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RS INVESTMENT TRUST
388 Market Street, Suite 200 PROSPECTUS SUPPLEMENT
San Francisco, CA 94111 dated November 22, 1999
800-766-3863 www.rsim.com to Prospectus dated May 3, 1999
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RS INTERNET AGE FUND
The RS Internet Age Fund seeks long-term capital appreciation by investing
primarily in companies that RS Investment Management believes are likely to
benefit substantially from the development of the Internet.
The RS Internet Age Fund is a series of shares of RS Investment Trust.
You can call RS Investment Management at (800) 766-3863 to find out more
about the Fund. This Prospectus Supplement, along with the full RS Investment
Trust Prospectus dated May 3, 1999, explains what you should know about the Fund
before you invest. Please read them carefully. The Prospectus also provides
information as to how you may obtain a Statement of Additional Information
relating to the Trust and the Fund.
TABLE OF CONTENTS
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2THE
SECURITIES AND
EXCHANGE
Summary Information..................... COMMISSION HAS
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NOT APPROVED OR DISAPPROVED
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Objective, Principal Investment
Strategies,
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DETERMINED IF THIS PROSPECTUS
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and Principal Risks.................... 2
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ACCURATE OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
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Fees and Expenses....................... 4
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THIS PROSPECTUS SUPPLEMENT IS
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DISOther Investment Strategies and
Risks.................................. 5
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TRIBUTION ONLY WITH THE
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INVESTRisks of Investing in the Fund.... 5
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MENT TRUST DATED MAY 3, 1999;
YOU SHOULD REFER TO THE
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Management of the Fund.................. 8
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THE FUND.
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SUMMARY INFORMATION
Objective, Principal Investment Strategies, and Principal Risks.
RS INTERNET AGE FUND
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- - INVESTMENT OBJECTIVE. Long-term capital appreciation.
- - PRINCIPAL INVESTMENT STRATEGIES. The Fund invests primarily in companies
that RS Investment Management believes are likely to benefit substantially
from the development of the Internet. Such companies may include
(i) companies that provide access, infrastructure, content, products, or
services to Internet companies or Internet users; (ii) companies engaged in
e-commerce; and (iii) other companies in any industry that RS Investment
Management believes are likely to benefit substantially as a direct or
indirect result of the growth of the Internet.
The following examples illustrate the wide range of products and services
provided by companies in which the Fund may invest:
- - Computer hardware and software of any kind, including, for example,
semiconductors, semiconductor equipment, Internet access devices and
technologies, optical components, and any technology used in the
distribution of data, voice, or interactive content.
- - Telecommunications products and services including landline, satellite, and
wireless technologies and any other related technology that may emerge in
the future.
- - E-commerce, including the distribution or sale of goods and services to
individuals and businesses over the Internet or other means of electronic
commerce.
- - Medical products and services developed or provided through or using the
Internet.
- - Multimedia products and services.
- - Data processing and interpretation products and services.
- - Dissemination of market, economic, and financial information.
The Fund may invest in companies that RS Investment Management believes are
likely to benefit indirectly from the development of the Internet. For
example, the Fund might invest in media companies RS Investment Management
believes will benefit substantially from advertising by companies providing
products or services to Internet users. As a result, the Fund's investments
will not necessarily be limited to high-technology or similar companies but
may include issuers in a wide range of industries.
The Fund may invest in companies of any size. It is likely, however, that
the Fund will at times invest a substantial portion of its assets in small-
and mid-cap companies, if RS Investment Management believes that they offer
the best opportunities for long-term capital appreciation. RS Investment
Management typically considers a number of factors in evaluating a potential
investment, including, for example, whether a company participates in an
emerging space with a large market opportunity; whether the company has a
distinct proprietary element; whether it is gaining market share; whether it
is earning superior margins or experiencing superior profitability or
whether its incremental margins have potential to show improving returns;
and whether it has a strong management team. RS Investment Management may
consider selling a security for the Fund if the issuer's growth rate
deteriorates or its performance otherwise disappoints, if the price of the
security attains RS Investment Management's
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price target or otherwise appears relatively high to RS Investment
Management, or if there is an unfavorable change in the issuer's management
or corporate plans or if institutional ownership of the security increases
substantially. Because many of the markets in which the Fund invests are
characterized by rapid change, frequent new entrants, and price volatility,
RS Investment Management will trade the Fund's portfolio actively,
potentially resulting in a high portfolio turnover rate.
The Fund may sell securities short if RS Investment Management expects the
values of those securities to decline.
- - PRINCIPAL INVESTMENTS. The Fund invests principally in common stocks, but
may also invest any portion of its assets in preferred stocks and warrants.
The Fund invests primarily (and will normally invest at least 65% of its
assets) in companies that RS Investment Management believes are likely to
benefit substantially from the development of the Internet.
- - PRINCIPAL RISKS.
- - It is possible to lose money on an investment in the Fund.
- - EQUITY SECURITIES. One risk of investing in the Fund is the risk that the
value of the equity securities in the portfolio will fall, or will not
appreciate as anticipated by RS Investment Management, due to factors that
adversely affect particular companies in the portfolio and/or equities
markets in general.
- - INTERNET-RELATED INVESTMENTS. Because the Fund's investments are
concentrated in the securities of companies whose success may depend on the
development of the Internet, the value of its shares will be especially
affected by factors peculiar to those companies and may fluctuate more
widely than the value of shares of a portfolio which invests in a broader
range of companies. These factors might include, for example, intense
competition, changes in consumer preferences, challenges in achieving
product compatibility, and government regulation. Securities of such
companies may experience significant price movements caused by
disproportionate investor optimism or pessimism with little or no basis in
fundamental economic conditions.
The Fund's investments in such companies may be highly volatile. Changes
in their prices may reflect changes in investor evaluation of a
particular product or group of products, of the prospects of a company
to develop and market a particular technology successfully, or of high-
technology investments generally.
- - SMALLER COMPANIES. The Fund may invest in smaller companies, which tend to
be more vulnerable to adverse developments than larger companies. Small
companies may have limited product lines, markets, or financial resources,
or may depend on a limited management group. Their securities may trade
infrequently and in limited volumes. As a result, the prices of these
securities may fluctuate more than the prices of securities of larger, more
widely traded companies and the Fund may experience difficulty in
establishing or closing out positions in these securities at prevailing
market prices. Also, there may be less publicly available information about
small companies or less market interest in their securities as compared to
larger companies, and it may take longer for the prices of the securities
to reflect the full value of their issuers' earnings potential or assets.
- - SHORT SALES AND SHORT POSITIONS. The Fund may sell securities short and
may take short positions on broad securities market indexes, such as the
Standard & Poor's 500 Index. The Fund may sell a security short and borrow
the same security from a broker or other institution to complete the sale
when RS Investment Management anticipates that the price of the security
will decline. The Fund may sell futures contracts and related options on a
broad market index if RS Investment Management expects a broad market
decline. Short positions may result in a loss if the market
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price of the security or index in question increases between the date when
the Fund enters into the short position and the date on which the Fund
closes the short position. The Fund may enter into short sales on
securities with a value of up to 25% of the Fund's total assets.
- - PORTFOLIO TURNOVER. Frequent purchases and sales of the Fund's portfolio
securities involve expenses to the Fund, including brokerage commissions or
dealer mark-ups and other transaction costs. They may also result in
realization of taxable capital gains, which may be taxed to shareholders at
ordinary income tax rates.
FEES AND EXPENSES
THIS TABLE DESCRIBES THE FEES AND EXPENSES THAT YOU MAY PAY IF YOU BUY AND HOLD
SHARES OF THE FUND.
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SHAREHOLDER FEES (paid directly from your investment):
Maximum Sales Charge (Load) Imposed on Purchases None
Maximum Deferred Sales Charge (Load) None
Maximum Sales Charge (Load) Imposed on Reinvested
Dividends None
Redemption Fee* None
Exchange Fee None
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* A $9.00 FEE IS CHARGED FOR REDEMPTION BY BANK WIRE.
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ANNUAL FUND OPERATING EXPENSES
(expenses that are deducted from Fund assets)
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Management Fees 1.25%
Distribution (12b-1) Fees 0.25%
Other Expenses 0.38%
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Total Annual Fund Operating Expenses 1.88%
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Because of Rule 12b-1 fees paid by the Fund, long-term shareholders may pay
more than the economic equivalent of the maximum front-end sales load permitted
under applicable broker-dealer sales rules.
EXAMPLE
This Example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds.
The Example assumes that you invest $10,000 in the Fund for the time periods
indicated and then redeem all of your shares at the end of those periods. The
Example also assumes that your investment earns a 5% return each year and that
the Fund's operating expenses remain the same as the Total Annual Fund Operating
Expenses shown above. Your actual costs may be higher or lower. Based on these
assumptions, your costs would be:
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1 YEAR 3 YEARS
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RS Internet Age Fund $ 191 $ 591
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OTHER INVESTMENT STRATEGIES AND RISKS
In addition to the principal investment strategies described in the Summary
Information section above, the Fund may at times use the strategies and
techniques described below, which involve certain special risks. This Prospectus
Supplement does not attempt to disclose all of the various investment techniques
and types of securities that RS Investment Management might use in managing the
Fund. As in any mutual fund, investors must rely on the professional investment
judgment and skill of RS Investment Management.
The Fund may not achieve its objective in all circumstances and you could
lose money by investing. The following provides more detail about the Fund's
principal risks and the circumstances that could adversely affect the value of
the Fund's shares or its total return.
The Fund's investment strategies and portfolio investments may differ from
those of most other mutual funds. RS Investment Management seeks aggressively to
identify favorable securities, economic and market sectors, and investment
opportunities that other investors and investment advisers may not have
identified. RS Investment Management may devote more of the Fund's assets to
pursuing an investment opportunity than many other mutual funds might; it may
buy or sell an investment at times different from when most other mutual funds
might do so; and it may select investments for the Fund that would be
inappropriate for less aggressive mutual funds. The Fund may hold a portion of
its assets in cash or money market investments.
All percentage limitations on investments will apply at the time of
investment and will not be considered violated unless an excess or deficiency
occurs or exists immediately after and as a result of the investment.
The Trustees of the Trust may change the investment objective and policies
of the Fund without a vote of the shareholders unless otherwise specifically
stated.
RISKS OF INVESTING IN THE FUND
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THE INTERNET AND HIGH-TECHNOLOGY. Many of the companies in which the Fund
will invest operate in markets that are characterized by rapid change, evolving
industry standards, frequent new service and product announcements,
introductions, and enhancements, and changing customer demands. The failure of a
company to adapt to such changes could have a material adverse effect on the
company's business, results of operations, and financial condition. In addition,
the widespread adoption of new networking or telecommunications technologies or
other technological changes could require substantial expenditures by a company
to modify or adapt its services or infrastructure, which could have a material
adverse effect on its business, results of operations, and financial condition.
INVESTMENTS IN SMALLER COMPANIES. The Fund may invest a substantial portion
of its assets in securities issued by small companies. Such companies may offer
greater opportunities for capital appreciation than larger companies, but
investments in such companies may involve certain special risks. Such companies
may have limited product lines, markets, or financial resources and may be
dependent on a limited management group. While the markets in securities of such
companies have grown rapidly in recent years, such securities may trade less
frequently and in smaller volume than more widely held securities. The values of
these securities may fluctuate more sharply than those of other securities, and
the Fund may experience some difficulty in establishing or closing out positions
in these securities at prevailing market prices. There may be less publicly
available information about the issuers of these securities or less market
interest in such securities than in the case of larger companies, and it may
take a longer period of time for the prices of such securities to reflect the
full value of their issuers' underlying earnings potential or assets.
