File No. 33-24962
Investment Company No. 811-5186
As filed with the Securities and Exchange Commission on April 30, 1996
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
Registration Statement under The Securities Act of 1933
Post-Effective Amendment No. 18
Registration Statement under The Investment Company Act of 1940
Amendment No. 20
AMERICAN SKANDIA TRUST
(Exact Name of Registrant as Specified in Charter)
One Corporate Drive, Shelton, Connecticut 06484
(Address of Principal Executive Offices) (Zip Code)
(203) 926-1888
(Registrant's Telephone Number, Including Area Code)
MARY ELLEN O'LEARY, ESQ., SECRETARY
AMERICAN SKANDIA TRUST
ONE CORPORATE DRIVE, SHELTON, CONNECTICUT 06484
(Name and Address of Agent for Service)
Copies to:
JOHN T. BUCKLEY, ESQ.
WERNER & KENNEDY
1633 BROADWAY, 46TH FLOOR, NEW YORK, NEW YORK 10019
It is proposed that this filing will become effective (check appropriate space)
_____ immediately upon filing pursuant to paragraph (b).
__X_ on May 1, 1996 pursuant to paragraph (b) of rule 485.
_____ 60 days after filing pursuant to paragraph (a)(1).
_____ on _______ pursuant to paragraph (a)(1).
_____ 75 days after filing pursuant to paragraph (a)(2).
_____ on _________ pursuant to paragraph (a)(2) of rule 485.
_____ this post-effective amendment designates a new effective
date for a previously filed post-effective amendment.
Registrant has elected to maintain an indefinite
registration of shares under Rule 24f-2. The Rule
24f-2 Notice for Registrant's fiscal period ended
December 31, 1995 was filed on February 28, 1996.
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This filing consists of 356 pages.
<PAGE>
AMERICAN SKANDIA TRUST
Registration Statement on Form N-1A
CROSS REFERENCE SHEET
Form N-1A
Item Number
Prospectus
Part A Prospectus Caption Page Number
1. Cover Page 1
2. *
3. Condensed Financial Information 5
4. Investment Objectives and
Policies; Organization and
Description of Shares of the Trust 12, 85
5. (a)(b)(c) Management of the Trust 75
(d) Transfer and Shareholder Servicing
Agent and Custodian 89
(e) Management of the Trust 75
(f) Condensed Financial Information 5
(g) Brokerage Allocation 74
6. (a) Organization and Description of
Shares of the Trust 85
(b) Other Information 89
(c) Organization and Description of
Shares of the Trust 85
(d) *
(e) Cover Page; Other Information 1, 89
(f) (g) Tax Matters 84
7. (a) *
(b) Purchase and Redemption of Shares;
Net Asset Values 74
(c) *
(d) *
(e) *
(f) *
8. Purchase and Redemption of Shares 74
9. *
<PAGE>
Statement of
Additional
Statement of Additional Information
Part B Information Caption Page Number
10. Cover Page 1
11. Table of Contents 2
12. *
13. Investment Objectives and Policies;
Investment Restrictions;
Portfolio Turnover; Allocation
of Investments 3, 101, 133, 138
14. Management 134
15. Other Information 140
16. (a) (b) Management of the Trust 135
(c) *
(d) Management of the Trust 135
(e) *
(f) *
(g) *
(h) See Prospectus
(i) *
17. (a) Brokerage Allocation 138
(b) *
(c) Brokerage Allocation 138
(d) *
(e) *
18. See Prospectus
19. (a) Purchase and Redemption of Shares;
See also Prospectus 140
(b) Computation of Net Asset Values 139
(c) *
20. See Prospectus
21. Underwriter 140
22. Other Information 140
23. Financial Statements 142
Part C
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this Registration Statement.
* Not Applicable
<PAGE>
PROSPECTUS MAY 1, 1996
AMERICAN SKANDIA TRUST
One Corporate Drive, Shelton, Connecticut 06484
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American Skandia Trust (the "Trust") is a managed, open-end investment company
whose separate portfolios ("Portfolios") are diversified, unless otherwise
indicated. The Trust seeks to meet the differing investment objectives of its
Portfolios. The Portfolios as of the date of this Prospectus and their
investment objectives are as follows:
Seligman Henderson International Equity Portfolio seeks long-term capital
appreciation consistent with the preservation of capital primarily through
investment in securities of non-United States issuers. Seligman Henderson
International Small Cap Portfolio seeks long-term capital appreciation primarily
by making international investments in companies with small to medium market
capitalizations. Lord Abbett Growth and Income Portfolio seeks long-term growth
of capital and income while attempting to avoid excessive fluctuations in market
value. JanCap Growth Portfolio seeks growth of capital in a manner consistent
with preservation of capital. AST Money Market Portfolio seeks high current
income and maintenance of high levels of liquidity by investing in high quality
money market instruments. Federated Utility Income Portfolio seeks high current
income and moderate capital appreciation by investing in equity and debt
securities of utility companies. Federated High Yield Portfolio seeks high
current income by investing in a diversified portfolio of fixed income
securities. The Portfolio consists primarily of lower-rated corporate debt
obligations, which are commonly referred to as "junk bonds." These lower-rated
bonds are considered speculative and are subject to additional risks. AST
Phoenix Balanced Asset Portfolio seeks reasonable income, long-term capital
growth and conservation of capital through investment in common stocks and fixed
income securities, with emphasis on income-producing securities which appear to
have some potential for capital enhancement. T. Rowe Price Asset Allocation
Portfolio seeks a high level of total return by investing primarily in a
diversified group of fixed income and equity securities. T. Rowe Price
International Equity Portfolio seeks total return on its assets from long-term
growth of capital and income through investment primarily in established,
non-U.S. companies. T. Rowe Price Natural Resources Portfolio seeks long-term
growth of capital through investments primarily in common stocks of companies
which own or develop natural resources and other basic commodities. T. Rowe
Price International Bond Portfolio (formerly, the AST Scudder International Bond
Portfolio) seeks to provide high current income and capital appreciation by
investing in high-quality, non dollar-denominated government and corporate bonds
outside the United States. Founders Capital Appreciation Portfolio seeks capital
appreciation through investment primarily in common stocks of small U.S.
companies with market capitalizations of $1.5 billion or less. The Portfolio's
securities will ordinarily be traded in the over-the-counter market. INVESCO
Equity Income Portfolio seeks high current income while following sound
investment practices, with capital growth potential as an additional but
secondary consideration, by investing its assets primarily in dividend-paying,
marketable common stock of domestic and foreign industrial issuers. PIMCO Total
Return Bond Portfolio seeks to maximize total return, consistent with
preservation of capital. PIMCO Limited Maturity Bond Portfolio seeks to realize
maximum total return, consistent with preservation of capital and prudent
investment management. Berger Capital Growth Portfolio seeks long-term capital
appreciation by investing primarily in the common stocks of established
companies. Robertson Stephens Value + Growth Portfolio seeks capital
appreciation.
Investments in American Skandia Trust are neither insured nor guaranteed by the
United States Government. Such investments are not bank deposits, and are not
insured by, guaranteed by, obligations of, or otherwise supported by, any bank.
Although the AST Money Market Portfolio seeks to maintain a stable net asset
value of $1.00 per share, there can be no assurance that it will be able to do
so.
This Prospectus sets forth concisely the information that a prospective investor
should know before investing in shares of the Trust and should be retained for
future reference. A Statement of Additional Information, dated May 1, 1996,
containing additional information about the Trust has been filed with the
Securities and Exchange Commission and is hereby incorporated by reference into
this Prospectus. That Statement is available without charge upon request to the
Trust at the address listed above or by calling (203) 926-1888.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
(continued on page 2)
<PAGE>
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Shares of the Trust are available, and are marketed as a pooled funding vehicle,
for life insurance companies ("Participating Insurance Companies") writing
variable annuity contracts and variable life insurance policies. Shares of the
Trust also may be offered directly to qualified pension and retirement plans,
including, but not limited to, plans under sections 401, 403, 408 and 457 of the
Internal Revenue Code of 1986, as amended ("Qualified Plans"). As of the date of
this Prospectus, the only Participating Insurance Company is American Skandia
Life Assurance Corporation. From time to time, however, the Trust may enter into
participation agreements with other Participating Insurance Companies. The Trust
sells and redeems its shares at net asset value without any sales charges,
commissions or redemption fees. Each variable annuity contract and variable life
insurance policy involves fees and expenses not described in this Prospectus.
Certain Portfolios may not be available in connection with a particular variable
annuity contract or variable life insurance policy or Qualified Plan. Please
read the Prospectus of the variable annuity contracts and variable life
insurance policies issued by Participating Insurance Companies for information
regarding contract fees and expenses and any restrictions on purchases.
<PAGE>
TABLE OF CONTENTS
Financial Highlights.........................................................5
Investment Objectives and Policies..........................................12
Seligman Henderson International Equity Portfolio......................12
Seligman Henderson International Small Cap Portfolio...................15
Lord Abbett Growth and Income Portfolio................................18
JanCap Growth Portfolio................................................19
AST Money Market Portfolio.............................................22
Federated Utility Income Portfolio.....................................24
Federated High Yield Portfolio.........................................26
AST Phoenix Balanced Asset Portfolio...................................29
T. Rowe Price Asset Allocation Portfolio...............................32
T. Rowe Price International Equity Portfolio...........................36
T. Rowe Price Natural Resources Portfolio..............................38
T. Rowe Price International Bond Portfolio.............................41
Founders Capital Appreciation Portfolio................................45
INVESCO Equity Income Portfolio........................................49
PIMCO Total Return Bond Portfolio......................................51
PIMCO Limited Maturity Bond Portfolio..................................56
Berger Capital Growth Portfolio........................................61
Robertson Stephens Value + Growth Portfolio............................62
Certain Risk Factors and Investment Methods.................................65
Regulatory Matters..........................................................72
Portfolio Turnover..........................................................73
Brokerage Allocation........................................................74
Investment Restrictions.....................................................74
Net Asset Values............................................................74
Purchase and Redemption of Shares...........................................74
Management of the Trust.....................................................75
Tax Matters.................................................................84
Organization and Description of Shares of the Trust.........................85
Portfolio Annual Expenses...................................................86
Performance.................................................................88
Transfer and Shareholder Servicing Agent
and Custodian..........................................................89
Counsel and Auditors........................................................89
Other Information...........................................................89
<PAGE>
(This page has been intentionally left blank.)
<PAGE>
FINANCIAL HIGHLIGHTS: Selected Per Share Data for an Average Share Outstanding
and Ratios Throughout Each Period: The tables below contain financial
information which has been audited in conjunction with the annual audits of the
financial statements of American Skandia Trust by Deloitte & Touche LLP,
Independent Auditors. Financial Statements for the year ended December 31, 1995
and the Independent Auditors' Report thereon are included in the Trust's
Statement of Additional Information. No financial information is included for
the Robertson Stephens Value + Growth Portfolio which is first being offered as
of the date of this Prospectus.
<TABLE>
<CAPTION>
Seligman Henderson International Equity Portfolio
Audited for the Years 1989 - 1995
For the Year Ended December 31,
1995 1994 1993 1992 1991 1990 1989(B)
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value at Beginning of Period $17.61 $17.34 $12.74 $13.90 $12.99 $13.76 $10.00
------ ------ ------ ------ ------ ------ ------
Increase (Decrease) from Investment Operations
Net Investment Income (Loss) 0.14 0.10 0.14 (0.17) 0.01 0.22 0.06
Net Realized & Unrealized Gains (Losses) on
Investments and Foreign Currency Transactions 1.44 0.36 4.46 (0.99) 0.90 (0.63) 3.70
---- ---- ---- ------ ---- ------ ----
Total Increase (Decrease)
from Investment Operations 1.58 0.46 4.60 (1.16) 0.91 (0.41) 3.76
---- ---- ---- ------ ---- ------ ----
Less Dividends and Distributions
Dividends from Net Investment Income ----- (0.03) ----- ----- ----- (0.23) -----
Distributions from Net Realized Capital Gains (0.99) (0.16) ----- ----- ----- (0.13) -----
------ ------ ----- ----- ----- ------ -----
Total Dividends and Distributions (0.99) (0.19) ----- ----- ----- (0.36) -----
------ ------ ----- ----- ----- ------ -----
Net Asset Value at End of Period. $18.20 $17.61 $17.34 $12.74 $13.90 $12.99 $13.76
------ ------ ------ ------ ------ ------ ------
Total Return 10.00% 2.64% 36.11% (8.35%) 7.01% (2.97%) 37.60%
Ratios/Supplemental Data
Net Assets at End of Period (in 000's) $268,056 $238,050 $150,646 $24,998 $15,892 $6,015 $1,299
Ratios of Expenses to Average Net Assets:
After Advisory Fee Waiver and Expense
Reimbursement 1.17% 1.22% 1.52% 2.50% 2.50% 2.38% 1.17%(A)
Before Advisory Fee Waiver and Expense
Reimbursement 1.27% 1.32% 1.52% 2.50% 2.82% 8.80% 67.51%(A)
Ratios of Net Investment Income (Loss) to
Average Net Assets:
After Advisory Fee Waiver and Expense
Reimbursement 0.88% 0.55% 0.28% (1.62%) 0.12% 1.67% 3.72%(A)
Before Advisory Fee Waiver and Expense
Reimbursement 0.78% 0.46% 0.28% (1.62%) (0.20%) (4.75%) (62.62%)(A)
Portfolio Turnover Rate 58.62% 48.69% 31.69% 54.56% 58.74% 76.10% 55.06%
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(A) Annualized.
(B) Commenced operations on April 19, 1989.
</TABLE>
<PAGE>
AMERICAN SKANDIA TRUST
FINANCIAL HIGHLIGHTS
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
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<TABLE>
<CAPTION>
LORD ABBETT GROWTH AND INCOME PORTFOLIO
-----------------------------------------
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------
1995 1994 1993 1992(2)
-------- ------- ------- -------
<S> <C> <C> <C> <C>
Net Asset Value at Beginning of Period................................. $ 12.00 $ 12.06 $ 10.70 $ 10.00
-------- ------- ------- -------
Increase (Decrease) from Investment Operations
Net Investment Income (Loss)....................................... 0.16 0.20 0.11 0.07
Net Realized & Unrealized Gains (Losses) on Investments and Foreign
Currency Transactions............................................ 3.22 0.06 1.35 0.63
-------- ------- ------- -------
Total Increase (Decrease) From Investment Operations.......... 3.38 0.26 1.46 0.70
-------- ------- ------- -------
Less Dividends and Distributions
Dividends from Net Investment Income............................... (0.20) (0.12) (0.04) --
Distributions from Net Realized Capital Gains...................... (0.20) (0.20) (0.06) --
-------- ------- ------- -------
Total Dividends and Distributions............................. (0.40) (0.32) (0.10) --
-------- ------- ------- -------
Net Asset Value at End of Period....................................... $ 14.98 $ 12.00 $ 12.06 $ 10.70
-------- ------- ------- -------
Total Return........................................................... 28.91% 2.22% 13.69% 7.00%
Ratios/Supplemental Data
Net Assets at End of Period (in 000's)............................. $288,749 $92,050 $48,385 $10,159
Ratios of Expenses to Average Net Assets:
After Advisory Fee Waiver and Expense Reimbursement.............. 0.99% 1.06% 1.22% 0.99%(1)
Before Advisory Fee Waiver and Expense Reimbursement............. 0.99% 1.06% 1.33% 1.75%(1)
Ratios of Net Investment Income (Loss)
to Average Net Assets:
After Advisory Fee Waiver and Expense Reimbursement.............. 2.50% 2.45% 2.05% 2.49%(1)
Before Advisory Fee Waiver and Expense Reimbursement............. 2.50% 2.45% 1.94% 1.73%(1)
Portfolio Turnover Rate................................................ 50.28% 60.47% 56.70% 34.29%
</TABLE>
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(1) Annualized.
(2) Commenced operations on May 1, 1992.
(3) Commenced operations on November 6, 1992.
(4) Commenced operations on November 10, 1992.
(5) Commenced operations on May 4, 1993.
<PAGE>
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<TABLE>
<CAPTION>
FEDERATED UTILITY
INCOME PORTFOLIO
JANCAP GROWTH PORTFOLIO AST MONEY MARKET PORTFOLIO --------------------
---------------------------------------------- -----------------------------------------------
FOR THE YEAR ENDED
FOR THE YEAR ENDED DECEMBER 31, FOR THE YEAR ENDED DECEMBER 31, DECEMBER 31,
---------------------------------------------- ----------------------------------------------- --------------------
1995 1994 1993 1992(3) 1995 1994 1993 1992(4) 1995 1994
-------- -------- -------- ------- -------- -------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 11.22 $ 11.78 $ 10.53 $ 10.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 9.87 $ 10.79
-------- -------- -------- ------- -------- -------- ------- -------
0.06 0.06 0.03 (0.01) 0.0494 0.0369 0.0252 0.0032 0.40 0.46
4.18 (0.59) 1.22 0.54 -- -- -- -- 2.09 (1.20)
-------- -------- -------- ------- -------- -------- ------- -------
4.24 (0.53) 1.25 0.53 0.0494 0.0369 0.0252 0.0032 2.49 (0.74)
-------- -------- -------- ------- -------- -------- ------- -------
(0.06) (0.03) -- -- (0.0494) (0.0367) (0.0252) (0.0032) (0.42) (0.16)
-- -- -- -- -- (0.0002) -- -- -- (0.02)
-------- -------- -------- ------- -------- -------- ------- -------
(0.06) (0.03) -- -- (0.0494) (0.0369) (0.0252) (0.0032) (0.42) (0.18)
-------- -------- -------- ------- -------- -------- ------- -------
$ 15.40 $ 11.22 $ 11.78 $ 10.53 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 11.94 $ 9.87
-------- -------- -------- ------- -------- -------- ------- -------
37.98% (4.51%) 11.87% 5.30% N/A N/A N/A N/A 26.13% (6.95%)
$431,321 $245,645 $157,852 $15,218 $344,225 $288,588 $114,074 $ 4,294 $107,399 $71,205
1.12% 1.18% 1.22% 1.33%(1) 0.60% 0.64% 0.65% 0.65%(1) 0.93% 0.99%
1.12% 1.18% 1.22% 2.21%(1) 0.72% 0.76% 0.84% 1.15%(1) 0.93% 0.99%
0.51% 0.62% 0.35% (0.90%)(1) 5.38% 3.90% 2.53% 2.43%(1) 4.58% 5.11%
0.51% 0.62% 0.35% (1.78%)(1) 5.26% 3.78% 2.34% 1.93%(1) 4.58% 5.11%
113.32% 93.92% 92.16% 1.52% N/A N/A N/A N/A 70.94% 54.26%
<CAPTION>
1993(5)
-------
<S> <C> <C>
$ 10.00
0.17
0.62
0.79
--
--
--
$ 10.79
7.90%
$57,643
1.18%(1)
1.18%(1)
5.09%(1)
5.09%(1)
5.30%
</TABLE>
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<PAGE>
AMERICAN SKANDIA TRUST
FINANCIAL HIGHLIGHTS
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
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<TABLE>
<CAPTION>
FEDERATED HIGH
AST PHOENIX YIELD PORTFOLIO
BALANCED ASSET PORTFOLIO ------------------
-------------------------------
FOR THE YEAR ENDED
FOR THE YEAR ENDED DECEMBER 31, DECEMBER 31,
------------------------------- ------------------
1995 1994 1993(5) 1995 1994(6)
-------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net Asset Value at Beginning of Period...................... $ 10.49 $ 10.57 $ 10.00 $ 9.69 $ 10.00
------- ------- ------- -------
Increase (Decrease) from Investment Operations
Net Investment Income (Loss)............................ 0.26 0.27 0.08 0.38 0.55
Net Realized & Unrealized Gains (Losses) on Investments
and Foreign Currency Transactions..................... 2.06 (0.26) 0.49 1.46 (0.86)
------- ------- ------- -------
Total Increase (Decrease) From Investment
Operations....................................... 2.32 0.01 0.57 1.84 (0.31)
------- ------- ------- -------
Less Dividends and Distributions
Dividends from Net Investment Income.................... (0.28) (0.07) -- (0.39) --
Distributions from Net Realized Capital Gains........... -- (0.02) -- -- --
------- ------- ------- -------
Total Dividends and Distributions.................. (0.28) (0.09) -- (0.39) --
------- ------- ------- -------
Net Asset Value at End of Period............................ $ 12.53 $ 10.49 $ 10.57 $ 11.14 $ 9.69
------- ------- ------- -------
Total Return................................................ 22.60% 0.09% 5.70% 19.57% (3.10%)
Ratios/Supplemental Data
Net Assets at End of Period (in 000's).................. $255,206 $145,624 $91,591 $83,692 $21,308
Ratios of Expenses to Average Net Assets:
After Advisory Fee Waiver and Expense Reimbursement... 0.94% 0.99% 1.13%(1) 1.11% 1.15%(1)
Before Advisory Fee Waiver and Expense
Reimbursement...................................... 0.94% 0.99% 1.13%(1) 1.11% 1.34%(1)
Ratios of Net Investment Income (Loss) to Average Net
Assets:
After Advisory Fee Waiver and Expense Reimbursement... 3.28% 3.08% 2.53%(1) 8.72% 9.06%(1)
Before Advisory Fee Waiver and Expense
Reimbursement...................................... 3.28% 3.08% 2.53%(1) 8.72% 8.87%(1)
Portfolio Turnover Rate..................................... 160.94% 86.50% 46.35% 29.64% 40.55%
</TABLE>
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(1) Annualized.
(5) Commenced operations on May 4, 1993.
(6) Commenced operations on January 4, 1994.
<PAGE>
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<TABLE>
<CAPTION>
T. ROWE PRICE ASSET
ALLOCATION PIMCO TOTAL RETURN INVESCO EQUITY
PORTFOLIO BOND PORTFOLIO INCOME PORTFOLIO
------------------- -------------------- --------------------
FOR THE YEAR ENDED FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
------------------- -------------------- --------------------
1995 1994(6) 1995 1994(6) 1995 1994(6)
------- ------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
$ 9.94 $ 10.00 $ 9.75 $ 10.00 $ 9.75 $ 10.00
------- ------- -------- ------- -------- -------
0.26 0.21 0.25 0.26 0.25 0.16
2.02 (0.27) 1.55 (0.51) 2.65 (0.41)
------- ------- -------- ------- -------- -------
2.28 (0.06) 1.80 (0.25) 2.90 (0.25)
------- ------- -------- ------- -------- -------
(0.21) -- (0.21) -- (0.15) --
-- -- -- -- -- --
------- ------- -------- ------- -------- -------
(0.21) -- (0.21) -- (0.15) --
------- ------- -------- ------- -------- -------
$ 12.01 $ 9.94 $ 11.34 $ 9.75 $ 12.50 $ 9.75
------- ------- -------- ------- -------- -------
23.36% (0.60%) 18.78% (2.50%) 30.07% (2.50%)
$59,399 $23,463 $225,335 $46,493 $176,716 $65,201
1.25% 1.25%(1) 0.89% 1.02%(1) 0.98% 1.14%(1)
1.29% 1.47%(1) 0.89% 1.02%(1) 0.98% 1.14%(1)
3.53% 3.64%(1) 5.95% 5.57%(1) 3.34% 3.41%(1)
3.49% 3.42%(1) 5.95% 5.57%(1) 3.34% 3.41%(1)
17.62% 31.62% 124.41% 139.25% 89.48% 62.87%
</TABLE>
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<PAGE>
AMERICAN SKANDIA TRUST
FINANCIAL HIGHLIGHTS
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
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<TABLE>
<CAPTION>
FOUNDERS CAPITAL T. ROWE PRICE
APPRECIATION INTERNATIONAL
PORTFOLIO EQUITY PORTFOLIO
------------------ --------------------
FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31, DECEMBER 31,
------------------ --------------------
1995 1994(6) 1995 1994(6)
------- ------- -------- --------
<S> <C> <C> <C> <C>
Net Asset Value at Beginning of Period................................ $ 10.84 $ 10.00 $ 9.62 $ 10.00
------- ------- -------- --------
Increase (Decrease) from Investment Operations
Net Investment Income (Loss)...................................... (0.04) 0.11 0.07 0.02
Net Realized & Unrealized Gains (Losses) on Investments and
Foreign Currency Transactions................................... 3.54 0.73 0.99 (0.40)
------- ------- -------- --------
Total Increase (Decrease) From Investment Operations......... 3.50 0.84 1.06 (0.38)
------- ------- -------- --------
Less Dividends and Distributions
Dividends from Net Investment Income.............................. (0.09) -- (0.01) --
Distributions from Net Realized Capital Gains..................... -- -- (0.02) --
------- ------- -------- --------
Total Dividends and Distributions............................ (0.09) -- (0.03) --
------- ------- -------- --------
Net Asset Value at End of Period...................................... $ 14.25 $ 10.84 $ 10.65 $ 9.62
------- ------- -------- --------
Total Return.......................................................... 32.56% 8.40% 11.09% (3.80%)
Ratios/Supplemental Data
Net Assets at End of Period (in 000's)............................ $90,460 $28,559 $195,667 $108,751
Ratios of Expenses to Average Net Assets:
After Advisory Fee Waiver and
Expense Reimbursement........................................ 1.22% 1.30%(1) 1.33% 1.75%(1)
Before Advisory Fee Waiver and
Expense Reimbursement........................................ 1.22% 1.55%(1) 1.33% 1.77%(1)
Ratios of Net Investment Income (Loss) to Average Net Assets:
After Advisory Fee Waiver and
Expense Reimbursement........................................ (0.28%) 2.59%(1) 1.03% 0.45%(1)
Before Advisory Fee Waiver and
Expense Reimbursement........................................ (0.28%) 2.34%(1) 1.03% 0.43%(1)
Portfolio Turnover Rate............................................... 68.32% 197.93% 17.11% 15.70%
</TABLE>
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(1) Annualized.
(6) Commenced operations on January 4, 1994.
(7) Commenced operations on May 3, 1994.
(8) Commenced operations on October 20, 1994.
(9) Commenced operations on May 2, 1995.
* Since May 1, 1996, Rowe Price-Fleming International, Inc. has been
Sub-advisor for the Portfolio, now named the T. Rowe Price International Bond
Portfolio. The information presented in these financial highlights is
historical and is not intended to indicate future performance of the
Portfolio as sub-advised by Rowe Price-Fleming International, Inc.
<PAGE>
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<TABLE>
<CAPTION>
SELIGMAN T. ROWE PIMCO
HENDERSON PRICE LIMITED
AST SCUDDER INTERNATIONAL NATURAL MATURITY
INTERNATIONAL BERGER CAPITAL SMALL CAP RESOURCES BOND
BOND PORTFOLIO* GROWTH PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
------------------- ------------------ ------------ ------------ ------------
FOR THE FOR THE FOR THE
FOR THE YEAR ENDED FOR THE YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
------------------- ------------------ ------------ ------------ ------------
1995 1994(7) 1995 1994(8) 1995(9) 1995(9) 1995(9)
------- ------- ------- ------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 9.68 $ 10.00 $ 9.97 $10.00 $ 10.00 $10.00 $ 10.00
------- ------- ------- ------ ------- ------ --------
0.31 0.27 0.04 0.01 0.03 0.04 0.05
0.75 (0.59) 2.40 (0.04) 0.30 1.07 0.42
------- ------- ------- ------ ------- ------ --------
1.06 (0.32) 2.44 (0.03) 0.33 1.11 0.47
------- ------- ------- ------ ------- ------ --------
(0.14) -- (0.01) -- -- -- --
-- -- -- -- -- -- --
------- ------- ------- ------ ------- ------ --------
(0.14) -- (0.01) -- -- -- --
------- ------- ------- ------ ------- ------ --------
$ 10.60 $ 9.68 $ 12.40 $ 9.97 $ 10.33 $11.11 $ 10.47
------- ------- ------- ------ ------- ------ --------
11.10% (3.20%) 24.42% (0.30%) 3.30% 11.10% 4.70%
$45,602 $15,218 $45,979 $3,030 $ 28,455 $9,262 $161,940
1.53% 1.68%(1) 1.17% 1.25%(1) 1.46%(1) 1.35%(1) 0.89%(1)
1.53% 1.68%(1) 1.17% 1.70%(1) 1.46%(1) 1.80%(1) 0.89%(1)
6.17% 7.03%(1) 0.70% 1.41%(1) 0.94%(1) 1.28%(1) 4.87%(1)
6.17% 7.03%(1) 0.70% 0.97%(1) 0.94%(1) 0.83%(1) 4.87%(1)
325.00% 163.27% 84.21% 5.36% 3.52% 2.32% 204.85%
</TABLE>
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<PAGE>
INVESTMENT OBJECTIVES AND POLICIES: The investment objective and policies for
each of the Portfolios are described below, and should be considered separately.
While certain policies apply to all Portfolios, generally each Portfolio has a
different investment objective and certain policies may vary. As a result, the
risks, opportunities and returns in each Portfolio may differ. The investment
objective of each Portfolio which is specifically identified as "fundamental"
may not be changed without approval of the shareholders of the affected
Portfolio. Each Portfolio's investment objective or investment policies, unless
otherwise specified, is not a fundamental policy and may be changed without
shareholder approval. There can be no assurance that any Portfolio's investment
objective will be achieved. Risk factors in relation to various securities and
instruments in which the Portfolios may invest are described in the sections of
this Prospectus and the Trust's Statement of Additional Information entitled
"Certain Risk Factors and Investment Methods." Additional information about the
investment objectives and policies of each Portfolio may be found in the Trust's
Statement of Additional Information under "Investment Objectives and Policies."
American Skandia Investment Services, Incorporated ("ASISI") is the
investment manager ("Investment Manager") for the Trust. Currently, ASISI
engages a sub-advisor ("Sub-advisor") for each Portfolio. The Sub-advisor for
each Portfolio is as follows: (a) Seligman Henderson International Equity
Portfolio: Seligman Henderson Co.; (b) Seligman Henderson International Small
Cap Portfolio: Seligman Henderson Co.; (c) Lord Abbett Growth and Income
Portfolio: Lord, Abbett & Co.; (d) JanCap Growth Portfolio: Janus Capital
Corporation; (e) AST Money Market Portfolio: J.P. Morgan Investment Management
Inc.; (f) Federated Utility Income Portfolio: Federated Investment Counseling;
(g) Federated High Yield Portfolio: Federated Investment Counseling; (h) AST
Phoenix Balanced Asset Portfolio: Phoenix Investment Counsel, Inc.; (i) T. Rowe
Price Asset Allocation Portfolio: T. Rowe Price Associates, Inc.; (j) T. Rowe
Price International Equity Portfolio: Rowe Price-Fleming International, Inc.;
(k) T. Rowe Price Natural Resources Portfolio: T. Rowe Price Associates, Inc.;
(l) T. Rowe Price International Bond Portfolio: Rowe Price-Fleming
International, Inc. (formerly, the AST Scudder International Bond Portfolio when
the Sub-advisor was Scudder, Stevens & Clark, Inc.); (m) Founders Capital
Appreciation Portfolio: Founders Asset Management, Inc.; (n) INVESCO Equity
Income Portfolio: INVESCO Trust Company; (o) PIMCO Total Return Bond Portfolio:
Pacific Investment Management Company; (p) PIMCO Limited Maturity Bond
Portfolio: Pacific Investment Management Company; (q) Berger Capital Growth
Portfolio: Berger Associates, Inc.; and (r) Robertson Stephens Value + Growth
Portfolio: Robertson, Stephens & Company Investment Management, L.P.
Subject to approval of the Board of Trustees of the Trust, the Trust
may add one or more portfolios and may cease to offer one or more portfolios,
any such cessation to be subject to obtaining required regulatory approvals.
Each Portfolio may be subject to state regulatory requirements which
may be more restrictive than the stated investment policies, in which case, the
Sub-advisors will adhere to the more restrictive standard.
Seligman Henderson International Equity Portfolio:
Investment Objective: The investment objective of the Seligman Henderson
International Equity Portfolio is long-term capital appreciation consistent with
preservation of capital primarily through investment in securities of non-United
States issuers. This is a fundamental objective of the Portfolio.
Investment Policies:
While the Sub-advisor may invest the assets of the Portfolio in
securities of issuers domiciled in any country, under normal conditions
investments will be made in three principal international regions: The United
Kingdom and Continental Europe; the Pacific Basin countries; and Latin America.
The Sub-advisor believes that the Portfolio will usually have assets invested in
each of these international regions. Although under normal market conditions the
Portfolio will be invested in a minimum of five countries, it may have assets
invested in many countries. Investments will not normally be made in securities
of issuers located in the United States or Canada. Some of the countries in
which the Portfolio may invest may be considered to be developing and may
involve special risks. For a description of these risks as well as the risks of
investing in foreign securities in general, see this Prospectus and the Trust's
Statement of Additional Information under "Certain Risk Factors and Investment
Methods."
When allocating investments among geographic regions and individual
countries, the Sub-advisor will consider various criteria that in its view are
deemed relevant based on its experience, such as the relative economic growth
potential of the various economies and securities regions; expected levels of
inflation; financial, social and political conditions influencing investment
opportunities; and the outlook for currency relationships.
The Portfolio may invest in all types of securities, most of which will
be denominated in foreign currencies. Since opportunities for long-term growth
are primarily expected from equity securities, the Portfolio will normally
invest substantially all of its assets in such securities, including common
stock, securities convertible into common stock, depository receipts for these
securities and warrants. The Portfolio may, however, invest up to 25% of its
assets in preferred stock and debt securities if the Sub-advisor believes that
the capital appreciation available from an investment in such securities will
equal or exceed the capital appreciation available from an investment in equity
securities.
Equity securities in which the Portfolio will invest may be listed on a
foreign stock exchange or traded in foreign over-the-counter markets. There is
no minimum capitalization requirement for a security to be eligible for
inclusion in the Portfolio. The Portfolio will generally purchase securities of
medium to large size companies in the principal international markets, although
it may purchase securities of companies which have a lower market capitalization
in the smaller regional markets.
With respect to the Portfolio's investment in debt securities, there is
no requirement that all such securities be rated by a recognized rating agency.
However, it is the policy of the Trust that investments for the Portfolio in
debt securities, whether rated or unrated, will be made only if they are, in the
opinion of the Sub-advisor, of equivalent quality to "investment grade"
securities. "Investment grade" securities are those rated within the four
highest quality grades as determined by Moody's Investors Service, Inc.
("Moody's") or Standard & Poor's Corporation ("Standard & Poor's"). Securities
rated within the highest of the four investment grade categories (i.e., Aaa by
Moody's and AAA by Standard & Poor's) are judged to be of the best quality and
carry the smallest degree of risk. Securities rated with the lowest of the four
categories (i.e., Baa by Moody's and BBB by Standard & Poor's) lack quality
investment characteristics, and, in fact, may be speculative. For a discussion
of the risks involved in investing in lower-rated debt securities, see this
Prospectus and the Trust's Statement of Additional Information under "Certain
Risk Factors and Investment Methods." For a description of securities ratings,
see the Appendix to the Trust's Statement of Additional Information.
The Portfolio may invest in securities represented by European
Depository Receipts ("EDRs") or American Depository Receipts ("ADRs"). For a
description of ADRs and EDRs and risks involved therein, see this Prospectus
under "Certain Risks Factors and Investment Methods."
By investing in foreign securities, the Sub-advisor will attempt to
take advantage of differences between economic trends and performance of
securities markets in various countries. To date, the market value of securities
of issuers located in different countries have moved relatively independently of
each other and during certain periods the return on equity investments in some
countries has exceeded the return on similar investments in the United States.
The Sub-advisor believes that, in comparison with investment companies investing
solely in domestic securities, it may be possible to obtain significant
appreciation from a portfolio of foreign investments and also achieve increased
diversification. The Portfolio will gain increased diversification by combining
securities from various markets that offer different investment opportunities
and are affected by different economic trends. International diversification
reduces the effect that events in any one country will have on the Portfolio's
entire investment holdings. Of course, a decline in the value of the Portfolio's
investments in one country may offset potential gains from investments in
another country. The Sub-advisor believes that it may reduce risk and may
increase returns to shareholders through exposure to a shifting international
investment base, expanding foreign stock markets and foreign currencies.
For a discussion of the risks involved in investing in foreign
securities, see this Prospectus and the Trust's Statement of Additional
Information under "Certain Risk Factors and Investment Methods."
Risk of Currency Fluctuations. The value of Portfolio investments
denominated in foreign currencies may be affected, favorably or unfavorably, by
the relative strength of the U.S. dollar, changes in foreign currency and U.S.
dollar exchange rates and exchange control regulations. The Portfolio's net
asset value per share will be affected by changes in currency exchange rates.
Changes in foreign currency exchange rates may also affect the value of
dividends and interest earned, gains and losses realized on the sale of
securities and net investment income and gains, if any, to be distributed to
shareholders by the Portfolio. The rate of exchange between the U.S. dollar and
other currencies is determined by the forces of supply and demand in the foreign
exchange markets and in some cases, exchange controls. For an additional
discussion of the risks of currency fluctuations, see this Prospectus and
Trust's Statement of Additional Information under "Certain Risk Factors and
Investment Methods."
Forward Currency Exchange Contracts. The Sub-advisor will consider
changes in exchange rates in making investment decisions. As one way of managing
exchange rate risk, the Portfolio may enter into forward currency exchange
contracts. The Portfolio will usually enter into these contracts to fix the U.S.
dollar value of a security that it has agreed to buy or sell for the period
between the date the trade was entered into and the date the security is
delivered and paid for. The Portfolio may also use these contracts to hedge the
U.S. dollar value of securities it already owns. The Portfolio may be required
to cover certain forward currency exchange contract positions by establishing a
segregated account with its custodian that will contain only liquid assets, such
as U.S. Government securities or other liquid high-grade debt obligations.
While the Sub-advisor will seek to benefit the Portfolio when using
forward contracts, it may or may not be able to project precisely the future
exchange rates between foreign currencies and the U.S. dollar. The Portfolio may
therefore incur a gain or loss on a forward contract. A forward contract may
help reduce the Portfolio's losses on securities denominated in foreign
currency, but it may also reduce the potential gain on the securities depending
on changes in the currency's value relative to the U.S. dollar or other
currencies. For an additional discussion of foreign currency exchange contracts,
see this Prospectus and the Trust's Statement of Additional Information under
"Certain Risk Factors and Investment Methods."
Options Transactions. The Portfolio may purchase put options on
portfolio securities in an attempt to provide a hedge against a decrease in the
price of a security held by the Portfolio. The Portfolio will not purchase
options for speculative purposes. Purchasing a put option gives the Portfolio
the right to sell, and obligates the writer to buy, the underlying security at
the exercise price at any time during the option period.
When the Portfolio purchases an option, it is required to pay a premium
to the party writing the option and a commission to the broker selling the
option. If the option is exercised by the Portfolio, the premium and the
commission paid may be greater than the amount of the brokerage commission
charged if the security were to be purchased or sold directly.
Risks in Options Transactions. There are risks involved in options
transactions. For a discussion of put options and the risks involved therein,
see this Prospectus and the Trust's Statement of Additional Information under
"Certain Risk Factors and Investment Methods."
Borrowing. The Portfolio may from time to time borrow money from banks
at prevailing interest rates for temporary, extraordinary or emergency purposes
in an amount up to 5% of its total assets and invest the funds in additional
securities. For additional limitations on borrowing see this Prospectus under
"Certain Risk Factors and Investment Methods" and the Trust's Statement of
Additional Information under "Investment Objectives and Policies."
Lending Portfolio Securities. The Portfolio may lend its securities to
brokers, dealers and other institutional investors in an amount not to exceed
33-1/3% of the Portfolio's total assets taken at market value, and receive
collateral in cash or securities issued or guaranteed by the U.S. Government
which will be maintained in an amount equal to at least 100% of the current
market value of the loaned securities. For a discussion of the risks involved in
lending and additional limitations on lending, see this Prospectus under
"Certain Risk Factors and Investment Methods" and the Trust's Statement of
Additional Information under "Investment Objectives and Policies."
Repurchase Agreements. Subject to guidelines promulgated by the Board
of Trustees of the Trust, the Portfolio may enter into repurchase agreements
whereby the Portfolio acquires a U.S. Government security or a short-term money
market instrument subject to resale to a commercial bank or broker/dealer at an
agreed-upon price which reflects an agreed-upon interest rate effective for the
period the Portfolio holds the instrument that is unrelated to the interest rate
on the instrument. The Portfolio will receive interest from the institution
until the time when the repurchase is to occur. The Portfolio will always
receive as collateral securities acceptable to it whose market value is equal to
at least 100% of the amount invested by the Portfolio, and the Portfolio will
make payment for such securities only upon the physical delivery or evidence of
book entry transfer to the account of the Trust's custodian. For a discussion of
repurchase agreements and the risks involved therein, see this Prospectus under
"Certain Risk Factors and Investment Methods."
Illiquid Securities. Subject to guidelines promulgated by the Board of
Trustees of the Trust, the Portfolio may invest in illiquid securities. The
Portfolio will not invest more than 10% of its total assets in securities that
are illiquid or not readily marketable, including restricted securities and
repurchase agreements of more than one week's duration. For a discussion of
illiquid securities and the risks involved therein, see this Prospectus under
"Certain Risk Factors and Investment Methods."
Short Sales. The Portfolio may sell securities short "against the box."
While a short sale is the sale of a security the Portfolio does not own, it is
"against the box" if at all times when the short position is open the Portfolio
owns an equal amount of the securities or securities convertible into, or
exchangeable without further consideration for, securities of the same issue as
the securities sold short.
Temporary Investments. When the Sub-advisor believes that market
conditions warrant a temporary defensive position, the Portfolio may invest up
to 100% of its assets in short-term instruments such as commercial paper, bank
certificates of deposit, bankers' acceptances, or repurchase agreements for such
securities and securities of the U.S. Government and its agencies and
instrumentalities, as well as cash and cash equivalents denominated in foreign
currencies. Investments in domestic bank certificates of deposit and bankers'
acceptances will be limited to banks which have total assets in excess of $500
million and are subject to regulatory supervision by the U.S. Government or
state governments. The commercial paper of U.S. issuers purchased by the
Portfolio will consist only of (a) obligations rated Prime-1 by Moody's or A-1
by Standard & Poor's; or (b) unrated obligations issued by companies having an
outstanding unsecured debt issue currently rated A or better by Standard &
Poor's. See the Appendix to the Trust's Statement of Additional Information for
a description of various commercial paper ratings and for debt securities
ratings. The Portfolio's investments in foreign short-term instruments will be
limited to those which, in the opinion of the Sub-advisor, equate generally to
the standards established for U.S. short-term instruments.
Seligman Henderson International Small Cap Portfolio:
Investment Objective: The investment objective of the Seligman Henderson
International Small Cap Portfolio is long-term capital appreciation. The
Portfolio seeks to achieve this objective primarily by making international
investments in securities of companies with small to medium market
capitalizations. This is a fundamental objective of the Portfolio.
Investment Policies:
The Portfolio may invest in securities of issuers domiciled in any
country. Under normal conditions investments will be made in three principal
regions: The United Kingdom and Continental Europe; the Pacific Basin; and Latin
American. Under normal market conditions, the Portfolio's assets will be
invested in securities of issuers located in at least three different countries.
Investments will not normally be made in securities of issuers located in the
United States or Canada. Some of the countries in which the Portfolio may invest
may be considered to be developing and may involve special risks. For
description of these risks as well as the risks of investing in foreign
securities in general, see this Prospectus and the Trust's Statement of
Additional Information under "Certain Risk Factors and Investment Methods."
In allocating investments among geographic regions and individual
countries, the Sub-advisor will consider such factors as the relative economic
growth potential of the various economies and securities markets; expected
levels of inflation; financial, social and political conditions influencing
investment opportunities; and the outlook for currency relationships.
The Portfolio may invest in all types of securities, most of which will
be denominated in currencies other than the U.S. dollar. The Portfolio will
normally invest its assets in equity securities, including common stock,
securities convertible into common stock, depository receipts for these
securities and warrants. The Portfolio may, however, invest up to 25% of its
assets in preferred stock and debt securities if the Sub-advisor believes that
the capital appreciation available from an investment in such securities will
equal or exceed the capital appreciation available from an investment in equity
securities. Dividends or interest income are considered only when the
Sub-advisor believes that such income will have a favorable influence on the
market value of a security in light of the Portfolio's objective of capital
appreciation.
Equity securities in which the Portfolio will invest may be listed on a
foreign stock exchange or traded in foreign over-the-counter markets. Under
normal market conditions, the Portfolio will invest at least 65% of its total
assets in securities of small-to medium-sized companies with market
capitalizations up to $750 million, although up to 35% of its total assets may
be invested in securities of companies with market capitalizations over $750
million. The Sub-advisor will periodically review and revise the capitalization
requirements of smaller companies as circumstances may require. The Sub-advisor
anticipates that the Portfolio will continue to hold the securities of smaller
companies as those companies grow or expand so long as those investments
continue to offer prospects of long-term growth. In extraordinary circumstances,
the Portfolio may invest for temporary defensive purposes, without limit, in
large capitalization companies or increase its investments in debt securities.
There is no requirement that the debt securities in which the Portfolio
may invest be rated by a recognized rating agency. However, it is the
Portfolio's policy that investments in debt securities, whether rated or
unrated, will be made only if they are "investment grade" securities or are, in
the opinion of the Sub-advisor, of equivalent quality to "investment grade"
securities. "Investment grade" securities are those rated within the four
highest quality grades as determined by Moody's Investors Service, Inc.
("Moody's") or Standard & Poor's Corporation ("Standard & Poor's"). Securities
rated within the highest of the four investment grade categories (i.e., Aaa by
Moody's and AAA by Standard & Poor's) are judged to be of the best quality and
carry the smallest degree of risk. Securities rated within the lowest of the
four categories (i.e., Baa by Moody's and BBB by Standard & Poor's) lack high
quality investment characteristics and, in fact, may be speculative. For a
discussion of the risks involved in lower-rated debt securities, see this
Prospectus and the Trust's Statement of Additional Information under "Certain
Risk Factors and Investment Methods." For a description of securities ratings,
see the Appendix to the Trust's Statement of Additional Information.
The Portfolio may invest in securities represented by European
Depository Receipts ("EDRs") or American Depository Receipts ("ADRs"). For a
description of ADRs and EDRs and risks involved therein, see this Prospectus
under "Certain Risk Factors and Investment Methods."
By investing in foreign securities, the Portfolio will attempt to take
advantage of differences among economic trends and the performance of securities
markets in various countries. To date, the market values of securities of
issuers located in different countries have moved relatively independently of
each other and during certain periods the return on equity investments in some
countries has exceeded the return on similar investments in the United States.
The Sub-advisor believes that, in comparison with investment companies investing
solely in domestic securities, it may be possible to obtain significant
appreciation from a portfolio of foreign investments and securities from various
markets that offer different investment opportunities and are affected by
different economic trends. International diversification reduces the effect that
events in any one country will have on the Portfolio's entire investment
portfolio. Of course, a decline in the value of the Portfolio's investments in
one country may offset potential gains from investments in another country.
For a discussion of the risks involved in investing in foreign
securities, see this Prospectus and the Trust's Statement of Additional
Information under "Certain Risk Factors and Investment Methods."
Risk of Currency Fluctuations. Investments in foreign securities will
usually be denominated in foreign currency, and the Portfolio may temporarily
hold funds in foreign currencies. The value of Portfolio investments denominated
in foreign currencies may be affected, favorably or unfavorably, by the relative
strength of the U.S. dollar, changes in foreign currency and U.S. dollar
exchange rates and exchange control regulations. The Portfolio's net asset value
per share will be affected by changes in currency exchange rates. Changes in
foreign currency exchange rates may also affect the value of dividends and
interest earned, gains and losses realized on the sale of securities and net
investment income and gains, if any, to be distributed to shareholders by the
Portfolio. The rate of exchange between the U.S. dollar and other currencies is
determined by the forces of supply and demand in the foreign exchange markets
and in some cases, exchange controls.
Forward Currency Exchange Contracts. The Sub-advisor will consider
changes in exchange rates in making investment decisions. As one way of managing
exchange rate risk, the Portfolio may enter into forward currency exchange
contracts. The Portfolio will usually enter into these contracts to fix the U.S.
dollar value of a security that it has agreed to buy or sell for the period
between the date the trade was entered into and the date the security is
delivered and paid for. The Portfolio may also use these contracts to hedge the
U.S. dollar value of securities it already owns. The Portfolio may be required
to cover certain forward currency exchange contract positions by establishing a
segregated account with its custodian that will contain only liquid assets, such
as U.S. Government securities or other liquid high-grade debt obligations.
While the Sub-advisor will seek to benefit the Portfolio when using
forward contracts, it may or may not be able to project precisely the future
exchange rates between foreign currencies and the U.S. dollar. The Portfolio may
therefore incur a gain or loss on a forward contract. A forward contract may
help reduce the Portfolio's losses on securities denominated in foreign
currency, but it may also reduce the potential gain on the securities depending
on changes in the currency's value relative to the U.S. dollar or other
currencies. For an additional discussion of foreign currency exchange contracts,
see this Prospectus and the Trust's Statement of Additional Information under
"Certain Risk Factors and Investment Methods."
Options Transactions. The Portfolio may purchase put options on
portfolio securities in an attempt to provide a hedge against a decrease in the
price of a security held by the Portfolio. The Portfolio will not purchase
options for speculative purposes. Purchasing a put option gives the Portfolio
the right to sell, and obligates the writer to buy, the underlying security at
the exercise price at any time during the option period.
When the Portfolio purchases an option, it is required to pay a premium
to the party writing the option and a commission to the broker selling the
option. If the option is exercised by the Portfolio, the premium and the
commission paid may be greater than the amount of the brokerage commission
charged if the security were to be purchased or sold directly.
Risks of Options Transactions. For a discussion of call and put options and
the risks involved therein, see this Prospectus and the Trust's Statement of
Additional Information under "Certain Risk Factors and Investment Methods."
Risks of Small Cap Investing. The Sub-advisor believes that smaller
companies generally have greater earnings and sales growth potential than larger
companies. However, investments in such companies may involve greater risks,
such as limited product lines, markets and financial or managerial resources.
Less frequently-traded securities may be subject to more abrupt price movements
than securities of larger companies.
Borrowing. The Portfolio may from time to time borrow money from banks
for temporary, extraordinary or emergency purposes and may invest the funds in
additional securities. Such borrowings will not exceed 5% of the Portfolio's
total assets and will be made at prevailing interest rates. For additional
limitations on borrowing, see this Prospectus under "Certain Risk Factors and
Investment Methods" and the Trust's Statement of Additional Information under
"Investment Objectives and Policies."
Lending Portfolio Securities. The Portfolio may lend its portfolio
securities to brokers, dealers and other institutional investors in an amount
not to exceed 33-1/3% of the Portfolio's total assets taken at market value, for
which it will receive collateral in cash or securities issued or guaranteed by
the U.S. Government to be maintained in an amount equal to at least 100% of the
current market value of the loaned securities. For a discussion of the risks
involved in lending, see this Prospectus under "Certain Risk Factors and
Investment Methods," and the Trust's Statement of Additional Information under
"Investment Objectives and Policies."
Repurchase Agreements. Subject to guidelines promulgated by the Board
of Trustees of the Trust, the Portfolio may enter into repurchase agreements
with commercial banks or broker/dealers under which the Portfolio acquires a
U.S. Government or a short-term money market instrument subject to resale at a
mutually agreed-upon price and time. The resale price reflects an agreed-upon
interest rate effective for the period the Portfolio holds the instrument that
is unrelated to the interest rate on the instrument. The Portfolio's repurchase
agreements will at all times be fully collateralized, and the Portfolio will
make payment for such securities only upon physical delivery or evidence of book
entry transfer to the account of the Trust's custodian. For a discussion of
repurchase agreements and the risks involved therein, see this Prospectus under
"Certain Risk Factors and Investment Methods."
Illiquid Securities. Subject to guidelines promulgated by the Board of
Trustees of the Trust, the Portfolio may invest in illiquid securities. The
Portfolio will not invest more than 10% of its total assets in securities that
are illiquid or not readily marketable, including restricted securities and
repurchase agreements of more than one week's duration. For a discussion of
illiquid securities and the risks involved therein, see this Prospectus under
"Certain Risk Factors and Investment Methods."
Short Sales. The Portfolio may sell securities short "against-the-box."
A short sale "against-the-box" is a short sale in which the Portfolio owns an
equal amount of the securities sold short or securities convertible into or
exchangeable without payment of further consideration for securities of the same
issue as, and equal in amount to, the securities sold short.
Temporary Investments. When the Sub-advisor believes that market
conditions warrant a temporary defensive position, the Portfolio may invest up
to 100% of its assets in short-term instruments such as commercial paper, bank
certificates of deposit, bankers' acceptances, or repurchase agreements for such
securities and securities of the U.S. Government and its agencies and
instrumentalities, as well as cash and cash equivalents denominated in foreign
currencies. Investments in domestic bank certificates of deposit and bankers'
acceptances will be limited to banks that have total assets in excess of $500
million and are subject to regulatory supervision by the U.S. Government or
state governments. The Portfolio's investments in commercial paper of U.S.
issuers will be limited to (a) obligations rated Prime-1 by Moody's or A-1 by
Standard & Poor's or (b) unrated obligations issued by companies having an
outstanding unsecured debt issue currently rated A or better by Standard &
Poor's. A description of various commercial paper ratings and debt securities
ratings appears in the Appendix to the Trust's Statement of Additional
Information. The Portfolio's investments in foreign short-term instruments will
be limited to those that, in the opinion of the Sub-advisor, equate generally to
the standards established for U.S. short-term instruments.
Lord Abbett Growth and Income Portfolio:
Investment Objective: The investment objective of the Lord Abbett Growth and
Income Portfolio is long-term growth of capital and income while attempting to
avoid excessive fluctuations in market value. This is a fundamental objective of
the Portfolio.
Investment Policies:
The Sub-advisor will try to keep the Portfolio's assets invested in
those securities which are selling at reasonable prices in relation to value. To
do so, the Portfolio may forgo some opportunities for gains when, in the
judgment of the Sub-advisor, they carry excessive risk. The Sub-advisor will try
to anticipate major changes in the economy and select stocks for the Portfolio
which it believes will benefit most from these changes.
The Portfolio normally will invest in common stocks (including
securities convertible into common stocks) of seasoned companies which are
expected to show above-average growth and which the Sub-advisor believes to be
in sound financial condition. Although the prices of common stocks fluctuate and
their dividends vary, historically, common stocks held over long periods of time
have appreciated in value and their dividends have increased when the companies
they represent have prospered and grown.
The Sub-advisor will be constantly balancing the opportunity for profit
against the risk of loss for the Portfolio. In the past, very few industries
have continuously provided the best investment opportunities. The Sub-advisor
will take a flexible approach and adjust the Portfolio to reflect changes in the
opportunity for sound investments relative to the risks assumed. Therefore, the
Portfolio will sell securities that the Sub-advisor judges to be overpriced and
reinvest the proceeds in other securities which the Sub-advisor believes offer
better values.
At such times that the Sub-advisor deems appropriate and consistent
with this Portfolio's investment objective, the Portfolio may: (a) write covered
call options which are traded on a national securities exchange with respect to
securities in the Portfolio; (b) invest up to 10% of the Portfolio's net assets
(at the time of investment) in foreign securities; and (c) invest in straight
bonds and other debt securities, including lower-rated high-yield bonds. It is
not intended for the Portfolio to write covered call options with respect to
securities with an aggregate market value of more than 10% of the Portfolio's
gross assets at the time an option is written. The Portfolio will not invest
more than 5% of its net assets (at the time of investment) in lower-rated (BB/Ba
or lower) high-yield bonds. For a discussion of the risks involved in options
transactions and in investing in lower-rated high-yield debt securities or
foreign securities, see this Prospectus and the Trust's Statement of Additional
Information under "Certain Risk Factors and Investment Methods." For an
additional description of covered options, see the Trust's Statement of
Additional Information under "Investment Objectives and Policies."
The Portfolio will not purchase securities for trading purposes. To
create reserve purchasing power and also for temporary defensive purposes, the
Portfolio may invest in short-term debt and other high quality fixed-income
securities.
Lending Portfolio Securities. The Portfolio may engage in the lending of
its securities. It is expected that no more that 5% of the Portfolio's gross
assets may be committed to securities lending. For a discussion of the risks
involved therein, see this Prospectus under "Certain Risk Factors and Investment
Methods."
Lower-Rated High-Yield Bonds. The Portfolio may invest no more than 5%
of its net assets (at the time of investment) in lower-rated high-yield bonds.
Lower-rated debt obligations are generally considered to be high risk
investments. The Portfolio does not have any minimum rating criteria applicable
to the fixed-income securities in which it invests. For a description of these
instruments and the risks involved therein, see this Prospectus and the Trust's
Statement of Additional Information under "Certain Risk Factors and Investment
Methods."
Illiquid Securities. Subject to guidelines promulgated by the Board of
Trustees of the Trust, the Portfolio may invest in securities eligible for
resale pursuant to Rule 144A of the Securities Act of 1933. For a discussion of
these instruments and the risks involved therein, see this Prospectus under
"Certain Risk Factors and Investment Methods" and the Trust's Statement of
Additional Information under "Investment Objectives and Policies."
Borrowing. For a discussion of limitations on borrowing by the Portfolio
and risks involved in borrowing, see this Prospectus under "Certain Risk Factors
and Investment Methods."
JanCap Growth Portfolio:
Investment Objective: The investment objective of the JanCap Growth Portfolio is
growth of capital in a manner consistent with the preservation of capital.
Realization of income is not a significant investment consideration and any
income realized on the Portfolio's investments, therefore, will be incidental to
the Portfolio's objective. This is a fundamental investment objective of the
Portfolio.
Investment Policies:
The Portfolio will pursue its objective by investing primarily in
common stocks. Common stock investments will be in industries and companies that
the Sub-advisor believes are experiencing favorable demand for their products
and services, and which operate in a favorable competitive and regulatory
environment. Although the Sub-advisor expects to invest primarily in equity
securities, the Sub-advisor may increase the Portfolio's cash position without
limitation when the Sub-advisor is of the opinion that appropriate investment
opportunities for capital growth with desirable risk/reward characteristics are
unavailable. The Portfolio may also invest to a lesser degree in preferred
stocks, convertible securities, warrants, and debt securities when the Portfolio
perceives an opportunity for capital growth from such securities or so that the
Portfolio may receive a return on its idle cash. Debt securities that the
Portfolio may purchase include corporate bonds and debentures (not to exceed 5%
of net assets in bonds rated below investment grade), government securities,
mortgage- and asset-backed securities, zero-coupon bonds, indexed/structured
notes, high-grade commercial paper, certificates of deposit and repurchase
agreements. For a discussion of risks involved in lower-rated securities,
mortgage- and asset-backed securities and zero coupon bonds, see this Prospectus
and the Trust's Statement of Additional Information under "Certain Risk Factors
and Investment Methods."
Although it is the general policy of the Portfolio to purchase and hold
securities for capital growth, changes in the Portfolio will be made as the
Sub-advisor deems advisable. For example, Portfolio changes may result from
liquidity needs, securities having reached a price objective, or by reason of
developments not foreseen at the time of the original investment decision.
Portfolio changes may be effected for other reasons. In such circumstances,
investment income will increase and may constitute a large portion of the return
on the Portfolio and the Portfolio will not participate in the market advances
or declines to the extent that it would if it were fully invested.
Because investment changes usually will be made without reference to
the length of time a security has been held, a significant number of short-term
transactions may result. To a limited extent, the Portfolio may also purchase
individual securities in anticipation of relatively short-term price gains, and
the rate of portfolio turnover will not be a determining factor in the sale of
such securities. However, certain tax rules may restrict the Portfolio's ability
to sell securities in some circumstances when the security has been held for
less than three months. Increased portfolio turnover necessarily results in
correspondingly higher brokerage costs for the Portfolio.
The Portfolio may invest in "special situations" from time to time. A
"special situation" arises when, in the opinion of the Sub-advisor, the
securities of a particular company will be recognized and appreciate in value
due to a specific development, such as a technological breakthrough, management
change or a new product at that company. Investment in "special situations"
carries an additional risk of loss in the event that the anticipated development
does not occur or does not attract the expected attention.
Foreign Securities. The Portfolio may also purchase securities of
foreign issuers, including foreign equity and debt securities and depository
receipts. Foreign securities are selected on a stock-by-stock basis without
regard to any defined allocation among countries or geographic regions. However,
certain factors such as expected levels of inflation, government policies
influencing business conditions, the outlook for currency relationships, and
prospects for economic growth among countries, regions or geographic areas may
warrant greater consideration in selecting foreign stocks. No more than 25% of
the Portfolio's assets may be invested in foreign securities denominated in
foreign currency and not publicly traded in the United States. For a discussion
of depository receipts and the risks involved in investing in foreign
securities, see this Prospectus and the Trust's Statement of Additional
Information under "Certain Risk Factors and Investment Methods."
Risks of Currency Fluctuations. The value of Portfolio investments
denominated in foreign currencies may be affected, favorably or unfavorably, by
the relative strength of the U.S. dollar, changes in foreign currency and U.S.
dollar exchange rates and exchange control regulations. The Portfolio's net
asset value per share will be affected by changes in currency exchange rates.
Changes in foreign currency exchange rates may also affect the value of
dividends and interest earned, gains and losses realized on the sale of
securities and net investment income and gains, if any, to be distributed to
shareholders by the Portfolio. The rate of exchange between the U.S. dollar and
other currencies is determined by the forces of supply and demand in the foreign
exchange markets and in some cases, exchange controls. For an additional
discussion of the risks of currency fluctuations, see this Prospectus and
Trust's Statement of Additional Information under "Certain Risk Factors and
Investment Methods."
Futures and Options Transactions. Subject to certain limitations, the
Portfolio may purchase and write options on securities, financial indices, and
foreign currencies, and may invest in futures contracts on securities, financial
indices, and foreign currencies ("futures contracts"), options on futures
contracts, forward contracts and swaps and swap-related products. These
instruments will be used primarily to hedge the Portfolio's positions, against
potential adverse movements in securities prices, foreign currency markets or
interest rates. To a limited extent, the Portfolio may also use derivative
instruments for non-hedging purposes such as increasing the Portfolio's income
or otherwise enhancing return. The Portfolio will not use futures contracts and
options for leveraging purposes. There can be no assurance, however, that the
use of these instruments by the Portfolio will assist it in achieving its
investment objective. The use of futures, options, forward contracts and swaps
involves investment risks and transaction costs to which the Portfolio would not
be subject absent the use of these strategies. The Sub-advisor may, from time to
time, at its own expense, call upon the experience of experts to assist it in
implementing these strategies.
Risks of Futures and Options Transactions. There are risks involved in
futures and options transactions. For a discussion of futures and options
transactions and the risks involved therein, see this Prospectus under "Certain
Risk Factors and Investment Methods" and the Trust's Statement of Additional
Information under "Investment Objectives and Policies" and "Certain Risk Factors
and Investment Methods."
Repurchase Agreements. Subject to guidelines promulgated by the Board
of Trustees of the Trust, the Portfolio may enter into repurchase agreements,
which involve the purchase of a security by the Portfolio and a simultaneous
agreement (generally with a bank or dealer) to repurchase the security from the
Portfolio at a specified date or upon demand. The Portfolio's repurchase
agreements will at all times be fully collateralized. Pursuant to an exemptive
order granted by the Securities and Exchange Commission, the Portfolio and other
funds advised by the Sub-advisor may invest in repurchase agreements and other
money market instruments through a joint trading account. For a discussion of
repurchase agreements and the risks involved therein, see this Prospectus under
"Certain Risk Factors and Investment Methods."
Reverse Repurchase Agreements. The Portfolio is permitted to enter into
reverse repurchase agreements. In a reverse repurchase agreement, the Portfolio
sells a security and agrees to repurchase it at a mutually agreed upon date and
price. For a discussion of reverse repurchase agreements and the risks involved
therein, see this Prospectus under "Certain Risk Factors and Investment
Methods."
When-Issued, Delayed Delivery and Forward Transactions. The Portfolio
may purchase securities on a when-issued or delayed delivery basis, which
generally involves the purchase of a security with payment and delivery due at
some time in the future. The Portfolio does not earn interest on such securities
until settlement and bears the risk of market value fluctuations in between the
purchase and settlement dates. For an additional discussion of when-issued
securities and certain risks involved therein, see the Trust's Statement of
Additional Information under "Certain Risk Factors and Investment Methods."
Illiquid Securities. Subject to guidelines promulgated by the Board of
Trustees of the Trust, the Portfolio may also invest up to 15% of its total
assets in securities that are considered illiquid because of the absence of a
readily available market or due to legal or contractual restrictions. Securities
eligible for resale under Rule 144A of the Securities Act of 1933, and
commercial paper issued under Section 4(2) of the Securities Act of 1933, could
be deemed "liquid" when saleable in a readily available market. For a discussion
of illiquid securities and the risks involved therein, see this Prospectus under
"Certain Risk Factors and Investment Methods."
Lending Portfolio Securities. Subject to the Portfolio's restrictions
on lending, the Portfolio may borrow money from or lend money to other
Portfolios of the Trust or other funds that permit such transactions and are
managed by the Investment Manager or are advised by the Sub-advisor if the Trust
seeks, on behalf of the Portfolio, permission to do so from the Securities and
Exchange Commission. There is no assurance that such permission will be sought
or granted. For a discussion of the risks involved in lending, see the
Prospectus under "Certain Risk Factors and Investment Methods."
Lower-Rated High-Yield Bonds. The Portfolio may invest no more than 5%
of its net assets (at the time of investment) in lower-rated high-yield bonds.
Lower-rated debt obligations are generally considered to be high risk
investments. The Portfolio does not have any minimum rating criteria applicable
to the fixed-income securities in which it invests. For a discussion of these
instruments and the risks involved therein, see this Prospectus and the
Statement of Additional Information under "Certain Risk Factors and Investment
Methods."
Borrowing. Subject to the Portfolio's restrictions on borrowing, the
Portfolio may also borrow money from banks. For a discussion of the limitations
on borrowing by the Portfolio and certain risks involved in borrowing, see this
Prospectus under "Certain Risk Factors and Investment Methods" and the Trust's
Statement of Additional Information under "Investment Objectives and Policies."
AST Money Market Portfolio:
Investment Objective: The investment objective of the AST Money Market Portfolio
is to seek high current income and maintain high levels of liquidity. This is
a fundamental objective of the Portfolio.
Investment Policies:
The Portfolio attempts to accomplish its objectives by maintaining a
dollar-weighted average portfolio maturity of not more than 90 days and by
investing in the types of high quality U.S. dollar-denominated securities
described below which have effective maturities of not more than 397 days. The
Portfolio will invest in one or more of the types of investments described
below.
United States Government Obligations. The Portfolio may invest in
obligations of the U.S. Government and its agencies ("U.S. Government
Obligations") and instrumentalities ("U.S. Government Instrumentalities")
maturing 397 days or less from the date of acquisition or purchased pursuant to
repurchase agreements that provide for repurchase by the seller within 397 days
from the date of acquisition. U.S. Government Obligations, for purposes of this
Portfolio, include: (i) direct obligations issued by the United States Treasury
such as Treasury bills, notes and bonds; and (ii) instruments issued or
guaranteed by government-sponsored agencies acting under authority of Congress,
such as, but not limited to, obligations of the Bank for Cooperatives, Federal
Financing Bank, Federal Intermediate Credit Banks, Federal Land Banks, and
Tennessee Valley Authority, Federal Home Loan Bank and Federal Farm Credit
Bureau. U.S. Government Instrumentalities are government agencies organized by
Congress under a Federal Charter and supervised and regulated by the U.S.
Government, such as the Federal National Mortgage Association and the Student
Loan Mortgage Association. Some of these U.S. Government Obligations are
supported by the full faith and credit of the U.S. Treasury; others are
supported by the right of the issuer to borrow from the Treasury; others, such
as those of the Federal National Mortgage Association, are supported by the
discretionary authority of the U.S. Government to purchase the agency's
obligations; still others, such as those of the Student Loan Mortgage
Association, are supported only by the credit of the instrumentality. No
assurance can be given that the U.S. Government would provide financial support
to the U.S.
Government-sponsored instrumentalities if it is not obligated to do so by law.
Bank Obligations. The Portfolio may invest in high quality United
States dollar-denominated negotiable certificates of deposit, time deposits and
bankers' acceptances of (i) banks, savings and loan associations and savings
banks which have more than $2 billion in total assets and are organized under
United States federal or state law, (ii) foreign branches of these banks or
foreign banks of equivalent size (Euros), and (iii) United States branches of
foreign banks of equivalent size (Yankees). The Portfolio may also invest in
obligations of international banking institutions designated or supported by
national governments to promote economic reconstruction, development or trade
between nations (e.g., the European Investment Bank, the Inter-American
Development Bank, or the World Bank). These obligations may be supported by
appropriated but unpaid commitments of their member countries, and there is no
assurance these commitments will be undertaken or met in the future.
Commercial Paper; Bonds. The Portfolio may invest in high quality
commercial paper and corporate bonds issued by United States corporations. The
Portfolio may also invest in bonds and commercial paper of foreign issuers if
the obligation is United States dollar-denominated and is not subject to foreign
withholding tax. For more information about foreign investments, see this
Prospectus and the Trust's Statement of Additional Information under "Certain
Risk Factors and Investment Methods."
Asset-Backed Securities. As may be permitted by current laws and
regulations and if expressly permitted by the Board of Trustees, the Portfolio
may also invest in securities generally referred to as asset-backed securities,
which directly or indirectly represent a participation interest in, or are
secured by and payable from, a stream of payments generated by particular assets
such as motor vehicle or credit card receivables. Asset-backed securities
provide periodic payments that generally consist of both interest and principal
payments. Consequently, the life of an asset-backed security varies with the
prepayment experience of the underlying debt instruments. For more information
about these instruments and the risks involved therein, see this Prospectus and
the Trust's Statement of Additional Information under "Certain Risk Factors and
Investment Methods."
Quality Information. The Portfolio will limit its investments to those
securities which, in accordance with guidelines adopted by the Trustees, present
minimal credit risks. In addition, the Portfolio will not purchase any security
(other than a United States Government security) unless: (i) if rated by only
one nationally recognized rating organization (such as Moody's and Standard &
Poor's), then such organization has rated it with the highest rating assigned to
short-term debt securities; (ii) if rated by more than one nationally recognized
rating organization, then at least two such rating organizations have rated it
with the highest rating assigned to short-term debt securities; or (iii) it is
not rated and is determined to be of comparable quality. Determinations of
comparable quality shall be made in accordance with procedures established by
the Trustees. These standards must be satisfied at the time an investment is
made. If the quality of the investment later declines, the Portfolio may
continue to hold the investment, subject in certain circumstances to a finding
by the Trustees that disposing of the investment would not be in the Portfolio's
best interest. For more information on ratings assigned to debt securities, see
the Appendix to the Trust's Statement of Additional Information.
When-Issued and Delayed Delivery Securities. The Portfolio may purchase
securities on a when-issued or delayed delivery basis. Delivery of and payment
for these securities may take as long as a month or more after the date of the
purchase commitment. The value of these securities is subject to market
fluctuation during this period and no interest or income accrues to the
Portfolio until settlement. The Portfolio maintains with the custodian a
separate account with a segregated portfolio of securities in an amount at least
equal to these commitments. When entering into a when-issued or delayed delivery
transaction, the Portfolio will rely on the other party to consummate the
transaction; if the other party fails to do so, the Portfolio may be
disadvantaged. It is the current policy of the Portfolio not to enter into
when-issued commitments exceeding in the aggregate 15% of the market value of
the Portfolio's total assets less liabilities other than the obligations created
by these commitments. For an additional discussion of when-issued securities and
certain risks involved therein, see the Trust's Statement of Additional
Information under "Certain Risk Factors and Investment Methods."
Repurchase Agreements. Subject to guidelines promulgated by the Board of
Trustees of the Trust, the Portfolio is permitted to enter into repurchase
agreements. For a discussion of repurchase agreements and the risks involved
therein, see this Prospectus under "Certain Risk Factors and Investment
Methods."
Reverse Repurchase Agreements. The Portfolio is permitted to enter into
reverse repurchase agreements. In a reverse repurchase agreement, the Portfolio
sells a security and agrees to repurchase it at a mutually agreed upon date and
price, reflecting the interest rate effective for the term of the agreement. It
may also be viewed as the borrowing of money by the Portfolio. If interest rates
rise during the term of a reverse repurchase agreement, entering into the
reverse repurchase agreement may have a negative impact on the Portfolio's
ability to maintain a net asset value of $1.00 per share. For a discussion of
reverse repurchase agreements and the risks involved therein, see this
Prospectus under "Certain Risk Factors and Investment Methods.
Foreign Securities. The Portfolio may invest in U.S. dollar-denominated
foreign securities. Any foreign commercial paper must not be subject to foreign
withholding tax at the time of purchase. Foreign investments may be made
directly in securities of foreign issuers or in the form of American Depository
Receipts ("ADRs") and European Depository Receipts ("EDRs"). Generally, ADRs and
EDRs are receipts issued by a bank or trust company that evidence ownership of
underlying securities issued by a foreign corporation and that are designed for
use in the domestic, in the case of ADRs, or European, in the case of EDRs,
securities markets. For a discussion of depository receipts and the risks
involved in investing in foreign securities, see this Prospectus and the Trust's
Statement of Additional Information under "Certain Risk Factors and Investment
Methods."
Lending Portfolio Securities. Subject to applicable investment
restrictions, the Portfolio is permitted to lend its securities. These loans
must be secured continuously by cash or equivalent collateral or by a letter of
credit at least equal to the market value of the securities loaned plus accrued
interest or income. For a discussion of the risks involved in lending, see this
Prospectus under "Certain Risk Factors and Investment Methods," and for more
information on restrictions on lending, see the Trust's Statement of Additional
Information under "Investment Objectives and Policies."
Borrowing. For a discussion of the limitations on borrowing by the
Portfolio and risks involved in Borrowing, see this Prospectus under "Certain
Risk Factors and Investment Methods."
Federated Utility Income Portfolio:
Investment Objective: The investment objective of the Federated Utility Income
Portfolio is to achieve high current income and moderate capital
appreciation by investing primarily in equity and debt securities of utility
companies. This is a fundamental objective of the Portfolio.
Investment Policies:
The Portfolio will pursue its investment objective by investing in
equity and debt securities of utility companies that produce, transmit, or
distribute gas and electric energy as well as those companies that provide
communications facilities, such as telephone and telegraph companies. The
Portfolio will invest at least 65% of its total assets in securities of utility
companies, and such investment policy may be changed by a vote of the Board of
Trustees. The Portfolio invests primarily in the common stocks of utility
companies. The Sub-advisor will select common stocks on the basis of traditional
research techniques, including assessment of earnings and dividend growth
prospects and the risk and volatility of the company's industry as well as other
factors such as product position, market share or profitability. The Portfolio
may invest in preferred stocks, corporate bonds, notes and warrants of these
companies and in cash, U.S. government securities and money market instruments
in proportions determined by the Sub-advisor. The Portfolio may also invest in
one or more of the types of investments described below.
Special Risks. There are certain risks associated with the utility
industry. These include difficulty in earning adequate returns on investment
despite frequent rate increases, restrictions on operations and increased costs
and delays due to governmental regulations, building or construction delays,
environmental regulations, difficulty of the capital markets in absorbing
utility debt and equity securities, and difficulties in obtaining fuel at
reasonable prices. The Investment Manager and Sub-advisor believe that the risks
of investing in utility securities can be reduced. The professional portfolio
management techniques used by the Portfolio to attempt to reduce these risks
include credit research. The Sub-advisor will perform its own credit analysis in
addition to using recognized ratings agencies and other sources, including
discussions with the issuer's management, the judgment of other investment
analysts, and its own informed judgment. The Sub-advisor's credit analysis will
consider the issuer's financial soundness, its responsiveness to changes in
interest rates and business conditions, and its anticipated cash flow, interest
or dividend coverage, and earnings. In evaluating an issuer, the Sub-advisor
places special emphasis on the estimated current value of the issuer's assets
rather than historical costs.
Foreign Securities. The Portfolio may invest in securities of foreign
issuers, whether traded on United States or foreign securities exchanges, in
United States or foreign over-the-counter markets, or in the form of depository
receipts. The Portfolio will not invest more than 15% of total assets in
securities of foreign issuers not listed on recognized exchanges. Securities of
a foreign issuer may present greater risks in the form of nationalization,
confiscation, domestic marketability or other national or international
restrictions. As a matter of practice, the Portfolio will not invest in the
securities of a foreign issuer if any such risk appears to the Sub-advisor to be
substantial. For a discussion of depository receipts and the risks involved in
foreign investments, see this Prospectus and the Trust's Statement of Additional
Information under "Certain Risk Factors and Investment Methods."
Illiquid Securities. Subject to guidelines promulgated by the Board of
Trustees of the Trust, the Portfolio may invest up to 15% of its net assets in
securities that are considered to be illiquid because of the absence of a
readily available market or due to legal or contractual restrictions. Illiquid
securities include non-negotiable time deposits, repurchase agreements providing
for settlement more than seven days after notice and restricted securities which
are determined by the Board of Trustees to be illiquid.
The Fund may invest in commercial paper issued in reliance on the
exemption from registration afforded by Section 4(2) of the Securities Act of
1933, as amended ("Section 4(2)"). Section 4(2) commercial paper is restricted
as to disposition under federal securities law and is generally sold to
institutional investors, such as the Portfolio, who agree that they are
purchasing the paper for investment purposes and not with a view to public
distribution. Any resale by the purchaser must be in an exempt transaction.
Section 4(2) commercial paper is normally resold to other institutional
investors like the Portfolio through or with the assistance of the issuer or
investment dealers who make a market in Section 4(2) commercial paper, thus
providing liquidity. For a discussion of illiquid and restricted securities and
the risks involved therein, see this Prospectus under "Certain Risk Factors and
Investment Methods."
Temporary Investments. When the Sub-advisor believes that market
conditions warrant a temporary defensive position, the Portfolio may also invest
all or a part of its assets in cash, cash items and short-term instruments, such
as commercial paper, notes, certificates of deposit, obligations issued or
guaranteed as to principal and interest by the U.S. government or any of its
agencies or instrumentalities and repurchase agreements. The Portfolio's
investment in repurchase agreements will be limited to those with banks and
other financial institutions, such as broker-dealers, which are determined by
the Sub-advisor to be creditworthy pursuant to guidelines promulgated by the
Board of Trustees. Repurchase agreements are arrangements in which banks,
broker-dealers, and other financial institutions sell U.S. government securities
or other securities to the Portfolio and agree at the time of sale to repurchase
them at a mutually agreed upon time and price. The Portfolio's custodian will
take possession of the securities subject to repurchase agreements and these
securities will be marked to market daily. To the extent that the original
seller does not repurchase the securities from the Portfolio, the Portfolio
could receive less than the repurchase price on any sale of such securities. In
the event that such a defaulting seller filed for bankruptcy or became
insolvent, disposition of such securities by the Portfolio might be delayed
pending court action. The Portfolio will only enter into repurchase agreements
with banks or other recognized financial institutions, such as broker-dealers,
which are found by the Sub-advisor to be creditworthy.
Reverse Repurchase Agreements. The Portfolio may enter into reverse
repurchase agreements. When effecting reverse repurchase agreements, assets of
the Portfolio, in a dollar amount sufficient to make payment for the obligations
to be purchased, are segregated on the Portfolio's records at the trade date and
are maintained until the transaction is settled. For a discussion of reverse
repurchase agreements and the risks involved therein, see this Prospectus under
"Certain Risk Factors and Investment Methods."
Lending Portfolio Securities. The Portfolio may lend its securities to
brokers, dealers, banks or other institutional borrowers of securities in an
amount not to exceed 33% of the Portfolio's total assets. The Portfolio will
only enter into loan arrangements with brokers, dealers, banks and other
institutions which the Sub-advisor has determined to be creditworthy pursuant to
guidelines promulgated by the Board of Trustees. The Portfolio will receive
collateral at least equal to 100% of the value of the securities loaned. For an
additional discussion of the restrictions on the Portfolio's lending, see the
Trust's Statement of Additional Information under "Investment Objectives and
Policies," and for a discussion of the risks involved therein, see this
Prospectus under "Certain Risk Factors and Investment Methods."
When-Issued and Delayed Delivery Transactions. The Portfolio may
purchase securities on a when-issued or delayed delivery basis. The Portfolio
will not enter into when-issued commitments exceeding in the aggregate 10% of
the market value of the Portfolio's total assets. For more information, see the
Trust's Statement of Additional Information under "Investment Objectives and
Policies" and "Certain Risk Factors and Investment Methods."
Put and Call Options. The Portfolio may purchase put options on all or
a portion of the Portfolio's securities for the purpose of hedging against
decreases in the value of the Portfolio's securities. The Portfolio will only
purchase puts on Portfolio securities which are traded on a recognized exchange.
The Portfolio may also write call options on all or a portion of the Portfolio's
securities to generate income. The Portfolio will write call options on either
Portfolio securities or securities which the Portfolio has the right to obtain
without payment of further consideration or for which it has segregated cash in
the amount of any additional consideration. The call options which the Portfolio
writes must be listed on a recognized options exchange. Although the Portfolio
reserves the right to write covered call options on its entire portfolio, it
will not write such options on more than 25% of its total assets unless a higher
limit is authorized by the Board of Trustees.
Risks of Options Transactions. For a discussion of put and call options and
the risks involved therein, see this Prospectus and the Trust's Statement of
Additional Information under "Certain Risk Factors and Investment Methods."
Futures Transactions and Related Options. The Portfolio may purchase
and sell financial futures contracts for the purpose of hedging all or a portion
of its long-term debt securities against changes in interest rates. The
Portfolio may also write call options and purchase put options on financial
futures contracts as a hedge to attempt to protect Portfolio securities against
decreases in value. The Portfolio will not purchase or sell futures contracts if
immediately thereafter the sum of the amount of margin deposits on the
Portfolio's existing futures positions and premiums paid for related options
would exceed 5% of the market value of the Portfolio's total assets. When the
Portfolio purchases futures contracts, an amount of cash and cash equivalents
equal to the underlying commodity value of the futures contracts (less any
related margin deposits), will be deposited in a segregated account with the
Portfolio's custodian (or broker if legally permitted) to collateralize the
position and thereby insure that the use of such futures contracts is
unleveraged. Futures transactions and related options may not be used for
leveraging purposes.
Risks of Futures Transactions. For a discussion of futures transactions
and related options and the risks involved therein, see this Prospectus and the
Trust's Statement of Additional Information under "Certain Risk Factors and
Investment Methods."
Borrowing. For a discussion of limitations on borrowing by the Portfolio
and risks involved in borrowing, see this Prospectus under "Certain Risk Factors
and Investment Methods."
Federated High Yield Portfolio:
Investment Objective: The investment objective of the Federated High Yield
Portfolio is to seek high current income by investing primarily in a diversified
portfolio of fixed income securities. The fixed income securities in which the
Portfolio intends to invest are lower-rated corporate debt obligations. This is
a fundamental investment objective.
Lower-rated debt obligations are generally considered to be high risk
investments.
Investment Policies:
The Portfolio will invest 65% of its assets in lower-rated fixed income
bonds. Under normal circumstances, the Portfolio will not invest more than 10%
of the value of its total assets in equity securities. The fixed income
securities in which the Portfolio may invest include, but are not limited to:
preferred stocks, bonds, debentures, notes, equipment lease certificates and
equipment trust certificates.
The Portfolio will invest primarily in fixed rate corporate debt
obligations. The fixed rate corporate debt obligations in which the Portfolio
intends to invest are expected to be lower rated. Permitted investments
currently include, but are not limited to, the following: corporate debt
obligations having fixed or floating rates of interest which are rated BBB or
lower by recognized rating agencies; commercial paper; obligations of the United
States; notes, bonds, and discount notes of the following U.S. government
agencies or instrumentalities: Federal Home Loan Banks, Federal National
Mortgage Association, Government National Mortgage Association, Federal Farm
Credit Banks, Tennessee Valley Authority, Export-Import Bank of the United
States, Commodity Credit Corporation, Federal Financing Bank, Student Loan
Marketing Association, Federal Home Loan Mortgage Corporation, or National
Credit Union Administration; time and savings deposits (including certificates
of deposit) in commercial or savings banks whose deposits are insured by the
Bank Insurance Fund ("BIF"), or the Savings Association Insurance Fund ("SAIF"),
including certificates of deposit issued by and other time deposits in foreign
branches of BIF-insured banks; bankers' acceptances issued by a BIF-insured
bank, or issued by the bank's Edge Act subsidiary and guaranteed by the bank,
with remaining maturities of nine months or less. The total acceptances of any
bank held by the Portfolio cannot exceed 0.25 of 1% of such bank's total
deposits according to the bank's last published statement of condition preceding
the date of acceptance; and general obligations of any state, territory, or
possession of the United States, or their political subdivisions, so long as
they are either (1) rated in one of the four highest grades by nationally
recognized statistical rating organizations or (2) issued by a public housing
agency and backed by the full faith and credit of the United States.
The corporate debt obligations in which the Portfolio may invest are
generally rated BBB or lower by Standard & Poor's Corporation ("Standard &
Poor's") or Baa or lower by Moody's Investors Service, Inc. ("Moody's"), or are
not rated but are determined by the Sub-advisor to be of comparable quality. A
description of the rating categories is contained in the Appendix to the Trust's
Statement of Additional Information. There is no lower limit with respect to
rating categories for securities in which the Portfolio may invest.
Special Risks of Lower-Rated Debt Obligations or "Junk Bonds." The
corporate debt obligations in which the Portfolio invests are usually not in the
three highest rating categories of a nationally recognized rating organization
(AAA, AA, or A for Standard & Poor's and Aaa, Aa or A for Moody's) but are in
the lower rating categories or are unrated but are of comparable quality and
have speculative characteristics or are speculative. Lower-rated or unrated
bonds are commonly referred to as "junk bonds." There is no minimal acceptable
rating for a security to be purchased or held in the Portfolio, and the
Portfolio may, from time to time, purchase or hold securities rated in the
lowest rating category. A description of the rating categories is contained in
the Appendix to the Trust's Statement of Additional Information.
The Sub-advisor believes that lower-rated securities will usually offer
higher yields than higher-rated securities. However, there is more risk
associated with these investments. This is because of reduced creditworthiness
and increased risk of default. Lower-rated securities generally tend to reflect
short-term corporate and market developments to a greater extent than
higher-rated securities which react primarily to fluctuations in the general
level of interest rates. Short-term corporate and market developments affecting
the prices or liquidity of lower-rated securities could include adverse news
affecting major issuers, underwriters, or dealers in lower-rated securities. In
addition, since there are fewer investors in lower-rated securities, it may be
harder to sell the securities at an optimum time.
As a result of these factors, lower-rated securities tend to have more
price volatility and carry more risk to principal and income than higher-rated
securities. An economic downturn may adversely affect the value of some
lower-rated bonds. Such a downturn may especially affect highly leveraged
companies or companies in cyclically sensitive industries, where deterioration
in a company's cash flow may impair its ability to meet its obligation to pay
principal and interest to bondholders in a timely fashion. From time to time, as
a result of changing conditions, issuers of lower-rated bonds may seek or may be
required to restructure the terms and conditions of the securities they have
issued. As a result of these restructurings, holders of lower-rated securities
may receive less principal and interest than they had bargained for at the time
such bonds were purchased. In the event of a restructuring, the Trust may bear
additional legal or administrative expenses in order to maximize recovery from
an issuer.
The secondary trading market for lower-rated bonds is generally less
liquid than the secondary trading market for higher-rated bonds. In 1989,
legislation was enacted that required federally insured savings and loan
associations to divest their holdings of lower-rated bonds by 1994. The
reduction of the number of institutions empowered to purchase and hold
lower-rated bonds could have an adverse impact on the overall liquidity of the
market. Adverse publicity and the perception of investors relating to issuers,
underwriters, dealers or underlying business conditions, whether or not
warranted by fundamental analysis, may also affect the price or liquidity of
lower-rated bonds. On occasion, therefore, it may become difficult to price or
dispose of a particular security in the Portfolio.
For an additional discussion of the risks involved in lower-rated
securities, see this Prospectus and the Trust's Statement of Additional
Information under "Certain Risk Factors and Investment Methods."
Illiquid Securities. Subject to guidelines promulgated by the Board of
Trustees of the Trust, the Portfolio may acquire securities which are subject to
legal or contractual delays, restrictions and costs on resale. As a matter of
investment policy which can be changed without shareholder approval, the
Portfolio will not invest more than 15% of its net assets in illiquid
securities, which include certain private placements not determined to be liquid
under criteria established by the Board of Trustees and repurchase agreements
providing for settlement in more than seven days after notice. Securities
eligible for resale under Rule 144A of the Securities Act of 1933, and
commercial paper issued under Section 4(2) of the Securities Act of 1933, could
be deemed "liquid" when saleable in a readily available market. For an
additional discussion of illiquid and restricted securities and the risks
involved therein, see this Prospectus under "Certain Risk Factors and Investment
Methods" and the Trust's Statement of Additional Information under "Investment
Objectives and Policies."
When-Issued and Delayed Delivery Transactions. The Portfolio may
purchase securities on a when-issued or delayed delivery basis. In when-issued
and delayed delivery transactions, the Portfolio relies on the seller to
complete the transaction. The seller's failure to complete the transaction may
cause the Portfolio to miss a price or yield considered to be advantageous. For
an additional discussion of these transactions and the risks involved therein,
see the Trust's Statement of Additional Information under "Investment Objectives
and Policies" and "Certain Risk Factors and Investment Methods."
Temporary Investments. The Portfolio may also invest all or a part of
its assets temporarily in cash or cash items during time of unusual market
conditions for defensive purposes or to maintain liquidity. Cash items may
include, but are not limited to: certificates of deposit; commercial paper
(generally lower-rated); short-term notes; obligations issued or guaranteed as
to principal and interest by the U.S. government or any of its agencies or
instrumentalities; and repurchase agreements.
Repurchase Agreements. Subject to guidelines promulgated by the Board
of Trustees of the Trust, the Portfolio may enter into repurchase agreements and
certain securities in which the Portfolio invests may be purchased pursuant to
repurchase agreements. For an additional discussion of repurchase agreements and
the risks involved therein, see this Prospectus under "Certain Risk Factors and
Investment Methods" and the Trust's Statement of Additional Information under
"Investment Objectives and Policies."
Lending Portfolio Securities. In order to generate additional income,
the Portfolio may lend portfolio securities on a short-term or long-term basis
to broker/dealers, banks, or other institutional borrowers of securities. The
Portfolio will only enter into loan arrangements with broker/dealers, banks, or
other institutions which the Sub-advisor has determined are creditworthy under
guidelines established by the Board of Trustees and will receive collateral in
the form of cash or U.S. government securities equal to at least 100% of the
value of the securities loaned. For an additional discussion of limitations on
lending and the risks involved in lending, see this Prospectus under "Certain
Risk Factors and Investment Methods" and the Trust's Statement of Additional
Information under "Investment Objectives and Policies."
Borrowing. For a discussion of the limitations on borrowing by the
Portfolio and certain risks involved in borrowing, see this Prospectus under
"Certain Risk Factors and Investment Methods."
Portfolio Turnover. While the Sub-advisor does not intend to do
substantial short-term trading, from time-to-time it may sell Portfolio
securities without considering how long they have been held. The Portfolio would
do this: to take advantage of short-term differentials in yields or market
values; to take advantage of new investment opportunities; to respond to changes
in creditworthiness of an issuer; or to try to preserve gains or limit losses.
Any such trading would increase the Portfolio's turnover rate and its
transaction costs. However, the Sub-advisor will not attempt to set or meet an
arbitrary turnover rate since turnover is incidental to transactions considered
necessary to achieve the Portfolio investment objective.
Zero Coupon Bonds. The Portfolio may, from time to time, own zero
coupon bonds or pay-in-kind securities. A zero coupon bond makes no periodic
interest payments and the entire obligation becomes due only upon maturity.
Pay-in-kind securities make periodic payments in the form of additional
securities (as opposed to cash). The price of zero coupon bonds and pay-in-kind
securities are generally more sensitive to fluctuations in interest rates than
are conventional bonds. Additionally, federal tax law requires that interest on
zero coupon bonds and paid-in-kind securities be reported as income to the Trust
even though the Trust received no cash interest until the maturity or payment
date of such securities.
Many corporate debt obligations, including many lower-rated bonds,
permit the issuers to call the security and thereby redeem their obligations
earlier than the stated maturity dates. Issuers are more likely to call bonds
during periods of declining interest rates. In these cases, if the Portfolio
owns a bond which is called, the Portfolio will receive its return of principal
earlier than expected and would likely be required to reinvest the proceeds at
lower interest rates, thus reducing income to the Portfolio.
For an additional discussion of zero coupon bonds, see the Trust's
Statement of Additional Information under "Certain Risk Factors and Investment
Methods."
Foreign Securities. The Portfolio may invest up to 5% of its total
assets in foreign securities which are not publicly traded in the United States.
For a discussion of the risks involved in foreign investing, see this Prospectus
and the Trust's Statement of Additional Information under "Certain Risk Factors
and Investment Methods."
Reducing Risks of Lower-Rated Securities. The Sub-advisor believes that
the risks of investing in lower-rated securities may be reduced. There can,
however, be no assurances that such risks will actually be reduced by the
following methods. The professional portfolio management techniques used by the
Sub-advisor to attempt to reduce these risks include:
Credit Research. The Sub-advisor will perform its own credit
analysis in addition to using nationally recognized rating organizations and
other sources, including discussions with the issuer's management, the judgment
of other investment analysts, and its own informed judgment. The Sub-advisor's
credit analysis will consider the issuer's financial soundness, its
responsiveness to changes in interest rates and business conditions, and its
anticipated cash flow, interest, or dividend coverage and earnings. In
evaluating an issuer, the Sub-advisor places special emphasis on the estimated
current value of the issuer's assets rather than historical cost.
Diversification. The Sub-advisor invests in securities of many different
issuers, industries, and economic sectors to reduce portfolio risk.
Economic Analysis. The Sub-advisor will analyze current
developments and trends in the economy and in the financial markets. When
investing in lower-rated securities, timing and selection are critical, and
analysis of the business cycle can be important.
AST Phoenix Balanced Asset Portfolio:
Investment Objective: The investment objective of the AST Phoenix Balanced Asset
Portfolio is to seek reasonable income, long-term capital growth and
conservation of capital. The Portfolio intends to invest based on combined
considerations of risk, income, capital enhancement and protection of capital
value. This is a fundamental objective of the Portfolio.
Investment Policies:
The Portfolio may invest in any type or class of security. Usually, the
Portfolio will invest in common stocks and fixed income securities; however, it
may also invest in securities convertible into common stocks. At least 25% of
the value of its assets will be invested in fixed income senior securities. The
Portfolio may also engage in certain options transactions and enter into
financial futures contracts and related contracts for hedging purposes and may
invest in deferred or zero coupon debt obligations. In implementing the
investment objectives, the Portfolio will invest in securities which the
Sub-advisor believes to have the potential for the production of current income,
with emphasis on securities that also have the potential for capital
enhancement. In an effort to protect its assets against major market declines,
or for other temporary defensive measures, the Portfolio may actively pursue a
policy of retaining cash or investing all or a part of the Portfolio's assets in
cash equivalents, such as government securities and high grade commercial paper.
Lower-Rated or Non-Rated Securities. Historically, the Portfolio has
emphasized investments in investment grade fixed income securities which are
rated within the four highest categories by recognized rating agencies, i.e.,
S&P, Moody's Investor's Services, Inc. ("Moody's"), Duff & Phelps Credit Rating
Co. ("D&P"), or Fitch Investor Services Inc. ("Fitch"). However, the Portfolio
may take a position in lower or non-rated fixed income securities, but the
Portfolio will not invest more than 35% of its net assets, determined at the
time of investment, in high yield, high risk fixed income securities (commonly
referred to as "junk bonds"). A fixed income securities issue may have its
ratings reduced below the minimum permitted for purchase by the Portfolio. In
that event the Sub-advisor will determine whether the Portfolio should continue
to hold such issue. If, in the Sub-advisor's opinion, market conditions warrant,
the Portfolio may increase its position in lower or non-rated securities from
time to time. For a discussion of lower-rated or non-rated securities and the
risks involved therein, see this Prospectus and the Trust's Statement of
Additional Information under "Certain Risk Factors and Investment Methods."
Zero Coupon Bonds. The Portfolio may invest in debt obligations that do
not make any interest payments for a specified period of time prior to maturity
or until maturity ("deferred coupon" or "zero coupon" obligations). Even though
interest is not actually paid on these instruments, for tax purposes the
Portfolio is imputed with ordinary income. This imputed income is paid out to
shareholders as dividends. The value of these obligations fluctuates more in
response to interest rate changes than does the value of debt obligations that
make current interest payments. For an additional discussion of zero coupon
bonds see the Trust's Statement of Additional Information under "Certain Risk
Factors and Investment Methods."
Repurchase Agreements. Subject to guidelines promulgated by the Board
of Trustees of the Trust and at such times that the Sub-advisor deems
appropriate and consistent with this Portfolio's investment objective, the
Portfolio may invest in repurchase agreements. The Sub-advisor will review the
creditworthiness of the other party to the agreement and will find it
satisfactory before entering into a repurchase agreement. For a discussion of
repurchase agreements and the risks involved therein, see this Prospectus under
"Certain Risk Factors and Investment Methods."
Securities and Index Options. The Portfolio may write covered call
options and purchase call and put options. Securities and index options and the
risks involved therein are described below and in more detail in the Trust's
Statement of Additional Information under "Investment Objectives and Policies"
and under "Certain Risk Factors and Investment Methods."
Writing (Selling) Call Options. The Portfolio may write (sell)
exchange-traded covered call options. A call option is "covered" if the
Portfolio owns the underlying security or has an absolute and immediate right to
acquire that security without additional cash consideration (or for additional
cash consideration held in a segregated account by the Portfolio's custodian)
upon conversion or exchange of other securities held in the Portfolio. A call
option is also covered if the Portfolio holds on a share-for-share basis a
covering call on the same security as the call written where (i) the exercise
price of the covering call held is equal to or less than the exercise price of
the call written or greater than the exercise price of the call written if the
difference is maintained by the Portfolio in cash, U.S. Treasury bills or other
high-grade short-term obligations in a segregated account with its custodian,
and (ii) the covering call expires at the same time or after the call written.
The value of the total assets of the Portfolio which may be subject to
call options is limited to 50% of the Portfolio's total assets. The Sub-advisor
currently intends to cease writing options if and as long as 25% of such total
assets are subject to outstanding options contracts or if required under
regulations of state securities administrators. Call options on securities
indices will be written only to hedge in an economically appropriate way
portfolio securities which are not otherwise hedged with options of financial
futures contacts and will be "covered" by identifying the specific portfolio
securities being hedged.
The Portfolio will write call options in order to obtain a return on
its investments from the premiums received and will retain the premiums whether
or not the options are exercised. Any decline in the market value of Portfolio
securities will be offset to the extent of the premiums received (net of
transaction costs). If an option is exercised, the premium received on the
option will effectively increase the exercise price.
During the option period the writer of a call option has given up the
opportunity for capital appreciation above the exercise price should market
price of the underlying security increase, but has retained the risk of loss
should the price of the underlying security decline. Writing call options also
involves the risk relating to the Portfolio's ability to close out options it
has written. For a discussion of selling call options and the risks involved
therein, see this Prospectus and the Trust's Statement of Additional Information
under "Certain Risk Factors and Investment Methods."
Purchasing Call and Put Options. The Portfolio may invest up to 2% of
its total assets in exchange-traded call and put options on securities and
securities indices for the purpose of hedging against changes in the market
value of its securities. The Portfolio will invest in call and put options
whenever, in the opinion of the Sub-advisor, a hedging transaction is consistent
with the investment objective of the Portfolio. The Portfolio may sell a call
option or a put option which it has previously purchased prior to purchase (in
the case of a call) or the sale (in the case of a put) of the underlying
security. Any such sale would result in a net gain or loss depending on whether
the amount received on the sale is more or less than the premium and other
transaction costs paid on the call or put which is sold.
Purchasing a call or put option involves the risk that the Portfolio
may lose the premium paid plus transactions costs. For a discussion of
purchasing call and put options and the risks involved therein, see this
Prospectus and the Trust's Statement of Additional Information under "Certain
Risk Factors and Investment Methods."
Warrants and Stock Rights. Warrants and stock rights are almost
identical to call options in their nature, use and effect except that they are
issued by the issuer of the underlying security rather than an option writer
(seller). The Portfolio may invest in up to 5% of its net assets in warrants or
stock rights valued at the lower of cost or market, but no more than 2% of its
net assets may be invested in warrants or stock rights not listed on the New
York Stock Exchange or American Stock Exchange.
Financial Futures and Related Options. The Portfolio may enter into
financial futures contracts and related options. The Portfolio may purchase and
sell futures contracts which are traded on a recognized exchange or board of
trade and may purchase exchange- or board-traded put and call options on
financial futures contracts as a hedge against anticipated changes in the market
value of the Portfolio's securities or changes in the market value of securities
which it intends to purchase. Hedging is the initiation of a position in the
futures market which is intended as a temporary substitute for the purchase or
sale of the underlying securities in the cash market.
The Portfolio will engage in transactions in financial futures
contracts and related options only for hedging purposes and not for speculation
or leveraging. In addition, the Portfolio will not buy or sell any financial
futures contract or related option, if immediately thereafter, the sum of the
cash or U.S. Treasury bills initially committed with respect to the Portfolio
existing futures and related options positions and the premiums paid for the
related options would exceed 2% of the market value of the Portfolio's total
assets. At the time of purchase of a futures contract or a call option on a
futures contract, an amount of cash, U.S. Government securities or other
appropriate high-grade debt obligations equal to the market value of the futures
contract minus the Portfolio's initial margin deposit with respect thereto will
be deposited in a segregated account with the Portfolio's custodian to
collateralize fully the position and thereby ensure that it is not leveraged.
The extent to which the Portfolio may enter into financial futures contracts and
related options may also be limited by requirements of the Internal Revenue Code
for qualification as a regulated investment company.
Risks of Options and Futures Transactions. For an additional discussion
of options and futures and the risks involved therein, see this Prospectus under
"Certain Risk Factors and Investment Methods" and the Trust's Statement of
Additional Information under "Investment Objectives and Policies" and "Certain
Risk Factors and Investment Methods."
Foreign Securities. The Portfolio may purchase foreign securities,
including emerging market securities and those issued by foreign branches of
U.S. banks. The Portfolio may invest less than 25% of its total net assets in
the securities of foreign issuers. The Portfolio may invest in a broad range of
foreign securities including equity, debt and convertible securities and foreign
government securities. The Portfolio may enter into forward foreign currency
exchange contracts for the purpose of protecting against losses resulting from
fluctuations in exchange rates between the U.S. Dollar and a particular foreign
currency denominating a security which the Portfolio holds or intends to
acquire. The Portfolio will not speculate in forward foreign currency exchange
contracts. For a discussion of foreign currency exchange contracts, and the
risks of foreign currency fluctuations, see below and this Prospectus and the
Trust's Statement of Additional Information under "Certain Risk Factors and
Investment Methods." For a discussion of the risks involved in investing in
developing countries or so called "emerging markets," as well as the risks
involved in foreign investing in general, see this Prospectus and the Trust's
Statement of Additional Information under "Certain Risk Factors and Investment
Methods."
The Portfolio's custodian may use a foreign sub-custodian in connection
with its purchase of foreign securities and may maintain cash and cash
equivalents in the care of a foreign sub-custodian. The amount of cash or cash
equivalent maintained in the care of eligible foreign sub-custodians will be
limited to an amount reasonably necessary to effect the Portfolio's foreign
securities transactions.
The Portfolio will calculate its net asset value and complete orders to
purchase, exchange or redeem shares only on a Monday-Friday basis (excluding
holidays on which the New York Stock Exchange is closed). Foreign securities in
which the Portfolio may invest may be primarily listed on foreign stock
exchanges which may trade on other days (such as Saturdays). As a result, the
net asset value of the Portfolio may be affected by such trading on days when a
shareholder has no access to the Portfolio.
Risks of Currency Fluctuations. The value of Portfolio investments
denominated in foreign currencies may be affected, favorably or unfavorably, by
the relative strength of the U.S. dollar, changes in foreign currency and U.S.
dollar exchange rates and exchange control regulations. The Portfolio's net
asset value per share will be affected by changes in currency exchange rates.
Changes in foreign currency exchange rates may also affect the value of
dividends and interest earned, gains and losses realized on the sale of
securities and net investment income and gains, if any, to be distributed to
shareholders by the Portfolio. The rate of exchange between the U.S. dollar and
other currencies is determined by the forces of supply and demand in the foreign
exchange markets and in some cases, exchange controls. For an additional
discussion of the risks of currency fluctuations, see this Prospectus and
Trust's Statement of Additional Information under "Certain Risk Factors and
Investment Methods."
Forward Currency Exchange Contracts. The Sub-advisor may consider
changes in exchange rates in making investment decisions. As one way of managing
exchange rate risk, the Portfolio may enter into forward currency exchange
contracts. The Portfolio may enter into these contracts to fix the U.S. dollar
value of a security that it has agreed to buy or sell for the period between the
date the trade was entered into and the date the security is delivered and paid
for. The Portfolio may also use these contracts to hedge the U.S. dollar value
of securities it already owns. The Portfolio may be required to cover certain
forward currency exchange contract positions by establishing a segregated
account with its custodian that will contain only liquid assets, such as U.S.
Government securities or other liquid high-grade debt obligations.
While the Sub-advisor will seek to benefit the Portfolio when using
forward contracts, it may or may not be able to project precisely the future
exchange rates between foreign currencies and the U.S. dollar. The Portfolio may
therefore incur a gain or loss on a forward contract. A forward contract may
help reduce the Portfolio's losses on securities denominated in foreign
currency, but it may also reduce the potential gain on the securities depending
on changes in the currency's value relative to the U.S. dollar or other
currencies. For an additional discussion of foreign currency exchange contracts,
see this Prospectus and the Trust's Statement of Additional Information under
"Certain Risk Factors and Investment Methods."
Borrowing. For a discussion of the limitations on borrowing by the
Portfolio and risks involved in borrowing, see this Prospectus under "Certain
Risk Factors and Investment Methods."
Lending. The Portfolio may make loans of its securities under certain
circumstances. For a discussion of limitations on lending and the risks involved
in lending, see this Prospectus under "Certain Risk Factors and Investment
Methods" and the Trust's Statement of Additional Information under "Investment
Objectives and Policies."
T. Rowe Price Asset Allocation Portfolio:
Investment Objective: The investment objective of the T. Rowe Price Asset
Allocation Portfolio is to seek a high level of total return by investing
primarily in a diversified group of fixed income and equity securities. This is
a fundamental investment objective of the Portfolio.
Investment Policies:
The Portfolio is designed to balance the potential appreciation of
common stocks with the income and principal stability of bonds over the long
term. Under normal market conditions over the long-term, the Portfolio expects
to allocate its assets so that approximately 40% of such assets will be in fixed
income securities and approximately 60% in equity securities. This mix may vary
over shorter time periods within the ranges set forth below:
Range
Fixed Income Securities 30-50%
Equity Securities 50-70%
The primary consideration in varying from the 60-40 allocation will be
the Sub-advisor's outlook for the different markets in which the Portfolio
invests. Shifts between bonds and stocks will normally be done gradually and the
Sub-advisor will not attempt to precisely "time" the market. There is, of
course, no guarantee that even the Sub-advisor's gradual approach to allocating
the Portfolio's assets will be successful in achieving the Portfolio's
objective. The Portfolio will also maintain cash reserves to facilitate the
Portfolio's cash flow needs (redemptions, expenses and purchases of Portfolio
securities) and it may invest in cash reserves without limitation for temporary
defensive purposes.
Assets allocated to the fixed income portion of the Portfolio primarily
will be invested in U.S. and foreign investment grade bonds and high-yield
bonds, and cash reserves.
Assets allocated to the equity portion of the Portfolio primarily will
be invested in the common stocks of a diversified group of U.S. and foreign
large and small companies.
The Portfolio's price share will fluctuate with changing market
conditions and interest rate levels and your investment may be worth more or
less when redeemed than when purchased. The Portfolio should not be relied upon
for short-term financial needs, nor used to play short-term swings in the stock
or bond markets. The Portfolio cannot guarantee that it will achieve its
investment objectives.
Fixed Income Securities. The Portfolio's fixed income securities will
be allocated among investment grade, high-yield and non-dollar debt securities
generally within the ranges indicated below:
Range
Investment Grade 50-100%
High Yield 0-30%
Non-dollar 0-30%
Cash Reserves 0-20%
Investment Grade. Long, intermediate and short-term investment
grade debt securities (e.g., AAA, AA, A or BBB by Standard & Poor's Corporation
("S&P"), or if not rated, of equivalent investment quality as determined by
Sub-advisor). The weighted average maturity for this portion of the Portfolio is
generally expected to be intermediate, although it may vary significantly.
Non-Dollar. Non-dollar denominated, high-quality (e.g., AAA
and AA by S&P, or if not rated, of equivalent investment quality as determined
by the Sub-advisor) government and corporate debt securities of at least three
countries. See this Prospectus and the Trust's Statement of Additional
Information for a discussion of the risks involved in foreign investing.
High-Yield, Lower-Rated Securities. High-yielding,
income-producing debt securities (commonly referred to as "junk bonds") and
preferred stocks including convertible securities. Bonds may be purchased
without regard to maturity, however, the average maturity of the bonds is
expected to be approximately 10 years, although it may vary if market conditions
warrant. Quality will generally range from lower-medium to low and the Portfolio
may also purchase bonds in default if, in the opinion of the Sub-advisor, there
is significant potential for capital appreciation. Lower-rated debt obligations
are generally considered to be high risk investments. See this Prospectus and
the Trust's Statement of Additional Information for a discussion of the risks
involved in investing in high-yield, lower-rated debt securities.
Cash Reserves. Liquid short-term investments of one year or
less having the highest ratings by at least one established rating organization,
or if not rated, of equivalent investment quality as determined by the
Sub-advisor.
Equity Securities. The Portfolio's equity securities will be allocated
among large and small-cap U.S. and non-dollar equity securities within the
ranges indicated below:
Range
Large Cap 45-100%
Small Cap 0-30%
International 0-35%
Large-Cap. Generally, stocks of well-established companies with
capitalization over $1 billion which can produce increasing dividend income.
Non-Dollar. Common stocks of established non-U.S. companies.
Investments may be made solely for capital appreciation or solely for income or
any combination of both for the purpose of achieving a higher overall return.
The Sub-advisor intends to diversify this portion of the Portfolio broadly among
countries and to normally have at least three different countries represented.
The countries of the Far East and Western Europe as well as South Africa,
Australia, Canada, and other areas (including developing countries) may be
included. Under unusual circumstances, however, investment may be substantially
in one or two countries. See this Prospectus and the Trust's Statement of
Additional Information for a discussion of the risks in international investing
under "Certain Risk Factors and Investment Methods."
Risks of Small-Cap Investing. Common stocks of small companies or
companies which offer the possibility of accelerated earnings growth because of
rejuvenated management, new products or structural changes in the economy.
Current income is not a factor in the selection of these stocks. Higher risks
are often associated with small companies. These companies may have limited
product lines, markets and financial resources, or they may be dependent on a
small or inexperienced management group. In addition, their securities may trade
less frequently and in limited volume and move more abruptly than securities of
larger companies. However, securities of smaller companies may offer greater
potential for capital appreciation since they are often overlooked or
undervalued by investors.
The Portfolio's investments include, but are not limited to, equity and
fixed income securities of any type, as well as the investments described below.
Asset-Backed Securities. The Portfolio may invest in asset-backed
securities. There are risks involved in asset-backed securities. For a
discussion of asset-backed securities and the risks involved therein, see this
Prospectus and the Trust's Statement of Additional Information under "Certain
Risk Factors and Investment Methods."
Cash Reserves. While the Portfolio will remain invested in primarily
common stocks and bonds, it may, for temporary defensive purposes, invest in
reserves without limitation. The Portfolio may establish and maintain reserves
as Sub-advisor believes is advisable to facilitate the Portfolio's cash flow
needs (e.g., redemptions, expenses and purchases of portfolio securities ) or
for temporary, defensive purposes. The Portfolio's reserves will be invested in
domestic and foreign money market instruments rated within the top two credit
categories by a national rating organization, or if unrated, of equivalent
investment quality as determined by the Sub-advisor.
Collateralized Mortgage Obligations (CMOs). There are risks involved in
CMOs. The Portfolio may also invest in CMOs. For a discussion of CMOs and the
risks involved therein, see this Prospectus and the Trust's Statement of
Additional Information under "Certain Risk Factors and Investment Methods."
Stripped Mortgage Securities. Stripped mortgage securities are created
by separating the interest and principal payments generated by a pool of
mortgage-backed bonds to create two classes of securities. Generally, one class
receives interest only payments (IO's) and principal only payments (PO's).
IO's and PO's are acutely sensitive to interest rate changes and to the
rate of principal prepayments. They are very volatile in price and may have
lower liquidity than most mortgage-backed securities. Certain CMO's may also
exhibit these qualities, especially those which pay variable rates of interest
which adjust inversely with and more rapidly than short-term interest rates.
There is no guarantee the Portfolio's investment in CMO's, IO's or PO's will be
successful, and the Portfolio's total return could be adversely affected as a
result.
For an additional discussion of stripped mortgage securities and the
risks involved therein, see this Trust's Prospectus under "Certain Risk Factors
and Investment Methods."
Convertible Securities, Preferred Stocks, and Warrants. The Portfolio
may invest in debt or preferred equity securities convertible into or
exchangeable for equity securities. Preferred stocks are securities that
represent an ownership interest in a corporation providing the owner with claims
on the company's earnings and assets before common stock owners, but after bond
owners. Warrants are options to buy a stated number of shares of common stock at
a specified price any time during the life of the warrants (generally, two or
more years).
Risks of Foreign Currency Fluctuations. Foreign securities of the
Portfolio are subject to currency risk, that is, the risk that the U.S. dollar
value of these securities may be affected favorably or unfavorably by changes in
foreign currency exchange rates and exchange control regulations. To manage this
risk and facilitate the purchase and sale of foreign securities, the Portfolio
will engage in foreign currency transactions involving the purchase and sale of
forward foreign currency exchange contracts. Although foreign currency
transactions will be used primarily to protect the Portfolio from adverse
currency movements, they also involve the risk that anticipated currency
movements will not be accurately predicted and the Portfolio's total return
could be adversely affected as a result. For a discussion of foreign currency
transactions, see this Prospectus and the Trust's Statement of Additional
Information under "Certain Risk Factors and Investment Methods."
Foreign Securities. The Portfolio may invest up to 35% of its total assets
in U.S. dollar-denominated and non U.S. dollar-denominated securities issued by
foreign issuers. Some of the countries in which the Portfolio may invest may be
considered to be developing and may involve special risks. For a discussion of
these risks as well as the risks involved in foreign securities investment in
general, see this Prospectus and the Trust's Statement of Additional Information
under "Certain Risk Factors and Investment Methods."
Futures Contracts and Options. The Portfolio may enter into futures
contracts (or options thereon) to hedge all or a portion of its portfolio, as a
hedge against changes in prevailing levels of interest rates or currency
exchange rates, or as an efficient means of adjusting its exposure to the bond,
stock, and currency markets. The Portfolio will not use futures contracts for
leveraging purposes. The Portfolio will limit its use of futures contracts so
that initial margin deposits and premiums on such contracts used for non-hedging
purposes will not equal more than 5% of the Portfolio's net assets. The
Portfolio may also write call and put options and purchase put and call options
on securities, financial indices, and currencies. The aggregate market value of
the Portfolio's portfolio securities or currencies covering call or put options
will not exceed 25% of the Portfolio's net assets.
Risks of Options and Futures Transactions. For a discussion of futures
contracts and options and the risks involved therein, see this Prospectus under
"Certain Risk Factors and Investment Methods" and the Trust's Statement of
Additional Information under "Investment Objectives and Policies" and "Certain
Risk Factors."
Hybrid Instruments. As part of its investment program and to maintain
greater flexibility, the Portfolio may invest in instruments which have the
characteristics of futures, options and securities. Such instruments may take a
variety of forms, such as debt instruments with interest or principal payments
determined by reference to the value of a currency, securities index or
commodity at a future point in time. The risks of such investments would reflect
both the risks of investing in futures, options and securities, including
volatility and illiquidity. Under certain conditions, the redemption value of a
hybrid instrument could be zero. For a discussion of hybrid securities and the
risks involved therein, see the Trust's Statement of Additional Information
under "Investment Objectives and Policies" and "Certain Risk Factors."
Lending of Portfolio Securities. As a fundamental policy, for the
purpose of realizing additional income, the Portfolio may lend securities with a
value of up to 33 1/3% of its total assets to broker-dealers, institutional
investors, or other persons. Any such loan will be continuously secured by
collateral at least equal to the value of the security loaned. Such lending
could result in delays in receiving additional collateral or in the recovery of
the securities or possible loss of rights in the collateral should the borrower
fail financially. For an additional discussion on limitations on lending and
risks of lending, see this Prospectus under "Certain Risk Factors and Investment
Methods" and the Trust's Statement of Additional Information under "Investment
Objectives and Policies."
Mortgage-Backed Securities. The Portfolio may invest in mortgage-backed
securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities or institutions such as banks, insurance companies and savings
and loans. Some of these securities, such as GNMA certificates, are backed by
the full faith and credit of the U.S. Treasury while others, such as Freddie Mac
certificates, are not. There are risks involved in mortgage-backed securities.
For an additional discussion of mortgage-backed securities, see the Trust's
Statement of Additional Information under "Investment Objectives and Policies"
and "Certain Risk Factors and Investment Methods."
Illiquid Securities. Subject to guidelines promulgated by the Board of
Trustees of the Trust, the Portfolio may acquire illiquid securities (no more
than 15% of net assets). Because an active trading market does not exist for
such securities, the sale of such securities may be subject to delay and
additional costs. The Portfolio will not invest more than 10% of its total
assets in restricted securities (other than securities eligible for resale under
Rule 144A of the Securities Act of 1933). For a discussion of illiquid
securities and the risks involved therein, see this Prospectus under "Certain
Risk Factors and Investment Methods" and the Trust's Statement of Additional
Information under "Investment Objectives and Policies."
Repurchase Agreements. Subject to guidelines promulgated by the Board
of Trustees of the Trust, the Portfolio may enter into repurchase agreements
with a well-established securities dealer or a bank which is a member of the
Federal Reserve System. For a discussion of repurchase agreements and the risks
involved therein, see this Prospectus under "Certain Risk Factors and Investment
Methods" and the Trust's Statement of Additional Information under "Investment
Objectives and Policies."
Portfolio Turnover. The Portfolio will generally trade in securities
(either common stocks or bonds) for short-term profits, but, when circumstances
warrant, securities may be purchased and sold without regard to the length of
time held.
Borrowing. For a discussion of the limitations on borrowing by the
Portfolio and certain risks involved therein, see this Prospectus under "Certain
Risk Factors and Investment Methods."
T. Rowe Price International Equity Portfolio:
Investment Objective: The T. Rowe Price International Equity Portfolio seeks a
total return on its assets from long-term growth of capital and income,
principally through investments in common stocks of established, non-U.S.
companies. Investments may be made solely for capital appreciation or solely for
income or any combination of both for the purpose of achieving a higher overall
return. Total return consists of capital appreciation or depreciation, dividend
income, and currency gains or losses. This is a fundamental investment objective
of the Portfolio.
Investment Policies:
The Portfolio intends to diversify investments broadly among countries
and to normally have at least three different countries represented in the
Portfolio. The Portfolio may invest in countries of the Far East and Western
Europe as well as South Africa, Australia, Canada and other areas (including
developing countries). Under unusual circumstances, the Portfolio may invest
substantially all of its assets in one or two countries.
In seeking its objective, the Portfolio will invest primarily in common
stocks of established foreign companies which have the potential for growth of
capital or income or both. However, the Portfolio may also invest in a variety
of other equity-related securities, such as preferred stocks, warrants and
convertible securities, as well as corporate and governmental debt securities,
when considered consistent with the Portfolio's investment objectives and
program. Under normal market conditions, the Portfolio's investment in
securities other than common stocks is limited to no more than 35% of total
assets. Under exceptional economic or market conditions abroad, the Portfolio
may temporarily invest all or a major portion of its assets in U.S. government
obligations or debt obligations of U.S. companies. The Portfolio will not
purchase any debt security which at the time of purchase is rated below
investment grade. This would not prevent the Portfolio from retaining a security
downgraded to below investment grade after purchase.
The Portfolio may also invest its reserves in domestic as well as
foreign money market instruments. Also, the Portfolio may enter into forward
foreign currency exchange contracts in order to protect against uncertainty in
the level of future foreign exchange rates.
In addition to the investments described below, the Portfolio's
investments may include, but are not limited to, American Depository Receipts
(ADRs), bonds, notes, other debt securities of foreign issuers, and the
securities of foreign investment funds or trusts (including passive foreign
investment companies).
Cash Reserves. While the Portfolio will remain primarily invested in
common stocks, it may, for temporary defensive measures, invest in cash reserves
without limitation. The Portfolio may establish and maintain reserves as
Sub-advisor believes is advisable to facilitate the Portfolio's cash flow needs
(e.g., redemptions, expenses and purchases of portfolio securities) or for
temporary, defensive purposes. The Portfolio's reserves may be invested in
domestic and foreign money market instruments rated within the top two credit
categories by a national rating organization, or if unrated, of equivalent
investment quality as determined by the Sub-advisor.
Convertible Securities, Preferred Stocks, and Warrants. The Portfolio
may invest in debt or preferred equity securities convertible into or
exchangeable for equity securities. Preferred stocks are securities that
represent an ownership interest in a corporation providing the owner with claims
on the company's earnings and assets before common stock owners, but after bond
owners. Warrants are options to buy a stated number of shares of common stock at
a specified price any time during the life of the warrants (generally, two or
more years).
Risks of Currency Fluctuations. The Portfolio will normally conduct its
foreign currency exchange transactions either on a spot (i.e., cash) basis at
the spot rate prevailing in the foreign currency exchange market, or through
entering into forward contracts to purchase or sell foreign currencies. The
Portfolio will generally not enter into a forward contract with a term of
greater than one year.
The Portfolio will generally enter into forward foreign currency
exchange contracts only under two circumstances. First, when the Portfolio
enters into a contract for the purchase or sale of a security denominated in a
foreign currency, it may desire to "lock in" the U.S. dollar price of the
security. Second, when Sub-advisor believes that the currency of a particular
foreign country may suffer or enjoy a substantial movement against another
currency, it may enter into a forward contract to sell or buy the former foreign
currency (or another currency which acts as a proxy for that currency)
approximating the value of some or all of the Portfolio's securities denominated
in such foreign currency. Under certain circumstances, the Portfolio may commit
a substantial portion or the entire value of its portfolio to the consummation
of these contracts. Sub-advisor will consider the effect such a commitment of
its portfolio to forward contracts would have on the investment program of the
Portfolio and the flexibility of the Portfolio to purchase additional
securities. Although forward contracts will be used primarily to protect the
Portfolio from adverse currency movements, they also involve the risk that
anticipated currency movements will not be accurately predicted and the
Portfolio's total return could be adversely affected as a result.
For a discussion of foreign currency contracts and the risks involved
therein, see this Prospectus and the Trust's Statement of Additional Information
under "Certain Risk Factors and Investment Methods."
Futures Contracts and Options. The Portfolio may enter into stock index
or currency futures contracts (or options thereon) to hedge a portion of the
portfolio, to provide an efficient means of regulating the Portfolio's exposure
to the equity markets, or as a hedge against changes in prevailing levels of
currency exchange rates. The Portfolio will not use futures contracts for
leveraging purposes. The Portfolio will limit its use of futures contracts so
that initial margin deposits and premiums on such contracts used for non-hedging
purposes will not equal more than 5% of the Portfolio's net assets. Such
contracts may be traded on U.S. or foreign exchanges. The Portfolio may write
covered call options and purchase put and call options on foreign currencies,
securities, and stock indices. The aggregate market value of the Portfolio's
currencies or portfolio securities covering call or put options will not exceed
25% of the Portfolio's total assets. The Portfolio will not commit more than 5%
of its total assets to premiums when purchasing call or put options.
Risks of Options and Futures Transactions. There are risks involved in
options and futures transactions. For a discussion of futures contracts and
options and the risks involved therein, see this Prospectus and the Trust's
Statement of Additional Information under "Certain Risk Factors and Investment
Methods" and the Trust's Statement of Additional Information under "Investment
Objectives and Policies" and "Certain Risk Factors."
Hybrid Investments. The Portfolio may invest up to 10% of its total
assets in hybrid instruments. As part of its investment program and to maintain
greater flexibility, the Portfolio may invest in instruments which have the
characteristics of futures, options and securities. Such instruments may take a
variety of forms, such as debt instruments with interest or principal payments
determined by reference to the value of a currency, security index or commodity
at a future point in time. The risks of such investments would reflect both the
risks of investing in futures, options, currencies, and securities, including
volatility and illiquidity. Under certain conditions, the redemption value of a
hybrid instrument could be zero. For a discussion of hybrid investments and the
risks involved therein, see the Trust's Statement of Additional Information
under "Investment Objectives and Policies" and "Certain Risk Factors and
Investment Methods."
Passive Foreign Investment Companies. The Portfolio may purchase the
securities of certain foreign investment funds or trusts called passive foreign
investment companies. Such trusts have been the only or primary way to invest in
certain countries. In addition to bearing their proportionate share of the
trusts' expenses (management fees and operating expenses) shareholders will also
indirectly bear similar expenses of such trusts.
Illiquid Securities. Subject to guidelines promulgated by the Board of
Trustees of the Trust, the Portfolio may acquire illiquid securities (no more
than 15% of net assets). The Portfolio will not invest more than 10% of its
total assets in restricted securities (other than securities eligible for resale
under Rule 144A of the Securities Act of 1933). For a discussion of illiquid
securities and the risks involved therein, see this Prospectus under "Certain
Risk Factors and Investment Methods" and the Trust's Statement of Additional
Information under "Investment Objectives and Policies."
Lending of Portfolio Securities. As a fundamental policy, for the
purpose of realizing additional income, the Portfolio may lend securities with a
value of up to 33 1/3% of its total assets to broker-dealers, institutional
investors, or other persons. Any such loan will be continuously secured by
collateral at least equal to the value of the security loaned. For an additional
discussion of limitations on lending and risks of lending, see this Prospectus
under "Certain Risk Factors and Investment Methods" and the Trust's Statement of
Additional Information under "Investment Objectives and Policies."
Repurchase Agreements. Subject to guidelines promulgated by the Board
of Trustees of the Trust, the Portfolio may enter into repurchase agreements
with a well-established securities dealer or a bank which is a member of the
Federal Reserve System. For a discussion of repurchase agreements and the risks
involved therein, see this Prospectus under "Certain Risk Factors and Investment
Methods" and the Trust's Statement of Additional Information under "Investment
Objectives and Policies."
Portfolio Turnover. The Portfolio will not generally trade in
securities for short-term profits, but, when circumstances warrant, securities
may be purchased and sold without regard to the length of time held.
Borrowing. For a discussion of the limitations on borrowing by the
Portfolio and risks involved in borrowing, see this Prospectus under "Certain
Risk Factors and Investment Methods."
T. Rowe Price Natural Resources Portfolio:
Investment Objective: The T. Rowe Price Natural Resources Portfolio's objective
is to seek long-term growth of capital through investment primarily in common
stocks of companies which own or develop natural resources and other basic
commodities. Current income is not a factor in the selection of stocks for
investment by the Portfolio. Total return will consist primarily of capital
appreciation (or depreciation).
Investment Policies:
The Portfolio will invest primarily (at least 65% of its total assets)
in common stocks of companies which own or develop natural resources and other
basic commodities. However, it may also purchase other types of securities, such
as selected, non-resource growth companies, foreign securities, convertible
securities and warrants, when considered consistent with the Portfolio's
investment objective and policies. The Portfolio may also engage in a variety of
investment management practices, such as buying and selling futures and options.
Some of the most important factors evaluated by the Sub-advisor in
selecting natural resource companies are the capability for expanded production,
superior exploration programs and production facilities, and the potential to
accumulate new resources. The Portfolio expects to invest in those natural
resource companies which own or develop energy sources (such as oil, gas, coal
and uranium), precious metals, forest products, real estate, nonferrous metals,
diversified resources, and other basic commodities which, in the opinion of the
Sub-advisor, can be produced and marketed profitably during periods of rising
labor costs and prices. However, the percentage of the Portfolio's assets
invested in natural resource and related businesses versus the percentage
invested in non-resource companies may vary greatly depending upon economic
monetary conditions and the outlook for inflation. The earnings of natural
resource companies may be expected to follow irregular patterns, because these
companies are particularly influenced by the forces of nature and international
politics. Companies which own or develop real estate might also be subject to
irregular fluctuations of earnings, because these companies are affected by
changes in the availability of money, interest rates, and other factors.
In the opinion of the Sub-advisor, inflation represents one of the
major economic problems investors will face over the long term. From the early
1970's through the late 1980's, the inflation rate was considerably above the
average historic levels. Although inflation was slowed in recent years, the
Sub-advisor believes the strenuous efforts required on the part of government,
business, labor, and consumers to control inflation are difficult to maintain
for extended periods - particularly during recessions. Political pressure to
counteract these economic slowdowns often leads to governmental policies which
in turn renew inflationary forces. The investment policies of the Portfolio have
been developed in light of these considerations.
The Portfolio invests in a diversified group of companies whose
earnings and/or value of tangible assets the Sub-advisor expects to grow faster
than the rate of inflation over the long term. The Sub-advisor believes the most
attractive opportunities which satisfy the Portfolio's objective are in
companies which own or develop natural resources and in companies where
management has the flexibility to adjust prices or the ability to control
operating costs.
Common and Preferred Stocks. Stocks represent shares of ownership in a
company. Generally preferred stock has a specified dividend and ranks after
bonds and before common stocks in its claim on income for dividend payments and
on assets should the company be liquidated. After other claims are satisfied,
common stockholders participate in company profits on a pro rata basis; profits
may be paid out in dividends or reinvested in the company to help it grow.
Increases and decreases in earnings are usually reflected in a company's stock
price, so common stocks generally have the greatest appreciation and
depreciation potential of all corporate securities. While most preferred stocks
pay a dividend, the Portfolio may purchase preferred stock where the issuer has
omitted, or is in danger of omitting, payment of its dividend. Such investments
would be made primarily for their capital appreciation potential.
Convertible Securities and Warrants. The Portfolio may invest in debt or
preferred equity securities convertible into or exchangeable for equity
securities. For a discussion of these instruments, see this Prospectus under
"Certain Risk Factors and Investment Methods."
Foreign Securities. The Portfolio may invest up to 50% of its total
assets in foreign securities. These include non-dollar denominated securities
traded outside of the U.S. and dollar denominated securities traded in the U.S.
(such as ADRs). Some of the countries in which the Portfolio may invest may be
considered to be developing and may involve special risks. For a discussion of
these risks as well as the risks involved in foreign securities investments in
general, see this Prospectus and the Trust's Statement of Additional Information
under "Certain Risk Factors and Investment Methods."
Risk of Currency Fluctuations. The Portfolio will normally conduct its
foreign currency exchange transactions either on a spot (i.e., cash) basis at
the spot rate prevailing in the foreign currency exchange market, or through
entering into forward contracts to purchase or sell foreign currencies. The
Portfolio will generally not enter into a forward contract with a term of
greater than one year.
The Portfolio will generally enter into forward foreign currency
exchange contracts only under two circumstances. First, when the Portfolio
enters into a contract for the purchase or sale of a security denominated in a
foreign currency, it may desire to "lock in" the U.S. dollar price of the
security. Second, when the Sub-advisor believes that the currency of a
particular foreign country may suffer or enjoy a substantial movement against
another currency, it may enter into a forward contract to sell or buy the former
foreign currency (or another currency which acts as a proxy for that currency)
approximating the value of some or all of the Portfolio's securities denominated
in such foreign currency. Under certain circumstances, the Portfolio may commit
a substantial portion or the entire value of its portfolio to the consummation
of these contracts. The Sub-advisor will consider the effect such a commitment
of its portfolio to forward contracts would have on the investment program of
the Portfolio and the flexibility of the Portfolio to purchase additional
securities. Although forward contracts will be used primarily to protect the
Portfolio from adverse currency movements, they also involve the risk that
anticipated currency movements will not be accurately predicted and the
Portfolio's total return could be adversely affected as a result.
For a discussion of foreign currency contracts and the risks involved
therein, see this Prospectus and the Trust's Statement of Additional Information
under "Certain Risk Factors and Investment Methods."
Fixed Income Securities. The Portfolio may invest in debt securities of
any type without regard to quality or rating. Such securities would be purchased
in companies which meet the investment criteria for the Portfolio. The price of
a bond fluctuates with changes in interest rates, rising when interest fall and
falling when interest rise.
Stripped Mortgage Securities. Stripped mortgage securities are created
by separating the interest and principal payments generated by a pool of
mortgage-backed bonds to create two classes of securities. Generally, one class
receives interest only payments (IO's) and principal only payments (PO's). The
Portfolio will treat IOs and POs, other than government-issued IOs or POs backed
by fixed rate mortgages, as illiquid securities and, accordingly, limit its
investments in such securities, together with all other illiquid securities, to
15% of the Portfolio's net assets.
IO's and PO's are acutely sensitive to interest rate changes and to the
rate of principal prepayments. They are very volatile in price and may have
lower liquidity than most mortgage-backed securities. Certain CMO's may also
exhibit these qualities, especially those which pay variable rates of interest
which adjust inversely with and more rapidly than short-term interest rates.
There is no guarantee the Portfolio's investment in CMO's, IO's or PO's will be
successful, and the Portfolio's total return could be adversely affected as a
result.
For an additional discussion of stripped mortgage securities and the
risks involved therein, see this Trust's Prospectus under "Certain Risk Factors
and Investment Methods."
High-Yield/High-Risk Investing. The Portfolio will not purchase a
non-investment grade debt security (or junk bond) if immediately after such
purchase the Portfolio would have more than 10% of its total assets invested in
such securities. The total return and yield of lower quality (high-yield/high
risk) bonds, commonly referred to as "junk bonds," can be expected to fluctuate
more than the total return and yield of higher quality, shorter-term bonds, but
not as much as common stocks. Junk bonds are regarded as predominantly
speculative and high risk with respect to the issuer's continuing ability to
meet principal and interest payments. See this Prospectus and the Trust's
Statement of Additional Information under "Certain Risk Factors and Investment
Methods" for a discussion of the risks involved in investing in high-yield
lower-rated debt securities.
Hybrid Instruments. The Portfolio may invest up to 10% of its total
assets in hybrid instruments. As part of its investment program and to maintain
greater flexibility, the Portfolio may invest in instruments which have the
characteristics of futures, options and securities. Such instruments may take a
variety of forms, such as debt instruments with interest or principal payments
determined by reference to the value of a currency, security index or commodity
at a future point in time. The risks of such investments would reflect both the
risks of investing in futures, options, currencies, and securities, including
volatility and illiquidity. Under certain conditions, the redemption value of a
hybrid instrument could be zero. For a discussion of hybrid investments, see the
Trust's Statement of Additional Information under "Certain Risk Factors and
Investment Methods."
Illiquid Securities. Subject to guidelines promulgated by the Board of
Trustees of the Trust, the Portfolio may acquire illiquid securities (no more
than 15% of net assets). For a discussion of illiquid securities and the risks
involved therein, see this Prospectus under "Certain Risk Factors and Investment
Methods" and the Trust's Statement of Additional Information under "Investment
Objectives and Policies."
Private Placements (Restricted Securities). These securities are sold
directly to a small number of investors, usually institutions. Unlike public
offerings, such securities are not registered with the SEC. Although certain of
these securities may be readily sold, for example under Rule 144A, the sale of
others may involve substantial delays and additional costs. Subject to
guidelines promulgated by the Board of Trustees of the Trust, the Portfolio will
not invest more than 15% of its net assets in illiquid securities, but not more
than 10% of its total assets in restricted securities (other than Rule 144A
securities). For a discussion of illiquid or restricted securities and the risks
involved therein, see this Prospectus and the Trust's Statement of Additional
Information under "Certain Risk Factors and Investment Methods."
Cash Position. The Portfolio will hold a certain portion of its assets
in U.S. and foreign dollar-denominated money market securities, including
repurchase agreements, in the two highest rating categories, maturing in one
year or less. For temporary, defensive purposes, the Portfolio may invest
without limitation in such securities. This reserve position provides
flexibility in meeting redemptions, expenses, and the timing of new investments,
and serves as a short-term defense during periods of unusual market volatility.
Borrowing. The Portfolio can borrow money from banks as a temporary
measure for emergency purposes, to facilitate redemption requests, or for other
purposes consistent with the Portfolio's investment objectives and policies.
Such borrowings may be collateralized with fund assets, subject to restrictions.
For a discussion of limitations on borrowing by the Portfolio and certain risks
involved therein, see this Prospectus under "Certain Risk Factors and Investment
Methods."
Futures and Options. The Portfolio may buy and sell futures contracts
(and options on such contracts) to manage its exposure to certain markets. The
Portfolio may purchase, sell or write call and put options on securities,
financial indices, and foreign currencies. The Portfolio may enter into stock
index or currency futures contracts (or options thereon) to hedge a portion of
the portfolio, to provide an efficient means of regulating the Portfolio's
exposure to the equity markets, or as a hedge against changes in prevailing
levels of currency exchange rates. The Portfolio will not use futures contracts
for leveraging purposes. The Portfolio will limit its use of futures contracts
so that initial margin deposits or premiums on such contracts used for
non-hedging purposes will not equal more than 5% of the Portfolio's net asset
value. Such contracts may be traded on U.S. or foreign exchanges. The Portfolio
may write covered call options and purchase put and call options on foreign
currencies, securities, and stock indices. The total market value of the
Portfolio's currencies or portfolio securities covering call or put options will
not exceed 25% of the Portfolio's total assets. The Portfolio will not commit
more than 5% of its total assets in premium when purchasing call or put options.
Risks of Options and Futures Transactions. There are risks involved in
options and futures transactions. For a discussion of futures contracts and
options and the risks involved therein, see this Prospectus and the Trust's
Statement of Additional Information under "Certain Risk Factors and Investment
Methods."
Lending of Portfolio Securities. As a fundamental policy, for the
purpose of realizing additional income, the Portfolio may lend securities with a
value of up to 33 1/3% of its total assets to broker-dealers, institutional
investors, or other persons. Any such loan will be continuously secured by
collateral at least equal to the value of the security loaned. For an additional
discussion on limitations in lending and the risks of lending, see this
Prospectus under "Certain Risk Factors and Investment Methods" and the Trust's
Statement of Additional Information under "Investment Objectives and Policies."
Portfolio Turnover. The Portfolio will not generally trade in
securities for short-term profits, but, when circumstances warrant, securities
may be purchased and sold without regard to the length of time held.
T. Rowe Price International Bond Portfolio:
Investment Objective: The Portfolio seeks to provide high current income and
capital appreciation by investing in high-quality, non dollar-denominated
government and corporate bonds outside the United States. This is a fundamental
objective of the Portfolio.
Special Risk Considerations. The Portfolio is intended for long-term
investors who can accept the risks associated with investing in international
bonds. Total return consists of income after expenses, bond price gains (or
losses) in terms of the local currency and currency gains (or losses). The value
of the Portfolio will fluctuate in response to various economic factors, the
most important of which are fluctuations in foreign currency exchange rates and
interest rates.
Because the Portfolio's investments are primarily denominated in
foreign currencies, exchange rates are likely to have a significant impact on
total Portfolio performance. For example, a fall in the U.S. dollar's value
relative to the Japanese yen will increase the U.S. dollar value of a Japanese
bond held in the Portfolio, even though the price of that bond in yen terms
remains unchanged. Conversely, if the U.S. dollar rises in value relative to the
yen, the U.S. dollar value of a Japanese bond will fall. Investors should be
aware that exchange rate movements can be significant and endure for long
periods of time.
The Sub-advisor's techniques include management of currency, bond
market and maturity exposure and security selection which will vary based on
available yields and the Sub-advisor's outlook for the interest rate cycle in
various countries and changes in foreign currency exchange rates. In any of the
markets in which the Portfolio invests, longer maturity bonds tend to fluctuate
more in price as interest rates change than shorter-term instruments-again
providing both opportunity and risk.
Because of the Portfolio's long-term investment objectives, investors
should not rely on an investment in the Portfolio for their short-term financial
needs and should not view the Portfolio as a vehicle for playing short-term
swings in the international bond and foreign exchange markets. Shares of the
Portfolio alone should not be regarded as a complete investment program. Also,
investors should be aware that investing in international bonds may involve a
higher degree of risk than investing in U.S. bonds.
Investments in foreign securities involve special considerations. For a
discussion of the risks involved in investing in foreign securities, see this
Prospectus and the Trust's Statement of Additional Information under "Certain
Risk Factors and Investment Methods."
Investment Policies:
To achieve its objectives, the Portfolio will invest at least 65% of
its assets in high-quality, non dollar-denominated government and corporate
bonds outside the United States. The Portfolio also seeks to moderate price
fluctuation by actively managing its maturity structure and currency exposure.
The Sub-advisor bases its investment decisions on fundamental market factors,
currency trends, and credit quality. The Portfolio generally invests in
countries where the combination of fixed-income returns and currency exchange
rates appears attractive, or, if the currency trend is unfavorable, where the
currency risk can be minimized through hedging.
Although the Portfolio expects to maintain an intermediate to long
weighted average maturity, it has no maturity restrictions on the overall
portfolio or on individual securities. Normally, the Portfolio does not hedge
its foreign currency exposure back to the dollar, nor involve more than 50% of
total assets in cross hedging transactions. Therefore, changes in foreign
interest rates and currency exchange rates are likely to have a significant
impact on total return and the market value of portfolio securities. Such
changes provide greater opportunities for capital gains and greater risks of
capital loss. The Sub-advisor attempts to reduce these risks through
diversification among foreign securities and active management of maturities and
currency exposures.
The Portfolio may also invest up to 20% of its assets in below
investment-grade, high-risk bonds, including bonds in default or those with the
lowest rating. Defaulted bonds are acquired only if the Sub-advisor foresees the
potential for significant capital appreciation. Securities rated below
investment-grade are commonly referred to as "junk bonds" and involve greater
price volatility and higher degrees of speculation with respect to the payment
of principal and interest than higher quality fixed-income securities. The
market prices of such lower-rated debt securities may decline significantly in
periods of general economic difficulty. In addition, the trading market for
these securities is generally less liquid than for higher rated securities and
the Portfolio may have difficulty disposing of these securities at the time it
wishes to do so. The lack of a liquid secondary market for certain securities
may also make it more difficult for the Portfolio to obtain accurate market
quotations for purposes of valuing its portfolio and calculating its net asset
value. For a discussion of the risks involved in lower-rated debt securities,
see this Prospectus and the Trust's Statement of Additional Information under
"Certain Risk Factors and Investment Methods."
The Portfolio's investments may include:
Debt securities issued or guaranteed by a foreign national government,
its agencies, instrumentalities or political subdivisions; debt securities
issued or guaranteed by supranational organizations (e.g., European Investment
Bank, InterAmerican Development Bank or the World Bank); corporate debt
securities; bank or bank holding company debt securities; other debt securities,
including those convertible into common stock.
The Portfolio may invest in zero coupon securities which pay no cash
income and are sold at substantial discounts from their value at maturity. When
held to maturity, their entire income, which consists of accretion of discount,
comes from the difference between the issue price and their value at maturity.
Zero coupon securities are subject to greater market value fluctuations from
changing interest rates than debt obligations of comparable maturities which
make current cash distribution of interest. For a discussion of zero coupon
securities, see the Trust's Statement of Additional Information under "Certain
Risk Factors and Investment Methods."
The Portfolio may purchase securities which are not publicly offered.
If such securities are purchased, they may be subject to restrictions applicable
to restricted securities. For a discussion of the risks involved with restricted
securities, see this Prospectus under "Certain Risk Factors and Investment
Methods."
The Portfolio intends to select its investments from a number of
country and market sectors. It may substantially invest in the issuers in one or
more countries and intends to have investments in securities of issuers from a
minimum of three different countries. The Portfolio may invest 15% of its net
assets in illiquid securities and securities of unseasoned issuers. For
temporary defensive or emergency purposes, however, the Portfolio may invest
without limit in U.S. debt securities, including short-term money market
securities. It is impossible to predict for how long such alternative strategies
will be utilized.
Short-Term Investments. To protect against adverse movements of
interest rates and for liquidity, the Portfolio may also purchase short-term
obligations denominated in U.S. and foreign currencies (including the ECU) such
as, but not limited to, bank deposits, bankers' acceptances, certificates of
deposit, commercial paper, short-term government, government agency,
supranational agency and corporate obligations, and repurchase agreements.
Nondiversified Investment Company. The Portfolio may invest more than
5% of its assets in the fixed-income securities of individual foreign
governments. The Portfolio generally will not invest more than 5% of its assets
in any individual corporate issuer, provided that (1) a fund may place assets in
bank deposits or other short-term bank instruments with a maturity of up to 30
days provided that (i) the bank has a short-term credit rating of A1+ (or, if
unrated, the equivalent as determined by the Sub-advisor) and (ii) the Portfolio
may not maintain more than 10% of its total assets with any single bank; and (2)
the Portfolio may maintain more than 5% of its total assets, including cash and
currencies, in custodial accounts or deposits of the Trust's custodian or
sub-custodians. In addition, the Portfolio intends to qualify as a regulated
investment company for purposes of the Internal Revenue Code. Such qualification
requires the Portfolio to limit its investments so that, at the end of each
calendar quarter, with respect to at least 50% of its total assets, not more
than 5% of such assets are invested in the securities of a single issuer, and
with respect to the remaining 50%, no more than 25% is invested in a single
issuer. Since, as a nondiversified investment company, the Portfolio is
permitted to invest a greater proportion of its assets in the securities of a
smaller number of issuers, the Portfolio may be subject to greater credit risk
with respect to its portfolio securities than an investment company that is more
broadly diversified.
Brady Bonds. The Portfolio may invest in Brady Bonds. Brady bonds,
named after former U.S. Secretary of the Treasury Nicholas Brady, are used as a
means of restructuring the external debt burden of a government in certain
emerging markets. A Brady bond is created when an outstanding commercial bank
loan to a government or private entity is exchanged for a new bond in connection
with a debt restructuring plan. Brady bonds may be collateralized or
uncollateralized and issued in various currencies (although typically in the
U.S. dollar). They are often fully collateralized as to principal in U.S.
Treasury zero coupon bonds. However, even with this collateralization feature,
Brady Bonds are often considered speculative, below investment grade investments
because the timely payment of interest is the responsibility of the issuing
party (for example, a Latin American country) and the value of the bonds can
fluctuate significantly based on the issuer's ability or perceived ability to
make these payments. Finally, some Brady Bonds may be structured with floating
rate or low fixed rate coupons. The Portfolio does not expect to have more than
10% of its total assets invested in Brady Bonds.
Repurchase Agreements. Subject to guidelines promulgated by the Board
of Trustees of the Trust, the Portfolio may enter into repurchase agreements
with well-established securities dealers or a bank that is a member of the
Federal Reserve System. For a discussion of repurchase agreements and the risks
involved therein, see this Prospectus under "Certain Risk Factors and Investment
Methods."
When-Issued or Delayed Delivery Securities. The Portfolio may purchase
securities on a when-issued or forward delivery basis, for payment and delivery
at a later date. The price and yield are generally fixed on the date of
commitment to purchase. During the period between purchase and settlement, no
interest accrues to the Portfolio. At the time of settlement, the market value
of the security may be more or less than the purchase price. For an additional
discussion of when-issued securities and the risks involved therein, see the
Trust's Statement of Additional Information under "Certain Risk Factors and
Investment Methods."
Passive Foreign Investment Companies. The Fund may purchase the
securities of certain foreign investment funds or trusts called passive foreign
investment companies. Such trusts have been the only or primary way to invest in
certain countries. In addition to bearing their proportionate share of the
trusts' expenses (management fees and operating expenses) shareholders will also
indirectly bear similar expenses of such trusts.
Hybrid Instruments. The Portfolio may invest up to 10% of its total
assets in hybrid instruments. As part of its investment program and to maintain
greater flexibility, the Portfolio may invest in instruments which have the
characteristics of futures, options and securities. Such instruments may take a
variety of forms, such as debt instruments with interest or principal payments
determined by reference to the value of a currency, securities index or
commodity at a future point in time. The risks of such investments would reflect
both the risks of investing in futures, options and securities, including
volatility and illiquidity. Under certain conditions, the redemption value of a
hybrid instrument could be zero. For a discussion of hybrid securities and the
risks involved therein, see the Trust's Statement of Additional Information
under "Certain Risk Factors and Investment Methods."
Foreign Currency Transactions. The Portfolio may engage in foreign
currency transactions either on a spot (cash) basis at the rate prevailing in
the currency exchange market at the time or through forward currency contracts
("forwards") with terms generally of less than one year. Forwards will be used
primarily to adjust the foreign exchange exposure of the Portfolio with a view
to protecting the Portfolio from adverse currency movements, based on the
Sub-advisor's outlook, and the Portfolio might be expected to enter into such
contracts under the following circumstances:
Lock In. When management desires to lock in the U.S. dollar price on the
purchase or sale of a security denominated in a foreign currency.
Cross Hedge. If a particular currency is expected to decrease
against another currency, the Portfolio may sell the currency expected to
decrease and purchase a currency which is expected to increase against the
currency sold in an amount approximately equal to some or all of the Portfolio's
holdings denominated in the currency sold.
Proxy Hedge. The Sub-advisor might choose to use a proxy
hedge, where the Portfolio, having purchased a bond, will sell a currency whose
value is believed to be closely linked to the currency in which the bond is
denominated. Interest rates prevailing in the country whose currency was sold
would be expected to be closer to those in the U.S. and lower than those of
bonds denominated in the currency of the original holding. This type of hedging
entails greater risk than a direct hedge because it is dependent on a stable
relationship between the two currencies paired as proxies and the relationships
can be very unstable at times.
For an additional discussion of foreign currency exchange contracts and
the risks involved therein, see this Prospectus and the Trust's Statement of
Additional Information under "Certain Risk Factors and Investment Methods."
Costs of Hedging. When the Portfolio purchases a foreign bond with a
higher interest rate than is available on U.S. bonds of a similar maturity, the
additional yield on the foreign bond could be substantially lost if the fund
were to enter into a direct hedge by selling the foreign currency and purchasing
the U.S. dollar. This is what is known as the "cost" of hedging. Proxy hedging
attempts to reduce this cost through an indirect hedge back to the U.S. dollar.
It is important to note that hedging costs are treated as capital transactions
and are not, therefore, deducted from the Portfolio's dividend distribution and
are not reflected in its yield. Instead such costs will, over time, be reflected
in the Portfolio's net asset value per share.
Futures and Options. The Portfolio may buy and sell futures and options
contracts for any number of reasons including: to manage their exposure to
changes in interest rates, securities prices and foreign currencies; as an
efficient means of adjusting overall exposure to certain markets; to enhance
income; to protect the value of portfolio securities; and to adjust the
portfolio's duration. The Portfolio may purchase, sell, or write call and put
options on securities, financial indices, and foreign currencies.
The Portfolio will limit its use of futures contracts so that initial
margin deposits and premiums on options used for non-hedging purposes will not
equal more than 5% of the Portfolio's net asset value. The total market value of
securities against which the Portfolio has written call or put options may not
exceed 25% of its total assets. The Portfolio will not commit more than 5% of
its total assets to premiums when purchasing call or put options.
Risks in Futures and Options Transactions. There are risks involved in
futures and options transactions. For a discussion of such transactions and the
risks involved therein, see this Prospectus and the Trust's Statement of
Additional Information under "Certain Risk Factors and Investment Methods."
Borrowing. For a discussion of the limitations on borrowing by the
Portfolio and certain risks involved therein, see this Prospectus under "Certain
Risk Factors and Investment Methods."
Founders Capital Appreciation Portfolio:
Investment Objective: The investment objective of the Founders Capital
Appreciation Portfolio is capital appreciation. This is a fundamental objective
of the Portfolio.
Investment Policies:
To achieve its objective, the Portfolio will normally invest at least
65% of its total assets in common stocks of U.S. companies with market
capitalizations of $1.5 billion or less. Market capitalization is a measure of
the size of a company and is based upon the total market value of a company's
outstanding equity securities. Ordinarily, the common stocks of the U.S.
companies selected for this Portfolio will not be listed on a national
securities exchange but will be traded in the over-the-counter market.
Companies selected for investment generally will be small corporations
still in the developing stages of their life cycles that are able to achieve
rapid growth in both sales and earnings. Capable management and fertile
operating areas are two of the most important characteristics of such companies.
In addition, these companies should employ sound financial and accounting
policies; demonstrate effective research and successful product development;
provide efficient services; and possess pricing flexibility.
