incorporates the SAI by reference.
You may obtain copies of these documents or ask questions about the Series at no
charge by calling (800) 445-7862 or by writing the Fund at P.O. Box 54299, Los
Angeles, California 90054-0299.
Information about the Series (including the SAI) can be reviewed and copied at
the Public Reference Room of the Securities and Exchange Commission, Washington,
D.C. Call (800) SEC-0330 for information on the operation of the Public
Reference Room. Information about the Series is also available on the Securities
and Exchange Commission's web-site at http://www.sec.gov and copies may be
obtained upon payment of a duplicating fee by electronic request at the
following e-mail address: [email protected], or by writing the Public Reference
Section of the Securities and Exchange Commission, Washington, D.C. 20549-6009.
You should rely only on the information contained in this prospectus. No one is
authorized to provide you with any different information.
INVESTMENT COMPANY ACT
- - File No. 811-5157
22
<PAGE> 24
Statement of Additional Information
ANCHOR PATHWAY FUND
This Statement of Additional Information is not a prospectus, but
should be read in conjunction with the current Prospectus of the Fund, dated
April 20, 2000. This Statement of Additional Information incorporates the
Prospectus by reference. The Fund's audited financial statements are
incorporated into this Statement of Additional Information by reference to its
2000 annual report to shareholders. You may request a copy of the Prospectus
and/or annual report at no charge by calling (800) 445-7862 or writing the Fund
at the address below. Capitalized terms used herein but not defined have the
meanings assigned to them in the Prospectus.
P.O. Box 54299
Los Angeles, California 90054-0299
April 20, 2000
<PAGE> 25
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Topic Page
<S> <C>
The Fund................................................................. B-2
Investment Policies...................................................... B-3
Investment Restrictions................................................. B-26
Fund Officers and Trustees.............................................. B-30
Investment Advisory Agreement........................................... B-33
Business Management Agreement........................................... B-34
Dividends, Distributions and Federal Taxes.............................. B-35
Shareholder Voting Rights............................................... B-36
Price of Shares......................................................... B-37
Execution of Portfolio Transactions..................................... B-38
General Information..................................................... B-40
Financial Statements.................................................... B-41
Appendix................................................................ B-42
</TABLE>
THE FUND
The Fund, organized as a Massachusetts business trust on March 23,
1987, is a diversified, open-end management investment company. It was
established to provide a funding medium for Variable Separate Account (the
"Account"), a separate account of Anchor National Life Insurance Company (the
"Company"). The sole shareholder of the Fund is the Account. The Company may
issue variable life contracts that also will use the Fund as the underlying
investment. The offering of Fund shares to variable annuity and variable life
separate accounts is referred to as "mixed funding." It may be disadvantageous
for variable annuity separate accounts and variable life separate accounts to
invest in the Fund simultaneously. Although neither the Company nor the Fund
currently foresees such disadvantages either to variable annuity or variable
life contract owners, the Board of Trustees of the Fund would monitor events in
order to identify any material conflicts to determine what action, if any,
should be taken in response thereto. Shares of the Fund may be offered to
separate accounts of other life insurance companies that are affiliates of the
Company. Effective January,1999, the Fund's fiscal year end changed from
November 30 to February 28 (29 in a leap year).
The Company is a wholly-owned subsidiary of SunAmerica Life Insurance
Company, an Arizona corporation, which is, in turn, wholly-owned by SunAmerica
Inc., a Maryland corporation, which is, in turn, wholly-owned by American
International Group, Inc., the leading U.S.-based international insurance
organization.
B-2
<PAGE> 26
INVESTMENT OBJECTIVES AND POLICIES
The investment goal and principal investment strategy for each of the
Series, along with certain types of investments the Series make under normal
market conditions and for efficient portfolio management, are described under
"More Information About the Series - Investment Strategies" in the Prospectus.
The following charts and information supplements the information contained in
the prospectus and also provides information concerning investments the Series
make on an periodic basis which includes infrequent investments or investments
in which the Series reserve the right to invest. We have also included a
supplemental glossary to define investment and risk terminology used in the
charts below that does not otherwise appear in the Prospectus under the section
entitled "Glossary." In addition, the supplemental glossary also provides
additional and/or more detailed information about certain investment and risk
terminology that appears in the Prospectus under the section entitled
"Glossary." Unless otherwise indicated, investment restrictions, including
percentage limitations, apply at the time of purchase.
SUPPLEMENTAL INVESTMENT/RISK CHART
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
SERIES
- --------------------------------------------------------------------------------------------------------------------
GROWTH INTERNATIONAL GROWTH-INCOME ASSET ALLOCATION
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
IN WHAT OTHER - U.S. government - U.S. government - U.S. government - Investment grade
TYPES OF securities securities securities corporate bonds
INVESTMENTS - Investment grade - Investment grade - Investment grade - Pass-through
MAY THE SERIES corporate bonds corporate bonds corporate bonds securities
PERIODICALLY - Junk bonds - Junk bonds - Junk bonds - Convertible
INVEST? (up to 10%) (up to 5%) (up to 5%) securities
- Pass-through - Pass-through - Pass-through - Non-convertible
securities securities securities preferred stocks
- Convertible - Convertible - Convertible - Warrants
securities securities securities - Defensive
- Non-convertible - Non-convertible - Non-convertible investments
preferred stocks preferred stocks preferred stocks - Currency
- Warrants - Warrants - Warrants transactions
- Defensive - Defensive - Defensive - Illiquid securities
investments investments investments (up to 15%)
- Currency - Currency - Currency - Borrowing for
transactions transactions transactions temporary or
- Illiquid securities - Illiquid securities - Illiquid securities emergency
(up to 15%) (up to 15%) (up to 15%) purposes
- Borrowing for - Borrowing for - Borrowing for
temporary or temporary or temporary or
emergency emergency emergency
purposes purposes purposes
- --------------------------------------------------------------------------------------------------------------------
WHAT OTHER - Interest rate - Interest rate - Interest rate - Foreign exposure
TYPES OF RISK fluctuations fluctuations fluctuations - Illiquidity
MAY - Foreign exposure - Illiquidity - Foreign exposure - Prepayment
POTENTIALLY OR - Illiquidity - Hedging - Illiquidity - Active trading
PERIODICALLY - Credit quality - Credit quality - Credit quality
AFFECT THE - Active trading - Active trading - Active trading
PORTFOLIO ?
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
B-3
<PAGE> 27
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
SERIES
- --------------------------------------------------------------------------------------------------------------------
HIGH-YIELD BOND GOVERNMENT/AAA-RATED CASH MANAGEMENT
SECURITIES
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
IN WHAT OTHER - U.S. government securities - Inflation-indexed bonds - Borrowing for temporary
TYPES OF - Investment grade corporate - Defensive investments or emergency purposes
INVESTMENTS bonds - Foreign securities - Illiquid securities
MAY THE SERIES - Inflation-indexed bonds (up to 5%, only in U.S. (up to 10%)
PERIODICALLY - Pass-through securities dollar denominated and
INVEST? - Convertible securities highly-liquid obligations)
- Non-convertible preferred - Illiquid securities
stocks (up to 15%)
- Warrants - Borrowing for temporary
- Defensive investments or emergency purposes
- Currency transactions - Corporate bonds rated
- Illiquid securities AAA
(up to 15%) - Investment grade
- Borrowing for temporary corporate bonds
or emergency purposes
- --------------------------------------------------------------------------------------------------------------------
WHAT OTHER - Prepayment - Foreign exposure - Active trading
TYPES OF RISK - Illiquidity - Illiquidity
MAY - Hedging - Active trading
POTENTIALLY or - Active trading
PERIODICALLY
AFFECT THE
SERIES?
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
SUPPLEMENTAL GLOSSARY
BORROWING FOR TEMPORARY OR EMERGENCY PURPOSES involves the borrowing of cash or
securities by a Series in limited circumstances, including to meet redemptions.
Borrowing will cost a Series interest expense and other fees. Borrowing may
exaggerate changes in a Series's net asset value and the cost may reduce a
Series's return.
CURRENCY TRANSACTIONS include the purchase and sale of currencies to facilitate
the settlement of securities transactions and forward currency contracts, which
are used to hedge against changes in currency exchange rates.
DEFENSIVE INVESTMENTS include high quality fixed income securities, repurchase
agreements and other money market instruments. A Series will make temporary
defensive investments in response to adverse market, economic, political or
other conditions. When a Series takes a defensive position, it may miss out on
investment opportunities that could have resulted from investing in accordance
with its principal investment strategy. As a result, a Series may not achieve
its investment goal.
B-4
<PAGE> 28
EQUITY SECURITIES, such as COMMON STOCKS, represent shares of equity ownership
in a corporation. Common stocks may or may not receive dividend payments.
Certain securities have common stock characteristics and are classified as
equity securities, including certain convertible securities such as:
- CONVERTIBLE SECURITIES are securities (such as bonds or
preferred stocks) that may be converted into common stock of
the same or a different company.
- WARRANTS are rights to buy common stock of a company at a
specified price during the life of the warrant.
- RIGHTS represent a preemptive right of stockholders to
purchase additional shares of a stock at the time of a new
issuance before the stock is offered to the general public.
FIXED INCOME SECURITIES are broadly classified as securities that provide for
periodic payment, typically interest or dividend payments, to the holder of the
security at a stated rate. Most fixed income securities, such as bonds,
represent indebtedness of the issuer and provide for repayment of principal at a
stated time in the future. Others do not provide for repayment of a principal
amount The issuer of a SENIOR FIXED INCOME SECURITY is obligated to make
payments on this security ahead of other payments to security holders.
Investments in fixed income securities may include:
- U.S. GOVERNMENT SECURITIES are issued or guaranteed by the
U.S. government, its agencies and instrumentalities. Some U.S.
government securities are issued or unconditionally guaranteed
by the U.S. Treasury. They are of the highest possible credit
quality. While these securities are subject to variations in
market value due to fluctuations in interest rates, they will
be paid in full if held to maturity. Other U.S. government
securities are neither direct obligations of, nor guaranteed
by, the U.S. Treasury. However, they involve federal
sponsorship in one way or another. For example, some are
backed by specific types of collateral; some are supported by
the issuer's right to borrow from the Treasury; some are
supported by the discretionary authority of the Treasury to
purchase certain obligations of the issuer; and others are
supported only by the credit of the issuing government agency
or instrumentality.
- CORPORATE DEBT INSTRUMENTS (BONDS, NOTES AND DEBENTURES) are
securities representing a debt of a corporation. The issuer is
obligated to repay a principal amount of indebtedness at a
stated time in the future and in most cases to make periodic
payments of interest at a stated rate.
- An INVESTMENT GRADE FIXED INCOME SECURITY is rated in one of
the top four rating categories by a debt rating agency (or is
considered of comparable quality by the Investment Adviser).
The two best-known debt rating agencies are Standard & Poor's
Rating Services, a Division of the McGraw-Hill Companies, Inc.
and Moody's Investors Service, Inc. INVESTMENT GRADE refers to
any security rated "BBB" or above by Standard & Poor's or
"Baa" or above by Moody's.
B-5
<PAGE> 29
- A JUNK BOND is a high yield, high risk bond that does not meet
the credit quality standards of an investment grade security.
Junk bonds are considered speculative.
- PASS-THROUGH SECURITIES involve various debt obligations that
are backed by a pool of mortgages or other assets. Principal
and interest payments made on the underlying asset pools are
typically passed through to investors. Types of pass-through
securities include mortgage-backed securities, collateralized
mortgage obligations, commercial mortgage-backed securities,
and asset-backed securities.
- PREFERRED STOCKS receive dividends at a specified rate and
have preference over common stock in the payment of dividends
and the liquidation of assets.
- ZERO-COUPON BONDS AND DEFERRED INTEREST BONDS. Zero coupon and
deferred interest bonds are debt obligations issued or
purchased at a significant discount from face value.
ILLIQUID/RESTRICTED SECURITIES are subject to legal or contractual restrictions
that may make them difficult to sell. A security that cannot easily be sold
within seven days will generally be considered illiquid. Certain restricted
securities (such as Rule 144A securities) are not generally considered illiquid
because of their established trading market.
ROLL TRANSACTIONS involve the sale of mortgage or other asset-backed securities
("roll securities") with the commitment to purchase substantially similar (same
type, coupon and maturity), but not identical securities on a specified future
date.
ACTIVE TRADING: Each Series may dispose of any security at any time, and it is
each Series' intention to take either short- or long-term profits or losses
consistent with its objective and sound investment practice, and when such
action would not impair the Series' tax status. Portfolio changes will be made
without regard to the length of time particular investments may have been held.
High portfolio turnover (100% or more) involves correspondingly greater
transaction costs in the form of dealer commissions, and may result in the
realization of net capital gains, which are taxable when distributed to
shareholders. Debt securities are generally traded on a net basis and usually
neither brokerage commissions nor transfer taxes are involved. The Series'
portfolio turnover rate would equal 100% if each security in the Series'
portfolio were replaced once per year. See the "Financial Highlights" in the
prospectus for each Series' annual portfolio turnover for each of the last five
fiscal periods.
SMALL AND MEDIUM SIZED COMPANIES: Companies with smaller market capitalizations
(particularly under $1.5 billion) tend to be at early stages of development with
limited product lines, market access for products, financial resources, access
to new capital, or depth in management. Consequently, the securities of smaller
companies may not be as readily marketable and may be subject to more abrupt or
erratic market movements. Securities of medium sized companies are also usually
more volatile and entail greater risks than securities of large companies.
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<PAGE> 30
SHORT-TERM INVESTMENTS, including both U.S. and non-U.S. dollar denominated
money market instruments, are invested in for reasons that may include (a) for
liquidity purposes (to meet redemptions and expenses); (b) to generate a return
on idle cash held by a Series during periods when an Capital Research and
Management Company ("CRMC," the "Adviser" or the "Investment Adviser"), is
unable to locate favorable investment opportunities; or (c) for temporary
defensive purposes. The CASH MANAGEMENT SERIES invests principally in short-term
investments. Common short-term investments include:
Money Market Securities - Money market securities may include
securities issued or guaranteed by the U.S. government, its agencies or
instrumentalities, repurchase agreements, commercial paper, bankers'
acceptances, time deposits and certificates of deposit.
Commercial Bank Obligations - Certificates of deposit (interest-bearing
time deposits), bankers' acceptances (time drafts drawn on a commercial bank
where the bank accepts an irrevocable obligation to pay at maturity) and
documented discount notes (corporate promissory discount notes accompanied by a
commercial bank guarantee to pay at maturity) representing direct or contingent
obligations of commercial banks.
Savings Association Obligations - Certificates of deposit
(interest-bearing time deposits) issued by mutual savings banks or savings and
loan associations with assets in excess of $1 billion and whose deposits are
insured by the FDIC.
Commercial Paper - Short-term notes (up to 12 months) issued by
corporations or governmental bodies, including variable amount master demand
notes. The CASH MANAGEMENT SERIES may purchase commercial paper only if judged
by the Adviser to be of suitable investment quality.
Variable Amount Master Demand Notes permit a Series to invest varying
amounts at fluctuating rates of interest pursuant to the agreement in the master
note. These are direct lending obligations between the lender and borrower, they
are generally not traded, and there is no secondary market. Such instruments are
payable with accrued interest in whole or in part on demand. The amounts of the
instruments are subject to daily fluctuations as the participants increase or
decrease the extent of their participation. The CASH MANAGEMENT SERIES'
investments in these instruments are limited to those that have a demand feature
enabling the CASH MANAGEMENT SERIES unconditionally to receive the amount
invested from the issuer upon seven or fewer days' notice. Generally, THE CASH
MANAGEMENT SERIES attempts to invest in instruments having a one-day notice
provision. In connection with master demand note arrangements, the Adviser,
subject to the direction of the Trustees, monitors 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 also considers 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 Standard &
Poor's and a Series may invest in them only if it is determined that at the time
of investment the notes are of comparable quality to the other commercial paper
in which a Series may invest. Master demand notes are considered to have a
maturity equal to the repayment notice period unless the Adviser has reason to
believe that the borrower could not make timely repayment upon demand.
B-7
<PAGE> 31
Corporate Bonds and Notes - A Series may purchase corporate obligations
that mature or that may be redeemed in 397 days or less. These obligations
originally may have been issued with maturities in excess of such period. The
CASH MANAGEMENT SERIES may invest only in long-term corporate bonds rated A or
better by Standard & Poor's and Moody's and short-term notes rates rated in the
top tier. See "Description of Commercial Paper and Bond Ratings" for description
of investment-grade ratings by Standard & Poor's and Moody's.
Government Securities - Debt securities maturing within one year of the
date of purchase include adjustable-rate mortgage securities backed by GNMA,
FNMA, FHLMC and other non-agency issuers. Although certain floating or variable
rate obligations (securities whose coupon rate changes at least annually and
generally more frequently) have maturities in excess of one year, they are also
considered short-term debt securities.
Repurchase Agreements. A Series will enter into repurchase agreements
involving only securities in which it could otherwise invest and with selected
banks and securities dealers whose financial condition is monitored by the
Adviser, subject to the guidance of the Board of Trustees. In such agreements,
the seller agrees to repurchase the security at a mutually agreed-upon time and
price. The period of maturity is usually quite short, either overnight or a few
days, although it may extend over a number of months. The repurchase price is in
excess of the purchase price by an amount that reflects an agreed-upon rate of
return effective for the period of time a Series' money is invested in the
security. Whenever a Series enters into a repurchase agreement, it obtains
appropriate collateral. The instruments held as collateral are valued daily and
if the value of the instruments declines, the Series will require additional
collateral. If the seller under the repurchase agreement defaults, the Series
may incur a loss if the value of the collateral securing the repurchase
agreement has declined, and may incur disposition costs in connection with
liquidating the collateral. In addition, if bankruptcy proceedings are commenced
with respect to the seller of the security, realization of the collateral by the
Series may be delayed or limited. The Trustees have established guidelines to be
used by the Adviser in connection with transactions in repurchase agreements and
will regularly monitor each Series' use of repurchase agreements. A Series will
not invest in repurchase agreements maturing in more than seven days if the
aggregate of such investments along with other illiquid securities exceeds 15%
(10% with respect to the CASH MANAGEMENT SERIES) of the value of its net assets.