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FOREIGN SECURITIES. The Fund may invest in securities principally traded in
foreign markets. Because foreign securities are normally denominated and traded
in foreign currencies, the value of the Fund's assets may be affected favorably
or unfavorably by currency exchange rates, exchange control regulations, foreign
withholding taxes, and restrictions or prohibitions on the repatriation of
foreign currencies. There may be less information publicly available about a
foreign company than about a U.S. company, and foreign companies are not
generally subject to accounting, auditing, and financial reporting standards and
practices comparable to those in the United States. The securities of some
foreign companies are less liquid and at times more volatile than securities of
comparable U.S. companies. Foreign brokerage commissions and other fees are also
generally higher than in the United States. Foreign settlement procedures and
trade regulations may involve certain risks (such as delay in payment or
delivery of securities or in the recovery of the Fund's assets held abroad) and
expenses not present in the settlement of domestic investments.
In addition, there may be a possibility of nationalization or expropriation
of assets, imposition of currency exchange controls, confiscatory taxation,
political or financial instability, and diplomatic developments that could
affect the value of the Fund's investments in certain foreign countries. Legal
remedies available to investors in certain foreign countries may be more limited
than those available with respect to investments in the United States or in
other foreign countries. In the case of securities issued by a foreign
governmental entity, the issuer may in certain circumstances be unable or
unwilling to meet its obligations on the securities in accordance with their
terms, and the Fund may have limited recourse available to it in the event of
default. The laws of some foreign countries may limit the Fund's ability to
invest in securities of certain issuers located in those foreign countries.
Special tax considerations apply to foreign securities. The Fund may buy or sell
foreign currencies and options and futures contracts on foreign currencies for
hedging purposes in connection with its foreign investments.
OPTIONS AND FUTURES. The Fund may buy and sell call and put options to
hedge against changes in net asset value or to attempt to realize a greater
current return. In addition, through the purchase and sale of futures contracts
and related options, the Fund may at times seek to hedge against fluctuations in
net asset value and to attempt to increase its investment return.
The Fund's ability to engage in options and futures strategies will depend
on the availability of liquid markets in such instruments. It is impossible to
predict the amount of trading interest that may exist in various types of
options or futures contracts. Therefore, there is no assurance that the Fund
will be able to utilize these instruments effectively for the purposes stated
above. Options and futures transactions involve certain risks which are
described below and in the Statement of Additional Information.
Transactions in options and futures contracts involve brokerage costs and
may require the Fund to segregate assets to cover its outstanding positions. For
more information, see the Statement of Additional Information.
INDEX FUTURES AND OPTIONS. The Fund may buy and sell index futures
contracts ("index futures") and options on index futures and on indices (or may
purchase investments whose values are based on the value from time to time of
one or more securities indices) for hedging purposes. An index future is a
contract to buy or sell units of a particular bond or stock index at an agreed
price on a specified future date. Depending on the change in value of the index
between the time when the Fund enters into and terminates an index futures or
option transaction, the Fund realizes a gain or loss. The Fund may also buy and
sell index futures and options to increase its investment return.
RISKS RELATED TO OPTIONS AND FUTURES STRATEGIES. Options and futures
transactions involve costs and may result in losses. Certain risks arise because
of the possibility of imperfect correlations between movements in the prices of
futures and options and movements in the prices of the underlying security or
index or of the securities held by the Fund that are the subject of a hedge.
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The successful use by the Fund of the strategies described above further depends
on the ability of RS Investment Management to forecast market movements
correctly. Other risks arise from the Fund's potential inability to close out
futures or options positions. Although the Fund will enter into an options or
futures transactions only if RS Investment Management believes that a liquid
secondary market exists for such option or futures contract, there can be no
assurance that the Fund will be able to effect closing transactions at any
particular time or at an acceptable price.
The Fund expects that its options and futures transactions generally will be
conducted on recognized exchanges. The Fund may in certain instances purchase
and sell options in the over-the-counter markets. The Fund's ability to
terminate options in the over-the-counter markets may be more limited than for
exchange-traded options, and such transactions also involve the risk that
securities dealers participating in such transactions would be unable to meet
their obligations to the Fund. The Fund will, however, engage in
over-the-counter transactions only when appropriate exchange-traded transactions
are unavailable and when, in the opinion of RS Investment Management, the
pricing mechanism and liquidity of the over-the-counter markets are satisfactory
and the participants are responsible parties likely to meet their obligations.
SHORT SALES. When RS Investment Management anticipates that the price of a
security will decline, it may sell the security short and borrow the same
security from a broker or other institution to complete the sale. The Fund may
make a profit or incur a loss depending upon whether the market price of the
security decreases or increases between the date of the short sale and the date
on which the Fund must replace the borrowed security. An increase in the value
of a security sold short by the Fund over the price at which it was sold short
will result in a loss to the Fund, and there can be no assurance that the Fund
will be able to close out the position at any particular time or at an
acceptable price.
The Fund may enter into short sales on securities with a value of up to 25%
of the Fund's total assets. Use of short sales by the Fund may have the effect
of providing the Fund with investment leverage, which increases the Fund's
market exposure and its risk. The use of short sales by the Fund may provide the
economic equivalent of the Fund's borrowing money. If the Fund is leveraged, the
Fund's net asset value will normally increase or decrease more than if it were
not leveraged. Successful use of short sales depends on RS Investment
Management's ability to predict market movements correctly.
DEFENSIVE STRATEGIES. At times, RS Investment Management may judge that
market conditions make pursuing the Fund's basic investment strategy
inconsistent with the best interests of its shareholders. At such times, RS
Investment Management may temporarily use alternative strategies, primarily
designed to reduce fluctuations in the values of the Fund's assets. In
implementing these "defensive" strategies, the Fund may invest in U.S.
Government securities, other high-quality debt instruments, and other securities
RS Investment Management believes to be consistent with the Fund's best
interests. If such a temporary "defensive" strategy is implemented, the Fund may
not achieve its investment objective.
PORTFOLIO TURNOVER. The length of time the Fund has held a particular
security is not generally a consideration in investment decisions. The
investment policies of the Fund may lead to frequent changes in the Fund's
investments, particularly in periods of volatile market movements. A change in
the securities held by the Fund is known as "portfolio turnover." Portfolio
turnover generally involves some expense to the Fund, including brokerage
commissions or dealer mark-ups and other transaction costs on the sale of
securities and reinvestment in other securities. Such sales may result in
realization of taxable capital gains including short-term capital gains which
are generally taxed to shareholders at ordinary income tax rates. RS Investment
Management anticipates that the portfolio turnover rate for the Fund's first
full year of operation will not exceed 200%.
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MANAGEMENT OF THE FUND
INVESTMENT ADVISER
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RS Investment Management, L.P. is the investment adviser for the Fund. In
addition, the Fund has entered into an agreement with RS Investment Management
pursuant to which RS Investment Management provides administrative services to
the Fund. No fees are payable by the Fund under the administrative services
agreement.
PORTFOLIO MANAGERS
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The Fund is managed by a team of investment professionals at RS Investment
Management. Mr. James L. Callinan and Ms. Catherine Baker currently serve as
senior members of the team. For more information about Mr. Callinan, see
"Management of the Funds" in the Prospectus.
CATHERINE BAKER, PRINCIPAL, ANALYST - Cathy joined the RS Investment
Management research team in March 1997 and is a member of RS Growth Equities
Group. Previously, she was a Principal and Senior Analyst covering information
technology and services companies at Robertson, Stephens & Co. beginning in the
spring of 1995. Prior to joining Robertson, Stephens & Co., she served as an
analyst at Cowen & Company. She also has previous brokerage analyst experience
at J.P. Morgan Securities and industry experience at IBM as an analyst in
software acquisitions. Cathy has a BSE in Electrical Engineering from the
University of Michigan and an MBA from Carnegie-Mellon University. She is also a
CFA.
THE ACCOMPANYING PROSPECTUS, BEGINNING WITH THE SECTION ENTITLED "MANAGEMENT
OF THE FUNDS," CONTAINS MORE INFORMATION ABOUT THE TRUST AND THE RS FUNDS
GENERALLY, INCLUDING THE RS INTERNET AGE FUND.
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STATEMENT OF ADDITIONAL INFORMATION
RS INTERNET AGE FUND
November 22, 1999
RS Internet Age Fund (the "Fund") is a series of shares of RS Investment
Trust (the "Trust"), an open-end series investment company. This Statement of
Additional Information is not a prospectus and should be read in conjunction
with the Prospectus Supplement of the Fund dated November 22, 1999, and the
Prospectus of the Trust, dated May 3, 1999, as it may be revised from time to
time. A copy of the Fund's Prospectus Supplement and the Trust's Prospectus
can be obtained upon request made to RS Investment Management, 388 Market
Street, Suite 200, San Francisco, CA 94111 telephone 1-800-766-3863.
TABLE OF CONTENTS
CAPTION PAGE
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INVESTMENTS AND RISKS B-2
THE FUND'S INVESTMENT LIMITATIONS B-12
DISTRIBUTION PLAN B-19
HOW NET ASSET VALUE IS DETERMINED B-19
TAXES B-20
HOW PERFORMANCE IS DETERMINED B-22
ADDITIONAL INFORMATION B-24
APPENDIX A B-25
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TRUST INFORMATION
TRUST HISTORY AND FUND CLASSIFICATION
RS Investment Trust (formerly, Robertson Stephens Investment Trust) was
organized on May 11, 1987 under the laws of The Commonwealth of Massachusetts
and is a business entity commonly known as a "Massachusetts business trust." A
copy of the Agreement and Declaration of Trust, which is governed by
Massachusetts law, is on file with the Secretary of State of The Commonwealth of
Massachusetts.
The Trust currently offers shares of beneficial interest of various series
with separate investment objectives and policies, of which the Fund is one. The
Fund is a diversified, open-end, management investment company under the
Investment Company Act of 1940, as amended (the "1940 Act"). This means that
with respect to 75% of the Fund's total assets, the Fund may not invest in
securities of any issuer if, immediately after such investment, more than 5% of
the total assets of the Fund (taken at current value) would be invested in the
securities of that issuer (this limitation does not apply to investments in U.S.
Government securities). The Fund is not subject to this limitation with respect
to the remaining 25% of its total assets.
CAPITALIZATION
The Trust has an unlimited number of shares of beneficial interest that
may, without shareholder approval, be divided into an unlimited number of series
of such shares, which, in turn, may be divided into an unlimited number of
classes of such shares.
The proceeds received by the Fund for each issue or sale of its shares, and
all income, earnings, profits, and proceeds thereof, subject only to the rights
of creditors, will be specifically allocated to the Fund, and constitute the
underlying assets of the Fund. The underlying assets of the Fund will be
segregated on the Trust's books of account, and will be charged with the
liabilities in respect of the Fund and with a share of the general liabilities
of the Trust. Expenses with respect to the Fund and one or more other series of
the Trust may be allocated in proportion to the net asset values of the
respective series except where allocations of direct expenses can otherwise be
fairly made.
Shareholders of the Fund will have one vote for each full share owned and
proportionate, fractional votes for fractional shares held. Generally, shares of
the Fund vote separately as a single series of the Trust except when required by
law or determined by the Board of Trustees. Although the Trust is not required
to hold annual meetings of its shareholders, shareholders have the right to call
a meeting to elect or remove Trustees or to take other actions as provided in
the Declaration of Trust.
INVESTMENTS AND RISKS
In addition to the principal investment strategies and the principal
risks of the Fund described in the Prospectus Supplement, the Fund may employ
other investment practices and may be subject to additional risks which are
described below.
RS Investment Management, L.P. ("RSIM, L.P.") serves as investment adviser
to the Fund.
OPTIONS
The Fund may purchase and sell put and call options on its portfolio
securities to enhance investment performance and to protect against changes in
market prices. There is no assurance that the Fund's use of put and
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call options will achieve its desired objective, and the Fund's use of options
may result in losses to the Fund.
COVERED CALL OPTIONS. The Fund may write covered call options on its
securities to realize a greater current return through the receipt of premiums
than it would realize on its securities alone. Such option transactions may also
be used as a limited form of hedging against a decline in the price of
securities owned by the Fund.