Risks of Small Cap Investing. Investments in such companies may involve
greater risk than is associated with more established companies. Smaller
companies often have limited product lines, markets or financial resources, and
may be dependent upon one-person management. Securities of smaller companies may
have limited marketability and may be subject to more abrupt or erratic
movements in prices than securities of larger companies or the market averages
in general. Therefore, the net asset value of the Portfolio may fluctuate more
widely than the popular market averages.
Fixed Income Securities. The Portfolio may invest in convertible
securities, preferred stocks, bonds, debentures, and other corporate obligations
when the Sub-advisor believes that these investments offer opportunities for
capital appreciation. Current income will not be a substantial factor in the
selection of these securities. Bonds, debentures, and corporate obligations
other than convertible securities and preferred stock purchased by the Portfolio
will be rated at or above investment grade at the time of purchase (Baa or
higher by Moody's Investors Service, Inc. ("Moody's") or BBB or higher by
Standard & Poor's Corporation ("S&P")). Bonds in the lowest investment grade
category (Baa or BBB) may have speculative characteristics, with changes in the
economy or other circumstances more likely to lead to a weakened capacity of the
bonds to make principal and interest payments than would occur with bonds rated
in higher categories. Convertible securities and preferred stocks purchased by
the Portfolio may be rated in medium and lower categories by Moody's or S&P (Ba
or lower by Moody's and BB or lower by S&P), but will not be rated lower than B.
The Portfolio may also invest in unrated convertible securities and preferred
stocks in instances in which the Sub-advisor believes that the financial
condition of the issuer or the protection afforded by the terms of the
securities limits risk to a level similar to that of securities eligible for
purchase by the Portfolio rated in categories no lower than B. Securities rated
B are referred to as "high risk" securities, generally lack characteristics of a
desirable investment, and are deemed speculative with respect to the issuer's
capacity to pay interest and repay principal over a long period of time. At no
time will the Portfolio have more than 5% of its assets invested in any
fixed-income securities which are unrated or are rated below investment grade
either at the time of purchase or as a result of a reduction in rating after
purchase. For a description of ratings of securities, see the Appendix to the
Trust's Statement of Additional Information. For a discussion of the special
risks involved in lower-rated debt securities, see this Prospectus and the
Trust's Statement of Additional Information under "Certain Risk Factors and
Investment Methods."
Foreign Securities. The Portfolio may invest in dollar-denominated
American Depository Receipts which are traded on exchanges or over-the-counter
in the United States without limit, and in foreign securities. The term "foreign
securities" refers to securities of issuers, wherever organized, which in the
judgment of the Sub-advisor have their principal business activities outside of
the United States. The determination of whether an issuer's principal activities
are outside of the United States will be based on the location of the issuer's
assets, personnel, sales, and earnings, and specifically on whether more than
50% of the issuer's assets are located, or more than 50% of the issuer's gross
income is earned, outside of the United States.
Foreign investments may include securities issued by countries not
considered to be major industrialized nations. Such countries are subject to
more economic, political and business risk than major industrialized nations and
the securities they issue are expected to be more volatile and more uncertain as
to payment of interest and principal. The secondary market for such securities
is expected to be less liquid than for securities of major industrialized
nations. Examples of such countries include, but are not limited to: Argentina,
Australia, Austria, Belgium, Bolivia, Brazil, Chile, China, Colombia, Costa
Rica, Czech Republic, Denmark, Ecuador, Egypt, Finland, Greece, Hong Kong,
Hungary, India, Indonesia, Ireland, Italy, Israel, Jordan, Malaysia, Mexico,
Netherlands, New Zealand, Nigeria, North Korea, Norway, Pakistan, Paraguay,
Peru, Philippines, Poland, Portugal, Singapore, Slovak Republic, South Africa,
South Korea, Spain, Sri Lanka, Sweden, Switzerland, Taiwan, Thailand, Turkey,
Uruguay, Venezuela, Vietnam and the countries of the former Soviet Union.
Investments may include securities created through the Brady Plan, a program
under which heavily indebted countries have restructured their bank debt into
bonds. Since the Portfolio will pay dividends in dollars, it may incur currency
conversion costs. The Portfolio will not invest more than 25% of its total
assets in any one foreign country.
Foreign Securities Risks. Investments in foreign securities involve
certain risks which are not typically associated with U.S. investments. Since a
portion of the Portfolio's assets may be invested in foreign securities and some
of its revenue received in foreign currencies, the Portfolio's net asset value
may be affected by changes in currency exchange rates. For a discussion of the
special risks involved in investing in developing countries and the risks
involved in foreign investing, in general, see this Prospectus and the Trust's
Statement of Additional Information under "Certain Risk Factors and Investment
Methods."
Risk of Currency Fluctuations. The value of Portfolio investments
denominated in foreign currencies may be affected, favorably or unfavorably, by
the relative strength of the U.S. dollar, changes in foreign currency and U.S.
dollar exchange rates and exchange control regulations. The Portfolio's net
asset value per share will be affected by changes in currency exchange rates.
Changes in foreign currency exchange rates may also affect the value of
dividends and interest earned, gains and losses realized on the sale of
securities and net investment income and gains, if any, to be distributed to
shareholders by the Portfolio. The rate of exchange between the U.S. dollar and
other currencies is determined by the forces of supply and demand in the foreign
exchange markets and in some cases, exchange controls. For an additional
discussion of the risks of currency fluctuations, see this Prospectus and
Trust's Statement of Additional Information under "Certain Risk Factors and
Investment Methods."
Foreign Currency Exchange Contracts. The Portfolio is permitted to use
forward foreign currency contracts in connection with the purchase or sale of a
specific security. For a discussion of foreign currency transactions, see this
Prospectus and the Trust's Statement of Additional Information under "Certain
Risk Factors and Investment Methods."
The Portfolio may conduct its foreign currency exchange transactions on
a spot (i.e., cash) basis at the spot rate prevailing in the foreign exchange
currency market, or on a forward basis to "lock in" the U.S. dollar price of the
security. By entering into a forward contract for the purchase or sale, for a
fixed amount of U.S. dollars, of the amount of foreign currency involved in the
underlying transactions, the Portfolio attempts to protect itself against
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 and the date on which such
payments are made or received.
In addition, the Portfolio may enter into forward contracts for hedging
purposes. When the Sub-advisor believes that the currency of a particular
foreign country may suffer a substantial decline against the U.S. dollar (or
sometimes against another currency), the Portfolio may enter into forward
contracts to sell, for a fixed dollar or other currency amount, foreign currency
approximating the value of some or all of the its securities denominated in that
currency. The precise matching of the forward contract amounts and the value of
the securities involved will not generally be possible. The future value of such
securities in foreign currencies changes as a consequence of market movements in
the value of those securities between the date on which the contract is entered
into and the date it expires.
The Portfolio generally will not enter into forward contracts with a
term greater than one year, or enter into forward contracts or maintain a net
exposure to such contracts where the fulfillment of the contracts would require
the Portfolio to deliver an amount of foreign currency in excess of the value of
its securities or other assets denominated in that currency. Under normal
circumstances, consideration of the possibility of changes in currency exchange
rates will be incorporated into the Portfolio's long-term investment strategies.
While forward contracts will be traded to attempt to reduce certain
risks, trading in forward contracts itself entails certain other risks. Thus,
while the Portfolio may benefit from the use of such contracts, if the
Sub-advisor is incorrect in its forecast of currency prices, a poorer overall
performance may result than if it had not entered into any forward contracts.
Some forward contracts may not have a broad and liquid market, in which case the
contracts may not be able to be closed at a favorable price. Moreover, in the
event of an imperfect correlation between the forward contract and the portfolio
position which is intended to be protected, the desired protection may not be
obtained. For an additional discussion of currency contracts and the risks of
foreign currency fluctuations, see this Prospectus and the Trust's Statement of
Additional Information "Certain Risk Factors and Investment Methods."
Temporary Investments. The Portfolio may invest up to 10% of its assets
for temporary defensive purposes in U.S. government obligations, commercial
paper, bank obligations, repurchase agreements relating to each of these
securities, negotiable U.S. dollar-denominated obligations of domestic and
foreign branches of U.S. depository institutions, U.S. branches of foreign
depository institutions, and foreign depository institutions, cash, or in other
cash equivalents, if the Sub-advisor determines it to be appropriate for
purposes of enhancing liquidity or preserving capital in light of prevailing
market or economic conditions. There can be no assurance that the Portfolio will
be able to achieve its investment objective; however, while it is in a defensive
position, the opportunity to achieve capital growth will be limited; moreover,
to the extent that this assessment of market conditions is incorrect, the
Portfolio will be foregoing the opportunity to benefit from capital growth
resulting from increases in the value of equity investments.
U.S. government obligations include Treasury bills, notes and bonds,
and issues of United States agencies, authorities and instrumentalities. Some
government obligations, such as Government National Mortgage Association
pass-through certificates, are supported by the full faith and credit of the
United States Treasury. Other obligations, such as securities of the Federal
Home Loan Banks, are supported by the right of the issuer to borrow from the
United States Treasury; and others, such as bonds issued by Federal National
Mortgage Association (a private corporation), are supported only by the credit
of the agency, authority or instrumentality.
The obligations of foreign branches of U.S. depository institutions may
be general obligations of the parent depository institution in addition to being
an obligation of the issuing branch. These obligations, and those of foreign
depository institutions, may be limited by the terms of the specific obligation
and by governmental regulation. The payment of these obligations, both interest
and principal, may also be affected by governmental action in the country of
domicile of the institution or branch, such as imposition of currency controls
and interest limitations. In connection with these investments, the Portfolio
will be subject to the risks associated with the holding of portfolio securities
overseas, such as possible changes in investment or exchange control
regulations, expropriation, confiscatory taxation, or political or financial
instability.
Obligations of U.S. branches of foreign depository institutions may be
general obligations of the parent depository institution in addition to being an
obligation of the issuing branch, or may be limited by the terms of a specific
foreign regulation applicable to the depository institutions and by government
regulation (both domestic and foreign).
Repurchase Agreements. Subject to guidelines promulgated by the Board
of Trustees of the Trust, the Portfolio may enter into repurchase agreements.
The Portfolio may enter into repurchase agreements with banks or
well-established securities dealers meeting the criteria established by the
Sub-advisor. All repurchase agreements entered into by the Portfolio will be
fully collateralized and marked to market daily. The Portfolio has not adopted
any limits on the amount of its total assets that may be invested in repurchase
agreements which mature in less than seven days. For a discussion of repurchase
agreements and the risks involved therein, see this Prospectus under "Certain
Risk Factors and Investment Methods."
Illiquid Securities. Subject to guidelines promulgated by the Board of
Trustees of the Trust, the Portfolio may invest up to 15% of the market value of
its assets in securities which are not readily marketable, including repurchase
agreements maturing in more than seven days and foreign securities not listed on
a recognized foreign or domestic exchange. The Portfolio may invest in Rule 144A
securities (securities issued in offerings made pursuant to Rule 144A under the
Securities Act of 1933), which may or may not be deemed to be readily
marketable. Factors which may be considered by Sub-advisor in evaluating whether
such a security is readily marketable include eligibility for trading, trading
activity, dealer interest, purchase interest, and ownership transfer
requirements. The Sub-advisor is required to monitor the readily marketable
nature of each Rule 144A security no less frequently than weekly. The Portfolio
may invest up to 5% of the market value of its respective assets in restricted
securities.
For an additional discussion of illiquid or restricted securities and
the risks involved therein, see this Prospectus under "Certain Risk Factors and
Investment Methods" and the Trust's Statement of Additional Information under
"Investment Options and Policies."
Borrowing. The Portfolio may borrow money from banks for extraordinary
or emergency purposes in amounts up to 10% of its net assets. While any
borrowings are outstanding, no purchases of securities will be made. For a
discussion of limitations on borrowing by the Portfolio and risks involved in
borrowing, see this Prospectus under "Certain Risk Factors and Investment
Methods."
Futures Contracts and Options. Other than as is limited in this
section, the Portfolio may enter into futures contracts for the purpose of
hedging all or a portion of its investment portfolios, for the purpose of
hedging against changes in prevailing levels of interest rates or currency
exchange rates, or as an efficient means of adjusting its exposure to the bond,
stock and currency markets. The Portfolio will not use futures contracts for
speculation or leveraging, and will limit its use of futures contracts so that
no more than 5% of its total assets will be committed to initial margin deposits
or premiums on such contracts. The Portfolio may purchase put and call options
on securities, financial indices, and currencies. Futures contracts and options
can be highly volatile and could result in reduction of the Portfolio's total
return, and any attempt to use such investments for hedging purposes may not be
successful.
Risks of Futures Contracts and Options. There are risks involved in
futures and options contracts. For a discussion of futures contracts and options
and the risks involved therein, see this Prospectus under "Certain Risk Factor
and Investment Methods" and the Trust's Statement of Additional Information
under "Investment Objectives and Policies" and "Certain Risk Factors and
Investment Methods."
Portfolio Turnover. The Portfolio reserves the right to sell its
securities, regardless of the length of time that they have been held, when it
is determined by the Sub-advisor that those securities have attained or are
unable to meet the investment objective of the Portfolio. The Portfolio may
engage in short-term trading and therefore normally will have annual portfolio
turnover rates in excess of 100%. Such portfolio turnover rates, which are
considered to be high, often may be greater than those of other investment
companies seeking capital appreciation. Such turnover rates would cause the
Portfolio to incur greater brokerage commissions than would otherwise be the
case. Such turnover rates may also generate larger taxable income and taxable
capital gains than would result from lower portfolio turnover rates, and may
create higher tax liability for the Portfolio's shareholders. A 100% portfolio
turnover rate would occur if all of the securities in the portfolio were
replaced during the period.
INVESCO Equity Income Portfolio:
Investment Objective: The investment objective of the INVESCO Equity Income
Portfolio is to seek high current income while following sound investment
practices. This is a fundamental investment objective of the Portfolio. Capital
growth potential is an additional, but secondary, consideration in the selection
of portfolio securities.
Investment Policies:
The Portfolio seeks to achieve its objective by investing in securities
which will provide a relatively high-yield and stable return and which, over a
period of years, may also provide capital appreciation. The Portfolio normally
will invest between 60% and 75% of its assets in dividend-paying, marketable
common stocks of domestic and foreign industrial issuers. The Portfolio also
will invest in convertible bonds, preferred stocks and debt securities. In
periods of uncertain market and economic conditions, as determined by the Board
of Trustees, the Portfolio may depart from the basic investment objective and
assume a defensive position with up to 50% of its assets temporarily invested in
high quality corporate bonds, or notes and government issues, or held in cash.
The Portfolio's investments in common stocks may, of course, decline in
value. To minimize the risk this presents, the Sub-advisor only invests in
dividend-paying common stocks of domestic and foreign industrial issuers which
are marketable; and will not invest more than 5% of the Portfolio's assets in
the securities of any one company or more than 25% of the Portfolio's assets in
any one industry.
Debt Securities. The Portfolio's investments in debt securities will
generally be subject to both credit risk and market risk. Credit risk relates to
the ability of the issuer to meet interest or principal payments, or both, as
they come due. Market risk relates to the fact that the market values of debt
securities in which the Portfolio invests generally will be affected by changes
in the level of interest rates. An increase in interest rates will tend to
reduce the market values of debt securities, whereas a decline in interest rates
will tend to increase their values. Although the Sub-advisor will limit the
Portfolio's debt security investments to securities it believes are not highly
speculative, both kinds of risk are increased by investing in debt securities
rated below the top four grades by Standard & Poor's Corporation ("Standard &
Poor's) or Moody's Investors Services, Inc. ("Moody's") and unrated debt
securities, other than Government National Mortgage Association modified
pass-through certificates. For an additional discussion of the special risks
involved in lower-rated debt securities, see this Prospectus and the Trust's
Statement of Additional Information under "Certain Risk Factors and Investment
Methods."
In order to decrease its risk in investing in debt securities, the
Portfolio will invest no more than 15% of its assets in debt securities rated
below AAA, AA, A or BBB by Standard & Poor's, or Aaa, Aa, A or Baa by Moody's,
and in no event will the Portfolio ever invest in a debt security rated below
Caa by Moody's or CCC by Standard & Poor's. Lower rated bonds by Moody's
(categories Ba, B, Caa) are of poorer quality and may have speculative
characteristics. Bonds rated Caa may be in default or there may be present
elements of danger with respect to principal or interest. Lower rated bonds by
Standard & Poor's (categories BB, B, CCC) include those which are regarded, on
balance, as predominantly speculative with respect to the issuer's capacity to
pay interest and repay principal in accordance with their terms; BB indicates
the lowest degree of speculation and CCC a high degree of speculation. While
such bonds will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions. For more information on debt securities, see the Appendix to the
Trust's Statement of Additional Information.
While the Sub-advisor will monitor all of the debt securities in the
Portfolio for the issuers' ability to make required principal and interest
payments and other quality factors, the Sub-advisor may retain in the Portfolio
a debt security whose rating is changed to one below the minimum rating required
for purchase of such a security.
Risks Involved in Lower-Rated High-Yield Bonds. For a discussion of the
special risks involved in lower-rated bonds, see this Prospectus and the
Statement of Additional Information under "Certain Risk Factors and Investment
Methods."
Portfolio Turnover. There are no fixed-limitations regarding portfolio
turnover. The rate of portfolio turnover may fluctuate as a result of constantly
changing economic conditions and market circumstances. Securities initially
satisfying the Portfolio's basic objectives and policies may be disposed of when
they are no longer suitable. As a result, it is anticipated that the Portfolio's
annual portfolio turnover rate may be in excess of 100%, and may be higher than
that of other investment companies seeking current income with capital growth as
a secondary consideration. Increased portfolio turnover would cause the
Portfolio to incur greater brokerage costs than would otherwise be the case.
Repurchase Agreements. Subject to guidelines promulgated by the Board
of Trustees of the Trust, the Portfolio may enter into repurchase agreements
with respect to debt instruments eligible for investment by the Portfolio. These
agreements are entered into with member banks of the Federal Reserve System,
registered broker-dealers, and registered government securities dealers which
are deemed creditworthy. A repurchase agreement is a means of investing moneys
for a short period. In a repurchase agreement, the Portfolio acquires a debt
instrument (generally a security issued by the U.S. Government or an agency
thereof, a banker's acceptance or a certificate of deposit) subject to resale to
the seller at an agreed upon price and date (normally, the next business day).
In the event that the original seller defaults on its obligation to repurchase
the security, the Portfolio could incur costs or delays in seeking to sell such
security. To minimize risk, the securities underlying each repurchase agreement
will be maintained with the Portfolio's custodian in an amount at least equal to
the repurchase price under the agreement (including accrued interest), and such
agreements will be effected only with parties that meet certain creditworthiness
standards established by the Trust's Board of Trustees. The Portfolio will not
enter into a repurchase agreement maturing in more than seven days if as a
result more than 15% of the Portfolio's total net assets would be invested in
such repurchase agreements and other illiquid securities. The Portfolio has not
adopted any limit on the amount of its total assets that may be invested in
repurchase agreements maturing in seven days or less.
Lending Portfolio Securities. The Portfolio also may lend its
securities to qualified brokers, dealers, banks, or other financial
institutions. This practice permits the Portfolio to earn income, which, in
turn, can be invested in additional securities to pursue the Portfolio's
investment objective. Loans of securities by the Portfolio will be
collateralized by cash, letters of credit, or securities issued or guaranteed by
the U.S. Government or its agencies, equal to at least 100% of the current
market value of the loaned securities, determined on a daily basis. Lending
securities involves certain risks, the most significant of which is the risk
that a borrower may fail to return a portfolio security. The Sub-advisor
monitors the creditworthiness of borrowers in order to minimize such risks. The
Portfolio will not lend any security if, as a result of such loan, the aggregate
value of securities then on loan would exceed 33-1/3% of the Portfolio's total
net assets (taken at market value). For an additional discussion on lending, see
this Prospectus under "Certain Risk Factors and Investment Methods."
Foreign Securities. The Portfolio may invest up to 25% of its total
assets in foreign securities. Investments in securities of foreign companies and
in foreign markets involve certain additional risks not associated with
investments in domestic companies and markets. The Portfolio may invest in
countries considered to be developing which may involve special risks. For a
discussion of these risks and the risks of foreign investing in general, see
this Prospectus and the Trust's Statement of Additional Information under
"Certain Risk Factors and Investment Methods."
Risk of Currency Fluctuations. The value of Portfolio investments
denominated in foreign currencies may be affected, favorably or unfavorably, by
the relative strength of the U.S. dollar, changes in foreign currency and U.S.
dollar exchange rates and exchange control regulations. The Portfolio's net
asset value per share will be affected by changes in currency exchange rates.
Changes in foreign currency exchange rates may also affect the value of
dividends and interest earned, gains and losses realized on the sale of
securities and net investment income and gains, if any, to be distributed to
shareholders by the Portfolio. The rate of exchange between the U.S. dollar and
other currencies is determined by the forces of supply and demand in the foreign
exchange markets and in some cases, exchange controls. For an additional
discussion of the risks of currency fluctuations, see this Prospectus and
Trust's Statement of Additional Information under "Certain Risk Factors and
Investment Methods."
Illiquid Securities. Subject to guidelines promulgated by the Board of
Trustees of the Trust, the Portfolio may invest up to 15% of its net assets in
securities that are illiquid by virtue of legal or contractual restrictions on
resale or the absence of a readily available market. The Board of Trustees or
the Investment Manager, acting pursuant to authority delegated by the Board of
Trustees, may determine that a readily available market exists for securities
eligible for resale pursuant to Rule 144A under the Securities Act of 1933, or
any successor to that rule, and therefore that such securities are not subject
to the foregoing limitation. For a discussion of restricted securities and the
risks involved therein, see this Prospectus under "Certain Risk Factors and
Investment Methods."
Borrowing. For a discussion of the risks involved with and the limitations
on borrowing and risks involved in borrowing, see this Prospectus under "Certain
Risk Factors and Investment Methods."
PIMCO Total Return Bond Portfolio:
Investment Objective: The investment objective of the PIMCO Total Return Bond
Portfolio is to maximize total return, consistent with preservation of capital.
The Sub-advisor will seek to employ prudent investment management techniques,
especially in light of the broad range of investment instruments in which the
Portfolio may invest.
Investment Policies:
In selecting securities for the Portfolio, the Sub-advisor will utilize
economic forecasting, interest rate anticipation, credit and call risk analysis,
foreign currency exchange rate forecasting, and other security selection
techniques. The proportion of the Portfolio's assets committed to investment in
securities with particular characteristics (such as maturity, type and coupon
rate) will vary based on the Sub-advisor's outlook for the U.S. and foreign
economies, the financial markets and other factors. The Portfolio will invest at
least 65% of its assets in the following types of securities which may be issued
by domestic or foreign entities and denominated in U.S. dollars or foreign
currencies: securities issued or guaranteed by the U.S. Government, its agencies
or instrumentalities; corporate debt securities; corporate commercial paper;
mortgage and other asset-backed securities; variable and floating rate debt
securities; bank certificates of deposit; fixed time deposits and bankers'
acceptances; repurchase agreements and reverse repurchase agreements;
obligations of foreign governments or their subdivisions, agencies and
instrumentalities, international agencies or supranational entities; and foreign
currency exchange-related securities, including foreign currency warrants.
The Portfolio will invest in a diversified portfolio of fixed-income
securities of varying maturities with a portfolio duration from three to six
years. The duration of the Portfolio will vary within the three- to six-year
time frame based upon the Sub-advisor's forecast for interest rates, but under
current conditions is expected to stay within one year of what the Sub-advisor
believes to be the average duration of the bond market as a whole. The
Sub-advisor bases its analysis of the average duration of the bond market on
bond market indices which it believes to be representative, and other factors.
The Portfolio may invest up to 10% of its assets in fixed income securities that
are rated below investment grade but rated B or higher by Moody's Investors
Services, Inc. ("Moody's") or Standard & Poor's Corporation ("S&P") (or, if
unrated, determined by the Sub-advisor to be of comparable quality). The
Portfolio will maintain an overall dollar-weighted average quality of at least A
(as rated by Moody's or S&P). Securities rated B are judged to be predominantly
speculative with respect to their capacity to pay interest and repay principal
in accordance with the terms of the obligations. The Sub-advisor will seek to
reduce the risks associated with investing in such securities by limiting the
Portfolio's holdings in such securities and by the depth of its own credit
analysis. For a discussion of the risks involved in lower-rated high-yield
bonds, see this Prospectus and the Trust's Statement of Additional Information
under "Certain Risk Factors and Investment Methods."
The Portfolio may invest up to 20% of its assets in securities
denominated in foreign currencies, and may invest beyond this limit in U.S.
dollar-denominated securities of foreign issuers. Portfolio holdings will be
concentrated in areas of the bond market (based on quality, sector, coupon or
maturity) which the Sub-advisor believes to be relatively undervalued.
The Portfolio may buy or sell interest rate futures contracts, options
on interest rate futures contracts and options on debt securities for the
purpose of hedging against changes in the value of securities which the
Portfolio owns or anticipates purchasing due to anticipated changes in interest
rates. The Portfolio may engage in foreign currency transactions. Foreign
currency exchange transactions may be entered into the purpose of hedging
against foreign currency exchange risk arising from the Portfolio's investment
or anticipated investment in securities denominated in foreign currencies.
The Portfolio may enter into swap agreements for the purposes of
attempting to obtain a particular investment return at a lower cost to the
Portfolio than if the Portfolio had invested directly in an instrument that
provided that desired return. In addition, the Portfolio may purchase and sell
securities on a when-issued and delayed delivery basis and enter into forward
commitments to purchase securities; lend its securities to brokers, dealers and
other financial institutions to earn income; and borrow money for investment
purposes. See the Appendix to the Trust's Statement of Additional Information
for a description of Moody's and S&P's ratings applicable to fixed income
securities.
The "total return" sought by the Portfolio will consist of interest and
dividends from underlying securities, capital appreciation reflected in
unrealized increases in value of portfolio securities or realized from the
purchase and sale of securities, and use of futures and options or gains from
favorable changes in foreign currency exchange rates. Generally, over the long
term, the total return of the Portfolio investing primarily in fixed income
securities is not expected to be as great as that obtained by a portfolio
investing in equity securities. At the same time, the market risk and volatility
of a fixed income portfolio is expected to be less than that of an equity
portfolio, so that a fixed income portfolio is generally considered to be a more
conservative investment. The change in the market value of fixed income
securities (and therefore their capital appreciation or depreciation) is largely
a function of changes in the current level of interest rates. When interest
rates are falling, a portfolio with a shorter duration generally will not
generate as high a level of total return as a portfolio with a longer duration.
Conversely, when interest rates are rising, a portfolio with a shorter duration
will generally outperform longer duration portfolios. When interest rates are
flat, shorter duration portfolios generally will not achieve as high a level of
return as longer duration portfolios (assuming that long-term interest rates are
higher than short-term interest rates, which is commonly the case). With respect
to any fixed-income portfolio, the longer the duration of the portfolio, the
greater the potential for total return, with, however, greater attendant market
risk and price volatility than for a portfolio with a shorter duration. The
market value of securities denominated in currencies other than U.S. dollars
also may be affected by movements in foreign currency exchange rates.
The Portfolio's investments include, but are not limited to, the
following:
U.S. Government Securities. The Portfolio may invest in U.S. Government
Securities. U.S. Government securities are obligations of, or guaranteed by, the
U.S. Government, its agencies or instrumentalities. Some U.S. Government
securities, such as Treasury bills, notes and bonds, and securities guaranteed
by the Government National Mortgage Association ("GNMA"), are supported by the
full faith and credit of the United States; others, such as those of the Federal
Home Loan Banks, are supported by the right of the issuer to borrow from the
U.S. Treasury; others, such as those of the Federal National Mortgage
Association ("FNMA"), are supported by the discretionary authority of the U.S.
Government to purchase the agency's obligations; and still others, such as the
Student Loan Marketing Association, are supported only by the credit of the
instrumentality.
Corporate Debt Securities. The Portfolio may invest in corporate debt
securities. Corporate debt securities include corporate bonds, debentures, notes
and other similar corporate debt instruments, including convertible securities.
Debt securities may be acquired with warrants attached. Corporate
income-producing securities may also include forms of preferred or preference
stock. The rate of return or return of principal on some debt obligations may be
linked or indexed to the level of exchange rates between the U.S. dollar and a
foreign currency or currencies. Investment in corporate debt securities that are
below investment grade (rated below Baa (Moody's) or BBB (S&P)) are described as
"speculative" both by Moody's and S&P. For a description of the special risks
involved with lower-rated high-yield bonds, see this Prospectus and the Trust's
Statement of Additional Information under "Certain Risk Factors and Investment
Methods."
Mortgage-Related and Other Asset-Backed Securities. The Portfolio may
invest all of its assets in mortgage-related and other asset-backed securities,
including mortgage pass-through securities and collateralized mortgage
obligations. The value of some mortgage- or asset-backed securities in which the
Portfolio invests may be particularly sensitive to changes in prevailing
interest rates, and, like the other investments of the Portfolio, the ability of
the Portfolio to successfully utilize these instruments may depend in part upon
the ability of the Sub-advisor to forecast interest rates and other economic
factors correctly. These investments involve special risks. For a description of
these securities and the special risks involved therein, see this Prospectus and
the Statement of Additional Information under "Certain Risk Factors and
Investment Methods."
Repurchase Agreements. For the purpose of achieving income, the
Portfolio may enter into repurchase agreements, subject to guidelines
promulgated by the Board of Trustees of the Trust. The Portfolio will not invest
more than 15% of its net assets (taken at current market value) in repurchase
agreements maturing in more than seven days. For a discussion of repurchase
agreements and the risks involved therein, see this Prospectus under "Certain
Risk Factors and Investment Methods."
Reverse Repurchase Agreements and Other Borrowings. The Portfolio may
enter into reverse repurchase agreements. For a discussion of reverse repurchase
agreements, see this Prospectus under "Certain Risk Factors and Investment
Methods." The Portfolio will maintain a segregated account consisting of cash,
U.S. Government securities or high-grade debt obligations, maturing not later
than the expiration of the reverse repurchase agreement, to cover its
obligations under reverse repurchase agreements. The Portfolio may also borrow
money for investment purposes. Such a practice will result in leveraging of the
Portfolio's assets. Leverage will tend to exaggerate the effect on net asset
value of any increase or decrease in the value of the Portfolio and may cause
the Portfolio to liquidate portfolio positions when it would not be advantageous
to do so.
Lending Portfolio Securities. For the purpose of achieving income, the
Portfolio may lend its portfolio securities, provided (1) the loan is secured
continuously by collateral consisting of U.S. Government securities or cash or
cash equivalents (cash, U.S. Government securities, negotiable certificates of
deposit, bankers' acceptances or letters of credit) maintained on a daily
mark-to-market basis in an amount at least equal to the current market value of
the securities loaned, (2) the Portfolio may at any time call the loan and
obtain the return of securities loaned, (3) the Portfolio will receive any
interest or dividends received on the loaned securities, and (4) the aggregate
value of the securities loaned will not at any time exceed one-third of the
total assets of the Portfolio. For a discussion of the risks involved in
lending, see this Prospectus under "Certain Risk Factors and Investment
Methods."
When-Issued or Delayed-Delivery Transactions. The Portfolio may
purchase or sell securities on a when-issued or delayed delivery basis. These
transactions involve a commitment by the Portfolio to purchase or sell
securities for a predetermined price or yield, with payment and delivery taking
place more than seven days in the future, or after a period longer than the
customary settlement period for that type of security. When delayed delivery
purchases are outstanding, the Portfolio will set aside and maintain until the
settlement date, in a segregated account, cash, U.S. Government securities or
high grade debt obligations in an amount sufficient to meet the purchase price.
Typically, no income accrues on securities purchased on a delayed delivery basis
prior to time delivery of the securities is made, although the Portfolio may
earn income on securities it has deposited in a segregated account. When
purchasing a security on a delayed delivery basis, the Portfolio assumes the
rights and risks of ownership of the security, including the risk of price and
yield fluctuations, and takes such fluctuations into account when determining
its net asset value. Because the Portfolio is not required to pay for the
security until the delivery date, these risks are in addition to the risks
associated with the Portfolio's other investments. If the Portfolio remains
substantially fully invested at a time when delayed delivery purchases are
outstanding, the delayed delivery purchases may result in a form of leverage.
When the Portfolio has sold a security on a delayed delivery basis, the
Portfolio does not participate in future gains or losses with respect to the
security. If the other party to a delayed delivery transaction fails to deliver
or pay for the security, the Portfolio could miss a favorable price or yield
opportunity or could suffer a loss. The Portfolio may dispose of or renegotiate
a delayed delivery transaction after it is entered into, and may sell
when-issued securities before they are delivered, which may result in a capital
gain or loss. There is no percentage limitation on the extent to which the
Portfolio may purchase or sell securities on a delayed delivery basis.
Foreign Securities. The Portfolio may invest directly in U.S. dollar-
or foreign currency-denominated fixed income securities. The Portfolio will
limit its foreign investments to securities of issuers based in developed
countries (including newly industrialized countries, such as Taiwan, South Korea
and Mexico). For a discussion of the risks involved in investing in foreign
securities, see this Prospectus and the Trust's Statement of Additional
Information under "Certain Risk Factors and Investment Methods."
Brady Bonds. The Portfolio may invest in Brady Bonds. Brady Bonds are
securities created through the exchange of existing commercial bank loans to
sovereign entities for new obligations in connection with debt restructurings
under a debt restructuring plan introduced by former U.S. Secretary of the
Treasury, Nicholas F. Brady. Brady Bonds have been issued only recently, and for
that reason do not have a long payment history. Brady Bonds may be
collateralized or uncollateralized, are issued in various currencies (but
primarily the U.S. dollar), and are actively traded in the over-the-counter
secondary market. Brady Bonds are not considered to be U.S. Government
Securities. In light of the residual risk of Brady Bonds and, among other
factors, the history of defaults with respect to commercial bank loans by public
and private entities in countries issuing Brady Bonds, investments in Brady
Bonds may be viewed as speculative. There can be no assurance that Brady Bonds
acquired by the Portfolio will not be subject to restructuring arrangements or
to requests for new credit, which may cause the Portfolio to suffer a loss of
interest or principal on any of its holdings.
Options on Securities, Securities Indexes and Currencies. The Portfolio
may purchase and write call and put options on securities, securities indexes
and on foreign currencies, and enter into futures contracts and use options on
futures contracts as further described below. The Portfolio may also enter into
swap agreements with respect to foreign currencies, interest rates and
securities indexes. The Portfolio may use these techniques to hedge against
changes in interest rates, foreign currency, exchange rates or securities prices
or as part of its overall investment strategy.
The Portfolio may purchase options on securities to protect holdings in
an underlying or related security against a substantial decline in market value.
A Portfolio may purchase call options on securities to protect against
substantial increases in prices of securities the Portfolio intends to purchase
pending its ability to invest in such securities in an orderly manner. The
Portfolio may sell put or call options it has previously purchased, which could
result in a net gain or loss depending on whether the amount realized on the
sale is more or less than the premium and other transaction costs paid on the
put or call option which is sold. A Portfolio may write a call or put option
only if it is "covered" by the Portfolio holding a position in the underlying
securities or by other means which would permit immediate satisfaction of the
Portfolio's obligation as writer of the option. Prior to exercise or expiration,
an option may be closed out by an offsetting purchase or sale of an option on of
the same series.
Risks of Options. The Portfolio may invest in foreign-denominated
securities and may buy or sell put and call options on foreign currencies.
Currency options traded on U.S. or other exchanges may be subject to position
limits which may limit the ability of the Portfolio to reduce foreign currency
risk using such options. For a discussion of the risks involved in investing in
foreign currency, see this Prospectus and the Trust's Statement of Additional
Information under "Certain Risk Factors and Investment Methods." For a
discussion of options and the risks involved therein, see this Prospectus and
the Trust's Statement of Additional Information under "Certain Risk Factors and
Investment Methods."
Swaps. The Portfolio may enter into interest rate, index and currency
exchange rate swap agreements for the purposes of attempting to obtain a
particular desired return at a lower cost to the Portfolio than if the Portfolio
had invested directly in an instrument that yielded the desired return. Swap
agreements are two-party contracts entered into primarily by institutional
investors for periods ranging from a few weeks to more than one year. In a
standard "swap" transaction, two parties agree to exchange the returns (or
differentials in rates of return) earned or realized on particular predetermined
investments or instruments. The gross returns to be exchanged or "swapped"
between the parties are calculated with respect to a "notional amount," i.e.,
the return on or increase in value of a particular dollar amount invested at a
particular interest rate, in a particular foreign currency, or in a "basket" of
securities representing a particular index. Commonly used swap agreements
include interest rate caps, under which, in return for a premium, one party
agrees to make payments to the other to the extent that interest rates exceed a
specified rate or "cap"; interest floors, under which, in return for a premium,
one party agrees to make payments to the other to the extent that interest rates
fall below a specified level or "floor"; and interest rate collars, under which
a party sells a cap and purchases a floor or vice versa in an attempt to protect
itself against interest rate movements exceeding given minimum or maximum
levels.
The "notional amount" of a swap agreement is only a fictive basis on
which to calculate the obligations which the parties to a swap agreement have
agreed to exchange. Most swap agreements entered into by the Portfolio would
calculate the obligations of the parties to the agreement on a "net basis."
Consequently, the Portfolio's obligations (or rights) under a swap agreement
will generally be equal only to the net amount to be paid or received under the
agreement based on the relative values of the positions held by each party to
the agreement ("net amount"). The Portfolio's obligations under a swap agreement
will be accrued daily (offset against amounts owed to the Portfolio) and any
accrued unpaid net amounts owed to a swap counterparty will be covered by the
maintenance of a segregated account consisting of cash, U.S. Government
securities, or high grade debt obligations, to avoid any potential leveraging of
the Portfolio. The Portfolio will not enter into a swap agreement with any
single party if the net amount owed or to be received under existing contracts
with that party would exceed 5% of the Portfolio's total assets.
Risks of Swaps. Whether the Portfolio's use of swap agreements will be
successful in furthering its investment objective will depend on the Portfolio's
ability to predict correctly whether certain types of investment are likely to
produce greater returns than other investments. Because they are two-party
contracts and because they have terms of greater than seven days, swap
agreements may be considered illiquid. Moreover, the Portfolio bears the risk of
loss of the amount expected to be received under a swap agreement in the event
of a default or bankruptcy of a swap agreement counterparty. The Sub-advisor
will cause the Portfolio to enter into swap agreements only with counterparties
that would be eligible for consideration as repurchase agreement counterparties
under the Portfolio's repurchase agreement guidelines. Certain restrictions
imposed on the Portfolio by the Internal Revenue Code may limit the Portfolio's
ability to use swap agreements. The swaps market is relatively new and is
largely unregulated. It is possible that developments in the swaps market,
including potential governmental regulation, could adversely affect the
Portfolio's ability to terminate existing swap agreements or to realize amounts
to be received under such agreements.
Futures Contracts and Options on Futures Contracts. The Portfolio may
invest in interest rate futures contracts, stock index futures contracts and
foreign currency futures contracts and options thereon that are traded on a U.S.
or foreign exchange or board of trade. The Portfolio will only enter into
futures contracts or futures options which are standardized and traded on a U.S.
or foreign exchange or board of trade, or similar entity, or quoted on an
automated quotation system. The Portfolio will use financial futures contracts
and related options only for "bona fide" hedging purposes, as such term is
defined in the applicable regulations of the CFTC, or, with respect to positions
in financial futures and related options that do not qualify as "bona fide
hedging" positions, will enter such non-hedging positions only to the extent
that aggregate initial margin deposit plus premiums paid by it for the open
futures options position, less the amount by which any such positions are
"in-the-money," would not exceed 5% of the Portfolio's total assets.
Risks of Futures Contracts and Related Options. There are risks
involved in futures and options contracts. For a discussion of futures contracts
and related options, and the risks involved therein, see this Prospectus and the
Trust's Statement of Additional Information under "Certain Risk Factors and
Investment Methods."
Risk of Currency Fluctuations. The value of Portfolio investments
denominated in foreign currencies may be affected, favorably or unfavorably, by
the relative strength of the U.S. dollar, changes in foreign currency and U.S.
dollar exchange rates and exchange control regulations. The Portfolio's net
asset value per share will be affected by changes in currency exchange rates.
Changes in foreign currency exchange rates may also affect the value of
dividends and interest earned, gains and losses realized on the sale of
securities and net investment income and gains, if any, to be distributed to
shareholders by the Portfolio. The rate of exchange between the U.S. dollar and
other currencies is determined by the forces of supply and demand in the foreign
exchange markets and in some cases, exchange controls. For an additional
discussion of the risks of currency fluctuations, see this Prospectus and
Trust's Statement of Additional Information under "Certain Risk Factors and
Investment Methods."
Other Foreign Currency Transactions. The Portfolio may buy and sell
foreign currency futures contracts and options on foreign currencies and foreign
currency futures contracts, enter into forward foreign currency exchange
contracts to reduce the risks of adverse changes in foreign exchange rates. The
Portfolio may enter into these contracts for the purpose of hedging against
foreign exchange risk arising from the Portfolio's investment or anticipated
investment in securities denominated in foreign currencies. For a discussion of
foreign currency transactions and the risks involved therein, see this
Prospectus and the Trust's Statement of Additional Information under "Certain
Risk Factors and Investment Methods."
Borrowing. For a discussion of the limitations on borrowing by the
Portfolio and certain risks involved therein, see this Prospectus under "Certain
Risk Factors and Investment Methods."
PIMCO Limited Maturity Bond Portfolio:
Investment Objective: The investment objective of the PIMCO Limited Maturity
Bond Portfolio is to seek to maximize total return, consistent with preservation
of capital and prudent investment management. This is a fundamental investment
objective of the Portfolio.
Investment Policies:
In selecting securities for the Portfolio, the Sub-advisor utilizes
economic forecasting, interest rate anticipation, credit and call risk analysis,
foreign currency exchange rate forecasting, and other security selection
techniques. The proportion of each Portfolio's assets committed to investment in
securities with particular characteristics (such as maturity, type and coupon
rate) will vary based on the Sub-advisor's outlook for the U.S. and foreign
economies, the financial markets, and other factors.
The Portfolio will invest at least 65% of its total assets in the
following types of securities, which may be issued by domestic or foreign
entities and denominated in U.S. dollars or foreign currencies: securities
issued or guaranteed by the U.S. Government, its agencies or instrumentalities
("U.S. Government securities"); corporate debt securities; corporate commercial
paper; mortgage and other asset-backed securities; variable and floating rate
debt securities; bank certificates of deposit, fixed time deposits and bankers'
acceptances; repurchase agreements and reverse repurchase agreements;
obligations of foreign governments or their subdivisions, agencies and
instrumentalities, international agencies or supranational entities; and foreign
currency exchange-related securities, including foreign currency warrants.
The Portfolio may hold different percentages of its assets in these
various types of securities, and may invest all of its assets in derivative
instruments or in mortgage- or asset-backed securities. There are special risks
involved in these instruments.
The Portfolio will invest in a diversified portfolio of fixed income
securities of varying maturities with a portfolio duration from one to three
years. The Portfolio may invest up to 10% of its assets in corporate debt
securities that are rated below investment grade but rated B or higher by
Moody's or S&P (or, if unrated, determined by the Sub-advisor to be of
comparable quality). The Portfolio may also invest up to 20% of its assets in
securities denominated in foreign currencies. The Portfolio will make use of use
of average portfolio credit quality standards to assist institutional investors
whose own investment guidelines limit its investments accordingly. In
determining the Portfolio's overall dollar-weighted average quality, unrated
securities are treated as if rated, based on the Sub-advisor's view of their
comparability to rated securities. The Portfolio's investments may range in
quality from securities rated in the lowest category in which the Portfolio is
permitted to invest to securities rated in the highest category (as rated by
Moody's or S&P or, if unrated, determined by the Sub-advisor to be of comparable
quality). The percentage of a the Portfolio's assets invested in securities in a
particular rating category will vary.
The Portfolio may buy or sell interest rate futures contracts, options
on interest rate futures contracts and options on debt securities for the
purpose of hedging against changes in the value of securities which the
Portfolio owns or anticipates purchasing due to anticipated changes in interest
rates. The Portfolio may invest in securities denominated in foreign currencies
also may engage in foreign currency exchange transactions by means of buying or
selling foreign currencies on a spot basis, entering into foreign currency
forward contracts, and buying and selling foreign currency options, foreign
currency futures, and options on foreign currency futures. Foreign currency
exchange transactions may be entered into for the purpose of hedging against
foreign currency exchange risk arising from the Portfolio's investment or
anticipated investment in securities denominated in foreign currencies. The
Portfolio also may enter into foreign currency forward contracts and buy or sell
foreign currencies or foreign currency options for purposes of increasing
exposure to a particular foreign currency or to shift exposure to foreign
currency fluctuations from one country to another.
The Portfolio may enter into swap agreements for purposes of attempting
to obtain a particular investment return at a lower cost to the Portfolio than
if the Portfolio had invested directly in an instrument that provided that
desired return. In addition, the Portfolio may purchase and sell securities on a
when-issued or delayed-delivery basis, sell securities short, and enter into
forward commitments to purchase securities; lend their securities to brokers,
dealers and other financial institutions to earn income; and borrow money for
investment purposes. See the Appendix to the Statement of Additional Information
for a description of Moody's and S&P ratings applicable to fixed income
securities.
The "total return" sought by the Portfolio will consist of interest and
dividends from underlying securities, capital appreciation reflected in
unrealized increases in value of portfolio securities (realized by the
shareholder only upon selling shares) or realized from the purchase and sale of
securities, and use of futures and options, or gains from favorable changes in
foreign currency exchange rates. Generally, over the long term, the total return
obtained by a portfolio investing primarily in fixed income securities is not
expected to be as great as that obtained by a portfolio that invests primarily
in equity securities. At the same time, the market risk and price volatility of
a fixed income portfolio is expected to be less than that of an equity
portfolio, so that a fixed income portfolio is generally considered to be a more
conservative investment. The change in market value of fixed income securities
(and therefore their capital appreciation or depreciation) is largely a function
of changes in the current level of interest rates. When interest rates are
falling, a portfolio with a shorter duration generally will not generate as high
a level of total return as a portfolio with a longer duration. Conversely, when
interest rates are rising, a portfolio with a shorter duration will generally
outperform longer duration portfolios. When interest rates are flat, shorter
duration portfolios generally will not generate as high a level of total return
as longer duration portfolios (assuming that long-term interest rates are higher
than short-term rates, which is commonly the case). With respect to the
composition of any fixed income portfolio, the longer the duration of the
portfolio, the greater the anticipated potential for total return, with,
however, greater attendant market risk and price volatility than for a portfolio
with a shorter duration. The market value of securities denominated in
currencies other than the U.S. dollar also may be affected by movements in
foreign currency exchange rates.
The Portfolio's investments include, but are not limited to, the
following:
U.S. Government Securities. U.S. Government securities are obligations
of, or guaranteed by, the U.S. Government, its agencies or instrumentalities.
Some U.S. Government securities, such as Treasury bills, notes and bonds, and
securities guaranteed by the Government National Mortgage Association ("GNMA"),
are supported by the full faith and credit of the United States; others, such as
those of the Federal Home Loan Banks, are supported by the right of the issuer
to borrow from the U.S. Treasury; others, such as those of the Federal National
Mortgage Association ("FNMA"), are supported by the discretionary authority of
the U.S. Government to purchase the agency's obligations; and still others, such
as those of the Student Loan Marketing Association, are supported only by the
credit of the instrumentality.
Corporate Debt Securities. Corporate debt securities include corporate
bonds, debentures, notes and other similar corporate debt instruments, including
convertible securities. Debt securities may be acquired with warrants attached.
Corporate income-producing securities may also include forms of preferred or
preference stock. The rate of return or return of principal on some debt
obligations may be linked or indexed to the level of exchange rates between the
U.S. dollar and a foreign currency or currencies.
Investments in corporate debt securities that are below investment
grade (rated below Baa (Moody's) or BBB (S&P)) are described as "speculative"
both by Moody's and S&P. Moody's also describes securities rated Baa as having
speculative characteristics. For a description of the special risks involved
with lower-rated high-yield bonds, see this Prospectus and the Trust's Statement
of Additional Information under "Certain Risk Factors and Investment Methods."
Mortgage-Related and Other Asset-Backed Securities. The Portfolio may
invest all of its assets in mortgage- or asset-backed securities. The value of
some mortgage- or asset-backed securities in which the Portfolio invests may be
particularly sensitive to changes in prevailing interest rates, and, like the
other investments of the Portfolio, the ability of the Portfolio to successfully
utilize these instruments may depend in part upon the ability of the Sub-advisor
to forecast interest rates and other economic factors correctly.
Mortgage-related securities include securities other than those
described above that directly or indirectly represent a participation in, or are
secured by and payable from, mortgage loans on real property, such as CMO
residuals or stripped mortgage-backed securities ("SMBS"), and may be structured
in classes with rights to receive varying proportions of principal and interest.
A common type of SMBS will have one class receiving some of the
interest and most of the principal from the mortgage assets, while the other
class will receive most of the interest and the remainder of the principal. In
the most extreme case, one class will receive all of the interest (the
interest-only or "IO" class), while the other class will receive all of the
principal (the principal-only or "PO" class). The yield to maturity on an IO
class is extremely sensitive to the rate of principal payments (including
prepayments) on the related underlying mortgage assets, and a rapid rate of
principal payments may have a material adverse effect on the Portfolio's yield
to maturity from these securities. In addition, the Portfolio may invest in
other asset-backed securities that have been offered to investors.
Risks of Mortgage-related and Other Asset-Backed Securities. For a
discussion of the risks involved in mortgage-related and other asset-backed
securities, see this Prospectus and the Trust's Statement of Additional
information under "Certain Risk Factors and Investment Methods."
Repurchase Agreements. Subject to guidelines promulgated by the Board
of Trustees of the Trust, for the purpose of achieving income, the Portfolio may
enter into repurchase agreements, which entail the purchase of a portfolio
eligible security from a bank or broker-dealer that agrees to repurchase the
security at the Portfolio's cost plus interest within a specified time (normally
one day). The Portfolio will not invest more than 15% of its net assets (taken
at current market value) in repurchase agreements maturing in more than seven
days. For a discussion of repurchase agreements and the risks involved therein,
see this Prospectus under "Certain Risk Factors and Investment Methods."
Reverse Repurchase Agreements and Other Borrowings. A reverse
repurchase agreement is a form of leverage that involves the sale of a security
by the Portfolio and its agreement to repurchase the instrument at a specified
time and price. The Portfolio will maintain a segregated account consisting of
cash, U.S. Government securities or high-grade debt obligations, maturing not
later than the expiration of the reverse repurchase agreement, to cover its
obligations under reverse repurchase agreements. The Portfolio also may borrow
money for investment purposes, subject to requirements imposed by the 1940 Act
that the Portfolio maintain a continuous asset coverage (that is, total assets
including borrowings, less liabilities exclusive of borrowings) of 300% of the
amount borrowed. Such a practice will result in leveraging of the Portfolio's
assets. Leverage will tend to exaggerate the effect on net asset value of any
increase or decrease in the value of the Portfolio's portfolio and may cause the
Portfolio to liquidate portfolio positions when it would not be advantageous to
do so.
Lending Portfolio Securities. For the purpose of achieving income, the
Portfolio may lend its portfolio securities, provided: (i) the loan is secured
continuously by collateral consisting of U.S. Government securities or cash or
cash equivalents (cash, U.S. Government securities, negotiable certificates of
deposit, bankers' acceptances or letters of credit) maintained on a daily
mark-to-market basis in an amount at least equal to the current market value of
the securities loaned; (ii) the Portfolio may at any time call the loan and
obtain the return of the securities loaned; (iii) the Portfolio will receive any
interest or dividends paid on the loaned securities; and (iv) the aggregate
market value of securities loaned will not at any time exceed one-third of the
total assets of the Portfolio. For a discussion of risks involved in lending,
see this Prospectus under "Certain Risk Factors and Investment Methods."
When-Issued or Delayed Delivery Transactions. The Portfolio may
purchase or sell securities on a when-issued or delayed delivery basis. These
transactions involve a commitment by the Portfolio to purchase or sell
securities for a predetermined price or yield, with payment and delivery taking
place more than seven days in the future, or after a period longer than the
customary settlement period for that type of security. When delayed delivery
purchases are outstanding, the Portfolio will set aside and maintain until the
settlement date in a segregated account, cash, U.S. Government securities or
high grade debt obligations in an amount sufficient to meet the purchase price.
Typically, no income accrues on securities purchased on a delayed delivery basis
prior to the time delivery of the securities is made, although the Portfolio may
earn income on securities it has deposited in a segregated account. When
purchasing a security on a delayed delivery basis, the Portfolio assumes the
rights and risks of ownership of the security, including the risk of price and
yield fluctuations, and takes such fluctuations into account when determining
its net asset value. Because the Portfolio is not required to pay for the
security until the delivery date, these risks are in addition to the risks
associated with the Portfolio's other investments. If the Portfolio remains
substantially fully invested at a time when delayed delivery purchases are
outstanding, the delayed delivery purchases may result in a form of leverage.
When the Portfolio has sold a security on a delayed delivery basis, the
Portfolio does not participate in future gains or losses with respect to the
security. If the other party to a delayed delivery transaction fails to deliver
or pay for the securities, the Portfolio could miss a favorable price or yield
opportunity or could suffer a loss. The Portfolio may dispose of or renegotiate
a delayed delivery transaction after it is entered into, and may sell
when-issued securities before they are delivered, which may result in a capital
gain or loss. There is no percentage limitation on the extent to which the
Portfolios may purchase or sell securities on a delayed-delivery basis.
Short Sales. The Portfolio may from time to time effect short sales as
part of its overall portfolio management strategies, including the use of
derivative instruments, or to offset potential declines in value of long
positions in similar securities as those sold short. A short sale (other than a
short sale against the box) is a transaction in which the Portfolio sells a
security it does not own at the time of the sale in anticipation that the market
price of that security will decline. To the extent that the Portfolio engages in
short sales, it must (except in the case of short sales "against the box")
maintain asset coverage in the form of cash, U.S. Government securities or high
grade debt obligations in a segregated account. A short sale is "against the
box" to the extent that the Portfolio contemporaneously owns, or has the right
to obtain at no added cost, securities identical to those sold short.
Foreign Securities. The Portfolio may invest directly in U.S. dollar-
or foreign currency-denominated fixed income securities of non-U.S. issuers. The
Portfolio will limit its foreign investments to securities of issuers based in
developed countries (including Newly Industrialized Countries, "NICs", such as
Taiwan, South Korea and Mexico). Investing in the securities of issuers in any
foreign country involves special risks and considerations not typically
associated with investing in U.S. companies. For a discussion of the risks
involved in foreign investing, see this Prospectus and the Trust's Statement of
Additional Information under "Certain Risk Factors and Investment Methods."
Options on Securities, Securities Indexes, and Currencies. The
Portfolio may purchase put options on securities. One purpose of purchasing put
options is to protect holdings in an underlying or related security against a
substantial decline in market value. The Portfolio may also purchase call
options on securities. One purpose of purchasing call options is to protect
against substantial increases in prices of securities the Portfolio intends to
purchase pending its ability to invest in such securities in an orderly manner.
The Portfolio may sell put or call options it has previously purchased, which
could result in a net gain or loss depending on whether the amount realized on
the sale is more or less than the premium and other transaction costs paid on
the put or call option which is sold. The Portfolio may write a call or put
option only if the option is "covered" by the Portfolio holding a position in
the underlying securities or by other means which would permit immediate
satisfaction of the Portfolio's obligation as writer of the option. Prior to
exercise or expiration, an option may be closed out by an offsetting purchase or
sale of an option of the same series.
Risks of Options. The purchase and writing of options involves certain
risks. The Portfolio may buy or sell put and call options on foreign currencies.
Currency options traded on U.S. or other exchanges may be subject to position
limits which may limit the ability of the Portfolio to reduce foreign currency
risk using such options. For a discussion of the risks involved in investing in
foreign currency, see this Prospectus and the Trust's Statement of Additional
Information under "Certain Risk Factors and Investment Methods." For a
discussion of options and the risks involved therein, see this Prospectus and
the Trust's Statement of Additional Information under "Certain Risk Factors and
Investment Methods."
Swap Agreements. The Portfolio may enter into interest rate, index and
currency exchange rate swap agreements for purposes of attempting to obtain a
particular desired return at a lower cost to the Portfolio than if the Portfolio
had invested directly in an instrument that yielded that desired return. Swap
agreements are two-party contracts entered into primarily by institutional
investors for periods ranging from a few weeks to more than one year. In a
standard "swap" transaction, two parties agree to exchange the returns (or
differentials in rates of return) earned or realized on particular predetermined
investments or instruments. The gross returns to be exchanged or "swapped"
between the parties are calculated with respect to a "notional amount," i.e.,
the return on or increase in value of a particular dollar amount invested at a
particular interest rate, in a particular foreign currency, or in a "basket" of
securities representing a particular index. Commonly used swap agreements
include interest rate caps, under which, in return for a premium, one party
agrees to make payments to the other to the extent that interest rates exceed a
specified rate, or "cap"; interest rate floors, under which, in return for a
premium, one party agrees to make payments to the other to the extent that
interest rates fall below a specified level, or "floor"; and interest rate
collars, under which a party sells a cap and purchases a floor or vice versa in
an attempt to protect itself against interest rate movements exceeding given
minimum or maximum levels.
The "notional amount" of the swap agreement is only a fictive basis on
which to calculate the obligations which the parties to a swap agreement have
agreed to exchange. Most swap agreements entered into by the Portfolio would
calculate the obligations of the parties to the agreement on a "net basis."
Consequently, the Portfolio's obligations (or rights) under a swap agreement
will generally be equal only to the net amount to be paid or received under the
agreement based on the relative values of the positions held by each party to
the agreement (the "net amount"). The Portfolio's obligations under a swap
agreement will be accrued daily (offset against amounts owed to the Portfolio)
and any accrued but unpaid net amounts owed to a swap counterparty will be
covered by the maintenance of segregated assets consisting of cash, U.S.
Government securities, or high grade debt obligations, to avoid any potential
leveraging of the Portfolio. A Portfolio will not enter into a swap agreement
with any single party if the net amount owed or to be received under existing
contracts with that party would exceed 5% of the Portfolio's assets.
Risks of Swaps. Whether the Portfolio's use of swap agreements will be
successful in furthering its investment objective will depend on the
Sub-advisor's ability to predict correctly whether certain types of investments
are likely to produce greater returns than other investments. Because they are
two-party contracts and because they may have terms of greater than seven days,
swap agreements may be considered to be illiquid. Moreover, the Portfolio bears
the risk of loss of the amount expected to be received under a swap agreement in
the event of the default or bankruptcy of a swap agreement counterparty. The
Sub-advisor will cause the Portfolio to enter into swap agreements only with
counterparties that would be eligible for consideration as repurchase agreement
counterparties under the Portfolio's repurchase agreement guidelines. Certain
restrictions imposed on the Portfolio by the Internal Revenue Code may limit the
Portfolio's ability to use swap agreements. The swaps market is a relatively new
market and is largely unregulated. It is possible that developments in the swaps
market, including potential government regulation, could adversely affect the
Portfolio's ability to terminate existing swap agreements or to realize amounts
to be received under such agreements.
Futures Contracts and Options on Futures Contracts. The Portfolio may
invest in interest rate futures contracts, stock index futures contracts and
foreign currency futures contracts and options thereon ("futures options") that
are traded on a U.S. or foreign exchange or board of trade. The Portfolio will
only enter into futures contracts or futures options which are standardized and
traded on a U.S. or foreign exchange or board of trade, or similar entity, or
quoted on an automated quotation system. Each Portfolio will use financial
futures contracts and related options only for "bona fide hedging" purposes, as
such term is defined in applicable regulations of the CFTC, or, with respect to
positions in financial futures and related options that do not qualify as "bona
fide hedging" positions, will enter such non-hedging positions only to the
extent that aggregate initial margin deposits plus premiums paid by it for open
futures option positions, less the amount by which any such positions are
"in-the-money," would not exceed 5% of the Portfolio's total net assets.
Risks of Futures and Related Options. There are risks involved in
futures and options contracts. For a discussion of futures contracts and related
options, and the risks involved therein, see this Prospectus and the Trust's
Statement of Additional Information under "Certain Risk Factors and Investment
Methods."
Risk of Currency Fluctuations. The value of Portfolio investments
denominated in foreign currencies may be affected, favorably or unfavorably, by
the relative strength of the U.S. dollar, changes in foreign currency and U.S.
dollar exchange rates and exchange control regulations. The Portfolio's net
asset value per share will be affected by changes in currency exchange rates.
Changes in foreign currency exchange rates may also affect the value of
dividends and interest earned, gains and losses realized on the sale of
securities and net investment income and gains, if any, to be distributed to
shareholders by the Portfolio. The rate of exchange between the U.S. dollar and
other currencies is determined by the forces of supply and demand in the foreign
exchange markets and in some cases, exchange controls. For an additional
discussion of the risks of currency fluctuations, see this Prospectus and
Trust's Statement of Additional Information under "Certain Risk Factors and
Investment Methods."
Other Foreign Currency Transactions. The Portfolio may buy and sell
foreign currency futures contracts and options on foreign currencies and foreign
currency futures contracts, enter into forward foreign currency exchange
contracts to reduce the risks of adverse changes in foreign exchange rates. The
Portfolio may enter into these contracts for the purpose of hedging against
foreign exchange risk arising from the Portfolio's investment or anticipated
investment in securities denominated in foreign currencies. For a discussion of
foreign currency transactions and the risks involved therein, see this
Prospectus and the Trust's Statement of Additional Information under "Certain
Risk Factors and Investment Methods."
Berger Capital Growth Portfolio:
Investment Objective: The investment objective of the Berger Capital Growth
Portfolio is long-term capital appreciation. The Portfolio seeks to achieve this
objective by investing primarily in common stocks of established companies which
the Sub-advisor believes offer favorable growth prospects. Current income is not
an investment objective of the Portfolio, and any income produced will be a
by-product of the effort to achieve the Portfolio's objective.
Investment Policies:
In general, investment decisions for the Portfolio are based on an
approach which seeks out successful companies because they are believed to be
more apt to become profitable investments. To evaluate a prospective investment,
the Sub-advisor analyzes information from various sources, including industry
economic trends, earnings expectations and fundamental securities valuation
factors to identify companies which in the Sub-advisor's opinion are more likely
to have predictable, above average earnings growth, regardless of the company's
size and geographic location. The Sub-advisor also takes into account a
company's management and its innovations in products and services in evaluating
its prospects for continued or future earnings growth.
In selecting its portfolio securities, the Portfolio places primary
emphasis on established companies which it believes to have favorable growth
prospects. Common stocks usually constitute all or most of the Portfolio's
investment holdings, but the Portfolio remains free to invest in securities
other than common stocks, and may do so when deemed appropriate by the
Sub-advisor to achieve the objective of the Portfolio. The Portfolio may, from
time to time, take substantial positions in securities convertible into common
stocks, and it may also purchase government securities, preferred stocks and
other senior securities if its Sub-advisor believes these are likely to be the
best suited at that time to achieve the Portfolio's objective. The Portfolio's
policy of investing in securities believed to have a potential for capital
growth means that a Portfolio share may be subject to greater fluctuations in
value than if the Portfolio invested in other securities.
Short-Term. The Portfolio may increase its investment in government
securities and other short-term interest-bearing securities without limit when
the Sub-advisor believes market conditions warrant a temporary defensive
position, during which period it may be more difficult for the Portfolio to
achieve its investment objective.
Put and Call Options. The Portfolio may purchase put and call options
on stock indices for the purpose of hedging, which includes establishing a
position in an equity equivalent as a temporary substitute for the purchase of
individual stocks. To hedge the Portfolio to cushion against a decline in value,
the Portfolio may buy puts on stock indices; to hedge against increases in
prices of equities, pending investments in equities, the Portfolio may buy calls
on stock indices. No more than 1% of the market value of the Portfolio's net
assets at the time of purchase may be invested in put and call options. For a
discussion of the risks associated with options, see this Prospectus and the
Trust's Statement of Additional Information under "Certain Risk Factors and
Investment Methods."
Foreign Securities. The Portfolio may invest in both domestic and foreign
securities. Investments in foreign securities involve some risks that are
different from the risks of investing in securities of U.S. issuers. For a
discussion of risks involved therein, see this Prospectus and the Trust's
Statement of Additional Information under "Certain Risk Factors and Investment
Methods."
Risk of Currency Fluctuations. The value of Portfolio investments
denominated in foreign currencies may be affected, favorably or unfavorably, by
the relative strength of the U.S. dollar, changes in foreign currency and U.S.
dollar exchange rates and exchange control regulations. The Portfolio's net
asset value per share will be affected by changes in currency exchange rates.
Changes in foreign currency exchange rates may also affect the value of
dividends and interest earned, gains and losses realized on the sale of
securities and net investment income and gains, if any, to be distributed to
shareholders by the Portfolio. The rate of exchange between the U.S. dollar and
other currencies is determined by the forces of supply and demand in the foreign
exchange markets and in some cases, exchange controls. For an additional
discussion of the risks of currency fluctuations, see this Prospectus and
Trust's Statement of Additional Information under "Certain Risk Factors and
Investment Methods."
Convertible Securities. The Portfolio may purchase securities which are
convertible into common stock when the Sub-advisor believes they offer the
potential for a higher total return than nonconvertible securities. While fixed
income securities generally have a priority claim on a corporation's assets over
that of common stock, some of the convertible securities which the Portfolio may
hold are high-yield/high-risk securities that are subject to special risks,
including the risk of default in interest or principal payments which could
result in a loss of income to the Portfolio or a decline in the market value of
the securities. Convertible securities often display a degree of market price
volatility that is comparable to common stocks. The credit risk associated with
convertible securities generally is reflected by their being rated below
investment grade by organizations such as Moody's Investors Service, Inc. and
Standard & Poor's Corporation. The Portfolio has no pre-established minimum
quality standards for convertible securities and may invest in convertible
securities of any quality, including lower rated or unrated securities. However,
under normal circumstances, the Portfolio will not invest in any security in
default at the time of purchase or in any nonconvertible debt securities rated
below investment grade, and the Portfolio will invest less than 20% of the
market value of its assets at the time of purchase in convertible securities
rated below investment grade. For a more detailed discussion of the risks
associated with these securities and their ratings, see the Appendix to the
Trust's Statement of Additional Information.
Zero Coupon Bonds. The Portfolio may invest in zero coupon bonds or in
"strips." Zero coupon bonds do not make regular interest payments; rather, they
are sold at a discount from face value. Principal and accreted discount
(representing interest accrued but not paid) are paid at maturity. "Strips" are
debt securities that are stripped of their interest coupons after the securities
are issued, but otherwise are comparable to zero coupon bonds. The market values
of "strips" and zero coupon bonds generally fluctuate in response to changes in
interest rates to a greater degree than do interest-paying securities of
comparable term and quality. The Portfolio will not invest in mortgage-backed or
other asset-backed securities.
Repurchase Agreements. Subject to guidelines promulgated by the Board
of Trustees of the Trust, the Portfolio may enter into repurchase agreements
with a well-established securities dealer or a bank which is a member of the
Federal Reserve System. For a discussion of repurchase agreements and the risks
involved therein, see this Prospectus under "Certain Risk Factors and Investment
Methods."
Illiquid Securities. Subject to guidelines promulgated by the Board of
Trustees of the Trust, the Portfolio may invest up to 15% of its net assets in
illiquid securities, including repurchase agreements maturing in more than seven
days. Securities eligible for resale under Rule 144A of the Securities Act of
1933 could be deemed "liquid" when saleable in a readily available market. For a
discussion of illiquid or restricted securities and the risks involved therein,
see this Prospectus under "Certain Risk Factors and Investment Methods."
Robertson Stephens Value + Growth Portfolio:
Investment Objective: The investment objective of the Robertson Stephens
Value + Growth Portfolio is to seek capital appreciation. This is a fundamental
objective of the Portfolio.
Investment Policies:
The Portfolio will invest primarily in growth companies believed by the
Sub-advisor to have favorable relationships between price/earnings ratios and
growth rates in sectors offering the potential for above-average returns.
In selecting investments for the Portfolio, the Sub-advisor's primary
emphasis is typically on evaluating a company's management, growth prospects,
business operations, revenues, earnings, cash flows, and balance sheet in
relationship to its share price. The Sub-advisor may select stocks which it
believes are undervalued relative to the current stock price. Undervaluation of
a stock can result from a variety of factors, such as a lack of investor
recognition of (1) the value of a business franchise and continuing growth
potential, (2) a new, improved or upgraded product, service or business
operation, (3) a positive change in either the economic or business condition
for a company, (4) expanding or changing markets that provide a company with
either new earnings direction or acceleration, or (5) a catalyst, such as an
impending or potential asset sale or change in management, that could draw
increased investor attention to a company. The Sub-advisor also may use similar
factors to identify stocks which it believes to be overvalued, and may engage in
short sales of such securities.
The Portfolio may also engage in the following investment practices,
each of which involves certain special risks.
Investments in Smaller Companies. The Portfolio 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 Portfolio 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.
Some securities of smaller issuers may be restricted as to resale or
may otherwise be highly illiquid. The ability of the Portfolio to dispose of
such securities may be greatly limited, and the Portfolio may have to continue
to hold such securities during periods when the Sub-advisor would otherwise have
sold the security. It is possible that the Sub-advisor or its affiliates or
clients may hold securities issued by the same issuers, and may in some cases
have acquired the securities at different times, on more favorable terms, or at
more favorable prices, than the Portfolio. The Portfolio will not invest, in the
aggregate, more than 10% of its net assets in illiquid securities. For a
discussion of illiquid and restricted securities and the risks involved therein,
see this Prospectus under "Certain Risk Factors and Investment Methods."
Short Sales. When the Sub-advisor 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 Portfolio
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 Portfolio must replace the borrowed security. All short sales must
be fully collateralized, and the Portfolio will not sell securities short if,
immediately after and as a result of the sale, the value of all securities sold
short by the Portfolio exceeds 25% of its total assets. The Portfolio limits
short sales of any one issuer's securities to 2% of the Portfolio's total assets
and to 2% of any one class of the issuer's securities.
Foreign Securities. The Portfolio may invest up to 35% of its net
assets in securities principally traded in foreign markets. The Portfolio may
buy or sell foreign currencies and options and futures contracts on foreign
currencies for hedging purposes in connection with its foreign investments.
The Portfolio may also at times invest a substantial portion of its
assets in securities of issuers in developing countries. Although many of the
securities in which the Portfolio may invest are traded on securities exchanges,
the Portfolio may trade in limited volume, and the exchanges may not provide all
of the conveniences or protections provided by securities exchanges in more
developed markets. The Portfolio may also invest a substantial portion of its
assets in securities traded in the over-the-counter markets in such countries
and not on any exchange, which may affect the liquidity of the investment and
expose the Portfolio to the credit risk of their counterparties in trading those
investments. For a discussion of the risks involved in investing in developing
countries and investing in foreign securities, in general, see this Prospectus
and the Trust's Statement of Additional Information under "Certain Risk Factors
and Investment Methods."
Debt Securities. The Portfolio may invest in debt securities from time
to time, if the Sub-advisor believes that such investments might help achieve
the Portfolio's investment objective. The Sub-advisor expects that under normal
circumstances the Portfolio will not likely invest a substantial portion of its
assets in debt securities.
The Portfolio will invest only in securities rated "investment grade"
or considered by the Sub-advisor to be of comparable quality. Investment grade
securities are rated Baa or higher by Moody's Investors Service, Inc. ("Moody's)
or BBB or higher by Standard & Poor's Corporation ("S&P"). Securities rated Baa
or BBB lack outstanding investment characteristics, have speculative
characteristics, and are subject to greater credit and market risks than
higher-rated securities. For a description of Moody's and S&P's rating
categories, see the Appendix to the Trust's Statement of Additional Information.
The Portfolio will not necessarily dispose of a security when its debt
rating is reduced below its rating at the time of purchase, although the
Sub-advisor will monitor the investment to determine whether continued
investment in the security will assist in meeting the Portfolio's investment
objective.
Zero-Coupon Bonds and Payment-in-Kind Bonds. The Portfolio may also
invest in so-called "zero-coupon" bonds and "payment-in-kind" bonds. Zero-coupon
bonds are issued at a significant discount from face value and pay interest only
at maturity rather than at intervals during the life of the security.
Payment-in-kind bonds allow the issuer, at its option, to make current interest
payments on the bonds either in cash or in additional bonds. The values of
zero-coupon bonds and payment-in-kind bonds are subject to greater fluctuation
in response to changes in market interest rates than bonds which pay interest
currently, and may involve greater credit risk than such bonds.
Options and Futures. The Portfolio 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 Portfolio may at times seek to hedge against
fluctuations in net asset value and to attempt to increase its investment
return.
The Portfolio'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
Portfolio will be able to utilize these instruments effectively for the purposes
stated above.
The Portfolio expects that its options and futures transactions
generally will be conducted on recognized exchanges. The Portfolio may in
certain instances purchase and sell options in the over-the-counter markets. The
Portfolio'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 Portfolio. The Portfolio will,
however, engage in over-the-counter transactions only when appropriate
exchange-traded transactions are unavailable and when, in the opinion of the
Sub-advisor, the pricing mechanism and liquidity of the over-the-counter markets
are satisfactory and the participants are responsible parties likely to meet
their obligations.
The Portfolio will not purchase futures or options on futures or sell
futures if, as a result, the sum of the initial margin deposits on the
Portfolio's existing futures positions and premiums paid for outstanding options
on futures contracts would exceed 5% of the Portfolio's assets. (For options
that are "in-the-money" at the time of purchase, the amount by which the option
is "in-the-money" is excluded from this calculation.)
Index Futures and Options. The Portfolio may buy and sell
index futures contracts ("index futures") and options on index futures and on
indices for hedging purposes (or may purchase warrants whose value is based on
the value from time to time of one or more foreign securities indices). 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 Portfolio enters into and terminates an
index futures or option transaction, the Portfolio realizes a gain or loss. The
Portfolio may also buy and sell index futures and options to increase its
investment return.
LEAPs and BOUNDs. The Portfolio may purchase long-term
exchange-traded equity options called Long-Term Equity Anticipation Securities
("LEAPs") and Buy-Write Options Unitary Derivatives ("BOUNDs"). LEAPs provide a
holder the opportunity to participate in the underlying securities' appreciation
in excess of a fixed dollar amount, and BOUNDs provide a holder the opportunity
to retain dividends on the underlying securities while potentially participating
in the underlying securities' capital appreciation up to a fixed dollar amount.
The Portfolio will not purchase these options with respect to more than 25% of
the value of its net assets and will limit the premiums paid for such options in
accordance with the most restrictive applicable state securities laws.
Risks of Options and Futures Transactions. There are risks
involved in options and futures transactions. For a discussion of options and
futures and the risks involved therein, see this Prospectus and the Trust's
Statement of Additional Information under "Certain Risk Factors and Investment
Methods."
Sector Concentration. At times, the Portfolio may invest more than 25%
of its assets in securities of issuers in one or more market sectors such as,
for example, the technology sector. A market sector may be made up of companies
in a number of related industries. The Portfolio would only concentrate its
investments in a particular market sector if the Sub-advisor were to believe the
investment return available from concentration in that sector justifies any
additional risk associated with concentration in that sector. When the Portfolio
concentrates its investments in a market sector, financial, economic, business,
and other developments affecting issuers in that sector will have a greater
effect on the Portfolio than if it had not concentrated its assets in that
sector.
Lending Portfolio Securities. The Portfolio may lend it securities to
broker-dealers. These transactions must be fully collateralized at all times,
but involve some risk to the Portfolio if the other party should default on its
obligations and the Portfolio is delayed or prevented from recovering the
collateral.
Repurchase Agreements. Subject to guidelines promulgated by the Board
of Trustees of the Trust, the Portfolio may enter into repurchase agreements.
These transactions must be fully collateralized at all times, but involve some
risk to the Portfolio if the other party should default on its obligations and
the Portfolio is delayed or prevented from recovering the collateral. For a
discussion of repurchase agreements and the risks involved therein, see this
Prospectus under "Certain Risk Factors and Investment Methods."
Defensive Strategies. At times, the Sub-advisor may judge that market
conditions make pursuing the Portfolio's basic investment strategy inconsistent
with the best interests of its shareholders. At such times, the Sub-advisor may
temporarily use alternative strategies, primarily designed to reduce
fluctuations in the values of the Portfolio's assets. In implementing these
"defensive" strategies, the Portfolio may invest in U.S. Government securities,
other high-quality debt instruments, and other securities the Sub-advisor
believes to be consistent with the Portfolio's best interests.
CERTAIN RISK FACTORS AND INVESTMENT METHODS:
Some of the risk factors related to certain securities, instruments and
techniques that may be used by one or more of the Portfolios are described in
the "Investment Objectives and Policies" section of this Prospectus and in the
"Investment Objectives and Policies" and "Certain Risk Factors and Investment
Methods" section of the Trust's Statement of Additional Information. The
following is a description of certain additional risk factors related to various
securities, instruments and techniques. The risks so described only apply to
those Portfolios which may invest in such securities and instruments or use such
techniques. Also included is a general description of some of the investment
instruments, techniques and methods which may be used by one or more of the
Portfolios. The methods described only apply to those Portfolios which may use
such methods.
Derivative Instruments:
To the extent permitted by the investment objectives and policies of a
Portfolio, a Portfolio may purchase and write call and put options on
securities, securities indexes and foreign currencies, and enter into futures
contracts and use options on futures contracts. A Portfolio also may enter into
swap agreements with respect to foreign currencies, interest rates, and
securities indexes. A Portfolio may use these techniques to hedge against
changes in interest rates, foreign currency exchange rates or securities prices
or as part of their overall investment strategies. A Portfolio may also purchase
and sell options relating to foreign currencies for purposes of increasing
exposure to a foreign currency or to shift exposure to foreign currency
fluctuations from one country to another.
Derivative instruments may consist of securities or other instruments
whose value is derived from or related to the value of some other instrument or
asset, and does not include those securities whose payment of principal and/or
interest depend upon cash flows from underlying assets, such as mortgage or
asset-backed securities. The value of some derivative instruments in which a
Portfolio invests may be particularly sensitive to changes in prevailing
interest rates, and, like the other investments of a Portfolio, the ability of
the Portfolio to successfully utilize these instruments may depend in part upon
the ability of the Sub-advisor to forecast interest rates and other economic
factors correctly. If the Sub-advisor incorrectly forecasts such factors and has
taken positions in derivative instruments contrary to prevailing market trends,
the Portfolio could be exposed to the risk of a loss.
A Portfolio might not employ any of the strategies described below, and
no assurance can be given that any strategy used will succeed. If a Sub-advisor
incorrectly forecasts interest rates, market values or other economic factors in
utilizing a derivatives strategy for a Portfolio, the Portfolio might have been
in a better position if it had not entered into the transaction at all. The use
of these strategies involves certain special risks, including a possible
imperfect correlation, or even no correlation, between price movements of
derivative instruments and price movements of related investments; the fact
that, while some strategies involving derivative instruments can reduce the risk
of loss, they can also reduce the opportunity for gain, or even result in
losses, by offsetting favorable price movements in related investments; and the
possible inability of the Portfolio to purchase or sell a portfolio security at
a time that otherwise would be favorable for it to do so, or the possible need
for the Portfolio to sell a portfolio security at a disadvantageous time, due to
the need for the Portfolio to maintain asset coverage or offsetting positions in
connection with transactions in derivative instruments and the possible
inability of the Portfolio to close out or to liquidate its derivatives
positions.
Asset-Backed Securities:
Asset-backed securities represent a participation in, or are secured by
and payable from, a stream of payments generated by particular assets, for
example, credit card, automobile or trade receivables. Asset-backed commercial
paper, one type of asset-backed security, is issued by a special purpose entity,
organized solely to issue the commercial paper and to purchase interests in the
assets. The credit quality of these securities depends primarily upon the
quality of the underlying assets and the level of credit support and/or
enhancement provided.
The underlying assets (e.g., loans) are subject to prepayments which
shorten the securities' weighted average life and may lower their return. If the
credit support or enhancement is exhausted, losses or delays in payment may
result if the required payments of principal and interest are not made. The
value of these securities also may change because of changes in the market's
perception of the creditworthiness of the servicing agent for the pool, the
originator of the pool, or the financial institution providing the credit
support or enhancement.
Mortgage Pass-Through Securities:
Mortgage pass-through securities are securities representing interests
in "pools" of mortgage loans secured by residential or commercial real property
in which payments of both interest and principal on the securities are generally
made monthly, in effect "passing through" monthly payments made by the
individual borrowers on the mortgage loans which underlie the securities (net of
fees paid to the issuer or guarantor of the securities). Early repayment of
principal on some mortgage-related securities (arising from prepayments of
principal due to sale of the underlying property, refinancing, or foreclosure,
net of fees and costs which may be incurred) expose a Portfolio to a lower rate
of return upon reinvestment of principal. Also, if a security subject to
prepayment has been purchased at a premium, in the event of prepayment the value
of the premium would be lost. Like other fixed-income securities, when interest
rates rise, the value of a mortgage-related security will generally decline;
however, when interest rates are declining, the value of mortgage-related
securities with prepayment features may not increase as much as other
fixed-income securities. The value of these securities also may change because
of changes in the market's perception of the creditworthiness of the federal
agency or private institution that issued them. In addition, the mortgage
securities market in general may be adversely affected by changes in
governmental regulation or tax policies.
Collateralized Mortgage Obligations (CMOs):
CMOs are obligations fully collateralized by a portfolio of mortgages
or mortgage-related securities. Payments of principal and interest on the
mortgages are passed through to the holders of the CMOs on the same schedule as
they are received, although certain classes of CMOs have priority over others
with respect to the receipt of prepayments on the mortgages. Therefore,
depending on the type of CMOs in which a Portfolio invests, the investment may
be subject to a greater or lesser risk of prepayment than other types of
mortgage-related securities. CMOs may also be less marketable than other
securities.
Stripped Agency Mortgage-Backed Securities:
Stripped Agency Mortgage-Backed securities represent interests in a
pool of mortgages, the cash flow of which has been separated into its interest
and principal components. "IOs" (interest only securities) receive the interest
portion of the cash flow while "POs" (principal only securities) receive the
principal portion. Stripped Agency Mortgage-Backed Securities may be issued by
U.S. Government Agencies or by private issuers similar to those described above
with respect to CMOs and privately-issued mortgage-backed certificates. As
interest rates rise and fall, the value of IOs tends to move in the same
direction as interest rates. The value of the other mortgage-backed securities
described herein, like other debt instruments, will tend to move in the opposite
direction compared to interest rates.
The cash flows and yields on IO and PO classes are extremely sensitive
to the rate of principal payments (including prepayments) on the related
underlying mortgage assets. For example, a rapid or slow rate of principal
payments may have a material adverse effect on the prices of IOs or POs,
respectively. If the underlying mortgage assets experience greater than
anticipated prepayments of principal, an investor may fail to recoup fully its
initial investment in an IO class of a stripped mortgage-backed security, even
if the IO class is rated AAA or Aaa or is derived from a full faith and credit
obligation. Conversely, if the underlying mortgage assets experience slower than
anticipated prepayments of principal, the price on a PO class will be affected
more severely than would be the case with a traditional mortgage-backed
security.
Options:
Call Options. A call option on a security gives the purchaser of the
option, in return for a premium paid to the writer (seller), the right to buy
the underlying security at the exercise price at any time during the option
period. Upon exercise by the purchaser, the writer (seller) of a call option has
the obligation to sell the underlying security at the exercise price. When a
Portfolio purchases a call option, it will pay a premium to the party writing
the option and a commission to the broker selling the option. If the option is
exercised by such Portfolio, the amount of the premium and the commission paid
may be greater than the amount of the brokerage commission that would be charged
if the security were to be purchased directly. By writing a call option, a
Portfolio assumes the risk that it may be required to deliver the security
having a market value higher than its market value at the time the option was
written. The Portfolio will write call options in order to obtain a return on
its investments from the premiums received and will retain the premiums whether
or not the options are exercised. Any decline in the market value of Portfolio
securities will be offset to the extent of the premiums received (net of
transaction costs). If an option is exercised, the premium received on the
option will effectively increase the exercise price.
During the option period the writer of a call option has given up the
opportunity for capital appreciation above the exercise price should market
price of the underlying security increase, but has retained the risk of loss
should the price of the underlying security decline. Writing call options also
involves the risk relating to a Portfolio's ability to close out options it has
written.
A call option on a securities index is similar to a call option on an
individual security, except that the value of the option depends on the weighted
value of the group of securities comprising the index and all settlements are
made in cash. A call option may be terminated by the writer (seller) by entering
into a closing purchase transaction in which it purchases an option of the same
series as the option previously written.
Put Options. A put option on a security gives the purchaser of the
option, in return for premium paid to the writer (seller), the right to sell the
underlying security at the exercise price at any time during the option period.
Upon exercise by the purchaser, the writer of a put option has the obligation to
purchase the underlying security at the exercise price. By writing a put option,
a Portfolio assumes the risk that it may be required to purchase the underlying
security at a price in excess of its current market value.
A put option on a securities index is similar to a put option on an
individual security, except that the value of the option depends on the weighted
value of the group of securities comprising the index and all settlements are
made in cash.
A Portfolio may sell a call option or a put option which it has
previously purchased prior to purchase (in the case of a call) or the sale (in
the case of a put) of the underlying security. Any such sale would result in a
net gain or loss depending on whether the amount received on the sale is more or
less than the premium and other transaction costs paid on the call or put which
is sold.
Futures Contracts and Related Options:
A financial futures contract calls for delivery of a particular
security at a certain time in the future. The seller of the contract agrees to
make delivery of the type of security called for in the contract and the buyer
agrees to take delivery at a specified future time. A Portfolio may also write
call options and purchase put options on financial futures contracts as a hedge
to attempt to protect the Portfolio's securities from a decrease in value. When
a Portfolio writes a call option on a futures contract, it is undertaking the
obligation of selling a futures contract at a fixed price at any time during a
specified period if the option is exercised. Conversely, the purchaser of a put
option on a futures contract is entitled (but not obligated) to sell a futures
contract at a fixed price during the life of the option.
Financial futures contracts consist of interest rate futures contracts
and securities index futures contracts. An interest rate futures contract
obligates the seller of the contract to deliver, and the purchaser to take
delivery of, interest rate securities called for in a contract at a specified
future time at a specified price. A stock index assigns relative values to
common stocks included in the index and the index fluctuates with changes in the
market values of the common stocks included. A stock index futures contract is a
bilateral contract pursuant to which two parties agree to take or make delivery
of an amount of cash equal to a specified dollar amount times the difference
between the stock index value at the close of the last trading day of the
contract and the price at which the futures contract is originally struck. An
option on a financial futures contract gives the purchaser the right to assume a
position in the 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.
Futures contracts and options can be highly volatile and could result
in reduction of a Portfolio's total return, and a Portfolio's attempt to use
such investments for hedging purposes may not be successful. Successful futures
strategies require the ability to predict future movements in securities prices,
interest rates and other economic factors. A Portfolio's potential losses from
the use of futures extends beyond its initial investment in such contracts.
Also, losses from options and futures could be significant if a Portfolio is
unable to close out its position due to distortions in the market or lack of
liquidity.
The use of futures, options and forward contracts involves investment
risks and transaction costs to which a Portfolio would not be subject absent the
use of these strategies. If a Sub-advisor seeks to protect a Portfolio against
potential adverse movements in the securities, foreign currency or interest rate
markets using these instruments, and such markets do not move in a direction
adverse to such Portfolio, such Portfolio could be left in a less favorable
position than if such strategies had not been used. Risks inherent in the use of
futures, options, forward contracts and swaps include: (a) the risk that
interest rates, securities prices and currency markets will not move in the
directions anticipated; (b) imperfect correlation between the price of futures,
options and forward contracts and movements in the prices of the securities or
currencies being hedged; (c) the fact that skills needed to use these strategies
are different from those needed to select portfolio securities; (d) the possible
absence of a liquid secondary market for any particular instrument at any time;
and (e) the possible need to defer closing out certain hedged positions to avoid
adverse tax consequences. A Portfolio's ability to terminate option positions
established in the over-the-counter market may be more limited than in the case
of exchange-traded options and may also involve the risk that securities dealers
participating in such transactions would fail to meet their obligations to such
Portfolio.
The use of options and futures involves the risk of imperfect
correlation between movements in options and futures prices and movements in the
price of securities which are the subject of a hedge. Such correlation,
particularly with respect to options on stock indices and stock index futures,
is imperfect, and such risk increases as the composition of the Portfolio
diverges from the composition of the relevant index. The successful use of these
strategies also depends on the ability of the Sub-advisor to correctly forecast
interest rate movements and general stock market price movements.
Foreign Securities:
Investments in securities of foreign issuers may involve risks that are
not present with domestic investments. While investments in foreign securities
are intended to reduce risk by providing further diversification, such
investments involve sovereign risk in addition to credit and market risks.
Sovereign risk includes local political or economic developments, potential
nationalization, withholding taxes on dividend or interest payments, and
currency blockage (which would prevent cash from being brought back to the
United States). Compared to United States issuers, there is generally less
publicly available information about foreign issuers and there may be less
governmental regulation and supervision of foreign stock exchanges, brokers and
listed companies. Fixed brokerage commissions on foreign securities exchanges
are generally higher than in the United States. Foreign issuers are not
generally subject to uniform accounting and auditing and financial reporting
standards, practices and requirements comparable to those applicable to domestic
issuers. Securities of some foreign issuers are less liquid and their prices are
more volatile than securities of comparable domestic issuers. In some countries,
there may also be the possibility of expropriation or confiscatory taxation,
limitations on the removal of funds or other assets, difficulty in enforcing
contractual and other obligations, political or social instability or
revolution, or diplomatic developments which could affect investments in those
countries. Settlement of transactions in some foreign markets may be delayed or
less frequent than in the United States, which could affect the liquidity of
investments. For example, securities which are listed on foreign exchanges or
traded in foreign markets may trade on days (such as Saturday or Holidays) when
a Portfolio does not compute its price or accept orders for the purchase,
redemption or exchange of its shares. As a result, the net asset value of a
Portfolio may be significantly affected by trading on days when shareholders
cannot make transactions. Further, it may be more difficult for the Trust's
agents to keep currently informed about corporate actions which may affect the
price of portfolio securities. Communications between the U.S. and foreign
countries may be less reliable than within the U.S., increasing the risk of
delayed settlements or loss of certificates for portfolio securities.
Investments by a Portfolio in foreign companies may require such
Portfolio to hold securities and funds denominated in a foreign currency.
Foreign investments may be affected favorably or unfavorably by changes in
currency rates and exchange control regulations. Thus, such a Portfolio's net
asset value per share will be affected by changes in currency exchange rates.
Changes in foreign currency exchange rates may also affect the value of
dividends and interest earned, gains and losses realized on the sale of
securities and net investment income and gains, if any, to be distributed to
shareholders of such a Portfolio. Foreign currency exchange rates generally are
determined by the forces of supply and demand in foreign exchange markets and
the relative merits of investment in different countries, actual or perceived
changes in interest rates or other complex factors, as seen from an
international perspective. Currency exchange rates also can be affected
unpredictably by intervention by U.S. or foreign governments or central banks or
the failure to intervene, or by currency controls or political developments in
the U.S. or abroad. In addition, a Portfolio may incur costs in connection with
conversions between various currencies. Investors should understand and consider
carefully the special risks involved in foreign investing. These risks are often
heightened for investments in emerging or developing countries.
Developing Countries. Investing in developing countries involves
certain risks not typically associated with investing in U.S. securities, and
imposes risks greater than, or in addition to, risks of investing in foreign,
developed countries. These risks include: the risk of nationalization or
expropriation of assets or confiscatory taxation; currency devaluations and
other currency exchange rate fluctuations; social, economic and political
uncertainty and instability (including the risk of war); more substantial
government involvement in the economy; higher rates of inflation; less
government supervision and regulation of the securities markets and participants
in those markets; controls on foreign investment and limitations on repatriation
of invested capital and on a Portfolio's ability to exchange local currencies
for U.S. dollars; unavailability of currency hedging techniques in certain
developing countries; the fact that companies in developing countries may be
smaller, less seasoned and newly organized companies; the difference in, or lack
of, auditing and financial reporting standards, which may result in
unavailability of material information about issuers; the risk that it may be
more difficult to obtain and/or enforce a judgment in a court outside the United
States; and greater price volatility, substantially less liquidity and
significantly smaller market capitalization of securities markets.
American Depository Receipts ("ADRs"), European Depository Receipts ("EDRs") and
Global Depository Receipts ("GDRs"):
ADRs are dollar-denominated receipts generally issued by a domestic
bank that represents the deposit of a security of a foreign issuer. ADRs may be
publicly traded on exchanges or over-the-counter in the United States. EDRs are
receipts similar to ADRs and are issued and traded in Europe. GDRs may be
offered privately in the United States and also trade in public or private
markets in other countries. Depository Receipts may be issued as sponsored or
unsponsored programs. In sponsored programs, the issuer makes arrangements to
have its securities traded in the form of a Depository Receipt. In unsponsored
programs, the issuer may not be directly involved in the creation of the
program. Although regulatory requirements with respect to sponsored and
unsponsored programs are generally similar, the issuers of unsponsored
Depository Receipts are not obligated to disclose material information in the
United States and, therefore, the import of such information may not be
reflected in the market value of such securities.
Currency Fluctuations:
Investments in foreign securities may be denominated in foreign
currencies. The value of Portfolio investments denominated in foreign currencies
may be affected, favorably or unfavorably, by the relative strength of the U.S.
dollar, changes in foreign currency and U.S. dollar exchange rates and exchange
control regulations. A Portfolio's net asset value per share may, therefore, be
affected by changes in currency exchange rates. Changes in foreign currency
exchange rates may also affect the value of dividends and interest earned, gains
and losses realized on the sale of securities and net investment income and
gains, if any, to be distributed to shareholders by a Portfolio. The rate of
exchange between the U.S. dollar and other currencies is determined by the
forces of supply and demand in the foreign exchange markets and in some cases,
exchange controls. For an additional discussion, see "Foreign Securities" above.
Forward Foreign Currency Exchange Contracts:
A forward foreign currency exchange contract involves an obligation to
purchase or sell a specified currency at a future date, which may be any fixed
number of days from the date the contract is agreed upon by the parties, at a
price set at the time of the contract. By entering into a forward foreign
currency contract, a Portfolio "locks in" the exchange rate between the currency
it will deliver and the currency it will receive for the duration of the
contract. As a result, a Portfolio reduces its exposure to changes in the value
of the currency it will deliver and increases its exposure to changes in the
value of the currency into which it will exchange. The effect on the value of a
Portfolio is similar to selling securities denominated in one currency and
purchasing securities denominated in another. The Portfolios may enter into
these contracts for the purposes of hedging against foreign exchange risk
arising from such Portfolio's investment or anticipated investment in securities
denominated in foreign currencies. Although a Sub-advisor may, from time to
time, seek to protect a Portfolio by using forward contracts, anticipated
currency movements may not be accurately predicted and the Portfolio may incur a
gain or a loss on a forward contract. A forward contract may reduce a
Portfolio's losses on securities denominated in foreign currency, but it may
also reduce the potential gain on the securities depending on changes in the
currency's value relative to the U.S. dollar or other currencies.
Lower-Rated High-Yield Bonds:
In general the market for lower-rated high-yield-bonds (commonly known
as "junk bonds") is more limited than the market for higher-rated bonds, and
because their markets may be thinner and less active, the market prices of
lower-rated high-yield bonds may fluctuate more than the prices of higher-rated
bonds, particularly in times of market stress. In addition, while the market for
high-yield corporate debt securities has been in existence for many years, the
market in recent years has experienced a dramatic increase in the large-scale
use of such securities to fund highly leveraged corporate acquisitions and
restructurings. Accordingly, past experience may not provide an accurate
indication of future performance of the high-yield bond market, especially
during periods of economic recession. Other risks which may be associated with
lower-rated high-yield bonds include their relative insensitivity to interest
rate changes; the exercise of any of their redemption or call provisions in a
declining market may result in their replacement by lower yielding bonds; and
legislation, from time to time, may adversely affect their market. Since the
risk of default is higher among lower-rated high-yield bonds, a Sub-advisor's
research and analysis are an important ingredient in the selection of
lower-rated high-yield bonds. Through portfolio diversification, good credit
analysis and attention to current developments and trends in interest rates and
economic conditions, investment risk may be reduced, although there is no
assurance that losses will not occur.
Illiquid or Restricted Securities:
The Board of Trustees of the Trust has promulgated guidelines with
respect to illiquid securities. Illiquid securities are deemed as such because
they are subject to restrictions on their resale ("restricted securities") or
because, based upon their nature or the market for such securities, they are not
readily marketable. Restricted securities are acquired through private placement
transactions, directly from the issuer or from security holders, generally at
higher yields or on terms more favorable to investors than comparable publicly
traded securities. However, the restrictions on resale may make it difficult for
a Portfolio to dispose of such securities at the time considered most
advantageous by its Sub-advisor, and/or may involve expenses that would not be
incurred in the sale of securities that were freely marketable. A Portfolio that
may purchase restricted securities may qualify for and trade restricted
securities in the "institutional trading market" pursuant to Rule 144A of the
Securities Act of 1933. Trading in the institutional trading market may enable a
Sub-advisor to dispose of restricted securities at a time the Sub-advisor
considers advantageous and/or at a more favorable price than would be available
if such securities were not traded in such market. However, the institutional
trading market is relatively new and liquidity of a Portfolio's investments in
such market could be impaired if trading does not develop or declines. Risks
associated with restricted securities include the potential obligation to pay
all or part of the registration expenses in order to sell certain restricted
securities. A considerable period of time may elapse between the time of the
decision to sell a security and the time a Portfolio may be permitted to sell it
under an effective registration statement. If, during such a period, adverse
conditions were to develop, a Portfolio might obtain a less favorable price than
prevailing when it decided to sell.
Repurchase Agreements:
The Board of Trustees of the Trust has promulgated guidelines with
respect to repurchase agreements. Repurchase agreements are agreements by which
a Portfolio purchases a security and obtains a simultaneous commitment from the
seller to repurchase the security at an agreed upon price and date. The resale
price is in excess of the purchase price and reflects an agreed upon market rate
unrelated to the coupon rate on the purchased security. A repurchase transaction
is usually accomplished either by crediting the amount of securities purchased
to the account of a Portfolio's custodian maintained in a central depository or
book-entry system or by physical delivery of the securities to a Portfolio's
custodian in return for delivery of the purchase price to the seller. Repurchase
transactions are intended to be short-term transactions with the seller
repurchasing the securities, usually within seven days.
A Portfolio which enters into a repurchase agreement bears a risk of
loss in the event that the other party to such an agreement defaults on its
obligation and such Portfolio is delayed or prevented from exercising its rights
to dispose of the collateral securities, including the risk of a possible
decline in value of the underlying securities during the period such Portfolio
seeks to assert these rights, as well as the risk of incurring expenses in
asserting these rights and the risk of losing all or part of the income from
such an agreement. If the seller institution defaults, a Portfolio might incur a
loss or delay in the realization of proceeds if the value of the collateral
securing the repurchase agreement declines and it might incur disposition costs
in liquidating the collateral. In the event that such a defaulting seller filed
for bankruptcy or became insolvent, disposition of such securities by a
Portfolio might be delayed pending court action.
Reverse Repurchase Agreements:
In a reverse repurchase agreement, a Portfolio transfers possession of
a portfolio instrument to another person, such as a broker-dealer or financial
institution in return for a percentage of the instrument's market value in cash
and agrees that on a stipulated date in the future such Portfolio will
repurchase the portfolio instrument by remitting the original consideration plus
interest at an agreed upon rate. When effecting reverse repurchase agreements,
assets of a Portfolio, in a dollar amount sufficient to make payment for the
obligations to be repurchased, are segregated on such Portfolio's records at the
trade date and are maintained until the transaction is settled. Reverse
repurchase agreements involve the risk that the market value of the securities
retained by the Portfolio may decline below the repurchase price of the
securities sold by the Portfolio which it is obligated to repurchase.
Borrowing:
Each Portfolio's borrowings are limited so that immediately after such
borrowing the value of the Portfolio's assets (including borrowings) less its
liabilities (not including borrowings) is at least three times the amount of the
borrowings. Should a Portfolio, for any reason, have borrowings that do not meet
the above test then, within three business days, such Portfolio must reduce such
borrowings so as to meet the necessary test. Under such a circumstance, such
Portfolio may have to liquidate securities at a time when it is disadvantageous
to do so. Gains made with additional funds borrowed will generally cause the net
asset value of such Portfolio's shares to rise faster than could be the case
without borrowings. Conversely, if investment results fail to cover the cost of
borrowings, the net asset value of such Portfolio could decrease faster than if
there had been no borrowings.
Convertible Securities and Warrants:
Convertible securities generally participate in the appreciation or
depreciation of the underlying stock into which they are convertible, but to a
lesser degree. Warrants are options to buy a stated number of shares of common
stock at a specified price any time during the life of the warrants. The value
of warrants may fluctuate more than the value of the securities underlying such
warrants. The value of a warrant detached from its underlying security will
expire without value if the rights under such warrant are not exercised prior to
its expiration date.
Lending:
With respect to the lending of securities, there is the risk of delays
in receiving additional collateral or in the recovery of securities and possible
loss of rights in collateral in the event that a borrower fails financially.
REGULATORY MATTERS:
In connection with its proposed futures and options transactions, the
Trust filed with the CFTC a notice of eligibility for exemption from the
definition of (and therefore from CFTC regulation as) a "commodity pool
operator" under the Commodity Exchange Act for the Portfolios. The Trust
represents in its notice of eligibility that:
(i) it will not purchase or sell futures or options on futures contracts or
stock indices for purposes other than bona fide hedging transactions (as defined
by the CFTC) if as a result the sum of the initial margin deposits and premiums
required to establish positions in futures contracts and related options that do
not fall within the definition of bona fide hedging transactions would exceed 5%
of the fair market value of each Portfolio's net assets; and
(ii) a Portfolio will not enter into any futures contracts if the aggregate
amount of that Portfolio's commitments under outstanding futures contracts
positions would exceed the market value of its total assets.
Currently, the Trust either has or will make a commitment regarding
each Portfolio to the State of California Department of Insurance to limit its
borrowings to 10% of the Portfolio's net asset value when borrowing for any
general purpose and to an additional 15% (for a total of 25%) when borrowing as
a temporary measure to facilitate redemptions. For purposes of the foregoing
commitment, net asset value is the market value of all investments or assets
owned by a Portfolio, less its outstanding liabilities, at the time that any new
or additional borrowing is undertaken.
Additionally, the Trust either has made or will make a commitment
regarding each Portfolio to the State of California Department of Insurance with
respect to diversification of its foreign investments. Such commitment generally
requires that a Portfolio: (i) (consistent with the Portfolio's investment
policies) invest in a minimum of five different foreign countries; except that
this minimum may be reduced to four when foreign country investments comprise
less than 80% of the Portfolio's net asset value, to three when less than 60% of
such assets, to two when less than 40% of such assets, or to one when less than
20% of such assets; and (ii) have no more than 20% of its net asset value
invested in securities of issuers located in any one foreign country; except
that, a Portfolio may have an additional 15% of its net asset value invested in
securities of issuers located in any one of the following countries: Australia,
Canada, France, Japan, the United Kingdom or Germany. (Investments in U.S.
issuers are not subject to any of the foregoing.)
The Trust currently does not foresee any disadvantages to the holders
of variable annuity contracts and variable life insurance policies of affiliated
or unaffiliated Participating Insurance Companies or participants of Qualified
Plans (see page 2) arising from the fact that the interests of the holders of
variable annuity contracts and variable life insurance policies and participants
of Qualified Plans may differ due to differences of tax treatment or other
considerations or due to conflicts between the affiliated or unaffiliated
Participating Insurance Companies or Qualified Plans. Nevertheless, the Trustees
intend to monitor events in order to identify any material irreconcilable
conflicts which may possibly arise and to determine what action, if any, should
be taken in response to such conflicts. The variable annuity contracts and
variable life insurance policies are described in the separate prospectuses
issued by the Participating Insurance Companies. The Trust assumes no
responsibility for such prospectuses.
PORTFOLIO TURNOVER:
Each Portfolio may generally change its investments at any time in
accordance with its Sub-advisor's appraisal of factors affecting any particular
issuer or the market or economy in general. The frequency of the Portfolio's
transactions -- the Portfolio's turnover rate -- will vary from year to year
depending upon market conditions. High turnover involves correspondingly greater
brokerage commissions, other transaction costs and a possible increase in
short-term capital gains or losses. The anticipated annual rate of turnover is
as follows:
Seligman Henderson International Equity Portfolio: not to exceed 100%.
Seligman Henderson International Small Cap Portfolio: not to exceed
100% under normal market conditions.
Lord Abbett Growth and Income Portfolio: not to exceed 100%.
JanCap Growth Portfolio: not to exceed 200% under normal market
conditions.
AST Money Market Portfolio: The policy of this Portfolio of investing only
in securities maturing 397 days or less from the date of acquisition or
purchased pursuant to repurchase agreements that provide for repurchase by the
seller within 397 days from the date of acquisition will result in a high
portfolio turnover rate.
Federated Utility Income Portfolio: not to exceed 75% under normal market
conditions.
Federated High Yield Portfolio: not to exceed 100% under normal market
conditions.
AST Phoenix Balanced Asset Portfolio: not to exceed 200% under normal
market conditions.
T. Rowe Price Asset Allocation Portfolio: not to exceed 100% under normal
market conditions.
T. Rowe Price International Equity Portfolio: not to exceed 100% under
normal market conditions.
T. Rowe Price Natural Resources Portfolio: not to exceed 100% under normal
market conditions
T. Rowe Price International Bond Portfolio: not to exceed 350%.
Founders Capital Appreciation Portfolio: not to exceed 200% under normal
market conditions.
INVESCO Equity Income Portfolio: not to exceed 200% under normal market
conditions.
PIMCO Total Return Bond Portfolio: not to exceed 150% under normal market
conditions.
PIMCO Limited Maturity Bond Portfolio: not to exceed 150% under normal
market conditions.
Berger Capital Growth Portfolio: not to exceed 100% under normal market
conditions.
Robertson Stephens Value + Growth Portfolio: portfolio turnover rate will
vary depending on various investing conditions.
For further details regarding the portfolio turnover rates, see
"Portfolio Turnover" in the Trust's Statement of Additional Information.
BROKERAGE ALLOCATION:
Generally, the primary consideration in placing Portfolio securities
transactions with broker-dealers for execution is to obtain, and maintain the
availability of, execution at the best net price available and in the most
effective manner possible. The Trust's brokerage allocation policy may permit a
Portfolio to pay a broker-dealer which furnishes research services a higher
commission than that which might be charged by another broker-dealer which does
not furnish research services, provided that such commission is deemed
reasonable in relation to the value of the services provided by such
broker-dealer. In addition, each Portfolio's Sub-advisor may consider the use of
broker-dealers which might be deemed to be their affiliates, and may consider
sale of shares of the Portfolio, as well as the recommendations of the
Investment Manager, as a factor in selection of broker-dealers to execute
transactions, subject to the requirements of best net price and most favorable
execution. For a complete discussion of portfolio transactions and brokerage
allocation, see "Brokerage Allocation" in the Statement of Additional
Information.
INVESTMENT RESTRICTIONS:
For each Portfolio the Trust has adopted a number of investment
restrictions which are fundamental policies and may not be changed without the
approval of the holders of a majority of the affected Portfolio's outstanding
voting securities as defined in the Investment Company Act of 1940, as amended
(the "1940 Act"). The Statement of Additional Information describes all the
restrictions on each Portfolio's investment activities.
NET ASSET VALUES:
The net asset value per share of each Portfolio, other than the AST
Money Market Portfolio, is determined by dividing the market value of that
Portfolio's securities as of the close of trading plus any cash or other assets
(including dividends and accrued interest) less all liabilities (including
accrued expenses) by the number of shares outstanding in that Portfolio. Each
Portfolio will determine the net asset value of its shares on each "business"
day, which is each day that the New York Stock Exchange (the "NYSE") is open for
business, exclusive of national holidays. The Trust's Board of Trustees has
established procedures for valuing the Portfolios' securities. In general, these
valuations are based on market value with special provisions for: securities not
listed on an exchange or securities market; securities for which recent market
quotations are not readily available; short-term obligations; and open short
positions and options written on securities. In addition, the AST Money Market
Portfolio values all securities by the amortized cost method. This method
attempts to maintain a constant net asset value per share of $1.00. No assurance
can be given that this goal can be attained. See "Computation of Net Asset
Values" in the Statement of Additional Information.
PURCHASE AND REDEMPTION OF SHARES:
Purchases of shares of the Portfolios may be made only by separate
accounts of Participating Insurance Companies for the purpose of funding
variable annuity contracts and variable life insurance policies or by Qualified
Plans. The separate accounts of the Participating Insurance Companies place
orders to purchase and redeem shares of the Trust based on, among other things,
the amount of premium payments to be invested and the amount of surrender and
transfer requests (as defined in the prospectus describing the variable annuity
contracts and variable life insurance policies issued by the Participating
Insurance Companies) to be effected on that day pursuant to variable annuity
contracts and variable life insurance policies. Orders received by the Trust or
the Trust's transfer agent are effected on days on which the NYSE is open for
trading. For orders received before 4:00 P.M. Eastern time, purchases and
redemptions of the shares of the Trust are effected at the net asset values per
share determined as of 4:00 P.M. Eastern time on that same day. Orders received
after 4:00 P.M. Eastern time, are effected at the next calculated net asset
values. Payment for redemptions will be made by the Trust's transfer agent on
behalf of the Trust within seven days after the request is received. The Trust
does not assess any fees, either when it sells or when it redeems its
securities. Surrender charges, mortality and expense risk fees and other charges
may be assessed by Participating Insurance Companies under the variable annuity
contracts or variable life insurance policies. These fees should be described in
the Participating Insurance Companies' prospectuses.
As of the date of this Prospectus, American Skandia Life Assurance
Corporation is the only Participating Insurance Company. In the future, shares
of the Trust may be sold to and held by separate accounts that fund variable
annuity and variable life insurance contracts issued by both affiliated and
unaffiliated Participating Insurance Companies and also directly to Qualified
Plans. While it is not anticipated, should any conflict arise between the
holders of variable annuity contracts and variable life insurance policies of
affiliated or unaffiliated Participating Insurance Companies and participants in
Qualified Plans which would require that a substantial amount of net assets be
withdrawn from the Trust, orderly Portfolio management could be disrupted to the
potential detriment of such holders (see "Other Information" for more details).
MANAGEMENT OF THE TRUST:
As of the date of this Prospectus, eighteen Portfolios are available.
The Trust may offer additional Portfolios with a range of investment objectives
that Participating Insurance Companies may consider suitable for variable
annuities and variable life insurance policies or that may be considered
suitable for Qualified Plans. The Trust's current approach to achieving this
goal is to seek to have multiple organizations unaffiliated with each other be
responsible for conducting the investment programs for the Portfolios. Each such
organization would be responsible for the Portfolio or Portfolios to which such
organization's expertise is best suited.
Formerly, the Trust was known as the Henderson International Growth
Fund, which consisted of only one Portfolio. The Investment Manager was
Henderson International, Inc. Shareholders of what was, at the time, the
Henderson International Growth Fund, approved certain changes in a meeting held
April 17, 1992. These changes included engagement of a new Investment Manager,
engagement of a Sub-advisor and election of new Trustees. Subsequent to that
meeting, the new Trustees adopted a number of resolutions, including, but not
limited to, resolutions renaming the Trust. Since that time the Trustees have
adopted a number of resolutions, including, but not limited to, making the new
Portfolios available and adopting the form of Management Agreements and
Sub-advisory Agreements between the Investment Manager and the Trust and the
Investment Manager and each Sub-advisor, respectively.
The Trustees are David E.A. Carson, Thomas M. O'Brien, F. Don Schwartz, Jan
R. Carendi and Gordon C. Boronow. Additional information about the Trustees and
the Trust's executive officers may be found in the Statement of Additional
Information under the section "Management."
Investment Manager: American Skandia Investment Services, Incorporated
("ASISI"), One Corporate Drive, Shelton, Connecticut, acts as Investment Manager
to the Trust. ASISI, a Connecticut corporation organized in 1991, is registered
as an investment adviser with the Securities and Exchange Commission. Prior to
April 7, 1995, ASISI was known as American Skandia Life Investment Management,
Inc. ASISI is a wholly-owned subsidiary of American Skandia Investment Holding
Corporation, whose indirect parent is Skandia Insurance Company Ltd.
("Skandia"). Skandia is a Swedish company that owns, directly or indirectly, a
number of insurance companies in many countries. The predecessor to Skandia
commenced operations in 1855.
The only Participating Insurance Company as of the date of this
Prospectus is American Skandia Life Assurance Corporation, which is also a
wholly-owned subsidiary of American Skandia Investment Holding Corporation.
Certain officers of the Trust are officers and/or directors of one or more of
the following companies: ASISI, American Skandia Life Assurance Corporation,
American Skandia Marketing, Incorporated (the principal underwriter for various
annuities deemed to be securities for American Skandia Life Assurance
Corporation) and American Skandia Investment Holding Corporation.
Sub-advisors:
Seligman Henderson International Equity Portfolio and Seligman Henderson
International Small Cap Portfolio: Seligman Henderson Co. serves as Sub-advisor
to the Seligman Henderson International Equity Portfolio and Seligman Henderson
International Small Cap Portfolio. Seligman Henderson Co. was founded in 1991 as
a joint venture between J.&W. Seligman & Co. Incorporated and Henderson
International, Inc., a controlled affiliate of Henderson Administration Group
plc. The Sub-advisor, headquartered in New York, was created to provide
international and global investment management services to institutional and
individual investors and investment companies in the United States. Seligman
Henderson Co. also currently serves as sub-advisor to Seligman Capital Fund,
Inc., Seligman Common Stock Fund, Inc., Seligman Communications and Information
Fund, Inc., Seligman Frontier Fund Inc., Seligman Growth Fund, Inc., Seligman
Henderson Global Technology Fund, Seligman Henderson International Fund,
Seligman Henderson Global Growth Opportunities Fund, Seligman Henderson Global
Smaller Companies Fund, Seligman Income Fund, Inc., the Global Portfolio and
Global Smaller Companies Portfolio of Seligman Portfolios, Inc., and
Tri-Continental Corporation. The address of the Sub-advisor is 100 Park Avenue,
New York, NY 10017.
Mr. Iain C. Clark is responsible for the day-to-day investment activity of
the Seligman Henderson International Equity Portfolio and Seligman Henderson
International Small Cap Portfolio. Mr. Clark is a Managing Director and Chief
Investment Officer of Seligman Henderson Co.
Lord Abbett Growth and Income Portfolio: Lord Abbett & Co., The General
Motors Building, 767 Fifth Avenue, New York, New York 10153-0203, which acts as
the Sub-advisor for the Lord Abbett Growth and Income Portfolio, has been an
investment manager for over 65 years. As of December 31, 1995, Lord Abbett
managed approximately $18 billion in a family of mutual funds and other advisory
accounts.
The portfolio manager responsible for management of the Portfolio is W.
Thomas Hudson, Jr., Executive Vice President. Mr. Hudson has served in this
capacity since the Portfolio's inception and has held a certain position in the
equity research department of Lord, Abbett & Co. since 1982.
JanCap Growth Portfolio: Janus Capital Corporation, 100 Fillmore
Street, Denver, Colorado 80206-4923, acts as the Sub-advisor for the JanCap
Growth Portfolio. Janus Capital Corporation serves as the investment advisor to
the Janus Funds, as well as advisor or sub-advisor to several other mutual funds
and individual, corporate, charitable and retirement accounts. As of December
31, 1995, Janus Capital Corporation managed assets worth over $30 billion.
Kansas City Southern Industries, Inc. ("KCSI") owns approximately 83% of the
outstanding voting stock of Janus Capital Corporation, most of which it acquired
in 1984. KCSI is a publicly-traded holding company whose primary subsidiaries
are engaged in transportation and financial services.
The portfolio manager responsible for management of the Portfolio is Thomas
F. Marsico. Mr. Marsico has managed Janus Growth and Income Fund since its
inception in May 1991 and Janus Twenty Fund since April 1985.
AST Money Market Portfolio: J.P. Morgan Investment Management Inc., 522
Fifth Avenue, New York, New York, 10036, acts as the Sub-advisor for the AST
Money Market Portfolio, and manages employee benefit funds of corporations,
labor unions and state and local governments and the accounts of other
institutional investors, including other investment companies. It is a
wholly-owned subsidiary of J.P. Morgan & Co. Incorporated, which, as of December
31, 1995, managed approximately $139 billion in assets. As of the date of this
Prospectus, it also was engaged to manage a portion of the assets of a separate
account of American Skandia Life Assurance Corporation, an affiliate of the
Investment Manager and, as of the date of this Prospectus, the only
Participating Insurance Company.
Federated Utility Income Portfolio and Federated High Yield Portfolio:
Federated Investment Counseling, Federated Investors Tower, Pittsburgh,
Pennsylvania 15222-3779, acts as the Sub-advisor for the Federated Utility
Income Portfolio and Federated High Yield Portfolio. Federated Investment
Counseling, organized as a Delaware business trust in 1989, is a registered
investment advisor under the Investment Advisers Act of 1940. It is a wholly
owned subsidiary of Federated Investors. Federated Investment Counseling and
other subsidiaries of Federated Investors serve as investment advisors to a
number of investment companies and private accounts. Total assets under
management or administration by these and other subsidiaries of Federated
Investors as of December 31, 1995, was approximately $80 billion.
The Co-portfolio managers responsible for management of the Federated
Utility Income Portfolio are Christopher H. Wiles, a Vice President of Federated
Research Corp., and Linda A. Duessel. Mr. Wiles joined Federated in 1990. He was
previously associated with Mellon Bank as an Assistant Vice President and as
Investment Manager with Mahoning National Bank. He is a Chartered Financial
Analyst and received his M.B.A. in Finance from Cleveland State University.
Linda A. Duessel has been the companies portfolio manager since May 1, 1995. Ms.
Duessel joined Federated Investors in 1991 and has been an Assistant Vice
President of an affiliate of the Sub-advisor. Ms. Duessel was employed by
Westinghouse Credit Corporation from 1983 until 1991, serving in a variety of
positions which culminated in her being named Vice President/Portfolio Manager
in the Mechanical Banking Group in 1990. Ms. Duessel served as a Senior Staff
Accountant at Arthur Young & Company from 1979 to 1982. Ms. Duessel received her
M.S.I.A. from Carnegie Mellon University. Ms. Duessel is a Certified Public
Accountant and a Chartered Financial Analyst.
The portfolio manager responsible for management of the Federated High
Yield Portfolio is Mark Durbiano. Mr. Durbiano has been a Vice President of
Federated Research Corp. since 1988. He joined Federated in 1982. He is a
Chartered Financial Analyst and received his M.B.A. from the University of
Pittsburgh.
AST Phoenix Balanced Asset Portfolio: Phoenix Investment Counsel, Inc.,
56 Prospect Street, Hartford, Connecticut 06115-0480, acts as Sub-advisor to the
AST Phoenix Balanced Asset Portfolio. The Sub-advisor was originally organized
in 1932 as John P. Chase, Inc. In addition to the AST Phoenix Balanced Asset
Portfolio, it serves as investment advisor to other entities. The Sub-advisor is
a wholly owned subsidiary of Phoenix Equity Planning Corporation, an indirect,
less than wholly-owned subsidiary of Phoenix Home Life Mutual Insurance Company
of Hartford, Connecticut. As of December 31, 1995, Phoenix Investment Counsel,
Inc. and its affiliates managed assets worth approximately $36 billion.
Mr. C. Edwin Riley, Jr. serves as Portfolio Manager primarily responsible
for the day-to-day management of the AST Phoenix Balanced Asset Portfolio. Mr.
Riley previously held the position of Senior Vice President and Director of
Equity Management at Nationsbank Investment Management.
T. Rowe Price Asset Allocation Portfolio: T. Rowe Price Associates, Inc.,
was founded in 1937 by the late Thomas Rowe Price, Jr. As of December 31, 1995,
the firm and its affiliates managed approximately $70 billion for approximately
four million individual and institutional investors. The Portfolio has an
Investment Advisory Committee composed of the following members: Edmund M.
Notzon, Chairman, Heather R. Landon, James M. McDonald, Jerome Clark, Peter Van
Dyke, M. David Testa and Richard T. Whitney. The Committee Chairman has
day-to-day responsibility for managing the Portfolio and works with the
Committee in developing and executing the Portfolio's investment program. Mr.
Notzon joined T. Rowe Price in 1989 and has been managing investments since
1991. Prior to joining T. Rowe Price, Mr. Notzon was Director of the Analysis
and Evaluation Division at the U.S. Environmental Protection Agency.
T. Rowe Price International Equity Portfolio: Rowe Price-Fleming
International, Inc. ("Price-Fleming") was founded in 1979 as a joint venture
between T. Rowe Price Associates, Inc. and Robert Fleming Holdings Limited.
Price-Fleming is one of the world's largest international mutual fund asset
managers with approximately $20 billion under management as of December 31, 1995
in its offices in Baltimore, London, Tokyo and Hong Kong. The Portfolio has an
investment advisory group that has day-to-day responsibility for managing the
Portfolio and developing and executing the Portfolio's investment program. The
members of the advisory group are listed below.
Martin G. Wade, Christopher Alderson, Peter Askew, Richard J. Bruce, Mark
J.T. Edwards, John R. Ford, Robert C. Howe, James B.M. Seddon, Benedict R.F.
Thomas, and David J.L. Warren.
Martin Wade joined Price-Fleming in 1979 and has 27 years of experience
with Fleming Group (Fleming Group includes Robert Fleming Holdings Ltd. and/or
Jardine Fleming International Holdings Ltd.) in research, client service and
investment management, including assignments in the Far East and the United
States.
Peter Askew joined Price-Fleming in 1988 and has 21 years of experience
managing multicurrency fixed income portfolios. Christopher Alderson joined
Price-Fleming in 1988, and has 9 years of experience with the Fleming Group in
research and portfolio management, including an assignment in Hong Kong. David
Boardman joined Price-Fleming in 1988 and has 21 years experience in managing
multicurrency fixed income portfolios. Richard J. Bruce joined Price-Fleming in
1991 and has 7 years of experience in investment management with the Fleming
Group in Tokyo. Mark J.T. Edwards joined Price-Fleming in 1986 and has 15 years
of experience in financial analysis, including 4 years in Fleming European
research. John R. Ford joined Price-Fleming in 1982 and has 16 years of
experience with Fleming Group in research and portfolio management, including
assignments in the Far East and the United States. Robert C. Howe joined
Price-Fleming in 1986 and has 16 years of experience in economic research in
Japan. James B.M. Seddon joined Price-Fleming in 1987 and has 9 years of
experience in investment management. Benedict R.F. Thomas joined Price-Fleming
in 1988 and has 7 years of portfolio management experience, including
assignments in London and Baltimore. David J.L. Warren joined Price-Fleming in
1984 and has 16 years experience in equity research, fixed income research and
portfolio management, including an assignment in Japan.
T. Rowe Price Natural Resources Portfolio: T. Rowe Price Associates, Inc.,
was founded in 1937 by the late Thomas Rowe Price, Jr. As of December 31, 1995,
the firm and its affiliates managed approximately $70 billion for approximately
four million individual and institutional investors.
The Portfolio is managed by an Investment Advisory Committee composed of
the following members: George A. Roche, Co-Chairman, Charles M. Ober,
Co-Chairman, Stephen W. Boesel, Hugh M. Evans, Richard P. Howard, James A.C.
Kennedy and David J. Wallack. The Committee Co-Chairmen have day-to-day
responsibility for managing the Portfolio and work with the Committee in
developing and executing the Portfolio's investment program. Mr. Roche joined T.
Rowe Price in 1968 and has been managing investments since 1979. Mr. Ober joined
T. Rowe Price in 1980 as an investment analyst, and has served as an Investment
Advisory Committee member for the past six years.
T. Rowe Price International Bond Portfolio: Rowe Price-Fleming
International, Inc. ("Price-Fleming") was founded in 1979 as a joint venture
between T. Rowe Price Associates, Inc. and Robert Fleming Holdings Limited.
Price-Fleming is one of the world's largest international mutual fund asset
managers with approximately $20 billion under management as of December 31, 1995
in its offices in Baltimore, London, Tokyo and Hong Kong. The Portfolio has an
investment advisory group that has day-to-day responsibility for managing the
Portfolio and developing and executing the Portfolio's investment program.
The advisory group for the Portfolio consists of Peter Askew,
Christopher Rothery and Michael Conelius. Peter Askew joined Price-Fleming in
1988 and has 21 years of experience managing multi-currency fixed-income
portfolios. Christopher Rothery joined Price-Fleming in 1994 and has 8 years of
experience managing multi-currency fixed-income portfolios. Prior to joining
Price-Fleming, he worked with Fleming International Fixed Income Management
Limited. Michael Conelius joined Price-Fleming in 1995. Prior to that, he had
been with T. Rowe Price since 1988.
Founders Capital Appreciation Portfolio: Founders Asset Management,
Inc., Founders Financial Center, 2930 East Third Avenue, Denver, Colorado 80206,
has acted as an investment advisor since 1938 and serves as investment advisor
to Founders Discovery, Frontier, Passport, Special, Worldwide Growth,
International Equity Growth, Blue Chip, Balanced, Government Securities, and
Money Market Funds. Founders, which is also the investment advisor for a number
of private accounts, managed assets aggregating approximately $31 billion as of
December 31, 1995.
The portfolio manager responsible for management of the Portfolio is
Michael K. Haines, a Senior Vice President of investments of Founders. Mr.
Haines has been associated with Founders for ten years, serving as assistant
portfolio manager and as a lead portfolio manager.
INVESCO Equity Income Portfolio: INVESCO Trust Company, a trust company
founded in 1969, is a wholly-owned subsidiary of INVESCO Funds Group, Inc., P.O.
Box 173706, Denver, Colorado 80217-3706, which was established in 1932. INVESCO
Trust Company serves as sub-advisor to INVESCO Growth Fund, Inc., INVESCO
Dynamics Fund, Inc.; INVESCO Money Market Funds, Inc.; INVESCO Income Funds,
Inc.; INVESCO Tax-Free Income Funds, Inc.; INVESCO Strategic Portfolios, Inc.;
INVESCO Emerging Opportunity Funds, Inc.; INVESCO Industrial Income Fund, Inc.;
INVESCO Multiple Asset Funds, Inc.; INVESCO Specialty Funds, Inc.; and INVESCO
Variable Investment Funds, Inc. INVESCO Funds Group, Inc. is a wholly-owned
subsidiary of INVESCO North American Holdings, Inc. ("INAH"), a Delaware
corporation, which in turn is a wholly-owned subsidiary of INVESCO PLC. INVESCO
PLC was organized in 1935.
The portfolio managers responsible for management of the INVESCO Equity
Income Portfolio are Charles P. Mayer, Portfolio Co-Manager; and Donovan J.
(Jerry) Paul, Portfolio Co-Manager. Mr. Mayer has served as Co-Portfolio Manager
of the INVESCO Industrial Income Fund since 1993 and also has served as
Portfolio Manager and Senior Vice President of INVESCO Trust Company since 1993.
Mr. Paul has served as Co-Portfolio Manager of the INVESCO Industrial Income
Fund since 1994 and has served as Senior Vice President (1994 to present) of
INVESCO Trust Company.
PIMCO Total Return Bond Portfolio and PIMCO Limited Maturity Bond
Portfolio: Pacific Investment Management Company ("PIMCO") serves as Sub-advisor
to the PIMCO Total Return Bond Portfolio and PIMCO Limited Maturity Bond
Portfolio. It is an investment counseling firm founded in 1971 and currently has
over $76.3 billion of assets under management. PIMCO is a subsidiary general
partnership of PIMCO Advisors L.P. ("PIMCO Advisors"). A majority interest in
PIMCO Advisors is held by PIMCO Partners, G.P., a general partnership between
Pacific Financial Asset Management Corporation, an indirect wholly owned
subsidiary of Pacific Mutual Life Insurance Company, and PIMCO Partners, LLC, a
California limited liability company controlled by the managing directors of
PIMCO. PIMCO's address is 840 Newport Center Drive, Suite 360, Newport Beach,
California 92660. PIMCO is a registered investment advisor with the Securities
and Exchange Commission and a commodity trader advisor with the CFTC.
The portfolio manager responsible for management of the PIMCO Total Return
Bond Portfolio and PIMCO Limited Maturity Bond Portfolio is William H. Gross.
Mr. Gross is managing director of PIMCO Investment Management Company and has
been associated with the firm for 24 years.
Berger Capital Growth Portfolio: Berger Associates, Inc., 210
University Blvd., Suite 900, Denver, Colorado, 80206, has acted as an investment
advisor since 1973. Berger Associates serves as the investment advisor to the
Berger Capital Growth Portfolio and other mutual funds, as well as for
retirement plans and institutional and private investors. As of December 31,
1995, Berger Associates, Inc., managed assets worth approximately $3.3 billion.
Kansas City Southern Industries, Inc. ("KCSI") owns approximately 84% of the
outstanding voting stock of Berger Associates, Inc., most of which it acquired
in 1994. KCSI is a publicly-traded holding company whose primary subsidiaries
are engaged in transportation services and financial asset management.
The portfolio manager responsible for the management of the Portfolio
is Rodney L. Linafelter. Mr. Linafelter, owner of approximately 8% of the
outstanding voting stock of Berger Associates, is Vice President, Chief
Investment Officer and a Director of Berger Associates. Mr. Linafelter joined
Berger Associates in January 1990, where he has served as portfolio manager of
the Berger One Hundred Fund and the Berger Growth and Income Fund, as well as
for retirement plans and institutional and private investors. From April 1986 to
December 1989, Mr. Linafelter was employed as a Financial Consultant (registered
representative) with Merrill Lynch, Pierce, Fenner & Smith, Inc., providing
investment advice to institutions and individuals.
Robertson Stephens Value + Growth Portfolio: Robertson, Stephens &
Company Investment Management, L.P., 555 California Street, San Francisco, CA
94104, serves as Sub-advisor to the Portfolio. Robertson, Stephens & Company
Investment Management, L.P., a California limited partnership, was formed in
1993 and is registered as an investment advisor with the Securities and Exchange
Commission. The sole limited partner of Robertson, Stephens & Company Investment
Management, L.P. is Robertson, Stephens & Company, L.L.C., a major investment
banking firm specializing in emerging growth companies that has developed
substantial investment research, underwriting, and venture capital expertise.
Since 1978, Robertson, Stephens & Company, L.L.C. has managed underwritten
public offerings for over $15.23 billion of securities of emerging growth
companies. Robertson, Stephens & Company Investment Management, L.P. and its
affiliates have in excess of $2.7 billion under management in public and private
investment funds. Robertson, Stephens & Company, L.L.C., its parent, Robertson,
Stephens & Company Group, L.L.C. and Sanford R. Robertson may be deemed to be
control persons of Robertson, Stephens & Company Investment Management, L.P.
The portfolio manager responsible for management of the Portfolio is Mr.
Ronald E. Elijah. From August 1985 to January 1990, Mr. Elijah was a securities
analyst for Robertson, Stephens & Company, L.P. From January 1990 to January
1992, Mr. Elijah was an analyst and portfolio manager for Water Street Capital,
which managed short selling investment funds. Mr. Elijah joined Robertson,
Stephens & Company Investment Management, L.P. as a portfolio manager in 1992.
Investment Management Agreements: The Trust has entered into Investment
Management Agreements with the Investment Manager (the "Management Agreements")
which provide that the Investment Manager will furnish each applicable Portfolio
with investment advice and investment management and administrative services
with respect to the applicable Portfolio subject to the supervision of the Board
of Trustees and in conformity with the stated policies of the applicable
Portfolio. The Investment Manager has engaged the Sub-advisors noted above to
conduct the investment programs of each Portfolio, including the purchase,
retention, disposition and lending of securities. Such Sub-advisors are required
to provide research and statistical analysis and to keep books and records of
securities transactions. The Investment Manager is responsible for monitoring
the activities of the Sub-advisors and reporting on the activities of the
Sub-advisors to the Trustees. The Investment Manager must also provide or obtain
for the Trust, and thereafter supervise, such executive, administrative,
accounting, custody, transfer agent and shareholder servicing services as are
deemed advisable by the Board of Trustees.
Under the terms of the Management Agreements, each Portfolio pays all
of its expenses, including, but not limited to, the costs incurred in connection
with the maintenance of its registration under the Securities Act of 1933, as
amended, and the 1940 Act, printing and mailing prospectuses and statements of
additional information to shareholders, certain office and financial accounting
services, taxes or governmental fees, brokerage commissions, Portfolio pricing,
custodial, transfer and shareholder servicing agent costs, expenses of outside
counsel and independent accountants, preparation of shareholder reports and
expenses of trustee and shareholder meetings. Expenses incurred by the Trust not
directly attributable to any specific Portfolio or Portfolios are allocated on
the basis of the net assets of the respective Portfolios.
The Investment Manager receives a fee, payable each month, for the
performance of its services. The Investment Manager pays each Sub-advisor a
portion of such fee for the performance of the Sub-advisory services. The
Investment Management fee payable may differ from Portfolio to Portfolio,
reflecting the objective, policies and restrictions of each Portfolio and the
nature of each Sub-advisory Agreement. Each Portfolio's fee is accrued daily for
the purposes of determining the offering and redemption price of the Portfolio's
shares. The fees payable to the Investment Manager are as follows:
Seligman Henderson International Equity Portfolio: An annual rate of
1.0% of the average daily net assets of the Portfolio. The Investment Manager
has also voluntarily agreed to waive a portion of its fee equal to .15% on
assets in excess of $75 million. The Investment Manager may terminate this
agreement at any time. For the year ended December 31, 1995, the amount of the
fee paid by the Trust to the Investment Manager was $2,198,484.
Seligman Henderson International Small Cap Portfolio: An annual rate of
1.0% of the average daily net assets of the Portfolio. For the period May 2,
1995 (commencement of operations) to December 31, 1995, the amount of the fee
paid by the Trust to the Investment Manager was $76,285.
Lord Abbett Growth and Income Portfolio: An annual rate of .75% of the
average daily net assets of the Portfolio. For the year ended December 31, 1995,
the amount of the fee paid by the Trust to the Investment Manager was
$1,059,567.
JanCap Growth Portfolio: An annual rate of .90% of the average daily
net assets of the Portfolio. For the year ended December 31, 1995, the amount of
the fee paid by the Trust to the Investment Manager was $2,977,217.
AST Money Market Portfolio: An annual rate of .50% of the average daily
net assets of the Portfolio. The Investment Manager has also voluntarily agreed
to waive a portion of its fee equal to .05% of the average daily net assets of
the Portfolio. The Investment Manager may terminate this agreement at any time.
For the year ended December 31, 1995, the amount of the fee paid by the Trust to
the Investment Manager was $1,503,661.
Federated Utility Income Portfolio: An annual rate equal to .75% of the
first $50 million of the average daily net assets of the Portfolio; plus .60% of
the Portfolio's average daily net assets in excess of $50 million. For the year
ended December 31, 1995, the amount of the fee paid by the Trust to the
Investment Manager was $601,598.
Federated High Yield Portfolio: .75% of the average daily net assets of the
Portfolio. For the year ended December 31, 1995, the amount of the fee paid by
the Trust to the Investment Manager was $346,448.
AST Phoenix Balanced Asset Portfolio: An annual rate equal to .75% of
the first $75 million of the Portfolio's average daily net assets; plus .65% of
the Portfolio's average daily net assets in excess of $75 million. For the year
ended December 31, 1995, the amount of the fee paid by the Trust to the
Investment Manager was $1,107,736.
T. Rowe Price Asset Allocation Portfolio: .85% of the average daily net
assets of the Portfolio. For the year ended December 31, 1995, the amount of the
fee paid by the Trust to the Investment Manager was $314,161.
T. Rowe Price International Equity Portfolio: 1.00% of the average daily
net assets of the Portfolio. For the year ended December 31, 1995, the amount of
the fee paid by the Trust to the Investment Manager was $1,412,350.
T. Rowe Price Natural Resources Portfolio: .90% of the average daily net
assets of the Portfolio. For the period May 2, 1995 (commencement of operations)
to December 31, 1995, the amount of the fee paid by the Trust to the Investment
Manager was $20,950.
T. Rowe Price International Bond Portfolio: .80% of the average daily net
assets of the Portfolio. Prior to May 1, 1996, the Investment Manager had
engaged Scudder, Stevens & Clark, Inc. as Sub-advisor for the Portfolio
(formerly, the AST Scudder International Bond Portfolio), for a total Investment
Management fee of 1.00% of the average daily net assets of the Portfolio. For
the year ended December 31, 1995, the amount of the fee paid by the Trust to the
Investment Manager was $276,299.
Founders Capital Appreciation Portfolio: .90% of the average daily net
assets of the Portfolio. For the year ended December 31, 1995, the amount of the
fee paid by the Trust to the Investment Manager was $486,749.
INVESCO Equity Income Portfolio: .75% of the average daily net assets of
the Portfolio. For the year ended December 31, 1995, the amount of the fee paid
by the Trust to the Investment Manager was $821,220.
PIMCO Total Return Bond Portfolio: .65% of the average daily net assets of
the Portfolio. For the year ended December 31, 1995, the amount of the fee paid
by the Trust to the Investment Manager was $652,311.
PIMCO Limited Maturity Bond Portfolio: .65% of the average daily net
assets of the Portfolio. For the period May 2, 1995 (commencement of operations)
to December 31, 1995, the amount of the fee paid by the Trust to the Investment
Manager was $100,949.
Berger Capital Growth Portfolio: .75% of the average daily net assets of
the Portfolio. For the year ended December 31, 1995, the amount of the fee paid
by the Trust to the Investment Manager was $160,794.
Robertson Stephens Value + Growth Portfolio: 1.00% of the average daily net
assets of the Portfolio.
The Investment Manager pays each Sub-advisor for the performance of
sub-advisory services. The fee to Sub-advisors may differ from Portfolio to
Portfolio, reflecting the objectives, policies and restrictions of each
Portfolio and the nature of each Sub-advisory Agreement. Each Sub-advisor's fee
is accrued daily for purposes of determining the amount payable to the
Sub-advisor. The fees payable to the present Sub-advisors are as follows:
Seligman Henderson Co. for the Seligman Henderson International Equity
Portfolio: An annual rate of 1.0% of the average daily net assets of the
Portfolio not in excess of $100 million; plus .75% of the portion over $100
million. The Sub-advisor has voluntarily agreed to waive a portion of its fee
equal to .25% of the Portfolio's average daily net assets not in excess of $50
million; plus .35% of the portion over $50 million but not in excess of $75
million; plus .50% of the portion over $75 million but not in excess of $100
million; plus .25% of the portion over $100 million. The Sub-advisor may
terminate this voluntary agreement at any time. For the year ended December 31,
1995, the amount paid by the Investment Manager to the Sub-advisor was
$1,389,549.
Seligman Henderson Co. for the Seligman Henderson International Small
Cap Portfolio: An annual rate of .60% of the average daily net assets of the
Portfolio not in excess of $100 million; plus .50% of the portion over $100
million. For the period May 2, 1995 (commencement of operations) to December 31,
1995, the amount paid by the Investment Manager to the Sub-advisor was $45,904.
Lord, Abbett & Co. for the Lord Abbett Growth and Income Portfolio: An
annual rate of .50% of the portion of the average daily net assets of the
Portfolio not in excess of $200 million; plus .40% of the portion over $200
million but not in excess of $500 million; plus .375% of the portion over $500
million but not in excess of $700 million; plus .35% of the portion over $700
million but not in excess of $900 million; plus .30% of the portion in excess of
$900 million. For the year ended December 31, 1995, the amount paid by the
Investment Manager to the Sub-advisor was $705,288.
Janus Capital Corporation for the JanCap Growth Portfolio: An annual
rate of .60% of the portion of the average daily net assets of the Portfolio not
in excess of $100 million; plus .55% of the portion over $100 million but not in
excess of $1 billion; plus .50% of the portion over $1 billion. For the year
ended December 31, 1995, the amount paid by the Investment Manager to the
Sub-advisor was $1,869,411.
J.P. Morgan Investment Management Inc. for the AST Money Market
Portfolio: An annual rate of .25% of the portion of the average daily net assets
of the Portfolio not in excess of $100 million; plus .20% of the portion over
$100 million but not in excess of $200 million; plus .15% of the portion over
$200 million but not in excess of $1 billion; and .10% of the portion in excess
of $1 billion. The Sub-advisor has voluntarily agreed to waive a portion of its
fee equal to .10% of the portion of the Portfolio's average daily net assets not
in excess of $100 million and to waive .05% of its fee on the portion of the
Portfolio's average daily net assets over $100 million but not in excess of $200
million. For the year ended December 31, 1995, the amount paid by the Investment
Manager to the Sub-advisor was $501,220.
Federated Investment Counseling for the Federated Utility Income
Portfolio: An annual rate of 0.50% of the portion of the average daily net
assets of the Portfolio not in excess $25 million; plus 0.35% of the portion in
excess of $25 million but not in excess of $50 million; plus 0.25% of the
portion in excess of $50 million. For the year ended December 31, 1995, the
amount paid by the Investment Manager to the Sub-advisor was $306,916.
Federated Investment Counseling for the Federated High Yield Portfolio:
An annual rate of .50 of 1% of the portion of the average daily net assets of
the Portfolio under $30 million; plus .40 of 1% of the portion of the net assets
equal to or in excess of $30 million but under $50 million; plus .30 of 1% of
the portion equal to or in excess of $50 million but under $75 million; and .25
of 1% of the portion equal to or in excess of $75 million. For the year ended
December 31, 1995, the amount paid by the Investment Manager to the Sub-advisor
was $210,529.
Phoenix Investment Counsel, Inc. for the AST Phoenix Balanced Asset
Portfolio: An annual rate of 0.50% of the portion of the average daily net
assets of the Portfolio not in excess $25 million; plus 0.40% of the portion
over $25 million but not in excess of $75 million; plus 0.30% of the portion in
excess of $75 million. For the year ended December 31, 1995, the amount paid by
the Investment Manager to the Sub-advisor was $576,648.
T. Rowe Price Associates, Inc. for the T. Rowe Price Asset Allocation
Portfolio: An annual rate of .50 of 1% of the portion of the average daily net
assets of the Portfolio not in excess of $25 million; plus .35 of 1% of the
portion in excess of $25 million but not in excess of $50 million; and .25 of 1%
of the portion in excess of $50 million. For the year ended December 31, 1995,
the amount paid by the Investment Manager to the Sub-advisor was $166,105.
Rowe Price-Fleming International, Inc. for the T. Rowe Price
International Equity Portfolio: An annual rate of .75 of 1% of the portion of
the average daily net assets of the Portfolio not in excess of $20 million; plus
.60 of 1% of the portion of the net assets over $20 million but not in excess of
$50 million; and .50 of 1% of the portion in excess of $50 million. Commencing
May 1, 1996, the Sub-advisor has voluntarily agreed to waive a portion of its
fee equal to .25 of 1% of the portion of the Portfolio's average daily net
assets not in excess of $20 million and .10 of 1% of the portion of the net
assets over $20 million but not in excess of $50 million, so long as the average
daily net assets of the Portfolio equal or exceed $200 million. The Sub-advisor
may terminate this voluntary agreement at any time. For the year ended December
31, 1995, the amount paid by the Investment Manager to the Sub-advisor was
$786,175.
T. Rowe Price Associates, Inc. for the T. Rowe Price Natural Resources
Portfolio: An annual rate of .60 of 1% of the portion of the average daily net
assets of the Portfolio not in excess of $20 million; plus .50 of 1% of the
portion of the net assets over $20 million but not in excess of $50 million.
When the net assets of the Portfolio exceed $50 million, the fee is an annual
rate of .50 of 1% of the average daily net assets of the T. Rowe Price Natural
Resources Portfolio. For the period May 2, 1995 (commencement of operations) to
December 31, 1995, the amount paid by the Investment Manager to the Sub-advisor
was $13,967.
Rowe Price-Fleming International, Inc. for the T. Rowe Price International
Bond Portfolio: An annual rate of .40 of 1% of the average daily net assets of
the Portfolio. Prior to May 1, 1996, the Investment Manager had engaged Scudder,
Stevens & Clark, Inc. (the "Former Sub-advisor") as Sub-advisor for the
Portfolio (formerly, the AST Scudder International Bond Portfolio), for a
Sub-advisory fee of .60 of 1% of the average daily net assets of the Portfolio.
For the year ended December 31, 1995, the amount paid by the Investment Manager
to the Former Sub-advisor was $165,779.
Founders Asset Management, Inc. for the Founders Capital Appreciation
Portfolio: An annual rate of .65 of 1% of the portion of the average daily net
assets of the Portfolio not in excess of $75 million; plus .60 of 1% of the
portion of the net assets over $75 million but not in excess of $150 million;
and .55 of 1% of the net assets in excess of $150 million. For the year ended
December 31, 1995, the amount paid by the Investment Manager to the Sub-advisor
was $350,949.
INVESCO Trust Company for the INVESCO Equity Income Portfolio: An
annual rate of .50 of 1% of the portion of the average daily net assets of the
Portfolio not in excess of $25 million; plus .45 of 1% of the portion of the net
assets over $25 million but not in excess of $75 million; plus .40 of 1% of the
portion of the net assets in excess of $75 million but not in excess of $100
million; and .35 of 1% of the portion of the net assets over $100 million. For
the year ended December 31, 1995, the amount paid by the Investment Manager to
the Sub-advisor was $482,833.
Pacific Investment Management Company for the PIMCO Total Return Bond
Portfolio: An annual rate of .30 of 1% of the average daily net assets of the
Portfolio not in excess of $150 million; and .25 of 1% on the portion of the net
assets over $150 million. For the year ended December 31, 1995, the amount paid
by the Investment Manager to the Sub-advisor was $299,969.
Pacific Investment Management Company for the PIMCO Limited Maturity
Bond Portfolio: An annual rate of .30 of 1% of the average daily net assets of
the Portfolio not in excess of $150 million; and .25 of 1% on the portion of the
net assets over $150 million. For the period May 2, 1995 (commencement of
operations) to December 31, 1995, the amount paid by the Investment Manager to
the Sub-advisor was $47,155.
Berger Associates, Inc. for the Berger Capital Growth Portfolio: An
annual rate of .55% of the average daily net assets of the Portfolio not in
excess of $25 million; plus .50% of the portion of average daily net assets over
$25 million but not in excess of $50 million; plus .40% of the portion of the
average daily net assets over $50 million. For the year ended December 31, 1995,
the amount paid by the Investment Manager to the Sub-advisor was $116,002.
Robertson, Stephens & Company Investment Management, L.P. for the
Robertson Stephens Value + Growth Portfolio: An annual rate of .60 of 1% of the
average daily net assets of the Portfolio not in excess of $200 million; and .50
of 1% of the portion of the net assets over $200 million.
The current Investment Manager has agreed, by the terms of the
Investment Management Agreements, to reimburse each Portfolio for certain
operating expenses so that total expenses of each Portfolio do not exceed a
specified percentage of such Portfolio's average daily net assets. Such
specified percentage may differ between the Portfolios, reflecting the
objective, policies and restrictions of each Portfolio and the expenses involved
in conducting an investment program for each Portfolio. See "Investment Manager"
and "Investment Management Agreement" in the Trust's Statement of Additional
Information.
The Annual Report of the Trust for the year ended December 31, 1995,
contains a discussion by the Trust's management of the performance of each
Portfolio. The Annual report is available free of charge upon request.
Administrator: PFPC Inc., a Delaware corporation which is an indirect
wholly-owned subsidiary of PNC Financial Corp. and has its principal offices at
103 Bellevue Parkway, Wilmington, Delaware 19809, is the administrator for the
Trust (the "Administrator"). The Administrator provides administrative services
to investment companies and other accounts.
The Administration Agreement: The Trust has entered into a Fund Accounting and
Administration Agreement with the Administrator (the "Administration Agreement")
dated May 1, 1992, under which the Administrator has agreed to provide certain
fund accounting and administrative services to the Trust, including, among other
services, accounting relating to the Trust and investment transactions of the
Trust; computation of daily net asset values; maintaining the Trust's books of
account; assisting in monitoring, in conjunction with the Investment Manager,
compliance with the Trust's investment objectives, policies and restrictions;
providing office space and equipment necessary for the proper administration and
accounting functions of the Trust; monitoring investment activity and income of
the Trust for compliance with applicable tax laws; preparing and filing Trust
tax returns; preparing financial information in connection with the preparation
of the Trust's annual and semi-annual reports and making requisite filings
thereof; preparing schedules of Trust share activity for footnotes to financial
statements; furnishing financial information necessary for the completion of
certain items to the Trust's registration statement, and necessary to prepare
and file Rule 24f-2 notices; providing an administrative interface between the
Investment Manager and the Trust's custodian; creating and maintaining all
necessary records in accordance with applicable laws, rules and regulations,
including, but not limited to, those records required to be kept pursuant to the
1940 Act; and performing such other duties related to the administration of the
Trust as may be requested by the Board of Trustees. The Administrator does not
have any responsibility or authority for the management of the assets of the
Trust, the determination of its investment policies, or for any matter
pertaining to the distribution of securities issued by the Trust.
As compensation for the services and facilities provided by the
Administrator under the Administration Agreement, the Trust has agreed to pay to
the Administrator its out-of pocket expenses plus the greater of certain maximum
percentages of the average daily net assets of the Trust or certain specified
minimums calculated for each Portfolio. The maximum percentages of the average
daily net assets are: (a) 0.10% of the first $200 million; (b) 0.075% of the
next $200 million; (c) 0.050% of the next $200 million; and (d) 0.03% of average
daily net assets over $600 million. The initial year of this Administration
Agreement commenced on May 1, 1992. The minimum amount for the fifth year of
this Administration Agreement is $75,000 for each of the Lord Abbett Growth and
Income Portfolio, the JanCap Growth Portfolio, the AST Money Market Portfolio,
the Federated High Yield Portfolio, the Federated Utility Income Portfolio, the
AST Phoenix Balanced Asset Portfolio, the T. Rowe Price Asset Allocation
Portfolio, the Founders Capital Appreciation Portfolio, the INVESCO Equity
Income Portfolio, the PIMCO Total Return Bond Portfolio and the Berger Capital
Growth Portfolio. The minimum for the fifth year of this Administration
Agreement is $100,000 for the T. Rowe Price International Bond Portfolio, the T.
Rowe Price International Equity Portfolio and the Seligman Henderson
International Equity Portfolio. The minimum amount for each of the T. Rowe Price
Natural Resources Portfolio and the PIMCO Limited Maturity Bond Portfolio is
$75,000 per year. The minimum amount for the Seligman Henderson International
Small Cap Portfolio is $90,000 per year. The minimum amount for the Robertson
Stephens Value + Growth Portfolio is $34,375 per year. For a description of the
"out-of-pocket" expenses the Trust is to pay the Administrator, see "The
Administration and Accounting Services Agreement" in the Trust's Statement of
Additional Information.
Sale of Shares: Shares are sold at net asset value to Participating Insurance
Companies and Qualified Plans. Owners of variable annuity contracts and variable
insurance policies and plan participants will receive annual and semi-annual
reports including the financial statement of the Portfolios that they have
authorized for investment. The Trust has entered into an agreement for the sale
of shares with American Skandia Life Assurance Corporation ("ASLAC"). Pursuant
to that agreement, the Trust will pay ASLAC for printing and delivery of certain
documents to the beneficial owners of Trust shares who are holders of variable
annuity and variable life insurance policies issued by ASLAC. Such documents
include prospectuses, semi-annual and annual reports and any proxy materials.
The Trust will pay ASLAC 0.1%, on an annualized basis, of the net asset value of
the shares legally owned by any separate accounts of ASLAC. The Trust may enter
into Sales Agreements with other Participating Insurance Companies or certain
Qualified Plans in the future.
TAX MATTERS:
This discussion of federal income tax consequences applies to the
Participating Insurance Companies, Qualified Plans and plan participants in
certain types of Qualified Plans since the separate accounts of the
Participating Insurance Companies, the Qualified Plans and plan participants in
certain Qualified Plans will be the shareholders of the Trust. Holders of
variable annuity contracts or variable life insurance policies must consult the
prospectuses of their respective contracts or policies for information on the
federal income tax consequences to such holders, and plan participants must
consult with any applicable plan documents for information on the federal income
tax consequences to such holders. The Trust intends to qualify as a regulated
investment company by satisfying the requirements under Subchapter M of the
Internal Revenue Code of 1986, as amended (the "Code"), including requirements
with respect to diversification of assets, distribution of income and sources of
income. It is the Trust's policy to distribute to shareholders all of its
investment income (net of expenses) and any capital gains (net of capital
losses) in accordance with the timing requirements imposed by the Code so that
the Trust will satisfy the distribution requirement of Subchapter M and not be
subject to federal income taxes or the 4% excise tax.