However, there is no limit on the amount of a Series' net assets that may be
subject to repurchase agreements having a maturity of seven days or less for
temporary defensive purposes.
MORTGAGE-BACKED SECURITIES include investments in mortgage-related
securities, including certain U.S. government securities such as GNMA, FNMA or
FHLMC certificates (as defined below), and private mortgage-related securities,
which represent an undivided ownership interest in a pool of mortgages. The
mortgages backing these securities include conventional thirty-year fixed-rate
mortgages, fifteen-year fixed-rate mortgages, graduated payment mortgages and
adjustable rate mortgages. The U.S. government or the issuing agency guarantees
the payment of interest and principal of government or agency issued securities.
However, the guarantees do not extend to the securities' yield or value, which
are likely to vary inversely with fluctuations in interest rates. These
certificates are in most cases pass-through instruments, through which the
holder receives a share of all interest and principal payments, including
prepayments, on the mortgages underlying the certificate, net of certain fees.
B-8
<PAGE> 32
The yield on mortgage-backed securities is based on the average
expected life of the underlying pool of mortgage loans. Because the prepayment
characteristics of the underlying mortgages vary, it is not possible to predict
accurately the average life of a particular issue of pass-through certificates.
Mortgage-backed securities are often subject to more rapid repayment than their
stated maturity date would indicate as a result of the pass-through of
prepayments of principal on the underlying mortgage obligations. Thus, the
actual life of any particular pool will be shortened by any unscheduled or early
payments of principal and interest. Principal prepayments generally result from
the sale of the underlying property or the refinancing or foreclosure of
underlying mortgages. The occurrence of prepayments is affected by a wide range
of economic, demographic and social factors and, accordingly, it is not possible
to predict accurately the average life of a particular pool. Yield on such pools
is usually computed by using the historical record of prepayments for that pool,
or, in the case of newly-issued mortgages, the prepayment history of similar
pools. The actual prepayment experience of a pool of mortgage loans may cause
the yield realized by the Series to differ from the yield calculated on the
basis of the expected average life of the pool.
Prepayments tend to increase during periods of falling interest rates,
while during periods of rising interest rates prepayments will most likely
decline. When prevailing interest rates rise, the value of a pass-through
security may decrease as does the value of other debt securities, but, when
prevailing interest rates decline, the value of a pass-through security is not
likely to rise on a comparable basis with other debt securities because of the
prepayment feature of pass-through securities. The reinvestment of scheduled
principal payments and unscheduled prepayments that the Series receives may
occur at higher or lower rates than the original investment, thus affecting the
yield of the Series. Monthly interest payments received by the Series have a
compounding effect, which may increase the yield to shareholders more than debt
obligations that pay interest semi-annually. Because of those factors,
mortgage-backed securities may be less effective than U.S. Treasury bonds of
similar maturity at maintaining yields during periods of declining interest
rates. Accelerated prepayments adversely affect yields for pass-through
securities purchased at a premium (i.e., at a price in excess of principal
amount) and may involve additional risk of loss of principal because the premium
may not have been fully amortized at the time the obligation is repaid. The
opposite is true for pass-through securities purchased at a discount. A Series
may purchase mortgage-backed securities at a premium or at a discount.
The following is a description of GNMA, FNMA and FHLMC certificates,
the most widely available mortgage-backed securities:
GNMA Certificates. GNMA Certificates are mortgage-backed securities
that evidence an undivided interest in a pool or pools of mortgages.
GNMA Certificates that a Series may purchase are the modified
pass-through type, which entitle the holder to receive timely payment
of all interest and principal payments due on the mortgage pool, net of
fees paid to the issuer and GNMA, regardless of whether or not the
mortgagor actually makes the payment.
B-9
<PAGE> 33
GNMA guarantees the timely payment of principal and interest on
securities backed by a pool of mortgages insured by the Federal Housing
Administration ("FHA") or the FMHA, or guaranteed by the Veterans
Administration. The GNMA guarantee is authorized by the National
Housing Act and is backed by the full faith and credit of the United
States. The GNMA is also empowered to borrow without limitation from
the U.S. Treasury if necessary to make any payments required under its
guarantee.
The average life of a GNMA Certificate is likely to be substantially
shorter than the original maturity of the mortgages underlying the
securities. Prepayments of principal by mortgagors and mortgage
foreclosure will usually result in the return of the greater part of
principal investment long before the maturity of the mortgages in the
pool. Foreclosures impose no risk to principal investment because of
the GNMA guarantee, except to the extent that a Series has purchased
the certificates at a premium in the secondary market.
FHLMC Certificates. The FHLMC issues two types of mortgage pass-through
securities: mortgage participation certificates ("PCs") and guaranteed
mortgage certificates ("GMCs") (collectively, "FHLMC Certificates").
PCs resemble GNMA Certificates in that each PC represents a pro rata
share of all interest and principal payments made and owed on the
underlying pool. The FHLMC guarantees timely monthly payment of
interest (and, under certain circumstances, principal) of PCs and the
ultimate payment of principal.
GMCs also represent a pro rata interest in a pool of mortgages.
However, these instruments pay interest semi-annually and return
principal once a year in guaranteed minimum payments. The expected
average life of these securities is approximately ten years. The FHLMC
guarantee is not backed by the full faith and credit of the U.S.
Government.
FNMA Certificates. The FNMA issues guaranteed mortgage pass-through
certificates ("FNMA Certificates"). FNMA Certificates represent a pro
rata share of all interest and principal payments made and owed on the
underlying pool. FNMA guarantees timely payment of interest and
principal on FNMA Certificates. The FNMA guarantee is not backed by the
full faith and credit of the U.S. Government.
Other types of mortgage-backed securities include:
Conventional Mortgage Pass-Through Securities represent participation
interests in pools of mortgage loans that are issued by trusts formed by
originators of the institutional investors in mortgage loans (or represent
custodial arrangements administered by such institutions). These originators and
institutions include commercial banks, savings and loans associations, credit
unions, savings banks, insurance companies, investment banks or special purpose
subsidiaries of the foregoing. For federal income tax purposes, such trusts are
generally treated as grantor trusts or REMICs and, in either case, are generally
not subject to any significant amount of federal income tax at the entity level.
B-10
<PAGE> 34
The mortgage pools underlying Conventional Mortgage Pass-Throughs
consist of conventional mortgage loans evidenced by promissory notes secured by
first mortgages or first deeds of trust or other similar security instruments
creating a first lien on residential or mixed residential and commercial
properties. Conventional Mortgage Pass-Throughs (whether fixed or adjustable
rate) provide for monthly payments that are a "pass-through" of the monthly
interest and principal payments (including any prepayments) made by the
individual borrowers on the pooled mortgage loans, net of any fees or other
amount paid to any guarantor, administrator and/or servicer of the underlying
mortgage loans. A trust fund with respect to which a REMIC election has been
made may include regular interests in other REMICs, which in turn will
ultimately evidence interests in mortgage loans.
Conventional mortgage pools generally offer a higher rate of interest
than government and government-related pools because of the absence of any
direct or indirect government or agency payment guarantees. However, timely
payment of interest and principal of mortgage loans in these pools may be
supported by various forms of insurance or guarantees, including individual
loans, title, pool and hazard insurance and letters of credit. The insurance and
guarantees may be issued by private insurers and mortgage poolers. Although the
market for such securities is becoming increasingly liquid, mortgage-related
securities issued by private organizations may not be readily marketable.
Collateralized Mortgage Obligations ("CMOs") are fully collateralized
bonds that are the general obligations of the issuer thereof (e.g., the U.S.
government, a U.S. government instrumentality, or a private issuer). Such bonds
generally are secured by an assignment to a trustee (under the indenture
pursuant to which the bonds are issued) of collateral consisting of a pool of
mortgages. Payments with respect to the underlying mortgages generally are made
to the trustee under the indenture. Payments of principal and interest on the
underlying mortgages are not passed through to the holders of the CMOs as such
(i.e., the character of payments of principal and interest is not passed
through, and therefore payments to holders of CMOs attributable to interest paid
and principal repaid on the underlying mortgages do not necessarily constitute
income and return of capital, respectively, to such holders), but such payments
are dedicated to payment of interest on and repayment of principal of the CMOs.
Principal and interest on the underlying mortgage assets may be
allocated among the several classes of CMOs in various ways. In certain
structures (known as "sequential pay" CMOs), payments of principal, including
any principal prepayments, on the mortgage assets generally are applied to the
classes of CMOs in the order of their respective final distribution dates. Thus,
no payment of principal will be made on any class of sequential pay CMOs until
all other classes having an earlier final distribution date have been paid in
full.
Additional structures of CMOs include, among others, "parallel pay"
CMOs. Parallel pay CMOs are those that are structured to apply principal
payments and prepayments of the mortgage assets to two or more classes
concurrently on a proportionate or disproportionate basis. These simultaneous
payments are taken into account in calculating the final distribution date of
each class.
B-11
<PAGE> 35
A wide variety of CMOs may be issued in the parallel pay or sequential
pay structures. These securities include accrual certificates (also known as
"Z-Bonds"), which accrue interest at a specified rate only until all other
certificates having an earlier final distribution date have been retired and are
converted thereafter to an interest-paying security, and planned amortization
class ("PAC") certificates, which are parallel pay CMOs which generally require
that specified amounts of principal be applied on each payment date to one or
more classes of CMOs (the "PAC Certificates"), even though all other principal
payments and prepayments of the mortgage assets are then required to be applied
to one or more other classes of the certificates. The scheduled principal
payments for the PAC Certificates generally have the highest priority on each
payment date after interest due has been paid to all classes entitled to receive
interest currently. Shortfalls, if any, are added to the amount payable on the
next payment date. The PAC Certificate payment schedule is taken into account in
calculating the final distribution date of each class of PAC. In order to create
PAC tranches, one or more tranches generally must be created to 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 the PAC classes.
Stripped Mortgage-Backed Securities ("SMBS") are often structured with
two classes that receive different proportions of the interest and principal
distributions on a pool of mortgage assets. SMBS have greater market volatility
than other types of U.S. government securities in which a Series invests. A
common type of SMBS has one class receiving some of the interest and all or most
of the principal (the "principal only" class) from the mortgage pool, while the
other class will receive all or most of the interest (the "interest only"
class). The yield to maturity on an interest only class is extremely sensitive
not only to changes in prevailing interest rates, but also to the rate of
principal payments, including principal prepayments, on the underlying pool of
mortgage assets, and a rapid rate of principal payment may have a material
adverse effect on a Series' yield. While interest-only and principal-only
securities are generally regarded as being illiquid, such securities may be
deemed to be liquid if they can be disposed of promptly in the ordinary course
of business at a value reasonably close to that used in the calculation of a
Series' net asset value per share. Only government interest-only and
principal-only securities backed by fixed-rate mortgages and determined to be
liquid under guidelines and standards established by the Trustees may be
considered liquid securities not subject to a Series' limitation on investments
in illiquid securities.
ASSET-BACKED SECURITIES, issued by trusts and special purpose
corporations, are backed by a pool of assets, such as credit card and automobile
loan receivables, representing the obligations of a number of different parties.
Asset-backed securities present certain risks. For instance, in the case of
credit card receivables, these securities may not have the benefit of any
security interest in the related collateral. Credit card 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 owed on the credit cards, thereby reducing the
balance due. Most issuers of automobile receivables permit the servicer to
retain possession of the underlying obligations. If the servicer were to sell
these obligations to another party, there is a risk that the purchaser would
acquire an interest superior to that of the holders of the related automobile
receivables. In addition, because of the large number of vehicles involved in a
typical issuance and technical requirements under state laws, the trustee for
the holders of the automobile receivables may not have a proper security
interest in all of the obligations backing such receivables. Therefore, there is
the possibility that recoveries on repossessed collateral may not, in some
cases, be available to support payments on these securities.
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<PAGE> 36
Asset-backed securities are often backed by a pool of assets
representing the obligations of a number of different parties. To lessen the
effect of failures by obligors to make payments on underlying assets, the
securities may contain elements of credit support that fall into two categories:
(i) liquidity protection and (ii) protection against losses resulting from
ultimate default by an obligor on the underlying assets. Liquidity protection
refers to the provision of advances, generally by the entity administering the
pool of assets, to ensure that the receipt of payments on the underlying pool
occurs in a timely fashion. Protection against losses resulting from ultimate
default ensures payment through insurance policies or letters of credit obtained
by the issuer or sponsor from third parties. A Series will not pay any
additional or separate fees for credit support. The degree of credit support
provided for each issue is generally based on historical information respecting
the level of credit risk associated with the underlying assets. Delinquency or
loss in excess of that anticipated or failure of the credit support could
adversely affect the return on an investment in such a security.
U.S. TREASURY INFLATION PROTECTION SECURITIES are issued by the United
States Department of Treasury ("Treasury") with a nominal return linked to the
inflation rate in prices. The index used to measure inflation is the
non-seasonally adjusted U.S. City Average All Items Consumer Price Index for All
Urban Consumers ("CPI-U"). The value of the principal is adjusted for inflation,
and pays interest every six months. The interest payment is equal to a fixed
percentage of the inflation-adjusted value of the principal. The final payment
of principal of the security will not be less than the original par amount of
the security at issuance. The principal of the inflation-protection security is
indexed to the non-seasonally adjusted CPI-U. To calculate the
inflation-adjusted principal value for a particular valuation date, the value of
the principal at issuance is multiplied by the index ratio applicable to that
valuation date. The index ratio for any date is the ratio of the reference CPI
applicable to such date to the reference CPI applicable to the original issue
date. Semiannual coupon interest is determined by multiplying the
inflation-adjusted principal amount by one-half of the stated rate of interest
on each interest payment date. Inflation-adjusted principal or the original par
amount, whichever is larger, is paid on the maturity date as specified in the
applicable offering announcement. If at maturity the inflation-adjusted
principal is less than the original principal value of the security, an
additional amount is paid at maturity so that the additional amount plus the
inflation-adjusted principal equals the original principal amount. Some
inflation-protection securities may be stripped into principal and interest
components. In the case of a stripped security, the holder of the stripped
principal component would receive this additional amount. The final interest
payment, however, will be based on the final inflation-adjusted principal value,
not the original par amount.
The reference CPI for the first day of any calendar month is the CPI-U
for the third preceding calendar month. (For example, the reference CPI for
December 1 is the CPI-U reported for September of the same year, which is
released in October.) The reference CPI for any other day of the month is
calculated by a linear interpolation between the reference CPI applicable to the
first day of the month and the reference CPI applicable to the first day of the
following month. Any revisions the Bureau of Labor Statistics (or successor
agency) makes to any CPI-U number that has been previously released will not be
used in calculations of the value of outstanding inflation-protection
securities. In the case that the CPI-U for a particular month is not reported by
the last day of the following month, the Treasury will announce an index number
based on the last year-over-year CPI-U inflation rate available. Any
calculations of the Treasury's payment obligations on the inflation-protection
security that need that month's CPI-U number will be based on the index number
that the Treasury has announced. If the CPI-U is rebased to a different year,
the Treasury will continue to use the CPI-U series based on the base reference
period in effect when the security was first issued as long as that series
continues to be published. If the CPI-
b-13
<PAGE> 37
U is discontinued during the period the inflation-protection security is
outstanding, the Treasury will, in consultation with the Bureau of Labor
Statistics (or successor agency), determine an appropriate substitute index and
methodology for linking the discontinued series with the new price index series.
Determinations of the Secretary of the Treasury in this regard are final.
Inflation-protection securities will be held and transferred in either
of two book-entry systems: the commercial book-entry system (TRADES) and
TREASURY DIRECT. The securities will be maintained and transferred at their
original par amount, i.e., not at their inflation-adjusted value. STRIPS
components will be maintained and transferred in TRADES at their value based on
the original par amount of the fully constituted security.
LOAN PARTICIPATIONS AND ASSIGNMENTS include investments in fixed and
floating rate loans ("Loans") arranged through private negotiations between an
issuer of sovereign or corporate debt obligations and one or more financial
institutions ("Lenders"). Investments in Loans are expected in most instances to
be in the form of participations in Loans ("Participations") and assignments of
all or a portion of Loans ("Assignments") from third parties. In the case of
Participations, the Series will have the right to receive payments of principal,
interest and any fees to which it is entitled only from the Lender selling the
Participation and only upon receipt by the Lender of the payments from the
borrower. In the event of the insolvency of the Lender selling a Participation,
the Series may be treated as a general creditor of the Lender and may not
benefit from any set-off between the Lender and the borrower. The Series will
acquire Participations only if the Lender interpositioned between the Series and
the borrower is determined by the Adviser to be creditworthy. When the Series
purchases Assignments from Lenders it will acquire direct rights against the
borrower on the Loan. Because Assignments are arranged through private
negotiations between potential assignees and potential assignors, however, the
rights and obligations acquired by the Series as the purchaser of an Assignment
may differ from, and be more limited than, those held by the assigning Lender.