A call option gives the holder the right to purchase, and obligates the
writer to sell, a security at the exercise price at any time before the
expiration date. A call option is "covered" if the writer, at all times while
obligated as a writer, either owns the underlying securities (or comparable
securities satisfying the cover requirements of the securities exchanges), or
has the right to acquire such securities through immediate conversion of
securities.
In return for the premium received when it writes a covered call option,
the Fund gives up some or all of the opportunity to profit from an increase in
the market price of the securities covering the call option during the life of
the option. The Fund retains the risk of loss should the price of such
securities decline. If the option expires unexercised, the Fund realizes a gain
equal to the premium, which may be offset by a decline in price of the
underlying security. If the option is exercised, the Fund realizes a gain or
loss equal to the difference between the Fund's cost for the underlying security
and the proceeds of sale (exercise price minus commissions) plus the amount of
the premium.
The Fund may terminate a call option that it has written before it expires
by entering into a closing purchase transaction. The Fund may enter into closing
purchase transactions in order to free itself to sell the underlying security or
to write another call on the security, realize a profit on a previously written
call option, or protect a security from being called in an unexpected market
rise. Any profits from a closing purchase transaction may be offset by a decline
in the value of the underlying security. Conversely, because increases in the
market price of a call option will generally reflect increases in the market
price of the underlying security, any loss resulting from a closing purchase
transaction is likely to be offset in whole or in part by unrealized
appreciation of the underlying security owned by the Fund.
COVERED PUT OPTIONS. The Fund may write covered put options in order to
enhance its current return. Such options transactions may also be used as a
limited form of hedging against an increase in the price of securities that the
Fund plans to purchase. A put option gives the holder the right to sell, and
obligates the writer to buy, a security at the exercise price at any time before
the expiration date. A put option is "covered" if the writer segregates cash and
high-grade short-term debt obligations or other permissible collateral equal to
the price to be paid if the option is exercised.
In addition to the receipt of premiums and the potential gains from
terminating such options in closing purchase transactions, the Fund also
receives interest on the cash and debt securities maintained to cover the
exercise price of the option. By writing a put option, the Fund assumes the risk
that it may be required to purchase the underlying security for an exercise
price higher than its then current market value, resulting in a potential
capital loss unless the security later appreciates in value.
The Fund may terminate a put option that it has written before it expires
by a closing purchase transaction. Any loss from this transaction may be
partially or entirely offset by the premium received on the terminated option.
PURCHASING PUT AND CALL OPTIONS. The Fund may also purchase put options to
protect portfolio holdings against a decline in market value. This protection
lasts for the life of the put option because the Fund, as a holder of the
option, may sell the underlying security at the exercise price regardless of any
decline in its market price. In order for a put option to be profitable, the
market price of the underlying security must decline sufficiently below
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the exercise price to cover the premium and transaction costs that the Fund must
pay. These costs will reduce any profit the Fund might have realized had it sold
the underlying security instead of buying the put option.
The Fund may purchase call options to hedge against an increase in the
price of securities that the Fund wants ultimately to buy. Such hedge protection
is provided during the life of the call option since the Fund, as holder of the
call option, is able to buy the underlying security at the exercise price
regardless of any increase in the underlying security's market price. In order
for a call option to be profitable, the market price of the underlying security
must rise sufficiently above the exercise price to cover the premium and
transaction costs. These costs will reduce any profit the Fund might have
realized had it bought the underlying security at the time it purchased the call
option.
The Fund may also purchase put and call options to attempt to enhance its
current return.
OPTIONS ON FOREIGN SECURITIES. The Fund may purchase and sell options on
foreign securities if RSIM, L.P. believes that the investment characteristics of
such options, including the risks of investing in such options, are consistent
with the Fund's investment objective. It is expected that risks related to such
options will not differ materially from risks related to options on U.S.
securities. However, position limits and other rules of foreign exchanges may
differ from those in the U.S. In addition, options markets in some countries,
many of which are relatively new, may be less liquid than comparable markets in
the U.S.
RISKS INVOLVED IN THE SALE OF OPTIONS. Options transactions involve certain
risks, including the risks that RSIM, L.P. will not forecast interest rate or
market movements correctly, that the Fund may be unable at times to close out
such positions, or that hedging transactions may not accomplish their purpose
because of imperfect market correlations. The successful use of these strategies
depends on the ability of RSIM, L.P. to forecast market and interest rate
movements correctly.
An exchange-listed option may be closed out only on an exchange which
provides a secondary market for an option of the same series. There is no
assurance that a liquid secondary market on an exchange will exist for any
particular option or at any particular time. If no secondary market were to
exist, it would be impossible to enter into a closing transaction to close out
an option position. As a result, the Fund may be forced to continue to hold, or
to purchase at a fixed price, a security on which it has sold an option at a
time when RSIM, L.P. believes it is inadvisable to do so.
Higher than anticipated trading activity or order flow or other unforeseen
events might cause The Options Clearing Corporation or an exchange to institute
special trading procedures or restrictions that might restrict the Fund's use of
options. The exchanges have established limitations on the maximum number of
calls and puts of each class that may be held or written by an investor or group
of investors acting in concert. It is possible that the Fund, the Trust and
other clients of RSIM, L.P. may be considered such a group. These position
limits may restrict the Fund's ability to purchase or sell options on particular
securities.
Options which are not traded on national securities exchanges may be closed
out only with the other party to the option transaction. For that reason, it may
be more difficult to close out unlisted options than listed options.
Furthermore, unlisted options are not subject to the protection afforded
purchasers of listed options by The Options Clearing Corporation.
Government regulations may also restrict the Fund's use of options.
SPECIAL EXPIRATION PRICE OPTIONS
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The Fund may purchase over-the-counter ("OTC") puts and calls with respect
to specified securities ("special expiration price options") pursuant to which
the Fund in effect may create a custom index relating to a particular industry
or sector that RSIM, L.P. believes will increase or decrease in value generally
as a group. In exchange for a premium, the counterparty, whose performance is
guaranteed by a broker-dealer, agrees to purchase (or sell) a specified number
of shares of a particular stock at a specified price and further agrees to
cancel the option at a specified price that decreases straight line over the
term of the option. Thus, the value of the special expiration price option is
comprised of the market value of the applicable underlying security relative to
the option exercise price and the value of the remaining premium. However, if
the value of the underlying security increases (or decreases) by a prenegotiated
amount, the special expiration price option is canceled and becomes worthless. A
portion of the dividends during the term of the option are applied to reduce the
exercise price if the options are exercised. Brokerage commissions and other
transaction costs will reduce the Fund's profits if the special expiration price
options are exercised. The Fund will not purchase special expiration price
options with respect to more than 25% of the value of its net assets, and will
limit premiums paid for such options in accordance with state securities laws.
FUTURES CONTRACTS
INDEX FUTURES CONTRACTS AND OPTIONS. The Fund may buy and sell stock index
futures contracts and related options for hedging purposes or to attempt to
increase investment return. A stock index futures contract is a contract to buy
or sell units of a stock index at a specified future date at a price agreed upon
when the contract is made. A unit is the current value of the stock index.
The following example illustrates generally the manner in which index
futures contracts operate. The Standard & Poor's 100 Stock Index (the "S&P 100
Index") is composed of 100 selected common stocks, most of which are listed on
the New York Stock Exchange. The S&P 100 Index assigns relative weightings to
the common stocks included in the Index, and the Index fluctuates with changes
in the market values of those common stocks. In the case of the S&P 100 Index,
contracts are to buy or sell 100 units. Thus, if the value of the S&P 100 Index
were $180, one contract would be worth $18,000 (100 units x $180). The stock
index futures contract specifies that no delivery of the actual stocks making up
the index will take place. Instead, settlement in cash must occur upon the
termination of the contract, with the settlement being the difference between
the contract price and the actual level of the stock index at the expiration of
the contract. For example, if the Fund enters into a futures contract to buy 100
units of the S&P 100 Index at a specified future date at a contract price of
$180 and the S&P 100 Index is at $184 on that future date, the Fund will gain
$400 (100 units x gain of $4). If the Fund enters into a futures contract to
sell 100 units of the stock index at a specified future date at a contract price
of $180 and the S&P 100 Index is at $182 on that future date, the Fund will lose
$200 (100 units x loss of $2).
Positions in index futures may be closed out only on an exchange or board
of trade which provides a secondary market for such futures.
In order to hedge its investments successfully using futures contracts and
related options, the Fund must invest in futures contracts with respect to
indexes or sub-indexes the movements of which will, in its judgment, have a
significant correlation with movements in the prices of the Fund's securities.
Options on index futures contracts give the purchaser the right, in return
for the premium paid, to assume a position in an index futures contract (a long
position if the option is a call and a short position if the option is a put) at
a specified exercise price at any time during the period of the option. Upon
exercise of the option, the holder would assume the underlying futures position
and would receive a variation margin payment of cash or securities
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approximatingthe increase in the value of the holder's option position. If an
option is exercised on the last trading day prior to the expiration date of the
option, the settlement will be made entirely in cash based on the difference
between the exercise price of the option and the closing level of the index on
which the futures contract is based on the expiration date. Purchasers of
options who fail to exercise their options prior to the exercise date suffer a
loss of the premium paid.
As an alternative to purchasing and selling call and put options on index
futures contracts, the Fund may purchase and sell index futures contracts may
purchase and sell call and put options on the underlying indexes themselves to
the extent that such options are traded on national securities exchanges. Index
options are similar to options on individual securities in that the purchaser of
an index option acquires the right to buy (in the case of a call) or sell (in
the case of a put), and the writer undertakes the obligation to sell or buy (as
the case may be), units of an index at a stated exercise price during the term
of the option. Instead of giving the right to take or make actual delivery of
securities, the holder of an index option has the right to receive a cash
"exercise settlement amount." This amount is equal to the amount by which the
fixed exercise price of the option exceeds (in the case of a put) or is less
than (in the case of a call) the closing value of the underlying index on the
date of the exercise, multiplied by a fixed "index multiplier."
The Fund may purchase or sell options on stock indices in order to close
out its outstanding positions in options on stock indices which it has
purchased. The Fund may also allow such options to expire unexercised.
Compared to the purchase or sale of futures contracts, the purchase of call
or put options on an index involves less potential risk to the Fund because the
maximum amount at risk is the premium paid for the options plus transactions
costs. The writing of a put or call option on an index involves risks similar to
those risks relating to the purchase or sale of index futures contracts.
MARGIN PAYMENTS. When the Fund purchases or sells a futures contract, it is
required to deposit with its custodian an amount of cash, U.S. Treasury bills,
or other permissible collateral equal to a small percentage of the amount of the
futures contract. This amount is known as "initial margin." The nature of
initial margin is different from that of margin in security transactions in that
it does not involve borrowing money to finance transactions. Rather, initial
margin is similar to a performance bond or good faith deposit that is returned
to the Fund upon termination of the contract, assuming the Fund satisfies its
contractual obligations.
Subsequent payments to and from the broker occur on a daily basis in a
process known as "marking to market." These payments are called "variation
margin" and are made as the value of the underlying futures contract fluctuates.
For example, when the Fund sells a futures contract and the price of the
underlying index rises above the delivery price, the Fund's position declines in
value. The Fund then pays the broker a variation margin payment equal to the
difference between the delivery price of the futures contract and the value of
the index underlying the futures contract. Conversely, if the price of the
underlying index falls below the delivery price of the contract, the Fund's
futures position increases in value. The broker then must make a variation
margin payment equal to the difference between the delivery price of the futures
contract and the value of the index underlying the futures contract.
When the Fund terminates a position in a futures contract, a final
determination of variation margin is made, additional cash is paid by or to the
Fund, and the Fund realizes a loss or a gain. Such closing transactions involve
additional commission costs.