Distributions by the Trust of its net investment income and the excess,
if any, of its net short-term capital gain over its net long-term capital loss
are taxable to shareholders as ordinary income. These distributions are treated
as dividends for federal income tax purposes, but will not qualify for the 70%
dividends-received deduction for corporate shareholders. Distributions by the
Trust of the excess, if any, of its net long-term capital gain over its net
short-term capital loss are designated as capital gain dividends and are taxable
to shareholders as long-term capital gains, regardless of the length of time the
shareholder held his shares.
Portions of certain Portfolio's investment income may be subject to
foreign income taxes withheld at source. The Trust may elect to "pass-through"
to the shareholders of such Portfolios these foreign taxes, in which event each
shareholder will be required to include his pro rata portion thereof in his
gross income, but will be able to deduct or (subject to various limitations)
claim a foreign tax credit for such amount.
Distributions to shareholders will be treated in the same manner for
federal income tax purposes whether received in cash or reinvested in additional
shares of the Trust. In general, distributions by the Trust are taken into
account by the shareholders in the year in which they are made. However, certain
distributions made during January will be treated as having been paid by the
Trust and received by the shareholders on December 31 of the preceding year. A
statement setting forth the federal income tax status of all distributions made
or deemed made during the year, including any amount of foreign taxes "passed
through," will be sent to shareholders promptly after the end of each year.
Notwithstanding the foregoing, distributions by the Trust to certain Qualified
Plans may be exempt from federal income tax.
Under Code Section 817(h), a segregated asset account upon which a
variable annuity contract or variable life insurance policy is based must be
"adequately diversified." A segregated asset account will be adequately
diversified if it satisfies one of two alternative tests set forth in Treasury
regulations. For purposes of these alternative diversification tests, a
segregated asset account investing in shares of a regulated investment company
will be entitled to "look-through" the regulated investment company to its pro
rata portion of the regulated investment company's assets, provided the
regulated investment company satisfies certain conditions relating to the
ownership of its shares. The Trust intends to satisfy these ownership
conditions. Further, the Trust intends that each Portfolio separately will be
adequately diversified. Accordingly, a segregated asset account investing solely
in shares of a Portfolio will be adequately diversified, and a segregated asset
account investing in shares of one or more Trust Portfolios and shares of other
adequately diversified funds generally will be adequately diversified.
The foregoing discussion of federal income tax consequences is based on
tax laws and regulations in effect on the date of this Prospectus, and is
subject to change by legislative or administrative action. As the foregoing
discussion is for general information only, a prospective shareholder should
also review the more detailed discussion of federal income tax considerations
relevant to the Trust that is contained in the Statement of Additional
Information. In addition, each prospective shareholder should consult with his
own tax advisor as to the tax consequences of investments in the Trust,
including the application of state and local taxes which may differ from the
federal income tax consequences described above.
ORGANIZATION AND DESCRIPTION OF SHARES OF THE TRUST: The Trust is a managed,
open-end investment company organized as a Massachusetts business trust, whose
separate Portfolios are diversified, unless otherwise indicated. The Trust's
Declaration of Trust dated October 31, 1988, which governs certain Trust
matters, permits the Trust's Board of Trustees to issue multiple classes of
shares, and within each class, an unlimited number of shares of beneficial
interest with a par value of $.001 per share. Each share entitles the holder to
one vote for the election of Trustees and on all other matters that are not
specific to one class of shares, and to participate equally in dividends,
distributions of capital gains and net assets of each applicable Portfolio. Only
shareholders of shares of a specific Portfolio may vote on matters specific to
that Portfolio. Shares of one class may not bear the same economic relationship
to the Trust as shares of another class. In the event of dissolution or
liquidation, holders of shares of a Portfolio will receive pro rata, subject to
the rights of creditors, the proceeds of the sale of the assets held in such
Portfolio less the liabilities attributable to such Portfolio. Shareholders of a
Portfolio will not be liable for the expenses, obligations or debts of another
Portfolio.
There are no preemptive or conversion rights applicable to any of the
Trust's shares. The Trust's shares, when issued, will be fully paid,
non-assessable and transferable. The Trustees may at any time create additional
series of shares without shareholder approval.
Generally, there will not be annual meetings of shareholders. A Trustee
may, in accordance with certain rules of the Securities and Exchange Commission,
be removed from office when the holders of record of not less than two-thirds of
the outstanding shares either present a written declaration to the Trust's
custodian or vote in person or by proxy at a meeting called for this purpose. In
addition, the Trustees will promptly call a meeting of shareholders to remove a
Trustee(s) when requested to do so in writing by record holders of not less than
10% of the outstanding shares. Finally, the Trustees shall, in certain
circumstances, give such shareholders access to a list of the names and
addresses of all other shareholders or inform them of the number of shareholders
and the cost of mailing their request.
Under Massachusetts law, shareholders could, under certain
circumstances, be held liable for the obligations of the Trust. However, the
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 to all parties, and each party thereto must expressly waive all rights
of action directly against shareholders. The Declaration of Trust provides for
indemnification out of the Trust's property for all loss and expense of any
shareholder of the Trust held liable on account of being or having been a
shareholder. Thus, the risk of a shareholder incurring financial loss on account
of shareholder liability is limited to circumstances in which the Trust would be
unable to meet its obligations wherein the complaining party was held not to be
bound by the disclaimer.
The Declaration of Trust further provides that the Trustees will not be
liable for errors of judgment or mistakes of fact or law. However, nothing in
the Declaration of Trust protects a Trustee against any liability to which the
Trustee would otherwise be subject by reason of willful misfeasance, bad faith,
gross negligence, or reckless disregard of the duties involving the conduct of
his office. The Declaration of Trust provides for indemnification by the Trust
of the Trustees and officers of the Trust except with respect to any matter as
to which any such person did not act in good faith in the reasonable belief that
his action was in or not opposed to the best interests of the Trust. Such person
may not be indemnified against any liability to the Trust or the Trust's
shareholders to which he would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his office. The Declaration of Trust also authorizes
the purchase of liability insurance on behalf of Trustees and officers.
PORTFOLIO ANNUAL EXPENSES (as a percentage of average net assets): Unless
otherwise indicated, the expenses shown on the following page are for the year
ending December 31, 1995. "N/A" indicates that no entity has agreed to reimburse
the particular expense indicated. "+" indicates that no reimbursement was
provided in 1995, but that current arrangements (which may change) provide for
reimbursement. The expenses of the portfolios either are currently being
partially reimbursed or may be partially reimbursed in the future. Management
Fees, Other Expenses and Total Annual Expenses are provided on both a reimbursed
and not reimbursed basis, if applicable.
* Because shares of the Portfolios may be purchased through variable insurance
contacts, the prospectus of the participating insurance company sponsoring such
contract should be carefully reviewed for information on relevant charges and
expenses. The table on the following page does not reflect any such charges.
<PAGE>
Maximum Sales Load Imposed on Purchases (as a percentage of offering price)
NONE* Maximum Sales Load Imposed on Reinvested Dividends (as a percentage of
offering price) NONE* Deferred Sales Load (as a percentage of original purchase
price or redemption proceeds, as applicable) NONE* Redemption Fees (as a
percentage of amount redeemed, if applicable) NONE* Exchange Fee NONE*
<TABLE>
<CAPTION>
Annual Fund Operating Expenses (as a percentage of average net assets)
Total Total
Annual Annual
Management Management Other Other Expenses Expenses
Fee Fee Expenses Expenses after any without any
after any without any after any without any applicable applicable
voluntary voluntary any applicable applicable waiver or waiver or
waiver waiver reimbursement reimbursement reimbursementreimbursement
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
JanCap Growth N/A 0.90% 0.22% 0.22% 1.12% 1.12%
Lord Abbett Growth
and Income N/A 0.75% 0.24% 0.24% 0.99% 0.99%
Seligman Henderson
International Equity 0.90% 1.00% 0.27% 0.27% 1.17% 1.27%
Seligman Henderson International
Small Cap Portfolio(1) N/A 1.00% 0.46% 0.46% 1.46% 1.46%
Federated Utility
Income N/A 0.69% 0.24% 0.24% 0.93% 0.93%
Federated High Yield N/A 0.75% 0.36% 0.36% 1.11% 1.11%
AST Phoenix Balanced Asset N/A 0.70% 0.24% 0.24% 0.94% 0.94%
AST Money Market 0.45% 0.50% 0.15% 0.22% 0.60% 0.72%
T. Rowe Price
Asset Allocation N/A 0.85% 0.40% 0.44% 1.25% 1.29%
T. Rowe Price
International Equity N/A 1.00% 0.33% 0.33% 1.33% 1.33%
T. Rowe Price Natural
Resources Portfolio(1) N/A 0.90% 0.45% 0.90% 1.35% 1.80%
T. Rowe Price International
Bond Portfolio(2) N/A 0.80% 0.53% 0.53% 1.33% 1.33%
Founders Capital Appreciation N/A 0.90% 0.32% 0.32% 1.22% 1.22%
INVESCO Equity Income N/A 0.75% 0.23% 0.23% 0.98% 0.98%
PIMCO Total Return Bond N/A 0.65% 0.24% 0.24% 0.89% 0.89%
PIMCO Limited Maturity
Bond Portfolio(1) N/A 0.65% 0.24% 0.24% 0.89% 0.89%
Berger Capital Growth N/A 0.75% 0.42% 0.42% 1.17% 1.17%
Robertson Stephens
Value + Growth Portfolio(3) N/A 1.00% 0.45% 0.61% 1.45% 1.61%
(1) These Portfolios commenced operation in May, 1995. Expenses shown are annualized.
(2) Prior to May 1, 1996, the Investment Manager had engaged Scudder, Stevens & Clark, Inc. as Sub-advisor for the
Portfolio (formerly, the AST Scudder International Bond Portfolio), for a total Investment Management fee payable at
the annual rate of 1.00% of the average daily net assets of the Portfolio. As of May 1, 1996, the Investment Manager
has engaged Rowe Price-Fleming International, Inc. as Sub-advisor for the Portfolio, for a total Investment Management
fee payable at the annual rate of .80% of the average daily net assets of the Portfolio. The Management Fee in the above
chart has been stated to reflect the current Investment Management fee payable to the Investment Manager.
(3) This Portfolio commenced operation in May, 1996. Expenses shown are estimated and annualized.
</TABLE>
<PAGE>
EXPENSE EXAMPLES: The examples reflect expenses of the Portfolio.
The examples shown assume that the total annual expenses for the Portfolios
throughout the period specified will be the lower of the total annual expenses
without any applicable reimbursement or expenses after any applicable
reimbursement.
THE EXAMPLES ARE ILLUSTRATIVE ONLY - THEY SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES OF THE PORTFOLIOS - ACTUAL EXPENSES
MAY BE GREATER OR LESS THAN THOSE SHOWN.
Examples (amounts shown are rounded to the nearest dollar)
You would pay the following expenses on a $1,000 investment assuming 5% annual
return at the end of each time period.
<TABLE>
<CAPTION>
After:
Portfolio: 1 yr. 3 yrs. 5 yrs. 10 yrs.
<S> <C> <C> <C> <C>
JanCap Growth 11 35 61 135
Lord Abbett Growth and Income 10 32 55 121
Seligman Henderson International Equity 12 37 64 142
Seligman Henderson Int'l Small Cap 15 46 80 175
Federated Utility Income 10 30 52 116
Federated High Yield 11 35 61 135
AST Phoenix Balanced Asset 10 30 52 116
AST Money Market 6 19 33 75
T. Rowe Price Asset Allocation 13 40 69 152
T. Rowe Price International Equity 14 43 74 161
T. Rowe Price Natural Resources 14 43 74 162
T. Rowe Price International Bond 14 43 74 161
Founders Capital Appreciation 13 39 67 148
INVESCO Equity Income 10 31 54 120
PIMCO Total Return Bond 9 28 49 110
PIMCO Limited Maturity Bond 9 28 49 110
Berger Capital Growth 12 37 64 142
Robertson Stephens Value + Growth 15 46 N/A N/A
</TABLE>
PERFORMANCE: The Portfolios may measure performance in terms of total return,
which is calculated for any specified period of time by assuming the purchase of
shares of the Portfolio at the net asset value at the beginning of the period.
Each dividend or other distribution paid by each Portfolio during such period is
assumed to have been reinvested at the net asset value on the reinvestment date.
The shares then owned as a result of this process are valued at the net asset
value at the end of the period. The percentage increase is determined by
subtracting the initial value of the investment from the ending value and
dividing the remainder by the initial value. Each Portfolio's total return shows
a Portfolio's overall dollar or percentage change in value, including changes in
share price and assuming each Portfolio's dividends and capital gains
distributions are reinvested. An average annual total return reflects the
hypothetical annually compounded return that would have produced the same
cumulative return if a Portfolio's performance had been constant over the entire
period. Total return figures are based on the overall change in value of a
hypothetical investment in each Portfolio. Because average annual returns for
more than one year tend to smooth out variations in each Portfolio's return,
investors should recognize that such figures are not the same as actual
year-by-year results. To illustrate the components of overall performance, a
Portfolio may separate its cumulative and average annual returns into income
results and capital gains or losses.
The Portfolios may also measure performance in terms of yield. Each
Portfolio's yield shows the rate of income the Portfolio earns on its
investments as a percentage of the Portfolio's share price. To calculate yield,
the Portfolio takes the interest and dividend income it earned from its
investments for a 30-day period (net of expenses), divides it by the average
number of Portfolio shares entitled to receive dividends, and expresses the
result as an annualized percentage rate based on the Portfolio's net asset value
at the end of the 30-day period. For the Portfolio's investments denominated in
foreign currencies, income and expenses are calculated in their respective
currencies and then converted to U.S. dollars. Yields are calculated according
to methods that are standardized for all stock and bond funds. Because yield
calculation methods differ from the method used for other accounting purposes
(in particular, currency gains and losses are not reflected in the yield
calculation), a Portfolio's yield may not equal the income paid to shareholders'
accounts or the income reported in the Portfolio's financial statements.
The Portfolios impose no sales or other charges that would impact the
total return or yield computations. Portfolio performance figures are based upon
historical results and are not intended to indicate future performance. The
investment return and principal value of an investment in any of the Portfolios
will fluctuate so that an investor's shares, when redeemed, may be worth more or
less than their original cost.
Yield and total returns quoted from the Portfolios include the effect
of deducting each Portfolio's expenses, but may not include charges and expenses
attributable to any particular insurance product. Because shares of the
Portfolios may be purchased through variable insurance contracts, the prospectus
of the participating insurance company sponsoring such contract should be
carefully reviewed for information on relevant charges and expenses. Excluding
these charges from quotations of each Portfolio's performance has the effect of
increasing the performance quoted. The effect of these charges should be
considered when comparing a Portfolio's performance to that of other mutual
funds. In advertising and sales literature, these figures will be accompanied by
figures that reflect the applicable contract charges.
From time to time in advertisements or sales material, the Portfolios
(or participating insurance companies) may discuss their performance ratings or
other information as published by recognized mutual fund statistical or rating
services, such as Lipper Analytical Services, Inc., Morningstar or by
publications of general interest, such as Forbes or Money. The Portfolios may
also compare their performance to that of other selected mutual funds, mutual
fund averages or recognized stock market indicators, including the Standard &
Poor's 500 Stock Index, the Standard & Poor Midcap Index, the Dow Jones
Industrial Average, the Russell 2000 and the NASDAQ composite. In addition, the
Portfolios may compare their total return or yield to the yield on U.S. Treasury
obligations and to the percentage change in the Consumer Price Index. The
Seligman Henderson International Equity Portfolio, Seligman Henderson
International Small Cap Portfolio, T. Rowe Price International Equity Portfolio
and T. Rowe Price International Bond Portfolio may compare its performance to
the record of global market indicators such as Morgan Stanley Capital
International Europe, Australia, Far East Index (EAFE Index), an unmanaged index
of foreign common stock prices translated into U.S. dollars. Such performance
ratings or comparisons may be made with funds that may have different investment
restrictions, objectives, policies or techniques than the Portfolios and such
other funds or market indicators may be comprised of securities that differ
significantly from the Portfolios' investments.
TRANSFER AND SHAREHOLDER SERVICING AGENT AND CUSTODIAN: The custodian for all
cash and securities of the Seligman Henderson International Equity Portfolio,
the Seligman Henderson International Small Cap Portfolio, the T. Rowe Price
International Equity Portfolio, and the T. Rowe Price International Bond
Portfolio is Morgan Stanley Trust Company, One Pierrepont, Brooklyn, New York.
The custodian for all cash and securities of the other Portfolios is PNC Bank,
Airport Business Center, International Court 2, 200 Stevens Drive, Philadelphia,
Pennsylvania 19113. For these Portfolios, Morgan Stanley Trust Company will
serve as co-custodian with respect to foreign securities. The Trust's transfer
and shareholder servicing agent is PFPC Inc., 103 Bellevue Parkway, Wilmington,
Delaware 19809.
COUNSEL AND AUDITORS: The firm of Werner & Kennedy, 1633 Broadway, 46th Floor,
New York, New York 10019, is counsel for the Trust. Deloitte & Touche LLP, 117
Campus Drive, Princeton, New Jersey 08540, has been appointed independent
auditor for the Trust.
OTHER INFORMATION: This Prospectus omits certain information contained in the
registration statement filed with the Securities and Exchange Commission. Copies
of the registration statement, including items omitted herefrom, may be obtained
from the Commission by paying the charges prescribed under its rules and
regulations. The Statement of Additional Information included in such
registration statement may be obtained without charge from the Trust's office at
One Corporate Drive, Shelton, Connecticut 06484.
Shareholder inquiries should be made by telephone to (203) 926-1888 or,
if in writing, to the Trust's office at One Corporate Drive, Shelton,
Connecticut 06484. Holders of variable annuity contracts or variable life
insurance policies issued by Participating Insurance Companies for which shares
of the Trust are the investment vehicle will receive from the Participating
Insurance Companies unaudited semi-annual financial statements and year-end
financial statements audited by the Trust's independent auditors. If applicable,
each plan participant will receive from the Qualified Plan trustees, or directly
from the Trust, unaudited semi-annual financial statements and year-end
financial statements audited by the Trust's independent auditors. Each report
will show the investments owned by the Trust and the market values of the
investments and will provide other information about the Trust and its
operations.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND INFORMATION
OR REPRESENTATIONS NOT HEREIN CONTAINED, IF GIVEN OR MADE, MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE TRUST. THIS PROSPECTUS DOES NOT CONSTITUTE
AN OFFER OR SOLICITATION IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT
LAWFULLY BE MADE.
<PAGE>
(This page has been intentionally left blank.)
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION May 1, 1996
AMERICAN SKANDIA TRUST
One Corporate Drive, Shelton, Connecticut 06484
- --------------------------------------------------------------------------------
American Skandia Trust (the "Trust") is a managed, open-end investment company
whose separate portfolios ("Portfolios") are diversified, unless otherwise
indicated. The Trust seeks to meet the differing objectives of its Portfolios.
Currently, these Portfolios include the Seligman Henderson International Equity
Portfolio, the Seligman Henderson International Small Cap Portfolio, the Lord
Abbett Growth and Income Portfolio, the JanCap Growth Portfolio, the AST Money
Market Portfolio, the Federated Utility Income Portfolio, the Federated High
Yield Portfolio, the AST Phoenix Balanced Asset Portfolio, the T. Rowe Price
Asset Allocation Portfolio, the T. Rowe Price International Equity Portfolio,
the T. Rowe Price Natural Resources Portfolio, the T. Rowe Price International
Bond Portfolio (formerly, the AST Scudder International Bond Portfolio), the
Founders Capital Appreciation Portfolio, the INVESCO Equity Income Portfolio,
the PIMCO Total Return Bond Portfolio, the PIMCO Limited Maturity Bond
Portfolio, the Berger Capital Growth Portfolio, and the Robertson Stephens Value
+ Growth Portfolio.
American Skandia Investment Services, Incorporated ("ASISI") is the
investment manager ("Investment Manager") for the Trust. Currently, ASISI
engages a sub-advisor ("Sub-advisor") for each Portfolio. The Sub-advisor for
each Portfolio is as follows: (a) Seligman Henderson International Equity
Portfolio: Seligman Henderson Co.; (b) Seligman Henderson International Small
Cap Portfolio: Seligman Henderson Co.; (c) Lord Abbett Growth and Income
Portfolio: Lord, Abbett & Co.; (d) JanCap Growth Portfolio: Janus Capital
Corporation; (e) AST Money Market Portfolio: J.P. Morgan Investment Management
Inc.; (f) Federated Utility Income Portfolio: Federated Investment Counseling;
(g) Federated High Yield Portfolio: Federated Investment Counseling; (h) AST
Phoenix Balanced Asset Portfolio: Phoenix Investment Counsel, Inc.; (i) T. Rowe
Price Asset Allocation Portfolio: T. Rowe Price Associates, Inc.; (j) T. Rowe
Price International Equity Portfolio: Rowe Price-Fleming International, Inc.;
(k) T. Rowe Price Natural Resources Portfolio: T. Rowe Price Associates, Inc.;
(l) T. Rowe Price International Bond Portfolio: Rowe Price-Fleming
International, Inc. (formerly, the AST Scudder International Bond Portfolio when
the Sub-advisor was Scudder, Stevens & Clark, Inc.); (m) Founders Capital
Appreciation Portfolio: Founders Asset Management, Inc.; (n) INVESCO Equity
Income Portfolio: INVESCO Trust Company; (o) PIMCO Total Return Bond Portfolio:
Pacific Investment Management Company; (p) PIMCO Limited Maturity Bond
Portfolio: Pacific Investment Management Company; (q) Berger Capital Growth
Portfolio: Berger Associates, Inc.; and (r) Robertson Stephens Value + Growth
Portfolio: Robertson, Stephens & Company Investment Management, L.P.
This Statement of Additional Information is not a prospectus. It should be read
in conjunction with the Trust's current Prospectus, a copy of which may be
obtained by writing the Trust's administrative office at One Corporate Drive,
Shelton, Connecticut 06484 or by calling (203) 926-1888.
This Statement relates to the Trust's Prospectus dated May 1, 1996.
<PAGE>
TABLE OF CONTENTS
Page
General Information and History..............................................3
Investment Objectives and Policies...........................................3
Seligman Henderson International Equity Portfolio.......................3
Seligman Henderson International Small Cap Portfolio....................6
Lord Abbett Growth and Income Portfolio.................................8
JanCap Growth Portfolio.................................................9
AST Money Market Portfolio..............................................12
Federated Utility Income Portfolio......................................13
Federated High Yield Portfolio..........................................14
AST Phoenix Balanced Asset Portfolio....................................16
T. Rowe Price Asset Allocation Portfolio................................19
T. Rowe Price International Equity Portfolio............................29
T. Rowe Price Natural Resources Portfolio...............................40
T. Rowe Price International Bond Portfolio..............................50
Founders Capital Appreciation Portfolio.................................61
INVESCO Equity Income Portfolio.........................................68
PIMCO Total Return Bond Portfolio.......................................69
PIMCO Limited Maturity Bond Portfolio...................................80
Berger Capital Growth Portfolio.........................................91
Robertson Stephens Value + Growth Portfolio.............................92
Investment Restrictions......................................................101
Certain Risk Factors and Investment Methods..................................117
Portfolio Turnover...........................................................133
Management...................................................................134
Management of the Trust......................................................135
Brokerage Allocation.........................................................138
Allocation of Investments....................................................138
Regulatory Matters...........................................................138
Computation of Net Asset Values..............................................139
Purchase and Redemption of Shares............................................140
Tax Matters..................................................................140
Underwriter..................................................................140
Other Information............................................................140
Performance..................................................................140
Financial Statements.........................................................142
Appendix.....................................................................222
<PAGE>
GENERAL INFORMATION AND HISTORY:
Prior to May 1, 1992, the Trust was known as the Henderson
International Growth Fund, which consisted of only one portfolio. This Portfolio
is now known as the Seligman Henderson International Equity Portfolio. The Lord
Abbett Growth and Income Portfolio was first offered as of May 1, 1992. The
JanCap Growth Portfolio and the AST Money Market Portfolio were first offered as
of November 4, 1992. The Federated Utility Income Portfolio and the AST Phoenix
Balanced Asset Portfolio were first offered as of May 1, 1993. The Federated
High Yield Portfolio, the T. Rowe Price Asset Allocation Portfolio, the T. Rowe
Price International Equity Portfolio, the Founders Capital Appreciation
Portfolio, the INVESCO Equity Income Portfolio and the PIMCO Total Return Bond
Portfolio were first offered as of December 31, 1993. The T. Rowe Price
International Bond Portfolio (formerly, the AST Scudder International Bond
Portfolio) was first offered as of May 1, 1994. The Berger Capital Growth
Portfolio was first offered as of October 19, 1994. The Seligman Henderson
International Small Cap Portfolio, the T. Rowe Price Natural Resources Portfolio
and the PIMCO Limited Maturity Bond Portfolio were first offered as of May 2,
1995. The Robertson Stephens Value + Growth Portfolio is first being offered as
of the date of this Statement.
INVESTMENT OBJECTIVES AND POLICIES:
The following information supplements, and should be read in
conjunction with, the section in the Trust's Prospectus entitled "Investment
Objectives and Policies." The investment objective and supplemental information
regarding the policies for each of the Portfolios are described below and should
be considered separately. Each Portfolio has a different investment objective
and certain policies may vary. As a result, the risks, opportunities and return
in each Portfolio may differ. There can be no assurance that any Portfolio's
investment objective will be achieved. Certain risk factors in relation to
various securities and instruments in which the Portfolios may invest are
described in this Statement and the Trust's Prospectus under "Certain Risk
Factors and Investment Methods."
The objective for each Portfolio specifically noted as its
"investment objective" and the restrictions specifically noted as "investment
restrictions" described in the section of this Statement entitled "Investment
Restrictions" are "fundamental" policies, and may not be changed without
approval of the shareholders of the affected Portfolio. Investment policies not
noted as "investment objectives" or "investment restrictions" are not
"fundamental" policies. As indicated in the "Investment Restrictions" section of
this Statement, certain investment restrictions apply to all Portfolios, while
others only apply to a specific Portfolio. The Trust has the right to modify
without shareholder approval the investment policies of any Portfolio that are
not specifically identified in the Trust's Prospectus or this Statement as
"fundamental."
Each portfolio may be subject to state regulatory requirements which may be
more restrictive than the stated investment policies, in which case, the
sub-advisor will adhere to the more restrictive standard.
Seligman Henderson International Equity Portfolio:
Investment Objective: The investment objective of the Seligman Henderson
International Equity Portfolio is long-term capital appreciation consistent with
preservation of capital primarily through investment in securities of non-United
States issuers.
Investment Policies: The following investment policies are not fundamental
policies and may be changed by the Trust without shareholder approval. For a
discussion of put and call options, futures contracts and related options, and
the risks involved in foreign investments, see this Statement and the Trust's
Prospectus under "Certain Risk Factors and Investment Methods."
The Continental European countries in which the Sub-advisor may,
from time to time, invest include, but are not limited to, Austria, Belgium,
Denmark, Federal Republic of Germany, Finland, France, Greece, Ireland, Italy,
Luxembourg, Netherlands, Norway, Portugal, Spain, Sweden and Switzerland.
Countries in the Pacific Basin include, but are not limited to, Australia, Hong
Kong, India, Indonesia, Japan, Korea, Malaysia, New Zealand, People's Republic
of China, Philippines, Singapore, Taiwan and Thailand. Countries in Latin
America include, but are not limited to, Argentina, Brazil, Chile, Mexico and
Venezuela. The Sub-advisor believes it will usually have assets invested in all
of these international regions. Although under normal market conditions the
Portfolio will be invested in a minimum of five countries, it may have assets
invested in many of the above countries. Investments will not normally be made
in securities of issuers located in the United States or Canada.
Purchasing Put Options on Securities. The Portfolio may purchase
put options to attempt to protect its holdings in an underlying security against
a decline in market value. Such hedge protection is provided during the life of
the put option since the Portfolio, as holder of the put option, is able to sell
the underlying security at the put exercise price regardless of any decline in
the underlying security's market price. In order for a put option to be
profitable, the market price of the underlying security must decline
sufficiently below the exercise price to cover the premium and transaction
costs. By using put options in this manner, the Portfolio will reduce any profit
it might otherwise have realized in its underlying security by the premium paid
for the put option and by transaction costs.
Because a purchased put option gives the purchaser a right and not
an obligation, the purchaser is not required to exercise the option. If the
underlying position incurs a gain, the Portfolio would let the put option expire
resulting in a reduced profit on the underlying security equal to the cost of
the put option. The cost of the put option is limited to the premium plus
commission paid. The Portfolio's maximum financial exposure will be limited to
these costs.
The Portfolio may purchase options listed on public exchanges as
well as over-the-counter. Options listed on an exchange are generally considered
very liquid. OTC options are considered less liquid, and therefore, will only be
considered where there is not a comparable listed option. Because options will
be used solely for hedging and due to their relatively low cost and short
duration, liquidity is not a significant concern.
The Portfolio's ability to engage in option transactions may be
limited by tax considerations.
Foreign Currency Transactions. The Portfolio will generally enter into
forward foreign currency exchange contracts to fix the U.S. dollar value of a
security it has agreed to buy or sell for the period between the date the trade
was entered into and the date the security is delivered and paid for, or, to
hedge the U.S. dollar value of securities it owns.
The Portfolio may enter into a forward contract to sell or buy the
amount of a foreign currency it believes may experience a substantial movement
against another currency (including the U.S. dollar). In this case the contract
would approximate the value of some or all of the Portfolio's securities
denominated in such foreign currency. Under normal circumstances, the
Sub-advisor will limit forward currency contracts to not greater than 75% of the
Portfolio's position in any one country as of the date the contract is being
entered into. This limitation will be measured at the point the hedging
transaction is entered into by the Portfolio. The precise matching of the
forward contract amounts and the value of the securities involved will not
generally be possible since the future value of such securities in foreign
currencies will change as a consequence of market movement in the value of those
securities between the date the forward contract is entered into and the date it
matures. The projection of short-term currency market movement is extremely
difficult, and the successful execution of a short-term hedging strategy is
highly uncertain. Under certain circumstances, the Portfolio may commit a
substantial portion or the entire value of its assets to the consummation of
these contracts. The Sub-advisor will consider the effect a substantial
commitment of its assets to forward contracts would have on the investment
program of the Portfolio and its ability to purchase additional securities.
Except as set forth above and immediately below, the Portfolio will
also not enter into such forward contracts or maintain a net exposure to such
contracts where the consummation of the contracts would oblige the Portfolio to
deliver an amount of foreign currency in excess of the value of the Portfolio's
securities or other assets denominated in that currency. The Portfolio, in order
to avoid excess transactions and transaction costs, may nonetheless maintain a
net exposure to forward contracts in excess of the value of the Portfolio's
securities or other assets denominated in that currency provided the excess
amount is "covered" by liquid, high-grade debt securities, denominated in any
currency, at least equal at all times to the amount of such excess. Under normal
circumstances, consideration of the prospect for currency parities will be
incorporated into the longer term investment decisions made with regard to
overall diversification strategies. However, the Sub-advisor believes that it is
important to have the flexibility to enter into such forward contracts when it
determines that the best interests of the Portfolio will be served.
At the maturity of a forward contract, the Portfolio may either sell
the portfolio security and make delivery of the foreign currency, or it may
retain the security and terminate its contractual obligation to deliver the
foreign currency by purchasing an "offsetting" contract obligating it to
purchase, on the same maturity date, the same amount of the foreign currency.
As indicated above, it is impossible to forecast with absolute
precision the market value of portfolio securities at the expiration of the
forward contract. Accordingly, it may be necessary for the Portfolio to purchase
additional foreign currency on the spot market (and bear the expense of such
purchase) if the market value of the security is less than the amount of foreign
currency the Portfolio is obligated to deliver and if a decision is made to sell
the security and make delivery of the foreign currency. Conversely, it may be
necessary to sell on the spot market some of the foreign currency received upon
the sale of the portfolio security if its market value exceeds the amount of
foreign currency the Portfolio is obligated to deliver. However, the Portfolio
may use liquid, high-grade debt securities, denominated in any currency, to
cover the amount by which the value of a forward contract exceeds the value of
the securities to which it relates.
If the Portfolio retains the portfolio security and engages in an
offsetting transaction, the Portfolio will incur a gain or a loss (as described
below) to the extent that there has been movement in forward contract prices. If
the Portfolio engages in an offsetting transaction, it may subsequently enter
into a new forward contract to sell the foreign currency. Should forward prices
decline during the period between the Portfolio's entering into a forward
contract for the sale of a foreign currency and the date it enters into an
offsetting contract for the purchase of the foreign currency, the Portfolio will
realize a gain to the extent the price of the currency it has agreed to sell
exceeds the price of the currency it has agreed to purchase. Should forward
prices increase, the Portfolio will suffer a loss to the extent the price of the
currency it has agreed to purchase exceeds the price of the currency it has
agreed to sell.
The Portfolio's dealing in forward foreign currency exchange contracts
will be limited to the transactions described above. Of course, the Portfolio is
not required to enter into forward contracts with regard to its foreign
currency-denominated securities and will not do so unless deemed appropriate by
the Sub-advisor. It also should be realized that this method of hedging against
a decline in the value of a currency does not eliminate fluctuations in the
underlying prices of the securities. It simply establishes a rate of exchange at
a future date. Additionally, although such contracts tend to minimize the risk
of loss due to a decline in the value of the hedged currency, at the same time,
they tend to limit any potential gain which might result from an increase in the
value of that currency.
Investors should be aware of the costs of currency conversion. Although
foreign exchange dealers do not charge a fee for conversion, they do realize a
profit based on the difference (the "spread") between the prices at which they
are buying and selling various currencies. Thus, a dealer may offer to sell a
foreign currency to the Portfolio at one rate, while offering a lesser rate of
exchange should the Portfolio desire to resell that currency to the dealer.
Borrowing. The Portfolio may from time to time borrow money for
temporary, extraordinary or emergency purposes in an amount up to 5% of its
total assets from banks at prevailing interest rates and invest the funds in
additional securities. The Portfolio's borrowings are limited so that
immediately after such borrowing the value of the Portfolio's assets (including
borrowings) less its liabilities (not including borrowings) is at least three
times the amount of the borrowings. Should the Portfolio, for any reason, have
borrowings that do not meet the above test then, within three business days, the
Portfolio must reduce such borrowings so as to meet the necessary test. Under
such a circumstance, the Portfolio may have to liquidate securities at a time
when it is disadvantageous to do so. Gains made with additional funds borrowed
will generally cause the net asset value of the Portfolio's shares to rise
faster than could be the case without borrowings. Conversely, if investment
results fail to cover the cost of borrowings, the net asset value of the
Portfolio could decrease faster than if there had been no borrowings.
Lending Portfolio Securities. The Portfolio may lend its securities to
brokers, dealers and other institutional investors in an amount not to exceed
33-1/3% of the Portfolio's total assets taken at market value, and receive
collateral in cash or securities issued or guaranteed by the U.S. Government
which will be maintained in an amount equal to at least 100% of the current
market value of the loaned securities. During the time securities are on loan,
the borrower pays the Portfolio any dividends paid on such securities, and the
Portfolio may invest the cash collateral and earn additional income, or it may
receive an agreed upon amount of interest income from the borrower who has
delivered equivalent collateral, such as U.S. Government securities. Loans are
subject to termination at the option of the Portfolio or the borrower at any
time. Such right of termination may be exercised by the Portfolio to obtain the
return of securities on loan for the purpose of voting on matters considered
material by the Sub-advisor or Investment Manager. The Portfolio may pay
reasonable administrative and custodial fees in connection with a loan and may
pay a negotiated portion of the income earned on the cash to the borrower or
placing broker.
Illiquid Securities. The Portfolio may invest up to 10% of its total
assets in illiquid securities, including restricted securities (i.e., securities
not readily marketable without registration under the Securities Act of 1933
(the "1933 Act")) and other securities that are not readily marketable. The
Portfolio does not currently expect to invest more than 5% of its assets in such
securities. The Portfolio may purchase restricted securities that can be offered
and sold to "qualified institutional buyers" under Rule 144A of the 1933 Act,
and the Sub-advisor may determine, when appropriate, that specific Rule 144A
securities are liquid and not subject to the limitation on illiquid securities.
Should the Sub-advisor make this determination, it will carefully monitor the
security (focusing on such factors, among others, as trading activity and
availability of information) to determine that the Rule 144A security continues
to be liquid. It is not possible to predict with assurance exactly how the
market for restricted securities sold and offered under Rule 144A will develop.
This investment practice could have the effect of increasing the level of
illiquidity in the Portfolio to the extent that qualified institutional buyers
become for a time uninterested in purchasing Rule 144A securities.
Seligman Henderson International Small Cap Portfolio:
Investment Objective: The Seligman Henderson International Small Cap Portfolio
seeks long-term capital appreciation primarily through making international
investments in companies with small to medium market capitalizations.
Investment Policies: The following investment policies are not fundamental
policies and may be changed by the Trust without shareholder approval. For a
discussion of put and call options, futures contracts and related options, and
the risks involved in foreign investments, see this Statement and the Trust's
Prospectus under "Certain Risk Factors and Investment Methods."
The Continental European countries in which the Sub-advisor may, from
time to time, invest include, but are not limited to, Austria, Belgium, Denmark,
Federal Republic of Germany, Finland, France, Greece, Ireland, Italy,
Luxembourg, Netherlands, Norway, Portugal, Spain, Sweden and Switzerland.
Countries in the Pacific Basin include, but are not limited to, Australia, Hong
Kong, India, Indonesia, Japan, Korea, Malaysia, New Zealand, People's Republic
of China, Philippines, Singapore, Taiwan and Thailand. Countries in Latin
America include, but are not limited to, Mexico, Argentina and Venezuela. The
Sub-advisor believes it will usually have assets invested in all of these
international regions. Investments will not normally be made in securities of
issuers located in the United States or Canada.
Purchasing Put Options on Securities. The Portfolio may purchase put
options to attempt to protect its portfolio holdings in an underlying security
against a decline in market value. This hedge protection is provided during the
life of the put option since the Portfolio, as holder of the put option, can
sell the underlying security at the put exercise price regardless of any decline
in the underlying security's market price. In order for a put option to be
profitable, the market price of the underlying security must decline
sufficiently below the exercise price to cover the premium and transaction
costs. By using put options in this manner, the Portfolio will reduce any profit
it might otherwise have realized in the underlying security by the premium paid
for the put option and by transaction costs.
Because a purchased put options gives the purchaser a right and not an
obligation, the purchaser is not required to exercise the option. If the
underlying position incurs a gain, the Portfolio would let the put option expire
resulting in a reduced profit on the underlying security equal to the cost of
the put option. The cost of the put option is limited to the premium plus
commission paid. The Portfolio's maximum financial exposure will be limited to
these costs.
The Portfolio may purchase options listed on public exchanges as well
as over-the-counter. Options listed on an exchange are generally considered very
liquid. OTC options are considered less liquid, and therefore, will only be
considered where there is not a comparable listed option. Because options will
be used solely for hedging and due to their relatively low cost and short
duration, liquidity is not a significant concern.
The Portfolio's ability to engage in option transactions may be limited
by tax considerations.
Foreign Currency Transactions. The Portfolio will generally enter into
forward foreign currency exchange contracts to fix the U.S. dollar value of a
security it has agreed to buy or sell for the period between the date the trade
was entered into and the date the security is delivered and paid for, or, to
hedge the U.S. dollar value of securities it owns.
The Portfolio may enter into a forward contract to sell or buy the
amount of a foreign currency it believes may experience a substantial movement
against another currency (including the U.S. dollar). In this case the contract
would approximate the value of some or all of the Portfolio's securities
denominated in such foreign currency. Under normal circumstances, the
Sub-advisor will limit forward currency contracts to not greater than 75% of the
Portfolio's position in any one country as of the date the contract is entered
into. This limitation will be measured at the point the hedging transaction is
entered into by the Portfolio. The precise matching of the forward contract
amounts and the value of the securities involved will not generally be possible
since the future value of such securities in foreign currencies will change as a
consequence of market movement in the value of those securities between the date
the forward contract is entered into and the date it matures. The projection of
short-term currency market movement is extremely difficult, and the successful
execution of a short-term hedging strategy is highly uncertain. Under certain
circumstances, the Portfolio may commit a substantial portion or the entire
value of its assets to the consummation of these contracts. The Sub-advisor will
consider the effect a substantial commitment of its assets to forward contracts
would have on the investment program of the Portfolio and its ability to
purchase additional securities.
Except as set forth above and immediately below, the Portfolio will
also not enter into such forward contracts or maintain a net exposure to such
contracts where the consummation of the contracts would oblige the Portfolio to
deliver an amount of foreign currency in excess of the value of the Portfolio's
securities or other assets denominated in that currency. The Portfolio, in order
to avoid excess transactions and transaction costs, may nonetheless maintain a
net exposure to forward contracts in excess of the value of the Portfolio's
securities or other assets denominated in that currency provided the excess
amount is "covered" by liquid, high-grade debt securities, denominated in any
currency, at least equal at all times to the amount of such excess. Under normal
circumstances, consideration of the prospect for currency parities will be
incorporated into the longer term investment decisions made with regard to
overall diversification strategies. However, the Sub-advisor believes that it is
important to have the flexibility to enter into such forward contracts when it
determines that the best interests of the Portfolio will be served.
At the maturity of a forward contract, the Portfolio may either sell
the portfolio security and make delivery of the foreign currency, or it may
retain the security and terminate its contractual obligation to deliver the
foreign currency by purchasing an "offsetting" contract obligating it to
purchase, on the same maturity date, the same amount of the foreign currency.
As indicated above, it is impossible to forecast with absolute
precision the market value of portfolio securities at the expiration of the
forward contract. Accordingly, it may be necessary for the Portfolio to purchase
additional foreign currency on the spot market (and bear the expense of such
purchase) if the market value of the security is less than the amount of foreign
currency the Portfolio is obligated to deliver and if a decision is made to sell
the security and make delivery of the foreign currency. Conversely, it may be
necessary to sell on the spot market some of the foreign currency received upon
the sale of the portfolio security if its market value exceeds the amount of
foreign currency the Portfolio is obligated to deliver. However, the Portfolio
may use liquid, high-grade debt securities, denominated in any currency, to
cover the amount by which the value of a forward contract exceeds the value of
the securities to which it relates.
If the Portfolio retains the portfolio security and engages in an
offsetting transaction, the Portfolio will incur a gain or a loss (as described
below) to the extent that there has been movement in forward contract prices. If
the Portfolio engages in an offsetting transaction, it may subsequently enter
into a new forward contract to sell the foreign currency. Should forward prices
decline during the period between the Portfolio's entering into a forward
contract for the sale of a foreign currency and the date it enters into an
offsetting contract for the purchase of the foreign currency, the Portfolio will
realize a gain to the extent the price of the currency it has agreed to sell
exceeds the price of the currency it has agreed to purchase. Should forward
prices increase, the Portfolio will suffer a loss to the extent the price of the
currency it has agreed to purchase exceeds the price of the currency it has
agreed to sell.
The Portfolio's dealing in forward foreign currency exchange contracts
will be limited to the transactions described above. Of course, the Portfolio is
not required to enter into forward contracts with regard to its foreign
currency-denominated securities and will not do so unless deemed appropriate by
the Sub-advisor. It also should be realized that this method of hedging against
a decline in the value of a currency does not eliminate fluctuations in the
underlying prices of the securities. It simply establishes a rate of exchange at
a future date. Additionally, although such contracts tend to minimize the risk
of loss due to a decline in the value of the hedged currency, at the same time,
they tend to limit any potential gain which might result from an increase in the
value of that currency.
Investors should be aware of the costs of currency conversion. Although
foreign exchange dealers do not charge a fee for conversion, they do realize a
profit based on the difference (the "spread") between the prices at which they
are buying and selling various currencies. Thus, a dealer may offer to sell a
foreign currency to the Portfolio at one rate, while offering a lesser rate of
exchange should the Portfolio desire to resell that currency to the dealer.
Borrowing. The Portfolio may from time to time borrow money for
temporary, extraordinary or emergency purposes in an amount up to 5% of its
total assets from banks at prevailing interest rates and invest the funds in
additional securities. The Portfolio's borrowings are limited so that
immediately after such borrowing the value of the Portfolio's assets (including
borrowings) less its liabilities (not including borrowings) is at least three
times the amount of the borrowings. Should the Portfolio, for any reason, have
borrowings that do not meet the above test then within three business days, the
Portfolio must reduce such borrowings so as to meet the foregoing test. Under
these circumstances, the Portfolio may have to liquidate portfolio securities at
a time when it is disadvantageous to do so. Gains made with additional funds
borrowed will generally cause the net asset value of the Portfolio's shares to
rise faster than could be the case without borrowings. Conversely, if investment
results fail to cover the cost of borrowings, the net asset value of the
Portfolio could decrease faster than if there had been no borrowings.
Lending of Portfolio Securities. The Portfolio may lend portfolio
securities to certain institutional borrowers of securities and may invest the
cash collateral and obtain additional income or receive an agreed upon amount of
interest from the borrower. Loans made by the Portfolio will generally be
short-term. Loans are subject to termination at the option of the Portfolio or
the borrower. The Portfolio may pay reasonable administrative and custodial fees
in connection with a loan and may pay a negotiated portion of the interest
earned on the cash or equivalent collateral to the borrower or placing broker.
The Portfolio does not have the right to vote securities on loan, but would
terminate the loan and regain the right to vote if that were considered
important with respect to the investment.
Illiquid Securities. The Portfolio may invest up to 10% of its total
assets in illiquid securities, including restricted securities (i.e., securities
not readily marketable without registration under the Securities Act of 1933
(the "1933 Act")) and other securities that are not readily marketable. The
Portfolio does not currently expect to invest more than 5% of its assets in such
securities. The Portfolio may purchase restricted securities that can be offered
and sold to "qualified institutional buyers" under Rule 144A of the 1933 Act,
and the Sub-advisor may determine, when appropriate, that specific Rule 144A
securities are liquid and not subject to the limitation on illiquid securities.
Should the Sub-advisor make this determination, it will carefully monitor the
security (focusing on such factors, among others, as trading activity and
availability of information) to determine that the Rule 144A security continues
to be liquid. It is not possible to predict with assurance exactly how the
market for restricted securities sold and offered under Rule 144A will develop.
This investment practice could have the effect of increasing the level of
illiquidity in the Portfolio to the extent that qualified institutional buyers
become for a time uninterested in purchasing Rule 144A securities.
Investment Policies Which May Be Changed Without Shareholder Approval.
The following are investment policies applicable only to the Seligman Henderson
International Small Cap Portfolio. These are not "fundamental" investment
restrictions, and may be changed by the Trustees without shareholder approval.
The Portfolio may not:
1. Invest in interests in oil, gas or other mineral exploration or
development program or mineral lease.
2. Invest more than 2% of its assets in warrants not listed on the New
York or American Stock Exchange.
3. Invest in real estate limited partnerships.
Lord Abbett Growth and Income Portfolio:
Investment Objective: The investment objective of the Lord Abbett Growth and
Income Portfolio is long-term growth of capital and income without excessive
fluctuation in market value.
Investment Policies:
Covered Call Options. The Portfolio may write covered call options
which are traded on a national securities exchange with respect to its
securities in an attempt to increase income and to provide greater flexibility
in the disposition of securities. A "call option" is a contract sold for a price
(the "premium") giving its holder the right to buy a specific number of shares
of stock at a specific price prior to a specified date. A "covered call option"
is a call option issued on securities already owned by the writer of the call
option for delivery to the holder upon the exercise of the option. During the
period of the option, the Portfolio forgoes the opportunity to profit from any
increase in the market price of the underlying security above the exercise price
of the option (to the extent that the increase exceeds the net premium). The
Portfolio may also enter into "closing purchase transactions" in order to
terminate its obligation to deliver the underlying security (this may result in
a short-term gain or loss). A closing purchase transaction is the purchase of a
call option (at a cost which may be more or less than the premium received for
writing the original call option) on the same security with the same exercise
price and call period as the option previously written. If the Portfolio is
unable to enter into a closing purchase transaction, it may be required to hold
a security that it might otherwise have sold to protect against depreciation.
The Sub-advisor does not intend to have the Portfolio write covered call options
with respect to securities with an aggregate market value of more than 10% of
the Portfolio's gross assets at the time an option is written. This percentage
limitation will not be increased without prior disclosure in the current
Prospectus of the Trust. For an additional discussion of call options, see this
Statement and the Trust's Prospectus under "Certain Risk Factors and Investment
Methods."
Illiquid Securities. Subject to guidelines promulgated by the Board of
Trustees of the Trust, the Portfolio may invest in illiquid securities.
Investments in illiquid securities are limited to a maximum of 10% of Portfolio
net assets. Illiquid securities for the purposes of this limitation do not
include securities eligible for resale pursuant to Rule 144A of the Securities
Act of 1933 which have been determined to be liquid by the Sub-advisor under the
supervision of the Trustees. Examples of factors which the Sub-advisor may take
into account with respect to a Rule 144A security include the frequency of
trades and quotes for the security, the number of dealers willing to purchase or
sell the security and the number of other potential purchasers, dealer
undertakings to make a market in the security, and the nature of the security
and the nature of the marketplace (e.g., the time period needed to dispose of
the security, the method of soliciting offers, and the mechanics of transfer).
For a discussion of illiquid or restricted securities and certain risks involved
therein see the Trust's Prospectus under "Certain Risk Factors and Investment
Methods."
JanCap Growth Portfolio:
Investment Objective: The investment objective of the JanCap Growth Portfolio is
growth of capital in a manner consistent with the preservation of capital.
Realization of income is not a significant investment consideration and any
income realized on the Portfolio's investments, therefore, will be incidental to
the Portfolio's objective.
Investment Policies: The Portfolio may, as a fundamental policy, invest all of
its assets in the securities of a single open-end management investment company
with substantially the same fundamental investment objectives, policies and
restrictions as the Portfolio subject to the prior approval of the Investment
Manager. The Investment Manager will not approve such investment unless: (a) the
Investment Manager believes, on the advice of counsel, that such investment will
not have an adverse effect on the tax status of the annuity contracts and/or
life insurance policies supported by the separate accounts of the Participating
Insurance Companies which purchase shares of the Trust; (b) the Investment
Manager has given prior notice to the Participating Insurance Companies that it
intends to permit such investment and has determined whether such Participating
Insurance Companies intend to redeem any shares and/or discontinue the purchase
of shares because of such investment; (c) the Trustees have determined that the
fees to be paid by the Trust for administrative, accounting, custodial and
transfer agency services for the Portfolio subsequent to such an investment are
appropriate, or the Trustees have approved changes to the agreements providing
such services to reflect a reduction in fees; (d) the Sub-advisor for the
Portfolio has agreed to reduce its fee by the amount of any investment advisory
fees paid to the investment manager of such open-end management investment
company; and (e) shareholder approval is obtained if required by law. The
Portfolio will apply for such exemptive relief under the provisions of the
Investment Company Act of 1940, or other such relief as may be necessary under
the then governing rules and regulations of the Investment Company Act of 1940,
regarding investments in such investment companies.
Futures, Options and Other Derivative Instruments. The JanCap Growth
Portfolio may enter into futures contracts on securities, financial indices, and
foreign currencies and options on such contracts, and may invest in options on
securities, financial indices and foreign currencies, forward contracts and
swaps. Please refer to the description of these strategies and these
instruments, as well as certain risks entailed with the use of such strategies
and instruments, in this Statement and the Trust's Prospectus under "Certain
Risk Factors and Investment Methods."
The Portfolio will not enter into any futures contracts or options on
futures contracts if the aggregate amount of the Portfolio's commitments under
outstanding futures contracts positions and options on futures contracts written
by the Portfolio would exceed the market value of the total assets of the
Portfolio (i.e., no leveraging).
The Portfolio may invest in forward currency contracts with stated
values of up to the value of the Portfolio's assets.
The Portfolio may buy or write options in privately negotiated
transactions on the types of securities and indices based on the types of
securities in which the Portfolio is permitted to invest directly. The Portfolio
will effect such transactions only with investment dealers and other financial
institutions (such as commercial banks or savings and loan institutions) deemed
creditworthy, and only pursuant to procedures adopted, by the Sub-advisor for
monitoring the creditworthiness of those entities. To the extent that an option
bought or written by the Portfolio in a negotiated transaction is illiquid, the
value of an option bought or the amount of the Portfolio's obligations under an
option written by the Portfolio, as the case may be, will be subject to the
Portfolio's limitation on illiquid investments. In the case of illiquid options,
it may not be possible for the Portfolio to effect an offsetting transaction at
a time when the Sub-advisor believes it would be advantageous for the Portfolio
to do so.
Interest Rate Swaps and Purchasing and Selling Interest Rate Caps and
Floors. In addition to the strategies noted above, the Portfolio, in order to
attempt to protect the value of its investments from interest rate or currency
exchange rate fluctuations, may enter into interest rate swaps and may buy or
sell interest rate caps and floors. The Portfolio expects to enter into these
transactions primarily to preserve a return or spread on a particular investment
or portion of its investments. The Portfolio also may enter into these
transactions to protect against any increase in the price of securities the
Portfolio may consider buying at a later date. The Portfolio does not intend to
use these transactions as a speculative investment. See the section in this
Statement entitled "Certain Risk Factors and Investment Methods" for a
description of these strategies. Interest rate swaps involve the exchange by the
Portfolio with another party of their respective commitments to pay or receive
interest, e.g., an exchange of floating rate payments for fixed rate payments.
The exchange commitments can involve payments to be made in the same currency or
in different currencies. The purchase of an interest rate cap entitles the
purchaser, to the extent that a specified index exceeds a predetermined interest
rate, to receive payments of interest on a contractually based principal amount
from the party selling the interest rate cap. The purchase of an interest rate
floor entitles the purchaser, to the extent that a specified index falls below a
predetermined interest rate, to receive payments of interest on a contractually
based principal amount from the party selling the interest rate floor.
The Portfolio may enter into interest rate swaps, caps and floors on
either an asset-based or liability-based basis, depending upon whether it is
hedging its assets or its liabilities, and will usually enter into interest rate
swaps on a net basis, i.e., the two payment streams are netted out, with the
Portfolio receiving or paying, as the case may be, only the net amount of the
two payments. The net amount of the excess, if any, of the Portfolio's
obligations over its entitlements with respect to each interest rate swap will
be calculated on a daily basis and an amount of cash or high-grade liquid assets
having an aggregate net asset value at least equal to the accrued excess will be
maintained in a segregated account by the Portfolio's custodian. If the
Portfolio enters into an interest rate swap on other than a net basis, the
Portfolio would maintain a segregated account in the full amount accrued on a
daily basis of the Portfolio's obligations with respect to the swap. The
Portfolio will not enter into any interest rate swap, cap or floor transaction
unless the unsecured senior debt or the claims-paying ability of the other party
thereto is rated in one of the three highest rating categories of at least one
nationally recognized statistical rating organization at the time of entering
into such transaction. The Sub-advisor will monitor the creditworthiness of all
counterparties on an ongoing basis. If there is a default by the other party to
such a transaction, the Portfolio will have contractual remedies pursuant to the
agreements related to the transaction.
The swap market has grown substantially in recent years with a large
number of banks and investment banking firms acting both as principals and as
agents utilizing standardized swap documentation. The Sub-advisor has determined
that, as a result, the swap market has become relatively liquid. Caps and floors
are more recent innovations for which standardized documentation has not yet
been developed and, accordingly, they are less liquid than swaps. To the extent
the Portfolio sells (i.e., writes) caps and floors, it will maintain in a
segregated account cash or high-grade liquid assets having an aggregate net
asset value at least equal to the full amount, accrued on a daily basis, of the
Portfolio's obligations with respect to any caps or floors.
There is no limit on the amount of interest rate swap transactions that
may be entered into by the Portfolio. These transactions may in some instances
involve the delivery of securities or other underlying assets by the Portfolio
or its counterparty to collateralize obligations under the swap. Under the
documentation currently used in those markets, the risk of loss with respect to
interest rate swaps is limited to the net amount of the payments that the
Portfolio is contractually obligated to make. If the other party to an interest
rate swap that is not collateralized defaults, the Portfolio would risk the loss
of the net amount of the payments that the Portfolio contractually is entitled
to receive. The Portfolio may buy and sell (i.e., write) caps and floors without
limitation, subject to the segregated account requirement described above.
Repurchase Agreements and Reverse Repurchase Agreements. Subject to
guidelines promulgated by the Board of Trustees of the Trust, the Portfolio may
enter into repurchase agreements. The Portfolio may also enter into reverse
repurchase agreements. For a description of these investment techniques see the
Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Investment Policies Which May Be Changed Without Shareholder Approval.
The following are investment policies applicable to the JanCap Growth Portfolio.
These are not "fundamental" investment restrictions, and may be changed by the
Trustees without shareholder approval.
1. The Portfolio will not purchase a security if as a result, more than
15% of its net assets in the aggregate, at market value, would be invested in
securities which cannot be readily resold because of legal or contractual
restrictions on resale or for which there is no readily available market, or
repurchase agreements maturing in more than seven days or securities used as a
cover for written over-the-counter options, if any. The Trustees, or the
Investment Manager or the Sub-advisor acting pursuant to authority delegated by
the Trustees, may determine that a readily available market exists for
securities eligible for resale pursuant to Rule 144A under the Securities Act of
1933, or any successor to such rule, and therefore that such securities are not
subject to the foregoing limitation.
2. The Portfolio may borrow money for temporary or emergency purposes
(not for leveraging or investment) in an amount not exceeding 25% of the value
of its total assets (including the amount borrowed) less liabilities (other than
borrowings). Any borrowings that come to exceed 25% of the value of the
Portfolio's total assets by reason of a decline in net assets will be reduced
within three business days to the extent necessary to comply with the 25%
limitation. Under such a circumstance, the Portfolio may have to liquidate
securities at a time when it is disadvantageous to do so. This policy shall not
prohibit reverse repurchase agreements or deposits of assets to margin or
guarantee positions in futures, options, swaps or forward contracts, or the
segregation of assets in connection with such contracts.
3. The Portfolio will not invest in warrants if, at the time of
acquisition, the investment in warrants, valued at the lower of cost or market
value, would exceed 5% of the Portfolio's net assets. Included within that
amount, but not to exceed 2% of the value of the Portfolio's net assets, may be
warrants that are not listed on the New York or American Stock Exchange. For
purposes of this restriction, warrants acquired by the Portfolio in units or
attached to securities may be deemed to be without value.
4. The Portfolio will not enter into any futures contracts or options
on futures contracts for purposes other than bona fide hedging transactions (as
defined by the CFTC) if as a result the sum of the initial margin deposits and
premium required to establish positions in futures contracts and related options
that do not fall within the definition of bona fide hedging transactions would
exceed 5% of the fair market value of the Portfolio's net assets.
5. The Portfolio will not enter into any futures contracts if the
aggregate amount of the Portfolio's commitments under outstanding futures
contracts positions of the Portfolio would exceed the market value of the total
assets of the Portfolio.
6. The Portfolio will not sell securities short, unless it owns or has
the right to obtain securities equivalent in kind and amount to the securities
sold short, and provided that transactions in options, swaps and forward futures
contracts are not deemed to constitute selling securities short.
7. The Portfolio will not mortgage or pledge any securities owned or
held by the Portfolio in amounts that exceed, in the aggregate, 15% of the
Portfolio's net asset value, provided that this limitation does not apply to
reverse repurchase agreements or in the case of assets deposited to margin or
guarantee positions in futures, options, swaps or forward contracts or placed in
a segregated account in connection with such contracts.
8. The Portfolio will not invest directly in oil, gas, or other mineral
exploration or development programs; however, the Portfolio may purchase
securities of issuers whose principal business activities fall within such
areas.
9. The Portfolio will not purchase a security (other than those issued
by U.S. government agencies and instrumentalities or instruments guaranteed by
an entity with a record of more than three years continuous operation, including
that of predecessors) if as a result, more than 5% of the value of that
Portfolio's assets, at market value, would be invested in the securities of
issuers which, with their predecessors, have been in business less than three
years.
AST Money Market Portfolio:
Investment Objective: The investment objective of the AST Money Market
Portfolio is to seek high current income and maintain high levels of liquidity.
Investment Policies:
Bank Obligations. The Portfolio will not invest in bank obligations for
which any affiliate of the Sub-advisor is the ultimate obligor or accepting
bank.
Asset-Backed Securities. Subject to the limitations described in the
Trust's Prospectus under "Investment Objectives and Policies," the asset-backed
securities in which the Portfolio may invest are subject to the Portfolio's
overall credit requirements. However, asset-backed securities, in general, are
subject to certain risks. Most of these risks are related to limited interests
in applicable collateral. For example, credit card receivables are generally
unsecured and the debtors are entitled to the protection of a number of state
and federal consumer credit laws, many of which give such debtors the right to
set off certain amounts on credit card debt thereby reducing the balance due.
Additionally, if the letter of credit is exhausted, holders of asset-backed
securities may also experience delays in payments or losses if the full amounts
due on underlying sales contracts are not realized. Because asset-backed
securities are relatively new, the market experience in these securities is
limited and the market's ability to sustain liquidity through all phases of the
market cycle has not been tested. For a discussion of asset-backed securities
and the risks involved therein see the Trust's Prospectus and this Statement
under "Certain Risk Factors and Investment Methods."
Repurchase Agreements. Subject to guidelines promulgated by the Board
of Trustees of the Trust, the Portfolio may enter into repurchase agreements.
The repurchase agreements into which the Portfolio may enter will usually be
short, from overnight to one week, and at no time will the Portfolio invest in
repurchase agreements for more than thirteen months. The securities which are
subject to repurchase agreements, however, may have maturity dates in excess of
thirteen months from the effective date of the repurchase agreement. For a
discussion of repurchase agreements and the certain risks involved therein, see
the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Reverse Repurchase Agreements. The Portfolio invests the proceeds of
borrowings under reverse repurchase agreements. The Portfolio will enter into a
reverse repurchase agreement only when the interest income to be earned from the
investment of the proceeds is greater than the interest expense of the
transaction. The Portfolio will not invest the proceeds of a reverse repurchase
agreement for a period which exceeds the duration of the reverse repurchase
agreement. The Portfolio may not enter into reverse repurchase agreements
exceeding in the aggregate one-third of the market value of its total assets,
less liabilities other than the obligations created by reverse repurchase
agreements. The Portfolio will establish and maintain with its custodian a
separate account with a segregated portfolio of securities in an amount at least
equal to its purchase obligations under its reverse repurchase agreements. If
interest rates rise during the term of a reverse repurchase agreement, such
reverse repurchase agreement may have a negative impact on the Portfolio's
ability to maintain a net asset value of $1.00 per share.
Foreign Securities. The Portfolio may invest in U.S. dollar-denominated
foreign securities. Any foreign commercial paper must not be subject to foreign
withholding tax at the time of purchase. Foreign investments may be made
directly in securities of foreign issuers or in the form of American Depository
Receipts ("ADRs") and European Depository Receipts ("EDRs"). Generally, ADRs and
EDRs are receipts issued by a bank or trust company that evidence ownership of
underlying securities issued by a foreign corporation and that are designed for
use in the domestic, in the case of ADRs, or European, in the case of EDRs,
securities markets. For a discussion of depository receipts and the risks
involved in investing in foreign securities, see this Statement and the Trust's
Prospectus under "Certain Risk Factors and Investment Methods."
Lending Portfolio Securities. The Portfolio may pay reasonable finders'
and custodial fees in connection with a loan. In making a loan, the Portfolio
will consider all facts and circumstances surrounding the making of the loan,
including the creditworthiness of the borrowing financial institution. The
Portfolio will not make any loans in excess of one year. The Portfolio will not
lend its securities to any officer, employee or Trustee of the Trust, the
Investment Manager, any Sub-advisor of the Trust, or the Administrator unless
otherwise permitted by applicable law.
Federated Utility Income Portfolio:
Investment Objective: The investment objective of the Federated Utility Income
Portfolio is high current income and moderate capital appreciation by investing
primarily in equity and debt securities of utility companies.
Investment Policies:
U.S. Government Securities. The Portfolio may invest in U.S. government
obligations which generally include direct obligations of the U.S. Treasury
(such as U.S. Treasury bills, notes and bonds) and obligations issued or
guaranteed by U.S. government agencies or instrumentalities. These securities
are backed by the full faith and credit of the U.S. Treasury; the issuer's right
to borrow from the U.S. Treasury; the discretionary authority of the U.S.
government to purchase certain obligations of agencies or instrumentalities; or
the credit of the agency or instrumentality issuing the obligations. Examples of
instrumentalities and agencies which may not always receive support from the
U.S. government are: Federal Land Banks; Central Bank for Cooperatives; Federal
Intermediate Credit Banks; Federal Home Loan Banks; Farmers Home Administration;
and Federal National Mortgage Association.
When-Issued and Delayed Delivery Transactions. These transactions are
made to secure what is considered to be an advantageous price and yield for the
Portfolio. Settlement dates may be a month or more after entering into these
transactions, and the market values of the securities purchased may vary from
the purchase prices. No fees or other expenses, other than normal transaction
costs, are incurred. However, liquid assets of the Portfolio sufficient to make
payment for the securities purchased are segregated on the Portfolio's records
at the trade date. These securities are marked to market daily and maintained
until the transaction is settled. For a discussion of when-issued securities and
certain risks involved therein see this Statement under "Certain Risk Factors
and Investment Methods."
Lending Portfolio Securities. The collateral received when the
Portfolio lends portfolio securities must be valued daily and, should the market
value of the loaned securities increase, the borrower must furnish additional
collateral to the Portfolio. During the time Portfolio securities are on loan,
the borrower pays the Portfolio any dividends or interest paid on such
securities. Loans are subject to termination at the option of the Portfolio or
the Borrower. The Portfolio may pay reasonable administrative and custodial fees
in connection with a loan and may pay a negotiated portion of the interest
earned on the cash or equivalent collateral to the borrower or placing broker.
The Portfolio does not have the right to vote the securities on loan, but would
terminate the loan and regain the right to vote if that were considered
important by the Investment Manager with respect to the investment.
Reverse Repurchase Agreements. The use of reverse repurchase agreements
may allow the Portfolio to avoid selling Portfolio instruments at a time when a
sale may be deemed to be disadvantageous, but the ability to enter into a
reverse repurchase agreement does not ensure that the Portfolio will be able to
avoid selling Portfolio instruments at a disadvantageous time. For a discussion
of reverse repurchase agreements, see the Trust's Prospectus under "Certain Risk
Factors and Investment Methods."
Investment Policy Which May Be Changed Without Shareholder Approval.
The following investment policy is not a "fundamental" restriction and may be
changed by the Trustees without shareholder approval. It is applicable only to
the Federated Utility Income Portfolio.
The Portfolio will not write call options on securities unless the
securities are held in the Portfolio or unless the Portfolio is entitled to them
in deliverable form without further payment or after segregating cash in the
amount of any further payment. The Portfolio will not purchase options on
securities unless the securities are held in the Portfolio.
Federated High Yield Portfolio:
Investment Objective: The Federated High Yield Portfolio's investment
objective is to seek high current income.
Investment Policies:
Corporate Debt Securities. Corporate debt obligations in which the
Portfolio invests may bear fixed, floating, floating and contingent, or
increasing rates of interest. They may involve equity features such as
conversion or exchange rights, warrants for the acquisition of common stock of
the same or a different issuer, participations based on revenues, sales or
profits, or the purchase of common stock in a unit transaction (where corporate
debt securities and common stock are offered as a unit). The Portfolio invests
primarily in fixed rate corporate debt securities. The fixed rate corporate debt
obligations in which the Portfolio intends to invest are expected to be lower
rated. There are special risks associated with lower-rated securities. See the
Trust's Prospectus and this Statement under "Certain Risk Factors and Investment
Methods" for a discussion of these risk factors.
U.S. Government Obligations. The types of U.S. government obligations in
which the Trust may invest include, but are not limited to, direct obligations
of the U.S. Treasury (such as U.S. Treasury bills, notes, and bonds) and
obligations issued or guaranteed by U.S. government agencies or
instrumentalities. These securities may be backed by: the full faith and credit
of the U.S. Treasury; the issuer's right to borrow from the U.S.. Treasury; the
discretionary authority of the U.S. government to purchase certain obligations
of agencies or instrumentalities; or the credit of the agency or instrumentality
issuing the obligations. For an additional discussion of the types of U.S.
Government Obligations in which the Portfolio may invest, see the Trust's
Prospectus under "Investment Objectives and Policies."
Restricted Securities. The Portfolio expects that any restricted
securities would be acquired either from institutional investors who originally
acquired the securities in private placements or directly from the issuers of
the securities in private placements. Restricted securities are generally
subject to legal or contractual delays on resale. Restricted securities and
securities that are not readily marketable may sell at a discount from the price
they would bring if freely marketable. For a discussion of illiquid or
restricted securities and certain risks involved therein, see the Trust's
Prospectus under "Certain Risk Factors and Investment Methods."
The Board of Trustees of the Trust has promulgated guidelines with
respect to illiquid securities.
When-Issued and Delayed Delivery Transactions. The Portfolio may
purchase fixed income securities on a when-issued or delayed delivery basis. The
Portfolio may engage in when-issued and delayed delivery transactions only for
the purpose of acquiring portfolio securities consistent with the Portfolio's
investment objective and policies, not for investment leverage. These
transactions are arrangements in which the Portfolio purchases securities with
payment and delivery scheduled for a future time. Settlement dates may be a
month or more after entering into these transactions, and the market values of
the securities purchased may vary from the purchase prices. These transactions
are made to secure what is considered to be an advantageous price and yield for
the Portfolio.
No fees or other expenses, other than normal transaction costs, are
incurred. However, liquid assets of the Portfolio sufficient to make payment for
the securities to be purchased are segregated at the trade date. These
securities are marked to market daily and will maintain until the transaction is
settled. For an additional discussion of when-issued securities and certain
risks involved therein, see this Statement under "Certain Risk Factors and
Investment Methods."
Repurchase Agreements. The Portfolio will require its custodian to take
possession of the securities subject to repurchase agreements, and these
securities will be marked to market daily. To the extent that the original
seller does not repurchase the securities from the Portfolio, the Portfolio
could receive less than the repurchase price on any sale of such securities. In
the event that such a defaulting seller filed for bankruptcy or became
insolvent, disposition of such securities by the Portfolio might be delayed
pending court action. The Portfolio believes that under the regular procedures
normally in effect for custody of the Portfolio's portfolio securities subject
to repurchase agreements, a court of competent jurisdiction would rule in favor
of the Portfolio and allow retention or disposition of such securities. The
Portfolio will only enter into repurchase agreements with banks and other
recognized financial institutions such as broker/dealers which are deemed by the
Sub-advisor to be creditworthy, pursuant to guidelines established by the Board
of Trustees. For an additional discussion of repurchase agreements and certain
risks involved therein, see the Trust's Prospectus under "Certain Risk Factors
and Investment Methods."
Lending Portfolio Securities. In order to generate additional income,
the Portfolio may lend its securities to brokers/dealers, banks, or other
institutional borrowers of securities. The Portfolio will only enter into loan
arrangements with broker/dealers, banks, or other institutions which the
Sub-advisor has determined are creditworthy under guidelines established by the
Trustees. The collateral received when the Portfolio lends portfolio securities
must be valued daily and, should the market value of the loaned securities
increase, the borrower must furnish additional collateral to the Portfolio.
During the time Portfolio securities are on loan, the borrower pays the
Portfolio any dividends or interest paid on such securities. Loans are subject
to termination at the option of the Portfolio or the borrower. The Portfolio may
pay reasonable administrative and custodial fees in connection with a loan and
may pay a negotiated portion of the interest earned on the cash or cash
equivalent collateral to the borrower or placing broker. The Portfolio does not
have the right to vote securities on loan, but would terminate the loan and
regain the right to vote if that were considered important with respect to the
investment.
Reverse Repurchase Agreements. The Portfolio may also enter into
reverse repurchase agreements. When effecting reverse repurchase agreements,
liquid assets of the Portfolio, in a dollar amount sufficient to make payment
for the obligations to be purchased, are segregated at the trade date. These
securities are marked to market daily and are maintained until the transaction
is settled. During the period any reverse repurchase agreements are outstanding,
but only to the extent necessary to ensure completion of the reverse repurchase
agreements, the Portfolio will restrict the purchase of portfolio instruments to
money market instruments maturing on or before the expiration date of the
reverse repurchase agreements. For a discussion of reverse repurchase agreements
and certain risks involved therein, see the Trust's Prospectus under "Certain
Risk Factors and Investment Methods."
Portfolio Turnover. The Portfolio may experience greater portfolio
turnover than would be expected with a portfolio of higher-rated securities. A
high portfolio turnover rate will result in increased transaction costs to the
Portfolio. The Portfolio will not attempt to set or meet a portfolio turnover
rate since any turnover rate would be incidental to transactions undertaken in
an attempt to achieve the Trust's investment objective.
Adverse Legislation. In 1989, legislation was enacted that required
federally insured savings and loan associations to divest their holdings of
lower-rated bonds by 1994. This legislation also created the Resolution Trust
Corporation (the "RTC"), which has disposed of a substantial portion of
lower-rated bonds held by failed savings and loan associations over the past
three years. The reduction of the number of institutions empowered to purchase
and hold lower-rated bonds, and the divestiture of bonds by these institutions
and the RTC, have had an adverse impact on the overall liquidity of the market
for such bonds. Federal and state legislatures and regulators have and may
continue to propose new laws and regulations designed to limit the number or
type of institutions that may purchase lower-rated bonds, reduce the tax
benefits to issuers of such bonds, or otherwise adversely impact the liquidity
of such bonds. The Portfolio cannot predict the likelihood that any of these
proposals will be adopted, or their potential impact on the liquidity of
lower-rated bonds.
Investment Risks. For a discussion of certain risks involved with investing
in foreign securities, including currency risks, see this Statement and the
Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Investment Restrictions Which May Be Changed Without Shareholder
Approval. The following restrictions are not "fundamental" and may be changed by
the Trustees without shareholder approval. They are applicable only to the
Federated High Yield Portfolio.
1. The Portfolio will not invest more than 5% of the value of its total
assets in securities of companies, including their predecessors, that have been
in operation for less than three years and in equity securities of any issuer
that are not readily marketable.
2. The Portfolio will not purchase the securities of any issuer (other
than the U.S. government, its agencies, or instrumentalities or instruments
secured by securities of such issuers, such as repurchase agreements) if as a
result more than 5% of the value of its total assets would be invested in the
securities of such issuer. For these purposes, the Portfolio takes all common
stock and all preferred stock of an issuer each as a single class, regardless of
priorities, series designations or other differences.
AST Phoenix Balanced Asset Portfolio:
Investment Objective: The investment objective of the AST Phoenix Balanced Asset
Portfolio is to seek reasonable income, long-term capital growth and
conservation of capital. The Portfolio intends to invest based on combined
considerations of risk, income, capital enhancement and protection of capital
value.
Investment Policies:
Lower-Rated or Non-Rated Securities. Historically, the Portfolio has
emphasized investments in investment grade fixed income securities which are
rated within the four highest categories by recognized rating agencies, i.e.,
S&P, Moody's Investor's Services, Inc. ("Moody's"), Duff & Phelps Credit Rating
Co. ("D&P"), or Fitch Investor Services Inc. ("Fitch"). However, the Portfolio
may take a position in lower or non-rated fixed income securities, but the
Portfolio will not invest more than 35% of its net assets, determined at the
time of investment, in high yield, high risk fixed income securities (commonly
referred to as "junk bonds"). A fixed income securities issue may have its
ratings reduced below the minimum permitted for purchase by the Portfolio. In
that event the Sub-advisor will determine whether the Portfolio should continue
to hold such issue. If, in the Sub-advisor's opinion, market conditions warrant,
the Portfolio may increase its position in lower or non-rated securities from
time to time. For a discussion of lower-rated or non-rated securities and the
risks involved therein, see this Statement and the Trust's Prospectus under
"Certain Risk Factors and Investment Methods."
Securities and Index Options. The Portfolio may write covered call
options and purchase call and put options on securities and securities indices
subject to the limitations described below. For a description of certain risks
involved therein see this Statement and the Trust's Prospectus under "Certain
Risk Factors and Investment Methods."
The call options written by the Portfolio will normally have expiration
dates between three and nine months from the date written. During the option
period, the Portfolio may be assigned an exercise notice by the broker-dealer
through which the call option was sold, requiring the Portfolio to deliver the
underlying security (or cash in the case of securities index calls) against
payment of the exercise price. This obligation is terminated upon expiration of
the option period or at such earlier time as the Portfolio effects a closing
purchase transaction. A closing purchase transaction cannot be effected with
respect to an option once the Portfolio has received an exercise notice.
The exercise price of a call option written by the Portfolio may be
below, equal to or above the current market value of the underlying security or
securities index at the time the option is written. A multiplier for an index
option performs a function similar to the unit of trading for an option on an
individual security. It determines the total dollar value per contract of each
point between the exercise price of the option and the current price of the
underlying index. A multiplier of 100 means that a one-point difference will
yield $100. Options on different indices may have different multipliers.
Securities indices for which options are currently traded include the Standard &
Poor's 100 and 500 Composite Stock Price Indices, Computer/Business Equipment
Index, Major Market Index, Amex Market Value Index, Computer Technology Index,
Oil and Gas Index, NYSE Options Index, Gaming/Hotel Index, Telephone Index,
Transportation Index, Technology Index, and Gold/Silver Index. The Portfolio may
write call options and purchase call and put options on any other indices traded
on a recognized exchange.
Closing purchase transactions will ordinarily be effected to realize a
profit on an outstanding call option written by the Portfolio, to prevent the
underlying security from being called, or to enable the Portfolio to write
another call option with either a different exercise price or expiration date or
both. The Portfolio may realize a net gain or loss from a closing purchase
transaction, depending upon whether the amount of premium received on the call
option is more or less than the cost of effecting the closing purchase
transaction. If a call option written by the Portfolio expires unexercised, the
Portfolio will realize a gain in the amount of the premium on the option less
the commission paid.
The Portfolio's option activities may increase its portfolio turnover
rate and the amount of brokerage commissions paid. The Portfolio will pay a
commission each time it purchases or sells a security in connection with the
exercise of an option. These commissions may be higher than those which apply to
purchases and sales of securities directly.
Limitations on Securities and Index Options. The Portfolio will only
write call options if they are covered and if they remain covered so long as the
Portfolio is obligated as a writer. If the Portfolio writes a call option on an
individual security, the Portfolio will own the underlying security at all times
during the option period. The Portfolio will write call options on indices only
to attempt to hedge in an economically appropriate way portfolio securities
which are not otherwise hedged with options or financial futures contracts. Call
options on securities indices will be "covered" by identifying the specific
securities being hedged.
To secure the obligation to deliver the underlying security, the writer
of a covered call option on an individual security is required to deposit the
underlying security or other assets in escrow with the broker in accordance with
clearing corporation and exchange rules. In the case of an index call option,
the Portfolio will be required to deposit "qualified" securities. A "qualified"
security is a security against which the Portfolio has not written a call option
and which has not been hedged by the sale of a financial futures contract. If at
the close of business on any day the market value of the qualified securities
falls below 100% of the current index value times the multiplier times the
number of contracts, the Portfolio will deposit an amount of cash or liquid
assets equal in value to the difference. In addition, when the Portfolio writes
a call on an index which is "in-the-money" at the time the call is written, the
Portfolio will segregate with its custodian bank cash or liquid assets equal in
value to the amount by which the call is "in-the-money" times the multiplier
times the number of contracts. Any amount segregated may be applied to the
Portfolio's obligation to segregate additional amounts in the event that the
market value of the qualified securities falls below 100% of the current index
value times the multiplier times the number of contracts.
The Portfolio may invest up to 2% of its total assets in
exchange-traded call and put options. The Portfolio may sell a call option or a
put option which has previously purchased prior to the purchase (in the case of
a call) or the sale (in the case of a put) of the underlying security. Any such
sale of a call option or a put option would result in a net gain or loss,
depending on whether the amount received on the sale is more or less than the
premium and other transaction costs as well.
The extent to which the Portfolio may enter into options transactions
also may be limited by the requirements of the Internal Revenue Code for
qualification as a regulated investment company.
Risk Factors in Writing Call Options and in Purchasing Call and Put
Options. The use of options involves certain risks. For an additional
description of certain risks involved see this Statement and the Trust's
Prospectus under "Certain Risk Factors and Investment Methods."
An option may only be closed out on an exchange which provides a market
for an option of the same series. Although the Portfolio will write and purchase
options only when the Sub-advisor believes that a liquid secondary market will
exist for options of the same series, there can be no assurance that a liquid
secondary market will exist for a particular option at a particular time and
that the Portfolio, if it so desires, can close out its position by effecting a
closing transaction. If the writer of a covered call option is unable to effect
a closing purchase transaction, it cannot sell the underlying security until the
option expires or the option is exercised. Accordingly, a covered call writer
may not be able to sell the underlying security at a time when it might
otherwise be advantageous to do so.
Each exchange has established limitations governing the maximum number
of call options, whether or not covered, which may be written by a single
investor acting alone or in concert with others (regardless of whether such
options are written on the same or different exchanges or are held or written on
one or more accounts or through one or more brokers). An exchange may order the
liquidation of positions found to be in violation of these limits and it may
impose other sanctions or restrictions. The Sub-advisor believes the position
limits established by the exchanges will not have any adverse impact upon the
Portfolio.
Risk Factors of Options on Indices. For an additional discussion of
certain risks involved in options on indices, see this Statement and the Trust's
Prospectus under "Certain Risk Factors and Investment Methods." Because the
value of an index option depends upon the movements in the level of the index
rather than upon movements in the price of a particular security, whether the
Portfolio will realize a gain or a loss on the purchase or sale of an option on
an index depends upon the movements in the level of prices in the market
generally or in an industry or market segment rather than upon movements in the
price of the individual security. Accordingly, successful use of positions will
depend upon the Sub-advisor's ability to predict correctly movements in the
direction of the market generally or in the direction of a particular industry.
This requires different skills and techniques than predicting changes in the
prices of individual securities.
Index prices may be distorted if trading of securities included in the
index is interrupted. Trading in index options also may be interrupted in
certain circumstances, such as if trading were halted in a substantial number of
securities in the index. If this occurred, the Portfolio would not be able to
close out options which it had written or purchased and, if restrictions on
exercise were imposed, might be unable to exercise an option it purchased, which
would result in substantial losses. However, it is the Sub-advisor's policy to
write or purchase options only on indices which include a sufficient number of
securities so that the likelihood of a trading halt in the index is minimized.
Because the exercise of an index option is settled in cash, an index call writer
cannot determine the amount of its settlement obligation in advance, and unlike
call writing, cannot provide in advance for its potential settlement obligation
by holding the underlying securities. Consequently, the Portfolio will write
call options on indices only subject to the limitations described above.
Unless the Portfolio has other liquid assets which are sufficient to
satisfy the exercise of a call on the index, the Portfolio will be required to
liquidate securities in order to satisfy the exercise. Because an exercise must
be settled within hours after receiving notice of the exercise, if the
Sub-advisor fails to anticipate an exercise, it may have to borrow from a bank
(in an amount not exceeding 10% of the Portfolio's total assets) pending
settlement of the sale of securities and pay interest on such borrowing.
Financial Futures Contracts and Related Options. The Portfolio may
purchase or sell interest rate and securities index futures contracts which are
traded on a recognized exchange or board of trade subject to the limitations and
risks described below. The Portfolio may only use such financial futures
contracts and related options to hedge against changes in the market value of
its securities or securities which it intends to purchase.
In contrast to the situation when a Portfolio purchases or sells a
security, no security is delivered or received by the Portfolio upon the
purchase or sale of a financial futures contract. Depending on the investment
policies and restrictions of the Portfolio, the Portfolio will be required to
deposit in a segregated account with its custodian bank an amount of cash, U.S.
Treasury bills or liquid high grade debt obligations. This amount is known as
initial margin and is in the nature of a performance bond or good faith deposit
on the contract. The current initial margin deposit required per contract is
approximately 5% of the contract amount. Brokers may establish deposit
requirements higher than this minimum. Subsequent payments, called variation
margin, will be made to and from the account on a daily basis as the price of
the futures contract fluctuates. This process is known as marking to market.
Limitations on Futures Contracts and Related Options. The Portfolio may
not engage in transactions in financial futures contracts or related options for
speculative purposes but only for the purpose of hedging against anticipated
changes in the market value of its securities or changes in the market value of
securities which it intends to purchase. The Portfolio may not purchase or sell
financial futures contracts or related options if, immediately thereafter, the
sum of the initial margin deposits on the Portfolio's existing futures and
related options positions and the premiums paid for related options would exceed
2% of the market value of the Portfolio's total assets after taking into account
unrealized profits and losses on any such contracts. At the time of purchase of
a futures contract or a call option on a futures contract, an amount of cash,
U.S. Government securities or other appropriate high-grade debt obligations
equal to the market value of the futures contract minus the Portfolio's initial
margin deposit with respect thereto will be deposited in a segregated account
with the Portfolio's custodian bank to collateralize fully the position and
thereby ensure that it is not leveraged.
The extent to which the Portfolio may enter into financial futures
contracts and related options also may be limited by requirements of the
Internal Revenue Code for qualification as a regulated investment company.
Risks Relating to Futures Contracts and Related Options. See this
Statement and the Trust's Prospectus under "Certain Risk Factors and Investment
Methods" for a description of certain risks involved in the use of financial
futures contracts and related options.
Positions in futures contracts and related options may be closed out on
an exchange which provides a secondary market for such contracts or options. The
Sub-advisor will enter into an option or futures position only if there appears
to be a liquid secondary market. However, there can be no assurance that a
liquid secondary market will exist for any particular option or futures contract
at any specific time. Thus it may not be possible to close out a futures or
related option position. In the case of a futures position, in the event of
adverse price movements the Portfolio would be required to continue to deposit
additional margin. In this situation, if the Portfolio has insufficient cash to
meet margin requirements it may be required to sell securities at a time when it
is disadvantageous to do so. In addition, the Portfolio may be required to take
or make delivery of the securities underlying the futures contracts it holds.
The inability to close out futures positions could also have an adverse impact
on the Portfolio's ability to hedge effectively.
Foreign Securities. The Portfolio may purchase foreign securities,
including emerging market securities and those issued by foreign branches of
U.S. banks. In any event, such investments in foreign securities will be limited
to less than 25% of the total net asset value of the Portfolio. For a discussion
of certain risks involved in foreign investing, including foreign currency
fluctuations and investing in developing countries or so called "emerging
markets," see this Statement and the Trust's Prospectus under "Certain Risk
Factors and Investment Methods."
Mortgage-Backed Securities. Securities issued by the Government
National Mortgage Association ("GNMA") are, and securities issued by the Federal
National Mortgage Association ("FNMA") include, mortgage-backed securities
representing part ownership of a pool of mortgage loans. See this Statement and
the Trust's Prospectus for a discussion of mortgage-backed securities and
certain risks involved therein.
Lending Portfolio Securities. In order to increase its return on
investments, the Portfolio may make loans of Portfolio securities as long as the
market value of loaned securities does not exceed 25% of the value of the
Portfolio's total assets. Loans of portfolio securities will always be fully
collateralized and made only to borrowers deemed creditworthy. Lending portfolio
securities involves a risk of delay in the recovery of the loaned securities and
possibly the loss of collateral if the borrower fails financially.
T. Rowe Price Asset Allocation Portfolio:
Investment Objective: The investment objective of the T. Rowe Price Asset
Allocation Portfolio is to seek a high level of total return by investing
primarily in a diversified group of fixed income and equity securities.
Investment Policies: The Portfolio's share price will fluctuate with changing
market conditions and interest rate levels and your investment may be worth more
or less when redeemed than when purchased. The Portfolio should not be relied
upon for short-term financial needs, nor used to play short-term swings in the
stock or bond markets. The Portfolio cannot guarantee that it will achieve its
investment objectives.
Fixed Income Securities. Fixed income securities in which the Portfolio may
invest include, but are not limited to, those described below.
U.S. Government Obligations. Bills, notes, bonds and other debt securities
issued by the U.S. Treasury. These are direct obligations of the U.S. Government
and differ mainly in the length of their maturities.
U.S. Government Agency Securities. Issued or guaranteed by U.S.
Government sponsored enterprises and federal agencies. These include securities
issued by the Federal National Mortgage Association, Government National
Mortgage Association, Federal Home Loan Bank, Federal Land Banks, Farmers Home
Administration, Banks for Cooperatives, Federal Intermediate Credit Banks,
Federal Financing Bank, Farm Credit Banks, the Small Business Association, and
the Tennessee Valley Authority. Some of these securities are supported by the
full faith and credit of the U.S. Treasury, and the remainder are supported only
by the credit of the instrumentality, which may or may not include the right of
the issuer to borrow from the Treasury.
Bank Obligations. Certificates of deposit, bankers' acceptances, and other
short-term debt obligations. Certificates of deposit are short-term obligations
of commercial banks. A bankers' acceptance is a time draft drawn on a commercial
bank by a borrower, usually in connection with international commercial
transactions. Certificates of deposit may have fixed or variable rates. The
Portfolio may invest in U.S. banks, foreign branches of U.S. banks, U.S.
branches of foreign banks and foreign branches of foreign banks.
Savings and Loan Obligations. Negotiable certificates of deposit and other
short-term debt obligations of savings and loan associations.
The Portfolio may also invest in the securities of certain
supranational entities, such as the International Development Bank.
Collateralized Mortgage Obligations (CMOs). CMOs are obligations fully
collateralized by a portfolio of mortgages or mortgage-related securities.
Payments of principal and interest on the mortgages are passed through to the
holders of the CMOs on the same schedule as they are received, although certain
classes of CMOs have priority over others with respect to the receipt of
prepayments on the mortgages. Therefore, depending on the type of CMOs in which
a Portfolio invests, the investment may be subject to a greater or lesser risk
of prepayment than other types of mortgage-related securities.
For a discussion of mortgage-backed securities and certain risks
involved therein, see this Statement and the Trust's Prospectus under "Certain
Risk Factors and Investment Methods."
Mortgage-Backed Securities. Mortgage-backed securities are securities
representing interest in a pool of mortgages. After purchase by the Portfolio, a
security may cease to be rated or its rating may be reduced below the minimum
required for purchase by the Portfolio. Neither event will require a sale of
such security by the Portfolio. However, the Sub-advisor will consider such
event in its determination of whether the Portfolio should continue to hold the
security. To the extent that the ratings given by Moody's or S&P may change as a
result of changes in such organizations or their rating systems, the Portfolio
will attempt to use comparable ratings as standards for investments in
accordance with the investment policies continued in the Trust's Prospectus.
For a discussion of mortgage-backed securities and certain risks
involved therein, see this Statement and the Trust's Prospectus under "Certain
Risk Factors and Investment Methods."
Asset-Backed Securities. The Portfolio may invest a portion of its
assets in debt obligations known as asset-backed securities. The credit quality
of most asset-backed securities depends primarily on the credit quality of the
assets underlying such securities, how well the entity issuing the security is
insulated from the credit risk of the originator or any other affiliated
entities and the amount and quality of any credit support provided to the
securities. The rate of principal payment on asset-backed securities generally
depends on the rate of principal payments received on the underlying assets
which in turn may be affected by a variety of economic and other factors. As a
result, the yield on any asset-backed security is difficult to predict with
precision and actual yield to maturity may be more or less than the anticipated
yield to maturity.
Automobile Receivable Securities. The Portfolio may invest in
asset-backed securities which are backed by receivables from motor vehicle
installment sales contracts or installment loans secured by motor vehicles
("Automobile Receivable Securities").
Credit Card Receivable Securities. The Portfolio may invest in
asset-backed securities backed by receivables from revolving credit card
agreements ("Credit Card Receivable Securities").
Other Assets. The Sub-advisor anticipates that asset-backed
securities backed by assets other than those described above will be issued in
the future. The Portfolio may invest in such securities in the future if such
investment is otherwise consistent with its investment objective and policies.
For a discussion of these securities, see this Statement and the Trust's
Prospectus under "Certain Risk Factors and Investment Methods."
In addition to the investments described in the Trust's Prospectus, the
Portfolio may invest in the following:
Writing Covered Call Options. The Portfolio may write (sell) "covered"
call options and purchase options to close out options previously written by the
Portfolio. In writing covered call options, the Portfolio expects to generate
additional premium income which should serve to enhance the Portfolio's total
return and reduce the effect of any price decline of the security or currency
involved in the option. Covered call options will generally be written on
securities or currencies which, in the Sub-advisor's opinion, are not expected
to have any major price increases or moves in the near future but which, over
the long term, are deemed to be attractive investments for the Portfolio.
The Portfolio will write only covered call options. This means that the
Portfolio will own the security or currency subject to the option or an option
to purchase the same underlying security or currency, having an exercise price
equal to or less than the exercise price of the "covered" option, or will
establish and maintain with its custodian for the term of the option, an account
consisting of cash, U.S. government securities or other liquid high-grade debt
obligations having a value equal to the fluctuating market value of the optioned
securities or currencies. In order to comply with the requirements of several
states, the Portfolio will not write a covered call option if, as a result, the
aggregate market value of all Portfolio securities or currencies covering call
or put options exceeds 25% of the market value of the Portfolio's net assets.
Should these state laws change or should the Portfolio obtain a waiver of their
application, the Portfolio reserves the right to increase this percentage. In
calculating the 25% limit, the Portfolio will offset, against the value of
assets covering written calls and puts, the value of purchased calls and puts on
identical securities or currencies with identical maturity dates.
Portfolio securities or currencies on which call options may be written
will be purchased solely on the basis of investment considerations consistent
with the Portfolio's investment objectives. The writing of covered call options
is a conservative investment technique believed to involve relatively little
risk (in contrast to the writing of naked or uncovered options, which the
Portfolio will not do), but capable of enhancing the Portfolio's total return.
When writing a covered call option, the Portfolio, in return for the premium,
gives up the opportunity for profit from a price increase in the underlying
security or currency above the exercise price, but conversely, retains the risk
of loss should the price of the security or currency decline. Unlike one who
owns securities or currencies not subject to an option, the Portfolio has no
control over when it may be required to sell the underlying securities or
currencies, since it may be assigned an exercise notice at any time prior to the
expiration of its obligations as a writer. If a call option which the Portfolio
has written expires, the Portfolio will realize a gain in the amount of the
premium; however, such gain may be offset by a decline in the market value of
the underlying security or currency during the option period. If the call option
is exercised, the Portfolio will realize a gain or loss from the sale of the
underlying security or currency, The Portfolio does not consider a security or
currency covered by a call "pledged" as that term is used in the Portfolio's
policy which limits the pledging or mortgaging of its assets.
Call options written by the Portfolio will normally have expiration
dates of less than nine months from the date written. The exercise price of the
options may be below, equal to, or above the current market values of the
underlying securities or currencies at the time the options are written. From
time to time, the Portfolio may purchase an underlying security or currency for
delivery in accordance with an exercise notice of a call option assigned to it,
rather than delivering such security or currency from its portfolio. In such
cases, additional costs may be incurred.
The premium received is the market value of an option. The premium the
Portfolio will receive from writing a call option will reflect, among other
things, the current market price of the underlying security or currency, the
relationship of the exercise price to such market price, the historical price
volatility of the underlying security or currency, and the length of the option
period. Once the decision to write a call option has been made, Sub-advisor, in
determining whether a particular call option should be written on a particular
security or currency, will consider the reasonableness of the anticipated
premium and the likelihood that a liquid secondary market will exist for those
options. The premium received by the Portfolio for writing covered call options
will be recorded as a liability of the Portfolio. This liability will be
adjusted daily to the option's current market value, which will be the latest
sale price at the time at which the net asset value per share of the Portfolio
is computed (close of the New York Stock Exchange), or, in the absence of such
sale, the latest asked price. The option will be terminated upon expiration of
the option, the purchase of an identical option in a closing transaction, or
delivery of the underlying security or currency upon the exercise of the option.
The Portfolio will realize a profit or loss from a closing purchase
transaction if the cost of the transaction is less or more than the premium
received from the writing of the option. Because increases in the market price
of a call option will generally reflect increases in the market price of the
underlying security or currency, any loss resulting from the repurchase of a
call option is likely to be offset in whole or in part by appreciation of the
underlying security or currency owned by the Portfolio.
Writing Covered Put Options. The Portfolio may write American or
European style covered put options and purchase options to close out options
previously written by the Portfolio.
The Portfolio would write put options only on a covered basis, which
means that the Portfolio would maintain in a segregated account cash, U.S.
government securities or other liquid high-grade debt obligations in an amount
not less than the exercise price or the Portfolio will own an option to sell the
underlying security or currency subject to the option having an exercise price
equal to or greater than the exercise price of the "covered" option at all times
while the put option is outstanding. (The rules of a clearing corporation
currently require that such assets be deposited in escrow to secure payment of
the exercise price.) The Portfolio would generally write covered put options in
circumstances where Sub-advisor wishes to purchase the underlying security or
currency for the Portfolio's portfolio at a price lower than the current market
price of the security or currency. In such event the Portfolio would write a put
option at an exercise price which, reduced by the premium received on the
option, reflects the lower price it is willing to pay. Since the Portfolio would
also receive interest on debt securities or currencies maintained to cover the
exercise price of the option, this technique could be used to enhance current
return during periods of market uncertainty. The risk in such a transaction
would be that the market price of the underlying security or currency would
decline below the exercise price less the premiums received. Such a decline
could be substantial and result in a significant loss to the Portfolio. In
addition, the Portfolio, because it does not own the specific securities or
currencies which it may be required to purchase in the exercise of the put, can
not benefit from appreciation, if any, with respect to such specific securities
or currencies. In order to comply with the requirements of several states, the
Portfolio will not write a covered put option if, as a result, the aggregate
market value of all portfolio securities or currencies covering put or call
options exceeds 25% of the market value of the Portfolio's net assets. Should
these state laws change or should the Portfolio obtain a waiver of their
application, the Portfolio reserves the right to increase this percentage. In
calculating the 25% limit, the Portfolio will offset, against the value of
assets covering written puts and calls, the value of purchased puts and calls on
identical securities or currencies. For a discussion of options, see this
Statement and the Trust's Prospectus under "Certain Risk Factors and Investment
Methods."
Purchasing Put Options. The Portfolio may purchase American or European
style put options. The Portfolio may enter into closing sale transactions with
respect to such options, exercise them or permit them to expire. The Portfolio
may purchase put options for defensive purposes in order to protect against an
anticipated decline in the value of its securities or currencies. An example of
such use of put options is provided in this Statement under "Certain Risk
Factors and Investment Methods."
To the extent required by the laws of certain states, the Portfolio may
not be permitted to commit more than 5% of its assets to premiums when
purchasing call and put options. Should these state laws change or should the
Portfolio obtain a waiver of their application, the Portfolio may commit more
than 5% of its assets to premiums when purchasing call and put options. The
Portfolio may also purchase call options on underlying securities or currencies
it owns in order to protect unrealized gains on call options previously written
by it. A call option would be purchased for this purpose where tax
considerations make it inadvisable to realize such gains through a closing
purchase transaction. Call options may also be purchased at times to avoid
realizing losses.
Purchasing Call Options. The Portfolio may purchase American or
European call options. The Portfolio may enter into closing sale transactions
with respect to such options, exercise them or permit them to expire. The
Portfolio may purchase call options for the purpose of increasing its current
return or avoiding tax consequences which could reduce its current return. The
Portfolio may also purchase call options in order to acquire the underlying
securities or currencies. Examples of such uses of call options are provided
this Statement under "Certain Risk Factors and Investment Methods."
To the extent required by the laws of certain states, the Portfolio may
not be permitted to commit more than 5% of its assets to premiums when
purchasing call and put options. Should these state laws change or should the
Portfolio obtain a waiver of their application, the Portfolio may commit more
than 5% of its assets to premiums when purchasing call and put options. The
Portfolio may also purchase call options on underlying securities or currencies
it owns in order to protect unrealized gains on call options previously written
by it. A call option would be purchased for this purpose where tax
considerations make it inadvisable to realize such gains through a closing
purchase transaction. Call options may also be purchased at times to avoid
realizing losses.
Dealer Options. The Portfolio may engage in transactions involving
dealer options. Certain risks are specific to dealer options. While the
Portfolio would look to a clearing corporation to exercise exchange-traded
options, if the Portfolio were to purchase a dealer option, it would rely on the
dealer from whom it purchased the option to perform if the option were
exercised. While the Portfolio will seek to enter into dealer options only with
dealers who will agree to and which are expected to be capable of entering into
closing transactions with the Portfolio, there can be no assurance that the
Portfolio will be able to liquidate a dealer option at a favorable price at any
time prior to expiration. Failure by the dealer to do so would result in the
loss of the premium paid by the Portfolio as well as loss of the expected
benefit of the transaction. For a discussion of dealer options, see this
Statement under "Certain Risk Factors and Investment Methods."
Futures Contracts.
Transactions in Futures. The Portfolio may enter into
financial futures contracts, including stock index, interest rate and currency
futures ("futures or futures contracts").
Stock index futures contracts may be used to attempt to provide a hedge
for a portion of the Portfolio's portfolio, as a cash management tool, or as an
efficient way for the Sub-advisor to implement either an increase or decrease in
portfolio market exposure in response to changing market conditions. Stock index
futures contracts are currently traded with respect to the S&P 500 Index and
other broad stock market indices, such as the New York Stock Exchange Composite
Stock Index and the Value Line Composite Stock Index. The Portfolio may,
however, purchase or sell futures contracts with respect to any stock index.
Nevertheless, to hedge the Portfolio's portfolio successfully, the Portfolio
must sell futures contacts with respect to indices or subindexes whose movements
will have a significant correlation with movements in the prices of the
Portfolio's securities.
Interest rate or currency futures contracts may be used to attempt to
hedge against changes in prevailing levels of interest rates or currency
exchange rates in order to establish more definitely the effective return on
securities or currencies held or intended to be acquired by the Portfolio. In
this regard, the Portfolio could sell interest rate or currency futures as an
offset against the effect of expected increases in interest rates or currency
exchange rates and purchase such futures as an offset against the effect of
expected declines in interest rates or currency exchange rates.
The Portfolio will enter into futures contracts which are traded on
national or foreign futures exchanges and are standardized as to maturity date
and underlying financial instrument. The principal financial futures exchanges
in the United States are the Board of Trade of the City of Chicago, the Chicago
Mercantile Exchange, the New York Futures Exchange, and the Kansas City Board of
Trade. Futures exchanges and trading in the United States are regulated under
the Commodity Exchange Act by the Commodity Futures Trading Commission ("CFTC").
Futures are traded in London at the London International Financial Futures
Exchange, in Paris at the MATIF and in Tokyo at the Tokyo Stock Exchange.
Although techniques other than the sale and purchase of futures contracts could
be used for the above-referenced purposes, futures contracts offer an effective
and relatively low cost means of implementing the Portfolio's objectives in
these areas. For a discussion of futures transactions and certain risks involved
therein, see this Statement and the Trust's Prospectus under "Certain Risk
Factors and Investment Methods."
Regulatory Limitations. The Portfolio will engage in
transactions in futures contracts and options thereon only for bona fide
hedging, yield enhancement and risk management purposes, in each case in
accordance with the rules and regulations of the CFTC.
The Portfolio may not enter into futures contracts or options thereon
if, with respect to positions which do not qualify as bona fide hedging under
applicable CFTC rules, the sum of the amounts of initial margin deposits on the
Portfolio's existing futures and premiums paid for options on futures would
exceed 5% of the net asset value of the Portfolio after taking into account
unrealized profits and unrealized losses on any such contracts it has entered
into; provided, however, that in the case of an option that is in-the-money at
the time of purchase, the in-the-money amount may be excluded in calculating the
5% limitation.
The Portfolio's use of futures contracts will not result in leverage.
Therefore, to the extent necessary, in instances involving the purchase of
futures contracts or call options thereon or the writing of put options thereon
by the Portfolio, an amount of cash, U.S. government securities or other liquid,
high-grade debt obligations, equal to the market value of the futures contracts
and options thereon (less any related margin deposits), will be identified in an
account with the Portfolio's custodian to cover the position, or alternative
cover will be employed.
In addition, CFTC regulations may impose limitations on the Portfolio's
ability to engage in certain yield enhancement and risk management strategies.
If the CFTC or other regulatory authorities adopt different (including less
stringent) or additional restrictions, the Portfolio would comply with such new
restrictions.
Risks of Transactions in Futures Contracts. See this Statement
and the Trust's Prospectus under "Certain Risks and Investment Methods" for an
additional description of certain risks involved in futures contracts.
Options on Futures Contracts. As an alternative to writing or
purchasing call and put options on stock index futures, the Portfolio may write
or purchase call and put options on stock indices. Such options would be used in
a manner similar to the use of options on futures contracts. From time to time,
a single order to purchase or sell futures contracts (or options thereon) may be
made on behalf of the Portfolio and other mutual funds or portfolios of mutual
funds for which T. Rowe Price Associates, Inc. or Rowe Price-Fleming
International, Inc. serve as sub-advisor. Such aggregated orders would be
allocated among the Portfolio and such other mutual funds or portfolios of
mutual funds in a fair and non-discriminatory manner.
Risks of Transactions in Options on Futures Contracts. See
this Statement and the Trust's Prospectus under "Certain Risk Factors and
Investment Methods" for a description of certain risks involved in options on
futures contracts.
Additional Futures and Options Contracts. Although the Portfolio has no
current intention of engaging in financial futures or options transactions other
than those described above, it reserves the right to do so. Such futures or
options trading might involve risks which differ from those involved in the
futures and options described above.
Foreign Futures and Options. The Portfolio is permitted to enter into
foreign futures and options transactions. See this Statement and the Trust's
Prospectus under "Certain Risk Factors and Investment Methods" for a description
of certain risks involved in foreign futures and options.
Foreign Securities. The Portfolio may invest in U.S. dollar-denominated
and non-U.S. dollar-denominated securities of foreign issuers in developed
countries. Because the Portfolio may invest in foreign securities, investment in
the Portfolio involves risks that are different in some respects from an
investment in a Portfolio which invests only in securities of U.S. domestic
issuers. Foreign investments may be affected favorably or unfavorably by changes
in currency rates and exchange control regulations. There may be less publicly
available information about a foreign company than about a U.S. company, and
foreign companies may not be subject to accounting, auditing, and financial
reporting standards and requirements comparable to those applicable to U.S.
companies. There may be less governmental supervision of securities markets,
brokers and issuers of securities. Securities of some foreign companies are less
liquid or more volatile than securities of U.S. companies, and foreign brokerage
commissions and custodian fees are generally higher than in the United States.
Settlement practices may include delays and may differ from those customary in
United States markets. Investments in foreign securities may also be subject to
other risks different from those affecting U.S. investments, including local
political or economic developments, expropriation or nationalization of assets,
restrictions on foreign investment and repatriation of capital, imposition of
withholding taxes on dividend or interest payments, currency blockage (which
would prevent cash from being brought back to the United States), and difficulty
in enforcing legal rights outside the U.S. For an additional discussion of
certain risks involved in investing in foreign securities, see this Statement
and the Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Foreign Currency Transactions. The Portfolio will generally enter into
forward foreign currency exchange contracts under two circumstances. First, when
the Portfolio enters into a contract for the purchase or sale of a security
denominated in a foreign currency, it may desire to "lock in" the U.S. dollar
price of the security.
Second, when the Sub-advisor believes that the currency of a particular
foreign country may suffer or enjoy a substantial movement against another
currency, including the U.S. dollar, it may enter into a forward contract to
sell or buy the amount of the former foreign currency, approximating the value
of some or all of the Portfolio's securities denominated in such foreign
currency. Alternatively, where appropriate, the Portfolio may hedge all or part
of its foreign currency exposure through the use of a basket of currencies or a
proxy currency where such currency or currencies act as an effective proxy for
other currencies. In such a case, the Portfolio may enter into a forward
contract where the amount of the foreign currency to be sold exceeds the value
of the securities denominated in such currency. The use of this basket hedging
technique may be more efficient and economical than entering into separate
forward contracts for each currency held in the Portfolio. The precise matching
of the forward contract amounts and the value of the securities involved will
not generally be possible since the future value of such securities in foreign
currencies will change as a consequence of market movements in the value of
those securities between the date the forward contract is entered into and the
date it matures. The projection of short-term currency market movement is
extremely difficult, and the successful execution of a short-term hedging
strategy is highly uncertain. Other than as set forth above, and immediately
below, the Portfolio will also not enter into such forward contracts or maintain
a net exposure to such contracts where the consummation of the contracts would
obligate the Portfolio to deliver an amount of foreign currency in excess of the
value of the Portfolio's securities or other assets denominated in that
currency. The Portfolio, however, in order to avoid excess transactions and
transaction costs, may maintain a net exposure to forward contracts in excess of
the value of the Portfolio's securities or other assets to which the forward
contracts relate (including accrued interest to the maturity of the forward on
such securities) provided the excess amount is "covered" by liquid, high-grade
debt securities, denominated in any currency, at least equal at all times to the
amount of such excess. For these purposes "the securities or other assets to
which the forward contracts relate may be securities or assets denominated in a
single currency, or where proxy forwards are used, securities denominated in
more than one currency. Under normal circumstances, consideration of the
prospect for currency parities will be incorporated into the longer term
investment decisions made with regard to overall diversification strategies.
However, the Sub-advisor believes that it is important to have the flexibility
to enter into such forward contracts when it determines that the best interests
of the Portfolio will be served.
At the maturity of a forward contract, the Portfolio may either sell
the portfolio security and make delivery of the foreign currency, or it may
retain the security and terminate its contractual obligation to deliver the
foreign currency by purchasing an "offsetting" contract obligating it to
purchase, on the same maturity date, the same amount of the foreign currency.
As indicated above, it is impossible to forecast with absolute
precision the market value of portfolio securities at the expiration of the
forward contract. Accordingly, it may be necessary for the Portfolio to purchase
additional foreign currency on the spot market (and bear the expense of such
purchase) if the market value of the security is less than the amount of foreign
currency the Portfolio is obligated to deliver and if a decision is made to sell
the security and make delivery of the foreign currency. Conversely, it may be
necessary to sell on the spot market some of the foreign currency received upon
the sale of the portfolio security if its market value exceeds the amount of
foreign currency the Portfolio is obligated to deliver. However, as noted, in
order to avoid excessive transactions and transaction costs, the Portfolio may
use liquid, high-grade debt securities denominated in any currency, to cover the
amount by which the value of a forward contract exceeds the value of the
securities to which it relates.
If the Portfolio retains the portfolio security and engages in an
offsetting transaction, the Portfolio will incur a gain or a loss (as described
below) to the extent that there has been movement in forward contract prices. If
the Portfolio engages in an offsetting transaction, it may subsequently enter
into a new forward contract to sell the foreign currency. Should forward prices
decline during the period between the Portfolio's entering into a forward
contract for the sale of a foreign currency and the date it enters into an
offsetting contract for the purchase of the foreign currency, the Portfolio will
realize a gain to the extent the price of the currency it has agreed to sell
exceeds the price of the currency it has agreed to purchase. Should forward
prices increase, the Portfolio will suffer a loss to the extent of the price of
the currency it has agreed to purchase exceeds the price of the currency it has
agreed to sell.
The Portfolio's dealing in forward foreign currency exchange contracts
will generally be limited to the transactions described above. However, the
Portfolio reserves the right to enter into forward foreign currency contracts
for different purposes and under different circumstances. Of course, the
Portfolio is not required to enter into forward contracts with regard to its
foreign currency-denominated securities and will not do so unless deemed
appropriate by the Sub-advisor. It also should be realized that this method of
hedging against a decline in the value of a currency does not eliminate
fluctuations in the underlying prices of the securities. It simply establishes a
rate of exchange at a future date. Additionally, although such contracts tend to
minimize the risk of loss due to a decline in the value of the hedged currency,
at the same time, they tend to limit any potential gain which might result from
an increase in the value of that currency.
Although the Portfolio values its assets daily in terms of U.S.
dollars, it does not intend to convert its holdings of foreign currencies into
U.S. dollars on a daily basis. It will do so from time to time, and investors
should be aware of the costs of currency conversion. Although foreign exchange
dealers do not charge a fee for conversion, they do realize a profit based on
the difference (the "spread") between the prices at which they are buying and
selling various currencies. Thus, a dealer may offer to sell a foreign currency
to the Portfolio at one rate, while offering a lesser rate of exchange should
the Portfolio desire to resell that currency to the dealer.
For a discussion of certain risks involved in foreign currency
transactions, see this Statement and the Trust's Prospectus under "Certain Risk
Factors and Investment Methods."
Federal Tax Treatment of Options, Futures Contracts and Forward Foreign
Exchange Contracts. The Portfolio may enter into certain option, futures, and
forward foreign exchange contracts, including options and futures on currencies,
which will be treated as Section 1256 contracts or straddles.
Transactions which are considered Section 1256 contracts will be
considered to have been closed at the end of the Portfolio's fiscal year and any
gains or losses will be recognized for tax purposes at that time. Such gains or
losses from the normal closing or settlement of such transactions will be
characterized as 60% long-term capital gain or loss and 40% short-term capital
gain or loss regardless of the holding period of the instrument. The Portfolio
will be required to distribute net gains on such transactions to shareholders
even though it may not have closed the transaction and received cash to pay such
distributions.
Options, futures and forward foreign exchange contracts, including
options and futures on currencies, which offset a foreign dollar denominated
bond or currency position may be considered straddles for tax purposes in which
case a loss on any position in a straddle will be subject to deferral to the
extent of unrealized gain in an offsetting position. The holding period of the
securities or currencies comprising the straddle will be deemed not to begin
until the straddle is terminated. For securities offsetting a purchased put,
this adjustment of the holding period may increase the gain from sales of
securities held less than three months. The holding period of the security
offsetting an "in-the-money qualified covered call" option on an equity security
will not include the period of time the option is outstanding.
Losses on written covered calls and purchased puts on securities,
excluding certain "qualified covered call" options on equity securities, may be
long-term capital loss, if the security covering the option was held for more
than twelve months prior to the writing of the option.
In order for the Portfolio to continue to qualify for federal income
tax treatment as a regulated investment company, at least 90% of its gross
income for a taxable year must be derived from qualifying income, i.e.,
dividends, interest, income derived from loans of securities, and gains from the
sale of securities or currencies. Pending tax regulations could limit the extent
that net gain realized from option, futures or foreign forward exchange
contracts on currencies is qualifying income for purposes of the 90%
requirement. In addition, gains realized on the sale or other disposition of
securities, including option, futures or foreign forward exchange contracts on
securities or securities indexes and, in some cases, currencies, held for less
than three months, must be limited to less than 30% of the Portfolio's annual
gross income. In order to avoid realizing excessive gains on securities or
currencies held less than three months, the Portfolio may be required to defer
the closing out of option, futures or foreign forward exchange contracts beyond
the time when it would otherwise be advantageous to do so. It is anticipated
that unrealized gains on Section 1256 option, futures and foreign forward
exchange contracts, which have been open for less than three months as of the
end of the Portfolio's fiscal year and which are recognized for tax purposes,
will not be considered gains on securities or currencies held less than three
months for purposes of the 30% test.
Hybrid Commodity and Security Instruments. Instruments have been
developed which combine the elements of futures contracts or options with those
of debt, preferred equity or a depository instrument (hereinafter "Hybrid
Instruments"). Often these hybrid instruments are indexed to the price of a
commodity or particular currency or a domestic or foreign debt or equity
securities index. Hybrid instruments may take a variety of forms, including, but
not limited to, debt instruments with interest or principal payments or
redemption terms determined by reference to the value of a currency or commodity
at a future point in time, preferred stock with dividend rates determined by
reference to the value of a currency, or convertible securities with the
conversion terms related to a particular commodity. For a discussion of certain
risks involved in investing in hybrid instruments, see this Statement under
"Certain Risk Factors and Investment Methods."
Restricted Securities. Subject to guidelines promulgated by the Board
of Trustees of the Trust, the Portfolio may invest in illiquid securities. The
Portfolio may invest in illiquid securities including repurchase agreements
which do not provide for payment within seven days, but will not acquire such
securities if, as a result, they would comprise more than 15% of the value of
the Portfolio's net assets.
Restricted securities may be sold only in privately negotiated
transactions or in a public offering with respect to which a registration
statement is in effect under the Securities Act of 1933 (the "1933 Act"). Where
registration is required, the Portfolio may be obligated to pay all or part of
the registration expenses and a considerable period may elapse between the time
of the decision to sell and the time the Portfolio may be permitted to sell a
security under an effective registration statement. If, during such a period,
adverse market conditions were to develop, the Portfolio might obtain a less
favorable price than prevailed when it decided to sell. Restricted securities
will be priced at fair value as determined in accordance with procedures
prescribed by the Board of Trustees. If through the appreciation of restricted
securities or the depreciation of unrestricted securities or the depreciation of
liquid securities, the Portfolio should be in a position where more than 15% of
the value of its net assets are invested in illiquid assets, including
restricted securities, the Portfolio will take appropriate steps to protect
liquidity.
The Portfolio may purchase securities which while privately placed, are
eligible for purchase and sale under Rule 144A under the 1933 Act. This rule
permits certain qualified institutional buyers, such as the Portfolio, to trade
in privately placed securities even though such securities are not registered
under the 1933 Act. Sub-advisor, under the supervision of the Trust's Board of
Trustees, will consider whether securities purchased under Rule 144A are
illiquid and thus subject to the Portfolio's restriction of investing no more
than 15% of its assets in illiquid securities. A determination of whether a Rule
144A security is liquid or not is a question of fact. In making this
determination, the Sub-advisor will consider the trading markets for the
specific security taking into account the unregistered nature of a Rule 144A
security. In addition, Sub-advisor could consider the (1) frequency of trades
and quotes, (2) number of dealers and potential purchasers, (3) dealer
undertakings to make a market, and (4) the nature of the security and of
marketplace trades (e.g., the time needed to dispose of the security, the method
of soliciting offers and the mechanics of transfer). The liquidity of Rule 144A
securities would be monitored, and if as a result of changed conditions it is
determined that a Rule 144A security is no longer liquid, the Portfolio's
holdings of illiquid securities would be reviewed to determine what, if any,
steps are required to assure that the Portfolio does not invest more than 15% of
its assets in illiquid securities. Investing in Rule 144A securities could have
the effect of increasing the amount of the Portfolio's assets invested in
illiquid securities if qualified institutional buyers are unwilling to purchase
such securities.
Repurchase Agreements. The Portfolio may enter into repurchase
agreements through which an investor (such as the Portfolio) purchases a
security (known as the "underlying security") from a well-established securities
dealer or a bank which is a member of the Federal Reserve System. Any such
dealer or bank will be on Sub-advisor's approved list and have a credit rating
with respect to its short-term debt of at least A1 by Standard & Poor's
Corporation, P1 by Moody's Investors Service, Inc., or the equivalent rating by
Sub-advisor. At that time, the bank or securities dealer agrees to repurchase
the underlying security at the same price, plus specified interest. Repurchase
agreements are generally for a short period of time, often less than a week.
Repurchase agreements which do not provide for payment within seven days will be
considered illiquid. The Portfolio will only enter into repurchase agreements
where (i) the underlying securities are of the type (excluding maturity
limitations) which the Portfolio's investment guidelines would allow it to
purchase directly, (ii) the market value of the underlying security, including
interest accrued, will be at all times equal to or exceed the value of the
repurchase agreement, and (iii) payment for the underlying security is made only
upon physical delivery or evidence of book-entry transfer to the account of the
custodian or a bank acting as agent. In the event of a bankruptcy or other
default of a seller of a repurchase agreement, the Portfolio could experience
both delays in liquidating the underlying securities and losses, including: (a)
possible decline in the value of the underlying security during the period while
the Portfolio seeks to enforce its rights thereto; (b) possible subnormal levels
of income and lack of access to income during this period; and (c) expenses of
enforcing its rights.
The Board of Trustees of the Trust has promulgated guidelines with
respect to repurchase agreements.
Lending of Portfolio Securities. For the purpose of realizing
additional income, the Portfolio may make secured loans of Portfolio securities
amounting to not more than 33 1/3% of its total assets. This policy is a
fundamental policy. Securities loans are made to broker-dealers, institutional
investors, or other persons pursuant to agreements requiring that the loans be
continuously secured by collateral at least equal at all times to the value of
the securities lent marked to market on a daily basis. The collateral received
will consist of cash, U.S. government securities, letters of credit or such
other collateral as may be permitted under its investment program. While the
securities are being lent, the Portfolio will continue to receive the equivalent
of the interest or dividends paid by the issuer on the securities, as well as
interest on the investment of the collateral or a fee from the borrower. The
Portfolio has a right to call each loan and obtain the securities on five
business days' notice or, in connection with securities trading on foreign
markets, within such longer period of time which coincides with the normal
settlement period for purchases and sales of such securities in such foreign
markets. The Portfolio will not have the right to vote securities while they are
being lent, but it will call a loan in anticipation of any important vote. The
risks in lending portfolio securities, as with other extensions of secured
credit, consist of possible delay in receiving additional collateral or in the
recovery of the securities or possible loss of rights in the collateral should
the borrower fail financially. Loans will only be made to persons deemed by the
Sub-advisor to be of good standing and will not be made unless, in the judgment
of Sub-advisor, the consideration to be earned from such loans would justify the
risk.
Other Lending/Borrowing. Subject to approval by the Securities and
Exchange Commission, the Portfolio may make loans to, or borrow Portfolios from,
other mutual funds or portfolios of mutual funds sponsored or advised by
Sub-advisor or Rowe Price-Fleming International, Inc. (collectively, "Price
Portfolios"). The Portfolio has no current intention of engaging in these
practices at this time.
When-Issued Securities. The Portfolio may from time to time purchase
securities on a "when-issued" basis. At the time the Portfolio makes the
commitment to purchase a security on a when-issued basis, it will record the
transaction and reflect the value of the security in determining its net asset
value. The Portfolio does not believe that its net asset value or income will be
adversely affected by its purchase of securities on a when-issued basis. The
Portfolio will maintain cash and marketable securities equal in value to
commitments for when-issued securities. Such segregated securities either will
mature or, if necessary, be sold on or before the settlement date. For a
discussion of when-issued securities, see this Statement under "Certain Risk
Factors and Investment Methods."
Investment Policies Which May Be Changed Without Shareholder Approval. The
following limitations are applicable only to the T. Rowe Price Asset Allocation
Portfolio. As a matter of operating policy, which can be changed without
shareholder approval, the Portfolio may not:
1. Purchase additional securities when money borrowed exceeds 5% of the
Portfolio's total assets;
2. Invest in companies for the purpose of exercising management or control;
3. Purchase illiquid securities and securities of unseasoned issuers if, as
a result, more than 15% of its net assets would be invested in such securities,
provided that the Portfolio will not invest more than 10% of its total assets in
restricted securities and not more than 5% of its total assets in securities of
unseasoned issuers. Securities eligible for resale under Rule 144A of the
Securities Act of 1933 are not included in the 10% limitation but are subject to
the 15% limitation.
4. Purchase securities of open-end or closed-end investment companies
except in compliance with the Investment Company Act of 1940 and applicable
state law. Duplicate fees may result from such purchases;
5. Mortgage, pledge, hypothecate or, in any manner, transfer any
security owned by the Portfolio as security for indebtedness except as may be
necessary in connection with permissible borrowings or investments and then such
mortgaging, pledging or hypothecating may not exceed 33 1/3% of the Portfolio's
total assets at the time of borrowing or investment;
6. Purchase participations or other direct interests in or enter into
leases with respect to, oil, gas, other mineral exploration or development
programs;
7. Invest in puts, calls, straddles, spreads, or any combination thereof to
the extent permitted by the Prospectus and this Statement;
8. Purchase securities on margin, except (i) for use of short-term credit
necessary for clearance of purchases of portfolio securities and (ii) the
Portfolio may make margin deposits in connection with futures contracts or other
permissible investments;
9. Purchase a security (other than obligations issued or guaranteed by the
U.S., and foreign, state or local government, their agencies or
instrumentalities) if, as a result, more than 5% of the value of the Portfolio's
total assets would be invested in the securities of issuers which at the time of
purchase had been in operation for less than three years (for this purpose, the
period of operation of any issuer shall include the period of operation of any
predecessor or unconditional guarantor of such issuer); provided, however, that
this restriction does not apply to securities of pooled investment vehicles or
mortgage- or asset-backed securities;
10. Invest in warrants if, as a result thereof, more than 2% of the value
of the total assets of the Portfolio would be invested in warrants which are not
listed on the New York Stock Exchange, the American Stock Exchange, or a
recognized foreign exchange, or more than 5% of the value of the total assets of
the Portfolio would be invested in warrants whether or not so listed. For
purposes of these percentage limitations, the warrants will be valued at the
lower of cost or market and warrants acquired by the Portfolio in units or
attached to securities may be deemed to be without value;
11. Purchase or retain the securities of any issuer if, to the
knowledge of the Trust's management, those officers and directors of the Trust,
and of the Investment Manager, who each own beneficially more then 0.5% of the
outstanding securities of any issuer, together beneficially own more than 5% of
such securities;
12. Effect short sales of securities;
13. Purchase a futures contract or an option thereon if, with respect to
positions in futures or options on futures which do not represent bona fide
hedging, the aggregate initial margin and premiums on such positions would
exceed 5% of the Portfolio's net assets.
Notwithstanding anything in the above fundamental and operating
restrictions to the contrary, the Portfolio may, as a fundamental policy, invest
all of its assets in the securities of a single open-end management investment
company with substantially the same fundamental investment objectives, policies
and restrictions as the Portfolio subject to the prior approval of the
Investment Manager. The Investment Manager will not approve such investment
unless: (a) the Investment Manager believes, on the advice of counsel, that such
investment will not have an adverse effect on the tax status of the annuity
contracts and/or life insurance policies supported by the separate accounts of
the Participating Insurance Companies which purchase shares of the Trust; (b)
the Investment Manager has given prior notice to the Participating Insurance
Companies that it intends to permit such investment and has determined whether
such Participating Insurance Companies intend to redeem any shares and/or
discontinue purchase of shares because of such investment; (c) the Trustees have
determined that the fees to be paid by the Trust for administrative, accounting,
custodial and transfer agency services for the Portfolio subsequent to such an
investment are appropriate, or the Trustees have approved changes to the
agreements providing such services to reflect a reduction in fees; (d) the
Sub-advisor for the Portfolio has agreed to reduce its fee by the amount of any
investment advisory fees paid to the investment manager of such open-end
management investment company; and (e) shareholder approval is obtained if
required by law. The Portfolio will apply for such exemptive relief under the
provisions of the Investment Company Act of 1940 (the "1940 Act"), or other such
relief as may be necessary under the then governing rules and regulations of the
1940 Act, regarding investments in such investment companies.
T. Rowe Price International Equity Portfolio:
Investment Objective: The investment objective of the T. Rowe Price
International Equity Portfolio is to seek a total return on its assets from
long-term growth of capital and income principally through investments in common
stocks of established, non-U.S. companies. Investments may be made solely for
capital appreciation or solely for income or any combination of both for the
purpose of achieving a higher overall return.
Sub-advisor regularly analyzes a broad range of international equity
and fixed income markets in order to assess the degree of risk and level of
return that can be expected from each market. Based upon its current assessment,
Sub-advisor believes long-term growth of capital may be achieved by investing in
marketable securities of non-U.S. companies which have the potential for growth
of capital. Of course, there can be no assurance that Sub-advisor's forecasts of
expected return will be reflected in the actual returns achieved by the
Portfolio.
The Portfolio's share price will fluctuate with market, economic and
foreign exchange conditions, and your investment may be worth more or less when
redeemed than when purchased. The Portfolio should not be relied upon as a
complete investment program, nor used to play short-term swings in the stock or
foreign exchange markets. The Portfolio is subject to risks unique to
international investing. Further, there is no assurance that the favorable
trends discussed below will continue, and the Portfolio cannot guarantee it will
achieve its objective.
Investment Policies: It is the present intention of Sub-advisor to invest in
companies based in (or governments of or within) the Far East (for example,
Japan, Hong Kong, Singapore, and Malaysia), Western Europe (for example, United
Kingdom, Germany, Netherlands, France, Spain, and Switzerland), South Africa,
Australia, Canada, and such other areas and countries as Sub-advisor may
determine from time to time.
In determining the appropriate distribution of investments among
various countries and geographic regions, Sub-advisor ordinarily considers the
following factors: prospects for relative economic growth between foreign
countries; expected levels of inflation; government policies influencing
business conditions; the outlook for currency relationships; and the range of
individual investment opportunities available to international investors.
In analyzing companies for investment, Sub-advisor ordinarily looks
for one or more of the following characteristics: an above-average earnings
growth per share; high return on invested capital; healthy balance sheet; sound
financial and accounting policies and overall financial strength; strong
competitive advantages; effective research and product development and
marketing; efficient service; pricing flexibility; strength of management; and
general operating characteristics which will enable the companies to compete
successfully in their market place. While current dividend income is not a
prerequisite in the selection of portfolio companies, the companies in which the
Portfolio invests normally will have a record of paying dividends, and will
generally be expected to increase the amounts of such dividends in future years
as earnings increase.
It is expected that the Portfolio's investments will ordinarily be
traded on exchanges located at least in the respective countries in which the
various issuers of such securities are principally based.
Today, more investment opportunities may exist abroad than in the U.S.
In 1970, more than one-half of the world's equity capitalization (the total
market value of the world's equity securities traded on stock exchanges) was
attributable to U.S. securities. Now practically the opposite is true. And over
the last ten years, the EAFE Index, a widely accepted index of European,
Australian and Far Eastern equity securities, has outperformed the Standard &
Poor's 500 Index. Although the EAFE Index may not be representative of the
Portfolio, Sub-advisor believes it may be a useful indicator of the
opportunities in foreign equity investing.
Risk Factors of Foreign Investing. There are special risks in
investing in the Portfolio. Certain of these risks are inherent in any
international mutual fund others relate more to the countries in which the
Portfolio will invest. Many of the risks are more pronounced for investments in
developing or emerging countries. Although there is no universally accepted
definition, a developing country is generally considered to be a country which
is in the initial stages of its industrialization cycle with a per capita gross
national product of less than $8,000.
Investors should understand that all investments have a risk factor.
There can be no guarantee against loss resulting from an investment in the
Portfolio, and there can be no assurance that the Portfolio's investment
policies will be successful, or that its investment objective will be attained.
The Portfolio is designed for individual and institutional investors seeking to
diversify beyond the United States in an actively researched and managed
portfolio, and is intended for long-term investors who can accept the risks
entailed in investment in foreign securities. For a discussion of certain risks
involved in foreign investing see this Statement and the Trust's Prospectus
under "Certain Risk Factors and Investment Methods."
The Portfolio will invest in securities denominated in currencies
specified elsewhere herein.
It is contemplated that most foreign securities will be purchased in
over-the-counter markets or on stock exchanged located in the countries in which
the respective principal offices of the issuers of the various securities are
located, if that is the best available market.
The Portfolio may invest in investment portfolios which have been
authorized by the governments of certain countries specifically to permit
foreign investment in securities of companies listed and traded on the stock
exchanges in these respective countries. The Portfolio's investment in these
portfolios is subject to the provisions of the 1940 Act discussed below. If the
Portfolio invests in such investment portfolios, the Portfolio's shareholders
will bear not only their proportionate share of the expenses of the Portfolio
(including operating expenses and the fees of the Investment Manager), but also
will bear indirectly similar expenses of the underlying investment portfolios.
In addition, the securities of these investment portfolios may trade at a
premium over their net asset value.
Apart from the matters described herein, the Portfolio is not aware at
this time of the existence of any investment or exchange control regulations
which might substantially impair the operations of the Portfolio as described in
the Trust's Prospectus and this Statement. It should be noted, however, that
this situation could change at any time.
The Portfolio may invest in companies located in Eastern Europe. The
Portfolio will only invest in a company located in, or a government of, Eastern
Europe or Russia, if the Sub-advisor believes the potential return justifies the
risk. To the extent any securities issued by companies in Eastern Europe and
Russia are considered illiquid, the Portfolio will be required to include such
securities within its 15% restriction on investing in illiquid securities.
In addition to the investments described in the Trust's Prospectus,
the Portfolio may invest in the following:
Writing Covered Call Options. The Portfolio may write (sell) "covered"
call options and purchase options to close out options previously written by the
Portfolio. In writing covered call options, the Portfolio expects to generate
additional premium income which should serve to enhance the Portfolio's total
return and reduce the effect of any price decline of the security or currency
involved in the option. Covered call options will generally be written on
securities or currencies which, in Sub-advisor's opinion, are not expected to
have any major price increases or moves in the near future but which, over the
long term, are deemed to be attractive investments for the Portfolio.
The Portfolio will write only covered call options. This means that
the Portfolio will own the security or currency subject to the option or an
option to purchase the same underlying security or currency, having an exercise
price equal to or less than the exercise price of the "covered" option, or will
establish and maintain with its custodian for the term of the option, an account
consisting of cash, U.S. government securities or other liquid high-grade debt
obligations having a value equal to the fluctuating market value of the optioned
securities or currencies. In order to comply with the requirements of the
securities or currencies laws in several states, the Portfolio will not write a
covered call option if, as a result, the aggregate market value of all Portfolio
securities or currencies covering call or put options exceeds 25% of the market
value of the Portfolio's net assets. Should these state laws change or should
the Portfolio obtain a waiver of their application, the Portfolio reserves the
right to increase this percentage. In calculating the 25% limit, the Portfolio
will offset, against the value of assets covering written calls and puts, the
value of purchased calls and puts on identical securities or currencies with
identical maturity dates.
Portfolio securities or currencies on which call options may be written
will be purchased solely on the basis of investment considerations consistent
with the Portfolio's investment objective. The writing of covered call options
is a conservative investment technique believed to involve relatively little
risk (in contrast to the writing of naked or uncovered options, which the
Portfolio will not do), but capable of enhancing the Portfolio's total return.
When writing a covered call option, the Portfolio, in return for the premium,
gives up the opportunity for profit from a price increase in the underlying
security or currency above the exercise price, but conversely, retains the risk
of loss should the price of the security or currency decline. Unlike one who
owns securities or currencies not subject to an option, the Portfolio has no
control over when it may be required to sell the underlying securities or
currencies, since it may be assigned an exercise notice at any time prior to the
expiration of its obligations as a writer. If a call option which the Portfolio
has written expires, the Portfolio will realize a gain in the amount of the
premium; however, such gain may be offset by a decline in the market value of
the underlying security or currency during the option period. If the call option
is exercised, the Portfolio will realize a gain or loss from the sale of the
underlying security or currency, The Portfolio does not consider a security or
currency covered by a call "pledged" as that term is used in the Portfolio's
policy which limits the pledging or mortgaging of its assets.
The premium received is the market value of an option. The premium the
Portfolio will receive from writing a call option will reflect, among other
things, the current market price of the underlying security or currency, the
relationship of the exercise price to such market price, the historical price
volatility of the underlying security or currency, and the length of the option
period. Once the decision to write a call option has been made, Sub-advisor, in
determining whether a particular call option should be written on a particular
security or currency, will consider the reasonableness of the anticipated
premium and the likelihood that a liquid secondary market will exist for those
options. The premium received by the Portfolio for writing covered call options
will be recorded as a liability of the Portfolio. This liability will be
adjusted daily to the option's current market value, which will be the latest
sale price at the time at which the net asset value per share of the Portfolio
is computed (close of the New York Stock Exchange), or, in the absence of such
sale, the average of the latest bid and asked price. The option will be
terminated upon expiration of the option, the purchase of an identical option in
a closing transaction, or delivery of the underlying security or currency upon
the exercise of the option.
Call options written by the Portfolio will normally have expiration
dates of less than nine months from the date written. The exercise price of the
options may be below, equal to, or above the current market values of the
underlying securities or currencies at the time the options are written. From
time to time, the Portfolio may purchase an underlying security or currency for
delivery in accordance with an exercise notice of a call option assigned to it,
rather than delivering such security or currency from its portfolio. In such
cases, additional costs may be incurred.
The Portfolio will effect closing transactions in order to realize a
profit on an outstanding call option, to prevent an underlying security or
currency from being called, or, to permit the sale of the underlying security or
currency. The Portfolio will realize a profit or loss from a closing purchase
transaction if the cost of the transaction is less or more than the premium
received from the writing of the option. Because increases in the market price
of a call option will generally reflect increases in the market price of the
underlying security or currency, any loss resulting from the repurchase of a
call option is likely to be offset in whole or in part by appreciation of the
underlying security or currency owned by the Portfolio.
Writing Covered Put Options. Although the Portfolio has no current
intention in the foreseeable future of writing American or European style
covered put options and purchasing put options to close out options previously
written by the Portfolio, the Portfolio reserves the right to do so.
The Portfolio would write put options only on a covered basis, which
means that the Portfolio would maintain in a segregated account cash, U.S.
government securities or other liquid high-grade debt obligations in an amount
not less than the exercise price or the Portfolio will own an option to sell the
underlying security or currency subject to the option having an exercise price
equal to or greater than the exercise price of the "covered" options at all
times while the put option is outstanding. (The rules of a clearing corporation
currently require that such assets be deposited in escrow to secure payment of
the exercise price.) The Portfolio would generally write covered put options in
circumstances where Sub-advisor wishes to purchase the underlying security or
currency for the Portfolio's portfolio at a price lower than the current market
price of the security or currency. In such event the Portfolio would write a put
option at an exercise price which, reduced by the premium received on the
option, reflects the lower price it is willing to pay. Since the Portfolio would
also receive interest on debt securities or currencies maintained to cover the
exercise price of the option, this technique could be used to enhance current
return during periods of market uncertainty. The risk in such a transaction
would be that the market price of the underlying security or currency would
decline below the exercise price less the premiums received. Such a decline
could be substantial and result in a significant loss to the Portfolio. In
addition, the Portfolio, because it does not own the specific securities or
currencies which it may be required to purchase in exercise of the put, cannot
benefit from appreciation, if any, with respect to such specific securities or
currencies. In order to comply with the requirements of several states, the
Portfolio will not write a covered put option if, as a result, the aggregate
market value of all portfolio securities or currencies covering put or call
options exceeds 25% of the market value of the Portfolio's net assets. Should
these state laws change or should the Portfolio obtain a waiver of their
application, the Portfolio reserves the right to increase this percentage. In
calculating the 25% limit, the Portfolio will offset, against the value of
assets covering written puts and calls, the value of purchased puts and calls on
identical securities or currencies with identical maturity dates. For a
discussion of certain risks involved in options, see this Statement and the
Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Purchasing Put Options. The Portfolio may purchase American or
European style put options. As the holder of a put option, the Portfolio has the
right to sell the underlying security or currency at the exercise price at any
time during the option period. The Portfolio may enter into closing sale
transactions with respect to such options, exercise them or permit them to
expire. The Portfolio may purchase put options for defensive purposes in order
to protect against an anticipated decline in the value of its securities or
currencies. An example of such use of put options is provided in this Statement
under "Certain Risk Factors and Investment Methods."
To the extent required by the laws of certain states, the Portfolio
may not be permitted to commit more than 5% of its assets to premiums when
purchasing call and put options. Should these state laws change or should the
Portfolio obtain a waiver of their application, the Portfolio may commit more
than 5% of its assets to premiums when purchasing call and put options. The
premium paid by the Portfolio when purchasing a put option will be recorded as
an asset of the Portfolio. This asset will be adjusted daily to the option's
current market value, which will be the latest sale price at the time at which
the net asset value per share of the Portfolio is computed (close of New York
Stock Exchange), or, in the absence of such sale, the latest bid price. This
asset will be terminated upon expiration of the option, the selling (writing) of
an identical option in a closing transaction, or the delivery of the underlying
security or currency upon the exercise of the option.
Purchasing Call Options. The Portfolio may purchase American or
European style call options. As the holder of a call option, the Portfolio has
the right to purchase the underlying security or currency at the exercise price
at any time during the option period (American style) or at the expiration of
the option (European style). The Portfolio may enter into closing sale
transactions with respect to such options, exercise them or permit them to
expire. The Portfolio may purchase call options for the purpose of increasing
its current return or avoiding tax consequences which could reduce its current
return. The Portfolio may also purchase call options in order to acquire the
underlying securities or currencies. Examples of such uses of call options are
provided below.
To the extent required by the laws of certain states, the Portfolio
may not be permitted to commit more than 5% of its assets to premiums when
purchasing call and put options. Should these state laws change or should the
Portfolio obtain a waiver of their application, the Portfolio may commit more
than 5% of its assets to premiums when purchasing call and put options. The
Portfolio may also purchase call options on underlying securities or currencies
it owns in order to protect unrealized gains on call options previously written
by it. A call option would be purchased for this purpose where tax
considerations make it inadvisable to realize such gains through a closing
purchase transaction. Call options may also be purchased at times to avoid
realizing losses.
Dealer Options. The Portfolio may engage in transactions involving
dealer options. Certain risks are specific to dealer options. While the
Portfolio would look to a clearing corporation to exercise exchange-traded
options, if the Portfolio were to purchase a dealer option, it would rely on the
dealer from whom it purchased the option to perform if the option were
exercised. While the Portfolio will seek to enter into dealer options only with
dealers who will agree to and which are expected to be capable of entering into
closing transactions with the Portfolio, there can be no assurance that the
Portfolio will be able to liquidate a dealer option at a favorable price at any
time prior to expiration. Failure by the dealer to do so would result in the
loss of the premium paid by the Portfolio as well as loss of the expected
benefit of the transaction.
Futures Contracts.
Transactions in Futures. The Portfolio may enter into
financial futures contracts, including stock index, interest rate and currency
futures ("futures or futures contracts"); however, the Portfolio has no current
intention of entering into interest rate futures. The Portfolio, however,
reserves the right to trade in financial futures of any kind.
Stock index futures contracts may be used to attempt to provide a
hedge for a portion of the Portfolio's portfolio, as a cash management tool, or
as an efficient way for Sub-advisor to implement either an increase or decrease
in portfolio market exposure in response to changing market conditions. Stock
index futures contracts are currently traded with respect to the S&P 500 Index
and other broad stock market indices, such as the New York Stock Exchange
Composite Stock Index and the Value Line Composite Stock Index. The Portfolio
may, however, purchase or sell futures contracts with respect to any stock index
whose movements will, in its judgment, have a significant correlation with
movements in the prices of all or portions of the Portfolio's portfolio
securities.
Interest rate or currency futures contracts may be used to attempt to
hedge against changes in prevailing levels of interest rates or currency
exchange rates in order to establish more definitely the effective return on
securities or currencies held or intended to be acquired by the Portfolio. In
this regard, the Portfolio could sell interest rate or currency futures as an
offset against the effect of expected increases in interest rates or currency
exchange rates and purchase such futures as an offset against the effect of
expected declines in interest rates or currency exchange rates.
The Portfolio will enter into futures contracts which are traded on
national or foreign futures exchanges and are standardized as to maturity date
and underlying financial instrument. The principal financial futures exchanges
in the United States are the Board of Trade of the City of Chicago, the Chicago
Mercantile Exchange, the New York Futures Exchange, and the Kansas City Board of
Trade. Futures exchanges and trading in the United States are regulated under
the Commodity Exchange Act by the Commodity Futures Trading Commission ("CFTC").
Futures are traded in London at the London International Financial Futures
Exchange, in Paris at the MATIF and in Tokyo at the Tokyo Stock Exchange.
Although techniques other than the sale and purchase of futures contracts could
be used for the above-referenced purposes, futures contracts offer an effective
and relatively low cost means of implementing the Portfolio's objectives in
these areas.
For a discussion of futures transactions and certain risks involved
therein, see this Statement and the Trust's Prospectus under "Certain Risk
Factors and Investment Methods."
Regulatory Limitations. The Portfolio will engage in transactions in
futures contracts and options thereon only for bona fide hedging, yield
enhancement and risk management purposes, in each case in accordance with the
rules and regulations of the CFTC.
The Portfolio may not enter into futures contracts or options thereon
if, with respect to positions which do not qualify as bona fide hedging under
applicable CFTC rules, the sum of the amounts of initial margin deposits on the
Portfolio's existing futures and premiums paid for options on futures would
exceed 5% of the net asset value of the Portfolio after taking into account
unrealized profits and unrealized losses on any such contracts it has entered
into; provided however, that in the case of an option that is in-the-money at
the time of purchase, the in-the-money amount may be excluded in calculating the
5% limitation.
The Portfolio's use of futures contracts will not result in leverage.
Therefore, to the extent necessary, in instances involving the purchase of
futures contracts or call options thereon or the writing of put options thereon
by the Portfolio, an amount of cash, U.S. government securities or other liquid,
high-grade debt obligations, equal to the market value of the futures contracts
and options thereon (less any related margin deposits), will be identified in an
account with the Portfolio's custodian to cover the position, or alternative
cover will be employed.
In addition, CFTC regulations may impose limitations on the
Portfolio's ability to engage in certain yield enhancement and risk management
strategies. If the CFTC or other regulatory authorities adopt different
(including less stringent) or additional restrictions, the Portfolio would
comply with such new restrictions.
Options on Futures Contracts. As an alternative to writing or
purchasing call and put options on stock index futures, the Portfolio may write
or purchase call and put options on stock indices. Such options would be used in
a manner similar to the use of options on futures contracts. From time to time,
a single order to purchase or sell futures contracts (or options thereon) may be
made on behalf of the Portfolio and other mutual funds or portfolios of mutual
funds managed by Price-Fleming International, Inc. or T. Rowe Price Associates,
Inc. Such aggregated orders would be allocated among the Portfolio and such
other portfolios in a fair and non-discriminatory manner.
Risks of Transactions in Options on Futures Contracts. See
this Statement and the Trust's Prospectus under "Certain Risk Factors and
Investment Methods" for a description of certain risks involved in options and
futures contracts.
Additional Futures and Options Contracts. Although the Portfolio has
no current intention of engaging in financial futures or option transactions
other than those described above, it reserves the right to do so. Such futures
or options trading might involve risks which differ from those involved in the
futures and options described above.
Foreign Futures and Options. The Portfolio is permitted to invest in
foreign futures and options. For a description of foreign futures and options
and certain risks involved therein as well as certain risks involved in foreign
investing, see this Statement and the Trust's Prospectus under "Certain Risk
Factors and Investment Methods."
Foreign Currency Transactions. The Portfolio will generally enter into
forward foreign currency exchange contracts under two circumstances. First, when
the Portfolio enters into a contract for the purchase or sale of a security
denominated in a foreign currency, it may desire to "lock in" the U.S. dollar
price of the security.
Second, when the Sub-advisor believes that the currency of a particular
foreign country may suffer or enjoy a substantial movement against another
currency, including the U.S. dollar, it may enter into a forward contract to
sell or buy the amount of the former foreign currency, approximating the value
of some or all of the Portfolio's securities denominated in such foreign
currency. Alternatively, where appropriate, the Portfolio may hedge all or part
of its foreign currency exposure through the use of a basket of currencies or a
proxy currency where such currency or currencies act as an effective proxy for
other currencies. In such a case, the Portfolio may enter into a forward
contract where the amount of the foreign currency to be sold exceeds the value
of the securities denominated in such currency. The use of this basket hedging
technique may be more efficient and economical than entering into separate
forward contracts for each currency held in the Portfolio. The precise matching
of the forward contract amounts and the value of the securities involved will
not generally be possible since the future value of such securities in foreign
currencies will change as a consequence of market movements in the value of
those securities between the date the forward contract is entered into and the
date it matures. The projection of short-term currency market movement is
extremely difficult, and the successful execution of a short-term hedging
strategy is highly uncertain. Other than as set forth above, and immediately
below, the Portfolio will also not enter into such forward contracts or maintain
a net exposure to such contracts where the consummation of the contracts would
obligate the Portfolio to deliver an amount of foreign currency in excess of the
value of the Portfolio's securities or other assets denominated in that
currency. The Portfolio, however, in order to avoid excess transactions and
transaction costs, may maintain a net exposure to forward contracts in excess of
the value of the Portfolio's securities or other assets to which the forward
contracts relate (including accrued interest to the maturity of the forward on
such securities) provided the excess amount is "covered" by liquid, high-grade
debt securities, denominated in any currency, at least equal at all times to the
amount of such excess. For these purposes "the securities or other assets to
which the forward contracts relate may be securities or assets denominated in a
single currency, or where proxy forwards are used, securities denominated in
more than one currency. Under normal circumstances, consideration of the
prospect for currency parities will be incorporated into the longer term
investment decisions made with regard to overall diversification strategies.
However, Sub-advisor believes that it is important to have the flexibility to
enter into such forward contracts when it determines that the best interests of
the Portfolio will be served.
At the maturity of a forward contract, the Portfolio may either sell
the portfolio security and make delivery of the foreign currency, or it may
retain the security and terminate its contractual obligation to deliver the
foreign currency by purchasing an "offsetting" contract obligating it to
purchase, on the same maturity date, the same amount of the foreign currency.
As indicated above, it is impossible to forecast with absolute
precision the market value of portfolio securities at the expiration of the
forward contract. Accordingly, it may be necessary for the Portfolio to purchase
additional foreign currency on the spot market (and bear the expense of such
purchase) if the market value of the security is less than the amount of foreign
currency the Portfolio is obligated to deliver and if a decision is made to sell
the security and make delivery of the foreign currency. Conversely, it may be
necessary to sell on the spot market some of the foreign currency received upon
the sale of the portfolio security if its market value exceeds the amount of
foreign currency the Portfolio is obligated to deliver. However, as noted, in
order to avoid excessive transactions and transaction costs, the Portfolio may
use liquid, high-grade debt securities denominated in any currency, to cover the
amount by which the value of a forward contract exceeds the value of the
securities to which it relates.
If the Portfolio retains the portfolio security and engages in an
offsetting transaction, the Portfolio will incur a gain or a loss (as described
below) to the extent that there has been movement in forward contract prices. If
the Portfolio engages in an offsetting transaction, it may subsequently enter
into a new forward contract to sell the foreign currency. Should forward prices
decline during the period between the Portfolio's entering into a forward
contract for the sale of a foreign currency and the date it enters into an
offsetting contract for the purchase of the foreign currency, the Portfolio will
realize a gain to the extent the price of the currency it has agreed to sell
exceeds the price of the currency it has agreed to purchase. Should forward
prices increase, the Portfolio will suffer a loss to the extent of the price of
the currency it has agreed to purchase exceeds the price of the currency it has
agreed to sell.
The Portfolio's dealing in forward foreign currency exchange contracts
will generally be limited to the transactions described above. However, the
Portfolio reserves the right to enter into forward foreign currency contracts
for different purposes and under different circumstances. Of course, the
Portfolio is not required to enter into forward contracts with regard to its
foreign currency-denominated securities and will not do so unless deemed
appropriate by the Sub-advisor. It also should be realized that this method of
hedging against a decline in the value of a currency does not eliminate
fluctuations in the underlying prices of the securities. It simply establishes a
rate of exchange at a future date. Additionally, although such contracts tend to
minimize the risk of loss due to a decline in the value of the hedged currency,
at the same time, they tend to limit any potential gain which might result from
an increase in the value of that currency.
Although the Portfolio values its assets daily in terms of U.S.
dollars, it does not intend to convert its holdings of foreign currencies into
U.S. dollars on a daily basis. It will do so from time to time, and investors
should be aware of the costs of currency conversion. Although foreign exchange
dealers do not charge a fee for conversion, they do realize a profit based on
the difference (the "spread") between the prices at which they are buying and
selling various currencies. Thus, a dealer may offer to sell a foreign currency
to the Portfolio at one rate, while offering a lesser rate of exchange should
the Portfolio desire to resell that currency to the dealer.
For an additional discussion of certain risks involved in foreign
investing, see this Statement and the Trust's Prospectus under "Certain Risk
Factors and Investment Methods."
Federal Tax Treatment of Options, Futures Contracts and Forward
Foreign Exchange Contracts. The Portfolio may enter into certain option,
futures, and forward foreign exchange contracts, including options and futures
on currencies, which will be treated as Section 1256 contracts or straddles.
Transactions which are considered Section 1256 contracts will be
considered to have been closed at the end of the Portfolio's fiscal year and any
gains or losses will be recognized for tax purposes at that time. Such gains or
losses from the normal closing or settlement of such transactions will be
characterized as 60% long-term capital gain or loss and 40% short-term capital
gain or loss regardless of the holding period of the instrument. The Portfolio
will be required to distribute net gains on such transactions to shareholders
even though it may not have closed the transaction and received cash to pay such
distributions.
Options, futures and forward foreign exchange contracts, including
options and futures on currencies, which offset a foreign dollar denominated
bond or currency position may be considered straddles for tax purposes in which
case a loss on any position in a straddle will be subject to deferral to the
extent of unrealized gain in an offsetting position. The holding period of the
securities or currencies comprising the straddle will be deemed not to begin
until the straddle is terminated. For securities offsetting a purchased put,
this adjustment of the holding period may increase the gain from sales of
securities held less than three months. The holding period of the security
offsetting an "in-the-money qualified covered call" option on an equity security
will not include the period of time the option is outstanding.
Losses on written covered calls and purchased puts on securities,
excluding certain "qualified covered call" options on equity securities, may be
long-term capital loss, if the security covering the option was held for more
than twelve months prior to the writing of the option.