Because there is no liquid market for such securities, the Series anticipates
that such securities could be sold only to a limited number of institutional
investors. The lack of a liquid secondary market may have an adverse impact on
the value of such securities and the Series' ability to dispose of particular
Assignments or Participations when necessary to meet the Series' liquidity needs
or in response to a specific economic event such as a deterioration in the
creditworthiness of the borrower. The lack of a liquid secondary market for
Assignments and Participations also may make it more difficult for the Series to
assign a value to these securities for purposes of valuing the Series and
calculating its net asset value.
The highly leveraged nature of many such loans may make such loans
especially vulnerable to adverse changes in economic or market conditions. Loan
participations and other direct investments may not be in the form of securities
or may be subject to restrictions on transfer, and there may be no liquid market
for such securities, as described above.
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<PAGE> 38
ILLIQUID SECURITIES. Each of the Series may invest no more than 15%
(10% in the case of the CASH MANAGEMENT SERIES) of its net assets, determined as
of the date of purchase, in illiquid securities including repurchase agreements
that have a maturity of longer than seven days or in other securities that are
illiquid by virtue of the absence of a readily available market or legal or
contractual restrictions on resale. Historically, illiquid securities have
included securities subject to contractual or legal restrictions on resale
because they have not been registered under the Securities Act of 1933, as
amended (the "Securities Act"), securities that are otherwise not readily
marketable and repurchase agreements having a maturity of longer than seven
days. Repurchase agreements subject to demand are deemed to have a maturity
equal to the notice period. Securities that have not been registered under the
Securities Act are referred to as private placements or restricted securities
and are purchased directly from the issuer or in the secondary market. Mutual
funds do not typically hold a significant amount of these restricted or other
illiquid securities because of the potential for delays on resale and
uncertainty in valuation. Limitations on resale may have an adverse effect on
the marketability of portfolio securities and a mutual fund might be unable to
dispose of restricted or other illiquid securities promptly or at reasonable
prices and might thereby experience difficulty satisfying redemptions within
seven days. A mutual fund might also have to register such restricted securities
in order to dispose of them, resulting in additional expense and delay. There
generally will be a lapse of time between a mutual fund's decision to sell an
unregistered security and the registration of such security promoting sale.
Adverse market conditions could impede a public offering of such securities.
When purchasing unregistered securities, the Series will seek to obtain the
right of registration at the expense of the issuer (except in the case of "Rule
144A securities," as described below).
In recent years, a large institutional market has developed for certain
securities that are not registered under the Securities Act, including
repurchase agreements, commercial paper, foreign securities, municipal
securities and corporate bonds and notes. Institutional investors depend on an
efficient institutional market in which the unregistered security can be readily
resold or on an issuer's ability to honor a demand for repayment. The fact that
there are contractual or legal restrictions on resale to the general public or
to certain institutions may not be indicative of the liquidity of such
investments.
Restricted securities eligible for resale pursuant to Rule 144A under
the Securities Act for which there is a readily available market will not be
deemed to be illiquid. The Adviser as the case may be, will monitor the
liquidity of such restricted securities subject to the supervision of the Board
of Trustees of the Trust. In reaching liquidity decisions, the Adviser, as the
case may be, will consider, inter alia, pursuant to guidelines and procedures
established by the Trustees, the following factors: (1) the frequency of trades
and quotes for the security; (2) the number of dealers wishing to purchase or
sell the security and the number of other potential purchasers; (3) dealer
undertakings to make a market in the security; and (4) the nature of the
security and the nature of the marketplace trades (e.g., the time needed to
dispose of the security, the method of soliciting offers and the mechanics of
the transfer).
B-15
<PAGE> 39
Commercial paper issues in which a Series may invest include securities
issue by major corporations without registration under the Securities Act in
reliance on the exemption from such registration afforded by Section 3(a)(3)
thereof, and commercial paper issued in reliance on the so-called private
placement exemption from registration afforded by Section 4(2) of the Securities
Act ("Section 4(2) paper"). Section 4(2) paper is restricted as to disposition
under the federal securities laws in that any resale must similarly be made in
an exempt transaction. Section 4(2) paper is normally resold to other
institutional investors through or with the assistance of investment dealers who
make a market in Section 4(2) paper, thus providing liquidity. Section 4(2)
paper that is issued by a company that files reports under the Securities
Exchange Act of 1934 is generally eligible to be sold in reliance on the safe
harbor of Rule 144A described above. The CASH MANAGEMENT SERIES'10% limitation
on investments in illiquid securities includes Section 4(2) paper other than
Section 4(2) paper that the Adviser has determined to be liquid pursuant to
guidelines established by the Trustees. The Series' Board of Trustees delegated
to the Adviser the function of making day-to-day determinations of liquidity
with respect to Section 4(2) paper, pursuant to guidelines approved by the
Trustees that require the Adviser to take into account the same factors
described above for other restricted securities and require the Adviser to
perform the same monitoring and reporting functions.
REITS pool investors' funds for investment primarily in income
producing real estate or real estate related loans or interests. A REIT is not
taxed on income distributed to shareholders if it complies with various
requirements relating to its organization, ownership, assets and income and with
the requirement that it distribute to its shareholders at least 95% of its
taxable income (other than net capital gains) for each taxable year. REITs can
generally be classified as Equity REITs, Mortgage REITs and Hybrid REITs. Equity
REITs invest the majority of their assets directly in real property and derive
their income primarily from rents. Equity REITs can also realize capital gains
by selling property that has appreciated in value. Mortgage REITs invest the
majority of their assets in real estate mortgages and derive their income
primarily from interest payments. Hybrid REITs combine the characteristics of
both Equity REITs and Mortgage REITs. Equity REITs may be affected by changes in
the value of the underlying property owned by the trusts, while Mortgage REITs
may be affected by the quality of credit extended. Equity and Mortgage REITs are
dependent upon management skill, may not be diversified and are subject to
project financing risks. Such trusts are also subject to heavy cash flow
dependency, defaults by borrowers, self-liquidation and the possibility of
failing to qualify for tax-free pass-through of income under the Internal
Revenue Code of 1986, as amended (the "Code") and to maintain exemption from
registration under the 1940 Act. Changes in interest rates may also affect the
value of the debt securities in the Series' portfolio. By investing in REITs
indirectly through the Series, a shareholder will bear not only his
proportionate share of the expense of the Series, but also, indirectly, similar
expenses of the REITs, including compensation of management.
FLOATING RATE OBLIGATIONS. These securities have a coupon rate that
changes at least annually and generally more frequently. The coupon rate is set
in relation to money market rates. The obligations, issued primarily by banks,
other corporations, governments and semi-governmental bodies, may have a
maturity in excess of one year. In some cases, the coupon rate may vary with
changes in the yield on Treasury bills or notes or with changes in LIBOR (London
Interbank Offering Rate). The Adviser considers floating rate obligations to be
liquid investments because a number of U.S. and foreign securities dealers make
active markets in these securities.
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WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES. When-issued or
delayed-delivery transactions call for the purchase or sale of securities at an
agreed-upon price on a specified future date. Although a Series will enter into
such transactions for the purpose of acquiring securities for its portfolio or
for delivery pursuant to options contracts it has entered into, the Series may
dispose of a commitment prior to settlement. When such transactions are
negotiated, the price (which is generally expressed in yield terms) is fixed at
the time the commitment is made, but delivery and payment for the securities
take place at a later date. During the period between commitment by a Series and
settlement (generally within two months but not to exceed 120 days), no payment
is made for the securities purchased by the purchaser, and no interest accrues
to the purchaser from the transaction. Such securities are subject to market
fluctuation, and the value at delivery may be less than the purchase price. A
Series will maintain a segregated account with its custodian, consisting of cash
or liquid securities at least equal to the value of purchase commitments until
payment is made. A Series will likewise segregate liquid assets in respect of
securities sold on a delayed delivery basis.
A Series will engage in when-issued transactions in order to secure
what is considered to be an advantageous price and yield at the time of entering
into the obligation. When a Series engages in when-issued or delayed delivery
transactions, it relies on the buyer or seller, as the case may be, to
consummate the transaction. Failure to do so may result in a Series losing the
opportunity to obtain a price and yield considered to be advantageous. If a
Series chooses to (i) dispose of the right to acquire a when-issued security
prior to its acquisition or (ii) dispose of its right to deliver or receive
against a firm commitment, it may incur a gain or loss. (At the time a Series
makes a commitment to purchase or sell a security on a when-issued or firm
commitment basis, it records the transaction and reflects the value of the
security purchased, or if a sale, the proceeds to be received in determining its
net asset value.)
To the extent a Series engages in when-issued and delayed delivery
transactions, it will do so for the purpose of acquiring or selling securities
consistent with its investment objectives and policies and not for the purposes
of investment leverage. A Series enters into such transactions only with the
intention of actually receiving or delivering the securities, although (as noted
above) when-issued securities and firm commitments may be sold prior to the
settlement date. In addition, changes in interest rates in a direction other
than that expected by the Adviser before settlement of a purchase will affect
the value of such securities and may cause a loss to a Series.
When-issued transactions and firm commitments may be used to offset
anticipated changes in interest rates and prices. For instance, in periods of
rising interest rates and falling prices, a Series might sell securities in its
portfolio on a forward commitment basis to attempt to limit its exposure to
anticipated falling prices. In periods of falling interest rates and rising
prices, a Series might sell portfolio securities and purchase the same or
similar securities on a when-issued or forward commitment basis, thereby
obtaining the benefit of currently higher cash yields. An example of a
when-issued or delayed delivery security is a "to be announced" or "TBA"
mortgage-backed security. A TBA mortgage-backed security transaction arises when
a mortgage-backed security is purchased or sold with the specific pools to be
announced on a future settlement date, with no definitive maturity date. The
actual principal amount and maturity date will be determined upon settlement
date.
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BORROWING. All of the Series (except the CASH MANAGEMENT AND
GOVERNMENT/AAA SERIES) are authorized to borrow money to the extent permitted by
applicable law. The 1940 Act permits each Series to borrow up to 33 1/3% of its
total assets from banks for temporary or emergency purposes. In seeking to
enhance performance, a Series may borrow for investment purposes and may pledge
assets to secure such borrowings. The CASH MANAGEMENT AND GOVERNMENT/AAA SERIES
may not borrow money except for temporary emergency purposes, and then in an
amount not in excess of 5% of the value of the Series' total assets. In the
event that asset coverage for a Series' borrowings falls below 300%, the Series
will reduce within three days the amount of its borrowings in order to provide
for 300% asset coverage.
To the extent a Series borrows for investment purposes, borrowing
creates leverage which is a speculative characteristic. Although a Series is
authorized to borrow, it will do so only when the Adviser believes that
borrowing will benefit the Series after taking into account considerations such
as the costs of borrowing and the likely investment returns on securities
purchased with borrowed monies. Borrowing by a Series will create the
opportunity for increased net income but, at the same time, will involve special
risk considerations. Leveraging results from borrowing and will magnify declines
as well as increases in a Series's net asset value per share and net yield. The
Series expect that all of their borrowing will be made on a secured basis. The
Series will maintain a segregated account of cash or other liquid assets
securing the borrowing for the benefit of the lenders. If assets used to secure
a borrowing decrease in value, a Series may be required to pledge additional
collateral to the lender in the form of cash or securities to avoid liquidation
of those assets.
Any such borrowing will be made pursuant to the requirements of the
1940 Act and will be made only to the extent that the value of each Series'
assets less its liabilities, other than borrowings, is equal to at least 300% of
all borrowings including the proposed borrowing. If the value of a Series'
assets, so computed, should fail to meet the 300% asset coverage requirement,
the Series is required, within three business days, to reduce its bank debt to
the extent necessary to meet such requirement and may have to sell a portion of
its investments at a time when independent investment judgment would not dictate
such sale. Interest on money borrowed is an expense the Series would not
otherwise incur, so that it may have little or no net investment income during
periods of substantial borrowings. Since substantially all of a Series' assets
fluctuate in value, but borrowing obligations are fixed when the Series has
outstanding borrowings, the net asset value per share of a Series
correspondingly will tend to increase and decrease more when the Series' assets
increase or decrease in value than would otherwise be the case. A Series' policy
regarding use of leverage is a fundamental policy, which may not be changed
without approval of the shareholders of the Series.
REVERSE REPURCHASE AGREEMENTS. Reverse repurchase agreements may be
entered into with brokers, dealers, domestic and foreign banks or other
financial institutions that have been determined by the Adviser to be
creditworthy. In a reverse repurchase agreement, the Series sells a security and
agrees to repurchase it at a mutually agreed upon date and price, reflecting the
interest rate effective for the term of the agreement. It may also be viewed as
the borrowing of money by the Series. The Series' investment of the proceeds of
a reverse repurchase agreement is the speculative factor known as leverage. A
Series will enter into a reverse repurchase agreement only if the interest
income from
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<PAGE> 42
investment of the proceeds is expected to be greater than the interest expense
of the transaction and the proceeds are invested for a period no longer than the
term of the agreement. The Series will maintain with the custodian a separate
account with a segregated portfolio of cash or liquid securities in an amount at
least equal to its purchase obligations under these agreements (including
accrued interest). In the event that the buyer of securities under a reverse
repurchase agreement files for bankruptcy or becomes insolvent, the buyer or its
trustee or receiver may receive an extension of time to determine whether to
enforce the Series' repurchase obligation, and the Series' use of proceeds of
the agreement may effectively be restricted pending such decision. Reverse
repurchase agreements are considered to be borrowings and are subject to the
percentage limitations on borrowings. See "Investment Restrictions."
ROLL TRANSACTIONS involve the sale of mortgage or other asset-backed
securities ("roll securities") with the commitment to purchase substantially
similar (same type, coupon and maturity) securities on a specified future date.
During the roll period, the Series foregoes principal and interest paid on the
Roll Securities. The Series is compensated by the difference between the current
sales price and the lower forward price for the future purchase (often referred
to as the "drop") as well as by the interest earned on the cash proceeds of the
initial sale. The Series also could be compensated through the receipt of fee
income equivalent to a lower forward price. A "covered roll" is a specific type
of dollar roll for which there is an offsetting cash position or a cash
equivalent security position that matures on or before the forward settlement
date of the dollar roll transaction. A Series will enter only into covered
rolls. Because "roll" transactions involve both the sale and purchase of a
security, they may cause the reported portfolio turnover rate to be higher than
that reflecting typical portfolio management activities.
Roll transactions involve certain risks, including the following: if
the broker-dealer to whom the Series sells the security becomes insolvent, the
Series' right to purchase or repurchase the security subject to the dollar roll
may be restricted and the instrument that the Series is required to repurchase
may be worth less than an instrument that the Series originally held. Successful
use of roll transactions will depend upon the Adviser's ability to predict
correctly interest rates and in the case of mortgage dollar rolls, mortgage
prepayments. For these reasons, there is no assurance that dollar rolls can be
successfully employed.
WARRANTS give the holder of the warrant a right to purchase a given
number of shares of a particular issue at a specified price until expiration.
Such investments can generally provide a greater potential for profit or loss
than investments of equivalent amounts in the underlying common stock. The
prices of warrants do not necessarily move with the prices of the underlying
securities. If the holder does not sell the warrant, it risks the loss of its
entire investment if the market price of the underlying stock does not, before
the expiration date, exceed the exercise price of the warrant plus the cost
thereof. Investment in warrants is a speculative activity. Warrants pay no
dividends and confer no rights (other than the right to purchase the underlying
stock) with respect to the assets of the issuer. Although the Series may not
invest directly in warrants, such Series may invest in securities that are
acquired as part of a unit consisting of a combination of fixed income and
equity securities or securities to which warrants are attached.
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ADRS, GDRS, AND EDRS. Foreign securities include, among other things,
American Depositary Receipts ("ADRs") and other Depositary Receipts, including
Global Depositary Receipts ("GDRs"), European Depositary Receipts ("EDRs") and
others (which, together with ADRs, GDRs and EDRs, are hereinafter collectively
referred to as "Depositary Receipts"), to the extent that such Depositary
Receipts become available. ADRs are securities, typically issued by a U.S.
financial institution (a "depositary"), that evidence ownership interests in a
security or a pool of securities issued by a foreign issuer (the "underlying
issuer") and deposited with the depositary. ADRs include American Depositary
Shares and New York Shares and may be "sponsored" or "unsponsored." Sponsored
ADRs are established jointly by a depositary and the underlying issuer, whereas
unsponsored ADRs may be established by a depositary without participation by the
underlying issuer. GDRs, EDRs and other types of Depositary Receipts are
typically issued by foreign depositaries, although they may also be issued by
U.S. depositaries, and evidence ownership interests in a security or pool of
securities issued by either a foreign or a U.S. corporation. Holders of
unsponsored Depositary Receipts generally bear all the costs associated with
establishing the unsponsored Depositary Receipt. The depositary of unsponsored
Depositary Receipts is under no obligation to distribute shareholder
communications received from the underlying issuer or to pass through to the
holders of the unsponsored Depositary Receipt voting rights with respect to the
deposited securities or pool of securities. Depositary Receipts are not
necessarily denominated in the same currency as the underlying securities to
which they may be connected. Generally, Depositary Receipts in registered form
are designed for use in the U.S. securities market and Depositary Receipts in
bearer form are designed for use in securities markets outside the United
States. A Series may invest in sponsored and unsponsored Depositary Receipts.
For purposes of a Series' investment policies, the Series' investments in
Depositary Receipts will be deemed to be investments in the underlying
securities.