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SPECIAL RISKS OF TRANSACTIONS IN FUTURES CONTRACTS AND RELATED OPTIONS
LIQUIDITY RISKS. Positions in futures contracts may be closed out only on
an exchange or board of trade which provides a secondary market for such
futures. Although the Fund intends to purchase or sell futures only on exchanges
or boards of trade where there appears to be an active secondary market, there
is no assurance that a liquid secondary market on an exchange or board of trade
will exist for any particular contract or at any particular time. If there is
not a liquid secondary market at a particular time, it may not be possible to
close a futures position at such time and, in the event of adverse price
movements, the Fund would continue to be required to make daily cash payments of
variation margin. However, in the event financial futures are used to hedge
portfolio securities, such securities will not generally be sold until the
financial futures can be terminated. In such circumstances, an increase in the
price of the portfolio securities, if any, may partially or completely offset
losses on the financial futures.
The ability to establish and close out positions in options on futures
contracts will be subject to the development and maintenance of a liquid
secondary market. It is not certain that such a market will develop. Although
the Fund generally will purchase only those options for which there appears to
be an active secondary market, there is no assurance that a liquid secondary
market on an exchange will exist for any particular option or at any particular
time. In the event no such market exists for particular options, it might not be
possible to effect closing transactions in such options, with the result that
the Fund would have to exercise the options in order to realize any profit.
HEDGING RISKS. There are several risks in connection with the use by the
Fund of futures contracts and related options as a hedging device. One risk
arises because of the imperfect correlation between movements in the prices of
the futures contracts and options and movements in the underlying securities or
index or movements in the prices of the Fund's securities which are the subject
of a hedge. RSIM, L.P. will, however, attempt to reduce this risk by purchasing
and selling, to the extent possible, futures contracts and related options on
securities and indexes the movements of which will, in its judgment, correlate
closely with movements in the prices of the underlying securities or index and
the Fund's portfolio securities sought to be hedged.
Successful use of futures contracts and options by the Fund for hedging
purposes is also subject to RSIM, L.P.'s ability to predict correctly movements
in the direction of the market. It is possible that, where the Fund has
purchased puts on futures contracts to hedge its portfolio against a decline in
the market, the securities or index on which the puts are purchased may increase
in value and the value of securities held in the portfolio may decline. If this
occurred, the Fund would lose money on the puts and also experience a decline in
value in its portfolio securities. In addition, the prices of futures, for a
number of reasons, may not correlate perfectly with movements in the underlying
securities or index due to certain market distortions. First, all participants
in the futures market are subject to margin deposit requirements. Such
requirements may cause investors to close futures contracts through offsetting
transactions which could distort the normal relationship between the underlying
security or index and futures markets. Second, the margin requirements in the
futures markets are less onerous than margin requirements in the securities
markets in general, and as a result the futures markets may attract more
speculators than the securities markets do. Increased participation by
speculators in the futures markets may also cause temporary price distortions.
Due to the possibility of price distortion, even a correct forecast of general
market trends by RSIM, L.P. still may not result in a successful hedging
transaction over a very short time period.
OTHER RISKS. The Fund will incur brokerage fees in connection with its
futures and options transactions. In addition, while futures contracts and
options on futures will be purchased and sold to reduce certain risks, those
transactions themselves entail certain other risks. Thus, while the Fund may
benefit from the use of futures and related options, unanticipated changes in
interest rates or stock price movements may result in a poorer overall
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performance for the Fund than if it had not entered into any futures contracts
or options transactions. Moreover, in the event of an imperfect correlation
between the futures position and the portfolio position which is intended to be
protected, the desired protection may not be obtained and the Fund may be
exposed to risk of loss.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements. A repurchase agreement is a
contract under which the Fund acquires a security for a relatively short period
(usually not more than one week) subject to the obligation of the seller to
repurchase and the Fund to resell such security at a fixed time and price
(representing the Fund's cost plus interest). It is the Fund's present intention
to enter into repurchase agreements only with member banks of the Federal
Reserve System and securities dealers meeting certain criteria as to
creditworthiness and financial condition established by the Trustees of the
Trust and only with respect to obligations of the U.S. Government or its
agencies or instrumentalities or other high-quality, short-term debt
obligations. Repurchase agreements may also be viewed as loans made by the Fund
which are collateralized by the securities subject to repurchase. RSIM, L.P.
will monitor such transactions to ensure that the value of the underlying
securities will be at least equal at all times to the total amount of the
repurchase obligation, including the interest factor. If the seller defaults,
the Fund could realize a loss on the sale of the underlying security to the
extent that the proceeds of sale including accrued interest are less than the
resale price provided in the agreement including interest. In addition, if the
seller should be involved in bankruptcy or insolvency proceedings, the Fund may
incur delay and costs in selling the underlying security or may suffer a loss of
principal and interest if the Fund is treated as an unsecured creditor and
required to return the underlying collateral to the seller's estate.
SECURITIES LENDING
The Fund may lend its portfolio securities, provided: (1) the loan is
secured continuously by collateral consisting of U.S. Government securities,
cash, or cash equivalents adjusted daily to have market value at least equal to
the current market value of the securities loaned; (2) the Fund may at any time
call the loan and regain the securities loaned; (3) the Fund will receive any
interest or dividends paid on the loaned securities; and (4) the aggregate
market value of securities of the Fund loaned will not at any time exceed
one-third (or such other limit as the Trustees may establish) of the total
assets of the Fund. In addition, it is anticipated that the Fund may share with
the borrower some of the income received on the collateral for the loan or that
it will be paid a premium for the loan.
Before the Fund enters into a loan, RSIM, L.P. considers all relevant facts
and circumstances, including the creditworthiness of the borrower. The risks in
lending portfolio securities, as with other extensions of credit, consist of
possible delay in recovery of the securities or possible loss of rights in the
collateral should the borrower fail financially. Although voting rights or
rights to consent with respect to the loaned securities pass to the borrower,
the Fund retains the right to call the loans at any time on reasonable notice,
and it will do so in order that the securities may be voted by the Fund if the
holders of such securities are asked to vote upon or consent to matters
materially affecting the investment. The Fund will not lend portfolio securities
to borrowers affiliated with the Fund.
SHORT SALES
The Fund may seek to hedge investments or realize additional gains through
short sales. Short sales are transactions in which the Fund sells a security it
does not own, in anticipation of a decline in the market value of that security.
To complete such a transaction, the Fund must borrow the security to make
delivery to the buyer. The Fund then is obligated to replace the security
borrowed by purchasing it at the market price at or prior to the time of
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replacement. The price at such time may be more or less than the price at which
the security was sold by the Fund. Until the security is replaced, the Fund is
required to repay the lender any dividends or interest that accrue during the
period of the loan. To borrow the security, the Fund also may be required to pay
a premium, which would increase the cost of the security sold. The net proceeds
of the short sale will be retained by the broker (or by the Fund's custodian in
a special custody account), to the extent necessary to meet margin requirements,
until the short position is closed out. The Fund also will incur transaction
costs in effecting short sales.
The Fund will incur a loss as a result of the short sale if the price of
the security increases between the date of the short sale and the date on which
the Fund replaces the borrowed security. The Fund will realize a gain if the
security declines in price between those dates. The amount of any gain will be
decreased, and the amount of any loss increased, by the amount of the premium,
dividends, interest or expenses the Fund may be required to pay in connection
with a short sale. An increase in the value of a security sold short by the Fund
over the price at which it was sold short will result in a loss to the Fund, and
there can be no assurance that the Fund will be able to close out the position
at any particular time or at an acceptable price.
FOREIGN INVESTMENTS
Investments in foreign securities may involve considerations different from
investments in domestic securities due to limited publicly available
information, non-uniform accounting standards, lower trading volume and possible
consequent illiquidity, greater volatility in price, the possible imposition of
withholding or confiscatory taxes, the possible adoption of foreign governmental
restrictions affecting the payment of principal and interest, expropriation of
assets, nationalization, or other adverse political or economic developments.
Foreign companies may not be subject to auditing and financial reporting
standards and requirements comparable to those which apply to U.S. companies.
Foreign brokerage commissions and other fees are generally higher than in the
United States. It may be more difficult to obtain and enforce a judgment against
a foreign issuer.
In addition, to the extent that the Fund's foreign investments are not U.S.
dollar-denominated, the Fund may be affected favorably or unfavorably by changes
in currency exchange rates or exchange control regulations and may incur costs
in connection with conversion between currencies.
DEVELOPING COUNTRIES. The considerations noted above for foreign
investments generally are intensified for investments in developing countries.
These risks include (i) volatile social, political and economic conditions; (ii)
the small current size of the markets for such securities and the currently low
or nonexistent volume of trading, which result in a lack of liquidity and in
greater price volatility; (iii) the existence of national policies which may
restrict the Fund's investment opportunities, including restrictions on
investment in issuers or industries deemed sensitive to national interests; (iv)
foreign taxation; (v) the absence of developed structures governing private or
foreign investment or allowing for judicial redress for injury to private
property; (vi) the absence, until recently in certain developing countries, of a
capital market structure or market-oriented economy; (vii) economies based on
only a few industries; and (viii) the possibility that recent favorable economic
developments in certain developing countries may be slowed or reversed by
unanticipated political or social events in such countries.
FOREIGN CURRENCY TRANSACTIONS
The Fund may engage in currency exchange transactions to protect against
uncertainty in the level of future foreign currency exchange rates and to
increase current return. The Fund may engage in both "transaction hedging" and
"position hedging."
There can be no assurance that appropriate foreign currency transactions
will be available for the Fund at any time; or that the Fund will enter into
such transactions at any time or under any circumstances even if
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appropriate transactions are available to it.
When it engages in transaction hedging, the Fund enters into foreign
currency transactions with respect to specific receivables or payables of the
Fund generally arising in connection with the purchase or sale of its portfolio
securities. The Fund will engage in transaction hedging when it desires to "lock
in" the U.S. dollar price of a security it has agreed to purchase or sell, or
the U.S. dollar equivalent of a dividend or interest payment in a foreign
currency. By transaction hedging, the Fund will attempt to protect against a
possible loss resulting from an adverse change in the relationship between the
U.S. dollar and the applicable foreign currency during the period between the
date on which the security is purchased or sold or on which the dividend or
interest payment is declared, and the date on which such payments are made or
received.
The Fund may purchase or sell a foreign currency on a spot (I.E., cash)
basis at the prevailing spot rate in connection with transaction hedging. The
Fund may also enter into contracts to purchase or sell foreign currencies at a
future date ("forward contracts") and purchase and sell foreign currency futures
contracts.
For transaction hedging purposes, the Fund may also purchase
exchange-listed and over-the-counter call and put options on foreign currency
futures contracts and on foreign currencies. A put option on a futures contract
gives the Fund the right to assume a short position in the futures contract
until expiration of the option. A put option on currency gives the Fund the
right to sell a currency at a specified exercise price until the expiration of
the option. A call option on a futures contract gives the Fund the right to
assume a long position in the futures contract until the expiration of the
option. A call option on currency gives the Fund the right to purchase a
currency at the exercise price until the expiration of the option. The Fund will
engage in over-the-counter transactions only when appropriate exchange-traded
transactions are unavailable and when, in the opinion of RSIM, L.P., the pricing
mechanism and liquidity are satisfactory and the participants are responsible
parties likely to meet their contractual obligations.
When it engages in position hedging, the Fund enters into foreign currency
exchange transactions to protect against a decline in the values of the foreign
currencies in which securities held by the Fund are denominated or are quoted in
their principle trading markets or an increase in the value of currency for
securities which the Fund expects to purchase. In connection with position
hedging, the Fund may purchase put or call options on foreign currency and
foreign currency futures contracts and buy or sell forward contracts and foreign
currency futures contracts. The Fund may also purchase or sell foreign currency
on a spot basis.
The precise matching of the amounts of foreign currency exchange
transactions and the value of the portfolio securities involved will not
generally be possible since the future value of such securities in foreign
currencies will change as a consequence of market movements in the values of
those securities between the dates the currency exchange transactions are
entered into and the dates they mature.