In order for the Portfolio to continue to qualify for federal income
tax treatment as a regulated investment company, at least 90% of its gross
income for a taxable year must be derived from qualifying income, i.e.,
dividends, interest, income derived from loans of securities, and gains from the
sale of securities or currencies. Pending tax regulations could limit the extent
that net gain realized from option, futures or foreign forward exchange
contracts on currencies is qualifying income for purposes of the 90%
requirement. In addition, gains realized on the sale or other disposition of
securities, including option, futures or foreign forward exchange contracts on
securities or securities indexes and, in some cases, currencies, held for less
than three months, must be limited to less than 30% of the Portfolio's annual
gross income. In order to avoid realizing excessive gains on securities or
currencies held less than three months, the Portfolio may be required to defer
the closing out of option, futures or foreign forward exchange contracts beyond
the time when it would otherwise be advantageous to do so. It is anticipated
that unrealized gains on Section 1256 option, futures and foreign forward
exchange contracts, which have been open for less than three months as of the
end of the Portfolio's fiscal year and which are recognized for tax purposes,
will not be considered gains on securities or currencies held less than three
months for purposes of the 30% test.
Hybrid Commodity and Security Instruments. Instruments have been
developed which combine the elements of futures contracts or options with those
of debt, preferred equity or a depository instrument (hereinafter "Hybrid
Instruments"). Often these hybrid instruments are indexed to the price of a
commodity or particular currency or a domestic or foreign debt or equity
securities index. Hybrid instruments may take a variety of forms, including, but
not limited to, debt instruments with interest or principal payments or
redemption terms determined by reference to the value of a currency or commodity
at a future point in time, preferred stock with dividend rates determined by
reference to the value of a currency, or convertible securities with the
conversion terms related to a particular commodity. For a discussion of certain
risks involved in hybrid instruments, see this Statement under "Certain Risk
Factors and Investment Methods."
Repurchase Agreements. The Portfolio may enter into repurchase
agreements through which an investor (such as the Portfolio) purchases a
security (known as the "underlying security") from a well-established securities
dealer or a bank that is a member of the Federal Reserve System. Any such dealer
or bank will be on T. Rowe Price Associates, Inc. ("T. Rowe Price") approved
list and have a credit rating with respect to its short-term debt of at least A1
by Standard & Poor's Corporation, P1 by Moody's Investors Service, Inc., or the
equivalent rating by T. Rowe Price. At that time, the bank or securities dealer
agrees to repurchase the underlying security at the same price, plus specified
interest. Repurchase agreements are generally for a short period of time, often
less than a week. Repurchase agreements which do not provide for payment within
seven days will be treated as illiquid securities. The Portfolio will only enter
into repurchase agreements where (i) the underlying securities are of the type
(excluding maturity limitations) which the Portfolio's investment guidelines
would allow it to purchase directly, (ii) the market value of the underlying
security, including interest accrued, will be at all times equal to or exceed
the value of the repurchase agreement, and (iii) payment for the underlying
security is made only upon physical delivery or evidence of book-entry transfer
to the account of the custodian or a bank acting as agent. In the event of a
bankruptcy or other default of a seller of a repurchase agreement, the Portfolio
could experience both delays in liquidating the underlying securities and
losses, including: (a) possible decline in the value of the underlying security
during the period while the Portfolio seeks to enforce its rights thereto; (b)
possible subnormal levels of income and lack of access to income during this
period; and (c) expenses of enforcing its rights.
The Board of Trustees of the Trust has promulgated guidelines with
respect to repurchase agreements.
Illiquid Securities. The Portfolio may not invest in illiquid
securities including repurchase agreements which do not provide for payment
within seven days, if as a result, they would comprise more than 15% of the
value of the Portfolio's net assets.
Restricted securities may be sold only in privately negotiated
transactions or in a public offering with respect to which a registration
statement is in effect under the Securities Act of 1933 (the "1933 Act"). Where
registration is required, the Portfolio may be obligated to pay all or part of
the registration expenses and a considerable period may elapse between the time
of the decision to sell and the time the Portfolio may be permitted to sell a
security under an effective registration statement. If, during such a period,
adverse market conditions were to develop, the Portfolio might obtain a less
favorable price than prevailed when it decided to sell. Restricted securities
will be priced at fair value as determined in accordance with procedures
prescribed by the Trust's Board of Trustees. If through the appreciation of
illiquid securities or the depreciation of liquid securities, the Portfolio
should be in a position where more than 15% of the value of its net assets are
invested in illiquid assets, including restricted securities, the Portfolio will
take appropriate steps to protect liquidity.
Notwithstanding the above, the Portfolio may purchase securities which
while privately placed, are eligible for purchase and sale under Rule 144A under
the 1933 Act. This rule permits certain qualified institutional buyers, such as
the Portfolio, to trade in privately placed securities even though such
securities are not registered under the 1933 Act. Sub-advisor, under the
supervision of the Trust's Board of Trustees, will consider whether securities
purchased under Rule 144A are illiquid and thus subject to the Portfolio's
restriction of investing no more than 15% of its assets in illiquid securities.
A determination of whether a Rule 144A security is liquid or not is a question
of fact. In making this determination Sub-advisor will consider the trading
markets for the specific security taking into account the unregistered nature of
a Rule 144A security. In addition, Sub-advisor could consider the (1) frequency
of trades and quotes, (2) number of dealers and potential purchasers, (3) dealer
undertakings to make a market, (4) and the nature of the security and of market
place trades (e.g., the time needed to dispose of the security, the method of
soliciting offers and the mechanics of transfer). The liquidity of Rule 144A
securities would be monitored and, if as a result of changed conditions, it is
determined that a Rule 144A security is no longer liquid, the Portfolio's
holdings of illiquid securities would be reviewed to determine what, if any,
steps are required to assure that the Portfolio does not invest more than 15% of
its assets in illiquid securities. Investing in Rule 144A securities could have
the effect of increasing the amount of a Portfolio's assets invested in illiquid
securities if qualified institutional buyers are unwilling to purchase such
securities.
The Board of Trustees of the Trust has promulgated guidelines with
respect to illiquid securities.
Lending of Portfolio Securities. For the purpose of realizing
additional income, the Portfolio may make secured loans of portfolio securities
amounting to not more than 33 1/3% of its total assets. This policy is a
"fundamental policy." Securities loans are made to broker-dealers, institutional
investors, or other persons pursuant to agreements requiring that the loans be
continuously secured by collateral at least equal at all times to the value of
the securities lent marked to market on a daily basis. The collateral received
will consist of cash, U.S. government securities, letters of credit or such
other collateral as may be permitted under its investment program. While the
securities are being lent, the Portfolio will continue to receive the equivalent
of the interest or dividends paid by the issuer on the securities, as well as
interest on the investment of the collateral or a fee from the borrower. The
Portfolio has a right to call each loan and obtain the securities on five
business days' notice or, in connection with securities trading on foreign
markets, within such longer period of time which coincides with the normal
settlement period for purchases and sales of such securities in such foreign
markets. The Portfolio will not have the right to vote securities while they are
being lent, but it will call a loan in anticipation of any important vote. The
risks in lending portfolio securities, as with other extensions of secured
credit, consist of possible delay in receiving additional collateral or in the
recovery of the securities or possible loss of rights in the collateral should
the borrower fail financially. Loans will only be made to persons deemed by
Sub-advisor to be of good standing and will not be made unless, in the judgment
of Sub-advisor, the consideration to be earned from such loans would justify the
risk.
Other Lending/Borrowing. Subject to approval by the Securities and Exchange
Commission, the Portfolio may make loans to, or borrow funds from, other mutual
funds sponsored or advised by Sub-advisor or T. Rowe Price Associates, Inc.
(collectively, "Price Portfolios"). The Portfolio has no current intention of
engaging in these practices at this time.
Investment Policies Which May Be Changed Without Shareholder Approval. The
following limitations are applicable to the T. Rowe Price International Equity
Portfolio. As a matter of operating policy which can be changed without
shareholder approval, the Portfolio may not:
1. Purchase additional securities when money borrowed exceeds 5% of the
Portfolio's total assets.
2. Invest in companies for the purpose of exercising management or control;
3. Purchase illiquid securities and securities of unseasoned issuers if, as
a result, more than 15% of its net assets would be invested in such securities,
provided that the Portfolio will not invest more than 10% of its total assets in
restricted securities and not more than 5% of its total assets in securities of
unseasoned issuers. Securities eligible for resale under Rule 144A of the
Securities Act of 1933 are not included in the 10% limitation but are subject to
the 15% limitation;
4. Purchase securities of open-end or closed-end investment companies
except in compliance with the Investment Company Act of 1940 and applicable
state law. Duplicate fees may result from such purchases;
5. Purchase participations or other direct interests in or enter into
leases with respect to oil, gas, other mineral exploration or development
programs;
6. Invest in puts, calls, straddles, spreads, or any combination thereof to
the extent permitted by the Prospectus and this Statement;
7. Purchase securities on margin, except (i) for use of short-term credit
necessary for clearance of purchases of Portfolio securities and (ii) the
Portfolio may make margin deposits in connection with futures contracts and
other permissible investments;
8. Mortgage, pledge, hypothecate or, in any manner, transfer any security
owned by the Portfolio as a security for indebtedness except as may be necessary
in connection with permissible borrowings or investments and then such
mortgaging, pledging, or hypothecating may not exceed 33 1/3% of the Portfolio's
total assets at the time of borrowing or investment;
9. Purchase a security (other than obligations issued or guaranteed by
the U.S., and foreign, state or local government, their agencies or
instrumentalities) if, as a result, more than 5% of the value of the Portfolio's
total assets would be invested in the securities of issuers which at the time of
purchase had been in operation for less than three years (for this purpose, the
period of operation of any issuer shall include the period of operation of any
predecessor or unconditional guarantor of such issuer); provided, however, that
this restriction does not apply to the purchase of securities of pooled
investment vehicles or mortgage- or asset-backed securities;
10. Effect short sales of securities;
11. Invest in warrants if, as a result thereof, more than 2% of the
value of the total assets of the Portfolio would be invested in warrants which
are not listed on the New York Stock Exchange, the American Stock Exchange, or a
recognized foreign exchange, or more than 5% of the value of the total assets of
the Portfolio would be invested in warrants whether or not so listed. For
purposes of these percentage limitations, the warrants will be valued at the
lower of cost or market and warrants acquired by the Portfolio in units or
attached to securities may be deemed to be without value;
12. Purchase or retain the securities of any issuer if, to the
knowledge of the Trust's management, those officers and directors of the Trust
and of the Investment Manager, who each own beneficially more than 0.5% of the
outstanding securities of such issuer, together own beneficially more than 5% of
such securities;
13. Purchase a futures contract or an option thereon if, with respect
to positions in futures or options on futures which do not represent bona fide
hedging, the aggregate initial margin and premiums on such positions would
exceed 5% of the Portfolio's net assets.
Notwithstanding anything in the above fundamental and operating
restrictions to the contrary, the Portfolio may, as a fundamental policy, invest
all of its assets in the securities of a single open-end management investment
company with substantially the same fundamental investment objectives, policies
and restrictions as the Portfolio subject to the prior approval of the
Investment Manager. The Investment Manager will not approve such investment
unless: (a) the Investment Manager believes, on the advice of counsel, that such
investment will not have an adverse effect on the tax status of the annuity
contracts and/or life insurance policies supported by the separate accounts of
the Participating Insurance Companies which purchase shares of the Trust; (b)
the Investment Manager has given prior notice to the Participating Insurance
Companies that it intends to permit such investment and has determined whether
such Participating Insurance Companies intend to redeem any shares and/or
discontinue purchase of shares because of such investment; (c) the Trustees have
determined that the fees to be paid by the Trust for administrative, accounting,
custodial and transfer agency services for the Portfolio subsequent to such an
investment are appropriate, or the Trustees have approved changes to the
agreements providing such services to reflect a reduction in fees; (d) the
Sub-advisor for the Portfolio has agreed to reduce its fee by the amount of any
investment advisory fees paid to the investment manager of such open-end
management investment company; and (e) shareholder approval is obtained if
required by law. The Portfolio will apply for such exemptive relief under the
provisions of the Investment Company Act of 1940 (the "1940 Act"), or other such
relief as may be necessary under the then governing rules and regulations of the
1940 Act, regarding investments in such investment companies.
In addition to the restrictions described above, some foreign
countries limit, or prohibit, all direct foreign investment in the securities of
their companies. However, the governments of some countries have authorized the
organization of investment portfolios to permit indirect foreign investment in
such securities. For tax purposes these portfolios may be known as Passive
Foreign Investment Companies. The Portfolio is subject to certain percentage
limitations under the 1940 Act and certain states relating to the purchase of
securities of investment companies, and may be subject to the limitation that no
more than 10% of the value of the Portfolio's total assets may be invested in
such securities.
T. Rowe Price Natural Resources Portfolio:
Investment Policies: The Portfolio will normally have primarily all of its
assets in equity securities (e.g., common stocks). This portion of the
Portfolio's assets will be subject to all of the risks of investing in the stock
market. There is risk in all investment. The value of the portfolio securities
of the Portfolio will fluctuate based upon market conditions. Although the
Portfolio seeks to reduce risk by investing in a diversified portfolio, such
diversification does not eliminate all risk.
Fixed Income Securities. The fixed income securities in which the Portfolio
may invest include, but are not limited to, those described below.
U.S. Government Obligations. Bills, notes, bonds and other debt securities
issued by the U.S. Treasury. These are direct obligations of the U.S. Government
and differ mainly in the length of their maturities.
U.S. Government Agency Securities. Issued or guaranteed by U.S.
Government sponsored enterprises and federal agencies. These include securities
issued by the Federal National Mortgage Association, Government National
Mortgage Association, Federal Home Loan Bank, Federal Land Banks, Farmers Home
Administration, Banks for Cooperatives, Federal Intermediate Credit Banks,
Federal Financing Bank, Farm Credit Banks, the Small Business Association, and
the Tennessee Valley Authority. Some of these securities are supported by the
full faith and credit of the U.S. Treasury; and the remainder are supported only
by the credit of the instrumentality, which may or may not include the right of
the issuer to borrow from the Treasury.
Bank Obligations. Certificates of deposit, bankers' acceptances, and other
short-term debt obligations. Certificates of deposit are short-term obligations
of commercial banks. A bankers' acceptance is a time draft drawn on a commercial
bank by a borrower, usually in connection with international commercial
transactions. Certificates of deposit may have fixed or variable rates. The
Portfolio may invest in U.S. banks, foreign branches of U.S. banks, U.S.
branches of foreign banks, and foreign branches of foreign banks.
Short-Term Corporate Debt Securities. Outstanding nonconvertible
corporate debt securities (e.g., bonds and debentures) which have one year or
less remaining to maturity. Corporate notes may have fixed, variable, or
floating rates.
Commercial Paper. Short-term promissory notes issued by corporations
primarily to finance short-term credit needs. Certain notes may have floating or
variable rates.
Foreign Government Securities. Issued or guaranteed by a foreign
government, province, instrumentality, political subdivision or similar unit
thereof.
Savings and Loan Obligations. Negotiable certificates of deposit and other
short-term debt obligations of savings and loan associations.
The Portfolio may also invest in the securities of certain
supranational entities, such as the International Development Bank.
Debt Obligations Although primarily all of the Portfolio's assets are
invested in common stocks, the Portfolio may invest in convertible securities,
corporate debt securities and preferred stocks. See this Statement under
"Certain Risk Factors and Investment Methods," for a discussion of debt
obligations.
The Portfolio's investment program permits it to purchase below
investment grade securities. Since investors generally perceive that there are
greater risks associated with investment in lower quality securities, the yields
from such securities normally exceed those obtainable from higher quality
securities. However, the principal value of lower-rated securities generally
will fluctuate more widely than higher quality securities. Lower quality
investments entail a higher risk of default -- that is, the nonpayment of
interest and principal by the issuer than higher quality investments. Such
securities are also subject to special risks, discussed below. Although the
Portfolio seeks to reduce risk by portfolio diversification, credit analysis,
and attention to trends in the economy, industries and financial markets, such
efforts will not eliminate all risk. There can, of course, be no assurance that
the Portfolio will achieve its investment objective.
After purchase by the Portfolio, a debt security may cease to be rated
or its rating may be reduced below the minimum required for purchase by the
Portfolio. Neither event will require a sale of such security by the Portfolio.
However, Sub-advisor will consider such event in its determination of whether
the Portfolio should continue to hold the security. To the extent that the
ratings given by Moody's or S&P may change as a result of changes in such
organizations or their rating systems, the Portfolio will attempt to use
comparable ratings as standards for investments in accordance with the
investment policies contained in the prospectus.
Risks of Low-Rated Debt Securities. The Portfolio may invest in low
quality bonds commonly referred to as "junk bonds." Junk bonds are regarded as
predominantly speculative with respect to the issuer's continuing ability to
meet principal and interest payments. Because investment in low and lower-medium
quality bonds involves greater investment risk, to the extent the Portfolio
invests in such bonds, achievement of its investment objective will be more
dependent on Sub-advisor's credit analysis than would be the case if the
Portfolio was investing in higher quality bonds. For a discussion of the special
risks involved in low-rated bonds, see this Statement and the Trust's Prospectus
under "Certain Risk Factors and Investment Methods."
Collateralized Mortgage Obligations (CMOs). CMOs are obligations fully
collateralized by a portfolio of mortgages or mortgage-related securities.
Payments of principal and interest on the mortgages are passed through to the
holders of the CMOs on the same schedule as they are received, although certain
classes of CMOs have priority over others with respect to the receipt of
prepayments on the mortgages. Therefore, depending on the type of CMOs in which
a Portfolio invests, the investment may be subject to a greater or lesser risk
of prepayment than other types of mortgage-related securities.
For a discussion of mortgage-backed securities and certain risks
involved therein, see this Statement and the Trust's Prospectus under "Certain
Risk Factors and Investment Methods."
Mortgage-Backed Securities. Mortgage-backed securities are securities
representing interest in a pool of mortgages. After purchase by the Portfolio, a
security may cease to be rated or its rating may be reduced below the minimum
required for purchase by the Portfolio. Neither event will require a sale of
such security by the Portfolio. However, the Sub-advisor will consider such
event in its determination of whether the Portfolio should continue to hold the
security. To the extent that the ratings given by Moody's or S&P may change as a
result of changes in such organizations or their rating systems, the Portfolio
will attempt to use comparable ratings as standards for investments in
accordance with the investment policies continued in the Trust's Prospectus.
For a discussion of mortgage-backed securities and certain risks
involved therein, see this Statement and the Trust's Prospectus under "Certain
Risk Factors and Investment Methods."
Asset-Backed Securities. The Portfolio may invest a portion of its
assets in debt obligations known as asset-backed securities. The credit quality
of most asset-backed securities depends primarily on the credit quality of the
assets underlying such securities, how well the entity issuing the security is
insulated from the credit risk of the originator or any other affiliated
entities and the amount and quality of any credit support provided to the
securities. The rate of principal payment on asset-backed securities generally
depends on the rate of principal payments received on the underlying assets
which in turn may be affected by a variety of economic and other factors. As a
result, the yield on any asset-backed security is difficult to predict with
precision and actual yield to maturity may be more or less than the anticipated
yield to maturity.
Automobile Receivable Securities. The Portfolio may invest in
asset-backed securities which are backed by receivables from motor vehicle
installment sales contracts or installment loans secured by motor vehicles
("Automobile Receivable Securities").
Credit Card Receivable Securities. The Portfolio may invest in
asset-backed securities backed by receivables from revolving credit card
agreements ("Credit Card Receivable Securities").
Other Assets. The Sub-advisor anticipates that asset-backed
securities backed by assets other than those described above will be issued in
the future. The Portfolio may invest in such securities in the future if such
investment is otherwise consistent with its investment objective and policies.
For a discussion of these securities, see this Statement and the Trust's
Prospectus under "Certain Risk Factors and Investment Methods."
Stripped Agency Mortgage-Backed Securities. Stripped Agency
Mortgage-Backed securities represent interests in a pool of mortgages, the cash
flow of which has been separated into its interest and principal components.
"IOs" (interest only securities) receive the interest portion of the cash flow
while "POs" (principal only securities) receive the principal portion. Stripped
Agency Mortgage-Backed Securities may be issued by U.S. Government Agencies or
by private issuers similar to those described above with respect to CMOs and
privately-issued mortgage-backed certificates. As interest rates rise and fall,
the value of IOs tends to move in the same direction as interest rates. The
value of the other mortgage-backed securities described herein, like other debt
instruments, will tend to move in the opposite direction compared to interest
rates. Under the Internal Revenue Code of 1986, as amended (the "Code"), POs may
generate taxable income from the current accrual of original issue discount,
without a corresponding distribution of cash to the Portfolio.
The cash flows and yields on IO and PO classes are extremely sensitive
to the rate of principal payments (including prepayments) on the related
underlying mortgage assets. For example, a rapid or slow rate of principal
payments may have a material adverse effect on the prices of IOs or POs,
respectively. If the underlying mortgage assets experience greater than
anticipated prepayments of principal, an investor may fail to recoup fully its
initial investment in an IO class of a stripped mortgage-backed security, even
if the IO class is rated AAA or Aaa or is derived from a full faith and credit
obligation. Conversely, if the underlying mortgage assets experience slower than
anticipated prepayments of principal, the price on a PO class will be affected
more severely than would be the case with a traditional mortgage-backed
security.
The Portfolio will treat IOs and POs, other than government-issued IOs
or POs backed by fixed rate mortgages, as illiquid securities and, accordingly,
limit its investments in such securities, together with all other illiquid
securities, to 15% of the Portfolio's net assets. Sub-advisor will determine the
liquidity of these investments based on the following guidelines: the type of
issuer; type of collateral, including age and prepayment characteristics; rate
of interest on coupon relative to current market rates and the effect of the
rate on the potential for prepayments; complexity of the issue's structure,
including the number of tranches; size of the issue and the number of dealers
who make a market in the IO or PO. The Portfolio will treat
non-government-issued IOs and POs not backed by fixed or adjustable rate
mortgages as illiquid unless and until the Securities and Exchange Commission
modifies its position.
Writing Covered Call Options. The Portfolio may write (sell) American
or European style "covered" call options and purchase options to close out
options previously written by a Portfolio. In writing covered call options, the
Portfolio expects to generate additional premium income which should serve to
enhance the Portfolio's total return and reduce the effect of any price decline
of the security or currency involved in the option. Covered call options will
generally be written on securities or currencies which, in Sub-advisor is
opinion, are not expected to have any major price increases or moves in the near
future but which, over the long term, are deemed to be attractive investments
for the Portfolio.
The Portfolio will write only covered call options. This means that the
Portfolio will own the security or currency subject to the option or an option
to purchase the same underlying security or currency, having an exercise price
equal to or less than the exercise price of the "covered" option, or will
establish and maintain with its custodian for the term of the option, an account
consisting of cash, U.S. government securities or other liquid high-grade debt
obligations having a value equal to the fluctuating market value of the optioned
securities or currencies.
Portfolio securities or currencies on which call options may be written
will be purchased solely on the basis of investment considerations consistent
with the Portfolio's investment objective. The writing of covered call options
is a conservative investment technique believed to involve relatively little
risk (in contrast to the writing of naked or uncovered options, which the
Portfolio will not do), but capable of enhancing the Portfolio's total return.
When writing a covered call option, a Portfolio, in return for the premium,
gives up the opportunity for profit from a price increase in the underlying
security or currency above the exercise price, but conversely retains the risk
of loss should the price of the security or currency decline. Unlike one who
owns securities or currencies not subject to an option, the Portfolio has no
control over when it may be required to sell the underlying securities or
currencies, since it may be assigned an exercise notice at any time prior to the
expiration of its obligation as a writer. If a call option which the Portfolio
has written expires, the Portfolio will realize a gain in the amount of the
premium; however, such gain may be offset by a decline in the market value of
the underlying security or currency during the option period. If the call option
is exercised, the Portfolio will realize a gain or loss from the sale of the
underlying security or currency. The Portfolio does not consider a security or
currency covered by a call to be "pledged" as that term is used in the
Portfolio's policy which limits the pledging or mortgaging of its assets.
Call options written by the Portfolio will normally have expiration
dates of less than nine months from the date written. The exercise price of the
options may be below, equal to, or above the current market values of the
underlying securities or currencies at the time the options are written. From
time to time, the Portfolio may purchase an underlying security or currency for
delivery in accordance with an exercise notice of a call option assigned to it,
rather than delivering such security or currency from its portfolio. In such
cases, additional costs may be incurred.
The premium received is the market value of an option. The premium the
Portfolio will receive from writing a call option will reflect, among other
things, the current market price of the underlying security or currency, the
relationship of the exercise price to such market price, the historical price
volatility of the underlying security or currency, and the length of the option
period. Once the decision to write a call option has been made, Sub-advisor, in
determining whether a particular call option should be written on a particular
security or currency, will consider the reasonableness of the anticipated
premium and the likelihood that a liquid secondary market will exist for those
options. The premium received by the Portfolio for writing covered call options
will be recorded as a liability of the Portfolio. This liability will be
adjusted daily to the option's current market value, which will be the latest
sale price at the time at which the net asset value per share of the Portfolio
is computed (close of the New York Stock Exchange), or, in the absence of such
sale, the latest asked price. The option will be terminated upon expiration of
the option, the purchase of an identical option in a closing transaction, or
delivery of the underlying security or currency upon the exercise of the option.
The Portfolio will realize a profit or loss from a closing purchase
transaction if the cost of the transaction is less or more than the premium
received from the writing of the option. Because increases in the market price
of a call option will generally reflect increases in the market price of the
underlying security or currency, any loss resulting from the repurchase of a
call option is likely to be offset in whole or in part by appreciation of the
underlying security or currency owned by the Portfolio.
The Portfolio will not write a covered call option if, as a result, the
aggregate market value of all portfolio securities or currencies covering call
or put options exceeds 25% of the market value of the Portfolio's net assets. In
calculating the 25% limit, the Portfolio will offset, against the value of
assets covering written calls and puts, the value of purchased calls and puts on
identical securities or currencies with identical maturity dates.
Writing Covered Put Options. The Portfolio may write American or
European style covered put options and purchase options to close out options
previously written by the Portfolio.
The Portfolio would write put options only on a covered basis, which
means that the Portfolio would maintain in a segregated account cash, U.S.
government securities or other liquid high-grade debt obligations in an amount
not less than the exercise price or the Portfolio will own an option to sell the
underlying security or currency subject to the option having an exercise price
equal to or greater than the exercise price of the "covered" option at all times
while the put option is outstanding. (The rules of a clearing corporation
currently require that such assets be deposited in escrow to secure payment of
the exercise price.) The Portfolio would generally write covered put options in
circumstances where the Sub-advisor wishes to purchase the underlying security
or currency for the Portfolio at a price lower than the current market price of
the security or currency. In such event the Portfolio would write a put option
at an exercise price which, reduced by the premium received on the option,
reflects the lower price it is willing to pay. Since the Portfolio would also
receive interest on debt securities or currencies maintained to cover the
exercise price of the option, this technique could be used to enhance current
return during periods of market uncertainty. The risk in such a transaction
would be that the market price of the underlying security or currency would
decline below the exercise price less the premiums received. Such a decline
could be substantial and result in a significant loss to the Portfolio. In
addition, the Portfolio, because it does not own the specific securities or
currencies which it may be required to purchase in exercise of the put, cannot
benefit from appreciation, if any, with respect to such specific securities or
currencies.
The Portfolio will not write a covered put option if, as a result, the
aggregate market value of all portfolio securities or currencies covering put or
call options exceeds 25% of the market value of the Portfolio's net assets. In
calculating the 25% limit, the Portfolio will offset, against the value of
assets covering written puts and calls, the value of purchased puts and calls on
identical securities or currencies with identical maturity dates.
Purchasing Put Options. The Portfolio may purchase American or European
style put options. As the holder of a put option, the Portfolio has the right to
sell the underlying security or currency at the exercise price at any time
during the option period (American style) or at the expiration of the option
(European style). The Portfolio may enter into closing sale transactions with
respect to such options, exercise them or permit them to expire. The Portfolio
may purchase put options for defensive purposes in order to protect against an
anticipated decline in the value of its securities or currencies. An example of
such use of put options is provided in this Statement under "Certain Risk
Factors and Investment Methods."
To the extent required by the laws of certain states, the Portfolio may
not be permitted to commit more than 5% of its assets to premiums when
purchasing put and call options. Should these state laws change or should the
Portfolio obtain a waiver of its application, the Portfolio may commit more than
5% of its assets to premiums when purchasing call and put options. The premium
paid by the Portfolio when purchasing a put option will be recorded as an asset
of the Portfolio. This asset will be adjusted daily to the option's current
market value, which will be the latest sale price at the time at which the net
asset value per share of the Portfolio is computed (close of New York Stock
Exchange), or, in the absence of such sale, the latest bid price. This asset
will be terminated upon expiration of the option, the selling (writing) of an
identical option in a closing transaction, or the delivery of the underlying
security or currency upon the exercise of the option.
Purchasing Call Options. The Portfolio may purchase American or
European style call options. As the holder of a call option, the Portfolio has
the right to purchase the underlying security or currency at the exercise price
at any time during the option period (American style) or at the expiration of
the option (European style). The Portfolio may enter into closing sale
transactions with respect to such options, exercise them or permit them to
expire. The Portfolio may purchase call options for the purpose of increasing
its current return or avoiding tax consequences which could reduce its current
return. The Portfolio may also purchase call options in order to acquire the
underlying securities or currencies. Examples of such uses of call options are
provided in this Statement under "Certain Risk Factors and Investment Methods."
To the extent required by the laws of certain states, the Portfolio may
not be permitted to commit more than 5% of its assets to premiums when
purchasing call and put options. Should these state laws change or should the
Portfolio obtain a waiver of its application, the Portfolio may commit more than
5% of its assets to premiums when purchasing call and put options. The Portfolio
may also purchase call options on underlying securities or currencies it owns in
order to protect unrealized gains on call options previously written by it. A
call option would be purchased for this purpose where tax considerations make it
inadvisable to realize such gains through a closing purchase transaction. Call
options may also be purchased at times to avoid realizing losses.
Dealer (Over-the-Counter) Options. The Portfolio may engage in
transactions involving dealer options. Certain risks are specific to dealer
options. While the Portfolio would look to a clearing corporation to exercise
exchange-traded options, if the Portfolio were to purchase a dealer option, it
would rely on the dealer from whom it purchased the option to perform if the
option were exercised. Failure by the dealer to do so would result in the loss
of the premium paid by the Portfolio as well as loss of the expected benefit of
the transaction. For a discussion of dealer options, see this Statement under
"Certain Risk Factors and Investment Methods."
Futures Contracts.
Transactions in Futures. The Portfolio may enter into futures
contracts, including stock index, interest rate and currency futures ("futures
or futures contracts"). The Portfolio may also enter into futures on commodities
related to the types of companies in which it invests, such as oil and gold
futures. Otherwise the nature of such futures and the regulatory limitations and
risks to which they are subject are the same as those described below.
Stock index futures contracts may be used to attempt to hedge a portion
of the Portfolio, as a cash management tool, or as an efficient way for the
Sub-advisor to implement either an increase or decrease in portfolio market
exposure in response to changing market conditions. The Portfolio may purchase
or sell futures contracts with respect to any stock index. Nevertheless, to
hedge the Portfolio successfully, the Portfolio must sell futures contacts with
respect to indices or subindices whose movements will have a significant
correlation with movements in the prices of the Portfolio's securities.
Interest rate or currency futures contracts may be used to attempt to
hedge against changes in prevailing levels of interest rates or currency
exchange rates in order to establish more definitely the effective return on
securities or currencies held or intended to be acquired by the Portfolio. In
this regard, the Portfolio could sell interest rate or currency futures as an
offset against the effect of expected increases in interest rates or currency
exchange rates and purchase such futures as an offset against the effect of
expected declines in interest rates or currency exchange rates.
The Portfolio will enter into futures contracts which are traded on
national or foreign futures exchanges, and are standardized as to maturity date
and underlying financial instrument. Futures exchanges and trading in the United
States are regulated under the Commodity Exchange Act by the CFTC. Futures are
traded in London, at the London International Financial Futures Exchange, in
Paris, at the MATIF, and in Tokyo, at the Tokyo Stock Exchange. Although
techniques other than the sale and purchase of futures contracts could be used
for the above-referenced purposes, futures contracts offer an effective and
relatively low cost means of implementing the Portfolio's objectives in these
areas.
Regulatory Limitations. The Portfolio will engage in futures
contracts and options thereon only for bona fide hedging, yield enhancement, and
risk management purposes, in each case in accordance with rules and regulations
of the CFTC and applicable state law.
The Portfolio may not purchase or sell futures contracts or related
options if, with respect to positions which do not qualify as bona fide hedging
under applicable CFTC rules, the sum of the amounts of initial margin deposits
and premiums paid on those positions would exceed 5% of the net asset value of
the Portfolio after taking into account unrealized profits and unrealized losses
on any such contracts it has entered into; provided, however, that in the case
of an option that is in-the-money at the time of purchase, the in-the-money
amount may be excluded in calculating the 5% limitation. For purposes of this
policy options on futures contracts and foreign currency options traded on a
commodities exchange will be considered "related options." This policy may be
modified by the Board of Trustees of the Trust without a shareholder vote and
does not limit the percentage of the Portfolio's assets at risk to 5%.
The Portfolio's use of futures contracts will not result in leverage.
Therefore, to the extent necessary, in instances involving the purchase of
futures contracts or the writing of call or put options thereon by the
Portfolio, an amount of cash, U.S. government securities or other liquid,
high-grade debt obligations, equal to the market value of the futures contracts
and options thereon (less any related margin deposits), will be identified in an
account with the Portfolio's custodian to cover the position, or alternative
cover (such as owning an offsetting position) will be employed. Assets used as
cover or held in an identified account cannot be sold while the position in the
corresponding option or future is open, unless they are replaced with similar
assets. As a result, the commitment of a large portion of a Portfolio's assets
to cover or identified accounts could impede portfolio management or the
Portfolio's ability to meet redemption requests or other current obligations.
If the CFTC or other regulatory authorities adopt different (including
less stringent) or additional restrictions, the Portfolio would comply with such
new restrictions.
Options on Futures Contracts. The Portfolio may purchase and sell
options on the same types of futures in which it may invest. As an alternative
to writing or purchasing call and put options on stock index futures, the
Portfolio may write or purchase call and put options on stock indices. Such
options would be used in a manner similar to the use of options on futures
contracts. From time to time, a single order to purchase or sell futures
contracts (or options thereon) may be made on behalf of the Portfolio and other
T. Rowe Price Portfolios. Such aggregated orders would be allocated among the
Portfolio and the other T. Rowe Price Portfolios in a fair and
non-discriminatory manner.
Special Risks of Transactions in Options on Future Contracts.
See this Statement and Trust's Prospectus under "Certain Risk Factors and
Investment Methods" for a description of certain risks in options and future
contracts.
Additional Futures and Options Contracts. Although the Portfolio has no
current intention of engaging in futures or options transactions other than
those described above, it reserves the right to do so. Such futures and options
trading might involve risks which differ from those involved in the futures and
options described above.
Foreign Futures and Options. The Portfolio is permitted to invest in
foreign futures and options. For a description of foreign futures and options
and certain risks involved therein as well as certain risks involved in foreign
investing, see this Statement and the Trust's Prospectus under "Certain Risk
Factors and Investment Methods."
Foreign Securities. The Portfolio may invest in U.S. dollar-denominated and
non-U.S. dollar-denominated securities of foreign issuers. For an additional
discussion of certain risks involved in investing in foreign securities, see
this Statement and the Trust's Prospectus under "Certain Risk Factors and
Investment Methods."
Risk Factors of Foreign Investing. There are special risks in foreign
investing. Certain of these risks are inherent in any international mutual
Portfolio while others relate more to the countries in which the Portfolio will
invest. Many of the risks are more pronounced for investments in developing or
emerging countries, such as many of the countries of Southeast Asia, Latin
America, Eastern Europe and the Middle East.
Foreign Currency Transactions. 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
agreed upon by the parties, at a price set at the time of the contract. These
contracts are principally 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.
The Portfolio may enter into forward contracts for a variety of
purposes in connection with the management of the foreign securities portion of
its portfolio. The Portfolio's use of such contracts would include, but not be
limited to, the following:
First, when the Portfolio enters into a contract for the purchase or
sale of a security denominated in a foreign currency, it may desire to "lock in"
the U.S. dollar price of the security.
Second, when the Sub-advisor believes that one currency may experience
a substantial movement against another currency, including the U.S. dollar, it
may enter into a forward contract to sell or buy the amount of the former
foreign currency, approximating the value of some or all of the Portfolio's
securities denominated in such foreign currency. Alternatively, where
appropriate, the Portfolio may hedge all or part of its foreign currency
exposure through the use of a basket of currencies or a proxy currency where
such currency or currencies act as an effective proxy for other currencies. In
such a case, the Portfolio may enter into a forward contract where the amount of
the foreign currency to be sold exceeds the value of the securities denominated
in such currency. The use of this basket hedging technique may be more efficient
and economical than entering into separate forward contracts for each currency
held in the Portfolio. The precise matching of the forward contract amounts and
the value of the securities involved will not generally be possible since the
future value of such securities in foreign currencies will change as a
consequence of market movements in the value of those securities between the
date the forward contract is entered into and the date it matures. The
projection of short-term currency market movement is extremely difficult, and
the successful execution of a short-term hedging strategy is highly uncertain.
Under normal circumstances, consideration of the prospect for currency parities
will be incorporated into the longer term investment decisions made with regard
to overall diversification strategies. However, Sub-advisor believes that it is
important to have the flexibility to enter into such forward contracts when it
determines that the best interests of the Portfolio will be served.
The Portfolio may enter into forward contacts for any other purpose
consistent with the Portfolio's investment objective and policies. However, the
Portfolio will not enter into a forward contract, or maintain exposure to any
such contract(s), if the amount of foreign currency required to be delivered
thereunder would exceed the Portfolio's holdings of liquid, high-grade debt
securities and currency available for cover of the forward contract(s). In
determining the amount to be delivered under a contract, the Portfolio may net
offsetting positions.
At the maturity of a forward contract, the Portfolio may sell the
portfolio security and make delivery of the foreign currency, or it may retain
the security and either extend the maturity of the forward contract (by
"rolling" that contract forward) or may initiate a new forward contract.
If the Portfolio retains the portfolio security and engages in an
offsetting transaction, the Portfolio will incur a gain or a loss (as described
below) to the extent that there has been movement in forward contract prices. If
the Portfolio engages in an offsetting transaction, it may subsequently enter
into a new forward contract to sell the foreign currency. Should forward prices
decline during the period between the Portfolio's entering into a forward
contract for the sale of a foreign currency and the date it enters into an
offsetting contract for the purchase of the foreign currency, the Portfolio will
realize a gain to the extent the price of the currency it has agreed to sell
exceeds the price of the currency it has agreed to purchase. Should forward
prices increase, the Portfolio will suffer a loss to the extent of the price of
the currency it has agreed to purchase exceeds the price of the currency it has
agreed to sell.
The Portfolio's dealing in forward foreign currency exchange contracts
will generally be limited to the transactions described above. However, the
Portfolio reserves the right to enter into forward foreign currency contracts
for different purposes and under different circumstances. Of course, the
Portfolio is not required to enter into forward contracts with regard to its
foreign currency-denominated securities and will not do so unless deemed
appropriate by the Sub-advisor. It also should be realized that this method of
hedging against a decline in the value of a currency does not eliminate
fluctuations in the underlying prices of the securities. It simply establishes a
rate of exchange at a future date. Additionally, although such contracts tend to
minimize the risk of loss due to a decline in the value of the hedged currency,
at the same time, they tend to limit any potential gain which might result from
an increase in the value of that currency.
Although the Portfolio values its assets daily in terms of U.S.
dollars, it does not intend to convert its holdings of foreign currencies into
U.S. dollars on a daily basis. It will do so from time to time, and investors
should be aware of the costs of currency conversion. Although foreign exchange
dealers do not charge a fee for conversion, they do realize a profit based on
the difference (the "spread") between the prices at which they are buying and
selling various currencies. Thus, a dealer may offer to sell a foreign currency
to the Portfolio at one rate, while offering a lesser rate of exchange should
the Portfolio desire to resell that currency to the dealer. For a discussion of
certain risk factors involved in foreign currency transactions, see this
Statement and the Trust's Prospectus under "Certain Risk Factors and Investment
Methods."
Federal Tax Treatment of Options, Futures Contracts and Forward Foreign
Exchange Contracts. The Portfolio may enter into certain option, futures, and
forward foreign exchange contracts, including options and futures on currencies,
which will be treated as Section 1256 contracts or straddles.
Transactions which are considered Section 1256 contracts will be
considered to have been closed at the end of the Portfolio's fiscal year and any
gains or losses will be recognized for tax purposes at that time. Such gains or
losses from the normal closing or settlement of such transactions will be
characterized as 60% long-term capital gain or loss and 40% short-term capital
gain or loss regardless of the holding period of the instrument. The Portfolio
will be required to distribute net gains on such transactions to shareholders
even though it may not have closed the transaction and received cash to pay such
distributions.
Options, futures and forward foreign exchange contracts, including
options and futures on currencies, which offset a foreign dollar denominated
bond or currency position may be considered straddles for tax purposes, in which
case a loss on any position in a straddle will be subject to deferral to the
extent of unrealized gain in an offsetting position. The holding period of the
securities or currencies comprising the straddle will be deemed not to begin
until the straddle is terminated. For securities offsetting a purchased put,
this adjustment of the holding period may increase the gain from sales of
securities held less than three months. The holding period of the security
offsetting an "in-the-money qualified covered call" option on an equity security
will not include the period of time the option is outstanding.
Losses on written covered calls and purchased puts on securities,
excluding certain "qualified covered call" options on equity securities, may be
long-term capital loss, if the security covering the option was held for more
than twelve months prior to the writing of the option.
In order for the Portfolio to continue to qualify for federal income
tax treatment as a regulated investment company, at least 90% of its gross
income for a taxable year must be derived from qualifying income, i.e.,
dividends, interest, income derived from loans of securities, and gains from the
sale of securities or currencies. Pending tax regulations could limit the extent
that net gain realized from option, futures or foreign forward exchange
contracts on currencies is qualifying income for purposes of the 90%
requirement. In addition, gains realized on the sale or other disposition of
securities, including option, futures or foreign forward exchange contracts on
securities or securities indexes and, in some cases, currencies, held for less
than three months, must be limited to less than 30% of the Portfolio's annual
gross income. In order to avoid realizing excessive gains on securities or
currencies held less than three months, the Portfolio may be required to defer
the closing out of option, futures or foreign forward exchange contracts) beyond
the time when it would otherwise be advantageous to do so. It is anticipated
that unrealized gains on Section 1256 option, futures and foreign forward
exchange contracts, which have been open for less than three months as of the
end of the Portfolio's fiscal year and which are recognized for tax purposes,
will not be considered gains on securities or currencies held less than three
months for purposes of the 30% test.
Illiquid or Restricted Securities. If through the appreciation of
illiquid securities or the depreciation of liquid securities, the Portfolio
should be in a position where more than 15% of the value of its net assets is
invested in illiquid assets, including restricted securities, the Portfolio will
take appropriate steps to protect liquidity.
Notwithstanding the above, the Portfolio may purchase securities which,
while privately placed, are eligible for purchase and sale under Rule 144A under
the 1933 Act. This rule permits certain qualified institutional buyers, such as
the Portfolio, to trade in privately placed securities even though such
securities are not registered under the 1933 Act. Sub-advisor under the
supervision of the Trust's Board of Trustees, will consider whether securities
purchased under Rule 144A are illiquid and thus subject to the Portfolio's
restriction of investing no more than 15% of its net assets in illiquid
securities. A determination of whether a Rule 144A security is liquid or not is
a question of fact. In making this determination, Sub-advisor will consider the
trading markets for the specific security taking into account the unregistered
nature of a Rule 144A security. In addition, Sub-advisor could consider the (1)
frequency of trades and quotes, (2) number of dealers and potential purchases,
(3) dealer undertakings to make a market, and (4) the nature of the security and
of marketplace trades (e.g., the time needed to dispose of the security, the
method of soliciting offers and the mechanics of transfer). The liquidity of
Rule 144A securities would be monitored, and if as a result of changed
conditions it is determined that a Rule 144A security is no longer liquid, the
Portfolio's holdings of illiquid securities would be reviewed to determine what,
if any, steps are required to assure that the Portfolio does not invest more
than 15% of its net assets in illiquid securities. Investing in Rule 144A
securities could have the effect of increasing the amount of the Portfolio's
assets invested in illiquid securities if qualified institutional buyers are
unwilling to purchase such securities.
The Board of Trustees of the Trust has promulgated guidelines with
respect to illiquid securities.
Hybrid Instruments. Hybrid Instruments have been developed and combine
the elements of futures contracts, options or other financial instruments with
those of debt, preferred equity or a depository instrument (hereinafter "Hybrid
Instruments. Hybrid Instruments may take a variety of forms, including, but not
limited to, debt instruments with interest or principal payments or redemption
terms determined by reference to the value of a currency or commodity or
securities index at a future point in time, preferred stock with dividend rates
determined by reference to the value of a currency, or convertible securities
with the conversion terms related to a particular commodity. For a discussion of
certain risks involved in investing in hybrid instruments see this statement
under "Certain Risk Factors and Investment Methods."
Repurchase Agreements. The Portfolio may enter into a repurchase
agreement through which an investor (such as the Portfolio) purchases a security
(known as the "underlying security") from a well-established securities dealer
or a bank that is a member of the Federal Reserve System. Any such dealer or
bank will be on Sub-advisor's approved list and have a credit rating with
respect to its short-term debt of at least A1 by Standard & Poor's Corporation,
P1 by Moody's Investors Service, Inc., or the equivalent rating by Sub-advisor.
At that time, the bank or securities dealer agrees to repurchase the underlying
security at the same price, plus specified interest. Repurchase agreements are
generally for a short period of time, often less than a week. Repurchase
agreements which do not provide for payment within seven days will be treated as
illiquid securities. The Portfolio will only enter into repurchase agreements
where (i) the underlying securities are of the type (excluding maturity
limitations) which the Portfolio's investment guidelines would allow it to
purchase directly, (ii) the market value of the underlying security, including
interest accrued, will be at all times equal to or exceed the value of the
repurchase agreement, and (iii) payment for the underlying security is made only
upon physical delivery or evidence of book- entry transfer to the account of the
custodian or a bank acting as agent. In the event of a bankruptcy or other
default of a seller of a repurchase agreement, the Portfolio could experience
both delays in liquidating the underlying security and losses, including: (a)
possible decline in the value of the underlying security during the period while
the Portfolio seeks to enforce its rights thereto; (b) possible subnormal levels
of income and lack of access to income during this period; and (c) expenses of
enforcing its rights.
The Board of Trustees of the Trust has promulgated guidelines with
respect to repurchase agreements.
Reverse Repurchase Agreements. Although the Portfolio has no current
intention, in the foreseeable future, of engaging in reverse repurchase
agreements, the Portfolio reserves the right to do so. Reverse repurchase
agreements are ordinary repurchase agreements in which a Portfolio is the seller
of, rather than the investor in, securities, and agrees to repurchase them at an
agreed upon time and price. Use of a reverse repurchase agreement may be
preferable to a regular sale and later repurchase of the securities because it
avoids certain market risks and transaction costs. A reverse repurchase
agreement may be viewed as a type of borrowing by the Portfolio.
Warrants. The Portfolio may acquire warrants. For a discussion of risks
involved therein, see this Statement under "Certain Risk Factor and Investment
Methods."
Lending of Portfolio Securities. Securities loans are made to
broker-dealers or institutional investors or other persons, pursuant to
agreements requiring that the loans be continuously secured by collateral at
least equal at all times to the value of the securities lent marked to market on
a daily basis. The collateral received will consist of cash, U.S. government
securities, letters of credit or such other collateral as may be permitted under
its investment program. While the securities are being lent, the Portfolio will
continue to receive the equivalent of the interest or dividends paid by the
issuer on the securities, as well as interest on the investment of the
collateral or a fee from the borrower. The Portfolio has a right to call each
loan and obtain the securities on five business days' notice or, in connection
with securities trading on foreign markets, within such longer period of time
which coincides with the normal settlement period for purchases and sales of
such securities in such foreign markets. The Portfolio will not have the right
to vote securities while they are being lent, but it will call a loan in
anticipation of any important vote. The risks in lending portfolio securities,
as with other extensions of secured credit, consist of possible delay in
receiving additional collateral or in the recovery of the securities or possible
loss of rights in the collateral should the borrower fail financially. Loans
will only be made to firms deemed by Sub-advisor to be of good standing and will
not be made unless, in the judgment of Sub-advisor, the consideration to be
earned from such loans would justify the risk.
Other Lending/Borrowing. Subject to approval by the Securities and
Exchange Commission and certain state regulatory agencies, the Portfolio may
make loans to, or borrow funds from, other mutual funds sponsored or advised by
Sub-advisor or Rowe Price-Fleming International, Inc.(collectively, "Price
Portfolio"). The Portfolio has no current intention of engaging in these
practices at this time.
When-Issued Securities and Forward Commitment Contracts. The Portfolio
may purchase securities on a "when-issued" or delayed delivery basis and may
purchase securities on a forward commitment basis. Any or all of the Portfolio's
investments in debt securities may be in the form of when-issueds and forwards.
The price of such securities, which may be expressed in yield terms, is fixed at
the time the commitment to purchase is made, but delivery and payment take place
at a later date. Normally, the settlement date occurs within 90 days of the
purchase for when-issueds, but may be substantially longer for forwards. The
Portfolio will cover these securities by maintaining cash and/or liquid,
high-grade debt securities with its custodian bank equal in value to commitments
for them during the time between the purchase and the settlement. Such
segregated securities either will mature or, if necessary, be sold on or before
the settlement date. For a discussion of these securities and the risks involved
therein, see this Statement under "Certain Risk Factors and Investment Methods."
Investment Policies Which May Be Changed Without Shareholder Approval. The
following limitations are applicable to the T. Rowe Price Natural Resources
Portfolio. As a matter of operating policy, which can be changed without
shareholder approval, the Portfolio may not:
1. Purchase additional securities when money borrowed exceeds 5% of its
total assets;
2. Invest in companies for the purpose of exercising management or control;
3. Purchase a futures contract or an option thereon if, with respect to
positions in futures or options on futures which do not represent bona fide
hedging, the aggregate initial margin and premiums on such options would exceed
5% of the Portfolio's net asset value;
4. Purchase illiquid securities and securities of unseasoned issuers if, as
a result, more than 15% of its net assets would be invested in such securities,
provided that the Portfolio will not invest more than 10% of its total assets in
restricted securities and not more than 5% of its total assets in securities of
unseasoned issuers. Securities eligible for resale under Rule 144A of the
Securities Act of 1933 are not included in the 10% limitation but are subject to
the 15% limitation;
5. Purchase securities of open-end or closed-end investment companies
except in compliance with the Investment Company Act of 1940 and applicable
state law. Duplicate fees may result from such purchases;
6. Purchase securities on margin, except (i) for use of short-term credit
necessary for clearance of purchases of portfolio securities and (ii) the
Portfolio may make margin deposits in connection with futures contracts or other
permissible investments;
7. Mortgage, pledge, hypothecate or, in any manner, transfer any security
owned by the Portfolio as security for indebtedness except as may be necessary
in connection with permissible borrowings or investments and then such
mortgaging, pledging or hypothecating may not exceed 33 1/3% of the Portfolio's
total assets at the time of borrowing or investment;
8. Purchase participations or other direct interests in or enter into
leases with respect to, oil, gas, or other mineral exploration or development
programs;
9. Invest in puts, calls, straddles, spreads, or any combination thereof,
except to the extent permitted by the Prospectus and this Statement;
10. Purchase or retain the securities of any issuer if those officers and
directors of the Portfolio, and of its investment manager, who each owns
beneficially more than .5% of the outstanding securities of such issuer,
together own beneficially more than 5% of such securities;
11. Effect short sales of securities;
12. Purchase a security (other than obligations issued or guaranteed by the
U.S., any foreign, state or local government, their agencies or
instrumentalities) if, as a result, more than 5% of the value of the Portfolio's
total assets would be invested in the securities of issuers which at the time of
purchase had been in operation for less than three years (for this purpose, the
period of operation of any issuer shall include the period of operation of any
predecessor or unconditional guarantor of such issuer). This restriction does
not apply to securities of pooled investment vehicles or mortgage- or
asset-backed securities; or
13. Invest in warrants if, as a result thereof, more than 2% of the value
of the net assets of the Portfolio would be invested in warrants which are not
listed on the New York Stock Exchange, the American Stock Exchange, or a
recognized foreign exchange, or more than 5% of the value of the net assets of
the Portfolio would be invested in warrants whether or not so listed. For
purposes of these percentage limitations, the warrants will be valued at the
lower of cost or market and warrants acquired by the Portfolio in units or
attached to securities may be deemed to be without value.
T. Rowe Price International Bond Portfolio:
Investment Objective: The T. Rowe Price International Bond Portfolio's objective
is to provide high current income and capital appreciation by investing in
high-quality, non dollar-denominated government and corporate bonds outside the
United States.
Investment Policies: The Portfolio also seeks to moderate price fluctuation by
actively managing its maturity structure and currency exposure. The Portfolio's
investments may include debt securities issued or guaranteed by a foreign
national government, its agencies, instrumentalities or political subdivisions,
debt securities issued or guaranteed by supranational organizations, corporate
debt securities, bank or bank holding company debt securities and other debt
securities including those convertible into common stock. The Portfolio will
invest at least 65% of its assets in high-quality bonds but may invest up to 20%
of assets in below investment-grade, high-risk bonds, including bonds in default
or those with the lowest rating.
Sub-advisor regularly analyzes a broad range of international equity
and fixed income markets in order to assess the degree of risk and level of
return that can be expected from each market. Of course, there can be no
assurance that Sub-advisor's forecasts of expected return will be reflected in
the actual returns achieved by the Portfolio.
The Portfolio's share price will fluctuate with market, economic and
foreign exchange conditions, and your investment may be worth more or less when
redeemed than when purchased. The Portfolio should not be relied upon as a
complete investment program, nor used to play short-term swings in the global
bond or foreign exchange markets. The Portfolio is subject to risks unique to
international investing.
Risk Factors of Foreign Investing. There are special risks in
investing in the Portfolio. Certain of these risks are inherent in any
international mutual fund others relate more to the countries in which the
Portfolio will invest. Many of the risks are more pronounced for investments in
developing or emerging countries. Although there is no universally accepted
definition, a developing country is generally considered to be a country which
is in the initial stages of its industrialization cycle with a per capita gross
national product of less than $8,000.
Investors should understand that all investments have a risk factor.
There can be no guarantee against loss resulting from an investment in the
Portfolio, and there can be no assurance that the Portfolio's investment
policies will be successful, or that its investment objective will be attained.
The Portfolio is designed for individual and institutional investors seeking to
diversify beyond the United States in an actively researched and managed
portfolio, and is intended for long-term investors who can accept the risks
entailed in investment in foreign securities. For a discussion of certain risks
involved in foreign investing see this Statement and the Trust's Prospectus
under "Certain Risk Factors and Investment Methods."
The Portfolio will invest in securities denominated in currencies
specified elsewhere herein.
It is contemplated that most foreign securities will be purchased in
over-the-counter markets or on stock exchanged located in the countries in which
the respective principal offices of the issuers of the various securities are
located, if that is the best available market.
The Portfolio may invest in investment portfolios which have been
authorized by the governments of certain countries specifically to permit
foreign investment in securities of companies listed and traded on the stock
exchanges in these respective countries. The Portfolio's investment in these
portfolios is subject to the provisions of the 1940 Act discussed below. If the
Portfolio invests in such investment portfolios, the Portfolio's shareholders
will bear not only their proportionate share of the expenses of the Portfolio
(including operating expenses and the fees of the Investment Manager), but also
will bear indirectly similar expenses of the underlying investment portfolios.
In addition, the securities of these investment portfolios may trade at a
premium over their net asset value.
Apart from the matters described herein, the Portfolio is not aware at
this time of the existence of any investment or exchange control regulations
which might substantially impair the operations of the Portfolio as described in
the Trust's Prospectus and this Statement. It should be noted, however, that
this situation could change at any time.
The Portfolio may invest in companies located in Eastern Europe,
Russia or certain Latin American countries. The Portfolio will only invest in a
company located in, or a government of, Eastern Europe, Russia or Latin America,
if the Sub-advisor believes the potential return justifies the risk.
In addition to the investments described in the Trust's Prospectus,
the Portfolio may invest in the following:
Writing Covered Call Options. The Portfolio may write (sell) "covered"
call options and purchase options to close out options previously written by the
Portfolio. In writing covered call options, the Portfolio expects to generate
additional premium income which should serve to enhance the Portfolio's total
return and reduce the effect of any price decline of the security or currency
involved in the option. Covered call options will generally be written on
securities or currencies which, in Sub-advisor's opinion, are not expected to
have any major price increases or moves in the near future but which, over the
long term, are deemed to be attractive investments for the Portfolio.
The Portfolio will write only covered call options. This means that
the Portfolio will own the security or currency subject to the option or an
option to purchase the same underlying security or currency, having an exercise
price equal to or less than the exercise price of the "covered" option, or will
establish and maintain with its custodian for the term of the option, an account
consisting of cash, U.S. government securities or other liquid high-grade debt
obligations having a value equal to the fluctuating market value of the optioned
securities or currencies. In order to comply with the requirements of the
securities or currencies laws in several states, the Portfolio will not write a
covered call option if, as a result, the aggregate market value of all Portfolio
securities or currencies covering call or put options exceeds 25% of the market
value of the Portfolio's net assets. Should these state laws change or should
the Portfolio obtain a waiver of their application, the Portfolio reserves the
right to increase this percentage. In calculating the 25% limit, the Portfolio
will offset, against the value of assets covering written calls and puts, the
value of purchased calls and puts on identical securities or currencies with
identical maturity dates.
Portfolio securities or currencies on which call options may be written
will be purchased solely on the basis of investment considerations consistent
with the Portfolio's investment objective. The writing of covered call options
is a conservative investment technique believed to involve relatively little
risk (in contrast to the writing of naked or uncovered options, which the
Portfolio will not do), but capable of enhancing the Portfolio's total return.
When writing a covered call option, the Portfolio, in return for the premium,
gives up the opportunity for profit from a price increase in the underlying
security or currency above the exercise price, but conversely, retains the risk
of loss should the price of the security or currency decline. Unlike one who
owns securities or currencies not subject to an option, the Portfolio has no
control over when it may be required to sell the underlying securities or
currencies, since it may be assigned an exercise notice at any time prior to the
expiration of its obligations as a writer. If a call option which the Portfolio
has written expires, the Portfolio will realize a gain in the amount of the
premium; however, such gain may be offset by a decline in the market value of
the underlying security or currency during the option period. If the call option
is exercised, the Portfolio will realize a gain or loss from the sale of the
underlying security or currency, The Portfolio does not consider a security or
currency covered by a call "pledged" as that term is used in the Portfolio's
policy which limits the pledging or mortgaging of its assets.
The premium received is the market value of an option. The premium the
Portfolio will receive from writing a call option will reflect, among other
things, the current market price of the underlying security or currency, the
relationship of the exercise price to such market price, the historical price
volatility of the underlying security or currency, and the length of the option
period. Once the decision to write a call option has been made, Sub-advisor, in
determining whether a particular call option should be written on a particular
security or currency, will consider the reasonableness of the anticipated
premium and the likelihood that a liquid secondary market will exist for those
options. The premium received by the Portfolio for writing covered call options
will be recorded as a liability of the Portfolio. This liability will be
adjusted daily to the option's current market value, which will be the latest
sale price at the time at which the net asset value per share of the Portfolio
is computed (close of the New York Stock Exchange), or, in the absence of such
sale, the average of the latest bid and asked price. The option will be
terminated upon expiration of the option, the purchase of an identical option in
a closing transaction, or delivery of the underlying security or currency upon
the exercise of the option.
Call options written by the Portfolio will normally have expiration
dates of less than nine months from the date written. The exercise price of the
options may be below, equal to, or above the current market values of the
underlying securities or currencies at the time the options are written. From
time to time, the Portfolio may purchase an underlying security or currency for
delivery in accordance with an exercise notice of a call option assigned to it,
rather than delivering such security or currency from its portfolio. In such
cases, additional costs may be incurred.
The Portfolio will effect closing transactions in order to realize a
profit on an outstanding call option, to prevent an underlying security or
currency from being called, or, to permit the sale of the underlying security or
currency. The Portfolio will realize a profit or loss from a closing purchase
transaction if the cost of the transaction is less or more than the premium
received from the writing of the option. Because increases in the market price
of a call option will generally reflect increases in the market price of the
underlying security or currency, any loss resulting from the repurchase of a
call option is likely to be offset in whole or in part by appreciation of the
underlying security or currency owned by the Portfolio.
Writing Covered Put Options. Although the Portfolio has no current
intention in the foreseeable future of writing American or European style
covered put options and purchasing put options to close out options previously
written by the Portfolio, the Portfolio reserves the right to do so.
The Portfolio would write put options only on a covered basis, which
means that the Portfolio would maintain in a segregated account cash, U.S.
government securities or other liquid high-grade debt obligations in an amount
not less than the exercise price or the Portfolio will own an option to sell the
underlying security or currency subject to the option having an exercise price
equal to or greater than the exercise price of the "covered" options at all
times while the put option is outstanding. (The rules of a clearing corporation
currently require that such assets be deposited in escrow to secure payment of
the exercise price.) The Portfolio would generally write covered put options in
circumstances where Sub-advisor wishes to purchase the underlying security or
currency for the Portfolio's portfolio at a price lower than the current market
price of the security or currency. In such event the Portfolio would write a put
option at an exercise price which, reduced by the premium received on the
option, reflects the lower price it is willing to pay. Since the Portfolio would
also receive interest on debt securities or currencies maintained to cover the
exercise price of the option, this technique could be used to enhance current
return during periods of market uncertainty. The risk in such a transaction
would be that the market price of the underlying security or currency would
decline below the exercise price less the premiums received. Such a decline
could be substantial and result in a significant loss to the Portfolio. In
addition, the Portfolio, because it does not own the specific securities or
currencies which it may be required to purchase in exercise of the put, cannot
benefit from appreciation, if any, with respect to such specific securities or
currencies. In order to comply with the requirements of several states, the
Portfolio will not write a covered put option if, as a result, the aggregate
market value of all portfolio securities or currencies covering put or call
options exceeds 25% of the market value of the Portfolio's net assets. Should
these state laws change or should the Portfolio obtain a waiver of their
application, the Portfolio reserves the right to increase this percentage. In
calculating the 25% limit, the Portfolio will offset, against the value of
assets covering written puts and calls, the value of purchased puts and calls on
identical securities or currencies with identical maturity dates. For a
discussion of certain risks involved in options, see this Statement and the
Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Purchasing Put Options. The Portfolio may purchase American or
European style put options. As the holder of a put option, the Portfolio has the
right to sell the underlying security or currency at the exercise price at any
time during the option period. The Portfolio may enter into closing sale
transactions with respect to such options, exercise them or permit them to
expire. The Portfolio may purchase put options for defensive purposes in order
to protect against an anticipated decline in the value of its securities or
currencies. An example of such use of put options is provided in this Statement
under "Certain Risk Factors and Investment Methods."
To the extent required by the laws of certain states, the Portfolio
may not be permitted to commit more than 5% of its assets to premiums when
purchasing call and put options. Should these state laws change or should the
Portfolio obtain a waiver of their application, the Portfolio may commit more
than 5% of its assets to premiums when purchasing call and put options. The
premium paid by the Portfolio when purchasing a put option will be recorded as
an asset of the Portfolio. This asset will be adjusted daily to the option's
current market value, which will be the latest sale price at the time at which
the net asset value per share of the Portfolio is computed (close of New York
Stock Exchange), or, in the absence of such sale, the latest bid price. This
asset will be terminated upon expiration of the option, the selling (writing) of
an identical option in a closing transaction, or the delivery of the underlying
security or currency upon the exercise of the option.
Purchasing Call Options. The Portfolio may purchase American or
European style call options. As the holder of a call option, the Portfolio has
the right to purchase the underlying security or currency at the exercise price
at any time during the option period (American style) or at the expiration of
the option (European style). The Portfolio may enter into closing sale
transactions with respect to such options, exercise them or permit them to
expire. The Portfolio may purchase call options for the purpose of increasing
its current return or avoiding tax consequences which could reduce its current
return. The Portfolio may also purchase call options in order to acquire the
underlying securities or currencies. Examples of such uses of call options are
provided below.
To the extent required by the laws of certain states, the Portfolio
may not be permitted to commit more than 5% of its assets to premiums when
purchasing call and put options. Should these state laws change or should the
Portfolio obtain a waiver of their application, the Portfolio may commit more
than 5% of its assets to premiums when purchasing call and put options. The
Portfolio may also purchase call options on underlying securities or currencies
it owns in order to protect unrealized gains on call options previously written
by it. A call option would be purchased for this purpose where tax
considerations make it inadvisable to realize such gains through a closing
purchase transaction. Call options may also be purchased at times to avoid
realizing losses.
Dealer Options. The Portfolio may engage in transactions involving
dealer options. Certain risks are specific to dealer options. While the
Portfolio would look to a clearing corporation to exercise exchange-traded
options, if the Portfolio were to purchase a dealer option, it would rely on the
dealer from whom it purchased the option to perform if the option were
exercised. While the Portfolio will seek to enter into dealer options only with
dealers who will agree to and which are expected to be capable of entering into
closing transactions with the Portfolio, there can be no assurance that the
Portfolio will be able to liquidate a dealer option at a favorable price at any
time prior to expiration. Failure by the dealer to do so would result in the
loss of the premium paid by the Portfolio as well as loss of the expected
benefit of the transaction.
Futures Contracts.
Transactions in Futures. The Portfolio may enter into
financial futures contracts, including stock index, interest rate and currency
futures ("futures or futures contracts"); however, the Portfolio has no current
intention of entering into interest rate futures. The Portfolio, however,
reserves the right to trade in financial futures of any kind.
Stock index futures contracts may be used to attempt to provide a
hedge for a portion of the Portfolio's portfolio, as a cash management tool, or
as an efficient way for Sub-advisor to implement either an increase or decrease
in portfolio market exposure in response to changing market conditions. Stock
index futures contracts are currently traded with respect to the S&P 500 Index
and other broad stock market indices, such as the New York Stock Exchange
Composite Stock Index and the Value Line Composite Stock Index. The Portfolio
may, however, purchase or sell futures contracts with respect to any stock index
whose movements will, in its judgment, have a significant correlation with
movements in the prices of all or portions of the Portfolio's portfolio
securities.
Interest rate or currency futures contracts may be used to attempt to
hedge against changes in prevailing levels of interest rates or currency
exchange rates in order to establish more definitely the effective return on
securities or currencies held or intended to be acquired by the Portfolio. In
this regard, the Portfolio could sell interest rate or currency futures as an
offset against the effect of expected increases in interest rates or currency
exchange rates and purchase such futures as an offset against the effect of
expected declines in interest rates or currency exchange rates.
The Portfolio will enter into futures contracts which are traded on
national or foreign futures exchanges and are standardized as to maturity date
and underlying financial instrument. The principal financial futures exchanges
in the United States are the Board of Trade of the City of Chicago, the Chicago
Mercantile Exchange, the New York Futures Exchange, and the Kansas City Board of
Trade. Futures exchanges and trading in the United States are regulated under
the Commodity Exchange Act by the Commodity Futures Trading Commission ("CFTC").
Futures are traded in London at the London International Financial Futures
Exchange, in Paris at the MATIF and in Tokyo at the Tokyo Stock Exchange.
Although techniques other than the sale and purchase of futures contracts could
be used for the above-referenced purposes, futures contracts offer an effective
and relatively low cost means of implementing the Portfolio's objectives in
these areas.
For a discussion of futures transactions and certain risks involved
therein, see this Statement and the Trust's Prospectus under "Certain Risk
Factors and Investment Methods."
Regulatory Limitations. The Portfolio will engage in
transactions in futures contracts and options thereon only for bona fide
hedging, yield enhancement and risk management purposes, in each case in
accordance with the rules and regulations of the CFTC.
The Portfolio may not enter into futures contracts or options thereon
if, with respect to positions which do not qualify as bona fide hedging under
applicable CFTC rules, the sum of the amounts of initial margin deposits on the
Portfolio's existing futures and premiums paid for options on futures would
exceed 5% of the net asset value of the Portfolio after taking into account
unrealized profits and unrealized losses on any such contracts it has entered
into; provided however, that in the case of an option that is in-the-money at
the time of purchase, the in-the-money amount may be excluded in calculating the
5% limitation.
The Portfolio's use of futures contracts will not result in leverage.
Therefore, to the extent necessary, in instances involving the purchase of
futures contracts or call options thereon or the writing of put options thereon
by the Portfolio, an amount of cash, U.S. government securities or other liquid,
high-grade debt obligations, equal to the market value of the futures contracts
and options thereon (less any related margin deposits), will be identified in an
account with the Portfolio's custodian to cover the position, or alternative
cover will be employed.
In addition, CFTC regulations may impose limitations on the
Portfolio's ability to engage in certain yield enhancement and risk management
strategies. If the CFTC or other regulatory authorities adopt different
(including less stringent) or additional restrictions, the Portfolio would
comply with such new restrictions.
Options on Futures Contracts. As an alternative to writing or
purchasing call and put options on stock index futures, the Portfolio may write
or purchase call and put options on stock indices. Such options would be used in
a manner similar to the use of options on futures contracts. From time to time,
a single order to purchase or sell futures contracts (or options thereon) may be
made on behalf of the Portfolio and other mutual funds or portfolios of mutual
funds managed by Price-Fleming International, Inc. or T. Rowe Price Associates,
Inc. Such aggregated orders would be allocated among the Portfolio and such
other portfolios in a fair and non-discriminatory manner.
Risks of Transactions in Options on Futures Contracts. See
this Statement and the Trust's Prospectus under "Certain Risk Factors and
Investment Methods" for a description of certain risks involved in options and
futures contracts.
Additional Futures and Options Contracts. Although the Portfolio has
no current intention of engaging in financial futures or option transactions
other than those described above, it reserves the right to do so. Such futures
or options trading might involve risks which differ from those involved in the
futures and options described above.
Foreign Futures and Options. The Portfolio is permitted to invest in
foreign futures and options. For a description of foreign futures and options
and certain risks involved therein as well as certain risks involved in foreign
investing, see this Statement and the Trust's Prospectus under "Certain Risk
Factors and Investment Methods."
Foreign Currency Transactions. The Portfolio will generally enter into
forward foreign currency exchange contracts under two circumstances. First, when
the Portfolio enters into a contract for the purchase or sale of a security
denominated in a foreign currency, it may desire to "lock in" the U.S. dollar
price of the security.
Second, when the Sub-advisor believes that the currency of a particular
foreign country may suffer or enjoy a substantial movement against another
currency, including the U.S. dollar, it may enter into a forward contract to
sell or buy the amount of the former foreign currency, approximating the value
of some or all of the Portfolio's securities denominated in such foreign
currency. Alternatively, where appropriate, the Portfolio may hedge all or part
of its foreign currency exposure through the use of a basket of currencies or a
proxy currency where such currency or currencies act as an effective proxy for
other currencies. In such a case, the Portfolio may enter into a forward
contract where the amount of the foreign currency to be sold exceeds the value
of the securities denominated in such currency. The use of this basket hedging
technique may be more efficient and economical than entering into separate
forward contracts for each currency held in the Portfolio. The precise matching
of the forward contract amounts and the value of the securities involved will
not generally be possible since the future value of such securities in foreign
currencies will change as a consequence of market movements in the value of
those securities between the date the forward contract is entered into and the
date it matures. The projection of short-term currency market movement is
extremely difficult, and the successful execution of a short-term hedging
strategy is highly uncertain. Other than as set forth above, and immediately
below, the Portfolio will also not enter into such forward contracts or maintain
a net exposure to such contracts where the consummation of the contracts would
obligate the Portfolio to deliver an amount of foreign currency in excess of the
value of the Portfolio's securities or other assets denominated in that
currency. The Portfolio, however, in order to avoid excess transactions and
transaction costs, may maintain a net exposure to forward contracts in excess of
the value of the Portfolio's securities or other assets to which the forward
contracts relate (including accrued interest to the maturity of the forward on
such securities) provided the excess amount is "covered" by liquid, high-grade
debt securities, denominated in any currency, at least equal at all times to the
amount of such excess. For these purposes "the securities or other assets to
which the forward contracts relate may be securities or assets denominated in a
single currency, or where proxy forwards are used, securities denominated in
more than one currency. Under normal circumstances, consideration of the
prospect for currency parities will be incorporated into the longer term
investment decisions made with regard to overall diversification strategies.
However, Sub-advisor believes that it is important to have the flexibility to
enter into such forward contracts when it determines that the best interests of
the Portfolio will be served.
At the maturity of a forward contract, the Portfolio may either sell
the portfolio security and make delivery of the foreign currency, or it may
retain the security and terminate its contractual obligation to deliver the
foreign currency by purchasing an "offsetting" contract obligating it to
purchase, on the same maturity date, the same amount of the foreign currency.
As indicated above, it is impossible to forecast with absolute
precision the market value of portfolio securities at the expiration of the
forward contract. Accordingly, it may be necessary for the Portfolio to purchase
additional foreign currency on the spot market (and bear the expense of such
purchase) if the market value of the security is less than the amount of foreign
currency the Portfolio is obligated to deliver and if a decision is made to sell
the security and make delivery of the foreign currency. Conversely, it may be
necessary to sell on the spot market some of the foreign currency received upon
the sale of the portfolio security if its market value exceeds the amount of
foreign currency the Portfolio is obligated to deliver. However, as noted, in
order to avoid excessive transactions and transaction costs, the Portfolio may
use liquid, high-grade debt securities denominated in any currency, to cover the
amount by which the value of a forward contract exceeds the value of the
securities to which it relates.
If the Portfolio retains the portfolio security and engages in an
offsetting transaction, the Portfolio will incur a gain or a loss (as described
below) to the extent that there has been movement in forward contract prices. If
the Portfolio engages in an offsetting transaction, it may subsequently enter
into a new forward contract to sell the foreign currency. Should forward prices
decline during the period between the Portfolio's entering into a forward
contract for the sale of a foreign currency and the date it enters into an
offsetting contract for the purchase of the foreign currency, the Portfolio will
realize a gain to the extent the price of the currency it has agreed to sell
exceeds the price of the currency it has agreed to purchase. Should forward
prices increase, the Portfolio will suffer a loss to the extent of the price of
the currency it has agreed to purchase exceeds the price of the currency it has
agreed to sell.
The Portfolio's dealing in forward foreign currency exchange contracts
will generally be limited to the transactions described above. However, the
Portfolio reserves the right to enter into forward foreign currency contracts
for different purposes and under different circumstances. Of course, the
Portfolio is not required to enter into forward contracts with regard to its
foreign currency-denominated securities and will not do so unless deemed
appropriate by the Sub-advisor. It also should be realized that this method of
hedging against a decline in the value of a currency does not eliminate
fluctuations in the underlying prices of the securities. It simply establishes a
rate of exchange at a future date. Additionally, although such contracts tend to
minimize the risk of loss due to a decline in the value of the hedged currency,
at the same time, they tend to limit any potential gain which might result from
an increase in the value of that currency.
Although the Portfolio values its assets daily in terms of U.S.
dollars, it does not intend to convert its holdings of foreign currencies into
U.S. dollars on a daily basis. It will do so from time to time, and investors
should be aware of the costs of currency conversion. Although foreign exchange
dealers do not charge a fee for conversion, they do realize a profit based on
the difference (the "spread") between the prices at which they are buying and
selling various currencies. Thus, a dealer may offer to sell a foreign currency
to the Portfolio at one rate, while offering a lesser rate of exchange should
the Portfolio desire to resell that currency to the dealer.
For an additional discussion of certain risks involved in foreign
investing, see this Statement and the Trust's Prospectus under "Certain Risk
Factors and Investment Methods."
Federal Tax Treatment of Options, Futures Contracts and Forward
Foreign Exchange Contracts. The Portfolio may enter into certain options,
futures, and forward foreign exchange contracts, including options and futures
on currencies, which will be treated as Section 1256 contracts or straddles.
Transactions which are considered Section 1256 contracts will be
considered to have been closed at the end of the Portfolio's fiscal year and any
gains or losses will be recognized for tax purposes at that time. Such gains or
losses from the normal closing or settlement of such transactions will be
characterized as 60% long-term capital gain or loss and 40% short-term capital
gain or loss regardless of the holding period of the instrument. The Portfolio
will be required to distribute net gains on such transactions to shareholders
even though it may not have closed the transaction and received cash to pay such
distributions.
Options, futures and forward foreign exchange contracts, including
options and futures on currencies, which offset a foreign dollar denominated
bond or currency position may be considered straddles for tax purposes in which
case a loss on any position in a straddle will be subject to deferral to the
extent of unrealized gain in an offsetting position. The holding period of the
securities or currencies comprising the straddle will be deemed not to begin
until the straddle is terminated. For securities offsetting a purchased put,
this adjustment of the holding period may increase the gain from sales of
securities held less than three months. The holding period of the security
offsetting an "in-the-money qualified covered call" option on an equity security
will not include the period of time the option is outstanding.
Losses on written covered calls and purchased puts on securities,
excluding certain "qualified covered call" options on equity securities, may be
long-term capital loss, if the security covering the option was held for more
than twelve months prior to the writing of the option.
In order for the Portfolio to continue to qualify for federal income
tax treatment as a regulated investment company, at least 90% of its gross
income for a taxable year must be derived from qualifying income, i.e.,
dividends, interest, income derived from loans of securities, and gains from the
sale of securities or currencies. Pending tax regulations could limit the extent
that net gain realized from option, futures or foreign forward exchange
contracts on currencies is qualifying income for purposes of the 90%
requirement. In addition, gains realized on the sale or other disposition of
securities, including option, futures or foreign forward exchange contracts on
securities or securities indexes and, in some cases, currencies, held for less
than three months, must be limited to less than 30% of the Portfolio's annual
gross income. In order to avoid realizing excessive gains on securities or
currencies held less than three months, the Portfolio may be required to defer
the closing out of option, futures or foreign forward exchange contracts beyond
the time when it would otherwise be advantageous to do so. It is anticipated
that unrealized gains on Section 1256 option, futures and foreign forward
exchange contracts, which have been open for less than three months as of the
end of the Portfolio's fiscal year and which are recognized for tax purposes,
will not be considered gains on securities or currencies held less than three
months for purposes of the 30% test.
Hybrid Commodity and Security Instruments. Instruments have been
developed which combine the elements of futures contracts or options with those
of debt, preferred equity or a depository instrument (hereinafter "Hybrid
Instruments"). Often these hybrid instruments are indexed to the price of a
commodity or particular currency or a domestic or foreign debt or equity
securities index. Hybrid instruments may take a variety of forms, including, but
not limited to, debt instruments with interest or principal payments or
redemption terms determined by reference to the value of a currency or commodity
at a future point in time, preferred stock with dividend rates determined by
reference to the value of a currency, or convertible securities with the
conversion terms related to a particular commodity. For a discussion of certain
risks involved in hybrid instruments, see this Statement under "Certain Risk
Factors and Investment Methods."
Repurchase Agreements. The Portfolio may enter into repurchase
agreements through which an investor (such as the Portfolio) purchases a
security (known as the "underlying security") from a well-established securities
dealer or a bank that is a member of the Federal Reserve System. Any such dealer
or bank will be on T. Rowe Price Associates, Inc. ("T. Rowe Price") approved
list and have a credit rating with respect to its short-term debt of at least A1
by Standard & Poor's Corporation, P1 by Moody's Investors Service, Inc., or the
equivalent rating by T. Rowe Price. At that time, the bank or securities dealer
agrees to repurchase the underlying security at the same price, plus specified
interest. Repurchase agreements are generally for a short period of time, often
less than a week. Repurchase agreements which do not provide for payment within
seven days will be treated as illiquid securities. The Portfolio will only enter
into repurchase agreements where (i) the underlying securities are of the type
(excluding maturity limitations) which the Portfolio's investment guidelines
would allow it to purchase directly, (ii) the market value of the underlying
security, including interest accrued, will be at all times equal to or exceed
the value of the repurchase agreement, and (iii) payment for the underlying
security is made only upon physical delivery or evidence of book-entry transfer
to the account of the custodian or a bank acting as agent. In the event of a
bankruptcy or other default of a seller of a repurchase agreement, the Portfolio
could experience both delays in liquidating the underlying securities and
losses, including: (a) possible decline in the value of the underlying security
during the period while the Portfolio seeks to enforce its rights thereto; (b)
possible subnormal levels of income and lack of access to income during this
period; and (c) expenses of enforcing its rights.
The Board of Trustees of the Trust has promulgated guidelines with
respect to repurchase agreements.
Illiquid or Restricted Securities. Subject to guidelines promulgated by
the Board of Trustees of the Trust, the Portfolio may invest in illiquid
securities. The Portfolio may invest in illiquid securities, including
restricted securities and repurchase agreements which do not provide for payment
within seven days, but will not acquire such securities if, as a result, they
would comprise more than 15% of the value of the Portfolio's net assets.
Restricted securities may be sold only in privately negotiated
transactions or in a public offering with respect to which a registration
statement is in effect under the Securities Act of 1933 (the "1933 Act"). Where
registration is required, the Portfolio may be obligated to pay all or part of
the registration expenses and a considerable period may elapse between the time
of the decision to sell and the time the Portfolio may be permitted to sell a
security under an effective registration statement. If, during such a period,
adverse market conditions were to develop, the Portfolio might obtain a less
favorable price than prevailed when it decided to sell. Restricted securities
will be priced at fair value as determined in accordance with procedures
prescribed by the Trust's Board of Trustees. If through the appreciation of
illiquid securities or the depreciation of liquid securities, the Portfolio
should be in a position where more than 15% of the value of its net assets are
invested in illiquid assets, including restricted securities, the Portfolio will
take appropriate steps to protect liquidity.
Notwithstanding the above, the Portfolio may purchase securities which,
while privately placed, are eligible for purchase and sale under Rule 144A under
the 1933 Act. This rule permits certain qualified institutional buyers, such as
the Portfolio, to trade in privately placed securities even though such
securities are not registered under the 1933 Act. The Sub-advisor, under the
supervision of the Trust's Board of Trustees, will consider whether securities
purchased under Rule 144A are illiquid and thus subject to the Portfolio's
restriction of investing no more than 15% of its net assets in illiquid
securities. A determination of whether a Rule 144A security is liquid or not is
a question of fact. In making this determination, the Sub-advisor will consider
the trading markets for the specific security taking into account the
unregistered nature of a Rule 144A security. In addition, the Sub-advisor could
consider the (1) frequency of trades and quotes, (2) number of dealers and
potential purchases, (3) dealer undertakings to make a market, and (4) the
nature of the security and of marketplace trades (e.g., the time needed to
dispose of the security, the method of soliciting offers and the mechanics of
transfer). The liquidity of Rule 144A securities would be monitored, and if as a
result of changed conditions it is determined that a Rule 144A security is no
longer liquid, the Portfolio's holdings of illiquid securities would be reviewed
to determine what, if any, steps are required to assure that the Portfolio does
not invest more than 15% of its net assets in illiquid securities. Investing in
Rule 144A securities could have the effect of increasing the amount of the
Portfolio's assets invested in illiquid securities if qualified institutional
buyers are unwilling to purchase such securities.
Debt Securities. The Portfolio's investment program permits it to
purchase below investment grade securities. Since investors generally perceive
that there are greater risks associated with investment in lower quality
securities, the yields from such securities normally exceed those obtainable
from higher quality securities. However, the principal value of lower-rated
securities generally will fluctuate more widely than higher quality securities.
Lower quality investments entail a higher risk of default -- that is, the
nonpayment of interest and principal by the issuer than higher quality
investments. Such securities are also subject to special risks, discussed below.
Although the Portfolio seeks to reduce risk by portfolio diversification, credit
analysis, and attention to trends in the economy, industries and financial
markets, such efforts will not eliminate all risk. There can, of course, be no
assurance that the Portfolio will achieve its investment objective.
After purchase by the Portfolio, a debt security may cease to be rated
or its rating may be reduced below the minimum required for purchase by the
Portfolio. Neither event will require a sale of such security by the Portfolio.
However, Sub-advisor will consider such event in its determination of whether
the Portfolio should continue to hold the security. To the extent that the
ratings given by Moody's Investors Service, Inc. ("Moody's") or Standard &
Poor's Corporation ("S&P") may change as a result of changes in such
organizations or their rating systems, the Portfolio will attempt to use
comparable ratings as standards for investments in accordance with the
investment policies contained in the prospectus. The Portfolio may invest up to
20% of its total assets in securities rated below BBB or Baa, including bonds in
default or those with the lowest rating. See the Appendix to this Statement for
a more complete description of the ratings assigned by ratings organizations and
their respective characteristics.
High Yield, High Risk Securities. Below investment grade securities
(rated below Baa by Moody's and below BBB by S&P) or unrated securities of
equivalent quality in the Sub-advisor's judgment, carry a high degree of risk
(including the possibility of default or bankruptcy of the issuers of such
securities), generally involve greater volatility of price and risk of principal
and income, and may be less liquid, than securities in the higher rating
categories and are considered speculative. The lower the ratings of such debt
securities, the greater their risks render them like equity securities.
For an additional discussion of certain risks involved in investing in
lower rated debt securities, see this Statement and the Trust's Prospectus under
"Certain Risk Factors and Investment Methods."
Zero Coupon Securities. The Portfolio may invest in zero coupon
securities which pay no cash income and are sold at substantial discounts from
their value at maturity. For a discussion of Zero Coupon Securities and the
risks associated therein, see this Statement under "Certain Risk Factors and
Investment Methods."
Lending of Portfolio Securities. For the purpose of realizing
additional income, the Portfolio may make secured loans of portfolio securities
amounting to not more than 33 1/3% of its total assets. This policy is a
"fundamental policy." Securities loans are made to broker-dealers, institutional
investors, or other persons pursuant to agreements requiring that the loans be
continuously secured by collateral at least equal at all times to the value of
the securities lent marked to market on a daily basis. The collateral received
will consist of cash, U.S. government securities, letters of credit or such
other collateral as may be permitted under its investment program. While the
securities are being lent, the Portfolio will continue to receive the equivalent
of the interest or dividends paid by the issuer on the securities, as well as
interest on the investment of the collateral or a fee from the borrower. The
Portfolio has a right to call each loan and obtain the securities on five
business days' notice or, in connection with securities trading on foreign
markets, within such longer period of time which coincides with the normal
settlement period for purchases and sales of such securities in such foreign
markets. The Portfolio will not have the right to vote securities while they are
being lent, but it will call a loan in anticipation of any important vote. The
risks in lending portfolio securities, as with other extensions of secured
credit, consist of possible delay in receiving additional collateral or in the
recovery of the securities or possible loss of rights in the collateral should
the borrower fail financially. Loans will only be made to persons deemed by
Sub-advisor to be of good standing and will not be made unless, in the judgment
of Sub-advisor, the consideration to be earned from such loans would justify the
risk.
Other Lending/Borrowing. Subject to approval by the Securities and Exchange
Commission, the Portfolio may make loans to, or borrow funds from, other mutual
funds sponsored or advised by Sub-advisor or T. Rowe Price Associates, Inc.
(collectively, "Price Portfolios"). The Portfolio has no current intention of
engaging in these practices at this time.
Investment Restrictions Which May Be Changed Without Shareholder Approval.
The following investment restrictions are not "fundamental" and apply only to
the T. Rowe Price International Bond Portfolio. As a matter of nonfundamental
policy which may be changed without shareholder approval, the Portfolio may not:
1. Pledge, mortgage or hypothecate its assets in excess, together with
permitted borrowings, of 1/3 of its total assets;
2. Purchase securities on margin, unless, by virtue of its ownership of other
securities, it has the right to obtain securities equivalent in kind and amount
to the securities sold and, if the right is conditional, the sale is made upon
the same conditions, except in connection with arbitrage transactions and except
that the Portfolio may obtain such short-term credits as may be necessary for
the clearance of purchases and sales of securities;
3. Purchase illiquid securities and securities of unseasoned issuers if, as a
result, more than 15% of its net assets would be invested in such securities;
4. Purchase securities of any issuer with a record of less than three years
continuous operations, including predecessors, except U.S. Government
securities, and obligations issued or guaranteed by any foreign government or
its agencies or instrumentalities, if such purchase would cause the investments
of the Portfolio in all such issues to exceed 5% of the total assets of the
Portfolio taken at market value;
5. Buy options on securities or financial instruments, unless the aggregate
premiums paid on all such options held by the Portfolio at any time do not
exceed 20% of its net assets; or sell put options on securities if, as a result,
the aggregate value of the obligations underlying such put options would exceed
50% of the Portfolio's net assets;
6. Enter into futures contracts or purchase options thereon unless immediately
after the purchase, the value of the aggregate initial margin with respect to
all futures contracts entered into on behalf of the Portfolio and the premiums
paid for options on futures contracts does not exceed 5% of the Portfolio's
total assets, provided that in the case of an option that is in-the-money at the
time of purchase, the in-the-money amount may be excluded in computing the 5%
limit;
7. Invest in oil, gas or other mineral leases, or exploration or development
programs (although it may invest in issuers which own or invest in such
interests);
8. Purchase warrants if as a result warrants taken at the lower of cost or
market value would represent more than 5% of the value of the Portfolio's total
net assets or more than 2% of its net assets in warrants that are not listed on
the New York or American Stock Exchanges or on a recognized foreign exchange
(for this purpose, warrants attached to securities will be deemed to have no
value);
9. Make securities loans if the value of such securities loaned exceeds 30% of
the value of the Portfolio's total assets at the time any loan is made; all
loans of portfolio securities will be fully collateralized and marked to market
daily. The Portfolio has no current intention of making loans of portfolio
securities that would amount to greater than 5% of the Portfolio's total assets;
or
10. Purchase or sell real estate limited partnership interests.
11. Purchase securities which are not bonds denominated in foreign currency
("international bonds") if, immediately after such purchase, less than 65% of
its total assets would be invested in international bonds, except that for
temporary defensive purposes the Portfolio may purchase securities which are not
international bonds without limitation;
12. Borrow money in excess of 5% of its total assets (taken at market value) or
borrow other than from banks; however, in the case of reverse repurchase
agreements, the Portfolio may invest in such agreements with other than banks
subject to total asset coverage of 300% for such agreements and all borrowings;
13. Invest more than 20% of its total assets in below investment grade,
high-risk bonds, including bonds in default or those with the lowest rating;
14. Invest in companies for the purpose of exercising management or control;
15. Purchase securities of open-end or closed-end investment companies except
in compliance with the Investment Company Act of 1940 and applicable state
law;
16. Purchase or retain the securities of any issuer if those officers and
directors of the Portfolio, and of the Sub-advisor, who each own beneficially
more than .5% of the outstanding securities of such issuer, together own
beneficially more than 5% of such securities; or
17. Effect short sales of securities.
In addition to the restrictions described above, some foreign countries
limit, or prohibit, all direct foreign investment in the securities of their
companies. However, the governments of some countries have authorized the
organization of investment funds to permit indirect foreign investment in such
securities. For tax purposes these funds may be known as Passive Foreign
Investment Companies. The Portfolio is subject to certain percentage limitations
under the 1940 Act and certain states relating to the purchase of securities of
investment companies, and may be subject to the limitation that no more than 10%
of the value of the Portfolio's total assets may be invested in such securities.
Restrictions with respect to repurchase agreements shall be construed
to be for repurchase agreements entered into for the investment of available
cash consistent with the Portfolio's repurchase agreement procedures, not
repurchase commitments entered into for general investment purposes.
If a percentage restriction on investment or utilization of assets as
set forth under "Investment Restrictions" and "Investment Policies" above is
adhered to at the time an investment is made, a later change in percentage
resulting from changes in the value or the total cost of Portfolio's assets will
not be considered a violation of the restriction.
Founders Capital Appreciation Portfolio:
Investment Policies:
Options On Stock Indices and Stocks. For a discussion of options on
stock indices and stocks and certain risks involved therein, see the Trust's
Prospectus and this Statement under "Certain Risk Factors and Investment
Methods."
Transactions in options are subject to limitations, established by each
of the exchanges upon which options are traded, governing the maximum number of
options which may be written or held by a single investor or group of investors
acting in concert, regardless of whether the options are held in one or more
accounts. Thus, the number of options the Portfolio may hold may be affected by
options held by other advisory clients of the Sub-advisor. As of the date of
this Statement, the Sub-advisor believes that these limitations will not affect
the purchase of stock index options by the Portfolio.
As indicated, the Portfolio may purchase options on stock indices. A
call option on a stock index gives a Purchaser the right to buy, and a put
option on a stock index gives a purchaser the right to sell, a designated number
of shares of the underlying instrument (the stock index) at the option exercise
price. The Portfolio purchases put options on stock indices to protect the
Portfolio against decline in value. The Portfolio purchases call options on
stock indices to establish a position in equities as a temporary substitute for
purchasing individual stocks that then may be acquired over the option period in
a manner designed to minimize adverse price movements. Purchasing put and call
options on stock indices also permits greater time for evaluation of investment
alternatives. When the Sub-advisor believes that the trend of stock prices may
be downward, particularly for a short period of time, the purchase of put
options on stock indices may eliminate the need to sell less liquid stocks and
possibly repurchase them later. The purpose of these transactions is not to
generate gain, but to "hedge" against possible loss. Therefore, successful
hedging activity will not produce net gain to the Portfolio. Any gain in the
price of a call option is likely to be offset by higher prices the Portfolio
must pay in rising markets, as cash reserves are invested. In declining markets,
any increase in the price of a put option is likely to be offset by lower prices
of stocks owned by the Portfolio.
The Portfolio may purchase only those put and call options that are
listed on a domestic exchange or quoted on the automatic quotation system of the
National Association of Securities Dealers ("NASDAQ"). Options traded on stock
exchanges are either broadly based, such as the Standard & Poor's 500 Stock
Index and 100 Stock Index, or involve stocks in a designated industry or group
of industries. The Portfolio may utilize either broadly based or market segment
indices in seeking a better correlation between the indices and its portfolio.
The value of a stock index option depends upon movements in the level
of the stock index rather than the price of a particular stock. Whether the
Portfolio will realize a gain or a loss from its option activities depends upon
movements in the level of stock prices generally or in an industry or market
segment, rather than movements in the price of a particular stock. Purchasing
call and put options on stock indices involves the risk that the Sub-advisor may
be incorrect in its expectations as to the extent of the various stock market
movements or the time within which the options are based. To compensate for this
imperfect correlation, the Portfolio may enter into options transactions in a
greater dollar amount than the securities being hedged if the historical
volatility of the prices of the securities being hedged is different from the
historical volatility of the stock index.
Futures Contracts. The Portfolio may enter into futures contracts (or
options thereon) for hedging purposes. U.S. futures contracts are traded on
exchanges which have been designated "contract markets" by the Commodity Futures
Trading Commission ("CFTC") and must be executed through a futures commission
merchant (an "FCM") or brokerage firm which is a member of the relevant contract
market. Although futures contracts by their terms call for the delivery or
acquisition of the underlying commodities or a cash payment based on the value
of the underlying commodities, in most cases the contractual obligation is
offset before the delivery date of the contract by buying, in the case of a
contractual obligation to sell, or selling, in the case of a contractual
obligation to buy, an identical futures contract on a commodities exchange. Such
a transaction cancels the obligation to make or take delivery of the
commodities.
The acquisition or sale of a futures contract could occur, for example,
if the Portfolio held or considered purchasing equity securities and sought to
protect itself from fluctuations in prices without buying or selling those
securities. For example, if prices were expected to decrease, the Portfolio
could sell equity index futures contracts, thereby hoping to offset a potential
decline in the value of equity securities in the portfolio by a corresponding
increase in the value of the futures contract position held by the Portfolio and
thereby prevent the Portfolio's net asset value from declining as much as it
otherwise would have. The Portfolio also could protect against potential price
declines by selling portfolio securities and investing in money market
instruments. However, since the futures market is more liquid than the cash
market, the use of futures contracts as an investment technique would allow the
Portfolio to maintain a defensive position without having to sell portfolio
securities.
Similarly, when prices of equity securities are expected to increase,
futures contracts could be bought to attempt to hedge against the possibility of
having to buy equity securities at higher prices. This technique is sometimes
known as an anticipatory hedge. Since the fluctuations in the value of futures
contracts should be similar to those of equity securities, the Portfolio could
take advantage of the potential rise in the value of equity securities without
buying them until the market had stabilized. At that time, the futures contracts
could be liquidated and the Portfolio could buy equity securities on the cash
market.
The Portfolio may also enter into interest rate and foreign currency
futures contracts. Interest rate futures contracts currently are traded on a
variety of fixed income securities, including long-term U.S. Treasury Bonds,
Treasury Notes, Government National Mortgage Association modified pass-through
mortgage-backed securities, U.S. Treasury Bills, bank certificates of deposit
and commercial paper. Foreign currency futures contracts currently are traded on
the British pound, Canadian dollar, Japanese yen, Swiss franc, West German mark
and on Eurodollar deposits.
Futures contracts entail risks. Although the Sub-advisor believes that
use of such contracts could benefit the Portfolio, if the Sub-advisor's
investment judgment were incorrect, the Portfolio's overall performance could be
worse than if the Portfolio had not entered into futures contracts. For example,
if the Portfolio hedged against the effects of a possible decrease in prices of
securities held in its portfolio and prices increased instead, the Portfolio
would lose part or all of the benefit of the increased value of these securities
because of offsetting losses in the Portfolio's futures positions. In addition,
if the Portfolio had insufficient cash, it might have to sell securities from
its portfolio to meet margin requirements. Those sales could be at increased
prices which reflect the rising market and could occur at a time when the sales
would be disadvantageous to the Portfolio. For a discussion of certain risks
involved in futures contracts, see the Trust's Prospectus and this Statement
under "Certain Risk Factors and Investment Methods."
The Portfolio will not, as to any positions, whether long, short or a
combination thereof, enter into futures and options thereon for which the
aggregate initial margins and premiums exceed 5% of the fair market value of its
assets after taking into account unrealized profits and losses on options
entered into. In the case of an option that is "in-the-money," the in-the-money
amount may be excluded in computing such 5%. In general a call option on a
future is "in-the-money" if the value of the future exceeds the exercise
("strike") price of the call; a put option on a future is "in-the-money" if the
value of the future which is the subject of the put is exceeded by the strike
price of the put. The Portfolio may use futures and options thereon solely for
bona fide hedging or for other non-speculative purposes. As to long positions
which are used as part of the Portfolio's strategies and are incidental to its
activities in the underlying cash market, the "underlying commodity value" of
the Portfolio's futures and options thereon must not exceed the sum of (i) cash
set aside in an identifiable manner, or short-term U.S. debt obligations or
other dollar-denominated high-quality, short-term money instruments so set
aside, plus sums deposited on margin; (ii) cash proceeds from existing
investments due in 30 days; and (iii) accrued profits held at the futures
commission merchant. The "underlying commodity value" of a future is computed by
multiplying the size of the future by the daily settlement price of the future.
For an option on a future, that value is the underlying commodity value of the
future underlying the option.
Unlike the situation in which the Portfolio purchases or sells a
security, no price is paid or received by the Portfolio upon the purchase or
sale of a futures contract. Instead, the Portfolio is required to deposit in a
segregated asset account an amount of cash or qualifying securities (currently
U.S. Treasury bills), currently in a minimum amount of $15,000. This is called
"initial margin." Such initial margin is in the nature of a performance bond or
good faith deposit on the contract. However, since losses on open contracts are
required to be reflected in cash in the form of variation margin payments, the
Portfolio may be required to make additional payments during the term of a
contract to its broker. Such payments would be required, for example, where,
during the term of an interest rate futures contract purchased by the Portfolio,
there was a general increase in interest rates, thereby making the Portfolio's
securities less valuable. In all instances involving the purchase of financial
futures contracts by the Portfolio, an amount of cash together with such other
securities as permitted by applicable regulatory authorities to be utilized for
such purpose, at least equal to the market value of the future contracts, will
be deposited in a segregated account with the Portfolio's custodian to
collateralize the position. At any time prior to the expiration of a futures
contract, the Portfolio may elect to close its position by taking an opposite
position which will operate to terminate the Portfolio's position in the futures
contract.
Because futures contracts are generally settled within a day from the
date they are closed out, compared with a settlement period of seven days for
some types of securities, the futures markets can provide superior liquidity to
the securities markets. Nevertheless, there is no assurance a liquid secondary
market will exist for any particular futures contract at any particular time. In
addition, futures exchanges may establish daily price fluctuation limits for
futures contracts and may halt trading if a contract's price moves upward or
downward more than the limit in a given day. On volatile trading days when the
price fluctuation limit is reached, it would be impossible for the Portfolio to
enter into new positions or close out existing positions. If the secondary
market for a futures contract were not liquid because of price fluctuation
limits or otherwise, the Portfolio would not promptly be able to liquidate
unfavorable futures positions and potentially could be required to continue to
hold a futures position until the delivery date, regardless of changes in its
value. As a result, the Portfolio's access to other assets held to cover its
futures positions also could be impaired.
Options on Futures Contracts. The Portfolio may purchase put and call
options on futures contracts. An option on a futures contract provides the
holder with the right to enter into a "long" position in the underlying futures
contract, in the case of a call option, or a "short" position in the underlying
futures contract, in the case of a put option, at a fixed exercise price to a
stated expiration date. Upon exercise of the option by the holder, a contract
market clearing house establishes a corresponding short position for the writer
of the option, in the case of a call option, or a corresponding long position,
in the case of a put option. In the event that an option is exercised, the
parties will be subject to all the risks associated with the trading of futures
contracts, such as payment of variation margin deposits.
A position in an option on a futures contract may be terminated by the
purchaser or seller prior to expiration by effecting a closing purchase or sale
transaction, subject to the availability of a liquid secondary market, which is
the purchase or sale of an option of the same series (i.e., the same exercise
price and expiration date) as the option previously purchased or sold. The
difference between the premiums paid and received represents the trader's profit
or loss on the transaction.
An option, whether based on a futures contract, a stock index or a
security, becomes worthless to the holder when it expires. Upon exercise of an
option, the exchange or contract market clearing house assigns exercise notices
on a random basis to those of its members which have written options of the same
series and with the same expiration date. A brokerage firm receiving such
notices then assigns them on a random basis to those of its customers which have
written options of the same series and expiration date. A writer therefore has
no control over whether an option will be exercised against it, nor over the
time of such exercise.
The purchase of a call option on a futures contract is similar in some
respects to the purchase of a call option on an individual security. See
"Options on Foreign Currencies" below. Depending on the pricing of the option
compared to either the price of the futures contract upon which it is based or
the price of the underlying instrument, ownership of the option may or may not
be less risky than ownership of the futures contract or the underlying
instrument. As with the purchase of futures contracts, when the Portfolio is not
fully invested it could buy a call option on a futures contract to hedge against
a market advance.
The purchase of a put option on a futures contract is similar in some
respects to the purchase of protective put options on portfolio securities. For
example, the Portfolio would be able to buy a put option on a futures contract
to hedge its portfolio against the risk of falling prices.
The amount of risk the Portfolio would assume if it bought an option on
a futures contract would be the premium paid for the option plus related
transaction costs. In addition to the correlation risks discussed above, the
purchase of an option also entails the risk that changes in the value of the
underlying futures contract will not fully be reflected in the value of the
options bought.
Options on Foreign Currencies. The Portfolio may buy and sell options
on foreign currencies for hedging purposes in a manner similar to that in which
futures on foreign currencies would be utilized. For example, a decline in the
U.S. dollar value of a foreign currency in which portfolio securities are
denominated would reduce the U.S. dollar value of such securities, even if their
value in the foreign currency remained constant. In order to protect against
such diminutions in the value of portfolio securities, the Portfolio could buy
put options on the foreign currency. If the value of the currency declines, the
Portfolio would have the right to sell such currency for a fixed amount in U.S.
dollars and would thereby offset, in whole or in part, the adverse effect on its
portfolio which otherwise would have resulted. Conversely, when a rise is
projected in the U.S. dollar value of a currency in which securities to be
acquired are denominated, thereby increasing the cost of such securities, the
Portfolio could buy call options thereon. The purchase of such options could
offset, at least partially, the effects of the adverse movements in exchange
rates.
Options on foreign currencies traded on national securities exchanges
are within the jurisdiction of the SEC, as are other securities traded on such
exchanges. As a result, many of the protections provided to traders on organized
exchanges will be available with respect to such transactions. In particular,
all foreign currency option positions entered into on a national securities
exchange are cleared and guaranteed by the Options Clearing Corporation ("OCC"),
thereby reducing the risk of counterparty default. Further, a liquid secondary
market in options traded on a national securities exchange may be more readily
available than in the over-the-counter market, potentially permitting the
Portfolio to liquidate open positions at a profit prior to exercise or
expiration, or to limit losses in the event of adverse market movements.
The purchase and sale of exchange-traded foreign currency options,
however, is subject to the risks of the availability of a liquid secondary
market described above, as well as the risks regarding adverse market movements,
margining of options written, the nature of the foreign currency market,
possible intervention by governmental authorities, and the effects of other
political and economic events. In addition, exchange-traded options on foreign
currencies involve certain risks not presented by the over-the-counter market.
For example, exercise and settlement of such options must be made exclusively
through the OCC, which has established banking relationships in applicable
foreign countries for this purpose. As a result, the OCC may, if it determines
that foreign governmental restrictions or taxes would prevent the orderly
settlement of foreign currency option exercises, or would result in undue
burdens on the OCC or its clearing member, impose special procedures on exercise
and settlement, such as technical changes in the mechanics of delivery of
currency, the fixing of dollar settlement prices, or prohibitions on exercise.
Risk Factors of Investing in Futures and Options. The successful use of
the investment practices described above with respect to futures contracts,
options on futures contracts, and options on securities indices, securities, and
foreign currencies draws upon skills and experience which are different from
those needed to select the other instruments in which the Portfolio invests.
Should interest or exchange rates or the prices of securities or financial
indices move in an unexpected manner, the Portfolio may not achieve the desired
benefits of futures and options or may realize losses and thus be in a worse
position than if such strategies had not been used. Unlike many exchange-traded
futures contracts and options on futures contracts, there are no daily price
fluctuation limits with respect to options on currencies and negotiated or
over-the-counter instruments, and adverse market movements could therefore
continue to an unlimited extent over a period of time. In addition, the
correlation between movements in the price of the securities and currencies
hedged or used for cover will not be perfect and could produce unanticipated
losses.
The Portfolio's ability to dispose of its positions in the foregoing
instruments will depend on the availability of liquid markets in the
instruments. Markets in a number of the instruments are relatively new and still
developing and it is impossible to predict the amount of trading interest that
may exist in those instruments in the future. Particular risks exist with
respect to the use of each of the foregoing instruments and could result in such
adverse consequences to the Portfolio as the possible loss of the entire premium
paid for an option bought by the Portfolio, as the writer of a covered call
option, to benefit from the appreciation of the underlying securities above the
exercise price of the option, and the possible need to defer closing out
positions in certain instruments to avoid adverse tax consequences. As a result,
no assurance can be given that the Portfolio will be able to use those
instruments effectively for the purposes set forth above.
In addition, options on U.S. Government securities, futures contracts,
options on futures contracts, forward contracts and options on foreign
currencies may be traded on foreign exchanges and over-the-counter in foreign
countries. Such transactions are subject to the risk of governmental actions
affecting trading in or the prices of foreign currencies or securities. The
value of such positions also could be affected adversely by (i) other complex
foreign political and economic factors, (ii) lesser availability than in the
United States of data on which to make trading decisions, (iii) delays in the
Portfolio's ability to act upon economic events occurring in foreign markets
during nonbusiness hours in the United States, (iv) the imposition of different
exercise and settlement terms and procedures and margin requirements than in the
United States, and (v) low trading volume.
For an additional discussion of certain risks involved in futures and
options, see this Statement and the Trust's Prospectus under "Certain Risk
Factors and Investment Methods."
Foreign Securities. Investments in foreign countries involve certain risks
which are not typically associated with U.S. investments. For a discussion of
the risks involved in foreign investments, see the Trust's Prospectus and this
Statement under "Certain Risk Factors and Investment Methods."
Forward Contracts For Purchase or Sale of Foreign Currencies. The
Portfolio generally will conduct its foreign currency exchange transactions on a
spot (i.e., cash) basis at the spot rate prevailing in the foreign exchange
currency market. When the Portfolio purchases or sells a security denominated in
a foreign currency, it may enter into a forward foreign currency contract
("forward contract") for the purchase or sale, for a fixed amount of dollars, of
the amount of foreign currency involved in the underlying security transaction.
A forward 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 agreed upon by the parties, at a price set at the time of the
contract. In this manner, the Portfolio may obtain protection against a possible
loss resulting from an adverse change in the relationship between the U.S.
dollar and the foreign currency during the period between the date the security
is purchased or sold and the date upon which payment is made or received.
Although such contracts tend to minimize the risk of loss due to the decline in
the value of the hedged currency, at the same time they tend to limit any
potential gain which might result should the value of such currency increase.
Forward contracts are traded in the interbank market conducted directly
between currency traders (usually large commercial banks) and their customers.
Generally a forward contract has no deposit requirement, and no commissions are
charged at any stage for trades. Although foreign exchange dealers do not charge
a fee for conversion, they do realize a profit based on the difference between
the prices at which they buy and sell various currencies. When the Sub-Advisor
believes that the currency of a particular foreign country may suffer a
substantial decline against the U.S. dollar the Portfolio may each enter into a
forward contract to sell, for a fixed amount of dollars, the amount of foreign
currency approximating the value of some or all of those Portfolio securities
denominated in such foreign currency. The Portfolio will not enter into such
forward contracts or maintain a net exposure to such contracts where the
consummation of the contracts would obligate the Portfolio to deliver an amount
of foreign currency in excess of the value of its portfolio securities or other
assets denominated in that currency. The custodian will place cash or high grade
liquid debt securities in a separate account with the custodian of the Portfolio
in an amount equal to the value of its total assets committed to the
consummation of forward contracts entered into under the above circumstances. If
the value of the securities placed in the separate account declines, additional
cash or securities will be placed in the account on a daily basis so that the
value of the account will equal the amount of the Portfolio's commitments with
respect to such contracts.
At the consummation of a forward contract for delivery by the Portfolio
of a foreign currency, the Portfolio may either make delivery of the foreign
currency or terminate its contractual obligation to deliver the foreign currency
by purchasing an offsetting contract obligating it to purchase, at the same
maturity date, the same amount of the foreign currency. If the Portfolio chooses
to make delivery of the foreign currency, it may be required to obtain such
currency through the sale of portfolio securities denominated in such currency
or through conversion of other Portfolio assets into such currency. It is
impossible to forecast the market value of portfolio securities at the
expiration of the forward contract. Accordingly, it may be necessary for the
Portfolio to purchase additional foreign currency on the spot market (and bear
the expense of such purchase) if the market value of the security is less than
the amount of foreign currency the Portfolio is obligated to deliver, and if a
decision is made to sell the security and make delivery of the foreign currency.
Conversely, it may be necessary to sell on the spot market some of the foreign
currency received on the sale of the portfolio security if its market value
exceeds the amount of foreign currency the Portfolio is obligated to deliver.
If the Portfolio retains the portfolio security and engages in an
offsetting transaction, it will incur a gain or loss to the extent that there
has been movement in spot or forward contract prices. If the Portfolio engages
in an offsetting transaction, it may subsequently enter into a new forward
contract to sell the foreign currency. Should forward prices decline during the
period between the Portfolio's entering into a forward contract for the sale of
a foreign currency and the date it enters into an offsetting contract for the
purchase of the foreign currency, the Portfolio will realize a gain to the
extent the price of the currency it has agreed to sell exceeds the price of the
currency it has agreed to purchase. Should forward prices increase, the
Portfolio will suffer a loss to the extent the price of the currency it has
agreed to purchase exceeds the price of the currency it has agreed to sell.
Dealings in forward contracts by the Portfolio will be limited to the
transactions described above. Of course, the Portfolio is not required to enter
into such transactions with regard to its foreign currency-denominated
securities and will not do so unless deemed appropriate by the Sub-advisor. It
also should be realized that this method of protecting the value of the
Portfolio's securities against a decline in the value of a currency does not
eliminate fluctuations in the underlying prices of the securities. It simply
establishes a rate of exchange which can be achieved at some future point in
time. Additionally, although such contracts tend to minimize the risk of loss
due to the decline in the value of the hedged currency, at the same time they
tend to limit any potential gain which might result should the value of such
currency increase.
Illiquid Securities. As discussed in the Trust's Prospectus, the
Portfolio may invest up to 15% of the value of its total assets, measured at the
time of investment, in investments which are not readily marketable. The
Portfolio may also invest up to 5% of the value of its assets in restricted
securities. Restricted securities are securities which are subject to
restrictions on resale because they have not been registered under the
Securities Act of 1933. Other types of illiquid securities are securities which
may be subject to other types of resale restrictions or which, due to their
market or the nature of the security, have no readily available markets for
their disposition. The Portfolio may invest in Rule 144A securities which, as
disclosed in the Prospectus, may or may not be readily marketable. These
limitations on resale and marketability may have the effect of preventing the
Portfolio from disposing of such a security at the time desired or at a
reasonable price. In addition, in order to resell a restricted security, the
Portfolio might have to bear the expense and incur the delays associated with
effecting registration. In purchasing illiquid securities, the Portfolio does
not intend to engage in underwriting activities, except to the extent the
Portfolio may be deemed to be a statutory underwriter under the Securities Act
in disposing of such securities. Illiquid securities will be purchased for
investment purposes only and not for the purpose of exercising control or
management of other companies. For an additional discussion of illiquid or
restricted securities, see the Trust's Prospectus under "Certain Risk Factors
and Investment Methods."
The Board of Trustees of the Trust has promulgated guidelines with
respect to illiquid securities.
Low-Rated and Unrated Fixed Income Securities. The Portfolio may invest
up to 5% of its assets in convertible securities and preferred stocks which are
unrated or are rated below investment grade either at the time of purchase or as
a result of reduction in rating after purchase. Investment in lower-rated or
unrated securities is generally considered to be high risk investment. These
debt securities are generally subject to two kinds of risk, credit risk and
market risk. Credit risk relates to the ability of the issuer to meet interest
or principal payments, or both, as they come due. The ratings given a security
by Moody's Investors Service, Inc. ("Moody's") and Standard & Poor's Corporation
("S&P") provide a generally useful guide as to such credit risk. The Appendix to
this Statement provides a description of such debt security ratings. The lower
the rating given a security by a rating service, the greater the credit risk
such rating service perceives to exist with respect to the security. Increasing
the amount of the Portfolio's assets invested in unrated or lower grade
securities, while intended to increase the yield produced by those assets, will
also increase the risk to which those assets are subject.
Market risk relates to the fact that the market values of debt
securities in which the Portfolio invests generally will be affected by changes
in the level of interest rates. An increase in interest rates will tend to
reduce the market values of such securities, whereas a decline in interest rates
will tend to increase their values. Medium and lower rated securities (Baa or
BBB and lower) and non-rated securities of comparable quality tend to be subject
to wider fluctuations in yields and market values than higher rated securities
and may have speculative characteristics. In order to decrease the risk in
investing in debt securities, in no event will the Portfolio ever invest in a
debt security rated below B by Moody's or by S&P. Of course, relying in part on
ratings assigned by credit agencies in making investments will not protect the
Portfolio from the risk that the securities in which they invest will decline in
value, since credit ratings represent evaluations of the safety of principal,
dividend, and interest payments on debt securities, and not the market values of
such securities, and such ratings may not be changed on a timely basis to
reflect subsequent events.
Because investment in medium and lower rated securities involves both
greater credit risk and market risk, achievement of the Portfolio's investment
objectives may be more dependent on the Sub-advisor's own credit analysis than
is the case for funds that do not invest in such securities. In addition, the
share price and yield of the Portfolio may fluctuate more than in the case of
funds investing in higher quality, shorter term securities. Moreover, a
significant economic downturn or major increase in interest rates may result in
issuers of lower rated securities experiencing increased financial stress, which
would adversely affect their ability to service their principal, dividend, and
interest obligations, meet projected business goals, and obtain additional
financing. In this regard, it should be noted that while the market for high
yield, high risk debt securities has been in existence for many years and from
time to time has experienced economic downturns in recent years, this market has
involved a significant increase in the use of high yield debt securities to
Portfolio highly leveraged corporate acquisitions and restructurings. Past
experience may not, therefore, provide an accurate indication of future
performance of the high yield debt securities market, particularly during
periods of economic recession. Furthermore, expenses incurred in recovering an
investment in a defaulted security may adversely affect the Portfolio's net
asset value. Finally, while the Sub-advisor attempts to limit purchases of
medium and lower rated securities to securities having an established secondary
market, the secondary market for such securities may be less liquid than the
market for higher quality securities. The reduced liquidity of the secondary
market for such securities may adversely affect the market price of, and ability
of the Portfolio to value, particular securities at certain times, thereby
making it difficult to make specific valuation determinations. The Portfolio
does not invest in any medium and lower rated securities which present special
tax consequences, such as zero coupon bonds or pay-in-kind bonds.
The Sub-advisor seeks to reduce the overall risks associated with the
Portfolio's investments through diversification and consideration of factors
affecting the value of securities it considers relevant. No assurance can be
given, however, regarding the degree of success that will be achieved in this
regard or that the Portfolio will achieve its investment objectives.
For an additional discussion of the certain risks involved in low-rated
or unrated securities, see this Statement and the Trust's Prospectus under
"Certain Risk Factors and Investment Methods."
Investment Policies Which May Be Changed Without Shareholder Approval.
The following limitations are applicable only to the Founders Capital
Appreciation Portfolio. As a matter of operating policy, which may be changed by
the Trustees without shareholder approval, the Portfolio will not:
1. Invest in interests in oil, gas or other mineral exploration or
development programs or leases, although the Portfolio may invest in the
securities of issuers which invest in or sponsor such programs or leases.
2. Invest more than 15% of the market value of its assets in securities
which are not readily marketable, including repurchase agreements maturing in
over seven days and foreign securities not listed on a recognized foreign or
domestic exchange.
3. Participate in any joint trading account.
4. Purchase more than 10% of any class of securities of any single
issuer or purchase more than 10% of the voting securities of any single issuer.
5. Invest more than 5% of the market value of its assets in securities
of companies which with their predecessors have a continuous operating record of
less than three years.
6. Purchase securities of other investment companies, except that the
Portfolio may purchase such securities in the open market where no commission or
profit to a sponsor or dealer other than the customary broker's commission
results from such purchase, and in no event in excess of 10% of the value of the
Portfolio's assets, and except in connection with a purchase or acquisition in
accordance with a plan of reorganization, merger or consolidation.
7. Acquire or retain the securities of any issuer if any officer or
director of the Sub-advisor owns beneficially more than one-half of 1% of the
issuer's outstanding securities and the aggregate owned by such persons exceeds
5% of such securities.
8. Invest in companies for the purpose of exercising control or
management.
9. Pledge, mortgage or hypothecate its assets except to secure
permitted borrowings, and then only in an amount up to 15% of the value of the
Portfolio's net assets taken at the lower of cost or market value at the time of
such borrowings.
10. Invest more than 5% of the market value of its assets in
restricted securities.
11. Purchase warrants, valued at the lower of cost or market, in excess
of 5% of total assets, except that the purchase of warrants not listed on the
New York or American Stock Exchanges is limited to 2% of total net assets.
12. Purchase securities of any issuer (other than obligations of, or
guaranteed by, the United States government, its agencies or instrumentalities)
if, as a result, more than 5% of the value of the Portfolio's assets would be
invested in securities of that issuer.
INVESCO Equity Income Portfolio:
Investment Objective: The INVESCO Equity Income Portfolio seeks high current
income while following sound investment practices. The Portfolio will pursue
this objective by investing its assets in securities which will provide a
relatively high-yield and stable return and which, over a period of years, may
also provide capital appreciation. Capital growth potential is a secondary
factor in the selection of portfolio securities. The Portfolio invests in common
stocks, as well as convertible bonds and preferred stocks.
Investment Policies: In pursuing its investment objective, the Portfolio will
endeavor to select and purchase securities providing reasonably secure dividend
or interest income. Sometimes warrants are acquired when offered with
income-producing securities, but the warrants are disposed of at the first
favorable opportunity. Acquiring warrants involves a risk that the Portfolio
will lose the premium it pays to acquire warrants if the Portfolio does not
exercise a warrant before it expires. The major portion of the investment
portfolio normally consists of common stocks, convertible bonds and debentures,
and preferred stocks; however, there may also be substantial holdings of debt
securities, including non-investment grade and unrated debt securities.
As discussed in the section of the Trust's Prospectus entitled
"Investment Objective and Policies," the debt securities in which the Portfolio
invests are generally subject to two kinds of risk, credit risk and market risk.
The ratings given a debt security by Moody's and Standard & Poor's ("S&P")
provide a generally useful guide as to such credit risk. The lower the rating
given a debt security by such rating service, the greater the credit risk such
rating service perceives to exist with respect to such security. Increasing the
amount of Portfolio assets invested in unrated or lower grade (Ba or less by
Moody's, BB or less by S&P) debt securities, while intended to increase the
yield produced by the Portfolio's debt securities, will also increase the credit
risk to which those debt securities are subject.
Lower rated debt securities and non-rated securities of comparable
quality tend to be subject to wider fluctuations in yields and market values
than higher rated debt securities and may have speculative characteristics.
Although the Portfolio may invest in debt securities assigned lower grade
ratings by S&P or Moody's, the Portfolio's investments have generally been
limited to debt securities rated B or higher by either S&P or Moody's. Debt
securities rated lower than B by either S&P or Moody's may be highly
speculative. The Sub-advisor intends to limit such Portfolio investments to debt
securities which are not believed by the Sub-advisor to be highly speculative
and which are rated at least CCC or Caa, respectively, by S&P or Moody's. In
addition, a significant economic downturn or major increase in interest rates
may well result in issuers of lower rated debt securities experiencing increased
financial stress which would adversely affect their ability to service their
principal and interest obligations, to meet projected business goals, and to
obtain additional financing. While the Sub-advisor attempts to limit purchases
of lower rated debt securities to securities having an established retail
secondary market, the market for such securities may not be as liquid as the
market for higher rated debt securities.
For an additional discussion of certain risks involved in lower rated
or unrated securities, see this Statement and the Trust's Prospectus under
"Certain Risk Factors and Investment Methods."
As discussed in the Trust's Prospectus, the Portfolio may enter into
repurchase agreements with respect to debt instruments eligible for investment
by the Portfolio, with member banks of the Federal Reserve System, registered
broker-dealers, and registered government securities dealers. A repurchase
agreement may be considered a loan collateralized by securities. The resale
price reflects an agreed upon interest rate effective for the period the
instrument is held by the Portfolio and is unrelated to the interest rate on the
underlying instrument. In these transactions, the securities acquired by the
Portfolio (including accrued interest earned thereon) must have a total value in
excess of the value of the repurchase agreement, and are held by the Portfolio's
Custodian Bank until repurchased.
Another practice in which the Portfolio may engage is to lend its
securities to qualified brokers, dealers, banks, or other financial
institutions. While voting rights may pass with the loaned securities, if a
material event (e.g., proposed merger, sale of assets, or liquidation) is to
occur affecting an investment on loan, the loan must be called and the
securities voted. Loans of securities made by the Portfolio will comply with all
other applicable regulatory requirements, including the rules of the New York
Stock Exchange and the requirements of the Investment Company Act of 1940 and
the Rules of the Securities and Exchange Commission thereunder.
PIMCO Total Return Bond Portfolio:
Investment Policies:
Borrowing. The Portfolio may borrow for temporary purposes in an amount
not exceeding five percent of the value of its total assets. The Portfolio also
may borrow for investment purposes. Such a practice will result in leveraging of
the Portfolio's assets and may cause the Portfolio to liquidate portfolio
positions when it would not be advantageous to do so. This borrowing may be
unsecured. The Investment Company Act of 1940 requires the Portfolio to maintain
continuous asset coverage (that is, total assets including borrowings, less
liabilities exclusive of borrowings) of 300% of the amount borrowed. If the 300%
asset coverage should decline as a result of market fluctuations or other
reasons, the Portfolio may be required to sell some of its holdings within three
days to reduce the debt and restore the 300% asset coverage, even though it may
be disadvantageous from an investment standpoint to sell securities at that
time. Borrowing will tend to exaggerate the effect on net asset value of any
increase or decrease in the market value of the Portfolio. Money borrowed will
be subject to interest costs which may or may not be recovered by appreciation
of the securities purchased. The Portfolio also may be required to maintain
minimum average balances in connection with such borrowing or to pay a
commitment or other fee to maintain a line of credit; either of these
requirements would increase the cost of borrowing over the stated interest rate.
The Portfolio also may enter into "mortgage dollar rolls," which are
similar to reverse repurchase agreements in certain respects. In a "dollar roll"
transaction the Portfolio sells a mortgage-related security (such as a GNMA
security) to a dealer and simultaneously agrees to repurchase a similar security
(but not the same security) in the future at a pre-determined price. A "dollar
roll" can be viewed, like a reverse repurchase agreement, as a collateralized
borrowing in which the Portfolio pledges a mortgage-related security to a dealer
to obtain cash. Unlike in the case of reverse repurchase agreements, the dealer
with which the Portfolio enters into a dollar roll transaction is not obligated
to return the same securities as those originally sold by the Portfolio, but
only securities which are "substantially identical." To be considered
"substantially identical, " the securities returned to the Portfolio generally
must: (1) be collateralized by the same types of underlying mortgages; (2) be
issued by the same agency and be part of the same program; (3) have a similar
original stated maturity; (4) have identical net coupon rates; (5) have similar
maturity: (4) have identical net coupon rates; (5) have similar market yields
(and therefore price); and (6) satisfy "good delivery" requirements, meaning
that the aggregate principal amounts of the securities delivered and received
back must be within 2.5% of the initial amount delivered.
Dollar roll transactions involve the risk that the market value of the
securities sold may decline below the repurchase price of those securities. The
securities that are repurchased will be collateralized with different pools of
mortgages with different prepayment histories, and as a result, the borrower is
subject to a greater degree of prepayment related uncertainty.
The Portfolio's obligations under a dollar roll agreement must be
covered by cash or high quality debt securities equal in value to the securities
subject to repurchase by the Portfolio, maintained in a segregated account. To
the extent that the Portfolio collateralized its obligations under a dollar roll
agreement, the asset coverage requirements of the Investment Company Act of 1940
will not apply to such transactions. Furthermore, because dollar roll
transactions may be for terms ranging between one and six months, dollar roll
transactions may be deemed "illiquid" and subject to the Portfolio's overall
limitations on investments in illiquid securities.
Corporate Debt Securities. The Portfolio's investments in U.S. dollar-
or foreign currency-denominated corporate debt securities of domestic or foreign
issuers are limited to corporate debt securities (corporate bonds, debentures,
notes and other similar corporate debt instruments, including convertible
securities) which meet the minimum ratings criteria set forth for the Portfolio,
or, if unrated, are in the Sub-advisor's opinion comparable in quality to
corporate debt securities in which the Portfolio may invest. The rate of return
or return of principal on some debt obligations may be linked or indexed to the
level of exchange rates between the U.S. dollar and a foreign currency or
currencies.
Among the corporate bonds in which the Portfolio may invest are
convertible securities. A convertible security is a bond, debenture, note, or
other security that entitles the holder to acquire common stock or other equity
securities of the same or a different issuer. A convertible security generally
entitles the holder to receive interest paid or accrued until the convertible
security matures or is redeemed, converted or exchanged. Before conversion,
convertible securities have characteristics similar to nonconvertible debt
securities. Convertible securities rank senior to common stock in a
corporation's capital structure and, therefore, generally entail less risk than
the corporation's common stock, although the extent to which such risk is
reduced depends in large measure upon the degree to which the convertible
security sells above its value as a fixed income security.
A convertible security may be subject to redemption at the option of
the issuer at a predetermined price. If a convertible security held by the
Portfolio is called for redemption, the Portfolio will be required to permit the
issuer to redeem the security and convert it to underlying common stock, or will
sell the convertible security to a third party. The Portfolio generally would
invest in convertible securities for their favorable price characteristics and
total return potential and would normally not exercise an option to convert.
Investments in securities rated below investment grade that are
eligible for purchase by the Portfolio (i.e., rated B or better by Moody's or
S&P) are described as "speculative" by both Moody's and S&P. Investment in lower
rated corporate debt securities ("high yield securities") generally provides
greater income and increased opportunity for capital appreciation than
investments in higher quality securities, but they also typically entail greater
price volatility and principal and income risk. These high yield securities are
regarded as high risk and predominantly speculative with respect to the issuer's
continuing ability to meet principal and interest payments. The market for these
securities is relatively new, and many of the outstanding high yield securities
have not endured a major business recession. A long-term track record on default
rates, such as that for investment grade corporate bonds, does not exist for
this market. Analysis of the creditworthiness of issuers of debt securities that
are high yield may be more complex than for issuers of higher quality debt
securities.
High yield, high risk securities may be more susceptible to real or
perceived adverse economic and competitive industry conditions than investment
grade securities. The price of high yield securities have been found to be less
sensitive to interest-rate adverse economic downturns or individual corporate
developments. A projection of an economic downturn or of a period of rising
interest rates, for example, could cause a decline in high yield security prices
because the advent of a recession could lessen the ability of a highly leveraged
company to make principal and interest payments on its debt securities. If an
issuer of high yield securities defaults, in addition to risking payment of all
or a portion of interest and principal, the Portfolio may incur additional
expenses to seek recovery. In the case of high yield securities structured as
zero-coupon or pay-in-kind securities, their market prices are affected to a
greater extent by interest rate changes, and therefore tend to be more volatile
than securities which pay interest periodically and in cash.
The secondary market on which high yield, high risk securities are
traded may be less liquid than the market for higher grade securities. Less
liquidity in the secondary trading market could adversely affect the price at
which the Portfolio could sell a high yield security, and could adversely affect
the daily net asset value of the shares. Adverse publicity and investor
perceptions, whether or not based on fundamental analysis, may decrease the
values and liquidity of high yield securities especially in a thinly-traded
market. When secondary markets for high yield securities are less liquid than
the market for higher grade securities, it may be more difficult to value the
securities because such valuation may require more research, and elements of
judgment may play a greater role in the valuation because there is less
reliable, objective data available. The Sub-advisor seeks to minimize the risks
of investing in all securities through diversification, in-depth credit analysis
and attention to current developments in interest rates and market conditions.
For an additional discussion of certain risks involved in lower rated
debt securities, see this Statement and the Trust's Prospectus under "Certain
Risk Factors and Investment Objectives."
Participation on Creditors Committees. The Portfolio may from time to
time participate on committees formed by creditors to negotiate with the
management of financially troubled issuers of securities held by the Portfolio.
Such participation may subject the Portfolio to expenses such as legal fees and
may make the Portfolio an "insider" of the issuer for purposes of the federal
securities laws, and therefore may restrict the Portfolio's ability to trade in
or acquire additional positions in a particular security when it might otherwise
desire to do so. Participation by the Portfolio on such committees also may
expose the Portfolio to potential liabilities under the federal bankruptcy laws
or other laws governing the rights of creditors and debtors. The Portfolio will
participate on such committees only when the Sub-advisor believes that such
participation is necessary or desirable to enforce the Portfolio's rights as a
creditor or to protect the value of securities held by the Portfolio.
Mortgage-Related and Other Asset-Backed Securities. Mortgage-related
securities are interests in pools of mortgage loans made to residential home
buyers, including mortgage loans made by savings and loan institutions, mortgage
bankers, commercial banks and others. Pools of mortgage loans are assembled as
securities for sale to investors by various governmental, government-related and
private organizations (see "Mortgage Pass-Through Securities"). The Portfolio
may also invest in debt securities which are secured with collateral consisting
of mortgage-related securities (see "Collateralized Mortgage Obligations"), and
in other types of mortgage-related securities.
Mortgage Pass-Through Securities. The Portfolio may invest in
mortgage-backed securities. For an additional discussion of mortgage-backed
securities and certain risks involved therein, see this Statement and the
Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Interests in pools of mortgage-related securities differ from other
forms of debt securities, which normally provide for periodic payment of
interest in fixed amounts with principal payments at maturity or specified call
dates. Instead, these securities provide a monthly payment which consists of
both interest and principal payments. In effect, these payments are a
"pass-through" of the monthly payments made by the individual borrowers on their
residential or commercial mortgage loans, net of any fees paid to the issuer or
guarantor of such securities. Additional payments are caused by repayments of
principal resulting from the sale of the underlying property, refinancing or
foreclosure, net of fees or costs which may be incurred. Some mortgage-related
securities (such as securities issued by the Government National Mortgage
Association) are described as "modified pass-through." These securities entitle
the holder to receive all interest and principal payments owned on the mortgage
pool, net of certain fees, at the scheduled payment dates regardless of whether
or not the mortgagor actually makes the payment.
The principal governmental guarantor of mortgage-related securities is
the Government National Mortgage Association ("GNMA"). GNMA is a wholly owned
United States Government corporation within the Department of Housing and Urban
Development. GNMA is authorized to guarantee, with the full faith and credit of
the United States Government, the timely payment of principal and interest on
securities issued by institutions approved by GNMA (such as savings and loan
institutions, commercial banks and mortgage bankers) and backed by pools of
FHA-insured or VA-guaranteed mortgages.
Government-related guarantors (i.e., not backed by the full faith and
credit of the United States Government) include the Federal National Mortgage
Association ("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC").
FNMA is a government-sponsored corporation owned entirely by private
stockholders. It is subject to general regulation by the Secretary of Housing
and Urban Development. FNMA purchases conventional (i.e., not insured or
guaranteed by any government agency) residential mortgages from a list of
approved seller/servicers which include state and federally chartered savings
and loan associations, mutual savings banks, commercial banks and credit unions
and mortgage bankers. Pass-though securities issued by FNMA are guaranteed as to
timely payment of principal and interest by FNMA but are not backed by the full
faith and credit of the United States Government.
FHLMC was created by Congress in 1970 for the purpose of increasing the
availability of mortgage credit for residential housing. It is a
government-sponsored corporation formerly owned by the twelve Federal Home Loan
Banks and now owned entirely by private stockholders. FHLMC issues Participation
Certificates ("PC's") which represent interests in conventional mortgages from
FHLMC's national portfolio. FHLMC guarantees the timely payment of interest and
ultimate collection of principal, but PCs are not backed by the full faith and
credit of the United States Government.
Commercial banks, savings and loan institutions, private mortgage
insurance companies, mortgage bankers and other secondary market issuers also
create pass-though pools of conventional residential mortgage loans. Such
issuers may, in addition, be the originators and/or servicers of the underlying
mortgage loans as well as the guarantors of the mortgage-related securities.
Pools created by such nongovernmental issuers generally offer a higher rate of
interest than government and government-related pools because there are no
direct or indirect government or agency guarantees of payments in the former
pools. However, timely payment of interest and principal of these pools may be
supported by various forms of insurance or guarantees, including individual
loan, title, pool and hazard insurance and letters of credit. The insurance and
guarantees are issued by governmental entities, private insurers and the
mortgage poolers. Such insurance and guarantees and the creditworthiness of the
issuers thereof will be considered in determining whether a mortgage-related
security meets the Trust's investment quality standards. There can be no
assurance that the private insurers or guarantors can meet their obligations
under the insurance policies or guarantee arrangements. The Portfolio may buy
mortgage-related securities without insurance or guarantees if, through an
examination of the loan experience and practices of the originator/servicers and
poolers, the Sub-advisor determines that the securities meet the Trust's quality
standards. Although the market for such securities is becoming increasingly
liquid, securities issued by certain private organizations may not be readily
marketable. The Portfolio will not purchase mortgage-related securities or any
other assets which in the Sub-advisor's opinion are illiquid if, as a result,
more than 15% of the value of the Portfolio's total assets will be illiquid.
Mortgage-backed securities that are issued or guaranteed by the U.S.
Government, its agencies or instrumentalities, are not subject to the
Portfolios' industry concentration restrictions, set forth below under
"Investment Restrictions," by virtue of the exclusion from that test available
to all U.S. Government securities. In the case of privately issued
mortgage-related securities do not represent interests in any particular
"industry" or group of industries. The assets underlying such securities may be
represented by the Portfolio of first lien residential mortgages (including both
whole mortgage loans and mortgage participation interests) or portfolios of
mortgage pass-through securities issued or guaranteed by GNMA, FNMA or FHLMC.
Mortgage loans underlying a mortgage-related security may in turn be insured or
guaranteed by the Federal Housing Administration or the Department of Veterans
Affairs. In the case of private issue mortgage-related securities whose
underlying assets are neither U.S. Government securities nor U.S.
Government-insured mortgages, to the extent that real properties securing such
assets may be located in the same geographical region, the security may be
subject to a greater risk of default that other comparable securities in the
event of adverse economic, political or business developments that may affect
such region and ultimately, the ability of residential homeowners to make
payments of principal and interest on the underlying mortgages.
Collateralized Mortgage Obligations (CMOs). A CMO is a hybrid between a
mortgage-backed bond and a mortgage pass-through security. Similar to a bond,
interest and prepaid principal is paid, in most cases, semiannually. CMOs may be
collateralized by whole mortgage loans, but are more typically collateralized by
portfolios of mortgage pass-through securities guaranteed by GNMA, FHLMC, or
FNMA, and their income streams.
CMOs are structured into multiple classes, each bearing a different
stated maturity. Actual maturity and average life will depend upon the
prepayment experience of the collateral. CMOs provide for a modified form of
call protection through a de facto breakdown of the underlying pool of mortgages
according to how quickly the loans are repaid. Monthly payment of principal
received from the pool of underlying mortgages, including prepayments, is first
returned to investors holding the shortest maturity class. Investors holding the
longer maturity classes receive principal only after the first class has been
retired. An investor is partially guarded against a sooner than desired return
or principal because of the sequential payments.
In a typical CMO transaction, a corporation ("issuer") issues multiple
series (e.g., A, B, C, Z) of the CMO bonds ("Bonds"). Proceeds of the Bond
offering are used to purchase mortgages or mortgage pass-through certificates
("Collateral"). The Collateral is pledged to a third party trustee as security
for the Bonds. Principal and interest payments from the Collateral are used to
pay principal on the Bonds in the order A, B, C, Z. The Series A, B, and C Bonds
all bear current interest. Interest on the Series Z Bond is accrued and added to
principal and a like amount is paid as principal on the Series A, B, or C Bond
currently being paid off. When the Series A, B, and C Bonds are paid in full,
interest and principal on the Series Z Bond begins to be paid currently. With
some CMOs, the issuer serves as a conduit to allow loan originators (primarily
builders or savings and loan associations) to borrow against their loan
portfolios.
FHLMC Collateralized Mortgage Obligations. FHLMC CMOs are debt
obligations of FHLMC issued in multiple classes having different maturity dates
which are secured by the pledge of a pool of conventional mortgage loans
purchased by FHLMC. Unlike FHLMC PCs, payments of principal and interest on the
CMOs are made semiannually, as opposed to monthly. The amount of principal
payable on each semiannual payment date is determined in accordance with FHLMC's
mandatory sinking fund schedule, which, in turn, is equal to approximately 100%
of FHA prepayment experience applied to the mortgage collateral pool. All
sinking fund payments in the CMOs are allocated to the retirement of the
individual classes of bonds in the order of their stated maturities. Payment of
principal on the mortgage loans in the collateral pool in excess of the amount
of FHLMC's minimum sinking fund obligation for any payment date are paid to the
holders of the CMOs as additional sinking fund payments. Because of the
"pass-through" nature of all principal payments received on the collateral pool
in excess of FHLMC's minimum sinking fund requirement, the rate at which
principal of the CMOs is actually repaid is likely to be such that each class of
bonds will be retired in advance of its scheduled maturity date.
If collection of principal (including prepayments) on the mortgage
loans during any semiannual payment period is not sufficient to meet FHLMC's
minimum sinking fund obligation on the next sinking fund payment date, FHLMC
agrees to make up the deficiency from its general funds.
Criteria for the mortgage loans in the pool backing the FHLMC CMOs are
identical to those of FHLMC PCs. FHLMC has the right to substitute collateral in
the event of delinquencies and/or defaults.
Other Mortgage-Related Securities. Other mortgage-related securities
include securities other than those described above that directly or indirectly
represent a participation in, or are secured by and payable from, mortgage loans
on real property, including CMO residuals or stripped mortgage-backed
securities. Other mortgage-related securities may be equity or debt securities
issued by agencies or instrumentalities of the U.S. Government or by private
originators of, or investors in, mortgage loans, including savings and loan
associations, homebuilders, mortgage banks, commercial banks, investment banks,
partnerships, trusts and special purpose entities of the foregoing.
CMO Residuals. CMO residuals are derivative mortgage securities issued
by agencies or instrumentalities of the U.S. Government or by private
originators of, or investors in, mortgage loans, including savings and loan
associations, homebuilders, mortgage banks, commercial banks, investment banks
and special purpose entities of the foregoing.
The cash flow generated by the mortgage assets underlying a series of
CMOs is applied first to make required payments of principal and interest on the
CMOs and second to pay the related administrative expenses of the issuer. The
residual in a CMO structure generally represents the interest in any excess cash
flow remaining after making the foregoing payments. Each payment of such excess
cash flow to a holder of the related CMO residual represents income and/or a
return of capital. The amount of residual cash flow resulting from a CMO will
depend on, among other things, the characteristics of the mortgage assets, the
coupon rate of each class of CMO, prevailing interest rates, the amount of
administrative expenses and the prepayment experience on the mortgage assets. In
particular, the yield to maturity on CMO residuals is extremely sensitive to
prepayments on the related underlying mortgage assets, in the same manner as an
interest-only ("IO") class of stripped mortgage-backed securities. See "Other
Mortgage-Related Securities -- Stripped Mortgage-Backed Securities." In
addition, if a series of a CMO includes a class that bears interest at an
adjustable rate, the yield to maturity on the related CMO residual will also be
extremely sensitive to changes in the level of the index upon which interest
rate adjustments are based. As described below with respect to stripped
mortgage-backed securities, in certain circumstances the Portfolio may fail to
recoup fully its initial investment in a CMO residual.
CMO residuals are generally purchased and sold by institutional
investors through several investment banking firms acting as brokers or dealers.
The CMO residual market has only very recently developed and CMO residuals
currently may not have the liquidity of other more established securities
trading in other markets. Transactions in CMO residuals are generally completed
only after careful review of the characteristics of the securities in question.
In addition, CMO residuals may or, pursuant to an exemption therefrom, may not
have been registered under the Securities Act of 1933, as amended. CMO
residuals, whether or not registered under such Act, may be subject to certain
restrictions on transferability, and may be deemed "illiquid" and subject to the
Portfolio's limitations on investment in illiquid securities.
Stripped Mortgage-Backed Securities. Stripped mortgage-backed
securities ("SMBS") are derivative multi-class mortgage securities. SMBS may be
issued by agencies or instrumentalities of the U.S. Government, or by private
originators of, or investors in, mortgage loans, including savings and loan
associations, mortgage banks, commercial banks, investment banks and special
purpose entities of the foregoing.
SMBS are usually structured with two classes that receive different
proportions of the interest and principal distributions on a pool of mortgage
assets. A common type of SMBS will have one class receiving some of the interest
and most of the principal from the mortgage assets, which the other class will
receive most of the interest and the remainder of the principal. In the most
extreme case, one class will receive all of the interest (the IO class), while
the other class will receive all of the principal (the principal-only or "PO"
class). The yield to maturity on an IO class is extremely sensitive to the rate
of principal payments ( including prepayments) on the related underlying
mortgage assets, and a rapid rate of principal payments may have a material
adverse effect on the Portfolio's yield to maturity from these securities. If
the underlying mortgage assets experience greater than anticipated prepayments
of principal, the Portfolio may fail to fully recoup its initial investment in
these securities even if the security is in one of the highest rating
categories.
Although SMBS are purchased and sold by institutional investors through
several investment banking firms acting as brokers or dealers, these securities
were only recently developed. As a result, established trading markets have not
yet developed and, accordingly, these securities may be deemed "illiquid" and
subject to the Portfolio's limitations on investment in illiquid securities.
Other Asset-Backed Securities. Similarly, the Sub-advisor expects that
other asset-backed securities (unrelated to mortgage loans) will be offered to
investors in the future. Several types of asset-backed securities may be offered
to investors, including Certificates for Automobile Receivables. For a
discussion of automobile receivables, see this Statement under "Certain Risk
Factors and Investment Methods." Consistent with the Portfolio's investment
objectives and policies, the Sub-advisor also may invest in other types of
asset-backed securities.
Foreign Securities. The Portfolio may invest in U.S. dollar- or foreign
currency-denominated corporate debt securities of foreign issuers (including
preferred or preference stock), certain foreign bank obligations (see "Bank
Obligations") and U.S. dollar- or foreign currency-denominated obligations of
foreign governments or their subdivisions, agencies and instrumentalities,
international agencies and supranational entities. The Portfolio may invest up
to 20% of its assets in securities denominated in foreign currencies, and may
invest beyond this limit in U.S. dollar-denominated securities of foreign
issuers. The Portfolio will limit its foreign investments to securities of
issuers based in developed countries (which include Newly Industrialized
Countries ("NICs") such as Mexico, Taiwan and South Korea). Investing in the
securities of foreign issuers involves special risks and considerations not
typically associated with investing in U.S. companies. For a discussion of
certain risks involved in foreign investments, see the Trust's Prospectus and
this Statement under "Certain Risk Factors and Investment Methods."
The Portfolio also may purchase and sell foreign currency options and
foreign currency futures contracts and related options (see ""Derivative
Instruments"), and enter into forward foreign currency exchange contracts in
order to protect against uncertainty in the level of future foreign exchange
rates in the purchase and sale of securities.
A forward foreign currency 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 agreed upon by the parties, at a price set at
the tine of the contract. These contracts may be bought or sold to protect the
Portfolio against a possible loss resulting from an adverse change in the
relationship between foreign currencies and the U.S. dollar or, open positions
in forward contracts are covered by the segregation with the Trust's custodian
of high quality short-term investments are marked to market daily. Although such
contracts are intended to minimize the risk of loss due to a decline on the
value of the hedged currencies, at the same time, they tend to limit any
potential gain which might result should the value of such currencies increase.
Brady Bonds. The Portfolio may invest in Brady Bonds. Brady Bonds are
securities created through the exchange of existing commercial bank loans to
sovereign entities for new obligations in connection with debt restructurings
under a debt restructuring plan introduced by former U.S. Secretary of the
Treasury, Nicholas F. Brady (the "Brady Plan"). Brady Plan debt restructurings
have been implemented in several countries, including in Argentina, Bulgaria,
Costa Rica, the Dominican Republic, Jordan, Mexico, Nigeria, the Philippines,
Uruguay, and Venezuela. In addition, Brazil has concluded a Brady-like plan.
Ecuador has reached an agreement with its lending banks, but the full
consummation of Ecuador's Brady Plan is still pending. It is expected that other
countries will undertake a Brady Plan in the future, including Panama, Peru, and
Poland.
Brady Bonds have been issued only recently, and accordingly do not have
a long payment history. Brady Bonds may be collateralized or uncollateralized,
are issued in various currencies (primarily the U.S. dollar) and are actively
traded in the over-the-counter secondary market.
U.S. dollar-denominated, collateralized Brady Bonds, which may be fixed
rate par bonds or floating rate discount bonds, are generally collateralized in
full as to principal by U.S. Treasury zero coupon bonds having the same maturity
as the Brady Bonds. Interest payments on these Brady Bonds generally are
collateralized on a one-year or longer rolling-forward basis by cash or
securities in an amount that, in the case of fixed rate bonds, is equal to at
least one year of interest payments or, in the case of floating rate bonds,
initially is equal to at least one year's interest payments based on the
applicable interest rate at that time and is adjusted at regular intervals
thereafter. Certain Brady Bonds are entitled to "value recovery payments" in
certain circumstances, which in effect constitute supplemental interest payments
but generally are not collateralized. Brady Bonds are often viewed as having
three or four valuation components: (i) the collateralized repayment of
principal at final maturity; (ii) the collateralized interest payments; (iii)
the uncollateralized interest payments; and (iv) any uncollateralized repayment
of principal at maturity (these uncollateralized amounts constitute the
"residual risk").
Most Mexican Brady Bonds issued to date have principal repayments at
final maturity fully collateralized by U.S. Treasury zero coupon bonds (or
comparable collateral denominated in other currencies) and interest coupon
payments collateralized on an 18-month rolling-forward basis by funds held in
escrow by an agent for the bondholders. A significant portion of the Venezuelan
Brady Bonds and the Argentine Brady Bonds issued to date have principal
repayments at final maturity collateralized by U.S. Treasury zero coupon bonds
(or comparable collateral denominated in other currencies) and/or interest
coupon payments collateralized on a 14-month (for Venezuela) or 12-month (for
Argentina) rolling-forward basis by securities held by the Federal Reserve Bank
of New York as collateral agent.
Brady Bonds involve various risk factors including residual risk and
the history of defaults with respect to commercial bank loans by public and
private entities of countries issuing Brady Bonds. There can be no assurance
that Brady Bonds in which the Portfolio may invest will not be subject to
restructuring arrangements or to requests for new credit, which may cause the
Portfolio to suffer a loss of interest or principal on any of its holdings.
Bank Obligations. Bank obligations in which the Portfolios invest
include certificates of deposit, bankers' acceptances, and fixed time deposits.
Certificates of deposit are negotiable certificates issued against funds
deposited in a commercial bank for a definite period of time and earning a
specified return. Bankers' acceptances are negotiable drafts or bills of
exchange, normally drawn by an importer or exporter to pay for specific
merchandise, which are "accepted" by a bank, meaning, in effect, that the bank
unconditionally agrees to pay the face value of the instrument on maturity.
Fixed time deposits are bank obligations payable at a stated maturity date and
bearing interest at a fixed rate. Fixed time deposits may be withdrawn on demand
by the investor, but may be subject to early withdrawal penalties which vary
depending upon market conditions and the remaining maturity of the obligation.
There are no contractual restrictions on the right to transfer a beneficial
interest in a fixed time deposit to a third party, although there is no market
for such deposits. The Portfolio will not invest in fixed time deposits which
(1) are not subject to prepayment or (2) provide for withdrawal penalties upon
prepayment (other an overnight deposits) if, in the aggregate, more than 15% of
its assets would be invested in such deposits, repurchase agreements maturing in
more than seven days and other illiquid assets.
The Portfolio will limit its investments in United States bank
obligations to obligation of United States bank (including foreign branches)
which have more than $1 billion in total assets at the time of investment and
are member of the Federal Reserve System or are examined by the Comptroller of
the Currency or whose deposits are insured by the Federal Deposit Insurance
Corporation. The Portfolio also may invest in certificates of deposit of savings
and loan associations (federally or state chartered and federally insured)
having total assets in excess $1 billion.
The Portfolio will limit its investments in foreign bank obligations to
United States dollar- or foreign currency-denominated obligations of foreign
banks (including United States branches of foreign banks) which at the time of
investment (i) have more than $10 billion, or the equivalent in other
currencies, in total assets; (ii) in terms of assets are among the 75 largest
foreign banks in the world; (iii) have branches or agencies ( limited purpose
offices which do not offer all banking services) in the United States; and (iv)
in the opinion of the Sub-advisor, are of an investment quality comparable to
obligations of United States banks in which the Portfolio may invest. Subject to
the Portfolio's limitation on concentration of no more than 25% of its assets in
the securities of issuers in particular industry, there is no limitation on the
amount of the Portfolio's assets which may be invested in obligations of foreign
banks which meet the conditions set forth herein.
Obligations of foreign banks involve somewhat different investment
risks than those affecting obligations of United States banks, including the
possibilities that their liquidity could be impaired because of future political
and economic developments, that their obligations may be less marketable than
comparable obligations of United States banks, that a foreign jurisdiction might
impose withholding taxes on interest income payable on those obligations, that
foreign deposits may be seized or nationalized, that foreign governmental
restrictions such as exchange controls may be adopted which might adversely
affect the payment of principal and interest on those obligations and that the
selection of those obligations may be more difficult because there may be less
publicly available information concerning foreign banks or the accounting,
auditing and financial reporting standards, practices and requirements
applicable to foreign banks may differ from those applicable to United States
banks. Foreign banks are not generally subject to examination by any United
States Government agency or instrumentality.
Derivative Instruments. In pursuing its individual objective, the
Portfolio may, as described in the Prospectus, purchase and sell (write) both
put options and call options on securities, securities indexes, and foreign
currencies, and enter into interest rate, foreign currency and index futures
contracts and purchase and sell options on such futures contracts ("future
options") for hedging purposes. The Portfolio also may enter into swap
agreements with respect to foreign currencies, interest rates and indexes of
securities. If other types of financial instruments, including other types of
options, futures contracts, or futures options are traded in the future, the
Portfolio may also use those instruments, provided that the Trust's Board of
Trustees determines that their use is consistent with the Portfolio's investment
objective, and provided that their use is consistent with restrictions
applicable to options and futures contracts currently eligible for use by the
Trust (i.e., that written call or put options will be "covered" or "secured" and
that futures and futures options will be used only for hedging purposes).