FOREIGN EXPOSURE: Investing outside the U.S. involves special risks,
caused by, among other things: currency controls, fluctuating currency values;
different account, auditing, and financial reporting regulations and practices
in some countries; changing local and regional economic, political, and social
conditions; expropriation or confiscatory taxation; greater market volatility;
differing securities market structures; and various administrative difficulties
such as delays in clearing and settling portfolio transactions or in receiving
payment of dividends. However, in the option of the Investment Adviser,
investing outside the U.S. also can reduce certain portfolio risks due to
greater diversification opportunities.
The risks described above are potentially heightened in connection with
investments in developing countries. Although there is no universally accepted
definition, a developing country is generally considered to be a country which
is in the initial stages of its industrialization cycle with a low per capital
gross national product. For example, political and/or economic structures in
these countries may be in their infancy and developing rapidly. Historically,
the markets of developing countries have been more volatile than the markets of
developed countries.
Additional costs could be incurred in connection with a Series'
investment activities outside the U.S. Brokerage commission may be higher
outside the U.S., and the Series will bear certain expenses in connection with
its currency transactions. Furthermore, increased custodian costs may be
associated with the maintenance in certain jurisdictions.
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<PAGE> 44
The GROWTH and GROWTH-INCOME SERIES may invest up to 10% of its assets
in securities of issuers domiciled outside the U.S. and not included in the S&P
500. Under normal circumstances, the INTERNATIONAL SERIES will invest at least
65% of its assets in equity securities of issuers domiciled outside the U.S. The
ASSET ALLOCATION SERIES may invest up to 10% of its equity assets in securities
of issuers domiciled outside the U.S. and not included in the S&P 500 and up to
5% of its debt assets in securities of issuers domiciled outside the U.S. The
HIGH-YIELD BOND SERIES may invest up to 25% of its assets in securities of
issuers domiciled outside the U.S. The U.S. GOVERNMENT/AAA-RATED SECURITIES
SERIES may invest up to 5% of its assets in securities of issuers domiciled
outside the U.S.; however, all such securities must be U.S. dollar denominated.
Under normal circumstances, the CASH MANAGEMENT SERIES does not invest in
non-U.S. securities.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS ("Forward Contracts")
involves bilateral obligations of one party to purchase, and another party to
sell, a specific currency at a future date (which may be any fixed number of
days from the date of the contract agreed upon by the parties), at a price set
at the time the contract is entered into. These contracts are traded in the
interbank market conducted directly between currency traders (usually large
commercial banks) and their customers. No price is paid or received upon the
purchase or sale of a Forward Contract. Series may use Forward Contracts to
reduce certain risks of their respective investments and/or to attempt to
enhance return.
Forward Contracts are generally used to protect against uncertainty in
the level of future exchange rates. The use of Forward Contracts does not
eliminate fluctuations in the prices of the underlying securities a Series owns
or intends to acquire, but it does fix a rate of exchange in advance. In
addition, although Forward Contracts limit the risk of loss due to a decline in
the value of the hedged currencies, at the same time they limit any potential
gain that might result should the value of the currencies increase.
Forward Contracts may also be entered into with respect to specific
transactions. For example, when a Series enters into a contract for the purchase
or sale of a security denominated in (or affected by fluctuations in, in the
case of ADRs) a foreign currency, or when a Series anticipates receipt of
dividend payments in a foreign currency, the Series may desire to "lock-in" the
U.S. dollar price of the security or the U.S. dollar equivalent of such payment
by entering into a Forward Contract, for a fixed amount of U.S. dollars per unit
of foreign currency, for the purchase or sale of the amount of foreign currency
involved in the underlying transaction. A Series will thereby be able to protect
itself against a possible loss resulting from an adverse change in the
relationship between the currency exchange rates during the period between the
date on which the security is purchased or sold, or on which the payment is
declared, and the date on which such payments are made or received.
Forward Contracts are also used to lock in the U.S. dollar value of
portfolio positions ("position hedge"). In a position hedge, for example, when a
Series believes that foreign currency may suffer a substantial decline against
the U.S. dollar, it may enter into a Forward Contract to sell an amount of that
foreign currency approximating the value of some or all of the portfolio
securities denominated in (or affected by fluctuations in, in the case of ADRs)
such foreign currency, or when a Series believes that the U.S. dollar may suffer
a substantial decline against a foreign currency, it
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<PAGE> 45
may enter into a Forward Contract to buy that foreign currency for a fixed
dollar amount. In this situation a Series may, in the alternative, enter into a
Forward Contract to sell a different foreign currency for a fixed U.S. dollar
amount where the Series believes that the U.S. dollar value of the currency to
be sold pursuant to the forward contract will fall whenever there is a decline
in the U.S. dollar value of the currency in which portfolio securities of the
Series are denominated ("cross-hedged").
The Series will cover outstanding forward currency contracts by
maintaining either liquid portfolio securities denominated in the currency
underlying the forward contract or the currency being hedged, or by owning a
corresponding opposite forward position (long or short position, as the case may
be) in the same underlying currency with the same maturity date
("Covering/Closing Forwards"). To the extent that a Series is not able to cover
its forward currency positions with either underlying portfolio securities or
with Covering/Closing Forwards, or to the extent to any portion of a position is
either not covered by a corresponding opposite position or is "out of the money"
in the case where settlement prices are different on the short and long
positions, the Trust's custodian will place cash or liquid securities in a
separate account of the Series having a value equal to the aggregate amount of
the Series' commitments under Forward Contracts entered into with respect to
position hedges and cross-hedges. If the value of the securities placed in a
separate account declines, additional cash or securities will be placed in the
account on a daily basis so that the value of the account will equal the amount
of the Series' commitments with respect to such contracts. As an alternative to
maintaining all or part of the separate account, a Series may purchase a call
option permitting the Series to purchase the amount of foreign currency being
hedged by a forward sale contract at a price no higher than the Forward Contract
price or the Series may purchase a put option permitting the Series to sell the
amount of foreign currency subject to a forward purchase contract at a price as
high or higher than the Forward Contract price. Unanticipated changes in
currency prices may result in poorer overall performance for a Series than if it
had not entered into such contracts.
The precise matching of the Forward Contract amounts and the value of
the securities involved will not generally be possible because the future value
of such securities in foreign currencies will change as a consequence of market
movements in the value of these securities between the date the Forward Contract
is entered into and the date it is sold. Accordingly, it may be necessary for a
Series to purchase additional foreign currency on the spot (i.e., cash) market
(and bear the expense of such purchase), if the market value of the security is
less than the amount of foreign currency a Series 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 a Series is obligated to deliver.
The projection of short-term currency market movements is extremely difficult,
and the successful execution of a short-term hedging strategy is highly
uncertain. Forward Contracts involve the risk that anticipated currency
movements will not be accurately predicted, causing a Series to sustain losses
on these contracts and transactions costs.
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<PAGE> 46
At or before the maturity of a Forward Contract requiring a Series to
sell a currency, the Series may either sell a portfolio security and use the
sale proceeds to make delivery of the currency or retain the security and offset
its contractual obligation to deliver the currency by purchasing a second
contract pursuant to which the Series will obtain, on the same maturity date,
the same amount of the currency that it is obligated to deliver. Similarly, a
Series may close out a Forward Contract requiring it to purchase a specified
currency by entering into a second contract entitling it to sell the same amount
of the same currency on the maturity date of the first contract. A Series would
realize a gain or loss as a result of entering into such an offsetting Forward
Contract under either circumstance to the extent the exchange rate or rates
between the currencies involved moved between the execution dates of the first
contract and offsetting contract.
The cost to a Series of engaging in Forward Contracts varies with
factors such as the currencies involved, the length of the contract period and
the market conditions then prevailing. Because Forward Contracts are usually
entered into on a principal basis, no fees or commissions are involved. Because
such contracts are not traded on an exchange, a Series must evaluate the credit
and performance risk of each particular counterparty under a Forward Contract.
Although a Series values its assets daily 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. A Series may convert foreign currency from time to time, and
investors should be aware of the costs of currency conversion. Foreign exchange
dealers do not charge a fee for conversion, but they do seek to realize a profit
based on the difference between the prices at which they buy and sell various
currencies. Thus, a dealer may offer to sell a foreign currency to a Series at
one rate, while offering a lesser rate of exchange should the Series desire to
resell that currency to the dealer.
In addition, each Series may invest in securities and other instruments
that do not presently exist but may be developed in the future, provided that
each such investment is consistent with the Series' investment objectives,
policies and restrictions and is otherwise legally permissible under federal and
state laws. The Prospectus and SAI, as appropriate, will be amended or
supplemented as appropriate to discuss any such new investments.
PORTFOLIO TRADING. A Series may engage in portfolio trading when it is
believed by the Manager that the sale of a security owned and the purchase of
another security of better value can enhance principal and/or increase income. A
security may be sold to avoid any prospective decline in market value in light
of what is evaluated as an expected rise in prevailing yields, or a security may
be purchased in anticipation of a market rise (a decline in prevailing yields).
A security also may be sold and a comparable security purchased coincidentally
in order to take advantage of what is believed to be a disparity in the normal
yield and price relationship between the two securities.
In addition, each Series may invest in securities and other instruments
that do not presently exist but may be developed in the future, provided that
each such investment is consistent with the Series' investment objectives,
policies and restrictions and is otherwise legally permissible under federal and
state laws. The Prospectus and SAI, as appropriate, will be amended or
supplemented as appropriate to discuss any such new investments.
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<PAGE> 47
SUPPLEMENTAL INFORMATION CONCERNING HIGH-YIELD,
HIGH-RISK BONDS AND SECURITIES RATINGS.
HIGH-YIELD, HIGH-RISK BONDS may present certain risks, which are
discussed below:
Sensitivity to Interest Rate and Economic Changes - High-yield bonds
are very sensitive to adverse economic changes and corporate
developments. During an economic downturn or substantial period of
rising interest rates, highly leveraged issuers may experience
financial stress that would adversely affect their ability to service
their principal and interest payment obligations, to meet projected
business goals, and to obtain additional financing. If the issuer of a
bond defaults on its obligations to pay interest or principal or enters
into bankruptcy proceedings, a Series may incur losses or expenses in
seeking recovery of amounts owed to it. In addition, periods of
economic uncertainty and changes can be expected to result in increased
volatility of market prices of high-yield bonds and the Series' net
asset value.
Payment Expectations - High-yield bonds may contain redemption or call
provisions. If an issuer exercised these provisions in a declining
interest rate market, a Series would have to replace the security with
a lower yielding security, resulting in a decreased return for
investors. Conversely, a high-yield bond's value will decrease in a
rising interest rate market, as will the value of the Series' assets.
If the Series experiences unexpected net redemptions, this may force it
to sell high-yield bonds without regard to their investment merits,
thereby decreasing the asset base upon which expenses can be spread and
possibly reducing the Series' rate of return.
Liquidity and Valuation - There may be little trading in the secondary
market for particular bonds, which may affect adversely a Series'
ability to value accurately or dispose of such bonds. 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 thin market.
The following are additional restrictions and/or requirements concerning
the ratings of securities:
- Up to 10% of the GROWTH SERIES' assets may be invested in
straight debt securities rated BB or below by Standard &
Poor's Ratings Services, a Division of the McGraw-Hill
Companies, Inc. ("S&P") and Ba or below by Moody's Investors
Service, Inc. ("Moody's") or in unrated securities that are
determined to be of equivalent quality, provided the
Investment Adviser determines that these securities have
characteristics similar to the equity securities eligible for
purchase by the GROWTH SERIES. These securities are commonly
referred to as "junk bonds" or "high-yield, high-risk" bonds,
carry a higher degree of investment risk than higher rated
bonds and are considered speculative.
- Up to 5% of the INTERNATIONAL SERIES' assets may be invested
in straight debt securities rated BB or below by S&P or Ba or
below by Moody's or in unrated securities that are determined
to be of equivalent quality.
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<PAGE> 48
- Up to 5% of the GROWTH-INCOME SERIES' assets may be invested
in straight debt securities rated BB or below by S&P and Ba or
below by Moody's or in unrated securities that are determined
to be equivalent quality by the Investment Adviser.
- Up to 25% of the ASSET ALLOCATION SERIES' fixed-income assets
may be invested in securities rated BB or below by S&P or Ba
or below by Moody's, including securities rated as low as CC
by S&P or Ca by Moody's.
- The HIGH-YIELD BOND SERIES may invest without limitation in
bonds rated as low as Ca by Moody's or CC by S&P (or in bonds
that are unrated but determined to be of equivalent quality).
In addition, the Series may invest up to 10% of its total
assets in bonds rated C by Moody's or D by S&P (or in bonds
that are unrated but determined by the Investment Adviser to
be of equivalent quality).
- The U.S. GOVERNMENT/AAA-RATED SECURITIES SERIES (the
"Government/AAA Series") may not purchase any security, other
than a U.S. Government security, not rated AAA by S&P or Aaa
by Moody's (or that has not received a rating but is
determined to be of comparable quality by the Investment
Adviser). However, if the rating of a security currently held
by the Series is reduced below AAA (or Aaa), the Series is not
required to dispose of the security.
- The CASH MANAGEMENT SERIES invests only in high-quality
short-term debt obligations.
SUPPLEMENTAL INFORMATION CONCERNING INVESTING IN VARIOUS COUNTRIES
Investing outside the U.S. involves special risks, particularly in certain
developing countries, caused by, among other things: fluctuating currency
values; different accounting, auditing, and financial reporting regulations and
practices in some countries; changing local and regional economic, political,
and social conditions; expropriation or confiscatory taxation; foreign taxation
or income from foreign sources; greater market volatility; differing securities
market structures; and various administrative difficulties such as delays in
clearing and settling portfolio transactions or in receiving payment of
dividends. However, in the opinion of the Investment Adviser, investing outside
the U.S. also can reduce certain portfolio risks due to greater diversification
opportunities. Although there is no universally accepted definition, a
developing country is generally a country with a low or middle income economy or
that is in the early stages of its industrialization cycle. Developing countries
may change over time depending on market and economic conditions. Historically,
the markets of developing countries have been more volatile than the markets of
developed countries.
Additional costs could be incurred in connection with the Series'
investment activities outside the U.S. Brokerage commissions are generally
higher outside the U.S., and the Series will bear certain expenses in connection
with their currency transactions. Furthermore, increased custodian costs may be
associated with the maintenance of assets in certain jurisdictions.
B-25
<PAGE> 49
The U.S. GOVERNMENT/AAA SERIES may purchase obligations of foreign
corporation or governmental entities, provided they are U.S. dollar denominated
and highly liquid.
With respect to its non-U.S. holdings, pursuant to California Department of
Insurance diversification guidelines, a Series will invest in securities with
issuers located in at least five different non-U.S. countries at all times with
no country representing more than 20% of the Series' non-U.S. assets. However,
this minimum number of countries is reduced to four when non-U.S. country
investments comprise less than 80% of the Series' net assets; to three countries
when less than 60% of net assets; to two countries when less than 40% of net
assets; and to one country when less than 20% of net assets.
An additional 15% of a Series' non-U.S. assets may be invested in
securities of issuers located in any one of following countries: Australia,
Canada, France, Japan, the United Kingdom or Germany. This policy is not deemed
a fundamental policy and therefore may be changed without shareholder approval.
INVESTMENT RESTRICTIONS
The Fund has adopted certain investment restrictions for each Series that
cannot be changed without approval by a majority of its outstanding shares. Such
majority is defined as the vote of the lesser of (i) 67 percent or more of the
outstanding shares of the Series present at a meeting, if the holders of more
than 50 percent of the outstanding shares of the Series are present in person or
by proxy or (ii) more than 50 percent of the outstanding shares of the Series.
INVESTMENT RESTRICTIONS OF THE CASH MANAGEMENT SERIES
The Cash Management Series has adopted the following restrictions that are
fundamental policies. These fundamental policies, as well as the Cash Management
Series' investment objective, cannot be changed without approval by a majority
of its outstanding shares. All percentage limitations expressed in the following
investment restrictions are measured immediately after the relevant transaction
is made. The Cash Management Series may not:
1. Invest more than 5% of the value of its total assets in the securities
of any one issuer, provided that this limitation shall apply only to 75% of the
value of the Series' total assets, and, provided further, that the limitation
shall not apply to obligations of the government of the U.S. or of any
corporation organized as an instrumentality of the U.S. under a general act of
Congress. The short-term obligations of commercial banks are excluded from this
5% limitation with respect to 25% of the Series' total assets.
2. As to 75% of its total assets, purchase more than 10% of the outstanding
voting class of securities of an issuer.
3. Invest more than 25% of the Series' total assets in the securities of
issuers in the same industry. Obligations of the U.S. Government, its agencies
and instrumentalities, are not subject to this 25% limitation on industry
concentration. In addition, the Series may, if deemed advisable, invest more
than 25% of its assets in the obligations of domestic commercial banks.
B-26
<PAGE> 50
4. Make loans to others except for the purchase of the debt securities
listed above under its Investment Policies. The Series may, however, enter into
repurchase agreements.
5. Borrow money, except from banks for temporary purposes, and then in an
amount not in excess of 5% of the value of the Series' total assets. Moreover,
in the event that the asset coverage for such borrowings falls below 300%, the
Series will reduce within three days the amount of its borrowings in order to
provide for 300% asset coverage.
6. Sell securities short except to the extent that the Series
contemporaneously owns or has the right to acquire at no additional cost
securities identical to those sold short.
7. Act as underwriter of securities issued by others, engage in
distribution of securities for others, or make investments in other companies
for the purpose of exercising control or management.