It is impossible to forecast with precision the market value of the Fund's
portfolio securities at the expiration or maturity of a forward or futures
contract. Accordingly, it may be necessary for the Fund to purchase additional
foreign currency on the spot market (and bear the expense of such purchase) if
the market value of the security or securities being hedged is less than the
amount of foreign currency the Fund is obligated to deliver and if a decision is
made to sell the security or securities 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 or securities
of the Fund if the market value of such security or securities exceeds the
amount of foreign currency the Fund is obligated to deliver.
To offset some of the costs to the Fund of hedging against fluctuations in
currency exchange rates, the
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Fund may write covered call options on those currencies.
Transaction and position hedging do not eliminate fluctuations in the
underlying prices of the securities which the Fund owns or intends to purchase
or sell. They simply establish a rate of exchange which one can achieve at some
future point in time. Additionally, although these techniques tend to minimize
the risk of loss due to a decline in the value of the hedged currency, they tend
to limit any potential gain which might result from the increase in the value of
such currency.
The Fund may also seek to increase its current return by purchasing and
selling foreign currency on a spot basis, by purchasing and selling options on
foreign currencies and on foreign currency futures contracts, and by purchasing
and selling foreign currency forward contracts.
CURRENCY FORWARD AND FUTURES CONTRACTS. A forward foreign currency exchange
contract involves an obligation to purchase or sell a specific currency at a
future date, which may be any fixed number of days from the date of the contract
as agreed by the parties, at a price set at the time of the contract. In the
case of a cancelable forward contract, the holder has the unilateral right to
cancel the contract at maturity by paying a specified fee. The contracts are
traded in the interbank market conducted directly between currency traders
(usually large commercial banks) and their customers. A forward contract
generally has no deposit requirement, and no commissions are charged at any
stage for trades. A foreign currency futures contract is a standardized contract
for the future delivery of a specified amount of a foreign currency at a future
date at a price set at the time of the contract. Foreign currency futures
contracts traded in the United States are designed by and traded on exchanges
regulated by the Commodity Futures Trading Commission (the "CFTC"), such as the
New York Mercantile Exchange.
Forward foreign currency exchange contracts differ from foreign currency
futures contracts in certain respects. For example, the maturity date of a
forward contract may be any fixed number of days from the date of the contract
agreed upon by the parties, rather than a predetermined date in a given month.
Forward contracts may be in any amounts agreed upon by the parties rather than
predetermined amounts. Also, forward foreign exchange contracts are traded
directly between currency traders so that no intermediary is required.
A forward contract generally requires no margin or other deposit.
At the maturity of a forward or futures contract, the Fund may either
accept or make delivery of the currency specified in the contract, or at or
prior to maturity enter into a closing transaction involving the purchase or
sale of an offsetting contract. Closing transactions with respect to forward
contracts are usually effected with the currency trader who is a party to the
original forward contract. Closing transactions with respect to futures
contracts are effected on a commodities exchange; a clearing corporation
associated with the exchange assumes responsibility for closing out such
contracts.
Positions in foreign currency futures contracts and related options may be
closed out only on an exchange or board of trade which provides a secondary
market in such contracts or options. Although the Fund will normally purchase or
sell foreign currency futures contracts and related options only on exchanges or
boards of trade where there appears to be an active secondary market, there is
no assurance that a secondary market on an exchange or board of trade will exist
for any particular contract or option or at any particular time. In such event,
it may not be possible to close a futures or related option position and, in the
event of adverse price movements, the Fund would continue to be required to make
daily cash payments of variation margin on its futures positions.
FOREIGN CURRENCY OPTIONS. Options on foreign currencies operate similarly
to options on securities, and are traded primarily in the over-the-counter
market, although options on foreign currencies have recently been listed on
several exchanges. Such options will be purchased or written only when RSIM,
L.P. believes that a liquid
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secondary market exists for such options. There can be no assurance that a
liquid secondary market will exist for a particular option at any specific time.
Options on foreign currencies are affected by all of those factors which
influence exchange rates and investments generally.
The value of a foreign currency option is dependent upon the value of the
foreign currency and the U.S. dollar, and may have no relationship to the
investment merits of a foreign security. Because foreign currency transactions
occurring in the interbank market involve substantially larger amounts than
those that may be involved in the use of foreign currency options, investors may
be disadvantaged by having to deal in an odd lot market (generally consisting of
transactions of less than $1 million) for the underlying foreign currencies at
prices that are less favorable than for round lots.
There is no systematic reporting of last-sale information for foreign
currencies and there is no regulatory requirement that quotations available
through dealers or other market sources be firm or revised on a timely basis.
Available quotation information is generally representative of very large
transactions in the interbank market and thus may not reflect relatively smaller
transactions (less than $1 million) where rates may be less favorable. The
interbank market in foreign currencies is a global, around-the-clock market. To
the extent that the U.S. options markets are closed while the markets for the
underlying currencies remain open, significant price and rate movements may take
place in the underlying markets that cannot be reflected in the U.S. options
markets.
FOREIGN CURRENCY CONVERSION. Although foreign exchange dealers do not
charge a fee for currency conversion, they do realize a profit based on the
difference (the "spread") between prices at which they buy and sell various
currencies. Thus, a dealer may offer to sell a foreign currency to the Fund at
one rate, while offering a lesser rate of exchange should the Fund desire to
resell that currency to the dealer.
The Fund may purchase pay-in-kind securities. Pay-in-kind securities pay
all or a portion of their interest or dividends in the form of additional
securities.
TEMPORARY DEFENSIVE STRATEGIES
At times, RSIM, L.P. may judge that market conditions make pursuing the
Fund's basic investment strategy inconsistent with the best interests of its
shareholders. At such times, RSIM, L.P. may temporarily use alternative
strategies, primarily designed to reduce fluctuations in the values of the
Fund's assets. In implementing these "defensive strategies", the Fund may invest
in U.S. Government securities, other high-quality debt instruments, and other
securities RSIM, L.P. believes to be consistent with the Fund's best interests.
THE FUND'S INVESTMENT LIMITATIONS
The Fund has adopted the following fundamental investment restrictions
which may not be changed without the affirmative vote of a majority of the
outstanding voting securities of the Fund. The Fund will not:
1. issue any class of securities which is senior to the Fund's shares of
beneficial interest, except that the Fund may borrow money to the
extent contemplated by Restriction 2 below;
B-12
<PAGE>
2. borrow money, except to the extent permitted by applicable law,
regulation, or order;
3. act as underwriter of securities of other issuers except to the extent
that, in connection with the disposition of portfolio securities, it
may be deemed to be an underwriter under certain federal securities
laws;
4. (i) (as to 75% of the Fund's total assets) purchase any security
(other than obligations of the U.S. Government, its agencies or
instrumentalities) if as a result more than 5% of the Fund's total
assets (taken at current value) would then be invested in securities
of a single issuer, or (ii) purchase any security if as a result 25%
or more of the Fund's total assets (taken at current value) would be
invested in a single industry, except that the Fund will invest in
companies RSIM believes are likely to benefit substantially from the
development of the Internet, without limitation as to industry
concentration;
5. make loans, except by purchase of debt obligations or other financial
instruments in which the Fund may invest consistent with its
investment policies, by entering into repurchase agreements, or
through the lending of its portfolio securities;
6. purchase or sell commodities or commodity contracts, except that
the Fund may purchase or sell financial futures contracts, options
on financial futures contracts, and futures contracts, forward
contracts, and options with respect to foreign currencies, and may
enter into swap transactions or other financial transactions, and
except as required in connection with otherwise permissible
options, futures, and commodity activities as described elsewhere
in the Prospectus or this Statement at the time;
7. purchase or sell real estate or interests in real estate, including
real estate mortgage loans, although (i) it may purchase and sell
securities which are secured by real estate and securities of
companies, including limited partnership interests, that invest or
deal in real estate and it may purchase interests in real estate
investment trusts. (For purposes of this restriction, investments by
the Fund in mortgage-backed securities and other securities
representing interests in mortgage pools shall not constitute the
purchase or sale of real estate or interests in real estate or real
estate mortgage loans.)
In addition, it is contrary to the current policy of the Fund, which policy
may be changed without shareholder approval, to invest more than 15% of its net
assets in securities which are not readily marketable, including securities
restricted as to resale (other than securities restricted as to resale but
determined by the Trustees, or persons designated by the Trustees to make such
determinations, to be readily marketable).
All percentage limitations on investments will apply at the time of
investment and shall not be considered violated unless an excess or deficiency
occurs or exists immediately after and as a result of such investment. Except
for the investment restrictions listed above as fundamental or to the extent
designated as such in the Prospectus, the other investment policies described in
this Statement or in the Prospectus are not fundamental and may be changed by
approval of the Trustees.
The 1940 Act provides that a "vote of a majority of the outstanding voting
securities" of the Fund means the affirmative vote of the lesser of (1) more
than 50% of the outstanding shares of the Fund, or (2) 67% or more of the shares
of the Fund present at a meeting if more than 50% of the outstanding shares of
the Fund are represented
B-13
<PAGE>
at the meeting in person or by proxy.
MANAGEMENT OF THE FUND
TRUSTEES AND OFFICERS
The Trustees of the Trust are responsible for generally overseeing the
conduct of the Trust's (and the Fund's) business. Set forth below is
certain information about the Trust's trustees and executive officers:
LEONARD B. AUERBACH, TRUSTEE
c/o RS Investment Management, 388 Market Street, Suite 200, San Francisco, CA
94111
Mr. Auerbach, 52, is the President and Chief Executive Officer of
Centre Capital Group, Inc., a member company of American
International Group, Inc. Mr. Auerbach is also President of LBA&C,
Inc., which served until July 1997 as general partner of Tuttle &
Company, which provides mortgage pipeline interest rate hedging
services and related software to a variety of institutional
clients. He also served until July 1997 as President of Tuttle &
Auerbach Securities, Inc., an introducing broker trading futures on
behalf of institutional hedging clients and individuals. He is also
a Director of Roelof Mining, Inc. and Headlands Mortgage Corp. Mr.
Auerbach is President of APMT LLC, a manager of mortgage assets.
Mr. Auerbach is a limited partner in Robertson Stephens Residential
Fund, L.P., RS Property Fund I, L.P., and Robertson Stephens
Commercial Property Fund, L.P., of which RSRF Company, L.L.C., RSRE
II., L.L.C., and Robertson, Stephens & Company, Inc., respectively,
affiliates of RSIM, L.P., and RS Investment Management, Inc.
("RSIM, Inc."), another adviser to several series of the Trust, are
the general partners. Mr. Auerbach has been a Trustee of the Trust
since June 1987.
JOHN W. GLYNN, JR., TRUSTEE
c/o RS Investment Management, 388 Market Street, Suite 200, San Francisco, CA
94111
Mr. Glynn, 57, is the Principal and Chairman of the Board of Glynn
Capital Management, an investment management firm which he founded in
1983. Mr. Glynn is a Director of Sterling Payot Company, a private
investment banking firm that advises executives and companies on
financial and strategic matters. He is also a director of several
private companies. He is also a lecturer at the Darden School of
Business at the University of Virginia and at the Stanford Business
School. Mr. Glynn was until June 1997 a limited partner in The Orphan
Fund, of which RSIM, L.P. is a general partner. He has been a Trustee
of the Trust since July , 1997.
*G. RANDALL HECHT, TRUSTEE, PRESIDENT, AND PRINCIPAL EXECUTIVE OFFICER
c/o RS Investment Management, 388 Market Street, Suite 200, San Francisco, CA
94111
Mr. Hecht, 47, was elected President and Principal Executive Officer
of the Trust in February 1999. Mr. Hecht is the chief executive
officer of RSIM, L.P. and RSIM, Inc. He is also the chief executive
officer and a member of RS Investment Management Co., LLC, the parent
company to RSIM, L.P. and RSIM, Inc. Mr. Hecht served as Chief
Operating Officer of Robertson, Stephens & Company, Inc. from January
1993 to 1997 as Chief Financial Officer of Robertson, Stephens &
Company LLC (and its predecessors) from June 1984 to January 1993 and
as the head of that firm's Investment Management Group. He was also a
limited partner of Robertson, Stephens & Company LLC, and a member of
the Management and Executive Committees of Robertson, Stephens &
Company, Inc. He was a Trustee of the Trust from June 1987 until
December 1997.