Options on Securities and Indexes. The Portfolio may purchase and sell
both put and call options on debt or other securities or indexes in standardized
contracts traded on foreign or national securities exchanges, boards of trade,
or similar entities, or quoted on NASDAQ or on a regulated foreign
over-the-counter market, and agreements sometimes called cash puts, which may
accompany the purchase of a new issue of bonds from a dealer.
The Portfolio will write call options and put options only if they are
"covered." In the case of a call option on a security, the option is "covered"
if the Portfolio owns the security underlying the call or has an absolute and
immediate right to acquire that security without additional cash consideration
(or, if additional cash consideration is required, cash or cash equivalents in
such amount are placed in a segregated account by its custodian) upon conversion
or exchange of other securities held by the Portfolio. For a call option on an
index, the option is covered if the Portfolio maintains with its custodian cash
or cash equivalents equal to the contract value. A call option is also covered
if the Portfolio holds a call on the same security or index as the call written
where the exercise price of the call held is (i) equal to or less than the
exercise ice of the call written, or (ii) greater than the exercise price of the
call written, provided the difference is maintained by the Portfolio in cash or
cash equivalents in a segregated account with its custodian. A put option on a
security or an index is "covered" if the Portfolio maintains cash or cash
equivalents equal to the exercise price in a segregated account with its
custodian. A put option is also covered if the Portfolio holds a put on the same
security or index as the put written where the exercise price of the put held is
(i) equal to or greater than the exercise price of the put written, or (ii) less
than the exercise price of the put written, provided the difference is
maintained by the Portfolio in cash or cash equivalents in a segregated account
with its custodian.
If an option written by the Portfolio expires, the Portfolio realizes a
capital gain equal to the premium received at the time the option was written.
If an option purchased by the Portfolio expires unexercised, the Portfolio
realizes a capital loss equal to the premium paid.
Prior to the earlier of exercise or expiration, an option may be closed
out by an offsetting purchase or sale of an option of the same series (type,
exchange, underlying security or index, exercise price, and expiration). There
can be no assurance, however, that a closing purchase or sale transaction can be
effected when the Portfolio desires.
The Portfolio will realize a capital gain from a closing purchase
transaction if the cost of the closing option is less than the premium received
from writing the option, or if it is more, the Portfolio will realize a capital
loss. If the premium received from a closing sale transaction is more than the
premium paid to purchase the option, the Portfolio will realize a capital gain
or, if it is less, the Portfolio will realize a capital loss. The principal
factors affecting the market value of a put or a call option include supply and
demand, interest rates, the current market price of the underlying security or
index in relation to the exercise price of the option, the volatility of the
underlying security or index, and the time remaining until the expiration date.
The premium paid for a put or call option purchased by the Portfolio is
an asset of the Portfolio. The premium received for a option written by the
Portfolio is recorded as a deferred credit. The value of an option purchased or
written is marked to market daily and is valued at the closing price on the
exchange on which it is traded or, if not traded on an exchange or no closing
price is available, at the mean between the last bid and asked prices.
Risks Associated with Options on Securities and Indexes. There are
several risks associated with transactions in options on securities and on
indexes. For a discussion of certain risks involved in options, see this
Statement and the Trust's Prospectus under "Certain Risk Factors and Investment
Methods."
Foreign Currency Options. The Portfolio may buy or sell put and call
options on foreign currencies either on exchanges or in the over-the-counter
market. A put option on a foreign currency gives the purchaser of the option the
right to sell a foreign currency at the exercise price until the option expires.
Currency options traded on U.S. or other exchanges may be subject to position
limits which may limit the ability of the Portfolio to reduce foreign currency
risk using such options. Over-the-counter options differ from traded options in
that they are two-party contracts with price and other terms negotiated between
buyer and seller, and generally do not have as much market liquidity as
exchange-traded options.
Futures Contracts and Options on Futures Contracts. The Portfolio may
use interest rate, foreign currency or index futures contracts, as specified for
the Portfolio in the Prospectus. An interest rate, foreign currency or index
futures contract provides for the future sale by one party and purchase by
another party of a specified quantity of a financial instrument, foreign
currency or the cash value of an index at a specified price and time. A futures
contract on an index is an agreement pursuant to which two parties agree to take
or make delivery of an amount of cash equal to the difference between the value
of the index at the close of the last trading day of the contract and the price
at which the index contract was originally written. Although the value of an
index might be a function of the value of certain specified securities, no
physical delivery of these securities is made.
The Portfolio may purchase and write call and put futures options.
Futures options possess many of the same characteristics as options on
securities and indexes (discussed above). A futures option gives the holder the
right, in return for the premium paid, to assume a long position (call) or short
position (put) in a futures contract at a specified exercise price at any time
during the period of the option. Upon exercise of a call option, the holder
acquires a long position in the futures contract and the writer is assigned the
opposite short position. In the case of a put option, the opposite is true.
To comply with applicable rules of the Commodity Futures Trading
Commission under which the Trust and the Portfolio avoid being deemed a
"commodity pool" or a "commodity pool operator," the Portfolio intends generally
to limit its use of futures contracts and futures options to "bona fide hedging"
transactions, as such term is defined in applicable regulations, interpretations
and practice. For example, the Portfolio might use futures contracts to hedge
against anticipated changes in interest rates that might adversely affect either
the value of the Portfolio's securities or the price of the securities which the
Portfolio intends to purchase. The Portfolio's hedging activities may include
sales of futures contracts as an offset against the effect or expected increases
in interest rates, and purchases of futures contracts as an offset against the
effect of expected declines in interest rates. Although other techniques could
be used to reduce that Portfolio's exposure to interest rate fluctuations, the
Portfolio may be able to hedge its exposure more effectively and perhaps at a
lower cost by using futures contracts and futures options.
The Portfolio will only enter into futures contracts and futures
options which are standardized and traded on a U.S. or foreign exchange, board
of trade, or similar entity, or quoted on an automated quotation system.
When a purchase or sale of a futures contract is made by the Portfolio,
the Portfolio is required to deposit with its custodian (or broker, if legally
permitted) a specified amount of cash or U.S. Government securities ("initial
margin"). The margin required for a futures contract is set by the exchange on
which the contract is traded and may be modified during the term of the
contract. The initial margin is in the nature of a performance bond or good
faith deposit on the futures contract which is returned to the Portfolio upon
termination of the contract, assuming all contractual obligations have been
satisfied. Each Portfolio expects to earn interest income on its initial margin
deposits. A futures contract held by the Portfolio is valued daily at the
official settlement price of the exchange on which it is traded. Each day the
Portfolio pays or receives cash, called "variation margin," equal to the daily
change in value of the futures contract. This process is known as "market to
market." Variation margin does not represent a borrowing or loan by the
Portfolio but is instead a settlement between the Portfolio and the broker of
the amount one would owe the other if the futures contract expired. In computing
daily net asset value, each Portfolio will mark to market its open futures
positions.
The Portfolio is also required to deposit and maintain margin with
respect to put and call options on futures contracts written by it. Such margin
deposits will vary depending on the nature of the underlying futures contract
(and the related initial margin requirements), the current market value of the
option, and other futures positions held by the Portfolio.
Although some futures contracts call for making or taking delivery of
the underlying securities, generally these obligations are closed out prior to
delivery by offsetting purchases or sales of matching futures contracts (same
exchange, underlying security or index, and delivery month). If an offsetting
purchase price is less than the original sale price, the Portfolio realizes a
capital gain, or if it is more, the Portfolio realizes a capital loss.
Conversely, if an offsetting sale price is more than the original purchase
price, the Portfolio realizes a capital gain, or if it is less, the Portfolio
realizes a capital loss. The transaction costs must also be included in these
calculations.
Limitations on Use of Futures and Futures Options. In general, the
Portfolios intend to enter into positions in futures contracts and related
options only for "bona fide hedging" purposes. With respect to positions in
futures and related options that do not constitute bona fide hedging positions,
the Portfolio will not enter into a futures contract or futures option contract
if, immediately thereafter, the aggregate initial margin deposits relating to
such positions plus premiums paid by it for open futures option positions, less
the amount by which any such options are "in-the-money," would exceed 5% of the
Portfolio's total assets. A call option is "in-the-money" if the value of the
futures contract that is the subject of the option exceeds the exercise price. A
put option is "in-the-money" if the exercise price exceeds the value of the
futures contract that is the subject of the option.
When purchasing a futures contract, the Portfolio will maintain with
its custodian (and mark-to-market on a daily basis) cash, U.S. Government
securities, or other highly liquid debt securities that, when added to the
amounts deposited with a futures commission merchant as margin, are equal to the
market value of the futures contract. Alternatively, the Portfolio may "cover"
its position by purchasing a put option on the same futures contract with a
strike price as high or higher than the price of the contract held by the
Portfolio.
When selling a futures contract, the Portfolio will maintain with its
custodian (and mark-to-market on a daily basis) liquid assets that, when added
to the amount deposited with a futures commission merchant as margin, are equal
to the market value of the instruments underlying the contract. Alternatively,
the Portfolio may "cover" its position by owning the instruments underlying the
contract (or, in the case of an index futures contract, the Portfolio with a
volatility substantially similar to that of the index on which the futures
contract is based), or by holding a call option permitting the Portfolio to
purchase the same futures contract at a price no higher than the price of the
contract written by the Portfolio (or at a higher price if the difference is
maintained in liquid assets with the Trust's custodian).
When selling a call option on a futures contract, the Portfolio will
maintain with its custodian (and mark-to-market on a daily basis) cash, U.S.
Government securities, or other highly liquid debt securities that, when added
to the amounts deposited with a futures commission merchant as margin, equal the
total market value of the futures contract underlying the call option.
Alternatively, the Portfolio may cover its position by entering into a long
position in the same futures contract at a price no higher than the strike price
of the call option, by owning the instruments underlying the futures contract,
or by holding a separate call option permitting the Portfolio to purchase the
same futures contract at a price not higher than the strike price of the call
option sold by the Portfolio.
When selling a put option on a futures contract, the Portfolio will
maintain with its custodian (and mark-to market on a daily basis) cash, U.S.
Government securities, or other highly liquid debt securities that equal the
purchase price of the futures contract, less any margin on deposit.
Alternatively, the Portfolio may cover the position either by entering into a
short position in the same futures contract, or by owning a separate put option
permitting it to sell the same futures contract so long as the strike price of
the purchased put option is the same or higher than the strike price of the put
option sold by the Portfolio.
Swap Agreements. The Portfolios may enter into interest rate, index and
currency exchange rate swap agreements for purposes of attempting to obtain a
particular desired return at a lower cost to the Portfolio than if the Portfolio
had invested directly in an instrument that yielded that desired return. For a
discussion of swap agreements, see the Trust's Prospectus under "Investment
Objectives and Policies." The Portfolio's obligations under a swap agreement
will be accrued daily (offset against any amounts owing to the Portfolio) and
any accrued but unpaid net amounts owed to a swap counterpart will be covered by
the maintenance of a segregated account consisting of cash, U.S. Government
securities, or high grade debt obligations, to avoid any potential leveraging of
the Portfolio's portfolio. The Portfolio will not enter into a swap agreement
with any single party if the net amount owned or to be received under existing
contracts with that party would exceed 5% of the Portfolio's assets.
Whether the Portfolio's use of swap agreements will be successful in
furthering its investment objective of total return will depend on the
Sub-advisor's ability correctly to predict whether certain types of investments
are likely to produce greater returns than other investments. Because they are
two party contracts and because they may have terms of greater than seven days,
swap agreements may be considered to be illiquid. Moreover, the Portfolio bears
the risk of loss of the amount expected to be received under a swap agreement in
the event of the default or bankruptcy of a swap agreement counterpart. The
Sub-advisor will cause the Portfolio to enter into swap agreements only with
counterparties that would be eligible for consideration as repurchase agreement
counterparties under the Portfolio's repurchase agreement guidelines. Certain
restrictions imposed on the Portfolios by the Internal Revenue Code may limit
the Portfolios' ability to use swap agreements. The swaps market is a relatively
new market and is largely unregulated. It is possible that developments in the
swaps market, including potential government regulation, could adversely affect
the Portfolio's ability to terminate existing swap agreements or to realize
amounts to be received under such agreements.
Certain swap agreements are exempt from most provisions of the
Commodity Exchange Act ("CEA") and, therefore, are not regulated as futures or
commodity option transactions under the CEA, pursuant to regulations approved by
the Commodity Futures Trading Commission ("CFTC"). To qualify for this
exemption, a swap agreement must be entered into by "eligible participants,"
which includes the following, provided the participants' total assets exceed
established levels: a bank or trust company, savings association or credit
union, insurance company, investment company subject to regulation under the
Investment Company Act of 1940, commodity pool, corporation, partnership,
proprietorship, organization, trust or other entity, employee benefit plan,
governmental entity, broker-dealer, futures commission merchant, natural person,
or regulated foreign person. To be eligible, natural persons and most other
entities must have total assets exceeding $10 million; commodity pools and
employee benefit plans must have assets exceeding $5 million. In addition, an
eligible swap transaction must meet three conditions. First, the swap agreement
may not be part of a fungible class of agreements that are standardized as to
their material economic terms. Second, the creditworthiness of parties with
actual or potential obligations under the swap agreement must be a material
consideration in entering into or determining the terms of the swap agreement,
including pricing, cost or credit enhancement terms. Third, swap agreements may
not be entered into and traded on or through a multilateral transaction
execution facility.
This exemption is not exclusive, and partnerships may continue to rely
on existing exclusions for swaps, such as the Policy Statement issued in July
1989 which recognized a safe harbor for swap transactions from regulation as
futures or commodity option transactions under the CEA or its regulations. The
Policy Statement applies to swap transactions settled in cash that (1) have
individual tailored terms, (2) lack exchange-style offset and the use of a
clearing organization or margin system, (3) are undertaken in conjunction with a
line of business, and (4) are not marketed to the public.
Foreign Currency Exchange-Related Securities. The Portfolio may invest
in foreign currency warrants, principal exchange rate linked securities and
performance indexed paper. For a description of these instruments, see this
Statement under "Certain Risk Factor and Investment Methods."
Warrants to Purchase Securities. The Portfolio may invest in or acquire
warrants to purchase equity or fixed income securities. Bonds with warrants
attached to purchase equity securities have many characteristics of convertible
bonds and their prices may, to some degree, reflect the performance of the
underlying stock. Bonds also may be issued with warrants attached to purchase
additional fixed income securities at the same coupon rate. A decline in
interest rates would permit the Portfolio to buy additional bonds at the
favorable rate or to sell the warrants at a profit. If interest rates rise, the
warrants would generally expire with no value. The Portfolio will not invest
more than 5% of its net assets, valued at the lower cost or market, in warrants
to purchase securities. Included within that amount, but not to exceed 2% of the
Portfolio's net assets, may be warrants that rare not listed on the New York or
American Stock Exchanges. Warrants acquired in units or attached to securities
will be deemed to be without value for purposes of this restriction.
Investment Policies Which May Be Changed Without Shareholder Approval.
The following limitations are applicable only to the PIMCO Total Return Bond
Portfolio. The following investment policies may be changed by the Trustees
without shareholder approval.
1. The Portfolio will not invest more than 15% of the assets of the
Portfolio (taken at market value at the time of the investment) in "illiquid
securities," illiquid securities being defined to include securities subject to
legal or contractual restrictions on resale (which may include private
placements), repurchase agreements maturing in more than seven days, certain
options traded over the counter that the Portfolio has purchased, securities
being used to cover options a Portfolio has written, securities for which market
quotations are not readily available, or other securities which legally or in
the Sub-advisor's option may be deemed illiquid.
2. The Portfolio will not invest in a security if, as a result of such
investment more than 5% of its total assets (taken at market value at the time
of such investment) would be invested in securities of issuers (other than
issuers of Federal agency obligations) having a record, together with
predecessors or unconditional guarantors, of less than three years of continuous
operation.
3. The Portfolio will not purchase securities for the Portfolio from,
or sell portfolio securities to, any of the officers and directors or Trustees
of the Trust or of the Investment Manager or of the Sub-advisor.
4. The Portfolio will not invest more than 5% of the assets of the
Portfolio (taken at market value at the time of investment) in any combination
of interest only, principal only, or inverse floating rate securities.
PIMCO Limited Maturity Bond Portfolio:
Investment Policies:
Borrowing. The Portfolio may borrow for temporary purposes in an amount
not exceeding five percent of the value of its total assets. The Portfolio also
may borrow for investment purposes. Such a practice will result in leveraging of
the Portfolio's assets and may cause the Portfolio to liquidate portfolio
positions when it would not be advantageous to do so. This borrowing may be
unsecured. The Investment Company Act of 1940 requires the Portfolio to maintain
continuous asset coverage (that is, total assets including borrowings, less
liabilities exclusive of borrowings) of 300% of the amount borrowed. If the 300%
asset coverage should decline as a result of market fluctuations or other
reasons, the Portfolio may be required to sell some of its portfolio holdings
within three days to reduce the debt and restore the 300% asset coverage, even
though it may be disadvantageous from an investment standpoint to sell
securities at that time. Borrowing will tend to exaggerate the effect on net
asset value of any increase or decrease in the market value of the Portfolio's
securities. Money borrowed will be subject to interest costs which may or may
not be recovered by appreciation of the securities purchased. The Portfolio also
may be required to maintain minimum average balances in connection with such
borrowing or to pay a commitment or other fee to maintain a line of credit;
either of these requirements would increase the cost of borrowing over the
stated interest rate.
Among the forms of borrowing in which the Portfolio may engage is the
entry into reverse repurchase agreements. A reverse repurchase agreement
involves the sale of the Portfolio-eligible security by the Portfolio, coupled
with its agreement to repurchase the instrument at a specified time and price.
The Portfolio will maintain a segregated account with its Custodian consisting
of cash, U.S. Government securities or high quality debt securities equal (on a
daily mark-to-market basis) to its obligations under reverse repurchase
agreements with broker-dealers (but not banks). However, reverse repurchase
agreements involve the risk that the market value of securities retained by the
Portfolio may decline below the repurchase price of the securities sold by the
Portfolio which it is obligated to repurchase. To the extent that the Portfolio
collateralizes its obligations under a reverse repurchase agreement, the asset
coverage requirements of the Investment Company Act of 1940 will not apply.
The Portfolio also may enter into "mortgage dollar rolls," which are
similar to reverse repurchase agreements in certain respects. In a "dollar roll"
transaction the Portfolio sells a mortgage-related security (such as a GNMA
security) to a dealer and simultaneously agrees to repurchase a similar security
(but not the same security) in the future at a pre-determined price. A "dollar
roll" can be viewed, like a reverse repurchase agreement, as a collateralized
borrowing in which the Portfolio pledges a mortgage-related security to a dealer
to obtain cash. Unlike in the case of reverse repurchase agreements, the dealer
with which the Portfolio enters into a dollar roll transaction is not obligated
to return the same securities as those originally sold by the Portfolio, but
only securities which are "substantially identical." To be considered
"substantially identical," the securities returned to the Portfolio generally
must: (1) be collateralized by the same types of underlying mortgages; (2) be
issued by the same agency and be part of the same program; (3) have a similar
original stated maturity; (4) have identical net coupon rates; (5) have similar
market yields (and therefore price); and (6) satisfy "good delivery"
requirements, meaning that the aggregate principal amounts of the securities
delivered and received back must be within 2.5% of the initial amount delivered.
Dollar roll transactions involve the risk that the market value of the
securities sold may decline below the repurchase price of those securities. The
securities that are repurchased will be collateralized with different pools of
mortgages with different prepayment histories, and as a result, the borrower is
subject to a greater degree of prepayment related uncertainty.
The Portfolio's obligations under a dollar roll agreement must be
covered by cash or high quality debt securities equal in value to the securities
subject to repurchase by the Portfolio, maintained in a segregated account. To
the extent that the Portfolio collateralizes its obligations under a dollar roll
agreement, the asset coverage requirements of the Investment Company Act of 1940
will not apply to such transactions. Furthermore, because dollar roll
transactions may be for terms ranging between one and six months, dollar roll
transactions may be deemed "illiquid" and subject to the Portfolio's overall
limitations on investments in illiquid securities.
Corporate Debt Securities. The Portfolio's investments in U.S. dollar-
or foreign currency-denominated corporate debt securities of domestic or foreign
issuers are limited to corporate debt securities (corporate bonds, debentures,
notes and other similar corporate debt instruments, including convertible
securities) which meet the minimum ratings criteria set forth for the Portfolio,
or, if unrated, are in the Sub-advisor's opinion comparable in quality to
corporate debt securities in which the Portfolio may invest. The rate of return
or return of principal on some debt obligations may be linked or indexed to the
level of exchange rates between the U.S. dollar and a foreign currency or
currencies.
Among the corporate bonds in which the Portfolio may invest are
convertible securities. A convertible security is a bond, debenture, note, or
other security that entitles the holder to acquire common stock or other equity
securities of the same or a different issuer. A convertible security generally
entitles the holder to receive interest paid or accrued until the convertible
security matures or is redeemed, converted or exchanged. Before conversion,
convertible securities have characteristics similar to nonconvertible debt
securities. Convertible securities rank senior to common stock in a
corporation's capital structure and, therefore, generally entail less risk than
the corporation's common stock, although the extent to which such risk is
reduced depends in large measure upon the degree to which the convertible
security sells above its value as a fixed income security.
A convertible security may be subject to redemption at the option of
the issuer at a predetermined price. If a convertible security held by the
Portfolio is called for redemption, the Portfolio would be required to permit
the issuer to redeem the security and convert it to underlying common stock, or
would sell the convertible security to a third party. The Portfolio generally
would invest in convertible securities for their favorable price characteristics
and total return potential and would normally not exercise an option to convert.
Investments in securities rated below investment grade that are
eligible for purchase by the Portfolio (i.e., rated B or better by Moody's or
S&P), are described as "speculative" by both Moody's and S&P. Investment in
lower rated corporate debt securities ("high yield securities") generally
provides greater income and increased opportunity for capital appreciation than
investments in higher quality securities, but they also typically entail greater
price volatility and principal and income risk. These high yield securities are
regarded as predominantly speculative with respect to the issuer's continuing
ability to meet principal and interest payments. The market for these securities
is relatively new, and many of the outstanding high yield securities have not
endured a major business recession. A long-term track record on default rates,
such as that for investment grade corporate bonds, does not exist for this
market. Analysis of the creditworthiness of issuers of debt securities that are
high yield may be more complex than for issuers of higher quality debt
securities.
High yield securities may be more susceptible to real or perceived
adverse economic and competitive industry conditions than investment grade
securities. The prices of high yield securities have been found to be less
sensitive to interest-rate changes than higher-rated investments, but more
sensitive to adverse economic downturns or individual corporate developments. A
projection of an economic downturn or of a period of rising interest rates, for
example, could cause a decline in high yield security prices because the advent
of a recession could lessen the ability of a highly leveraged company to make
principal and interest payments on its debt securities. If an issuer of high
yield securities defaults, in addition to risking payment of all or a portion of
interest and principal, the Portfolio may incur additional expenses to seek
recovery. In the case of high yield securities structured as zero-coupon or
pay-in-kind securities, their market prices are affected to a greater extent by
interest rate changes, and therefore tend to be more volatile than securities
which pay interest periodically and in cash.
The secondary market on which high yield securities are traded may be
less liquid than the market for higher grade securities. Less liquidity in the
secondary trading market could adversely affect the price at which the Portfolio
could sell a high yield security, and could adversely affect the daily net asset
value of the shares. Adverse publicity and investor perceptions, whether or not
based on fundamental analysis, may decrease the values and liquidity of high
yield securities especially in a thinly-traded market. When secondary markets
for high yield securities are less liquid than the market for higher grade
securities, it may be more difficult to value the securities because such
valuation may require more research, and elements of judgment may play a greater
role in the valuation because there is less reliable, objective data available.
The Sub-advisor seeks to minimize the risks of investing in all securities
through diversification, in-depth credit analysis and attention to current
developments in interest rates and market conditions.
For a discussion of the risks involved in lower-rated debt securities,
see this Statement and the Trust's Prospectus under "Certain Risk Factors and
Investment Methods."
Participation on Creditors Committees. The Portfolio may from time to
time participate on committees formed by creditors to negotiate with the
management of financially troubled issuers of securities held by the Portfolio.
Such participation may subject the Portfolio to expenses such as legal fees and
may make the Portfolio an "insider" of the issuer for purposes of the federal
securities laws, and therefore may restrict the Portfolio's ability to trade in
or acquire additional positions in a particular security when it might otherwise
desire to do so. Participation by the Portfolio on such committees also may
expose the Portfolio to potential liabilities under the federal bankruptcy laws
or other laws governing the rights of creditors and debtors. The Portfolio would
participate on such committees only when the Adviser believed that such
participation was necessary or desirable to enforce the Portfolio's rights as a
creditor or to protect the value of securities held by the Portfolio.
Mortgage-Related and Other Asset-Backed Securities. Mortgage-related
securities are interests in pools of residential or commercial mortgage loans,
including mortgage loans made by savings and loan institutions, mortgage
bankers, commercial banks and others. Pools of mortgage loans are assembled as
securities for sale to investors by various governmental, government-related and
private organizations (see "Mortgage Pass-Through Securities"). The Portfolio
may also invest in debt securities which are secured with collateral consisting
of mortgage-related securities (see "Collateralized Mortgage Obligations"), and
in other types of mortgage-related securities.
Mortgage Pass-Through Securities. The Portfolio may invest in
mortgage-backed securities. For an additional discussion of mortgage-backed
securities and certain risks involved therein, see this Statement and the
Trust's Prospectus under "Certain Risk Factors and Investment Methods."
Interests in pools of mortgage-related securities differ from other
forms of debt securities, which normally provide for periodic payment of
interest in fixed amounts with principal payments at maturity or specified call
dates. Instead, these securities provide a monthly payment which consists of
both interest and principal payments. In effect, these payments are a
"pass-through" of the monthly payments made by the individual borrowers on their
residential or commercial mortgage loans, net of any fees paid to the issuer or
guarantor of such securities. Additional payments are caused by repayments of
principal resulting from the sale of the underlying property, refinancing or
foreclosure, net of fees or costs which may be incurred. Some mortgage-related
securities (such as securities issued by the Government National Mortgage
Association) are described as "modified pass-through." These securities entitle
the holder to receive all interest and principal payments owed on the mortgage
pool, net of certain fees, at the scheduled payment dates regardless of whether
or not the mortgagor actually makes the payment.
The principal governmental guarantor of mortgage-related securities is
the Government National Mortgage Association ("GNMA"). GNMA is a wholly owned
United States Government corporation within the Department of Housing and Urban
Development. GNMA is authorized to guarantee, with the full faith and credit of
the United States Government, the timely payment of principal and interest on
securities issued by institutions approved by GNMA (such as savings and loan
institutions, commercial banks and mortgage bankers) and backed by pools of
FHA-insured or VA-guaranteed mortgages.
Government-related guarantors (i.e., not backed by the full faith and
credit of the United States Government) include the Federal National Mortgage
Association ("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC").
FNMA is a government-sponsored corporation owned entirely by private
stockholders. It is subject to general regulation by the Secretary of Housing
and Urban Development. FNMA purchases conventional (i.e., not insured or
guaranteed by any government agency) residential mortgages from a list of
approved seller/servicers which include state and federally chartered savings
and loan associations, mutual savings banks, commercial banks and credit unions
and mortgage bankers. Pass-through securities issued by FNMA are guaranteed as
to timely payment of principal and interest by FNMA but are not backed by the
full faith and credit of the United States Government.
FHLMC was created by Congress in 1970 for the purpose of increasing the
availability of mortgage credit for residential housing. It is a
government-sponsored corporation formerly owned by the twelve Federal Home Loan
Banks and now owned entirely by private stockholders. FHLMC issues Participation
Certificates ("PCs") which represent interests in conventional mortgages from
FHLMC's national portfolio. FHLMC guarantees the timely payment of interest and
ultimate collection of principal, but PCs are not backed by the full faith and
credit of the United States Government.
Commercial banks, savings and loan institutions, private mortgage
insurance companies, mortgage bankers and other secondary market issuers also
create pass-through pools of conventional residential mortgage loans. Such
issuers may, in addition, be the originators and/or servicers of the underlying
mortgage loans as well as the guarantors of the mortgage-related securities.
Pools created by such non-governmental issuers generally offer a higher rate of
interest than government and government-related pools because there are no
direct or indirect government or agency guarantees of payments in the former
pools. However, timely payment of interest and principal of these pools may be
supported by various forms of insurance or guarantees, including individual
loan, title, pool and hazard insurance and letters of credit. The insurance and
guarantees are issued by governmental entities, private insurers and the
mortgage poolers. Such insurance and guarantees and the creditworthiness of the
issuers thereof will be considered in determining whether a mortgage-related
security meets the Trust's investment quality standards. There can be no
assurance that the private insurers or guarantors can meet their obligations
under the insurance policies or guarantee arrangements. The Fixed Income
Portfolio may buy mortgage-related securities without insurance or guarantees
if, through an examination of the loan experience and practices of the
originator/servicers and poolers, the Adviser determines that the securities
meet the Trust's quality standards. Although the market for such securities is
becoming increasingly liquid, securities issued by certain private organizations
may not be readily marketable. No Portfolio will purchase mortgage-related
securities or any other assets which in the Adviser's opinion are illiquid if,
as a result, more than 15% of the value of the Portfolio's total assets will be
illiquid.
Mortgage-backed securities that are issued or guaranteed by the U.S.
Government, its agencies or instrumentalities, are not subject to the Portfolio'
industry concentration restrictions, set forth below under "Investment
Restrictions," by virtue of the exclusion from that test available to all U.S.
Government securities. In the case of privately issued mortgage-related
securities, the Portfolio take the position that mortgage-related securities do
not represent interests in any particular "industry" or group of industries. The
assets underlying such securities may be represented by the Portfolio of first
lien residential mortgages (including both whole mortgage loans and mortgage
participation interests) or portfolios of mortgage pass-through securities
issued or guaranteed by GNMA, FNMA or FHLMC. Mortgage loans underlying a
mortgage-related security may in turn be insured or guaranteed by the Federal
Housing Administration or the Department of Veterans Affairs. In the case of
private issue mortgage-related securities whose underlying assets are neither
U.S. Government securities nor U.S. Government-insured mortgages, to the extent
that real properties securing such assets may be located in the same
geographical region, the security may be subject to a greater risk of default
than other comparable securities in the event of adverse economic, political or
business developments that may affect such region and, ultimately, the ability
of residential homeowners to make payments of principal and interest on the
underlying mortgages.
Collateralized Mortgage Obligations (CMOs). A CMO is a hybrid between a
mortgage-backed bond and a mortgage pass-through security. Similar to a bond,
interest and prepaid principal is paid, in most cases, semiannually. CMOs may be
collateralized by whole mortgage loans, but are more typically collateralized by
portfolios of mortgage pass-through securities guaranteed by GNMA, FHLMC, or
FNMA, and their income streams.
CMOs are structured into multiple classes, each bearing a different
stated maturity. Actual maturity and average life will depend upon the
prepayment experience of the collateral. CMOs provide for a modified form of
call protection through a de facto breakdown of the underlying pool of mortgages
according to how quickly the loans are repaid. Monthly payment of principal
received from the pool of underlying mortgages, including prepayments, is first
returned to investors holding the shortest maturity class. Investors holding the
longer maturity classes receive principal only after the first class has been
retired. An investor is partially guarded against a sooner than desired return
of principal because of the sequential payments.
In a typical CMO transaction, a corporation ("issuer") issues multiple
series (e.g., A, B, C, Z) of CMO bonds ("Bonds"). Proceeds of the Bond offering
are used to purchase mortgages or mortgage pass-through certificates
("Collateral"). The Collateral is pledged to a third party trustee as security
for the Bonds. Principal and interest payments from the Collateral are used to
pay principal on the Bonds in the order A, B, C, Z. The Series A, B, and C Bonds
all bear current interest. Interest on the Series Z Bond is accrued and added to
principal and a like amount is paid as principal on the Series A, B, or C Bond
currently being paid off. When the Series A, B, and C Bonds are paid in full,
interest and principal on the Series Z Bond begins to be paid currently. With
some CMOs, the issuer serves as a conduit to allow loan originators (primarily
builders or savings and loan associations) to borrow against their loan
portfolios.
FHLMC Collateralized Mortgage Obligations. FHLMC CMOs are debt
obligations of FHLMC issued in multiple classes having different maturity dates
which are secured by the pledge of a pool of conventional mortgage loans
purchased by FHLMC. Unlike FHLMC PCs, payments of principal and interest on the
CMOs are made semiannually, as opposed to monthly. The amount of principal
payable on each semiannual payment date is determined in accordance with FHLMC's
mandatory sinking fund schedule, which, in turn, is equal to approximately 100%
of FHA prepayment experience applied to the mortgage collateral pool. All
sinking fund payments in the CMOs are allocated to the retirement of the
individual classes of bonds in the order of their stated maturities. Payment of
principal on the mortgage loans in the collateral pool in excess of the amount
of FHLMC's minimum sinking fund obligation for any payment date are paid to the
holders of the CMOs as additional sinking fund payments. Because of the
"pass-through" nature of all principal payments received on the collateral pool
in excess of FHLMC's minimum sinking fund requirement, the rate at which
principal of the CMOs is actually repaid is likely to be such that each class of
bonds will be retired in advance of its scheduled maturity date.
If collection of principal (including prepayments) on the mortgage
loans during any semiannual payment period is not sufficient to meet FHLMC's
minimum sinking fund obligation on the next sinking fund payment date, FHLMC
agrees to make up the deficiency from its general funds.
Criteria for the mortgage loans in the pool backing the FHLMC CMOs are
identical to those of FHLMC PCs. FHLMC has the right to substitute collateral in
the event of delinquencies and/or defaults.
Other Mortgage-Related Securities. Other mortgage-related securities
include securities other than those described above that directly or indirectly
represent a participation in, or are secured by and payable from, mortgage loans
on real property, including CMO residuals or stripped mortgage-backed
securities. Other mortgage-related securities may be equity or debt securities
issued by agencies or instrumentalities of the U.S. Government or by private
originators of, or investors in, mortgage loans, including savings and loan
associations, homebuilders, mortgage banks, commercial banks, investment banks,
partnerships, trusts and special purpose entities of the foregoing.
CMO residuals are derivative mortgage securities issued by agencies or
instrumentalities of the U.S. Government or by private originators of, or
investors in, mortgage loans, including savings and loan associations,
homebuilders, mortgage banks, commercial banks, investment banks and special
purpose entities of the foregoing.
The cash flow generated by the mortgage assets underlying a series of
CMOs is applied first to make required payments of principal and interest on the
CMOs and second to pay the related administrative expenses of the issuer. The
residual in a CMO structure generally represents the interest in any excess cash
flow remaining after making the foregoing payments. Each payment of such excess
cash flow to a holder of the related CMO residual represents income and/or a
return of capital. The amount of residual cash flow resulting from a CMO will
depend on, among other things, the characteristics of the mortgage assets, the
coupon rate of each class of CMO, prevailing interest rates, the amount of
administrative expenses and the prepayment experience on the mortgage assets. In
particular, the yield to maturity on CMO residuals is extremely sensitive to
prepayments on the related underlying mortgage assets, in the same manner as an
interest-only ("IO") class of stripped mortgage-backed securities. See "Other
Mortgage-Related Securities -- Stripped Mortgage-Backed Securities." In
addition, if a series of a CMO includes a class that bears interest at an
adjustable rate, the yield to maturity on the related CMO residual will also be
extremely sensitive to changes in the level of the index upon which interest
rate adjustments are based. As described below with respect to stripped
mortgage-backed securities, in certain circumstances the Portfolio may fail to
recoup fully its initial investment in a CMO residual.
CMO residuals are generally purchased and sold by institutional
investors through several investment banking firms acting as brokers or dealers.
The CMO residual market has only very recently developed and CMO residuals
currently may not have the liquidity of other more established securities
trading in other markets. Transactions in CMO residuals are generally completed
only after careful review of the characteristics of the securities in question.
In addition, CMO residuals may or, pursuant to an exemption therefrom, may not
have been registered under the Securities Act of 1933, as amended. CMO
residuals, whether or not registered under such Act, may be subject to certain
restrictions on transferability, and may be deemed "illiquid" and subject to the
Portfolio's limitations on investment in illiquid securities.
Stripped Mortgage-Backed Securities. Stripped mortgage-backed
securities ("SMBS") are derivative multi-class mortgage securities. SMBS may be
issued by agencies or instrumentalities of the U.S. Government, or by private
originators of, or investors in, mortgage loans, including savings and loan
associations, mortgage banks, commercial banks, investment banks and special
purpose entities of the foregoing.
SMBS are usually structured with two classes that receive different
proportions of the interest and principal distributions on a pool of mortgage
assets. A common type of SMBS will have one class receiving some of the interest
and most of the principal from the mortgage assets, while the other class will
receive most of the interest and the remainder of the principal. In the most
extreme case, one class will receive all of the interest (the IO class), while
the other class will receive all of the principal (the principal-only or "PO"
class). The yield to maturity on an IO class is extremely sensitive to the rate
of principal payments (including prepayments) on the related underlying mortgage
assets, and a rapid rate of principal payments may have a material adverse
effect on the Portfolio's yield to maturity from these securities. If the
underlying mortgage assets experience greater than anticipated prepayments of
principal, the Portfolio may fail to fully recoup its initial investment in
these securities even if the security is in one of the highest rating
categories.
Although SMBS are purchased and sold by institutional investors through
several investment banking firms acting as brokers or dealers, these securities
were only recently developed. As a result, established trading markets have not
yet developed and, accordingly, these securities may be deemed "illiquid" and
subject to the Portfolio's limitations on investment in illiquid securities.
Other Asset-Backed Securities. Similarly, the Sub-advisor expects that
other asset-backed securities (unrelated to mortgage loans) will be offered to
investors in the future. Several types of asset-backed securities maybe offered
to investors, including Certificates for Automobile Receivables. For a
discussion of automobile receivables, see this Statement under "Certain Risk
Factors and Investment Methods."
Foreign Securities. The Portfolio may invest in U.S. dollar- or foreign
currency-denominated corporate debt securities of foreign issuers (including
preferred or preference stock), certain foreign bank obligations (see "Bank
Obligations") and U.S. dollar- or foreign currency-denominated obligations of
foreign governments or their subdivisions, agencies and instrumentalities,
international agencies and supranational entities. The Portfolio will limit its
foreign investments to securities of issuers based in developed countries (which
include Newly Industrialized Countries ("NICs") such as Mexico, Taiwan and South
Korea). Investing in the securities of foreign issuers involves special risks
and considerations not typically associated with investing in U.S. companies.
The Portfolio also may purchase and sell foreign currency options and foreign
currency futures contracts and related options (see "Derivative Instruments"),
and enter into forward foreign currency exchange contracts in order to protect
against uncertainty in the level of future foreign exchange rates in the
purchase and sale of securities.
A forward foreign currency 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 agreed upon by the parties, at a price set at
the time of the contract. These contracts may be bought or sold to protect the
Portfolio against a possible loss resulting from an adverse change in the
relationship between foreign currencies and the U.S. dollar or to increase
exposure to a particular foreign currency. Open positions in forward contracts
are covered by the segregation with the Trust's custodian of high quality
short-term investments and are marked to market daily. Although such contracts
are intended to minimize the risk of loss due to a decline in the value of the
hedged currencies, at the same time, they tend to limit any potential gain which
might result should the value of such currencies increase.
Bank Obligations. Bank obligations in which the Portfolio invests
include certificates of deposit, bankers' acceptances, and fixed time deposits.
Certificates of deposit are negotiable certificates issued against funds
deposited in a commercial bank for a definite period of time and earning a
specified return. Bankers' acceptances are negotiable drafts or bills of
exchange, normally drawn by an importer or exporter to pay for specific
merchandise, which are "accepted" by a bank, meaning, in effect, that the bank
unconditionally agrees to pay the face value of the instrument on maturity.
Fixed time deposits are bank obligations payable at a stated maturity date and
bearing interest at a fixed rate. Fixed time deposits may be withdrawn on demand
by the investor, but may be subject to early withdrawal penalties which vary
depending upon market conditions and the remaining maturity of the obligation.
There are no contractual restrictions on the right to transfer a beneficial
interest in a fixed time deposit to a third party, although there is no market
for such deposits. The Portfolio will not invest in fixed time deposits which
(1) are not subject to prepayment or (2) provide for withdrawal penalties upon
prepayment (other than overnight deposits) if, in the aggregate, more than 15%
of its assets would be invested in such deposits, repurchase agreements maturing
in more than seven days and other illiquid assets.
The Portfolio will limit its investments in United States bank
obligations to obligations of United States banks (including foreign branches)
which have more than $1 billion in total assets at the time of investment and
are members of the Federal Reserve System or are examined by the Comptroller of
the Currency or whose deposits are insured by the Federal Deposit Insurance
Corporation. The Portfolio also may invest in certificates of deposit of savings
and loan associations (federally or state chartered and federally insured)
having total assets in excess of $1 billion.
The Portfolio will limit its investments in foreign bank obligations to
United States dollar- or foreign currency-denominated obligations of foreign
banks (including United States branches of foreign banks) which at the time of
investment (i) have more than $10 billion, or the equivalent in other
currencies, in total assets; (ii) in terms of assets are among the 75 largest
foreign banks in the world; (iii) have branches or agencies (limited purpose
offices which do not offer all banking services) in the United States; and (iv)
in the opinion of the Sub-advisor, are of an investment quality comparable to
obligations of United States banks in which the Portfolio may invest. Subject to
the Trust's limitation on concentration of no more than 25% of its assets in the
securities of issuers in a particular industry, there is no limitation on the
amount of the Portfolio's assets which may be invested in obligations of foreign
banks which meet the conditions set forth herein.
Obligations of foreign banks involve somewhat different investment
risks than those affecting obligations of United States banks, including the
possibilities that their liquidity could be impaired because of future political
and economic developments, that their obligations may be less marketable than
comparable obligations of United States banks, that a foreign jurisdiction might
impose withholding taxes on interest income payable on those obligations, that
foreign deposits may be seized or nationalized, that foreign governmental
restrictions such as exchange controls may be adopted which might adversely
affect the payment of principal and interest on those obligations and that the
selection of those obligations may be more difficult because there may be less
publicly available information concerning foreign banks or the accounting,
auditing and financial reporting standards, practices and requirements
applicable to foreign banks may differ from those applicable to United States
banks. Foreign banks are not generally subject to examination by any United
States Government agency or instrumentality.
Short Sales. The Portfolio may make short sales of securities as part
of their overall portfolio management strategies involving the use of derivative
instruments and to offset potential declines in long positions in similar
securities. A short sale is a transaction in which the Portfolio sells a
security it does not own in anticipation that the market price of that security
will decline.
When the Portfolio makes a short sale, it must borrow the security sold
short and deliver it to the broker-dealer through which it made the short sale
as collateral for its obligation to deliver the security upon conclusion of the
sale. The Portfolio may have to pay a fee to borrow particular securities and is
often obligated to pay over any accrued interest on such borrowed securities.
If the price of the security sold short increases between the time of
the short sale and the time and the Portfolio replaces the borrowed security,
the Portfolio will incur a loss; conversely, if the price declines, the
Portfolio will realize a capital gain. Any gain will be decreased, and any loss
increased, by the transaction costs described above. The successful use of short
selling may be adversely affected by imperfect correlation between movements in
the price of the security sold short and the securities being hedged.
To the extent that the Portfolio engages in short sales, it will
provide collateral to the broker-dealer and (except in the case of short sales
"against the box") will maintain additional asset coverage in the form of cash,
U.S. Government securities or high grade debt obligations in a segregated
account. The Portfolio does not intend to enter into short sales (other than
those "against the box") if immediately after such sale the aggregate of the
value of all collateral plus the amount in such segregated account exceeds
one-third of the value of the Portfolio's net assets. This percentage may be
varied by action of the Trust's Board of Trustees. A short sale is "against the
box" to the extent that the Portfolio contemporaneously owns, or has the right
to obtain at no added cost, securities identical to those sold short. The
Portfolio will engage in short selling to the extent permitted by the Investment
Company Act of 1940 and rules and interpretations thereunder.
Derivative Instruments. In pursuing its objective, the Portfolio may,
as described in the Prospectus, purchase and sell (write) both put options and
call options on securities, securities indexes, and foreign currencies, and
enter into interest rate, foreign currency and index futures contracts and
purchase and sell options on such futures contracts ("futures options") for
hedging purposes. The Portfolio also may purchase and sell foreign currency
options for purposes of increasing exposure to a foreign currency or to shift
exposure to foreign currency fluctuations from one country to another. The
Portfolio also may enter into swap agreements with respect to foreign
currencies, interest rates and indexes of securities. If other types of
financial instruments, including other types of options, futures contracts, or
futures options are traded in the future, the Portfolio may also use those
instruments, provided that the Trust's Board of Trustees determines that their
use is consistent with the Portfolio's investment objective, and provided that
their use is consistent with restrictions applicable to options and futures
contracts currently eligible for use by the Trust (i.e., that written call or
put options will be "covered" or "secured" and that futures and futures options
will be used only for hedging purposes).
Options on Securities and Indexes. The Portfolio may purchase and sell
both put and call options on debt or other securities or indexes in standardized
contracts traded on foreign or national securities exchanges, boards of trade,
or similar entities, or quoted on NASDAQ or on a regulated foreign
over-the-counter market, and agreements, sometimes called cash puts, which may
accompany the purchase of a new issue of bonds from a dealer.
The Portfolio will write call options and put options only if they are
"covered." In the case of a call option on a security, the option is "covered"
if the Portfolio owns the security underlying the call or has an absolute and
immediate right to acquire that security without additional cash consideration
(or, if additional cash consideration is required, cash or cash equivalents in
such amount are placed in a segregated account by its custodian) upon conversion
or exchange of other securities held by the Portfolio. For a call option on an
index, the option is covered if the Portfolio maintains with its custodian cash
or cash equivalents equal to the contract value. A call option is also covered
if the Portfolio holds a call on the same security or index as the call written
where the exercise price of the call held is (i) equal to or less than the
exercise price of the call written, or (ii) greater than the exercise price of
the call written, provided the difference is maintained by the Portfolio in cash
or cash equivalents in a segregated account with its custodian. A put option on
a security or an index is "covered" if the Portfolio maintains cash or cash
equivalents equal to the exercise price in a segregated account with its
custodian. A put option is also covered if the Portfolio holds a put on the same
security or index as the put written where the exercise price of the put held is
(i) equal to or greater than the exercise price of the put written, or (ii) less
than the exercise price of the put written, provided the difference is
maintained by the Portfolio in cash or cash equivalents in a segregated account
with its custodian.
If an option written by the Portfolio expires, the Portfolio realizes a
capital gain equal to the premium received at the time the option was written.
If an option purchased by the Portfolio expires unexercised, the Portfolio
realizes a capital loss equal to the premium paid.
Prior to the earlier of exercise or expiration, an option may be closed
out by an offsetting purchase or sale of an option of the same series (type,
exchange, underlying security or index, exercise price, and expiration). There
can be no assurance, however, that a closing purchase or sale transaction can be
effected when the Portfolio desires.
The Portfolio will realize a capital gain from a closing purchase
transaction if the cost of the closing option is less than the premium received
from writing the option, or, if it is more, the Portfolio will realize a capital
loss. If the premium received from a closing sale transaction is more than the
premium paid to purchase the option, the Portfolio will realize a capital gain
or, if it is less, the Portfolio will realize a capital loss. The principal
factors affecting the market value of a put or a call option include supply and
demand, interest rates, the current market price of the underlying security or
index in relation to the exercise price of the option, the volatility of the
underlying security or index, and the time remaining until the expiration date.
The premium paid for a put or call option purchased by the Portfolio is
an asset of the Portfolio. The premium received for an option written by the
Portfolio is recorded as a deferred credit. The value of an option purchased or
written is marked to market daily and is valued at the closing price on the
exchange on which it is traded or, if not traded on an exchange or no closing
price is available, at the mean between the last bid and asked prices.
Risks Associated with Options on Securities and Indexes. There are
several risks associated with transactions in options on securities and on
indexes. For a discussion of certain risks involved in options, see this
Statement and the Trust's Prospectus under "Certain Risk Factors and Investment
Methods."
Foreign Currency Options. The Portfolio may buy or sell put and call
options on foreign currencies either on exchanges or in the over-the-counter
market. A put option on a foreign currency gives the purchaser of the option the
right to sell a foreign currency at the exercise price until the option expires.
Currency options traded on U.S. or other exchanges may be subject to position
limits which may limit the ability of the Portfolio to reduce foreign currency
risk using such options. Over-the-counter options differ from traded options in
that they are two-party contracts with price and other terms negotiated between
buyer and seller, and generally do not have as much market liquidity as
exchange-traded options.
Futures Contracts and Options on Futures Contracts. The Portfolio may
use interest rate, foreign currency or index futures contracts. An interest
rate, foreign currency or index futures contract provides for the future sale by
one party and purchase by another party of a specified quantity of a financial
instrument, foreign currency or the cash value of an index at a specified price
and time. A futures contract on an index is an agreement pursuant to which two
parties agree to take or make delivery of an amount of cash equal to the
difference between the value of the index at the close of the last trading day
of the contract and the price at which the index contract was originally
written. Although the value of an index might be a function of the value of
certain specified securities, no physical delivery of these securities is made.
The Portfolio may purchase and write call and put futures options.
Futures options possess many of the same characteristics as options on
securities and indexes (discussed above). A futures option gives the holder the
right, in return for the premium paid, to assume a long position (call) or short
position (put) in a futures contract at a specified exercise price at any time
during the period of the option. Upon exercise of a call option, the holder
acquires a long position in the futures contract and the writer is assigned the
opposite short position. In the case of a put option, the opposite is true.
To comply with applicable rules of the Commodity Futures Trading
Commission under which the Trust and the Portfolio avoid being deemed a
"commodity pool" or a "commodity pool operator," the Portfolio intends generally
to limit its use of futures contracts and futures options to "bona fide hedging"
transactions, as such term is defined in applicable regulations, interpretations
and practice. For example, the Portfolio might use futures contracts to hedge
against anticipated changes in interest rates that might adversely affect either
the value of the Portfolio's securities or the price of the securities which the
Portfolio intends to purchase. The Portfolio's hedging activities may include
sales of futures contracts as an offset against the effect of expected increases
in interest rates, and purchases of futures contracts as an offset against the
effect of expected declines in interest rates. Although other techniques could
be used to reduce that Portfolio's exposure to interest rate fluctuations, the
Portfolio may be able to hedge its exposure more effectively and perhaps at a
lower cost by using futures contracts and futures options.
The Portfolio will only enter into futures contracts and futures
options which are standardized and traded on a U.S. or foreign exchange, board
of trade, or similar entity, or quoted on an automated quotation system.
When a purchase or sale of a futures contract is made by the Portfolio,
the Portfolio is required to deposit with its custodian (or broker, if legally
permitted) a specified amount of cash or U.S. Government securities ("initial
margin"). The margin required for a futures contract is set by the exchange on
which the contract is traded and may be modified during the term of the
contract. The initial margin is in the nature of a performance bond or good
faith deposit on the futures contract which is returned to the Portfolio upon
termination of the contract, assuming all contractual obligations have been
satisfied. The Portfolio expects to earn interest income on its initial margin
deposits. A futures contract held by the Portfolio is valued daily at the
official settlement price of the exchange on which it is traded. Each day the
Portfolio pays or receives cash, called "variation margin," equal to the daily
change in value of the futures contract. This process is known as "marking to
market." Variation margin does not represent a borrowing or loan by the
Portfolio but is instead a settlement between the Portfolio and the broker of
the amount one would owe the other if the futures contract expired. In computing
daily net asset value, the Portfolio will mark to market its open futures
positions.
The Portfolio is also required to deposit and maintain margin with
respect to put and call options on futures contracts written by it. Such margin
deposits will vary depending on the nature of the underlying futures contract
(and the related initial margin requirements), the current market value of the
option, and other futures positions held by the Portfolio.
Although some futures contracts call for making or taking delivery of
the underlying securities, generally these obligations are closed out prior to
delivery by offsetting purchases or sales of matching futures contracts (same
exchange, underlying security or index, and delivery month). If an offsetting
purchase price is less than the original sale price, the Portfolio realizes a
capital gain, or if it is more, the Portfolio realizes a capital loss.
Conversely, if an offsetting sale price is more than the original purchase
price, the Portfolio realizes a capital gain, or if it is less, the Portfolio
realizes a capital loss. The transaction costs must also be included in these
calculations.
Limitations on Use of Futures and Futures Options. In general, the
Portfolio intends to enter into positions in futures contracts and related
options only for "bona fide hedging" purposes. With respect to positions in
futures and related options that do not constitute bona fide hedging positions,
the Portfolio will not enter into a futures contract or futures option contract
if, immediately thereafter, the aggregate initial margin deposits relating to
such positions plus premiums paid by it for open futures option positions, less
the amount by which any such options are "in-the-money," would exceed 5% of the
Portfolio's total net assets. A call option is "in-the-money" if the value of
the futures contract that is the subject of the option exceeds the exercise
price. A put option is "in-the-money" if the exercise price exceeds the value of
the futures contract that is the subject of the option.
When purchasing a futures contract, the Portfolio will maintain with
its custodian (and mark-to-market on a daily basis) cash, U.S. Government
securities, or other highly liquid debt securities that, when added to the
amounts deposited with a futures commission merchant as margin, are equal to the
market value of the futures contract. Alternatively, the Portfolio may "cover"
its position by purchasing a put option on the same futures contract with a
strike price as high or higher than the price of the contract held by the
Portfolio.
When selling a futures contract, the Portfolio will maintain with its
custodian (and mark-to-market on a daily basis) liquid assets that, when added
to the amount deposited with a futures commission merchant as margin, are equal
to the market value of the instruments underlying the contract. Alternatively,
the Portfolio may "cover" its position by owning the instruments underlying the
contract (or, in the case of an index futures contract, the Portfolio with a
volatility substantially similar to that of the index on which the futures
contract is based), or by holding a call option permitting the Portfolio to
purchase the same futures contract at a price no higher than the price of the
contract written by the Portfolio (or at a higher price if the difference is
maintained in liquid assets with the Trust's custodian).
When selling a call option on a futures contract, the Portfolio will
maintain with its custodian (and mark-to-market on a daily basis) cash, U.S.
Government securities, or other highly liquid debt securities that, when added
to the amounts deposited with a futures commission merchant as margin, equal the
total market value of the futures contract underlying the call option.
Alternatively, the Portfolio may cover its position by entering into a long
position in the same futures contract at a price no higher than the strike price
of the call option, by owning the instruments underlying the futures contract,
or by holding a separate call option permitting the Portfolio to purchase the
same futures contract at a price not higher than the strike price of the call
option sold by the Portfolio.
When selling a put option on a futures contract, the Portfolio will
maintain with its custodian (and mark-to-market on a daily basis) cash, U.S.
Government securities, or other highly liquid debt securities that equal the
purchase price of the futures contract, less any margin on deposit.
Alternatively, the Portfolio may cover the position either by entering into a
short position in the same futures contract, or by owning a separate put option
permitting it to sell the same futures contract so long as the strike price of
the purchased put option is the same or higher than the strike price of the put
option sold by the Portfolio.
Risks in Futures Contracts and Related Options. For a discussion of the
risks involved in futures contracts and related options, see the Trust's
Prospectus and this Statement under "Certain Factors and Investment Methods."
Swap Agreements. The Portfolio may enter into interest rate, index and
currency exchange rate swap agreements for purposes of attempting to obtain a
particular desired return at a lower cost to the Portfolio than if the Portfolio
had invested directly in an instrument that yielded that desired return. For a
discussion of swap agreements, see the Trust's Prospectus under "Investment
Objectives and Policies." The Portfolio's obligations (or rights) under a swap
agreement will generally be equal only to the net amount to be paid or received
under the agreement based on the relative values of the positions held by each
party to the agreement (the "net amount"). The Portfolio's obligations under a
swap agreement will be accrued daily (offset against any amounts owing to the
Portfolio) and any accrued but unpaid net amounts owed to a swap counterparty
will be covered by the maintenance of a segregated account consisting of cash,
U.S. Government securities, or high grade debt obligations, to avoid any
potential leveraging of the Portfolio's portfolio. The Portfolio will not enter
into a swap agreement with any single party if the net amount owed or to be
received under existing contracts with that party would exceed 5% of the
Portfolio's assets.
Whether the Portfolio's use of swap agreements will be successful in
furthering its investment objective of total return will depend on the
Sub-advisor's ability correctly to predict whether certain types of investments
are likely to produce greater returns than other investments. Because they are
two party contracts and because they may have terms of greater than seven days,
swap agreements may be considered to be illiquid. Moreover, the Portfolio bears
the risk of loss of the amount expected to be received under a swap agreement in
the event of the default or bankruptcy of a swap agreement counterparty. The
Sub-advisor will cause the Portfolio to enter into swap agreements only with
counterparties that would be eligible for consideration as repurchase agreement
counterparties under the Portfolio' repurchase agreement guidelines. Certain
restrictions imposed on the Portfolio by the Internal Revenue Code may limit the
Portfolio' ability to use swap agreements. The swaps market is a relatively new
market and is largely unregulated. It is possible that developments in the swaps
market, including potential government regulation, could adversely affect the
Portfolio's ability to terminate existing swap agreements or to realize amounts
to be received under such agreements.
Certain swap agreements are exempt from most provisions of the
Commodity Exchange Act ("CEA") and, therefore, are not regulated as futures or
commodity option transactions under the CEA, pursuant to regulations approved by
the Commodity Futures Trading Commission ("CFTC"). To qualify for this
exemption, a swap agreement must be entered into by "eligible participants,"
which includes the following, provided the participants' total assets exceed
established levels: a bank or trust company, savings association or credit
union, insurance company, investment company subject to regulation under the
Investment Company Act of 1940, commodity pool, corporation, partnership,
proprietorship, organization, trust or other entity, employee benefit plan,
governmental entity, broker-dealer, futures commission merchant, natural person,
or regulated foreign person. To be eligible, natural persons and most other
entities must have total assets exceeding $10 million; commodity pools and
employee benefit plans must have assets exceeding $5 million. In addition, an
eligible swap transaction must meet three conditions. First, the swap agreement
may not be part of a fungible class of agreements that are standardized as to
their material economic terms. Second, the creditworthiness of parties with
actual or potential obligations under the swap agreement must be a material
consideration in entering into or determining the terms of the swap agreement,
including pricing, cost or credit enhancement terms. Third, swap agreements may
not be entered into and traded on or through a multilateral transaction
execution facility.
This exemption is not exclusive, and participants may continue to rely
on existing exclusions for swaps, such as the Policy Statement issued in July
1989 which recognized a safe harbor for swap transactions from regulation as
futures or commodity option transactions under the CEA or its regulations. The
Policy Statement applies to swap transactions settled in cash that (1) have
individually tailored terms, (2) lack exchange-style offset and the use of a
clearing organization or margin system, (3) are undertaken in conjunction with a
line of business, and (4) are not marketed to the public.
Foreign Currency Exchange Related Securities. The Portfolio may also
invest in foreign currency warrants, principal exchange rate linked securities
and performance indexed paper. For a discussion of these, see this Statement
under "Certain Risk Factors and Investment Methods."
Warrants to Purchase Securities. The Portfolio may invest in or acquire
warrants to purchase equity or fixed income securities. Bonds with warrants
attached to purchase equity securities have many characteristics of convertible
bonds and their prices may, to some degree, reflect the performance of the
underlying stock. Bonds also may be issued with warrants attached to purchase
additional fixed income securities at the same coupon rate. A decline in
interest rates would permit the Portfolio to buy additional bonds at the
favorable rate or to sell the warrants at a profit. If interest rates rise, the
warrants would generally expire with no value.
The Portfolio will not invest more than 5% of its net assets, valued at
the lower of cost or market, in warrants to purchase securities. Included within
that amount, but not to exceed 2% of the Portfolio's net assets, may be warrants
that are not listed on the New York or American Stock Exchanges. Warrants
acquired in units or attached to securities will be deemed to be without value
for purposes of this restriction.
Investment Policies Which May Be Changed Without Shareholder Approval.
The following limitations are applicable to the PIMCO Limited Maturity Bond
Portfolio. The following investment policies may be changed by the Trustees
without shareholder approval. The Portfolio may not:
1. Invest more than 15% of the assets of the Portfolio (taken at market
value at the time of the investment) in "illiquid securities", illiquid
securities being defined to include securities subject to legal or contractual
restrictions on resale (which may include private placements), repurchase
agreements maturing in more than seven days, certain options traded over the
counter that a Portfolio has purchased, securities being used to cover such
options a Portfolio has written, securities for which market quotations are not
readily available, or other securities which legally or in the Sub-advisor's
opinion may be deemed illiquid.
2. Invest in a security if, as a result of such investment, more than
5% of its total assets (taken at market value at the time of such investment)
would be invested in securities of issuers (other than issuers of Federal agency
obligations) having a record, together with predecessors or unconditional
guarantors, of less than three years of continuous operation.
3. Invest more than 5% of the assets of the Portfolio (taken at market
value at the time of investment) in any combination of interest only, principal
only, or inverse floating rate securities.
The Staff of the Securities and Exchange Commission has taken the
position that purchased OTC options and the assets used as cover for written OTC
options are illiquid securities. Therefore, the Portfolio has adopted an
investment policy pursuant to which the Portfolio will not purchase or sell OTC
options if, as a result of such transactions, the sum of the market value of OTC
options currently outstanding which are held by the Portfolio, the market value
of the underlying securities covered by OTC call options currently outstanding
which were sold by the Portfolio and margin deposits on the Portfolio's existing
OTC options on futures contracts exceeds 15% of the total assets of the
Portfolio, taken at market value, together with all other assets of the
Portfolio which are illiquid or are otherwise not readily marketable. However,
if an OTC option is sold by the Portfolio to a primary U.S. Government
securities dealer recognized by the Federal Reserve Bank of New York and if the
Portfolio has the unconditional contractual right to repurchase such OTC option
from the dealer at a predetermined price, then the Portfolio will treat as
illiquid such amount of the underlying securities equal to the repurchase price
less the amount by which the option is "in-the-money" (i.e., current market
value of the underlying securities minus the option's strike price). The
repurchase price with the primary dealers is typically a formula price which is
generally based on a multiple of the premium received for the option, plus the
amount by which the option is "in-the-money."
Berger Capital Growth Portfolio:
Investment Policies:
Index Options. An option on a stock index gives the holder the right to
receive, upon exercise of the option, an amount of cash if the closing level of
the stock index on which the option is based is less than (in the case of a put)
or a greater than (in the case of a call) the exercise price of the options.
This amount of cash is equal to the difference between the closing price of the
index and the exercise price of the option expressed in dollars times a
specified multiple (the "multiplier"). The writer of the option is obligated, in
return for the purchase price (the "premium") paid to him, to make delivery of
this amount. Options are traded on a number of different indices.
Hedging. The Portfolio will purchase put and call options on stock
indices for the purpose of hedging and not for speculation. Hedging may be
employed to cushion the Portfolio against possible declines in the market value
of its securities, or to establish a position in an equity equivalent as a
temporary substitute for the purchase of individual stocks. To hedge a Portfolio
against a decline in value, the Portfolio may buy a put on a stock index. To
protect the Portfolio against an increase in the price of equities at a time
when the Portfolio has a substantial cash equivalent position, the Portfolio may
buy a call on a stock index pending investment in equities.
When the Sub-advisor believes the trend of stock prices may be
downward, particularly over a short period of time, the Portfolio may hedge
through the purchase of a put on a stock index to cushion the anticipated
decline in value of the Portfolio's holdings. This is an alternative to the sale
and possible subsequent repurchase of stocks, which might involve significant
transaction costs. Conversely, the purchase of a call option on a stock index
may allow the Portfolio to quickly obtain exposure to common stock equivalents
in a rising market, thus permitting the Portfolio to purchase stocks gradually
over the option period in a manner designed to minimize adverse price movements,
and with more thorough evaluation of investment alternatives. The purpose of
purchasing put and call options on stock indices is therefore not to generate
gains, but to hedge. Successful hedging activities are not designed to produce a
net gain to a Portfolio. Any gain in the price of a put option is likely to be
offset by lower prices of stocks owned by the Portfolio and any gain in the
price of a call option is likely to be offset by the higher prices the Portfolio
must pay in rising markets as it increases its holdings of common stocks.
Restricted Securities. The Portfolio expects that any restricted
securities would be acquired either from institutional investors who originally
acquired the securities in private placements or directly from the issuers of
the securities in private placements. Restricted securities are generally
subject to legal or contractual delays on resale. Restricted securities and
securities that are not readily marketable may sell at a discount from the price
they would bring if freely marketable. For a discussion of illiquid or
restricted securities and certain risks involved therein, see the Trust's
Prospectus under "Certain Risk Factors and Investment Methods."
The Board of Trustees of the Trust has promulgated guidelines with
respect to illiquid securities.
Repurchase Agreements. The Portfolio may enter into repurchase
agreements through which an investor (such as the Portfolio) purchases a
security (known as the "underlying security") from a well-established securities
dealer or a bank which is a member of the Federal Reserve System. Any such
dealer or bank will be on Sub-advisor's approved list and have a credit rating
with respect to its short-term debt of at least A1 by Standard & Poor's
Corporation, P1 by Moody's Investors Service, Inc., or the equivalent rating by
Sub-advisor. At that time, the bank or securities dealer agrees to repurchase
the underlying security at the same price, plus specified interest. Repurchase
agreements are generally for a short period of time, often less than a week.
Repurchase agreements which do not provide for payment within seven days will be
considered illiquid. The Portfolio will only enter into repurchase agreements
where (i) the underlying securities are of the type (excluding maturity
limitations) which the Portfolio's investment guidelines would allow it to
purchase directly, (ii) the market value of the underlying security, including
interest accrued, will be at all times equal to or exceed the value of the
repurchase agreement, and (iii) payment for the underlying security is made only
upon physical delivery or evidence of book-entry transfer to the account of the
custodian or a bank acting as agent. In the event of a bankruptcy or other
default of a seller of a repurchase agreement, the Portfolio could experience
both delays in liquidating the underlying securities and losses, including: (a)
possible decline in the value of the underlying security during the period while
the Portfolio seeks to enforce its rights thereto; (b) possible subnormal levels
of income and lack of access to income during this period; and (c) expenses of
enforcing its rights.
The Board of Trustees of the Trust has promulgated guidelines with
respect to repurchase agreements.
Investment Policies Which May Be Changed Without Shareholder Approval.
Set forth below are "non-fundamental" investment restrictions applicable only to
the Berger Capital Growth Portfolio, which may be changed without shareholder
approval:
1. The Portfolio may purchase put and call options on stock indexes for
the purpose of hedging, but no more than 1% of the Portfolio's total net assets
at the time of purchase of such an option may be invested in put and call
options.
2. The Portfolio may not purchase or sell any interest in an oil,
gas or mineral development or exploration program, including investments in
oil, gas or mineral leases.
3. The Portfolio's investment in warrants, valued at the lower of cost
or market, may not exceed 5% of the value of the Portfolio's net assets.
Included within that amount, but not to exceed 2% of the value of the
Portfolio's net assets, may be warrants that are not listed on the New York
Stock Exchange or American Stock Exchange.
4. The Portfolio does not currently intend to purchase any security,
including any repurchase agreement maturing in more than seven days, which is
not readily marketable, if more than 15% of the net assets of the Portfolio
taken at market value at the time of purchase would be invested in such
securities.
Robertson Stephens Value + Growth Portfolio:
Investment Objective: The investment objective of the Robertson Stephens
Value + Growth Portfolio is to seek capital appreciation.
Investment Policies:
Options. The Portfolio may purchase and sell put and call options on its
securities to enhance performance and to protect against changes in market
prices.
Covered Call Options. The Portfolio 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 Portfolio.
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 Portfolio 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 Portfolio retains the risk of loss should the price
of such securities decline. If the option expires unexercised, the Portfolio
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 Portfolio realizes a
gain or loss equal to the difference between the Portfolio's cost for the
underlying security and the proceeds of sale (exercise price minus commissions)
plus the amount of the premium.
The Portfolio may terminate a call option that it has written before it
expires by entering into a closing purchase transaction. The Portfolio 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 Portfolio.
Covered Put Options. The Portfolio 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 Portfolio 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 Portfolio also
receives interest on the cash and debt securities maintained to cover the
exercise price of the option. By writing a put option, the Portfolio 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 Portfolio 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 Portfolio 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
Portfolio, 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 the exercise price to cover the premium and
transaction costs that the Portfolio must pay. These costs will reduce any
profit the Portfolio might have realized had it sold the underlying security
instead of buying the put option.
The Portfolio may purchase call options to hedge against an increase in
the price of securities that the Portfolio wants ultimately to buy. Such hedge
protection is provided during the life of the call option since the Portfolio,
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 Portfolio
might have realized had it bought the underlying security at the time it
purchased the call option.
The Portfolio may also purchase put and call options to attempt to
enhance its current return.
Options on Foreign Securities. The Portfolio may purchase and
sell options on foreign securities if the Sub-advisor believes that the
investment characteristics of such options, including the risks of investing in
such options, are consistent with the Portfolio's investment objectives. 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 Associated with Options. See this Statement and the
Trust's Prospectus under "Certain Risk Factors and Investment Methods" for a
description of certain risks involved in options transactions.
Special Expiration Price Options. The Portfolio may purchase
over-the-counter ("OTC") puts and calls with respect to specified securities
("special expiration price options") pursuant to which the Portfolio in effect
may create a custom index relating to a particular industry or sector that the
Sub-advisor 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 Portfolio's profits if the special expiration price
options are exercised. The Portfolio 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.
LEAPs and BOUNDs. The Portfolio may purchase certain long-term
exchange-traded equity options called Long-Term Equity Anticipation Securities
("LEAPs") and Buy-Right Options Unitary Derivatives ("BOUNDs"). LEAPs provide a
holder the opportunity to participate in the underlying securities' appreciation
in excess of a fixed dollar amount. BOUNDs provide a holder the opportunity to
retain dividends on the underlying security while potentially participating in
the underlying securities' capital appreciation up to a fixed dollar amount. The
Portfolio will not purchase these options with respect to more than 25% of the
value of its net assets, and will limit the premiums paid for purchasing such
options in accordance with the most restrictive applicable state securities
laws.
LEAPs are long-term call options that allow holders the opportunity to
participate in the underlying securities' appreciation in excess of a specified
strike price, without receiving payments equivalent to any cash dividends
declared on the underlying securities. A LEAP holder will be entitled to receive
a specified number of shares of the underlying stock upon payment of the
exercise price, and therefore the LEAP will be exercisable at any time the price
of the underlying stock is above the strike price. However, if at expiration the
price of the underlying stock is at or below the strike price, the LEAP will
expire worthless.
BOUNDs are long-term options which are expected to have the same
economic characteristics as covered call options, with the added benefits that
BOUNDs can be traded in a single transaction and are not subject to early
exercise. Covered call writing is a strategy by which an investor sells a call
option while simultaneously owning the number of shares of the stock underlying
the call. BOUND holders are able to participate in a stock's price appreciation
up to but not exceeding a specified strike price while receiving payments
equivalent to any cash dividends declared on the underlying stock. At
expiration, a BOUND holder will receive a specified number of shares of the
underlying stock for each BOUND held if, on the last day of trading, the
underlying stock closes at or below the strike price. However, if at expiration
the underlying stock closes above the strike price, the BOUND holder will
receive a payment equal to a multiple of the BOUND's strike price for each BOUND
held. The terms of a BOUND are not adjusted because of cash distributions to the
shareholders of the underlying security. BOUNDs are subject to the position
limits for equity options imposed by the exchanges on which they are traded.
The settlement mechanism for BOUNDs operates in conjunction with that
of the corresponding LEAPs. For example, if at expiration the underlying stock
closes at or below the strike price, the LEAP will expire worthless, and the
holder of a corresponding BOUND will receive a specified number of shares of
stock from the writer of the BOUND. If, on the other hand, the LEAP is "in the
money" at expiration, the holder of the LEAP is entitled to receive a specified
number of shares of the underlying stock from the LEAP writer upon payment of
the strike price, and the holder of a BOUND on such stock is entitled to the
cash equivalent of a multiple of the strike price from the writer of the BOUND.
An investor holding both a LEAP and a corresponding BOUND, where the underlying
stock closes above the strike price at expiration, would be entitled to receive
a multiple of the strike price from the writer of the BOUND and, upon exercise
of the LEAP, would be obligated to pay the same amount to receive shares of the
underlying stock. LEAPs are American-style options (exercisable at any time
prior to expiration), whereas BOUNDs are European-style options (exercisable
only on the expiration date).
Futures Contracts.
Index Futures Contracts and Options. The Portfolio may buy and
sell futures contracts and related options for hedging purposes or to attempt to
increase investment return. The Portfolio currently expects that it will only
purchase and sell stock index futures contracts and related options. 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 Portfolio 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
Portfolio will gain $400 (100 units x gain of $4). If the Portfolio 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 Portfolio will lose $200 (100 units x loss of $2).
The Portfolio may purchase or sell futures contracts with respect to
any securities indexes. 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 Portfolio 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 Portfolio'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
approximating the 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 Portfolio 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 Portfolio 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 Portfolio 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 Portfolio
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 Portfolio 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 Portfolio upon termination of the
contract, assuming the Portfolio 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 Portfolio sells a futures contract and the price of the
underlying index rises above the delivery price, the Portfolio's position
declines in value. The Portfolio 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
Portfolio'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 Portfolio terminates a position in a futures contract, a final
determination of variation margin is made, additional cash is paid by or to the
Portfolio, and the Portfolio realizes a loss or a gain. Such closing
transactions involve additional commission costs.
Special Risks of Transactions in Futures Contracts and Related Options.
See this Statement and the Trust's Prospectus under "Certain Risk Factors and
Investment Methods" for a description of certain risks involved in transactions
in futures contracts and related options.
Indexed Securities. The Portfolio may purchase securities whose prices
are indexed to the prices of other securities, securities indices, currencies,
precious metals or other commodities, or other financial indicators. Indexed
securities typically, but not always, are debt securities or deposits whose
value at maturity or coupon rate is determined by reference to a specific
instrument or statistic. Gold-indexed securities, for example, typically provide
for a maturity value that depends on the price of gold, resulting in a security
whose price tends to rise and fall together with gold prices. Currency-indexed
securities typically are short-term to intermediate-term debt securities whose
maturity values or interest rates are determined by reference to the values of
one or more specified foreign currencies, and may offer higher yields than U.S.
dollar-denominated securities of equivalent issuers. Currency-indexed securities
may be positively or negatively indexed; that is, their maturity value may
increase when the specified currency value increases, resulting in a security
whose price characteristics are similar to a put option on the underlying
currency. Currency-indexed securities also may have prices that depend on the
values of a number of different foreign currencies relative to each other.
The performance of indexed securities depends to a great extent on the
performance of the security, currency, commodity or other instrument to which
they are indexed, and also may be influenced by interest rate changes in the
U.S. and abroad. At the same time, indexed securities are subject to the credit
risks associated with the issuer of the security, and their values may decline
substantially if the issuer's creditworthiness deteriorates. Recent issuers of
indexed securities have included banks, corporations, and certain U.S.
Government agencies.
Repurchase Agreements. The Portfolio may enter into repurchase
agreements. A repurchase agreement is a contract under which the Portfolio
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 Portfolio to
resell such security at a fixed time and price (representing the Portfolio's
cost plus interest). It is the Portfolio's present intention to enter into
repurchase agreements only with member banks of the Federal Reserve System and
securities dealers which the Sub-advisor deems to be creditworthy, pursuant to
guidelines established by the Trust's Board of Trustees, 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 Portfolio which are collateralized by the
securities subject to repurchase. The Sub-advisor 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. For a discussion of repurchase agreements and the risks
involved therein, see the Trust's Prospectus under "Certain Risk Factors and
Investment Methods."
The Board of Trustees of the Trust has promulgated guidelines with
respect to repurchase agreements.
Portfolio Securities Lending. The Portfolio may lend its 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 Portfolio may at any time call the loan and regain the securities loaned;
(3) the Portfolio will receive any interest or dividends paid on the loaned
securities; and (4) the aggregate market value of securities loaned will not at
any time exceed one-third (or such other limit as the Trust's Board of Trustees
may establish) of the total assets of the Portfolio. In addition, it is
anticipated that the Portfolio may share with the borrower some of the income
received on the collateral for the loan or that it will be paid a premium for
the loan.
Before the Portfolio enters into a loan, the Sub-advisor 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 Portfolio 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 Portfolio if the holders of such securities are asked to vote upon or
consent to matters materially affecting the investment. The Portfolio will not
lend portfolio securities to borrowers affiliated with the Portfolio.
Short Sales. The Portfolio may seek to hedge investments or realize
additional gains through short sales. Short sales are transactions in which the
Portfolio 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 Portfolio
must borrow the security to make delivery to the buyer. The Portfolio then is
obligated to replace the security borrowed by purchasing it at the market price
at or prior to the time of replacement. The price at such time may be more or
less than the price at which the security was sold by the Portfolio. Until the
security is replaced, the Portfolio is required to repay the lender any
dividends or interest that accrue during the period of the loan. To borrow the
security, the Portfolio 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 Portfolio's custodian in a special custody
account), to the extent necessary to meet margin requirements, until the short
position is closed out. The Portfolio also will incur transaction costs in
effecting short sales.
The Portfolio 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 Portfolio replaces the borrowed security. The Portfolio 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 Portfolio may be
required to pay in connection with a short sale.
Foreign Investments. The Portfolio may invest in foreign securities,
securities denominated in or indexed to foreign currencies, and certificates of
deposit issued by United States branches of foreign banks and foreign branches
of United States banks. For a discussion of the risks involved in foreign
currency fluctuations and investing in foreign securities, in general, see this
Statement and the Trust's Prospectus under "Certain Risk Factors and Investment
Methods."
The considerations associated with foreign investments generally are
intensified for investments in developing countries. For a discussion of the
risks involved therein, see this Statement and the Trust's Prospectus under
"Certain Risk Factors and Investment Methods."
Foreign Currency Transactions. The Portfolio 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 Portfolio
may engage in both "transaction hedging" and "position hedging".
When it engages in transaction hedging, the Portfolio enters into
foreign currency transactions with respect to specific receivables or payables
of the Portfolio generally arising in connection with the purchase or sale of
its portfolio securities. The Portfolio 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 Portfolio 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 Portfolio 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 Portfolio 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 Portfolio 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 Portfolio the right to assume a short position in the futures contract
until expiration of the option. A put option on currency gives the Portfolio 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 Portfolio the right to
assume a long position in the futures contract until the expiration of the
option. A call option on currency gives the Portfolio the right to purchase a
currency at the exercise price until the expiration of the option. The Portfolio
will engage in over-the-counter transactions only when appropriate
exchange-traded transactions are unavailable and when, in the opinion of the
Sub-advisor, 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 Portfolio enters into foreign
currency exchange transactions to protect against a decline in the values of the
foreign currencies in which securities held by the Portfolio are denominated or
are quoted in their principle trading markets or an increase in the value of
currency for securities which the Portfolio expects to purchase. In connection
with position hedging, the Portfolio 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 Portfolio 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
Portfolio's securities at the expiration or maturity of a forward or futures
contract. Accordingly, it may be necessary for the Portfolio 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 Portfolio 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 Portfolio if the market value of such security or securities
exceeds the amount of foreign currency the Portfolio is obligated to deliver.
To offset some of the costs to the Portfolio of hedging against
fluctuations in currency exchange rates, the Portfolio 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 Portfolio 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 Portfolio 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 Portfolio 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 Portfolio 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 Portfolio 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 the Sub-advisor believes that a liquid 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 Portfolio
at one rate, while offering a lesser rate of exchange should the Portfolio
desire to resell that currency to the dealer.
Zero-Coupon Debt Securities and Pay-in-Kind Securities. The Portfolio
may invest in zero-coupon securities. Zero-coupon securities allow an issuer to
avoid the need to generate cash to meet current interest payments. For a
discussion of zero-coupon debt securities and the risks involved therein, see
this Statement under "Certain Risk Factors and Investment Methods."
The Portfolio also 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.
Investment Policies Which May Be Changed Without Shareholder Approval.
The following investment restrictions, applicable only to the Robertson Stephens
Value + Growth Portfolio, are not "fundamental" restrictions and may be changed
without shareholder approval. The Portfolio may not:
1. Invest in warrants (other than warrants acquired by the Portfolio as
a part of a unit or attached to securities at the time of purchase) if, as a
result, such investment (valued at the lower of cost or market value) would
exceed 5% of the value of the Portfolio's net assets, provided that not more
than 2% of the Portfolio's net assets may be invested in warrants not listed on
the New York or American Stock Exchanges;
2. Purchase or sell commodities or commodity contracts, except that the
Portfolio 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;
3. Purchase securities restricted as to resale if, as a result, (i)
more than 10% of the Portfolio's total assets would be invested in such
securities, or (ii) more than 5% of the Portfolio's total assets (excluding any
securities eligible for resale under Rule 144A under the Securities Act of 1933)
would be invested in such securities;
4. Invest in (a) securities which at the time of such investment are
not readily marketable, (b) securities restricted as to resale, and (c)
repurchase agreements maturing in more than seven days, if, as a result, more
than 15% of the Portfolio's net assets (taken at current value) would then be
invested in the aggregate in securities described in (a), (b), and (c) above;
5. Invest in securities of other registered investment companies,
except by purchases in the open market involving only customary brokerage
commissions and as a result of which not more than 5% of its total assets (taken
at current value) would be invested in such securities, or except as part of a
merger, consolidation, or other acquisition;
6. Invest in real estate limited partnerships;
7. Purchase any security if, as a result, the Portfolio would then have
more than 5% of its total assets (taken at current value) invested in securities
of companies (including predecessors) less than three years old;
8. Purchase or sell real estate or interests in real estate, including
real estate mortgage loans, although 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 Portfolio 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.);
9. Make investments for the purpose of exercising control or
management;
10. Invest in interests in oil, gas or other mineral exploration
or development programs or leases, although it may invest in the common stocks
of companies that invest in or sponsor such programs;
11. Acquire more than 10% of the voting securities of any issuer;
12. Invest more than 15%, in the aggregate, of its total assets in the
securities of issuers which, together with any predecessors, have a record of
less than three years continuous operation and securities restricted as to
resale (including any securities eligible for resale under Rule 144A under the
Securities Act of 1933); or
13. Purchase or sell puts, calls, straddles, spreads, or any
combination thereof, if, as a result, the aggregate amount of premiums paid or
received by the Portfolio in respect of any such transactions then outstanding
would exceed 5% of its total assets.
In addition, the Portfolio will only sell short securities that are
traded on a national securities exchange in the U.S. (including the National
Association of Securities Dealers' Automated Quotation National Market System)
or in the country where the principal trading market in the securities is
located. (This limitation does not apply to short sales against the box).
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.
Investment Objective and Policy Applicable to All Portfolios: In order to permit
the sale of shares of the Trust to separate accounts of Participating Insurance
Companies in certain states, the Trust may make commitments more restrictive
than the restrictions described in the section of this Statement entitled
"Investment Restrictions." Should the Trust determine that any such commitment
is no longer in the best interests of the Trust and its shareholders it will
revoke the commitment and terminate sales of its shares in the state(s)
involved.
The Board of Trustees of the Trust may, from time to time, promulgate
guidelines with respect to the investment policies of the Portfolios.
INVESTMENT RESTRICTIONS:
The investment restrictions set forth below are "fundamental" policies.
See the subsection of this Statement entitled "Investment Objectives and
Policies" for further discussion of "fundamental" policies of the Trust and the
requirements for changing such "fundamental" policies.
Certain investment restrictions apply to all Portfolios of the Trust.
Such investment restrictions are described below. Investment restrictions that
apply to each of these Portfolios separately are also described below.
Investment restrictions that are not "fundamental" may be found in the general
description of the Investment Policies of each Portfolio, as described in the
section of the Trust's Prospectus entitled "Investment Objectives and Policies"
and in the section of this Statement entitled "Investment Objectives and
Policies."
Investment Restrictions Applicable to All of the Portfolios Except the T.
Rowe Price Asset Allocation Portfolio, the T. Rowe Price International Equity
Portfolio, the T. Rowe Price Natural Resources Portfolio, the T. Rowe Price
International Bond Portfolio and the Robertson Stephens Value + Growth
Portfolio:
1. A Portfolio will not purchase securities of other investment companies,
except in connection with a merger, consolidation, acquisition or
reorganization, or by purchase in the open market of securities of closed-end
investment companies where no underwriter or dealer's commission or profit,
other than a customary broker's commission, is involved and only if immediately
thereafter not more than 10% of this Portfolio's total assets, at market value,
would be invested in such securities, or by investing no more than 5% of the
Portfolio's total assets in other open-end investment companies or by purchasing
no more than 3% of any one open-end investment company's securities.
2. A Portfolio will not buy any securities or other property on margin
(except for such short-term credits as are necessary for the clearance of
transactions).
3. A Portfolio will not invest in companies for the purpose of exercising
control or management.
4. A Portfolio will not underwrite securities issued by others except to the
extent that the Portfolio may be deemed an underwriter when purchasing or
selling securities.
5. A Portfolio will not purchase or retain securities of any issuer (other than
the shares of such Portfolio) if to the Trust's knowledge, the officers and
Trustees of the Trust and the officers and directors of the Investment Manager
who individually own beneficially more than 1/2 of 1% of the outstanding
securities of such issuer, together own beneficially more than 5% of such
outstanding securities.
6. A Portfolio will not issue senior securities.
Investment Restrictions Applicable Only to the Seligman Henderson
International Equity Portfolio:
1. The Portfolio will not purchase a security if as a result, the Portfolio
would own more than 10% of the outstanding voting securities of any issuer.
2. As to 75% of the value of its total assets, the Portfolio will not invest
more than 5% of its total assets, at market value, in the securities of any one
issuer (except securities issued or guaranteed by the U.S. Government, its
agencies or instrumentalities).
3. The Portfolio will not purchase a security if as a result, more than 25% of
its total assets, at market value, would be invested in the securities of
issuers principally engaged in the same industry (except securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities).
4. The Portfolio will not purchase a security if as a result, more than 10% of
its net assets in the aggregate, at market value, would be invested in
securities which cannot be readily resold because of legal or contractual
restrictions on resale or for which there is no readily available market, or
repurchase agreements maturing in more than seven days or securities used as a
cover for written over-the-counter options, if any.
5. The Portfolio will not invest in warrants if, at the time of acquisition, the
investment in warrants, valued at the lower of cost or market value, would
exceed 5% of the Portfolio's net assets. For purposes of this restriction,
warrants acquired by the Portfolio in units or attached to securities may be
deemed to be without value.
6. The Portfolio will not make loans of money or securities other than (a)
through the purchase of securities in accordance with the Portfolio's investment
objective, (b) through repurchase agreements and (c) by lending securities in an
amount not to exceed 33 1/3% of the Portfolio's total assets to broker-dealers
or other institutional investors where the borrower of such securities provides
cash or cash equivalents as collateral (such cash equivalents will be limited to
securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities) at all times in an amount at least equal to 100% of the value
of the borrowed securities, marked to market, and the Portfolio will retain the
right to obtain any dividend, interest or other distribution on the securities
and any increase in their market value and may invest the cash collateral and
earn additional income, or it may receive an agreed-upon amount of interest
income from the borrower who has delivered equivalent collateral or secured a
letter of credit. The Portfolio reserves the right to terminate such arrangement
at any time (such right of termination may be exercised, among other reasons, to
obtain the return of the securities on loan for the purpose of voting on any
matters considered material by the Portfolio). The Portfolio will make only
loans of securities for nine months or less.
7. The Portfolio will not borrow money except from banks and then in amounts not
in excess of 33 1/3% of its total assets. The Portfolio may borrow at prevailing
interest rates and invest the funds in additional securities. The Portfolio's
borrowings are limited so that immediately after such borrowing the value of the
Portfolio's assets (including borrowings) less its liabilities (not including
borrowings) is at least three times the amount of the borrowings. Should the
Portfolio, for any reason, have borrowings that do not meet the above test then,
within three business days, the Portfolio must reduce such borrowings so as to
meet the necessary test. Under such a circumstance, the Portfolio may have to
liquidate securities at a time when it is disadvantageous to do so.
8. The Portfolio will not make short sales except short sales made "against the
box" to defer recognition of taxable gains or losses.
9. The Portfolio will not purchase or sell real estate (although it may purchase
securities secured by real estate interests or interests therein, or issued by
companies or investment trusts which invest in real estate or interests
therein).
10. The Portfolio will not invest directly in oil, gas, or other mineral
exploration or development programs; however, the Portfolio may purchase
securities of issuers whose principal business activities fall within such
areas.
11. The Portfolio will not purchase a security if as a result, more than 5% of
the value of that Portfolio's assets, at market value, would be invested in the
securities of issuers which, with their predecessors, have been in business less
than three years.
Investment Restrictions Applicable Only to the Seligman Henderson
International Small Cap Portfolio:
The Portfolio will not:
1. As to 75% of the value of its total assets, invest more than 5% of its total
assets, at market value, in the securities of any one issuer (except securities
issued or guaranteed by the U.S. Government, its agencies or instrumentalities).
2. Invest more than 25% of its total assets, at market value, in the securities
of issuers principally engaged in the same industry (except securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities).
3. Own more than 10% of the outstanding voting securities of any issuer, or
more than 10% of any class of securities of one issuer.
4. Invest more than 5% of the value of its total assets, at market value, in the
securities of issuers which, with their predecessors, have been in business less
than three years; provided, however, that securities guaranteed by a company
that (including predecessors) has been in operation at least three continuous
years shall be excluded from this limitation.
5. Invest in warrants, if, at the time of acquisition, the investment in
warrants, valued at the lower of cost or market value, would exceed 5% of the
Portfolio's net assets. For purposes of this restriction, warrants acquired by
the Portfolio in units or attached to securities may be deemed to have been
purchased without cost.
6. Make loans of money or securities other than (a) through the purchase of
securities in accordance with the Portfolio's investment objective, (b) through
repurchase agreements, and (c) by lending portfolio securities in an amount not
to exceed 33 1/3% of the Portfolio's total assets.
7. Purchase or sell real estate (although it may purchase securities secured by
real estate interests on interests therein, or issued by companies or investment
trusts that invest in real estate or interests therein).
8. Make short sales except short sales against-the-box.
Investment Restrictions Applicable Only to the Lord Abbett Growth and
Income Portfolio:
1. The Portfolio will not purchase a security if as a result, that Portfolio
would own more than 10% of the outstanding voting securities of any issuer.
2. The Portfolio will not lend money or securities to any person except through
entering into short-term repurchase agreements with sellers of securities the
Portfolio has purchased, and through lending Portfolio securities to registered
broker-dealers where the loan is 100% secured by cash or its equivalent as long
as the Portfolio complies with regulatory requirements and the Sub-advisor deems
such loans not to expose the Portfolio to significant risk or adversely affect
the Portfolio's qualification for pass-through tax treatment under the Internal
Revenue Code (investment in repurchase agreements exceeding 7 days and in other
illiquid investments is limited to a maximum of 10% of Portfolio net assets).
3. The Portfolio will not pledge, mortgage, or hypothecate its assets --
however, this provision does not apply to the grant of escrow receipts or the
entry into other similar escrow arrangements arising out of the writing of
covered call options.
4. The Portfolio will not purchase securities of any issuer unless it or its
predecessor has a record of three years' continuous operation, except that the
Portfolio may purchase securities of such issuers through subscription offers or
other rights it receives as a security holder of companies offering such
subscriptions or rights, and such purchases will then be limited in the
aggregate to 5% of the Portfolio's net assets at the time of investment.
5. The Portfolio will not concentrate its investments in any one industry (the
Portfolio's investment policy of keeping its assets in those securities which
are selling at the most reasonable prices in relation to value normally results
in diversification among many industries -- consistent with this, the Portfolio
does not intend to invest more than 25% of its assets in any one industry
classification used by the Sub-advisor for investment purposes, although such
concentration could, under unusual economic and market conditions, amount to 30%
or conceivably somewhat more).
6. The Portfolio will not borrow money except from banks and then in amounts not
in excess of 33 1/3% of its total assets. The Portfolio may borrow at prevailing
interest rates and invest the Portfolios in additional securities. The
Portfolio's borrowings are limited so that immediately after such borrowing the
value of the Portfolio's assets (including borrowings) less its liabilities (not
including borrowings) is at least three times the amount of the borrowings.
Should the Portfolio, for any reason, have borrowings that do not meet the above
test then, within three business days, the Portfolio must reduce such borrowings
so as to meet the necessary test. Under such a circumstance, the Portfolio have
to liquidate securities at a time when it is disadvantageous to do so.
7. The Portfolio will not make short sales except short sales made "against the
box" to defer recognition of taxable gains or losses.
8. The Portfolio will not purchase or sell real estate (although it may purchase
securities secured by real estate interests or interests therein, or issued by
companies or investment trusts which invest in real estate or interests
therein).
9. The Portfolio will not invest directly in oil, gas, or other mineral
exploration or development programs; however, the Portfolio may purchase
securities of issuers whose principal business activities fall within such
areas.
10. The Portfolio will not purchase a security if as a result, more than 5% of
the value of that Portfolio's assets, at market value, would be invested in the
securities of issuers which, with their predecessors, have been in business less
than three years.
Investment Restrictions Applicable Only to the AST Money Market Portfolio:
1. The Portfolio will not purchase a security if as a result, the Portfolio
would own more than 10% of the outstanding voting securities of any issuer.
2. As to 75% of the value of its total assets, the Portfolio will not invest
more than 5% of its total assets, at market value, in the securities of any one
issuer (except securities issued or guaranteed by the U.S. Government, its
agencies or instrumentalities).
3. The Portfolio will not acquire any illiquid securities, such as repurchase
agreements with more than seven days to maturity or fixed time deposits with a
duration of over seven calendar days, if as a result thereof, more than 10% of
the market value of the Portfolio's total assets would be in investments which
are illiquid.
4. The Portfolio will not purchase a security if as a result, more than 25% of
its total assets, at market value, would be invested in the securities of
issuers principally engaged in the same industry (except securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities, negotiable
certificates of deposit, time deposits, and bankers' acceptances of United
States branches of United States banks).
5. The Portfolio will not enter into reverse repurchase agreements exceeding in
the aggregate one-third of the market value of the Portfolio's total assets,
less liabilities other than obligations created by reverse repurchase
agreements.
6. The Portfolio will not borrow money, except from banks for extraordinary or
emergency purposes and then only in amounts not to exceed 10% of the value of
the Portfolio's total assets, taken at cost, at the time of such borrowing. The
Portfolio may not mortgage, pledge or hypothecate any assets except in
connection with any such borrowing and in amounts not to exceed 10% of the value
of the Portfolio's net assets at the time of such borrowing. The Portfolio will
not purchase securities while borrowings exceed 5% of the Portfolio's total
assets. This borrowing provision is included to facilitate the orderly sale of
securities, for example, in the event of abnormally heavy redemption requests,
and is not for investment purposes and shall not apply to reverse repurchase
agreements.
7. The Portfolio will not make loans, except through purchasing or holding debt
obligations, or entering into repurchase agreements, or loans of Portfolio
securities in accordance with the Portfolio's investment objectives and
policies.
8. The Portfolio will not purchase securities on margin, make short sales of
securities, or maintain a short position, provided that this restriction shall
not be deemed to be applicable to the purchase or sale of when-issued securities
or of securities for delivery at a future date.
9. The Portfolio will not purchase or sell puts, calls, straddles, spreads, or
any combination thereof; real estate; commodities; or commodity contracts or
interests in oil, gas or mineral exploration or development programs. However,
the Portfolio may purchase bonds or commercial paper issued by companies which
invest in real estate or interests therein including real estate investment
trusts.
Investment Restrictions Applicable Only to the JanCap Growth Portfolio:
1. The Portfolio will not purchase a security if as a result, that Portfolio
would own more than 10% of the outstanding voting securities of any issuer.
2. As to 75% of the value of its total assets, the Portfolio will not invest
more than 5% of its total assets, at market value, in the securities of any one
issuer (except cash items and securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities).
3. The Portfolio will not purchase a security if as a result, more than 25% of
its total assets, at market value, would be invested in the securities of
issuers principally engaged in the same industry (except securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities).
4. The Portfolio will not purchase or sell real estate (although it may purchase
securities secured by real estate interests or interests therein, or issued by
companies or investment trusts which invest in real estate or interests
therein).
5. The Portfolio will not purchase or sell physical commodities other than
foreign currencies unless acquired as a result of ownership of securities (but
this shall not prevent the Portfolio from purchasing or selling options,
futures, swaps and forward contracts or from investing in securities and other
instruments backed by physical commodities).
6. The Portfolio will not lend any security or make any other loan, if as a
result, more than 25% of its total assets would be lent to other parties (but
this limitation does not apply to purchases of commercial paper, debt securities
or to repurchase agreements).
Investment Restrictions Applicable Only to the Federated Utility Income
Portfolio:
1. The Portfolio will invest at least 25% of its total assets in securities
of utility companies.
2. The Portfolio will not purchase or sell commodities. However, the Portfolio
may purchase options on Portfolio securities and on financial futures contracts
for hedging purposes only.
3. The Portfolio will not purchase or sell real estate, although it may invest
in securities of companies whose business involves the purchase or sale of real
estate or in securities which are secured by real estate or interests in real
estate.
4. The Portfolio will not purchase any securities on margin, other than in
connection with the purchase of put options on financial futures contracts, but
may obtain such short-term credits as may be necessary for the clearance of
transactions.
5. The Portfolio will not sell securities short unless: (i) during the time the
short position is open, it owns an equal amount of securities sold or securities
readily and freely convertible into or exchangeable, without payment of
additional consideration, for securities of the same issue as, and equal in
amount to, the securities sold short; and (ii) not more than 10% of the current
value of the Portfolio's net assets is held as collateral for such sales at any
one time.
6. The Portfolio will not issue senior securities, except that the Portfolio may
borrow money and engage in reverse repurchase agreements in amounts up to
one-third of the value of its net assets, including the amounts borrowed.
7. The Portfolio will not borrow money or engage in reverse repurchase
agreements for investment leverage, but rather as a temporary, extraordinary or
emergency measure to facilitate management of the Portfolio by enabling the
Portfolio to meet redemption requests when the liquidation of Portfolio
securities is deemed to be inconvenient or disadvantageous. The Portfolio will
not purchase any securities while any such borrowings are outstanding. However,
during the period any reverse repurchase agreements are outstanding, but only to
the extent necessary to assure completion of the reverse repurchase agreements,
the Portfolio will restrict the purchase of portfolio investments to money
market instruments maturing on or before the expiration date of the reverse
repurchase agreements.
8. The Portfolio may lend Portfolio securities, as long as the value of the
loaned securities does not exceed one-third of the value of the Portfolio's
total assets. This shall not prevent the holding of corporate bonds, debentures,
notes, certificates of indebtedness or other debt securities of an issuer,
repurchase agreements, or other transactions which are permitted by the
Portfolio's Investment Objective and Policies.
9. The Portfolio will not invest more than 10% of its total assets in
restricted securities.
10. The Portfolio will not purchase interests in oil, gas or other mineral
exploration or development programs or leases, although it may purchase
securities of issuers which engage in whole or in part in such activities.
11. The Portfolio will not invest more than 5% of the value of its total assets
in securities of companies, including their predecessors, that have been in
operation for less than three years.
12. The Portfolio will not purchase the securities of any issuer (other than the
U.S. government, its agencies, or instrumentalities or instruments secured by
the securities of such issuers, such as repurchase agreements or cash or cash
items) if, as a result, more than 5% of the value of its total assets would be
invested in the securities of such issuer, or acquire more than 10% of any class
of voting securities of any issuer. For these purposes, all common stock and
preferred stock of an issuer, taken together, will be deemed to be a single
class, regardless of priorities, series, designations, or other differences.
13. The Portfolio will not invest more than 5% of its net assets in warrants,
not more than 2% of which may be warrants not listed on the New York Stock
Exchange or American Stock Exchange.
Investment Restrictions Applicable Only to the Federated High Yield Portfolio:
1. The Portfolio will not purchase any securities on margin but may obtain
such short-term credits as may be necessary for the clearance of transactions.
2. The Portfolio will not borrow money except as a temporary measure for
extraordinary or emergency purposes and then only from banks and only in amounts
not in excess of 5% of the value of its net assets, taken at the lower of cost
or market. In addition, to meet redemption requests without immediately selling
portfolio securities, the Portfolio may borrow up to one-third of the value of
its total assets (including the amount borrowed) less its liabilities (not
including borrowings, but including the current fair market value of any
securities carried in open short positions). This practice is not for investment
leverage but solely to facilitate management of the portfolio by enabling the
Portfolio to meet redemption requests when the liquidation of portfolio
securities is deemed to be inconvenient or disadvantageous. If, due to market
fluctuations or other reasons, the value of the Portfolio's assets falls below
300% of its borrowings, it will reduce its borrowings within three business
days. No more than 10% of the value of the Portfolio's total assets at the time
of providing such security may be used to secure borrowings.
3. The Portfolio will not invest more than 5% of its total assets in the
securities of any one issuer (except cash and cash instruments, securities
issued or guaranteed by the U.S. government, its agencies, or instrumentalities,
or instruments secured by these money market instruments, such as repurchase
agreements).
4. The Portfolio will not invest more than 5% of the value of its total assets
in securities of companies, including their predecessors, that have been in
operation for less than three years.
5. The Portfolio will not invest more than 5% of the value of its total
assets in foreign securities which are not publicly traded in the United States.
6. The Portfolio will not purchase or sell real estate, although it may invest
in marketable securities secured by real estate or interests in real estate, and
it may invest in the marketable securities of companies investing or dealing in
real estate.
7. The Portfolio will not purchase or sell commodities or commodity contracts or
oil, gas, or other mineral exploration or development programs. However, it may
invest in the marketable securities of companies investing in or sponsoring such
programs.
8. The Portfolio will not make loans, except through the purchase or holding of
securities in accordance with its investment objective, policies, and
limitations and through repurchase agreements. The Portfolio may invest up to 5%
of its total assets in repurchase agreements which mature more than seven days
from the time they are entered into. The Portfolio may lend portfolio securities
if the borrower provides 100% cash collateral in the form of cash or U.S.
government securities. This collateral must be valued daily and should the
market value of the loaned securities increase, the borrower must furnish
additional collateral. The Portfolio retains the right to any dividends,
interest, or other distribution paid on the securities and any increase in their
market value. Loans will be subject to termination at the option of the
Portfolio or the borrower.
9. The Portfolio will not invest more than 10% of its net assets in securities
subject to restrictions on resale under federal securities laws.
10. The Portfolio will not write, purchase, or sell puts, calls, or any
combination thereof.
11. The Portfolio will not make short sales of securities or maintain short
positions, unless: during the time the short position is open, it owns an equal
amount of the securities sold or securities readily and freely convertible into
or exchangeable, without payment of additional consideration, for securities of
the same issue as, and equal in amount to, the securities sold short; and not
more than 10% of the Portfolio's net assets (taken at current value) is held as
collateral for such sales at any one time.
12. The Portfolio will not purchase securities of a company for the purpose of
exercising control or management. However, the Portfolio may invest in up to 10%
of the voting securities of any one issuer and may exercise its voting powers
consistent with the best interests of the Portfolio. From time to time, the
Portfolio, together with other investment companies advised by subsidiaries or
affiliates of Federated Investors, may together buy and hold substantial amounts
of a company's voting stock. All such stock may be voted together. In some such
cases, the Portfolio and the other investment companies might collectively be
considered to be in control of the company in which they have invested. In some
cases, Directors, agents, employees, officers, or others affiliated with or
acting for the Portfolio, its Sub-advisor, or affiliated companies might
possibly become directors of companies in which the Portfolio holds stock.
13. The Portfolio will not invest more than 25% of the value of its total assets
in one industry. However, for temporary defensive purposes, the Portfolio may at
times invest more than that percentage in: cash and cash items; securities
issued or guaranteed by the U.S. government, its agencies, or instrumentalities;
or instruments secured by these money market instruments, such as repurchase
agreements.
Investment Restrictions Applicable Only to the AST Phoenix Balanced Asset
Portfolio:
If a percentage restriction described below is adhered to at the time of
investment, a later increase or decrease in percentage beyond the specified
limit resulting from a change in values of the Portfolio's securities or amount
of net assets shall not be considered a violation of the restriction.
1. The Portfolio will not purchase the securities of any issuer, other than
obligations issued or guaranteed as to principal and interest by the United
States government or its agencies or instrumentalities, if immediately
thereafter (i) more than 5% of the market value of the Portfolio's total assets
would be invested in the securities of such issuer or (ii) more than 10% of the
outstanding securities of any class of such issuer would be held by the
Portfolio or by all of the portfolios of the Trust in the aggregate.
2. The Portfolio will not concentrate the portfolio investments in any one
industry. To comply with this restriction, no security may be purchased by the
Portfolio if such purchase would cause the value of the Portfolio's aggregate
investment in any one industry to exceed 25% of the market value of the
Portfolio's total assets.
3. The Portfolio will not make short sales of securities or maintain a short
position.
4. The Portfolio will not make cash loans, except that the Portfolio may (i)
purchase bonds, notes, debentures or similar obligations which are customarily
purchased by institutional investors whether publicly distributed or not and
(ii) enter into repurchase agreement, provided that, no more than 10% of the
market value of the Portfolio's net assets may be subject to repurchase
agreements maturing in more than seven days.
5. The Portfolio will not make securities loans, except that the Portfolio may
make loans of its securities provided that the market value of the securities
subject to any such loans does not exceed 25% of the market value of the
Portfolio's total assets.
6. The Portfolio will not make investments in real estate or commodities or
commodities contracts, although (i) the Portfolio may purchase securities of
issuers which deal in real estate or commodities and may purchase securities
which are secured by interests in real estate, specifically, securities issued
by real estate investment trusts and (ii) the Portfolio may engage in
transactions in financial futures contracts and related options, provided that
the sum of the initial margin deposits on such Portfolio's existing futures
positions and the premiums paid for related options would not exceed in the
aggregate 2% of the Portfolio's total assets.
7. The Portfolio will not invest in oil, gas or other mineral exploration or
development programs, although the Portfolio may purchase securities of issuers
which engage in whole or in part in such activities.
8. The Portfolio will not invest in puts, calls, straddles and any combination
thereof, except that the Portfolio may (i) write (sell) exchange-traded covered
call options on portfolio securities and on securities indices and engage in
closing purchase transactions and (ii) invest up to 2% of its total assets in
exchange-traded covered call and put options on securities and securities
indices.
9. The Portfolio will not participate in a joint or joint and several trading
account in securities.
10. The Portfolio will not purchase securities of any issuer which together with
predecessors has a record of less than three years' continuous operation, if as
a result more than 5% of the market value of the total net assets of the
Portfolio would then be invested in such securities.
11. The Portfolio will not borrow money, except that the Portfolio may (i)
borrow money for the Portfolio for temporary administrative purposes provided
that any such borrowing does not exceed 10% of the market value of the
Portfolio's total assets and (ii) borrow money for the Portfolio for investment
purposes, provided that such borrowing is (a) authorized by the Board of
Trustees, (b) limited to 5% of the market value of the Portfolio's total assets
and (c) subject to an agreement by the lender that any recourse is limited to
the assets of the Portfolio.
12. The Portfolio will not pledge, mortgage or hypothecate the Portfolio's
assets to an extent greater than 10% of the market value of the Portfolio's
total assets to secure borrowing made pursuant to item 11 above.
13. The Portfolio may purchase illiquid securities, including repurchase
agreements providing for settlement more than seven days after notice and
restricted securities deemed to be illiquid, but such securities may not
constitute more than 10% of the Portfolio's securities.
Investment Restrictions Only Applicable to the T. Rowe Price Asset Allocation
Portfolio:
The following fundamental policies should be read in connection with
the notes set forth below. The notes are not fundamental policies. As a matter
of fundamental policy, the Portfolio may not:
1. Borrow money except that the Portfolio may (i) borrow for non-leveraging,
temporary or emergency purposes and (ii) engage in reverse repurchase agreements
and make other investments or engage in other transactions, which may or may be
deemed to involve a borrowing, in a manner consistent with the Portfolio's
investment objective and policies, provided that the combination of (i) and (ii)
shall not exceed 33 1/3% of the value of the Portfolio's total assets (including
the amount borrowed) less liabilities (other than borrowings) or such other
percentage permitted by law. Any borrowings which come to exceed this amount
will be reduced in accordance with applicable law. The Portfolio may borrow from
banks, other Price Portfolios or other persons to the extent permitted by
applicable law;
2. Purchase or sell physical commodities; except that it may enter into
futures contracts and options thereon;
3. Purchase the securities of any issuer if, as a result, more than 25% of
the value of the Portfolio's total assets would be invested in the securities of
issuers having their principal business activities in the same industry;
4. Make loans, although the Portfolio may (i) purchase money market securities
and enter into repurchase agreements; (ii) acquire publicly- distributed or
privately placed debt securities and purchase debt; (iii) lend portfolio
securities; and (iv) participate in an interfund lending program with other
Price Portfolios provided that no such loan may be made if, as a result, the
aggregate of such loans would exceed 33 1/3% of the value of the Portfolio's
total assets;
5. Purchase a security if, as a result, with respect to 75% of the value of
its total assets, more than 5% of the value of the Portfolio's total assets
would be invested in the securities of a single issuer, except securities issued
or guaranteed by the U.S. government, or any of its agencies or
instrumentalities;
6. Purchase a security if, as a result, with respect to 75% of the value of
the Portfolio's total assets, more than 10% of the outstanding voting securities
of any issuer would be held by the Portfolio (other than obligations issued or
guaranteed by the U.S. government, its agencies or instrumentalities);
7. Purchase or sell real estate unless acquired as a result of ownership of
securities or other instruments (but this shall not prevent the Portfolio from
investing in securities or other instruments back by real estate or securities
of companies engaged in the real estate business);
8. Issue senior securities except in compliance with the Investment Company
Act of 1940; or
9. Underwrite securities issued by other persons, except to the extent that the
Portfolio may be deemed to be an underwriter within the meaning of the
Securities Act of 1933 in connection with the purchase and sale of its portfolio
securities in the ordinary course of pursuing its investment program.
Notes: The following notes should be read in connection with the above
described fundamental policies. The notes are not fundamental policies.
With respect to investment restrictions (1) and (4), the Portfolio will
not borrow or lend to any other Price Portfolio unless it applies for and
receives an exemptive order from the SEC or the SEC issues rules permitting such
transactions. The Portfolio has no current intention of engaging in any such
activity and there is no assurance the SEC would grant any order requested by
the Portfolio or promulgate any rules allowing the transactions.
With respect to investment restriction (2), the Portfolio does not
consider currency contracts on hybrid investments to be commodities.
For the purposes of investment restriction (3), United States federal,
state or local governments, or related agencies and instrumentalities, are not
considered an industry. Foreign governments are considered an industry.
For purposes of investment restriction (4), the Portfolio will consider
the acquisition of a debt security to include the execution of a note or other
evidence of an extension of credit with a term of more than nine months.
Investment Restrictions Only Applicable to the T. Rowe Price International
Equity Portfolio:
The following fundamental policies should be read in connection with
the notes set forth below. The notes are not fundamental policies. As a matter
of fundamental policy, the Portfolio may not:
1. Borrow money except that the Portfolio may (i) borrow for non-leveraging,
temporary or emergency purposes and (ii) engage in reverse repurchase agreements
and make other investments or engage in other transactions, which may or may be
deemed to involve a borrowing, in a manner consistent with the Portfolio's
investment objective and policies, provided that the combination of (i) and (ii)
shall not exceed 33 1/3% of the value of the Portfolio's total assets (including
the amount borrowed) less liabilities (other than borrowings) or such other
percentage permitted by law. Any borrowings which come to exceed this amount
will be reduced in accordance with applicable law. The Portfolio may borrow from
banks, other Price Portfolios or other persons to the extent permitted by
applicable law;
2. Purchase or sell physical commodities; except that the Portfolio may enter
into futures contracts and options thereon;
3. Purchase the securities of any issuer if, as a result, more than 25% of
the value of the Portfolio's total assets would be invested in the securities of
issuers having their principal business activities in the same industry;
4. Make loans, although the Portfolio may (i) purchase money market securities
and enter into repurchase agreements; (ii) acquire publicly-distributed or
privately placed debt securities and purchase debt; (iii) lend portfolio
securities; and (iv) participate in an interfund lending program with other
Price Portfolios provided that no such loan may be made if, as a result, the
aggregate of such loans would exceed 33 1/3% of the value of the Portfolio's
total assets;
5. Purchase a security if, as a result, with respect to 75% of the value of the
Portfolio's total assets, more than 5% of the value of its total assets would be
invested in the securities of any one issuer (other than obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities);
6. Purchase a security if, as a result, with respect to 75% of the value of the
Portfolio's total assets, more than 10% of the outstanding voting securities of
any issuer would be held by the Portfolio (other than obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities);
7. Purchase or sell real estate unless acquired as a result of ownership of
securities or other instruments (but this shall not prevent the Portfolio from
investing in securities or other instruments back by real estate or securities
of companies engaged in the real estate business);
8. Issue senior securities except in compliance with the Investment Company
Act of 1940; or
9. Underwrite securities issued by other persons, except to the extent that the
Portfolio may be deemed to be an underwriter within the meaning of the
Securities Act of 1933 in connection with the purchase and sale of its portfolio
securities in the ordinary course of pursuing its investment program.
Notes: The following notes should be read in connection with the above
described fundamental policies. The notes are not fundamental policies.
With respect to investment restrictions (1) and (4), the Portfolio will
not borrow or lend to any other Price Portfolio unless it applies for and
receives an exemptive order from the SEC or the SEC issues rules permitting such
transactions. The Portfolio has no current intention of engaging in any such
activity and there is no assurance the SEC would grant any order requested by
the Portfolio or promulgate any rules allowing the transactions.
With respect to investment restriction (2), the Portfolio does not
consider currency contracts or hybrid investments to be commodities.
For the purposes of investment restriction (3), United States federal,
state or local governments, or related agencies and instrumentalities, are not
considered an industry. Foreign governments are considered an industry.
For purposes of investment restriction (4), the Portfolio will consider
the acquisition of a debt security to include the execution of a note or other
evidence of an extension of credit with a term of more than nine months.
Investment Restrictions Applicable Only to the T. Rowe Price Natural
Resources Portfolio:
The following fundamental policies should be read in connection with
the notes set forth below. The notes are not fundamental policies. As a matter
of fundamental policy, the Portfolio may not:
1. Borrow money except that the Portfolio may (i) borrow for non-leveraging,
temporary or emergency purposes and (ii) engage in reverse repurchase agreements
and make other investments or engage in other transactions, which may involve a
borrowing, in a manner consistent with the Portfolio's investment objective and
program, provided that the combination of (i) and (ii) shall not exceed 33 1/3%
of the value of the Portfolio's total assets (including the amount borrowed)
less liabilities (other than borrowings) or such other percentage permitted by
law. Any borrowings which come to exceed this amount will be reduced in
accordance with applicable law. The Portfolio may borrow from banks, other Price
Portfolio or other persons to the extent permitted by applicable law;
2. Purchase or sell physical commodities; except that it may enter into
futures contracts and options thereon;
3. Purchase the securities of any issuer if, as a result, more than 25% of
the value of the Portfolio's total assets would be invested in the securities of
issuers having their principal business activities in the same industry;
4. Make loans, although the Portfolio may (i) lend portfolio securities and
participate in an interfund lending program with other Price Portfolio provided
that no such loan may be made if, as a result, the aggregate of such loans would
exceed 33 1/3% of the value of the Portfolio's total assets; (ii) purchase money
market securities and enter into repurchase agreements; and (iii) acquire
publicly-distributed or privately-placed debt securities and purchase debt;
5. Purchase a security if, as a result, with respect to 75% of the value of its
total assets, more than 5% of the value of the Portfolio's total assets would be
invested in the securities of a single issuer, except securities issued or
guaranteed by the U.S. Government or any of its agencies or instrumentalities;
6. Purchase a security if, as a result, with respect to 75% of the
value of the Portfolio's total assets, more than 10% of the outstanding voting
securities of any issuer would be held by the Portfolio (other than obligations
issued or guaranteed by the U.S. Government, its agencies or instrumentalities);
7. Purchase or sell real estate unless acquired as a result of ownership of
securities or other instruments (but this shall not prevent the Portfolio
from investing in securities or other instruments backed by real estate or
in securities of companies engaged in the real estate business);
8. Issue senior securities except in compliance with the Investment Company
Act of 1940; or
9. Underwrite securities issued by other persons, except to the extent that the
Portfolio may be deemed to be an underwriter within the meaning of the
Securities Act of 1933 in connection with the purchase and sale of its portfolio
securities in the ordinary course of pursuing its investment program.
Notes: The following notes should be read in connection with the
above-described fundamental policies. The notes are not fundamental policies.
With respect to investment restrictions (1) and (4), the Portfolio will
not borrow from or lend to any other Price Portfolio unless it applies for and
receives an exemptive order from the SEC or the SEC issues rules permitting such
transactions. The Portfolio has no current intention of engaging in any such
activity and there is no assurance the SEC would grant any order requested by
the Portfolio or promulgate any rules allowing the transactions.
With respect to investment restriction (2), the Portfolio does not
consider currency contracts or hybrid investments to be commodities.
For purposes of investment restriction (3), U.S., state or local
governments, or related agencies or instrumentalities, are not considered an
industry. Industries are determined by reference to the classifications of
industries set forth in the Portfolio's semi-annual and annual reports.
For purposes of investment restriction (4), the Portfolio will consider
the acquisition of a debt security to include the execution of a note or other
evidence of an extension of credit with a term of more than nine months.
Investment Restrictions Applicable Only to the T. Rowe Price International
Bond Portfolio:
As a matter of fundamental policy, the Portfolio may not:
1. Borrow money, except as a temporary measure for extraordinary or emergency
purposes or except in connection with reverse repurchase agreements provided
that the Portfolio maintains asset coverage of 300% for all borrowings;
2. Purchase or sell real estate (except that the Portfolio may invest in (i)
securities of companies which deal in real estate or mortgages, and (ii)
securities secured by real estate or interests therein, and that the Portfolio
reserves freedom of action to hold and to sell real estate acquired as a result
of the Portfolio's ownership of securities) or purchase or sell physical
commodities or contracts relating to physical commodities;
3. Act as underwriter of securities issued by others, except to the extent that
it may be deemed an underwriter in connection with the disposition of
portfolio securities of the Portfolio;
4. Make loans to other persons, except (a) loans of portfolio securities, and
(b) to the extent the entry into repurchase agreements and the purchase of debt
securities in accordance with its investment objectives and investment policies
may be deemed to be loans;
5. Issue senior securities except in compliance with the Investment Company
Act of 1940; or
6. Purchase any securities which would cause more than 25% of the market value
of its total assets at the time of such purchase to be invested in the
securities of one or more issuers having their principal business activities in
the same industry, provided that there is no limitation with respect to
investments in obligations issued or guaranteed by the U.S. Government, its
agencies or instrumentalities (for the purposes of this restriction, telephone
companies are considered to be in a separate industry from gas and electric
public utilities, and wholly-owned finance companies are considered to be in the
industry of their parents if their activities are primarily related to financing
the activities of their parents).
Investment Restrictions Applicable Only to the Founders Capital Appreciation
Portfolio:
As a matter of fundamental policy, the Portfolio will not:
1. Purchase any securities on margin except to obtain such short-term credits
as may be necessary for the clearance of transactions.
2. Sell securities short.
3. Make loans to other persons; the purchase of a portion of an issue of
publicly distributed bonds, debentures or other securities is not considered the
making of a loan by the Portfolio. The Portfolio may also enter into repurchase
agreements by purchasing U.S. Government securities with a simultaneous
agreement with the seller to repurchase them at the original purchase price plus
accrued interest.
4. Underwrite the securities of other issuers.
5. Invest in commodities, commodity futures contracts, real estate, real estate
mortgage loans or other illiquid interests in real estate, except that the
Portfolio may invest in securities of issuers which invest in commodities,
commodity futures, real estate, real estate mortgage loans or other illiquid
interests in real estate.
6. Make any investment which would concentrate 25% or more of the Portfolio's
total assets in the securities of issuers having their principal business
activities in the same industry, provided that this limitation does not apply to
obligations issued or guaranteed by the U.S. government, its agencies or
instrumentalities.
7. Issue any senior securities.
8. Borrow money, except for extraordinary or emergency purposes, and then only
from banks in amounts up to 10% of the Portfolio's net assets computed at the
lesser of cost or value.
Investment Restrictions Applicable Only to the INVESCO Equity Income Portfolio:
The Portfolio has adopted certain fundamental investment restrictions.
Under these restrictions, the Portfolio may not:
1. Issue preference shares or create any funded debt;
2. Sell short;
3. Borrow money except from banks in excess of 5% of the value of its total
net assets, and when borrowing, it is a temporary measure for emergency
purposes;
4. Buy or sell real estate, commodities, commodity contracts (however, the
Portfolio may purchase securities of companies investing in real estate);
5. Purchase any security or enter into a repurchase agreement, if as a result,
more than 15% of its net assets would be invested in repurchase agreements not
entitling the holder to payment of principal and interest within seven days and
in securities that are illiquid by virtue of legal or contractual restrictions
on resale or the absence of a readily available market. The Trustees or the
Investment Manager or the Sub-advisor, acting pursuant to authority delegated by
the Trustees, may determine that a readily available market exists for
securities eligible for resale pursuant to Rule 144A under the Securities Act of
1933, or any successor to that rule, and therefore that such securities are not
subject to the foregoing limitation;
6. Purchase securities if the purchase would cause the Portfolio, at the time,
to have more than 5% of its total assets invested in the securities of any one
company or to own more than 10% of the voting securities of any one company
(except obligations issued or guaranteed by the U.S. Government);
7. Make loans to any person, except through the purchase of debt securities in
accordance with the Portfolio's investment policies, or the lending of portfolio
securities to broker-dealers or other institutional investors, or the entering
into repurchase agreements with member banks of the Federal Reserve System,
registered broker-dealers and registered government securities dealers. The
aggregate value of all portfolio securities loaned may not exceed 33-1/3% of the
Portfolio's total net assets (taken at current value); or
8. Invest more than 25% of the value of the Portfolio's assets in one
particular industry.
Investment Restrictions Applicable Only to the PIMCO Total Return Bond
Portfolio:
The following are fundamental investment restrictions.
1. The Portfolio will not invest in a security if, as a result of such
investment, more than 25% of its total assets (taken at market value at the time
of investment) would be invested in securities of issuers of a particular
industry, except that this restriction does not apply to securities issued or
guaranteed by the U.S. government or its agencies or instrumentalities (or
repurchase agreements with respect thereto);
2. The Portfolio will not, with respect to 75% of its total assets, invest in a
security if, as a result of such investment, more than 5% of its total assets
(taken at market value at the time of investment) would be invested in the
securities of any one issuer, except that this restriction does not apply to
securities issued or guaranteed by the U.S. government or its agencies or
instrumentalities (or repurchase agreements with respect thereto);
3. The Portfolio will not, with respect to 75% of its assets, invest in a
security if, as a result of such investment, it would hold more than 10% (taken
at the time of investment) of the outstanding voting securities of any one
issuer;
4. The Portfolio will not purchase or sell real estate (although it may purchase
securities secured by real estate or interests therein, or securities issued by
companies which invest in real estate, or interests therein);
5. The Portfolio will not purchase or sell commodities contracts or oil, gas or
mineral programs. This restriction shall not prohibit the Portfolio, subject to
restrictions stated in the Trust's Prospectus and elsewhere in this Statement,
from purchasing, selling or entering into futures contracts, options on futures
contracts, foreign currency forward contracts, foreign currency options, or any
interest rate, securities related or foreign currency-related hedging
instrument, including swap agreements and other derivative instruments, subject
to compliance with any applicable provisions of the federal securities laws or
commodities laws;
6. The Portfolio will not borrow money, issue senior securities, pledge,
mortgage, hypothecate its assets, except that the Portfolio may (i) borrow from
banks or enter into reverse repurchase agreements, or employ similar investment
techniques, and pledge its assets in connection therewith, but only if
immediately after each borrowing there is an asset coverage of 300% and (ii)
enter into transactions in options, futures and options on futures and other
derivative instruments as described in the Trust's Prospectus and this Statement
(the deposit of assets in escrow in connection with the writing of covered put
and call options and the purchase of securities on a when-issued or delayed
delivery basis, collateral arrangements with respect to initial or variation
margin deposits for future contracts and commitments entered into under swap
agreements or other derivative instruments, will not be deemed to be pledges of
the Portfolio's assets);
7. The Portfolio will not lend funds or other assets, except that the Portfolio
may, consistent with its investment objective and policies: (a) invest in debt
obligations, including bonds, debentures or other debt securities, bankers'
acceptances and commercial paper, even though the purchase of such obligations
may be deemed to be the making of a loan, (b) enter into repurchase agreements,
and (c) lend its Portfolio securities in an amount not to exceed one-third the
value of its total assets, provided such loans are and in accordance with
applicable guidelines established by the SEC and the Trust's Board of Trustees;
or
8. The Portfolio will not maintain a short position, or purchase, write or sell
puts, calls, straddles, spreads or combinations thereof, except as set forth in
the Trust's Prospectus and this Statement for transactions in options, futures,
and options on futures transactions arising under swap agreements or other
derivative instruments.
Investment Restrictions Applicable Only to the PIMCO Limited Maturity Bond
Portfolio:
The Portfolio may not:
1. Invest in a security if, as a result of such investment, more than 25% of its
total assets (taken at market value at the time of such investment) would be
invested in the securities of issuers in any particular industry, except that
this restriction does not apply to securities issued or guaranteed by the U.S.
Government or its agencies or instrumentalities (or repurchase agreements with
respect thereto);
2. With respect to 75% of its assets, invest in a security if, as a result of
such investment, more than 5% of its total assets (taken at market value at the
time of such investment) would be invested in securities of any one issuer,
except that this restriction does not apply to securities issued or guaranteed
by the U.S. Government or its agencies or instrumentalities;
3. With respect to 75% of its assets, invest in a security if, as a result
of such investment, it would hold more than 10% (taken at the time of such
investment) of the outstanding voting securities of any one issuer;
4. Purchase or sell real estate (although it may purchase securities secured by
real estate or interests therein, or securities issued by companies which
invest in real estate, or interests therein);
5. Purchase or sell commodities or commodities contracts or oil, gas or mineral
programs. This restriction shall not prohibit the Portfolio, subject to
restrictions described in the Prospectus and elsewhere in this Statement, from
purchasing, selling or entering into futures contracts, options, or any interest
rate, securities-related or foreign currency-related hedging instrument,
including swap agreements and other derivative instruments, subject to
compliance with any applicable provisions of the federal securities or
commodities laws;
6. Borrow money, issue senior securities, or pledge, mortgage or hypothecate its
assets, except that the Portfolio may (i) borrow from banks or enter into
reverse repurchase agreements, or employ similar investment techniques, and
pledge its assets in connection therewith, but only if immediately after each
borrowing there is asset coverage of 300% and (ii) enter into transactions in
options, futures and options on futures and other derivative instruments as
described in the Prospectus and in this Statement (the deposit of assets in
escrow in connection with the writing of covered put and call options and the
purchase of securities on a when-issued or delayed delivery basis, collateral
arrangements with respect to initial or variation margin deposits for futures
contracts and commitments entered into under swap agreements or other derivative
instruments, will not be deemed to be pledges of the Portfolio assets);
7. Lend any funds or other assets, except that a Portfolio may, consistent with
its investment objective and policies: (a) invest in debt obligations, including
bonds, debentures or other debt securities, banker' acceptance and commercial
paper, even though the purchase of such obligations may be deemed to be the
making of loans, (b) enter into repurchase agreements, and (c) lend its
portfolio securities in an amount not to exceed one-third of the value of its
total assets, provided such loans are made in accordance with applicable
guidelines established by the Securities and Exchange Commission and the Trust's
Board of Trustees; or
8. Maintain a short position, or purchase, write or sell puts, calls, straddles,
spreads or combinations thereof, except on such conditions as may be set forth
in the Prospectus and in this Statement.
Investment Restrictions Applicable Only to the Berger Capital Growth Portfolio:
The following fundamental restrictions apply to the Berger Capital
Growth Portfolio. The Portfolio may not:
1. Purchase the securities of any one issuer (except U.S. Government securities)
if immediately after and as a result of such purchase (a) the value of the
holdings of the Portfolio in the securities of such issuer exceeds 5% of the
value of the Portfolio's total assets or (b) the Portfolio owns more than 10% of
the outstanding voting securities or of any class of securities of such issuer.
2. Purchase securities of any company with a record of less than three years'
continuous operation (including that of predecessors) if such purchase would
cause the Portfolio's investments in all such companies taken at cost to exceed
5% of the value of the Portfolio's total assets.
3. Invest in any one industry more than 25% of the value of its total assets at
the time of such investment.
4. Purchase securities on margin from a broker or dealer or make short sales of
securities.
5. Make loans, except that the Portfolio may enter into repurchase agreements in
accordance with the Trust's investment policies. The Portfolio does not, for
this purpose, consider the purchase of all or a portion of an issue of publicly
distributed bonds, bank loan participation agreements, bank certificates of
deposit, bankers' acceptances, debentures or other securities, whether or not
the purchase is made upon the original issuance of the securities, to be the
making of a loan.
6. Borrow in excess of 5% of the value of its total assets, or pledge, mortgage,
or hypothecate its assets taken at market value to an extent greater than 10% of
the Portfolio's total assets taken at cost (and no borrowing may be undertaken
except from banks as a temporary measure for extraordinary or emergency
purposes).
7. Act as a securities underwriter (except to the extent the Portfolio may be
deemed an underwriter under the Securities Act of 1933 in disposing of a
security), issue senior securities (except to the extent permitted under the
Investment Company Act of 1940), invest in real estate although it may purchase
shares of a real estate investment trust), or invest in commodities or commodity
contracts.
8. Participate on a joint or joint and several basis in any securities trading
account.
Investment Restrictions Applicable Only to the Robertson Stephens Value +
Growth Portfolio:
As a matter of fundamental policy, the Portfolio may not:
1. Issue any class of securities which is senior to the Portfolio's shares of
beneficial interest, except that the Portfolio may borrow money to the extent
contemplated by Restriction 3 below;
2. Purchase securities on margin (but the Portfolio may obtain such short-term
credits as may be necessary for the clearance of transactions). (Margin payments
or other arrangements in connection with transactions in short sales, futures
contracts, options, and other financial instruments are not considered to
constitute the purchase of securities on margin for this purpose.);
3. Borrow more than one-third of the value of its total assets less all
liabilities and indebtedness (other than such borrowings) not represented by
senior securities;
4. 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;
5. As to 75% of the Portfolio's total assets, purchase any security (other than
obligations of the U.S. Government, its agencies or instrumentalities) if as a
result: (i) more than 5% of the Portfolio's total assets (taken at current
value) would then be invested in securities of a single issuer, or (ii) more
than 25% of the Portfolio's total assets (taken at current value) would be
invested in a single industry;
6. Invest in securities of any issuer if any officer or Trustee of the Trust or
any officer or director of the Sub-advisor, as the case may be, owns more than
1/2 of 1% of the outstanding securities of such issuer, and such officers,
Trustees and directors who own more than 1/2 of 1% own in the aggregate more
than 5% of the outstanding securities of such issuer; or
7. Make loans, except by purchase of debt obligations or other financial
instruments in which the Portfolio may invest consistent with its investment
policies, by entering into repurchase agreements, or through the lending of its
portfolio securities.
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.
CERTAIN RISK FACTORS AND INVESTMENT METHODS:
Some of the investment instruments, techniques and methods which may be
used by one or more of the Portfolios and the risks attendant thereto are
described below. Other risk factors and investment methods may be described in
the "Investment Objectives and Policies" and "Certain Risk Factors and
Investment Methods" section in the Trust's Prospectus and in the "Investment
Objectives and Policies" section of this Statement. The risks and investment
methods described below apply only to those Portfolios which may invest in such
instruments or use such techniques.
Debt Obligations:
Yields on short, intermediate, and long-term securities are dependent
on a variety of factors, including, the general conditions of the money and bond
markets, the size of a particular offering, the maturity of the obligation, and
the rating of the issue. Debt securities with longer maturities tend to produce
higher yields and are generally subject to potentially greater capital
appreciation and depreciation than obligations with shorter maturities and lower
yields. The market prices of debt securities usually vary, depending upon
available yields. An increase in interest rates will generally reduce the value
of portfolio investments, and a decline in interest rates will generally
increase the value of portfolio investments. The ability of the Portfolio to
achieve its investment objectives is also dependent on the continuing ability of
the issuers of the debt securities in which the Portfolio invests to meet their
obligations for the payment of interest and principal when due.
Special Risks Associated with Low-Rated and Comparable Unrated Securities:
Low-rated and comparable unrated securities, while generally offering
higher yields than investment-grade securities with similar maturities, involve
greater risks, including the possibility of default or bankruptcy. They are
regarded as predominantly speculative with respect to the issuer's capacity to
pay interest and repay principal. The special risk considerations in connection
with such investments are discussed below. See the Appendix of this Statement
for a discussion of securities ratings.
Effect of Interest Rates and Economic Changes. The low-rated and
comparable unrated securities market is relatively new, and its growth
paralleled a long economic expansion. As a result, it is not clear how this
market may withstand a prolonged recession or economic downturn. Such a
prolonged economic downturn could severely disrupt the market for and adversely
affect the value of such securities.
All interest-bearing securities typically experience appreciation when
interest rates decline and depreciation when interest rates rise. The market
values of low-rated and comparable unrated securities tend to reflect individual
corporate developments to a greater extent than do higher-rated securities,
which react primarily to fluctuations in the general level of interest rates.
Low-rated and comparable unrated securities also tend to be more sensitive to
economic conditions than are higher-rated securities. As a result, they
generally involve more credit risks than securities in the higher-rated
categories. During an economic downturn or a sustained period of rising interest
rates, highly leveraged issuers of low-rated and comparable unrated securities
may experience financial stress and may not have sufficient revenues to meet
their payment obligations. The issuer's ability to service its debt obligations
may also be adversely affected by specific corporate developments, the issuer's
inability to meet specific projected business forecasts, or the unavailability
of additional financing. The risk of loss due to default by an issuer of
low-rated and comparable unrated securities is significantly greater than
issuers of higher-rated securities because such securities are generally
unsecured and are often subordinated to other creditors. Further, if the issuer
of a low-rated and comparable unrated security defaulted, a Portfolio might
incur additional expenses to seek recovery. Periods of economic uncertainty and
changes would also generally result in increased volatility in the market prices
of low-rated and comparable unrated securities and thus in a Portfolio's net
asset value.
As previously stated, the value of such a security will decrease in a
rising interest rate market and accordingly, so will a Portfolio's net asset
value. If a Portfolio experiences unexpected net redemptions in such a market,
it may be forced to liquidate a portion of its portfolio securities without
regard to their investment merits. Due to the limited liquidity of high-yield
securities (discussed below) a Portfolio may be forced to liquidate these
securities at a substantial discount. Any such liquidation would reduce a
Portfolio's asset base over which expenses could be allocated and could result
in a reduced rate of return for a Portfolio.
Payment Expectations. Low-rated and comparable unrated securities
typically contain redemption, call, or prepayment provisions which permit the
issuer of such securities containing such provisions to, at their discretion,
redeem the securities. During periods of falling interest rates, issuers of
high-yield securities are likely to redeem or prepay the securities and
refinance them with debt securities with a lower interest rate. To the extent an
issuer is able to refinance the securities, or otherwise redeem them, a
Portfolio may have to replace the securities with a lower-yielding security,
which would result in a lower return for a Portfolio.
Credit Ratings. Credit ratings issued by credit-rating agencies
evaluate the safety of principal and interest payments of rated securities. They
do not, however, evaluate the market value risk of low-rated and comparable
unrated securities and, therefore, may not fully reflect the true risks of an
investment. In addition, credit-rating agencies may or may not make timely
changes in a rating to reflect changes in the economy or in the condition of the
issuer that affect the market value of the security. Consequently, credit
ratings are used only as a preliminary indicator of investment quality.
Investments in low-rated and comparable unrated securities will be more
dependent on the Sub-advisor's credit analysis than would be the case with
investments in investment-grade debt securities. The Sub-advisor may employ its
own credit research and analysis, which could include a study of existing debt,
capital structure, ability to service debt and to pay dividends, the issuer's
sensitivity to economic conditions, its operating history, and the current trend
of earnings. The Sub-advisor continually monitors the investments in a Portfolio
and evaluates whether to dispose of or to retain low-rated and comparable
unrated securities whose credit ratings or credit quality may have changed.
Liquidity and Valuation. A Portfolio may have difficulty disposing of
certain low-rated and comparable unrated securities because there may be a thin
trading market for such securities. Because not all dealers maintain markets in
all low-rated and comparable unrated securities, there is no established retail
secondary market for many of these securities. A Portfolio anticipates that such
securities could be sold only to a limited number of dealers or institutional
investors. To the extent a secondary trading market does exist, it is generally
not as liquid as the secondary market for higher-rated securities. The lack of a
liquid secondary market may have an adverse impact on the market price of the
security. As a result, a Portfolio's asset value and a Portfolio's ability to
dispose of particular securities, when necessary to meet a Portfolio's liquidity
needs or in response to a specific economic event, may be impacted. The lack of
a liquid secondary market for certain securities may also make it more difficult
for the Portfolio to obtain accurate market quotations for purposes of valuing a
Portfolio. Market quotations are generally available on many low-rated and
comparable unrated issues only from a limited number of dealers and may not
necessarily represent firm bids of such dealers or prices for actual sales.
During periods of thin trading, the spread between bid and asked prices is
likely to increase significantly. In addition, adverse publicity and investor
perceptions, whether or not based on fundamental analysis, may decrease the
values and liquidity of low-rated and comparable unrated securities, especially
in a thinly-traded market.
Put and Call Options:
Writing (Selling) Call Options. A call option gives the holder (buyer)
the "right to purchase" a security or currency at a specified price (the
exercise price), at expiration of the option (European style) or at any time
until a certain date (the expiration date) (American style). So long as the
obligation of the writer of a call option continues, he may be assigned an
exercise notice by the broker-dealer through whom such option was sold,
requiring him to deliver the underlying security or currency against payment of
the exercise price. This obligation terminates upon the expiration of the call
option, or such earlier time at which the writer effects a closing purchase
transaction by repurchasing an option identical to that previously sold.
When writing a call option, a Portfolio, in return for the premium,
gives up the opportunity for profit from a price increase in the underlying
security or currency above the exercise price, but conversely retains the risk
of loss should the price of the security or currency decline. Unlike one who
owns securities or currencies not subject to an option, the Portfolio has no
control over when it may be required to sell the underlying securities or
currencies, since it may be assigned an exercise notice at any time prior to the
expiration of its obligation as a writer. If a call option which the Portfolio
has written expires, the Portfolio will realize a gain in the amount of the
premium; however, such gain may be offset by a decline in the market value of
the underlying security or currency during the option period. If the call option
is exercised, a Portfolio will realize a gain or loss from the sale of the
underlying security or currency.
Writing (Selling) Put Options. A put option gives the purchaser of the
option the right to sell, and the writer (seller) has the obligation to buy, the
underlying security or currency at the exercise price during the option period
(American style) or at the expiration of the option (European style). So long as
the obligation of the writer continues, he may be assigned an exercise notice by
the broker-dealer through whom such option was sold, requiring him to make
payment of the exercise price against delivery of the underlying security or
currency. The operation of put options in other respects, including their
related risks and rewards, is substantially identical to that of call options.
Premium Received from Writing Call or Put Options. A Portfolio will
receive a premium from writing a put or call option, which increases such
Portfolio's return in the event the option expires unexercised or is closed out
at a profit. The amount of the premium will reflect, among other things, the
relationship of the market price of the underlying security to the exercise
price of the option, the term of the option and the volatility of the market
price of the underlying security. By writing a call option, a Portfolio limits
its opportunity to profit from any increase in the market value of the
underlying security above the exercise price of the option. By writing a put
option, a Portfolio 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 if the purchase price exceeds the
market value plus the amount of the premium received, unless the security
subsequently appreciates in value.
Closing Transactions. Closing transactions may be effected in order to
realize a profit on an outstanding call option, to prevent an underlying
security or currency from being called, or, to permit the sale of the underlying
security or currency. A Portfolio may terminate an option that it has written
prior to its expiration by entering into a closing purchase transaction in which
it purchases an option having the same terms as the option written. A Portfolio
will realize a profit or loss from such transaction if the cost of such
transaction is less or more than the premium received from the writing of the
option. In the case of a put option, any loss so incurred may be partially or
entirely offset by the premium received from a simultaneous or subsequent sale
of a different put option. 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 the repurchase of a call option is likely to
be offset in whole or in part by unrealized appreciation of the underlying
security owned by such Portfolio.
Furthermore, effecting a closing transaction will permit the Portfolio
to write another call option on the underlying security or currency with either
a different exercise price or expiration date or both. If the Portfolio desires
to sell a particular security or currency from its portfolio on which it has
written a call option, or purchased a put option, it will seek to effect a
closing transaction prior to, or concurrently with, the sale of the security or
currency. There is, of course, no assurance that the Portfolio will be able to
effect such closing transactions at a favorable price. If the Portfolio cannot
enter into such a transaction, it may be required to hold a security or currency
that it might otherwise have sold. When the Portfolio writes a covered call
option, it runs the risk of not being able to participate in the appreciation of
the underlying securities or currencies above the exercise price, as well as the
risk of being required to hold on to securities or currencies that are
depreciating in value. This could result in higher transaction costs. The
Portfolio will pay transaction costs in connection with the writing of options
to close out previously written options. Such transaction costs are normally
higher than those applicable to purchases and sales of portfolio securities.
Purchasing Call Options. Call options may be purchased by a Portfolio
for the purpose of acquiring the underlying securities or currencies for its
portfolio. Utilized in this fashion, the purchase of call options enables the
Portfolio to acquire the securities or currencies at the exercise price of the
call option plus the premium paid. At times the net cost of acquiring securities
or currencies in this manner may be less than the cost of acquiring the
securities or currencies directly. This technique may also be useful to a
Portfolio in purchasing a large block of securities or currencies that would be
more difficult to acquire by direct market purchases. So long as it holds such a
call option rather than the underlying security or currency itself, the
Portfolio is partially protected from any unexpected decline in the market price
of the underlying security or currency and in such event could allow the call
option to expire, incurring a loss only to the extent of the premium paid for
the option.
Purchasing Put Options. A Portfolio may purchase a put option on an
underlying security or currency (a "protective put") owned by the Portfolio as a
defensive technique in order to protect against an anticipated decline in the
value of the security or currency. Such hedge protection is provided only during
the life of the put option when the Portfolio, as the holder of the put option,
is able to sell the underlying security or currency at the put exercise price
regardless of any decline in the underlying security's market price or
currency's exchange value. For example, a put option may be purchased in order
to protect unrealized appreciation of a security or currency where a Sub-advisor
deems it desirable to continue to hold the security or currency because of tax
considerations. The premium paid for the put option and any transaction costs
would reduce any capital gain otherwise available for distribution when the
security or currency is eventually sold.
If a Portfolio purchases put options at a time when the Portfolio does
not own the underlying security or currency. By purchasing put options on a
security or currency it does not own, the Portfolio seeks to benefit from a
decline in the market price of the underlying security or currency. If the put
option is not sold when it has remaining value, and if the market price of the
underlying security or currency remains equal to or greater than the exercise
price during the life of the put option, the Portfolio will lose its entire
investment in the put option. In order for the purchase of a put option to be
profitable, the market price of the underlying security or currency must decline
sufficiently below the exercise price to cover the premium and transaction
costs, unless the put option is sold in a closing sale transaction.
Dealer Options. Exchange-traded options generally have a continuous
liquid market while dealer options have none. Consequently, the Portfolio will
generally be able to realize the value of a dealer option it has purchased only
by exercising it or reselling it to the dealer who issued it. Similarly, when
the Portfolio writes a dealer option, it generally will be able to close out the
option prior to its expiration only by entering into a closing purchase
transaction with the dealer to which the Portfolio originally wrote the option.
While the Portfolio will seek to enter into dealer options only with dealers who
will agree to and which are expected to be capable of entering into closing
transactions with the Portfolio, there can be no assurance that the Portfolio
will be able to liquidate a dealer option at a favorable price at any time prior
to expiration. Until the Portfolio, as a covered dealer call option writer, is
able to effect a closing purchase transaction, it will not be able to liquidate
securities (or other assets) used as cover until the option expires or is
exercised. In the event of insolvency of the contra party, the Portfolio may be
unable to liquidate a dealer option. With respect to options written by the
Portfolio, the inability to enter into a closing transaction may result in
material losses to the Portfolio. For example, since the Portfolio must maintain
a secured position with respect to any call option on a security it writes, the
Portfolio may not sell the assets which it has segregated to secure the position
while it is obligated under the option. This requirement may impair the
Portfolio's ability to sell portfolio securities at a time when such sale might
be advantageous.
The Staff of the SEC has taken the position that purchased dealer
options and the assets used to secure the written dealer options are illiquid
securities. The Portfolio may treat the cover used for written OTC options as
liquid if the dealer agrees that the Portfolio may repurchase the OTC option it
has written for a maximum price to be calculated by a predetermined formula. In
such cases, the OTC option would be considered illiquid only to the extent the
maximum repurchase price under the formula exceeds the intrinsic value of the
option. To this extent, the Portfolio will treat dealer options as subject to
the Portfolio's limitation on unmarketable securities. If the SEC changes its
position on the liquidity of dealer options, the Portfolio will change its
treatment of such instrument accordingly.
Certain Risk Factors in Writing Call Options and in Purchasing Call and
Put Options: During the option period, a Portfolio, as writer of a call option
has, in return for the premium received on the option, given up the opportunity
for capital appreciation above the exercise price should the market price of the
underlying security increase, but has retained the risk of loss should the price
of the underlying security decline. The writer has no control over the time when
it may be required to fulfill its obligation as a writer of the option. The risk
of purchasing a call or put option is that the Portfolio may lose the premium it
paid plus transaction costs. If the Portfolio does not exercise the option and
is unable to close out the position prior to expiration of the option, it will
lose its entire investment.
An option position may be closed out only on an exchange which provides
a secondary market. There can be no assurance that a liquid secondary market
will exist for a particular option at a particular time and that the Portfolio,
can close out its position by effecting a closing transaction. If the Portfolio
is unable to effect a closing purchase transaction, it cannot sell the
underlying security until the option expires or the option is exercised.
Accordingly, the Portfolio may not be able to sell the underlying security at a
time when it might otherwise be advantageous to do so. Possible reasons for the
absence of a liquid secondary market include the following: (i) insufficient
trading interest in certain options; (ii) restrictions on transactions imposed
by an exchange; (iii) trading halts, suspensions or other restrictions imposed
with respect to particular classes or series of options or underlying
securities; (iv) inadequacy of the facilities of an exchange or the clearing
corporation to handle trading volume; and (v) a decision by one or more
exchanges to discontinue the trading of options or impose restrictions on
orders. In addition, the hours of trading for options may not conform to the
hours during which the underlying securities are traded. To the extent that the
options markets close before the markets for the underlying securities,
significant price and rate movements can take place in the underlying markets
that cannot be reflected in the options markets. The purchase of options is a
highly specialized activity which involves investment techniques and risks
different from those associated with ordinary portfolio securities transactions.
Each exchange has established limitations governing the maximum number
of call options, whether or not covered, which may be written by a single
investor acting alone or in concert with others (regardless of whether such
options are written on the same or different exchanges or are held or written on
one or more accounts or through one or more brokers). An exchange may order the
liquidation of positions found to be in violation of these limits and it may
impose other sanctions or restrictions.
Options on Stock Indices:
Options on stock indices are similar to options on specific securities
except that, rather than the right to take or make delivery of the specific
security at a specific price, an option on a stock index gives the holder the
right to receive, upon exercise of the option, an amount of cash if the closing
level of that stock index is greater than, in the case of a call, or less than,
in the case of a put, the exercise price of the option. This amount of cash is
equal to such difference between the closing price of the index and the exercise
price of the option expressed in dollars multiplied by a specified multiple. The
writer of the option is obligated, in return for the premium received, to make
delivery of this amount. Unlike options on specific securities, all settlements
of options on stock indices are in cash and gain or loss depends on general
movements in the stocks included in the index rather than price movements in
particular stocks. A stock index futures contract is an agreement in which one
party agrees to deliver to the other an amount of cash equal to a specific
amount multiplied by the difference between the value of a specific stock index
at the close of the last trading day of the contract and the price at which the
agreement is made. No physical delivery of securities is made.
Risk Factors in Options on Indices. Because the value of an index
option depends upon the movements in the level of the index rather than upon
movements in the price of a particular security, whether the Portfolio will
realize a gain or a loss on the purchase or sale of an option on an index
depends upon the movements in the level of prices in the market generally or in
an industry or market segment rather than upon movements in the price of the
individual security. Accordingly, successful use of positions will depend upon a
Sub-advisor's ability to predict correctly movements in the direction of the
market generally or in the direction of a particular industry. This requires
different skills and techniques than predicting changes in the prices of
individual securities.
Index prices may be distorted if trading of securities included in the
index is interrupted. Trading in index options also may be interrupted in
certain circumstances, such as if trading were halted in a substantial number of
securities in the index. If this occurred, a Portfolio would not be able to
close out options which it had written or purchased and, if restrictions on
exercise were imposed, might be unable to exercise an option it purchased, which
would result in substantial losses.
Price movements in Portfolio securities will not correlate perfectly
with movements in the level of the index and therefore, a Portfolio bears the
risk that the price of the securities may not increase as much as the level of
the index. In this event, the Portfolio would bear a loss on the call which
would not be completely offset by movements in the prices of the securities. It
is also possible that the index may rise when the value of the Portfolio's
securities does not. If this occurred, a Portfolio would experience a loss on
the call which would not be offset by an increase in the value of its securities
and might also experience a loss in the market value of its securities.
Unless a Portfolio has other liquid assets which are sufficient to
satisfy the exercise of a call on the index, the Portfolio will be required to
liquidate securities in order to satisfy the exercise.
When a Portfolio has written a call on an index, there is also the risk
that the market may decline between the time the Portfolio has the call
exercised against it, at a price which is fixed as of the closing level of the
index on the date of exercise, and the time the Portfolio is able to sell
securities. As with options on securities, the Sub-advisor will not learn that a
call has been exercised until the day following the exercise date, but, unlike a
call on securities where the Portfolio would be able to deliver the underlying
security in settlement, the Portfolio may have to sell part of its securities in
order to make settlement in cash, and the price of such securities might decline
before they could be sold.
If a Portfolio exercises a put option on an index which it has
purchased before final determination of the closing index value for the day, it
runs the risk that the level of the underlying index may change before closing.
If this change causes the exercised option to fall "out-of-the-money" the
Portfolio will be required to pay the difference between the closing index value
and the exercise price of the option (multiplied by the applicable multiplier)
to the assigned writer. Although the Portfolio may be able to minimize this risk
by withholding exercise instructions until just before the daily cutoff time or
by selling rather than exercising an option when the index level is close to the
exercise price, it may not be possible to eliminate this risk entirely because
the cutoff time for index options may be earlier than those fixed for other
types of options and may occur before definitive closing index values are
announced.
Trading in Futures:
A futures contract provides for the future sale by one party and
purchase by another party of a specified amount of a specific financial
instrument (e.g., units of a stock index) for a specified price, date, time and
place designated at the time the contract is made. Brokerage fees are incurred
when a futures contract is bought or sold and margin deposits must be
maintained. Entering into a contract to buy is commonly referred to as buying or
purchasing a contract or holding a long position. Entering into a contract to
sell is commonly referred to as selling a contract or holding a short position.
Unlike when the Portfolio purchases or sells a security, no price
would be paid or received by the Portfolio upon the purchase or sale of a
futures contract. Upon entering into a futures contract, and to maintain the
Portfolio's open positions in futures contracts, the Portfolio would be required
to deposit with its custodian in a segregated account in the name of the futures
broker an amount of cash, U.S. government securities, suitable money market
instruments, or liquid, high-grade debt securities, known as "initial margin."
The margin required for a particular futures contract is set by the exchange on
which the contract is traded, and may be significantly modified from time to
time by the exchange during the term of the contract. Futures contracts are
customarily purchased and sold on margins that may range upward from less than
5% of the value of the contract being traded.
Margin is the amount of funds that must be deposited by the Portfolio
with its custodian in a segregated account in the name of the futures commission
merchant in order to initiate futures trading and to maintain the Portfolio's
open positions in futures contracts. A margin deposit is intended to ensure the
Portfolio's performance of the futures contract. The margin required for a
particular futures contract is set by the exchange on which the futures contract
is traded, and may be significantly modified from time to time by the exchange
during the term of the futures contract. Futures contracts are customarily
purchased and sold on margins that may range upward from less than 5% of the
value of the futures contract being traded.