The following additional restrictions are not fundamental policies and may
be changed by the Trustees without a vote of shareholders. The Cash Management
Series may not:
8. Enter into any repurchase agreement maturing in more than seven days or
invest in any other illiquid security if, as a result, more than 10% of the
Series' total assets would be so invested. Restricted securities eligible for
resale pursuant to Rule 144A under the Securities Act that have a readily
available market, and commercial paper exempted from registration under the
Securities Act pursuant to Section 4(2) of that Act that may be offered and sold
to "qualified institutional buyers" as defined in Rule 144A, which the
Investment Adviser has determined to be liquid pursuant to guidelines
established by the Trustees, will not be considered illiquid for purposes of
this limitation on illiquid securities.
9. Pledge or hypothecate its assets.
10. Invest in puts, calls, straddles, spreads or any combination thereof,
except as permitted by the Prospectus and Statement of Additional Information,
as amended from time to time.
11. Invest in securities of other investment companies, except to the
extent permitted by applicable law and the Prospectus and Statement of
Additional Information, as amended from time to time.
Notwithstanding investment restriction Number 1 above, in order to comply
with Rule 2a-7 under the 1940 Act, the Cash Management Series has adopted a more
restrictive policy (which may be changed by the Trustees without shareholder
approval) of investing no more than 5% of its assets (measured at the time of
purchase) in the securities of any one issuer (other than the U.S. government);
provided however, that the Cash Management Series may invest, as to 25% of its
assets, more than 5% of its assets in certain high-quality securities (as
defined in the Rule) of a single issuer for a period of up to three business
days. The purchase by the Cash Management Series of securities that have "put"
or "stand-by" commitment features are not considered "puts" for purposes of
investment restriction Number 10 above.
B-27
<PAGE> 51
INVESTMENT RESTRICTIONS OF THE GROWTH SERIES, THE INTERNATIONAL SERIES, THE
GROWTH-INCOME SERIES, THE ASSET ALLOCATION SERIES AND THE HIGH-YIELD BOND SERIES
The Growth Series, the International Series, the Growth-Income Series, the
Asset Allocation Series and the High-Yield Bond Series have each adopted the
following investment restrictions that are fundamental policies. These
fundamental policies, as well as each Series' investment objective, cannot be
changed without the approval of the holders of a majority of the outstanding
shares of the respective Series. All percentage limitations expressed in the
following investment restrictions are measured immediately after the relevant
transaction is made. The Growth Series, the International Series, the
Growth-Income Series, the Asset Allocation Series and the High-Yield Bond Series
may not:
1. Invest more than 5% of the value of the total assets of the Series in
the securities of any one issuer, provided that this limitation shall apply only
to 75% of the value of the Series' total assets and, provided further, that the
limitation shall not apply to obligations of the government of the United States
or of any corporation organized as an instrumentality of the U.S. under a
general Act of Congress. The short-term obligations of commercial banks are
excluded from this 5% limitation with respect to 25% of the Series' total
assets.
2. As to 75% of its total assets, purchase more than 10% of the outstanding
voting class of securities of an issuer.
3. Invest more than 25% of the Series' total assets in the securities of
issuers in the same industry. Obligations of the U.S. Government, its agencies
and instrumentalities are not subject to this 25% limitation on industry
concentration. The Series may, if deemed advisable, invest more than 25% of its
assets in the obligations of domestic commercial banks.
4. Invest in real estate (including limited partnership interests but
excluding securities of companies, such as real estate investment trusts, that
deal in real estate or interests therein).
5. Purchase commodities or commodity contracts; except that the
International Series, the Asset Allocation Series and the High-Yield Bond Series
may engage in transactions involving currencies (including forward and futures
contracts or put and call options).
6. Make loans to others except for (a) the purchase of debt securities; (b)
entering into repurchase agreements; and (c) the lending of its portfolio
securities.
7. Borrow money, except to the extent permitted by applicable law.
8. Purchase securities on margin.
The following additional restrictions are not fundamental policies and may
be changed by the Trustees without a vote of shareholders. The Growth Series,
the International Series, the Growth-Income Series, the Asset Allocation Series
and the High-Yield Bond Series may not:
B-28
<PAGE> 52
9. Enter into any repurchase agreement maturing in more than seven days or
invest in any other illiquid security if, as a result, more than 15% of the
Series' total assets would be so invested. Restricted securities eligible for
resale pursuant to Rule 144A under the Securities Act that have a readily
available market, and commercial paper exempted from registration under the
Securities Act pursuant to Section 4(2) of that Act that may be offered and sold
to "qualified institutional buyers" as defined in Rule 144A, which the
Investment Adviser has determined to be liquid pursuant to guidelines
established by the Trustees, will not be considered illiquid for purposes of
this limitation on illiquid securities.
10. Pledge or hypothecate its assets.
11. Invest in puts, calls, straddles, spreads or any combination thereof,
except as permitted by the Prospectus and Statement of Additional Information,
as amended from time to time.
12. Invest in securities of other investment companies, except to the
extent permitted by applicable law and the Prospectus and Statement of
Additional Information, as amended from time to time.
13. Invest in companies for the purpose of exercising control or
management.
14. Engage in underwriting of securities issued by others, except to the
extent it may be deemed to be acting as an underwriter in the purchase and
resale of portfolio securities.
15. Sell securities short, except to the extent permitted by applicable
law.
INVESTMENT RESTRICTIONS OF THE U.S. GOVERNMENT/AAA-RATED SECURITIES SERIES
The Government/AAA Series has adopted the following investment restrictions
that are fundamental policies. These fundamental policies, as well as the
Government/AAA Series' investment objective, cannot be changed without approval
of a majority of its outstanding shares. All percentage limitations expressed in
the following investment restrictions are measured immediately after the
relevant transaction is made. The Government/AAA Series may not:
1. Purchase any security (other than securities issued or guaranteed by the
U.S. government or its agencies or instrumentalities ("U.S. government
securities")) if, immediately after and as a result of such investment, more
than 5% of the value of the Government/AAA Series' total assets would be
invested in securities of the issuer.
2. Invest 25% or more of the value of its total assets in the securities of
issuers conducting their principal business activities in the same industry,
except that this limitation shall not apply to U.S. government securities or
other securities to the extent they are backed by or represent interests in U.S.
government securities or U.S. government-guaranteed mortgages.
3. Invest in companies for the purpose of exercising control or management.
B-29
<PAGE> 53
4. Buy or sell real estate or commodities or commodity contracts in the
ordinary course of its business; however, the Government/AAA Series may purchase
or sell readily marketable debt securities secured by real estate or interests
therein or issued by companies that invest in real estate or interests therein,
including real estate investment trusts.
5. Engage in the business of underwriting securities of other issuers,
except to the extent that the disposal of an investment position may technically
cause the Series to be considered an underwriter as that term is defined under
the Securities Act.
6. Make loans to others except for (a) the purchase of debt securities; (b)
entering into repurchase agreements; and (c) the lending of its portfolio
securities.
7. Sell securities short, except to the extent that the Government/AAA
Series contemporaneously owns or has the right to acquire at no additional cost
securities identical to those sold short.
8. Purchase securities on margin, except that the Series may obtain
necessary short-term credits for the clearance of purchases and sales of
securities.
9. Borrow money, except from banks for temporary or emergency purposes not
in excess of 5% of the value of the Government/AAA Series' total assets, except
that the Series may enter into reverse repurchase agreements.
10. Write, purchase or sell puts, calls or combinations thereof.
The following additional restrictions are not fundamental policies and may
be changed by the Trustees without a vote of shareholders. The Government/AAA
Series may not:
1. Enter into any repurchase agreement maturing in more than seven days or
invest in any other illiquid security if, as a result, more than 15% of the
Series' total assets would be so invested. Restricted securities eligible for
resale pursuant to Rule 144A under the Securities Act that have a readily
available market, and commercial paper exempted from registration under the
Securities Act pursuant to Section 4(2) of that Act that may be offered and
sold to "qualified institutional buyers" as defined in Rule 144A, which the
Investment Adviser has determined to be liquid pursuant to guidelines
established by the Trustees, will not be considered illiquid for purposes of
this limitation on illiquid securities.
2. Mortgage, pledge, or hypothecate any of its assets, provided that this
restriction shall not apply to the sale of securities pursuant to a reverse
repurchase agreement.
3. Invest in securities of other investment companies, except to the
extent permitted by applicable law and the Prospectus and Statement of
Additional Information, as amended from time to time.
FUND OFFICERS AND TRUSTEES
The Trustees and executive officers of the Fund and their principal
occupations for the past five years are set forth below. Unless otherwise noted,
the address of each executive officer and trustee is 1 SunAmerica Center, Los
Angeles, California 90067-6022.
B-30
<PAGE> 54
<TABLE>
<CAPTION>
Principal Occupations
Name, Age and Address Position with the Fund During Past Five Years
<S> <C> <C>
James K. Hunt, *48 Trustee, Chairman and Executive Vice President, SunAmerica
President Investments, Inc. (1993 to Present);
President, SunAmerica Corporate
Finance, (since January 1994);
Trustee, Chairman and President,
SunAmerica Series Trust (since 1994)
and Seasons Series Trust (since 1994).
Monica C. Lozano, 43 Trustee Associate Publisher, La Opinion
3257 Purdue Avenue (newspaper publishing concern) (since
Los Angeles, CA 90066 1995); Director, First Interstate Bank
of California (1994-1996); Editor, La
Opinion (1991-1995). Trustee,
SunAmerica Series Trust and Seasons
Series Trust
Allan L. Sher, 68 Trustee Retired; Trustee, SunAmerica Series
Trust (since 1994) and Seasons Series
Trust (since 1997).
William M. Wardlaw, 53 Trustee Principal, Freeman Spogli & Co.
(investment banking) (1988-Present),
Vice President and Director, MCC
International Holdings (cable) (since
April 1996); Trustee, SunAmerica
Series Trust and Seasons Series Trust.
Susan L. Harris, 43 Vice President, Senior Vice President (since November
Counsel and Secretary 1995), Secretary (since 1989) and
General Counsel-Corporate Affairs
(since December 1994), SunAmerica
Inc.; Senior Vice President and
Secretary, Anchor National (since
1990); Vice President, Counsel and
Secretary, SunAmerica Series Trust
(since 1993) and Seasons Series
Trust (since 1997); Joined SunAmerica
Inc. in 1985.
</TABLE>
B-31
<PAGE> 55
<TABLE>
<CAPTION>
Principal Occupations
Name, Age and Address Position with the Fund During Past Five Years
<S> <C> <C>
Peter C. Sutton, 35 Vice President, Senior Vice President, SunAmerica
The SunAmerica Center Treasurer and Asset Management Corp. (since April
733 Third Avenue Controller 1997); Treasurer (since February
New York, NY 10017-3204 1996), SunAmerica Mutual Funds,
Anchor Series Trust and Style
Select Series, Inc. (since 1996),
SunAmerica Strategic Investment
Series, Inc. (since December 1998);
Vice President (since 1994), Treasurer
and Controller (since February 2000),
SunAmerica Series Trust and Seasons
Series Trust; Vice President
and Assistant Treasurer, Brazos Mutual
Funds (since May 1999), formerly, Vice President,
SunAmerica (1994-1997); Controller,
SunAmerica Mutual Funds and Anchor Series
Trust (March 1993 to February 1996);
Assistant Treasurer, SunAmerica Series Trust and
Seasons Series Trust (1994-February 2000); Joined
SAAMCo in 1990.
Robert M. Zakem, 42 Vice President and Vice President and Assistant Secretary,
The SunAmerica Center Assistant Secretary SunAmerica Series Trust (since 1993)
733 Third Avenue and Seasons Series Trust (since 1997);
New York, NY 10017-3204 Secretary and Chief Compliance
Officer, SunAmerica Mutual Funds
and Anchor Series Trust (since 1993)
and Style Select Series (since 1996);
Senior Vice President and General
Counsel, SunAmerica Asset
Management Corp. (since April 1993);
Executive Vice President, General
Counsel and Director, SunAmerica
Capital Services, Inc. (since August
1993); Vice President, General
Counsel and Assistant Secretary,
SunAmerica Fund Services, Inc. (since
January 1994); Secretary, SunAmerica
Strategic Investment Series, Inc. (since
1998); Vice President and Assistant
Secretary, Brazos Mutual Funds (since
May 1999).
</TABLE>
*A Trustee who may be deemed to be an "interested person" of the Fund as that
term is defined in the 1940 Act.
As of April 1, 2000, the officers and Trustees as a group owned an
aggregate of less than 1% of the shares of each Series.
B-32
<PAGE> 56
The Trustees of the Fund are responsible for the overall supervision of
the operation of the Fund and each Series and perform various duties imposed on
trustees of investment companies by the 1940 Act and under the Fund's
Declaration of Trust. The Fund pays no salaries or compensation to any of its
officers, all of whom are officers or employees of the Company or its
affiliates.
The following table sets forth information summarizing the compensation
of each Trustee of the Fund for their services as Trustees for the fiscal year
ended February 29, 2000. Trustees who are affiliated with the Company do not
receive any compensation.
COMPENSATION TABLE
<TABLE>
<CAPTION>
PENSION OR
RETIREMENT TOTAL COMPENSATION
AGGREGATE BENEFITS ACCRUED FROM REGISTRANT AND
COMPENSATION AS PART OF FUND FUND COMPLEX PAID
TRUSTEE FROM REGISTRANT EXPENSES TO TRUSTEES*
- ------------------ --------------- ---------------- -------------------
<S> <C> <C> <C>
Monica C. Lozano $13,000 N/A $24,000
Allan L. Sher $13,000 N/A $24,000
William M. Wardlaw $13,000 N/A $24,000
</TABLE>
* Information is as of February 29, 2000 for the three investment companies in
the complex (the Fund, SunAmerica Series Trust and Seasons Series Trust) that
pay fees to these Trustees.
INVESTMENT ADVISORY AGREEMENT
The Fund is advised by CRMC of Los Angeles, California, which is a
wholly-owned subsidiary of the Capital Group Companies, Inc., and is
headquartered at 333 South Hope Street, Los Angeles California 90071. The
Amended and Restated Investment Advisory Agreement between the Fund and the
Investment Adviser, dated March 14, 1990, provides that the Investment Adviser
shall determine what securities are purchased or sold by the Fund.
The Investment Advisory Agreement continues in effect with respect to
each Series from year to year provided that such continuance is specifically
approved at least annually by (i) the Board of Trustees, or by the vote of a
majority (as defined in the 1940 Act) of the outstanding voting securities of
each Series, and (ii) the vote of a majority of Trustees who are not parties to
the Agreement or interested persons (as defined in the 1940 Act) of any such
party, cast in person, at a meeting called for the purpose of voting on such
approval. The Agreement also provides that it may be terminated by either party
without penalty upon 60 days' written notice to the other party. The Agreement
provides for automatic termination upon assignment.
As compensation for its services, the Investment Adviser receives from
the Fund a fee, accrued daily and payable monthly, based on the net assets of
each Series. For all the Series except the International Series, the fee is
equal to 0.36% (on an annualized basis) of that portion of each Series' average
daily net assets not exceeding $30 million, plus 0.30% of that portion of the
Series' average daily net assets in excess of $30 million. The Investment
Adviser receives a fee, accrued
B-33
<PAGE> 57
daily and payable monthly, based on the net assets of the International Series,
at the annual rate of 0.66% of that portion of the Series' average daily net
assets not exceeding $60 million, plus 0.58% of that portion of the Series'
average daily net assets in excess of $60 million.
The following tables set forth the total advisory fees received by the
Investment Adviser from each Series pursuant to the Investment Advisory
Agreement for the last three fiscal years.
ADVISORY FEES
<TABLE>
<CAPTION>
FUND 2000 1999+ 1998
- ------------------------- ---------- -------- ----------
<S> <C> <C> <C>
Growth Series $3,064,305 $676,000 $2,453,000
International Series $1,363,317 $303,000 $1,283,000
Growth-Income Series $2,744,223 $692,000 $2,854,000
Asset Allocation Series $ 391,251 $102,000 $ 456,000
High-Yield Bond Series $ 257,089 $ 76,000 $ 353,000
U.S. Government/AAA-Rated
Securities Series $ 219,991 $ 62,000 $ 253,000
Cash Management Series $ 243,670 $ 56,000 $ 228,000
</TABLE>
+ For the period December 1, 1998 through February 28, 1999 (new fiscal year
end).
BUSINESS MANAGEMENT AGREEMENT
SunAmerica Asset Management Corp. (the "Business Manager"), organized
in 1982 under the laws of Delaware, provides administrative services to the
Fund. The Business Manager is an indirect wholly-owned subsidiary of Anchor
National Life Insurance Company, an indirect subsidiary of SunAmerica Inc., an
investment-grade financial services company. SunAmerica Inc. is wholly-owned by
American International Group, Inc., the leading U.S.-based international
insurance organization, which, through its affiliates, is also engaged in a
range of financial services activities. The Business Management Agreement
between the Fund and the Business Manager, dated January 1, 1999, provides that
the Business Manager will manage the business affairs of the Fund and perform
the administrative functions required of a registered investment company at all
times in accordance with the organizational documents and current prospectus of
the Fund.
As compensation for its services, the Business Manager receives a fee,
accrued daily and payable monthly, based on the net assets of each Series of the
Fund other than the International Series, at the annual rate of 0.24% of that
portion of each Series' average daily net assets not exceeding $30 million, plus
0.20% on that portion of the Series' average daily net assets in excess of $30
million. The Business Manager receives a monthly fee, accrued daily, based on
the average daily net assets of the International Series at the annual rate of
0.24%.
B-34
<PAGE> 58
The following tables set forth the total administrative fees paid by
the Fund to the Business Manager and its predecessor, Anchor Investment Adviser,
Inc., pursuant to the Business Management Agreement for the last three fiscal
years.