B-14
<PAGE>
JAMES K. PETERSON, TRUSTEE
c/o RS Investment Management, 388 Market Street, Suite 200, San Francisco, CA
94111
Mr. Peterson, 56, is a Managing Director of Oak Glen Consultancy,
L.L.C., a firm which advises pension funds and other institutions on
investment issues. From October 1998 until April 1999, Mr. Peterson
was an employee of Mitchum, Jones & Templeton, Inc. a registered
broker-dealer. He served as Director of Investment Management for the
IBM Retirement Funds from April 1988 until October 1996. Mr. Peterson
was a Manager of the IBM Retirement Funds from March 1981 until April
1988. Mr. Peterson is a limited partner of Robertson Stephens
Residential Fund, L.P., a limited partnership of which RSRF Company,
L.L.C., an affiliate of RSIM, L.P. and RSIM, Inc., is the general
partner. He has been a Trustee of the Trust since June 1987.
STEVEN COHEN, TREASURER
c/o RS Investment Management, 388 Market Street, Suite 200, San Francisco, CA
94111
Mr. Cohen, 32, is the Chief Financial Officer of RSIM, L.P. and RSIM,
Inc. Prior to joining RS Investment Management in April 1999,
Mr. Cohen was Trading Operations Manager of Ziff Brothers Investments
from 1997 until 1998. From 1994 until 1997, he served as an Audit
Manager at Ernst & Young. Mr. Cohen has been Treasurer of the Trust
since April 1999.
SUZANNE DUFRANE, SECRETARY
c/o RS Investment Management, 388 Market Street, Suite 200, San Francisco, CA
94111
Prior to joining RS Investment Management, Ms. DuFrane was a Vice
President at Credit Suisse First Boston in New York. From 1996-1997,
Ms. DuFrane worked at Robertson Stephens Investment Management as a
controller in the hedge fund group. Before joining Robertson Stephens
Investment Management in 1996, Ms. DuFrane was a senior tax consultant
at Price Waterhouse in San Francisco for three years. She has a B.A.
in Social Science from U.C. Berkeley. Ms. DuFrane has been Secretary
of the Trust since July, 1999.
Pursuant to the terms of the Advisory Agreement with the Fund, RS
Investment Management pays all compensation of officers of the Trust as well as
the fees and expenses of all Trustees of the Trust who are affiliated persons of
RSIM, L.P. or RSIM, Inc. The Trust pays each unaffiliated Trustee an annual fee
of $5,000 for each series of the Trust, including the Fund, and reimburses their
actual out-of-pocket expenses relating to attendance at meetings of the Board of
Trustees.
<TABLE>
<CAPTION>
COMPENSATION TABLE
Name of Aggregate Pension or Estimated Annual Total Compensation
Person, Position Compensation From Retirement Benefits Benefits Upon From Fund Paid to
Trust Accrued As Part of Retirement Trustees in 1998
in 1998 Trust Expenses
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Leonard Auerbach, Trustee $90,000 -- -- $0
John W. Glynn, Jr., Trustee $90,000 -- -- $0
James K. Peterson, Trustee $95,488 -- -- $0
G. Randall Hecht*, Trustee -- -- -- --
- --------------------
</TABLE>
B-15
<PAGE>
* Denotes a Trustee who is an "interested person," as defined in the 1940 Act.
CONTROL PERSONS AND SHARE OWNERSHIP
As of November 20, 1999, all outstanding shares of the Fund were owned by
RS Investment Management CO., L.L.C.
On November 20, 1999 the officers and Trustees of the Trust owned no
shares of the Fund.
The Trust's Declaration of Trust and By-Laws provide that the Trust will
indemnify its Trustees and officers against liabilities and expenses incurred in
connection with litigation in which they may be involved because of their
offices with the Trust, except if it is determined in the manner specified in
the Declaration of Trust and By-Laws that they have not acted in good faith in
the reasonable belief that their actions were in the best interests of the Trust
or that such indemnification would relieve any officer or Trustee of any
liability to the Trust or its shareholders by reason of willful misfeasance, bad
faith, gross negligence, or reckless disregard of his or her duties. The Trust,
at its expense, provides liability insurance for the benefit of its Trustees and
officers.
RSIM, L.P.
RS Investment Management Co. LLC ("RSIM Co."), a Delaware limited liability
company, is the owner of all of the outstanding beneficial interest in RSIM,
L.P. G. Randall Hecht, Chairman and Chief Executive Officer of RSIM Co., owns
29% of the membership interest in RSIM Co.; Mr. Paul Stephens, Mr. Andrew P.
Pilara, and Mr. James Callinan, portfolio managers of certain of the series of
the Trust, own 22%, 15%, and 20%, respectively. The remainder of the membership
interests is owned by other employees of RSIM Co. or its affiliates and by other
persons otherwise unaffiliated with RSIM Co. Each of Messrs. Callinan, Hecht,
Pilara, and Stephens and Messrs. David Evans and James Foster, employees of RSIM
Co. or its affiliates, is a member of the Board of Managers of RSIM Co. Mr.
Hecht serves as the President and Principal Executive Officer of the Trust. Mr.
Pilara serves as a Trustee of the Trust.
Pursuant to an Investment Advisory Agreement (the "Advisory Agreement"),
RSIM, L.P., at its expense, furnishes investment management services with
respect to the assets of the Fund, consistent with the investment objective and
policies of the Fund and subject to the supervision and direction of the Trust's
Board of Trustees, and (i) furnishes the Fund with investment advice, research,
and recommendations with respect to the investment of the Fund's assets and the
purchase and sale of its portfolio securities, (ii) furnishes the Trust and the
Fund with reports, statements, and other data on securities, economic
conditions, and other pertinent subjects, and (iii) in general superintends and
manages the investments of the Fund, subject to the ultimate supervision and
direction of the Board of Trustees. In addition, RSIM, L.P. provides all
administrative services needed for the management and operation of the Fund and
furnishes such office space and personnel as are needed by the Fund pursuant to
an Administrative Services Agreement with the Fund, as described in
"Administrative Services" below. The services of RSIM, L.P. to the Fund are not
deemed to be exclusive, and RSIM, L.P. or any affiliate may provide similar
services to other series of the Trust, other investment companies, and other
clients, and may engage in other activities.
The Advisory Agreement provides that RSIM, L.P. shall not, in the absence
of willful misfeasance, bad faith, gross negligence, or reckless disregard by it
of its obligations or duties, be subject to liability to the Fund or
the shareholders of the Fund for any act or omission in the course of, or
connected with, its rendering services thereunder, or for any losses that may be
sustained in the purchase, holding, or sale of any security by the Fund.
B-16
<PAGE>
The Advisory Agreement is subject to annual approval, commencing in 2001,
by (i) the vote of the Trustees or of a majority of the outstanding voting
securities (as defined in the 1940 Act) of the Fund, and (ii) the vote of a
majority of the Trustees who are not "interested persons" (as defined in the
1940 Act) of the Trust or RSIM, L.P. It is terminable by RSIM, L.P., the Trust,
or a vote of a majority of the outstanding voting securities of the Fund,
without penalty, on 60 days' written notice and will terminate automatically in
the event of its assignment.
The Advisory Agreement also provides that RSIM, L.P. may, at its own
expense, delegate certain of its responsibilities under the Agreement to
sub-advisers for the Fund, who would be required to furnish an investment
program and make investment decisions for the Funds. RSIM, L.P. has not entered
into sub-advisory agreements in respect of the Fund.
MANAGEMENT AND ADMINISTRATIVE FEES
MANAGEMENT FEES. The Fund pays RSIM, L.P. fees as compensation for the
services provided by it under the Advisory Agreement. The amount of these
management fees is calculated daily and payable monthly at the annual rate of
1.25% of the average daily net assets of the Fund.
These management fees are higher than those paid by most other investment
companies. RSIM, L.P. also may at its discretion from time to time pay Fund
expenses from its own assets, or reduce the management fee of the Fund.
ADMINISTRATIVE SERVICES. The Fund has entered into an Administrative
Services Agreement with RSIM, L.P., pursuant to which RSIM, L.P. continuously
provides business management services to the Fund and generally manages all of
the business and affairs of the Fund, subject to the general oversight of the
Trustees. No fees are payable by the Fund under the Administrative Services
Agreement.
The Administrative Services Agreement is subject to annual approval,
commencing in 2001, by (i) the Board of Trustees, and (ii) the vote of a
majority of the Trustees who are not "interested persons" (as defined in the
1940 Act). The Administrative Services Agreement may be terminated without
penalty, by the Trust or by the vote of a majority of the outstanding voting
securities (as defined in the 1940 Act) of the Fund, on 30 days' notice to RSIM,
L.P.
EXPENSES
The Fund will pay all expenses related to its operation which are not borne
by RSIM, L.P., including but not limited to taxes, interest, brokerage fees
and commissions, compensation paid to Provident Distributors, Inc., Four Falls
Corporate Center, 6th Floor, West Conshohocken, Pennsylvania 19428 ("Provident"
or the "Distributor"), the Trust's distributor, under the Fund's 12b-1 Plan,
fees paid to members of the Board of Trustees who are not officers, directors,
stockholders, or employees of RSIM, L.P. or Provident, SEC fees and related
expenses, state Blue Sky qualification fees, charges of custodians, transfer
agents, registrars or other agents, outside auditing, accounting, and legal
services, charges for the printing of prospectuses and statements of additional
information for regulatory purposes or for distribution to shareholders, certain
shareholder report charges, and charges relating to corporate matters.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Investment decisions for the Fund and for the other investment advisory
clients of RSIM, L.P. and its affiliates are made with a view to achieving their
respective investment objectives. Investment decisions are the
B-17
<PAGE>
product of many factors in addition to basic suitability for the particular
client involved. Thus, a particular security may be bought or sold for certain
clients even though it could have been bought or sold for other clients at the
same time. Likewise, a particular security may be bought for one or more clients
when one or more other clients are selling the security. In some instances, one
client may sell a particular security to another client. It also sometimes
happens that two or more clients simultaneously purchase or sell the same
security, in which event each day's transactions in such security are, insofar
as possible, averaged as to price and allocated between such clients in a manner
which in opinion of RSIM, L.P. is equitable to each and in accordance with the
amount being purchased or sold by each. There may be circumstances when
purchases or sales of portfolio securities for one or more clients will have an
adverse effect on other clients. RSIM, L.P. employs professional staffs of
portfolio managers who draw upon a variety of resources for research information
for the Fund.
Transactions on U.S. stock exchanges, commodities markets, and futures
markets and other agency transactions involve the payment by the Fund of
negotiated brokerage commissions. Such commissions vary among different brokers.
A particular broker may charge different commissions according to such factors
as the difficulty and size of the transaction. Transactions in foreign
investments often involve the payment of fixed brokerage commissions, which may
be higher than those in the United States. There is generally no stated
commission in the case of securities traded in the over-the-counter markets, but
the price paid by the Fund usually includes an undisclosed dealer commission or
mark-up. In underwritten offerings, the price paid by the Fund includes a
disclosed, fixed commission or discount retained by the underwriter or dealer.