If the price of an open futures contract changes (by increase in the
case of a sale or by decrease in the case of a purchase) so that the loss on the
futures contract reaches a point at which the margin on deposit does not satisfy
margin requirements, the broker will require an increase in the margin. However,
if the value of a position increases because of favorable price changes in the
futures contract so that the margin deposit exceeds the required margin, the
broker will pay the excess to the Portfolio.
These subsequent payments, called "variation margin," to and from the
futures broker, are made on a daily basis as the price of the underlying assets
fluctuate making the long and short positions in the futures contract more or
less valuable, a process known as "marking to the market." The Portfolio expects
to earn interest income on its margin deposits. Although certain futures
contracts, by their terms, require actual future delivery of and payment for the
underlying instruments, in practice most futures contracts are usually closed
out before the delivery date. Closing out an open futures contract purchase or
sale is effected by entering into an offsetting futures contract purchase or
sale, respectively, for the same aggregate amount of the identical securities
and the same delivery date. If the offsetting purchase price is less than the
original sale price, the Portfolio realizes a gain; if it is more, the Portfolio
realizes a loss. Conversely, if the offsetting sale price is more than the
original purchase price, the Portfolio realizes a gain; if it is less, the
Portfolio realizes a loss. The transaction costs must also be included in these
calculations. There can be no assurance, however, that the Portfolio will be
able to enter into an offsetting transaction with respect to a particular
futures contract at a particular time. If the Portfolio is not able to enter
into an offsetting transaction, the Portfolio will continue to be required to
maintain the margin deposits on the futures contract.
For example, one contract in the Financial Times Stock Exchange 100
Index future is a contract to buy 25 pounds sterling multiplied by the level of
the UK Financial Times 100 Share Index on a given future date. Settlement of a
stock index futures contract may or may not be in the underlying security. If
not in the underlying security, then settlement will be made in cash, equivalent
over time to the difference between the contract price and the actual price of
the underlying asset at the time the stock index futures contract expires.
Options on futures are similar to options on underlying instruments
except that options on futures give the purchaser the right, in return for the
premium paid, to assume a position in a futures contract (a long position if the
option is a call and a short position if the option is a put), rather than to
purchase or sell the futures contract, at a specified exercise price at any time
during the period of the option. Upon exercise of the option, the delivery of
the futures position by the writer of the option to the holder of the option
will be accompanied by the delivery of the accumulated balance in the writer's
futures margin account which represents the amount by which the market price of
the futures contract, at exercise, exceeds (in the case of a call) or is less
than (in the case of a put) the exercise price of the option on the futures
contract. Alternatively, settlement may be made totally in cash. Purchasers of
options who fail to exercise their options prior to the exercise date suffer a
loss of the premium paid.
The writer of an option on a futures contract is required to deposit
margin pursuant to requirements similar to those applicable to futures
contracts. Upon exercise of an option on a futures contract, the delivery of the
futures position by the writer of the option to the holder of the option will be
accompanied by delivery of the accumulated balance in the writer's margin
account. This amount will be equal to the amount by which the market price of
the futures contract at the time of exercise exceeds, in the case of a call, or
is less than, in the case of a put, the exercise price of the option on the
futures contract.
Although financial futures contracts by their terms call for actual
delivery or acceptance of securities, in most cases the contracts are closed out
before the settlement date without the making or taking of delivery. Closing out
is accomplished by effecting an offsetting transaction. A futures contract sale
is closed out by effecting a futures contract purchase for the same aggregate
amount of securities and the same delivery date. If the sale price exceeds the
offsetting purchase price, the seller immediately would be paid the difference
and would realize a gain. If the offsetting purchase price exceeds the sale
price, the seller would immediately pay the difference and would realize a loss.
Similarly, a futures contract purchase is closed out by effecting a futures
contract sale for the same securities and the same delivery date. If the
offsetting sale price exceeds the purchase price, the purchaser would realize a
gain, whereas if the purchase price exceeds the offsetting sale price, the
purchaser would realize a loss.
Commissions on financial futures contracts and related options
transactions may be higher than those which would apply to purchases and sales
of securities directly.
A public market exists in interest rate futures contracts covering
primarily the following financial instruments: U.S. Treasury bonds; U.S.
Treasury notes; Government National Mortgage Association ("GNMA") modified
pass-through mortgage-backed securities; three-month U.S. Treasury bills; 90-day
commercial paper; bank certificates of deposit; and Eurodollar certificates of
deposit. It is expected that Futures contracts trading in additional financial
instruments will be authorized. The standard contract size is generally $100,000
for Futures contracts in U.S. Treasury bonds, U.S. Treasury notes, and GNMA
pass-through securities and $1,000,000 for the other designated Futures
contracts. A public market exists in Futures contracts covering a number of
indexes, including, but not limited to, the Standard & Poor's 500 Index, the
Standard & Poor's 100 Index, the NASDAQ 100 Index, the Value Line Composite
Index and the New York Stock Exchange Composite Index.
Certain Risks Relating to Futures Contracts and Related Options. There are
special risks involved in futures transactions.
Volatility and Leverage. The prices of futures contracts are
volatile and are influenced, among other things, by actual and anticipated
changes in the market and interest rates, which in turn are affected by fiscal
and monetary policies and national and international policies and economic
events.
Most United States futures exchanges limit the amount of fluctuation
permitted in futures contract prices during a single trading day. The daily
limit establishes the maximum amount that the price of a futures contract may
vary either up or down from the previous day's settlement price at the end of a
trading session. Once the daily limit has been reached in a particular type of
futures contract, no trades may be made on that day at a price beyond that
limit. The daily limit governs only price movement during a particular trading
day and therefore does not limit potential losses, because the limit may prevent
the liquidation of unfavorable positions. Futures contract prices have
occasionally moved to the daily limit for several consecutive trading days with
little or no trading, thereby preventing prompt liquidation of futures positions
and subjecting some futures traders to substantial losses.
Because of the low margin deposits required, futures trading involves
an extremely high degree of leverage. As a result, a relatively small price
movement in a futures contract may result in immediate and substantial loss, as
well as gain, to the investor. For example, if at the time of purchase, 10% of
the value of the futures contract is deposited as margin, a subsequent 10%
decrease in the value of the futures contract would result in a total loss of
the margin deposit, before any deduction for the transaction costs, if the
account were then closed out. A 15% decrease would result in a loss equal to
150% of the original margin deposit, if the contract were closed out. Thus, a
purchase or sale of a futures contract may result in losses in excess of the
amount invested in the futures contract. However, the Portfolio would presumably
have sustained comparable losses if, instead of the futures contract, it had
invested in the underlying instrument and sold it after the decline.
Furthermore, in the case of a futures contract purchase, in order to be certain
that the Portfolio has sufficient assets to satisfy its obligations under a
futures contract, the Portfolio earmarks to the futures contract money market
instruments equal in value to the current value of the underlying instrument
less the margin deposit.
Liquidity. The Portfolio may elect to close some or all of
its futures positions at any time prior to their expiration. The Portfolio would
do so to reduce exposure represented by long futures positions or increase
exposure represented by short futures positions. The Portfolio may close its
positions by taking opposite positions which would operate to terminate the
Portfolio's position in the futures contracts. Final determinations of variation
margin would then be made, additional cash would be required to be paid by or
released to the Portfolio, and the Portfolio would realize a loss or a gain.
Futures contracts may be closed out only on the exchange or board of
trade where the contracts were initially traded. Although the Portfolio intends
to purchase or sell futures contracts only on exchanges or boards of trade where
there appears to be an active market, there is no assurance that a liquid market
on an exchange or board of trade will exist for any particular contract at any
particular time. In such event, it might not be possible to close a futures
contract, and in the event of adverse price movements, the Portfolio would
continue to be required to make daily cash payments of variation margin.
However, in the event futures contracts have been used to hedge the underlying
instruments, the Portfolio would continue to hold the underlying instruments
subject to the hedge until the futures contracts could be terminated. In such
circumstances, an increase in the price of the underlying instruments, if any,
might partially or completely offset losses on the futures contract. However, as
described below, there is no guarantee that the price of the underlying
instruments will, in fact, correlate with the price movements in the futures
contract and thus provide an offset to losses on a futures contract.
Hedging Risk. A decision of whether, when, and how to hedge
involves skill and judgment, and even a well-conceived hedge may be unsuccessful
to some degree because of unexpected market behavior, market or interest rate
trends. There are several risks in connection with the use by the Portfolio of
futures contracts as a hedging device. One risk arises because of the imperfect
correlation between movements in the prices of the futures contracts and
movements in the prices of the underlying instruments which are the subject of
the hedge. Sub-advisor will, however, attempt to reduce this risk by entering
into futures contracts whose movements, in its judgment, will have a significant
correlation with movements in the prices of the Portfolio's underlying
instruments sought to be hedged.
Successful use of futures contracts by the Portfolio for hedging
purposes is also subject to a Sub-advisor's ability to correctly predict
movements in the direction of the market. It is possible that, when the
Portfolio has sold futures to hedge its portfolio against a decline in the
market, the index, indices, or underlying instruments on which the futures are
written might advance and the value of the underlying instruments held in the
Portfolio's portfolio might decline. If this were to occur, the Portfolio would
lose money on the futures and also would experience a decline in value in its
underlying instruments. However, while this might occur to a certain degree,
Sub-advisor may believe that over time the value of the Portfolio's portfolio
will tend to move in the same direction as the market indices which are intended
to correlate to the price movements of the underlying instruments sought to be
hedged. It is also possible that if the Portfolio were to hedge against the
possibility of a decline in the market (adversely affecting the underlying
instruments held in its portfolio) and prices instead increased, the Portfolio
would lose part or all of the benefit of increased value of those underlying
instruments that it has hedged, because it would have offsetting losses in its
futures positions. In addition, in such situations, if the Portfolio had
insufficient cash, it might have to sell underlying instruments to meet daily
variation margin requirements. Such sales of underlying instruments might be,
but would not necessarily be, at increased prices (which would reflect the
rising market). The Portfolio might have to sell underlying instruments at a
time when it would be disadvantageous to do so.
In addition to the possibility that there might be an imperfect
correlation, or no correlation at all, between price movements in the futures
contracts and the portion of the portfolio being hedged, the price movements of
futures contracts might not correlate perfectly with price movements in the
underlying instruments due to certain market distortions. First, all
participants in the futures market are subject to margin deposit and maintenance
requirements. Rather than meeting additional margin deposit requirements,
investors might close futures contracts through offsetting transactions which
could distort the normal relationship between the underlying instruments and
futures markets. Second, the margin requirements in the futures market are less
onerous than margin requirements in the securities markets, and as a result the
futures market might attract more speculators than the securities markets do.
Increased participation by speculators in the futures market might also cause
temporary price distortions. Due to the possibility of price distortion in the
futures market and also because of the imperfect correlation between price
movements in the underlying instruments and movements in the prices of futures
contracts, even a correct forecast of general market trends by Sub-advisor might
not result in a successful hedging transaction over a very short time period.
Certain Risks of Options on Futures Contracts. The Portfolio may seek
to close out an option position by writing or buying an offsetting option
covering the same index, underlying instruments, or contract and having the same
exercise price and expiration date. The ability to establish and close out
positions on such options will be subject to the maintenance of a liquid
secondary market. Reasons for the absence of a liquid secondary market on an
exchange include the following: (i) there may be insufficient trading interest
in certain options; (ii) restrictions may be imposed by an exchange on opening
transactions or closing transactions or both; (iii) trading halts, suspensions
or other restrictions may be imposed with respect to particular classes or
series of options, or underlying instruments; (iv) unusual or unforeseen
circumstances may interrupt normal operations on an exchange; (v) the facilities
of an exchange or a clearing corporation may not at all times be adequate to
handle current trading volume; or (vi) one or more exchanges could, for economic
or other reasons, decide or be compelled at some future date to discontinue the
trading of options (or a particular class or series of options), in which event
the secondary market on that exchange (or in the class or series of options)
would cease to exist, although outstanding options on the exchange that had been
issued by a clearing corporation as a result of trades on that exchange would
continue to be exercisable in accordance with their terms. There is no assurance
that higher than anticipated trading activity or other unforeseen events might
not, at times, render certain of the facilities of any of the clearing
corporations inadequate, and thereby result in the institution by an exchange of
special procedures which may interfere with the timely execution of customers'
orders.
Foreign Futures and Options:
Participation in foreign futures and foreign options transactions
involves the execution and clearing of trades on or subject to the rules of a
foreign board of trade. Neither the National Futures Association nor any
domestic exchange regulates activities of any foreign boards of trade, including
the execution, delivery and clearing of transactions, or has the power to compel
enforcement of the rules of a foreign board of trade or any applicable foreign
law. This is true even if the exchange is formally linked to a domestic market
so that a position taken on the market may be liquidated by a transaction on
another market. Moreover, such laws or regulations will vary depending on the
foreign country in which the foreign futures or foreign options transaction
occurs. For these reasons, customers who trade foreign futures or foreign
options contracts may not be afforded certain of the protective measures
provided by the Commodity Exchange Act, the CFTC's regulations and the rules of
the National Futures Association and any domestic exchange, including the right
to use reparations proceedings before the Commission and arbitration proceedings
provided by the National Futures Association or any domestic futures exchange.
In particular, Portfolios received from customers for foreign futures or foreign
options transactions may not be provided the same protections as Portfolios
received in respect of transactions on United States futures exchanges. In
addition, the price of any foreign futures or foreign options contract and,
therefore, the potential profit and loss thereon may be affected by any variance
in the foreign exchange rate between the time your order is placed and the time
it is liquidated, offset or exercised.
Foreign Currency Futures Contracts and Related Options. 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 agreed upon by the parties, at a price set at the time
of the contract. These contracts are principally 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.
Depending on the applicable investment policies and restrictions
applicable to a Portfolio, a Portfolio will generally enter into forward foreign
currency exchange contracts under two circumstances. First, when a Portfolio
enters into a contract for the purchase or sale of a security denominated in a
foreign currency, it may desire to "lock in" the U.S. dollar price of the
security. By entering into a forward contract for the purchase or sale, for a
fixed amount of dollars, of the amount of foreign currency involved in the
underlying security transactions, the Portfolio will be able to protect itself
against a possible loss resulting from an adverse change in the relationship
between the U.S. dollar and the subject foreign currency during the period
between the date the security is purchased or sold and the date on which payment
is made or received.
Second, when a Sub-advisor believes that the currency of a particular
foreign country may suffer or enjoy a substantial movement against another
currency, including the U.S. dollar, it may enter into a forward contract to
sell or buy the amount of the former foreign currency, approximating the value
of some or all of the Portfolio's securities denominated in such foreign
currency. Alternatively, where appropriate, the Portfolio may hedge all or part
of its foreign currency exposure through the use of a basket of currencies or a
proxy currency where such currencies or currency act as an effective proxy for
other currencies. In such a case, the Portfolio may enter into a forward
contract where the amount of the foreign currency to be sold exceeds the value
of the securities denominated in such currency. The use of this basket hedging
technique may be more efficient and economical than entering into separate
forward contracts for each currency held in the Portfolio. The precise matching
of the forward contract amounts and the value of the securities involved will
not generally be possible since the future value of such securities in foreign
currencies will change as a consequence of market movements in the value of
those securities between the date the forward contract is entered into and the
date it matures. The projection of short-term currency market movement is
extremely difficult, and the successful execution of a short-term hedging
strategy is highly uncertain.
As indicated above, it is impossible to forecast with absolute
precision the market value of portfolio securities at the expiration of the
forward contract. Accordingly, it may be necessary for a Portfolio to purchase
additional foreign currency on the spot market (and bear the expense of such
purchase) if the market value of the security is less than the amount of foreign
currency the Portfolio is obligated to deliver and if a decision is made to sell
the security and make delivery of the foreign currency. Conversely, it may be
necessary to sell on the spot market some of the foreign currency received upon
the sale of the portfolio security if its market value exceeds the amount of
foreign currency the Portfolio is obligated to deliver. However, as noted, in
order to avoid excessive transactions and transaction costs, the Portfolio may
use liquid, high-grade debt securities, denominated in any currency, to cover
the amount by which the value of a forward contract exceeds the value of the
securities to which it relates.
If the Portfolio retains the portfolio security and engages in an
offsetting transaction, the Portfolio will incur a gain or a loss (as described
below) to the extent that there has been movement in forward contract prices. If
the Portfolio engages in an offsetting transaction, it may subsequently enter
into a new forward contract to sell the foreign currency. Should forward prices
decline during the period between the Portfolio's entering into a forward
contract for the sale of a foreign currency and the date it enters into an
offsetting contract for the purchase of the foreign currency, the Portfolio will
realize a gain to the extent the price of the currency it has agreed to sell
exceeds the price of the currency it has agreed to purchase. Should forward
prices increase, the Portfolio will suffer a loss to the extent of the price of
the currency it has agreed to purchase exceeds the price of the currency it has
agreed to sell.
Purchase and Sale of Currency Futures Contracts and Related Options. As
noted above, a currency futures contract sale creates an obligation by a
Portfolio, as seller, to deliver the amount of currency called for in the
contract at a specified future time for a special price. A currency futures
contract purchase creates an obligation by a Portfolio, as purchaser, to take
delivery of an amount of currency at a specified future time at a specified
price. Although the terms of currency futures contracts specify actual delivery
or receipt, in most instances the contracts are closed out before the settlement
date without the making or taking of delivery of the currency. Closing out of a
currency futures contract is effected by entering into an offsetting purchase or
sale transaction. Unlike a currency futures contract, which requires the parties
to buy and sell currency on a set date, an option on a currency futures contract
entitles its holder to decide on or before a future date whether to enter into
such a contract. If the holder decides not to enter into the contract, the
premium paid for the option is fixed at the point of sale.
Interest Rate Swaps and Interest Rate Caps and Floors:
Interest rate swaps involve the exchange by the Portfolio with another
party of their respective commitments to pay or receive interest, e.g., an
exchange of floating rate payments for fixed rate payments. The exchange
commitments can involve payments to be made in the same currency or in different
currencies. The purchase of an interest rate cap entitles the purchaser, to the
extent that a specified index exceeds a predetermined interest rate, to receive
payments of interest on a contractually based principal amount from the party
selling the interest rate cap. The purchase of an interest rate floor entitles
the purchaser, to the extent that a specified index falls below a predetermined
interest rate, to receive payments of interest on a contractually based
principal amount from the party selling the interest rate floor.
Hybrid Instruments:
Hybrid instruments combine the elements of futures contracts or options
with those of debt, preferred equity or a depository instrument ("Hybrid
Instruments"). The risks of investing in Hybrid Instruments reflect a
combination of the risks from investing in securities, futures and currencies,
including volatility and lack of liquidity. Reference is made to the discussion
of futures and forward contracts in this Statement for a discussion of these
risks. Further, the prices of the Hybrid Instrument and the related commodity or
currency may not move in the same direction or at the same time. Hybrid
Instruments may bear interest or pay preferred dividends at below market (or
even relatively nominal) rates. In addition, because the purchase and sale of
Hybrid Instruments could take place in an over-the-counter market or in a
private transaction between the Portfolio and the seller of the Hybrid
Instrument, the creditworthiness of the contra party to the transaction would be
a risk factor which the Portfolio would have to consider. Hybrid Instruments
also may not be subject to regulation of the CFTC, which generally regulates the
trading of commodity futures by U.S. persons, the SEC, which regulates the offer
and sale of securities by and to U.S. persons, or any other governmental
regulatory authority.
Foreign Currency Exchange-Related Securities:
Certain Portfolios may invest in foreign currency warrants and
performance indexed paper.
Foreign Currency Warrants. Foreign currency warrants are warrants which
entitle the holder to receive from their issuer an amount of cash (generally,
for warrants issued in the United States, in U.S. dollars) which is calculated
pursuant to a predetermined formula and based on the exchange rate between a
specified foreign currency and the U.S. dollar as of the exercise date of the
warrant. Foreign currency warrants generally are exercisable upon their issuance
and expire as of a specified date and time. Foreign currency warrants have been
issued in connection with U.S. dollar-denominated debt offerings by major
corporate issuers in an attempt to reduce the foreign currency exchange risk
which, from the point of view of prospective purchasers of the securities, is
inherent in the international fixed-income marketplace. Foreign currency
warrants may attempt to reduce the foreign exchange risk assumed by purchasers
of a security by, for example, providing for a supplemental payment in the event
that the U.S. dollar depreciates against the value of a major foreign currency
such as the Japanese Yen or German Deutschmark. The formula used to determine
the amount payable upon exercise of a foreign currency warrant may make the
warrant worthless unless the applicable foreign currency exchange rate moves in
a particular direction (e.g., unless the U.S. dollar appreciates or depreciates
against the particular foreign currency to which the warrant is linked or
indexed). Foreign currency warrants are severable from the debt obligations with
which they may be offered, and may be listed on exchanges. Foreign currency
warrants may be exercisable only in certain minimum amounts, and an investor
wishing to exercise warrants who possesses less than the minimum number required
for exercise may be required either to sell the warrants or to purchase
additional warrants, thereby incurring additional transaction costs. In the case
of any exercise of warrants, there may be a time delay between the time a holder
of warrants gives instructions to exercise and the time the exchange rate
relating to exercise is determined, during which time the exchange rate could
change significantly, thereby affecting both the market and cash settlement
values of the warrants being exercised. The expiration date of the warrants may
be accelerated if the warrants should be delisted from an exchange or if their
trading should be suspended permanently, which would result in the loss of any
remaining "time value" of the warrants (i.e., the difference between the current
market value and the exercise value of the warrants), and, in the case the
warrants were "out-of-the-money," in a total loss of the purchase price of the
warrants. Warrants are generally unsecured obligations of their issuers and are
not standardized foreign currency options issued by the Options Clearing
Corporation ("OCC"). Unlike foreign currency options issued by OCC, the terms of
foreign exchange warrants generally will not be amended in the event of
governmental or regulatory actions affecting exchange rates or in the event of
the imposition of other regulatory controls affecting the international currency
markets. The initial public offering price of foreign currency warrants is
generally considerably in excess of the price that a commercial user of foreign
currencies might pay in the interbank market for a comparable option involving
significantly larger amounts of foreign currencies. Foreign currency warrants
are subject to significant foreign exchange risk, including risks arising from
complex political or economic factors.
Principal Exchange Rate Linked Securities. Principal exchange rate
linked securities are debt obligations the principal on which is payable at
maturity in an amount that may vary based on the exchange rate between the U.S.
dollar and a particular foreign currency at or about that time. The return on
"standard" principal exchange rate linked securities is enhanced if the foreign
currency to which the security is linked appreciates against the U.S. dollar,
and is adversely affected by increases in the foreign exchange value of the U.S.
dollar. "Reverse" principal exchange rate linked securities are like the
"standard" securities, except that their return is enhanced by increases in the
value of the U.S. dollar and adversely impacted by increases in the value of
foreign currency. Interest payments on the securities are generally made in U.S.
dollars at rates that reflect the degree of foreign currency risk assumed or
given up by the purchaser of the notes (i.e., at relatively higher interest
rates if the purchaser has assumed some of the foreign exchange risk, or
relatively lower interest rates if the issuer has assumed some of the foreign
exchange risk, based on the expectations of the current market). Principal
exchange rate linked securities may in limited cases be subject to acceleration
of maturity (generally, not without the consent of the holders of the
securities), which may have an adverse impact on the value of the principal
payment to be made at maturity.
Performance Indexed Paper. Performance indexed paper is U.S.
dollar-denominated commercial paper the yield of which is linked to certain
foreign exchange rate movements. The yield to the investor on performance
indexed paper is established at maturity as a function of spot exchange rates
between the U.S. dollar and a designated currency as of or about that time
(generally, the index maturity two days prior to maturity). The yield to the
investor will be within a range stipulated at the time of purchase of the
obligation, generally with a guaranteed minimum rate of return that is below,
and a potential maximum rate of return that is above, market yields on U.S.
dollar-denominated commercial paper, with both the minimum and maximum rates of
return on the investment corresponding to the minimum and maximum values of the
spot exchange rate two business days prior to maturity.
Zero Coupon Securities:
Zero coupon securities pay no cash income and are sold at substantial
discounts from their value at maturity. When held to maturity, their entire
income, which consists of accretion of discount, comes from the difference
between the issue price and their value at maturity. Zero coupon securities are
subject to greater market value fluctuations from changing interest rates than
debt obligations of comparable maturities which make current distributions of
interest (cash). Zero coupon securities which are convertible into common stock
offer the opportunity for capital appreciation as increases (or decreases) in
market value of such securities closely follows the movements in the market
value of the underlying common stock. Zero coupon convertible securities
generally are expected to be less volatile than the underlying common stocks, as
they usually are issued with maturities of 15 years or less and are issued with
options and/or redemption features exercisable by the holder of the obligation
entitling the holder to redeem the obligation and receive a defined cash
payment.
Zero coupon securities include securities issued directly by the U.S.
Treasury, and U.S. Treasury bonds or notes and their unmatured interest coupons
and receipts for their underlying principal ("coupons") which have been
separated by their holder, typically a custodian bank or investment brokerage
firm. A holder will separate the interest coupons from the underlying principal
(the "corpus") of the U.S. Treasury security. A number of securities firms and
banks have stripped the interest coupons and receipts and then resold them in
custodial receipt programs with a number of different names, including "Treasury
Income Growth Receipts" (TIGRSTM) and Certificate of Accrual on Treasuries
(CATSTM). The underlying U.S. Treasury bonds and notes themselves are held in
book-entry form at the Federal Reserve Bank or, in the case of bearer securities
(i.e., unregistered securities which are owned ostensibly by the bearer or
holder thereof), in trust on behalf of the owners thereof. Counsel to the
underwriters of these certificates or other evidences of ownership of the U.S.
Treasury securities have stated that, for federal tax and securities purposes,
in their opinion purchasers of such certificates, such as the Portfolio, most
likely will be deemed the beneficial holder of the underlying U.S.
Government securities.
The U.S. Treasury has facilitated transfers of ownership of zero coupon
securities by accounting separately for the beneficial ownership of particular
interest coupon and corpus payments on Treasury securities through the Federal
Reserve book-entry record keeping system. The Federal Reserve program as
established by the Treasury Department is known as "STRIPS" or "Separate Trading
of Registered Interest and Principal of Securities." Under the STRIPS program,
the Portfolio will be able to have its beneficial ownership of zero coupon
securities recorded directly in the book-entry record-keeping system in lieu of
having to hold certificates or other evidences of ownership of the underlying
U.S.
Treasury securities.
When U.S. Treasury obligations have been stripped of their unmatured
interest coupons by the holder, the principal or corpus is sold at a deep
discount because the buyer receives only the right to receive a future fixed
payment on the security and does not receive any rights to periodic interest
(cash) payments. Once stripped or separated, the corpus and coupons may be sold
separately. Typically, the coupons are sold separately or grouped with other
coupons with like maturity dates and sold bundled in such form. Purchasers of
stripped obligations acquire, in effect, discount obligations that are
economically identical to the zero coupon securities that the Treasury sells
itself.
When-Issued Securities:
The price of when-issued securities, which may be expressed in yield
terms, is fixed at the time the commitment to purchase is made, but delivery and
payment for the when-issued securities take place at a later date. Normally, the
settlement date occurs within 90 days of the purchase. During the period between
purchase and settlement, no payment is made by the Portfolio to the issuer and
no interest accrues to the Portfolio. Forward commitments involve a risk of loss
if the value of the security to be purchased declines prior to the settlement
date, which risk is in addition to the risk of decline in value of the
Portfolio's other assets. Such when-issued securities may be sold prior to the
settlement date. The price of such securities, which may be expressed in yield
terms, is fixed at the time the commitment to purchase is made, but delivery and
payment for the when-issued securities take place at a later date. Normally, the
settlement date occurs within one month of the purchase. During the period
between purchase and settlement, no payment is made by the Portfolio to the
issuer and no interest accrues to the Portfolio. Forward commitments involve a
risk of loss if the value of the security to be purchased declines prior to the
settlement date, which risk is in addition to the risk of decline in value of
the Portfolio's other assets. While when-issued securities may be sold prior to
the settlement date, the Portfolio intends to purchase such securities with the
purpose of actually acquiring them unless a sale appears desirable for
investment reasons.
Mortgage-Backed Securities:
Principal and interest payments made on the mortgages in an underlying
mortgage pool are passed through to the Portfolio. Unscheduled prepayments of
principal shorten the securities' weighted average life and may lower their
total return. (When a mortgage in the underlying mortgage pool is prepaid, an
unscheduled principal prepayment is passed through to the Portfolio. This
principal is returned to the Portfolio at par. As a result, if a mortgage
security were trading at a premium, its total return would be lowered by
prepayments, and if a mortgage securities were trading at a discount, its total
return would be increased by prepayments.) The value of these securities also
may change because of changes in the market's perception of the creditworthiness
of the federal agency that issued them. In addition, the mortgage securities
market in general may be adversely affected by changes in governmental
regulation or tax policies.
Asset-Backed Securities:
Asset-backed securities directly or indirectly represent a
participation interest in, or are secured by and payable from, a stream of
payments generated by particular assets such as motor vehicle or credit card
receivables. Payments of principal and interest may be guaranteed up to certain
amounts and for a certain time period by a letter of credit issued by a
financial institution unaffiliated with the entities issuing the securities.
Asset-backed securities may be classified as pass-through certificates or
collateralized obligations.
Pass-through certificates are asset-backed securities which represent
an undivided fractional ownership interest in an underlying pool of assets.
Pass-through certificates usually provide for payments of principal and interest
received to be passed through to their holders, usually after deduction for
certain costs and expenses incurred in administering the pool. Because
pass-through certificates represent an ownership interest in the underlying
assets, the holders thereof bear directly the risk of any defaults by the
obligors on the underlying assets not covered by any credit support. See "Types
of Credit Support."
Asset-backed securities issued in the form of debt instruments, also
known as collateralized obligations, are generally issued as the debt of a
special purpose entity organized solely for the purpose of owning such assets
and issuing such debt. Such assets are most often trade, credit card or
automobile receivables. The assets collateralizing such asset-backed securities
are pledged to a trustee or custodian for the benefit of the holders thereof.
Such issuers generally hold no assets other than those underlying the
asset-backed securities and any credit support provided. As a result, although
payments on such asset-backed securities are obligations of the issuers, in the
event of defaults on the underlying assets not covered by any credit support
(see "Types of Credit Support"), the issuing entities are unlikely to have
sufficient assets to satisfy their obligations on the related asset-backed
securities.
Methods of Allocating Cash Flows. While many asset-backed securities
are issued with only one class of security, many asset-backed securities are
issued in more than one class, each with different payment terms. Multiple class
asset-backed securities are issued for two main reasons. First, multiple classes
may be used as a method of providing credit support. This is accomplished
typically through creation of one or more classes whose right to payments on the
asset-backed security is made subordinate to the right to such payments of the
remaining class or classes. See "Types of Credit Support." Second, multiple
classes may permit the issuance of securities with payment terms, interest rates
or other characteristics differing both from those of each other and from those
of the underlying assets. Examples include so-called "strips" (asset-backed
securities entitling the holder to disproportionate interests with respect to
the allocation of interest and principal of the assets backing the security),
and securities with a class or classes having characteristics which mimic the
characteristics of non-asset-backed securities, such as floating interest rates
(i.e., interest rates which adjust as a specified benchmark changes) or
scheduled amortization of principal.
Asset-backed securities in which the payment streams on the underlying
assets are allocated in a manner different than those described above may be
issued in the future. The Portfolio may invest in such asset-backed securities
if such investment is otherwise consistent with its investment objectives and
policies and with the investment restrictions of the Portfolio.
Types of Credit Support. Asset-backed securities are often backed by a
pool of assets representing the obligations of a number of different parties. To
lessen the effect of failures by obligors on underlying assets to make payments,
such securities may contain elements of credit support. Such credit support
falls into two classes: liquidity protection and protection against ultimate
default by an obligor on the underlying assets. Liquidity protection refers to
the provision of advances, generally by the entity administering the pool of
assets, to ensure that scheduled payments on the underlying pool are made in a
timely fashion. Protection against ultimate default ensures ultimate payment of
the obligations on at least a portion of the assets in the pool. Such protection
may be provided through guarantees, insurance policies or letters of credit
obtained from third parties, through various means of structuring the
transaction or through a combination of such approaches. Examples of
asset-backed securities with credit support arising out of the structure of the
transaction include "senior-subordinated securities" (multiple class
asset-backed securities with certain classes subordinate to other classes as to
the payment of principal thereon, with the result that defaults on the
underlying assets are borne first by the holders of the subordinated class) and
asset-backed securities that have "reserve portfolios" (where cash or
investments, sometimes funded from a portion of the initial payments on the
underlying assets, are held in reserve against future losses) or that have been
"over collateralized" (where the scheduled payments on, or the principal amount
of, the underlying assets substantially exceeds that required to make payment of
the asset-backed securities and pay any servicing or other fees). The degree of
credit support provided on each issue is based generally on historical
information respecting the level of credit risk associated with such payments.
Delinquency or loss in excess of that anticipated could adversely affect the
return on an investment in an asset-backed security. Additionally, if the letter
of credit is exhausted, holders of asset-backed securities may also experience
delays in payments or losses if the full amounts due on underlying sales
contracts are not realized.
Automobile Receivable Securities. Asset-backed securities may be backed
by receivables from motor vehicle installment sales contracts or installment
loans secured by motor vehicles ("Automobile Receivable Securities"). Since
installment sales contracts for motor vehicles or installment loans related
thereto ("Automobile Contracts") typically have shorter durations and lower
incidences of prepayment, Automobile Receivable Securities generally will
exhibit a shorter average life and are less susceptible to prepayment risk.
Most entities that issue Automobile Receivable Securities create an
enforceable interest in their respective Automobile Contracts only by filing a
financing statement and by having the servicer of the Automobile Contracts,
which is usually the originator of the Automobile Contracts, take custody
thereof. In such circumstances, if the servicer of the Automobile Contracts were
to sell the same Automobile Contracts to another party, in violation of its
obligation not to do so, there is a risk that such party could acquire an
interest in the Automobile Contracts superior to that of the holders of
Automobile Receivable Securities. Also although most Automobile Contracts grant
a security interest in the motor vehicle being financed, in most states the
security interest in a motor vehicle must be noted on the certificate of title
to create an enforceable security interest against competing claims of other
parties. Due to the large number of vehicles involved, however, the certificate
of title to each vehicle financed, pursuant to the Automobile Contracts
underlying the Automobile Receivable Security, usually is not amended to reflect
the assignment of the seller's security interest for the benefit of the holders
of the Automobile Receivable Securities. Therefore, there is the possibility
that recoveries on repossessed collateral may not, in some cases, be available
to support payments on the securities. In addition, various state and federal
securities laws give the motor vehicle owner the right to assert against the
holder of the owner's Automobile Contract certain defenses such owner would have
against the seller of the motor vehicle. The assertion of such defenses could
reduce payments on the Automobile Receivable Securities.
Credit Card Receivable Securities. Asset-backed securities may be
backed by receivables from revolving credit card agreements ("Credit Card
Receivable Securities"). Credit balances on revolving credit card agreements
("Accounts") are generally paid down more rapidly than are Automobile Contracts.
Most of the Credit Card Receivable Securities issued publicly to date have been
Pass-Through Certificates. In order to lengthen the maturity of Credit Card
Receivable Securities, most such securities provide for a fixed period during
which only interest payments on the underlying Accounts are passed through to
the security holder and principal payments received on such Accounts are used to
Portfolio the transfer to the pool of assets supporting the related Credit Card
Receivable Securities of additional credit card charges made on an Account. The
initial fixed period usually may be shortened upon the occurrence of specified
events which signal a potential deterioration in the quality of the assets
backing the security, such as the imposition of a cap on interest rates. The
ability of the issuer to extend the life of an issue of Credit Card Receivable
Securities thus depends upon the continued generation of additional principal
amounts in the underlying accounts during the initial period and the
non-occurrence of specified events. An acceleration in cardholders' payment
rates or any other event which shortens the period during which additional
credit card charges on an Account may be transferred to the pool of assets
supporting the related Credit Card Receivable Security could shorten the
weighted average life and yield of the Credit Card Receivable Security.
Credit card holders are entitled to the protection of a number of state
and federal consumer credit laws, many of which give such holder the right to
set off certain amounts against balances owed on the credit card, thereby
reducing amounts paid on Accounts. In addition, unlike most other asset-backed
securities, Accounts are unsecured obligations of the cardholder.
Warrants:
Investments in warrants is pure speculation in that they have no voting
rights, pay no dividends, and have no rights with respect to the assets of the
corporation issuing them. Warrants basically are options to purchase equity
securities at a specific price valid for a specific period of time. They do not
represent ownership of the securities but only the right to buy them. Warrants
differ from call options in that warrants are issued by the issuer of the
security which may be purchased on their exercise, whereas call options may be
written or issued by anyone. The prices of warrants do not necessarily move
parallel to the prices of the underlying securities.
Certain Risks of Foreign Investing:
Currency Fluctuations. Investment in securities denominated in foreign
currencies involves certain risks. A change in the value of any such currency
against the U.S. dollar will result in a corresponding change in the U.S. dollar
value of a Portfolio's assets denominated in that currency. Such changes will
also affect a Portfolio's income. Generally, when a given currency appreciates
against the dollar (the dollar weakens) the value of a Portfolio's securities
denominated in that currency will rise. When a given currency depreciates
against the dollar (the dollar strengthens). The value of a Portfolio's
securities denominated in that currency would be expected to decline.
Investment and Repatriation Restrictions. Foreign investment in the
securities markets of certain foreign countries is restricted or controlled in
varying degrees. These restrictions may at times limit or preclude investment in
certain of such countries and may increase the cost and expenses of a Portfolio.
Investments by foreign investors are subject to a variety of restrictions in
many developing countries. These restrictions may take the form of prior
governmental approval, limits on the amount or type of securities held by
foreigners, and limits on the types of companies in which foreigners may invest.
Additional or different restrictions may be imposed at any time by these or
other countries in which a Portfolio invests. In addition, the repatriation of
both investment income and capital from several foreign countries is restricted
and controlled under certain regulations, including in some cases the need for
certain government consents. Although these restrictions may in the future make
it undesirable to invest in these countries, Sub-advisor does not believe that
any current repatriation restrictions would affect its decision to invest in
these countries.
Market Characteristics. Foreign securities may be purchased in
over-the-counter markets or on stock exchanges located in the countries in which
the respective principal offices of the issuers of the various securities are
located, if that is the best available market. Foreign stock markets are
generally not as developed or efficient as, and may be more volatile than, those
in the United States. While growing in volume, they usually have substantially
less volume than U.S. markets and a Portfolio's securities may be less liquid
and more volatile than securities of comparable U.S. companies. Equity
securities may trade at price/earnings multiples higher than comparable U.S.
securities and such levels may not be sustainable. Fixed commissions on foreign
stock exchanges are generally higher than negotiated commissions on U.S.
exchanges, although a Portfolio will endeavor to achieve the most favorable net
results on its portfolio transactions. There is generally less government
supervision and regulation of foreign stock exchanges, brokers and listed
companies than in the United States. Moreover, settlement practices for
transactions in foreign markets may differ from those in U.S. markets, and may
include delays beyond periods customary in the United States.
Political and Economic Factors. Individual foreign economies of
certain countries may differ favorably or unfavorably from the United States'
economy in such respects as growth of gross national product, rate of inflation,
capital reinvestment, resource self-sufficiency and balance of payments
position. The internal politics of certain foreign countries are not as stable
as in the United States.
Governments in certain foreign countries continue to participate to a
significant degree, through ownership interest or regulation, in their
respective economies. Action by these governments could have a significant
effect on market prices of securities and payment of dividends. The economies of
many foreign countries are heavily dependent upon international trade and are
accordingly affected by protective trade barriers and economic conditions of
their trading partners. The enactment by these trading partners of protectionist
trade legislation could have a significant adverse effect upon the securities
markets of such countries.
Information and Supervision. There is generally less publicly
available information about foreign companies comparable to reports and ratings
that are published about companies in the United States. Foreign companies are
also generally not subject to uniform accounting, auditing and financial
reporting standards, practices and requirements comparable to those applicable
to U.S. companies.
Taxes. The dividends and interest payable on certain of a Portfolio's
foreign securities may be subject to foreign withholding taxes, thus reducing
the net amount of income available for distribution to the Portfolio's
shareholders. A shareholder otherwise subject to U.S. federal income taxes may,
subject to certain limitations, be entitled to claim a credit or deduction for
U.S. federal income tax purposes for his or her proportionate share of such
foreign taxes paid by the Portfolio.
Costs. Investors should understand that the expense ratio of the
Portfolio can be expected to be higher than investment companies investing in
domestic securities since the cost of maintaining the custody of foreign
securities and the rate of advisory fees paid by the Portfolio are higher.
Other. With respect to certain foreign countries, especially
developing and emerging ones, there is the possibility of adverse changes in
investment or exchange control regulations, expropriation or confiscatory
taxation, limitations on the removal of funds or other assets of the Portfolio,
political or social instability, or diplomatic developments which could affect
investments by U.S. persons in those countries.
Eastern Europe. Changes occurring in Eastern Europe and Russia today
could have long-term potential consequences. As restrictions fall, this could
result in rising standards of living, lower manufacturing costs, growing
consumer spending, and substantial economic growth. However, investment in the
countries of Eastern Europe and Russia is highly speculative at this time.
Political and economic reforms are too recent to establish a definite trend away
from centrally-planned economies and state owned industries. In many of the
countries of Eastern Europe and Russia, there is no stock exchange or formal
market for securities. Such countries may also have government exchange
controls, currencies with no recognizable market value relative to the
established currencies of western market economies, little or no experience in
trading in securities, no financial reporting standards, a lack of a banking and
securities infrastructure to handle such trading, and a legal tradition which
does not recognize rights in private property. In addition, these countries may
have national policies which restrict investments in companies deemed sensitive
to the country's national interest. Further, the governments in such countries
may require governmental or quasi-governmental authorities to act as custodian
of the Portfolio's assets invested in such countries and these authorities may
not qualify as a foreign custodian under the Investment Company Act of 1940 and
exemptive relief from such Act may be required. All of these considerations are
among the factors which could cause significant risks and uncertainties to
investment in Eastern Europe and Russia.
Latin America. The political history of certain Latin American
countries has been characterized by political uncertainty, intervention by the
military in civilian and economic spheres, and political corruption. Such
developments, if they were to reoccur, could reverse favorable trends toward
market and economic reform, privatization and removal of trade barriers and
result in significant disruption in securities markets. Persistent levels of
inflation or in some cases, hyperinflation, have led to high interest rates,
extreme measures by governments to keep inflation in check and a generally
debilitating effect on economic growth. Although inflation in many countries has
lessened, there is no guarantee it will remain at lower levels. In addition, a
number of Latin American countries are also among the largest debtors of
developing countries. There have been moratoria on, and reschedulings of,
repayment with respect to these debts. Such events can restrict the flexibility
of these debtor nations in the international markets and result in the
imposition of onerous conditions on their economics.
Certain Latin American countries may have managed currencies which are
maintained at artificial levels to the U.S. dollar rather than at levels
determined by the market. This type of system can lead to sudden and large
adjustments in the currency which, in turn, can have a disruptive and negative
effect on foreign investors. Certain Latin American countries also may restrict
the free conversion of their currency into foreign currencies, including the
U.S. dollar. There is no significant foreign exchange market for certain
currencies and it would, as a result, be difficult for the Portfolio to engage
in foreign currency transactions designed to protect the value of the
Portfolio's interests in securities denominated in such currencies.
PORTFOLIO TURNOVER: High turnover involves correspondingly greater brokerage
commissions, other transaction costs and a possible increase in short-term
capital gains or losses. For the year ended December 31, 1994 and for the year
ended December 31, 1995, the Seligman Henderson International Equity Portfolio's
rates of turnover were 48.69% and 58.62% respectively. The turnover rate for the
Lord Abbett Growth and Income Portfolio for the year ended December 31, 1994 was
60.47% and for the year ended December 31, 1995 was 50.28%. The turnover rate
for the JanCap growth Portfolio for the year ended December 31, 1994 was 93.92%
and for the year ended December 31, 1995 was 113.32%. The policy of the AST
Money Market Portfolio of investing only in securities maturing 397 days or less
from the date of acquisition or purchased pursuant to repurchase agreements that
provide for repurchase by the seller within 397 days from the date of
acquisition will result in a high portfolio turnover rate. The turnover rate for
the Federated Utility Income Portfolio for the year ended December 31, 1994 was
54.26% and for the year ended December 31, 1995 was 70.94%. The turnover rate
for the AST Phoenix Balanced Asset Portfolio for the year ended December 31,
1994 was 86.50% and for the year ended December 31, 1995 was 160.94%. The
turnover rate for the Federated High Yield Portfolio from January 3, 1994
(commencement of operations) to December 31, 1994 was 40.55% and for the year
ended December 31, 1995 was 29.64%. The turnover rate for the T. Rowe Price
Asset Allocation Portfolio from January 3, 1994 (commencement of operations) to
December 31, 1994 was 31.62% and for the year ended December 31, 1995 was
17.62%. The turnover rate for the T. Rowe Price International Equity Portfolio
from January 3, 1994 (commencement of operations) to December 31, 1994 was
15.70% and for the year ended December 31, 1995 was 17.11%. The turnover rate
for the Founders Capital Appreciation Portfolio from January 3, 1994
(commencement of operations) to December 31, 1994 was 197.93% and for the year
ended December 31, 1995 was 68.32%. The turnover rate for the INVESCO Equity
Income Portfolio from January 3, 1994 (commencement of operations) to December
31, 1994 was 62.87% and for the year ended December 31, 1995 was 89.48%. The
turnover rate for the PIMCO Total Return Bond Portfolio from January 3, 1994
(commencement of operations) to December 31, 1994 was 139.25% and for the year
ended December 31, 1995 was 124.41%. The turnover rate for the T. Rowe Price
International Bond Portfolio (formerly, the AST Scudder International Bond
Portfolio) from May 1, 1994 (commencement of operations) to December 31, 1994
was 163.27% and for the year ended December 31, 1995 was 325.00%. Such rate of
turnover represents that of the Portfolio as sub-advised by the former
Sub-advisor, Scudder, Stevens & Clark, Inc. As of May 1, 1996, the Portfolio has
been sub-advised by Rowe Price-Fleming International, Inc., with an anticipated
annual rate of turnover not to exceed 350%. The turnover rate for the Berger
Capital Growth Portfolio from October 19, 1994 (commencement of operations) to
December 31, 1994 was 5.36% and for the year ended December 31, 1995 was 84.21%.
The turnover rate respectively from May 2, 1995 (commencement of operations) to
December 31, 1995 for the Seligman Henderson International Small Cap Portfolio,
the T. Rowe Price Natural Resources Portfolio and the PIMCO Limited Maturity
Bond Portfolio was 3.52%, 2.32% and 204.85%. No portfolio turnover rate is
available for the Robertson Stephens Value + Growth Portfolio because this
Portfolio first became effective as of the date of this Statement.
MANAGEMENT: The overall management of the business and affairs of the Trust is
vested with the Board of Trustees. The Board of Trustees approves all
significant agreements between the Trust and persons or companies furnishing
services to the Trust, including the Trust's agreements with the Trust's
Investment Manager and the agreements between the Investment Manager and each
Sub-advisor, Administrator, Custodian and Transfer and Shareholder Servicing
Agent. The day-to-day operations of the Trust are delegated to the Trust's
officers subject always to the investment objectives and policies of the Trust
and to the general supervision of the Board of Trustees.
The Trustees and officers of the Trust and their principal occupations
are listed below. Unless otherwise indicated, the address of each Trustee and
executive officer is One Corporate Drive, Shelton, Connecticut 06484:
Name, Office and Age Principal Occupation
Gordon C. Boronow*+ President and
Vice President and Trustee Chief Operating Officer:
43 American Skandia Life
Assurance Corporation
Jan R. Carendi*+ Executive Vice President and
President, Principal Executive Officer Member of Corporate Management Group
and Trustee Skandia Insurance Company Ltd.
51
David E. A. Carson President, Chairman and
Trustee Chief Executive Officer:
61 People's Bank
850 Main Street
Bridgeport, Connecticut 06604
Richard G. Davy, Jr.*+ Controller
Controller American Skandia Investment
47 Services, Incorporated
Thomas M. Mazzaferro*+ Executive Vice President and
Treasurer Chief Financial Officer:
43 American Skandia Life
Assurance Corporation
Thomas M. O'Brien President and
Trustee Chief Executive Officer:
45 North Side Savings Bank
170 Tulip Avenue
Floral Park, New York 11001
Mary Ellen O'Leary* Corporate Counsel:
Secretary American Skandia Life
36 Assurance Corporation
M. Priscilla Pannell*+ Assistant Corporate Secretary:
Assistant Corporate Secretary American Skandia Life
61 Assurance Corporation
F. Don Schwartz Management Consultant
Trustee 1101 Penn Grant Road
60 Lancaster, PA 17602
* Interested person as defined in the Investment Company Act of 1940.
+ Individuals are officers and/or directors of one or more of the following
companies: The Investment Manager (ASISI), American Skandia Life Assurance
Corporation, American Skandia Marketing, Incorporated (the principal underwriter
for various annuities deemed to be securities for American Skandia Life
Assurance Corporation) and the immediate parent of each these companies -
American Skandia Investment Holding Corporation.
The interested Trustees and officers of the Trust do not receive
compensation directly from the Trust for serving in such capacities. However,
those officers and Trustees of the Trust who are affiliated with the Investment
Manager or the Trust's Transfer and Shareholder Servicing Agent and
Administrator may receive remuneration indirectly, as such entities will receive
fees from the Trust for the services they provide. Each of the other Trustees
receives an annual fee paid by the Trust plus expenses for each meeting of the
Board and of shareholders which he or she attends. For the year ended December
31, 1995, the Trust paid to its disinterested Trustees fees and expenses for all
meetings of the Board and any committee meetings attended in the aggregate
amount of $69,958.
Under the terms of the Massachusetts General Corporation Law, the Trust
may indemnify any person who was or is a Trustee, officer or employee of the
Trust to the maximum extent permitted by the Massachusetts General Corporation
Law; provided, however, that any such indemnification (unless ordered by a
court) shall be made by the Trust only as authorized in the specific case upon a
determination that indemnification of such persons is proper in the
circumstances. Such determination shall be made (i) by the Board of Trustees, by
a majority vote of a quorum which consists of Trustees who are neither
"interested persons" of the Trust as defined in Section 2(a)(19) of the
Investment Company Act of 1940 (the "1940 Act"), nor parties to the proceeding,
or (ii) if the required quorum is not obtainable or if a quorum of such Trustees
so directs by independent legal counsel in a written opinion. No indemnification
will be provided by the Trust to any Trustee or officer of the Trust for any
liability to the Trust or its shareholders to which he or she would otherwise be
subject by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of duty.
MANAGEMENT OF THE TRUST:
Investment Management Agreements: The Trust has entered into Investment
Management Agreements with the Investment Manager (the "Management Agreements").
The Investment Manager furnishes each Portfolio with investment advice and
certain administrative services with respect to the applicable Portfolio's
assets subject to the supervision of the Board of Trustees and in conformity
with the stated policies of the applicable Portfolio. The Investment Manager has
engaged the Sub-advisors noted below to conduct the investment programs of each
Portfolio. Under the terms of the Management Agreements, the Investment Manager
furnishes, at its expense, such personnel as is required by each Portfolio for
the proper conduct of its affairs and engages the Sub-advisors to conduct the
investment programs pursuant to the Investment Manager's obligations under the
Management Agreements. The Investment Manager, not the Trust, is responsible for
the expenses of conducting the investment programs. The Sub-advisor is
responsible for the expenses of conducting the investment programs in relation
to the applicable Portfolio pursuant to agreements between the Investment
Manager and each Sub-advisor. Each Portfolio pays all of its other expenses,
including but not limited to, brokerage commissions, legal, auditing, taxes or
governmental fees, the cost of preparing share certificates, custodian,
depository, transfer and shareholder servicing agent costs, expenses of issue,
sale, redemption and repurchase of shares, expenses of registering and
qualifying shares for sale, insurance premiums on property or personnel
(including officers and Trustees if available) of the Trust which inure to its
benefit, expenses relating to Trustee and shareholder meetings, the cost of
preparing and distributing reports and notices to shareholders, the fees and
other expenses incurred by the Trust in connection with membership in investment
company organizations and the cost of printing copies of prospectuses and
statements of additional information distributed to shareholders. Expenses
incurred by the Trust not directly attributable to any specific Portfolio and
Portfolios are allocated on the basis of the net assets of the respective
Portfolios.
Under the terms of the Management Agreements, the Investment Manager is
permitted to render services to others. The Management Agreements provide that
neither the Investment Manager nor its personnel shall be liable for any error
of judgment or mistake of law or for any act or omission in the administration
or management of the applicable Portfolios, except for willful misfeasance, bad
faith or gross negligence in the performance of its or their duties or by reason
of reckless disregard of its or their obligations and duties under the
Management Agreements.
The Investment Manager has agreed, by the terms of the Management
Agreement for the Seligman Henderson International Equity Portfolio, to
reimburse the Portfolio for any fiscal year in order to prevent Portfolio
expenses (exclusive of taxes, interest, brokerage commissions and extraordinary
expenses, determined by the Trust or the Investment Manager, but inclusive of
the management fee) from exceeding the most restrictive expense limitations
imposed by the securities laws or regulations of those states or jurisdictions
in which the Portfolio's shares may be registered or qualified for sale.
Currently, the most restrictive of such expense limitation would require the
Investment Manager to reimburse the Portfolio so that ordinary expenses
(excluding interest, taxes, brokerage commissions and extraordinary expenses)
for any fiscal year do not exceed 2.5% of the first $30 million of the
Portfolio's average daily net assets, plus 2.0% of the next $70 million, plus
1.5% of the Portfolio's average daily net assets in excess of $100 million. For
the year ended December 31, 1992, the current Investment Manager voluntarily
agreed to reimburse the Portfolio for certain operating expenses in excess of
2.5% of the average daily net assets of the Portfolio. Commencing April 1, 1993,
the Investment Manager has voluntarily agreed to reimburse certain operating
expenses in excess of 1.75% on the first $100 million of the Portfolio's average
daily net assets. This voluntary agreement may be terminated by the Investment
Manager at any time.
The Investment Manager has agreed by the terms of the Management
Agreements for the other Portfolios to reimburse each Portfolio for any fiscal
year in order to prevent Portfolio expenses (exclusive of taxes, interest,
brokerage commissions and extraordinary expenses, determined by the Trust or the
Investment Manager, but inclusive of the management fee), from exceeding a
specified percentage of each Portfolio's average daily net assets, as follows:
Seligman Henderson International Small Cap Portfolio: 1.75%
Lord Abbett Growth and Income Portfolio: 1.25
JanCap Growth Portfolio: 1.35%
AST Money Market Portfolio: .65%
The Investment Manager has voluntarily agreed to reimburse certain
operating expenses in excess of .60% for the AST Money Market
Portfolio. This voluntary agreement may be terminated by the Investment
Manager at any time.
Federated Utility Income Portfolio: 1.25%
Federated High Yield Portfolio: 1.15%
AST Phoenix Balanced Asset Portfolio: 1.25%
T. Rowe Price Asset Allocation Portfolio: 1.25%
T. Rowe Price International Equity Portfolio: 1.75%
Commencing May 1, 1996, the Investment Manager has voluntarily agreed
to reimburse certain operating expenses in excess of 1.71% for the
T. Rowe Price International Equity Portfolio. This voluntary agreement
may be terminated by the Investment Manager at any time.
T. Rowe Price Natural Resources Portfolio: 1.35%
T. Rowe Price International Bond Portfolio: 1.75%
Founders Capital Appreciation Portfolio: 1.30%
INVESCO Equity Income Portfolio: 1.20%
PIMCO Total Return Bond Portfolio: 1.05%
PIMCO Limited Maturity Bond Portfolio: 1.05%
Berger Capital Growth Portfolio: 1.25%
Robertson Stephens Value + Growth Portfolio: 1.45%
Each Management Agreement will continue in effect from year to year,
provided it is approved, at least annually, in the manner stipulated in the 1940
Act. This requires that each Management Agreement and any renewal be approved by
a vote of the majority of the Trustees who are not parties thereto or interested
persons of any such party, cast in person at a meeting specifically called for
the purpose of voting on such approval. Each Management Agreement may be
terminated without penalty on sixty days' written notice by vote of a majority
of the Board of Trustees or by the Investment Manager, or by holders of a
majority of the applicable Portfolio's outstanding shares, and will
automatically terminate in the event of its "assignment" as that term is defined
in the 1940 Act.
The Administrator and Transfer and Shareholder Servicing Agent: PFPC
Inc., a Delaware corporation which is an indirect wholly-owned subsidiary of PNC
Financial Corp., 103 Bellevue Parkway, Wilmington, Delaware 19809, currently
serves as the Trust's Administrator and as the Trust's Transfer and Shareholder
Servicing Agent.
The Administration and Accounting Services Agreement: Under a Trust
Accounting and Administration Agreement (the "Administration Agreement") dated
May 1, 1992, PFPC, Inc. (the "Administrator") provides certain fund accounting
and administrative services to the Trust, as described in the Prospectus.
Pursuant to the terms of the Administration Agreement, the
Administrator shall not be liable for any error of judgment or mistake of law or
for any loss or expense suffered by the Trust, in connection with the matters to
which the Administration Agreement relates, except for a loss or expense
resulting from willful misfeasance, bad faith, or gross negligence on its part
in the performance of its duties or from reckless disregard by it of its
obligations and duties under this Agreement. Any person, even though also an
officer, director, partner, employee or agent of the Administrator, who may be
or become an officer, Trustee, employee or agent of the Trust, shall be deemed
when rendering services to the Trust or acting on any business of the Trust
(other than services or business in connection with the Administrator's duties
hereunder) to be rendering such services to or acting solely for the Trust and
not as an officer, director, partner employee or agent or one under the control
or direction of the Administrator even though paid by them.
Compensation for the services and facilities provided by the
Administrator under the Administration Agreement includes the Administrator's
out-of pocket expenses. "Out-of-pocket" expenses of the Administrator include,
but are not limited to: postage and mailing, forms, envelopes, checks, toll-free
lines (if requested by the Trust), telephone, hardware and telephone lines for
remote terminals (if required by the Trust), wire fees, certificate issuance
fees, microfiche and microfilm, telex, federal express, outside independent
pricing service charges, record retention/storage and proxy solicitation,
mailing and tabulation expenses (if required by the Trust).
For the period from January 1, 1995 to December 31, 1995, the Trust
paid its current Administrator $2,080,598. For the period from January 1, 1994
to December 31, 1994, the Trust paid its current Administrator $1,192,633. For
the period from June 30, 1993 to December 31, 1993, the Trust paid its current
Administrator $228,037. For the period January 1, 1993 to June 30, 1993, the
Trust paid its current Administrator $82,623 for administrative services
rendered.
The Administration Agreement provides that it will continue in effect
from year to year. The Administration Agreement is terminable, without penalty,
by the Board of Trustees, by vote of a majority (as defined in the 1940 Act) of
the outstanding voting securities, or by the Administrator, on not less than
sixty days' notice. The Administration Agreement shall automatically terminate
upon its assignment by the Administrator without the prior written consent of
the Trust, provided, however, that no such assignment shall release
Administrator from its obligations under this Agreement.
BROKERAGE ALLOCATION: Subject to the supervision of the Board of Trustees,
decisions to buy and sell securities for the Trust are made for each Portfolio
by its Sub-advisor. Each Sub-advisor is authorized to allocate the orders placed
by it on behalf of the applicable Portfolio to such brokers who also provide
research or statistical material, or other services to the Portfolio or the
Sub-advisor for the use of the applicable Portfolio. Such allocation shall be in
such amounts and proportions as the Sub-advisor shall determine and the
Sub-advisor will report on said allocations either to the Investment Manager,
which will report on such allocations to the Board of Trustees, or, if
requested, directly to the Board of Trustees. Such reports will indicate the
brokers to whom such allocations have been made and the basis therefor. The
Sub-advisor may consider sale of shares of the Portfolio, as well as the
recommendations of the Investment Manager, as factors in the selection of
brokers to execute portfolio transactions for a Portfolio, subject to the
requirements of best net price and most favorable execution.
Subject to the rules promulgated by the SEC, as well as other
regulatory requirements, a Sub-advisor also may allocate orders to brokers or
dealers affiliated with the Sub-advisor or the Investment Manager. Such
allocation shall be in such amounts and proportions as the Sub-advisor shall
determine and the Sub-advisor will report on said allocations either to the
Investment Manager, which will report on such allocations to the Board of
Trustees, or, if requested, directly to the Board of Trustees.
In selecting a broker to execute each particular transaction, each
Sub-advisor will take the following into consideration: the best net price
available; the reliability, integrity and financial condition of the broker; the
size and difficulty in executing the order; and the value of the expected
contribution of the broker to the investment performance of the Portfolio on a
continuing basis. Accordingly, the cost of the brokerage commissions in any
transaction may be greater than that available from other brokers if the
difference is reasonably justified by other aspects of the execution services
offered. Subject to such policies and procedures as the Board of Trustees may
determine, a Sub-advisor shall not be deemed to have acted unlawfully or to have
breached any duty solely by reason of its having caused a Portfolio to pay a
broker that provides research services to the Sub-advisor an amount of
commission for effecting an investment transaction in excess of the amount of
commission another broker would have charged for effecting that transaction, if
the Sub-advisor determines in good faith that such amount of commission was
reasonable in relation to the value of the research service provided by such
broker viewed in terms of either that particular transaction or the
Sub-advisor's ongoing responsibilities with respect to a Portfolio. For the year
ended December 31, 1993, for the year ended December 31, 1994, and for the year
ended December 31, 1995, respectively, aggregate brokerage commissions of
$928,123, $2,244,147 and $3,220,077, respectively, were paid in relation to
brokerage transactions for the Trust. Less than 1% of the Trust's aggregate
brokerage commissions were paid to affiliates of Sub-advisors for the year ended
December 31, 1995.
ALLOCATION OF INVESTMENTS: The Sub-advisors have other advisory clients, some of
which have similar investment objectives to one or more Portfolios for which
advisory services are being provided. In addition, a Sub-advisor may be engaged
to provide advisory services for more than one of the Trust's Portfolios. There
will be times when a Sub-advisor may recommend purchases and/or sales of the
same securities for a Portfolio and such Sub-advisor's other clients. In such
circumstances, it will be the policy of each Sub-advisor to allocate purchases
and sales among a Portfolio and its other clients, including other Trust
Portfolios for which it provides advisory services, in a manner which the
Sub-advisor deems equitable, taking into consideration such factors as size of
account, concentration of holdings, investment objectives, tax status, cash
availability, purchase costs, holding period and other pertinent factors
relative to each account.
REGULATORY MATTERS: The Staff of Securities and Exchange Commission ("SEC") has
taken the position that the purchase and sale of futures contracts and the
writing of related options may involve senior securities for the purposes of the
restrictions contained in Section 18 of the Investment Company Act of 1940 on
investment companies' issuing senior securities. However, the Staff has issued
letters declaring that it will not recommend enforcement action under Section 18
if an investment company:
(i) sells futures contracts to offset expected declines in the value of
the investment company's securities, provided the value of such futures
contracts does not exceed the total market value of those securities (plus such
additional amount as may be necessary because of differences in the volatility
factor of the securities vis-a-vis the futures contracts);
(ii) writes call options on futures contracts, stock indexes or other
securities, provided that such options are covered by the investment company's
holding of a corresponding long futures position, by its ownership of securities
which correlate with the underlying stock index, or otherwise;
(iii) purchases futures contracts, provided the investment company
establishes a segregated account ("cash segregated account") consisting of cash
or cash equivalents in an amount equal to the total market value of such futures
contracts less the initial margin deposited therefor; and
(iv) writes put options on futures contracts, stock indexes or other
securities, provided that such options are covered by the investment company's
holding of a corresponding short futures position, by establishing a cash
segregated account in an amount equal to the value of its obligation under the
option, or otherwise.
Each Portfolio will conduct its purchases and sales of any futures
contracts and writing of related options transactions in accordance with the
foregoing.
COMPUTATION OF NET ASSET VALUES: The Trust determines the net asset values of a
Portfolio's shares at the close of the New York Stock Exchange (the "Exchange"),
currently 4:00 p.m., on each day that the Exchange is open for business and on
such other days as there is sufficient trading in such Portfolio's securities to
affect materially its net asset value per share except for New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving and Christmas.
All Portfolios with the exception of the AST Money Market Portfolio:
The net asset value per share of all of the Portfolios with the exception of the
AST Money Market Portfolio is determined by dividing the market value of its
securities as of the close of trading plus any cash or other assets (including
dividends and accrued interest receivable) less all liabilities (including
accrued expenses), by the number of shares outstanding. Portfolio securities,
including open short positions and options written, are valued at the last sale
price on the securities exchange or securities market on which such securities
primarily are traded. Securities not listed on an exchange or securities market,
or securities in which there were not transactions, are valued at the average of
the most recent bid and asked prices, except in the case of open short positions
where the asked price is available. Any securities or other assets for which
recent market quotations are not readily available are valued at fair market
value as determined in good faith by the Board of Trustees. Short-term
obligations with more than sixty days remaining to maturity are valued at
current market value until the sixtieth day prior to maturity, and will then be
valued on an amortized cost basis on the value on such date unless the Trustees
determine that this amortized cost value does not represent fair market value.
Expenses and fees, including the investment management fees, are accrued daily
and taken into account for the purpose of determining net asset value of shares.
Generally, trading in foreign securities, as well as U.S. Government
securities, money market instruments and repurchase agreements, is substantially
completed each day at various times prior to the close of the Exchange. The
values of such securities used in computing the net asset value of the shares of
a Portfolio are determined as of such times. Foreign currency exchange rates are
also generally determined prior to the close of the Exchange. Occasionally,
events affecting the value of such securities and such exchange rates may occur
between the times at which they are determined and the close of the Exchange,
which will not be reflected in the computation of net asset values. If during
such periods events occur which materially affect the value of such securities,
the securities will be valued at their fair market value as determined in good
faith by the Trustees.
For purposes of determining the net asset value per share of each
Portfolio all assets and liabilities initially expressed in foreign currencies
will be converted into U.S. dollars quoted by a major bank that is a regular
participant in the foreign exchange market or on the basis of a pricing service
that takes into account the quotes provided by a number of such major banks.
AST Money Market Portfolio: For the AST Money Market Portfolio, all
securities are valued by the amortized cost method. The purpose of this method
of calculation is to attempt to maintain a constant net asset value per share of
$1.00. No assurance can be given that this goal can be attained. The amortized
cost method of valuation values a security at its cost at the time of purchase
and thereafter assumes a constant amortization to maturity of any discount or
premium, regardless of the impact of fluctuating interest rates on the market
value of the instrument. If a difference of more than 1/2 of 1% occurs between
valuation based on the amortized cost method and valuation based on market
value, the Trustees will take steps necessary to reduce such deviation, such as
changing dividend policy, shortening the average maturity of the investments in
the Portfolio or realizing gains or losses.
PURCHASE AND REDEMPTION OF SHARES: A complete description of the manner by which
the Trust's shares may be purchased and redeemed appears in the Prospectus under
the heading "Purchase and Redemption of Shares."
TAX MATTERS: A description of some of the tax considerations generally affecting
the Trust and its shareholders is found in the section of the Prospectus
entitled "Tax Matters." No attempt is made to present a detailed explanation of
the tax treatment of the Trust or its shareholders. The discussion in the
Prospectus is not intended as a substitute for careful tax planning.
UNDERWRITER: The Trust is presently used for funding variable annuities, and may
also be used for funding variable life insurance. Pursuant to an exemptive order
of the Securities and Exchange Commission, the Trust may also sell its shares
directly to qualified plans. If the Trust does so, it intends to use American
Skandia Marketing, Incorporated ("ASM, Inc.") or another affiliated
broker-dealer as underwriter, if so required by applicable law. ASM, Inc. is
registered as a broker-dealer with the Securities and Exchange Commission and
the National Association of Securities Dealers. It is an affiliate of American
Skandia Life Assurance Corporation, being a wholly-owned subsidiary of American
Skandia Investment Holding Corporation. As of the date of this Statement, ASM,
Inc. has not received payments from the Trust in connection with any brokerage
or underwriting services provided to the Trust.
OTHER INFORMATION:
Principal Holders: As of April 15, 1996, the amount of shares of the Trust owned
by the nine persons who were officers and directors at that time, and are
expected to be officers and directors as of the date of this Statement, and who
are shown as such in the section of this Statement entitled "Management," was
less than one percent of the shares.
The Participating Insurance Companies and Qualified Plans are not obligated to
continue to invest in shares of any Portfolio under all circumstances. Variable
annuity and variable life insurance policy holders should refer to the
prospectuses for such products for a description of the circumstances in which
such a change might occur.
Reports to Holders: Holders of variable annuity contracts or variable life
insurance policies issued by Participating Insurance Companies and Qualified
Plans for which shares of the Trust are the investment vehicle will receive from
the Participating Insurance Companies or Qualified Plans, as applicable,
unaudited semi-annual financial statements and audited year-end financial
statements. Participants in Qualified Plans will receive from trustees of the
Qualified Plans, or directly from the Trust as applicable, unaudited semi-annual
financial statements and audited year-end financial statements. Each report will
show the investments owned by the Trust and the market values of the investments
and will provide other information about the Trust and its operations
Performance Information: The Prospectus contains a brief description of how
performance is calculated. Quotations of average annual return for a Portfolio
will be expressed in terms of the average annual compounded rate of return of a
hypothetical investment in such Portfolio over periods of 1, 5, and 10 years (up
to the life of the Portfolio). These are the annual total rates of return that
would equate the initial amount invested to the ending redeemable value. These
rates of return are calculated pursuant to the following formula: P(1+T)n=ERV
(where P= a hypothetical initial payment of $1,000, T = the average annual total
return, n = the number of years and ERV = the ending redeemable value of a
hypothetical $1,000 payment made at the beginning of the period). All total
return figures reflect the deduction of a proportional share of Portfolio
expenses on an annual basis, and assume that all dividends and distributions are
reinvested when paid. The total return of each Portfolio, computed as of
December 31, 1995, is shown in the table on the following page:
<TABLE>
<CAPTION>
Total Return
Portfolio Name Date Available One Year Three Five Since
for Sale Years Years Inception
- --------------------------------------------- ---------------- --------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Seligman Henderson International Equity 5/17/89 10.00% 15.40% 7.09% 10.98%
Portfolio
Seligman Henderson International Small Cap 5/2/95 N/A N/A N/A 5.00%
Portfolio
Lord Abbett Growth and Income Portfolio 5/1/92 28.91% 14.42% N/A 13.73%
JanCap Growth Portfolio 11/6/92 37.98% 13.80% N/A 14.97%
Federated Utility Income Portfolio 5/4/93 26.13% N/A N/A 9.28%
Federated High Yield Portfolio 1/4/94 19.57% N/A N/A 7.69%
AST Phoenix Balanced Asset Portfolio 5/4/93 22.60% N/A N/A 10.27%
T. Rowe Price Asset Allocation Portfolio 1/4/94 23.36% N/A N/A 10.80%
T. Rowe Price International Equity Portfolio 1/4/94 11.09% N/A N/A 3.40%
T. Rowe Price Natural Resources Portfolio 5/2/95 N/A N/A N/A 17.13%
Founders Capital Appreciation Portfolio 1/4/94 32.56% N/A N/A 19.99%
INVESCO Equity Income Portfolio 1/4/94 30.07% N/A N/A 12.69%
PIMCO Total Return Bond Portfolio 1/4/94 18.78% N/A N/A 7.66%
PIMCO Limited Maturity Bond Portfolio 5/2/95 N/A N/A N/A 7.14%
AST Scudder International Bond Portfolio(*) 5/3/94 11.10% N/A N/A 4.47%
Berger Capital Growth Portfolio 10/20/94 24.42% N/A N/A 19.67%
</TABLE>
(*) As of May 1, 1996, Rowe Price-Fleming International, Inc. has been
Sub-Advisor to the Portfolio, now named the T. Rowe Price International Bond
Portfolio. The performance information provided in the above chart reflects that
of the Portfolio as sub-advised by the prior Sub-advisor, Scudder, Stevens &
Clark, Inc., computed as of December 31, 1995. Such performance figures are
based upon historical information and are not intended to indicate future
performance of the Portfolio.
Quotations of a Portfolio's yield are based on the investment income
per share earned during a particular 30-day period (including dividends, if any,
and interest), less expenses accrued during the period ("net investment
income"), and are computed by dividing net investment income by the net asset
value per share on the last day of the period, according to the following
formula:
YIELD = 2[(a-b + 1)6 -1]
cd
where a = dividend and interest income
b = expenses accrued for the period
c = average daily number of shares outstanding during the period that
were entitled to receive dividends d = maximum net asset value per
share on the last day of the period
The AST Money Market Portfolio yield refers to the income generated by
an investment in the Portfolio over a seven-day period expressed as an annual
percentage rate. Such Portfolio also may calculate an effective yield by
compounding the base period return over a one-year period. The effective yield
will be slightly higher than the yield because of the compounding effect on this
assumed reinvestment.
The current yield and effective yield calculations for shares of the
AST Money Market Portfolio are illustrated for the seven-day period ended
December 31, 1995:
AST Money Market Portfolio
Current Yield Effective Yield
5.23% 5.37%
Such Portfolio's total return is based on the overall dollar or
percentage change in value of a hypothetical investment in the Portfolio
assuming dividend distributions are reinvested. A cumulative total return
reflects the hypothetical annual compounded rate that would have produced the
same cumulative total return if performance had been constant over the entire
period. Because average annual returns tend to smooth out variations in a
Portfolio's performance, investors should recognize that they are not the same
as actual year-by-year results.
FINANCIAL STATEMENTS: Included in this Statement of Additional Information are
audited financial statements for the Trust for the year ended December 31, 1995.
To the extent and only to the extent that any statement in a document
incorporated by reference into this Statement is modified or superseded by a
statement in this Statement or in a later-filed document, such statement is
hereby deemed so modified or superseded and not part of this Statement.
You may obtain, without charge, a copy of any or all the documents
incorporated by reference in this Statement, including any exhibits to such
documents which have been specifically incorporated by reference. We do so upon
receipt of your written or oral request. Please address your request to American
Skandia Trust, P.O. Box 883, Shelton, Connecticut, 06484. Our phone number is
(203) 926-1888.
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Trustees and Shareholders,
American Skandia Trust:
We have audited the accompanying statement of assets and liabilities,
including the portfolio of investments, of Seligman Henderson International
Equity Portfolio (formerly Henderson International Equity Portfolio) of American
Skandia Trust (the "Trust") as of December 31, 1995, the related statements of
operations for the year then ended and changes in net assets for each of the
years in the two-year period then ended, and the financial highlights for each
of the years in the five-year period then ended. We also have audited the
accompanying statements of assets and liabilities, including the portfolios of
investments, of Lord Abbett Growth and Income Portfolio, JanCap Growth
Portfolio, AST Money Market Portfolio, Federated Utility Income Portfolio, AST
Phoenix Balanced Asset Portfolio, Federated High Yield Portfolio, T. Rowe Price
Asset Allocation Portfolio, PIMCO Total Return Bond Portfolio, INVESCO Equity
Income Portfolio, Founders Capital Appreciation Portfolio, T. Rowe Price
International Equity Portfolio, AST Scudder International Bond Portfolio, Berger
Capital Growth Portfolio, Seligman Henderson International Small Cap Portfolio,
T. Rowe Price Natural Resources Portfolio, and PIMCO Limited Maturity Bond
Portfolio of the Trust as of December 31, 1995, the related statements of
operations and changes in net assets and the financial highlights for each of
the periods presented. We also have audited the accompanying statements of
assets and liabilities of AST Phoenix Capital Growth Portfolio and Eagle Growth
Equity Portfolio of the Trust as of December 31, 1995, the related statements of
operations and changes in net assets, and the financial highlights for each of
the periods presented. These financial statements and the financial highlights
are the responsibility of the Trust's management. Our responsibility is to
express an opinion on these financial statements and the financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at December
31, 1995 by correspondence with the custodians and brokers and where replies
were not received, we performed other auditing procedures. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial positions of Seligman Henderson
International Equity Portfolio, Lord Abbett Growth and Income Portfolio, JanCap
Growth Portfolio, AST Money Market Portfolio, Federated Utility Income
Portfolio, AST Phoenix Balanced Asset Portfolio, Federated High Yield Portfolio,
AST Phoenix Capital Growth Portfolio, T. Rowe Price Asset Allocation Portfolio,
PIMCO Total Return Bond Portfolio, INVESCO Equity Income Portfolio, Founders
Capital Appreciation Portfolio, T. Rowe Price International Equity Portfolio,
Eagle Growth Equity Portfolio, AST Scudder International Bond Portfolio, Berger
Capital Growth Portfolio, Seligman Henderson International Small Cap Portfolio,
T. Rowe Price Natural Resources Portfolio, and PIMCO Limited Maturity Bond
Portfolio of American Skandia Trust as of December 31, 1995, the results of
their operations, the changes in their net assets, and the financial highlights
for the respective stated periods in conformity with generally accepted
accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
February 9, 1996 (April 16, 1996 with respect to Note 7)
<PAGE>
AMERICAN SKANDIA TRUST
SELIGMAN HENDERSON INTERNATIONAL EQUITY PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
--------- -------------
<S> <C> <C>
FOREIGN STOCKS -- 89.0%
AUSTRALIA -- 3.0%
Broken Hill Proprietary Co.
LTD. ......................... 292,705 $ 4,137,635
MIM Holdings LTD. .............. 1,177,791 1,629,857
News Corp. ..................... 400,901 2,141,559
------------
7,909,051
------------
DENMARK -- 1.2%
Teledanmark Cl-B................ 60,264 3,288,133
------------
FRANCE -- 9.6%
AXA SA.......................... 55,766 3,757,586
Carrefour Supermarch SA......... 5,410 3,281,901
Cie Generale des Eaux........... 39,156 3,908,804
Lafarge -- Coppee SA............ 54,934 3,538,882
Roussel Uclaf................... 22,299 3,779,106
Societe Generale................ 33,372 4,122,524
Societe Nationale Elf
Aquitaine..................... 47,046 3,465,890
------------
25,854,693
------------
GERMANY -- 5.5%
Adidas.......................... 36,823 1,943,593
Bayer AG........................ 13,551 3,597,979
Deutsche Bank AG................ 64,218 3,049,258
Karstadt AG..................... 6,630 2,718,198
Lufthansa....................... 24,218 3,351,885
------------
14,660,913
------------
HONG KONG -- 2.7%
Hong Kong Telecommunications
LTD........................... 1,877,600 3,350,949
Swire Pacific LTD. Cl-A......... 505,000 3,918,576
------------
7,269,525
------------
INDONESIA -- 1.1%
Gadjah Tungal................... 5,073,000 2,828,192
------------
ITALY -- 2.2%
Assicurazione Generali.......... 146,373 3,542,991
Olivetti & Co. SPA Cl-C......... 2,851,074 2,284,808
------------
5,827,799
------------
JAPAN -- 27.0%
Aoyama Trading Co. LTD. ........ 37,500 1,197,735
CSK Corp. ...................... 117,000 3,657,666
Denny's Japan Co. LTD. ......... 38,000 1,268,873
East Japan Railway Co. ......... 1,416 6,879,907
Joshin Demki.................... 88,000 1,149,826
Kao Corp. ...................... 169,000 2,093,690
Mitsui Marine & Fire
Insurance..................... 542,000 3,860,937
Mitsui O.S.K. Lines*............ 1,234,000 3,953,291
Mitsubishi Materials Corp. ..... 716,000 3,707,511
Nippon Telegraph & Telephone
Corp. ........................ 855 6,909,843
Nippon TV Network............... 8,410 2,246,574
<CAPTION>
SHARES VALUE
--------- -------------
<S> <C> <C>
Nomura Securities Co. LTD. ..... 186,000 $ 4,050,523
Pioneer Electronic Corp. ....... 426,000 7,792,683
Sumitomo Metal Industries*...... 1,183,000 3,583,808
Sumitomo Sitix Corp. ........... 63,000 1,146,341
Sumitomo Trust & Banking........ 266,000 3,758,808
Tokyo Steel Manufacturing....... 51,000 937,863
Toshiba Corp. .................. 959,000 7,509,011
Toyo Ink Manufacturing.......... 194,000 957,607
Tsutsumi Jewelry Co. LTD. ...... 21,000 1,050,813
Yamaha Corp. ................... 255,000 4,590,592
------------
72,303,902
------------
MALAYSIA -- 1.5%
Malayan Banking BHD............. 246,500 2,077,302
Proton Perusahaan Otomobil...... 550,000 1,938,450
------------
4,015,752
------------
MEXICO -- 0.1%
Grupo Financiero Banamex Cl-B... 225,000 375,195
------------
NETHERLANDS -- 2.8%
Elsevier NV..................... 279,625 3,729,030
ING Groep NV.................... 57,857 3,865,065
------------
7,594,095
------------
NORWAY -- 1.7%
Kvaerner AS Cl-B................ 47,276 1,583,836
Norsk Hydro AS.................. 68,195 2,866,604
------------
4,450,440
------------
SINGAPORE -- 3.1%
Jurong Shipyard................. 596,000 4,593,693
United Overseas Bank LTD. ...... 394,860 3,797,268
------------
8,390,961
------------
SPAIN -- 2.8%
Banco de Santander SA........... 76,573 3,858,747
Iberdrola SA.................... 208,362 1,913,792
Uralita SA...................... 179,327 1,632,269
------------
7,404,808
------------
SWEDEN -- 2.5%
Ericsson, (L.M.) Telephone Co.
Cl-B.......................... 182,390 3,568,470
Stora Kopparbergs Bergslags
Cl-B.......................... 257,111 3,076,277
------------
6,644,747
------------
SWITZERLAND -- 5.6%
Brown Boveri AG-Bearer.......... 3,341 3,881,852
Nestle SA....................... 3,270 3,617,896
Roche Holding AG-Genussshein.... 481 3,805,710
Zuerich Versicherung-Bearer..... 12,501 3,707,051
------------
15,012,509
------------
</TABLE>
<PAGE>
AMERICAN SKANDIA TRUST
SELIGMAN HENDERSON INTERNATIONAL EQUITY PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
--------- -------------
<S> <C> <C>
THAILAND -- 1.9%
Siam Cement Co. LTD............. 52,000 $ 2,881,778
Siam Commercial Bank............ 168,000 2,214,212
------------
5,095,990
------------
UNITED KINGDOM -- 14.7%
BAT Industries PLC.............. 410,000 3,613,078
British Petroleum Co. PLC....... 333,500 2,791,337
Caradon PLC..................... 620,000 1,882,201
Central European Growth
Fund***....................... 1,680,000 1,023,945
Central European Growth Fund
(Warrants)*................... 258,000 24,038
Farnell Electronics PLC......... 240,000 2,679,586
FKI Babcock PLC................. 962,500 2,466,109
Granada Group PLC............... 362,000 3,625,734
Rentikil Group PLC.............. 381,800 1,986,133
Reuters Holdings PLC............ 343,600 3,147,986
Royal Bank of Scotland PLC...... 310,000 2,820,895
Siebe PLC....................... 225,000 2,774,154
Tesco PLC....................... 781,500 3,604,235
Unilever PLC.................... 178,000 3,656,853
WPP Group Ord. PLC.............. 1,350,000 3,437,995
------------
39,534,279
------------
TOTAL FOREIGN STOCKS
(COST $220,036,687)............... 238,460,984
------------
AMERICAN DEPOSITORY RECEIPTS -- 1.1%
DIVERSIFIED -- 0.5%
Grupo Carso SA*................. 110,000 1,221,000
------------
MISCELLANEOUS -- 0.6%
Sociedad Anoni.................. 80,000 1,730,000
------------
TOTAL AMERICAN DEPOSITORY RECEIPTS
(COST $3,435,327)................. 2,951,000
------------
GLOBAL DEPOSITORY RECEIPTS -- 1.9%
DIVERSIFIED -- 0.9%
Hindalco Industries............. 75,000 2,540,250
------------
ELECTRONICS -- 1.0%
Samsung Electronics Co.*........ 43,000 2,547,750
------------
TOTAL GLOBAL DEPOSITORY RECEIPTS
(COST $4,105,665)................. 5,088,000
------------
</TABLE>
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
--------- ------ ------------
<S> <C> <C> <C>
SOVEREIGN ISSUES -- 1.3%
ELECTRICAL-EQUIPMENT -- 0.6%
Teco Electric & Machine
Corp.
2.75%................. 04/15/04 $2,000 $ 1,567,500
INDUSTRIAL -- 0.7%
Gujarat Ambuja Cement
3.50%................. 06/30/99 1,450 1,950,250
TOTAL SOVEREIGN ISSUES
(COST $3,582,659).................... 3,517,750
TOTAL INVESTMENTS
(COST $231,160,338**) -- 93.3%....... 250,017,734
OTHER ASSETS LESS
LIABILITIES -- 6.7%.................. 18,038,094
NET ASSETS -- 100.0%................... $268,055,828
NOTES TO SCHEDULE OF INVESTMENTS:
The aggregate unrealized appreciation (depreciation) on a tax
basis is as follows:
Gross appreciation................. $ 29,767,682
Gross depreciation................. (11,120,367)
Net appreciation................... $ 18,647,315
</TABLE>
Foreign currency exchange contracts outstanding at December 31, 1995:
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
COVERED EXPIRATION UNREALIZED
TYPE BY CONTRACT MONTH APPRECIATION
<S> <C> <C> <C> <C>
- ----------------------------------------------------------
Buy ESP 64,462,119 01/96 $ 1,755
Sell JPN 3,330,855,000 02/96 543,751
--------
$545,506
========
COUNTRY/CURRENCY ABBREVIATIONS
- ----------------------------------------------------------
ESP - Spain/Spanish Peseta
JPN - Japan/Japanese Yen
</TABLE>
- --------------------------------------------------------------------------------
Unless otherwise noted, all foreign stocks are common stock.
* Non-income producing securities.
** Cost for Federal income tax purposes was $231,370,419.
*** Closed-end fund.
See Notes to Financial Statements.
<PAGE>
AMERICAN SKANDIA TRUST
LORD ABBETT GROWTH AND INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
--------- ------------
<S> <C> <C>
COMMON STOCK -- 63.9%
AEROSPACE -- 1.3%
Boeing Co. .................... 30,000 $ 2,351,250
Rockwell International
Corp. ....................... 25,000 1,321,875
------------
3,673,125
------------
AUTOMOBILES -- 1.6%
General Motors Corp. .......... 90,000 4,758,750
------------
BANKING -- 4.4%
BankAmerica Corp. ............. 70,000 4,532,500
Chemical Banking Corp. ........ 80,000 4,700,000
Comerica, Inc. ................ 90,000 3,611,250
------------
12,843,750
------------
BUSINESS SUPPLIES -- 1.1%
Snap-On, Inc. ................. 70,000 3,167,500
------------
CHEMICALS -- 3.0%
Dow Chemical Co. .............. 30,000 2,111,250
James River Corp. ............. 180,000 4,342,500
M.A. Hanna Co. ................ 80,000 2,240,000
------------
8,693,750
------------
COMMUNICATIONS -- 0.9%
Harris Corp. .................. 50,000 2,731,250
------------
COMPUTERS -- 0.9%
EMC Corp.*..................... 170,000 2,613,750
------------
DIVERSIFIED -- 1.4%
Crane Co. ..................... 35,000 1,290,625
National Services Industries,
Inc. ........................ 90,000 2,913,750
------------
4,204,375
------------
DRUGS -- 0.9%
Merck & Co., Inc. ............. 40,000 2,630,000
------------
ELECTRONICS -- 4.4%
AMP, Inc. ..................... 100,000 3,837,500
Emerson Electric Co. .......... 60,000 4,905,000
Hewlett-Packard Co. ........... 35,000 2,931,250
Seagate Technology, Inc.*...... 25,000 1,187,500
------------
12,861,250
------------
FINANCIAL-BANK & TRUST -- 1.0%
Bank of Boston Corp. .......... 60,000 2,775,000
------------
FINANCIAL SERVICES -- 1.9%
H. F. Ahmanson Co. ............ 100,000 2,650,000
H&R Block, Inc. ............... 70,000 2,835,000
------------
5,485,000
------------
FOODS & BEVERAGES -- 4.8%
Conagra, Inc. ................. 100,000 4,125,000
Dean Foods Co. ................ 35,700 981,750
<CAPTION>
SHARES VALUE
--------- ------------
<S> <C> <C>
Hershey Foods Corp. ........... 55,000 $ 3,575,000
Sara Lee Corp. ................ 50,000 1,593,750
Supervalu, Inc. ............... 110,000 3,465,000
------------
13,740,500
------------
FOOD PROCESSING -- 0.7%
Pioneer Hi-Bred
International................ 35,000 1,946,875
------------
FOREST PRODUCTS -- 0.8%
Westvaco Corp. ................ 80,000 2,220,000
------------
HEALTHCARE -- 1.7%
Malincrodt Group, Inc. ........ 135,000 4,910,625
------------
HOSPITAL MANAGEMENT -- 0.7%
Baxter International, Inc. .... 45,000 1,884,375
------------
INSURANCE -- 5.1%
Aetna Life & Casualty Co. ..... 70,000 4,847,500
CHUBB Corp. ................... 45,000 4,353,750
Lincoln National Corp. ........ 30,000 1,612,500
Transamerica Corp. ............ 55,000 4,008,125
------------
14,821,875
------------
MACHINERY & HEAVY EQUIPMENT -- 0.8%
Goulds Pumps, Inc. ............ 90,000 2,250,000
------------
NATURAL GAS -- 1.3%
Sonat, Inc. ................... 105,000 3,740,625
------------
OFFICE EQUIPMENT -- 0.8%
Moore Corp. LTD. .............. 125,000 2,328,125
------------
OIL & GAS -- 2.3%
Chevron Corp. ................. 70,000 3,675,000
Coastal Corp. ................. 80,000 2,980,000
------------
6,655,000
------------
OIL & GAS-EQUIPMENT & SERVICES -- 0.3%
Schlumberger LTD. ............. 13,700 948,725
------------
PAPER & PAPER PRODUCTS -- 1.0%
Kimberly-Clark Corp. .......... 35,100 2,904,525
------------
PHARMACEUTICALS -- 1.2%
Warner Lambert Co. ............ 35,000 3,399,375
------------
PHOTOGRAPHY -- 0.5%
Perkin Elmer Corp. ............ 35,000 1,321,250
------------
PRINTING & PUBLISHING -- 1.5%
Deluxe Corp. .................. 80,000 2,320,000
R.R. Donnelley & Sons Co. ..... 50,000 1,968,750
------------
4,288,750
------------
RESTAURANTS -- 0.9%
Brinker International, Inc.*... 180,000 2,722,500
------------
</TABLE>
<PAGE>
AMERICAN SKANDIA TRUST
LORD ABBETT GROWTH AND INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
--------- ------------
<S> <C> <C>
RETAIL-MERCHANDISING -- 2.1%
May Department Stores Co. ..... 70,000 $ 2,957,500
Sears Roebuck & Co. ........... 80,000 3,120,000
------------
6,077,500
------------
RUBBER & PLASTIC -- 0.2%
Standard Products Co. ......... 34,100 601,013
------------
SAVINGS & LOAN ASSOCIATIONS -- 1.2%
Great Western Financial
Corp. ....................... 140,000 3,570,000
------------
TELECOMMUNICATIONS -- 3.0%
AT&T Corp. .................... 80,000 5,180,000
MCI Communications Corp. ...... 130,000 3,396,250
------------
8,576,250
------------
TEXTILES -- 1.3%
VF Corp. ...................... 45,000 2,373,750
Warnaco Group, Inc. Cl-A....... 50,000 1,250,000
------------
3,623,750
------------
UTILITIES-ELECTRIC -- 3.1%
Detroit Edison Co. ............ 100,000 3,450,000
Ohio Edison Co. ............... 170,000 3,995,000
Public Service Co. of
Colorado..................... 45,000 1,591,875
------------
9,036,875
------------
UTILITIES-GAS -- 3.0%
Cinergy Corp. ................. 160,000 4,900,000
Consolidated Natural Gas
Co. ......................... 80,000 3,630,000
------------
8,530,000
------------
WASTE MANAGEMENT -- 2.8%
Browning-Ferris Industries,
Inc. ........................ 150,000 4,425,000
WMX Technologies, Inc. ........ 120,000 3,585,000
------------
8,010,000
------------
TOTAL COMMON STOCK
(COST $162,644,061).............. 184,546,013
------------
PREFERRED STOCK -- 4.4%
FINANCE -- 1.2%
St. Paul's Capital,
Convertible Cl-C
6.00%........................ 60,000 3,375,000
------------
METALS & MINING -- 0.5%
Cyprus Amax Minerals,
Convertible $4.00............ 25,000 1,484,375
------------
OIL & GAS -- 0.8%
Atlantic Richfield Co. $2.23... 105,000 2,467,500
------------
<CAPTION>
SHARES VALUE
--------- ------------
<S> <C> <C>
PACKAGING & PAPER PRODUCTS -- 1.9%
International Paper Co.,
Convertible
5.25%........................ 55,000 $ 2,512,125
Sonoco Products Co.,
Convertible $2.25............ 50,000 2,856,250
------------
5,368,375
------------
TOTAL PREFERRED STOCK
(COST $12,777,635)............... 12,695,250
------------
AMERICAN DEPOSITORY RECEIPTS -- 3.3%
AIRLINES -- 0.8%
British Airways PLC............ 30,000 2,182,500
------------
HEALTH -- 1.2%
Smithkline Beecham PLC
(Unit)....................... 65,000 3,607,500
------------
OIL -- 1.3%
Total Petroleum................ 110,000 3,740,000
------------
TOTAL AMERICAN DEPOSITORY RECEIPTS
(COST $7,338,946)................ 9,530,000
------------
SHORT TERM INVESTMENTS -- 5.8%
Temporary Investment
Cash Fund.................... 8,382,244 8,382,244
Temporary Investment Fund...... 8,382,244 8,382,244
------------
(COST $16,764,488)........... 16,764,488
------------
TOTAL INVESTMENTS
(COST $199,525,130**) -- 77.4%... 223,535,751
OTHER ASSETS LESS
LIABILITIES -- 22.6%............. 65,213,522
------------
NET ASSETS -- 100.0%............... $288,749,273
============
NOTES TO SCHEDULE OF INVESTMENTS:
The aggregate unrealized appreciation (depreciation) on a tax
basis is as follows:
Gross appreciation........................ $26,543,215
Gross depreciation........................ (2,559,577)
----------
Net appreciation.......................... $23,983,638
----------
----------
</TABLE>
- --------------------------------------------------------------------------------
* Non-income producing securities.
** Cost for Federal income tax purposes was $199,552,113.
See Notes to Financial Statements.
<PAGE>
AMERICAN SKANDIA TRUST
JANCAP GROWTH PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
---------- ------------
<S> <C> <C>
COMMON STOCK -- 84.8%
AEROSPACE-DEFENSE -- 2.4%
Lockheed Martin Corp. ........... 112,550 $ 8,891,450
McDonnell Douglas Corp. ......... 16,250 1,495,000
------------
10,386,450
------------
BANKING -- 10.3%
Chemical Banking Corp. .......... 281,450 16,535,188
Citicorp......................... 231,545 15,571,401
First Bank System, Inc. ......... 82,375 4,087,859
First Chicago NBD Corp. ......... 46,075 1,819,963
First Interstate Bancorp......... 45,275 6,180,038
------------
44,194,449
------------
BEVERAGES & BOTTLING -- 6.1%
Coca-Cola Co. ................... 148,600 11,033,550
Coca-Cola Enterprises, Inc. ..... 151,850 4,061,988
Pepsico, Inc. ................... 204,475 11,425,041
------------
26,520,579
------------
BIOPHARMACEUTICALS -- 3.1%
Amgen, Inc. ..................... 225,025 13,360,859
------------
BROADCASTING -- 0.1%
Infinity Broadcasting Corp.
Cl-A*.......................... 11,475 427,444
------------
CHEMICALS -- 4.2%
Cytec Industries, Inc. .......... 88,525 5,521,747
Hercules, Inc. .................. 67,700 3,816,588
Monsanto Co. .................... 70,200 8,599,500
------------
17,937,835
------------
COMPUTER SERVICES & SOFTWARE -- 5.8%
Cisco Systems, Inc.*............. 170,125 12,695,578
First Data Corp. ................ 182,500 12,204,688
------------
24,900,266
------------
COMPUTERS -- 4.1%
Sun Microsystems, Inc.*.......... 384,600 17,547,375
------------
CONSUMER GOODS & SERVICES -- 2.6%
Coleman Co., Inc.*............... 75,875 2,665,109
CUC International, Inc. ......... 135,450 4,622,231
Lowe's Companies, Inc. .......... 114,625 3,839,938
------------
11,127,278
------------
CONSUMER PRODUCTS -- 0.5%
General Electric Co. ............ 28,700 2,066,400
------------
ELECTRICAL EQUIPMENT -- 0.8%
Duracell International, Inc. .... 69,000 3,570,750
------------
ELECTRONICS -- 4.8%
Altera Corp. .................... 163,825 8,150,294
Diebold, Inc. ................... 49,100 2,718,913
Lexmark International Group, Inc.
Cl-A........................... 400,000 7,300,000
National Semiconductor Corp.*.... 118,725 2,641,631
------------
20,810,838
------------
<CAPTION>
SHARES VALUE
---------- ------------
<S> <C> <C>
ENTERTAINMENT -- 2.4%
Walt Disney Co. ................. 177,725 $ 10,485,775
------------
FINANCIAL SERVICES -- 8.5%
Charles Schwab Corp. (New)....... 182,700 3,676,838
Federal Home Loan Mortgage
Association.................... 10,175 849,613
Federal National Mortgage
Association.................... 90,215 11,197,937
Merrill Lynch & Co., Inc. ....... 316,875 16,160,625
Morgan Stanley Group, Inc. ...... 58,225 4,694,391
------------
36,579,404
------------
FOOD PROCESSING -- 0.3%
Pioneer Hi-Bred International.... 23,000 1,279,375
------------
FOREST PRODUCTS -- 0.8%
Georgia Pacific Corp. ........... 11,750 806,344
Willamette Industries, Inc. ..... 50,300 2,829,375
------------
3,635,719
------------
HOME BUILDER -- 0.3%
D.R. Horton, Inc.*............... 107,625 1,264,594
------------
HOTELS & MOTELS -- 1.2%
Hospitality Franchise Systems,
Inc. .......................... 65,625 5,364,844
------------
MACHINERY & HEAVY EQUIPMENT -- 0.6%
Caterpillar, Inc. ............... 46,525 2,733,344
------------
MEDICAL & MEDICAL SERVICES -- 1.2%
Medtronic, Inc. ................. 36,450 2,036,644
Oxford Health Plans, Inc. ....... 39,100 2,888,513
------------
4,925,157
------------
METALS & STEELS -- 1.7%
Phelps Dodge Corp. .............. 118,900 7,401,525
------------
PHARMACEUTICALS -- 7.2%
Bristol-Meyers Squibb Co. ....... 49,700 4,267,988
Merck & Co., Inc. ............... 168,275 11,064,081
Pfizer, Inc. .................... 180,750 11,387,250
Warner Lambert Co. .............. 46,175 4,484,747
------------
31,204,066
------------
PRINTING & PUBLISHING -- 1.1%
Gartner Group, Inc. Cl-A......... 100,000 4,787,500
------------
RESTAURANTS -- 3.8%
Boston Chicken, Inc. ............ 122,175 3,924,872
McDonald's Corp. ................ 274,625 12,392,453
------------
16,317,325
------------
RETAIL-SPECIALTY -- 0.7%
Nike, Inc. ...................... 44,100 3,070,463
------------
SAVINGS & LOAN ASSOCIATIONS -- 1.4%
Fidelity Federal Bank FSB........ 2,682,439 5,869,177
------------
</TABLE>
<PAGE>
AMERICAN SKANDIA TRUST
JANCAP GROWTH PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
---------- ------------
<S> <C> <C>
TELECOMMUNICATIONS -- 5.1%
Ascend Communications, Inc.*..... 102,350 $ 8,303,144
Premisys Communications, Inc. ... 20,000 1,120,000
Sprint Corp. .................... 103,700 4,135,038
Tele-Communications
International, Inc.*........... 78,600 1,788,150
US Robotics, Inc. ............... 75,975 6,666,806
------------
22,013,138
------------
TRANSPORTATION -- 3.7%
AMR Corp. ....................... 134,100 9,956,925
Delta Air Lines, Inc. ........... 48,525 3,584,784
UAL Corp. ....................... 13,550 2,418,675
------------
15,960,384
------------
TOTAL COMMON STOCK
(COST $301,903,995)................ 365,742,313
------------
PREFERRED STOCK -- 0.7%
FINANCIAL SERVICES
American Express Convertible
6.25%
(COST $2,780,360)............ 56,000 3,108,000
------------
AMERICAN DEPOSITORY RECEIPTS -- 2.4%
FINANCIAL SERVICES -- 0.3%
Reuters Holdings PLC............. 22,725 1,252,716
------------
HEALTH -- 0.5%
Smithkline Beecham PLC (Unit).... 43,300 2,403,150
------------
RETAIL -- 1.6%
Fila Holding SPA................. 148,075 6,737,413
------------
TOTAL AMERICAN DEPOSITORY RECEIPTS
(COST $8,536,059).................. 10,393,279
------------
FOREIGN STOCKS -- 6.8%
COMPUTERS -- 2.8%
Sap AG Vorzug -- (DEM)........... 77,810 11,816,352
------------
PHARMACEUTICALS -- 4.0%
Roche Holding AG-
Genussshein -- (SW)............ 2,187 17,303,711
------------
TOTAL FOREIGN STOCKS
(COST $22,958,932)................. 29,120,063
------------
SHORT TERM INVESTMENTS --
MONEY MARKET FUNDS -- 0.0%
Temporary Investment Cash Fund... 9,686 9,686
Temporary Investment Fund........ 9,685 9,685
------------
(COST $19,371)................. 19,371
------------
</TABLE>
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
--------- ------- ------------
<S> <C> <C> <C>
COMMERCIAL PAPER -- 6.0%
Ford Motor Credit Co.
5.75%................ 01/02/96 $15,800 $ 15,797,476
General Electric
Capital Corp.
5.95%................ 01/04/96 10,000 9,995,042
-----------
TOTAL COMMERCIAL PAPER
(COST $25,792,518)....... 25,792,518
-----------
U.S. GOVERNMENT AGENCY OBLIGATIONS -- 2.3%
Federal Home Loan Bank
5.66%
(COST $9,976,417).... 01/16/96 10,000 9,976,417
-----------
TOTAL INVESTMENTS
(COST $371,967,652**) -- 103.0%..... 444,151,961
LIABILITIES IN EXCESS OF
OTHER ASSETS -- (3.0%).............. (12,831,188)
-----------
NET ASSETS -- 100.0%.................. $431,320,773
===========
NOTES TO SCHEDULE OF INVESTMENTS:
The aggregate unrealized appreciation (depreciation) on a tax
basis is as follows:
Gross appreciation................ $75,256,541
Gross depreciation................ (3,077,801)
----------
Net appreciation.................. $72,178,740
----------
----------
Foreign currency exchange contracts outstanding at December
31, 1995:
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT UNREALIZED
COVERED EXPIRATION APPRECIATION
TYPE BY CONTRACT MONTH (DEPRECIATION)
<S> <C> <C> <C> <C>
-----------------------------------------------------------
Sell DEM 9,127,000 02/96 $145,741
Sell DEM 6,000,000 04/96 36,562
182,303
Buy FIM 13,500,000 02/96 (23,719)
Sell FIM 13,500,000 02/96 121,478
97,759
$280,062
</TABLE>
COUNTRY/CURRENCY ABBREVIATIONS
- ----------------------------------------------------------
DEM - Germany/German Deutschemark
FIM - Finland/Finnish Markka
SW - Switzerland/Swiss Franc
- --------------------------------------------------------------------------------
* Non-income producing securities.
** Cost for Federal income tax purposes was $371,973,221.
See Notes to Financial Statements.
<PAGE>
AMERICAN SKANDIA TRUST
AST MONEY MARKET PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
--------- ------- ------------
<S> <C> <C> <C>
COMMERCIAL PAPER -- 19.6%
BANKING -- 4.3%
Bank of New York
5.83%................. 01/18/96 $15,000 $ 14,958,704
FINANCIAL -- 14.2%
Bayerische Vereinsbank
Caymen
6.50%................. 01/02/96 18,000 17,996,750
CIT Group Holdings, Inc.
5.60%................. 03/08/96 15,000 14,843,667
General Electric Capital
Corp.
5.79%................. 01/30/96 16,000 15,925,373
48,765,790
PHARMACEUTICALS -- 1.1%
Pfizer, Inc.
5.65%................. 02/05/96 3,763 3,742,330
TOTAL COMMERCIAL PAPER
(COST $67,466,824)........ 67,466,824
CERTIFICATES OF DEPOSIT -- 50.3%
DOMESTIC -- 29.6%
Bank of Nova Scotia
5.75%................. 02/06/96 5,000 5,000,000
Canada Imperial Bank of
Commerce Toronto
5.80%................. 01/18/96 16,000 16,000,000
Dai Ichi Kangyo
Bank LTD.
6.26%................. 02/02/96 10,000 10,000,907
Fuji Bank
6.12%................. 01/17/96 16,000 16,000,000
Harris Trust Bank
5.65%................. 01/25/96 15,000 15,000,000
Industrial Bank of Japan
6.03%................. 02/23/96 17,000 17,004,011
National Westminster
Bank New York
5.72%................. 02/16/96 18,000 18,002,533
Sumitomo Bank New York
6.09%................. 01/16/96 5,000 5,000,000
102,007,451
EURO DOLLAR -- 4.4%
Sanwa London
6.01%................. 01/16/96 15,000 15,000,062
<CAPTION>
PAR
MATURITY (000) VALUE
--------- ------- ------------
<S> <C> <C> <C>
YANKEE DOLLAR -- 16.3%
Banque National de Paris
5.79%................. 01/26/96 $10,000 $ 10,000,000
5.74%................. 03/25/96 5,000 5,000,000
National Bank of
Australia
5.75%................. 10/02/96 5,000 4,995,315
NBD Bank NA
5.95%................. 05/30/96 8,000 8,009,560
Societe Generale
5.65%................. 02/08/96 15,000 15,000,000
6.60%................. 04/12/96 3,000 3,000,972
Sumitomo Bank New York
5.99%................. 01/16/96 10,000 10,000,163
56,006,010
TOTAL CERTIFICATES OF
DEPOSIT
(COST $173,013,523)....... 173,013,523
U.S. TREASURY BILLS -- 0.2%
5.29%................... 03/21/96 400 395,302
5.29%................... 03/21/96 442 436,804
TOTAL U.S. TREASURY BILLS
(COST $832,106)........... 832,106
MEDIUM TERM NOTES -- 9.9%
BANKING -- 1.4%
Comerica Bank of
Detroit, Michigan
5.70%................. 09/03/96 5,000 4,997,731
FINANCIAL -- 4.4%
Xerox Credit Corp.
17.00%................ 02/09/96 15,000 15,168,654
U.S. GOVERNMENT
AGENCIES -- 4.1%
Federal National
Mortgage Association
5.30%................. 12/26/96 14,000 13,970,800
TOTAL MEDIUM TERM NOTES
(COST $34,137,185)........ 34,137,185
VARIABLE RATE DISCOUNT NOTES -- 1.5%
U.S. GOVERNMENT AGENCIES
Federal National
Mortgage Association
5.75%
(COST $4,995,774)... 10/11/96 5,000 4,995,774
</TABLE>
<PAGE>
AMERICAN SKANDIA TRUST
AST MONEY MARKET PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
--------- ------- ------------
<S> <C> <C> <C>
U.S. GOVERNMENT AGENCY OBLIGATIONS -- 18.2%
FEDERAL FARM CREDIT BANK -- 2.9%
6.07%................... 06/03/96 $10,000 $ 9,995,958
FEDERAL HOME LOAN BANK -- 6.6%
5.46%................... 01/22/96 22,815 22,742,334
FEDERAL HOME LOAN MORTGAGE
CORP. -- 3.2%
5.47%................... 01/19/96 9,093 9,068,131
6.06%................... 03/21/96 2,000 1,973,067
11,041,198
FEDERAL NATIONAL MORTGAGE
ASSOCIATION -- 5.5%
5.60%................... 11/01/96 6,000 5,991,850
5.50%................... 01/31/96 13,050 12,990,188
18,982,038
TOTAL U.S. GOVERNMENT AGENCY
OBLIGATIONS
(COST $62,761,528).................. 62,761,528
TOTAL INVESTMENTS
(COST $343,206,940*) - 99.7%........ 343,206,940
OTHER ASSETS LESS
LIABILITIES -- 0.3%................. 1,018,232
NET ASSETS -- 100.0%.................. $344,225,172
</TABLE>
- --------------------------------------------------------------------------------
* Also cost for Federal income tax purposes.
See Notes to Financial Statements.
<PAGE>
AMERICAN SKANDIA TRUST
FEDERATED UTILITY INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------- -----------
<S> <C> <C>
COMMON STOCK -- 76.0%
BANKING -- 0.3%
PNC Financial Corp. ............. 10,800 $ 348,300
-----------
ENERGY -- 2.5%
Sonat, Inc. ..................... 58,500 2,084,063
Westcoast Energy, Inc. .......... 38,400 561,600
-----------
2,645,663
-----------
FINANCIAL SERVICES -- 0.1%
First USA, Inc. ................. 2,700 106,650
-----------
FOOD & TOBACCO -- 1.1%
Philip Morris Companies, Inc. ... 13,000 1,176,500
-----------
HEALTHCARE -- 1.9%
Meditrust SBI.................... 58,500 2,040,187
-----------
NATURAL GAS -- 5.5%
MCN Corp. ....................... 81,800 1,901,850
Pacific Enterprises, Inc. ....... 70,700 1,997,275
Panhandle Eastern Corp. ......... 23,700 660,638
Williams Companies, Inc. ........ 30,300 1,329,413
-----------
5,889,176
-----------
OIL & GAS -- 1.5%
Exxon Corp. ..................... 19,500 1,562,437
-----------
TELECOMMUNICATIONS -- 21.7%
Ameritech Corp. ................. 55,700 3,286,300
AT&T Corp. ...................... 70,900 4,590,775
BellSouth Corp. ................. 93,700 4,075,950
GTE Corp. ....................... 85,800 3,775,200
MCI Communications Corp. ........ 157,000 4,101,625
SBC Communications Corp. ........ 59,900 3,444,250
-----------
23,274,100
-----------
UTILITIES-COMBINATION -- 2.6%
CMS Energy Corp. ................ 92,700 2,769,412
-----------
UTILITIES-ELECTRIC -- 36.2%
Baltimore Gas & Electric Co. .... 47,100 1,342,350
Cinergy Corp. ................... 45,700 1,399,562
DPL, Inc. ....................... 107,200 2,653,200
DQE, Inc. ....................... 83,550 2,569,162
Duke Power Co. .................. 71,900 3,406,262
Florida Progress Corp. .......... 44,600 1,577,725
FPL Group, Inc. ................. 90,700 4,206,213
General Public Utilities
Corp. ......................... 49,200 1,672,800
Illinova Corp. .................. 77,800 2,334,000
NIPSCO Industries, Inc. ......... 58,000 2,218,500
Ohio Edison Co. ................. 30,300 712,050
Pacificorp....................... 75,600 1,606,500
PECO Energy Co. ................. 52,900 1,593,613
Pinnacle West Capital Co. ....... 93,600 2,691,000
<CAPTION>
SHARES VALUE
------- -----------
<S> <C> <C>
Southern Co. .................... 85,800 $ 2,112,825
Texas Utilities Co. ............. 60,000 2,467,500
Unicom Corp. .................... 20,000 655,000
Utilicorp United, Inc. .......... 66,700 1,959,313
Western Resources, Inc. ......... 54,400 1,815,600
-----------
38,993,175
-----------
UTILITIES-GAS -- 2.6%
Enron Corp. ..................... 54,300 2,070,187
Enron Global Power & Pipeline.... 30,600 761,175
-----------
2,831,362
-----------
TOTAL COMMON STOCK
(COST $70,730,913)................. 81,636,962
-----------
PREFERRED STOCK -- 13.4%
AUTOMOBILES -- 1.0%
General Motors Corp., Convertible
Cl-C $3.25..................... 15,100 1,106,075
-----------
BEVERAGES & TOBACCO -- 4.0%
RJR Nabisco Holdings Corp.,
Convertible Cl-C $0.60......... 674,200 4,298,025
-----------
FINANCE -- 3.8%
Merrill Lynch & Co., Inc.,
Convertible $3.12.............. 28,100 1,457,687
SunAmerica, Inc., Convertible
Cl-E $3.10..................... 15,000 982,500
SunAmerica, Inc., Convertible
Cl-D $2.78..................... 33,500 1,603,813
-----------
4,044,000
-----------
FOREST PRODUCTS -- 1.0%
James River Corp., Convertible
9.00%.......................... 44,500 1,040,187
-----------
HOME FURNISHINGS & HOUSEWARES -- 0.6%
Kaufman & Broad, Convertible Cl-B
$1.52.......................... 42,600 633,675
-----------
METALS & MINING -- 1.6%
Reynolds Metals Co., Convertible
$3.31.......................... 33,700 1,706,063
-----------
NATURAL GAS -- 1.0%
Williams Companies, Inc.,
Convertible $3.50.............. 14,300 1,058,200
-----------
PAPER & PAPER PRODUCTS -- 0.4%
International Paper Co.,
Convertible $5.25.............. 11,000 502,425
-----------
TOTAL PREFERRED STOCK
(COST $13,683,523)................. 14,388,650
-----------
</TABLE>
<PAGE>
AMERICAN SKANDIA TRUST
FEDERATED UTILITY INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------- -----------
<S> <C> <C>
AMERICAN DEPOSITORY RECEIPTS -- 6.3%
ELECTRIC POWER -- 0.6%
National Power PLC............... 70,200 $ 649,350
-----------
ELECTRONIC-SYSTEMS -- 1.0%
Nokia Corp. C1-A................. 27,700 1,076,837
-----------
TELECOMMUNICATIONS -- 4.7%
Cable & Wireless PLC............. 10,600 223,925
Cointel Prides................... 43,900 2,546,200
Compania de Telefonos de Chile... 7,100 588,413
Telcomunicacoes Brasileras....... 12,800 606,400
Telefonica de Espana............. 26,200 1,097,125
-----------
5,062,063
-----------
TOTAL AMERICAN DEPOSITORY RECEIPTS
(COST $7,356,442).................. 6,788,250
-----------
</TABLE>
<TABLE>
<CAPTION>
PAR
MATURITY (000)
-------- -------
<S> <C> <C> <C>
CORPORATE BONDS -- 2.5%
INDUSTRIAL -- 0.6%
Analog Devices, Inc.,
Convertible
3.50%............... 12/01/00 $ 330 358,050
National Semiconductor
Corp., Convertible
6.50%............... 10/01/02 280 262,500
------------
620,550
------------
INSURANCE -- 0.9%
Equitable Companies,
Inc., Convertible
Subordinate
Debentures
6.13%............... 12/15/24 825 945,656
------------
RETAIL -- 0.3%
Federated Department
Stores, Inc.,
Convertible
5.00%............... 10/01/03 370 372,313
------------
<CAPTION>
PAR
MATURITY (000) VALUE
-------- ------- ------------
<S> <C> <C> <C>
TECHNOLOGY -- 0.7%
3Com Corp.,
Convertible
10.25%.............. 11/01/01 $ 320 $ 492,000
VLSI Technology, Inc.
8.25%............... 10/01/05 280 260,400
------------
752,400
------------
TOTAL CORPORATE BONDS
(COST $2,612,272)....... 2,690,919
------------
REPURCHASE AGREEMENT -- 1.0%
HSBC Securities, Inc.
5.50%, dated
12/29/95 matures on
01/02/96, repurchase
price $1,000,611
(Collateralized by
U.S. Treasury Notes,
par value
$1,025,000, market
value $1,023,078,
due on 04/30/96)
(COST
$1,000,000)..... 01/02/96 1,000 1,000,000
------------
TOTAL INVESTMENTS
(COST $95,383,150*) -- 99.2%...... 106,504,781
OTHER ASSETS LESS
LIABILITIES -- 0.8%............... 894,233
------------
NET ASSETS -- 100.0%................ $107,399,014
===========
NOTES TO SCHEDULE OF INVESTMENTS:
The aggregate unrealized appreciation (depreciation) on a tax
basis is as follows:
Gross appreciation........................ $11,993,758
Gross depreciation........................ (1,020,210)
----------
Net appreciation.......................... $10,973,548
----------
----------
</TABLE>
- --------------------------------------------------------------------------------
* Cost for Federal income tax purposes was $95,531,233.
See Notes to Financial Statements.
<PAGE>
AMERICAN SKANDIA TRUST
AST PHOENIX BALANCED ASSET PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
--------- ------------
<S> <C> <C>
COMMON STOCK -- 33.5%
AEROSPACE- 1.7%
Boeing Co. ...................... 30,000 $ 2,351,250
Lockheed Martin Corp. ........... 25,000 1,975,000
------------
4,326,250
------------
BANKING -- 2.1%
Bankers Trust New York Corp. .... 25,000 1,662,500
Citicorp......................... 25,000 1,681,250
Great Western Financial Corp. ... 57,000 1,453,500
Integra Financial Corp. ......... 10,500 661,500
------------
5,458,750
------------
BROADCASTING & PUBLISHING -- 2.1%
Capital Cities ABC, Inc. ........ 15,000 1,850,625
Scholastic Corp.*................ 25,000 1,943,750
Tele-Communications Liberty
Media, Inc. Cl-A*.............. 15,000 403,125
Tele-Communications Group
Cl-A*.......................... 60,000 1,192,500
------------
5,390,000
------------
CHEMICALS -- 1.3%
IMC Global, Inc. ................ 30,000 1,226,250
Monsanto Co. .................... 7,500 918,750
Potash Corp. of Saskatchewan..... 15,000 1,063,125
------------
3,208,125
------------
COMPUTER SERVICES & SOFTWARE -- 1.5%
Bay Networks, Inc. .............. 20,000 822,500
Cisco Systems, Inc.*............. 20,000 1,492,500
Informix Corp.*.................. 25,000 750,000
Oracle Systems Corp.*............ 20,000 847,500
------------
3,912,500
------------
COMPUTERS -- 1.6%
Digital Equipment Corp.*......... 30,000 1,923,750
Silicon Graphics, Inc.*.......... 20,000 550,000
Sun Microsystems, Inc.*.......... 15,000 684,375
3Com Corp.*...................... 22,000 1,025,750
------------
4,183,875
------------
CONGLOMERATES -- 0.8%
Thermo Electron Corp.*........... 39,000 2,028,000
------------
CONSUMER-CYCLICAL -- 0.2%
Newell Co. ...................... 20,000 517,500
------------
CONSUMER GOODS & SERVICES -- 0.8%
General Electric Co. ............ 28,000 2,016,000
------------
COSMETICS-TOILETRY -- 0.2%
Gillette Co. .................... 10,000 521,250
------------
<CAPTION>
SHARES VALUE
--------- ------------
<S> <C> <C>
DRUGS -- 2.0%
Amgen, Inc.*..................... 30,000 $ 1,781,250
Genzyme Corp.*................... 10,000 623,750
Merck & Co., Inc. ............... 30,000 1,972,500
Watson Pharmaceuticals, Inc.*.... 15,000 735,000
------------
5,112,500
------------
ELECTRICAL-EQUIPMENT -- 0.8%
Honeywell, Inc. ................. 40,000 1,945,000
------------
ELECTRONICS -- 0.6%
Hewlett-Packard Co. ............. 5,000 418,750
LSI Logic Corp.*................. 8,000 262,000
S3, Inc.*........................ 44,000 775,500
------------
1,456,250
------------
ENGINEERING & CONSTRUCTION -- 0.9%
Fluor Corp. ..................... 33,000 2,178,000
------------
FINANCIAL SERVICES -- 2.3%
Bank of Boston Corp. ............ 29,000 1,341,250
Donaldson Lufkin & Jenrette,
Inc. .......................... 11,200 350,000
Equifax, Inc. ................... 80,000 1,710,000
Morgan Stanley Group, Inc. ...... 11,000 886,875
Travelers Group, Inc. ........... 25,000 1,571,875
------------
5,860,000
------------
FOOD & TOBACCO -- 1.4%
Nabisco Holdings Corp. .......... 50,000 1,631,250
Philip Morris Companies, Inc. ... 20,000 1,810,000
------------
3,441,250
------------
HEALTHCARE -- 0.5%
American Home Products Corp. .... 13,000 1,261,000
------------
HOSPITAL-INFORMATION SYSTEM -- 0.5%
HBO & Co. ....................... 17,000 1,302,625
------------
HOSPITAL SUPPLIES & HOSPITAL
MANAGEMENT -- 0.3%
Manor Care, Inc. ................ 25,000 875,000
------------
INSURANCE -- 1.5%
Allstate Corp. .................. 25,000 1,028,125
American International Group,
Inc. .......................... 18,000 1,665,000
Cigna Corp. ..................... 10,000 1,032,500
------------
3,725,625
------------
MEDICAL PRODUCTS -- 1.2%
Johnson & Johnson................ 15,000 1,284,375
Medtronic, Inc. ................. 30,000 1,676,250
------------
2,960,625
------------
</TABLE>
<PAGE>
AMERICAN SKANDIA TRUST
AST PHOENIX BALANCED ASSET PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
--------- ------------
<S> <C> <C>
OIL -- 1.6%
Chevron Corp. ................... 25,000 $ 1,312,500
Mobil Corp. ..................... 10,000 1,120,000
Texaco, Inc. .................... 21,000 1,648,500
------------
4,081,000
------------
OIL & GAS-EQUIPMENT &
SERVICES -- 0.1%
Enron Oil & Gas.................. 15,000 360,000
------------
OIL-EQUIPMENT & SERVICES -- 3.1%
Baker Hughes, Inc. .............. 50,000 1,218,750
Ensco International, Inc.*....... 50,000 1,150,000
Halliburton Co. ................. 35,000 1,771,875
Schlumberger LTD. ............... 27,800 1,925,150
Sonat Offshore Drilling, Inc. ... 39,000 1,745,250
------------
7,811,025
------------
PERSONAL ITEMS -- 0.3%
Procter & Gamble Co. ............ 10,000 830,000
------------
RETAIL-SPECIALTY -- 0.2%
Officemax, Inc.*................. 20,000 447,500
------------
TECHNOLOGY -- 0.1%
Texas Instruments, Inc. ......... 7,000 362,250
------------
TELECOMMUNICATIONS -- 3.2%
AT&T Corp. ...................... 30,000 1,942,500
Bell Atlantic Corp. ............. 25,000 1,671,875
BellSouth Corp. ................. 50,000 2,175,000
GTE Corp. ....................... 35,000 1,540,000
Qualcomm, Inc.*.................. 20,000 860,000
------------
8,189,375
------------
TELECOMMUNICATIONS EQUIPMENT -- 0.6%
Ascend Communications, Inc.*..... 20,000 1,622,500
------------
TOTAL COMMON STOCK
(COST $71,350,226)................. 85,383,775
------------
AMERICAN DEPOSITORY RECEIPTS -- 1.1%
OIL
British Petroleum Co. PLC........ 10,000 1,021,250
Royal Dutch Petroleum Co. ....... 13,500 1,905,187
------------
TOTAL AMERICAN DEPOSITORY RECEIPTS
(COST $2,342,401).................. 2,926,437
------------
</TABLE>
<TABLE>
<CAPTION>
PAR
MATURITY (000)
--------- -------
<S> <C> <C> <C>
COLLATERALIZED MORTGAGE OBLIGATIONS -- 1.9%
CS First Boston
Mortgage Securities
Corp.
7.182%............... 11/25/27 $ 450 454,641
Donaldson Lufkin &
Jenrette, Inc.
6.955%............... 11/01/23 1,200 1,173,750
LB Commercial Conduit
Mortgage Trust Cl-B
7.184%............... 01/01/10 $ 350 $ 365,531
<CAPTION>
PAR
MATURITY (000) VALUE
--------- ------- ------------
<S> <C> <C> <C>
Merrill Lynch Mortgage
Investors Cl-B
7.53%................ 06/15/21 $ 248 $ 256,219
Resolution Trust
Corp. Cl-A5
6.02%................ 02/25/27 452 450,208
Resolution Trust Corp.
Cl-B
8.75%................ 05/25/24 350 365,641
6.80%................ 02/01/27 990 987,624
6.90%................ 02/25/27 425 428,719
Resolution Trust
Corp. Cl-M1
7.15%................ 05/25/29 436 439,442
------------
TOTAL COLLATERALIZED MORTGAGE
OBLIGATIONS
(COST $4,868,110)........ 4,921,775
------------
CORPORATE BONDS -- 0.4%
TELECOMMUNICATIONS
Continental Cablevision
8.30%
(COST $987,534).... 05/15/06 990 996,187
------------
SOVEREIGN ISSUES -- 1.4%
ARGENTINA -- 0.2%
Argentina Registered
FRB
7.31%................ 03/31/05 650 462,719
------------
BRAZIL -- 0.2%
Brazil Capitalization
Bond
8.00%................ 04/15/14 796 455,155
------------
COLUMBIA -- 0.3%
Financiera Energy
Nacional
9.00%................ 11/08/99 390 406,575
Republic of Columbia
7.25%................ 02/23/04 425 414,906
------------
821,481
------------
MEXICO -- 0.2%
Banco Nacional de
Commerce Global
7.25%................ 02/02/04 500 385,625
------------
PHILIPPINES -- 0.2%
Philippines Bond
6.81%................ 01/05/05 450 405,563
------------
</TABLE>
<PAGE>
AMERICAN SKANDIA TRUST
AST PHOENIX BALANCED ASSET PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
--------- ------- ------------
<S> <C> <C> <C>
POLAND -- 0.3%
Republic of Poland
Global Registered Par
Eu Variable Rate
2.75%................ 10/27/24 $ 900 $ 424,305
Republic of Poland
Government PDI
Variable Rate
3.75%................ 10/27/14 650 420,875
------------
845,180
------------
TOTAL SOVEREIGN ISSUES
(COST $3,239,953)........ 3,375,723
------------
MUNICIPAL BONDS -- 2.4%
De Kalb County Water &
Sewer Revenue
5.25%................ 10/01/23 350 344,750
Florida State Board of
Education
5.25%................ 06/01/23 405 396,393
Florida State Turnpike
Revenue Authority
Ref-Dept of
Transportation-A
5.00%................ 07/01/19 240 231,900
Intermountain Power
Agency Utah Power
Supply Revenue
5.00%................ 07/01/23 365 340,818
Kergen County CA
Pension Obligation
7.26%................ 08/15/14 370 387,575
LA County Transit
Authority
5.25%................ 07/01/23 400 390,500
Long Beach Pension
Obligation
6.87%................ 09/01/06 200 206,500
Massachusetts Bay
Transportation
Authority Cl-B
5.38%................ 03/01/25 400 393,500
Miami Beach Tax
Obligation
8.60%................ 09/01/21 780 887,250
Michigan Public Power
Agency Revenue, Ref.
Belle River Project
Cl-A
5.25%................ 01/01/18 400 388,500
New York State Power
Authority Revenue and
General Purpose Cl-C
5.25%................ 01/01/18 185 181,763
<CAPTION>
PAR
MATURITY (000) VALUE
--------- ------- ------------
<S> <C> <C> <C>
Northern California
Power Agency,
Adjustable Rate
Refunding Revenue
Bonds Hydroelectric
Project Number One
5.50%................ 07/01/24 $ 370 $ 370,925
Puerto Rico
Commonwealth
5.38%................ 07/01/22 280 279,650
San Bernardino County
Pension Obligation
Revenue
6.87%................ 08/01/08 100 103,125
6.94%................ 08/01/09 270 279,450
Seattle WA Drain &
Wastewater Utility
Revenue
5.25%................ 12/01/25 240 233,400
South Carolina State
Public Service
Authority Revenue
5.125%............... 01/01/21 150 140,625
5.00%................ 01/01/25.. 305 289,750
Ventura County Pension
Obligation
6.54%................ 11/01/05 235 237,938
------------
TOTAL MUNICIPAL BONDS
(COST $5,884,614)........ 6,084,312
------------
U.S. GOVERNMENT AGENCY OBLIGATIONS -- 1.0%
GOVERNMENT NATIONAL
MORTGAGE ASSOCIATION
7.50%................ 08/15/23 302 310,534
6.50%................ 11/15/23 628 623,840
6.50%................ 12/15/23 1,715 1,703,722
------------
TOTAL U.S. GOVERNMENT AGENCY
OBLIGATIONS
(COST $2,547,482)........ 2,638,096
------------
U.S. TREASURY OBLIGATIONS -- 16.9%
U.S. TREASURY BONDS -- 2.2%
6.25%.................. 08/15/23 5,500 5,661,259
------------
U.S. TREASURY
NOTES -- 14.7%
4.75%.................. 02/15/97 4,000 3,980,440
5.75%.................. 09/30/97 10,000 10,092,899
5.13%.................. 04/30/98 2,500 2,495,750
5.13%.................. 12/31/98 4,000 3,988,440
5.50%.................. 04/15/00 2,350 2,370,280
6.25%.................. 02/15/03 3,200 3,341,472
7.25%.................. 05/15/04 5,200 5,777,563
6.50%.................. 08/15/05 5,000 5,330,750
------------
37,377,594
------------
TOTAL U.S. TREASURY OBLIGATIONS
(COST $41,865,757).................. 43,038,853
------------
</TABLE>
<PAGE>
AMERICAN SKANDIA TRUST
AST PHOENIX BALANCED ASSET PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
--------- ------- ------------
<S> <C> <C> <C>
COMMERCIAL PAPER -- 14.8%
Abbott Laboratories
5.64%................ 01/05/96 $ 2,845 $ 2,843,217
Ameritech Capital
Funding Corp.
5.65%................ 02/16/96 2,000 1,985,647
Amoco Corp.
5.75%................ 01/10/96 2,500 2,496,406
Dupont (E.I.) de
Nemours & Co.
5.75%................ 01/10/96 1,400 1,397,988
5.75%................ 01/19/96 1,200 1,196,550
First Deposit
Funding Trust
5.80%................ 01/16/96 2,065 2,060,010
5.70%................ 02/26/96 3,765 3,731,667
General Electric
Capital Corp.
5.79%................ 01/12/96 3,697 3,697,000
Kimberly-Clark Corp.
5.65%................ 01/30/96 2,225 2,214,873
5.53%................ 02/01/96 705 701,643
Mobil Corp.
5.80%................ 01/02/96 3,395 3,394,453
<CAPTION>
PAR
MATURITY (000) VALUE
--------- ------- ------------
<S> <C> <C> <C>
Private Export
Funding Corp.
5.68%................ 01/12/96 $ 5,100 $ 5,091,149
Shell Oil Co.
5.60%................ 01/24/96 3,840 3,826,261
TDK Corp.
5.75%................ 01/22/96 1,765 1,759,080
Wisconsin Electric
Power Co.
5.80%................ 01/30/96 1,480 1,473,085
------------
TOTAL COMMERCIAL PAPER
(COST $37,868,893).................. 37,869,029
------------
TOTAL INVESTMENTS
(COST $170,954,970**) -- 73.4%...... 187,234,187
OTHER ASSETS LESS
LIABILITIES -- 26.6%................ 67,971,856
------------
NET ASSETS -- 100.0%.................. $255,206,043
===========
NOTES TO SCHEDULE OF INVESTMENTS:
The aggregate unrealized appreciation (depreciation) on a tax
basis is as follows:
Gross appreciation......................... $17,370,891
Gross depreciation......................... (1,098,662)
----------
Net appreciation........................... $16,272,229
----------
----------
</TABLE>
- --------------------------------------------------------------------------------
* Non-income producing securities.
** Cost for Federal income tax purposes was $170,961,958.
See Notes to Financial Statements.
<PAGE>
AMERICAN SKANDIA TRUST
FEDERATED HIGH YIELD PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
--------- ------ -----------
<S> <C> <C> <C>
CORPORATE BONDS -- 82.8%
AEROSPACE -- 0.9%
Howmet Corp., Senior
Subordinate Notes
10.00%.................. 12/01/03 $ 100 $ 104,250
Tracor, Senior Subordinate
Notes
10.88%.................. 08/15/01 650 678,438
----------
782,688
----------
AUTOMOTIVE PARTS-EQUIPMENT -- 2.1%
Aftermarket Technology
Co., Senior Subordinate
Notes
12.00%.................. 08/01/04 750 795,000
JPS Automotive Products
Corp., Senior Notes
11.13%.................. 06/15/01 250 251,250
Lear Seating Corp.,
Subordinate Notes
8.25%................... 02/01/02 550 542,438
Motor Wheel Corp., Senior
Notes
11.50%.................. 03/01/00 250 218,750
----------
1,807,438
----------
BANKING -- 1.0%
First Nationwide Holdings,
Senior Notes
12.25%.................. 05/15/01 750 843,750
----------
BEVERAGES -- 0.5%
Cott Corp., Senior Notes
9.38%................... 07/01/05 450 450,000
----------
BROADCASTING -- 6.4%
Ackerly Communications,
Inc., Senior Secured
Notes
10.75%.................. 10/01/03 125 134,063
ACT III Broadcasting,
Senior Secured Notes
10.25%.................. 12/15/05 450 461,250
Argyle Television, Senior
Subordinate Notes
9.75%................... 11/01/05 750 750,938
Australis Media (Unit)
8.62%................... 05/15/03 500 363,750
A3 Holdings (Unit)
13.25%.................. 12/15/06 150 150,375
Chancellor Broadcasting
Co., Senior Subordinate
Notes
12.50%.................. 10/01/04 500 537,500
Granite Broadcasting
Corp., Senior
Subordinate Notes
10.38%.................. 05/15/05 500 515,625
Pegasus Media (Unit)
12.50%.................. 07/01/05 300 300,000
<CAPTION>
PAR
MATURITY (000) VALUE
--------- ------ -----------
<S> <C> <C> <C>
Sinclair Broadcasting
Group, Senior
Subordinate Notes
10.00%.................. 12/15/03 $ 500 $ 513,750
10.00%.................. 09/30/05 500 513,750
Videotron Group LTD.
10.63%.................. 02/15/05 500 538,750
Young Broadcasting, Senior
Subordinate Notes
11.75%.................. 11/15/04 250 280,938
10.13%.................. 02/15/05 250 264,688
----------
5,325,377
----------
BUSINESS EQUIPMENT -- 1.0%
Monarch Acquisition,
Senior Notes
12.50%.................. 07/01/03 375 397,500
United Stationers, Senior
Subordinate Notes
12.75%.................. 05/01/05 400 439,000
----------
836,500
----------
CABLE TELEVISION -- 4.3%
Bell Cablemedia PLC,
Senior Discount Notes
4.95%................... 07/15/04 250 178,125
Cablevision Systems,
Senior Subordinate Notes
9.25%................... 11/01/05 500 520,625
CF Cable TV, Inc., Senior
Notes
11.625%................. 02/15/05 500 551,250
Diamond Cable Co.
5.79%................... 12/15/05 500 295,625
International Cabletel,
Inc., Senior Deferred
Notes
5.99%................... 10/15/03 500 350,000
5.29%................... 04/15/05 250 159,375
Rogers Cable Systems,
Senior Notes
10.00%.................. 03/15/05 300 323,625
11.00%.................. 12/01/15 750 808,125
Wireless One, Inc. (Unit)
13.00%.................. 10/15/03 375 397,500
----------
3,584,250
----------
CHEMICALS -- 2.6%
Arcadian Partners LP,
Senior Notes Cl-B
10.75%.................. 05/01/05 550 607,750
Crain Industries, Inc.,
Senior Subordinate Notes
13.50%.................. 08/15/05 400 406,000
Laroche Industries, Senior
Subordinate Notes
13.00%.................. 08/15/04 200 213,500
</TABLE>
<PAGE>
AMERICAN SKANDIA TRUST
FEDERATED HIGH YIELD PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
--------- ------ -----------
<S> <C> <C> <C>
CHEMICALS (CONT'D)
Polymer Group, Inc.
12.25%.................. 07/15/02 $ 700 $ 724,500
RBX Corp., Senior
Subordinate Notes
11.25%.................. 10/15/05 200 197,000
----------
2,148,750
----------
CONSUMER GOODS &
SERVICES -- 1.0%
American Safety Razor
9.88%................... 08/01/05 500 510,000
Hosiery Corp. of America,
Inc., Senior Subordinate
Notes
13.75%.................. 08/01/02 350 378,875
----------
888,875
----------
CONTAINERS & GLASS PRODUCTS -- 4.8%
Container Corp. of
America, Senior Notes
9.75%................... 04/01/03 250 244,375
11.25%.................. 05/01/04 250 258,125
Owens Illinois, Inc.,
Senior Subordinate Notes
10.50%.................. 06/15/02 300 322,125
9.95%................... 10/15/04 1,750 1,863,750
Sea Containers LTD.,
Senior Notes
9.50%................... 07/01/03 375 373,125
Sea Containers LTD.,
Senior Subordinate
Debenture Notes Cl-B
12.50%.................. 12/01/04 125 134,375
Silgan Corp., Senior
Subordinate Notes
11.75%.................. 06/15/02 170 182,750
Trans Ocean Container
Corp., Senior
Subordinate Notes
12.25%.................. 07/01/04 350 365,750
U.S. Can Co., Senior
Subordinate Notes
13.50%.................. 01/15/02 250 275,000
----------
4,019,375
----------
CONSUMER PRODUCTS -- 0.7%
Revlon Consumer Products
Corp., Senior
Subordinate Notes
9.38%................... 04/01/01 500 507,500
10.50%.................. 02/15/03 100 102,500
----------
610,000
----------
<CAPTION>
PAR
MATURITY (000) VALUE
--------- ------ -----------
<S> <C> <C> <C>
ECOLOGICAL SERVICES &
EQUIPMENT -- 1.5%
Allied Waste Industries,
Inc., Senior Subordinate
Notes
12.00%.................. 02/01/04 $ 500 $ 543,750
Mid-American Waste
Systems, Inc., Senior
Subordinate Notes
12.25%.................. 02/15/03 750 682,500
----------
1,226,250
----------
ENTERTAINMENT &
LEISURE -- 1.0%
Alliance Entertainment
11.25%.................. 07/15/05 600 606,000
Premier Parks Inc., Senior
Notes
12.00%.................. 08/15/03 250 258,125
----------
864,125
----------
FARMING & AGRICULTURE -- 0.3%
Spreckels Industries,
Inc., Senior Secured
Notes
11.50%.................. 09/01/00 250 247,500
----------
FINANCIAL SERVICES -- 0.7%
Trizec Financial, Senior
Notes
10.88%.................. 10/15/05 525 544,688
----------
FOOD & DRUG RETAILERS -- 1.1%
Carr-Gottstein Foods,
Senior Subordinate Notes
12.00%.................. 11/15/05 400 404,000
Pathmark Stores, Senior
Subordinate Notes
9.63%................... 05/01/03 500 487,500
----------
891,500
----------
FOOD PRODUCTS -- 1.6%
Doskocil Companies, Senior
Subordinate Notes
9.75%................... 07/15/00 250 240,000
Specialty Foods Corp.,
Senior Subordinate Notes
11.13%.................. 10/01/02 400 382,000
11.25%.................. 08/15/03 500 447,500
Van de Kamp's, Inc.,
Senior Subordinate Notes
12.00%.................. 09/15/05 300 312,000
----------
1,381,500
----------
FOOD SERVICES -- 2.6%
Curtice-Burns Foods, Inc.,
Senior Subordinate Notes
12.25%.................. 02/01/05 725 750,375
</TABLE>
<PAGE>
AMERICAN SKANDIA TRUST
FEDERATED HIGH YIELD PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
--------- ------ -----------
<S> <C> <C> <C>
FOOD SERVICES (CONT'D)
Flagstar Corp., Senior
Notes
10.75%.................. 09/15/01 $ 375 $ 344,063
10.88%.................. 12/01/02 275 250,250
11.25%.................. 11/01/04 125 89,375
PMI Acquisition Corp.,
Senior Subordinate Notes
10.25%.................. 09/01/03 750 772,500
----------
2,206,563
----------
HEALTHCARE -- 3.4%
Amerisource Corp., Senior
Debenture Notes
11.25%.................. 07/15/05 384 423,896
Genesis Health Ventures,
Senior Subordinate Notes
9.75%................... 06/15/05 350 371,000
Tenet Healthcare Corp.
10.13%.................. 03/01/05 1,350 1,501,875
Icon Health & Fitness,
Senior Subordinate Notes
13.00%.................. 07/15/02 530 575,050
----------
2,871,821
----------
HOME VIDEOS -- 0.9%
Triangle Pacific, Senior
Notes
10.50%.................. 08/01/03 700 745,500
----------
HOTELS/RESTAURANTS -- 0.4%
Motels of America, Inc.,
Senior Subordinate Notes
12.00%.................. 04/15/04 350 348,688
----------
INDUSTRIAL -- 5.5%
Cabot Safety Acquisition,
Senior Subordinate Notes
12.50%.................. 07/15/05 500 535,000
Coinmach Corp., Senior
Notes
11.75%.................. 11/15/05 556 565,730
Insight Communications
Co., Senior Subordinate
Notes
8.25%................... 03/01/00 850 864,875
Portola Packaging, Inc.,
Senior Notes
10.75%.................. 10/01/05 675 696,938
S.D. Warren Co.
12.00%.................. 12/15/04 500 550,000
Sherritt Gordon LTD.,
Senior Notes
9.75%................... 04/01/03 775 825,375
Sherritt, Inc., Debentures
10.50%.................. 03/31/14 500 548,125
----------
4,586,043
----------
LEISURE TIME -- 0.7%
Affinity Group, Inc.,
Senior Subordinated
Notes
11.50%.................. 10/15/03 550 561,000
----------
<CAPTION>
PAR
MATURITY (000) VALUE
--------- ------ -----------
<S> <C> <C> <C>
MACHINERY & HEAVY
EQUIPMENT -- 1.8%
Pace Industries, Inc.,
Delaware Senior Notes
Cl-B
10.63%.................. 12/01/02 $ 500 $ 442,500
Primeco, Inc., Senior
Subordinate Notes
12.75%.................. 03/01/05 500 525,000
Waters Corp., Senior
Subordinate Notes
12.75%.................. 09/30/04 500 565,000
----------
1,532,500
----------
MANUFACTURING -- 1.5%
American Standard, Senior
Debenture Notes
11.38%.................. 05/15/04 250 276,875
3.40%................... 06/01/05 750 646,875
Fairfield Manufacturing
Co., Senior Subordinate
Notes
11.38%.................. 07/01/01 300 294,750
----------
1,218,500
----------
MEDIA -- 3.7%
Allbritton Communications
Co., Senior Subordinate
Notes
11.50%.................. 08/15/04 500 530,000
Continental Cablevision,
Senior Debenture Notes
9.50%................... 08/01/13 1,250 1,328,125
New World Television,
Inc., Senior Secured
Notes
11.00%.................. 06/30/05 1,150 1,227,625
----------
3,085,750
----------
MISCELLANEOUS -- 0.9%
Envirosource, Inc., Senior
Notes
9.75%................... 06/15/03 500 440,000
Pronet, Inc., Senior
Subordinate Notes
11.88%.................. 06/15/05 250 276,563
----------
716,563
----------
OIL & GAS -- 3.3%
Clark USA, Inc., Senior
Notes
10.88%.................. 12/01/05 600 626,250
</TABLE>
<PAGE>
AMERICAN SKANDIA TRUST
FEDERATED HIGH YIELD PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
--------- ------ -----------
<S> <C> <C> <C>
OIL & GAS (CONT'D)
Falcon Drilling Co., Inc.,
Senior Notes
9.75%................... 01/15/01 $ 350 $ 358,750
12.50%.................. 03/15/05 300 330,000
Giant Industries Co.,
Senior Subordinate Notes
9.75%................... 11/15/03 550 558,938
HS Resources, Inc., Senior
Subordinate Notes
9.88%................... 12/01/03 250 246,563
United Meridian Corp.,
Senior Subordinate Notes
11.00%.................. 10/15/05 600 634,500
----------
2,755,001
----------
OTHER INDUSTRIAL
MATERIALS -- 2.4%
Exide Corp., Senior Notes
10.00%.................. 04/15/05 975 1,060,313
Foamex LP, Senior Notes
11.25%.................. 10/01/02 550 541,750
ICF Kaiser International
(Units)
12.00%.................. 12/31/03 250 235,000
ICF Kaiser International,
Senior Subordinate Notes
12.00%.................. 12/31/03 150 141,750
----------
1,978,813
----------
PACKAGING & PAPER
PRODUCTS -- 0.4%
Riverwood International
Corp.
11.25%.................. 06/15/02 300 327,000
----------
PAPER & FOREST
PRODUCTS -- 1.5%
Domtar, Inc., Notes
11.25%.................. 09/15/17 250 266,563
Repap New Brunswick,
Senior Notes
9.88%................... 07/15/00 250 252,500
10.63%.................. 04/15/05 250 245,000
Stone Container Corp.,
Senior Notes
9.88%................... 02/01/01 250 243,750
11.50%.................. 10/01/04 250 251,563
----------
1,259,376
----------
PERSONAL ITEMS -- 0.8%
Playtex Family Products
9.00%................... 12/15/03 750 667,500
----------
PRINTING & PUBLISHING -- 0.4%
Webcraft Technologies,
Inc., Senior Subordinate
Notes
9.38%................... 02/15/02 300 294,000
----------
<CAPTION>
PAR
MATURITY (000) VALUE
--------- ------ -----------
<S> <C> <C> <C>
RETAILING -- 1.2%
Brylane Capital Corp.
10.00%.................. 09/01/03 $ 500 $ 445,000
Herff Jones, Inc., Senior
Subordinate Notes Cl-B
11.00%.................. 08/15/05 550 591,250
----------
1,036,250
----------
RETAIL FOOD CHAINS -- 1.4%
Penn Traffic Co., Senior
Subordinate Notes
9.63%................... 04/15/05 250 195,938
Ralph's Grocery Co.,
Senior Notes
10.45%.................. 06/15/04 650 661,375
11.00%.................. 06/15/05 325 322,563
----------
1,179,876
----------
SPECIALTY CHEMICALS -- 1.4%
Harris Chemical, Inc.
1.76%................... 07/15/01 750 731,250
Uniroyal Technology (Unit)
11.75%.................. 06/01/03 425 410,125
----------
1,141,375
----------
STEEL -- 1.7%
Bayou Steel Corp., First
Mortgage Notes
10.25%.................. 03/01/01 500 445,000
Geneva Steel, Senior Notes
9.50%................... 01/15/04 125 97,813
GS Technologies Operating
Co., Inc., Senior Notes
12.00%.................. 09/01/04 725 721,375
Northwestern Steel & Wire
Co., Senior Notes
9.50%................... 06/15/01 250 246,250
----------
1,510,438
----------
SURFACE TRANSPORTATION -- 0.7%
Trism, Inc., Senior
Subordinate Notes
10.75%.................. 12/15/00 575 563,500
----------
TELECOMMUNICATIONS -- 7.6%
Cablevision Industries,
Debentures Cl-B
9.25%................... 04/01/08 250 266,875
CAI Wireless Systems,
Senior Notes
12.25%.................. 09/15/02 250 268,125
Fonorola, Senior Secured
Notes
12.50%.................. 08/15/02 150 158,250
</TABLE>
<PAGE>
AMERICAN SKANDIA TRUST
FEDERATED HIGH YIELD PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
--------- ------ -----------
<S> <C> <C> <C>
TELECOMMUNICATIONS (CONT'D)
IXC Communications, Inc.,
Senior Notes
12.50%.................. 10/01/05 $ 700 $ 750,750
Metrocall, Inc., Senior
Subordinate Notes
10.38%.................. 10/01/07 250 267,500
Mobilemedia Corp., Senior
Subordinate Notes
9.38%................... 11/01/07 300 309,000
Nextel Communications,
Senior Discount Notes
11.53%.................. 08/15/04 725 398,750
Paging Network, Inc.,
Senior Subordinate Notes
10.13%.................. 08/01/07 500 546,250
Panamsat LP, Senior
Subordinate Discount
Notes
4.94%................... 08/01/03 1,150 943,000
Peoples Telephone Co.,
Senior Notes
12.25%.................. 07/15/02 250 202,500
Telewest PLC
4.56%................... 10/01/07 2,375 1,439,844
USA Mobile Communications
Corp.
9.50%................... 02/01/04 800 796,000
----------
6,346,844
----------
TEXTILES -- 2.6%
Dan River, Inc., Senior
Subordinate Notes
10.13%.................. 12/15/03 750 695,625
Westpoint Stevens, Inc.,
Senior Subordinate
Debenture Notes
9.38%................... 12/15/05 1,500 1,488,750
----------
2,184,375
----------
TRANSPORTATION -- 2.8%
Ameritruck Distribution,
Senior Subordinate Notes
12.25%.................. 11/15/05 350 347,375
Gearbulk Holdings LTD.
11.25%.................. 12/01/04 850 918,000
Great Dane Holding, Senior
Subordinate Debenture
12.75%.................. 08/01/01 450 412,875
Stena AB, Senior Notes
10.50%.................. 12/15/05 600 619,500
----------
2,297,750
----------
<CAPTION>
PAR
MATURITY (000) VALUE
--------- ------ -----------
<S> <C> <C> <C>
UTILITIES-ELECTRIC -- 1.7%
California Energy,
Discount Notes
9.87%................... 01/15/04 $1,200 $ 1,134,000
California Energy, Senior
Secured Notes
9.88%................... 06/30/03 250 261,875
----------
1,395,875
----------
TOTAL CORPORATE BONDS
(COST $67,272,177).......... 69,263,467
----------
ZERO COUPON BONDS -- 6.1%
BEVERAGES -- 0.4%
Dr. Pepper Bottling
Holding Co., Senior
Discount Notes
3.02%................... 02/15/03 400 328,000
----------
BROADCASTING -- 0.2%
NWCG Holding Corp., Senior
Discount Notes
13.20%.................. 06/15/99 300 208,500
----------
CABLE TELEVISION -- 0.8%
Diamond Cable Co., Senior
Discount Notes
5.84%................... 09/30/04 250 176,250
Peoples Choice T.V. (Unit)
7.09%................... 06/01/04 900 528,750
----------
705,000
----------
CHEMICALS -- 1.4%
G-I Holdings Corp.
11.20%.................. 10/01/98 1,475 1,139,438
----------
METALS & STEELS -- 0.3%
Acme Metals Inc., Senior
Discount Notes
13.50%.................. 08/01/04 350 282,188
----------
PRINTING & PUBLISHING -- 1.1%
Affiliated Newspaper
Investments
5.31%................... 07/01/06 1,400 885,500
----------
RECREATION -- 1.5%
Six Flags Theme Parks,
Senior Subordinate
Discount Note
3.06%................... 06/15/05 1,550 1,220,625
----------
</TABLE>
<PAGE>
AMERICAN SKANDIA TRUST
FEDERATED HIGH YIELD PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
--------- ------ -----------
<S> <C> <C> <C>
TELECOMMUNICATIONS -- 0.4%
Cellular Communications
International, Inc.
13.25%.................. 08/15/00 $ 600 $ 372,000
----------
TOTAL ZERO COUPON BONDS
(COST $4,862,565)........... 5,141,251
----------
U.S. TREASURY NOTES -- 2.5%
6.38%
(COST $2,011,459)....... 08/15/02 2,000 2,099,448
----------
REPURCHASE AGREEMENT -- 5.7%
HSBC Securities, Inc.
5.50% dated 12/29/95
matures on 01/02/96,
repurchase price
$4,772,915
(Collateralized by U.S.
Treasury Note, par value
$4,860,000, market value
$4,891,250 due 04/30/98)
(COST $4,770,000)..... 01/02/96 4,770 4,770,000
----------
</TABLE>
<TABLE>
<CAPTION>
SHARES
------
<S> <C> <C> <C>
COMMON STOCK -- 0.1%
CHEMICALS -- 0.0%
Uniroyal (Warrants)*...... 2,500 6,250
-----------
CONSUMER PRODUCTS -- 0.0%
Hosiery Corp. of America,
Inc.*................... 250 0
-----------
HEALTHCARE -- 0.0%
Icon Health & Fitness
(Warrants)*............. 250 6,250
-----------
<CAPTION>
SHARES VALUE
------ -----------
<S> <C> <C> <C>
PRINTING & PUBLISHING -- 0.0%
Affiliated Newspaper
Investments, Inc. ...... 1,000 $ 25,000
-----------
RETAIL FOOD CHAINS -- 0.1%
Grand Union Co. .......... 7,069 53,018
-----------
TELECOMMUNICATIONS -- 0.0%
Pegasus Media &
Communications, Inc. ... 30 9,000
-----------
TOTAL COMMON STOCK
(COST $412,029)............. 99,518
-----------
PREFERRED STOCK -- 0.5%
TELECOMMUNICATIONS
K-111 Communications Corp.