BUSINESS MANAGEMENT FEES
<TABLE>
<CAPTION>
FUND 2000 1999+ 1998
- --------------------------- ---------- -------- ----------
<S> <C> <C> <C>
Growth Series $2,042,870 $451,000 $1,635,000
International Series $ 544,269 $120,000 $ 511,000
Growth-Income Series $1,829,482 $461,000 $1,903,000
Asset Allocation Series $ 260,834 $ 68,000 $ 304,000
High-Yield Bond Series $ 171,392 $ 50,000 $ 236,000
U.S. Government/AAA-Rated $ 146,660 $ 41,000
Securities Series $ 169,000
Cash Management Series $ 162,446 $ 38,000 $ 152,000
</TABLE>
+ For the period December 1, 1998 through February 28, 1999 (new fiscal year
end).
The Business Management Agreement provides that it will continue in
effect for two years after initial approval, unless terminated, and may be
renewed from year to year thereafter as to each Series provided that such
continuance is specifically approved at least annually by (i) the Board of
Trustees of the Fund, or a vote of the majority (as defined in the 1940 Act) of
the outstanding voting securities of each Series, and (ii) the vote of a
majority of Trustees who are not parties to the Management Agreement or
interested persons (as defined in said Act) of any such party, cast in person at
a meeting called for the purpose of voting on such approval. The Business
Management Agreement also provides that it may be terminated by either party
without penalty upon 60 days' written notice to the other party. The Agreement
provides for its automatic termination upon assignment.
The Fund pays certain expenses not assumed by the Business Manager
including, but not limited to, expenses of shareholder meetings; reports to
shareholders and the printing of proxies and prospectuses; insurance premiums;
legal and auditing fees; dividend disbursement expenses; the expenses of
issuance, transfer and redemption of shares; custodian fees; printing and
preparation of registration statements; taxes; and the compensation of trustees
who are not interested persons of the Fund.
DIVIDENDS, DISTRIBUTIONS AND FEDERAL TAXES
FEDERAL TAXES - Each Series is qualified and intends to remain
qualified and elect to be treated as a regulated investment company under
Subchapter M under the Code. To remain qualified as a regulated investment
company, a Series generally must, among other things, (a) derive at least 90% of
its gross income from dividends, interest, payments with respect to securities
loans, gains
B-35
<PAGE> 59
from the sale or other disposition of stocks, securities or foreign currencies,
or other income (including but not limited to gains from options, futures or
forward contracts) derived with respect to its business of investing in such
stocks, securities or currencies; (b) diversify its holdings so that, at the end
of each fiscal quarter, (i) 50% of the market value of the Series' assets is
represented by cash, government securities and other securities limited in
respect of any one issuer to 5% of the Series' net assets and to not more than
10% of the voting securities of any one issuer (other than government
securities) and (ii) not more than 25% of the value of its assets are invested
in the securities of any one issuer (other than government securities or the
securities of other regulated investment companies); and (c) distribute at least
90% of its investment company taxable income (including short-term capital
gains).
Each Series will comply with asset diversification regulations
prescribed by the U.S. Treasury Department under the Code. In general, these
regulations effectively provide that, as of the end of each calendar quarter or
within 30 days thereafter, no more that 55% of the total assets of the Series
may be represented by any one investment, no more than 70% by any two
investments, no more than 80% by any three investments, and no more than 90% by
any four investments. For this purpose, all securities of the same issuer are
considered a single investment, but each U.S. agency or instrumentality is
treated as a separate issuer. There are also alternative diversification tests
that may be satisfied by the Series under the regulation. Each Series intends to
comply with the diversification regulations. If a Series fails to comply with
these regulations, the contracts invested in that Series will not be treated as
annuity, endowment or life insurance contracts under the Code.
Income received by a Series from sources within foreign countries may
be subject to withholding and other taxes imposed by such countries. Income tax
treaties between certain countries and the United States may reduce or eliminate
such taxes. It is impossible to determine in advance the effective rate of
foreign tax to which a Series will be subject, since the amount of that Series'
assets to be invested in various countries is not known. Shareholders are urged
to consult their tax advisors regarding specific questions as to Federal, state
and local taxes.
For the fiscal year ended February 29, 2000, the High-Yield Bond, U.S.
Government/AAA-Rated and Cash Management Series had capital loss carry-forwards
of $8,406,043, $1,548,667, $396,556 and $546, respectively. To the extent not
yet utilized, such losses will be available to each of the Series to offset
future gains through 2005 and 2008. The utilization of such losses will be
subject to annual limitations under the Code.
SHAREHOLDER VOTING RIGHTS
All shares of the Fund have equal voting rights and may be voted in the
election of Trustees and on other matters submitted to the vote of the
shareholders. Shareholders' meetings ordinarily will not be held unless required
by the 1940 Act. As permitted by Massachusetts law, there normally will be no
shareholders' meetings for the purpose of electing Trustees unless and until
such time as fewer than a majority of the Trustees holding office have been
elected by shareholders. At that time, the Trustees then in office will call a
shareholders' meeting for the election of Trustees. The Trustees must call a
meeting of shareholders for the purpose of voting upon the removal of any
Trustee when requested to do so by the record holders of 10 percent of the
outstanding shares of the Fund. A Trustee may be removed after the holders of
record of not less than two-thirds of the outstanding
B-36
<PAGE> 60
shares have declared that the Trustee be removed either by declaration in
writing or by votes cast in person or by proxy. Except as set forth above, the
Trustees shall continue to hold office and may appoint successor Trustees,
provided that immediately after the appointment of any successor Trustee, at
least two-thirds of the Trustees have been elected by the shareholders. Shares
do not have cumulative voting rights. Thus, holders of a majority of the shares
voting for the election of Trustees can elect all the Trustees. No amendment may
be made to the Declaration of Trust without the affirmative vote of a majority
of the outstanding shares of the Fund, except that amendments to conform the
Declaration to the requirements of applicable federal laws or regulations or the
regulated investment company provisions of the Code may be made by the Trustees
without the vote or consent of shareholders. If not terminated by the vote or
written consent of a majority of its outstanding shares, the Fund will continue
indefinitely.
In matters affecting only a particular Series, the matter shall have
been effectively acted upon by a majority vote of that Series even though: (1)
the matter has not been approved by a majority vote of any other Series; or (2)
the matter has not been approved by a majority vote of the Fund as a whole.
PRICE OF SHARES
Shares of the Fund are currently offered only to the Variable Separate
Account. The Fund is open for business on any day the NYSE is open for regular
trading. The price paid for shares is the net asset value per share calculated
once daily at the close of regular trading on the NYSE (generally, 4:00 p.m.,
Eastern time). Each Series calculates the net asset value of its shares
separately by dividing the total value of its net assets by its shares
outstanding.
Stocks are stated at value based upon closing sales prices reported on
recognized securities exchanges or, for listed securities having no sales
reported and for unlisted securities, upon last reported bid prices.
Non-convertible bonds, debentures, other long-term debt securities and
short-term securities with original or remaining maturities in excess of 60
days, are normally valued at prices obtained for the day of valuation from a
bond pricing service of a major dealer in bonds, when such prices are available;
however, in circumstances in which the Investment Adviser deems it appropriate
to do so, an over-the-counter or exchange quotation at the mean of
representative bid or asked prices may be used. Securities traded primarily on
securities exchanges outside the United States are valued at the last sale price
on such exchanges on the day of valuation, or if there is no sale on the day of
valuation, at the last-reported bid price. If a security's price is available
from more than one foreign exchange, a Series uses the exchange that is the
primary market for the security. Short-term securities with 60 days or less to
maturity are amortized to maturity based on their cost to the Fund if acquired
within 60 days of maturity or, if already held by the Fund on the 60th day, are
amortized to maturity based on the value determined on the 61st day. Options
traded on national securities exchanges are valued as of the close of the
exchange on which they are traded. Futures and options traded on commodities
exchanges are valued at their last sale price as of the close of such exchange.
Other securities are valued on the basis of last sale or bid price (if a last
sale price is not available) in what is, in the opinion of the Investment
Adviser, the broadest and most representative market, that may be either a
securities exchange or the over-the-counter market. Where quotations are not
readily available, securities are valued at fair value as determined in good
B-37
<PAGE> 61
faith in accordance with procedures adopted by the Board of Trustees. The fair
value of all other assets is added to the value of securities to arrive at the
respective Series' total assets. A Series' liabilities, including proper
accruals of expense items, are deducted from total assets.
EXECUTION OF PORTFOLIO TRANSACTIONS
Orders for the Fund's portfolio securities transactions are placed by
the Investment Adviser. The Investment Adviser strives to obtain the best
available prices in its portfolio transactions taking into account the costs and
promptness of executions. When in the opinion of the Investment Adviser, two or
more brokers (either directly or through their correspondent clearing agents)
are in a position to obtain the best price and execution, the order is placed
with that broker. Preference may be given to brokers who have provided
investment research statistical, or other related services to the Investment
Adviser or has sold shares of the Fund or other funds served by the Investment
Adviser or Business Manager. The Fund does not consider that it has an
obligation to obtain the lower available commission rate to the exclusion of
price, service and qualitative considerations.
There are occasions on which portfolio transactions for the Fund may be
executed as part of concurrent authorizations to purchase or sell the same
security for other Funds served by the Investment Adviser, or for trusts or
other accounts served by affiliated companies of the Investment Adviser.
Although such concurrent authorizations potentially could be either advantageous
or disadvantageous to the Fund, they are effected only when the Investment
Adviser believes that to do so is in the interest of the Fund. When such
concurrent authorizations occur, the objective is to allocate the executions in
an equitable manner. The Fund does not intend to pay a mark-up in exchange for
research in connection with principal transactions.
Purchases and sales of money market and other fixed income instruments
usually are principal transactions. Normally, no brokerage commissions are paid
by the Fund for such purchases. Money market instruments are generally purchased
directly from the issuer or from an underwriter or market maker for the
securities. Purchases from underwriters include an underwriting commission or
concession and purchases from dealers serving as market makers include the
spread between the bid and asked price. In the over-the-counter market,
securities are generally traded on a "net" basis with dealers acting as
principal for their own accounts without a stated commission (although the price
of the security usually includes a profit to the dealer). Where transactions are
made in the over-the-counter market, the Series deals with the primary market
makers unless more favorable prices are obtainable.
The policy of the Fund with respect to brokerage practices is reviewed
by the Board of Trustees from time to time. Because of the possibility of
further regulatory developments affecting the securities exchanges and brokerage
practices generally, the foregoing practices may be modified.
The following tables set forth the brokerage commissions paid by the
Series and the amount of the brokerage commissions that were paid to affiliated
broker-dealers by the Series for the last three fiscal years.
B-38
<PAGE> 62
2000 BROKERAGE COMMISSIONS
<TABLE>
<CAPTION>
AGGREGATE AMOUNT PAID TO PERCENTAGE PAID TO
BROKERAGE AFFILIATED BROKER- AFFILIATED BROKER-
SERIES COMMISSIONS DEALERS DEALERS
- ----------------------- ----------- ------------------ ------------------
<S> <C> <C> <C>
Growth Series $616,318 $ 455 0.07%
International Series $191,461 -- --
Growth-Income Series $660,490 $ 715 0.11%
Asset Allocation Series $ 66,535 $1,000 1.50%
High-Yield Bond Series $ 786 -- --
U.S. Government/AAA- -- -- --
Rated Securities Series
Cash Management Series -- -- --
</TABLE>
* The affiliated broker-dealers that effected transactions with the indicated
Series included: FSC Securities and Sentra Securities.
1999 BROKERAGE COMMISSIONS+
<TABLE>
<CAPTION>
AGGREGATE AMOUNT PAID TO PERCENTAGE PAID TO
BROKERAGE AFFILIATED AFFILIATED
SERIES COMMISSIONS BROKER-DEALERS BROKER-DEALERS
- ----------------------- ----------- -------------- ------------------
<S> <C> <C> <C>
Growth Series $ 98,452 $ 420 0.43%
International Series $ 50,195 - -
Growth-Income Series $162,830 $3,100 1.90%
Asset Allocation Series $ 21,342 - -
High-Yield Bond Series - - -
U.S. Government/AAA- - - -
Rated Securities Series
Cash Management Series - - -
</TABLE>
+ For the period December 1, 1998 through February 28, 1999 (new fiscal year
end).
B-39
<PAGE> 63
1998 BROKERAGE COMMISSIONS
<TABLE>
<CAPTION>
AGGREGATE AMOUNT PAID TO PERCENTAGE PAID TO
BROKERAGE AFFILIATED BROKER- AFFILIATED
SERIES COMMISSIONS DEALERS BROKER-DEALERS
- ----------------------- ----------- ------------------ ------------------
<S> <C> <C> <C>
Growth Series $537,003 $4,400 0.82%
International Series $485,903 -- --
Growth-Income Series $615,135 $5,605 0.91%
Asset Allocation Series $57,341 -- --
High-Yield Bond Series $100 -- --
U.S. Government/AAA-Rated
Securities Series -- -- --
Cash Management Series -- -- --
</TABLE>
GENERAL INFORMATION
CUSTODIAN - State Street Bank and Trust Company ("State Street"), 225
Franklin Street, Boston, Massachusetts 02110, serves as the Fund's custodian. In
this capacity, State Street maintains the portfolio securities held by the Fund,
administers the purchase and sale of portfolio securities and performs certain
other duties. State Street also serves as transfer agent and dividend disbursing
agent for the Fund.
INDEPENDENT ACCOUNTANTS AND LEGAL COUNSEL - PricewaterhouseCoopers LLP,
1177 Avenue of the Americas, New York, New York 10036, are the Fund's
independent accountants. PricewaterhouseCoopers LLP performs an annual audit of
the Fund's financial statements and provides tax consulting, tax return
preparation and accounting services relating to filings with the Commission. The
firms of Blazzard, Grodd & Hasenauer, 943 Coast Road East, Westport, CT 06881
and Swidler Berlin Shereff Friedman, LLP, The Chrysler Building, 405 Lexington
Avenue, 11th floor, New York, NY 10174, provide legal services to the Fund.
REPORTS TO SHAREHOLDERS - Contract owners are provided at least
semiannually with reports showing the investment portfolio, financial statements
and other information.
SHAREHOLDER AND TRUSTEE RESPONSIBILITY - Shareholders of a
Massachusetts business trust may, under certain circumstances, be held
personally liable as partners for the obligations of such trust. The risk of a
shareholder of the Fund incurring any financial loss on account of shareholder
liability is limited to circumstances in which the Fund itself would be unable
to meet its obligations.
B-40
<PAGE> 64
The Declaration of Trust contains an express disclaimer of shareholder liability
for acts or obligations of the Fund and provides that notice of the disclaimer
must be given in each agreement, obligation or instrument entered into or
executed by the Fund or Trustees. The Declaration of Trust provides for
indemnification of any shareholder held personally liable for the obligations of
the Fund and also provides for the Fund to reimburse the shareholder for all
legal and other expenses reasonably incurred in connection with any such claim
or liability.
Under the Declaration of Trust, the Trustees or officers are not liable
for actions or failure to act; however, they are not protected from liability by
reason of their willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of their office. The Fund
provides indemnification to its Trustees and officers as authorized by its
By-Laws and by the 1940 Act and the rules and regulations thereunder.
REGISTRATION STATEMENT - A registration statement has been filed with
the Commission under the Securities Act and the 1940 Act. The Prospectus and
this Statement of Additional Information do not contain all information set
forth in the registration statement, its amendments and exhibits thereto, that
the Fund has filed with the Commission, Washington, D.C., to all of which
reference is hereby made.
FINANCIAL STATEMENTS
The Fund's audited financial statements are incorporated into this
Statement of Additional Information by reference to its 2000 annual report to
shareholders. You may request a copy of the Annual Report at no charge by
calling (800) 445-7862 or writing the Fund at P.O. Box 54299, Los Angeles,
California 90054-0299.
B-41
<PAGE> 65
APPENDIX
DESCRIPTION OF COMMERCIAL PAPER AND BAND RATINGS
COMMERCIAL PAPER RATINGS -- Moody's employs the designations "Prime-1,"
"Prime-2" and "Prime-3" to indicate commercial paper having the highest capacity
for timely repayment. Issuers rated Prime-1 have a superior capacity for
repayment of short-term promissory obligations. Prime-1 repayment capacity will
normally be evidenced by the following characteristics: leading market positions
in well-established industries; high rates of return on funds employed;
conservative capitalization structures with moderate reliance on debt and ample
asset protection; broad margins in earnings coverage of fixed financial charges
and high internal cash generation; and well-established access to a range of
financial markets and assured sources of alternate liquidity. Issues rated
Prime-2 have a strong capacity for repayment of short-term promissory
obligations. This will normally be evidenced by many of the characteristics
cited above, but to a lesser degree. Earnings trends and coverage ratios, while
sound, will be more subject to variation. Capitalization characteristics, while
still appropriate, may be more affected by external conditions. Ample alternate
liquidity is maintained.
S&P's ratings of commercial paper are graded into four categories
ranging from "A" for the highest quality obligations to "D" for the lowest. A --
Issues assigned its highest rating are regarded as having the greatest capacity
for timely payment. Issues in this category are delineated with numbers 1, 2,
and 3 to indicate the relative degree of safety. A-1 -- This designation
indicates that the degree of safety regarding timely payment is either
overwhelming or very strong. Those issues determined to possess overwhelming
safety characteristics will be denoted with a plus (+) sign designation. A-2 --
Capacity for timely payments on issues with this designation is strong. However,
the relative degree of safety is not as high as for issues designated "A-1."
CORPORATE DEBT SECURITIES -- Moody's rates the long-term debt
securities issued by various entities from "Aaa" to "C." Aaa -- Best quality.