It has for many years been a common practice in the investment advisory
business for advisers of investment companies and other institutional investors
to receives brokerage and research services (as defined in the Securities
Exchange Act of 1934, as amended (the "1934 Act")) from broker-dealers that
execute portfolio transactions for the clients of such advisers and from third
parties with which such broker-dealers have arrangements. Consistent with this
practice, RSIM, L.P. receives brokerage and research services and other similar
services from many broker-dealers with which they place the Fund's portfolio
transactions and from third parties with which these broker-dealers have
arrangements. These services include such matters as general economic and market
reviews, industry and company reviews, evaluations of investments,
recommendations as to the purchase and sale of investments, newspapers,
magazines, pricing services, quotation services, news services, and personal
computers utilized by managers and analysts of RSIM, L.P. Where the services
referred to above are not used exclusively by RSIM, L.P. for research purposes,
RSIM, L.P., based upon its own allocations of expected use, bears that portion
of the cost of these services which directly relates to its non-research use.
Some of these services are of value to RSIM, L.P. and its affiliates in advising
various of its clients (including the Fund), although not all of these services
are necessarily useful and of value in managing the Fund. The management fee
paid by the Fund is not reduced because RSIM, L.P. or its affiliates receive
these services, even though RSIM, L.P. might otherwise be required to purchase
some of these services for cash.
RSIM, L.P. places all orders for the purchase and sale of portfolio
investments for the Fund and buys and sells investments for the Fund through a
substantial number of brokers and dealers. RSIM, L.P. seeks the best overall
terms available for the Fund, except to the extent RSIM, L.P. may be permitted
to pay higher brokerage commissions as described below. In doing so, RSIM, L.P.,
having in mind the Fund's best interests, considers all factors it deems
relevant, including, by way of illustration, price, the size of the transaction,
the nature of the market for the security or other investment, the amount of the
commission, the timing of the transaction taking into account market prices, and
trends, the reputation, experience, and financial stability of the broker-dealer
involved and the quality of service rendered by the broker-dealer in other
transactions.
As permitted by Section 28(e) of the 1934 Act, RSIM, L.P. may cause the
Fund to pay a broker-dealer which provides "brokerage and research services" (as
defined in the 1934 Act) to RSIM, L.P. an amount of
B-18
<PAGE>
disclosed commission for effecting securities transactions on stock exchanges
and other transactions for the Fund on an agency basis in excess of the
commission which another broker-dealer would have charged for effecting that
transaction. The authority of RSIM, L.P. to cause the Fund to pay any such
greater commissions is also subject to such policies as the Trustees may adopt
from time to time. RSIM, L.P. does not currently intend to cause the Fund to
make such payments. It is the position of the staff of the Securities and
Exchange Commission that Section 28(e) does not apply to the payment of such
greater commissions in "principal" transactions. Accordingly, RSIM, L.P. will
use its best efforts to obtain the best overall terms available with respect to
such transactions.
DISTRIBUTION PLAN
The Fund has adopted a Distribution Plan under Rule 12b-l of the 1940 Act
(the "Plan"). Pursuant to the Plan, the Fund may pay distribution fees to
Provident Distributors, Inc. (the "Distributor") for services the Distributor
renders and costs and expenses it incurs in connection with the promotion and
distribution of the Fund's shares, at an annual rate of 0.25% of the Fund's
average daily net assets. Such expenses may include, but are not limited to,
costs of advertising and promoting the sale of shares of the Fund and payments
to dealers, financial institutions, advisers, or other firms. They may also
include the Distributor's overhead expenses attributable to the distribution of
the Fund's shares, which may include, for example, expenses for office space,
communications, and salaries of the Distributor's personnel, and any other of
the Distributor's expenses attributable to the distribution of the Fund's
shares. RSIM, L.P. and its affiliates provide certain services to the
Distributor in respect of the promotion of the shares of the Funds. In return
for those services, the Distributor pays to RSIM, L.P. a portion of the payments
received by the Distributor under the Plan. The Plan is a "compensation" plan.
HOW NET ASSET VALUE IS DETERMINED
The Fund determines the net asset value per share once daily, as of 4:30
p.m. eastern time, on each day the New York Stock Exchange (the "Exchange") is
open. The Exchange is closed Saturdays, Sundays, New Year's Day, Martin Luther
King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, the Independence Day
(observed), Labor Day, Thanksgiving, and Christmas.
Securities for which market quotations are readily available are valued
using the last reported sale price or, if no sales are reported (as in the case
of some securities traded over-the-counter), at the mean between the closing bid
and asked prices, except that certain U.S. Government securities are stated at
the mean between the last reported bid and asked prices. Short-term investments
having remaining maturities of 60 days or less are stated at amortized cost,
which approximates market value. All other securities and assets are valued at
their fair value following procedures approved by the Trustees.
Reliable market quotations are not considered to be readily available for
long-term corporate bonds and notes, certain preferred stocks, or certain
foreign securities. These investments are stated at fair value on the basis of
valuations furnished by pricing services, which determine valuations for normal,
institutional-size trading units of such securities using methods based on
market transactions for comparable securities and various relationships between
securities which are generally recognized by institutional traders.
If any securities held by the Fund are restricted as to resale, their fair
value is determined in accordance with the guidelines and procedures adopted by
the Trust's Board of Trustees. The fair value of such securities is generally
determined as the amount which the Fund could reasonably expect to realize from
an orderly disposition of such securities over a reasonable period of time. The
valuation procedures applied in any specific instance are likely to vary from
case to case. However, consideration is generally given to the financial
position of the issuer and other
B-19
<PAGE>
fundamental analytical data relating to the investment and to the nature of the
restrictions on disposition of the securities (including any registration
expenses that might be borne by the Fund in connection with such disposition).
In addition, specific factors are also generally considered, such as the cost of
the investment, the market value of any unrestricted securities of the same
class (both at the time of purchase and at the time of valuation), the size of
the holding, the prices of any recent transactions or offers with respect to
such securities, and any available analysts' reports regarding the issuer.
Generally, trading in certain securities (such as foreign securities) is
substantially completed each day at various times prior to the close of the
Exchange. The values of these securities used in determining the net asset value
of the Fund's shares are computed as of such times. Also, because of the amount
of time required to collect and process trading information as to large numbers
of securities issues, the values of certain securities (such as convertible
bonds and U.S. Government securities) are determined based on market quotations
collected earlier in the day at the latest practicable time prior to the close
of the Exchange. Occasionally, events affecting the value of such securities may
occur between such times and the close of the Exchange which will not be
reflected in the computation of the Fund's net asset value. If events materially
affecting the value of such securities occur during such period, then these
securities will be valued at their fair value following procedures approved by
the Trustees.
TAXES
The Fund intends to qualify each year and elect to be taxed as a regulated
investment company under Subchapter M of the United States Internal Revenue Code
of 1986, as amended (the "Code").
As a regulated investment company qualifying to have its tax liability
determined under Subchapter M, the Fund would not be subject to federal income
tax on any of its net investment income or net realized capital gains that are
distributed to shareholders.
In order to qualify as a "regulated investment company," the Fund must,
among other things, (a) derive at least 90% of its gross income from dividends,
interest, payments with respect to securities loans, gains from the sale or
other dispositions of stock, securities, or foreign currencies, and other income
(including gains from options, futures, or forward contracts) derived with
respect to its business of investing in such stock, securities, or currencies
and (b) diversify its holdings so that, at the close of each quarter of its
taxable year, (i) at least 50% of the value of its total assets consists of
cash, cash items, U.S. Government securities, and other securities limited
generally with respect to any one issuer to not more than 5% of the total assets
of the Fund and not more than 10% of the outstanding voting securities of such
issuer, and (ii) not more than 25% of the value of its assets is invested in the
securities of any issuer (other than U.S. Government securities). In order to
receive the favorable tax treatment accorded regulated investment companies and
their shareholders, moreover, the Fund must in general distribute with respect
to each taxable year at least 90% of the sum of its taxable net investment
income, its net tax-exempt income, and the excess, if any, of net short-term
capital gains over net long-term capital gains.
An excise tax at the rate of 4% will be imposed on the excess, if any, of
the Fund's "required distribution" over its actual distributions in any calendar
year. Generally, the "required distribution" is 98% of the Fund's ordinary
income for the calendar year plus 98% of its capital gain net income recognized
during the one-year period ending on October 31 (or December 31, if the Fund so
elects) plus undistributed amounts from prior years. The Fund intends to make
distributions sufficient to avoid imposition of the excise tax. Distributions
declared by the Fund during October, November, or December to shareholders of
record on a date in any such month and paid by the Fund during the following
January will be treated for federal tax purposes as paid by the Fund and
received by shareholders on December 31 of the year in which declared.
B-20
<PAGE>
With respect to investment income and gains received by the Fund from
sources outside the United States, such income and gains may be subject to
foreign taxes which are withheld at the source. Thus, the Fund's yield on
foreign investments would be decreased by such taxes. The effective rate of
foreign taxes to which the Fund will be subject depends on the specific
countries in which its assets will be invested and the extent of the assets
invested in each such country and therefore cannot be determined in advance.
If the Fund engages in hedging transactions, including hedging
transactions in options, futures contracts, and straddles, or other similar
transactions, it will be subject to special tax rules (including constructive
sale, mark-to-market, straddle, wash sale, and short sale rules), the effect of
which may be to accelerate income to the Fund, defer losses to the Fund, cause
adjustments in the holding periods of the Fund's securities, convert long-term
capital gains into short-term capital gains, or convert short-term capital
losses into long-term capital losses. These rules could therefore affect the
amount, timing and character of distributions to shareholders. The Fund will
endeavor to make any available elections pertaining to such transactions in a
manner believed to be in the best interests of the Fund.
The Fund's transactions in foreign currencies, foreign
currency-denominated debt securities and certain foreign currency options,
futures contracts and forward contracts (and similar instruments) may give rise
to ordinary income or loss to the extent such income or loss results from
fluctuations in the value of the foreign currency concerned.
The Fund's transactions in foreign currency-denominated debt instruments
and its hedging activities will likely produce a difference between its book
income and its taxable income. This difference may cause a portion of the Fund's
distributions of book income to constitute returns of capital for tax purposes
or require the Fund to make distributions exceeding book income in order to
permit the Fund to continue to qualify, and be taxed under Subchapter M of the
Code, as a regulated investment company.
Under federal income tax law, a portion of the difference between the
purchase price of zero-coupon securities in which the Fund has invested and
their face value ("original issue discount") is considered to be income to the
Fund each year, even though the Fund will not receive cash interest payments
from these securities. This original issue discount (imputed income) will
comprise a part of the net investment income of the Fund which must be
distributed to shareholders in order to maintain the qualification of the Fund
as a regulated investment company and to avoid federal income tax at the level
of the Fund. Thus, the Fund could be required at times to liquidate other
investments in order to satisfy its distribution requirements.
The Fund generally is required to withhold and remit to the U.S.
Treasury 31% of the taxable dividends and other distributions paid to
non-corporate shareholders who fail to furnish the Fund with a correct taxpayer
identification number, who have underreported dividends or interest income, or
who fail to certify to the Fund that they are not subject to such withholding.
An individual's taxpayer identification number is his or her social security
number. Tax-exempt shareholders are not subject to these back-up withholding
rules so long as they furnish the Fund with a proper certification.
Non-resident alien individuals, foreign corporations and certain other
foreign entities generally will be subject to a U.S. withholding tax at a rate
of 30% on the Fund's distributions from its ordinary income and the excess of
its net short-term capital gain over its net long-term capital loss, unless the
tax is reduced or eliminated by an applicable tax treaty. Distributions from the
excess of the Fund's net capital gain received by such shareholders and any gain
from the sale or other disposition of shares of the Fund generally will not be
subject to U.S. Federal income taxation, provided that non-resident alien status
has been certified by the shareholder. Different U.S. tax consequences may
result if the shareholder is engaged in a trade or business in the United
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States, is present in the United States for a sufficient period of time during a
taxable year to be treated as a U.S. resident, or fails to provide any required
certifications regarding status as a non-resident alien investor. Foreign
shareholders should consult their tax advisors regarding the U.S. and foreign
tax consequences of an investment in the Fund.