PIK Cl-B
11.63%.................. 2,573 257,265
Panamsat Corp.
12.75%.................. 132 148,590
-----------
TOTAL PREFERRED STOCK
(COST $362,500)............. 405,855
-----------
TOTAL INVESTMENTS
(COST $79,690,730**) -- 97.7%......... 81,779,539
OTHER ASSETS LESS LIABILITIES -- 2.3%... 1,912,481
-----------
NET ASSETS -- 100.0%.................... $83,692,020
==========
NOTES TO SCHEDULE OF
INVESTMENTS:
The aggregate unrealized appreciation (depreciation) on a tax
basis is as follows:
Gross appreciation.................. $ 3,123,771
Gross depreciation.................. (1,039,186)
-----------
Net appreciation.................... $ 2,084,585
==========
</TABLE>
- --------------------------------------------------------------------------------
* Non-income producing securities.
** Cost for Federal income tax purposes was $79,694,954.
See Notes to Financial Statements.
<PAGE>
AMERICAN SKANDIA TRUST
T. ROWE PRICE ASSET ALLOCATION PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------- -----------
<S> <C> <C>
COMMON STOCK -- 39.6%
AEROSPACE -- 0.7%
Boeing Co. ......................... 3,000 $ 235,125
Northrop Corp. ..................... 2,700 172,800
--------
407,925
--------
AUTOMOBILES -- 0.1%
General Motors Corp. ............... 1,400 74,025
--------
AUTOMOTIVE PARTS-EQUIPMENT -- 0.7%
Echlen, Inc. ....................... 5,000 182,500
Gentex Corp.*....................... 600 13,200
Genuine Parts Co. .................. 1,000 41,000
Superior Industries International,
Inc. ............................. 600 15,825
TRW, Inc. .......................... 2,200 170,500
--------
423,025
--------
BEVERAGES & BOTTLING -- 1.5%
Anheuser-Busch Companies, Inc. ..... 3,700 247,438
Coca-Cola Co. ...................... 4,800 356,400
Pepsico, Inc. ...................... 4,700 262,613
--------
866,451
--------
BUILDING & REAL ESTATE -- 0.3%
Clayton Homes, Inc. ................ 1,000 21,375
Masco Corp. ........................ 4,200 131,775
Oakwood Homes Corp. ................ 600 23,025
--------
176,175
--------
BUSINESS SERVICES -- 0.3%
Browning-Ferris Industries, Inc. ... 1,500 44,250
GATX Corp. ......................... 1,400 68,075
Sanifill, Inc.*..................... 2,000 66,750
--------
179,075
--------
CHEMICALS -- 1.8%
Dupont (E.I.) de Nemours & Co. ..... 1,700 118,788
Geon Co. ........................... 700 17,063
Great Lakes Chemical Corp. ......... 2,700 194,400
Loctite Corp. ...................... 1,100 52,250
Lyondell Petrochemical Co. ......... 800 18,300
Minnesota Mining & Manufacturing
Co. .............................. 1,200 79,500
Monsanto Co. ....................... 1,200 147,000
Morton International, Inc. ......... 5,300 190,138
Olin Corp. ......................... 900 66,825
Pall Corp. ......................... 1,200 32,250
Rohm & Haas Co. .................... 2,400 154,500
Wellman, Inc. ...................... 400 9,100
--------
1,080,114
--------
<CAPTION>
SHARES VALUE
------- -----------
<S> <C> <C>
COMPUTER SERVICES & SOFTWARE -- 0.5%
Autodesk, Inc. ..................... 1,700 $ 58,225
Automatic Data Processing, Inc. .... 700 51,975
Computer Associates International... 1,050 59,719
General Motors Corp. Cl-E........... 400 20,800
Parametric Technology Corp.*........ 500 33,250
Reynolds & Reynolds Co. Cl-A........ 2,300 89,413
--------
313,382
--------
CONSUMER DURABLES -- 0.7%
Black & Decker Corp. ............... 3,300 116,325
Corning, Inc. ...................... 1,700 54,400
Eastman Kodak Co. .................. 1,900 127,300
Legget & Platt, Inc. ............... 600 14,550
Tandy Corp. ........................ 1,000 41,500
York International Corp. ........... 1,300 61,100
--------
415,175
--------
CONSUMER PRODUCTS -- 1.8%
Brunswick Corp. .................... 2,000 48,000
Colgate-Palmolive Co. .............. 3,400 238,850
Jones Apparel Group*................ 2,100 82,688
Philip Morris Companies, Inc. ...... 1,400 126,700
Procter & Gamble Co. ............... 3,000 249,000
Service Corp. International......... 3,700 162,800
Springs Industries, Inc. ........... 3,200 132,400
--------
1,040,438
--------
COSMETICS-TOILETRY -- 0.0%
International Flavors & Fragrances,
Inc. ............................. 400 19,200
--------
ELECTRICAL EQUIPMENT -- 1.8%
American Power Conversion Corp.*.... 1,000 9,500
Emerson Electric Co. ............... 3,500 286,125
General Electric Co. ............... 7,200 518,400
Hubbell, Inc. Cl-B.................. 3,850 253,138
--------
1,067,163
--------
ELECTRONIC COMPONENTS -- 0.7%
Advanced Micro Devices, Inc.*....... 3,900 64,350
Analog Devices, Inc.*............... 1,900 67,212
Cypress Semiconductor Corp.*........ 4,400 56,100
Intel Corp. ........................ 1,600 90,800
Motorola, Inc. ..................... 1,000 57,000
Xilinx, Inc.*....................... 2,400 73,200
--------
408,662
--------
</TABLE>
<PAGE>
AMERICAN SKANDIA TRUST
T. ROWE PRICE ASSET ALLOCATION PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------- -----------
<S> <C> <C>
ELECTRONICS -- 1.1%
Arrow Electronics, Inc.*............ 700 $ 30,188
Hewlett-Packard Co. ................ 1,800 150,750
Honeywell, Inc. .................... 1,500 72,938
KLA Instruments Corp.*.............. 1,800 46,912
LAM Research Corp.*................. 1,100 50,325
Phillips Electronics NV............. 3,600 129,150
Teradyne, Inc.*..................... 2,600 65,000
Trimas Corp. ....................... 2,900 54,738
Varian Associates, Inc. ............ 700 33,425
--------
633,426
--------
ENERGY SERVICES -- 0.5%
Halliburton Co. .................... 800 40,500
Helmerich & Payne, Inc. ............ 2,000 59,500
Schlumberger LTD. .................. 2,000 138,500
Smith International, Inc.*.......... 4,500 105,750
--------
344,250
--------
ENTERTAINMENT & LEISURE -- 0.6%
Brinker International, Inc.*........ 3,800 57,475
Cracker Barrel Old Country Store,
Inc. ............................. 1,800 31,050
Del Webb Corp. ..................... 900 18,113
Mirage Resorts, Inc.*............... 2,600 89,700
President Riverboat Casino
(Warrants)*....................... 883 883
Viacom, Inc. Cl-A*.................. 400 18,350
Viacom, Inc. Cl-B*.................. 1,200 56,850
Walt Disney Co. .................... 2,000 118,000
--------
390,421
--------
FINANCIAL-BANK & TRUST -- 2.7%
Baybanks, Inc. ..................... 600 58,950
Chase Manhattan Corp. .............. 1,400 84,875
Chemical Banking Corp. ............. 1,900 111,625
CoreStates Financial Corp. ......... 2,000 75,750
Crestar Financial Corp. ............ 500 29,562
First American Corp.*............... 400 18,950
First Bank System, Inc. ............ 1,000 49,625
First Union Corp. .................. 2,200 122,375
J.P. Morgan & Co., Inc. ............ 2,100 168,525
Keycorp............................. 4,900 177,625
Mellon Bank Corp. .................. 1,500 80,625
Midlantic Corp., Inc. .............. 400 26,250
NationsBank Corp. .................. 3,000 208,875
Norwest Corp. ...................... 4,500 148,500
Southern National Corp. ............ 1,740 45,675
Southtrust Corp. ................... 1,200 30,750
U.S. Bancorp........................ 2,352 79,085
UJB Financial Corp. ................ 1,700 60,775
--------
1,578,397
--------
FINANCIAL SERVICES -- 1.8%
AMBAC, Inc. ........................ 1,600 75,000
American Express Co. ............... 3,600 148,950
<CAPTION>
SHARES VALUE
------- -----------
<S> <C> <C>
Countrywide Credit Industries,
Inc. ............................. 8,700 $ 189,225
Federal National Mortgage
Association....................... 1,200 148,950
Franklin Resources, Inc. ........... 1,300 65,487
H&R Block, Inc. .................... 2,800 113,400
Household International, Inc. ...... 2,600 153,720
Salomon, Inc. ...................... 400 14,200
Travelers Group, Inc. .............. 2,500 157,187
--------
1,066,119
--------
FOOD PROCESSING -- 1.5%
Archer-Daniels Midland Co. ......... 3,150 56,700
Conagra, Inc. ...................... 3,800 156,750
CPC International, Inc. ............ 500 34,312
Dole Food, Inc. .................... 1,500 52,500
General Mills, Inc. ................ 900 51,975
H.J. Heinz Co. ..................... 4,650 154,031
Hershey Foods Corp. ................ 800 52,000
Ralston-Purina Group................ 2,100 130,987
Sara Lee Corp. ..................... 3,800 121,125
Tyson Foods, Inc. .................. 2,000 52,250
--------
862,630
--------
HEALTHCARE -- 0.1%
Foxmeyer Health Corp. .............. 1,500 40,125
Healthsource, Inc.*................. 800 28,800
--------
68,925
--------
HOSPITAL SUPPLIES & HOSPITAL
MANAGEMENT -- 1.0%
Abbott Laboratories................. 2,800 116,900
Becton Dickinson & Co. ............. 500 37,500
Columbia Healthcare Corp. .......... 2,464 125,047
Pacificare Health Systems, Inc.*.... 400 34,800
Sunrise Medical, Inc.*.............. 700 12,950
U.S. Healthcare, Inc. .............. 600 27,900
United Healthcare Corp. ............ 3,500 229,250
Wellpoint Health Cl-A*.............. 300 9,637
--------
593,984
--------
INFORMATION PROCESSING -- 0.9%
Compaq Computer Corp.*.............. 5,000 240,000
International Business Machines,
Inc. ............................. 1,100 100,513
Komag, Inc.*........................ 2,000 92,250
Sun Microsystems, Inc.*............. 2,600 118,625
--------
551,388
--------
INSURANCE -- 1.6%
American General.................... 3,000 104,625
American International Group,
Inc. ............................. 3,000 277,500
American Re Corp. .................. 1,300 53,137
Hartford Steam Boiler Inspection &
Insurance Co. .................... 1,400 70,000
MGIC Investment Corp. .............. 1,200 65,100
National Re Corp. .................. 800 30,400
</TABLE>
<PAGE>
AMERICAN SKANDIA TRUST
T. ROWE PRICE ASSET ALLOCATION PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------- -----------
<S> <C> <C>
INSURANCE (CONT'D)
Security Connecticut Corp. ......... 1,200 $ 32,550
Selective Insurance Group, Inc. .... 1,000 35,500
Torchmark Corp. .................... 2,600 117,650
Transport Holdings Cl-A*............ 10 407
UNUM Corp. ......................... 2,500 137,500
--------
924,369
--------
MACHINERY -- 0.2%
FMC Corp.*.......................... 900 60,862
Watts Industries, Inc. ............. 2,900 67,425
--------
128,287
--------
MANUFACTURING -- 0.2%
Allied-Signal, Inc. ................ 2,600 123,500
--------
MEDIA & COMMUNICATIONS -- 1.2%
Capital Cities ABC, Inc. ........... 1,300 160,387
Comcast Corp. Special Cl-A.......... 1,700 30,918
Dun & Bradstreet Corp. ............. 800 51,800
Gannett, Inc. ...................... 700 42,962
Infinity Broadcasting Corp. Cl-A*... 600 22,350
McGraw Hill Co., Inc. .............. 2,200 191,675
Time Warner, Inc. .................. 4,400 166,650
U.S. West Media Group............... 1,600 30,400
--------
697,142
--------
METALS & MINING -- 0.3%
Alumax, Inc.*....................... 1,600 49,000
Aluminum Co. of America............. 2,600 137,475
Coeur D'alene Mines Corp. .......... 800 13,700
--------
200,175
--------
MISCELLANEOUS -- 1.2%
Standard & Poor's 400 Mid-Cap
Depository Receipts............... 16,000 695,250
--------
OFFICE EQUIPMENT -- 0.1%
Ceridian Corp.*..................... 1,100 45,375
--------
OIL & GAS -- 2.5%
Amerada Hess Corp. ................. 2,700 143,100
Atlantic Richfield Co. ............. 1,900 210,425
Exxon Corp. ........................ 3,300 264,412
Mobil Corp. ........................ 3,200 358,400
Phillips Petroleum Co. ............. 1,800 61,425
Questar Corp. ...................... 400 13,400
Sonat, Inc. ........................ 2,800 99,750
Texaco, Inc. ....................... 1,600 125,600
Union Texas Petroleum Holdings,
Inc. ............................. 3,300 63,937
USX Marathon Group.................. 8,200 159,900
--------
1,500,349
--------
<CAPTION>
SHARES VALUE
------- -----------
<S> <C> <C>
PAPER & FOREST PRODUCTS -- 0.7%
Bowater, Inc. ...................... 700 $ 24,850
Georgia Pacific Corp. .............. 1,900 130,388
International Paper Co. ............ 2,000 75,750
Jefferson Smurfit Corp.*............ 9,000 85,500
Kimberly-Clark Corp. ............... 700 57,925
Schweitzer Manduit International,
Inc. ............................. 70 1,619
Weyerhaeuser Co. ................... 500 21,625
--------
397,657
--------
PHARMACEUTICALS -- 2.4%
American Home Products Corp. ....... 2,500 242,500
Amgen, Inc.*........................ 4,200 249,375
Bristol-Meyers Squibb Co. .......... 4,200 360,675
Liposome Co., Inc.*................. 1,100 22,000
Merck & Co., Inc. .................. 3,600 236,700
Perrigo Co.*........................ 5,000 59,375
Pfizer, Inc. ....................... 4,200 264,600
--------
1,435,225
--------
RAILROADS -- 0.4%
Burlington Northern Santa Fe
Corp. ............................ 500 39,000
Consolidated Rail Corp. ............ 400 28,000
CSX Corp. .......................... 1,000 45,625
Union Pacific Corp. ................ 2,200 145,200
--------
257,825
--------
REAL ESTATE -- 0.0%
Castle & Cooke, Inc. ............... 500 8,375
--------
RESTAURANTS -- 0.5%
Darden Restaurants, Inc. ........... 900 10,687
Lone Star Steakhouse & Saloon*...... 1,900 72,912
McDonald's Corp. ................... 2,000 90,250
Sbarro, Inc. ....................... 4,950 106,425
--------
280,274
--------
RETAIL & MERCHANDISING -- 2.3%
Albertson's, Inc. .................. 2,000 194,250
Ben Franklin Retail Stores, Inc.*... 250 687
Circuit City Stores, Inc. .......... 4,300 118,787
Dayton-Hudson Corp. ................ 1,800 135,000
Eckerd (Jack) Corp.*................ 1,100 49,087
Gap, Inc. .......................... 3,500 147,000
Heilig-Meyers Co. .................. 2,000 36,750
J.C. Penney Co., Inc. .............. 1,000 47,625
Kroger Corp.*....................... 3,700 138,750
May Department Stores Co. .......... 4,200 177,450
Petrie Stores Corp. ................ 2,700 7,425
Price Costco, Inc.*................. 3,000 45,750
Toys 'R' Us, Inc.*.................. 3,920 85,260
TJX Companies, Inc. ................ 4,600 86,825
</TABLE>
<PAGE>
AMERICAN SKANDIA TRUST
T. ROWE PRICE ASSET ALLOCATION PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------- -----------
<S> <C> <C>
RETAIL & MERCHANDISING (CONT'D)
Waban, Inc.*........................ 600 $ 11,250
Wal-Mart Stores, Inc. .............. 4,000 89,500
--------
1,371,396
--------
STEEL -- 0.2%
Nucor............................... 2,000 114,250
--------
TELECOMMUNICATIONS -- 2.9%
Ameritech Corp. .................... 2,700 159,300
Aspect Telecommunications Corp.*.... 600 20,100
AT&T Corp. ......................... 6,100 394,975
Bell Atlantic Corp. ................ 900 60,188
BellSouth Corp. .................... 4,000 174,000
Glenayre Technologies, Inc.*........ 1,050 65,361
GTE Corp. .......................... 4,800 211,200
Novell, Inc.*....................... 1,200 17,100
Pacific Telesis Group............... 4,000 134,500
SBC Communications, Inc. ........... 4,700 270,250
Southern New England
Telecommunications Corp. ......... 1,400 55,650
Tellabs, Inc.*...................... 1,000 37,000
U.S. West, Inc. .................... 1,600 57,200
3Com Corp.*......................... 848 39,538
--------
1,696,362
--------
TRANSPORTATION SERVICES -- 0.3%
PHH Corp. .......................... 2,100 98,175
TNT Freightways Corp. .............. 600 12,075
WMX Technologies, Inc. ............. 2,700 80,663
--------
190,913
--------
UTILITIES-ELECTRIC -- 1.4%
Centerior Energy Corp. ............. 17,200 152,650
Duke Power Co. ..................... 3,100 146,862
Entergy Corp. ...................... 2,600 76,050
FPL Group, Inc. .................... 800 37,100
Niagara Mohawk Power Corp. ......... 11,600 111,650
Public Service Co. of New Mexico*... 2,800 49,350
SCEcorp............................. 6,900 122,475
Texas Utilities Co. ................ 1,400 57,575
Unicom Corp. ....................... 1,900 62,225
--------
815,937
--------
UTILITIES-GAS -- 0.1%
Atlanta Gas Light Co. .............. 3,800 75,050
--------
TOTAL COMMON STOCK
(COST $20,016,957).................... 23,518,061
--------
PREFERRED STOCK -- 0.0%
INDUSTRIAL
Teledyne, Inc. Cl-E
(COST $513)....................... 72 1,035
--------
AMERICAN DEPOSITORY RECEIPTS -- 3.9%
AUTOMOBILES -- 0.1%
Honda Motor Co. LTD. ............... 1,600 67,200
--------
<CAPTION>
SHARES VALUE
------- -----------
<S> <C> <C>
CHEMICALS -- 0.1%
AKZO Nobel NV....................... 1,000 $ 58,000
--------
CONSUMER GOODS & SERVICES -- 0.1%
Hanson PLC.......................... 2,700 41,175
U.S. Industries, Inc.*.............. 135 2,481
--------
43,656
--------
FOOD PROCESSING -- 0.4%
Cadbury Schweppes PLC............... 3,473 115,477
Unilever PLC........................ 1,300 109,850
--------
225,327
--------
INFORMATION PROCESSING -- 0.4%
Hitachi LTD. ....................... 2,400 241,200
--------
INTEGRATED PETROLEUM -- 0.1%
Shell Transport & Trading-NY........ 1,000 81,375
--------
OIL & GAS -- 1.1%
British Petroleum Co. PLC........... 800 81,700
Repsol SA........................... 3,000 98,625
Royal Dutch Petroleum Co. .......... 3,100 437,488
Societe National Elf Aquitaine...... 2,000 73,500
--------
691,313
--------
PHARMACEUTICALS -- 0.4%
Smithkline Beecham PLC (Unit)....... 4,600 255,300
--------
RETAIL FOOD CHAINS -- 0.1%
Ito-Yokado Co., LTD. ............... 200 49,225
--------
TELECOMMUNICATIONS -- 0.9%
British Telecommunications PLC...... 2,000 113,000
Ericsson, (L.M.) Telephone Co. ..... 4,800 93,600
Hong Kong Telecommunications
LTD. ............................. 9,000 159,750
Telefonica de Espana................ 1,600 67,000
Telefonos de Mexico SA.............. 600 19,125
Vodafone Group PLC.................. 2,000 70,500
--------
522,975
--------
UTILITIES-ELECTRIC -- 0.2%
Empresa Nacional de Electridad...... 1,900 108,775
--------
TOTAL AMERICAN DEPOSITORY RECEIPTS
(COST $2,078,757)..................... 2,344,346
--------
</TABLE>
<PAGE>
AMERICAN SKANDIA TRUST
T. ROWE PRICE ASSET ALLOCATION PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------- -----------
<S> <C> <C>
AMERICAN DEPOSITORY SECURITIES -- 0.0%
FINANCIAL SERVICES
Grupo Financiero Bancomer*
(COST $36,750).................... 1,400 $ 8,470
--------
FOREIGN STOCKS -- 10.1%
AEROSPACE -- 0.2%
Mitsubishi Heavy
Industry -- (JPN)................. 17,000 135,414
--------
AUTOMOBILES -- 0.7%
Man AG -- (DEM)..................... 1,000 271,929
Schweizerischer
Bankverein -- (SW)*............... 300 122,518
--------
394,447
--------
BEVERAGES -- 0.2%
Louis Vuitton Moet
Hennessy -- (FRF)................. 660 137,458
--------
BUILDING & REAL ESTATE -- 0.2%
DBS Land -- (SNG)................... 25,000 84,500
Hopewell Holding -- (HK)............ 59,463 34,221
--------
118,721
--------
BUSINESS SERVICES -- 0.1%
Generale Des Eaux -- (FRF).......... 480 47,917
--------
CHEMICALS -- 0.2%
Bayer AG -- (DEM)................... 320 84,964
L'air Liquide -- (FRF).............. 300 49,678
--------
134,642
--------
CONGLOMERATES -- 0.3%
BTR PLC -- (UK)..................... 27,000 137,939
Lonrho PLC -- (UK).................. 22,000 60,126
--------
198,065
--------
COSMETICS-TOILETRY -- 0.2%
Kao Corp. -- (JPN).................. 11,000 136,276
--------
DIVERSIFIED -- 0.2%
Sime Darby -- (MALA)................ 50,000 132,905
--------
ELECTRICAL EQUIPMENT -- 0.5%
BBC Brown Boveri
AG-Bearer -- (SW)................. 80 92,951
Getronics Geneue
Electric -- (NETH)................ 1,800 84,128
Mitsubishi Electric
Corp. -- (JPN).................... 17,000 122,251
--------
299,330
--------
ELECTRONICS -- 0.3%
Sharp Corp. -- (JPN)................ 9,000 143,728
--------
ENTERTAINMENT -- 0.5%
Hutchison Whampoa LTD. -- (HK)...... 48,000 292,380
--------
FINANCIAL-BANK & TRUST -- 1.6%
Bank of Scotland -- (UK)............ 20,208 88,177
Bankgesellschaft Berlin
AG -- (DEM)....................... 545 139,081
Deutsche Bank AG -- (DEM)........... 1,600 75,973
ING Groep -- (NETH)................. 4,000 267,215
Mediobanca -- (ITL)................. 7,000 48,451
Societe Generale -- (FRF)........... 1,212 149,721
Toronto Dominion Bank -- (CAN)...... 4,100 72,265
Union Bank of Switzerland -- (SW)... 100 108,385
--------
949,268
--------
<CAPTION>
SHARES VALUE
------- -----------
<S> <C> <C>
FINANCIAL SERVICES -- 0.1%
Gemina SPA -- (ITL)................. 50,000 $ 21,467
Pearson PLC -- (UK)................. 5,600 54,263
--------
75,730
--------
FOOD PROCESSING -- 0.4%
Eridania Beghin-Say -- (FRF)........ 400 68,606
Nestle SA -- (SW)................... 150 165,959
--------
234,565
--------
GENERAL MERCHANDISERS -- 0.4%
Carrefour Supermarch SA -- (FRF).... 150 90,995
Tesco PLC -- (UK)................... 25,174 116,101
--------
207,096
--------
MACHINERY -- 0.2%
Sig Schweiz
Industries-Bearer -- (SW)......... 70 146,276
--------
OFFICE EQUIPMENT -- 0.2%
Ricoh Corp. -- (JPN)................ 13,000 142,180
--------
OIL & GAS -- 0.3%
Lion Nathan LTD. -- (NZD)........... 50,000 119,227
Societe National Elf
Aquitaine -- (FRF)................ 1,100 81,037
--------
200,264
--------
PAPER & FOREST PRODUCTS -- 0.1%
Kimberly-Clark de Mexico SA --
(MEX)............................. 2,000 30,234
--------
PHARMACEUTICALS -- 0.7%
Astra AB Cl-B -- (SW)............... 5,500 217,699
Ciba Geigy AG Bearer -- (SW)........ 150 131,362
Gehe AG (New) -- (DEM)*............. 25 12,472
Gehe AG -- (DEM)*................... 100 51,248
--------
412,781
--------
PRINTING & PUBLISHING -- 0.2%
Dai Nippon -- (JPN)................. 8,000 135,501
--------
</TABLE>
<PAGE>
AMERICAN SKANDIA TRUST
T. ROWE PRICE ASSET ALLOCATION PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------- -----------
<S> <C> <C>
PUBLISHING -- 0.3%
Elsevier NV --(NETH)................ 12,000 $ 160,030
--------
RETAIL GROCERY -- 0.1%
Ito-Yokado Co., LTD. -- (JPN)....... 1,000 61,556
--------
SPECIALTY CHEMICALS -- 0.3%
BASF AG Ord. (New) -- (DEM)......... 400 90,085
Technip SA -- (FRF)................. 1,000 68,811
--------
158,896
--------
TELEPHONES -- 0.8%
Telecom Italia Mobile -- (ITL)*..... 75,000 131,964
Telecom Italia SPA -- (ITL)......... 75,000 116,619
Telecom Corp. of New Zealand LTD. --
(NZD)............................. 22,000 94,859
Telekom Malaysia Berhad -- (MALA)... 16,000 124,754
--------
468,196
--------
TIRE & RUBBER -- 0.2%
Bridgestone Corp. -- (JPN).......... 8,000 126,984
--------
TRANSPORTATION -- 0.2%
KLM Royal Dutch Airlines NV --
(NETH)............................ 3,000 105,440
--------
TRANSPORTATION EQUIPMENT -- 0.2%
Swire Pacific LTD. Cl-A -- (HK)..... 14,000 108,634
--------
UTILITIES-ELECTRIC -- 0.2%
Veba AG -- (DEM).................... 2,500 107,028
--------
TOTAL FOREIGN STOCKS
(COST $5,611,127)..................... 6,001,942
--------
</TABLE>
<TABLE>
<CAPTION>
PAR
MATURITY (000)
--------- ------
<S> <C> <C> <C>
CORPORATE BONDS -- 19.2%
AEROSPACE -- 0.2%
Boeing Co.
6.35%.................... 06/15/03 $ 120 123,300
-----------
AUTOMOBILES -- 0.1%
Daimler-Benz Auto
Grantor Trust
3.90%.................... 10/15/98 63 62,167
-----------
<CAPTION>
PAR
MATURITY (000) VALUE
--------- ------ -----------
<S> <C> <C> <C>
AUTOMOTIVE PARTS-
EQUIPMENT -- 0.7%
Exide Corp.
10.75%................... 12/15/02 $ 125 $ 135,313
Pep Boys Manny Moe & Jack
8.88%.................... 04/15/96 250 252,188
-----------
387,501
-----------
BANKING -- 0.4%
Banesto, Inc.
8.25%.................... 07/28/02 50 51,750
Bank of Nova Scotia
6.25%.................... 09/15/08 50 49,375
NationsBank Texas
6.75%.................... 08/15/00 150 155,625
-----------
256,750
-----------
BEVERAGES & BOTTLING -- 0.5%
Coca-Cola Bottling Group
9.00%.................... 11/15/03 100 100,500
Dr. Pepper Bottling Holding
Co., Senior Discount
Notes
11.63%................... 02/15/03 140 111,125
Texas Bottling Group
9.00%.................... 11/15/03 100 99,750
-----------
311,375
-----------
BROADCASTING -- 0.4%
Sinclair Broadcasting Group
10.00%................... 09/30/05 100 102,500
Young Broadcasting, Senior
Subordinate Notes
10.13%................... 02/15/05 100 106,000
-----------
208,500
-----------
BUILDING & REAL ESTATE -- 0.4%
B.F. Saul REIT Senior Notes
11.63%................... 04/01/02 100 103,750
The Rouse Co., Notes
8.50%.................... 01/15/03 120 132,750
-----------
236,500
-----------
</TABLE>
<PAGE>
AMERICAN SKANDIA TRUST
T. ROWE PRICE ASSET ALLOCATION PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
--------- ------ -----------
<S> <C> <C> <C>
CABLE TELEVISION -- 0.6%
Continental Cablevision
9.00%.................... 09/01/08 $ 100 $ 105,000
Fundy Cable LTD.
11.00%................... 11/15/05 125 130,625
Rogers Cablesystems, Senior
Notes
10.00%................... 03/15/05 125 134,688
-----------
370,313
-----------
CHEMICALS -- 0.2%
Arcadian Partners LP,
Senior Notes Cl-B
10.75%................... 05/01/05 100 110,000
-----------
CONGLOMERATES -- 0.5%
Alpine Group, Inc.
12.25%................... 07/15/03 100 98,000
Tenneco, Inc.
8.00%.................... 11/15/99 55 58,644
7.88%.................... 10/01/02 150 162,938
-----------
319,582
-----------
CONSUMER NON-DURABLES -- 0.2%
Herff Jones, Inc., Senior
Subordinate Notes Cl-B
11.00%................... 08/15/05 100 107,250
-----------
CONTAINERS -- 0.4%
Owens Illinois, Inc.
11.00%................... 12/01/03 125 141,563
Riverwood International
Corp.
11.25%................... 06/15/02 100 108,750
-----------
250,313
-----------
ELECTRIC POWER -- 0.4%
Potomac Capital
6.19%.................... 04/28/97 250 250,650
-----------
ENERGY -- 0.5%
Ferrellgas LP Financial
Corp.
10.00%................... 08/01/01 100 107,000
Gulf Canada Resources LTD.
9.63%.................... 07/01/05 100 105,000
Petroleum Heat & Power
10.13%................... 04/01/03 100 95,375
-----------
307,375
-----------
ENTERTAINMENT & LEISURE -- 0.7%
TCI Communications, Inc.
8.65%.................... 09/15/04 200 221,750
<CAPTION>
PAR
MATURITY (000) VALUE
--------- ------ -----------
<S> <C> <C> <C>
Time Warner Entertainment
Debenture
7.25%.................... 09/01/08 $ 100 $ 101,125
United Artists Theatre
9.30%.................... 07/01/15 100 100,500
-----------
423,375
-----------
FINANCE & CREDIT -- 2.4%
Advanta Corp.
7.07%.................... 09/15/97 235 239,994
Aristar, Inc.
8.88%.................... 08/15/98 200 214,000
7.88%.................... 02/15/99 200 212,000
Associates Corp. of North
America
8.63%.................... 06/15/97 10 10,438
Chrysler Financial Corp.
8.46%.................... 01/19/00 200 217,000
Commercial Credit Notes
8.13%.................... 03/01/97 5 5,156
CoreStates Home Loan Equity
6.65%.................... 05/15/09 84 84,985
Ford Motor Credit Co.
9.45%.................... 05/20/97 50 52,625
General Motors Acceptance
Corp.
7.75%.................... 04/15/97 50 51,375
8.38%.................... 05/01/97 10 10,363
General Motors Acceptance
Corp., Grantor Trust
6.30%.................... 06/15/99 44 44,221
Household Finance Corp.
6.96%.................... 04/27/98 300 308,625
-----------
1,450,782
-----------
FINANCIAL-BANK & TRUST -- 0.4%
Ciesco LP
7.38%.................... 04/19/00 250 263,438
-----------
FINANCIAL SERVICES -- 0.5%
Lehman Brothers Holdings,
Inc.
7.63%.................... 06/15/97 65 66,706
Smith Barney Holdings
6.63%.................... 06/01/00 200 204,500
-----------
271,206
-----------
FOOD & TOBACCO -- 0.2%
Consolidated Cigar, Senior
Subordinate Notes
10.50%................... 03/01/03 100 102,500
-----------
</TABLE>
<PAGE>
AMERICAN SKANDIA TRUST
T. ROWE PRICE ASSET ALLOCATION PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
--------- ------ -----------
<S> <C> <C> <C>
FOREIGN GOVERNMENT -- 0.1%
Export-Import Korea Notes
6.50%.................... 05/15/00 $ 40 $ 40,900
-----------
HEALTHCARE -- 0.2%
Tenet Healthcare Corp.
8.63%.................... 12/01/03 90 94,613
-----------
HOTEL/GAMING -- 0.7%
Bally Park Place Funding
9.25%.................... 03/15/04 100 101,250
Grand Casino
10.13%................... 12/01/03 125 130,625
President Riverboat Casino
13.00%................... 09/15/01 100 84,000
Trump Taj Mahal
11.35%................... 11/15/99 100 96,250
-----------
412,125
-----------
INDUSTRIAL -- 1.1%
Coinmach Corp., Senior
Notes
11.75%................... 11/15/05 100 101,250
Raytheon Co.
6.50%.................... 07/15/05 350 360,938
Westinghouse Electric Corp.
8.88%.................... 06/01/01 200 208,250
-----------
670,438
-----------
INSURANCE -- 0.1%
New York Life Insurance
7.50%.................... 12/15/23 100 101,625
-----------
MANUFACTURING -- 0.8%
American Standard, Senior
Debenture Notes
11.38%................... 05/15/04 75 83,063
9.25%.................... 12/01/16 25 26,125
Ametek, Inc.
9.75%.................... 03/15/04 100 106,250
Coltec Industries
10.25%................... 04/01/02 125 129,375
IMO Industries, Senior
Subordinate Debentures
12.00%................... 11/01/01 100 102,250
-----------
447,063
-----------
NATURAL RESOURCES -- 0.0%
Gulf Canada Resources LTD.
9.25%.................... 01/15/04 25 25,469
-----------
OTHER INDUSTRIAL
MATERIALS -- 0.2%
HMC Acquisition Properties
9.00%.................... 12/15/07 100 101,000
-----------
<CAPTION>
PAR
MATURITY (000) VALUE
--------- ------ -----------
<S> <C> <C> <C>
PACKAGING -- 0.5%
Container Corp. of America,
Senior Notes
11.25%................... 05/01/04 $ 100 $ 104,125
Portola Packaging, Inc.,
Senior Notes
10.75%................... 10/01/05 100 103,250
Stone Container Corp.,
Senior Notes
9.88%.................... 02/01/01 100 97,875
-----------
305,250
-----------
PAPER & PAPER PRODUCTS -- 0.2%
Repap Wisconsin, Inc.
9.25%.................... 02/01/02 100 95,500
-----------
RESTAURANTS -- 0.2%
McDonald's Corp.
6.63%.................... 09/01/05 100 103,750
-----------
RETAIL -- 0.1%
Southland Corp.
5.00%.................... 12/15/03 100 83,875
-----------
RETAIL GROCERY -- 0.1%
Ralph's Grocery Co., Senior
Note
10.45%................... 06/15/04 50 50,875
-----------
RETAIL MERCHANDISING -- 0.5%
Federated Department
Stores, Inc.
8.13%.................... 10/15/02 125 125,781
Kmart Corp., Medium Term
Notes
8.50%.................... 05/09/97 100 98,250
Wal-Mart Stores, Inc.
7.25%.................... 06/01/13 85 90,950
-----------
314,981
-----------
SAVINGS & LOAN ASSOCIATIONS -- 0.2%
H.F. Ahmanson & Co.
9.88%.................... 11/15/99 100 112,625
-----------
SERVICE -- 0.2%
Alliance Entertainment
11.25%................... 07/15/05 100 101,000
-----------
SPECIALTY CHEMICALS -- 0.5%
Agricultural Minerals, Inc.
10.75%................... 09/30/03 100 110,250
IMC Fertilizer Group
9.45%.................... 12/15/11 100 106,875
Scott Co.
9.88%.................... 08/01/04 100 107,250
-----------
324,375
-----------
</TABLE>
<PAGE>
AMERICAN SKANDIA TRUST
T. ROWE PRICE ASSET ALLOCATION PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
--------- ------ -----------
<S> <C> <C> <C>
TELECOMMUNICATIONS -- 0.9%
Mobilemedia Corp.
9.38%.................... 11/01/07 $ 125 $ 129,375
Paging Network, Inc.,
Senior Subordinate Notes
8.88%.................... 02/01/06 125 128,438
United Telecommunications
Debentures
9.75%.................... 04/01/00 250 284,375
-----------
542,188
-----------
TEXTILES -- 0.2%
Dan River, Inc., Senior
Subordinate Notes
10.13%................... 12/15/03 100 92,500
-----------
TRANSPORTATION -- 0.3%
Federal Express
6.25%.................... 04/15/98 70 70,788
Sea Containers LTD.
12.50%................... 11/15/04 100 108,000
Southwest Airlines Co.
9.25%.................... 02/15/98 25 26,625
-----------
205,413
-----------
UTILITIES-ELECTRIC -- 2.3%
Commonwealth Edison
7.00%.................... 02/15/97 50 50,625
Consumers Power Co.
6.00%.................... 07/01/97 65 65,163
6.63%.................... 10/01/98 50 50,313
Florida Power & Light
5.70%.................... 03/05/98 200 201,250
Gulf States Utilities
5.38%.................... 02/01/97 128 127,840
Monongahela Power
8.50%.................... 06/01/22 150 159,938
Pacific Gas & Electric
Corp.
6.75%.................... 12/01/00 200 202,500
Public Service Electric &
Gas First Mortgage
7.00%.................... 09/01/24 300 295,125
Southern California Edison
Notes
6.50%.................... 06/01/01 100 102,500
Wisconsin Electric Power
Co.
5.88%.................... 10/01/97 100 100,625
-----------
1,355,879
-----------
TOTAL CORPORATE BONDS
(COST $11,013,689)........... 11,394,321
-----------
<CAPTION>
PAR
MATURITY (000) VALUE
--------- ------ -----------
<S> <C> <C> <C>
MEDIUM TERM NOTES -- 0.7%
BANKING -- 0.2%
U.S. Bancorp
6.72%.................... 06/01/98 $ 100 $ 102,750
FINANCE & CREDIT -- 0.1%
Associates Corp. of North
America
7.70%.................... 03/15/00 50 53,250
UTILITIES-ELECTRIC -- 0.4%
Commonwealth Edison
9.00%.................... 10/15/99 250 271,875
-----------
TOTAL MEDIUM TERM NOTES
(COST $419,951).............. 427,875
-----------
ZERO COUPON BONDS -- 0.2%
FINANCIAL-BANK & TRUST -- 0.1%
Coleman Holdings
9.18%.................... 05/27/98 100 81,000
-----------
RETAIL FOOD CHAINS -- 0.1%
Pathmark Stores
6.18%.................... 11/01/03 100 61,000
-----------
TOTAL ZERO COUPON BONDS
(COST $142,664).............. 142,000
-----------
U.S. GOVERNMENT AGENCY OBLIGATIONS -- 16.6%
FEDERAL HOME LOAN BANK
CONSOLIDATED DISCOUNT NOTES -- 6.1%
5.53%...................... 01/16/96 3,621 3,612,657
-----------
GOVERNMENT NATIONAL MORTGAGE
ASSOCIATION -- 6.4%
9.50%...................... 10/15/09 29 31,675
10.00%..................... 11/15/09 38 42,032
11.50%..................... 06/15/10 52 59,187
12.00%..................... 09/15/13 1 1,637
12.00%..................... 01/15/14 7 8,402
10.50%..................... 08/15/15 15 16,490
11.50%..................... 09/15/15 160 180,865
11.50%..................... 11/15/15 59 66,721
8.00%...................... 05/15/16 33 34,340
8.50%...................... 06/15/16 44 46,431
9.00%...................... 07/15/16 18 19,051
8.00%...................... 12/15/16 59 61,032
9.00%...................... 12/15/16 3 2,839
8.00%...................... 02/15/17 115 119,438
8.00%...................... 05/15/17 64 66,992
9.00%...................... 05/15/17 110 116,610
8.00%...................... 06/15/17 30 31,209
9.50%...................... 11/15/18 5 5,675
9.50%...................... 03/15/19 17 18,454
9.50%...................... 01/15/20 11 11,965
</TABLE>
<PAGE>
AMERICAN SKANDIA TRUST
T. ROWE PRICE ASSET ALLOCATION PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
--------- ------ -----------
<S> <C> <C> <C>
GOVERNMENT NATIONAL MORTGAGE
ASSOCIATION (CONT'D)
9.50%...................... 06/15/20 $ 14 $ 15,251
8.00%...................... 06/15/22 182 189,674
8.00%...................... 09/15/22 35 36,989
8.00%...................... 07/15/23 90 93,521
7.00%...................... 09/15/23 394 398,481
6.50%...................... 02/15/24 726 720,704
6.50%...................... 04/15/24 91 90,278
6.50%...................... 05/15/24 900 893,083
7.50%...................... 06/15/24 93 95,664
7.00%...................... 12/15/25 294 297,768
-----------
3,772,458
-----------
FEDERAL HOME LOAN MORTGAGE CORP. -- 4.0%
5.47%...................... 01/22/96 2,391 2,383,371
7.50%...................... 07/15/20 15 15,353
-----------
2,398,724
-----------
TENNESSEE VALLEY AUTHORITY NOTES -- 0.1%
7.75%...................... 12/15/22 10 10,450
7.25%...................... 07/15/43 20 20,850
6.88%...................... 12/15/43 40 40,100
-----------
71,400
-----------
TOTAL U.S. GOVERNMENT AGENCY OBLIGATIONS
(COST $9,746,084).................... 9,855,239
-----------
U.S. TREASURY OBLIGATIONS -- 8.5%
U.S. TREASURY BONDS -- 1.9%
11.63%..................... 11/15/02 100 134,771
7.13%...................... 02/15/23 240 274,502
7.63%...................... 02/15/25 300 366,690
6.83%...................... 08/15/25 300 338,397
-----------
1,114,360
-----------
U.S. TREASURY NOTES -- 6.6%
6.50%...................... 09/30/96 80 80,700
7.25%...................... 11/30/96 240 244,219
6.13%...................... 05/31/97 450 455,697
6.13%...................... 05/15/98 100 102,052
5.13%...................... 12/31/98 50 49,856
6.75%...................... 05/31/99 460 480,695
6.88%...................... 03/31/00 250 264,382
6.25%...................... 05/31/00 100 103,451
6.13%...................... 09/30/00 150 154,610
5.63%...................... 11/30/00 275 277,739
5.75%...................... 08/15/03 965 977,979
7.50%...................... 02/15/05 250 283,537
5.88%...................... 11/15/05 425 434,707
-----------
3,909,624
-----------
TOTAL U.S. TREASURY OBLIGATIONS
(COST $4,688,436)............ 5,023,984
-----------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
IN LOCAL
CURRENCY***
MATURITY (000) VALUE
--------- ------------ ----------
<S> <C> <C> <C>
FOREIGN BONDS -- 2.8%
AUSTRALIA -- 0.0%
Australian Government
9.50%............... 08/15/03 20 $ 16,081
----------
BELGIUM -- 0.1%
Belgium Kingdom
Government
7.25%............... 04/29/04 1,550 55,013
----------
CANADA -- 0.2%
Canadian Government
6.50%............... 06/01/04 110 77,857
9.75%............... 06/01/21 10 9,106
----------
86,963
----------
DENMARK -- 0.1%
Denmark Government
7.00%............... 12/15/04 275 49,322
----------
FRANCE -- 0.2%
France O.A.T.
8.25%............... 02/27/04 264 59,791
8.50%............... 04/25/23 50 11,542
French Treasury Bills
8.50%............... 03/12/97 75 15,914
----------
87,247
----------
GERMANY -- 0.6%
German Government
8.50%............... 08/21/00 375 298,651
6.50%............... 07/15/03 110 79,888
----------
378,539
----------
ITALY -- 0.3%
Italian Government
11.50%.............. 03/01/03 275,000 180,650
8.50%............... 08/01/04 45,000 24,976
----------
205,626
----------
JAPAN -- 0.9%
International Bank
Recovery &
Development
6.75%............... 03/15/00 14,000 162,432
Japan Government
4.50%............... 06/20/03 33,500 358,410
----------
520,842
----------
NETHERLANDS -- 0.1%
Netherland Government
5.75%............... 01/15/04 115 71,234
----------
</TABLE>
<PAGE>
AMERICAN SKANDIA TRUST
T. ROWE PRICE ASSET ALLOCATION PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
IN LOCAL
CURRENCY***
MATURITY (000) VALUE
--------- ------------ ----------
<S> <C> <C> <C>
SPAIN -- 0.1%
Spanish Government
8.00%............... 05/30/04 6,400 $ 48,007
----------
UNITED KINGDOM -- 0.2%
United Kingdom Gilt
9.00%............... 03/03/00 85 142,634
----------
TOTAL FOREIGN BONDS
(COST $1,477,645)....... 1,661,508
----------
</TABLE>
<TABLE>
<CAPTION>
PAR
(000)
-------
<S> <C> <C> <C>
COMMERCIAL PAPER -- 2.1%
Coca-Cola Co. Bottling
Co.
6.00%................ 01/12/96 $ 400 399,267
Dupont (E.I.) de
Nemours & Co.
5.75%................ 01/17/96 500 498,722
Tampa Electric Co.
6.00%................ 01/08/96 339 338,605
-----------
TOTAL COMMERCIAL PAPER
(COST $1,236,594)........ 1,236,594
-----------
TOTAL INVESTMENTS
(COST $56,469,167**) -- 103.7%....... 61,615,375
LIABILITIES IN EXCESS OF
OTHER ASSETS -- (3.7%)............... (2,216,244)
-----------
NET ASSETS -- 100.0%................... $59,399,131
==========
<CAPTION>
<S> <C> <C> <C>
NOTES TO SCHEDULE OF INVESTMENTS:
The aggregate unrealized appreciation (depreciation) on a tax
basis is as follows:
Gross appreciation................. $5,733,908
Gross depreciation................. (587,700)
---------
Net appreciation................... $5,146,208
---------
---------
</TABLE>
Foreign currency exchange contracts outstanding at December 31, 1995.
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
COVERED EXPIRATION UNREALIZED
TYPE BY CONTRACT MONTH DEPRECIATION
- ----------------------------------------------------------
<S> <C> <C> <C> <C>
Buy UK 28,940 01/96 $ (241)
</TABLE>
<TABLE>
<CAPTION>
COUNTRY/CURRENCY ABBREVIATIONS
- ------------------------------------------------------------
<S> <C>
CAN - Canada/Canadian Dollar NZD - New Zealand/
DEM - Germany/German New Zealand Dollar
Deutschemark MALA - Malaysia/Malaysian
FRF - France/French Franc Ringgit
HK - Hong Kong/Hong Kong MEX - Mexico/Mexican Peso
Dollar SNG - Singapore/Singapore
ITL - Italy/Italian Lira Dollar
JPN - Japan/Japanese Yen SW - Switzerland/Swiss Franc
NETH - Netherlands/ UK - United Kingdom/British
Netherland Guilder Pound
</TABLE>
- --------------------------------------------------------------------------------
Unless otherwise noted, all foreign stocks are common stock.
* Non-income producing securities.
** Also cost for Federal income tax purposes.
*** Currency of countries indicated.
See Notes to Financial Statements.
<PAGE>
AMERICAN SKANDIA TRUST
PIMCO TOTAL RETURN BOND PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
-------- ------- -----------
<S> <C> <C> <C>
CORPORATE BONDS -- 8.3%
AIRLINES -- 1.5%
American Air Equipment
10.19%................ 05/26/15 $ 250 $ 308,780
AMR Corp.
10.45%................ 11/15/11 100 124,250
United Air Lines, Inc.
10.67%................ 05/01/04 500 606,875
10.02%................ 03/22/14 2,000 2,393,755
-----------
3,433,660
-----------
ELECTRIC POWER -- 1.5%
Cleveland Electric
9.11%................. 07/22/96 250 253,125
8.75%................. 11/15/05 100 99,500
CMS Energy Corp.
9.50%................. 10/01/97 150 157,688
Commonwealth Edison
Corp.
6.50%................. 07/15/97 750 757,500
Illinois Power Co.
5.85%................. 10/01/96 2,000 2,000,000
-----------
3,267,813
-----------
FINANCIAL -- 0.4%
Ohio Edison First Mortgage
8.50%................. 05/01/96 1,000 1,008,750
-----------
INDUSTRIAL -- 0.3%
Arkla, Inc.
9.20%................. 12/18/97 500 528,750
-----------
OIL -- 0.7%
Occidental Petroleum Corp.
9.63%................. 07/01/99 500 510,625
11.75%................ 03/15/11 1,000 1,058,750
-----------
1,569,375
-----------
PUBLISHING -- 1.7%
Time Warner, Inc.
7.45%................. 02/01/98 2,000 2,062,500
6.84%................. 08/15/00 437 437,000
7.98%................. 08/15/04 262 277,720
8.11%................. 08/15/06 525 565,031
8.18%................. 08/15/07 525 570,281
-----------
3,912,532
-----------
REAL ESTATE -- 2.2%
Spieker Properties
6.95%................. 12/15/02 5,000 5,018,750
-----------
TOTAL CORPORATE BONDS
(COST $17,842,452)........ 18,739,630
-----------
<CAPTION>
PAR
MATURITY (000) VALUE
-------- ------- -----------
<S> <C> <C> <C>
SOVEREIGN ISSUES -- 1.9%
Republic of Argentina
FRB
6.81%................. 03/31/05 $ 3,000 $ 2,124,375
United Mexican States
Cl-B
6.25%................. 12/31/19 1,500 984,375
United Mexican States
Cl-C
6.97%................. 12/31/19 1,000 722,500
United Mexican States
Cl-D
6.55%................. 12/31/19 500 361,250
United Mexican States
(Rights)*............. 3,807 0
-----------
TOTAL SOVEREIGN ISSUES
(COST $4,251,622)......... 4,192,500
-----------
MORTGAGE BACKED SECURITIES -- 1.7%
Countrywide Adjustable
Rate Mortgage
6.70%................. 03/25/24 1,476 1,514,874
7.66%................. 11/25/24 1,529 1,568,524
Guardian Adjustable Rate
Mortgage
7.14%................. 12/25/19 100 71,116
Saxon Adjustable Rate
Mortgage
7.79%................. 05/25/24 742 765,223
-----------
TOTAL MORTGAGE BACKED SECURITIES
(COST $3,859,629)......... 3,919,737
-----------
COLLATERALIZED MORTGAGE SECURITIES -- 5.6%
Citicorp Mortgage
Securities, Inc.
7.73%................. 10/25/22 875 878,543
Collateralized Mortgage
Security Corp.
7.99%................. 05/01/17 495 509,976
Mortgage Capital Trust
VI
9.50%................. 02/01/18 1,327 1,363,293
Prudential Securities
CMO Trust
7.50%................. 03/25/19 292 291,076
Prudential-Bache CMO
Trust
8.40%................. 03/20/21 2,977 3,169,690
Resolution Trust Corp.
8.00%................. 09/25/21 712 721,516
Rothschild L.F. Mortgage
Trust
9.95%................. 08/01/17 3,390 3,689,666
Ryland Mortgage
Securities Corp.
7.91%................. 09/25/23 1,929 1,958,277
-----------
TOTAL COLLATERALIZED MORTGAGE SECURITIES
(COST $12,154,765)........ 12,582,037
-----------
</TABLE>
<PAGE>
AMERICAN SKANDIA TRUST
PIMCO TOTAL RETURN BOND PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
-------- ------- -----------
<S> <C> <C> <C>
MEDIUM TERM NOTES -- 1.8%
FINANCE
General Motors
Acceptance Corp.
6.70%................. 05/20/96 $ 2,000 $ 2,008,160
7.75%................. 07/18/96 2,000 2,022,420
-----------
(COST $4,002,777)... 4,030,580
-----------
<CAPTION>
PRINCIPAL
IN LOCAL
CURRENCY****
(000)
------------
<S> <C> <C> <C>
FOREIGN BONDS -- 4.7%
CANADA -- 1.3%
Canadian Government
8.75%................. 12/01/05 3,500 2,865,011
-----------
GERMANY -- 3.4%
German Government
6.25%................. 01/04/24 11,900 7,732,834
-----------
TOTAL FOREIGN BONDS
(COST $10,194,113)........ 10,597,845
-----------
<CAPTION>
PAR
(000)
-------
<S> <C> <C> <C>
U.S. GOVERNMENT AGENCY
OBLIGATIONS -- 18.1%
FEDERAL HOME LOAN MORTGAGE
CORP. -- 4.0%
8.25%................... 08/01/17 $ 761 791,936
7.00%***................ 04/25/19 625 68,339
6.09%................... 02/01/24 3,917 4,005,508
8.00%................... 01/16/26 4,000 4,145,625
-----------
9,011,408
-----------
FEDERAL NATIONAL MORTGAGE
ASSOCIATION -- 3.0%
5.55%................... 02/13/96 1,000 993,272
9.40%................... 07/25/03 426 447,547
6.25%***................ 05/25/08 236 76,812
6.50%***................ 06/25/14 3,000 262,734
8.50%................... 11/25/18 2,066 2,063,741
6.90%................... 05/25/23 179 160,475
7.29%................... 01/01/24 670 688,985
7.00%................... 04/25/24 562 523,762
6.23%................... 04/01/25 1,560 1,628,675
-----------
6,846,003
-----------
GOVERNMENT NATIONAL
MORTGAGE ASSOCIATION -- 11.1%
7.00%................... 06/20/22 3,046 3,104,598
7.38%................... 04/20/23 3,938 3,997,391
6.50%................... 10/20/23 846 860,037
7.50%................... 12/20/23 482 492,285
7.25%................... 09/20/24 1,791 1,835,079
<CAPTION>
PAR
MATURITY (000) VALUE
-------- ------- -----------
<S> <C> <C> <C>
6.50%................... 10/20/24 $ 4,677 $ 4,776,027
6.50%................... 01/22/26 10,000 9,918,750
-----------
24,984,167
-----------
TOTAL U.S. GOVERNMENT AGENCY OBLIGATIONS
(COST $40,350,525)........ 40,841,578
-----------
U.S. TREASURY OBLIGATIONS -- 30.9%
U.S. TREASURY BILLS -- 0.5%
5.22%#.................. 02/08/96 55 54,682
5.27%#.................. 02/08/96 105 104,393
5.29%#.................. 02/08/96 55 54,682
5.34%#.................. 02/08/96 105 104,393
5.35%#.................. 02/08/96 40 39,769
5.39%#.................. 02/08/96 40 39,769
5.45%#.................. 02/08/96 95 94,451
5.27%................... 02/15/96 150 149,011
5.28%................... 02/15/96 100 99,340
5.31%#.................. 02/22/96 330 327,640
-----------
1,068,130
-----------
U.S. TREASURY NOTES -- 30.4%
4.38%................... 08/15/96 10,000 9,948,599
6.50%................... 09/30/96 40,000 40,350,000
6.38%................... 08/15/02 17,400 18,273,130
-----------
68,571,729
-----------
TOTAL U.S. TREASURY OBLIGATIONS
(COST $69,158,328)........ 69,639,859
-----------
COMMERCIAL PAPER -- 11.4%
Abbott Laboratories
5.62%................. 01/09/96 4,100 4,094,880
BellSouth Telecomm, Inc.
5.75%................. 01/12/96 700 698,770
5.75%................. 01/09/96 2,500 2,496,806
Canadian Wheat Board
5.49%................. 03/05/96 700 692,809
General Electric Capital Corp.
5.65%................. 01/31/96 4,100 4,080,696
Hewlett-Packard Co.
5.67%................. 01/09/96 700 699,092
5.55%................. 03/05/96 2,800 2,771,234
5.53%................. 03/12/96 3,500 3,460,287
Mexico Treasury Bills
16.59%................ 01/18/96 600 597,642
National Rural Utility
5.55%................. 03/18/96 1,500 1,481,700
Pitney Bowes Credit,
Inc.
5.66%................. 01/26/96 1,200 1,195,283
Procter & Gamble Co.
5.67%................. 01/24/96 3,500 3,486,996
-----------
TOTAL COMMERCIAL PAPER
(COST $25,757,788)........ 25,756,195
-----------
</TABLE>
<PAGE>
AMERICAN SKANDIA TRUST
PIMCO TOTAL RETURN BOND PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
(000) VALUE
------ -----------
<S> <C> <C>
OPTIONS -- 0.0%
CME Put Option on Eurodollar
Futures, Strike Price $90.75,
Expire 06/17/96.................. $ 750 $ 0
CME Put Option on Eurodollar
Futures, Strike Price $91.00,
Expire 06/17/96.................. 1,500 1,500
Written CME Put Option on
Eurodollar Futures, Strike Price
$94.00,
Expire 03/18/96.................. 2,000 (2,000)
-----------
TOTAL OPTIONS
(COST ($29,962))..................... (500)
-----------
</TABLE>
<TABLE>
<CAPTION>
SHARES
-------
<S> <C> <C>
SHORT TERM INVESTMENTS -- 1.3%
Temporary Investment Cash
Fund.......................... 1,451,819 1,451,819
Temporary Investment Fund....... 1,451,818 1,451,818
-----------
(COST $2,903,637)............. 2,903,637
-----------
TOTAL INVESTMENTS (COST
$190,445,674**) -- 85.7%.......... 193,203,098
OTHER ASSETS LESS
LIABILITIES -- 14.3%.............. 32,132,331
-----------
NET ASSETS -- 100.0%................ $225,335,429
============
NOTES TO SCHEDULE OF INVESTMENTS:
The aggregate unrealized appreciation (depreciation) on a tax
basis is as follows:
Gross appreciation.............. $3,026,754
Gross depreciation.............. (299,974)
---------
Net appreciation................ $2,726,780
---------
---------
</TABLE>
Foreign currency exchange contracts outstanding at December 31, 1995:
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT UNREALIZED
COVERED EXPIRATION APPRECIATION/
TYPE BY CONTRACT MONTH (DEPRECIATION)
<S> <C> <C> <C> <C>
- ----------------------------------------------------------
Sell CAN 153,125 01/96 $ 16
Sell DEM 7,106,000 01/96 2,078
Sell DEM 4,524,850 12/96 (28,308)
--------
$(26,214)
========
</TABLE>
# Securities with an aggregate market value of $819,779, which have been
segregated with the custodian to cover margin requirements for the following
open futures contracts at December, 31, 1995:
<TABLE>
<CAPTION>
UNREALIZED
TYPE CONTRACTS APPRECIATION
<S> <C> <C>
- ----------------------------------------------------------
U.S. Treasury 5 Year Note (03/96) 350 $301,172
U.S. Treasury 10 Year Note (03/96) 196 211,500
U.S. Treasury 30 Year Note (03/96) 104 143,000
German Treasury 10 Year Note (03/96) 60 88,435
--------
$744,107
========
</TABLE>
COUNTRY/CURRENCY ABBREVIATIONS
- ----------------------------------------------------------
CAN - Canada/Canadian Dollar
DEM - Germany/German Deutschemark
- --------------------------------------------------------------------------------
* Non-income producing securities.
** Cost for Federal income tax purposes was $190,476,318.
*** Interest Only Securities.
**** Currency of countries indicated.
See Notes to Financial Statements.
<PAGE>
AMERICAN SKANDIA TRUST
INVESCO EQUITY INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------- ------------
<S> <C> <C>
COMMON STOCK -- 64.5%
AEROSPACE -- 2.0%
Boeing Co........................ 20,000 $ 1,567,500
Lockheed Martin Corp............. 25,000 1,975,000
----------
3,542,500
----------
AIRLINES -- 0.6%
KLM Royal Dutch Airlines......... 30,000 1,057,500
----------
AUTOMOBILES -- 1.4%
Chrysler Corp. .................. 10,000 553,750
Ford Motor Co. .................. 30,000 870,000
General Motors Corp. Cl-H........ 20,000 982,500
----------
2,406,250
----------
AUTOMOTIVE PARTS-EQUIPMENT -- 1.3%
Borg Warner Automotive Corp. .... 40,000 1,280,000
Eaton Corp. ..................... 20,000 1,072,500
----------
2,352,500
----------
BANKING -- 0.7%
BankAmerica Corp. ............... 20,000 1,295,000
----------
BEVERAGES -- 1.0%
Seagram Co. LTD. ................ 50,000 1,731,250
----------
BREWERIES & DISTILLERS -- 1.6%
Anheuser-Busch Companies,
Inc. .......................... 25,000 1,671,875
Coors (Adolph) Co. Cl-B.......... 50,000 1,106,250
----------
2,778,125
----------
BROADCASTING -- 1.2%
Comcast Corp. Special Cl-A....... 35,000 636,563
U.S. West Media Group............ 80,000 1,520,000
----------
2,156,563
----------
BUILDING & BUILDING SUPPLIES -- 0.5%
Masco Corp....................... 30,000 941,250
----------
CHEMICALS -- 6.2%
Agrium, Inc. .................... 70,000 3,150,000
Arco Chemical Co. ............... 20,000 972,500
Lawter International, Inc. ...... 100,000 1,162,500
Olin Corp. ...................... 35,000 2,598,750
Vigoro Corp. .................... 50,000 3,087,500
----------
10,971,250
----------
COMPUTERS -- 1.8%
Honeywell, Inc. ................. 30,000 1,458,750
International Business Machines
Corp. ......................... 18,000 1,651,500
----------
3,110,250
----------
CONGLOMERATES -- 0.8%
Tenneco, Inc. ................... 30,000 1,488,750
----------
ELECTRICAL EQUIPMENT -- 1.1%
General Electric Co. ............ 27,000 1,944,000
----------
<CAPTION>
SHARES VALUE
------- ------------
<S> <C> <C>
ELECTRONICS -- 1.2%
Hewlett-Packard Co. ............. 15,000 $ 1,256,250
Intel Corp. ..................... 15,000 851,250
----------
2,107,500
----------
ENGINEERING & CONSTRUCTION -- 2.0%
Fluor Corp. ..................... 14,000 924,000
Foster Wheeler Corp. ............ 60,000 2,550,000
----------
3,474,000
----------
ENTERTAINMENT -- 1.5%
Time Warner, Inc. ............... 25,000 946,875
Walt Disney Co. ................. 30,000 1,770,000
----------
2,716,875
----------
FINANCIAL-BANK & TRUST -- 3.9%
Bank of New York Co., Inc. ...... 20,000 975,000
Chase Manhattan Corp. ........... 30,000 1,818,750
Citicorp......................... 15,000 1,008,750
Mellon Bank Corp. ............... 30,000 1,612,500
NDB Bancorp, Inc. ............... 36,200 1,429,900
----------
6,844,900
----------
FINANCIAL SERVICES -- 2.2%
American Express Co. ............ 20,000 827,500
Beneficial Corp. ................ 15,000 699,375
H&R Block, Inc. ................. 60,000 2,430,000
----------
3,956,875
----------
FOODS -- 2.6%
General Mills, Inc. ............. 25,000 1,443,750
Heinz, H.J. Co. ................. 33,000 1,093,125
Philip Morris Companies, Inc. ... 15,000 1,357,500
Quaker Oats Co. ................. 20,000 690,000
----------
4,584,375
----------
HOTELS & MOTELS -- 0.8%
Hilton Hotels Corp. ............. 23,000 1,414,500
----------
INSURANCE -- 2.1%
Allmerica Property & Casualty,
Inc. .......................... 80,000 2,160,000
Ohio Casualty Corp. ............. 40,000 1,550,000
----------
3,710,000
----------
MANUFACTURING -- 2.3%
Allied-Signal, Inc. ............. 25,000 1,187,500
Eastman Kodak Co. ............... 25,000 1,675,000
Whitman Corp. ................... 50,000 1,162,500
----------
4,025,000
----------
MEDICAL -- 0.6%
Baxter International, Inc. ...... 25,000 1,046,875
----------
MEDICAL PRODUCTS -- 1.3%
Becton Dickinson & Co. .......... 30,000 2,250,000
----------
</TABLE>
<PAGE>
AMERICAN SKANDIA TRUST
INVESCO EQUITY INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------- ------------
<S> <C> <C>
METALS & MINING -- 0.8%
ASARCO, Inc. .................... 25,000 $ 800,000
Newmont Mining Corp. ............ 12,994 587,979
----------
1,387,979
----------
MISCELLANEOUS -- 0.8%
Service Corp. International...... 32,000 1,408,000
----------
OIL -- 3.0%
Amoco Corp. ..................... 14,000 1,006,250
Atlantic Richfield Co. .......... 8,000 886,000
Chevron Corp. ................... 20,000 1,050,000
Exxon Corp. ..................... 12,000 961,500
Mobil Corp. ..................... 12,000 1,344,000
----------
5,247,750
----------
OIL & GAS -- 0.5%
Sonat, Inc. ..................... 25,000 890,625
----------
OIL EQUIPMENT & SERVICES -- 3.8%
Dresser Industries, Inc. ........ 70,000 1,706,250
Halliburton Co. ................. 35,000 1,771,875
Schlumberger LTD. ............... 11,000 761,750
Union Pacific Resources Group.... 100,000 2,537,500
----------
6,777,375
----------
PAPER & FOREST PRODUCTS -- 0.5%
Champion International Corp. .... 20,000 840,000
----------
PHARMACEUTICALS -- 2.6%
Abbott Laboratories.............. 20,000 835,000
American Home Products Corp. .... 15,000 1,455,000
Pharmacia & Upjohn, Inc. ........ 58,000 2,247,500
----------
4,537,500
----------
PUBLISHING -- 0.7%
R.R. Donnelley & Sons Co. ....... 30,000 1,181,250
----------
RAILROADS -- 2.8%
Canadian National Railways*...... 35,550 533,250
Illinois Central Corp. .......... 25,000 959,375
Kansas City Southern Industries,
Inc. .......................... 40,000 1,830,000
Union Pacific Corp. ............. 25,000 1,650,000
----------
4,972,625
----------
REAL ESTATE -- 1.2%
Patriot American Hospitality..... 80,000 2,060,000
----------
RETAIL FOOD CHAINS -- 0.5%
Albertson's, Inc. ............... 30,000 986,250
----------
RETAIL-SPECIALTY -- 1.5%
Jostens, Inc. ................... 30,000 727,500
Limited, Inc. ................... 60,000 1,042,500
Melville Corp. .................. 30,000 922,500
----------
2,692,500
----------
TELECOMMUNICATIONS -- 4.9%
AT&T Corp. ...................... 40,000 2,590,000
Bell Atlantic Corp. ............. 15,000 1,003,125
GTE Corp. ....................... 20,000 880,000
NYNEX Corp. ..................... 25,000 1,350,000
U.S. West, Inc. ................. 80,000 2,860,000
----------
8,683,125
----------
<CAPTION>
SHARES VALUE
------- ------------
<S> <C> <C>
TRANSPORTATION -- 0.2%
Overseas Shipholding Group,
Inc. .......................... 17,000 $ 323,000
----------
TOTAL COMMON STOCK
(COST $97,722,347)................. 113,894,067
----------
PREFERRED STOCK -- 0.6%
GOLD MINING
Amax Gold, Inc. $3.75 Cl-B
(COST $996,575)................ 20,000 1,090,000
----------
AMERICAN DEPOSITORY RECEIPTS -- 0.8%
ELECTRONICS -- 0.4%
Nokia Corp. C1-A ................ 20,000 777,500
----------
TELECOMMUNICATIONS -- 0.4%
Cable & Wireless PLC............. 30,000 633,750
----------
TOTAL AMERICAN DEPOSITORY RECEIPTS
(COST $1,830,404).................. 1,411,250
----------
</TABLE>
<TABLE>
<CAPTION>
PAR
MATURITY (000)
-------- ------
<S> <C> <C> <C>
CORPORATE BONDS -- 12.8%
AIRLINES -- 0.3%
Delta Air Lines, Inc.
9.30%................... 01/02/11 $ 500 592,125
------------
BROADCASTING -- 1.8%
Allbritton Communications
Co., Senior Subordinate
Notes
11.50%.................. 08/15/04 1,000 1,055,000
Benedek Broadcast Corp.,
Senior Secured Notes
11.88%.................. 03/01/05 500 525,000
Granite Broadcasting
Corp., Senior
Subordinate Notes
10.38%.................. 05/15/05 1,000 1,030,000
Outlet Broadcasting, Inc.
10.88%.................. 07/15/03 500 560,000
------------
3,170,000
------------
CABLE TELEVISION -- 2.2%
Cablevision Industries,
Debentures Cl-B
9.25%................... 04/01/08 1,000 1,070,000
</TABLE>
<PAGE>
AMERICAN SKANDIA TRUST
INVESCO EQUITY INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
-------- ------ ------------
<S> <C> <C> <C>
CABLE TELEVISION (CONT'D)
Century Communications
11.88%.................. 10/15/03 $1,000 $ 1,076,250
Diamond Cable Co.
5.75%................... 12/15/05 2,000 1,165,000
Marcus Cable Co.
5.24%................... 12/15/05 900 612,000
------------
3,923,250
------------
CAPITAL GOODS -- 0.2%
Jones Intercable, Senior
Subordinate Debentures
10.50%.................. 03/01/08 250 273,750
------------
CHEMICALS -- 0.6%
Rexene Corp.
11.75%.................. 12/01/04 500 528,750
Sifto Canada, Inc.
8.50%................... 07/15/00 500 482,500
------------
1,011,250
------------
ENTERTAINMENT -- 0.9%
Viacom, Inc., Subordinate
Debentures
8.00%................... 07/07/06 1,500 1,533,750
------------
FINANCE -- 1.2%
Associates Corp. of North
America
8.55%................... 07/15/09 425 510,531
Empress River Casino
10.75%.................. 04/01/02 500 516,250
General Motors Acceptance
Corp.
7.13%................... 06/01/99 500 520,625
Tembec Finance
9.88%................... 09/30/05 500 495,000
------------
2,042,406
------------
HEALTHCARE -- 0.6%
Tenet Healthcare Corp.
9.63%................... 09/01/02 500 551,250
8.63%................... 12/01/03 500 525,625
------------
1,076,875
------------
INDUSTRIAL -- 0.8%
Crown Paper Co.
11.00%.................. 09/01/05 500 438,750
Lenfest Communications,
Inc., Senior Notes
8.38%................... 11/01/05 1,000 1,006,250
------------
1,445,000
------------
<CAPTION>
PAR
MATURITY (000) VALUE
-------- ------ ------------
<S> <C> <C> <C>
OIL & GAS -- 0.3%
Transtexas Gas
11.50%.................. 06/15/02 $ 500 $ 515,000
------------
PAPER & PAPER PRODUCTS -- 0.3%
Repap New Brunswick
10.63%.................. 04/15/05 500 491,875
------------
PUBLISHING -- 0.8%
News America Holdings
8.50%................... 02/15/05 1,000 1,128,750
8.50%................... 02/23/25 250 289,375
------------
1,418,125
------------
RAILROADS -- 0.6%
Southern Pacific Railroad,
Senior Notes
9.38%................... 08/15/05 1,000 1,091,250
------------
RECREATIONAL -- 0.1%
United Artists Theatre
11.50%.................. 05/01/02 175 187,688
------------
RETAIL DRUGS -- 0.4%
Revco D.S., Inc.
9.13%................... 01/15/00 650 699,563
------------
TELECOMMUNICATIONS -- 0.5%
Centennial Cellular,
Senior Notes
8.88%................... 11/01/01 1,000 980,000
------------
TRANSPORTATION -- 0.6%
Overseas Shipholding
Group, Inc.
8.00%................... 12/01/03 1,000 1,033,521
------------
UTILITIES -- 0.6%
Commonwealth Edison Corp.
8.38%................... 10/15/06 1,000 1,132,500
------------
TOTAL CORPORATE BONDS
(COST $22,023,553).......... 22,617,928
------------
U.S. GOVERNMENT AGENCY OBLIGATIONS -- 5.9%
FEDERAL HOME LOAN MORTGAGE
CORP. -- 4.9%
6.50%..................... 06/01/10 949 955,734
7.50%..................... 07/01/09 889 915,498
6.50%..................... 10/01/10 1,948 1,960,956
6.50%..................... 11/01/10 1,954 1,967,223
7.00%..................... 04/01/24 968 977,949
7.00%..................... 07/01/24 873 882,215
8.00%..................... 12/01/24 930 964,500
------------
8,624,075
------------
</TABLE>
<PAGE>
AMERICAN SKANDIA TRUST
INVESCO EQUITY INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
-------- ------ ------------
<S> <C> <C> <C>
GOVERNMENT NATIONAL MORTGAGE
ASSOCIATION -- 1.0%
7.50%..................... 10/15/23 $1,797 $ 1,849,890
------------
TOTAL U.S. GOVERNMENT AGENCY
OBLIGATIONS
(COST $9,990,980)........... 10,473,965
------------
U.S. TREASURY OBLIGATIONS -- 9.9%
U.S. TREASURY BONDS -- 2.8%
7.63%..................... 02/15/25 4,000 4,889,200
------------
U.S. TREASURY NOTES -- 7.1%
5.38%..................... 11/30/97 3,000 3,010,350
5.88%..................... 06/30/00 1,000 1,021,520
6.50%..................... 05/15/05 8,000 8,518,639
------------
12,550,509
------------
TOTAL U.S. TREASURY
OBLIGATIONS
(COST $16,864,826).......... 17,439,709
------------
COMMERCIAL PAPER -- 2.0%
General Electric Capital
Corp.
5.91%
(COST $3,500,000)..... 01/04/96 3,500 3,500,000
------------
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE
---------- ------------
<S> <C> <C>
SHORT TERM INVESTMENTS --
MONEY MARKET FUNDS -- 2.4%
Temporary Investment Cash
Fund......................... 2,157,381 $ 2,157,381
Temporary Investment Fund...... 2,157,381 2,157,381
------------
(COST $4,314,762)............ 4,314,762
------------
TOTAL INVESTMENTS
(COST $157,243,447**) -- 98.9%... 174,741,681
OTHER ASSETS LESS
LIABILITIES -- 1.1%.............. 1,974,186
------------
NET ASSETS -- 100.0%............... $176,715,867
===========
NOTES TO SCHEDULE OF INVESTMENTS:
The aggregate unrealized appreciation (depreciation) on a tax
basis is
as follows:
Gross appreciation......................... $18,956,413
Gross depreciation......................... (1,458,179)
----------
Net appreciation........................... $17,498,234
----------
----------
</TABLE>
- --------------------------------------------------------------------------------
* Non-income producing securities.
** Also cost for Federal income tax purposes.
See Notes to Financial Statements.
<PAGE>
AMERICAN SKANDIA TRUST
FOUNDERS CAPITAL APPRECIATION PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------- -----------
<S> <C> <C>
COMMON STOCK -- 82.5%
AUTOMOTIVE PARTS-EQUIPMENT -- 0.3%
Top Source Technologies,
Inc.*......................... 46,000 $ 322,000
-----------
BROADCASTING -- 1.2%
Comcast U.K. Cable Partners*.... 45,000 562,500
SFX Broadcasting Cl-A*.......... 18,700 565,675
-----------
1,128,175
-----------
BUILDING & BUILDING SUPPLIES -- 1.6%
Harsco Corp..................... 25,000 1,453,125
-----------
BUSINESS SERVICES -- 0.5%
Norrell Corp.................... 17,000 499,375
-----------
COMMERCIAL SERVICES -- 2.1%
Medaphis Corp.*................. 32,000 1,184,000
Meta Group, Inc................. 22,875 700,547
-----------
1,884,547
-----------
COMMUNICATION EQUIPMENT -- 0.6%
Anadigics, Inc.*................ 26,000 552,500
-----------
COMPUTER SERVICES &
SOFTWARE -- 17.6%
Adobe Systems, Inc.............. 13,000 806,000
Astea International, Inc.*...... 29,800 681,675
Avant Corp...................... 39,450 759,413
Broadway & Seymour, Inc.*....... 18,175 295,344
Computron Software, Inc.*....... 41,300 743,400
Dendrite International, Inc.*... 62,075 1,117,350
Dialogic Corp................... 12,000 462,000
Eagle Point Software Corp.*..... 32,200 692,300
Geoworks........................ 49,100 932,900
GT Interactive Software......... 43,750 612,500
HCIA, Inc.*..................... 27,500 1,285,625
Informix Corp.*................. 19,500 585,000
Madge NV........................ 25,000 1,118,750
Manugistics Group, Inc.......... 10,425 153,769
Network General Corp.*.......... 23,000 767,625
Parametric Technology Corp.*.... 14,000 931,000
Platinum Technology............. 25,500 468,563
PRI Automation, Inc.*........... 22,750 799,094
Scopus Technology, Inc.......... 18,125 457,656
7th Level, Inc.................. 18,000 252,000
Symantec Corp................... 23,000 534,750
Sync Research, Inc.............. 8,650 391,413
Triple P NV..................... 46,700 467,000
Wonderware Corp................. 34,700 594,238
-----------
15,909,365
-----------
COMPUTERS -- 6.3%
Alantec Corp.*.................. 28,000 1,631,000
Computervision Corp............. 55,000 845,625
Gandalf Technologies, Inc.*..... 31,000 527,000
Mylex Corp...................... 40,250 769,781
Printronix, Inc.*............... 21,850 305,900
<CAPTION>
SHARES VALUE
------- -----------
<S> <C> <C>
Radisys Corp.................... 46,900 $ 551,075
Stormedia, Inc.*................ 27,800 1,014,700
-----------
5,645,081
-----------
CONSUMER GOODS & SERVICES -- 0.9%
Quicksilver, Inc.*.............. 25,000 854,688
-----------
ELECTRICAL EQUIPMENT -- 2.2%
Microchip Technology, Inc.*..... 23,050 841,325
Sanmina Holdings*............... 22,325 1,158,109
-----------
1,999,434
-----------
ELECTRICAL MACHINERY -- 0.5%
Tegal Corp...................... 40,525 415,381
-----------
ELECTRONICS -- 7.4%
Altera Corp.*................... 7,000 348,250
DSP Group, Inc.*................ 54,700 629,050
LAM Research Corp.*............. 10,000 457,500
LSI Logic Corp.*................ 15,000 491,250
Maxim Integrated Products,
Inc.*......................... 33,000 1,270,500
Orbit Semiconductor, Inc.*...... 43,175 420,956
Speedfam International, Inc..... 65,250 734,063
Tencor Instruments.............. 19,075 464,953
Teradyne, Inc.*................. 25,000 625,000
Tylan General, Inc.............. 69,000 845,250
Vitesse Semiconductor, Inc...... 31,000 395,250
-----------
6,682,022
-----------
ENTERTAINMENT -- 1.1%
Anchor Gaming*.................. 16,275 370,256
Movie Gallery, Inc.*............ 11,900 362,950
WMS Industries, Inc.*........... 16,000 262,000
-----------
995,206
-----------
ENVIRONMENTAL CONTROL -- 0.8%
United Waste Systems............ 20,000 745,000
-----------
FINANCIAL SERVICES -- 2.1%
Banco Latinoamericano de
Exportaciones SA.............. 24,000 1,116,000
Credit Acceptance Corp.......... 20,075 416,556
Mercury Finance Co.............. 30,000 397,500
-----------
1,930,056
-----------
FOOD PRODUCTS -- 0.3%
General Nutrition
Companies, Inc.*.............. 10,000 230,000
-----------
FUNERAL SERVICES -- 0.6%
Loewen Group, Inc............... 22,125 560,039
-----------
HEALTHCARE -- 0.8%
Healthsource, Inc.*............. 20,000 720,000
-----------
HOME FURNISHINGS &
HOUSEWARES -- 0.1%
Catalina Lighting, Inc.*........ 18,025 87,872
-----------
HOTELS & GAMING -- 1.5%
Trump Hotels & Casino Resort*... 61,700 1,326,550
-----------
</TABLE>
<PAGE>
AMERICAN SKANDIA TRUST
FOUNDERS CAPITAL APPRECIATION PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------- -----------
<S> <C> <C>
INSURANCE -- 0.7%
HCC Insurance Holdings, Inc.*... 18,000 $ 666,000
-----------
INSURANCE-LIFE -- 1.0%
Reliastar Financial Corp........ 20,000 887,500
-----------
LEISURE TIME -- 0.2%
Golf Enterprises, Inc........... 30,000 217,500
-----------
MANUFACTURING -- 4.1%
Asyst Technologies, Inc.*....... 45,900 1,617,975
Authentic Fitness Corp.......... 40,000 830,000
Plantronics, Inc.*.............. 14,000 505,750
Wolverine World Wide, Inc....... 22,500 708,750
-----------
3,662,475
-----------
MEDICAL & MEDICAL SERVICES -- 4.6%
Gulf South Medical Supply*...... 30,000 907,500
Horizon Healthcare Corp.*....... 29,725 750,556
Multicare Companies, Inc.*...... 36,000 864,000
Orthodontic Centers of America,
Inc.*......................... 16,000 772,000
Sola International, Inc......... 33,000 833,250
-----------
4,127,306
-----------
OIL & GAS -- 1.3%
Seitel, Inc.*................... 32,300 1,142,613
-----------
OIL & GAS-EQUIPMENT &
SERVICES -- 1.0%
Falcon Drilling Co., Inc.*...... 60,000 900,000
-----------
PHARMACEUTICALS -- 1.9%
Pharmaceutical Resources,
Inc.*......................... 35,900 269,250
Watson Pharmaceuticals, Inc.*... 30,000 1,470,000
-----------
1,739,250
-----------
PUBLISHING -- 0.2%
Desktop Data, Inc.*............. 9,500 232,750
-----------
RESTAURANTS -- 0.6%
Doubletree Corp.*............... 21,400 561,750
-----------
RETAIL -- 7.2%
Creative Computers Corp.*....... 64,350 1,174,388
Henry Schein, Inc............... 31,200 920,400
Insight Enterprises, Inc........ 43,000 537,500
Maxim Group..................... 26,475 357,413
Officemax, Inc.*................ 21,840 488,670
Proffitt's, Inc.*............... 26,975 708,094
The Sports Authority, Inc.*..... 19,200 391,200
Tiffany & Co. (New)............. 9,000 454,500
Trend-Lines, Inc. Cl-A*......... 55,000 550,000
U.S. Office Products Co.*....... 41,500 944,125
-----------
6,526,290
-----------
TELECOMMUNICATIONS -- 3.9%
Arch Communications
Group, Inc.................... 20,000 480,000
Frontier Corp................... 32,000 960,000
<CAPTION>
SHARES VALUE
------- -----------
<S> <C> <C>
Intermedia Communications of
Florida, Inc.*................ 32,000 $ 560,000
LCI International, Inc.*........ 48,250 989,125
Worldcom, Inc.*................. 15,000 528,750
-----------
3,517,875
-----------
TELECOMMUNICATIONS-EQUIPMENT -- 1.9%
Inter-Tel, Inc. Cl-A............ 55,125 847,547
Periphonics Corp................ 30,000 832,500
-----------
1,680,047
-----------
TEXTILES -- 3.1%
Nautica Enterprises, Inc.*...... 30,000 1,312,500
Supreme International Corp...... 42,000 672,000
Warnaco Group, Inc. Cl-A........ 31,000 775,000
-----------
2,759,500
-----------
TRANSPORTATION -- 2.0%
Mark VII, Inc.*................. 30,000 474,375
Western Pacific Airlines,
Inc........................... 23,150 387,763
Wisconsin Central Transport
Corp.*........................ 14,775 971,456
-----------
1,833,594
-----------
TRUCKING -- 0.3%
Celadon Group, Inc.*............ 28,000 252,000
-----------
TOTAL COMMON STOCK
(COST $62,330,368)................ 74,646,866
-----------
AMERICAN DEPOSITORY RECEIPTS -- 0.7%
DRUGS
Teva Pharmaceutical
Industries LTD.
(COST $304,524)............. 13,000 602,875
-----------
FOREIGN STOCKS -- 4.7%
BROADCASTING -- 0.9%
Flextech PLC -- (UK)*........... 107,000 784,248
-----------
GLASS-PRODUCTS -- 0.9%
Hoya Corp. -- (JPN)............. 25,000 858,982
-----------
MANUFACTURING -- 0.7%
Hunter Douglas -- (NETH)........ 13,356 619,235
-----------
RESTAURANTS -- 0.7%
J.D. Wetherspoon -- (UK)........ 60,000 598,155
-----------
RETAIL-MERCHANDISING -- 0.8%
Next PLC Ord. -- (UK)........... 100,000 708,097
-----------
TRANSPORTATION-EQUIPMENT -- 0.7%
IHC Caland -- (NETH)............ 20,000 673,023
-----------
TOTAL FOREIGN STOCKS
(COST $3,501,612)................. 4,241,740
-----------
</TABLE>
<PAGE>
AMERICAN SKANDIA TRUST
FOUNDERS CAPITAL APPRECIATION PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
-------- ------ -----------
<S> <C> <C> <C>
COMMERCIAL PAPER -- 10.5%
Allergan, Inc.
5.82%................ 01/02/96 $ 440 $ 439,929
American General
Finance Corp.
5.63%................ 01/02/96 955 954,851
Ciesco, LP
5.75%................ 01/04/96 1,365 1,364,346
Ford Motor Credit Co.
5.77%................ 01/11/96 985 983,421
General Electric
Capital Corp.
5.80%................ 01/03/96 935 934,699
Pacific Bell
5.80%................ 01/08/96 1,000 998,867
PHH Corp.
5.85%................ 01/10/96 1,540 1,537,748
<CAPTION>
PAR
MATURITY (000) VALUE
-------- ------ -----------
<S> <C> <C> <C>
Raytheon Co.
5.65%................ 01/05/96 $1,115 $ 1,114,300
Texaco, Inc.
5.80%................ 01/09/96 1,200 1,198,453
-----------
TOTAL COMMERCIAL PAPER
(COST $9,526,614)........ 9,526,614
-----------
TOTAL INVESTMENTS
(COST $75,663,118 **) -- 98.4%...... 89,018,095
OTHER ASSETS LESS
LIABILITIES -- 1.6%................. 1,441,611
-----------
NET ASSETS -- 100.0%.................. $90,459,706
===========
NOTES TO SCHEDULE OF INVESTMENTS:
The aggregate unrealized appreciation (depreciation) on a tax
basis is as follows:
Gross appreciation.......................... $17,000,989
Gross depreciation.......................... (3,646,012)
-----------
Net appreciation............................ $13,354,977
===========
COUNTRY ABBREVIATIONS
- ----------------------------------------------------------
JPN - Japan
NETH - Netherlands
UK - United Kingdom
</TABLE>
- --------------------------------------------------------------------------------
Unless otherwise noted, all foreign stocks are common stock.
* Non-income producing securities.
** Also cost for Federal income tax purposes.
See Notes to Financial Statements.
<PAGE>
AMERICAN SKANDIA TRUST
T. ROWE PRICE INTERNATIONAL EQUITY PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
--------- ------------
<S> <C> <C>
FOREIGN STOCKS -- 84.9%
ARGENTINA -- 0.1%
Compania Naviera Perez Compac
S.A.C.F.I.M.F.A............... 35,014 $ 185,574
Sociedad Comercial del Plata*... 14,380 38,107
Telecom Argentina Stet-Fran Tel
SA Cl-B....................... 10,450 49,324
-----------
273,005
-----------
AUSTRALIA -- 1.7%
Amcor LTD. ..................... 21,000 148,426
Australian Gas Light Co. ....... 104,321 391,951
Broken Hill Proprietary Co.
LTD. ......................... 32,747 462,907
Burns Philip & Co. LTD. ........ 78,783 176,428
Coca-Cola Amatil LTD. .......... 22,251 177,631
Fletcher Challenge Forest
Division LTD. ................ 1,702 2,406
Lend Lease Corp. ............... 19,486 282,700
News Corp. ..................... 45,228 241,602
Publishing & Broadcasting....... 49,300 172,024
Sydney Harbour Casino
Holdings*..................... 88,000 111,301
Tab Corp. ...................... 71,000 200,729
TNT LTD., Convertible
PFD. Cl-A..................... 150,000 213,154
Westpac Banking Corp. .......... 71,000 314,828
WMC LTD. ....................... 34,377 220,979
Woodside Petroleum LTD. ........ 52,000 266,171
-----------
3,383,237
-----------
AUSTRIA -- 0.2%
Creditanstalt-Bankverein
PFD. ......................... 1,600 82,222
Energie Versorgung Nieder....... 520 71,448
Flughafen Wien AG............... 1,581 105,086
Oesterreichsche Elektrizitats... 1,800 108,214
-----------
366,970
-----------
BELGIUM -- 1.0%
Generale de Banque SA........... 1,330 470,647
Kredietbank NV.................. 3,370 920,859
Societe Generale de Belgique.... 220 18,184
U.C.B. NPV...................... 474 630,310
-----------
2,040,000
-----------
BRAZIL -- 0.3%
Brazil Fund, Inc.***............ 29,290 618,751
-----------
CANADA -- 0.3%
Alcan Aluminum LTD. ............ 13,510 418,724
Macmillan Bloedel LTD. ......... 8,290 102,471
Royal Bank of Canada............ 5,140 119,069
-----------
640,264
-----------
CHILE -- 0.5%
Five Arrows Chile Investment
Trust***...................... 118,730 351,440
Genesis Chile Fund***........... 9,350 378,675
The Chile Fund***............... 9,294 241,644
-----------
971,759
-----------
<CAPTION>
SHARES VALUE
--------- ------------
<S> <C> <C>
DENMARK -- 0.2%
Den Danske Bank AB.............. 3,630 $ 250,354
Teledanmark Cl-B................ 1,180 64,383
Unidanmark...................... 3,310 163,912
-----------
478,649
-----------
FINLAND -- 0.1%
Nokia Series PFD. Cl-A.......... 7,004 275,446
-----------
FRANCE -- 7.0%
Accor........................... 4,480 579,953
Assurances Generales de
France........................ 6,123 205,038
Carrefour Supermarch SA......... 2,035 1,234,504
Castorama Duois Investisse...... 1,996 326,859
Charguers SA.................... 2,344 466,646
Cie des Gaz Petrole............. 2,392 189,992
Cie des Gaz Petrole
(Warrants)*................... 217 1,850
Credit Local Ord. .............. 1,928 154,319
Ecco Ste Ord. .................. 3,904 590,682
Generale des Eaux............... 17,980 1,794,879
GTM Entrepose SA................ 2,500 175,345
Guilbert SA..................... 1,480 173,762
Hermes International............ 152 28,553
L'Oreal......................... 870 232,888
LaFarge-Coppee SA............... 6,641 427,817
Lapeyre......................... 5,525 275,263
Legrand......................... 2,600 401,348
Louis Vuitton Moet Hennessy..... 4,430 922,634
Pinault Printemps Redoute....... 3,763 750,679
Poliet-Ex Lambert Freres........ 4,950 402,064
Rexel........................... 1,175 198,412
Sanofi SA....................... 2,527 161,965
Societe Generale................ 1,470 181,593
Societe Nationale Elf
Aquitaine..................... 7,780 573,154
Sodexho SA...................... 1,150 338,132
St. Gobain*..................... 8,260 914,124
Television Francais............. 10,240 1,097,703
Total Cl-B...................... 8,910 601,277
Valeo........................... 7,504 347,505
-----------
13,748,940
-----------
GERMANY -- 4.1%
Allianz Holdings Reg'd. ........ 581 1,140,773
Altana AG....................... 362 210,759
Ava Allgemeine Handels
Der Verbrau................... 130 43,962
</TABLE>
<PAGE>
AMERICAN SKANDIA TRUST
T. ROWE PRICE INTERNATIONAL EQUITY PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
--------- ------------
<S> <C> <C>
GERMANY (CONT'D)
Bayer AG........................ 2,878 $ 764,149
Bilfinger & Berger Bau AG....... 630 239,402
Buderus AG...................... 407 158,918
Deutsche Bank AG................ 10,210 484,801
Fielmann AG PFD. ............... 1,348 69,740
Gehe AG*........................ 1,664 852,768
Gehe AG (New)*.................. 406 202,547
Hoechst AG...................... 742 201,771
Hornbach Baumarkt AG............ 1,300 55,927
Hornbach Holding AG PFD. ....... 3,350 284,500
Krones AG PFD. ................. 456 184,409
Mannesmann AG................... 1,748 556,381
Praktiker Bau Und Heimwerker
Market*....................... 3,779 108,559
Rhoen-Klinicum AG............... 5,760 572,305
Schering AG..................... 6,473 430,119
Siemens AG...................... 326 179,116
Veba AG......................... 18,060 773,173
Veba AG (Warrants)*............. 1,220 194,373
Volkswagen AG................... 1,095 367,240
Volkswagen International Finance
(Warrants)*................... 370 31,216
-----------
8,106,908
-----------
HONG KONG -- 4.0%
Dao Heng Bank Group............. 117,000 420,646
First Pacific Co. .............. 638,845 710,525
Guangdong Investment LTD. ...... 589,000 354,204
Guangzhou Investment Co.
LTD. ......................... 1,828,000 349,884
Guoco Group LTD. ............... 150,000 723,579
Hong Kong Land Holdings......... 595,831 1,102,287
Hutchison Whampoa LTD. ......... 260,000 1,583,726
Maanshan Iron and Steel......... 710,000 99,167
Shanghai Petrochemical Co.
LTD. ......................... 1,060,000 305,015
Swire Pacific LTD. Cl-A......... 92,000 713,879
Wharf Holdings.................. 383,000 1,275,445
Yizheng Chemical Fibre Co. ..... 822,000 184,972
-----------
7,823,329
-----------
ITALY -- 1.8%
Assicurazioni Generali.......... 30,756 744,456
Banca Fideuram SPA.............. 126,770 146,442
Danieli & Co. .................. 14,954 40,480
Danieli & Co. (Warrants)*....... 875 457
Ente Nazionale
Idrocarburi (ENI)*............ 49,000 171,199
Instituto Mobiliare Italiano.... 13,000 81,838
Instituto National
Assicurazioni................. 57,480 76,170
Italgas Ord. ................... 61,936 188,323
Mondadori (Arnoldo)
Editore SPA................... 13,399 116,066
Ras Ord. ....................... 2,410 27,377
Rinascente...................... 22,800 137,934
<CAPTION>
SHARES VALUE
--------- ------------
<S> <C> <C>
Sasib di Risp................... 47,260 $ 115,435
Sasib SPA....................... 13,598 59,922
SME (Meridionale di
Finanziara)................... 36,752 75,077
Stet di Risp.................... 73,220 149,344
Stet Ord. ...................... 156,480 442,301
Stet (Warrants)*................ 1,000 14,920
Telecom Italia Mobile*.......... 199,773 351,505
Telecom Italia SPA.............. 268,453 417,425
Telecom Italia SPA di Risp...... 100,718 123,131
Union Cem March Emil SPA*....... 8,642 46,515
-----------
3,526,317
-----------
JAPAN -- 21.8%
Advantest Co. LTD. ............. 4,000 205,188
Alps Electric Co. LTD. ......... 31,000 357,046
Amada Co. ...................... 65,000 641,696
Canon, Inc. .................... 72,000 1,303,136
Citizen Watch Co. .............. 34,000 259,969
Dai Ichi Seiyaku................ 59,000 839,431
Dai Nippon Screen
Manufacturing................. 57,000 499,826
Daifuku Co. LTD. ............... 14,000 197,832
Daiwa House Industry Co. ....... 69,000 1,135,308
DDI Corp. ...................... 45 348,432
East Japan Railway Co. ......... 185 898,858
Fanuc Co. ...................... 16,000 692,218
Hitachi LTD. ................... 100,000 1,006,581
Hitachi Zosen Corp. ............ 96,000 497,096
Honda Motor Co. LTD. ........... 23,000 474,158
Inax............................ 32,000 303,523
Ishihara Sangyo Kaisha LTD.*.... 36,000 116,725
Ito-Yokado Co. LTD. ............ 21,000 1,292,683
Kokuyo Co. LTD. ................ 28,000 650,407
Komatsu LTD. ................... 77,000 633,469
Komori Corp. ................... 22,000 553,620
Kumagai Gumi Co. ............... 60,000 240,999
Kuraray Co. LTD. ............... 59,000 645,277
Kyocera......................... 22,000 1,633,178
Makita Electric Corp. .......... 43,000 686,702
Matsushita Electric Industrial
Co. .......................... 65,000 1,056,911
Mauri Co. ...................... 49,000 1,019,648
Mitsubishi Corp. ............... 42,000 516,260
Mitsubishi Heavy Industry....... 183,000 1,457,695
Mitsubishi Paper Mills LTD. .... 44,000 264,460
Mitsui Fudosan.................. 95,000 1,167,731
Mitsui Petrochemical
Industries.................... 29,000 237,176
Murata Manufacturing Co. ....... 18,000 662,021
National House Industrial
Co. .......................... 18,000 329,268
NEC Corp. ...................... 104,000 1,268,293
Nippon Hodo..................... 17,000 287,940
Nippon Steel Corp. ............. 350,000 1,199,187
Nippon Telegraph & Telephone
Corp. ........................ 84 678,862
</TABLE>
<PAGE>
AMERICAN SKANDIA TRUST
T. ROWE PRICE INTERNATIONAL EQUITY PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
--------- ------------
<S> <C> <C>
JAPAN (CONT'D)
Nippondenso Co. LTD. ........... 71,000 $ 1,326,268
Nomura Securities Co. LTD. ..... 67,000 1,459,059
Pioneer Electronic Corp. ....... 33,000 603,659
Sangetsu Co. ................... 11,000 276,810
Sankyo Pharmaceuticals.......... 41,000 920,635
Sega Enterprises................ 6,700 369,628
Sekisui Chemical Co. LTD. ...... 74,000 1,088,657
Sekisui House................... 53,000 677,120
Seven Eleven Japan Co. LTD. .... 7,000 493,225
Sharp Corp. .................... 70,000 1,117,886
Shin-Etsu Chemical Co. ......... 23,000 476,384
Sony Corp. ..................... 18,400 1,102,362
Sumitomo Corp. ................. 108,000 1,097,561
Sumitomo Electric Industries.... 102,000 1,224,158
Sumitomo Forestry Co. LTD. ..... 38,000 581,107
TDK Corp. ...................... 17,000 867,112
Teijin LTD. .................... 105,000 536,585
Tokio Marine & Fire
Insurance Co. ................ 31,000 405,052
Tokyo Electron LTD. ............ 12,000 464,576
Tokyo Steel Manufacturing....... 30,000 551,684
Toppan Printing Co. LTD. ....... 22,000 289,586
Yurtec Corp. ................... 21,750 381,025
-----------
42,568,949
-----------
KOREA -- 1.3%
Choung Bank Co. ................ 20,000 255,588
Hanil Bank...................... 11,000 126,533
Hanil Securities Co. ........... 10,060 120,036
Kookmin Bank*................... 10,739 209,356
Korea Electric Power Corp. ..... 12,600 554,256
Pohang Iron & Steel Co. ........ 6,030 436,631
Samsung Co. LTD. (New)*......... 60 10,906
Samsung Electronics Co.*........ 1,940 355,155
Samsung Electronics Co.
(New)*........................ 205 37,263
Seoul Bank...................... 16,000 139,808
Yukong.......................... 5,471 190,370
Yukong LTD. (1st New)*.......... 284 9,845
-----------
2,445,747
-----------
MALAYSIA -- 2.8%
Affin Holdings Berhad........... 463,000 893,400
Affin Holdings (Warrants)*...... 72,600 47,744
Berjaya Sports Toto............. 158,000 367,095
Commerce Asset Holdings Berhad
(Warrants)*................... 74,000 190,872
MBF Capital Berhad.............. 251,000 254,025
Multi-Purpose Holdings BHD...... 383,000 561,062
Renong Berhad................... 329,000 487,139
<CAPTION>
SHARES VALUE
--------- ------------
<S> <C> <C>
Technology Resources
Industry*..................... 408,000 $ 1,205,009
United Engineers................ 231,000 1,473,655
-----------
5,480,001
-----------
MEXICO -- 0.6%
Cemex SA Cl-B................... 39,999 143,633
Fomento Ecenomico Mexicano SA... 58,849 136,041
Gruma SA de CV BCP*............. 22,333 63,809
Grupo Embotellador de Mexico
Cl-B NPV*..................... 10,080 4,385
Grupo Embotellador de Mexico SA
de CV Cl-B/D/L*............... 148,677 249,082
Grupo Financiero Banamex Cl-B... 90,270 150,528
Grupo Financiero Banamex Cl-L... 736 1,082
Grupo Financiero
Bancomer Cl-L*................ 1,725 444
Grupo Industrial Maseca SA de CV
Cl-B.......................... 156,955 95,804
Grupo Modelo Cl-C............... 12,116 56,489
Grupo Sidek SA de CV*........... 36,774 15,760
Kimberly-Clark de Mexico SA..... 12,254 185,242
-----------
1,102,299
-----------
NETHERLANDS -- 8.9%
ABN AMRO Holdings NV............ 11,880 541,178
Ahold NV........................ 9,340 381,236
AKZO Nobel NV................... 1,902 219,986
CSM NV.......................... 19,284 841,204
Elsevier NV..................... 246,049 3,281,267
Fortis Amev NV.................. 7,927 531,035
Hagemeyer NV.................... 4,242 221,524
ING Groep NV.................... 18,540 1,238,542
Koninklijke Nederland........... 13,138 477,314
Nutricia Verenigde Bedrijven.... 3,480 281,488
Polygram NV..................... 19,217 1,020,308
Royal Dutch Petroleum Co. ...... 20,836 2,911,093
Unilever PLC.................... 7,150 1,004,752
Wolters Kluwer.................. 47,754 4,517,391
-----------
17,468,318
-----------
NEW ZEALAND -- 0.6%
Air New Zealand LTD. ........... 57,000 193,638
Carter Holt Harvey LTD. ........ 78,000 168,159
Fernz Corp. .................... 43,100 113,755
Fletcher Challenge LTD. ........ 49,000 113,001
Fletcher Challenge
Forest Division............... 121,952 173,683
Telecom Corp. of New Zealand
LTD. ......................... 78,000 336,319
-----------
1,098,555
-----------
</TABLE>
<PAGE>
AMERICAN SKANDIA TRUST
T. ROWE PRICE INTERNATIONAL EQUITY PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
--------- ------------
<S> <C> <C>
NORWAY -- 1.4%
Bergesen Cl-A Ord. ............. 5,170 $ 102,942
Kvaerner AS..................... 6,050 214,159
Norsk Hydro AS.................. 30,390 1,277,456
Orkla Cl-A...................... 19,470 969,192
Saga Petroleum.................. 8,260 103,119
-----------
2,666,868
-----------
PERU -- 0.0%
Telefonica de Peru.............. 26,690 56,563
-----------
PORTUGAL -- 0.3%
Jeronimo Martins................ 11,070 614,589
-----------
SINGAPORE -- 2.5%
DBS Land........................ 101,000 341,380
Development Bank Singapore
(Foreign)..................... 30,000 373,356
Far East-Levingston Shipbuilding
LTD. ......................... 30,000 141,069
Jurong Shipyard................. 33,000 254,349
Keppel Corp. ................... 20,000 178,193
Neptune Orient Lines............ 76,000 85,448
Overseas Union Bank
LTD. (Foreign)................ 81,000 558,443
Overseas Union Enterprises...... 50,000 252,793
Sembawang Shipyard.............. 47,000 260,890
Singapore International
Airlines...................... 28,000 261,349
Singapore Land.................. 106,000 685,829
Singapore Press Holdings
(Foreign)..................... 21,000 371,235
Total Access Communications*.... 12,000 78,000
United Industrial Corp. ........ 174,000 171,022
United Overseas Bank LTD. ...... 74,400 715,486
United Overseas Bank LTD.
(Warrants)*................... 27,092 109,196
-----------
4,838,038
-----------
SPAIN -- 2.2%
Banco de Santander SA........... 11,626 585,870
Banco Popular Espanol........... 1,600 296,169
Centros Comerciales Pryca
Ord. ......................... 20,089 423,058
Empresa Nacional de
Electridad.................... 18,678 1,061,794
Fomentos de Construcciones
y Contra...................... 2,730 210,087
Gas Natural SDG................. 3,088 482,939
Iberdrola SA.................... 46,483 426,944
Repsol SA....................... 17,044 560,612
Sevillana de Electricidad....... 28,475 221,957
-----------
4,269,430
-----------
SWEDEN -- 2.0%
AGA AB Cl-B..................... 2,500 31,432
ASEA AB Cl-A.................... 3,790 367,906
Astra AB Cl-B................... 40,300 1,595,139
<CAPTION>
SHARES VALUE
--------- ------------
<S> <C> <C>
Atlas Copco AB Cl-B............. 21,740 $ 327,188
Electrolux Co. ................. 13,060 535,608
Esselte......................... 5,800 86,854
Hennes & Mauritz AB Cl-B........ 4,870 271,187
Sandvik AB Cl-A................. 3,610 63,295
Sandvik AB Cl-B................. 22,210 389,415
Scribona Cl-B................... 5,500 58,770
Stora Kopparbergs Cl-B.......... 16,600 198,615
-----------
3,925,409
-----------
SWITZERLAND -- 3.9%
BBC Brown Boveri AG-Bearer...... 1,079 1,253,672
Ciba Geigy AG................... 570 501,647
CS Holdings..................... 3,860 395,773
Nestle SA....................... 1,478 1,635,245
Roche Holding AG-Genussshein.... 215 1,701,097
Sandoz AG....................... 997 912,886
Swiss Bank Corp. ............... 1,560 637,094
Union Bank of Switzerland....... 530 574,439
-----------
7,611,853
-----------
THAILAND -- 0.9%
Advanced Information Services
(Foreign)..................... 10,400 182,485
Advanced Information Services
(Local)....................... 8,000 141,644
Bangkok Bank PLC................ 32,500 394,800
Bank of Ayudhya LTD. ........... 31,600 176,880
Land and House Public Co. ...... 4,400 72,314
Siam Cement Co. LTD. ........... 3,000 166,256
Siam Commercial Bank............ 22,900 301,818
Thai Farmer Bank (Foreign)...... 24,200 244,017
-----------
1,680,214
-----------
UNITED KINGDOM -- 14.4%
Abbey National PLC.............. 138,000 1,362,899
Argos PLC....................... 85,160 788,151
Argyll Group PLC................ 121,660 642,324
Asda Group PLC.................. 377,450 647,663
British Airports Authorities
PLC........................... 20,440 153,940
British Gas PLC................. 86,210 340,031
British Petroleum Co. PLC....... 53,840 450,631
Cable & Wireless PLC............ 138,000 985,745
Cadbury Schweppes PLC........... 117,456 970,319
Caradon PLC..................... 181,700 551,606
Coats Viyella PLC............... 74,270 201,827
Compass Group PLC............... 56,000 425,665
East Midlands Electricity PLC... 54,385 563,291
Electrocomponents PLC........... 35,000 195,658
GKN PLC......................... 13,000 157,256
Glaxo Wellcome PLC.............. 85,000 1,207,724
Grand Metropolitan Ord. PLC..... 155,300 1,118,966
Guinness Ord. .................. 124,640 917,410
</TABLE>
<PAGE>
AMERICAN SKANDIA TRUST
T. ROWE PRICE INTERNATIONAL EQUITY PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
--------- ------------
<S> <C> <C>
UNITED KINGDOM (CONT'D)
Heywood Williams Group Ord. .... 32,010 $ 122,278
Hillsdown Holdings PLC.......... 55,160 144,757
Kingfisher PLC.................. 127,950 1,076,880
Ladbroke Group PLC.............. 103,000 234,316
Laing (John) PLC Cl-A NV........ 70,000 301,096
London Electricity Ord. PLC..... 64,770 577,316
National Grid PLC*.............. 94,011 291,239
National Westminster Ord. PLC... 228,670 2,304,525
Rank Organisation PLC Reg'd. ... 113,120 818,565
Reed International PLC.......... 137,370 2,094,744
Rolls-Royce PLC................. 60,140 176,503
RTZ Corp. Ord. PLC Reg'd. ...... 60,600 880,798
Sears Holdings PLC.............. 44,490 71,849
Shell Transport & Trading Co.
Ord. PLC...................... 116,000 1,534,706
Smith David Holdings PLC........ 97,900 431,746
Smithkline Beecham (Units)...... 220,220 2,400,609
Spring Ram Corp. PLC............ 12,000 5,031
T & N Corp. PLC................. 133,680 336,286
Tesco PLC....................... 102,000 470,418
Tomkins Ord. PLC................ 283,220 1,240,225
United News and Media PLC....... 105,470 908,975
-----------
28,103,968
-----------
TOTAL FOREIGN STOCKS
(COST $153,238,339)............... 166,184,376
-----------
AMERICAN DEPOSITORY RECEIPTS -- 2.8%
A.F.P. Provida SA............... 1,152 31,824
Banco de Galicia
Buenos Aires SA............... 6,207 128,019
Buenos Aires Embotelladora...... 1,535 31,659
Cemex SA*....................... 50,068 338,741
Cervecerias Unidas (CCU)........ 3,628 84,351
Cesp-Cia Energetica
de Sao Paolo*................. 5,020 43,835
Chilectra Metropolitana SA...... 3,196 154,450
Chilgener SA.................... 4,371 109,275
Cifra SA de CV NPV*............. 432,174 454,215
Companhia Energetica de Minas
Geras......................... 6,068 134,230
Compania de Telefonos
de Chile SA................... 2,020 167,408
Electrobras-Centrais Eletr
Bras.......................... 16,358 221,324
<CAPTION>
SHARES VALUE
--------- ------------
<S> <C> <C>
Empresa National
de Electridad SA.............. 14,096 $ 320,684
Enersis SA...................... 5,314 151,449
Enron Global Power & Pipeline... 1,356 33,731
Huaneng Power
International, Inc.*.......... 35,000 503,125
Panamerica Beverages, Inc. ..... 7,120 227,840
Repsol SA....................... 110 3,616
Sociedad Comercial del Plata*... 1,640 43,468
Telebras........................ 23,784 1,126,767
Telecome Argentina Cl-B......... 941 44,815
Telecomunicacoes Brasileiras
SA............................ 217 10,449
Telefonica de Argentina......... 14,780 402,755
Telekomunikasi Indonesia*....... 16,000 404,000
Uniao Siderurgicas de Minas
Gerais SA..................... 23,370 189,951
-----------
TOTAL AMERICAN DEPOSITORY RECEIPTS
(COST $6,564,517)................. 5,361,981
-----------
AMERICAN DEPOSITORY SECURITIES -- 0.6%
Banco Frances del Rio de la
Plata......................... 2,643 71,031
Sociedad Anoni.................. 13,600 294,100
Telefonos de Mexico SA.......... 22,584 719,865
Transportadora de Gas del Sur... 2,632 33,887
Usinas Siderurgicas de Minas
Gerais SA..................... 11,100 90,221
-----------
TOTAL AMERICAN DEPOSITORY SECURITIES
(COST $1,196,437)................. 1,209,104
-----------
GLOBAL DEPOSITORY RECEIPTS -- 0.4%
Grupo Televisia................. 12,639 284,378
Samsung Electronics def
del (New)*.................... 92 8,878
Samsung Electronics def del*.... 62 5,983
Samsung Electronics N/V*........ 6,000 360,000
Samsung Electronics Rfd.*....... 593 35,580
Samsung Electronics
Rfd. (New)*................... 11 1,062
-----------
TOTAL GLOBAL DEPOSITORY RECEIPTS
(COST $837,943)................... 695,881
-----------
GLOBAL DEPOSITORY SECURITIES -- 0.0%
Grupo Financiero Bancomer C1-B
(COST $62,422)................ 2,330 13,980
-----------
</TABLE>
<PAGE>
AMERICAN SKANDIA TRUST
T. ROWE PRICE INTERNATIONAL EQUITY PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
IN LOCAL
CURRENCY****
MATURITY (000) VALUE
--------- ------------ ------------
<S> <C> <C> <C>
FOREIGN BONDS -- 0.0%
BELGIUM -- 0.0%
Kredietbank NV
5.75%.............. 11/30/03 900 $ 32,749
------------
ITALY -- 0.0%
Danieli & Co.
7.25%.............. 01/01/00 5,250 2,935
------------
TOTAL FOREIGN BONDS
(COST $29,798)................... 35,684
------------
TOTAL INVESTMENTS
(COST $161,929,456**) -- 88.7%... 173,501,006
OTHER ASSETS LESS
LIABILITIES -- 11.3%............. 22,166,287
------------
NET ASSETS -- 100.0%............... $195,667,293
===========
<CAPTION>
<S> <C> <C> <C>
NOTES TO SCHEDULE OF INVESTMENTS:
The aggregate unrealized appreciation (depreciation) on a tax
basis is as follows:
Gross appreciation........................... $19,515,366
Gross depreciation........................... (8,309,983)
----------
Net appreciation............................. $11,205,383
----------
----------
</TABLE>
- --------------------------------------------------------------------------------
Unless otherwise noted, all foreign stocks are common stock.
* Non-income producing securities.
** Cost for Federal income tax purposes was $162,295,623.
*** Closed-end funds.
**** Currency of countries indicated.
See Notes to Financial Statements.
<PAGE>
AMERICAN SKANDIA TRUST
AST SCUDDER INTERNATIONAL BOND PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
IN LOCAL
CURRENCY**
MATURITY (000) VALUE
--------- ---------- -----------
<S> <C> <C> <C>
FOREIGN BONDS -- 87.6%
ARGENTINA -- 0.6%
Republic of Argentina
FRB Cl-L
6.81%............... 03/31/05 375 $ 265,547
-----------
AUSTRALIA -- 7.4%
Australian Government
10.00%.............. 10/15/07 1,100 920,936
New South Wales
Treasury Corp.
6.50%............... 05/01/06 2,100 1,354,391
Queensland Treasury
Corp.
8.00%............... 08/14/01 1,485 1,106,408
-----------
3,381,735
-----------
BRAZIL -- 0.6%
Brazil DCB
7.31%............... 04/15/12 500 286,250
-----------
CANADA -- 2.2%
Canadian Government
8.50%............... 03/01/00 580 456,042
8.75%............... 12/01/05 525 429,752
Province of Ontario
9.00%............... 09/15/04 140 113,886
-----------
999,680
-----------
DENMARK -- 4.3%
Denmark Government
9.00%............... 11/15/00 4,400 879,081
8.00%............... 05/15/03 4,675 892,352
7.00%............... 12/15/04 1,000 178,795
-----------
1,950,228
-----------
EUROPEAN CURRENCY UNIT -- 2.0%
Council of Europe
9.00%............... 11/14/01 625 890,100
-----------
FRANCE -- 6.9%
Credit Local de France
8.88%............... 06/10/02 2,200 505,921
France O.A.T.
5.50%............... 04/25/04 3,200 610,924
7.25%............... 04/25/06 3,400 723,868
Republic of Portugal
7.70%............... 06/07/05 2,500 537,583
Societe Nationale
de Chemins XW
7.75%............... 03/01/02 3,600 784,686
-----------
3,162,982
-----------
GERMANY -- 14.8%
Bundesobligation
7.00%............... 01/13/00 1,400 1,058,249
Deutsche Finance BV
6.00%............... 11/11/03 450 318,156
General Electric
Capital Corp.
7.25%............... 02/03/00 1,580 1,165,556
<CAPTION>
PRINCIPAL
IN LOCAL
CURRENCY**
MATURITY (000) VALUE
--------- ---------- -----------
<S> <C> <C> <C>
German Government
6.50%............... 07/15/03 1,200 $ 870,674
Inter-America
Development Bank
7.00%............... 06/08/05 1,100 806,132
Republic of Austria
8.00%............... 06/17/02 2,000 1,553,479
Republic of Finland
5.50%............... 02/09/01 1,400 983,963
_________
6,756,209
---------
ITALY -- 9.7%
Eurofima
11.13%.............. 02/02/00 1,950,000 1,264,400
European Bank
Reconstruction &
Development
9.75%............... 07/28/00 800,000 496,695
European Investment
Bank
10.15%.............. 07/06/98 1,700,000 1,075,543
Italian Government
10.50%.............. 04/15/98 150,000 95,071
8.50%............... 01/01/99 865,000 524,391
8.50%............... 01/01/04 1,720,000 963,785
-----------
4,419,885
-----------
JAPAN -- 12.5%
Asian Development Bank
3.13%............... 06/29/05 85,000 822,687
Export-Import Bank of
Japan
4.38%............... 10/01/03 136,000 1,446,283
Japan Development Bank
6.50%............... 09/20/01 120,000 1,417,683
Republic of Austria
6.25%............... 10/16/03 65,000 777,741
World Bank Notes
5.25%............... 03/20/02 110,000 1,236,994
5,701,388
NETHERLANDS -- 3.3%
Netherland Government
7.75%............... 01/15/00 700 480,931
6.50%............... 04/15/03 1,600 1,045,429
-----------
1,526,360
-----------
NEW ZEALAND -- 4.7%
Electric Corp. of
New Zealand
10.00%.............. 10/15/01 900 649,832
New Zealand Government
8.00%............... 11/15/06 2,155 1,490,454
-----------
2,140,286
-----------
</TABLE>
<PAGE>
AMERICAN SKANDIA TRUST
AST SCUDDER INTERNATIONAL BOND PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
IN LOCAL
CURRENCY**
MATURITY (000) VALUE
--------- ---------- -----------
<S> <C> <C> <C>
POLAND -- 1.9%
Republic of Poland
Discount FRN
7.13%............... 10/27/24 150 $ 113,250
Republic of Poland PDI
Variable Rate
3.75%............... 10/27/14 1,150 744,625
-----------
857,875
-----------
SOUTH AFRICA -- 1.0%
Republic of South
Africa
12.00%.............. 02/28/05 1,790 435,582
-----------
SWEDEN -- 7.0%
Kingdom of Sweden
Bonds
6.00%............... 02/09/05 4,400 559,726
Swedish Government
11.00%.............. 01/21/99 4,000 647,242
10.25%.............. 05/05/00 1,700 274,400
10.25%.............. 05/05/03 10,500 1,732,512
-----------
3,213,880
-----------
UNITED KINGDOM -- 8.7%
Abbey National
Treasury
6.00%............... 08/10/99 995 1,495,830
Barclays Bank PLC
6.50%............... 02/16/04 925 1,323,265
European Investment
Bank
9.50%............... 12/09/09 150 265,300
Government of United
Kingdom
9.50%............... 01/15/99 345 579,594
International Bank
Reconstructive &
Development
9.25%............... 07/20/07 100 171,486
United Kingdom
Treasury
6.75%............... 11/26/04 90 133,816
-----------
3,969,291
-----------
TOTAL FOREIGN BONDS
(COST $39,064,161)...... 39,957,278
-----------
<CAPTION>
PAR
(000)
----------
<S> <C> <C> <C>
SOVEREIGN ISSUES -- 0.8%
Mexican States Cl-A
6.77%
(COST $358,228)........... 12/31/19 $ 500 360,938
-----------
<CAPTION>
SHARES
----------
<S> <C> <C> <C>
FOREIGN STOCKS -- 0.0%
MEXICO
Mexican Value Recovery
Cl-A (Rights)*
(COST $0)......... 769,000 0
-----------
<CAPTION>
VALUE
-----------
<S> <C> <C> <C>
OPTIONS -- 0.0%
Written Call Option on British
Pounds, Strike Price GBP 1.54,
Expire 01/04/96................ $ (14,418)
Written Call Option on German
Deutschemark, Strike Price DEM
1.33, Expire 01/26/96.......... 0
Written Call Option on Italian
Lira, Strike Price ITL 1590.75,
Expire 01/18/96................ (1,087)
Written Call Option on Swedish
Krona, Strike Price SEK 6.64,
Expire 01/09/96................ (5,716)
Written Call Option on Swedish
Krona, Strike Price SEK 6.68,
Expire 01/08/96................ (452)
Put Option on Australian Dollar,
Strike Price AUD .72, Expire
02/01/96....................... 1,147
Put Option on German
Deutschemark, Strike Price DEM
1.45, Expire 01/26/96.......... 11,163
Put Option on French Francs,
Strike Price FRF 5.00, Expire
02/01/96....................... 2,048
Put Option on French Francs,
Strike Price FRF 5.05, Expire
03/01/96....................... 4,480
Put Option on French Francs,
Strike Price FRF 5.22, Expire
01/12/96....................... 100
Put Option on Japanese Yen,
Strike Price JPY 103.80, Expire
01/29/96....................... 12,503
Written Put Option on Japanese
Yen, Strike Price JPY 107.00,
Expire 01/29/96................ (2,482)
Put Option on New Zealand Dollar,
Strike Price NZD .64, Expire
02/01/96....................... 769
-----------
TOTAL OPTIONS (COST $36,393)......... 8,055
-----------
TOTAL INVESTMENTS
(COST $39,458,782*) -- 88.4%....... 40,326,271
OTHER ASSETS LESS
LIABILITIES -- 11.6%............... 5,275,704
-----------
NET ASSETS -- 100.0%................. $45,601,975
===========
NOTES TO SCHEDULE OF INVESTMENTS:
The aggregate unrealized appreciation (depreciation) on a tax
basis is as follows:
Gross appreciation........................... $1,164,210
Gross depreciation........................... (297,905)
---------
Net appreciation............................. $ 866,305
---------
---------
</TABLE>
<PAGE>
AMERICAN SKANDIA TRUST
AST SCUDDER INTERNATIONAL BOND PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
Foreign currency exchange contracts outstanding at December 31, 1995:
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT UNREALIZED
COVERED EXPIRATION APPRECIATION/
TYPE BY CONTRACT MONTH (DEPRECIATION)
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------
(Dollar Based)
Buy AUD 1,541,039 01/96 $ 10,255
Sell AUD 3,853,826 01/96 10,943
Buy DEM 428,986 01/96 (391)
Buy DEM 608,326 02/96 143
Sell DEM 428,986 01/96 5,877
Sell DEM 608,326 02/96 1,678
Buy ECU 247,601 02/96 (6,122)
Sell ECU 247,601 02/96 4,215
Buy FRF 5,340,866 01/96 (731)
Sell FRF 5,340,866 01/96 4,807
Buy JPN 142,153,246 02/96 (17,778)
Sell JPN 87,630,868 02/96 12,252
Buy UK 216,353 01/96 103
Sell UK 216,353 01/96 2,073
Buy ZAR 1,647,162 01/96 4,552
</TABLE>
<TABLE>
<CAPTION>
UNREALIZED
EXPIRATION APPRECIATION/
BUY SELL MONTH (DEPRECIATION)
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------
DEM 1,555,476 ECU 856,152 01/96 $ (9,710)
DEM 1,621,588 UK 736,453 01/96 (11,879)
ECU 856,152 DEM 1,567,372 01/96 1,405
ECU 383,500 JPN 49,072,660 01/96 14,721
JPN 112,313,159 ECU 855,467 01/96 (5,020)
JPN 76,375,863 FRF 3,732,571 01/96 (21,697)
JPN 119,012,704 UK 749,674 01/96 (9,727)
UK 744,752 DEM 1,656,844 01/96 156
--------------
$ (9,875)
=============
</TABLE>
COUNTRY/CURRENCY ABBREVIATIONS
- ----------------------------------------------------------
<TABLE>
<S> <C>
AUD - Australia/Australian JPN - Japan/Japanese Yen
Dollar UK - United Kingdom/British
DEM - Germany/German Pound
Deutschemark ZAR - South Africa/South
ECU - European Currency Unit African Rand
FRF - France/French Franc
</TABLE>
- --------------------------------------------------------------------------------
* Cost for Federal income tax purposes was $39,459,966.
** Currency of countries indicated.
See Notes to Financial Statements.
<PAGE>
AMERICAN SKANDIA TRUST
BERGER CAPITAL GROWTH PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
-------- -----------
<S> <C> <C>
COMMON STOCK -- 82.3%
AEROSPACE -- 1.5%
Boeing Co. .................... 9,000 $ 705,375
-----------
AUTOMOBILES -- 1.5%
Chrysler Corp. ................ 12,000 664,500
-----------
AUTOMOTIVE PARTS-EQUIPMENT -- 0.6%
Lear Seating Corp.*............ 10,000 290,000
-----------
BIOPHARMACEUTICALS -- 2.9%
Amgen, Inc.*................... 14,000 831,250
Curative Technology, Inc.*..... 35,000 498,750
-----------
1,330,000
-----------
BUSINESS SERVICES -- 0.8%
Paging Network, Inc.*.......... 15,000 365,625
-----------
COMMUNICATIONS -- 2.8%
GTECH Holdings Group*.......... 12,000 312,000
Micro Warehouse, Inc.*......... 11,000 475,750
Western Atlas, Inc.*........... 10,000 505,000
-----------
1,292,750
-----------
COMPUTER SERVICES &
SOFTWARE -- 4.2%
American Online, Inc. ......... 10,000 375,000
Bay Networks, Inc. ............ 13,500 555,187
First Data Corp. .............. 5,550 371,156
Oracle Systems Corp.*.......... 10,000 423,750
Parametric Technology Corp.*... 3,000 199,500
-----------
1,924,593
-----------
COMPUTERS -- 2.4%
Cisco Systems, Inc.*........... 7,500 559,688
EMC Corp.*..................... 35,000 538,125
-----------
1,097,813
-----------
DRUGS -- 2.9%
Merck & Co., Inc. ............. 10,000 657,500
Watson Pharmaceuticals,
Inc.*........................ 14,000 686,000
-----------
1,343,500
-----------
ELECTRICAL EQUIPMENT -- 0.7%
Sanmina Holdings*.............. 6,500 337,188
-----------
ELECTRONIC COMPONENTS -- 4.0%
Elsag Bailey Process NV*....... 20,000 537,500
Intel Corp. ................... 9,000 510,750
Solectron Corp.*............... 18,000 794,250
-----------
1,842,500
-----------
ELECTRONICS -- 2.9%
Dovatron International,
Inc.*........................ 8,000 270,000
Input Output, Inc.*............ 10,000 577,500
Motorola, Inc. ................ 3,000 171,000
SCI Systems, Inc.*............. 9,000 279,000
-----------
1,297,500
-----------
<CAPTION>
SHARES VALUE
-------- -----------
<S> <C> <C>
ENVIRONMENTAL INSTRUMENTS -- 1.4%
Thermo Electron Corp.*......... 12,000 $ 624,000
-----------
FINANCIAL -- 0.5%
First USA, Inc. ............... 5,000 221,875
-----------
FINANCIAL SERVICES -- 1.8%
H&R Block, Inc. ............... 13,000 526,500
Waterhouse Investment
Services, Inc. .............. 12,500 309,375
-----------
835,875
-----------
HEALTHCARE -- 7.7%
Health Management Association,
Inc. C1-A.................... 22,500 587,812
Healthsouth Rehabilitation
Corp.*....................... 20,000 582,500
Horizon Healthcare Corp.*...... 25,000 631,250
Oxford Health Plans, Inc. ..... 7,500 554,063
Total Renal Care Holdings*..... 18,000 531,000
United Healthcare Corp......... 10,000 655,000
-----------
3,541,625
-----------
HOSPITAL-INFORMATION SYSTEM -- 1.3%
HBO & Co. ..................... 8,000 613,000
-----------
INSURANCE -- 3.6%
Conseco, Inc. ................. 10,000 626,250
Tidewater, Inc. ............... 18,000 567,000
USF&G Corp. ................... 28,000 472,500
-----------
1,665,750
-----------
MACHINERY-MINING -- 1.0%
Case Corp. .................... 10,000 457,500
-----------
MANUFACTURING -- 2.4%
Black & Decker Corp. .......... 15,000 528,750
Eastman Kodak Co. ............. 8,500 569,500
-----------
1,098,250
-----------
MEDIA -- 0.8%
New World Communications, Inc.
Cl-A*........................ 22,000 385,000
-----------
MEDICAL & MEDICAL SERVICES -- 6.4%
Apria Healthcare Group,
Inc. ........................ 20,000 565,000
Columbia Healthcare Corp. ..... 12,000 609,000
Conmed Corp. .................. 21,000 525,000
IDEXX Laboratories, Inc. ...... 15,000 705,000
Lincare Holdings, Inc.*........ 22,000 550,000
-----------
2,954,000
-----------
MEDICAL PRODUCTS -- 4.0%
Boston Scientific Corp.*....... 9,000 441,000
Guidant........................ 17,000 718,250
Lunar Corp. ................... 24,000 660,000
-----------
1,819,250
-----------
</TABLE>
<PAGE>
AMERICAN SKANDIA TRUST
BERGER CAPITAL GROWTH PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
-------- -----------
<S> <C> <C>
OFFICE EQUIPMENT -- 2.2%
Officemax, Inc.*............... 14,000 $ 313,250
Staples, Inc.*................. 13,000 316,875
Viking Office Products,
Inc.*........................ 8,000 372,000
-----------
1,002,125
-----------
OIL & GAS-EQUIPMENT & SERVICES -- 7.9%
Baker Hughes, Inc. ............ 25,000 609,375
BJ Services Co.*............... 25,000 725,000
Dresser Industries, Inc. ...... 20,000 487,500
Halliburton Co. ............... 12,000 607,500
Schlumberger LTD. ............. 8,000 554,000
Sonat Offshore Drilling,
Inc. ........................ 15,000 671,250
-----------
3,654,625
-----------
PHARMACEUTICALS -- 3.1%
Biochem Pharmaceutical,
Inc.*........................ 20,000 802,500
Pfizer, Inc. .................. 10,000 630,000
-----------
1,432,500
-----------
PUBLISHING -- 0.7%
Time Warner, Inc. ............. 8,000 303,000
-----------
RECREATIONAL -- 0.5%
Mirage Resorts, Inc.*.......... 7,000 241,500
-----------
RETAIL -- 2.9%
Federated Department Stores,
Inc.*........................ 15,000 412,500
General Nutrition Companies,
Inc.*........................ 20,000 460,000
Nine West Group, Inc. ......... 12,000 450,000
-----------
1,322,500
-----------
RETAIL MAIL ORDER -- 1.5%
CUC International, Inc. ....... 20,000 682,500
-----------
TELECOMMUNICATIONS -- 3.3%
ECI Telecom LTD. .............. 25,000 570,312
Intelcom Group, Inc.*.......... 20,000 247,500
Worldcom, Inc.*................ 20,000 705,000
-----------
1,522,812
-----------
TEXTILES -- 1.2%
Tommy Hilfiger Corp.*.......... 13,000 550,875
-----------
TRANSPORTATION -- 0.9%
Western Pacific Airlines,
Inc.*........................ 25,000 418,750
-----------
TOTAL COMMON STOCK
(COST $33,195,213)............... 37,838,656
-----------
<CAPTION>
SHARES VALUE
-------- -----------
<S> <C> <C>
AMERICAN DEPOSITORY RECEIPTS -- 5.8%
ELECTRONICS -- 1.3%
Nokia Corp. C1-A .............. 16,000 $ 622,000
-----------
MANUFACTURING -- 1.3%
Luxottica Group SPA............ 10,000 585,000
-----------
OIL & GAS -- 0.6%
Petroleum Geo Services*........ 12,000 300,000
-----------
PHARMACEUTICALS -- 0.8%
Elan Corp. PLC*................ 7,500 364,687
-----------
PUBLISHING -- 0.6%
News Corp. LTD. ............... 12,500 267,188
-----------
RETAIL -- 1.2%
Fila Holding SPA............... 12,000 546,000
-----------
TOTAL AMERICAN DEPOSITORY RECEIPTS
(COST $2,432,529)................ 2,684,875
-----------
SHORT TERM INVESTMENTS --
MONEY MARKET FUNDS -- 4.2%
Temporary Investment Cash
Fund......................... 963,888 963,888
Temporary Investment Fund...... 963,887 963,887
-----------
(COST $1,927,775)............ 1,927,775
-----------
</TABLE>
<TABLE>
<CAPTION>
PAR
MATURITY (000)
-------- -----------
<S> <C> <C> <C>
U.S. TREASURY BILLS -- 8.2%
5.28%
(COST
$3,779,491)..... 01/11/96 $ 3,785 3,779,491
-----------
TOTAL INVESTMENTS
(COST
$41,335,008**) -- 100.5%........ 46,230,797
LIABILITIES IN EXCESS OF
OTHER ASSETS -- (0.5)%.......... (252,037)
-----------
NET ASSETS -- 100.0%.............. $45,978,760
==========
NOTES TO SCHEDULE OF INVESTMENTS:
The aggregate unrealized appreciation (depreciation) on a tax
basis is as follows:
Gross appreciation.......................... $5,560,455
Gross depreciation.......................... (664,666)
---------
Net appreciation............................ $4,895,789
---------
---------
</TABLE>
- --------------------------------------------------------------------------------
* Non-income producing securities.
** Also cost for Federal income tax purposes.
See Notes to Financial Statements.
<PAGE>
AMERICAN SKANDIA TRUST
SELIGMAN HENDERSON INTERNATIONAL SMALL CAP PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------- -----------
<S> <C> <C>
FOREIGN STOCKS -- 85.3%
AUSTRALIA -- 1.1%
Futuris Corp. LTD. .............. 170,000 $ 166,952
Skilled Engineering Pty LTD. .... 55,000 139,945
-------
306,897
-------
AUSTRIA -- 1.5%
Bau Holding AG................... 2,200 118,730
Bau Holding AG -- Vorzug......... 8,350 313,953
-------
432,683
-------
BELGIUM -- 1.6%
D'ieteren Trading NV............. 5,550 468,152
-------
DENMARK -- 1.7%
Danske Traelast.................. 7,390 499,028
-------
FINLAND -- 2.9%
Lassila & Tikanoja Oy............ 6,800 254,922
Nokian Renkaat Oy................ 56,250 569,227
-------
824,149
-------
FRANCE -- 5.8%
Christian Dalloz*................ 120 24,992
Montupet......................... 4,433 488,784
Sylea............................ 7,255 524,404
Technip SA....................... 8,900 612,414
-------
1,650,594
-------
GERMANY -- 5.8%
APCOA Parking AG*................ 7,090 465,185
Hornbach Baumarkt AG............. 13,000 559,266
Jean Pascale AG.................. 8,080 247,887
Jean Pascale AG (Rights)*........ 2,020 59,155
Kiekert AG*...................... 5,200 309,999
-------
1,641,492
-------
HONG KONG -- 2.3%
Jardine International Motor
Holdings....................... 144,000 163,882
Manhattan Card Co. LTD. ......... 399,500 170,497
New Asia Realty & Trust Co.
Cl-A........................... 84,000 160,778
Yue Yuen Industrial Holding...... 582,000 154,299
-------
649,456
-------
INDONESIA -- 1.2%
PT Darya Varia Lab*.............. 38,000 69,163
PT Mulia Industrindo............. 67,000 187,128
Sorini Corp. .................... 16,000 80,805
-------
337,096
-------
ITALY -- 0.7%
Stayer SPA*...................... 123,200 201,649
-------
JAPAN -- 21.9%
Aiya Co. LTD. ................... 16,000 201,316
Asahi Diamond Industry Co.,
LTD. .......................... 16,000 224,545
Asatsu, Inc. .................... 4,100 172,222
Danto Corp. ..................... 16,000 198,219
<CAPTION>
SHARES VALUE
------- -----------
<S> <C> <C>
Danto Rfd. Corp. ................ 1,800 $ 22,300
Enplas Corp. .................... 5,000 93,399
Fujitsu Business Systems......... 7,000 184,282
Glory LTD. ...................... 6,000 220,674
Higashi Nihon House.............. 15,000 246,806
Hitachi Medical Corp. ........... 14,000 200,542
Hokushin......................... 17,000 202,381
Horiba Instruments............... 15,000 194,541
Ichiyoshi Securities............. 32,000 216,802
Iino Kaiun*...................... 31,000 176,423
Kentucky Fried Chicken........... 14,000 230,352
Mitsui Home Co. LTD. ............ 14,000 223,577
Nakayama Steel Works Ord. ....... 50,000 274,874
Namura Shipbuilding.............. 39,000 215,157
Nichicon......................... 13,000 191,250
Nippon Seiki..................... 14,000 168,022
Nittetsu Mining.................. 20,000 199,381
Rengo Co. LTD. .................. 39,000 260,453
Sagami Chain Co. LTD. ........... 12,000 198,606
Sanyo Special Steel Co. ......... 66,000 286,179
Sodick*.......................... 21,000 197,154
Sumitomo Sitix Corp. ............ 6,000 109,175
Tokai Senko K.K.*................ 8,000 31,823
Toyo Ink Manufacturing........... 50,000 246,806
Tsubakimoto Precision Products... 15,000 207,607
Tsudakoma........................ 35,000 220,190
Tsutsumi Jewelry Co. LTD. ....... 4,000 200,155
Xebio Co. LTD. .................. 6,000 211,963
-------
6,227,176
-------
MALAYSIA -- 0.6%
Asas Dunia Berhad................ 15,000 42,530
Chemical Co. of Malaysia
Berhad......................... 25,000 49,716
Sistem Televisyen Malaysia....... 26,000 93,684
-------
185,930
-------
NETHERLANDS -- 1.7%
Otra NV.......................... 28,080 498,710
-------
NORWAY -- 3.5%
Ekornes AS*...................... 42,000 457,965
Fokus Bank AS*................... 100,000 540,455
-------
998,420
-------
SINGAPORE -- 1.6%
Bukit Sembawang Estates LTD. .... 7,500 164,404
Comfort Group LTD. .............. 168,000 142,554
Courts LTD. ..................... 95,000 145,100
-------
452,058
-------
SWEDEN -- 9.5%
BT Industries AB................. 45,000 494,394
Cardo AB*........................ 16,400 304,824
</TABLE>
<PAGE>
AMERICAN SKANDIA TRUST
SELIGMAN HENDERSON INTERNATIONAL SMALL CAP PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------- -----------
<S> <C> <C>
SWEDEN (CONT'D)
Finnveden AB-B*.................. 29,000 $ 296,787
Forsheda Cl-B.................... 24,185 382,185
Iro AB........................... 44,600 503,424
Kalmar Industries................ 27,775 459,816
Rottneros AB..................... 246,200 259,372
-------
2,700,802
-------
SWITZERLAND -- 3.3%
Foto Laboratory SA............... 1,210 482,615
Lem Holding...................... 203 71,639
Sig Schweiz Industries........... 366 371,300
-------
925,554
-------
THAILAND -- 0.6%
Loxley Co. LTD. ................. 9,000 167,924
-------
UNITED KINGDOM -- 18.0%
Ashtead Group PLC................ 108,000 290,133
Capital Radio PLC................ 45,000 372,449
David Brown Group PLC............ 102,657 314,038
Domnick Hunter Group PLC......... 60,000 303,736
Frost Group PLC.................. 73,833 223,570
Hamleys PLC...................... 55,000 298,068
Hodder Headline PLC.............. 48,730 190,689
IBC Group PLC.................... 60,000 266,468
ISA International PLC............ 150,000 356,378
Pet City Holdings PLC*........... 48,000 284,729
Pizzaexpress PLC................. 96,100 323,825
Polypipe PLC..................... 113,300 307,890
Ruberoid PLC..................... 104,000 230,939
Stoves PLC*...................... 65,000 262,431
Tilbury Douglas PLC.............. 32,000 221,125
<CAPTION>
SHARES VALUE
------- -----------
<S> <C> <C>
Trifast PLC...................... 50,000 $ 292,711
Wace Group PLC................... 95,000 361,424
Wellington Holdings PLC.......... 55,000 211,808
-------
5,112,411
-------
TOTAL INVESTMENTS
(COST $24,295,226**) -- 85.3%...... 24,280,181
OTHER ASSETS LESS
LIABILITIES -- 14.7%............... 4,175,022
-------
NET ASSETS -- 100.0%................. $28,455,203
=======
NOTES TO SCHEDULE OF INVESTMENTS:
The aggregate unrealized appreciation (depreciation) on a tax
basis is as follows:
Gross appreciation............... $ 1,278,860
Gross depreciation............... (1,293,905)
----------
Net depreciation................. $ (15,045)
----------
----------
</TABLE>
Foreign currency exchange contracts outstanding at December 31, 1995:
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT UNREALIZED
COVERED EXPIRATION APPRECIATION/
TYPE BY CONTRACT MONTH (DEPRECIATION)
- ----------------------------------------------------------
<S> <C> <C> <C> <C>
Buy FIM 410,018 01/96 $ 88
Buy HK 104,173 01/96 (3)
Buy THB 1,032,192 01/96 (65)
Buy UK 70,770 01/96 (214)
Sell JPN 191,776,500 02/96 31,307
$ 31,113
</TABLE>
COUNTRY/CURRENCY ABBREVIATIONS
- ----------------------------------------------------------
FIM - Finland/Finnish Markka
HK - Hong Kong/Hong Kong Dollar
JPN - Japan/Japanese Yen
THB - Thailand/Thai Baht
UK - United Kingdom/British Pound
- --------------------------------------------------------------------------------
Unless otherwise noted, all foreign stocks are common stock.
* Non-income producing securities.
** Also cost for Federal income tax purposes.
See Notes to Financial Statements.
<PAGE>
AMERICAN SKANDIA TRUST
T. ROWE PRICE NATURAL RESOURCES PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------- ----------
<S> <C> <C>
COMMON STOCK -- 63.9%
CHEMICALS -- 3.8%
Dupont (E.I.) de Nemours & Co. .... 3,200 $ 223,600
Petrolite Corp. ................... 4,400 125,400
----------
349,000
----------
FOREST PRODUCTS -- 4.3%
Georgia Pacific Corp. ............. 2,900 199,012
International Paper Co. ........... 5,300 200,737
----------
399,749
----------
MANUFACTURING -- 0.5%
Oakley, Inc.*...................... 1,300 44,200
----------
METALS & MINING -- 13.3%
Applied Extrusion Technologies,
Inc. ............................ 7,100 88,750
Barrick Gold Corp.................. 4,700 123,963
Cambior, Inc. ..................... 12,000 130,500
Freeport McMoran Copper Co.,
Inc. ............................ 2,900 81,200
Greenstone Resources LTD.*......... 20,200 57,444
Newmont Mining Corp. .............. 4,600 208,150
Pegasus Gold, Inc.*................ 8,700 120,713
Santa Fe Pacific Gold Corp. ....... 13,600 164,900
TVX Gold, Inc.*.................... 36,100 257,213
----------
1,232,833
----------
OIL & GAS -- 26.4%
Amerada Hess Corp. ................ 3,400 180,200
Atlantic Richfield Co. ............ 3,700 409,775
Cross Timbers Oil Co. ............. 3,500 61,687
HS Resources, Inc.*................ 8,000 103,000
Mobil Corp. ....................... 2,900 324,800
Noble Affiliates, Inc. ............ 7,300 218,087
Oryx Energy Co.*................... 6,400 85,600
Sun, Inc. ......................... 4,000 109,500
Tejas Power Corp.*................. 9,000 82,125
Ultramar Corp. .................... 4,000 103,000
Union Texas Petroleum Holdings,
Inc. ............................ 15,100 292,563
United Meridian Corp.*............. 9,600 166,800
USX Marathon Group................. 13,300 259,350
Wainoco Oil Corp.*................. 15,400 50,050
----------
2,446,537
----------
OIL & GAS-EQUIPMENT & SERVICES -- 8.8%
Camco International, Inc. ......... 4,500 126,000
Cooper Cameron Corp.*.............. 3,900 138,450
Halliburton Co. ................... 2,500 126,562
Nowsco Well Service................ 7,300 93,987
Oceaneering International, Inc.*... 10,300 132,613
Schlumberger LTD. ................. 2,800 193,900
Weatherford Enterra, Inc. ......... 253 7,305
----------
818,817
----------
<CAPTION>
SHARES VALUE
------- ----------
<S> <C> <C>
PACKAGING & PAPER PRODUCTS -- 2.3%
Jefferson Smurfit Corp.*........... 22,700 $ 215,650
----------
PAPER & FOREST PRODUCTS -- 1.3%
Kimberly-Clark Corp. .............. 1,400 115,850
Schweitzer Manduit
International, Inc.*............. 140 3,238
----------
119,088
----------
RAILROADS -- 1.7%
Canadian National Railways*........ 10,500 157,500
----------
STEEL -- 1.5%
Nucor Corp. ....................... 2,400 137,100
----------
TOTAL COMMON STOCK
(COST $5,630,748).................... 5,920,474
----------
AMERICAN DEPOSITORY RECEIPTS -- 11.3%
OIL & GAS -- 9.8%
Repsol SA.......................... 11,300 371,488
Royal Dutch Petroleum Co. ......... 3,800 536,275
----------
907,763
----------
OIL & GAS-EQUIPMENT & SERVICES -- 1.5%
Coflexip........................... 7,400 139,675
----------
TOTAL AMERICAN DEPOSITORY RECEIPTS
(COST $957,901)...................... 1,047,438
----------
FOREIGN STOCKS -- 5.7%
METALS & MINING
Anglo American Plantinum
Corp. -- (ZAR)................... 14,500 82,533
Bougainville Copper
LTD. -- (AUD)*................... 50,000 22,320
Dayton Mining Corp. -- (CAN)*...... 17,900 74,572
Golden Shamrock Mines
LTD. -- (AUD)*................... 117,600 72,620
Golden Shamrock Mines
LTD. -- (CAN)*................... 15,700 9,775
Greenstone Resources
LTD. -- (CAN)*................... 8,000 23,029
Loki Gold Corp.
(Warrants) -- (CAN)*............. 61,000 94,503
Lonrho PLC -- (UK)................. 17,600 48,101
Potgietersrust Platinums
LTD. -- (ZAR).................... 16,900 101,989
----------
TOTAL FOREIGN STOCKS
(COST $525,578)...................... 529,442
----------
</TABLE>
<PAGE>
AMERICAN SKANDIA TRUST
T. ROWE PRICE NATURAL RESOURCES PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------- ----------
<S> <C> <C>
SHORT TERM INVESTMENTS --
MONEY MARKET FUNDS -- 1.4%
Temporary Investment Cash Fund..... 65,353 $ 65,353
Temporary Investment Fund.......... 65,352 65,352
----------
(COST $130,705).................... 130,705
----------
</TABLE>
<TABLE>
<CAPTION>
PAR
MATURITY (000)
-------- ------
<S> <C> <C> <C>
COMMERCIAL PAPER -- 15.9%
Dun & Bradstreet Corp.
5.80%................... 01/02/96 $ 227 226,963
Federal Home Loan
Mortgage Corp.
5.50%................... 01/05/96 1,250 1,249,236
----------
TOTAL COMMERCIAL PAPER
(COST $1,476,199)........... 1,476,199
----------
TOTAL INVESTMENTS
(COST $8,721,131**) -- 98.3%.......... 9,104,258
OTHER ASSETS LESS LIABILITIES -- 1.7%... 157,335
----------
NET ASSETS -- 100.0%.................... $9,261,593
==========
<CAPTION>
<S> <C> <C> <C>
NOTES TO SCHEDULE OF
INVESTMENTS:
The aggregate unrealized appreciation (depreciation) on a tax
basis is
as follows:
Gross appreciation........................... $ 526,841
Gross depreciation........................... (145,958)
--------
Net appreciation............................. $ 380,883
==========
</TABLE>
COUNTRY/CURRENCY ABBREVIATIONS
- ----------------------------------------------------------
AUD - Australia/Australian Dollar
CAN - Canada/Canadian Dollar
UK - United Kingdom/British Pound
ZAR - South Africa/South African Rand
- --------------------------------------------------------------------------------
Unless otherwise noted, all foreign stocks are common stock.
* Non-income producing securities.
** Cost for Federal income tax purposes was $8,723,375.
See Notes to Financial Statements.
<PAGE>
AMERICAN SKANDIA TRUST
PIMCO LIMITED MATURITY BOND PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAR
MATURITY (000) VALUE
-------- ------- ------------
<S> <C> <C> <C>
CORPORATE BONDS -- 1.6%
ELECTRIC POWER
CMS Energy Corp.
9.50%................... 10/01/97 $ 1,000 $ 1,051,250
Texas Utilities Co.
6.38%................... 05/01/99 1,500 1,499,856
-----------
TOTAL CORPORATE BONDS
(COST $2,499,976).................. 2,551,106
-----------
COLLATERALIZED MORTGAGE SECURITIES -- 1.0%
Merrill Lynch Mortgage
Investors C1-B
7.67% (COST
$1,513,304)........... 06/15/21 1,491 1,543,139
-----------
U.S. GOVERNMENT AGENCY OBLIGATIONS -- 21.0%
FEDERAL HOME LOAN BANK -- 0.4%
5.70%..................... 01/02/96 700 699,889
-----------
FEDERAL HOME LOAN MORTGAGE CORP. -- 3.2%
8.00%..................... 01/16/26 5,000 5,182,031
-----------
FEDERAL NATIONAL MORTGAGE ASSOCIATION -- 10.3%
5.37%..................... 03/12/96 1,000 989,064
6.38%..................... 01/01/25 924 936,685
5.88%..................... 05/01/25 2,028 2,069,013
6.36%..................... 01/24/26 12,500 12,640,600
-----------
16,635,362
-----------
GOVERNMENT NATIONAL MORTGAGE
ASSOCIATION -- 7.1%
7.25%..................... 07/20/17 404 413,865
7.25%..................... 08/20/17 494 505,617
7.25%..................... 09/20/17 418 429,091
7.00%..................... 01/15/24 56 56,771
7.00%..................... 02/15/24 62 62,589
7.00%..................... 04/15/24 440 445,611
7.38%..................... 05/20/24 4,402 4,495,266
7.00%..................... 06/15/24 63 63,552
7.25%..................... 07/20/24 540 553,013
7.00%..................... 07/15/25 458 464,347
7.00%..................... 08/15/25 1,930 1,954,280
7.00%..................... 01/22/26 2,000 2,022,500
-----------
11,466,502
-----------
TOTAL U.S. GOVERNMENT AGENCY OBLIGATIONS
(COST $33,729,071)................. 33,983,784
-----------
U.S. TREASURY OBLIGATIONS -- 12.4%
U.S. TREASURY BILLS -- 0.0%
5.27%#.................... 02/08/96 $ 10 $ 9,942
5.30%#.................... 02/08/96 60 59,653
5.00%#.................... 02/15/96 15 14,901
5.35%#.................... 02/15/96 10 9,934
-----------
94,430
-----------
<CAPTION>
PAR
MATURITY (000) VALUE
-------- ------- ------------
<S> <C> <C> <C>
U.S. TREASURY NOTES -- 12.4%
4.38%..................... 08/15/96 5,000 4,974,300
6.50%..................... 09/30/96 15,000 15,131,250
-----------
20,105,550
-----------
TOTAL U.S. TREASURY OBLIGATIONS
(COST $20,168,250)................. 20,199,980
-----------
COMMERCIAL PAPER -- 10.8%
Abbott Laboratories
5.62%................... 01/09/96 2,000 1,997,502
BellSouth Telecomm, Inc.
5.75%................... 01/09/96 1,000 998,722
Canadian Wheat Board
5.58%................... 03/01/96 1,000 990,305
5.49%................... 03/05/96 1,300 1,286,644
Commonwealth Bank of
Australia
5.54%................... 03/13/96 2,500 2,471,250
Hewlett-Packard Co.
5.53%................... 03/12/96 2,000 1,977,307
General Electric Capital
Corp.
5.84%................... 01/26/96 300 298,783
5.65%................... 01/31/96 900 895,762
KFW International Finance
Corp.
5.53%................... 03/06/96 800 791,659
National Rural Utility
5.55%................... 03/06/96 800 791,659
5.63%................... 03/08/96 500 494,633
5.55%................... 03/18/96 2,000 1,975,600
Pitney Bowes Credit, Inc.
5.66%................... 01/26/96 100 99,607
Shell Oil Co.
5.65%................... 01/26/96 2,500 2,490,191
-----------
TOTAL COMMERCIAL PAPER
(COST $17,564,082)................. 17,559,624
-----------
</TABLE>
<PAGE>
AMERICAN SKANDIA TRUST
PIMCO LIMITED MATURITY BOND PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
------- ------------
<S> <C> <C> <C>
SHORT TERM INVESTMENTS --
MONEY MARKET FUNDS -- 0.4%
Temporary Investment Cash Fund... 289,707 $ 289,707
Temporary Investment Fund........ 289,706 289,706
-----------
(COST $579,413)................ 579,413
-----------
TOTAL INVESTMENTS
(COST $76,054,096*) -- 47.2%....... 76,417,046
OTHER ASSETS LESS
LIABILITIES -- 52.8%............... 85,523,348
-----------
NET ASSETS -- 100.0%................. $161,940,394
===========
NOTES TO SCHEDULE OF INVESTMENTS:
The aggregate unrealized appreciation (depreciation) on a tax
basis is
as follows:
Gross appreciation......................... $368,223
Gross depreciation......................... (5,273)
-------
Net appreciation........................... $362,950
========
</TABLE>
# Securities with an aggregate market value of $94,430, which have been
segregated with the custodian to cover margin requirements for the following
open futures contracts at December 31, 1995:
<TABLE>
<CAPTION>
UNREALIZED
TYPE CONTRACTS APPRECIATION
----------------------------------------------------------
<S> <C> <C>
U.S. Treasury 5 Year Note (03/96) 90 $ 92,813
U.S. Treasury 10 Year Note (03/96) 20 32,500
------------
$125,313
============
</TABLE>
- --------------------------------------------------------------------------------
* Also cost for Federal income tax purposes.
See Notes to Financial Statements.