These securities carry the smallest degree of investment risk and are generally
referred to as "gilt edge." Interest payments are protected by a larger, or by
an exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of these issues. Aa --
High quality by all standards. They are rated lower than the best bond because
margins of protection may not be as large as in Aaa securities, fluctuation of
protective elements may be of greater amplitude, or there may be other elements
present that make the long-term risks appear somewhat greater. A -- Upper medium
grade obligations. These bonds possess many favorable investment attributes.
Factors giving security to principal and interest are considered adequate, but
elements may be present that suggest a susceptibility to impairment sometime in
the future. Baa -- medium grade obligations. 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
B-42
<PAGE> 66
bonds lack outstanding investment characteristics and, in fact, have speculative
characteristics as well. Ba -- Have speculative elements; future cannot be
considered as well assured. 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. Bonds in this class are characterized by uncertainty of
position. B -- Generally lack characteristics of the desirable investment;
assurance of interest and principal payments or of maintenance of other terms of
the contract over any long period of time may be small. Caa -- Of poor standing.
Issues may be in default or there may be present elements of danger with respect
to principal or interest. Ca -- Speculative in a high degree; often in default
or have other marked shortcomings. C -- Lowest rated class of bonds; can be
regarded as having extremely poor prospects of ever attaining any real
investment standing.
S&P rates the long-term securities debt of various entities in
categories ranging from "AAA" to "D" according to quality. AAA -- Highest
rating. Capacity to pay interest and repay principal is extremely strong. AA --
High grade. Very strong capacity to pay interest and repay principal. Generally,
these bonds differ from AAA issues only in a small degree. A -- Have a strong
capacity to pay interest and repay principal, although they are somewhat more
susceptible to the adverse effects of change in circumstances and economic
conditions than debt in higher rated categories. BBB -- Regarded as having
adequate capacity to pay interest and repay principal. These bonds normally
exhibit adequate protection parameters, but adverse economic conditions or
changing circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal than for debt in higher rated categories. BB, B,
CCC, CC, C -- Regarded, on balance, as predominately speculative with respect to
capacity to pay interest and repay principal in accordance with the terms of the
obligation. BB indicated the lowest degree of speculation and C the highest
degree of speculation. While this debt will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or major
risk exposures to adverse conditions. C1 -- Reserved for income bonds on which
no interest is being paid. D -- In default and payment of interest and or
principal is in arrears.
B-43
<PAGE> 67
PART C
OTHER INFORMATION
Item 23: Exhibits.
(a) Declaration of Trust, as Amended. Incorporated herein by
reference to Post-Effective Amendment No. 12 to the
Registrant's Registration Statement on Form N-1A (File No.
33-14227) filed on January 26, 1996.
(b) By-Laws. Incorporated herein by reference to Post-Effective
Amendment No. 12 to the Registrant's Registration Statement on
Form N-1A (File No. 33-14227) filed on January 26, 1996.
(c) Not applicable.
(d) (i) Investment Advisory and Management Agreement.
Incorporated herein by reference to Post-Effective
Amendment No. 12 to the Registrant's Registration
Statement on Form N-1A (File No. 33-14227) filed on
January 26, 1996.
(ii) Business Management Agreement.
Incorporated herein by reference to Post-Effective
Amendment No. 16 to the Registrant's Registration
Statement on Form N-1A (File No. 33-14227) filed on
January 29, 1999.
(e) Not applicable.
(f) Not applicable.
(g) Custodian Agreement.
Incorporated herein by reference to Post-Effective Amendment
No. 16 to the Registrant's Registration Statement on Form N-1A
(File No. 33-14227) filed on January 29, 1999.
(h) Form of Fund Participation Agreement.
Incorporated herein by reference to Post-Effective Amendment
No. 16 to the Registrant's Registration Statement on Form N-1A
(File No. 33-14227) filed on January 29, 1999.
(i) Opinion and Consent of Counsel.
Incorporated herein by reference to Post-Effective Amendment
No. 16 to the Registrant's Registration Statement on Form N-1A
(File No. 33-14227) filed on January 29, 1999.
(j) Consent of Independent Accountants.
(k) Not applicable.
(l) Not applicable.
(m) Not applicable.
(n) Not applicable.
(p) (i) Code of Ethics.
C-1
<PAGE> 68
(ii) Powers of Attorney. Incorporated by reference to the
Registrant's Post-Effective Amendment No. 16 to its
Registration Statement on Form N-1A filed January 29,
1999 (File No. 33-14227).
Item 24. Persons Controlled by or Under Common Control with Registrant
The following entities are under control with the Registrant, Anchor
Pathway Fund:
1) Anchor Series Trust;
2) Seasons Series Trust; and
3) SunAmerica Series Trust.
Each of the above-referenced entities, including Anchor Pathway Fund, is
organized under the laws of the State of Massachusetts as a Massachusetts
business trust.
Item 25. Indemnification
Article VI of the Registrant's By-Laws relating to the indemnification
of officers and trustees is quoted below:
ARTICLE VI
INDEMNIFICATION
The Fund shall provide any indemnification required by applicable law
and shall indemnify trustees, officers, agents and employees as follows:
(a) the Fund shall indemnify any director or officer of the Fund who
was or is a party or is threatened to be made a party to any threatened, pending
or completed action, suit or proceeding, whether civil, criminal, administrative
or investigative (other than action by or in the right of the Fund) by reason of
the fact that such Person is or was such Trustee or officer or an employee or
agent of the Fund, or is or was serving at the request of the Fund as a
director, officer, employee or agent of another corporation, partnership, joint
venture, Fund or other enterprise, against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
by such Person in connection with such action, suit or proceeding, provided such
Person acted in good faith and in a manner such Person reasonably believed to be
in or not opposed to the best interests of the Fund, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe such Person's
conduct was unlawful. The termination of any action, suit or proceeding by
judgment, order, settlement, conviction or upon a plea of nolo contendere or its
equivalent, shall not, of itself, create a presumption that the Person did not
reasonably believe his or her actions to be in or not opposed to the best
interests of the Fund, and, with respect to any criminal action or proceeding,
had reasonable cause to believe that such Person's conduct was unlawful.
(b) The Fund shall indemnify any Trustee or officer of the Fund who was
or is a party or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the Fund to procure a judgment in
its favor by reason of the fact that such Person is or was such Trustee or
officer or an employee or agent of the Fund, or is or was serving at the request
of the Fund as a director, officer, employee or agent of another corporation,
partnership, joint venture, Fund or other enterprise, against expenses
(including attorneys' fees), actually and reasonably incurred by such Person in
connection with the defense or settlement of such action or suit if such Person
acted in good faith and in a manner such Person reasonably believed to be in or
not opposed to the best interests of the Fund, except that no indemnification
shall be made in respect of any claim, issue or matter as to which such Person
shall have been adjudged to be liable for negligence or misconduct in the
performance of such Person's duty to the Fund unless and only to the extent that
the court in which such action or suit was brought, or any other court having
jurisdiction in the premises, shall determine upon application that, despite the
adjudication of liability but in view of all circumstances of the case, such
Person is fairly and reasonably entitled to indemnity for such expenses which
such court shall deem proper.
(c) To the extent that a Trustee or officer of the Fund has been
successful on the merits or otherwise in defense of any action, suit or
proceeding referred to in subparagraphs (a) or (b) above or in defense of any
claim, issue or matter therein, such Person shall be indemnified against
expenses (including attorneys' fees) actually and reasonably incurred by such
Person in connection therewith, without the necessity for the determination as
to the standard of conduct as provided in subparagraph (d).
(d) Any indemnification under subparagraph (a) or (b) (unless ordered
by a court) shall be made by the Fund only as authorized in the specific case
upon a determination that indemnification of the Trustee or officer is proper in
view of the standard of
C-2
<PAGE> 69
conduct set forth in subparagraph (a) or (b). Such determination shall be made
(i) by the Board by a majority vote of a quorum consisting of Trustees who were
disinterested and not parties to such action, suit or proceedings, or (ii) if
such a quorum of disinterested Trustees so directs, by independent legal counsel
in a written opinion; and any determination so made shall be conclusive and
binding upon all parties.
(e) Expenses incurred in defending a civil or criminal action, writ or
proceeding may be paid by the Fund in advance of the final disposition of such
action, suit or proceeding, as authorized in the particular case, upon receipt
of an undertaking by or on behalf of the Trustee or officer to repay such amount
unless it shall ultimately be determined that such Person is entitled to be
indemnified by the Fund as authorized herein. Such determination must be made by
disinterested Trustees or independent legal counsel.
Prior to any payment being made pursuant to this paragraph, a majority
of quorum of disinterested, non-party Trustees of the Fund, or an independent
legal counsel in a written opinion, shall determine, based on a review of
readily available facts that there is reason to believe that the indemnitee
ultimately will be found entitled to indemnification.
(f) Agents and employees of the Fund who are not Trustees or officers
of the Fund may be indemnified under the same standards and procedures set forth
above, in the discretion of the Board.
(g) Any indemnification pursuant to this Article shall not be deemed
exclusive of any other rights to which those indemnified may be entitled and
shall continue as to a Person who has ceased to be a Trustee or officer and
shall inure to the benefit of the heirs, executors and administrators of such a
Person.
(h) Nothing in the Declaration or in these By-Laws shall be deemed to
protect any Trustee or officer of the Fund against any liability to the Fund or
to its Shareholders to which such Person would otherwise be subject by reason of
willful malfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of such Person's office.
(i) The Fund shall have power to purchase and maintain insurance on
behalf of any Person against any liability asserted against or incurred by such
Person, whether or not the Fund would have the power to indemnify such Person
against such liability under the provisions of this Article. Nevertheless,
insurance will not be purchased or maintained by the Fund if the purchase or
maintenance of such insurance would result in the indemnification of any Person
in contravention of any rule or regulation and/or interpretation of the
Securities and Exchange Commission.
* * * * * * * * * * * * * *
The Investment Advisory Agreement provides that in absence of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of office on the part of the Investment Adviser (and its
officers, directors, agents, employees, controlling persons, shareholders and
any other person or entity affiliated with the Investment Adviser to perform or
assist in the performance of its obligations under each Agreement) the
Investment Adviser shall not be subject to liability to the Fund or to any
shareholder of the Fund for any act or omission in the course of, or connected
with, rendering services, including without limitation, any error of judgment or
mistake or law or for any loss suffered by any of them in connection with the
matters to which each Agreement relates, except to the extent specified in
Section 36(b) of the Investment Company Act of 1940 concerning loss resulting
from a breach of fiduciary duty with respect to the receipt of compensation for
services.
SunAmerica Inc., the parent of Anchor National Life Insurance Company,
provides, without cost to the Fund, indemnification of individual trustees. By
individual letter agreement, SunAmerica Inc. indemnifies each trustee to the
fullest extent permitted by law against expenses and liabilities (including
damages, judgments, settlements, costs, attorney's fees, charges and expenses)
actually and reasonably incurred in connection with any action which is the
subject of any threatened, asserted, pending or completed action, suit or
proceeding, whether civil, criminal, administrative, investigative or otherwise
and whether formal or informal to which any trustee was, is or is threatened to
be made a party by reason of facts which include his being or having been a
trustee.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended (the "Act"), may be permitted to trustees, officers and
controlling persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is therefore unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
C-3
<PAGE> 70
Registrant of expenses incurred or paid by a trustee, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such trustee, officer or controlling person in
connection with the securities 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 issue.
Item 26. Business and other Connections of Investment Adviser
Information concerning the business and other connections of Capital
Research and Management Company ("CRMC") is incorporated herein by reference
from CRMC's Form ADV (File No. 801-8055), which is currently on file with the
Securities and Exchange Commission.
Item 27. Principal Underwriters
Not applicable.
Item 28. Location of Accounts and Records
State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110, acts as custodian, transfer agent and dividend paying
agent. It maintains books, records and accounts pursuant to the
instructions of the Fund.
Capital Research and Management Company, the Investment Adviser, is
located at 333 South Hope Street, Los Angeles, California 90071. It
maintains the books, accounts and records required to be maintained
pursuant to Section 31(a) of the Investment Company Act of 1940 and the
rules promulgated thereunder.
SunAmerica Asset Management Corp., the Business Manager, is located at 733
Third Avenue, New York, New York 10017. It maintains the books, accounts
and records required to be maintained pursuant to Section 31(a) of the
Investment Company Act of 1940 and the rules promulgated thereunder.
Item 29. Management Services
Not applicable.
Item 30. Undertakings
Not applicable.
C-4
<PAGE> 71
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, (the "1933 Act") and Investment Company Act of 1940, as amended, the
Registrant certifies that it meets all of the requirements for effectiveness of
this Post-Effective Amendment No. 18 to the Registration Statement under Rule
485(b) under the 1933 Act and has duly caused this Post-Effective Amendment No.
18 to the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of New York, and State of New York, on
the 14th day of April, 2000.
ANCHOR PATHWAY FUND
By: /s/ Peter C. Sutton
-------------------------------
Peter C. Sutton
Vice President, Treasurer and Controller
Pursuant to the requirements of the 1933 Act, this Post-Effective
Amendment No. 18 to the Registrant's Registration Statement on Form N-1A has
been signed below by the following persons in the capacities and on the date
indicated:
* Chairman, President April 14, 1999
--------------------------
James K. Hunt and Trustee
(Principal Executive Officer)
Vice President,
--------------------------
Peter C. Sutton Treasurer and Controller April 14, 1999
(Principal Financial and
Accounting Officer)
* Trustee April 14, 1999
--------------------------
Monica C. Lozano
* Trustee April 14, 1999
--------------------------
Allan L. Sher
* Trustee April 14, 1999
--------------------------
William M. Wardlaw
*By: /s/ Robert M. Zakem
-------------------
Attorney-in-Fact
Robert M. Zakem
<PAGE> 72
ANCHOR PATHWAY FUND
EXHIBIT INDEX
Exhibit No. Description
(j) Consent of Independent Accountants
(p) (i) Code of Ethics.
<PAGE> 1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in this Registration
Statement on Form N-1A of our report dated April 14, 2000, relating to the
financial statements and financial highlights which appears in the February 29,
2000 Annual Report to the Shareholder of Anchor Pathway Fund, which are also
incorporated by reference into the Registration Statement. We also consent to
the references to us under the headings "Financial Highlights" and "General
Information - Independent Accountants and Legal Counsel" in such Registration
Statement.
/s/ PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
April 14, 2000
<PAGE> 1
CODE OF ETHICS
FOR
SUNAMERICA ASSET MANAGEMENT CORP.
SUNAMERICA CAPITAL SERVICES, INC.
AND
ANCHOR SERIES TRUST
STYLE SELECT SERIES, INC.
SUNAMERICA EQUITY FUNDS
SUNAMERICA INCOME FUNDS
SUNAMERICA MONEY MARKET FUNDS, INC.
SUNAMERICA SERIES TRUST
SUNAMERICA STRATEGIC INVESTMENT SERIES, INC.
SEASONS SERIES TRUST
<PAGE> 2
I. PURPOSE
SunAmerica Asset Management Corp. has a fiduciary duty to Investment
Company and investment advisory clients which requires each employee to
act solely for the benefit of clients. This Code of Ethics (the "Code")
has been adopted in accordance with Rule 17j-1(b) under the Investment
Company Act of 1940, as amended (the "Act"). Rule 17j-1 under the Act
generally proscribes fraudulent or manipulative practices with respect
to purchases or sales of securities held or to be acquired by
investment companies, if effected by associated persons of such
companies. The purpose of this Code is to provide regulations and
procedures consistent with the Act, and Rule 17j-1 thereunder, designed
to give effect to the general prohibitions set forth in Rule 17j-1(a)
as follows:
A. It shall be unlawful for any affiliated person of or principal
underwriter for a registered investment company, or any
affiliated person of an investment adviser of or principal
underwriter for a registered investment company in connection
with the purchase or sale, directly or indirectly, by such
person of a security held or to be acquired, as defined in the
Rule, by such registered investment company --
1. To employ any device, scheme or artifice to defraud
such registered investment company;
2. To make to such registered investment company any
untrue statement of a material fact or omit to state
to such registered investment company a material fact
necessary in order to make the statements made, in
light of the circumstances under which they are made,
not misleading;
3. To engage in any act, practice, or course of business
which operates or would operate as a fraud or deceit
upon any such registered investment company; or
4. To engage in any manipulative practice with respect
to such registered investment company.
Also, each employee has a duty to act in the best interest of the firm.
In addition to the various laws and regulations covering our
activities, it is clearly in our best interest as a professional
investment advisory organization to avoid potential conflicts of
interest or even the appearance of such conflict with respect to the
conduct of our officers and employees. While it is not possible to
anticipate all instances of potential conflict, the standard is clear.
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II. GENERAL PRINCIPLES
In light of our professional and legal responsibilities, we believe it
is appropriate to restate and periodically distribute the firm's Code
to all employees. Our aim is to be as flexible as possible in our
organization and our internal procedures, while simultaneously
protecting our organization and our clients from the damage that could
arise from a situation involving a real or apparent conflict of
interest. While it is not possible to specifically define and prescribe
rules regarding all possible cases in which conflicts might arise, this
Code is designed to set forth our policy regarding employee conduct in
those situations in which conflicts are most likely to develop. As a
general principle, it is imperative that those who work for or on
behalf of an Investment Company, avoid any such situation that might
comprise, or call into question, their exercise of fully independent
judgement in the interests of shareholders. If you have any doubt as to
the propriety of any activity, you should consult the General Counsel.