The IRS recently revised its regulations affecting the application to
foreign investors of the back-up withholding and withholding tax rules described
above. The new regulations will generally be effective for payments made on or
after January 1, 2000 (although transition rules will apply). In some
circumstances, the new rules will increase the certification and filing
requirements imposed on foreign investors in order to qualify for exemption from
31% back-up withholding tax and for reduced withholding tax rates under income
tax treaties. Foreign investors in the Fund should consult their tax advisors
with respect to the potential application of these new regulations.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and related regulations currently in effect. For the
complete provisions, reference should be made to the pertinent Code sections and
regulations. The Code and regulations are subject to change by legislative or
administrative actions. Dividends and distributions also may be subject to
local, state and foreign taxes. Shareholders are urged to consult their tax
advisers regarding specific questions as to federal, state, local, and foreign
taxes. The foregoing discussion relates solely to U.S. federal income tax law.
Non-U.S. investors should consult their tax advisers concerning the tax
consequences of ownership of shares of the Fund. Statements as to the tax status
of distributions will be mailed annually.
HOW PERFORMANCE IS DETERMINED
STANDARDIZED PERFORMANCE INFORMATION
Average annual total return of a class of shares of the Fund for one-,
five-, and ten-year periods (or for such shorter periods as shares of that class
of shares of the Fund have been offered) is determined by calculating the actual
dollar amount of investment return on a $1,000 investment in that class of
shares at the beginning of the period, and then calculating the annual
compounded rate of return which would produce that amount. Total return for a
period of one year or less is equal to the actual return of that class of shares
during that period. Total return calculations assume reinvestment of all Fund
distributions at net asset value on their respective reinvestment dates. Total
return may be presented for other periods.
At times, RSIM, L.P. may reduce its compensation or assume expenses of the
Fund in order to reduce the Fund's expenses. Any such fee reduction or
assumption of expenses would increase the Fund's total return during the period
of the fee reduction or assumption of expenses.
All data are based on past performance and do not predict future results.
PERFORMANCE INFORMATION
Yield and total return data for the Fund's shares may from time to time be
included in advertisements about the Fund. The Fund's "yield" is calculated by
dividing the annualized net investment income per share during a recent 30-day
period by the net asset value per share on the last day of that period. "Total
return" for one-, five-, and ten-year periods, and for the life of the Fund,
through the most recent calendar quarter represents the average annual
compounded rate of return (or, in the case of a period of one year or less, the
actual rate of return) on an investment of $1,000 in the Fund's shares. Total
return may also be presented for other periods.
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Quotations of yield or total return for a period when an expense limitation was
in effect will be greater than if the limitation had not been in effect. The
Fund's performance may be compared to various indices. Information may be
presented in advertisements about the Fund describing the background and
professional experience of RSIM, L.P. or any portfolio manager.
All data are based on the Fund's past investment results and do not predict
future performance. Investment performance, which will vary, is based on many
factors, including market conditions, the composition of the Fund's portfolio,
and the Fund's investments expenses. Investment performance also often reflects
the risks associated with the Fund's investment objective and policies. These
factors should be considered when comparing the Fund's investment results to
those of other mutual funds and other investment vehicles.
NON-STANDARDIZED TOTAL RETURN INFORMATION
From time to time, the Fund may present non-standardized total return
information, in addition to standardized performance information, which may
include such results as the growth of a hypothetical $10,000 investment in the
Fund's shares, and cumulative total return. Cumulative total return is
calculated in a similar manner to average annual total return, except that the
results are not annualized. Each calculation assumes that all dividends and
distributions are reinvested at net asset value on the reinvestment dates during
the period.
INDICES AND PUBLICATIONS
The Fund may compare its performance with that of appropriate indices such
as the Standard & Poor's Composite Index of 500 stocks ("S&P 500"), Standard &
Poor's MidCap 400 Index ("S&P 400"), the NASDAQ Industrial Index, the NASDAQ
Composite Index, Russell 2000 Index, or other unmanaged indices so that
investors may compare such results with those of a group of unmanaged
securities. The S&P 500, the S&P 400, the NASDAQ Industrial Index, the NASDAQ
Composite Index, and the Russell 2000 Index are unmanaged groups of common
stocks traded principally on national securities exchanges and the over the
counter market, as the case may be. The Fund may also, from time to time,
compare its performance to other mutual funds with similar investment objectives
and to the industry as a whole, as quoted by rating services and publications,
such as Lipper Analytical Services, Inc., Morningstar Mutual Funds, Forbes,
Money, and Business Week.
In addition, one or more portfolio managers or other employees of RSIM,
L.P. may be interviewed by print media, such as THE WALL STREET JOURNAL or
BUSINESS WEEK, or electronic news media, and such interviews may be reprinted or
excerpted for the purpose of advertising regarding the Fund.
RELATIVE VOLATILITY - BETA
From time to time the Fund may present a statistical measure of the
volatility of the Fund's performance relative to the volatility of the
performance of the S&P 500. The Fund calls this comparative measure its "beta."
Beta is approximate, because it is statistical, and is not necessarily
indicative of future fund performance volatility. Thus, if the Fund's portfolio
volatility perfectly represents that of the S&P 500, the Fund's beta would be
1.0. If the Fund's beta is greater than 1.0, the Fund's portfolio would tend to
represent a greater market risk than the S&P 500 because the Fund's portfolio
would tend to be more sensitive to movements in the securities markets. For
example, if the Fund's beta is 1.1, the Fund's performance would tend to vary
approximately 10% more than would the performance of the S&P 500. If the Fund's
beta is 0.9, the Fund's performance would tend to vary 10% less than the
performance of the S&P 500. The correlation is not usually exact because,
depending upon the diversification of
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the Fund's portfolio, a beta of less than 1.0 may indicate only that the
portfolio is less sensitive to market movements, not that the Fund's portfolio
has low overall risk.
The beta included with any presentation of the Fund's performance data will be
calculated according to the following formula:
n
-
the sum of R R - nR R
FT MT F M
BETA = ---------------------------
n
2 - 2
the sum of R - nR
MT M
Where: n = number of months measured
R = rate of return on the Fund in month T
FT
R = rate of return on the market index, I.E., the S&P 500,
MT in month T
-
R = arithmetic average monthly rate of return of the Fund
F
-
R = arithmetic average monthly rate of return on the
M market index, I.E., the S&P 500
ADDITIONAL INFORMATION
TRANSFER AGENT AND CUSTODIAN
State Street Bank and Trust Company, c/o National Financial Data
Services, at P.O. Box 419717, Kansas City, MO 64141, serves as the Fund's
transfer agent and dividend-paying agent ("Transfer Agent"). PFPC Trust Company
("PFPC Trust"), 400 Bellevue Parkway, Wilmington, DE 19809, serves as the Fund's
custodian ("Custodian"). As Custodian, PFPC Trust and subcustodians approved by
the Board of Trustees hold the securities in the Fund's portfolio and other
assets for safekeeping. The Transfer Agent and Custodian do not participate in
making investment decisions for the Fund.
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP, 555 California Street, San Francisco,
California 94104, are the Trust's independent accountants, providing audit
services, tax return review, and other tax consulting services and assistance
and consultation in connection with the review of various Securities and
Exchange Commission filings.
SHAREHOLDER LIABILITY
Under Massachusetts law, shareholders could, under certain circumstances,
be held personally liable for the obligations of the Trust. However, the
Agreement and Declaration of Trust disclaims shareholder liability for acts or
obligations of the Trust and requires that notice of such disclaimer be given in
each agreement, obligation, or instrument entered into or executed by the Trust
or the Trustees. The Agreement and Declaration of Trust provides for
indemnification out of the Fund's property for all loss and expense of any
shareholder held personally liable for the obligations of that Fund. Thus the
risk of a shareholder's incurring financial loss on account of shareholder
liability is limited to circumstances in which the Fund would be unable to meet
its obligations.
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APPENDIX A
DESCRIPTION OF SECURITIES RATINGS
This Appendix describes ratings applied to corporate bonds by Standard & Poor's
("S&P"), Moody's Investors Service, Inc. ("Moody's") and Fitch Investor
Services, Inc. ("Fitch").
S&P'S RATINGS
AAA: Debt rated 'AAA' has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA: Debt rated 'AA' has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
A: Debt rated 'A' has a strong capacity to pay interest and repay principal,
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher-rated categories.
BBB: Debt rated 'BBB' is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher-rated categories.
Debt rated `BB,' `B,' `CCC,' `CC,' and `C' is regarded as having predominantly
speculative characteristics with respect to capacity to pay interest and repay
principal. `BB' indicates the least degree of speculation and `C' the highest.
While such debt will likely have some quality and protective characteristics,
these are outweighed by large uncertainties of major exposures to adverse
markets.
BB: Debt rated 'BB' has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The 'BB'
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied 'BBB-' rating.
B: Debt rated 'B' has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The 'B' rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied 'BB' or 'BB-'
rating.
CCC: Debt rated 'CCC' has a currently identifiable vulnerability to default, and
is dependent upon favorable business, financial, and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial, or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The 'CCC' rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
'B' or 'B-' rating.
CC: The rating 'CC' typically is applied to debt subordinated to senior debt
that is assigned an actual or implied
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'CCC' rating.
C: The rating 'C' typically is applied to debt subordinated to senior debt that
is assigned an actual or implied 'CCC-' rating. The 'C' rating may be used to
cover a situation where a bankruptcy petition has been filed, but debt service
payments are continued.
CI: The rating 'CI' is reserved for income bonds on which no interest is being
paid.
D: Debt rated 'D' is in payment default. The 'D' rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The 'D' rating will also be used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
The ratings from 'AA' to 'CCC' may be modified by the addition of a plus or
minus to show relative standing within the major rating categories.
MOODY'S RATINGS
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edge." Interest payments are protected by a large or 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 such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than in Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba: Bonds which are Ba are judged to have speculative elements; their future
cannot be considered as well assured. Often the protection of interest and
principal payments may be very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
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Ca: Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Moody's applies numerical modifiers, 1, 2, and 3, in each generic rating
classification from Aa through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the
modifier 3 indicates that the issue ranks in the lower end of its generic rating
category.
FITCH RATINGS
AAA: Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.
AA: Bonds considered to be investment grade and of very high credit quality. The
obligor's ability to pay interest and repay principal is very strong, although
not quite as strong as bonds rated `AAA.' Because bonds rate in the `AAA' and
`AA' categories are not significantly vulnerable to foreseeable future
developments, short-term debt of these issuers is generally rated `F-1+.'
A: Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB: Bonds considered to be investment grade and of satisfactory credit quality.
The obligor's ability to pay interest and repay principal is considered to be
adequate. Adverse changes in economic conditions and circumstances, however, are
more likely to have adverse impact on these bonds, and therefore impair timely
payment. The likelihood that the rating of these bonds will fall below
investment grade is higher than for bonds with higher ratings.
BB: Bonds are considered to be speculative. The obligor's ability to pay
interest and repay principal may be affected over time by adverse economic
changes. However, business and financial alternatives can be identified which
could assist the obligor in satisfying its debt service requirements.
B: Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin of
safety and the need for reasonable business and economic activity throughout the
life of the issues.
CCC: Bonds have certain identifiable characteristics that, if not remedied, may
lead to default. The ability to meet obligations requires an advantageous
business and economic environment.
CC: Bonds are minimally protected. Default in payment of interest and/or
principal seems probable.
C: Bonds are in imminent default in payment of interest or principal.
DDD, DD, and D: Bonds in default on interest and/or principal payments. Such
bonds are extremely speculative
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and should be valued on the basis of their ultimate recovery value in
liquidation or reorganization of the obligor. "DDD" represents the highest
potential for recovery on these bonds, and `D' represents the lowest potential
for recovery.
Note: Fitch ratings (other than the "AAA," "DDD," "DD," or "D" categories) may
be modified by the addition of a plus (+) or minus (-) sign to show relative
position of a credit within the rating category.
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