<PAGE>
AMERICAN SKANDIA TRUST
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1995
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SELIGMAN AST AST
HENDERSON LORD ABBETT AST FEDERATED PHOENIX PHOENIX
INTERNATIONAL GROWTH AND JANCAP MONEY UTILITY BALANCED FEDERATED CAPITAL
EQUITY INCOME GROWTH MARKET INCOME ASSET HIGH YIELD GROWTH
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO(1)
------------- ----------- --------- --------- --------- -------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Investments in
securities at
value (A)
(Note 1)..... $ 250,018 $ 223,536 $444,152 $343,207 $106,505 $187,234 $ 81,780 $ --
Cash in bank,
including
foreign
currency
holdings..... 17,183 -- -- 2 4 1 -- 19,240
Receivable for
securities
sold......... 93 -- 246 -- -- -- -- --
Receivable for
dividends and
interest..... 769 505 224 2,776 374 1,136 1,775 11
Receivable for
fund shares
sold......... 2,671 66,117 2,282 -- 735 69,718 1,478 --
Deferred
organization
costs (Note
1)........... 17 -- -- -- -- -- -- --
Other assets... 16 -- -- -- -- -- -- --
Unrealized
appreciation
on foreign
currency
exchange
contracts and
futures (Note
1)........... 546 -- 280 -- -- -- -- --
-------- -------- -------- -------- ------- -------- ------- -------
TOTAL
ASSETS... 271,313 290,158 447,184 345,985 107,618 258,089 85,033 19,251
-------- -------- -------- -------- ------- -------- ------- -------
LIABILITIES
Cash
overdraft.... -- -- -- -- -- -- -- --
Payable for
securities
purchased.... 2,975 1,228 15,450 -- 143 2,729 1,275 --
Payable for
fund shares
redeemed..... -- -- -- -- -- -- -- 19,228
Unrealized
depreciation
on foreign
currency
exchange
contracts and
futures (Note
1)........... -- -- -- -- -- -- -- --
Advisory fee
payable (Note
2)........... 197 136 327 98 59 107 49 9
Shareholder
servicing fee
payable (Note
2)........... 22 18 36 30 9 15 7 2
Accrued
expenses..... 63 27 50 58 8 32 10 12
Dividends
payable (Note
1)........... -- -- -- 1,574 -- -- -- --
-------- -------- -------- -------- ------- -------- ------- -------
TOTAL
LIABILITIES... 3,257 1,409 15,863 1,760 219 2,883 1,341 19,251
-------- -------- -------- -------- ------- -------- ------- -------
NET ASSETS........ $ 268,056 $ 288,749 $431,321 $344,225 $107,399 $255,206 $ 83,692 $ --
======== ======== ======== ======== ======= ======== ======= =======
COMPONENTS OF NET
ASSETS
Common stock
(unlimited number
of shares
authorized, $.001
par value per
share)........... $ 15 $ 19 $ 28 $ 344 $ 9 $ 20 $ 8 $ --
Additional paid-in
capital.......... 239,727 254,072 334,097 343,732 95,017 224,886 77,593 --
Undistributed net
investment income
(loss)........... 2,901 3,534 1,412 -- 4,023 5,212 4,026 --
Accumulated net
realized gain
(loss) on
investments and
foreign currency
transactions..... 6,014 7,113 23,307 149 (2,772 ) 8,809 (24) --
Accumulated net
unrealized
appreciation on
investments,
foreign currency
transactions, and
forward currency
contracts........ 19,399 24,011 72,477 -- 11,122 16,279 2,089 --
-------- -------- -------- -------- ------- -------- ------- -------
NET ASSETS........ $ 268,056 $ 288,749 $431,321 $344,225 $107,399 $255,206 $ 83,692 $ --
======== ======== ======== ======== ======= ======== ======= =======
Shares of common
stock
outstanding...... 14,726 19,278 28,014 344,076 8,997 20,363 7,511 --
Net asset value,
offering and
redemption price
per share (Note
1)............... $ 18.20 $ 14.98 $ 15.40 $ 1.00 $ 11.94 $ 12.53 $ 11.14 $ --
======== ======== ======== ======== ======= ======== ======= =======
(A) Investments at
cost............. $ 231,160 $ 199,525 $371,968 $343,207 $ 95,383 $170,955 $ 79,691 $ --
======== ======== ======== ======== ======= ======== ======= =======
</TABLE>
- --------------------------------------------------------------------------------
(1) See Note 6.
See Notes to Financial Statements.
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
T. ROWE PIMCO
PRICE TOTAL INVESCO FOUNDERS T. ROWE PRICE EAGLE AST SCUDDER BERGER
ASSET RETURN EQUITY CAPITAL INTERNATIONAL GROWTH INTERNATIONAL CAPITAL
ALLOCATION BOND INCOME APPRECIATION EQUITY EQUITY BOND GROWTH
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO(1) PORTFOLIO PORTFOLIO
---------- --------- -------- ------------ ------------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 61,615 $193,203 $174,742 $ 89,018 $ 173,501 $ -- $40,326 $46,231
-- 452 1 85 21,226 5,263 4,140 --
-- -- -- -- 46 -- -- --
453 2,784 1,062 18 548 6 1,483 23
367 42,734 1,066 2,780 617 -- 167 137
-- -- -- -- -- -- -- --
-- -- -- -- -- -- -- --
-- 182 -- -- -- -- -- --
------- -------- ------- ------- -------- ------ ------- -------
62,435 239,355 176,871 91,901 195,938 5,269 46,116 46,391
------- -------- ------- ------- -------- ------ ------- -------
344 -- -- -- -- -- -- --
2,621 13,864 -- 1,351 12 -- 449 371
-- -- -- -- -- 5,255 -- --
-- 26 -- -- -- -- 10 --
38 95 109 64 158 2 36 27
5 15 14 7 16 -- 4 4
28 20 32 19 85 12 15 10
-- -- -- -- -- -- -- --
------- -------- ------- ------- -------- ------ ------- -------
3,036 14,020 155 1,441 271 5,269 514 412
------- -------- ------- ------- -------- ------ ------- -------
$ 59,399 $225,335 $176,716 $ 90,460 $ 195,667 $ -- $45,602 $45,979
======= ======== ======= ======= ======== ====== ======= =======
$ 5 $ 20 $ 14 $ 6 $ 18 $ -- $ 4 $ 4
52,646 209,801 150,532 75,443 183,647 -- 43,117 41,133
1,269 5,951 3,658 (141) 1,601 -- 1,865 150
331 6,094 5,013 1,797 (1,173) -- (241) (204)
5,148 3,469 17,499 13,355 11,574 -- 857 4,896
------- -------- ------- ------- -------- ------ ------- -------
$ 59,399 $225,335 $176,716 $ 90,460 $ 195,667 $ -- $45,602 $45,979
======= ======== ======= ======= ======== ====== ======= =======
4,944 19,865 14,133 6,350 18,365 -- 4,301 3,707
$ 12.01 $ 11.34 $ 12.50 $ 14.25 $ 10.65 $ -- $ 10.60 $ 12.40
======= ======== ======= ======= ======== ====== ======= =======
$ 56,469 $190,446 $157,243 $ 75,663 $ 161,929 $ -- $39,459 $41,335
======= ======== ======= ======= ======== ====== ======= =======
<CAPTION>
SELIGMAN T. ROWE PIMCO
HENDERSON PRICE LIMITED
INTERNATIONAL NATURAL MATURITY
SMALL CAP RESOURCES BOND
PORTFOLIO PORTFOLIO PORTFOLIO
------------- --------- ---------
<S> <C> <C> <C>
$24,280 $ 9,104 $ 76,417
3,983 -- --
-- -- 1,034
46 4 454
625 716 104,848
-- -- --
-- -- --
31 -- 24
------- ------ --------
28,965 9,824 182,777
------- ------ --------
-- -- --
469 548 20,793
-- -- --
-- -- --
22 4 28
2 1 4
17 9 12
-- -- --
------- ------ --------
510 562 20,837
------- ------ --------
$28,455 $ 9,262 $161,940
======= ====== ========
$ 3 $ 1 $ 15
28,356 8,817 160,498
72 30 765
8 31 174
16 383 488
------- ------ --------
$28,455 $ 9,262 $161,940
======= ====== ========
2,756 834 15,465
$ 10.33 $ 11.11 $ 10.47
======= ====== ========
$24,295 $ 8,721 $ 76,054
======= ====== ========
</TABLE>
- --------------------------------------------------------------------------------
<PAGE>
AMERICAN SKANDIA TRUST
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SELIGMAN AST AST
HENDERSON LORD ABBETT AST FEDERATED PHOENIX PHOENIX
INTERNATIONAL GROWTH AND JANCAP MONEY UTILITY BALANCED FEDERATED CAPITAL
EQUITY INCOME GROWTH MARKET INCOME ASSET HIGH YIELD GROWTH
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
------------- ----------- --------- --------- --------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME
(NOTE 1)
Interest......... $ 847 $ 729 $ 2,275 $19,996 $ 476 $ 5,318 $4,538 $ 146
Dividends........ 4,186 4,197 3,110 -- 4,366 1,380 -- 182
-------- -------- ------- ------ ------- ------- ------ ------
Total
Investment
Income..... 5,033 4,926 5,385 19,996 4,842 6,698 4,538 328
-------- -------- ------- ------ ------- ------- ------ ------
EXPENSES
Investment
advisory fees
(Note 2)....... 2,454 1,060 2,977 1,674 601 1,108 347 144
Shareholder
servicing fees
(Note 2)....... 245 141 331 335 88 159 46 19
Administration
and accounting
fees........... 227 141 278 280 87 159 75 75
Custodian fees... 153 30 70 95 25 40 17 24
Professional
fees........... 38 20 47 47 13 23 6 2
Registration
fees........... (30) (15) (33) (57) (6) (18 ) (7) (5)
Trustees' fees
and expenses
(Note 2)....... 10 5 12 12 4 6 1 1
Insurance fees... 7 3 8 11 2 4 1 1
Amortization of
organization
costs (Note
1)............. 1 -- 2 2 -- 1 -- --
Miscellaneous
expenses....... 18 7 7 7 5 6 26 3
-------- -------- ------- ------ ------- ------- ------ ------
Total
Expenses... 3,123 1,392 3,699 2,406 819 1,488 512 264
Less:
Advisory
fee waivers
and expense
reimbursements
(Note 2)... (255) -- -- (402) -- -- -- (43)
-------- -------- ------- ------ ------- ------- ------ ------
Net
Expenses... 2,868 1,392 3,699 2,004 819 1,488 512 221
-------- -------- ------- ------ ------- ------- ------ ------
Net Investment
Income (Loss)...... 2,165 3,534 1,686 17,992 4,023 5,210 4,026 107
REALIZED AND
UNREALIZED GAIN
(LOSS) ON
INVESTMENTS AND
FOREIGN CURRENCY
TRANSACTIONS (NOTE
1)
Net realized gain
(loss) on
investments and
foreign
currency
transactions... 8,916 7,136 38,435 156 358 9,100 124 5,417
Net unrealized
appreciation
(depreciation)
on investments,
foreign
currency
transactions,
and forward
currency
contracts...... 13,385 23,471 58,329 -- 16,069 18,547 3,479 (136)
-------- -------- ------- ------ ------- ------- ------ ------
Net Increase in
Net Assets
resulting from
Operations..... $24,466 $34,141 $98,450 $18,148 $20,450 $32,857 $7,629 $ 5,388
======== ======== ======= ====== ======= ======= ====== ======
</TABLE>
- --------------------------------------------------------------------------------
(1) Commenced operations on May 2, 1995.
See Notes to Financial Statements.
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PIMCO
T. ROWE TOTAL INVESCO FOUNDERS T. ROWE PRICE EAGLE AST SCUDDER BERGER
PRICE ASSET RETURN EQUITY CAPITAL INTERNATIONAL GROWTH INTERNATIONAL CAPITAL
ALLOCATION BOND INCOME APPRECIATION EQUITY EQUITY BOND GROWTH
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
----------- --------- ------- ------------ ------------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 1,368 $ 6,857 $2,789 $ 419 $ 632 $ 28 $ 2,127 $ 329
400 -- 1,943 88 2,694 84 -- 72
------ ------- ------- ------- ------- ----- ------ ------
1,768 6,857 4,732 507 3,326 112 2,127 401
------ ------- ------- ------- ------- ----- ------ ------
314 652 821 487 1,412 46 276 161
37 100 109 54 141 6 28 21
75 105 110 76 141 72 83 53
35 24 25 35 140 12 30 10
5 13 14 7 18 1 3 3
(8) (16) (23 ) (9) (38) (1) (5) (1)
1 3 3 2 5 -- 1 1
1 3 3 1 5 -- 1 --
-- -- 1 -- -- -- -- --
18 7 11 5 48 5 5 3
------ ------- ------- ------- ------- ----- ------ ------
478 891 1,074 658 1,872 141 422 251
(16) -- -- -- -- (69) -- --
------ ------- ------- ------- ------- ----- ------ ------
462 891 1,074 658 1,872 72 422 251
------ ------- ------- ------- ------- ----- ------ ------
1,306 5,966 3,658 (151) 1,454 40 1,705 150
483 6,557 5,268 2,836 (908) 1,216 13 (195)
5,440 4,574 19,246 10,589 15,141 21 1,290 4,860
------ ------- ------- ------- ------- ----- ------ ------
$ 7,229 $17,097 $28,172 $ 13,274 $15,687 $ 1,277 $ 3,008 $ 4,815
====== ======= ======= ======= ======= ===== ====== ======
<CAPTION>
SELIGMAN T. ROWE PIMCO
HENDERSON PRICE LIMITED
INTERNATIONAL NATURAL MATURITY
SMALL CAP RESOURCES BOND
PORTFOLIO (1) PORTFOLIO(1) PORTFOLIO(1)
------------- ---------- -----------
<S> <C> <C> <C>
$ 110 $ 30 $ 906
73 31 --
---- --- -----
183 61 906
---- --- -----
76 21 101
8 2 16
14 13 16
10 3 3
1 -- 3
-- -- --
-- -- --
-- -- --
-- -- --
2 3 2
---- --- -----
111 42 141
-- (11) --
---- --- -----
111 31 141
---- --- -----
72 30 765
8 31 174
16 383 488
---- --- -----
$ 96 $444 $ 1,427
==== === =====
</TABLE>
- --------------------------------------------------------------------------------
<PAGE>
AMERICAN SKANDIA TRUST
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31,
(AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SELIGMAN HENDERSON
INTERNATIONAL EQUITY LORD ABBETT GROWTH AND
PORTFOLIO INCOME PORTFOLIO JANCAP GROWTH PORTFOLIO
---------------------------- ---------------------------- ----------------------------
1995 1994 1995 1994 1995 1994
------------- ------------ ------------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
FROM OPERATIONS
Net investment income (loss)..... $ 2,165 $ 1,164 $ 3,534 $ 1,700 $ 1,686 $ 1,245
Net realized gain (loss) on
investments and foreign
currency transactions.......... 8,916 10,789 7,136 1,699 38,435 (15,037)
Net unrealized appreciation
(depreciation) on investments,
foreign currency transactions,
and forward currency
contracts...................... 13,385 (11,302) 23,471 (1,797) 58,329 4,596
-------- --------- -------- ------- -------- --------
Net Increase (Decrease) in Net
Assets from Operations....... 24,466 651 34,141 1,602 98,450 (9,196)
-------- --------- -------- ------- -------- --------
DIVIDENDS AND DISTRIBUTIONS TO
SHAREHOLDERS
Dividends to shareholders from
net investment income.......... -- (309) (1,700) (559) (1,363) (447)
Distributions to shareholders
from capital gains............. (12,667) (1,751) (1,699) (922) -- --
-------- --------- -------- ------- -------- --------
Total Dividends and
Distributions to
Shareholders............... (12,667) (2,060) (3,399) (1,481) (1,363) (447)
CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold........ 105,273 199,458 170,735 43,721 135,311 117,459
Net asset value of shares issued
in reinvestment of dividends
and distributions.............. 12,667 2,060 3,399 1,481 1,363 447
Cost of shares redeemed.......... (99,733) (112,705) (8,177) (1,658) (48,085) (20,470)
-------- --------- -------- ------- -------- --------
Increase (Decrease) in Net
Assets from Capital Share
Transactions................. 18,207 88,813 165,957 43,544 88,589 97,436
-------- --------- -------- ------- -------- --------
Total Increase (Decrease) in
Net Assets................. 30,006 87,404 196,699 43,665 185,676 87,793
-------- --------- -------- ------- -------- --------
NET ASSETS
Beginning of Period.............. 238,050 150,646 92,050 48,385 245,645 157,852
-------- --------- -------- ------- -------- --------
End of Period.................... $ 268,056 $ 238,050 $ 288,749 $ 92,050 $ 431,321 $245,645
======== ========= ======== ======= ======== ========
SHARES ISSUED AND REDEEMED
Shares sold...................... 6,250 11,116 11,930 3,682 9,644 10,265
Shares issued in reinvestment of
dividends and distributions.... 823 117 276 118 119 37
Shares redeemed.................. (5,865) (6,401) (600) (139) (3,650) (1,801)
-------- --------- -------- ------- -------- --------
Net Increase (Decrease) in
Shares Outstanding........... 1,208 4,832 11,606 3,661 6,113 8,501
======== ========= ======== ======= ======== ========
</TABLE>
- --------------------------------------------------------------------------------
(1) Commenced operations on January 4, 1994.
See Notes to Financial Statements.
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FEDERATED UTILITY INCOME AST PHOENIX BALANCED ASSET
AST MONEY MARKET PORTFOLIO PORTFOLIO PORTFOLIO
------------------------------ ------------------------------ ------------------------------
1995 1994 1995 1994 1995 1994
------------- ------------ ------------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
$ 17,992 $ 9,697 $ 4,023 $ 3,376 $ 5,210 $ 3,869
156 (7) 358 (3,130) 9,100 (291)
-- -- 16,069 (4,810) 18,547 (3,287)
--------- --------- -------- -------- -------- --------
18,148 9,690 20,450 (4,564) 32,857 291
--------- --------- -------- -------- -------- --------
(17,992) (9,697) (3,376) (884) (3,867) (724)
-- (19) -- (109) -- (180)
--------- --------- -------- -------- -------- --------
(17,992) (9,716) (3,376) (993) (3,867) (904)
674,956 510,604 43,009 33,886 92,940 63,156
17,896 8,496 3,376 993 3,867 904
(637,371) (344,560) (27,265) (15,760) (16,215) (9,414)
--------- --------- -------- -------- -------- --------
55,481 174,540 19,120 19,119 80,592 54,646
--------- --------- -------- -------- -------- --------
55,637 174,514 36,194 13,562 109,582 54,033
--------- --------- -------- -------- -------- --------
288,588 114,074 71,205 57,643 145,624 91,591
--------- --------- -------- -------- -------- --------
$ 344,225 $ 288,588 $ 107,399 $ 71,205 $ 255,206 $145,624
========= ========= ======== ======== ======== ========
674,956 510,604 4,009 3,338 7,580 6,038
17,896 8,496 344 96 367 86
(637,371) (344,560) (2,569) (1,562) (1,473) (904)
--------- --------- -------- -------- -------- --------
55,481 174,540 1,784 1,872 6,474 5,220
========= ========= ======== ======== ======== ========
<CAPTION>
FEDERATED HIGH YIELD
PORTFOLIO
-----------------------------
1995 1994(1)
------------- ------------
<S> <C> <C>
$ 4,026 $ 1,210
124 (147)
3,479 (1,390)
-------- --------
7,629 (327)
-------- --------
(1,210) --
-- --
-------- --------
(1,210) --
75,531 32,507
1,210 --
(20,776) (10,872)
-------- --------
55,965 21,635
-------- --------
62,384 21,308
-------- --------
21,308 --
-------- --------
$ 83,692 $ 21,308
======== ========
7,197 3,302
124 --
(2,008) (1,104)
-------- --------
5,313 2,198
======== ========
</TABLE>
- --------------------------------------------------------------------------------
<PAGE>
AMERICAN SKANDIA TRUST
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31,
(AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AST PHOENIX CAPITAL GROWTH T. ROWE PRICE ASSET PIMCO TOTAL RETURN BOND
PORTFOLIO* ALLOCATION PORTFOLIO PORTFOLIO
---------------------------- ---------------------------- ----------------------------
1995 1994(1) 1995 1994(1) 1995 1994(1)
------------- ------------ ------------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
FROM OPERATIONS
Net investment income (loss)..... $ 107 $ 116 $ 1,306 $ 489 $ 5,966 $ 1,256
Net realized gain (loss) on
investments
and foreign currency
transactions................... 5,417 (705) 483 (152) 6,557 (463)
Net unrealized appreciation
(depreciation) on investments,
foreign currency transactions,
and forward currency
contracts...................... (136) 136 5,440 (292) 4,574 (1,104)
-------- ------- ------- ------- ------- -------
Net Increase (Decrease) in Net
Assets from Operations....... 5,388 (453) 7,229 45 17,097 (311)
-------- ------- ------- ------- ------- -------
DIVIDENDS AND DISTRIBUTIONS TO
SHAREHOLDERS
Dividends to shareholders from
net investment income.......... (116) -- (525) -- (1,271) --
Distributions to shareholders
from
capital gains.................. -- -- -- -- -- --
-------- ------- ------- ------- ------- -------
Total Dividends and
Distributions to
Shareholders............... (116) -- (525) -- (1,271) --
CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold........ 6,536 16,685 31,289 24,603 199,583 49,723
Net asset value of shares issued
in reinvestment of dividends
and distributions.............. 116 -- 525 -- 1,271 --
Cost of shares redeemed.......... (26,769) (1,387) (2,582) (1,185) (37,838) (2,919)
-------- ------- ------- ------- ------- -------
Increase (Decrease) in Net
Assets from
Capital Share Transactions... (20,117) 15,298 29,232 23,418 163,016 46,804
-------- ------- ------- ------- ------- -------
Total Increase (Decrease) in
Net Assets................. (14,845) 14,845 35,936 23,463 178,842 46,493
-------- ------- ------- ------- ------- -------
NET ASSETS
Beginning of Period.............. 14,845 -- 23,463 -- 46,493 --
-------- ------- ------- ------- ------- -------
End of Period.................... $ -- $ 14,845 $59,399 $ 23,463 $ 225,335 $ 46,493
======== ======= ======= ======= ======= =======
SHARES ISSUED AND REDEEMED
Shares sold...................... 633 1,735 2,775 2,481 18,460 5,067
Shares issued in reinvestment of
dividends and distributions.... 12 -- 52 -- 128 --
Shares redeemed.................. (2,234) (146) (244) (120) (3,491) (299)
-------- ------- ------- ------- ------- -------
Net Increase (Decrease) in
Shares Outstanding........... (1,589) 1,589 2,583 2,361 15,097 4,768
======== ======= ======= ======= ======= =======
</TABLE>
- --------------------------------------------------------------------------------
* See Note 6.
(1) Commenced operations on January 4, 1994.
(2) Commenced operations on May 3, 1994.
See Notes to Financial Statements.
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOUNDERS CAPITAL APPRECIATION T. ROWE PRICE INTERNATIONAL
INVESCO EQUITY INCOME
PORTFOLIO PORTFOLIO EQUITY PORTFOLIO
------------------------------ ------------------------------ ------------------------------
1995 1994(1) 1995 1994(1) 1995 1994(1)
------------- ------------ ------------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
$ 3,658 $ 1,056 $ (151) $ 290 $ 1,454 $ 268
5,268 (255) 2,836 (1,039) (908) (16)
19,246 (1,748) 10,589 2,767 15,141 (3,567)
-------- ------- -------- ------- -------- --------
28,172 (947) 13,274 2,018 15,687 (3,315)
-------- ------- -------- ------- -------- --------
(1,056) -- (280) -- (121) --
-- -- -- -- (249) --
-------- ------- -------- ------- -------- --------
(1,056) -- (280) -- (370) --
93,257 66,925 62,848 29,373 101,284 122,535
1,056 -- 280 -- 370 --
(9,914) (777) (14,221) (2,832) (30,055) (10,469)
-------- ------- -------- ------- -------- --------
84,399 66,148 48,907 26,541 71,599 112,066
-------- ------- -------- ------- -------- --------
111,515 65,201 61,901 28,559 86,916 108,751
-------- ------- -------- ------- -------- --------
65,201 -- 28,559 -- 108,751 --
-------- ------- -------- ------- -------- --------
$ 176,716 $ 65,201 $ 90,460 $ 28,559 $ 195,667 $108,751
======== ======= ======== ======= ======== ========
8,188 6,769 4,764 2,908 10,012 12,383
105 -- 26 -- 41 --
(850) (79) (1,074) (274) (2,997) (1,074)
-------- ------- -------- ------- -------- --------
7,443 6,690 3,716 2,634 7,056 11,309
======== ======= ======== ======= ======== ========
<CAPTION>
EAGLE GROWTH EQUITY AST SCUDDER INTERNATIONAL
PORTFOLIO* BOND PORTFOLIO
------------------------------- ------------------------------
1995 1994(2) 1995 1994(2)
------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
$ 40 $ 10 $ 1,705 $ 421
1,216 (42) 13 (254)
21 (21) 1,290 (432)
-------- ------ ------- -------
1,277 (53) 3,008 (265)
-------- ------ ------- -------
(10) -- (263) --
-- -- -- --
-------- ------ ------- -------
(10) -- (263) --
5,636 3,841 30,340 16,273
10 -- 263 --
(10,392) (309) (2,964) (790)
-------- ------ ------- -------
(4,746) 3,532 27,639 15,483
-------- ------ ------- -------
(3,479) 3,479 30,384 15,218
-------- ------ ------- -------
3,479 -- 15,218 --
-------- ------ ------- -------
$ -- $3,479 $45,602 $ 15,218
======== ====== ======= =======
516 381 2,996 1,654
1 -- 27 --
(867) (31) (295) (81)
-------- ------ ------- -------
(350) 350 2,728 1,573
======== ====== ======= =======
</TABLE>
- --------------------------------------------------------------------------------
<PAGE>
AMERICAN SKANDIA TRUST
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31,
(AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SELIGMAN
HENDERSON T. ROWE PRICE
INTERNATIONAL NATURAL PIMCO LIMITED
BERGER CAPITAL GROWTH SMALL CAP RESOURCES MATURITY BOND
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
---------------------------- ------------- ------------- -------------
1995 1994(3) 1995(4) 1995(4) 1995(4)
------------- ------------ ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
FROM OPERATIONS
Net investment income (loss)................... $ 150 $ 3 $ 72 $ 30 $ 765
Net realized gain (loss) on investments and
foreign
currency transactions........................ (195) (9) 8 31 174
Net unrealized appreciation (depreciation) on
investments, foreign currency transactions,
and forward currency contracts............... 4,860 36 16 383 488
------- ------ ------- ------ --------
Net Increase (Decrease) in Net Assets
from Operations............................ 4,815 30 96 444 1,427
------- ------ ------- ------ --------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
Dividends to shareholders from net investment
income....................................... (3) -- -- -- --
Distributions to shareholders from capital
gains........................................ -- -- -- -- --
------- ------ ------- ------ --------
Total Dividends and Distributions to
Shareholders............................. (3) -- -- -- --
CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold...................... 42,283 3,077 29,685 9,686 166,622
Net asset value of shares issued in
reinvestment of dividends and
distributions................................ 3 -- -- -- --
Cost of shares redeemed........................ (4,149) (77) (1,326) (868) (6,109)
------- ------ ------- ------ --------
Increase (Decrease) in Net Assets from
Capital Share Transactions................. 38,137 3,000 28,359 8,818 160,513
------- ------ ------- ------ --------
Total Increase (Decrease) in Net Assets.... 42,949 3,030 28,455 9,262 161,940
------- ------ ------- ------ --------
NET ASSETS
Beginning of Period............................ 3,030 -- -- -- --
------- ------ ------- ------ --------
End of Period.................................. $45,979 $3,030 $28,455 $ 9,262 $ 161,940
======= ====== ======= ====== ========
SHARES ISSUED AND REDEEMED
Shares sold.................................... 3,773 312 2,884 918 16,062
Shares issued in reinvestment of dividends and
distributions................................ -- -- -- -- --
Shares redeemed................................ (370) (8) (128) (84) (597)
------- ------ ------- ------ --------
Net Increase (Decrease) in Shares
Outstanding................................ 3,403 304 2,756 834 15,465
======= ====== ======= ====== ========
</TABLE>
- --------------------------------------------------------------------------------
(3) Commenced operations on October 20, 1994.
(4) Commenced operations on May 2, 1995.
See Notes to Financial Statements.
<PAGE>
AMERICAN SKANDIA TRUST
FINANCIAL HIGHLIGHTS
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SELIGMAN HENDERSON INTERNATIONAL EQUITY PORTFOLIO
------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
Net Asset Value at Beginning of Period...................... $ 17.61 $ 17.34 $ 12.74 $ 13.90 $ 12.99
-------- -------- -------- ------- -------
Increase (Decrease) from Investment Operations
Net Investment Income (Loss)............................ 0.14 0.10 0.14 (0.17) 0.01
Net Realized & Unrealized Gains (Losses) on Investments
and Foreign Currency Transactions..................... 1.44 0.36 4.46 (0.99) 0.90
-------- -------- -------- ------- -------
Total Increase (Decrease) From Investment
Operations....................................... 1.58 0.46 4.60 (1.16) 0.91
-------- -------- -------- ------- -------
Less Dividends and Distributions
Dividends from Net Investment Income.................... -- (0.03) -- -- --
Distributions from Net Realized Capital Gains........... (0.99) (0.16) -- -- --
-------- -------- -------- ------- -------
Total Dividends and Distributions.................. (0.99) (0.19) -- -- --
-------- -------- -------- ------- -------
Net Asset Value at End of Period............................ $ 18.20 $ 17.61 $ 17.34 $ 12.74 $ 13.90
-------- -------- -------- ------- -------
Total Return................................................ 10.00% 2.64% 36.11% (8.35%) 7.01%
Ratios/Supplemental Data
Net Assets at End of Period (in 000's).................. $268,056 $238,050 $150,646 $24,998 $15,892
Ratios of Expenses to Average Net Assets:
After Advisory Fee Waiver and Expense Reimbursement... 1.17% 1.22% 1.52% 2.50% 2.50%
Before Advisory Fee Waiver and Expense
Reimbursement...................................... 1.27% 1.32% 1.52% 2.50% 2.82%
Ratios of Net Investment Income (Loss)
to Average Net Assets:
After Advisory Fee Waiver and Expense Reimbursement... 0.88% 0.55% 0.28% (1.62%) 0.12%
Before Advisory Fee Waiver and Expense
Reimbursement...................................... 0.78% 0.46% 0.28% (1.62%) (0.20%)
Portfolio Turnover Rate..................................... 58.62% 48.69% 31.69% 54.56% 58.74%
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
<PAGE>
AMERICAN SKANDIA TRUST
FINANCIAL HIGHLIGHTS
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
LORD ABBETT GROWTH AND INCOME PORTFOLIO
-----------------------------------------
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------
1995 1994 1993 1992(2)
-------- ------- ------- -------
<S> <C> <C> <C> <C>
Net Asset Value at Beginning of Period................................. $ 12.00 $ 12.06 $ 10.70 $ 10.00
-------- ------- ------- -------
Increase (Decrease) from Investment Operations
Net Investment Income (Loss)....................................... 0.16 0.20 0.11 0.07
Net Realized & Unrealized Gains (Losses) on Investments and Foreign
Currency Transactions............................................ 3.22 0.06 1.35 0.63
-------- ------- ------- -------
Total Increase (Decrease) From Investment Operations.......... 3.38 0.26 1.46 0.70
-------- ------- ------- -------
Less Dividends and Distributions
Dividends from Net Investment Income............................... (0.20) (0.12) (0.04) --
Distributions from Net Realized Capital Gains...................... (0.20) (0.20) (0.06) --
-------- ------- ------- -------
Total Dividends and Distributions............................. (0.40) (0.32) (0.10) --
-------- ------- ------- -------
Net Asset Value at End of Period....................................... $ 14.98 $ 12.00 $ 12.06 $ 10.70
-------- ------- ------- -------
Total Return........................................................... 28.91% 2.22% 13.69% 7.00%
Ratios/Supplemental Data
Net Assets at End of Period (in 000's)............................. $288,749 $92,050 $48,385 $10,159
Ratios of Expenses to Average Net Assets:
After Advisory Fee Waiver and Expense Reimbursement.............. 0.99% 1.06% 1.22% 0.99%(1)
Before Advisory Fee Waiver and Expense Reimbursement............. 0.99% 1.06% 1.33% 1.75%(1)
Ratios of Net Investment Income (Loss)
to Average Net Assets:
After Advisory Fee Waiver and Expense Reimbursement.............. 2.50% 2.45% 2.05% 2.49%(1)
Before Advisory Fee Waiver and Expense Reimbursement............. 2.50% 2.45% 1.94% 1.73%(1)
Portfolio Turnover Rate................................................ 50.28% 60.47% 56.70% 34.29%
</TABLE>
- --------------------------------------------------------------------------------
(1) Annualized.
(2) Commenced operations on May 1, 1992.
(3) Commenced operations on November 6, 1992.
(4) Commenced operations on November 10, 1992.
(5) Commenced operations on May 4, 1993.
See Notes to Financial Statements.
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
JANCAP GROWTH PORTFOLIO AST MONEY MARKET PORTFOLIO
---------------------------------------------- -----------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------- -----------------------------------------------
1995 1994 1993 1992(3) 1995 1994 1993 1992(4)
-------- -------- -------- ------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 11.22 $ 11.78 $ 10.53 $ 10.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- ------- -------- -------- ------- -------
0.06 0.06 0.03 (0.01) 0.0494 0.0369 0.0252 0.0032
4.18 (0.59) 1.22 0.54 -- -- -- --
-------- -------- -------- ------- -------- -------- ------- -------
4.24 (0.53) 1.25 0.53 0.0494 0.0369 0.0252 0.0032
-------- -------- -------- ------- -------- -------- ------- -------
(0.06) (0.03) -- -- (0.0494) (0.0367) (0.0252) (0.0032)
-- -- -- -- -- (0.0002) -- --
-------- -------- -------- ------- -------- -------- ------- -------
(0.06) (0.03) -- -- (0.0494) (0.0369) (0.0252) (0.0032)
-------- -------- -------- ------- -------- -------- ------- -------
$ 15.40 $ 11.22 $ 11.78 $ 10.53 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- ------- -------- -------- ------- -------
37.98% (4.51%) 11.87% 5.30% N/A N/A N/A N/A
$431,321 $245,645 $157,852 $15,218 $344,225 $288,588 $114,074 $ 4,294
1.12% 1.18% 1.22% 1.33%(1) 0.60% 0.64% 0.65% 0.65%(1)
1.12% 1.18% 1.22% 2.21%(1) 0.72% 0.76% 0.84% 1.15%(1)
0.51% 0.62% 0.35% (0.90%)(1) 5.38% 3.90% 2.53% 2.43%(1)
0.51% 0.62% 0.35% (1.78%)(1) 5.26% 3.78% 2.34% 1.93%(1)
113.32% 93.92% 92.16% 1.52% N/A N/A N/A N/A
<CAPTION>
FEDERATED UTILITY
INCOME PORTFOLIO
- ----------------------------------
FOR THE YEAR ENDED
DECEMBER 31,
- ----------------------------------
1995 1994 1993(5)
- -------- ------- -------
<S> <C> <C> <C>
$ 9.87 $ 10.79 $ 10.00
- -------- ------- -------
0.40 0.46 0.17
2.09 (1.20) 0.62
- -------- ------- -------
2.49 (0.74) 0.79
- -------- ------- -------
(0.42) (0.16) --
-- (0.02) --
- -------- ------- -------
(0.42) (0.18) --
- -------- ------- -------
$ 11.94 $ 9.87 $ 10.79
- -------- ------- -------
26.13% (6.95%) 7.90%
$107,399 $71,205 $57,643
0.93% 0.99% 1.18%(1)
0.93% 0.99% 1.18%(1)
4.58% 5.11% 5.09%(1)
4.58% 5.11% 5.09%(1)
70.94% 54.26% 5.30%
</TABLE>
- --------------------------------------------------------------------------------
<PAGE>
AMERICAN SKANDIA TRUST
FINANCIAL HIGHLIGHTS
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FEDERATED HIGH
AST PHOENIX YIELD PORTFOLIO
BALANCED ASSET PORTFOLIO ------------------
-------------------------------
FOR THE YEAR ENDED
FOR THE YEAR ENDED DECEMBER 31, DECEMBER 31,
------------------------------- ------------------
1995 1994 1993(5) 1995 1994(6)
-------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net Asset Value at Beginning of Period...................... $ 10.49 $ 10.57 $ 10.00 $ 9.69 $ 10.00
------- ------- ------- ------- -------
Increase (Decrease) from Investment Operations
Net Investment Income (Loss)............................ 0.26 0.27 0.08 0.38 0.55
Net Realized & Unrealized Gains (Losses) on Investments
and Foreign Currency Transactions..................... 2.06 (0.26) 0.49 1.46 (0.86)
------- ------- ------- ------- -------
Total Increase (Decrease) From Investment
Operations....................................... 2.32 0.01 0.57 1.84 (0.31)
------- ------- ------- ------- -------
Less Dividends and Distributions
Dividends from Net Investment Income.................... (0.28) (0.07) -- (0.39) --
Distributions from Net Realized Capital Gains........... -- (0.02) -- -- --
------- ------- ------- ------- -------
Total Dividends and Distributions.................. (0.28) (0.09) -- (0.39) --
------- ------- ------- ------- -------
Net Asset Value of Final Redemptions on December 29, 1995...
Net Asset Value at End of Period............................ $ 12.53 $ 10.49 $ 10.57 $ 11.14 $ 9.69
------- ------- ------- ------- -------
Total Return................................................ 22.60% 0.09% 5.70% 19.57% (3.10%)
Ratios/Supplemental Data
Net Assets at End of Period (in 000's).................. $255,206 $145,624 $91,591 $83,692 $21,308
Ratios of Expenses to Average Net Assets:
After Advisory Fee Waiver and Expense Reimbursement... 0.94% 0.99% 1.13%(1) 1.11% 1.15%(1)
Before Advisory Fee Waiver and Expense
Reimbursement...................................... 0.94% 0.99% 1.13%(1) 1.11% 1.34%(1)
Ratios of Net Investment Income (Loss) to Average Net
Assets:
After Advisory Fee Waiver and Expense Reimbursement... 3.28% 3.08% 2.53%(1) 8.72% 9.06%(1)
Before Advisory Fee Waiver and Expense
Reimbursement...................................... 3.28% 3.08% 2.53%(1) 8.72% 8.87%(1)
Portfolio Turnover Rate..................................... 160.94% 86.50% 46.35% 29.64% 40.55%
</TABLE>
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(1) Annualized.
(5) Commenced operations on May 4, 1993.
(6) Commenced operations on January 4, 1994.
See Notes to Financial Statements.
<PAGE>
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<TABLE>
<CAPTION>
T. ROWE PRICE ASSET
AST PHOENIX CAPITAL ALLOCATION PIMCO TOTAL RETURN INVESCO EQUITY
GROWTH PORTFOLIO PORTFOLIO BOND PORTFOLIO INCOME PORTFOLIO
------------------- ------------------- -------------------- --------------------
FOR THE YEAR ENDED FOR THE YEAR ENDED FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
------------------- ------------------- -------------------- --------------------
1995 1994(6) 1995 1994(6) 1995 1994(6) 1995 1994(6)
------- ------- ------- ------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 9.34 $ 10.00 $ 9.94 $ 10.00 $ 9.75 $ 10.00 $ 9.75 $ 10.00
------- ------- ------- ------- -------- ------- -------- -------
0.06 0.07 0.26 0.21 0.25 0.26 0.25 0.16
2.92 (0.73) 2.02 (0.27) 1.55 (0.51) 2.65 (0.41)
------- ------- ------- ------- -------- ------- -------- -------
2.98 (0.66) 2.28 (0.06) 1.80 (0.25) 2.90 (0.25)
------- ------- ------- ------- -------- ------- -------- -------
(0.07) -- (0.21) -- (0.21) -- (0.15) --
-- -- -- -- -- -- -- --
------- ------- ------- ------- -------- ------- -------- -------
(0.07) -- (0.21) -- (0.21) -- (0.15) --
------- ------- ------- ------- -------- ------- -------- -------
$ 12.25
-- $ 9.34 $ 12.01 $ 9.94 $ 11.34 $ 9.75 $ 12.50 $ 9.75
------- ------- ------- ------- -------- ------- -------- -------
32.10% (6.60%) 23.36% (0.60%) 18.78% (2.50%) 30.07% (2.50%)
$ -- $14,845 $59,399 $23,463 $225,335 $46,493 $176,716 $65,201
1.15% 1.15%(1) 1.25% 1.25%(1) 0.89% 1.02%(1) 0.98% 1.14%(1)
1.37% 1.59%(1) 1.29% 1.47%(1) 0.89% 1.02%(1) 0.98% 1.14%(1)
0.55% 1.47%(1) 3.53% 3.64%(1) 5.95% 5.57%(1) 3.34% 3.41%(1)
0.33% 1.03%(1) 3.49% 3.42%(1) 5.95% 5.57%(1) 3.34% 3.41%(1)
290.38% 216.86% 17.62% 31.62% 124.41% 139.25% 89.48% 62.87%
</TABLE>
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<PAGE>
AMERICAN SKANDIA TRUST
FINANCIAL HIGHLIGHTS
PER SHARE DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
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<TABLE>
<CAPTION>
FOUNDERS CAPITAL T. ROWE PRICE
APPRECIATION INTERNATIONAL
PORTFOLIO EQUITY PORTFOLIO
------------------ --------------------
FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31, DECEMBER 31,
------------------ --------------------
1995 1994(6) 1995 1994(6)
------- ------- -------- --------
<S> <C> <C> <C> <C>
Net Asset Value at Beginning of Period................................ $ 10.84 $ 10.00 $ 9.62 $ 10.00
------- ------- -------- --------
Increase (Decrease) from Investment Operations
Net Investment Income (Loss)...................................... (0.04) 0.11 0.07 0.02
Net Realized & Unrealized Gains (Losses) on Investments and
Foreign Currency Transactions................................... 3.54 0.73 0.99 (0.40)
------- ------- -------- --------
Total Increase (Decrease) From Investment Operations......... 3.50 0.84 1.06 (0.38)
------- ------- -------- --------
Less Dividends and Distributions
Dividends from Net Investment Income.............................. (0.09) -- (0.01) --
Distributions from Net Realized Capital Gains..................... -- -- (0.02) --
------- ------- -------- --------
Total Dividends and Distributions............................ (0.09) -- (0.03) --
------- ------- -------- --------
Net Asset Value of Final Redemptions on December 29, 1995.............
Net Asset Value at End of Period...................................... $ 14.25 $ 10.84 $ 10.65 $ 9.62
------- ------- -------- --------
Total Return.......................................................... 32.56% 8.40% 11.09% (3.80%)
Ratios/Supplemental Data
Net Assets at End of Period (in 000's)............................ $90,460 $28,559 $195,667 $108,751
Ratios of Expenses to Average Net Assets:
After Advisory Fee Waiver and
Expense Reimbursement........................................ 1.22% 1.30%(1) 1.33% 1.75%(1)
Before Advisory Fee Waiver and
Expense Reimbursement........................................ 1.22% 1.55%(1) 1.33% 1.77%(1)
Ratios of Net Investment Income (Loss) to Average Net Assets:
After Advisory Fee Waiver and
Expense Reimbursement........................................ (0.28%) 2.59%(1) 1.03% 0.45%(1)
Before Advisory Fee Waiver and
Expense Reimbursement........................................ (0.28%) 2.34%(1) 1.03% 0.43%(1)
Portfolio Turnover Rate............................................... 68.32% 197.93% 17.11% 15.70%
</TABLE>
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(1) Annualized.
(6) Commenced operations on January 4, 1994.
(7) Commenced operations on May 3, 1994.
(8) Commenced operations on October 20, 1994.
(9) Commenced operations on May 2, 1995.
See Notes to Financial Statements.
<PAGE>
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<TABLE>
<CAPTION>
SELIGMAN T. ROWE PIMCO
HENDERSON PRICE LIMITED
AST SCUDDER INTERNATIONAL NATURAL MATURITY
EAGLE GROWTH INTERNATIONAL BERGER CAPITAL SMALL CAP RESOURCES BOND
EQUITY PORTFOLIO BOND PORTFOLIO GROWTH PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
------------------ ------------------- ------------------ ------------ ------------ ------------
FOR THE FOR THE FOR THE
FOR THE YEAR ENDED FOR THE YEAR ENDED FOR THE YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
------------------ ------------------- ------------------ ------------ ------------ ------------
1995 1994(7) 1995 1994(7) 1995 1994(8) 1995(9) 1995(9) 1995(9)
------- ------ ------- ------- ------- ------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 9.95 $10.00 $ 9.68 $ 10.00 $ 9.97 $10.00 $ 10.00 $10.00 $ 10.00
------- ------ ------- ------- ------- ------ ------- ------ --------
0.09 0.03 0.31 0.27 0.04 0.01 0.03 0.04 0.05
2.30 (0.08) 0.75 (0.59) 2.40 (0.04) 0.30 1.07 0.42
------- ------ ------- ------- ------- ------ ------- ------ --------
2.39 (0.05) 1.06 (0.32) 2.44 (0.03) 0.33 1.11 0.47
------- ------ ------- ------- ------- ------ ------- ------ --------
(0.02) -- (0.14) -- (0.01) -- -- -- --
-- -- -- -- -- -- -- -- --
------- ------ ------- ------- ------- ------ ------- ------ --------
(0.02) -- (0.14) -- (0.01) -- -- -- --
------- ------ ------- ------- ------- ------ ------- ------ --------
$ 12.32
-- $ 9.95 $ 10.60 $ 9.68 $ 12.40 $ 9.97 $ 10.33 $11.11 $ 10.47
------- ------ ------- ------- ------- ------ ------- ------ --------
24.11% (0.50%) 11.10% (3.20%) 24.42% (0.30%) 3.30% 11.10% 4.70%
$ -- $3,479 $45,602 $15,218 $45,979 $3,030 $ 28,455 $9,262 $161,940
1.25% 1.25%(1) 1.53% 1.68%(1) 1.17% 1.25%(1) 1.46%(1) 1.35%(1) 0.89%(1)
2.44% 2.63%(1) 1.53% 1.68%(1) 1.17% 1.70%(1) 1.46%(1) 1.80%(1) 0.89%(1)
0.69% 0.80%(1) 6.17% 7.03%(1) 0.70% 1.41%(1) 0.94%(1) 1.28%(1) 4.87%(1)
(0.50%) (0.56%)(1) 6.17% 7.03%(1) 0.70% 0.97%(1) 0.94%(1) 0.83%(1) 4.87%(1)
107.63% 11.39% 325.00% 163.27% 84.21% 5.36% 3.52% 2.32% 204.85%
</TABLE>
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<PAGE>
AMERICAN SKANDIA TRUST
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
American Skandia Trust (the "Trust"), was organized under the laws of the
Commonwealth of Massachusetts on October 31, 1988, as a "Massachusetts Business
Trust". The Trust is registered under the Investment Company Act of 1940, as
amended, as a diversified, open-end management investment company. The Trust
operates as a series company, issuing nineteen classes of shares of beneficial
interest during 1995: Seligman Henderson International Equity Portfolio
("Henderson"), Lord Abbett Growth and Income Portfolio ("Lord Abbett"), JanCap
Growth Portfolio ("JanCap"), AST Money Market Portfolio ("Money Market"),
Federated Utility Income Portfolio ("Federated"), AST Phoenix Balanced Asset
Portfolio ("Balanced"), Federated High Yield Portfolio ("High Yield"), AST
Phoenix Capital Growth Portfolio ("Growth"), T. Rowe Price Asset Allocation
Portfolio ("Asset Allocation"), PIMCO Total Return Bond Portfolio ("PIMCO"),
INVESCO Equity Income Portfolio ("INVESCO"), Founders Capital Appreciation
Portfolio ("Founders"), T. Rowe Price International Equity Portfolio ("T.
Rowe"), Eagle Growth Equity Portfolio ("Eagle"), AST Scudder International Bond
Portfolio ("Scudder"), Berger Capital Growth Portfolio ("Berger"), Seligman
Henderson International Small Cap Portfolio ("Small Cap"), T. Rowe Price Natural
Resources Portfolio ("Natural Resources"), and PIMCO Limited Maturity Bond
Portfolio ("Limited Maturity") (collectively "the Portfolios").
The following is a summary of the Trust's significant accounting policies:
Security Valuation
All Portfolios, other than Money Market: Securities are valued at the close
of regular trading on each business day the New York Stock Exchange ("NYSE") is
open. Securities are valued at the last sale price on the securities exchange or
securities market on which such securities primarily are traded. Securities not
listed on an exchange or securities market, or securities on which there were no
transactions, are valued at the average of the most recent bid and asked prices.
Any securities or other assets for which recent market quotations are not
readily available are valued at fair value as determined in good faith by the
Board of Trustees.
Short-term obligations with less than sixty days remaining to maturity are
valued at amortized cost. Short-term obligations with more than sixty days
remaining to maturity are valued at current market value until the sixtieth day
prior to maturity, and thereafter are valued on an amortized cost basis based on
the value on such date.
Money Market: Securities are valued at amortized cost. The amortized cost
method values a security at its cost at the time of purchase and thereafter
assumes a constant amortization to maturity of any discount or premium.
Foreign Currency Translation and Foreign Currency Exchange Contracts
The Trust's investment valuations, other assets, and liabilities initially
expressed in foreign currencies are converted each business day into U.S.
dollars based upon current exchange rates determined prior to the close of the
NYSE. Purchases and sales of foreign investments and income and expenses are
converted into U.S. dollars based upon currency exchange rates prevailing on the
respective dates of such transactions. Gains and losses attributable to changes
in foreign currency exchange rates are recorded for financial statement purposes
as net realized gains and losses on investments and foreign currency
transactions.
A foreign currency exchange contract (FCEC) is a commitment to purchase or
sell a specified amount of foreign currency at the settlement date at a
specified rate. FCECs are used to hedge against foreign exchange rate risk
arising from a Portfolio's investment or anticipated investment in securities
denominated in foreign currencies. Risks may arise upon entering into FCECs from
the potential inability of counterparties to meet the terms of their contracts.
Also, when utilizing FCECs a Portfolio
<PAGE>
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gives up the opportunity to profit from favorable exchange rate movements
during the term of the contract. FCECs are marked-to-market daily at the
applicable exchange rates and any gains or losses are recorded as unrealized
until the contract settlement date.
Futures and Options
Certain Portfolios, as permitted by the Trust's prospectus, may enter into
futures contracts and purchase and write both put and call options. Futures
contracts provide for the future sale by one party and purchase by another of a
specified amount of a financial instrument at an agreed upon price and date. Put
and call options give the holder the right to sell or purchase, respectively, a
specified amount of a security or currency at a specified price on a certain
date. For both futures and options, risks arise from possible illiquidity and
from movements in security values, interest rates or currency values.
Futures and purchased options are valued based on their quoted daily
settlement prices. The premium received for a written option is recorded as an
asset with an equal liability which is marked-to-market based on the option's
quoted daily settlement price. Fluctuations in the value of futures and options
are recorded as unrealized appreciation (depreciation) until terminated, at
which time realized gains (losses) are recognized.
Investment Transactions and Investment Income
Security transactions are accounted for on the trade date. Realized gains
and losses from security transactions are recognized on the FIFO cost basis.
Dividend income is recognized on the ex-dividend date. Interest income is
accrued daily. Gains or losses on premiums from expired options are recognized
on the date of expiration.
Dividends and Distributions to Shareholders
All Portfolios other than Money Market: Dividends and distributions arising
from net investment income and net short-term and long-term capital gains, if
any, are declared and paid annually.
Money Market: Dividends from net investment income are declared daily and
paid monthly, and capital gains, if any, are declared and paid annually.
Organizations Costs
The Trust bears all costs in connection with its organization, including
the initial fees and expenses of registering and qualifying its shares for
distribution under Federal and state securities regulations. All such costs are
being amortized on a straight-line basis over a period of five years from May 1,
1992.
Tax Matters
It is the Trust's policy to comply with the requirements of the Internal
Revenue Code pertaining to regulated investment companies and to distribute all
of its taxable income, as well as any net realized gains to its shareholders.
Therefore, no federal income tax provision has been made. Foreign taxes have
been provided for dividend and interest income earned on foreign investments in
accordance with the applicable country's tax rates and, to the extent
unrecoverable, are recorded as a reduction of investment income.
2. INVESTMENT MANAGEMENT AGREEMENTS,
INVESTMENT SUB-ADVISORY
AGREEMENTS AND TRANSACTIONS
WITH AFFILIATES
The Portfolios have entered into Investment Management Agreements with
American Skandia Investment Services, Inc., formerly American Skandia Life
Investment Management, Inc., ("Investment Manager") which provide that the
Investment Manager will furnish each Portfolio with investment advice and
investment management and administrative services. The Investment Manager has
engaged the following entities as sub-advisors for their respective Portfolios:
Seligman Henderson Co., a joint venture between J&W Seligman & Co. Incorporated
and Henderson International, Inc. for Henderson and Small Cap, Lord Abbett & Co.
for Lord Abbett, Janus Capital Corporation for JanCap,
<PAGE>
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J. P. Morgan Investment Management, Inc. for Money Market, Federated
Investment Counseling for Federated and High Yield, Phoenix Investment Counsel,
Inc. for Balanced and Growth, T. Rowe Price Associates, Inc. for Asset
Allocation and Natural Resources, Pacific Investment Management Co. for PIMCO
and Limited Maturity, INVESCO Trust Co. for INVESCO, Founders Asset Management
Inc. for Founders, Rowe Price-Fleming International, a United Kingdom
corporation, for T. Rowe, Eagle Asset Management for Eagle, Scudder, Stevens,
and Clark for Scudder, and Berger Associates, Inc. for Berger. The Investment
Manager receives a fee computed daily and paid monthly based on an annual rate
of 1.00%, .75%, .90%, .50%, .75%, .75%, .75%, .75%, .85%, .65%, .75%, .90%,
1.00%, .80%, 1.00%, .75%, 1.00%, .90%, and .65% of the average daily net assets
of the Henderson, Lord Abbett, JanCap, Money Market, Federated, Balanced, High
Yield, Growth, Asset Allocation, PIMCO, INVESCO, Founders, T. Rowe, Eagle,
Scudder, Berger, Small Cap, Natural Resources, and Limited Maturity Portfolios,
respectively. The fees for Federated are at the rate of .60% for average daily
net assets in excess of $50,000,000 and for Balanced are at the rate of .65% for
average daily net assets in excess of $75,000,000. The Investment Manager is
currently voluntarily waiving .15% of its fee for Henderson on average daily net
assets in excess of $75,000,000, and .05% of its fee for Money Market.
The Investment Manager pays each sub-advisor a fee computed daily and
payable monthly based on an annual rate of 1.00%, .50%, .60%, .25%, .50%, .50%,
.50%, .50%, .50%, .30%, .50%, .65%, .75%, .50%, .60%, .55%, .60%, .60%, and .30%
of the average daily net assets of the Henderson, Lord Abbett, JanCap, Money
Market, Federated, Balanced, High Yield, Growth, Asset Allocation, PIMCO,
INVESCO, Founders, T. Rowe, Eagle, Scudder, Berger, Small Cap, Natural
Resources, and Limited Maturity Portfolios, respectively. The sub-advisors for
Henderson and Money Market are currently voluntarily waiving portions of the
fees payable to them by the Investment Manager. The annual rates of the fees
payable by the Investment Manager to the sub-advisors of all Portfolios, other
than Eagle and Scudder, are reduced for Portfolio net assets in excess of
specified levels.
The Investment Manager has agreed to reimburse each Portfolio for the
amount, if any, by which the total operating and management expenses (after fee
waivers and expense reimbursements) of the Portfolio for any fiscal year exceed
the most restrictive state blue sky expense limitation in effect from time to
time, to the extent required by such limitation. The Investment Management
Agreement with each Portfolio also provides that the Investment Manager will
reimburse the Portfolio to prevent its expenses from exceeding a specific
percentage limit. During the year ended December 31, 1995, the Investment
Manager reimbursed Money Market, Growth, Asset Allocation, Eagle and Natural
Resources for expenses pursuant to those provisions.
The Trust has entered into an agreement for the sale of shares with
American Skandia Life Assurance Corporation ("ASLAC") pursuant to which it pays
ASLAC a shareholder servicing fee at an annual rate of 0.1% of each Portfolio's
average daily net assets.
Certain officers and/or Trustees of the Trust are also officers and/or
directors of the Investment Manager. During the year ended December 31, 1995,
the Trust made no direct payments to its officers or interested Trustees.
3. PURCHASES AND SALES OF SECURITIES
The cost of security purchases and proceeds from the sales of securities,
excluding short-term obligations, during the year ended December 31, 1995 were
($ in thousands): $139,949 and $135,018 for Henderson, $161,248 and $67,797 for
Lord Abbett, $481,042 and $338,056 for JanCap, $79,463 and $60,002 for
Federated, $231,131 and $201,726 for Balanced, $65,672 and $12,996 for High
Yield, $44,632 and $61,254 for Growth, $37,318 and $5,889 for Asset Allocation,
<PAGE>
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$229,857 and $87,401 for PIMCO, $175,237 and $93,917 for INVESCO, $77,534
and $32,394 for Founders, $90,390 and $22,238 for T. Rowe, $4,887 and $9,040 for
Eagle, $106,962 and $80,393 for Scudder, $54,444 and $15,457 for Berger, $24,497
and $359 for Small Cap, $7,314 and $271 for Natural Resources, and $100,645 and
$44,050 for Limited Maturity.
4. FINANCIAL INSTRUMENTS Certain Portfolios, as permitted by the Trust's
prospectus, may trade financial instruments with off-balance sheet risk in the
normal course of investing activities and to assist in managing exposure to
market risks such as changes in interest rates and foreign currency exchange
rates. The financial instruments include written options, forward foreign
currency exchange contracts and futures contracts.
The notional or contractual amounts of these instruments represent the
investment the Trust has in particular classes of financial instruments and do
not necessarily represent the amounts potentially subject to risk. The
measurement of the risks associated with these instruments is meaningful only
when all related and offsetting transactions are considered.
5. CAPITAL LOSS CARRYOVERS
At December 31, 1995, for Federal income tax purposes, capital loss
carryovers which may be applied against future net taxable realized gains of
each succeeding year until the earlier of utilization or expiration in 2002 were
($ in thousands): $2,704 for Federated, $26 for High Yield and $9 for Berger.
Capital loss carryovers that expire in 2003 were ($ in thousands): $418 for T.
Rowe, $195 for Berger and $14 for Small Cap.
6. FUND SUBSTITUTION
On December 29, 1995, pursuant to an exemptive order granted by the
Securities and Exchange Commission, ASLAC effected a substitution involving
various Portfolios and other unaffiliated mutual funds offered as investment
options in its annuity contracts. As a result of that substitution, on December
29, 1995, the separate accounts of ASLAC redeemed all of the then-outstanding
shares of Growth and Eagle, and effected purchases of the shares of various
Portfolios of the Trust, as follows ($ in thousands unaudited):
<TABLE>
<CAPTION>
VALUE OF FUND SHARES:
PORTFOLIO PURCHASED REDEEMED
- ----------------------------- ---------- ---------
<S> <C> <C>
Henderson.................... $ 2,154
Lord Abbett.................. 66,471
JanCap....................... 623
Balanced..................... 69,746
PIMCO........................ 44,198
Limited Maturity............. 101,712
Growth....................... $19,220
Eagle........................ 5,255
</TABLE>
7. SUBSEQUENT EVENT
On April 12, 1996 the shareholders of the AST Scudder International Bond
Portfolio approved a proposal to enter into a new Investment Management
Agreement with the Investment Manager, effective May 1, 1996, which provides for
a reduction in the Investment Manager's fee to an annual rate of .80% of the
Portfolio's average daily net assets. Also on April 12, 1996, the Portfolio's
shareholders approved a proposal to enter into a new Sub-Advisory Agreement
under which Rowe Price-Fleming International will become sub-advisor to the
Portfolio, effective May 1, 1996, and the annual fee rate paid by the Investment
Manager to the sub-advisor will be .40% of the Portfolio's average daily net
assets. In conjunction with the adoption of these new agreements, the name of
the Portfolio will change to the "T. Rowe Price International Bond Portfolio,"
effective May 1, 1996.
<PAGE>
APPENDIX
Description of Certain Debt Securities Ratings
Moody's Investors Service, Inc. ("Moody's")
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 exceptionally
stable, margin, and principal is secure. While the various protective elements
are likely to change, it is improbable that such changes would 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 highest rated bonds because
margins of protection may not be as large as in Aaa securities, or because
fluctuation of protective elements may be of greater amplitude, or because there
may be other elements present which make the long-term risks appear somewhat
larger than 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 certain
characteristics may exist which suggest a susceptibility to impairment 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.
Although interest payments and principal security appear adequate for the
present, certain protective elements may be lacking or may be characteristically
unreliable over time. Such bonds lack high quality investment characteristics
and in fact have speculative characteristics as well.
Ba -- Bonds which are rated 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 a
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.
Ca -- Bonds which are rated Ca represent obligations which are
speculative to a large 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.
Standard & Poor's Corporation ("Standard & Poor's")
AAA -- Debt issues rated AAA have the highest rating assigned by
Standard & Poor's. Capacity to pay interest and repay principal is extremely
strong.
AA -- Debt issues rated AA have a strong capacity to pay interest and
repay principal, and differ only in small degree from the highest rated issues.
A -- Debt issues rated A have a strong capacity to pay interest and
repay principal but they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt issues in higher
rated categories.
BBB -- Debt issues rated BBB are regarded as having an adequate
capacity to pay interest and repay principal. Whereas they normally exhibit
adequate protection parameters, adverse economic conditions or changing
circumstances are more likely to weaken their capacity to pay interest and repay
principal for debt in this category than in higher rated categories.
BB, B, CCC, CC -- Debt rated BB, B, CCC, and CC is regarded on balance,
as predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and CC is the highest degree of speculative. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties of major risk exposures to adverse
conditions.
C -- The rating C is reserved for income bonds on which no interest is
paid.
D -- Debt rated D is in default, and payment of interest and/or
repayment of principal is in arrears.
Description of Certain Commercial Paper Ratings
Moody's
Prime-1 -- Issuers (or related supporting institutions) rated Prime-1
have a superior capacity for repayment of short-term debt obligations. Prime-1
repayment capacity will normally be evidenced by the following characteristics:
leading market positions in well-established industries; high rates of return on
funds employed; conservative capitalization structures with moderate reliance on
debt and ample asset protection; broad margins in earnings coverage of fixed
financial charges and high internal cash generation; and well-established access
to a range of financial markets and assured sources of alternate liquidity.
Prime-2 -- Issuers rated Prime-2 (or related supporting institutions)
have a strong ability for repayment of senior short-term debt obligations. This
will normally be evidenced by many of the characteristics cited above, but to a
lesser degree. Earnings trends and coverage ratios, while sound, may be more
subject to variation. Capitalization characteristics, while still appropriate,
may be more affected by external conditions. Ample alternate liquidity is
maintained.
Prime-3 -- Issuers rated Prime-3 (or related supporting institutions)
have an acceptable ability for repayment of senior short-term debt obligations.
The effect of industry characteristics and market compositions may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and may require relatively high
financial leverage. Adequate alternate liquidity is maintained.
Standard & Poor's
A -- Issues assigned this highest rating are regarded as having the
greatest capacity for timely payment. Issues in this category are delineated
with the numbers 1, 2 and 3 to indicate the relative degree of safety.
A-1 -- This designation indicates that the degree of security regarding
timely payment is either overwhelming or very strong. Those issues determined to
possess overwhelming security characteristics are given a plus (+) sign
designation.
A-2 -- Capacity for timely payment on issues with this designation is
strong. However, the relative degree of safety is not as high as for issues
designated "A-1".
A-3 -- Issues carrying this designation have a satisfactory capacity
for timely payment. They are, however, somewhat more vulnerable to the adverse
effects of the changes in circumstances than obligations carrying the higher
designations.
<PAGE>
PART C. OTHER INFORMATION
ITEM 24. Financial Statements and Exhibits
(a) Financial statements contained in Part A:
Financial Highlights for the period April 19, 1989 (commencement of
operations) to December 31, 1995.
Financial Statements contained in Part B:
(1) Independent Auditors' Report;
(2) Portfolios of Investments as of December 31, 1995;
(3) Statements of Assets and Liabilities as of December 31, 1995;
(4) Statements of Operations for the year ended December 31, 1995;
(5) Statements of Changes in Net Assets for the years ended
December 31, 1994 and December 31, 1995;
(6) Financial Highlights for the period April 19, 1989 (commencement of
operations) to December 31, 1995;
(b) Exhibits
* 1. (a) Form of Declaration of Trust of Registrant.
i (b) Amendment to Agreement and Declaration of Trust of Registrant.
ii (c) Amendment to Declaration of Trust of Registrant.
* 2. Form of By-laws of Registrant.
3. None.
** 4. Specimen certificate for shares of beneficial interest of Registrant.
ii 5. (a) Investment Management Agreement between Registrant and American
Skandia Life Investment Management, Inc. for the Henderson International Growth
Portfolio.
ii (b) Investment Management Agreement between Registrant and American
Skandia Life Investment Management, Inc. for the Lord Abbett Growth and Income
Portfolio.
iii (c) Investment Management Agreement between Registrant and American
Skandia Life Investment Management, Inc. for the JanCap Growth Portfolio.
iii (d) Investment Management Agreement between Registrant and American
Skandia Life Investment Management, Inc. for the AST Money Market.
iv (e) Investment Management Agreement between Registrant and American
Skandia Life Investment Management, Inc. for the Federated Utility Income
Portfolio.
iv (f) Investment Management Agreement between Registrant and American
Skandia Life Investment Management, Inc. for the AST Phoenix Balanced Asset
Portfolio.
v (g) Investment Management Agreement between Registrant and American
Skandia Life Investment Management, Inc. for the Federated High Yield Portfolio.
v (h) Investment Management Agreement between Registrant and American
Skandia Life Investment Management, Inc. for the AST Phoenix Capital Growth
Portfolio.
v (i) Investment Management Agreement between Registrant and American
Skandia Life Investment Management, Inc. for the T. Rowe Price Asset Allocation
Portfolio.
v (j) Investment Management Agreement between Registrant and American
Skandia Life Investment Management, Inc. for the T. Rowe Price International
Equity Portfolio.
v (k) Investment Management Agreement between Registrant and American
Skandia Life Investment Management, Inc. for the Founders Capital Appreciation
Portfolio.
v (l) Investment Management Agreement between Registrant and American
Skandia Life Investment Management, Inc. for the INVESCO Equity Income
Portfolio.
v (m) Investment Management Agreement between Registrant and American
Skandia Life Investment Management, Inc. for the PIMCO Total Return Portfolio.
vi (n) Investment Management Agreement between Registrant and American
Skandia Life Investment Management, Inc. for the AST Scudder International Bond
Portfolio.
vi (o) Investment Management Agreement between Registrant and American
Skandia Life Investment Management, Inc. for the Eagle Growth Equity Portfolio.
vii (p) Investment Management Agreement between Registrant and American
Skandia Life Investment Management, Inc. for the Berger Capital Growth
Portfolio.
viii (q) Investment Management Agreement between Registrant and American
Skandia Life Investment Management, Inc. for Seligman Henderson International
Small Cap Portfolio.
viii (r) Investment Management Agreement between Registrant and American
Skandia Life Investment Management, Inc. for T. Rowe Price Natural Resources
Portfolio.
viii (s) Investment Management Agreement between Registrant and American
Skandia Life Investment Management, Inc. for PIMCO Limited Maturity Bond
Portfolio.
(t) Investment Management Agreement between Registrant and American
Skandia Investment Services, Incorporated for the T. Rowe Price International
Bond Portfolio.
(u) Investment Management Agreement between Registrant and American
Skandia Investment Services, Incorporated for the Robertson Stephens
Value + Growth Portfolio.
ii (v) Sub-advisory Agreement between American Skandia Life Investment
Management, Inc. and Henderson International, Inc. for the Henderson
International Growth Portfolio.
ii (w) Sub-advisory Agreement between American Skandia Life Investment
Management, Inc. and Lord, Abbett & Co. for the Lord Abbett Growth and Income
Portfolio.
iii (x) Sub-advisory Agreement between American Skandia Life Investment
Management, Inc. and Janus Capital Corporation for the JanCap Growth Portfolio.
iii (y) Sub-advisory Agreement between American Skandia Life Investment
Management, Inc. and J.P. Morgan Investment Management Inc. for the AST Money
Market Portfolio.
iv (z) Sub-advisory Agreement between American Skandia Life Investment
Management, Inc. and Federated Investment Counseling for the Federated Utility
Income Portfolio.
iv (aa) Sub-advisory Agreement between American Skandia Life Investment
Management, Inc. and Phoenix Investment Counsel, Inc. for the AST Phoenix
Balanced Portfolio.
v (bb) Sub-advisory Agreement between American Skandia Life Investment
Management, Inc. and Federated Investment Counseling for the Federated High
Yield Portfolio.
v (cc) Sub-advisory Agreement between American Skandia Life Investment
Management, Inc. and Phoenix Investment Counsel, Inc. for the AST Phoenix
Capital Growth Portfolio.
v (dd) Sub-advisory Agreement between American Skandia Life Investment
Management, Inc. and T. Rowe Price Associates, Inc. for the T. Rowe Price Asset
Allocation Portfolio.
v (ee) Sub-advisory Agreement between American Skandia Life Investment
Management, Inc. and Rowe Price-Fleming International, Inc. for the T. Rowe
Price International Equity Portfolio.
v (ff) Sub-advisory Agreement between American Skandia Life Investment
Management, Inc. and Founders Asset Management, Inc. for the Founders Capital
Appreciation Portfolio.
v (gg) Sub-advisory Agreement between American Skandia Life Investment
Management, Inc. and INVESCO Trust Company for the INVESCO Equity Income
Portfolio.
v (hh) Sub-advisory Agreement between American Skandia Life Investment
Management, Inc. and Pacific Investment Management Company for the PIMCO Total
Return Portfolio.
vi (ii) Sub-advisory Agreement between American Skandia Life Investment
Management, Inc. and Scudder, Stevens & Clark, Inc. for the AST Scudder
International Bond Portfolio.
vi (jj) Sub-advisory Agreement between American Skandia Life Investment
Management, Inc. and Eagle Asset Management, Inc. for the Eagle Growth Equity
Portfolio.
vii (kk) Sub-advisory Agreement between American Skandia Life Investment
Management, Inc. and Berger Associates, Inc.
viii (ll) Sub-Advisory Agreement between American Skandia Life Investment
Management, Inc. and Seligman Henderson Co. for the Seligman Henderson
International Small Cap Portfolio.
viii (mm) Sub-Advisory Agreement between American Skandia Life Investment
Management, Inc. and T. Rowe Price Associates, Inc. for the T. Rowe Price
Natural Resources Portfolio.
viii (nn) Sub-Advisory Agreement between American Skandia Life Investment
Management, Inc. and Pacific Investment Management Company for the PIMCO Limited
Maturity Bond Portfolio.
viii (oo) Sub-Advisory Agreement between American Skandia Investment
Services, Incorporated and Seligman Henderson Co. for the Seligman Henderson
International Equity Portfolio.
(pp) Sub-Advisory Agreement between American Skandia Investment Services,
Incorporated and Rowe Price-Fleming International, Inc. for the T. Rowe Price
International Bond Portfolio.
(qq) Sub-Advisory Agreement between American Skandia Investment Services,
Incorporated and Robertson, Stephens & Company Investment Management, L.P. for
the Robertson Stephens Value + Growth Portfolio.
iii Amended Administration Agreement between Registrant and Provident
Financial Processing Corporation
ii 6. Sales Agreement between Registrant and American Skandia Life
Assurance Corporation.
7. None.
iii 8. (a) Custodian Agreement between Registrant and Morgan Stanley Trust
Company for the Henderson International Growth Portfolio.
iii (b) Amended Custodian Agreement between Registrant and
Provident National Bank.
iii (c) Amended Transfer Agency Agreement between Registrant and
Provident Financial Processing Corporation.
9. None.
10. Consent of Counsel for the Registrant.
11. Independent Auditors' Consent.
12. None.
** 13. Certificate re: initial $100,000 capital.
14. None.
15. None.
*** 16. Calculation of Total Return.
17. Financial Data Schedules.
18. None.
- --------------------------
* Filed as an Exhibit to Pre-Effective Amendment No. 1 to Registration
Statement, which Amendment was filed on October 7, 1988, and is incorporated
herein by reference.
** Filed as an Exhibit to Pre-Effective Amendment No. 2 to Registration
Statement, which Amendment was filed on April 20, 1989, and is incorporated
herein by reference.
*** Filed as an Exhibit to Post-Effective Amendment No. 1 to Registration
Statement, which Amendment was filed on March 2, 1990, and is incorporated
herein by reference.
i Filed as an Exhibit to Post-Effective Amendment No. 2 to Registration
Statement, which Amendment was filed on April 30, 1991, and is incorporated
herein by reference.
ii Filed as an Exhibit to Post-Effective Amendment No. 4 to Registration
Statement, which Amendment was filed on August 25, 1992, and is incorporated
herein by reference.
iii Filed as an Exhibit to Post-Effective Amendment No. 5 to Registration
Statement, which Amendment was filed on October 30, 1992, and is incorporated
herein by reference.
iv Filed as an Exhibit to Post-Effective Amendment No. 7 to Registration
Statement, which was filed on April 20, 1993 and is incorporated herein by
reference.
v Filed as an Exhibit to Post-Effective Amendment No. 10 to Registration
Statement, which Amendment was filed on December 9, 1993, and is incorporated
herein by reference.
vi Filed as an Exhibit to Post-Effective Amendment No. 12 to Registration
Statement which Amendment was filed on April 29, 1994, and is incorporated
herein by reference.
vii Filed as an Exhibit to Post-Effective Amendment No. 13 to Registration
Statement which Amendment was filed on October 12, 1994, and is incorporated
herein by reference.
viii Filed as an Exhibit to Post-Effective Amendment No. 16 to Registration
Statement which Amendment was filed on April 21, 1995, and is incorporated
herein by reference.
ITEM 25. Persons Controlled By or Under Common Control with Registrant
See "Investment Manager and Investment Management Agreements" in the
Prospectus and in the Statement of Additional Information.
ITEM 26. Number of Holders of Securities
Number of Record Holders
Title of Class as of April 1 , 1996
- -------------- --------------------
Seligman Henderson
International Equity Portfolio 1
Seligman Henderson
International Small Cap Portfolio 1
Lord Abbett Growth and
Income Portfolio 1
AST Money Market Portfolio 1
JanCap Growth Portfolio 1
Federated Utility Income Portfolio 1
Federated High Yield Portfolio 1
AST Phoenix Balanced Asset Portfolio 1
T. Rowe Price Asset Allocation Portfolio 1
T. Rowe Price International Equity Portfolio 1
T. Rowe Price Natural Resources Portfolio 1
T. Rowe Price International Bond Portfolio 1
(formerly, the AST Scudder
International Bond Portfolio)
Founders Capital Appreciation Portfolio 1
INVESCO Equity Income Portfolio 1
PIMCO Total Return Bond Portfolio 1
PIMCO Limited Maturity Bond Portfolio 1
Berger Capital Growth Portfolio 1
ITEM 27. Indemnification
Article VIII of the Registrant's Declaration of Trust provides as
follows:
The Trust shall indemnify each of its Trustees and officers (including
persons who serve at the Trust's request as directors, officers or trustees of
another organization in which the Trust has any interest as a shareholder,
creditor or otherwise) (hereinafter referred to as a "Covered Person") against
all liabilities and expenses, including but not limited to amounts paid in
satisfaction of judgments, in compromise or as fines and penalties, and counsel
fees reasonably incurred by as fines and penalties, and counsel fees reasonably
incurred by any Covered Person in connection with the defense or disposition of
any action, suit or any other proceeding, whether civil or criminal, before any
court or administrative legislative body, in which such Covered Person may be or
may have been involved as a party or otherwise or with which such Covered Person
may be or may have been threatened, while in office or thereafter, by reason of
being or having been such a Covered Person except with respect to any matter as
to which such Covered Person shall have been finally adjudicated in any such
action, suit or other proceeding (a) not to have acted in good faith in the
reasonable belief that such Covered Person's action was in the best interests of
the Trust or (b) to be liable to the Trust or its Shareholders by reason of
willful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of such Covered Person's office. Expenses,
including counsel fees so incurred by any such Covered Person (but excluding
amounts paid in satisfaction of judgments, in compromise or as fines or
penalties) shall be paid from time to time by the Trust in advance of the final
disposition of any such action, suit or proceeding upon receipt of any
undertaking by or on behalf of such Covered Person repay amounts so paid to the
Trust if it is ultimately determined that indemnification of such expenses is
not authorized under this Article, provided, however, that either (1) such
Covered Person shall have provided appropriate security for such undertaking,
(b) the Trust shall be insured against losses arising from any such advance
payments or (c) either a majority of the disinterested Trustees acting on the
matter (providing that a majority of the disinterested Trustees then in the
office act on the matter), or independent legal counsel in a written opinion
shall have determined, based upon a review of readily available facts (as
opposed to a full trial type inquiry) that there is reason to believe that such
Covered Person will be found entitled to indemnification under this Article.
Insofar as indemnification for liability arising under the Securities
Act of 1933 may be permitted to trustees, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant or expenses
incurred or paid by a trustee, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
ITEM 28. Business and Other Connections of Investment Adviser
See "Management of the Trust" in the Prospectus and "Management" in the
Statement of Additional Information.
ITEM 29. Principal Underwriter
Registrant's shares are presently offered exclusively as an investment
medium for life insurance companies writing both variable annuity and variable
life insurance policies. Pursuant to an exemptive order of the Securities and
Exchange Commission, Registrant may also sell its shares directly to qualified
plans. If Registrant does so, it intends to use American Skandia Marketing,
Incorporated ("ASM, Inc.") or another affiliated broker-dealer as underwriter,
if so required by applicable law.
The following individuals, all of whom have as their principal business
address, One Corporate Drive, Shelton, Connecticut 06484, are the current
officers and/or directors of ASM, Inc.: Jan R. Carendi (Chief Executive Officer
& Director); Gordon C. Boronow (Director); Wade A. Dokken (President, Chief
Operating Officer, Chief Marketing Officer & Director); Thomas M. Mazzaferro
(Executive Vice President & Chief Financial Officer); Amanda C. Sutyak
(Executive Vice President); N. David Kuperstock (Vice President & Director);
Alan H. Blank (Vice President & National Sales Manager); Don Thomas Peck (Vice
President & National Sales Manager); Hayward Sawyer (Vice President & National
Sales Manager); Paul DeSimone (Controller); M. Priscilla Pannell (Corporate
Secretary); and Kristen E. Newall (Assistant Corporate Secretary).
Of the above, the following individuals are also officers and/or directors
of Registrant: Jan R. Carendi (President, Principal Executive Officer &
Trustee); Gordon C. Boronow (Vice President & Trustee); Thomas M. Mazzaferro
(Treasurer); and M. Priscilla Pannell (Assistant Corporate Secretary).
ITEM 30. Location of Accounts and Records
The accounts, books or other documents required to be maintained by
Section 31(a) of the Investment Company act of 1940 are maintained at the
offices of the Trust, One Corporate Drive, Shelton, Connecticut 06484, except
for those maintained by the Trust's Custodian.
ITEM 31. Management Services
None.
ITEM 32. Undertakings
None.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Amendment to
its Registration Statement to be signed on its behalf by the Undersigned,
thereunto duly authorized, in the City of Shelton and State of Connecticut, on
the 29th day of April, 1996.
AMERICAN SKANDIA TRUST
By: /s/ Mary Ellen O'Leary
Mary Ellen O'Leary
Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Amendment to its Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated.
Signature Title Date
/s/ Jan R. Carendi* President (Principal 4/29/96
Jan R. Carendi Executive Officer)
and Trustee
/s/ Gordon Boronow* Vice President 4/29/96
Gordon C. Boronow and Trustee
/s/ Mary Ellen O'Leary Secretary 4/29/96
Mary Ellen O'Leary
/s/ Thomas M. Mazzaferro Treasurer 4/29/96
Thomas M. Mazzaferro
/s/ Richard G. Davy, Jr. Controller 4/29/96
Richard G. Davy, Jr.
/s/ David E. A. Carson* Trustee 4/29/96
David E. A. Carson
/s/ Thomas M. O'Brien* Trustee 4/29/96
Thomas M. O'Brien
/s/ F. Don Schwartz* Trustee 4/29/96
F. Don Schwartz
*By: /s/ Mary Ellen O'Leary
Mary Ellen O'Leary
*Pursuant to Powers of Attorney previously filed
<PAGE>
Registration No. 33-24962
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
EXHIBITS
FILED WITH POST-EFFECTIVE AMENDMENT NO. 18
TO FORM N-1A
REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933 AND
INVESTMENT COMPANY ACT OF 1940
AMERICAN SKANDIA TRUST
<PAGE>
Exhibits
Table of Contents
Exhibit Number Description
5(t) Investment Management Agreement between Registrant and
American Skandia Investment Services, Incorporated for
the T. Rowe Price International Bond Portfolio
5(u) Investment Management Agreement between Registrant and
American Skandia Investment Services, Incorporated for
the Robertson Stephens Value + Growth Portfolio
5(pp) Sub-advisory Agreement between American Skandia
Investment Services, Incorporated and Rowe Price-Fleming
International, Inc. for the T. Rowe Price International
Bond Portfolio
5(qq) Sub-advisory Agreement between American Skandia
Investment Services, Incorporated and Robertson, Stephens
& Company Investment Management, L.P. for the Robertson
Stephens Value + Growth Portfolio
10 Consent of Counsel for the Registrant
11 Independent Auditors' Consent
17 Financial Data Schedules
INVESTMENT MANAGEMENT AGREEMENT
THIS AGREEMENT is made this 1st day of May, 1996 by and between
American Skandia Trust, a Massachusetts business trust (the "Fund"), and
American Skandia Investment Services, Incorporated, a Connecticut corporation
(the "Investment Manager");
W I T N E S E T H
WHEREAS, the Fund is registered as an open-end, diversified
management investment company under the Investment Company Act of 1940, as
amended (the "Investment Company Act"), and the rules and regulations
promulgated thereunder; and
WHEREAS, the Investment Manager is registered as an investment
adviser under the Investment Advisers Act of 1940, as amended (the "Investment
Advisers Act"); and
WHEREAS, the Fund and the Investment Manager desire to enter into
an agreement to provide for the management of the assets of the T. Rowe Price
International Bond Portfolio (the "Portfolio") on the terms and conditions
hereinafter set forth.
NOW THEREFORE, in consideration of the mutual covenants herein
contained and other good and valuable consideration, the receipt whereof is
hereby acknowledged, the parties hereto agree as follows:
1. Management. The Investment Manager shall act as investment
manager for the Portfolio and shall, in such capacity, manage the investment
operations of the Portfolio, including the purchase, retention, disposition and
lending of securities, subject at all times to the policies and control of the
Fund's Board of Trustees. The Investment Manager shall give the Portfolio the
benefit of its best judgments, efforts and facilities in rendering its services
as investment manager.
2. Duties of Investment Manager. In carrying out its
obligation under paragraph 1 hereof, the Investment Manager shall:
(a) supervise and manage all aspects of the Portfolio's operations:
(b) provide the Portfolio or obtain for it, and thereafter supervise, such
executive, administrative, clerical and shareholder servicing services as are
deemed advisable by the Fund's Board of Trustees;
(c) arrange, but not pay for, the periodic updating of prospectuses and
supplements thereto, proxy material, tax returns, reports to the Portfolio's
shareholders, reports to and filings with the Securities and Exchange
Commission, state Blue Sky authorities and other applicable regulatory
authorities;
(d) provide to the Board of Trustees of the Fund on a regular basis,
written financial reports and analyses on the Portfolio's securities
transactions and the operations of comparable investment companies;
(e) obtain and evaluate pertinent information about significant
developments and economic, statistical and financial data, domestic, foreign or
otherwise, whether affecting the economy generally or the Portfolio, and whether
concerning the individual issuers whose securities are included in the Portfolio
or the activities in which they engage, or with respect to securities which the
Investment Manager considers desirable for inclusion in the Portfolio;
(f) determine what issuers and securities shall be represented in the
Portfolio's portfolio and regularly report them in writing to the Board of
Trustees;
(g) formulate and implement continuing programs for the purchases and sales
of the securities of such issuers and regularly report in writing thereon to the
Board of Trustees; and
(h) take, on behalf of the Portfolio, all actions which appear to the Fund
necessary to carry into effect such purchase and sale programs and supervisory
functions as aforesaid, including the placing of orders for the purchase and
sale of portfolio securities.
3. Broker-Dealer Relationships. The Investment Manager is
responsible for decisions to buy and sell securities for the Portfolio,
broker-dealer selection, and negotiation of its brokerage commission rates. The
Investment Manager shall determine the securities to be purchased or sold by the
Portfolio pursuant to its determinations with or through such persons, brokers
or dealers, in conformity with the policy with respect to brokerage as set forth
in the Fund's Prospectus and Statement of Additional Information, or as the
Board of Trustees may determine from time to time. Generally, the Investment
Manager's primary consideration in placing Portfolio securities transactions
with broker-dealers for execution is to obtain and maintain the availability of,
execution at the best net price and in the most effective manner possible. The
Investment Manager may consider sale of the shares of the Portfolio, subject to
the requirements of best net price and most favorable execution.
Consistent with this policy, the Investment Manager will take the
following into consideration: the best net price available; the reliability,
integrity and financial condition of the broker-dealer; the size of and
difficulty in executing the order; and the value of the expected contribution of
the broker-dealer to the investment performance of the Portfolio on a continuing
basis. Accordingly, the cost of the brokerage commissions to the Portfolio may
be greater than that available from other brokers if the difference is
reasonably justified by other aspects of the portfolio execution services
offered. Subject to such policies and procedures as the Board of Trustees of the
Fund may determine, the Investment Manager shall not be deemed to have acted
unlawfully or to have breached any duty solely by reason of its having caused
the Portfolio to pay a broker or dealer that provides research services to the
Investment Manager for the Portfolio's use an amount of commission for effecting
a portfolio investment transaction in excess of the amount of commission another
broker or dealer would have charged for effecting that transaction, if the
Investment Manager, determines in good faith that such amount of commission was
reasonable in relation to the value of the research services provided by such
broker, viewed in terms of either that particular transaction or the Investment
Manager's ongoing responsibilities with respect to the Portfolio. The Investment
Manager is further authorized to allocate the orders placed by it on behalf of
the Portfolio to such brokers and dealers who also provide research or
statistical material, or other services to the Fund or the Investment Manager.
Such allocation shall be in such amounts and proportions as the Investment
Manager shall determine and the Investment Manager will report on said
allocations to the Board of Trustees of the Fund regularly as requested by the
Board and, in any event, at least once each calendar year if no specific request
is made, indicating the brokers to whom such allocations have been made and the
basis therefor.
4. Control by Board of Trustees. Any investment program
undertaken by the Investment Manager pursuant to this Agreement, as well as any
other activities undertaken by the Investment Manager on behalf of the Fund
pursuant thereto, shall at all times be subject to any directives of the Board
of Trustees of the Fund.
5. Compliance with Applicable Requirements. In carrying out its
obligations under this Agreement, the Investment Manager shall at all times
conform to:
(a) all applicable provisions of the Investment Company Act and Investment
Advisers Act and any rules and regulations adopted thereunder, as amended; and
(b) the provisions of the Registration Statements of the Fund under the
Securities Act of 1933 and the Investment Company Act, including the investment
objectives, policies and restrictions, and permissible investments specified
therein; and
(c) the provisions of the Declaration of Trust of the Fund, as amended; and
(d) the provisions of the By-laws of the Fund, as amended; and
(e) any other applicable provisions of state and federal law.
6. Expenses. The expenses connected with the Fund shall be
allocable between the Fund and the Investment Manager as follows:
(a) The Investment Manager shall furnish, at its expense and without cost
to the Fund, the services of a President, Secretary, and one or more Vice
Presidents of the Fund, to the extent that such additional officers may be
required by the Fund for the proper conduct of its affairs.
(b) The Investment Manager shall further maintain, at its expense and
without cost to the Fund, a trading function in order to carry out its
obligations under subparagraphs (f), (g) and (h) of paragraph 2 hereof to place
orders for the purchase and sale of portfolio securities for the Portfolio.
(c) Nothing in subparagraph (a) hereof shall be construed to require the
Investment Manager to bear:
(i) any of the costs (including applicable office space,
facilities and equipment) of the services of a principal
financial officer of the Fund whose normal duties consist of
maintaining the financial accounts and books and records of the
Fund; including the reviewing of calculations of net asset value
and preparing tax returns; or
(ii) any of the costs (including applicable office space,
facilities and equipment) of the services of any of the personnel
operating under the direction of such principal financial
officer. Notwithstanding the obligation of the Fund to bear the
expense of the functions referred to in clauses (i) and (ii) of
this subparagraph (c), the Investment Manager may pay the
salaries, including any applicable employment or payroll taxes
and other salary costs, of the principal financial officer and
other personnel carrying out such functions and the Fund shall
reimburse the Investment Manager therefor upon proper accounting.
(d) All of the ordinary business expenses incurred in the operations of the
Fund and the offering of its shares shall be borne by the Fund unless
specifically provided otherwise in this paragraph 6. These expenses include but
are not limited to brokerage commissions, legal, auditing, taxes or governmental
fees, the cost of preparing share certificates, custodian, depository, transfer
and shareholder service agent costs, expenses of issue, sale, redemption and
repurchase of shares, expenses of registering and qualifying shares for sale,
insurance premiums on property or personnel (including officers and trustees if
available) of the Fund which inure to its benefit, expenses relating to trustee
and shareholder meetings, the cost of preparing and distributing reports and
notices to shareholders, the fees and other expenses incurred by the Fund in
connection with membership in investment company organizations and the cost of
printing copies of prospectuses and statements of additional information
distributed to shareholders.
7. Delegation of Responsibilities. Upon the request of the Fund's
Board of Trustees, the Investment Manager may perform services on behalf of the
Fund which are not required by this Agreement. Such services will be performed
on behalf of the Fund and the Investment Manager's cost in rendering such
services may be billed monthly to the Fund, subject to examination by the Fund's
independent accountants. Payment or assumption by the Investment Manager of any
Fund expense that the Investment Manager is not required to pay or assume under
this Agreement shall not relieve the Investment Manager of any of its
obligations to the Fund nor obligate the Investment Manager to pay or assume any
similar Fund expense on any subsequent occasion.
8. Engagement of Sub-advisors and Broker-Dealers. The Investment
Manager may engage, subject to approval of the Fund's Board of Trustees, and
where required, the shareholders of the Portfolio, a sub-advisor to provide
advisory services in relation to the Portfolio. Under such sub-advisory
agreement, the Investment Manager may delegate to the sub-advisor the duties
outlined in subparagraphs (e), (f), (g) and (h) of paragraph 2 hereof.
9. Compensation. The Fund shall pay the Investment Manager
in full compensation for services rendered hereunder an annual investment
advisory fee, payable monthly, of .80 of 1.0% of the average daily net
assets of the Portfolio.
10. Expense Limitation. If, for any fiscal year of the Fund, the
total of all ordinary business expenses of the Portfolio, including all
investment advisory and administration fees but excluding brokerage commissions
and fees, taxes, interest and extraordinary expenses such as litigation, would
exceed 1.75% of the average daily net assets of the Portfolio, the Investment
Manager agrees to pay the Fund such excess expenses, and if required to do so
pursuant to such applicable statute or regulatory authority, to pay to the Fund
such excess expenses no later than the last day of the first month of the next
succeeding fiscal year of the Fund. For the purposes of this paragraph, the term
"fiscal year" shall exclude the portion of the Fund's current fiscal year which
shall have elapsed prior to the date hereof and shall include the portion of the
then current fiscal year which shall have elapsed at the date of termination of
this Agreement.
11. Non-Exclusivity. The services of the Investment Manager to
the Portfolio are not to be deemed to be exclusive, and the Investment Manager
shall be free to render investment advisory and corporate administrative or
other services to others (including other investment companies) and to engage in
other activities. It is understood and agreed that officers or directors of the
Investment Manager may serve as officers or trustees of the Fund, and that
officers or trustees of the Fund may serve as officers or directors of the
Investment Manager to the extent permitted by law; and that the officers and
directors of the Investment Manager are not prohibited from engaging in any
other business activity or from rendering services to any other person, or from
serving as partners, officers or directors of any other firm or corporation,
including other investment companies.
12. Term and Approval. This Agreement shall become effective on
May 1, 1996 and shall continue in force and effect from year to year, provided
that such continuance is specifically approved at least annually:
(a) (i) by the Fund's Board of Trustees or (ii) by the vote of a majority
of the Portfolio's outstanding voting securities (as defined in Section 2(a)(42)
of the Investment Company Act); and
(b) by the affirmative vote of a majority of the trustees who are not
parties to this Agreement or interested persons of a party to this Agreement
(other than as Fund trustees), by votes cast in person at a meeting specifically
called for such purpose.
13. Termination. This Agreement may be terminated at any time
without the payment of any penalty or prejudice to the completion of any
transactions already initiated on behalf of the Portfolio, by vote of the Fund's
Board of Trustees or by vote of a majority of the Portfolio's outstanding voting
securities, or by the Investment Manager, on sixty (60) days' written notice to
the other party. The notice provided for herein may be waived by either party.
This Agreement automatically terminates in the event of its assignment, the term
"assignment" for the purpose having the meaning defined in Section 2(a)(4) of
the Investment Company Act.
14. Liability of Investment Manager and Indemnification. In the
absence of willful misfeasance, bad faith, gross negligence or reckless
disregard of obligations or duties hereunder on the part of the Investment
Manager or any of its officers, trustees or employees, it shall not be subject
to liability to the Fund or to any shareholder of the Portfolio for any act or
omission in the course of, or connected with, rendering services hereunder or
for any losses that may be sustained in the purchase, holding or sale of any
security.
15. Liability of Trustees and Shareholders. A copy of the
Agreement and Declaration of Trust of the Fund is on file with the Secretary of
The Commonwealth of Massachusetts, and notice is hereby given that this
instrument is executed on behalf of the trustees of the Fund as trustees and not
individually and that the obligations of this instrument are not binding upon
any of the trustees or shareholders individually but are binding only upon the
assets and property of the Fund. Federal and state laws impose responsibilities
under certain circumstances on persons who act in good faith, and therefore,
nothing herein shall in any way constitute a waiver of limitation of any rights
which the Fund or Investment Manager may have under applicable law.
16. Notices. Any notices under this Agreement shall be in
writing, addressed and delivered or mailed postage paid to the other party at
such address as such other party may designate for the receipt of such notice.
Until further notice, it is agreed that the address of the Fund shall be 126
High Street, Boston, Massachusetts, 02110, and the address of the Investment
Manager shall be One Corporate Drive, Shelton, Connecticut 06484.
17. Questions of Interpretation. Any question of interpretation
of any term or provision of this Agreement having a counterpart in or otherwise
derived from a term or provision of the Investment Company Act, shall be
resolved by reference to such term or provision of the Act and to
interpretations thereof, if any, by the United States Courts or in the absence
of any controlling decision of any such court, by rules, regulations or orders
of the Securities and Exchange Commission issued pursuant to said Act. In
addition, where the effect of a requirement of the Investment Company Act,
reflected in any provision of this Agreement is released by rules, regulation or
order of the Securities and Exchange Commission, such provision shall be deemed
to incorporate the effect of such rule, regulation or order.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be executed in duplicate by their respective officers on the day and year
first above written.
AMERICAN SKANDIA TRUST
Attest: By __________________________________
Gordon C. Boronow
_____________________________ Vice President
AMERICAN SKANDIA INVESTMENT
SERVICES, INCORPORATED
Attest: By __________________________________
Thomas M. Mazzaferro
_____________________________ President & Chief Operating Officer
INVESTMENT MANAGEMENT AGREEMENT
THIS AGREEMENT is made this 1st day of May, 1996 by and between
American Skandia Trust, a Massachusetts business trust (the "Fund"), and
American Skandia Investment Services, Incorporated, a Connecticut corporation
(the "Investment Manager");
W I T N E S E T H
WHEREAS, the Fund is registered as an open-end, diversified
management investment company under the Investment Company Act of 1940, as
amended (the "Investment Company Act"), and the rules and regulations
promulgated thereunder; and
WHEREAS, the Investment Manager is registered as an investment
adviser under the Investment Advisers Act of 1940, as amended (the "Investment
Advisers Act"); and
WHEREAS, the Fund and the Investment Manager desire to enter into
an agreement to provide for the management of the assets of the Robertson
Stephens Value + Growth Portfolio (the "Portfolio") on the terms and conditions
hereinafter set forth.
NOW THEREFORE, in consideration of the mutual covenants herein
contained and other good and valuable consideration, the receipt whereof is
hereby acknowledged, the parties hereto agree as follows:
1. Management. The Investment Manager shall act as investment
manager for the Portfolio and shall, in such capacity, manage the investment
operations of the Portfolio, including the purchase, retention, disposition and
lending of securities, subject at all times to the policies and control of the
Fund's Board of Trustees. The Investment Manager shall give the Portfolio the
benefit of its best judgments, efforts and facilities in rendering its services
as investment manager.
2. Duties of Investment Manager. In carrying out its
obligation under paragraph 1 hereof, the Investment Manager shall:
(a) supervise and manage all aspects of the Portfolio's operations:
(b) provide the Portfolio or obtain for it, and thereafter supervise, such
executive, administrative, clerical and shareholder servicing services as are
deemed advisable by the Fund's Board of Trustees;
(c) arrange, but not pay for, the periodic updating of prospectuses and
supplements thereto, proxy material, tax returns, reports to the Portfolio's
shareholders, reports to and filings with the Securities and Exchange
Commission, state Blue Sky authorities and other applicable regulatory
authorities;
(d) provide to the Board of Trustees of the Fund on a regular basis,
written financial reports and analyses on the Portfolio's securities
transactions and the operations of comparable investment companies;
(e) obtain and evaluate pertinent information about significant
developments and economic, statistical and financial data, domestic, foreign or
otherwise, whether affecting the economy generally or the Portfolio, and whether
concerning the individual issuers whose securities are included in the Portfolio
or the activities in which they engage, or with respect to securities which the
Investment Manager considers desirable for inclusion in the Portfolio;
(f) determine what issuers and securities shall be represented in the
Portfolio's portfolio and regularly report them in writing to the Board of
Trustees;
(g) formulate and implement continuing programs for the purchases and sales
of the securities of such issuers and regularly report in writing thereon to the
Board of Trustees; and
(h) take, on behalf of the Portfolio, all actions which appear to the Fund
necessary to carry into effect such purchase and sale programs and supervisory
functions as aforesaid, including the placing of orders for the purchase and
sale of portfolio securities.
3. Broker-Dealer Relationships. The Investment Manager is
responsible for decisions to buy and sell securities for the Portfolio,
broker-dealer selection, and negotiation of its brokerage commission rates. The
Investment Manager shall determine the securities to be purchased or sold by the
Portfolio pursuant to its determinations with or through such persons, brokers
or dealers, in conformity with the policy with respect to brokerage as set forth
in the Fund's Prospectus and Statement of Additional Information, or as the
Board of Trustees may determine from time to time. Generally, the Investment
Manager's primary consideration in placing Portfolio securities transactions
with broker-dealers for execution is to obtain and maintain the availability of,
execution at the best net price and in the most effective manner possible. The
Investment Manager may consider sale of the shares of the Portfolio, subject to
the requirements of best net price and most favorable execution.
Consistent with this policy, the Investment Manager will take the
following into consideration: the best net price available; the reliability,
integrity and financial condition of the broker-dealer; the size of and
difficulty in executing the order; and the value of the expected contribution of
the broker-dealer to the investment performance of the Portfolio on a continuing
basis. Accordingly, the cost of the brokerage commissions to the Portfolio may
be greater than that available from other brokers if the difference is
reasonably justified by other aspects of the portfolio execution services
offered. Subject to such policies and procedures as the Board of Trustees of the
Fund may determine, the Investment Manager shall not be deemed to have acted
unlawfully or to have breached any duty solely by reason of its having caused
the Portfolio to pay a broker or dealer that provides research services to the
Investment Manager for the Portfolio's use an amount of commission for effecting
a portfolio investment transaction in excess of the amount of commission another
broker or dealer would have charged for effecting that transaction, if the
Investment Manager, determines in good faith that such amount of commission was
reasonable in relation to the value of the research services provided by such
broker, viewed in terms of either that particular transaction or the Investment
Manager's ongoing responsibilities with respect to the Portfolio. The Investment
Manager is further authorized to allocate the orders placed by it on behalf of
the Portfolio to such brokers and dealers who also provide research or
statistical material, or other services to the Fund or the Investment Manager.
Such allocation shall be in such amounts and proportions as the Investment
Manager shall determine and the Investment Manager will report on said
allocations to the Board of Trustees of the Fund regularly as requested by the
Board and, in any event, at least once each calendar year if no specific request
is made, indicating the brokers to whom such allocations have been made and the
basis therefor.
4. Control by Board of Trustees. Any investment program
undertaken by the Investment Manager pursuant to this Agreement, as well as any
other activities undertaken by the Investment Manager on behalf of the Fund
pursuant thereto, shall at all times be subject to any directives of the Board
of Trustees of the Fund.
5. Compliance with Applicable Requirements. In carrying out its
obligations under this Agreement, the Investment Manager shall at all times
conform to:
(a) all applicable provisions of the Investment Company Act and Investment
Advisers Act and any rules and regulations adopted thereunder, as amended; and
(b) the provisions of the Registration Statements of the Fund under the
Securities Act of 1933 and the Investment Company Act, including the investment
objectives, policies and restrictions, and permissible investments specified
therein; and
(c) the provisions of the Declaration of Trust of the Fund, as amended; and
(d) the provisions of the By-laws of the Fund, as amended; and
(e) any other applicable provisions of state and federal law.
6. Expenses. The expenses connected with the Fund shall be
allocable between the Fund and the Investment Manager as follows:
(a) The Investment Manager shall furnish, at its expense and without cost
to the Fund, the services of a President, Secretary, and one or more Vice
Presidents of the Fund, to the extent that such additional officers may be
required by the Fund for the proper conduct of its affairs.
(b) The Investment Manager shall further maintain, at its expense and
without cost to the Fund, a trading function in order to carry out its
obligations under subparagraphs (f), (g) and (h) of paragraph 2 hereof to place
orders for the purchase and sale of portfolio securities for the Portfolio.
(c) Nothing in subparagraph (a) hereof shall be construed to require the
Investment Manager to bear:
(i) any of the costs (including applicable office space, facilities and
equipment) of the services of a principal financial officer of the Fund whose
normal duties consist of maintaining the financial accounts and books and
records of the Fund; including the reviewing of calculations of net asset value
and preparing tax returns; or
(ii) any of the costs (including applicable office space, facilities and
equipment) of the services of any of the personnel operating under the direction
of such principal financial officer. Notwithstanding the obligation of the Fund
to bear the expense of the functions referred to in clauses (i) and (ii) of this
subparagraph (c), the Investment Manager may pay the salaries, including any
applicable employment or payroll taxes and other salary costs, of the principal
financial officer and other personnel carrying out such functions and the Fund
shall reimburse the Investment Manager therefor upon proper accounting.
(d) All of the ordinary business expenses incurred in the operations of the
Fund and the offering of its shares shall be borne by the Fund unless
specifically provided otherwise in this paragraph 6. These expenses include but
are not limited to brokerage commissions, legal, auditing, taxes or governmental
fees, the cost of preparing share certificates, custodian, depository, transfer
and shareholder service agent costs, expenses of issue, sale, redemption and
repurchase of shares, expenses of registering and qualifying shares for sale,
insurance premiums on property or personnel (including officers and trustees if
available) of the Fund which inure to its benefit, expenses relating to trustee
and shareholder meetings, the cost of preparing and distributing reports and
notices to shareholders, the fees and other expenses incurred by the Fund in
connection with membership in investment company organizations and the cost of
printing copies of prospectuses and statements of additional information
distributed to shareholders.
7. Delegation of Responsibilities. Upon the request of the Fund's
Board of Trustees, the Investment Manager may perform services on behalf of the
Fund which are not required by this Agreement. Such services will be performed
on behalf of the Fund and the Investment Manager's cost in rendering such
services may be billed monthly to the Fund, subject to examination by the Fund's
independent accountants. Payment or assumption by the Investment Manager of any
Fund expense that the Investment Manager is not required to pay or assume under
this Agreement shall not relieve the Investment Manager of any of its
obligations to the Fund nor obligate the Investment Manager to pay or assume any
similar Fund expense on any subsequent occasion.
8. Engagement of Sub-advisors and Broker-Dealers. The Investment
Manager may engage, subject to approval of the Fund's Board of Trustees, and
where required, the shareholders of the Portfolio, a sub-advisor to provide
advisory services in relation to the Portfolio. Under such sub-advisory
agreement, the Investment Manager may delegate to the sub-advisor the duties
outlined in subparagraphs (e), (f), (g) and (h) of paragraph 2 hereof.
9. Compensation. The Fund shall pay the Investment
Manager in full compensation for services rendered hereunder an annual
investment advisory fee, payable monthly, of 1.00% of the average daily net
assets of the Portfolio.
10. Expense Limitation. If, for any fiscal year of the Fund, the
total of all ordinary business expenses of the Portfolio, including all
investment advisory and administration fees but excluding brokerage commissions
and fees, taxes, interest and extraordinary expenses such as litigation, would
exceed 1.45% of the average daily net assets of the Portfolio, the Investment
Manager agrees to pay the Fund such excess expenses, and if required to do so
pursuant to such applicable statute or regulatory authority, to pay to the Fund
such excess expenses no later than the last day of the first month of the next
succeeding fiscal year of the Fund. For the purposes of this paragraph, the term
"fiscal year" shall exclude the portion of the Fund's current fiscal year which
shall have elapsed prior to the date hereof and shall include the portion of the
then current fiscal year which shall have elapsed at the date of termination of
this Agreement.
11. Non-Exclusivity. The services of the Investment Manager to
the Portfolio are not to be deemed to be exclusive, and the Investment Manager
shall be free to render investment advisory and corporate administrative or
other services to others (including other investment companies) and to engage in
other activities. It is understood and agreed that officers or directors of the
Investment Manager may serve as officers or trustees of the Fund, and that
officers or trustees of the Fund may serve as officers or directors of the
Investment Manager to the extent permitted by law; and that the officers and
directors of the Investment Manager are not prohibited from engaging in any
other business activity or from rendering services to any other person, or from
serving as partners, officers or directors of any other firm or corporation,
including other investment companies.
12. Term and Approval. This Agreement shall become effective on
May 1, 1996 and shall continue in force and effect from year to year, provided
that such continuance is specifically approved at least annually:
(a) (i) by the Fund's Board of Trustees or (ii) by the vote of a majority
of the Portfolio's outstanding voting securities (as defined in Section 2(a)(42)
of the Investment Company Act); and
(b) by the affirmative vote of a majority of the trustees who are not
parties to this Agreement or interested persons of a party to this Agreement
(other than as Fund trustees), by votes cast in person at a meeting specifically
called for such purpose.
13. Termination. This Agreement may be terminated at any time
without the payment of any penalty or prejudice to the completion of any
transactions already initiated on behalf of the Portfolio, by vote of the Fund's
Board of Trustees or by vote of a majority of the Portfolio's outstanding voting
securities, or by the Investment Manager, on sixty (60) days' written notice to
the other party. The notice provided for herein may be waived by either party.
This Agreement automatically terminates in the event of its assignment, the term
"assignment" for the purpose having the meaning defined in Section 2(a)(4) of
the Investment Company Act.
14. Liability of Investment Manager and Indemnification. In the
absence of willful misfeasance, bad faith, gross negligence or reckless
disregard of obligations or duties hereunder on the part of the Investment
Manager or any of its officers, trustees or employees, it shall not be subject
to liability to the Fund or to any shareholder of the Portfolio for any act or
omission in the course of, or connected with, rendering services hereunder or
for any losses that may be sustained in the purchase, holding or sale of any
security.
15. Liability of Trustees and Shareholders. A copy of the
Agreement and Declaration of Trust of the Fund is on file with the Secretary of
The Commonwealth of Massachusetts, and notice is hereby given that this
instrument is executed on behalf of the trustees of the Fund as trustees and not
individually and that the obligations of this instrument are not binding upon
any of the trustees or shareholders individually but are binding only upon the
assets and property of the Fund. Federal and state laws impose responsibilities
under certain circumstances on persons who act in good faith, and therefore,
nothing herein shall in any way constitute a waiver of limitation of any rights
which the Fund or Investment Manager may have under applicable law.
16. Notices. Any notices under this Agreement shall be in
writing, addressed and delivered or mailed postage paid to the other party at
such address as such other party may designate for the receipt of such notice.
Until further notice, it is agreed that the address of the Fund shall be 126
High Street, Boston, Massachusetts, 02110, and the address of the Investment
Manager shall be One Corporate Drive, Shelton, Connecticut 06484.
17. Questions of Interpretation. Any question of interpretation
of any term or provision of this Agreement having a counterpart in or otherwise
derived from a term or provision of the Investment Company Act, shall be
resolved by reference to such term or provision of the Act and to
interpretations thereof, if any, by the United States Courts or in the absence
of any controlling decision of any such court, by rules, regulations or orders
of the Securities and Exchange Commission issued pursuant to said Act. In
addition, where the effect of a requirement of the Investment Company Act,
reflected in any provision of this Agreement is released by rules, regulation or
order of the Securities and Exchange Commission, such provision shall be deemed
to incorporate the effect of such rule, regulation or order.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be executed in duplicate by their respective officers on the day and year
first above written.
AMERICAN SKANDIA TRUST
Attest: By____________________________________
Gordon C. Boronow
_______________________________ Vice President
AMERICAN SKANDIA INVESTMENT
SERVICES, INCORPORATED
Attest: By____________________________________
Thomas M. Mazzaferro
_______________________________ President & Chief Operating Officer
SUB-ADVISORY AGREEMENT
THIS AGREEMENT is between American Skandia Investment Services, Incorporated
(the "Investment Manager") and Rowe Price-Fleming International, Inc. (the
"Sub-Advisor").
WHEREAS American Skandia Trust (the "Trust") is a Massachusetts business trust
organized with one or more series of shares, and is registered as an investment
company under the Investment Company Act of 1940 (the "ICA"); and
WHEREAS the trustees of the Trust (the "Trustees") have engaged the Investment
Manager to act as investment manager for the T. Rowe Price International Bond
Portfolio (the "Portfolio") under the terms of a management agreement, dated May
1, 1996, with the Trust (the "Management Agreement"); and
WHEREAS the Investment Manager has engaged the Sub-Advisor and the Trustees have
approved the engagement of the Sub-Advisor to provide investment advice and
other investment services set forth below;
NOW, THEREFORE the Investment Manager and the Sub-Advisor agree as follows:
1. Investment Services. The Sub-Advisor will furnish the Investment
Manager with investment advisory services in connection with a continuous
investment program for the Portfolio which is to be managed in accordance
with the investment objective, investment policies and restrictions of the
Portfolio as set forth in the Prospectus and Statement of Additional Information
of the Trust and in accordance with the Trust's Declaration of Trust and
By-Laws. Representatives of Sub-Advisor will be available as reasonably
requested to consult with Investment Manager and the Trust, their officers,
employees and Trustees concerning the business of the Trust. Investment Manager
will promptly furnish Sub-Advisor with any amendments to such documents. Such
amendments will not be effective with respect to the Sub-Advisor until receipt
thereof.
Subject to the supervision and control of the Investment Manager, which
is in turn subject to the supervision and control of the Trust's Board of
Trustees, the Sub-Advisor, will in its discretion determine and select the
securities to be purchased for and sold from the Portfolio from time to time and
will place orders with and give instructions to brokers, dealers and others for
all such transactions and cause such transactions to be executed. The Portfolio
will be maintained by a custodian bank (the "Custodian") and the Investment
Manager will authorize the Custodian to honor orders and instructions by
employees of the Sub-Advisor authorized by the Investment Manager to settle
transactions in respect of the Portfolio. No assets may be withdrawn from the
Portfolio other than for settlement of transactions on behalf of the Portfolio
except upon the written authorization of appropriate officers of the Trust who
shall have been certified as such by proper authorities of the Trust prior to
the withdrawal.
The Sub-Advisor will obtain and evaluate pertinent information about
significant developments and economic, statistical and financial data, domestic,
foreign or otherwise, whether affecting the economy generally or the Portfolio,
and concerning the individual issuers whose securities are included in the
Portfolio or the activities in which they engage, or with respect to securities
which the Sub-Advisor considers desirable for inclusion in the Portfolio.
The Sub-Advisor represents that it reviewed the Registration Statement
of the Trust, including any amendments or supplements thereto, and any Proxy
Statement relating to the approval of this Agreement, as filed with the
Securities and Exchange Commission and represents and warrants that information
relating directly or indirectly to the Sub-Advisor, supplied or to be supplied
by Sub-Advisor for inclusion or incorporation by reference in such Registration
Statement or Proxy Statement, contained or contains no untrue statement of any
material fact and did not or does not omit any statement of material fact which
was required to be stated therein or necessary to make the statements contained
therein not misleading. The Sub-Advisor further represents and warrants that it
is an investment advisor registered under the ICA, and under the laws of all
jurisdictions in which the conduct of its business hereunder requires such
registration.
The Investment Manager represents that it reviewed the Registration
Statement of the Trust, including any amendments or supplements thereto and any
Proxy Statement relating to the approval of this Agreement, as filed with the
Securities and Exchange Commission and represents and warrants that with respect
to disclosure about the manager or information relating directly or indirectly
to the Investment Manager, such Registration Statement or Proxy Statement
contains, as of the date hereof, no untrue statement of any material fact and
does not omit any statement of material fact which was required to be stated
therein or necessary to make the statements contained therein not misleading.
The Investment Manager further represents and warrants that it is an investment
adviser registered under the ICA and under the laws of all jurisdictions in
which the conduct of its business hereunder requires such registration.
Sub-Advisor shall use its best judgment, effort, and advice in
rendering services under this Agreement.
In furnishing the services under this Agreement, the Sub-Advisor will
comply with the requirements of the ICA and subchapter M (including Section
851(b)(1), (2) and (3)) of the Internal Revenue Code, applicable to the
Portfolio, and the regulations promulgated thereunder. Sub-Advisor shall comply
with (i) other applicable provisions of state or federal law; (ii) the provision
of the Declaration of Trust and By-Laws of the Trust; (iii) policies and
determinations of the Trust and Investment Manager; (iv) the fundamental
policies and investment restrictions of the Trust, as set out in the Trust's
registration statement under the ICA, or as amended by the Trust's shareholders;
(v) the Prospectus and Statement of Additional Information of the Trust; and
(vi) investment guidelines or other instructions received in writing from
Investment Manager. Sub-Advisor shall supervise and monitor the investment
program of the Portfolio.
Nothing in this Agreement shall be implied to prevent the Investment
Manager from engaging other sub-advisors to provide investment advice and other
services in relation to portfolios of the Trust for which Sub-Advisor does not
provide such services, or to prevent Investment Manager from providing such
services itself in relation to such portfolios.
2. Delivery of Documents to Sub-Advisor. The Investment Manager has
furnished the Sub-Advisor with copies of each of the following documents:
(a) The Declaration of Trust of the Trust as in effect on the date hereof;
(b) The By-laws of the Trust in effect on the date hereof;
(c) The resolutions of the Trustees approving the engagement of the
Sub-Advisor as Sub-Advisor to the Investment Manager and approving the form of
this agreement;
(d) The resolutions of the Trustees selecting the Investment Manager as
investment manager to the Trust and approving the form of the Investment
Manager's Management Agreement with the Trust;
(e) The Investment Manager's Management Agreement with the Trust;
(f) The Code of Ethics of the Trust and of the Investment Manager as
currently in effect; and
(g) A list of companies the securities of which are not to be bought or
sold for the Portfolio because of non-public information regarding such
companies that is available to Investment Manager or the Trust, or which, in the
sole opinion of the Investment Manager, it believes such non-public information
would be deemed to be available to Investment Manager and/or the Trust.
The Investment Manager will furnish the Sub-Advisor from time to time
with copies, properly certified or otherwise authenticated, of all amendments of
or supplements to the foregoing, if any. Such amendments or supplements as to
items (a) through (f) above will be provided within 30 days of the time such
materials became available to the Investment Manager. Such amendments or
supplements as to item (g) above will be provided not later than the end of the
business day next following the date such amendments or supplements become known
to the Investment Manager.
3. Delivery of Documents to the Investment Manager. The Sub-Advisor has
furnished the Investment Manager with copies of each of the following documents:
(a) The Sub-Advisor's Form ADV as filed with the Securities and Exchange
Commission;
(b) The Sub-Advisor's most recent balance sheet;
(c) Separate lists of persons who the Sub-Advisor wishes to have authorized
to give written and/or oral instructions to Custodians of Trust assets for the
Portfolio;
(d) The Code of Ethics of the Sub-Advisor as currently in effect.
The Sub-Advisor will furnish the Investment Manager from time to time
with copies, properly certified or otherwise authenticated, of all material
amendments of or supplements to the foregoing, if any. Such amendments or
supplements as to items (a) through (d) above will be provided within 30 days of
the time such materials became available to the Sub-Advisor.
4. Investment Advisory Facilities. The Sub-Advisor, at its expense, will
furnish all necessary investment facilities, including salaries of personnel
required for it to execute its duties faithfully.
5. Execution of Portfolio Transactions. Sub-Advisor is responsible for
decisions to buy and sell securities for the Portfolio, broker-dealer selection,
and negotiation of its brokerage commission rates. Sub-Advisor shall determine
the securities to be purchased or sold by the Portfolio pursuant to its
determinations with or through such persons, brokers or dealers, in conformity
with the policy with respect to brokerage as set forth in the Trust's Prospectus
and Statement of Additional Information, or as the Board of Trustees may
determine from time to time. Generally, Sub-Advisor's primary consideration in
placing Portfolio securities transactions with broker-dealers for execution is
to obtain and maintain the availability of best execution at the best net price
and in the most effective manner possible. The Sub-Advisor may consider sale of
the shares of the Portfolio, as well as recommendations of the Investment
Manager, subject to the requirements of best net price and most favorable
execution.
Consistent with this policy, the Sub-Advisor will take the following
into consideration: the best net price available; the reliability, integrity and
financial condition of the broker-dealer; the size of and difficulty in
executing the order; and the value of the expected contribution of the
broker-dealer to the investment performance of the Portfolio on a continuing
basis. Accordingly, the cost of the brokerage commissions to the Portfolio may
be greater than that available from other brokers if the difference is
reasonably justified by other aspects of the portfolio execution services
offered. Subject to such policies and procedures as the Board of Trustees of the
Trust may determine, the Sub-Advisor shall not be deemed to have acted
unlawfully or to have breached any duty solely by reason of its having caused
the Portfolio to pay a broker-dealer that provides research services to the
Sub-Advisor for the Portfolio's use an amount of commission for effecting a
portfolio investment transaction in excess of the amount of commission another
broker-dealer would have charged for effecting that transaction, if the
Sub-Advisor determines in good faith that such amount of commission was
reasonable in relation to the value of the research services provided by such
broker, viewed in terms of either that particular transaction or the
Sub-Advisor's ongoing responsibilities with respect to the Portfolio. The
Sub-Advisor is further authorized to allocate the orders placed by it on behalf
of the Portfolio to such broker-dealers who also provide research or statistical
material, or other services to the Portfolio or the Sub-Advisor. Such allocation
shall be in such amounts and proportions as the Sub-Advisor shall determine and
the Sub-Advisor will report on said allocations to the Investment Manager
regularly as requested by the Investment Manager and, in any event, at least
once each calendar year if no specific request is made, indicating the brokers
to whom such allocations have been made and the basis therefor.
6. Reports by Sub-Advisor. The Sub-Advisor shall furnish the Investment
Manager monthly, quarterly and annual reports concerning transactions and
performance of the Portfolio, including information required in the Trust's
Registration, in such form as may be mutually agreed, to review the Portfolio
and discuss the management of it. The Sub-Advisor shall permit the financial
statements, books and records with respect to the Portfolio to be inspected and
audited by the Trust, the Investment Manager or their agents at all reasonable
times during normal business hours. The Sub-Advisor shall immediately notify and
forward to both Investment Manager and legal counsel for the Trust any legal
process served upon it on behalf of the Investment Manager or the Trust. The
Sub-Advisor shall promptly notify the Investment Manager of any changes in any
information required to be disclosed in the Trust's Registration Statement.
7. Compensation of Sub-Advisor. The amount of the compensation to the
Sub-Advisor is computed at an annual rate. The fee is payable monthly in
arrears, based on the average daily net assets of the Portfolio for each month,
at the annual rates shown below.
For all services rendered, the Investment Manager will calculate and
pay the Sub-Advisor at the annual rate of: .40 of 1% of the average daily net
assets of the Portfolio.
In computing the fee to be paid to the Sub-Advisor, the net asset value
of the Portfolio shall be valued as set forth in the then current registration
statement of the Trust. If this agreement is terminated, the payment shall be
prorated to the date of termination.
Investment Manager and Sub-Advisor shall not be considered as partners
or participants in a joint venture. Sub-Advisor will pay its own expenses for
the services to be provided pursuant to this Agreement and will not be obligated
to pay any expenses of Investment Manager or the Trust. Except as otherwise
provided herein, Investment Manager and the Trust will not be obligated to pay
any expenses of Sub-Advisor.
8. Confidential Treatment. It is understood that any information or
recommendation supplied by the Sub-Advisor in connection with the performance of
its obligations hereunder is to be regarded as confidential and for use only by
the Investment Manager, the Trust or such persons the Investment Manager may
designate in connection with the Portfolio. It is also understood that any
information supplied to Sub-Advisor in connection with the performance of its
obligations hereunder, particularly, but not limited to, any list of securities
which, on a temporary basis, may not be bought or sold for the Portfolio, is to
be regarded as confidential and for use only by the Sub-Advisor in connection
with its obligation to provide investment advice and other services to the
Portfolio.
9. Representations of the Parties. Each party to this Agreement hereby
acknowledges that it is registered as an investment advisor under the Investment
Advisers Act of 1940, it will use its reasonable best efforts to maintain such
registration, and it will promptly notify the other if it ceases to be so
registered, if its registration is suspended for any reason, or if it is
notified by any regulatory organization or court of competent jurisdiction that
it should show cause why its registration should not be suspended or terminated.
The Investment Manager hereby represents that it has provided to the
Sub-Advisor a true, correct and complete copy of the Registration Statement of
the Trust as in effect on the date of this Agreement, including any amendments
and supplements thereto, and agrees to provide to Sub-Advisor true, correct and
complete copies of any amendments and supplements thereto subsequent to the date
of this Agreement.
10. Liability. The Sub-Advisor shall use its best efforts and good faith in
the performance of its services hereunder. However, so long as the Sub-Advisor
has acted in good faith and has used its best efforts, then in the absence of
willful misfeasance, bad faith, gross negligence or reckless disregard for its
obligations hereunder, it shall not be liable to the Trust or its shareholders
or to the Investment Manager for any act or omission resulting in any loss
suffered in any portfolio of the Trust in connection with any service to be
provided herein. The Federal laws impose responsibilities under certain
circumstances on persons who act in good faith, and therefore, nothing herein
shall in any way constitute a waiver of limitation of any rights which the Trust
or Investment Manager may have under applicable law.
The Investment Manager agrees that the Sub-Advisor shall not be liable
for any failure to recommend the purchase or sale of any security on behalf of
the Portfolio on the basis of any information which might, in Sub-Advisor's
opinion, constitute a violation of any federal or state laws, rules or
regulations.
11. Other Activities of Sub-Advisor. Investment Manager agrees that the
Sub-Advisor and any of its partners or employees, and persons affiliated with it
or with any such partner or employee may render investment management or
advisory services to other investors and institutions, and such investors and
institutions may own, purchase or sell, securities or other interests in
property the same as or similar to those which are selected for purchase,
holding or sale for the Portfolio, and the Sub-Advisor shall be in all respects
free to take action with respect to investments in securities or other interests
in property the same as or similar to those selected for purchase, holding or
sale for the Portfolio. Purchases and sales of individual securities on behalf
of the Portfolio and other portfolios of the Trust or accounts for other
investors or institutions will be made on a basis that is equitable to all
portfolios of the Trust and other accounts. Nothing in this agreement shall
impose upon the Sub-Advisor any obligation to purchase or sell or recommend for
purchase or sale, for the Portfolio any security which it, its partners,
affiliates or employees may purchase or sell for the Sub-Advisor or such
partner's, affiliate's or employee's own accounts or for the account of any
other client, advisory or otherwise.
12. Continuance and Termination. This Agreement shall remain in full force
and effect for one year from the date hereof, and is renewable annually
thereafter by specific approval of the Board of Trustees of the Trust or by vote
of a majority of the outstanding voting securities of the Portfolio. Any such
renewal shall be approved by the vote of a majority of the Trustees who are not
interested persons under the ICA, cast in person at a meeting called for the
purpose of voting on such renewal. This agreement may be terminated without
penalty at any time by the Investment Manager or Sub-Advisor upon 60 days
written notice, and will automatically terminate in the event of its assignment
by either party to this Agreement, as defined in the ICA, or (provided
Sub-Advisor has received prior written notice thereof) upon termination of the
Investment Manager's Management Agreement with the Trust.
13. Notification. Sub-Advisor will notify the Investment Manager within a
reasonable time of any change in the personnel of the Sub-Advisor with
responsibility for making investment decisions in relation to the Portfolio or
who have been authorized to give instructions to a Custodian of the Trust.
Any notice, instruction or other communication required or contemplated
by this agreement shall be in writing. All such communications shall be
addressed to the recipient at the address set forth below, provided that either
party may, by notice, designate a different address for such party.
Investment Manager: American Skandia Investment Services, Incorporated
One Corporate Drive
Shelton, Connecticut 06484
Attention: Thomas M. Mazzaferro
President & Chief Operating Officer
Sub-Advisor: Rowe Price-Fleming International, Inc.
100 East Pratt Street
Baltimore, Maryland 21202
Attention: Mr. Henry H. Hopkins
14. Indemnification. The Sub-Advisor agrees to indemnify and hold harmless
Investment Manager, any affiliated person within the meaning of Section 2(a)(3)
of the 1940 Act ("affiliated person") of Investment Manager and each person, if
any who, within the meaning of Section 15 of the Securities Act of 1933 (the
"1933 Act"), controls ("controlling person") Investment Manager, against any
and all losses, claims, damages, liabilities or litigation (including reasonable
legal and other expenses), to which Investment Manager or such affiliated person
or controlling person may become subject under the 1933 Act, the 1940 Act, the
Investment Adviser's Act of 1940 ("Adviser's Act"), under any other statute, at
common law or otherwise, arising out of Sub-Advisor's responsibilities as
portfolio manager of the Portfolio (1) to the extent of and as a result of the
willful misconduct, bad faith, or gross negligence by Sub-Advisor, any of
Sub-Advisor's employees or representatives or any affiliate of or any person
acting on behalf of Sub-Advisor, or (2) as a result of any untrue statement or
alleged untrue statement of a material fact contained in information relating
directly or indirectly to the Sub-Advisor supplied or to be supplied by
Sub-Advisor for inclusion or incorporation by reference in a prospectus or
statement of additional information covering the Portfolio or the Trust or any
amendment thereof or any supplement thereto or the omission or alleged omission
to state therein a material fact required to be stated therein or necessary to
make the statement therein not misleading, or (3) to the extent of, and as a
result of, the failure of the Sub-Advisor to execute, or cause to be executed,
Portfolio transactions according to the standards and requirements of the 1940
Act; provided, however, that in no case is Sub-Advisor's indemnity in favor of
Investment Manager or any affiliated person or controlling person of Investment
Manager deemed to protect such person against any liability to which any such
person would otherwise be subject by reason of willful misconduct, bad faith or
gross negligence in the performance of its duties or by reason of its reckless
disregard of its obligations and duties under this Agreement.
The Investment Manager agrees to indemnify and hold harmless
Sub-Advisor, any affiliated person within the meaning of Section 2(a)(3) of the
1940 Act ("affiliated person") of Sub-Advisor and each person, if any who,
within the meaning of Section 15 of the Securities Act of 1933 (the "1933 Act"),
controls ("controlling person") Sub-Advisor, against any and all losses, claims,
damages, liabilities or litigation (including reasonable legal and other
expenses), to which Sub-Advisor or such affiliated person or controlling person
may become subject under the 1933 Act, the 1940 Act, the Investment Adviser's
Act of 1940 ("Adviser's Act"), under any other statute, at common law or
otherwise, arising out of Investment Manager's responsibilities as investment
manager of the Portfolio (1) to the extent of and as a result of the willful
misconduct, bad faith, or gross negligence by Investment Manager, any of
Investment Manager's employees or representatives or any affiliate of or any
person acting on behalf of Investment Manager, or (2) as a result of any untrue
statement or alleged untrue statement of a material fact contained in a
prospectus or statement of additional information covering the Portfolio or the
Trust or any amendment thereof or any supplement thereto or the omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statement therein not misleading, if such a statement
or omission was made by the Trust other than in reliance upon information
relating directly or indirectly to the Sub-Advisor supplied or to be supplied by
Sub-Advisor for inclusion or incorporation by reference in such prospectus or
statement of additional information; provided, however, that in no case is
Investment Manager's indemnity in favor of Sub-Advisor or any affiliated person
or controlling person of Sub-Advisor deemed to protect such person against any
liability to which any such person would otherwise be subject by reason of
willful misconduct, bad faith or gross negligence in the performance of its
duties or by reason of its reckless disregard of its obligations and duties
under this Agreement.
15. Warranty. The Investment Manager represents and warrants that (i) the
appointment of the Sub-Advisor by the Investment Manager has been duly
authorized and (ii) it has acted and will continue to act in connection with the
transactions contemplated hereby, and the transactions contemplated hereby are,
in conformity with the Investment Company Act of 1940, the Trust's governing
documents and other applicable laws.
The Sub-Advisor represents and warrants that it is authorized to
perform the services contemplated to be performed hereunder.
16. Amendment. This Agreement may be amended by mutual written consent of
the parties, subject to the provisions of the ICA.
17. Governing Law. This agreement is made under, and shall be governed by
and construed in accordance with, the laws of the State of Connecticut.
The effective date of this agreement is May 1, 1996.
FOR THE INVESTMENT MANAGER: FOR THE SUB-ADVISOR:
- -------------------------------- ---------------------------------
Thomas Mazzaferro
President & Chief Operating Officer
Date: _________________________ Date: __________________________
Attest: _________________________ Attest: __________________________
SUB-ADVISORY AGREEMENT
THIS AGREEMENT is between American Skandia Investment Services, Incorporated
(the "Investment Manager") and Robertson, Stephens & Company Investment
Management, L.P. (the "Sub-Advisor").
WHEREAS American Skandia Trust (the "Trust") is a Massachusetts business trust
organized with one or more series of shares, and is registered as an investment
company under the Investment Company Act of 1940 (the "ICA"); and
WHEREAS the trustees of the Trust (the "Trustees") have engaged the Investment
Manager to act as investment manager for the Robertson Stephens Value + Growth
Portfolio (the "Portfolio") under the terms of a management agreement, dated May
1, 1996, with the Trust (the "Management Agreement"); and
WHEREAS the Investment Manager has engaged the Sub-Advisor and the Trustees have
approved the engagement of the Sub-Advisor to provide investment advice and
other investment services set forth below;
NOW, THEREFORE the Investment Manager and the Sub-Advisor agree as follows:
1. Investment Services. The Sub-Advisor will furnish the Investment Manager
with investment advisory services in connection with a continuous investment
program for the Portfolio which is to be managed in accordance with the
investment objective, investment policies and restrictions of the Portfolio as
set forth in the Prospectus and Statement of Additional Information of the Trust
and in accordance with the Trust's Declaration of Trust and By-Laws. Officers,
directors, and employees of Sub-Advisor will be available to consult with
Investment Manager and the Trust, their officers, employees and Trustees
concerning the business of the Trust. Investment Manager will promptly furnish
Sub-Advisor with any amendments to such documents. Such amendments will not be
effective with respect to the Sub-Advisor until receipt thereof.
Subject to the supervision and control of the Investment Manager, which
is in turn subject to the supervision and control of the Trust's Board of
Trustees, the Sub-Advisor, will in its discretion determine and select the
securities to be purchased for and sold from the Portfolio from time to time and
will place orders with and give instructions to brokers, dealers and others for
all such transactions and cause such transactions to be executed. The Portfolio
will be maintained by a custodian bank (the "Custodian") and the Investment
Manager will authorize the Custodian to honor orders and instructions by
employees of the Sub-Advisor authorized by the Investment Manager to settle
transactions in respect of the Portfolio. No assets may be withdrawn from the
Portfolio other than for settlement of transactions on behalf of the Portfolio
except upon the written authorization of appropriate officers of the Trust who
shall have been certified as such by proper authorities of the Trust prior to
the withdrawal.
The Sub-Advisor will obtain and evaluate pertinent information about
significant developments and economic, statistical and financial data, domestic,
foreign or otherwise, whether affecting the economy generally or the Portfolio,
and concerning the individual issuers whose securities are included in the
Portfolio or the activities in which they engage, or with respect to securities
which the Sub-Advisor considers desirable for inclusion in the Portfolio.
The Sub-Advisor represents that it reviewed the Registration Statement
of the Trust, including any amendments or supplements thereto, and any Proxy
Statement relating to the approval of this Agreement, as filed with the
Securities and Exchange Commission and represents and warrants that with respect
to disclosure about the Sub-Advisor or information relating directly or
indirectly to the Sub-Advisor, such Registration Statement or Proxy Statement
contains, as of the date hereof, no untrue statement of any material fact and
does not omit any statement of material fact which was required to be stated
therein or necessary to make the statements contained therein not misleading.
The Sub-Advisor further represents and warrants that it is an investment advisor
registered under the Investment Advisers Act of 1940, as amended, and under the
laws of all jurisdictions in which the conduct of its business hereunder
requires such registration.
Sub-Advisor shall use its best judgment, effort, and advice in
rendering services under this Agreement.
In furnishing the services under this Agreement, the Sub-Advisor will
comply with the requirements of the ICA and subchapters L and M (including,
respectively, Section 817(h) and Section 851(b)(1), (2), (3) and (4)) of the
Internal Revenue Code, applicable to the Portfolio, and the regulations
promulgated thereunder. Sub-Advisor shall comply with (i) other applicable
provisions of state or federal law; (ii) the provision of the Declaration of
Trust and By-Laws of the Trust; (iii) policies and determinations of the Trust
and Investment Manager; (iv) the fundamental policies and investment
restrictions of the Trust, as set out in the Trust's registration statement
under the ICA, or as amended by the Trust's shareholders; (v) the Prospectus and
Statement of Additional Information of the Trust; and (vi) investment guidelines
or other instructions received in writing from Investment Manager. Sub-Advisor
shall supervise and monitor the investment program of the Portfolio.
Nothing in this Agreement shall be implied to prevent the Investment
Manager from engaging other sub-advisors to provide investment advice and other
services in relation to portfolios of the Trust for which Sub-Advisor does not
provide such services, or to prevent Investment Manager from providing such
services itself in relation to such portfolios.
2. Delivery of Documents to Sub-Advisor. The Investment Manager has
furnished the Sub-Advisor with copies of each of the following documents:
(a) The Declaration of Trust of the Trust as in effect on the date hereof;
(b) The By-laws of the Trust in effect on the date hereof;
(c) The resolutions of the Trustees approving the engagement of the
Sub-Advisor as Sub-Advisor to the Investment Manager and approving the form of
this agreement;
(d) The resolutions of the Trustees selecting the Investment
Manager as investment manager to the Trust and approving the
form of the Investment Manager's Management Agreement with the
Trust;
(e) The Investment Manager's Management Agreement with the Trust;
(f) The Code of Ethics of the Trust and of the Investment Manager as
currently in effect; and
(g) A list of companies the securities of which are not to be
bought or sold for the Portfolio because of non-public
information regarding such companies that is available to
Investment Manager or the Trust, or which, in the sole opinion
of the Investment Manager, it believes such non-public
information would be deemed to be available to Investment
Manager and/or the Trust.
The Investment Manager will furnish the Sub-Advisor from time to time
with copies, properly certified or otherwise authenticated, of all amendments of
or supplements to the foregoing, if any. Such amendments or supplements as to
items (a) through (f) above will be provided within 30 days of the time such
materials became available to the Investment Manager. Such amendments or
supplements as to item (g) above will be provided not later than the end of the
business day next following the date such amendments or supplements become known
to the Investment Manager.
3. Delivery of Documents to the Investment Manager. The Sub-Advisor has
furnished the Investment Manager with copies of each of the following documents:
(a) The Sub-Advisor's Form ADV as filed with the Securities and Exchange
Commission;
(b) The Sub-Advisor's most recent balance sheet;
(c) Separate lists of persons who the Sub-Advisor wishes to have authorized
to give written and/or oral instructions to Custodians of Trust assets for the
Portfolio;
(d) The Code of Ethics of the Sub-Advisor as currently in effect.
The Sub-Advisor will furnish the Investment Manager from time to time
with copies, properly certified or otherwise authenticated, of all material
amendments of or supplements to the foregoing, if any. Such amendments or
supplements as to items (a) through (d) above will be provided within 30 days of
the time such materials became available to the Sub-Advisor.
4. Investment Advisory Facilities. The Sub-Advisor, at its expense, will
furnish all necessary investment facilities, including salaries of personnel
required for it to execute its duties faithfully.
5. Execution of Portfolio Transactions. Sub-Advisor is responsible for
decisions to buy and sell securities for the Portfolio, broker-dealer selection,
and negotiation of its brokerage commission rates. Sub-Advisor shall determine
the securities to be purchased or sold by the Portfolio pursuant to its
determinations with or through such persons, brokers or dealers, in conformity
with the policy with respect to brokerage as set forth in the Trust's Prospectus
and Statement of Additional Information, or as the Board of Trustees may
determine from time to time. Generally, Sub-Advisor's primary consideration in
placing Portfolio securities transactions with broker-dealers for execution is
to obtain and maintain the availability of best execution at the best net price
and in the most effective manner possible. The Sub-Advisor may consider sale of
the shares of the Portfolio, as well as recommendations of the Investment
Manager, subject to the requirements of best net price and most favorable
execution.
Consistent with this policy, the Sub-Advisor will take the following
into consideration: the best net price available; the reliability, integrity and
financial condition of the broker-dealer; the size of and difficulty in
executing the order; and the value of the expected contribution of the
broker-dealer to the investment performance of the Portfolio on a continuing
basis. Accordingly, the cost of the brokerage commissions to the Portfolio may
be greater than that available from other brokers if the difference is
reasonably justified by other aspects of the portfolio execution services
offered. Subject to such policies and procedures as the Board of Trustees of the
Trust may determine, the Sub-Advisor shall not be deemed to have acted
unlawfully or to have breached any duty solely by reason of its having caused
the Portfolio to pay a broker-dealer that provides research services to the
Sub-Advisor for the Portfolio's use an amount of commission for effecting a
portfolio investment transaction in excess of the amount of commission another
broker-dealer would have charged for effecting that transaction, if the
Sub-Advisor determines in good faith that such amount of commission was
reasonable in relation to the value of the research services provided by such
broker, viewed in terms of either that particular transaction or the
Sub-Advisor's ongoing responsibilities with respect to the Portfolio. The
Sub-Advisor is further authorized to allocate the orders placed by it on behalf
of the Portfolio to such broker-dealers who also provide research or statistical
material, or other services to the Portfolio or the Sub-Advisor. Such allocation
shall be in such amounts and proportions as the Sub-Advisor shall determine and
the Sub-Advisor will report on said allocations to the Investment Manager
regularly as requested by the Investment Manager and, in any event, at least
once each calendar year if no specific request is made, indicating the brokers
to whom such allocations have been made and the basis therefor.
6. Reports by Sub-Advisor. The Sub-Advisor shall furnish the Investment
Manager monthly, quarterly and annual reports concerning transactions and
performance of the Portfolio, including information required in the Trust's
Registration, in such form as may be mutually agreed, to review the Portfolio
and discuss the management of it. The Sub-Advisor shall permit the financial
statements, books and records with respect to the Portfolio to be inspected and
audited by the Trust, the Investment Manager or their agents at all reasonable
times during normal business hours. The Sub-Advisor shall immediately notify and
forward to both Investment Manager and legal counsel for the Trust any legal
process served upon it on behalf of the Investment Manager or the Trust. The
Sub-Advisor shall promptly notify the Investment Manager of any changes in any
information required to be disclosed in the Trust's Registration Statement.
7. Compensation of Sub-Advisor. The amount of the compensation to the
Sub-Advisor is computed at an annual rate. The fee is payable monthly in
arrears, based on the average daily net assets of the Portfolio for each month,
at the annual rates shown below.
For all services rendered, the Investment Manager will calculate and
pay the Sub-Advisor at the annual rate of: .60 of 1% of the portion of the net
assets of the Portfolio not in excess of $200 million; and .50 of 1% of the
portion of the net assets over $200 million.
In computing the fee to be paid to the Sub-Advisor, the net asset value
of the Portfolio shall be valued as set forth in the then current registration
statement of the Trust. If this agreement is terminated, the payment shall be
prorated to the date of termination.
Investment Manager and Sub-Advisor shall not be considered as partners
or participants in a joint venture. Sub-Advisor will pay its own expenses for
the services to be provided pursuant to this Agreement and will not be obligated
to pay any expenses of Investment Manager or the Trust. Except as otherwise
provided herein, Investment Manager and the Trust will not be obligated to pay
any expenses of Sub-Advisor.
8. Confidential Treatment. It is understood that any information or
recommendation supplied by the Sub-Advisor in connection with the performance of
its obligations hereunder is to be regarded as confidential and for use only by
the Investment Manager, the Trust or such persons the Investment Manager may
designate in connection with the Portfolio. It is also understood that any
information supplied to Sub-Advisor in connection with the performance of its
obligations hereunder, particularly, but not limited to, any list of securities
which, on a temporary basis, may not be bought or sold for the Portfolio, is to
be regarded as confidential and for use only by the Sub-Advisor in connection
with its obligation to provide investment advice and other services to the
Portfolio.
9. Representations of the Parties. Each party to this Agreement hereby
acknowledges that it is registered as an investment advisor under the Investment
Advisers Act of 1940, it will use its reasonable best efforts to maintain such
registration, and it will promptly notify the other if it ceases to be so
registered, if its registration is suspended for any reason, or if it is
notified by any regulatory organization or court of competent jurisdiction that
it should show cause why its registration should not be suspended or terminated.
10. Liability. The Sub-Advisor shall use its best efforts and good faith in
the performance of its services hereunder. However, so long as the Sub-Advisor
has acted in good faith and has used its best efforts, then in the absence of
willful misfeasance, bad faith, gross negligence or reckless disregard for its
obligations hereunder, it shall not be liable to the Trust or its shareholders
or to the Investment Manager for any act or omission resulting in any loss
suffered in any portfolio of the Trust in connection with any service to be
provided herein. The Federal laws impose responsibilities under certain
circumstances on persons who act in good faith, and therefore, nothing herein
shall in any way constitute a waiver of limitation of any rights which the Trust
or Investment Manager may have under applicable law.
The Investment Manager agrees that the Sub-Advisor shall not be liable
for any failure to recommend the purchase or sale of any security on behalf of
the Portfolio on the basis of any information which might, in Sub-Advisor's
opinion, constitute a violation of any federal or state laws, rules or
regulations.
11. Other Activities of Sub-Advisor. Investment Manager agrees that the
Sub-Advisor and any of its partners or employees, and persons affiliated with it
or with any such partner or employee may render investment management or
advisory services to other investors and institutions, and such investors and
institutions may own, purchase or sell, securities or other interests in
property the same as or similar to those which are selected for purchase,
holding or sale for the Portfolio, and the Sub-Advisor shall be in all respects
free to take action with respect to investments in securities or other interests
in property the same as or similar to those selected for purchase, holding or
sale for the Portfolio. Purchases and sales of individual securities on behalf
of the Portfolio and other portfolios of the Trust or accounts for other
investors or institutions will be made on a basis that is equitable to all
portfolios of the Trust and other accounts. Nothing in this agreement shall
impose upon the Sub-Advisor any obligation to purchase or sell or recommend for
purchase or sale, for the Portfolio any security which it, its partners,
affiliates or employees may purchase or sell for the Sub-Advisor or such
partner's, affiliate's or employee's own accounts or for the account of any
other client, advisory or otherwise.
12. Continuance and Termination. This Agreement shall remain in full force
and effect for one year from the date hereof, and is renewable annually
thereafter by specific approval of the Board of Trustees of the Trust or by vote
of a majority of the outstanding voting securities of the Portfolio. Any such
renewal shall be approved by the vote of a majority of the Trustees who are not
interested persons under the ICA, cast in person at a meeting called for the
purpose of voting on such renewal. This agreement may be terminated without
penalty at any time by the Investment Manager or Sub-Advisor upon 60 days
written notice, and will automatically terminate in the event of its assignment
by either party to this Agreement, as defined in the ICA, or (provided
Sub-Advisor has received prior written notice thereof) upon termination of the
Investment Manager's Management Agreement with the Trust.
13. Notification. Sub-Advisor will notify the Investment Manager within a
reasonable time of any change in the personnel of the Sub-Advisor with
responsibility for making investment decisions in relation to the Portfolio or
who have been authorized to give instructions to a Custodian of the Trust.
Any notice, instruction or other communication required or contemplated
by this agreement shall be in writing. All such communications shall be
addressed to the recipient at the address set forth below, provided that either
party may, by notice, designate a different address for such party.
Investment Manager: American Skandia Investment Services, Incorporated
One Corporate Drive
Shelton, Connecticut 06484
Attention: Thomas M. Mazzaferro
President & Chief Operating Officer
Sub-Advisor: Robertson, Stephens & Company
Investment Management, L.P.
555 California Street
San Francisco, California 94104
Attention: David Elliot
14. Indemnification. The Sub-Advisor agrees to indemnify and hold harmless
Investment Manager, any affiliated person within the meaning of Section 2(a)(3)
of the 1940 Act ("affiliated person") of Investment Manager and each person, if
any who, within the meaning of Section 15 of the Securities Act of 1933 (the
"1933 Act"), controls ("controlling person") Investment Manager, against any and
all losses, claims, damages, liabilities or litigation (including reasonable
legal and other expenses), to which Investment Manager or such affiliated person
or controlling person may become subject under the 1933 Act, the 1940 Act, the
Investment Adviser's Act of 1940 ("Adviser's Act"), under any other statute, at
common law or otherwise, arising out of Sub-Advisor's responsibilities as
portfolio manager of the Portfolio (1) to the extent of and as a result of the
willful misconduct, bad faith, or gross negligence by Sub-Advisor, any of
Sub-Advisor's employees or representatives or any affiliate of or any person
acting on behalf of Sub-Advisor, or (2) as a result of any untrue statement or
alleged untrue statement of a material fact contained in a prospectus or
statement of additional information covering the Portfolio or the Trust or any
amendment thereof or any supplement thereto or the omission or alleged omission
to state therein a material fact required to be stated therein or necessary to
make the statement therein not misleading, if such a statement or omission was
made in reliance upon written information furnished to Investment Manager, the
Trust or any affiliated person of the Investment Manager or the Trust or upon
verbal information confirmed by the Sub-Advisor in writing or (3) to the extent
of, and as a result of, the failure of the Sub-Advisor to execute, or cause to
be executed, Portfolio transactions according to the standards and requirements
of the 1940 Act; provided, however, that in no case is Sub-Advisor's indemnity
in favor of Investment Manager or any affiliated person or controlling person of
Investment Manager deemed to protect such person against any liability to which
any such person would otherwise be subject by reason of willful misconduct, bad
faith or gross negligence in the performance of its duties or by reason of its
reckless disregard of its obligations and duties under this Agreement.
The Investment Manager agrees to indemnify and hold harmless
Sub-Advisor, any affiliated person within the meaning of Section 2(a)(3) of the
1940 Act ("affiliated person") of Sub-Advisor and each person, if any who,
within the meaning of Section 15 of the Securities Act of 1933 (the "1933 Act"),
controls ("controlling person") Sub-Advisor, against any and all losses, claims,
damages, liabilities or litigation (including reasonable legal and other
expenses), to which Sub-Advisor or such affiliated person or controlling person
may become subject under the 1933 Act, the 1940 Act, the Investment Adviser's
Act of 1940 ("Adviser's Act"), under any other statute, at common law or
otherwise, arising out of Investment Manager's responsibilities as investment
manager of the Portfolio (1) to the extent of and as a result of the willful
misconduct, bad faith, or gross negligence by Investment Manager, any of
Investment Manager's employees or representatives or any affiliate of or any
person acting on behalf of Investment Manager, or (2) as a result of any untrue
statement or alleged untrue statement of a material fact contained in a
prospectus or statement of additional information covering the Portfolio or the
Trust or any amendment thereof or any supplement thereto or the omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statement therein not misleading, if such a statement
or omission was made by the Trust other than in reliance upon written
information furnished by Sub-Advisor, or any affiliated person of the
Sub-Advisor or other than upon verbal information confirmed by the Sub-Advisor
in writing; provided, however, that in no case is Investment Manager's indemnity
in favor of Sub-Advisor or any affiliated person or controlling person of
Sub-Advisor deemed to protect such person against any liability to which any
such person would otherwise be subject by reason of willful misconduct, bad
faith or gross negligence in the performance of its duties or by reason of its
reckless disregard of its obligations and duties under this Agreement.
15. Warranty. The Investment Manager represents and warrants that (i) the
appointment of the Sub-Advisor by the Investment Manager has been duly
authorized and (ii) it has acted and will continue to act in connection with the
transactions contemplated hereby, and the transactions contemplated hereby are,
in conformity with the Investment Company Act of 1940, the Trust's governing
documents and other applicable laws.
The Sub-Advisor represents and warrants that it is authorized to
perform the services contemplated to be performed hereunder.
16. Amendment. This agreement may be amended by mutual written consent of
the parties, subject to the provisions of the ICA.
17. Governing Law. This agreement is made under, and shall be governed by
and construed in accordance with, the laws of the State of Connecticut.
18. Counterparts. This agreement may be executed in one or more
counterparts, each of which shall be deemed an original.
The effective date of this agreement is May 1, 1996.
FOR THE INVESTMENT MANAGER: FOR THE SUB-ADVISOR:
Thomas Mazzaferro _____________________________________
President & Chief Operating Officer
Date: __________________________ Date: ____________________________
Attest: __________________________ Attest: ____________________________
WERNER & KENNEDY
1633 Broadway
New York, N.Y. 10019
-------
Telephone (212) 408-6900
Facsimile (212) 408-6950
(212) 408-6900
April 29, 1996
American Skandia Trust
One Corporate Drive
Shelton, Connecticut 06484
Re: Post-effective Amendment No. 18 under the Securities Act of 1933 and
Post-effective Amendment No. 20 under the Investment Company Act of 1940 on Form
N-1A filed by American Skandia Trust Registration No.: 33-24962 Investment
Company No.: 811-5186 Our File No. 74874-00-100
Dear Mesdames and Messrs.:
You have requested us, as general counsel to American Skandia Trust
(the "Trust") to furnish you with this opinion in connection with the
above-referenced registration statement filed by the Trust under the Securities
Act of 1933, as amended, and the Investment Company Act of 1940, as amended,
(the "Registration Statement").
We have made such examination of the statutes, authorities, and records
of the Trust and other documents as in our judgment are necessary to form a
basis for opinions hereinafter expressed. In our examination, we have assumed
the genuineness of all signatures on, and authenticity of, and the conformity to
original documents of all copies submitted to us. As to various questions of
fact material to our opinion, we have relied upon statements and certificates of
officers and representatives of the Trust and others.
Based upon the foregoing, we are of the opinion that the Trust is a
registered business trust under the laws of the Commonwealth of Massachusetts,
whose securities, sold in accordance with the laws of applicable jurisdictions,
and with the terms of the Prospectus and Statement of Additional Information
included as part of the Registration Statement, are valid, legally issued, fully
paid, and non-assessable.
We hereby consent to the use of this opinion as an exhibit to
Post-effective Amendment No. 18 to the Registration Statement on Form N-1A under
the Securities Act of 1933, as amended, and to Post-effective Amendment No. 20
under the Investment Company Act of 1940, as amended, and to the reference to
our name under the heading "Legal Proceedings" included in the Registration
Statement.
Very truly yours,
/s/ Werner & Kennedy
Werner & Kennedy
EXHIBIT 11
INDEPENDENT AUDITORS' CONSENT
American Skandia Trust:
We consent to the use in Post-Effective Amendment No. 18 to Registration
Statement No. 33-24962 of our report dated February 9, 1996 (April 16, 1996 as
to Note 7) appearing in the Statement of Additional Information, which is a part
of such Registration Statement, and to the reference to us under the caption
"Financial Highlights" appearing in the Prospectus, which also is a part of such
Registration Statement.
DELOITTE & TOUCHE LLP
Princeton, New Jersey
April 29, 1996
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