III. DEFINITIONS
A. "Adviser" means SunAmerica Asset Management Corp.
B. "Investment Company" means a company registered as such under
the Act, any series thereof or any component of such series
for which the Adviser is an investment adviser.
C. "Access person" means any trustee, director, officer, general
partner or advisory person of the Investment Company or
Adviser. (For purposes of this Code, the term "Access Person"
shall mean only those trustees/directors, officers, general
partners or advisory persons of the Investment Company or
Adviser who, with respect to any Investment Company or
advisory client, make a recommendation, participate in the
determination of which recommendation shall be made, or whose
principal function or duties relate to the determination of
which recommendation shall be made to any Investment Company
or advisory client, or who, in connection with their duties,
obtain any information concerning such recommendations which
are being made to the Investment Company or advisory client.)
D. "Advisory person" means (i) any employee of the Investment
Company or Adviser or any company in a control relationship to
such Investment Company or the Adviser, who in connection with
his or her regular functions or duties, makes, participates
in, or obtains information regarding the purchase or sale of a
security by an Investment Company, or whose functions relate
to the making
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of any recommendations with respect to such purchases or
sales; and (ii) any natural person in a control relationship,
or deemed by the Review Officer to be in a control
relationship, to the Investment Company or Adviser who obtains
information concerning the recommendations made to an
Investment Company with regard to the purchase or sale of a
security.
E. A security is "being considered for purchase or sale" when a
recommendation to purchase or sell a security has been made
and communicated and, with respect to the person making the
recommendation, when such person seriously considers making
such a recommendation.
F. "Beneficial ownership" shall be interpreted to include any
person who, directly or indirectly, through any contract,
arrangement, understanding, relationship, or otherwise has or
shares a direct or indirect pecuniary interest in the
security. As set forth in Rule 16a-1(a)(2) of the Securities
Exchange Act of 1934, their term "pecuniary interest" in
securities shall mean the opportunity, directly or indirectly,
to profit or share in any profit derived from a transaction in
the subject securities.
G. "Control" shall have the same meaning as that set forth in
Section 2(a)(9) of the Act.
H. "Disinterested director or trustee" means a director or
trustee of an Investment Company who is not an "interested
person" of an Investment Company within the meaning of Section
2(a)(19) of the Act.
I. "Purchase or sale of a security" includes, inter alia, the
writing of an option to purchase or sell a security, the
conversion of a convertible security, and the exercise of a
warrant for the purchase of a security.
J. "Review Officer" means the officer of the Adviser designated
from time-to-time by the Adviser to receive and review reports
of purchases and sales by Access Persons.
K. "Security" shall have the meaning set forth in Section
2(a)(36) of the Act, except that it shall not include shares
of registered open-end investment companies, securities issued
by the United States Government, short-term debt securities
which are "government securities" within the meaning of
Section 2(a)(16) of the Act, bankers' acceptances, bank
certificates of deposit and commercial paper.
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L. "Security held or to be acquired" by a registered Investment
Company means any security as defined in Rule 17j-1(e) under
the Act which, within the most recent 15 days, (i) is or has
been held by such company, or (ii) is being or has been
considered by such company or its Adviser for purchase by such
company.
M. "Personal securities transaction" means (i) transactions for
your own account, including IRA's, or (ii) transactions for an
account in which you have indirect beneficial ownership,
unless you have no direct or indirect influence or control
over the account. Accounts involving family (including
husband, wife, minor children or other dependent relatives),
or accounts in which you have a beneficial interest (such as a
trust of which you are an income or principal beneficiary) are
included within the meaning of "indirect beneficial interest."
IV. INCORPORATION OF INVESTMENT SUB-ADVISERS' CODES OF ETHICS
Those provisions of an Investment Sub-Adviser's Code of Ethics
applicable to persons who, in connection with their regular functions
or duties, make, participate in, or obtain information regarding the
purchase or sale of a security, or whose functions relate to the making
of any recommendation with respect to such purchase or sale by
registered investment companies managed by such Investment Sub-Adviser
are hereby incorporated herein by reference as additional provisions of
this Code of Ethics (to the extent such provisions are in addition to
or more restrictive than the provision set forth in this Code)
applicable to those officers, trustees, directors and advisory
personnel of the Adviser or Investment Company who have direct
responsibility of investments of the Investment Company, except that
approval or disclosure required thereunder shall be obtained from or
made to the officer designated in Section IX. A violation of an
Investment Sub-Adviser's Code of Ethics shall constitute a violation of
this Code.
V. EXEMPTED TRANSACTIONS
A. Purchases or sales effected in any account over which the
Access Person has no direct or indirect influence or control;
B. Purchases or sales of securities which are not eligible for
purchase or sale by the Investment Company (e.g., SunAmerica
Inc.);
C. Purchases or sales which are non-volitional on the part of
either the Access Person or the Investment Company.
Non-volitional transactions include gifts
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to you over which you have no control of the timing or
transactions which result from corporate action applicable to
all similar security holders (such as splits, tender offers,
mergers, stock dividends, etc.);
D. Purchases which are part of an automatic dividend reinvestment
plan;
E. Purchases effected upon the exercise of rights issued by an
issuer pro rata to all holders of a class of its securities,
to the extent such rights were acquired from such issuer, and
sales of such rights so acquired;
F. Purchases or sales approved by a majority vote of those
trustees or directors having no interest in the transaction
upon a showing of good cause. Good cause will be deemed to
exist where unexpected hardship occasions the need for
additional funds. A change in investment objectives will not
be deemed "good cause;" and
G. Purchases or sales which receive the prior approval of the
Review Officer because they are only remotely potentially
harmful to the Investment Company because they would be very
unlikely to affect a highly institutional market, or because
they clearly are not related economically to the securities to
be purchased, sold or held by the Investment Company.
H. The Review Officer can grant exemptions from the personal
trading restrictions in this Code upon determining that the
transaction for which an exemption is requested would not
violate any policy embodied in this Code and that an exemption
is appropriate to avoid an injustice to the employee in the
particular factual situation presented. Factors to be
considered may include: the size and holding period of the
employee's position in the security, the market capitalization
of the issuer, the liquidity of the security, the reason for
the employee's requested transaction, the amount and timing of
client trading in the same or a related security, and other
relevant factors.
Any employee wishing an exemption should submit a written
request to the Review Officer setting forth the pertinent
facts and reasons why the employee believes that the exemption
should be granted. Employees are cautioned that exemptions are
intended to be exceptions, and repetitive exemptive
applications by an employee will not be well received.
VI. RESTRICTIONS AND PROCEDURES ON PERSONAL SECURITIES TRANSACTIONS
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A. Prohibited Purchases and Sales - Except as otherwise provided
in Section V hereof:
1. No Access Person shall purchase or sell, directly or
indirectly, any security in which he or she has, or
by reason of such transaction acquires, any direct or
indirect beneficial ownership and which to his or her
actual knowledge at the time of such purchase or
sale:
(a) is being considered for purchase or sale by
an Investment Company; or
(b) is being purchased or sold by an Investment
Company.(1)
2. No Access Person shall reveal to any other person
(except in the normal course of his or her duties on
behalf of an Investment Company) any information
regarding securities transactions by an Investment
Company or consideration by an Investment Company or
the Adviser of any such securities transaction.
3. No Access Person shall recommend any securities
transaction by an Investment Company without having
disclosed his or her interest, if any, in such
securities or the issuer thereof, including without
limitation (i) his or her direct or indirect
beneficial ownership of any securities or such
issuer, (ii) any contemplated transaction by such
person in such securities, (iii) any position with
such issuer or its affiliates and (iv) any present or
proposed business relationship between such issuer or
its affiliates, on the one hand, and such person or
any party in which such person has a significant
interest, on the other; provided, however, that in
the event the interest of such Access Person in such
securities or issuer is not material to his or her
personal net worth and any contemplated transaction
by such person in such securities cannot reasonably
be expected to have a material adverse effect on any
such transaction by the company or on the market for
the securities generally, such Access Person shall
not be required to disclose his or her interest in
the securities or issuer thereof in connection with
any such recommendation.
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(1) The Adviser, and any and all Access Persons or Advisory Persons
thereof, shall not be deemed to have actual knowledge, for purposes
hereof, of securities transactions effected for any company, series
thereof, or component of such series, for which the Adviser is the
investment adviser, but for which the portfolio management is performed
by an entity which is not an affiliate of SunAmerica Inc.
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B. Initial Public Offerings: No Access Person shall acquire any
securities in an initial public offering, in order to preclude
any possibility of their profiting improperly from their
positions on behalf of an Investment Company.
C. Private Placements: No Advisory Person shall acquire any
securities in a private placement without the prior approval
of the Review Person. This prior approval should take into
account, among other factors, whether the investment
opportunity should be reserved for an Investment Company and
its shareholders, and whether the opportunity is being offered
to an individual by virtue of his or her position with the
Investment Company. Advisory Persons who have been authorized
to acquire securities in a private placement should disclose
such private placement investment if he or she plays a
material role in an Investment Company's subsequent investment
decision regarding the same issuer. In the foregoing
circumstances, the Investment Company's decision to purchase
securities of the issuer shall be subject to an independent
review by Advisory Persons with no personal interest in such
issuer.
D. Blackout Periods: No Access Person shall execute a securities
transaction, other than an exempted transaction, on a day
during which any Investment Company in the complex has a
pending "buy" or "sell" order in that same security and no
Access Person shall execute such securities transaction until
one trading day after such Investment Company order is
executed or withdrawn. In addition, no portfolio manager shall
purchase or sell a security within at least seven calendar
days before and after an Investment Company that he or she
manages trades in that security.
E. Short-Term Trading Profits: Subject to the other provisions of
this Code, while there is no prohibition on short-term trading
profits, the Review Officer will monitor quarterly reports and
address abuses of short-term trading profits on a case-by-case
basis.
F. Gifts: No Access Person shall receive any gift or other thing
of more than de minimis value ($100) from any person or entity
that does business with or on behalf of the Investment
Company.
G. Service as a Director: No Access Person shall serve on the
boards of directors of publicly traded companies, absent prior
authorization based upon a determination that the board
service would be consistent with the interests of the
Investment Company and its shareholders. See "Other Conflicts
of Interest - Outside Activities."
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H. Other Conflicts of Interest: Employees should also be aware
that areas other than personal securities transactions or
gifts and sensitive payments may involve conflicts of
interest. The following should be regarded as examples of
situations involving real or potential conflicts rather than a
complete list of situations to avoid.
1. "INSIDE INFORMATION" - Specific reference is made to
the firm's policy of the use of "inside information"
which applies to personal securities transactions as
well as to client transactions.
2. "USE OF INFORMATION" - Information acquired in
connection with employment by the organization may
not be used in any way which might be contrary to or
in competition with the interests of clients.
Employees are reminded that certain clients have
specifically required their relationship with us to
be treated confidentially.
3. "DISCLOSURE OF INFORMATION" - Information regarding
actual or contemplated investment decisions, research
priorities or client interests should not be
disclosed to persons outside our organization and in
no way can be used for personal gain.
4. "OUTSIDE ACTIVITIES" - All outside relationships such
as directorships or trusteeships of any kind or
membership in investment organizations (e.g., an
investment club) should be discussed with the
President and/or General Counsel prior to the
acceptance of such position.
As a general matter, directorships in unaffiliated
public companies or companies which may reasonably be
expected to become public companies will not be
authorized because of the potential for conflicts
which may impede our freedom to act in the best
interests of clients. Service with charitable
organizations generally will be authorized, subject
to considerations related to time required during
working hours and use of proprietary information.
VII. DISINTERESTED DIRECTORS OR TRUSTEES
A director or trustee of an Investment Company who is not an officer of
such Investment Company or an officer, employee or director of the
Adviser need only report a transaction in a security if the director or
trustee, at the time of that transaction, knew
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or, in the ordinary course of fulfilling his official duties as a
director or trustee of the Investment Company, should have known that,
during the 15-day period immediately preceding the date of the
transaction by the director or trustee, the security was under active
consideration by the Investment Company.
VIII. COMPLIANCE PROCEDURES
A. Preclearance: All Advisory Persons are to "preclear" personal
securities investments prior to execution through the firm's
Head Trader, or such other person as is designated from
time-to-time by the Review Officer. This includes bonds,
stocks (including closed-end funds), convertibles, preferreds,
options on securities, warrants, rights, etc. for domestic and
foreign securities whether publicly traded or privately
placed. In addition, any portfolio manager wishing to effect a
personal securities transaction which might be viewed as
contrary to a position held in any portfolio for which he or
she serves as portfolio manager must preclear such transaction
with the firm's Review Officer, in addition to the normal
preclearance procedure. The only exceptions to this
requirement are automatic dividend reinvestment plan
acquisitions, financial futures and options on futures,
automatic employee stock purchase plan acquisitions,
transactions in open-end mutual funds, U.S. Government
securities, commercial paper, or exempted transactions. Please
note, however, that most of these transactions must be
reported even though they do not have to be precleared. The
Review Officer may require other persons to preclear personal
securities transactions as he or she may deem necessary and
appropriate for compliance with this Code. See the Section
"IX" for reporting obligations.
B. Records of Securities Transactions: All Advisory Persons are
to direct their brokers to supply to a designated compliance
official, on a timely basis, duplicate copies of confirmations
of all personal securities transactions and copies of periodic
statements for all securities accounts.
C. Post-Trade Monitoring: The Review Officer shall review all
personal securities transactions by Access Persons to ensure
that no conflict exists with Investment Company trades.
D. Disclosure of Personal Holdings: Access Persons are required
to disclose all personal securities holdings upon commencement
of employment and thereafter on an annual basis.
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E. Certification of Compliance With Code of Ethics: All Access
Persons are required to certify annually that they have read
and understand the Code and recognize that they are subject
thereto. Further, Access Persons are required to certify
annually that they have complied with the requirements of the
Code and that they have disclosed or reported all personal
securities transactions required to be disclosed or reported
pursuant to the requirements of the Code.
F. Review by the Board of Directors or Trustees: Management will
prepare a report to the Board of Directors or Trustees (1)
quarterly that identifies any violations requiring significant
remedial action during the past quarter; and (2) annually that
a) summarizes existing procedures concerning personal
investing and any changes in the procedures made during the
past year, and b) identifies any recommended changes in
existing restrictions or procedures based upon the Investment
Company's experience under the Code, evolving industry
practices, or developments in applicable laws or regulations.
The Board of Directors or Trustees will review the operations
of this policy and make recommendations if necessary, as
stated in Section "X" at least once a year.
IX. REPORTING
The Securities and Exchange Commission requires that a record of all
personal securities transactions be kept available for inspection, and
that these records be maintained on at least a quarterly basis. To
comply with these rules, it is necessary to have every Access Person
file a quarterly report (on the form attached hereto as Exhibit 1)
within 10 calendar days after the end of each calendar quarter(2).
Quarterly Report forms will be distributed to all employees on the last
business day of each quarter. Completed forms should be sent to the
Review Officer. The forms and transactions in all personal accounts
will be reviewed each quarter on a confidential basis.
The quarterly report must include the required information for all
personal securities transactions as defined above, except transactions
in open-end mutual funds, U.S. Government securities or commodities.
Except as noted above, exempted transactions must also be reported and
the nature of the transaction clearly specified in the report.
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(2) Advisory Persons who are required to provide copies of confirmations
and periodic statements pursuant to Section VIII.B hereof are only
required to certify in such report that no other transactions were
executed during the quarter.
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Quarterly reports must be filed by all Access Persons even if there
were no reportable transactions during the quarter. (Write "none" and
return with your signature.)
The report required by this section shall state: (i) the title and
amount of the security involved; (ii) the date and nature of the
transaction (i.e., purchase, sale or other acquisition or disposition);
(iii) the price at which the transaction was effected; and (iv) the
name of the broker, dealer or bank with or through whom the transaction
was effected. A copy of the broker's confirmation may be submitted in
lieu of the required report.
The report may also contain a statement declaring that the reporting or
recording of any transaction shall not be construed as an admission
that the Access Person making the report has any direct or indirect
Beneficial Ownership in the Security to which the report relates.
X. AUDIT BY REVIEW OFFICER
Adherence to the Code is considered a basic condition of employment
with our organization. The Review Officer will monitor compliance with
the Code and review such violations of the Code as may occur and
determine what action or sanctions are appropriate in the event of a
violation. The Review Officer will report, periodically and upon
request, to the Boards of Directors or Trustees of the various
Investment Companies for which the Adviser serves as investment
adviser.
Again, we emphasize the importance of Advisory Persons obtaining prior
clearance of all personal securities transactions, filing the quarterly
reports promptly and avoiding other situations which might involve even
the appearance of a conflict of interest. Questions regarding
interpretation of this policy or questions related to specific
situations should be directed to the Review Officer.
XI. SANCTIONS
Upon discovering a violation of this Code, the Adviser may impose such
sanctions as it deems appropriate, including, among other things, a
letter of censure or suspension or termination of the employment of the
violator. All material violations of this Code and any sanctions
imposed with respect thereto shall be reported periodically to the
Board of Directors or Trustees of the Investment Company with respect
to whose securities the violation occurred.
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XII. ADDITIONAL DISCLOSURE
General disclosure concerning Access Persons engaging in personal
securities transactions, restrictions and procedures as well as a
statement from the Investment Company addressing any conflicts of
interest that might arise has been incorporated into Investment
Company's Statement of Additional Information ("SAI").
XIII. EFFECTIVE DATE
This Code was adopted at a meeting of the Boards of Directors/Trustees
of the Investment Companies. This Code shall become effective on
February 26, 1997 and remain in effect until amended or replaced by the
Boards of Directors/Trustees by subsequent action.
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